The thesis analyses Mongolia's transition from a planned to a market economy during the period 1991 to 2000. A review of the initial conditions for reforms and the transition strategy is followed by an examination of the outcomes of the transition from the perspective of the Lewis Dual Economy model. The thesis suggests that a process of "reverse development" occurred during the transition. Amartya Sen's capabilities approach and its elaboration by Anthony Atkinson are used and augmented by a notion of "unlearning by not going" to construct a model showing how privatization causes the exclusion of workers from the labor market. The key results are that there exists a trade-off between monopoly profits and participation levels in the formal labor market and that exclusion reduces average incomes and increases income inequality. The thesis closes with calibrations of the proposed model which replicate the stylized facts of Mongolia's transition