Centrally Planned Economy
- Pages: 8
- Word count: 1978
- Category: Economics
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The world’s economies consist of three main economy systems with different economic mechanisms. There are centrally planned economy, mixed economy and unplanned economy. Centrally planned economy is one kind of planned economy, it is also known as command economy or socialism. The process of implementation of centrally planned economy is called planification. The phrase is originally generated from “Befehlswirtschaft” in German which used to represent Nazi economy (Amadeo, 2012). Incan empire in 16th century Peru, the Mormons in 19th century Utah had already proven with the existence of command economy. However, many believe that the idea of command economy is derived from the work of Karl Marx. The goals of command economy are to boost the economy, lower inflation and unemployment rate, utilize scarce resources without wasting on domestic business competition and benefit from consolidation of natural resources or labor when making decision on allocation of resources. Besides, government also aims to provide resources and basic needs to every nation and advocates the equality of equity for every nation. These macro-economic plans are normally carred out through five years plan created by government.
Command economy is based on top down administration where the highest state planning agency gives instruction to lower level entrepreneurs on the factors of production, allocates labor based on the ability, sets the priorities for production of all goods and services. For example, Mao concentrated all the resources in the production of steel in order to increase economic growth. Mixed economy is also known as dual economy which takes the characteristics from both centrally planned economy and market economy. There are private-owned enterprises, state owned enterprises and cooperative enterprises under mixed economy. The price of products, interest rates and exchange rates are determined by market while government intervenes to protect the welfare of nation and environment through application of taxes, subsidies, tariffs and implementation of regulations such as law of equity. Businesses are run privately while entrepreneurs have the right in employment and deny employment. Entrepreneurs also allowed to trade freely without regional limitation as long as didn’t bleach the law. The term “mixed economy” generated in the political debate in United Kingdoms during the postwar period and the policies appeared from at least the 1930’s. Supporters of mixed economy are mostly associated with British Labour Party.
Since Britain’s transition to mixed economy in the early 1980s, there is a liberalization wave around the world (Zhu, 2007). Many countries that abandoned centrally planned economy such as china and Vietnam have shown great success. In recent years, we have witnessed the healthy and optimisc economic growth in People’s Republic of China. It is certainly true that China economic has impressively improved for the last three decades. As mentioned above, China was once used centrally planned economic system while all the decisions regarding production are formulated by a central authority (Kimberly, 2012).
However, China has successfully boosted the economic and development in country by using the mixed economic system because decision making regarding production has been decentralized to individual household and firms. The characteristics of mixed economies are market economies with strong regulation oversight which simply means governmental provision of public goods, but unlike centrally planned economic that decisions are fully made by government. Government plays an important role in mixed economic system too, since they have to provide environmental protection and standardized welfare system to the citizen.
In mixed economiy, individual household and firms have the ability to make decisions that maximize their profit. this is contrast to centrally planned economy where resources are distributed evenly among nation. Then non incentive based system have decreased the enthusiasm of nations after decades. Labors don’t have motivation to work and this will definitely slow down the progress of production. Moreover, the growth rate of a nation’s productivity determines the growth rate of is average income. In countries which their nations can produce huge amount of goods and services per unit of a time, the people is most likely enjoy a high standard of living. Besides, China have gained maximum advantage from private entrepreneurship. So, it is undoubtedly important for china to shift the share of financial assets and land holdings from government to public sector (L. Assar, 2007). Thus, the productivity of china dramatically improved, similarly to the economic development. The estimated results showed that the pattern of China’s productivity growth have obviously shifted in the year 2000s compare to 1990s (Journal of Daily Science, 2012).
A country’s standard of living depends on its ability to produce goods and services which means the more goods and services are produced, the higher standard of living (L. Assar, 2007). Besides, total factor productivity was decomposed into technical efficiency and technical development changes on China manufacturing industries (Journal of Daily Science, 2012). With open market and liberalization of economy, technology of production and skills of labors have increased due to the technology and labors exchange program with advanced countries. Workers show their enthusiast in learning new skills or brush up their skills after economy reform. Technology advancement can increase productivity in shorter of time period and definitely lighten the workers’ burden. Furthermore, China industries need more labor force because the productivity has been increased, so it’s directly lower the unemployment rate of China.
Unemployment rate can be simply defined as the number of people that actively seeking for job divided by the labor force. In mixed economy system, the government tends to create more job opportunities to standardize the unemployment rate. Government also establishes regulations that prevent discrimination in employment, make sure every nation have the equality to pursue a job and lower the unemployment through intervention. For example, Ministry of education Malaysia have launched program to lower the unemployment rate among graduates. This is because a job loss means nations will have lower living standard in the present, being anxiety about future, and have lower self-esteem. Long-run unemployment usually doesn’t arise from a single problem that has a single solution, so it would be easier to reduce the unemployment rate with the government intervention. Besides, china also export labors to foreign market and contribute in providing human resources with different skills in international stage.
In addition, one of the reasons China switch to mixed economy system is because government can mechanize the market price as ensure the market price of certain product do not go beyond its actual price. So, the Chinese can purchase products that under regulated price (Kimberly, 2012). Ownerships can set their price based on equilibrium point which is the quantity of the good that buyers are willing and able to purchase exactly balances the quantity that sellers are willing and able to sell. Government interference is given more purchase power to citizen as the prices of products have been controlled. Unlike centrally planned economic system, mixed economic system is the economic structure that government and the private sector jointly control the economy.
With the transition from planned market economy to mixed economy that announced by Deng Xiaoping at the end of 1978, China conducted a minimum amount of $20.6 billion which included imports and exports for its international trade (Li, n.d.). The profits of exporting were just slightly enough to recover the costs of importing those production materials which are not available in its country. After 22 years, this policy decision brings a huge benefit to China’s income. The total amount of its international trades was increased from $20.6 billion to $3 trillion and this made China become the largest export commodity and second largest import commodity among the world (Li, n.d.). The new economic system pushes China becomes second largest economy among all countries in the world. The reforms created a big flow in Foreign Direct Investment (FDI). FDI of China rose sharply from US$636 million in 1978 to US$ 4.5 billion in 1999 (“China – Overview of Economy,” n.d.). Taiwan and Hong Kong contributed two third of China’s FDI during that time period. Even though the largest economy country, United State, also become third largest investor in China by contributed 8% of total FDI in China (“China – Overview of Economy,” n.d.).
Besides, the real GDP for China was low during the command economy system. Due to the system, there is less ownership or foreign investment company. All the prices, target and resources are set or distributed by the government of China to emphasis on welfare to its citizen if compare to profit. So, the average rate of annual GDP was just raised 5.3% from 1960 to 1978 (“China – Overview of Economy,” n.d.). However, the economic grew steadily after the reforms of economy system. Its GDP grew 8% annually between years 1978 to 1995 and keep on boosting up in the next five years (“China – Overview of Economy,” n.d.). This mixed economic system brought a lot of incentives to country and citizen. First of all, the reforms benefited farmers in rural areas. Those farmers allow trading their products to the buyers on the free market base on the price that was set by government. For the coastal areas, government tried to attract investors of oversea by offer fascinate tariff to raise the GDP of nation. Optimistic profitable return is motivated foreign investors to invest in China instead of invest in other countries. Research showed that exporting agriculture products were raised doubled in year 1980. Furthermore, government also encouraged and support citizens to import advance technology and knowledge from other countries for increasing productions (“China – Overview of Economy,” n.d.).
This action actually increased abilities for producers to manufacture their products because they could produce more products in the same length of period. On the other hand, everything comes with both sides. After the pros of reforms, there are several cons of reforms too. First of all, although China’s GDP was growing about 8% to 10% annually during the economy crisis year in 2008, the developments in China made the wealth accumulation of China decreased but not increase (Zhang, June 2012). The richness of China doesn’t rise at the same tempo with their GDP. China focuses on developments like rebuilt factories or houses to attract buyers or investors. No doubt, this action may increase the GDP of its country but will not increase the wealth of its country. Seconds, the quality of goods are reducing (Zhang, June 2012). Because of the attractiveness profit, many manufacturers in China plan to reduce the cost of production to increase the profit for them. They even plagiarize the designs and features of their competitors and sell those products at lower prices. Moreover, environment pollution of China is growing up seriously due to the new system.
World Bank estimated that four fifth of the dirtiest cities are located in China (Zhang, June 2012). Today all successful national economies are combination economy system which influenced by market and intervention of government. For example, japan, Australia, china, Germany and Canada are leading countries that apply mixed economy. However, there are drawbacks of mixed economy. So, we should consider every aspect during the transition in progress, such as the cultural changes and the attitudes of labors. These elements can’t be ignored as there are big changes in the lifestyle and nations had been directed by government for long period and their persisted skills may not coherent with the changes of economy. Besides, “shock therapy” have been proven failure and transition should be done gradually from liberalization to open market. A post Washington consensus was developed after decades of transition.
Amadeo, K. (2012). Command Economy. Retrieved from http://useconomy.about.com/od/US-Economy-Theory/a/Command-Economy.htm Zhu, A. (2007). Public enterprises in mixed economies. Retrieved from http://www.networkideas.org/working/dec2007/04_2007.pdf Kimberly, A. (2012). Characteristics of a Command Economy. Retrieved from http://useconomy.about.com/od/US-Economy-Theory/a/Command-Economy.htm
Assar, L. (2007, April 27). China evolving economic system. Retrieved from http://www.project-syndicate.org/commentary/china-s-evolving-economic-system Journal of Dairy Science; Dec2012, Vol. 95 Issue 12, p7074-7085, 12p, 8 Charts