Comparison of the Planned and Market Economic Model - Essay Example

Commanding Heights Synopsis Episode The Battle of Ideas From the beginning of the 20th century until the seventies, technological inventions revolutionized communication and transportation, making interactions among nations inevitable. Global economy and international interdependence began to emerge. John Maynard Keynes of England and Friedrich von Hayek of Austria began to formulate their theories of market economies. Keynes favored a planned, controlled economy, while Hayek envisioned the free market economy. At the end of World War I, Germany had to pay reparations to victorious nations, further contributing to her improverishment. The hyperinflation and economic morass that followed led to the rise of fascism and, together with Hitler’s assumption of power as chancellor of Germany, eventually World War II. In the early 20s, In Russia, Lenin’s espousal, then eventual modification of Bolshevik and Marxisr socialism was followed by Josef Stalin’s hardline communism. At about the same time, USA experienced an economic boom and the stock market became the national pastime. At the close of the decade, the US experienced the collapse of the stock market bubble which led to the Great Depression of the 1930s. Franklin D. Roosevelt responded to the economic downturn with a slew of government regulatory measures for practically all financial institutions, and most major industries. This was pursuant to John Maynard Keynes’ General Theory which advocated government spending “against the wind”, building surpluses in good times and run up deficits in bad in order to put purchasing power in consumers’ hands. However, it was the rise in government’s spending during World War II that ended the Great Depression. It was at this time that the government provided wartime jobs for the unemployed. Government’s role in ending the depression was viewed as a confirmation of Keynesianism. Hayek felt that Keynes’ theory was a dangerous premise, an idea he discussed in his book The Road to Serfdom. He felt that “Too much government planning means too much government power,” in effect destroying freedom and making men slaves (Chapter 6). In this aspect there emerged a clash in Keynes’ and Hayek’s economic philosphies. The end of World War II ushered in changes. The participants in the Bretton Woods Conference took their direction from Keynesianism and established the World Bank and the International Monetary Fund, institutions intended to oversee the world economy. Also, the victorious allied countries apportioned among themselves the various regions of Europe, upon which they imposed their own economic systems. In post-war Britain, Winston Churchill leaned towards Hayek’s position and opposed government planning and control. For this reason, Churchill lost to socialism and the Labor movement. In Russia, Lenin’s scientific socialism also gained stronger foothold. In postwar democratic Germany, the opposite trend occurred. “Social market economy”, which is characterized by the combination of unregulated markets and a strong welfare state, proved more successful than the planned economies of Europe. In Chicago in the 1960s, Milton Friedman espoused free market economy with minimal government intervention. But American president John Kennedy preferred Keynesian ideology, a precursor to the stagflation of the 1970s. For the most part, the world turned towards socialism, a tide turned by British Prime Minister Margaret Thatcher, who implemented Hayek’s theories and followed a policy of deregulation. Her example was followed by Ronald Reagan who had by then assumed the presidency of the United States. Episode 2: The Agony of Reform During the eighties and nineties, most governments moved away from state control to deregulation, but along the way undergoing varying degrees of upheaval. At the start of this period, the Soviet Union began to succumb to its “crumbling economy” which was only supported by military might. The absence of productivity was due to the lack of incentives and the inability of individuals to improve their station through personal industry. It was not long before Prime Minister Mikhail Gorbachev. He introduced “perestroika” which aimed at gradual political change to support a market economy, and “glasnost”. The shift away from communism was hastened by Poland’s “Solidarity” movement which worked for political freedom and thus a free market. For Latin America, the “dependency theory” of aiming for national self-sufficiency shut off their economies from outside infusion of investment, technology, and know-how. Chile’s Pinochet overthrew the Marxist Allende, and turned to Chicago School economics advocates to come up with an economic plan. The emphasis thus shifted from centrist to minimalist government intervention and emphasis on free market economy. It spurred economic take-off and eventually a shift to democracy from communism. In Bolivia, there was hyperinflation and constant government upheavals. This was caused by massive debt due to the easy availability of petrodollars from foreign banks and a stubborn refusal to collect taxes to pay off the debt. However, reforms introduced by economic planning minister Gonzalo Sanchez de Lozada corrected this situation and the success of their efforts was critical in spurring similar reforms throughout Latin America. In China, Communist leader Deng Xiaoping had began to introduce market reforms while maintaining centralized political control. Gorbachev sought to duplicate the Chinese experience; however, due to inherent difference between the industrialized Soviet Union and the largely agricultural China, this had not been successful. Communists tried to stage a coup against Gorbachev, but largely through the effort of Boris Yeltsin, the pro-democracy advocate, the coup was quelled. A short time after, the USSR was dismantled, and Yeltsin became President of Russia. The market reforms that followed were swift and painful, particularly due to problems such as interference caused by the political elite (the “Red Directors”) , but in time shortages disappeared and prices stabilized. In India, which looked to the USSR as its model, market reform was embraced by the new prime minister and state control was abandoned. Russia, on the other hand, was embarked on a program of privatization of state-owned factories. Political instability and a bid by hardline communists to retake control of Russia forced the government and the growing oligarchy to combine forces. The oligarchs provided the financial support while the government allowed the oligarchs to gain control of strategic assets (the “commanding heights”) through a loans-for-shares (privatization) program at knock-down prices. Crony capitalism thrived, but it was the price Yeltsin had to pay to win over the communist hardliners in the polls. However, in the succeeding decade, the oligarchs were brought under control by President Putin. Russia continues its reforms process and has been experiencing steady growth. Episode 3: The New Rules of the Game The new millennium saw the defeat of communism as an economic ideology and acceptance of free market economy by most countries. Easily foreseen is the inevitable move towards globalization and heightened interdependence among these economies. On the issue of trade liberalization, stark contrasts were drawn between the plight of the Third World countries as against the overpowering bargaining power of the industrialized nations. The European nations had formed a unified trading bloc, thus strengthening their global security. Likewise, the North American Free Trade Agreement was struck among the United States, Canada and Mexico. In Asia, the Association of South East Asian Nations, of ASEAN, emerged. Likewise, the North American Free Trade Agreement was struck among the United States, Canada and Mexico. The agreement allowed for the free flow of trade among them which Mexico, in particular, found advantageous in terms of increased exports and employment. In short, countries began creating venues of cooperation to advance their common, regional, interests. In the United States, President Bill Clinton, followed by President George W. Bush, both pursued a policy of free trade, reduction in government spending, and balancing of the budget. Aside from this, America took the lead in going global not only in trade but also in investment. The California Public Employees’ Retirement System, or CalPERS, invested as much as a quarter of its funds in foreign markets. The warning call, however, was sounded off because of the harm that unrestricted movement of capital apparently without any restraints. Furthermore, advances in communication have revolutionized and empowered individual businessmen “to act like multinationals” (Chapter 8). It also created new industries that flourish in a borderless environment, such as the call center system. But while the new global economy empowered the less developed economies in Asia, the Asian miracle that was Japan entered into an economic slump due to runaway debt and an asset bubble, the results of Japan’s largely protectionist mindset. In 1997, another Asian country began to fail. Thailand suffered from a huge debt problem, institutional weaknesses and poor infrastructure to support the banking industry, and currency kept artificially high. The Thai baht was pegged to the dollar, a situation which became untenable as her economy buckled under market pressure. The unexpected and severe devaluation of the baht triggered a painful crisis. Due to the interconnected nature of regional economies and capital markets at this point, the contagion spread rapidly among the neighboring Asian countries and, eventually, to countries across the world. The Asian crisis served to highlight the negative effects of globalization, a debate which continued to today. Answers to Questions 1. Indentify 3 countries that are going to have to face reform in the economy ,who they are and why they had to face it. Many countries are in need of reforms, but it is those countries who, by their size and influence, exert a pull on other countries economies that must be given special emphasis. The first of these is Russia. During its existence, the defunct Soviet Union had wielded military might that rivalled the United States. Today, Russia is still a potent moving force in international relations and the balance of power. Russia must continue to explore reforms in its economy, to address the remaining vestiges of crony capitalism and corruption in its politico-economic structure. The collapse of institutions that prevailed during seventy years of communism has left a vacuum which cannot be replaced overnight. As the presentation said, Russia is its own unique model, not similar to Latin America or China. Many reforms are still needed. Second is Japan, the formidable economic empire that rose from the ashes of World War II and which has permeated almost every aspect of international life. Despite her emergence, Japan has, it seems, shied away from taking her place as a world economic power. The presentation is correct in describing Japan as parochial, protectionist, and hitherto unwilling to open up her trade. In the recent years, tentative steps have been taken in the right direction and Japans growth rate has begun to ease up. Her efforts at transfer of technology and dissemination of industrial capability are commendable. Many more reforms should be forthcoming. Finally, the country that must institute reforms is the United States. The strongest nation on the earth has recently shown that weaknesses in its financial systems and institutions are capable of creating a global recession, possibly depression. Such potential for mischief cannot exist without oversight. Unbridled liberalization has led to the abuse of the power of these markets. It is important that while governments should not control.their operations, these markets and institutions must operate within a regulatory framework, most especially for such newly created financial instruments as sub prime lending instruments and financial derivatives which operate largely on trust. 2. Tell what are two positive and negative aspects of reform It may be said that two positive aspects of reform are: (1) creation and redistribution of wealth, and (2) enhancement of human dignity through the dispersal of political as well as economic power into the hands of the people. When markets are free to move on its own power and volition, it must be remembered that this is the aggregate action of many individual participants. The creation of wealth is thus democratized, open to those who have the entrepreneurial spirit and initiative to produce. Consequently, due to the economic empowerment of the greater number, political will and self determination necessarily follow, for the exercise of discretion in an open market is innately the exercise of ones control over his destiny. Reform also has its negative aspects. Reform has the propensity to trigger contagion effects, as has been seen in the Asian crisis and the more recent global financial crisis, thus increased vigilance is needed to prevent abuses by persons in power. Secondly, reform, particularly sudden reform, even if not violent, has the tendency to displace people sometimes with disastrous consequences. It is apparent from the video presentation that wars, suicides, loss of livelihood and starvation have resulted from the institutions of reforms that were not carefully implemented. The China experience is an exception in that the reforms introduced were well managed and gradually introduced. The use of "shock therapy" as mentioned in Episode 2 may, in a way, be also desirable, as in the Chilean experience - which further serves to highlight the fact that reforms must be introduced with consideration for the people to be affected, and thus governments must institute adequate "safety nets" to soften the blow of reforms among the lives of the people. Reference Heights Productions, Inc., Commanding Height, The Battle for the World Economy. Retrieved November 14, 2002 from http://www.pbs.org/wgbh/commandingheights/hi/story/index.html Read More