XState-Directed Economy

WCommand Economy

In a pure command economy, the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government. Consistent with the collectivist ideology, the objective of a command economy is for government to allocate resources for "the good of society." In addition, in a pure command economy, all businesses are state owned, the rationale being that the government can then direct them to make investments that are in the best interests of the nation as a whole, rather than in the interests of private individuals.

Historically, command economies were found in communist countries where collectivist goals were given priority over individual goals. Since the demise of communism in the late 1980s, the number of command economies has fallen dramatically. Some elements of a command economy were also evident in a number of democratic nations led by socialist-inclined governments. France and India both experimented with extensive government planning and state ownership, although government planning has fallen into disfavor in both countries.

While the objective of a command economy is to mobilize economic resources for the public good, just the opposite seems to have occurred. In a command economy, state-owned enterprises have little incentive to control costs and be efficient, because they cannot go out of business. Moreover, the abolition of private ownership means there is no incentive for individuals to look for better ways to serve consumer needs; hence, dynamism and innovation are absent from command economies. Instead of growing and becoming more prosperous, such economies tend to be characterized by stagnation.

A state-directed economy is one in which the state plays a significant role in directing the investment activities of private enterprise through "industrial policy" and in otherwise regulating business activity in accordance with national goals. Japan and South Korea are frequently cited as examples of state-directedeconomies. A state-directedeconomy differs from a mixed economy in so far as the state does not routinely take private enterprises into public ownership. Instead, it nurtures private enterprise but proactively directs investments made by private firms in accordance with the goals of its industrial policy. For example, in the early 1970s, the Japanese Ministry of International Trade and Industry (MITI) targeted the semiconductor industry as one in which it would like to see Japanese firms have a major presence. Industrial policy often takes the form of state subsidies to private enterprises to encourage them to build significant sales in industries deemed to be of strategic value for the nation's economic development. Thus, the Japanese government subsidized research and development (R&D) investments made by Japanese semiconductor companies. It also used direct administrative pressure to persuade several companies to enter the industry. To help targeted industries develop, the state may also protect them from foreign competition by erecting barriers to imports and foreign direct investment. Accordingly, Japanese semiconductor companies were protected from foreign competition by barriers to imports and restrictions on the ability of foreigners to establish operations in Japan.

The intellectual foundation for a state-directedeconomy is based on the so-called infant industry argument. This argument suggests that in some industries, economies of scale are so large firms from developed nations have such an advantage that it is difficult for new firms from developing nations to establish themselves. Industrial policy is seen as a means of overcoming this economic disadvantage. Moreover, it is argued that state-directed industrial policy may allow a country to establish a leading position in an emerging industry where scale economies will ultimately be of great importance.

One criticism of state-directedeconomies is that government bureaucrats don't necessarily make better decisions about the allocation of investment capital than the market mechanism would. For a long time, the economic success of countries such as Japan and South Korea allowed advocates of state involvement to dismiss such criticisms. However, a decade of stagnant growth in Japan coupled with the 1997 implosion of the South Korean economy have added legitimacy to these criticisms. The South Korean collapse, in particular, has been widely attributed to uneconomic investments by Korean companies in industries that the government deemed to be of national importance, such as semiconductors.

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