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Economy System and Ideology as Basis for Policy Making

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Learning Outcomes

The reader should be able to:

  1. Understand the basic history of the Asian Financial Crisis 1997-1999
  2. Realise the role of economy system and theory in policy making
  3. Apply suitable policies in making a good policy
  4. Realise good policies to stabilise economy


Asia had learned many lessons from the past. Asian leaders renewed banking and financial sectors regulation and ensuring financial institutions remain sound with capital adequacy ratios above international norms. Policies being implemented should be align with the objective to avoid any issue that may arise in the future. Over a decade ago, Asian Financial Crisis had strike in most countries in East Asia. The region wide financial crisis and economic disruptions was triggered by the panic and inadequate policy responses to it (Sachs and Radelet, 1998). It started with the collapsed of Thai Baht in July 1997 followed by tremendous declined in currencies against USD months after in most East Asian countries. Countries most affected were Philippines, Indonesia, Malaysia and South Korea (Bernanke, B 1983). Previously, these countries had experienced strong economic growth for decades (Cypher & Dietz, 1997).

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This crisis had contributed huge impact not only on their economy but involved political stability and social situation. While most countries’ currencies were badly affected with the crisis, Hong Kong maintained its currency parity with the U.S Dollar besides successfully defended its currency from the speculative attacks nonetheless. By attempts of East Asia countries to keep a fixed exchange rate relative to the U.S. dollar, where when one country in that region devalued their currency as part of restructuring their financial management the whole region was negatively affected worsen the whole situation (Feldstein, 1998).

However, there were arguments that agreed the situation was worsening with the bailout done by IMF during the midst of the crisis. Thailand as the most effected country besides Indonesia accepted the assistance (bailout) by IMF in the aftermath of the Asian Financial Crisis (AFC) (Radelet, 1998). Other countries that also felt the effect of the financial crisis were offered bailout packages, but not all countries accepted the help. Malaysia was one of the countries that, despite suffering similar circumstances as Thailand and Indonesia during the financial crisis, resisted calling on the IMF to bail them out (Feldstein, 1998). Despite causes mentioned above, root caused was largely by the weaknesses in providing large incentives in managing risk management (flawed in financial system) created by implicit or explicit government guarantees against failure (Moreno, Pasadilla, Remolona, et al, 1998). In addition to this, government guarantees, be it implicitly or explicitly protect the financial intermediaries against losses.

However, the economic crisis way back in 1997 is now behind us and the economies are recovering steadily ever since then despite another disruptions in the year 2008. The recovering process does not happen spontaneously, but as a result of steadfast policy implementation and financial aid from the international community especially the aid from IMF to countries that were badly affected such as South Korea, Indonesia and Thailand.

Understanding the Economy

Economy in general means understanding the science of scarcity where scarcity is defined as condition where wants is more than the available resources. Choices need to be made since it is impossible to get everything we want in life. Economic system is a method used by a society to produce and distribute goods and services. Economic system can be divided to three main systems which are centrally – planned economy, free economy and mixed economy.

Command Economy as Directive Mechanism

Command economy can be defined as an economy that was based on directive or regulations mechanism rather than market mechanism. It is synonym to central – planned economy. The phrase ‘command economy’ comes from the German ‘Befehlswirtschaft’, and was originally applied to the Nazi economy, which shared many formal similarities with that of Soviet Russia. The coordination of economic activity is so essential to be functioning in a complex social economy. In command economy, the economic agents act by virtue of specific directives principle. They will act upon receiving the command from the superior or even the higher authority from their hierarchy. In addition to that, in firms or enterprise activities, command economy system is governed by the action or regulations taken by the superior that responsible in managing the organizations. The production of output, employment of resources, adjustment of disruption and other interaction were based on the directive approach by the superior.

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One of the main features of command economy or well – known as central – planned economy is the setting of firm’s production targets directive by the superior of the hierarchy. The administrative aimed at limiting the discretion of subordinate operational units/firms includes rationing, prices and wages control and material balances and other technical aspects. This principle strives to fully divert the operation of market forces in the key industrial and developmental sectors of the economy to political direction where everything takes control by the hierarchy of the political or administrative superior. Thus the command principle is likely to clash with the operation of market forces, yet a command economy may nonetheless contain and rely on the market mechanism in some of its sectors and areas: for example, influencing labour allocation, or stimulating small-scale private production of some consumables.

Tolerable microbalance is much needed to maintain the survival of complex social economy. That means good correspondence between the supply of individual producer and consumer goods and the effective demand for them. To ensure appropriate balance can be achieved, method such as decentralized, market-based inter action of autonomous units, or by virtue of explicit specific coordinating directives from some higher authorities. Operational-level units (e.g. firms) must merely ‘implement’ commands; they become ‘executants’ of plans and directives from above, plans which must insure balance through the coherence and consistency of the instructions they give. Thus the command mechanism requires relative centralization and severe restriction on the autonomy of subordinate operational units. It derives from the overwhelming priority of social goals, and requires the severe limitation, if not total destruction, of autonomous social and economic powers and the enforcement of strict obedience to directives.

Hence, command economy can be defined as creature of state authority. Command economies are imposed, whether through external duress or imitation, or indigenously in order to achieve specific purposes such as to maximum resource mobilization towards urgent and over-riding national objectives. Example is on rapid industrialization or the prosecution of war. Second is by radical transformation of the socio-economic system in a collectivist direction based on ideological views and power-political imperatives and last but not the least, as an answer to the disorganization of a market economy through price control, possibly occasioned by inflationary pressure arising from those.

Therefore, command economy requires formal and centralized personnel by bureaucracy to exercise full control and avoid any disruptions such as corruption, bargaining power between superiors and subordinate and many more. These activities are climbing but as long as the personnel can take control over the regulations and centralized economy then it will not give harm to any parties.

Significances of Command Economy

Rational application of the command principle calls for planning, which is basically of two types. Longer-term, developmental planning expresses the leadership’s politico-economic strategy (e.g. five-year and ‘perspective’ plans); shorter-term, coordinative planning (annual, quarterly, monthly, ten-day) ideally translates the strategy into resource allocation while aiming to match resource requirements and availabilities for individual inputs, goods, etc., in a sufficiently disaggregated way for given time periods and locations.

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