Economic system of mixed economy: a case of Malaysia

Author: Iloka Benneth Chiemelie

Published: 1st of April 2014

1.0 INTRODUCTION

One thing is for sure, and that is that every society must answer the difficult economic questions of how to use resources, what goods should be produced, how much quantity to produce, whom to produce for, cost per value of the goods, and how much to save and consume now (Acs, Desai & Hessels 2008a, b; Beck, Demirgue-Kunt & Levine 2005; Bolumole, Frankel & Naslund 2007). How a society answers this question depends on the economic system they adopt. An economic system can thus be defined as a way of producing and distributing goods and services that will be used to meet human wants. There are four types of major economic systems adopted across the world, and they are: capitalism, socialism, command economy, and mixed economy (Washoe County School 2013).

In the context of capitalism, it is a type of economic system where individuals and businesses own most of the natural and capital resources. These resources include the factories, farms machineries, land, minerals, and other resources found within the geographical area where this form of economic system is adopted (Washoe County School 2013). There is also a high level of freedom for individual and businesses to buy and sale goods. Goods are made available to customers through the market of exchange between buyers and seller. A good example of a purely capitalist society is the United States.

Another type of economic system is socialism. A socialist system is such where the government own most of the resources and distribute it to people in the society. The representatives of the people make the decision of what to produce and how much to produce. The government on the other hand plans how to carry out the production decisions. The government also distributes goods and services, especially those like housing, food, medicine, and basic necessities (Washoe County School 2013). Many nations presently engage in some sort of limited socialism, such as socialized medical or education system. However, only few countries such as Vietnam if presently socialist in nature.

Command economy is another system. In this type of economic system, the government owns nearly everything that is used for production of goods. Government planners instead of people have the responsibility of making decisions about what to produce and how to distribute it. A good example of country with command economic is North Korea (Washoe County School 2013).

The last in discussion is mixed economy. In a mixed economy, individuals, businesses, and government own some parts of the economy. All of these groups have the responsibility of making economic decisions about what to produce and how to distribute it (Washoe County School 2013). A good example is Malaysia.

As such, the paper is designed to understand the economic system of mixed-economy, with the focus on Malaysia. The justification for such is because Malaysia is one of the developing economies in the world and also maintains one of highest production capacity in ASEAN region with international brands clustered around the economy. As such, an understanding of the economic system of the country will help to reveal the forces that are behind the country’s continued growth in terms of what makes investors want to invest in the country, how they invest and the chances of success.

2.0 UNDERSTANDING THE MALAYSIAN ECONOMIC SYSTEM

Levels of control ( Bolumole, Frankel & Naslund 2007) - In Malaysia, the resources are controlled by the government, businesses and individuals. The government controls those areas that are about national security (e.g. military) and provision of basic amenities. The level of control is also weighed up by business laws that describe how operations in a specific industry can be carried out.

Businesses that wish to establish operation in Malaysia can control all their business operations, but must always be in line with government requirement and policies that are related to their business process. Additionally, individuals can also control resources and sale them for their own benefits.

Such a level of country serves right for investment as international brand will have little worries with issues that might arise from business country. In any case, there have been numerous cases of Malay-preferentialism in the county in which Malay-owned firms are favored in government policies, but the country is fast growing in terms of democracy and such acts are fast wading of.

Decision making (Bolumole, Frankel & Naslund 2007) – the level of decision basically depends on the people who control the business. In cases where the government controls the business then the government makes the necessary decision for the running of the business; in cases where the business is controlled by the individuals, these individuals run the business with their own decisions; and in cases where the level of control is mixed between governments and individuals, then the decision is made equally or by the designated person in such a business process.

Distribution and purpose (Bolumole, Frankel & Naslund 2007) – the distribution of goods and purpose for such distribution varies depending on the level of control and the business decision process. Basically, the underlying fact is that the main purpose of every business is for profit making (even NGOs as they need to make profit in order to carry out their charity works), as such it can be seen that the main purpose of distribution of goods in Malaysia is also for profit related reasons. This is most revealing in cases where the control is by individuals and these individuals own and run the business. Profit is still an underlying element in government run business but it must be understood that the government of Malaysia just like every other government has the responsibility of catering for the society with certain social amenities like transportation, water and electricity, thus the main purpose is not for profit but for meeting the expectation, but the people who make use of these amenities still have to pay certain fees for its usage.

3.0 PROBLEMS OF MIXED ECONOMY

In the above analysis, this paper has been able to demonstrate the differences between two economic systems in the form of Malaysia (Mixed economy) and USA (Capitalism). It is clear that these countries adopt different economic systems in bid to enhance the lives of people in their society differently. A number of literatures (for example: Acs, Desai & Hessels 2008a, b; Beck, Demirgue-Kunt & Levine 2005; Bolumole, Frankel & Naslund 2007; Bosma, & Levie 2009; Bruton, Ahlstrom & Obloj 2008; Dragoslaw 2007; Eckholm 1979; Esman 1978) have presented an understanding of economics.

3.0.1 Interdependence of group can leave customer’s needs unsatisfied

These different groups control the production process, have freedom of production and make decision related to production, there is a tendency of them depending on each other to satisfy the needs of the people (Terrence 2004).  The fact is that individuals and businesses will focus on the more profitable sections of the economy, and this can sometimes result in customers’ needs not being satisfied as the groups don’t have a clear definition of the segment or market or products and services to focus in.

Basically, the defining element of this discussion is based on the fact that differences exist in terms of control and purpose of business and in cases where the economy is perfectly mixed, both the government and individuals can undertake any form of business in order to meet their own personal desires. However, the fact still remains as pointed out earlier that the general purpose of any business is profit making as the business need to recover investments made in order to be able to make more investments in the future. Without recovering these investments, the company (be it individual or business) will not have the necessary financial resources required to maintain sustainable business operations in the future. On that account, most of the people who go into business operations in mixed economy seem to focus on areas that have be proven as source of higher income in order to recuperate their investment quickly and verge into the profit making system. As such, some of the needs of the customers might not be meet as these business owners focus more on the profitable business settings and ignore areas that have profitability chances.

3.0.2 Government can enact policies meant to favor government owned businesses

Another issue is that the government of this kind of economy can sometimes enact policies meant to favor government owned businesses at the expense of individually owned businesses (Terrence 2004). For instance, government can increase the tax on imported cars in order to favor government owned car production companies. This case is very common in Malaysia with the government’s high task on imported cars designed to favor Malaysian owned car manufacturers that have ties with the government.

This is still pretty much in line with the earlier statement in the introductory part of this paper were it was noted that there are still cases of preferential treatment for Malay owned companies in terms of government policies and this is geared towards giving them a high competitive edge over other companies. This preferential treatment comes in the form of higher access to loan and lower importation tax.

While the mixed economy features a system in which the power for business ownership is given to both individual and governments to run any form of business, it is must also be noted that the process involved in running any given business in such an economy must be in line with the rules contained in the business laws of that given economy. What is then the implication? On that note, the implication is that while the running of business is undertaken by both individuals and the government, the running of the state is undertaken by the government alone and the government is the ones responsible for enacting as well as executing the rules that govern business process in that given economy. As such, this government can always make such rules to come in a way in which they are meant to favor government owned companies at the expense of individual businesses. From that view point, it can be seen that mixed economy comes with numerous disadvantages to individual businesses as one single change in the rule of the government will have detrimental effect on the individual owned business in terms of performance and can even lead to their total failure in cases where such rules are very adverse in nature.

4.0 ADVANTAGES AND DISADVANTAGES OF MIXED ECONOMY

At this point, a clear understanding of the various economic systems has been presented in relation to their definitions, comparative analysis and problems faced in each of these economic systems. This section of the paper aims to illustrate the advantages and disadvantages of the economic systems discussed below:

4.1 Advantages of mixed economy

The first advantage as noted by Terrence (2004) is that in a well-structured mixed economy, customers’ needs are well meet because the government combines with individuals and businesses to carter for all the needs of people in the society. While the combination of government with individuals for the purpose of production in an economy has been earlier discussed as a limitation to this form of economy system, it must be noted that such limitations occur only in cases where these combination are not well structured in terms of what the business will have to invest in and what the individuals will have to invest in. In a mixed economy where such structure exist as to areas that individuals have right to invest in and areas they don’t have right to invest in, it can easily be seen that such an economy will yield a subsequent increase in the potential to meet customers’ needs. This is because, the investment will be coming from both individuals and governments and as such increasing the investment fund available in such an economy and the end product will be that the economy will be more positioned to understand and meet the needs of the customers as both government and individuals seek for new investment opportunities.

Terrence (2004) also noted that another advantage is that the production process is regulated to favor locally made goods and this is beneficial to local producers because they can make more sales and generate more profits. In a mixed economy such as Malaysia, the focus of the government is geared toward promoting locally made goods and this is of high advantage to the functionality of the economy because it would help boost its internal revenue generation and limit the dependence of the economy on internationally made goods. This is the case for Malaysia as it can be seen that locally made products are promoted well in this economy with the heft tax value that are been leveled on imported goods. The tax policy is geared towards wading off the interest of customers on imported goods and as such shifting this interest in locally made products and the end product is that these locally made products will end up as success in both national and international markets as can be seen with Malaysian companies such as Proton, Perodua, Petronas, AirAsia and others.

4.2 Disadvantages of mixed economy

Still on the verge of understanding the significance of the combination of government and individuals in production, it was noted by Terrence (2004) that as a result of interdependence on each group of producers, customers’ needs are not always meet as the individuals focus on the most profitable sectors of the economy. This has already been discussed earlier in this discussion of limitations above where it was noted that as a result of the combined efforts, consumers’ needs are not always meet because these producers focus only on sections that increases their chances of profit and as such ignore areas that significantly influences the

Since governments can enact certain policies to favor government manufactures, other manufactures can be at risk of sustaining business growth Terrence (2004). This is another disadvantage as can be noticed in the international firms that maintain presence in the country. This is because there is a need for competitiveness to be on a level ground if these firms are to be profitable, but the note from all indication is that the chances of these firms to successes are limited as a result of the limitation in their competitive capacity because the government has already given the local firms a higher competitive advantage by imposing higher task on international brand, and limiting the chances of these international brand to adopt price-based competitive sphere.

5.0 RECOMMENDATION AND CONCLUSION

The need to satisfy human wants is very important and the government of all the nations across the world understands this issue. The issue is that for humanity to survive, the government must adopt sustainability measure to meet the needs of the citizens. The forms of economic system adopted by countries vary, but the purpose if the same, which is to satisfy human wants.

From the above analysis, the mixed economy operated by Malaysia has been discussed, with the discussion highlighting numerous advantages in the sense that such an economy will increase the chances of consumers’ needs to be meet, with another benefits being that it also stand the chances of promoting locally made goods and increasing employment opportunities as a result of the fact that both producers will be sourcing for employees to undertake their production process. Still on the bases of understanding the importance of mixed economy as compared to other forms of economic system, it was noted that such an economy as operated by Malaysia has a higher chances for business failure especially in cases where these businesses are internationally based, and it also has higher chances of not meeting the needs of customers because the business owners will be more focused on investing in businesses that have higher chances for success.

On that note, the recommendation presented in this paper is that the Malaysian government should not diverge from its current economy system as the benefits are better than the associated problems, instead the focus should be on how to restructure it in order to enhance the chances of success. The restructuring approach can involves defining areas that businesses will have to invest in and areas that government will have to invest in. The end product will be an economy where all customers’ needs are well meet and equality establishing for competition and business growth.

On that ground, the conclusion presented in this paper is that mixed economy is right for the economic growth of Malaysia as it serves the right background for understanding what should be invested and defining how such investment will be undertaken, and also providing the necessary resources for such investment because it is both the government and the individuals that combines to finance the production process.

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