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Region : Mashonaland Central, Zimbabwe

Programme : Bachelor of Commerce Honours in Marketing Management

Intake : 35

Full Name (Student) : Muzondo Itai Lionel

Student Pin : P2019517B

National ID Number : 63-2255872 S18

Mailing address : 1884 Mutamba Circle, Chiwaridzo Bindura

Email address : lionelitai.muzondo@gmail.com

Contact Number : +263 77 396 9160 / +263 77 449 8984 / +263 71 410 5122

Course name : Principles of Economics (microeconomics)

Course Code : BBFH104

Assignment Number : 1 Due Dates : January 18th 2021

Date of submission : December 31st 2020

Assignment Title : (a) Define command economy (1 mark)

(b) Discuss any four advantages and disadvantages of a

command economy giving practical examples. (24 marks)

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Muzondo Itai Lionel, P2019517B, Bcom (Hons) Marketing Management 1|
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a) Define command economy (1 mark)

A command economy is defined as an economic system in which the factors of production

are owned and controlled by a collective or central government.

b) Discuss any four advantages and four disadvantages of a command economy giving
practical examples (24 marks)

A command economy is also referred to as a planned economy. The core of such a system is
the existence of a centrally planned allotment and distribution of factor resources and goods,
services respectively by the collective or government. Granular control of the economy is
exhibited through use of legislation, making the whole system entirely unfavourable to the
key stakeholders in the economy.

In a command economy, the basic laws of supply and demand are virtually set aside as the
central government or collective dictates how the fundamental questions of economics; what
to produce, how to produce, when to produce and for whom to produce, are answered.
Consequently, there are many issues that arise from this policy.

Foremostly, societal freedoms are restricted and basic needs of the society are or may be
ignored, as government dictates according to the particular needs at a given time. Citizens do
not enjoy the liberties to choose their career trajectories by virtue of their interests and skill
sets, rather, the central planner chooses for them. Social incentives such as housing are
controlled; people may enjoy free housing, but may not own a house. An example of such a
scenario occurred under the administration of Colonel Muammar Gadhafi in Libya. Salaries
of workers are regulated and pre-set by the government, in most instances, not reflective of
the skill set of the worker. This causes an economic “brain-drain” or exodus of skilled labour
from the country outwards. This is evidenced by the mass exodus of teachers, nurses, doctors
and engineers from Cuba to the Americas in the 1960s.

Secondly, planned economies are marred by bureaucracy. The decision-making process is

complex and there is no freedom of enterprise. The state controls all forms of investment and
imposes stringent regulations especially to outside investors. Freedom of enterprise is
restricted in that foreign-owned companies are compelled by legislation or risk
nationalisation. A practical example of this was the seizure of the Cuban Telephone Company
by Fidel Castro’s government in March 1959, where US$9,000,000 worth of assets were
nationalised and the seizure of American-owned oil refineries (Bourne, 1986). The result
usually is allocative, productive and X-inefficiencies. This is evidenced by the uneven
allocation of resources where the Democratic Peoples Republic of North Korea under Kim
Jeung Un II allocated 15 – 25% of the Korean economy’s Gross Domestic Product towards
military spending in the 1990s. the consequences of this were that the agriculture sector was
crippled and North Korea suffered severe food shortages leaving the general population at the
benevolence of the World Food Program. Children accounted for 62% of the
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 country’s chronic malnutrition (Noland, C., 2000). Government controls the market,
industries hence there is no primary driver for improvement, that is, competition. Minimal
competition or rather, the inexistence of it altogether reduces the motivation for the economy
to improve on its production processes already in place. As a result, goods and services are
not produced at least cost. In addition, lack of investment incentives drives away Foreign
Direct Investment.

Thirdly, in a centrally planned economy, there is poor data collection methods employed in
obtaining crucial economic information. The information obtained thus will be inaccurate and
will not reflect the market needs. As a result, export problems may arise as government may
not be fully aware of goods and services that may be performing well on the international
market. There may also be misplacement of investment incentives for domestic consumption
as well as export companies. There will always be a mismatch between supply and demand
because of inefficient coordination. An example of this is the overcultivation of sugar cane in
Cuba between 1980 – 1985 when the international market prices for sugar were low. Cuba
could have placed more emphasis on tobacco which was performing remarkably well at the
time (Bourne, 1986).

A centrally coordinated economic system carries a high risk of commodity shortages. The
emergence of a parallel economy or black market to counter these shortages, cannot be
averted. Rationing by the government may be implemented in the case of chronic commodity
shortages. Parallel markets will thrive on these shortages and government will have a hard
time controlling and/or eradicating them using legislative means. Parallel markets are born of
market forces. An example is the disappearance of cash from the formal banking sector and
emergence of black-market cash circulation in Zimbabwe in the wake of fiscal rationing
policies implemented by the Reserve Bank of Zimbabwe, limiting cash withdrawals and
availability of cash in the economy (Thompson, 2018).

However, a command economy also has its advantages. For instance, social welfare is viewed
as a top priority. The system itself is based on a socialist perspective and thus it will try to
even out income distribution by reduction of high-income earner’s wages and incrementing
that of the peasantry. This is evidenced by Cuban government’s reduction of judges’ wages
and incrementing that of lower-class employees. There is relative boost of heavy industrial
investment, increasing the macroeconomic stability as employment creation that is sustained
by the state grows. In the Cuban economy of 1981, civil service employment levels were
relatively higher (92%) compared to private sector (8%) (Bourne, 1986). In addition, housing,
transportation and healthcare are subsidised keeping with prioritisation of societal welfare.

Secondly, central planning has the effect of streamlining the government’s vision and its
people. This is evidenced by Fidel Castro’s rationalisation of industry in Cuba 1997, shifting
from sugar cane production to tourism and encouragement of self-empowered business,

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which saw an increase in the GDP by 6% in 1999 and 11% in 2005 (Bourne, 1986).
Resources are easily mobilised as evidenced by Fidel Castro’s ten-million-ton plan of 1970
where he mobilised the masses to cultivate sugar cane for export, producing 7.56 million tons
as a result.

Planned economies tailor make products in their economic systems to benefit the society.
They make use of common good principle unlike the motivation to make profit, that stirs the
decision-making process in any free market business. Citizens may be offered free universal
healthcare like in the case of Cuba.

Having discussed this economic system, one would say that since the disadvantages outweigh
the advantages, it would not be wise to implement this type of economic policy. Another
would argue and say that this system, all it does would be to create a socialist utopia.
However, just as eighty percent of the world runs on free market (capitalist) economies, this
does not necessarily imply that it is a capitalist utopia as well. In my own opinion, rather, I
choose to think that whatever the economic system that a country opts to implement would be
in the best interests of that particular administration’s agenda. Whether it is to bring about
social parity despite the economic implications of this, or not. In the end it depends on the
government’s ultimate goals and the people who are in power.

References:

i. Bourne, A., Cuba under Fidel Castro, 1986

ii. Noland, C., Avoiding the Apocalypse: the future of the two Koreas, Institute for
International Economics, 2000
iii. http\\www.greengarageblog.org/16-main-advantages-and-disadvantages-of-
command-economy/

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