What is Planned Economy – Its Features, Examples and Benefits
Different nations follow a particular economic model based on their economic objectives. Nations that follow a planned economy have a central controlling authority that plans and manages all production and supply processes and overall economic activities. The primary goal of a planned economy is to provide equal employment opportunities to all citizens and regulate pricing of resources.
Read on to know the features of a planned economy and how it is different from a command economy.
What is a Planned Economy?
A planned economy can be defined as a type of economic system where financial decisions are made according to government plans. All decisions related to investments, production and other economic parameters are structured as per the decisions of a central authority.
This economic model prioritises public necessities and financial welfare and sets its objectives accordingly. Several important sectors, such as education and healthcare, are controlled by the Government that directly contribute to equal availability of resources to the citizens.
What Are the Features of a Planned Economy?
The primary features of a centrally planned economy include:
- The Government controls production limits and prices.
- Government policies are put in place to execute economic plans.
- Most economic plans are created by the Government, except for a few sectors.
- Effective and equal economic stability is the objective.
- Central authority distributes the resources at its own will.
- The Government owns and controls several market sectors to create a monopoly.
- Market factors are restricted from financial bias.
What Are the Examples of a Planned Economy?
Several countries with authoritative Governments follow a planned economic system; however, most of these countries have now opened up to private sectors.
Former Soviet and Communist nations were primarily planned economies, all of which have now eventually become mixed economies.
Some planned economy examples include:
- North Korea
- China
- Laos
- Cuba
- Vietnam
Among these examples, North Korea is the only nation still under a properly planned economic system.
What Are the Advantages of a Planned Economy?
It is an efficient economic structure that has several advantages.
- Unemployment is low as the Government controls employment.
- Least financial wastage as supply of resources is regulated.
- Affordable market prices.
- Profit is not a primary objective. Instead, the economy focuses on public welfare.
- Negligible inequality of wealth.
- Restriction on essential sector monopoly.
What Are the Disadvantages of a Planned Economy?
In the present world, most planned economies have evolved into mixed economies, as a planned economy model has several disadvantages.
- Inefficient grievance acknowledgement of the public.
- Shortage of supply due to fixed prices and production limits.
- Negative bureaucratic culture of economy.
- Unjustified pricing of goods compared to demand.
- Limitation of private economic development.
What is a Command Economy?
Command Economy can be described as a planned economic system completely regulated by a single authority where all processes of production and market factors are owned, controlled and operated by the central authority. All decisions are processed under strict scrutiny of the controlling authority.
A Soviet-type economic structure is followed in this type of economy. The central authority assigns production goals and allocates resources to enterprises. It also works out the assortment of goods to be produced and the quotas for each enterprise.
Examples of Centrally Planned Economy
North Korea is the prime centrally planned economy example where the Supreme Leader of the country decides and delegates economic policies which his offices govern.
Another example of a centrally planned economy is the Republic of Cuba. However, it has been slowly evolving into a mixed command economy where most of the market players are state-run enterprises.
What Are the Advantages of a Command Economy?
From the Central Government’s perspective, a command economy allows crucial monopoly over the economic system of a country. Some advantages of a command economy have been discussed below:
- No malpractices or forgery of resources.
- Balance of economic class within the public.
- Availability of necessities for all citizens.
What Are the Disadvantages of a Command Economy?
A command economic system is a rigid model with several restrictions that object private economic elements from performing. Other primary disadvantages have been discussed below:
- There is no space for foreign markets to perform inside this economy.
- There’s a monopoly of the Government over all sectors.
- No foreign investment can be made by any authority.
- Restricted growth of the economy.
What Are the Differences between Planned Economy & Command Economy?
Although a command economy is a subcategory of planned economy, there are certain differences between the two:
| Planned Economy | Command Economy |
| A planned economy may use a centralised, decentralised, participatory or soviet type of economic planning. | Command economy follows an administrative command system and uses a soviet type of economic planning. |
| Government ownership of sectors within the economy is comparatively lower. | Government ownership of sectors within the economy is comparatively higher. |
| Social and public necessities influence economic planning. | Government objectives influence planning. |
Why Do Planned Economies Fail?
Economic models are influenced by several factors like demand and supply in the market and key players (suppliers) who control the flow of goods in the market. Prices and production work in sync with these elements and function accordingly.
Growth of an economy depends on the increase and decrease of wealth and foreign penetration. Unlike market and mixed economies, planned economies are restricted from external growth and only operate in an economic setup that is closed to the outside world.
Command economy countries like North Korea aim to actively keep their nation closed to the rest of the world. However, this is not an efficient economic model for most countries. Additionally, private sector players do not prefer excessive restrictions from authority and hence refrain from participating in such markets.
Due to all the various factors, a planned economy often fails, evolving into a mixed economy in the long run.
Final Word
The planned economy model was a common economic structure among the soviet and communist nations where the Government was the overall authority over the economy and all other sectors in the nation.
On the other hand, command economy is the core form of planned economy where Government is the most important factor, and the entire system is in sole control of the central authority.
Both economies try to ensure equal economic distribution and availability of resources; however, neither of them is a progressive economy.
FAQs
Ans: No, India follows a mixed economy model. Both public and private sector entities co-exist and work under the general guidance of economic planning. India’s economic system entails features from both the capitalist economy as well as socialist economy.
Ans: Some of the disadvantages of a planned economy include inefficient resource allocation, lack of innovation and creativity and poor social planning. Another primary reason why most planned economies fail is the lack of information regarding market demand.
Ans: Unlike its northern counterpart, South Korea does not have a command economy system. Instead, they follow a mixed economy system, which is why they are one of the fastest-developing countries.
Ans: Centrally planned economies deal with scarcity by attempting to plan the appropriate amount of various resources to make. However, lack of information regarding market demand is one of the reasons why this plan fails.
Ans: In a planned economy, the central Government or authority appoints several departments that take all decisions mutually. All important economic decisions are made through a combination of political and administrative bodies.
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