Types Of Economies: Free Market, Planned And Mixed Economy

The three main types of economies are free market, planned and mixed economy. By definition, a planned economy depicts an economic system that is controlled by a single authority. State-owned entities are responsible for making all the financial decisions relating to the production and distribution of goods and services within the economy (Evensky, 2005, p. 123). On the contrary, a market-driven economy defines a system whose operations are controlled by the forces of demand and supply. The effects of demand and supply directly influence how prices of goods and services are determined within an economy through market forces by the method of price mechanism. This can be shown in the diagram below:

If the initial equilibrium is at a price of $110 and the market faces an increase in costs of production, the supply curve will shift to the left from S1 to S2 causing an increase in the price to $190 through the process of price mechanism. This will result in a new equilibrium level at a lower quantity (from 9 million barrels to 8 million barrels) through the automatic adjustment of prices (Pettinger, 2019).

A mixed economy is one that includes the characteristics of both, a free market and a planned economy. Almost all countries in today’s world follow a mixed economy system, a combination of both the types of economies.

The United Arab Emirates transitioned more towards a free market economy in 2006 after introducing the diversification program that led to more non-oil entities making a significant contribution towards the country’s economic growth. This attracted private investors from various parts of the world. Growth of the local and foreign private sector within the UAE has been the underlying reason behind UAE’s success. Foreign direct investment (FDI) has spread knowledge as well as expertise, opened up new market opportunities by creating distinct networks and has generated employment in knowledge-intensive and high value-added sectors. (WTO, 2006a).

The figure below shows the increase in investment in the UAE as a result of a shift towards a more market-based economy (Trading Economics. (2016b)).

Shifting towards a market driven economy entails changing an economy from being controlled by the government to being controlled mainly by demand and supply forces (Burgin, 2012). Secondly, a large portion of the goods and services are owned by private individuals and not the government. Private entrepreneurs have greater control over what they produce compared to their publicly owned counterparts who are reliant on guidelines from the government on how and what to produce (McFadden, 2006, p. 25). This was brought about in the UAE by enabling foreign ownership, corporate tax holidays, no personal taxes, freedom to repatriate profits, and no import duties and no restrictions on currency. (WTO, 2006b).

By having private decision-makers in a free market economy, consumers face greater freedom of choice of goods and services. Also, a market-driven economy gives the stakeholders a self-interest motive (Walton, and Seddon, 2008). Every individual is free to sell their merchandise to the customers who offer them the highest bid. Notably, negotiations between the customers and the producers imply that consumers bargain and buy goods based on their financial capabilities. Bargaining also gives the producer a chance to negotiate the price of their products and sell at the most appropriate price that minimize losses (Evensky, 2005, p. 115). However, this move towards a free market economy implies that since profit maximization is the main goal of producers, higher prices lead to excess supply and a substantial decline in demand. Additionally, leaving the market prices to be controlled by private investors leads to more consumer exploitation. While a lot of freedom may be exercised, prices are determined by the price mechanism without government intervention at all (Walton, and Seddon, 2008). This can result in excessive exploitation of consumers. Furthermore, only higher income earners can afford these expensive goods, leading to greater inequality.

The shift towards a more market-based economy leads to higher levels of competition within firms in the UAE, therefore making firms more efficient and providing consumers with greater variety (McFadden, 2006, p. 15). Recently, Dubai has started a series of multibillion-dollar projects, like the Mohammed bin Rashid City, which has an estimated value of USD 65 billion (National, 2015). Such multi-billion-dollar projects boost the real estate and construction sector, and also contribute heavily towards the tourism sector. However, due to freedom of choice and asymmetric information being present, prices may significantly vary amongst producers (McFadden, 2006, p. 19). Secondly, a high amount of capital is required by producers in order to be competitive. This may drive weaker firms out of the market and lead to unemployment.

A significant disadvantage of this market system is the minimal control of the government. Notably, the role of government to make sure that the markets operates in a fair and open environment, but does not regulate who gets in and out of it (McFadden, 2006, p. 26). The result of having an uncontrolled market where firms enter and leave when they wish to do so affects the quality of goods offered (Evensky, 2005, p. 110). Since the government plays no role in a free market, it cannot influence any activity as private investors are the main decision makers.

To conclude, shifting from a command economy to a market-driven economy equips producers and consumers with greater power to make market decisions. As such, the performance of UAE’s economy has been highly influenced by its economic structure because more investors keep on investing the country to take advantage of the attractive business environment. Although this shift towards a free market implies that the government is unable to ensure a perfectly equitable distribution of income, within a period of 44 years, UAE has become one of the strongest and competitive countries characterized by technological advancements, therefore attracting businesses worldwide.

References

1. Burgin, A., 2012. The great persuasion: Reinventing free markets since the depression. Harvard University Press.
2. Economics, T., 2016. Trading Economics- United Arab Emirates Foreign Direct Investment.
3. Retrieved from Trading Economics: http://www.tradingeconomics.com/united-arab-emirates/foreign-directinvestment
4. Evensky, J., 2005. Adam Smith’s Theory of Moral Sentiments: On morals and why they matter to a liberal society of free people and free markets. Journal of Economic Perspectives, 19(3), pp.109-130.
5. McFadden, D., 2006. Free markets and fettered consumers. American Economic Review, 96(1), pp.5-29.
6. National, T. (2015). UAE’s top 5 most costly megaprojects under construction. Retrieved from The National: http://www.thenational.ae/business/property/uaes-top-5-most-costlymegaprojects-under-construction–in-pictures#1
7. Pettinger, T., 2019. Retrieved from Economics help: https://www.economicshelp.org/blog/1811/markets/diagrams-for-supply- and-demand/
8. Walton, J.K. and Seddon, D., 2008. Free markets and food riots: The politics of global adjustment. John Wiley & Sons.
9. WTO, 2006a Trade Policy Review – Report by The United Arab Emirates.
10. WTO, 2006b. Trade Policy Review – Report by the Secretariat: United Arab Emirates.