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Statist Economies Are Doomed

Communism may be dead, but part of it is alive and well in many countries where business is closely linked to government. Stop protecting businesses from the market through government control for a more dynamic economy.

Written by johnleemk on 10:04:48 pm Apr 3, 2007.

In the modern day, with the triumph of capitalism over communism, a planned economy run by the state is mostly a thing of the past, with countries like North Korea and Cuba being the exception rather than the rule. However, worryingly, many economies are being run indirectly by the state.

State interference in the workings of the free market is to be expected. After all, the market is hardly a perfect device for allocating resources. But at the same time, should the government be monopolising certain industries and becoming the sole provider of some goods and resources?

Many countries, such as Venezuela, have seen a resurgence of government intervention in the economy through the nationalisation of certain industries. Not all countries are as blatant in their socialism, however. Most, such as Mexico, indirectly intervene by subtly protecting existing monopolies and oligopolies that are connected to officials in the government.

In Malaysia, it is worrying that both symptoms of government intervention are present. The petroleum industry is controlled mainly by Petronas, which is wholly owned by the government. Meanwhile, the largest conglomerates that make up the backbone of the economy are all either partially state-owned, controlled by cronies of the ruling regime, or both.

It is not enough to have the appearance of capitalism if the substance is communism. Many people have remarked that even large private sector companies are run like communist societies, since they are managed from the top-down. How, then, when the economy is dominated by "private sector" firms that are in reality all linked to the government in one way or another?

The problems with a government running the economy are hopefully obvious to all. Governments are often inefficient and wasteful of resources, because civil servants rarely have an incentive to spend their time and efforts in the most prudent manner for society (even if they do mean well).

In addition, governments are often unable to adapt to change. Few things are more resistant to change than a bureaucracy. The private sector handles such dynamics by killing companies that don't adapt, whereas a government can easily cling on to outmoded economic models and policies for far longer than necessary.

Similarly, state-run and state-linked companies suffer from the same problems. Because their ties to the government render them immune from market pressure, because they have no incentive to buck up and perform, because they have no incentive to constantly reinvent themselves in accordance with the changing needs and wants of consumers.

A state-run economy, whether it is run directly or indirectly by the government, is doomed to failure. (Or, at the very least, doomed to slow progress — which is almost the same as failure in a globalised economy.) The peoples of the world should be finding methods to reduce state control of firms. The solutions to problems with the market can often be found in policies that do not require any direct control over companies. There is rarely a good excuse for the government to take over and run a firm or an industry, whether directly or indirectly.