International Political Economy

Contents 1.0 Explanation of: 3 1.1 Free Market System 3 1.2 Command System 3 1.2 Mixed Economy System 4 1.4 Islamic Economic System 5 2.0 Introduction 6 3.0 Description of the Malaysian Economic System 7 4.0 What caused the failure of the Free Market System in Malaysia 10 5.0 How does the Government intervene? 11 Reference 13

1.0 Explanation of: 1.1 Free Market System

Free market system is an economy where the question is answered by and controlled by the people. It is a market based economy that depends on the law of supply and demand. The values of properties and facilities are set by the participants in the market i.e. suppliers, vendors, businesses, and consumers, in which the government has no role in setting any rules or regulations of prices and resources. In other words, the government does not interfere. It can be often referred to as Barter Trading. Both parties voluntarily agree to exchange something for the other to which he holds value. Which goods are to be produced are defined by the demand and supply rule. In a free market the products chosen by the consumers survive, a deficiency happens at time when consumers need to obtaining more than manufacturers produce. A surplus happens while creators want to sell more than customers wish to buy. Unavailability of a manufactured goods commonly result in value growths in a market economy; surpluses typically consequence in cost reductions. The disadvantages are this can also create a negative atmosphere and many companies can and have compromised worker safety, environmental standards, to survive in the market, to be on the top. It also revolves around “profit motive”, which has caused so many recent market failures around the world such as low oil prices, GM bankruptcy, real estate market crash of 2008. The advantages are that few of the countries successfully striving by this economy are Switzerland, Australia, Singapore, New Zealand, and Hong Kong (Fuhrmann, 2012). Hong Kong’s success can be attributed by their strong legal framework in the field of property rights and general support for the rule of law. Since they do not rely on government for expensive services, they pay low taxes. The free-market economy is usually associated with a pure capitalist system, where land and capital are private owned. (Sloman, 2004)

1.2 Command System
Command economic system can be said that a command economy is difference to that of a free economy. The government is in command. It chooses what to produce, for whom and how much to manufacture and allocate. In an ideal world, the command economy is perfect. This is because the economy can be stable, and least affected by inflation and financial downturns. Furthermore, it provides employment for the citizens, there is surplus amounts of production. However, in reality, things do not always work out as planned. For the government to take control of everything, it requires vast amount of information. Government assistances frequently have inadequate data approximately what to produce. Command economies, similar to the Soviet Union frequently created properties that were there used. When all internal factors of invention are controlled by the government, often a certain brand for any product becomes the national product. Which doesn’t leave the people much choices and it kills innovation and competition. That is why entrepreneurs feel discouraged to pursue business ventures because the government has the ultimate power over the economy and don’t allow private sector businesses to grow over a certain limit. This in turn has an adverse effect on workers. While this may be good for the low income workers or the lazy ones as they don’t have to put any extra effort in their workplace. But the ones who want to earn more, achieve more aren’t given a chance to grow, as the government believes in equality. Take North Korea as an example, North Korea remains as a closed society. This is one of the world's greatest centrally guided and minimum open economies and that country faces long-lasting economic problems. Industrialized capital stock is approximately beyond reform as a nresult of years of underinvestment, deficiencies of extra parts, and poor service. Bribery and corruption has spread its roots to all levels. There also exists a huge black market. By contrast, a command economy is one in which the government makes all important decisions about production and distribution (Samuelson & Nordhaus, 1998) 1.2 Mixed Economy System
Next, a mixed economic system is a dual economy. A mixed economy is supposed to be a balance of both free market and command economy. A mixed market does not have a set of particular criteria that every mixed economic countries follow. Several differences presents, by some mixed economies being mostly free markets and others being powerfully organized by the government. All economies of the world can be said to be ‘mixed’ to a greater or lesser degree (Beardshaw, 1992)
A part of the economy is controlled by private enterprises, while the government controls other economic areas; which include military, international trade and national transportation. In many countries the government also controls the monopoly markets such as aerospace, energy production and banking. The spotlight is that government controls those areas in which private sector or businesses should not make a profit. America’s economy is one of the most successful example of mixed economy but it is said to be heading towards another bubble burst. The US economy has had a few economic collapses in the past (2000,2008/9).The previous economic collapse was due to housing bubble which was caused by low bank loan interest rates, low short-term interest rates. Examples of other mixed economy countries are Iceland, Sweden and France. (Pettinger, 2012)
1.4 Islamic Economic System
Islamic economic system is said to be the roots from four sources. The first being Holy Quran, Sunnah i.e sayings and practices by Prophet Muhammad, pbuh, ijma and Qiyas (beliefs and principles). The Islamic economic system can be very similar to free market system with two major exceptions. The first one is prohibition of interest, as it is forbidden in The Holy Quran and the second one is giving ‘Zakat’ which is obligatory alms, which is also mentioned in The Quran. These two are the indispensable part of Islamic economics. The advantages of this system is probably the ‘no-interest’ on loans. This policy works for the common people. In other systems, often middle classed people or low income families cannot afford to take loans because of the interest laws but under this system this proves as a major benefit to them. For example if the individual wants to take out a loan for investing in a business purpose, he will give a percentage of the profit to the bank but if the business is a failure, the bank shares the risk. The other aspect of the system is relief from poverty and starvation by giving charity. After every Eid-Al-Adha, Muslims who have a certain amount of wealth, that is practicing this system have to give 2.5% to charity on what they have and the animals sacrificed during the festival, 1/3 parts have to be given to the poor, thus, reducing poverty and starvation. Disadvantages include that other economic systems are based on interest based but the absence of this hinders the economic growth of the country. This system is also difficult to implement in non-Muslim societies.
The Islamization of the economy of Pakistan, alludes to the financial approaches that began with General Muhammad Zia-ul-Haq's "Islamization" database. Under this system, Pakistan started practicing Pakistani culture—including assessment, monetary regulation, and so forth. In accordance with the standards of Sharia law, General Zia-ul-Haq marked and issued official declarations on Mudarabah (benefit sharing), Zakāt (poor-due), Ushr (Tithe), and end of Riba (characterized by activists as interest charged on advances and securities). (Mehmood, 2002)

2.0 Introduction Malaysia is a newly developed market company and is the third largest in Southeast Asia with the current Gross Domestic Product (GDP) of $800.169 billion (Purchasing Power Parity 2015 est.) and at $375.633 billion at a nominal 2015 est (International Monetary Fund, 2015). The GDP growth of Malaysia is 6.0% at the year 2014 (Damodaran, 2015). The GDP per capita of Malaysia is $25,833.204 (PPP 2015 est.) and $ 12,127.206 (nominal, 2015 est.). The inflation rate of the country is at 2.5 and the unemployment rate at 3.1% at the year 2014.
In 2014, the Household Income Survey embraced by the government demonstrated that there were 7 million family units in Malaysia, with a normal of 4.3 individuals in every family. The normal family unit salary of Malaysia expanded by 18% to RM5900 a month, contrasted with RM5000 in 2012. (Basic Amentites Survey (HIS/BA), 2009)
As one of three countries that monitor the Strait of Malacca, universal exchange accepts an extensive part in Malaysia's economy. In the past, it was the biggest manufacturer of tin, rubber and palm oil in the world. Manufacturing has a huge impact in the country's economy, accounting more than 40% of the GDP. Malaysia is additionally the world's biggest Islamic banking and financial center.

3.0 Description of the Malaysian Economic System Malaysia, a centre salary nation, has changed itself since the 1970s from a maker of crude materials into a rising multi-division economy. Malaysia is under the Mix Economy. Current Prime Minister NAJIB, Malaysia is endeavouring to accomplish high-wage status by 2020 and to move more remote up the worth included generation chain by pulling in interests in Islamic account, high innovation commercial enterprises, biotechnology, and administrations. If we look at levels of control, regardless, there have been various instances of Malay-preferentialism in the area in which Malay-possessed firms are favoured in government strategies, yet the nation is quickly developing as far as majority rule government and such acts are quick wading of. (Chiemelie, 1st of April 2014) The problem in Malaysian Mix Economical system is that, the mixed system was not held in the right way where the Government of Malaysia took more power than they should where left the business market having less capability to make decisions. Malaysian Government implemented the GST taxation over all the country where each individuals was ruled to obey. This have led to many growing organizations in Malaysia to close down. The big organizations in Malaysia as Proton, Air Asia, Perodua, and Panasonic would not face much affect to this change as the revenue of the organization have been already set and calculated to sustain in any conditions. When the companies was closed down, many were left unemployed where begun to impact on the overall countries gross domestic profit (GDP). The Malaysian government did try to overcome by opening job employment to all fresh graduates but soon it was close down due to staffing issue. Malaysia’s ability to sustain in the global market begun to shatter as the political issue where being concentrated more in the country compared to the market ability. Malaysia’s political issue where not being solved, slowly affecting the whole country ability to reach its 2020 vision. Malaysian government inability to overcome this issue making the foreign company to afraid from bringing their business to enter the Malaysian market. Slowly many companies would leave the Malaysian market before the failing economy in Malaysia would affect their business.

Advantages of mixed economy | Disadvantages of mixed economy | Needs are well meet on the grounds that the government consolidates with people and organizations to carter for everything the needs of individuals in the general public. | Still very nearly understanding the centrality of the blend of government and people underway, it was noted by Terrence (2004) As profits are being focused by individuals in business, consumer’s needs are not always being satisfied. | Territories that people have right to put resources into and regions they don't have right to put resources into, it can be monitored that such an economy will yield an ensuing increment in the possibility to address clients' issues. | Consumers’ requirements are not generally meet in light of the fact that these makers concentrate just on segments that builds their shots of benefit. | Production procedure is controlled to support by regional standards made products and this is gainful to nearby makers in light of the fact that they can make more deals and create more benefits. | Since governments can authorize certain approaches to support government produces, different makes can be at danger of maintaining business development | centre of the legislature is designed for advancing provincially made merchandise and this is of high point of interest to the usefulness of the economy in light of the fact that it would help support its inward income era and cut off the reliance of the economy on globally made products | Shots of international firms to victories are constrained as a consequence of the constraint in their focused limit in light of the fact that the legislature has effectively given the neighbourhood firms a higher upper hand by forcing higher assignment on universal brand, and restricting the possibilities of these global brand to embrace cost based aggressive circle. | The assessment arrangement is outfitted towards wading off the enthusiasm of clients on imported merchandise and as being what is indicated moving this enthusiasm for by regional standards made items and the finished item is that these provincially made items will wind up as accomplishment in both national and universal markets as can be seen with Malaysian organizations, for example, Proton, Perodua, Petronas, AirAsia and others. |

4.0 What caused the failure of the Free Market System in Malaysia
Free market system is define as market in which prices are allowed to reflect supply and demand. There is total freedom of men competition and government does not intervene. Buyers and sellers has the freedom to trade based on an agreement on price. In other words, absence of taxes, subsidies or regulation in completely free market. Business decisions are propelled by the desire to earn a profit, until extend of great deal of competition.
There is two type of market failure, complete market failure and partial market failure. It refer to those condition and solution needed to achieve efficient market failed. It exist when the allocation, production and use of goods and services by the market is not optimal, either over or under produced. In a particular market, failure of free market system leads to intervention of government. Subsidies, taxes, bailout, price control mechanism and minimum wages will be implemented to fix the economic.
There are many reasons why free market system failed because existence of imperfect competition. Free market mechanism works under the condition of perfect competition in which there is equality among all competitors. However, in reality, competitors does not have the same efficiency which will leads to imperfect competition. It is known that imperfectly competitive markets will never be perfectly competitive. This results in the growth of monopolistic and oligopolistic competition which brings up economic problems, such as low production, low employment, and high prices, improper distribution of income, causing consumer welfare and increase in poverty and unemployment.
For instance, in Malaysia the fuel price has been facing a huge rise and drop where affects the consumers overall. This means, as the fuel price goes up, many consumers would face issue on handling the cost that being spent on fuel price. As the fuel price is not controlled by the government, the consumers face a huge impact on the rise of fuel price.
Besides, during the Mas airline financial crisis issue, the suspected number of employee that would lose their jobs were around 6000 people (BBC News, 2014) . This is a very serious issue that would increase the unemployment rate in the country. MAS’s share market value that depreciating has been dropping the economic stability of Malaysia.
5.0 How does the Government intervene?
The government intervenes into the free market system to enhance the growth of the country’s economy with a multivariable regression model. This model applies an explanatory variable to foresee the consequence of a responsive variable. It can be utilized to inspect the relationship between the scale of increase in consumption of a country and growth of formal gross domestic product statistically.
Other variables includes growth of exports, imports, investment, and private consumption and inflation rates. The search shows that the growth of exports, investment and private consumption had a positive, operating and important relationship with the economic growth. Meanwhile, according to the qualitative research, the state of Malaysia showed how to turn out to be an integral part of economic growth.
As the government identifies that risk will come along if they do not step into, and to solve the market mechanism by ignoring the market will not be a good choice. So the government who has a responsibility must come up with policies to maintain the citizen’s well-being.
One of the good example is about subdue inflation, by mainly subsidized fuel in the year 2012. Firstly, the Malaysia’s inflation rate was at 3.2 % in 2011, but when 2012 it fell down and caught to 1.8 % in the following year compared to Thailand and Singapore which are 3.1 and 4.4% respectively. In this manner, the government has announced a revamp in subsidy system by controlling the prices which means set maximum or minimum prices on the normal goods, by setting price controlling for petrol price at RM 2.85 per liter to RM1.90 per liter. This means the government has intervened by subsidizing 33.33%. This will help to citizens pay for petrol 33% by the actual price, also similarly to diesel subsidized made RM2.82 per liter to RM1.80 per liter by 36.17%, the government still claimed that the price will be steady even if global fuel prices is increasing . (asiaone, 2012)

Furthermore, another good example can be seen by the protection of consumers against profiteering is about Price Control and Anti-Profiteering Act 2011 (formerly Price Control Act 1946) which has been carried out for more than 15 years. The project is geared to determine the kind of products that are curbed by the presence of government whereby the selling price is established based on the places and region. The project is imposed throughout the country encompassing all the levels whether they are wholesalers or producers. For example 15 days with 18 types of goods before, during and after the Hari Raya or 5 days with 13 types of goods in Christmas festival. (kpdnkk, 2015)
Similarly, in the free market mechanism, jobs are not allocated in a way that individuals can perform them without putting extra efforts. Apart from this, in the free market mechanism, individuals do not receive wages according to their productivity. Markets is able to create an “inadmissible” allocation of profits and subsequent communal elimination which the government may perhaps select to modification. Equity issue rises as well as income gap become bigger, where the rich get richer, and poor get poorer until an extent free market system collapses. Next, Malaysia Airline union wants the government to intervene to solve an internal issue between the organization and the employees. It was reported that MAS net loss had widened to RM1.17 bill last year from RM432.59 mil the year before although there was a hike in sales by 9.92% to RM12.12 bill versus RM13.76, which was higher than the RM14.76 bill estimated by analysts. Malaysia Airlines is a national airline company founded in Malaysia. However, if the government does not intervene, it will cause a huge lost to Malaysia’s economic system because the company has 20,000 employees as of 2014. (Ahmad, 2014)
Free market system is the right thing to be done at a controlled level. For example, a government that is led by the command system would lead to a failure in the market system. The dissatisfaction by the entrepreneurs and small enterprises will be controlled to benefit to everybody for the economic system to be fair to all. For instance nations like the U.S.A as well as Singapore adopted controlled free market system resulting there will be a balance of the rich and the poor. . The overall judgment on the market experiment must be at best mixed (Beardshaw, 2001)

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