Closed economy

Closed Economy is the economic system of a country that considers itself self-sufficient with regard to the production of goods and services it needs for its citizens and businesses. Furthermore, these countries have a relatively small trade relationship with other countries, in that it is not dependent on imports and exports (Thai 2014). Also known as Autarky or Isolationist Economies, in theoretical terms, this economic system was conceived by Aristotle and other thinkers of Classical Antiquity as one in which the State controls all the resources necessary for its total self-sufficiency and independence from any foreign interference.

According to the World Bank, in 2013, among the 110 countries studied, the most closed economies were those of:

• Brazil,
• Argentina,
• Venezuela,
• Colombia,
• Sudan,
• Australia,
• Russia,
• Eritrea and
• Peru.

In countries with small trade relations, there is a tendency to specialise in a particular sector, using indigenous raw materials and cheap, unskilled labour.

Semi-closed economy

This economic system, in the true sense of the word, is not possible to achieve, as the economy would have to be completely closed to foreign trade. Even North Korea, known to be the most closed country in the world, politically and economically, has had a privileged commercial relationship with China since the 1950s. If this system were possible, the country would rely solely on its own consumption, investment and government spending for economic growth (Adolfson et al. 2008). As a result, if a country was unable to produce a good, it would not be able to obtain it elsewhere.

Reasons for closing an economy

Although fully closed economies do not exist, governments may limit to international competition the possibility of trading a certain type of product and/or service, due to cultural, religious, political, military and/or economic factors (Thai 2014). In addition, advocates of partially closed economies consider that open economies are prone to become excessively import-dependent, preferring their domestic products for similar international ones at lower prices and/or buying non-domestically available ones, leading to a strongly unbalanced trade balance. In partially closed economies, there is a policy of protectionism, which protects and supports domestic companies, which are generally subjugated to the regime, fearful of having their profits eroded, from international competition.

Advantages and Disadvantages of a Closed Economy

Analysing the pros and cons of this economic system, Dib (2011) consider its advantages as: being independent, since it satisfy all its needs from internal resources, not depending on external countries; and foreign financial crisis will not affect this market, since it, as it does not establish any relationship with other countries, will not be subject to any controversy that may arise.

And as disadvantages: the scarcity of natural and human resources, which limits the production and commercialisation of products and services and, consequently, the development of the economy. These markets are completely excluded, since, as it does not trade with the other countries, it will not establish any type of relationship with it. The main disadvantage adjacent to this concept is that it is quite complicated for an economy to remain completely closed, because, as it depend only on the natural resources existing in its country, it is evident that it will not possess all the resources that are fundamental for the subsistence of the community and for the production of goods. Thus, it will always depend on external countries to develop its economy.

Closed Economy Conclusion

Today, we live in a Global Village, where billions of people transit annually around the world, for work, tourism or as refugees; where products and services are increasingly multinational; and where an infinite amount of information circulates daily around the world, through the media and social networks; closed economies are a theoretical concept, although there are some economies that are partially more closed than others and, even these, due to growing more slowly than open ones, are a declining trend, insofar as, given the current modus vivendi, no economy is self-sufficient (Turnovsky 1999).

Closed economy — recommended articles

Centrally planned economy — Globalization — Hegemony — Etatism — Emerging market economy — Interventionism — Economic factor — Global demand — David Ricardo

References

• Adolfson, M., Laseen, S., Lindé, J., & Villani, M. (2008). Empirical Properties of Closed - and Open Economy DSGE Models of the Euro Area. Macroeconomic Dynamics, 12.
• Dib, A. (2011). Monetary Policy in Estimated Models of Small Open and Closed Economies. Open Economies Review, 22.
• Thai, M. (2014). Closed Economy. Wiley.
• Turnovsky, S. (1999). Fiscal Policy and Growth in a Small Open Economy with Elastic Labour Supply. The Canadian Journal of Economics, 32(5).

Author: Ana Inês Jorge Gonçalves, Inês Espregueira Guerra Teixeira de Morais, Marta Gomes Ribeiro