This research paper explores the economic systems of Canada, Mexico, and U.S.A. A detailed focus on the three countries’ resources will be reviewed in relation to the role that the state and private sector play in the production and distribution of the same. On the background of a review of literature, the three economic systems (planned, mixed, and capitalism) will be analyzed to determine the specific details that each of them entails. It is against this literature that a case for analyzing Mexico, Canada and the U.S. will be made to determine their similarities and differences. The economic output, international relations, and economic policies are used to analyze who is responsible for making critical decisions for each economy.
Economic Systems in Mexico and Canada as Compared to that of U.S.A.
Mexico, Canada and the U.S.A. have some of the largest economies in the world. The economic drivers of the three economies differ in some aspects despite having close economic relations. In the past three decades, the three countries have experienced various problems that have affected their economies. Mexico, for instance, is recorded to have gone through the damaging 1994 Mexican Peso crisis as well as the 2008 global financial crisis. It has however shown signs of stabilizing after capitalizing on its economic diversification and the growth in U.S. domestic demand. The United States, on the other hand, has experienced some economic grueling problems such as the recent recession of 2007 and 2009. Canada has also gone through, amongst others, the global financial crisis. Not only have these challenges affected the countries’ economic systems, but also revealed the most influential macroeconomic imbalances that influence their growth. The economic systems of these countries have restructured every time they are faced by financial challenges. However, it is still widely established that the Canadian economy resembles that of capitalism that the U.S. has relied on for its economic dominance. Mexico, however, has a mixed economic system which is more market than command-oriented. Still, the economic systems in Canada and Mexico can be compared to that of the U.S. using several economic variables.
The objective of this paper is to determine how similar the economic systems in Canada and Mexico are compared to that of the U.S. The variables used to figure out the similarities and differences between these model economic systems are the most dominant economic sectors, the GDP per capita, and the level of government control. These variables are important determinants of economic systems that exist in Mexico, Canada, and the U.S. Since the economic outcomes of Mexico and Canada are almost similar, it can be hypothesized that their economic systems have similar aspects compared to that in the U.S. given their considerable dependence on America.
Comparative economists have made huge steps in studying economic phenomena across different countries. While dealing with economic systems, the nature of economic agents and allocation of resources over competing ends has to be determined based on the present economic system. This is because a country’s economic outcome is dependent on its economic system. Zimbalist, Andrew, and Sherman (65) define an economic system as “the manner in which a country’s resources are owned and the way that the country decides on its levels of production and distribution to determine the kind of economic system it practices.” In this case, there are three economic systems: market, planned, and mixed economies.
The type of economic system practiced by a country determines the economic agents that influence its economic outcomes. In a market economy, the private firms control the means of production as well as make critical decisions on what, how, and for whom to produce. In this economic setting, the consumers’ influence what is produced and the businesses determine what is produced. The major role of the government in a market economy is to prevent the firms from becoming monopolies and regulating the market to ensure the consumers and businesses are protected (Baiman, Ron, Boushey and Saunders 113). However, in a planned economy, the state is in control of all production means. No individual is allowed to own property since the state and its planners make the key decisions on production. As such, the government makes the major economic decisions as far as planning and coordinating the entire production process is concerned. As for the mixed economy, the balance between state planning and free market provision is at equilibrium. The “degree” of mixing is influenced by the government so that in a nation where the private sector has a larger economic responsibility, the social provision and taxation are reduced. The market and state allocate the resources although the government plays a major role in regulating businesses to sustain fair competition within the private sector (Mjøset 32).
Apart from the above determinants of economic systems, economic theories have also been used to explore the different aspects of economic phenomena. Based on the Marxian theory, the economic outcomes are also influenced by the political and cultural aspects of the society. Wolff, Richard, and Stephen (144) cite that “the economy is full of contradictory influences, tensions, and uncertainties. These reflect the many different influences that overdetermine any economy.” In this view, the economy is not expected to remain constant since changes in noneconomic aspects exert considerable impact on the economy. The Marxian theory appreciates that the groupings of processes such as individuals, institutions, and economic organizations form the basic elements of economic systems.
Keynesian economists have always advocated for a mixed type of economic system. They argue that the private sector and the public sector have to relate equally to correct any inefficiency in macroeconomic outcomes. This is particularly so for the monetary and fiscal policy actions needed to stabilize the output of a country in the process of determining its most appropriate economic system. The popularity of the Keynesian thought of prioritizing the mixed economy has been resurgent in nations previously hit by the global financial crisis of 2008. They view the mixed economy as a necessary compromise between capitalism and government socialism. Nelson (277) explains that the aggregate demand should not be viewed as equal to the capacity of production in an economy. Rather it should be seen as dependent on a series of factors whose behavior is unexpected in the process of determining employment, production and inflation. All the Western European nations are known to have a mixed economy while China, Cuba, and Russia have a planned economy. Japan and the U.S.A. rely on the market economy. Important to note is the impact of the private sector, public sector, the government and economic outcomes in determining the type of economic systems adopted by these nations (Gottlieb 134).
To determine if the economic systems of Canada and Mexico are similar to that of the U.S.A., qualitative data from economic surveys, peer-reviewed journals, and other literature sources will be used to explore the various aspects of Mexican, American, and Canada economies. Some more quantitative sources are also incorporated into the research findings. In all three cases, the rate of dependence on either economic system will be evaluated using variables such as the import and export rates, GDP per capita, resource availability and allocation, private versus public sectors, and the industry sectors.
United States of America
The U.S. economic system can be used as a benchmark of other economies around the world. Having faced several challenges since the Great Depression, its economy has become stronger. The state government responded to the crisis by introducing cutbacks but the private sector pulled the economy up by adding approximately 4 million jobs yearly (Friedman 415). The exports have also grown in the manufacturing and agricultural sectors. The American economy has been recorded to have improved even after the impact of the global financial crisis. In 2015, the economy was estimated to be worth approximately $18000 billion. This represents about 28.94% of the global economy. With a $2.2 trillion in its exports, the U.S. relies on capital goods, industrial supplies, and the services sector (Jorgenson et al 112). However, with respect to the economic system, the business firms and the private individuals make the major decisions while the state engages the private marketplace on its purchases.
The free enterprise system does not hinder the role of state intervention as the public still relies on it to address what the private sector ignores. For example, the agricultural sector has relied on the state to protect itself from competition as it is now highly subsidized. There is, therefore, a strong interaction between the public and the private sector. The one side of free enterprise system is dominated by private ownership in the U.S. Setterfield (18) explains that the private sector produces most of the commodities in the U.S. About two-thirds of the country’s economic output is sought for personal use while the rest is consumed by the business and state (Basu, Deepankar and Duncan Foley 1076). Therefore, the producers and consumers make huge decisions for the economy and the state intervenes in regulating the private enterprise.
Having the 12th largest economy, Mexico is considered one of the vibrant economies in the world. It has an estimated GDP of US $1.6 trillion even after going through various challenges in the past three decades. The government has been involved severally such as when it devalued peso to directly cause the Mexican Peso crisis of 1994. Hence the high rate of inflation and subsequent recession in the country. The multiplier effect was the country going on to record high rates of layoffs, reduced FDI (foreign direct investment), and a huge decline in GDP. However, the country recovered after the U.S. intervened to bail out the economy with an aid of over US $50 billion. The global financial crisis exposed the economy again in 2008 resulting in a decrease in exports to the U.S. and reduced FDI. However, the Mexican government has been involved severally in crafting free trade arrangements such as the North American Free Trade Agreement (NAFTA). This agreement was signed back in 1994 with the U.S. to increase trade between the country and other American nations. Apart from NAFTA, the economy has also been boosted by being a member of World Trade Organization (WTO).
Mexico also depends on its oil deposits to support the economy being one of the largest producers in the world. However, the private sector is still regarded as one of the most critical sectors in Mexico as it contributes approximately 33.4% of its GDP (Solis 121). The industry sector, dominated by the automotive and electronics, takes up a huge proportion of the country’s resources in the process of production. Most notable of them is the services industry that is responsible for about 63% of the country’s GDP. The intervention by the state continues to manifest in the Mexican economic system. President Enrique Nieto has spearheaded the “reform agenda” that has focused on overhauling the taxation system, government expenditure, and liberalization of the energy sector. The state owns PEMEX which is one of the leading oil producers in the world. However, the economic disparity in Mexico is so huge that the upper 10% are known to dispose almost 38% of the country’s resources (Story 30).
The Canadian economic system resembles that of the U.S. with some scholars defining its system as still being more of a social market economy. It has increasingly adopted a more market-oriented system dictated by the further growth of mining, manufacturing and the services industry. The economy is highly dominated by the services sector which has transformed the economy from being agrarian to one that is industrialized and urbanized. Comparing it to the U.S. net trade, Canada differs a bit in the context of imports and exports. While the U.S. is a net exporter of its production, Canada imports more than it exports its commodities. However, Canada venture into international trade has opened up its economy especially with the U.S. Having signed the NAFTA in 1994, it has continued to rely more on the market-oriented economic system of the U.S. Pomfret (87) explains that the reliance of Canada’s economic system in the U.S. is so strong that even a minor adjustment in the economic variables in the U.S. such as interest rates have a direct impact on Canada’s economy.
Canada and the U.S. economic system are similar in various aspects. Its rich abundance in natural resources makes it a world leader in various exports. For example, Canada is the 10th largest and 3rd largest exporter of oil and natural gas across the world. In 2010, Canada exported almost 3 million barrels of oil daily and about 95 billion cubic meters of natural gas. The government directs most of the nation’s natural resources towards the U.S. and benefits from the U.S. foreign investments in the mining industries, chemicals, and machinery. However, the economic system in Canada has increasingly been supported by the government especially through the industry sectors. Apart from the economy’s reliance on the services (77%) and industry (21%) sectors, agriculture has also been assisted by the government through subsidies. The global financial crisis of 2008 had a huge impact on the economy thereby affecting industrial production.
Based on the methodological approach above, the U.S. is a capitalist economy since it depends on the competitive markets for resource allocation. The state is still involved in addressing market inefficiencies. For this addition, it is often regarded as a “mixed economy” According to Kemp (54), most of the U.S. natural resources either comes from land owned by private individuals and huge corporations or leased from the state. The government regulates the use of the resources. Canada’s capitalist system is less similar to that of the U.S. since those who own the means of production are the minority. The bigger firms push the rest of the traders and small producers out of the way and this has created monopolies (inefficiencies). Whereas the banking and industrial sectors are independent in the U.S., the Canadian capitalist economic system has a fused finance capital composed of the banks and the industries leaving the state intervention on the minimum levels. This fusion controls the transnational organizations leading to the various inefficiencies brought about by the struggle for global supremacy.
Whereas the U.S. capitalist system relies on the market forces to determine prices, Canada’s system is dominated by the finance capital fusion and the emerging monopolies (Bergstrand et al 201). Note that the owners of capital in Canada prioritize profits as they are free to produce and trade in contrast with the regulated U.S. system. As such, it is clear that the capitalist economic systems in the U.S. and Canada differ with the price system almost dominating entirely in the U.S. while finance-capitalist tycoons dominating in Canada.
In Mexico, the state’s role is greater than that of a free market economy. The government makes the key decisions for the private individuals and sectors. Hewings (143) states that, in Mexico, the market economy is informed by the state ownership of the major industries. Mexico has undergone through economic challenges in the past and in all instances, the state and the market system have combined to stimulate the sluggish economy. It is still the state that decided to liberalize the markets to ensure the country would encourage foreign direct investments and more imports. In a similar economical judgment, the government reduced its role in the public sector by deciding to privatize around 80% of state-controlled organizations. However, a significant number of government-owned companies are still present in the services and oil sectors. One of these is the PEMEX Company that is estimated to have yearly revenues of over $130 billion.
Compared to the U.S. capitalism, this aspect of the state intervening when needed within the market system appears similar. It is evident that there is a compromise between the state interventionism and the mixed economy that the U.S. and Mexican economic systems rely on. This could explain why Mexico and the U.S. are close business partners in international trade and foreign direct investments. Just like in the U.S., the foreign investors are free to hold large stakes in Mexican corporations except in some of the areas reserved for the state. However, the major difference between Mexico and the U.S. economic systems is that the state intervenes more in Mexico than in the U.S. Having nationalized the oil sector, the Mexican government still owns the oil reserves and other businesses have been consistently privatized (Acemoglu, Daron, and Robinson 25). Therefore, the state has a huge role to play in Mexico than in the U.S., given that it has taken a direct role in encouraging business growth, developed new power plants, and provided funds to modern businesses.
Economic systems define how a nation’s resources are owned and how they are distributed for production. Mexico and Canadian’s economic systems have both similarities and differences to the American capitalist system. In all the three nations, the managers and entrepreneurs use the natural resources, capital, and labor for production and distribution of goods. However, the way these unique elements are organized, owned, and used differs according to the nation’s economic, political, and cultural ideals. While the U.S. and Canada’s economic systems seem to lie between capitalism and a mixed economy, the Mexican system is a mixed one where the state and the private sector have huge roles to play in production and distribution of resources. The United States has evolved from the initial pure capitalist economy to more of a mixed economy because the government and the private sector combine in relative roles. Canada, on the other hand, has a capitalist economy that emphasizes on private ownership with the state having little to do in regulating the private sector. The respective economic systems may change in the future as the nations struggle for economic supremacy.
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