What is a closed economy? Definition and meaning

The definition and meaning of a closed economy is a country that does not import or export – it sees itself as self-sufficient and claims it does not want or need to trade internationally.

In a completely closed economy, there are no imports or exports, everything the citizens need are supposedly produced domestically. This type economy is also known as isolationist or an autarky.

A closed economy is the opposite of an open economy, also known as a free-market economy or trading country. Open economies trade with other nations – they import and export goods and services.

Maintaining a closed economy is considerably more difficult today compared to a couple of hundred years ago.

Certain raw materials, such as oil, are key components of so many finished products and productions systems. If a country does not have these raw materials within its borders, it will find it virtually impossible today to function without them.

Closed economyA closed economy is one that claims to be self-reliant – it is an autarky. It does not import or export. The idea is a myth, because the largest black markets – which import goods from abroad – are found in the so-called closed economies.

Henry George (1839-1897), an American political economist, journalist and philosopher explained clearly in his work – Progress and Poverty – published in 1879, how much more wealth is created if households, cities and whole nations cooperate with each other.

Mr. George’s illustration consisted of a plot of undeveloped, resource-rich land that was divided up equally among twenty people. Those people, he explained, could produce significantly more than 20 times the amount of wealth than just one individual could, if they cooperated intelligently. In the same way, twenty nations cooperating intelligently can create considerably more wealth than twenty countries can with no cooperation.

According to The Economist, a closed economy is:

“An economy that does not take part in international trade; the opposite of an open economy. At the turn of the century about the only notable example left of a closed economy is North Korea.

Closed economy equals povertyThe total wealth created by twenty countries that have completely closed economies is significantly less than what twenty nations can produce if they cooperate intelligently, i.e. trade with each other.

Closed economy utopia is a myth

A closed economy or autarky is not a utopia, as many leaders have eventually found. No country has ever been able to produce the full range of products and services demanded by its population at competitive prices. Those who have tried to do so have condemned their systems to inefficiency and their people to comparative poverty, compared with nations that engage in international trade.

All examples of closed economies – North Korea today and India after 1950 for four decades – are countries whose people have suffered abject poverty under that system.

In a closed economy, citizens find the lack of goods intolerable and develop black markets, which import products from other countries. And herein lies the myth – the autarky exists only in theory, because in practice a country’s population eventually finds another way to engage in international trade.

Over the past one hundred years, the largest black markets have flourished in the Soviet Union, its satellite countries in Eastern Europe, North Korea and Cuba – all of them relatively closed economies.

Modern history of closed economies

In the Dominican Republic between the 1600s and early 1900s, rural peasants, freed slaves and slaves who had escaped lived in woodland deep in the interior of the country in total isolation.

In Japan until the 1850s when it opened to the west, Japan was a partial autarky. That period of isolationism – the Edo Period – is known in Japan as Sakoku (鎖国).

The empires of the 17th and 19th centuries pursued a policy of mercantilism, which limited or banned trade outside the empire.

Open vs Closed EconomyIn the 1930s, Canada and Argentina stood neck-and-neck regarding economic development and GDP per capita (income per capita). After eighty five years, in which Canada pursued an open economy and Argentina a relitively closed one, GDP per capita in Canada today is 3.37 times greater than Argentina’s. (Data: Trade % of GDP, World Bank. GDP per capita: Statistics Times)

US President Thomas Jefferson, in 1808, declared a self-imposed embargo on all shipping from abroad. This embargo lasted until 1809. The US was emerging from the American Revolution and feared the economic and military might of Great Britain.

In the 1930s, Adolph Hitler had a goal of self-sufficiency. The Nazis encouraged trade within its economic bloc, but discouraged external trade, especially with the United Kingdom, France and the Soviet Union, countries against which it expected to be fighting in a war.

Nazi Germany did trade with seemingly economically weak countries that were rich in raw materials, such as those of South America.

After its establishment as an independent state in 1950, India pursued a quasi-autarky, a policy that continued until 1991.

In 1976, Enver Hoxha, the Communist dictator of Albania, turned his country into a quasi-autarky. After he died in 1985, the country began trading again with other countries.

Spain’s dictator, Francisco Franco, severely restricted international trade from 1939 to 1959. After the country started trading with other nations, the Spanish Miracle occurred – a period of rapid economic growth that lasted well into the 1970s.

Burma’s dictator, Ne Win, pursued the Burmese Way to Socialism from 1962 to 1988, during which it imported and exported as little as possible with other countries.

Nicolae Ceaușescu, Romania’s dictator, proposed paying off the country’s entire foreign debt and dramatically increasing the number of goods produced at home. He wanted to reduce dependency on imports, because his relationship with both Western and communist leaders had worsened.

South Africa had a closed economy forced upon it during the Apartheid period – from 1948 to 1991. The international community imposed economic sanctions.

Totally closed economies do not exist any more. North Korea, whose economic ideology is based on Juche (Chosŏn’gŭl: 주체; Hancha: 主體 – self-sufficiency), is the best example today of a nation aiming for total autarky. It is one of the poorest countries in the world. Without food aid from other countries, millions of its citizens would not be alive today – which means it is not self-sufficient.

Brazil – the cost of a closed economy

Brazil is not a completely closed economy, but compared with other countries in the world, it is one of the least open. As measured by trade penetration, in 2013 exports plus imports equaled just 27.6% of GDP, compared to an average of 55% among the six countries with bigger economies than Brazil.

The country’s large size is frequently used to explain its relative lack of openness. However, this argument does not stand up to scrutiny, says The World Bank.

Given Brazil’s size, economists at the World Bank would expect its trade to be equal to 85% of GDP, i.e. more than three times its actual size.

Very few companies in Brazil export. There are 20,000 exporters in Brazil, a country with 200 million people – roughly the same number of exporters as in Norway, which has a population of just over 5 million. Norway has one exported for every 250 citizens compared to one for every 10,000 Brazilians.

Writing in a World Bank web page, Otaviano Canuto, Cornelius Fleischhaker and Philip Schellekens made the following comment regarding Brazil if it opened up to the world:

“Opening up and integrating more deeply into global value chains would result in the closure of uncompetitive production chain segments and their replacement with imports.”

“The surviving businesses would be more competitive thanks to their access to imported inputs, allowing them to create products of lower cost and higher quality. Furthermore, in dynamic terms, integration into global value chains would allow scarce domestic resources such as skilled labour to be reallocated to the most productive companies and activities, increasing overall productivity.”

Put simply, if Brazil had opted not to have a closed economy forty years ago, and had spent the past four decades trading vigorously in the global marketplace, it would be a significantly richer country today, and its citizens would be enjoying a standard of living seen only in the advanced economies.

An open and closed economy – definition and meaning

This video explains what a closed economy and open economy are.