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Chapter 4: The Economic Environments Facing Businesses A man is rich who owes nothing. ²French proverb
Chapter Opening Photo
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Objectives y y y y y To communicate the importance of economic analysis To discuss the idea of economic freedom To profile the characteristics of the types of economic systems To introduce the notion of state capitalism To profile indicators of economic development, performance, and potential
CASE: The Comeback Accelerates1
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In the world of globalization, one often struggles to separate the rhetoric from reality. Some view it in the extreme, as in the transformation of everything. Others see it as just the latest stage in the evolution of the market. Some see it as the final phase before forces of deglobalization usher in the inevitable return to local enterprise. Despite wide-ranging opinions, the ongoing integration of national economies into the global market resets the business environment. Discussions have taken a far more dramatic tone the past few years. Some commentators see the flattening of the world whereby advances in institutions, communications, and technology fundamentally change the economics of globalization. They speak of ³distributed tools of innovation and connectivity empowering individuals from anywhere to compete, connect, and collaborate.´ 2 Powered by hardware and software innovations, companies operate anywhere, anytime. Others emphasize the entry of billions of people into the global marketplace. They reason that the world is in the ³middle of a two-part revolution. Three billion new people²billion and a half Chinese, billion Indians, half a billion people from former Soviet bloc²have suddenly come into the global economy all at one time. Within these three billion people is a population as big as the United States, bigger than anybody in Europe or Japan, who are every bit as skilled and can do anything that could be done in the U.S. or Japan or any of the developed countries for ten cents on the dollar.´3 Billions of low-wage, skilled workers radically resets how we interpret capital and labor in the production of goods and services. Finally, the consequences of the global economic meltdown raised the specter of slowing markets triggering deglobalization. Rising trade barriers, risk-adverse companies, and nationalistic consumers slow the cross-national movement of information, people, products, capital, and jobs. Governments constrain the animal spirits of capitalism, regulating what had become hazardously free markets. Economic freedom, as we saw with political freedom in Chapter 3, is under siege from surging state intervention.
MAP 4.1 Leading Emerging Markets Pick up from page 132, 13th Edition Source: Compiled from The Economist and the Morgan Stanley Emerging Markets Index.
What's Next? Provocative in their own right, these interpretations suggest that, in the first decade of the twenty-first century, globalization reinforced long-running developments and initiated powerful trends. Combined, they challenge one¶s lifestyle, job, company, country, and future. The possibility that globalization has reached an inflection point²namely a time where old strategic patterns give way to the new²signals the need for managers to rethink economic principles and practices. Understanding where we are heading calls for highlighting where we have come from. Initially, attention turns to how the world economy evolved from 1950 through 2000. During this time, the diffusion of democracy and free market principles powered growing trade among the richer, developed nations. It
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also spilled over to many poorer, developing countries. Institutions like the IMF, WTO, and World Bank stabilized the playing field. Companies from the United States, Western Europe, and Japan²the so-called Triad²ruled international business and globalized the world in their image. The precedents from this era increasingly fall short in helping managers interpret today¶s puzzles. Indeed, focusing on the tried-and-true indicators of the past distort interpreting today¶s global economy. Unquestionably, measures of the performance and potential in developed countries matter. However, they no longer matter decisively. Unfolding trends direct attention toward an epochal shift in the center of gravity of the global economy. The Emergence By 2050, four of the six largest economies in the world²Japan, China, India, and Russia²will be in greater Asia. Their growth will create a second tier of robust economies among their Asian neighbors, such as Singapore, South Korea, Indonesia, Taiwan, Kyrgyzstan, Vietnam, Thailand, and Australia. Countries in other parts of the world, like Brazil in South America, South Africa in Africa, and Israel and Saudi Arabia in the Middle East, will develop in-step with their Asian counterparts. (See Map 4.1). All, although each at a different pace, are inexorably moving from the periphery to the center of the global economy. Extrapolating from 2012 out to 2050 is, unquestionably, more speculation than estimation. Still, these countries are implementing powerful pro-growth policies. Hard data confirm their success so far. In 1980, the combined output of emerging economies accounted for 36 percent of global GDP. They crossed a milestone in 2009, accounting for more than half of total world GDP.4 Similarly, emerging economies¶ share of world exports is nearly 50 percent (up from 20 percent in 1970). Their share of the world¶s foreign-exchange reserves is 70 percent (up from net deficits in the mid-1990s). China alone holds more than 28 percent of total reserves in the world. Institutionally, the G-7 expanded into the G-20, thereby giving new members, like China, India, Brazil, Mexico, and South Korea, greater say in the premier global policy forum. These new stakeholders advocate different views of trade and investment regulation. Collectively, the accelerating rise of emerging economies signaled that the wealthy countries of the twentieth century would not dominate the global economy in the twenty-first century.5 The economics in emerging markets suggests the revolution has only begun. Ambition to improve infrastructure, increase productivity, create jobs, and alleviate poverty has put into motion what will likely be the biggest economic stimulus in history. The last transformation of similar magnitude²the Industrial Revolution²involved far fewer people in far fewer nations but still produced a century-and-a-half economic expansion that altered lives everywhere. Today's revolution spans the globe and includes far more people in far more countries. The transfer of the leadership baton from wealthy countries to emerging markets, for better and for worse, resets our interpretation of economic environments. PRECEDENTS AND PREDICTIONS Making sense of the situation moves some to review a broader span of history. One need only track the past millennium, they say, to put the current economic drama into perspective. Before the steam engine and
Indonesia. If these trends persist. their ambition is straightforward: Restore their historic stature as the engine of the global economy. such as the United States. Paris: OECD Development Centre Studies. today¶s emerging economies. soon claimed this title before ceding the top spot to the United States around the beginning of the 20th Century. nearly 70 percent of the world growth over the next few years will come from emerging markets. on the basis of the Industrial Revolution. Sources: Compiled from The World Economy: A Millennial Perspective.1). By the twentieth century. 13th Edition New Caption Over most of the past millennium. the global financial crisis slows and shrinks many developed economies. coupled with the accelerating scope of emerging economies.
Today. They lost their lead (temporarily trends now suggest) as internal political failure. emerging economies will again account for more than 70 percent of global economic output. again accounting for more than 70 percent of global output. China and India were the world¶s two biggest economies. Over the next decade.8 The diminishing role of today¶s rich economies. China¶s share had fallen to 5 percent. 2001. they produced. Britain. today¶s developed economies. Since 2001. emerging economies¶ share of global output had fallen to 40 percent. Consequently.
FIGURE 4.6 percent. By 1950. the Industrial Revolution benefited the West while bypassing them. spurred isolationism and xenophobia. China produced the highest percent of all the goods consumed in the world. IMF. and monetary patterns.1 Emerging Markets Make a Comeback Pick up from page 134. if not sooner. today¶s emerging economies will complete their comeback. most developed economies will be fortunate just to grow. thereby culminating their comeback. trade. generated more than half of global economic output. Germany. For
. Angus Maddison. accounted for about 70 percent of global economic output. in 20 years or so. the rich economies have averaged 1. From 1000 to the mid-1880s. China alone generated one-third of the world¶s gross domestic product in 1820. 70 to 80 percent of world output (see Figure 4. and Japan. changes investment. consumption.6 In contrast.4 percent and fell to second. In addition.. The Economist.4 percent. the United States. on average. While they expand. Over this span. by 2050. leader for the previous 110 years. Trends suggest that. emerging economies will grow at an average of 6. with 40 percent coming from China and India and another 15 percent from Brazil.7 Symbolizing this process. fiscal. in contrast. today¶s emerging economies dominated world output. Russia.Page 4 of 63
the power loom drove the transfer of economic might from Asia to the West. wealth.8 percent of all the goods consumed in the world in 2009. In 1850. aggravated by colonial exploitation and unfair trade agreements. produced 19. annual growth in emerging markets has averaged 6. most notably China and India. and South Korea. poverty. China reclaimed the top spot it last held in 1850--it produced 19.8 percent a year.
1 gives an indication of who sees which. Chart 4. whether newcomers or incumbents. strategic inflection points do not necessarily lead to disaster. Nevertheless.Page 5 of 63
some. as cell-phones to land lines or the Internet to printcentric newspapers. For others. evaluate the performance. Policymakers. seems unpredictable. such as those who applied computer chips to cell phones or publishers that migrated to the Web. Change creates prospects for players.1 Is the country's economic situation good or bad?
(% Affirming it is Good)
China India Poland Indonesia Kenya Turkey Nigeria Russia Mexico Argentina South Korea
Germany United States Britain France Japan
Source: Adapted from Pew Global Attitudes Project: Country's Economic Situation. Noted one observer. and assess the potential of economic environments.10
Still. particularly if his starting point is the recession-racked West« [emerging markets] see opportunities in every difficulty rather than difficulties in every opportunity. as this chapter shows. these shifts pose threats. "No visitor to the emerging world can fail to be struck by its prevailing optimism. they create opportunities. Economic change. CRN
. there is rhyme and reason that helps managers interpret the development. executives.
Chart 4. Against this backdrop."9 Put differently. 2011. who are adept at operating in the new economy. this chapter profiles the frameworks that interpret the brave. workers. new world. particularly the sort we have seen during the global financial crisis. megatrends such as the Comeback are rare events. and investors will wrestle with this shift for decades.
and countries. forecasting China's response to polycrystalline silicon shortages would have encouraged some options while rejecting others. performance. and adapt to its economic environment. Policymakers worldwide watch the game. along with China's sovereign-wealth fund. and a few not at all. companies enjoyed opportunities as nations
. poured money into local polysilicon manufacturers. anticipate. In 2007. Local governments expedited approvals for new plants.Page 6 of 63
Introduction Cultural. Globalization seemingly expanded the economy for all. Different reasons explained success and failures in different countries. Managers track changes. For instance. he has created one of the world's biggest polysilicon makers. adding this or taking away that in order to boost performance. and how to do business.12 Rather than an isolated situation. State-owned banks. GCL-Poly Energy--which counts China's sovereign wealth fund as a key owner. In the West. China makes about a quarter of the world's polysilicon and supplies roughly half the global market for finished solar-power equipment. when. hitting $450 a kilogram in 2008. in absolute terms. Political and economic processes require anticipating new situations. and legal systems influence a company¶s decisions on where.11 Although easily overdramatized. In China. making prudent investment and operational decisions depends on how well managers understand. Since the 1980s. built it. This chapter completes our macro-profile. shortage of polycrystalline silicon²the main raw material for solar panels²threatened China's nascent solar-energy industry. economic environments change. some prospered more than others. once there. and potential. Since then. For example. Today. Zhu Gongshan raised $1 billion for a plant. Emerging economies are reinventing systems of production and distribution as well as experimenting with entirely new business models. In relative terms. Polysilicon prices soared tenfold in a year. polysilicon factories require lengthy reviews that results in years to build a plant. growing from $12 to $61 trillion. many countries prospered. It presents the perspectives and tools that managers use to interpret economic environments. consider the following situation.
Margin Note 2 Economic and political changes alter market circumstances Although the pace varies from country to country. For example. this task has perhaps not been more important in our lifetimes given the opportunities and challenges currently facing individuals. Estimating the attractiveness of a country as a place to do business and. Western MNEs rethink strategies and reposition assets. political. evaluating events and trends in terms of the following assumptions: Margin Note 1 Countries differ in different ways Countries have different levels of economic development. As a result. companies. the tale of GCL-Poly Energy increasingly is the norm. Beijing's response was swift: the development of domestic polysilicon supplies was declared a national priority. and started production within 15 months. Foreign companies then dominated production and passed high costs onto Chinese producers. gross world output more than quintupled between 1970 and 2010.
Policymakers.000 multinationals based in the emerging world. Companies also monitor changes in countries where improving performance or revised policies strengthen local competitors. dethroned Exxon Mobil as the world¶s most valuable company. Greater competition for scarce resources increases prices of commodities but decreases costs of manufactured goods. Estonia. a Chinese company. impossible in 1980. it shut its Massachusetts factory. PetroChina. and Institutions Economics is vital to citizens. the apparent triumph of free markets over state-controlled economies had led
. or South Africa. Consequently. CRN Choices of Citizens. the global financial crisis has reset the game. more people are working worldwide but poverty is increasing. Change in one country has consequences in others.15 More than 70 percent of the world's growth over the next few years will be in emerging markets. for example. They also spotlight implications for economic freedom. both big and small. In Boston. In 2011. Australia. Evergreen Solar cited the superior location economics and higher government support for solar activity in China. In the West. Change. laid-off 800 workers. Challenges of the Comeback The rise of emerging economies distorts traditional economic indicators. managers study changes. for the first time. In the least. China fast tracking its polysilicon factories. few of these existed 10 years ago. managers realize that steps taken in Ireland.14 The number of companies from Brazil. Bolivia dismantled its privatization model that governed the mining industry and expropriated all assets owned by private. The task is distinguishing common trends from unique events. it has endorsed growing government involvement in allocating resources. CRN In both worlds. And. and institutions. China or Russia on the Financial Times 500 moved from 15 in 2006 to 77 in 2010.13 On the larger scale. By 2000. policymakers. Managers' macroeconomic instincts. sometimes confusing. In the East. Evergreen Solar became one of the largest makers of solar panels in the United States by 2009. in the back of their minds. the United Nations estimates there are approximately 22.
Concept Check 1 Connections. Brazil. For example. Too. India. adapt to the changing. or Mexico differ from those taken in China. China. globalization connects countries. and Consequences Besides assessing the foreign markets in which they operate.Page 7 of 63
adopted the principles of capitalism and practices of free markets. Executives worldwide had to determine if this was an isolated example or the start of a trend. managers monitor those in which they do not. too expensive there. moved it from the periphery to the center of the solar power industry in 2010. changing economic policies reveal government ambitions. both here and there. and recycling massive foreign exchange reserves means capital is too cheap here. aided by $43 million in public assistance. tried and tested for the past decades in the West. Thailand. circumstances. triggering market reforms and tighter regulation. in mid 2011. that shape economic environments. largely foreign owned mining companies. and shifted production to a joint venture with a Chinese company in Wuhan.
Northern Europe. The record shrinking of the polar ice cap is turning the forbidding waters at the top of the world into new shipping routes. so too might global warming do the same. For example. also misallocate capital and over-promote consumption and opportunism. Satellite images show the consequences of global warming in northerly latitudes. most goods between Asia and southern Europe travel through the South China Sea. and spatial organization of economic activities across the earth.
. as we see. Hence. Companies and countries evaluate the implications of emerging shipping routes linking the Atlantic and Pacific along Russia's Arctic coast (the Northeast Passage) or through Canada's Arctic Archipelago (the Northwest Passage). a fuller understanding of economic transitions and market evolution helps citizens. Free markets.
Concept Check 2
Does geography matter? Change and Consequence of Arctic Sea Ice Understanding economic environments moves managers to mind the changing dimensions of the world. However. Today. Today. However. http://www. New market standards reset asset valuation and resource allocation. economic geography is the study of the location. just as the Panama and Suez Canal changed the flow of trade. policymakers. cross the Mediterranean. rapidly happened in the solar power industry.nasa. Free market reforms increased investment. consumption. distribution. the bulk of goods between Eastern United States. we see interesting developments in the geography of globalization. increasingly constrain the animal spirits of unbridled capitalism through expanding regulations.gov/topics/earth/features/ice-min-approach. and wealth. the crisis showed. the global financial crisis cast doubt on the sustainability of market led change.html. Governments. pass through the Suez Canal. for both good and bad reasons. and Asia travel through the Panama Canal to navigate between the Atlantic and the Pacific. round the bottom of India.16 Passage through the Arctic Sea Ice Source: Adapted from NASA satellite image taken September 2010. One would think that the terrain of our planet had been thoroughly mapped over the past millennium given the relentless expansion of trade and investment. employment. Similarly. particularly those in the West. and reconfigure industries. cut past Singapore. reshape trade and investment.Page 8 of 63
countries to launch bold development programs. and institutions make better decisions. and head up the west coast of Europe. All of which.
Traveling the Northwest Passage shaves around 3. shipping goods from South Korea to the Netherlands via the Suez Canal travels 14. The voyage from Vladivostok in the Russian Far East to Rotterdam.000 nautical miles (3. the Arctic Ocean's ice cover shrinks dramatically. However. it yields new trade routes. an increasingly hotter world poses innumerable side effects that likely trump the benefits of shorter trade routes. and resources. the shorter trip significantly reduces the cost per ship per trip.452 miles) and ten days off the journey.Page 9 of 63
Traveling these fabled Passages.000 miles)."19 The shrinking Arctic ice is. by mid-century. Scientists tracking the annual maximum extent of Arctic sea ice reported that 2011 was among the lowest ice extents measured. scientists predict these waterways could remain ice-free year round. rather than the Panama or Suez Canals.000 nautical miles (about 15. "Then. we see an abrupt decline. Improving conditions for traveling the Northwest or Northeast Passages depend upon worsening conditions for the planet.18 For a couple of months or so. Similarly. alters shipping logistics and trade routes. Nevertheless. Germany via the Northeast Passage takes less than a month. markets.17 Presently." said NASA. And since time is money. the average annual maximum was basically uniform. to say nothing of radically redrawing the world's coastlines. Accelerating ice loss may bring that date forward. As climate change resets the Arctic ice cap. The traditional route through the Panama Canal runs at least 6 weeks. "For the first 20 years of the satellite record.
. at best. a mixed blessing. in 2011. ships can feasibly ply the Northwest or Northeast Passage at the end of the summer melt season.
Resource constraints mean managers must prioritize their options.2 reports aspects of the U. Mind you.20 Few MNEs can fund and run operations in all 208 markets. economy that profile its outstanding debt and obligations. In the wake of the global financial crisis.
Figure 4. this a partial selection. unemployment. assessments are often more conditional than universal because: Margin Note 3 1. The complexity of even the simplest economic system defies straightforward classification. Just as no man is an island.usdebtclock.Page 10 of 63
INTERNATIONAL ECONOMIC ANALYSIS The World Bank identifies 208 discrete economic environments in the world today²194 countries and 14 other economies with populations of more than 30.S. 3. Interdependencies complicate interpretations. operating in countries that offer the greatest return with the least risk.000. income distribution. Still. it excludes important indicators like inflation. Improving decisions depends on assessing the development. The consequence of connections is an integrated system of markets in which actions in one influences outcomes in others. Stipulating indicators that definitively represent a country¶s economic performance and potential is difficult.21As a result. it highlight the complexity of an economy. no country is isolated. indicators that worked in 2009 were flawed by 2010 and remained dubious in 2011. Marketplace dynamism means that today¶s valid measures may prove invalid tomorrow. although economics champions many scientific principles it still relies on a variety of behavioral assumptions to interpret activity. and potential of an economy.org/
. Figure 4. In particular.2 Indicators of an Economy: A Partial Profile
Source: http://www. Adjusting analysis for actions and reactions across a broad scope of markets is difficult. 2. and balance of trade. For example. performance.
Therefore.2 from page 144 of 12th edition. performance. namely economic freedom and system type. which guide assessment. the insights help managers pinpoint where investments should go and. and news articles in developing a mosaic profile that represents an economy's features and estimates its interactions. Collectively. Clarifying interactions among elements of an economy help estimate its development path and performance potential. Consider.3 shows how managers overcome these constraints. analysts¶ reports.
Concept Check 3 FIGURE 4. It identifies economic conditions that shape a country¶s development. managers apply three perspectives to help make sense of situations. they evaluate the type of economic system in the country. where they should not. and potential. a systems perspective. for example. studying how current policies shape development and performance.
. Figure 4. Lastly. Replace sidebar contents as indicated here. it highlights elements. proves useful. First. managers typically integrate insights from company activities. the consequences of a reduction in interest rates. a cut spurs more borrowing that fans greater demand that boosts inflation that erodes purchasing power that creates wage pressure that reduces profits that lowers savings and so on. they estimate how much freedom they will have to make investments and run operations as they see fit. Second. perhaps more importantly. The third investigates the points of change that drive economic change. therefore. assessing the conditions that moderate economic freedom as well as move a country from one economic system to another.3 Economic Factors Affecting International Business Operations Pickup figure 4.Page 11 of 63
Figure 4.3 also suggests that linkages among elements mean that a change in one affects others. Too.
conversely." 22 Rather than the state. the higher the degree of economic freedom (or. capital. these sorts of freedoms are taken so for granted. grading each's performance.1). In many others. and goods. however. Although managers monitor a range of economic issues.
. Property Rights Ability of individuals to accumulate private property. liberty. The higher the score on a factor. these freedoms are so rare. Margin Note 4 Against this backdrop. This index rests on Adam Smith's notion that "basic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society.Page 12 of 63
ECONOMIC FREEDOM Chapter 3 used political freedom to organize discussion for a simple reason: any discussion of politics. no matter the terminology. and efficiency. within the range of 0 to 100 percent. save. produce. We reapply the same logic here. individuals decide how they wish to work. and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process. fully realized freedoms of movement for labor. Importantly. Freedom House applies this index to 183 countries. safety.´23 The Economic Freedom Index is made up of 50 indicators organized into 10 dimensions (see Table 4. dimensions. ultimately takes one to the issue of what one is free to do in a political system. economic freedom is the ³absolute right of property ownership.1 Dimensions of the Economic Freedom Index Business Freedom The ability to start. Trade Freedom The absence of tariff and non-tariff barriers that affect imports and exports of goods and services. secured by clear laws that are fully enforced by the state. operate. The Economic Freedom Index estimates the extent to which a government constrains free choice and free enterprise for reasons that go beyond the need to protect property. the lower the level of government interference)
Table 4. consume. they are ongoing points of fascination and conflict. they rarely cross one's minds. and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself. and invest. Monetary Freedom The degree of price stability and the extent to price controls. or dynamics. analysis ultimately centers on what they are free to do as economic agents: What investments can they make? How can they allocate resources? What property rights can they claim? How can they compete? Whom can they hire and fire? What forms of operations can they engage? In many countries. that freedom is both protected by the state as well as unconstrained by the state.
4).2 percent in 2007.2 billion people live with high to moderate degrees of economic freedom. economic freedom remains down from the pre-crisis high of 60. regulatory reform. Nevertheless.4 in 2010.
Source: Adapted from The Economic Freedom Index.
Government Size Government expenditures as a percentage of GDP. Economic freedom on a regional basis shows higher degrees in Western countries and lower degrees in Eastern countries. and property rights.4 Economic Freedom by Region
. Approximately 1. Freedom From Corruption Degree that corruption introduces insecurity and uncertainty into economic relationships. without restriction. Investment Freedom Ability of individuals and firms to move resources. regaining some momentum it had lost during the great financial crisis and ensuing global recession.
Worldwide.7 percent. economic freedom advanced in 2011. lives in countries where the state grants them low degrees of economic freedom.24 More governments reiterated the importance of sound finances.Page 13 of 63
Fiscal Freedom Tax burden imposed by government on its citizens. with people in North America and Europe enjoying more than do others elsewhere. roughly 5. up from 59. open markets.2 billion people. The population data indicate that most people of the world live in countries with lower degrees of economic freedom (See Figure 4. into and out of activities both internally and across the country¶s borders.
FIGURE 4. the average freedom score was 59. Economic freedom varies across regions. Labor Freedom Aspects of the legal and policy framework that regulates the country¶s labor market. In 2011. The majority of the world. The Heritage Foundation and the Wall Street Journal. Financial Freedom Efficiency of banking as well as the independence of the financial sector from government control and interference.
Map 4. Singapore. and 32 are repressed. and Canada. Cuba. Eritrea.heritage. Margin Note 5
MAP 4. 2011). DC: The Heritage Foundation and Dow Jones & Co. Switzerland.
. retrieved June 1. mostly unfree. 57 are mostly not free. 27 are rated mostly free. debt. 2011 Index of Economic Freedom. Its score of 77. and Venezuela.2 Global Distribution of Economic Freedom The Index of Economic Freedom classifies a country as either: free.org.25 The freest economies are Hong Kong. mostly free. the United States ranked fifth with a score of 81. Zimbabwe..8 placed it in the ³mostly free´ category. 2011 (www. Inc.2 profiles economic freedom around the world. moderately free.2 and placed in the "Free" category. It indicates 6 countries have free economies. Washington. and regulations. New Zealand. The least free economies include North Korea. 57 are moderately free. In 2007.Page 14 of 63
Source: Terry Miller and Kim Holmes. Reprinted by permission of The Heritage Foundation. The United States dropped to 9th place in 2011 largely due to increased government spending. and repressed given the degree to which its government regulates individual's economic choices. Australia.
Countries with high economic freedom have higher rates of growth and productivity.org. Reprinted by permission of The Heritage Foundation.heritage. Income is higher in countries with higher economic freedom.Page 15 of 63
Freedom Map Design Info: Map Source: http://www. performance.org/index/pdf/2011/Index2011_map. 2011 (www. Washington.
Margin Note 6
The Value of Economic Freedom: Economic freedom helps explain a country's development. and potential. Higher-rated countries generally outperform laggards on a variety of measures. 2011 Index of Economic Freedom. DC: The Heritage Foundation and Dow Jones & Co. it more than doubles the worldwide average and is 7 times higher than in mostly unfree and repressed
.. retrieved June 1.heritage. 2011).pdf Updated data for legend box: y y y y y free economies: 6 mostly free economies: 27 moderately free economies:57 non-free economies:57 repressed economies: 32
Source: Terry Miller and Kim Holmes. Inc.
Margin Note 7
CHART 4. 0. and employment.2 Economic Freedom and Leading Economic Indicators
GDP Per Capita.9
. Economic freedom pays social dividends.9
Inflation Rate. 33. ModFree. Repressed. 5. Mostly Free.2). 3.6 Inflation Rate. Mostly Free. Life expectancy. data indicate a positive relationship between economic freedom and various measures of economic performance and quality of life. and environmental sustainability show positive relationships with economic freedom.2
Inflation Rate. Repressed. 26 The data support the argument that liberating resources from government control improves financial performance.464 GDP Per Capita. and standards of living. 1 4. 10 . Free.770
GDP Per Capita.8
Inflation Rate. literacy. 6. 39.987
GDP Per Capita ($)
GDP Per Capita. Collectively.Page 16 of 63
economies (See Chart 4. 4. Mostly Free. economic stability. Mostly Unfree. political openness. 0. Mostly Unfree.495 GDP Per Capita.253
Inflation Rate. Positive relationships exist between economic freedom inflation. Free.
Free markets had consistently outperformed "not free" countries.6 Unemployment Rate. in signifying the triumph of capitalism over communism. Its immediate aftermath saw industrial production. and equity valuations tracking or doing worse than during the Great Depression. The scale.Page 17 of 63
Unemployment Rate.heritage.27 Downturns in many economies signaled the biggest global economic contraction since the Second World War. 5. Throughout the world. The 2011 Index of Economic Freedom. Mostly Free. The state. Repressed. 21 .org (accessed June 6. managers could safely presume that countries would adopt reforms that increased economic freedom. governments deferred to the laws of supply and demand²the invisible hand of the marketplace rather than the visible hand of politicians²to anchor the philosophy and regulate the practices of their economic environments.
Trends in Economic Freedom For the past few decades. 8. Large and growing majorities believed that people¶s lives benefited from more. exports. Increasingly. Mostly Free. and spurred rethinking government¶s role in the economy. Reprinted by permission of The Heritage Foundation. scope. Free. 9. The fall of the Berlin Wall in 1989. at www. should control the animal
Unemployment Rate. Mostly Unfree. some argue. countries abandoned the policies of state control and adopted the principles of capitalism and the practices of economic freedom.5
Unemployment Rate. The global financial crisis has disrupted the expansion of economic freedoms. and swiftness of the global financial crisis highlighted the limits of a market economy. economic freedom.5
Unemployment Rate. not less. symbolized the supremacy of economic freedom. contested the usefulness of market fundamentalism. 12
Source: Adapted from data reported by the Heritage Foundation and the Wall Street Journal. Margin Note 8 Changing marketplace conditions and unfolding political trends indicate that MNEs face increasingly uncertain economic times. 2011).
stabilizing panics. Each and all decreases economic freedom. reported that an average of 11 percent across 27 countries held the opinion that capitalism works well. and sustaining demand. Today. A leading survey. especially those initially hit hardest by the global financial crisis and still experiencing anemic growth. Installing safeguards to prevent another round of the crisis has increased state control of economic affairs. which we evaluate in the closing case of this chapter. Only in two countries--the United States (25 percent) and Pakistan (21 percent)²did more than one in five feel that capitalism works well as it stands. rising unemployment. in turn. 80 percent of Americans regarded the free market as the best economic system for the future²then the bellwether of support. Countries. many economies have stabilized. CRN In 2002. Dissatisfaction with capitalism prevails across the globe. emerging economies now match or have overtaken the United States in their enthusiasm. redistributing wealth. sluggish growth. complicate recovery. This.29 Our opening case cautions qualifying attitudes in developed versus emerging economies. 28 Some 23 percent believed capitalism is fatally flawed. Nominally Communist China is one of the world¶s strongest supporters of free markets. 35 percent in Brazil. Still. managers struggle to pinpoint the implication of these market trends to economic freedom.Page 18 of 63
spirits of free and unfettered markets.30
. Many called for a new economic system²including 43 percent in France. question the legitimacy of the quest to maximize economic freedom. Now. They hasten to add that its endemic flaws require reform and regulation. By 2010. five years down the road from the start of the crisis. All in all. up from 66 percent in 2002. Fear of Free Markets The causes and consequences of the global financial crisis. reduces economic freedom. they are wary of free markets. sovereign debt crises. 38 percent in Mexico. regulating markets. at 68 percent. costly commodities. about half of the "world" reasons that the free market is still the best option. as the world regroups. Rather than an ideal to emulate. and 31 percent in Ukraine. Some 67 percent of Brazilians and 59 percent of Indians see free markets as the best option for the future. show weakening support for free markets. for example. support had fallen to 59 percent. Conversely. safeguarding citizens.
notably western markets. Arguably. Presently. and openness to trade and FDI are telltale signs. ultimately the legitimacy of the prevailing economic outlook is tied to how people feel about their particular situation. falls short of missing India's economic surge. In situations like those that we see today. Dire circumstances inevitably fuel public clamor for government intervention. In summary. Those who lives are improving. Their evolution and interplay will alter the relationship between markets and governments. apparently. people on the go need to move. as citizens seeking stability appeal to politicians. notably emerging economies. the financial crisis signals a radical shift in the legitimacy of free markets and. Specific link isttp://uncyclopedia. support it. Continuing skepticism will push for greater state control and. we are likely to see more people question the legitimacy of capitalism and the free market. economic freedom. clamor for change. Source: Uncyclopedia the content-free encyclopedia that anyone can edit. Here we see Indian passengers hanging onto a crowded local train in ways that defy reason. Low inflation. The risk of traveling this way.wikia. praise for the virtues of economic freedom has turned to criticism of its deficiencies. those whose lives are deteriorating.
The Test The test of any economic system is straightforward: it must apply sound macroeconomic policies that sustain a productive economic system. In others. Meeting these standards powers performance and boosts potential. prudent public finances. by extension. the exact opposite takes place.Page 19 of 63
Caption: Despite the risk.com/wiki/File:043_overcrowded_train_India. low unemployment.
Photo is content/royalty-free. consequently. less economic freedom. the question of whether free markets and their endorsement of maximum economic freedom create the superior economic system is no longer a strawman. if the legacies of the global financial crisis persist or worsen.31 In many countries.
5 Pick up from PowerPoint file. implement fiscal and monetary policies. interpret economic freedom. Managers often begin analysis by evaluating the economic system in a country. make most economic decisions is a market economy. It is anchored in the philosophy of capitalism and its principle that private
. 5) Margin Note 9
Figure 4. rather than the government. mixed. authorize property rights. and command economies (See Figure 4. managers question how the host government might regulate the economy. and ultimately.Page 20 of 63
TYPES OF ECONOMIC SYSTEMS Wherever they go.
Market Economy A system whereby individuals. Three types of economic systems stand out: the market. This leads them to investigate the structures and processes that guide resource allocation and business conduct.
quantity. it advises "let it be" or "leave it alone... Margin Note 12
Table 4. Optimal resource allocation follows from consumers exercising their freedom to choose and producers responding accordingly. and provide general safety and security (See Table 4. supply.32 Ultimately. individuals¶ free choice in a market economy powers a country¶s progress toward prosperity. Privatization. and the United States grants people the economic freedom to decide where to work. there is an enduring bias toward minimal government intervention in market economies. The more visible the ³hand´ becomes due to government intervention. ensure fair and free competition. the anchor of the market economy is the invisible hand of economically free agents driving growth and prosperity. The need for public goods (e. proponents concede that the invisible hand is not infallible.´33 Deregulation helps
.g. the less efficiently the market works. protect property rights. investment. minimum wage. Government is the problem." More broadly. Consequently. improves production and consumption decisions. national defense) and protections (e. how to spend or save money." Whatever the translation. and risk..2 Means and Methods of a Market Economy Privatization A necessary condition of a market economy is the state¶s sale and legal transfer of government-owned resources to private interests. Singapore. Australia. a market economy pushes producers. regulate certain sorts of economic activities. Switzerland. to make products that consumers. buy. it opposes government intervention in business affairs. it sees the ³invisible hand´ of self-interested consumers as the foundation of efficient economic activity.2). Deregulation Government regulations reduce individual choice²i. by virtue of what they do and do not buy. Therefore. Canada. With that said. ³Government is not a solution to our problem. Ultimately. A market economy of the sort seen in Hong Kong. by letting the private sector regulate supply and demand. spurred by the profit motive. Rather.Page 21 of 63
ownership confers inalienable property rights that legitimize profits earned by one's initiative. consumers direct the efficient allocation of resources and the optimal valuation of assets. Literally translated. optimally determine relationships among price. financial regulation. and demand. As Adam Smith observed. environmental standards) that preempt those inclined to maximize personal gain at the expense of society¶s welfare requires some governmental involvement. through their interactions with producers.g. Margin Note 10 Concept Check 4 The market economy champions the principle of laissez-faire.e. Consumers. it suggests. what to do and for how long. and whether to consume now or later. "let do. spurred by their need to maximize purchasing power. traffic lights. a market economy calls upon the state to enforce contracts. Margin Note 11 Unquestionably.
in what quantity. communism champions state ownership of resources and control of all economic activity. India prior to its economic reforms in 1991. usually labor. and Burma.
. capital-intensive. communism calls for an egalitarian. Product quality is erratic and typically deteriorates. Protection boosts economic freedom by assuring individuals. such as Iran. the visible hand of the government. orders state-owned companies to make computers. and ultimately stateless society based on the government¶s command of the economy. commanding the authority to decide what products to make. and unprofitable. inefficient.
Concept Check 5 Command economies have included the Soviet Union (which was for a time the world¶s second-largest economy). managers operate in economies that exhibit many but not all methods of state control. Property Rights Property rights give entrepreneurs ownership of their idea. Indisputably. 34 Antitrust Legislation Antitrust laws prompt industries with as many competing businesses as the market can sustain. in a market economy. 35 This reasoning results in a command economy in which the government owns and controls resources. typically large-scale. and Afghanistan during the rule by Soviet occupation and the Taliban. For example. with little regard for price. effort. Venezuela. North Korea. High productivity continues as long as the state can utilize idle resources. More often. at what price. Turkmenistan. the bias toward political stability and social control suppresses economic freedom. will prosper from their ingenuity. and risk. notably Cuba. Although nominally a socioeconomic structure and political ideology. China during its Great Leap Forward era beginning in 1958. Today. not the government. Controlling everything and everybody lets the state mobilize idle resources. if the government wants computers. command economies can perform well for short periods. to generate growth spurts. These sorts. Libya. Products are usually in short supply and there are few substitutes.
Command Economy In theory. we see few pure examples. State owned companies. Above all. it collects taxes and buys computers at market prices. classless. They prevent monopolies from exploiting consumers and restraining market growth.Page 22 of 63
markets optimize productivity. and in what way. have few resources to upgrade or incentive to innovate. In a command economy.36 Margin Note 13 Making the invisible hand visible means that government officials²not consumers²determine the prices of goods and services. Iran.
and innovativeness found in free markets yet grants the state the authority to prevent individualism from harming the welfare of society. Rather than instructing the state-owned firm how many computers to make. It utilizes the market to allocate resources. and extensively regulates the market. but it subjects investment to social control largely directed by the government. the government may own companies that manufacture computers. More specifically. in allocating resources. the interaction of supply and demand.Page 23 of 63
Belarus. and China. the state intermingles ownership of some resources. determines production. Zimbabwe. also defends the weak by supporting low unemployment. S.40 Advocates of the mixed economy do not unconditionally endorse state intervention as a panacea. Countries that favoured a strong state presence.39 As the free market British economy cratered. Regarding the former. fall between the market and command economies. stabilizes the system by responding to market failures. regrouped and wondered what next."37 The mixed economy integrates elements of the command and market systems. tougher job-protection laws. and social circumstances shape how the government balances economic freedom and state control. the extent and nature of government intervention differs from country to country. productivity. Margin Note 14 A country's adoption of the socialist philosophy explains its decision to forsake the market or command economy. helps the impoverished by fairly distributing income. centralizes economic planning. as opposed to the market. fall in the "mostly unfree" and "repressed" categories of the Economic Freedom Index. signaled to producers through the price system. This mandate requires a country achieve the efficiencies. A mixed economy is a system in which economic decisions are principally marketdriven and ownership is largely private. Governments. the slate of officials. and protects society by limiting abuses of market power. Vietnam. Socialism holds that a fair and just economy.
.S.41 Hence. are presumed to far more conscientiously instill an egalitarian ethos into the economy. President Obama reasoned that it is the government's responsibility to make "strategic decisions about strategic industries. from slightly to extensive. The aftermath of the global financial crisis corroborated many of these principles. as does capitalism. heavier regulation. At present. Russia. U. Socialism advocates regulating economic activity with an eye toward social equality and fair distribution of wealth. and generous social safety programs better navigated the economic upheaval than had their free market counterparts. Ethiopia. but the government intervenes. countries commonly classified as mixed economies include South Africa. Political agendas. higher taxes. the government permits market forces to influence quantity. as does communism. besides optimizing efficiencies. Mixed Economy Most economies. Regarding the latter. As the economically free U. prevents the consolidation of wealth and power. broadly labeled mixed economies.38 For example. the socialism of Denmark supported its steady economic performance and citizens¶ status as the happiest people in the world. France¶s mixed economy perservered.
the global financial crisis has thrown markets into disarray.Page 24 of 63
Japan. Margin Note 15
Looking to the Future: Is State Capitalism a Detour or Destination? Managers question will free markets prevail. Politics has a profound and pervasive impact on the performance of markets.42 The State develops national champions. Some of these have a command economy--notably. protecting hard-won economic freedoms? Or. Austria. manages trade relations and exchange rates to promote exports and punish imports. The rest do not. North Korea and Cuba. However. such as Evergreen Solar. Mexico. and Saudi Arabia. it is not. South Korea.2 shows that 6 of 183 countries have free economies while another 27 are mostly free. They typically fall in the "mostly" and "moderately" free categories of the Economic Freedom Index. world-class economy that unconditionally reinforces the power of the typically one-party state. State Capitalism is an economic system whereby the State decides how. like China. So. relied on quick approvals. 33 countries. State Capitalism does not have an ideological component--the government manages markets for long-term political survival and power projection. Foremost. the owner. Brazil. China's disruption of the solar power industry prompted many firms to shut down. we see countries enforcing greater state control of the economy. regulating performance. Venezuela. not to enforce an abstract ideal or promote the cult of personality. Now. in many others. buffeted by the meltdown. so few countries maximize it. State Capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. will governments reclaim the commanding heights of the economy. practice State Capitalism. and where assets will be valued and resources allocated. taking control of development. State Capitalism relies upon skilled technocrats whose goal is developing a powerful. and India. grant individuals substantial economic freedom.
. thereby creating the prosperity and wealth that maximize state power and supports its continued rule. and maintains accommodative legal and regulatory systems. many reflect on a perplexing feature of the economic environment. Swede. relocated to China. Put differently. Some may contend that State Capitalism sounds a lot like a mixed or command economy. managers watch and wait as the contest between the siren call of free markets and the surge of state power determine the sort of economy that works best in the modern world. Most. But. and determining potential? For decades. some. Map 4. Recall our earlier profile of GCL-Poly Energy of China. Germany. when. France. In some ways it is. The government uses markets to promote stability and growth. cheap government loans. leverages control of the financial system to provide low-cost capital to domestic industries. and broad governmental support to build a world-class company in 15 months. Notwithstanding the dividends of economic freedom. Zhu Gongshan. United Arab Emirate. Instead of politicized revolutionaries promising a brighter future. economies had steadily adopted the free market model given the success of countries that had migrated from command and mixed to market economies. or 18 percent of all. As they do. Russia.
Page 25 of 63
Moreover.S. its policies. National. If need be. For the most part. Collectively. and direct market development. communication. where it goes. public wealth. Over the past 32 years. the state typically treats the legal system as an apparatus that legitimates. Under normal circumstances. 129 huge conglomerates in finance. influencing activities and shaping outcomes. market economies encourage the psychology that greed is good. using state-owned banks to provide cheap loans. both good and bad. transportation. the State stays in the shadows. The government explicitly promotes the growth of particular industrial sectors and companies in order to speed economic development. China is the majority owner of 99 of the 100 largest publicly listed Chinese companies. the State favors local companies at the expense of their foreign competitors. favorable regulations. heavier regulation. the State steps in. most extensive rise out of poverty any
. media. Officials install barriers to trade and investment in order to generate local development and prosperity. State Capitalism has little need for an independent judiciary. company. stops it from devolving into psychosis. goes the reasoning. higher taxes. Many see China as the bellwether. capturing competitive advantages through whatever means necessary.45 Whether they advocate economic freedom or state capitalism remains to be seen. for example. and so on answer directly to the Chinese central government. its three major oil companies. Eastern Europe.46 China has used its brand of capitalism to develop and direct the world's fastest-growing economy that has powered the swiftest. China's provinces and cities run thousands of medium-sized and smaller ones. Regulations restrict foreign companies from entering strategic industries. many will follow. its three telecom carriers. mining. Countries that favored a larger state presence. State Capitalism professes to better protect protected social values. the State owns its national champions. and prevent the accumulation of vast wealth and powerful selfinterests that threaten social harmony. the invisible hand is visible--but only when necessary. whether in the Middle East. More fundamentally. and public enterprise prevail. Public investment. In the event plans go awry. and redirects activities. State capitalist economies. Bolstering its developing solar power industry. Officials fan economic nationalism. have telltale marks. Allowed to run free. and more generous social safety programs dealt more successfully with market disruptions than did their free-market counterparts. and local officials control resources to fund investments. equalize income distribution. provincial. Gaining Momentum The global credit crisis has expanded the scale and scope of State Capitalism. No matter the question. For instance. The State promotes domestic markets as sanctuaries for national champions. Only a strong state. shape operations.43 Furthermore. resets funding. including all major banks. Its goal is developing national companies into global leaders. a technology rich U. and stable industry settings. led China to recruit Evergreen Solar. metals. the state attracts technology rich foreign companies. The State games the system. revises policies. tougher job-protection laws.44 Presently. or South America. and its major media firms. some 70 strategically important countries worldwide are at a critical crossroads in determining their political and economic future. the Chinese renaissance has shown that Western-style economics is no longer the only viable route to modernization. as needed. Asia.
find State Capitalism attractive. and potential. This type has low per capita income--an average of $2. one-party political systems. It relative success. PERFORMANCE. or repressed in terms of economic freedom. Some measures may be informal or idiosyncratic: i. Africa. amount of electrical power generated.
Leaders of the BRIC cohort. not just surviving but prospering during the great financial crisis.
MEASURING ECONOMIC DEVELOPMENT. authoritarian governments emulate China¶s model of State Capitalism. AND POTENTIAL Managers use various measures to assess a country¶s economic development.and middle-income nations as developing countries.. Typically. Hu Jintao.Page 26 of 63
nation has ever seen. number of wireless subscriptions. The vast majority of their citizens have a low standard of living with limited access to few goods and services. one should not be surprised if others. Dmitri Medvedev of Russia. Margin Note 16 Before reviewing each.963 in 2009. Brazil. convention dominates practice.48 Democracy's retreat. of China.
. helps explain why 80 percent of the countries in the world are moderately free. Luiz Inácio Lula da Silv of Brazil.5 billion) in the world. the Middle East. mostly unfree. They also monitor indicators of the direction and dynamic of transition from one type of economic system to another.e. therefore. Arcing though Asia. a brief note regarding how we classify countries is in order. Developing countries comprise the largest number of countries (151 or so. Matters of income and wealth often anchor analysis. particularly authoritarian. performance. and Latin America. newspaper circulation patterns. domestic tranquility. at their Second Summit Brasilia. or military officers running companies. We follow the World Bank¶s lead in labeling low. according to the World Bank) and have the highest number of inhabitants (a combined 5. along with the surging success of State Capitalism. further "persuaded the Chinese leadership that state control of much of the country's economic development is the steadiest path toward prosperity--and."47 Given economic circumstances in the world today. Managers elaborate their analyses with indicators of sustainability and stability. covered in Chapter 3. and Manmohan Singh of India.
3 lists some of the acronym used to sort them.970 in 2009. Nigeria. or industrial countries. advanced markets. T for Turkey. Many presume that where the BRICs go. these countries are called high-income countries.org/wikipedia/commons/d/da/BRIC2010.Page 27 of 63
Direct link to high resolution photo: http://upload. Indonesia. there are approximately 30 or so emerging economies in the world. Russia. the BRICs are the vanguard of change.org/wikipedia/en/wiki/File:BRIC2010. C for China Add S for South Africa Adds K for South Korea Adds I for Indonesia.wikimedia. Although much larger in scale and scope than other emerging economies. developed countries are those with high per capita income-. and sophisticated institutional framework but comparatively slower growth. relatively prosperous developing countries such as China. Notwithstanding the variability. Kuwait. Turkey and Vietnam CIVETS C for Colombia. I for India. T for Turkey Adds M for Mexico Adds E for Eastern Europe. R for Russia.wikimedia. Their citizens have a high standard of living with access to a variety of goods and services. others will follow. V for Vietnam. given their high per capita income. I for Indonesia. high standard of living. Developed countries include Japan. Iran. Pakistan. South Korea. both good and bad. Qatar. Philippines. (See Map 4. Brazil. In the future. one speaks principally of the BRICs. Currently. Less commonly. and India are referred to as emerging markets or emerging economies. India. T for Turkey Adds A for Arab countries--Saudi Arabia. Mexico. and China. when one speaks of the emerging economies. and many in Western Europe.1).3 The Emerging Economy Alphabet Members B for Brazil.
Table 4. E for Egypt. Canada.
Concept Check 6
.jpg Source file that contains links to high res photo: https://secure.jpg
The faster growing. S for South Africa Acronym BRIC BRICS BRICK BRICIT BRIMC BRICET BRICA
In contrast. Bahrain. Australia. we may see United States and similar countries called established market economies (EMEs). Typically. Table 4.an average of $37. New Zealand. Oman and the United Arab Emirates N-11 (The Next 11) Bangladesh. the United States. Egypt. the core group consistently includes Brazil.
Source: World Bank Development Indicators 2009.4 identifies the 15 largest economies in the world in terms of GNI.324 966 962 957 $59.476 1. it increases South Korea's GNI.557 1. a Samsung TV built in South Korea as well as the portion of the value of a Samsung TV made in Malaysia using Samsung's resources is counted in South Korea's GNI.476 2.367 1. Reproduced with permission of the World Bank. Similarly.416 1. billions)49 14.
.233 4.750 2. Margin Note 17
TABLE 4. if Samsung's Malaysian subsidiary repatriates profits to headquarters in Seoul. It measures the value of all production in the domestic economy together with the income that the country receives from other countries (mainly interest and dividends).558 2.856 3. 2009 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 ** Country United States Japan China Germany France United Kingdom Italy Brazil Spain Canada India Russian Federation Korea. Copyright 2011 by the World Bank. the portion of the value of a Sony TV built in South Korea using Malaysian resources counts in the GNI of Malaysia. Rep.Page 28 of 63
GROSS NATIONAL INCOME Gross national income (GNI) is the broadest measure of a country¶s economy. Thus. Table 4.857 4. the value of. less similar payments it has made to other countries. Lastly.114 1. Mexico Australia World GNI (US$.4 The 15 Largest Economies by GNI.
size of the population. minus the income earned by foreigners from domestic production. Improving Analysis GNI and its offshoots estimate an economy¶s absolute performance. GDP plus the income generated from exports. For example. Japan averaged 1. not GNI.2 percent growth over the same span.3 reports the real GDP growth rates for various developed and developing economies.51 GDP helps assess countries in which the output of the multinational sector is a significant share of activity. Interpreting present and forecasting future performance requires pinpointing an economy's growth rate.
Margin Note 19 Gross Domestic Product (GDP) The total value of all goods and services produced within a nation¶s borders. Meanwhile. Conceptually. Looking at countries in terms of their growth rate shows a wide range.3 GDP±±Real Growth Rate Nominal GDP increases from year to year partly because a country produces more goods and services and
. no matter whether domestic or foreign-owned companies make the product. Japan. They do not measure the rate of change in an indicator. world GNP and world GNI are equal.Page 29 of 63
Margin Note 18 Gross national product (GNP) is the value of all final goods and services produced within a nation in a given year. For example. For example. Managers improve GNI's usefulness by adjusting for the rate of economic growth. is the gross domestic product. and the international operations of a nation¶s companies equals GNI. managers crosscheck their analysis. but TVs made in Malaysia by Samsung do not. and purchasing power of the local currency. Some may mistakenly presume that they are also more productive and faster growing than lower-ranked countries. the opposite is true. more accurately measure its performance. They can mislead managers when comparing countries.52
Chart 4. Technically. GDP. both Samsung and Sony TVs made in South Korea contribute to South Korea's GDP. almost 90 percent of Irish exports are made by foreign-owned firms. their slightly calculation can result in small discrepancy at the country level. economic powers like the United States. and Germany consistently claim the top rankings when sorted by GNI. Therefore. Chart 4. plus the income earned by its citizens abroad.CRN. Often. However.50 Consequently. noting the assumptions of the measure and characteristics of a particular country. Margin Note 20 Rate of Economic Growth Gross figures are a snapshot of one year. China grew more than 11 percent per annum. between 2000 and 2008. imports.
This conversion shows that many emerging markets are growing faster than developed markets. 2010
Qatar Singapore Paraguay Turkmenistan Taiwan China Uruguay India Mozambique Uzbekistan Thailand Brazil Argentina Turkey Philippines Malaysia Kazakhstan Zambia Vietnam South Korea Indonesia Tajikistan Mexico Ghana World Saudi Arabia Russia Germany Australia South Africa Japan Canada Switzerland United States European Union France United Kingdom 0 3 6 9 12 15 18
.3 Real Growth Rates for Select Countries.Page 30 of 63
partly because prices increase.
Chart 4. Real GDP strips out price effects in order to estimate the annual growth in the actual production of goods and services.
For example.54 This conversion is common sense.53 It also indicates business opportunities. Therefore.650). Japan 32nd ($38. It ranks in the lower-middle income tier for GNI per capita given its immense population. China is the world¶s second largest economy according to GNI. up from $7. 2009.360).201. World Bank income groupings.gov (accessed June 1.195
MAP 4. The World Factbook.180). by the number of people who live in a country. China 125th (3. Monaco ranked first in the world by GNI per capita in 2009.Page 31 of 63
Source: Central Intelligence Agency.922. Worldwide GNI per capita was $8. For instance. and India 154th ($1.3 GNI per Capita. given how unevenly the world¶s population of 6. most extensive rise out of poverty in history. Legend for Map 4. Commensurately. China's GNI has gone from $1.cia. such as is the case for Monaco whose 33.995 in 2007.946 to $12.728 in 2009. Box title GNI per capita.040). For example.68 trillion in 2000 to $4. like many other economic indicators. GNI may be low in absolute terms. there is a tremendous range.
The growth rate of GNI indicates a country's economic potential: if it grows faster (or slower) than its population.55 From the high of 1. A country with a high rank for GNI may rank lower for GNI per capita. China has been one of the fastest-growing economies over the past 30 years.3 y Please pick up the insert box shown in the lower left corner on page 139 of the 13th edition. y The new data for the box are : o o o low-income countries $995 or less lower-middle countries is $996 to $3. Population Size Managers adjust GNI. adjusting GNI by population measures a country¶s relative performance.011 in 2005 and $5.080). the United States ranked 18th ($46. It has seen the swiftest.000 citizens puts it among the smaller economies of the world. Brazil 84th ($8.409 (as of June 2011) is distributed across countries.900. In comparison. thereby attracting foreign investment CRN. 2011). 2009 GNI per capita measures a country¶s performance in terms of its population. at www.857 trillion in 2009.34 billion in China to the low of 50 in the Pitcairn Islands. the country's standards of living are rising (or falling). Rising income has fueled consumer demand. $7. with a value of $203.500 in 2003. However.945 upper-middle countries $3. averaging double-digit growth for many.
even though the cost of living differs between the United States and India.Page 32 of 63
o y Source: World Development Indicators database. Therefore. move up.3 shows that high-income countries are clustered in a few regions of the world.. it lets us determine how much "stuff" a dollar will buy in a particular country. they report an average GNI per capita in the mid-tens of thousands. Revisiting our comparison of the United States and India finds that India¶s GNI per capita in 2009 is $1. the unadjusted rankings reported in Table 4.196 or more
Map 4. Though comprising a large share of world population. Russia. Margin Note 21 We calculate PPP between countries by estimating the value of a universal ³basket´ of goods (e. a loaf of bread that sells for 44.. Japan. China. May 1. PPP reduces some of the otherwise extreme variability in many country-to-country comparisons. they have a small share of the world¶s GNI and report GNI per capita from the mid-hundreds to low thousands.180 but rises to $3. soap and bread) and services (e. managers adjust GNI per capita for a country in terms of purchasing power parity (PPP).5 shows the impact of adjusting a country¶s performance for PPP.4 change. 58
TABLE 4.00 in the United States given an exchange rate between India and the United States of 44.4 profiles the countries of the world in terms of GNI per capita adjusted for PPP. Purchasing Power Parity The calculation of GNI per capita does not account for the cost of living from one country to another. it presumes that a dollar of income in Minneapolis has the same purchasing power as a dollar of income in Mumbai. and Canada. telephone and electricity) that can be purchased with one unit of a country¶s currency. World Bank. It represents the number of units of a country¶s currency required to buy the same amount of goods and services in the domestic market that one unit of income would buy in the other country. On average. for instance. Its GNI per capita falls from $203.g. Map 4.57 The opposite occurs in the case of countries with expensive standards of living. Alternatively. the United Kingdom. GNI per capita is unable to tell us much about how many goods and services one can buy with a unit of income in one country relative to how much one can buy with a unit of income in another.g. Currently they account for about 15 percent of world population but more than 70 percent of global GNI. such as Monaco. Mexico.38 INR to US$1. India. Consequently.694 when adjusted for the reduced purchasing power a unit of currency has in high-priced Monaco. Second.5 The 15 Largest Economies. 2009: GNI Adjusted for PPP
. Instead.250 when adjusted for local purchasing power.900 to $131. 2011.56 Table 4. and Italy drop down. Lower-income countries are spread throughout the world. For example. France. high-income countries $12.38 rupees in India should cost US$1. First off.
189 $1.4 GNI per Capita Adjusted for Purchasing Power Parity Adjusting raw income data for purchasing power parity essentially creates an international dollar that has the same purchasing power as a dollar has in the United States. Canada Turkey World
Source: World Bank Development Indicators 2009. Rep.Page 33 of 63
GNI by PPP (US$.025 $71.302 $2.
. May 1. Copyright 2011 by the World Bank.758 $3.262 $1.011 $2. Legend for Map 4.
MAP 4.514 $1. It lets managers compare economic differences between nations by taking into account the relative cost of living.888 $1.269 $3. 2011.331 $1. Reproduced with permission of the World Bank.603 $2.4 y Please pick up box in the lower left corner of the 4.976 $1.011 $9. 000 trillions)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 **
United States China Japan India Germany Russian Federation United Kingdom France Brazil Italy Mexico Spain Korea.3 shown on page 143 of the 13h edition. Box title is GNI (PPP) per capita Source: Source: World Development Indicators database. World Bank.464 $1.170 $4.
free time. there is no consensus on how to adjust GNI. However. Effectively. unlike GDP. and family breakdown.´59 As such. Margin Note 23 Consequently. Measuring the monetary quantity of market activity without accounting for the associated social and ecological costs misrepresents performance. sustainable development calls for economic activity that ³meets the needs of the present without compromising the ability of future generations to meet their own needs. So. GPI values unpaid voluntary and household work as paid work. and educational attainment. Presently. GNI. GDP versus GPI is analogous to the difference between the gross profits versus net profits of a company--net is gross less the costs incurred. they will given that improving the human condition inevitably improves economic performance. As must a company depreciate its tangible and intangible assets when making a product. Furthermore. For example. and subtracts the costs of crime. GPI will be zero if the costs of pollution. holding all other factors constant.Page 34 of 63
Broader Conceptions of Performance and Potential Measures of gross national income emphasize monetary aggregates. Managers enrich assessment by estimating sustainability and stability. equity. Ultimately. intellectual. GNP. and family breakdown. and GDP. as measured by life expectancy at birth. Knowledge. NNP does so by depreciating the country¶s assets commensurate with their use to generate growth.
Margin Note 22 Sustainability Measures Concern for the ecological welfare of the world spurs calls for green measures of growth that look beyond narrow measures of monetary aggregates. population health. population size. so too should countries. and social standards that shape a country¶s overall quality of life helps managers measure market potential61 The United Nations translates this view into the HDI and its components. equal the monetary gains from the production of goods and services. as
. goes this reasoning. it endorses a broader accounting of the gains and costs of growth²as seen in this chapter¶s Point-Counterpoint--to better gauge an economy. crime. the natural world. and GDP. and cost-of-living. only partially represent current performance and long-term potential. pollution. Current candidates include: y Net National Product (NNP): Calls for measuring the depletion of natural resources and degradation of the environment that results from generating GNI. GNP. including adjustments for growth. livelihood security. and dependent on. or GDP for green economics. Green economics holds that a country¶s is a component of. estimating a country¶s degree of human development in terms of the physical. Accordingly. partially profile a country¶s performance and potential.60 y Genuine Progress Indicator (GPI): Starts with the same accounting framework used to calculate GDP but then adjusts for values assigned to environmental quality. GNP. the reasoning goes. Longevity. y Human Development Index (HDI) Matters of human development do not show up immediately in income or growth figures. notably GNI. narrow indicators.
rather than simply emphasizing financial performance. friendship. healthy. such as love. some may say worrying about happiness unnecessarily confuses economic analysis.66 Granted. flawed. dollars. is often in the eye of the beholder.S. rated just on monetary measures. people in rich countries do not appear to be any happier than people in poor countries.63 Consequently. like safe streets and clean air. Therefore. the emerging science of happiness reports that nearly 70 percent of personal satisfaction is determined by the quantity and quality of relationships. and tertiary gross enrollment ratio. however. not by economic output or wealth creation. how does one value elements. makes living standards in France and Germany about the same as those in the United States. Margin Note 24 Presently.Page 35 of 63
measured by the adult literacy rate and the combined primary. and Standard of living. misleading. managers can consider: y Gross National Happiness (GNH): Progressive society presumes material and spiritual development occur side by side. there has been little evidence that it improved peoples' reported happiness. one must reinforce the other or both suffer. and income equality. Accounting for life expectancy. family relations. there is growing criticism that GNI and its offshoots are at best. as measured by GNI per capita expressed in PPP for U. and establishing good governance."65 Assessing a country's performance and potential depends on measuring the national wellbeing in ways that take into account the happiness of a society and peoples' life satisfaction. In the meantime. are tough to pin down. No matter how high income rose. and actualization. like beauty. policy makers have puzzled over a paradox that casts doubt on the validity of monetary aggregates as measures of performance. secondary. preserving and promoting cultural values. Potential items. For example. which can be measured? The intricacies of happiness capture increasing attention. insight should clarify measures. However. Defining happiness. y Happy Planet Index (HPI): Reflects the utilitarian view that most people wish to live long.62 Namely. a country's economic performance and potential is represented by how well it
. Furthermore. GNH measures a country's ability to promote equitable and sustainable socioeconomic development. leisure time. the United States is far in front of France and Germany. happy lives. estimation is difficult. an unhappy citizenry may be a leading indicator of a significant change in government policy that alters the economic environment. 64 "Happynomics" calls for moving ³from the concept of financial prosperity to the idea of emotional prosperity. In addition. conserving the natural environment. and at worst.
Concept Check 7 Stability Measures For several decades.
employment. social relationships. Said OECD secretary general. y Your Better Life Index (YBLI) This index measures well-being and perceptions of living conditions by evaluating 11 areas: housing. and society. Finland."67 This index indicates that the 10 happiest countries in the world.Page 36 of 63
helps its citizens do so while not infringing on the opportunity of future generations. are Denmark. Canada. Switzerland. It liberates those trapped in poverty. from number one through number 10. the Netherlands. It morally stabilizes society. to do the same. it is a fundamental necessity. general satisfaction. and people in other countries. it recognizes increasing interest in evaluating performance in terms of matters that people worldwide believe are important but which fall beyond the narrow scope of monetary measures. communities. health. not monetary wealth. Israel. Developed by the Organization for Economic Cooperation and Development (OECD). It raises living standards. Sweden. YBLI pushes the "boundaries of knowledge and understanding in a pioneering and innovative manner«It has extraordinary potential to help us deliver better policies for better lives. Growth provides long-term benefits to everyone in every country. Growth is life. creating the basis for individuals. It creates material improvements
. Norway. It reduces violent conflict. It funds safety nets and government backstops. and Austria. the environment. incomes. The HPI advocates measuring the environmental costs of growth while emphasizing that maximizing happiness and health. security and the balance between work and family. the administration of institutions. education. Australia. is the objective. institutions.68
Published in The New Yorker 7/23/2001 by Edward Koren SKU:120812
Point > < Counterpoint: Is Growth Good? Point > Yes Growth is not only good.
amidst the panic of the recent global crisis. Growth creates the resources that promote transparency of authority. Peace Dividend Growth creates more opportunities for more people in more places. tolerance of diversity. Some 76 percent of Americans agreed that U. province. Rising asset
valuations. reducing it to 22 percent of the world--about 1. A thriving economy boosts tax revenues. presuming they survive. Environmental Benefits Growth encourages innovations.
usiness Dividend Growth stimulates higher employment. and resolute confidence in surviving tough times supports the prosperity of individuals and companies. and more inclined to have faith in the future. People specialize in what they do best and. and national governments the monies to finance spending projects that support. Moving poor people into the middle class. By making resources valuable. Together. outsource the rest.
. Although appealing.'s strength is "mostly based on the success of American business" and that 90 percent admired people who "get rich by working hard.Page 37 of 63
that comfort life. It creates jobs. income. more inclined to settle conflicts peacefully. and prosperity for individuals and society.S. more concerned about their children¶s future. testifies to the benefits of growth. humanity loses the war against poverty. Without growth. people endorsed the virtue of growth. growth spurs us to consume them wisely. Moral Stability Growth affects social attitudes and political institutions. enrich."69 Fiscal Dividend Government finances are ultimately at the mercy of growth. for example. suffer physically and psychologically. In 1990. By 2008. People who see the potential for prosperity behave peacefully. thereby providing local.6 billion people. Billions. Free from the tyranny of ceaselessly seeking sustenance and shelter. Moreover. wealth. Let¶s take a closer look at the dividends of growth. pathways of social mobility. they become more open-minded. Growth in many impoverished countries has reduced the number of people living in abject poverty. more supportive of free markets and democracy. history shows cheap government does not translate into good government. freer markets had fueled economic growth. state. and virtues of democracy. stabilizing wealth effects. Poverty Reduction Notwithstanding the kindness of strangers. the keystone to the moral stability of society. capital investment. and sustain society. more influenced by abstract values than traditional norms. The falling ratio of energy consumption per unit of GDP over the past 40 years. openness of opportunity. fair and just laws. regional. these drive the efficient allocation of resources. courtesy of pro-growth public policy. In a word. growth is the only means to alleviate poverty for the billions struggling to sustain life. enables them to think and behave differently. in the face of the growing abundance of goods and services. 34 percent of the global population survived on less than $1 a day. People experiencing rising incomes and economic improvement are commensurately tolerant of and benevolent toward each other. and profits. wealth engenders humanity.
Still. It creates free time to spend with family and community but then demands mobility and migration that fracture groups. each strikes society hard. our position is crystal clear: No matter the costs of growth. It liberates people from old routines but enslaves them to new habits. the promise of endless milk and honey for all devolves into a bitter delusion. mobility. In 1900. By 2011. justice. Life Growth supports longer lives. However.
. or fancier. relying on new tools to boost productivity. growth imposes costs on individuals. Pushing back the frontier of human experience²whether it involves the trivial (e. shinier. Counterpoint > No We accept the premise that growth supports life. ignoring or worse. many struggle to keep their leaky boats afloat. their imagination. The problems of growth span the immediate and the future. as this list shows. decay starts. Eliminating the pursuit of progress leaves society stuck in sloth.. transparency. increasing growth has lifted the tide. and self-interests that lace insidious pro-growth arguments. In reality. confuse consumption of the latest and greatest as the path toward actualization when. faster. falsehoods.g. Moreover. and wealth for all. it generates higher wages. the costs of these benefits² costs that seem to grow faster than growth itself²imperils civil society and. humanity. It rewards the financially strong but punishes the economically weak. the destination is alienation. denying. However. finding comfort in the rising quality-of-life standards. tolerance. people now need work just half the time they once had to. it was 78. and a minute fraction upgraded their yachts. and the planet. as an economy grows.Page 38 of 63
Quest to Excel Growth incents people to bring to bear their ingenuity. ultimately. in actuality. Moreover.´70 People. a share of the global population have seen their patchwork-rafts capsize. growth does not deliver the benefits it promises. and power. alternative energy)²is powered by the quest to grow. Growth Is Inefficient The defining benefit of growth is that ³a rising tide lifts all boats. after a century of growth. as the Counterpoint argues. Still. and their industriousness to find a better way. cooler products to enable self-fulfillment but then restarts a never-ending cycle of hope and deception. bigger. We agree that over the long run. trapped on hedonic treadmills in the quest for newer. Put bluntly. we fully agree that these costs are striking. condemning people to ³spiritual despair scarcely concealed by the frantic pace of life. the survival of humanity and the planet. they pale in comparison to the unacceptable price of not growing.4 years. Growth Is Misleading Despite the hype and hoopla. every day. Once you untangle the strands of half-truths. life expectancy at birth was 47 years in the United States. and liberty. Where one stops and the other starts is tough to pinpoint. fostering morality.. to make a difference. In a phrase.´ In theory. It promises newer. Unquestionably. and taking solace in improving health care. creating extreme inequalities of income. economic growth oversells and underdelivers.g. forms of entertainment) or the substantive (e. wealth. the benefits of growth are unevenly distributed. when growth stops. better. income.
and so on. NPP) estimators profile absolute and relative conditions in a country. at current trends. in GNI²no costs are tallied. HPI." understood to impact society but conveniently excluded while we sing praise of the wondrous ³benefits´ of growth. ³For more than 20 years we have exceeded the Earth¶s ability to support a consumptive lifestyle that is unsustainable and we cannot afford to continue down this path. HDI. when we measure the value created by an economy²say. the loss of craftsmanship.72 Barring black-swan innovation in mining. They meaningfully indicate its performance and potential. local variety and richness. In summary. Alternatively. Granted. Presently. of eccentricity and character. Effectively.´ warned the Worldwatch Institute. mass markets. the loss of intimacy and atmosphere. ³a part of the price that people in the West pay for this unending procession of shiny assembly-line products is the concomitant loss of those now rarer things that once imparted zest and gratification²the loss of individuality. Ultimately. humanity will require five planets of natural resources just to keep the game going. they are mysteriously called ³externalities. Massification delivers great benefits. warped society. and financial servitude. the alienation of binge-buying. GDP. mass consumption. slow-motion death spiral of the ecosystem. since "nobody" is responsible for the costs of externalities. and resource depletion²are the byproducts of growth.. agriculture. and the transformation of nominal democracies into functional oligarchies puts the world at the proverbial fork in the road. Ironically.g. and GNP) and broad (e. uniqueness and flavor. mass media. and manufacturing. Rather. poisoned water. By 2050. and the growth engine chugs merrily along. biodiversity collapse.´71 Current Growth Is Unsustainable Humanity plunders the earth at an unprecedented rate. our position is straightforward. but at high cost. we need some production and consumption. however. no matter how hard we wish otherwise. We can remain blissfully ignorant of the price of growth.g. human consumption is 30 percent larger than nature¶s capacity to regenerate. "nobody" pays for them. mass distribution. we can face the issue full on and radically reset the equation so that growth ³meets the needs of the present without compromising the ability of future generations to meet their own needs. Noted one observer. Managers also
. lost in the endless rush of apparent gains but continually surprised by inevitable and underestimated externalities. GNI. Epic poverty for billions. overproduction and overconsumption destabilize the basis for life.´73
FEATURES OF AN ECONOMY Narrow (e.Page 39 of 63
Growth Threatens Life Polluted air. "everybody" pays the price of those costs with a despoiled environment. false hope of actualization by consumption.. Mother Earth is going to stop current growth patterns sooner than later. and toxic land²let alone global warming. Growth Destroys Individuality Growth¶s mandate to optimize efficiency requires massification²mass production.
Mainstream economics holds that inflation results when aggregate demand grows faster than aggregate supply²essentially. an item that cost $10. 75 No matter the explanation. Unless incomes rise at the same pace or faster. gas. or 2000 would cost you. Other theories.18. hold that inflation results from increasing supply of money by central banking authorities.74 Lastly.79
Margin Note 25 History shows that chronic inflation²essentially. INFLATION Margin Note 24 Inflation is the sustained rise in prices measured against a standard level of purchasing power. regulate wages and prices. too many people try to buy too few goods. by 2009. and Turkmenistan in the 1990s.000. consumers struggle to buy groceries. such as the Austrian School of Economics. through policies that raise interest rates. thereby creating demand that exceeds supply that increases prices faster than incomes. debt. annual inflation of 10 to 30 percent²erodes confidence in a country¶s currency and spurs people to seek other ways to store value. or ³hyperinflation´ as seen in Brazil. and the balance of payments.Page 40 of 63
study other features of an economy to refine analyses and elaborate interpretation. Neither they nor their customers can plan long-term investments. $227.76 Inflation and the Cost of Living Consider the impact of inflation on the cost of living. These measures slow performance and erode potential. Yugoslavia. For example. poverty. or $13. interest rates. the annual inflation rate hit an astounding 79. inflation in the United States. consumers spent their money as fast as they got it or else watched it turn worthless.´78 Even in normal circumstances. during periods of rapid inflation. and political stability.77 The chair of the Combined Harare Residents Association in Zimbabwe noted.97. respectively.06 in 2011. because tomorrow it¶s going to be worth 5 percent less. More pointedly. If you need something and have cash. Leading indicators include inflation. Chronic inflation has bleak implications for companies. you spend it today. living costs. managers watch inflation given its influence on. among others. significantly changes the cost of products. income distribution. in Zimbabwe over the past few years. some define inflation as the continuous fall in the value of the currency. Inflation pressures governments to control it. Sometimes just buying stuff is practically impossible. and ordinary investment instrument like insurance policies and long-term bonds become speculative. inflation is a decisive economic condition. $57.600. ³There¶s a surrealism here that¶s hard to get across to people. We estimate it by comparing two sets of products at two points in time and computing the increase in cost that is not due to quality improvement. For example. consumer confidence. Normal horizons don¶t exist here. If you have cash.00 in 1913. There is no incentive to save. prices increased up to 95 percent per day. like most Western markets. unemployment. or impose protectionism. For instance.000 percent and prices doubled every 25 hours.
. you buy it. 1960. and so forth.
Explained a Japanese analyst. deflation. not just inflation. then consumers stop shopping. Countries that cannot create jobs suffer sluggish growth. ³Profits fall. Persistent unemployment symbolizes the ineptitude of the government in managing domestic affairs. Unchecked. For example. reduced corporate spending. economies fall into deflationary spirals wherein companies increasingly struggle to sell products. the Federal Reserve of the United States has implemented quantitative easing programs. UNEMPLOYMENT The unemployment rate is the share of unemployed workers seeking employment for pay relative to the total civilian labor force. Unlike the CPI. Reduction in the money or credit supply contracts personal and investment spending. managers mind the estimation process. shrinking credit. which then lowers demand. In recourse.´83 Likewise.. People gainfully employed testify to the competency of policymakers to sustain a productive economy. At present. The proportion of employed workers in a country shows how well it productively uses its human resources. For the first time in generations. central banks and governments rely on reflation²increasing the money supply and reducing taxes²to combat deflation. the OECD urged the Bank of Japan to keep pumping cash into the economy ³until underlying inflation is firmly positive. Deflation is the opposite of inflation--prices for products go down. poses a menacing risk. social pressures.Page 41 of 63
Measuring Inflation The measurement of inflation highlights a common difficulty: namely. companies lower prices. declining real estate values.81 If Not Inflation. Lower demand slows company activity.. Overcapacity. essentially printing money to stimulate demand in order to achieve inflation targets. it occurs when the annual inflation rate is less than zero. it is the Harmonized Index of Consumer Prices (HICP). and falling consumer demand fan deflationary dynamics. the HICP surveys the rural population and excludes owner-occupied housing. Margin Note 27
. It isn¶t easy to break out of. Declining demand and growing supply trigger increasing quantity and falling prices.´82 Deflation and unemployment are intricately linked. Technically. In the European Union. which then fires workers. and so on.80 The United States uses the Consumer Price Index (CPI). then wages come down. what a country measures when estimating an economic variable. Then Deflation A nagging consequence of the global financial crisis has been the movement of deflation from conjecture to concern. Price indices are sensitive to decisions about their scope and the calculations applied. not up. Consequently. they discount prices to appeal to consumers who delay purchases in order to exploit tomorrow's cheaper price. Margin Note 26 Deflation results from rather ordinary circumstances. and political instability. And because people aren¶t shopping.
Internal debt results when the government spends more than it collects in revenues. on average. Different assumptions and exclusions alter measurements. Company bailouts.CRN The IMF estimates that the debt of the 10 wealthiest countries will rise from 78 percent of their GDP in 2007 to nearly 115 percent by 2014. the total of a government¶s financial obligations. will then owe approximately $50. it does not count the number of people who are not working at all. 85 Often. Regarding the future. the unemployment rate means different things in different countries due to different social policies. The national debt for many countries had been steadily.88 Our closing case--The Global Financial Crisis: Causes and Consequences--develops these issues. measuring the number of unemployed workers seeking work in various countries is difficult. worries about the ability of coming generations to repay saps consumer confidence and constrains government activity. measures what the state borrows from its citizens. Besides measurement issues. This changed dramatically as governments responded to the global financial crisis. such as
. thereby reducing productivity. and macroeconomic stimulus led to unprecedented debt creation. worker productivity. 86 Countries in Asia.
Margin Note 28 DEBT Debt. and South America face economic. interest expenses divert money from more productive uses. foreign organizations. are working without pay. the more uncertain an economy¶s performance and potential. Technically. and family stress. albeit slowly. more significantly. people work only part time. The higher the sum.84 Measuring Unemployment As with inflation. political. despondency. foreign governments. such as crime. the greater the economic misery. as the misery index increases so too does social cost indicators. In the present. Unemployment measures in many poorer nations routinely underestimate the true degree of joblessness and.000 for each citizen. and social problems due to underemployment.Page 42 of 63
Some economists advise tracking the misery index. or have stopped looking for work. whereas countries like China. and international institutions. increasing. lowering incomes. the unemployment rate underestimates the scale and scope of the jobless. In addition. these governments. or Jordan offer little to none. provide generous unemployment protection. and decreasing social stability. Africa.
Margin Note 29 Internal and External Debt A country¶s debt has two parts: internal and external. even though officially employed. However. Deficits occur for several reasons. it indicates how many are not working for pay but seeking employment for pay. That is. Kenya. The larger the total debt. such as France and Germany. which is the sum of a country¶s inflation and unemployment rates. unemployment benefits.87 Some countries. researchers confirm that misery loves company. and the more likely consumers and companies curtail spending and investment.
or state-owned enterprises run deficits. even when adjusted for population size or purchasing power. economic. and eventually the debt itself.89 Consequently. and companies. For example. For consumers. its GNI per capita is an impressive $45. or can do so only at high political. and tax policy. investors. can misestimate the relative wealth of a nation¶s citizens.
External debt results when a government borrows money from lenders outside the country. such as private commercial banks. That is. the economy grinds to a halt. smaller-scale version.g. Hence. Similarly. In this situation. Stress and loss usually precede its reboot to an efficient. it does not tell us what share of income goes to what segments of the population. GNI per capita reports how much income the average person earns. the performance of United States looks less aweinspiring when qualified by its income distribution. Pressures to revise policies to deal with growing internal debt create economic uncertainties for consumers. Margin Note 30 INCOME DISTRIBUTION Income distribution often defines a market¶s performance and potential. budget management. other governments. governments struggle with spending priorities. since not everyone is average.640 in 2009. the GNI of the United States exceeds $14 trillion.
Crime and Punishment Protesters march in London against the governmentµs spending cuts and austerity measures. GNI. the borrowing country may have to export its goods to the lender¶s country to earn that currency or to convert its currency into that of its creditor. and social cost. security and social programs exceed tax revenues. or international financial institutions (e. is repaid in the currency in which the loan was made. a performance that ranks first among nations. Interest on the debt. growing public debt is usually an early indicator of austerity measures and tax increases. Presently. the richest one percent of Americans
. the IMF or World Bank).. Escalating public debt increasingly constrains Britain's economy. But.Page 43 of 63
when an imperfect tax system under-collects revenue.90 However. Dreaded debt crises often occur when a weak economy is unable to do this.
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receives more income than the bottom 40 percent²the widest gap in 70 years. Lamborghini.S. with much bigger multiples in Israel. The Gini coefficient presumes that there is a reasonable degree of income within a country. Americans with incomes below $20.98 Gini Coefficient Managers estimate the degree of inequality in the distribution of family income in a country with the Gini coefficient. This grew to 32 times in 1970. However.93 Margin Note 32 Benefits and Costs Some income inequality is useful in rewarding effort. In addition. in which fair play and equality of opportunity power economic performance and unleashes productive potential.97 Ultimately. poorer human-development records. the United States. The average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent. In 1960.96 Whereas one sees Lexus. Rising income disparities between booming cities and impoverished countryside threaten social stability and economic performance. the 50 million richest people in the world received as much income as did the 3.´ for instance. and innovation. approximately 10 percent of U. Chile. resource inefficiencies."94 Countries that are more unequal have worse social indicators. trust funds. talent. One controls for this error by assessing the scale and scope of poverty. citizens ³own´ the country. Turkey. as in the United States. including shrinking opportunity. A score of zero implies perfect equality (everybody has the same income). widening inequality threatens the stability that supports growth as it ³fans tensions that wear down the social fabric. Data indicate such. grows. and business equity. many in rural China rely on bicycles and animals for transportation. The top 1 percent own 37 percent of all privately held stock. If not. and higher degrees of insecurity. Most countries range between 25 and 60 percent. income inequality erodes a country sense of identity.95 China¶s steadfast commitment to a ³harmonious society. 45 times in 1980. reflects the CCP¶s fear of growing income inequality between the 800 million people living on its coastal plain and the 500 million who populate its interior. and 75 times in 2000. Widening inequality eventually triggers destructive outcomes. and excessive individualism. 60 times in 1990.000 are more likely to have lost faith in the free market. and Bentley dealerships in Beijing.92 The United States is not the exception. A score of one implies perfect inequality (one person has all the income). support dropped from 76 per cent to 44 per cent between 2009 and 2010. dozens of countries exhibit similar or worse income distributions. bonds. the wealthiest 20 percent of the world¶s population had 30 times the income of the poorest 20 percent. and 62 percent of business equity. and Mexico.91 The top 10 percent of Americans own 85 to 90 percent of stocks. 65 percent of financial securities. then it partially represents income distribution. the richest 1 percent claimed as much income as the bottom 57 percent²in other words. Essentially. Margin Note 31 Inequality.8 billion poorest people.
. and over 75 percent of non-home real estate.
according to the World Bank. death. is not the exception. Japan.99 So income may be distributed evenly on a relative basis. Granted. Approximately 1.8 percent (Sweden.2 billion between 1981 and 2005. Rather. 102 Prevalence of Poverty Poverty grows worldwide.100 These essentials can be life-sustaining resources such as food. clothing. they may be the opportunity to sustain extended families or connect with people to build communities. respectively. widespread poverty is not.104 Margin Note 35 Consequences Poverty shapes economic environments. China. and 10 percent rich. the per capita dietary protein supply in the United States is 121 grams but 32 grams in Mozambique.101 Today. malnutrition. security. The global financial crisis has threatened many more. shelter. 38.105 The daunting gap between the rich and poor challenges the country's economic performance and fundamentally shapes its potential. and education. to say nothing of safety. 100 percent of Canadians have access to clean water. and 56. the average life expectancy is 83 years in Japan yet 32 years in Swaziland. it represents the cheerless fact that most Indians are poor: 80 percent of its population lives on less than $2 per day. 10 percent middle income. Poverty is a multidimensional condition in which a person or community lacks the essentials for a minimum standard of well-being and life. but there is very little to distribute in absolute terms. It reports a Gini coefficient of 36. and Brazil. the world population is roughly 80 percent poor. Removing China from the tally reveals that the number of poor in the developing world has remained constant.Page 45 of 63
Consider India. clean water. However. and war.1. Moderate poverty is less than $2 per day (PPP).7 percent).25 per day (PPP). clean water. some saw it pushing 200 million people deeper into poverty. they may be social resources such as access to information. While dramatic income inequality is a recent phenomenon. is living on less than $1. mental illness. famine. education. Managers fine-tune their study of income and wealth by considering its conditions and consequences. this reduction has been concentrated in essentially one country. roughly 1. and health care. People struggle for food. rising food prices imperil millions more. India. Margin Note 34 Extreme poverty.
. 45. and shelter. India's score does not reflect enlightens ideals of equality. report 23. The historical record adds an important perspective. and health services. estimates of the number of people in extreme poverty have fallen by approximately 200 million since 1990. Failure to find them results in.5. epidemics. although extreme. compared to 13 percent of Afghans. For example. Margin Note 33 Concept Check 8
POVERTY Poverty prevails throughout the world. United States. 103 Presently.5 billion people live in extreme poverty. 41.
India had fewer than 15 million mobile phone subscribers. India and China (its state-owned mobile carriers report more 800 million subscribers) account for more than half the world¶s increase in wireless-technology subscriptions over the past five years.107 Narrowly defined. and a $100 house. Similar developments with computers (e. For example. Today. one manager noted.50 per day. Indian companies offer the cheapest mobile services in the world while still earning profits. It was fast approaching 700 million by 2011 even though more than 80 percent of Indians are poor.. people earning US$8 per day or
. Margin Note 36 The Potential of the Poor Managers monitor the buying potential of today¶s poor. Market systems may not exist. scraping by on less than $2 a day. Boosting the threshold highlights its potential. national infrastructures may not work. For example. More dramatically. By 2006. priced at US$2.5 billion people who live on less than $2. it had 136 million subscribers. the Base includes the 2.g. however.500) highlight finding opportunities in the face of dire circumstances. It symbolizes how frugal engineering speaks to the economics of the Base of the Pyramid. crime may be pervasive. Economies experiencing extreme poverty require MNEs reassess many taken-for-granted aspects of an economy.´106
Caption: The Tata "Nano" is the world's least expensive production car. in 2002.900) and housing (Idealab's program to provide functional homes for about $2. a $10 solar lantern. ³A billion customers in the world are waiting for a $2 pair of eyeglasses. Source: Shutterstock ----------------------------------------------------------------------------------------------------------------
Margin Note 37 This perspective alerts managers to the Base of the Pyramid phenomenon²the billions of poor people that have been seen as inaccessible and unprofitable yet arguably represent the next market frontier of the global economy.Page 46 of 63
The growth of business activity and economic progress ultimately depends on alleviating poverty. and governments may struggle to regulate society consistently or adopt prudent economic policies. the XO-1 programs of low-cost laptops for children) and automobiles (the development of functional cars such as Tata¶s Nano.
They seek out different information. process it in a different way. Nokia. lifestyle-sensitive innovations²both here and there. Tata¶s various businesses have co-produced a cheap water filter. ³seeing´ opportunity calls for market pioneers that have a particular mind-set. you find companies that have learned how to think differently from the herd. use no internal lamp. and make different decisions. and are specially enabled for text messaging. their annual spending will rise to $20 trillion--twice-current U. MNEs translate frugal innovations into new product that serve Western consumers. During the next decade. 400 hours of standby time on one battery charge. Accelerating income growth in emerging economies will move many of today's poor into their already expanding middle class. the task at hand is developing affordable. the global middle class will include 5 billion people. Serving the Base of the Pyramid has two preconditions. and larger screens that work in reflected light. Its efficiency and performance soon led to units marketed in Germany and the United States.S. More pointedly. If growth rates remain steady. pioneering money-transfer by mobile phone in remote locations that lack efficient means to exchange funds. come to different conclusions. Where others see a barren landscape. Chinese firms have introduced reusable sutures--versus the old approach of higher cost. the Base of the Pyramid sets new standards: low-cost. resource-minimizing. disposable ones²as well as heart stents that run 40 percent cheaper than those in the West.109 By 2030.´110 Second. they see a cornucopia of choices. the contours of the Base of the Pyramid will change. Where others see threats and complexity. First. Samsung.114
Concept Check 9 Success Standards As the world moves from being mostly poor to mostly middle-class. ³When you look behind the success stories of leading globalizers. Too.111 Increasingly.108 Presently. This multi-year process creates immense opportunities. these changes benefit the rich. and Motorola offer phones with sealed faceplates (for water and dirt resistance). movements afoot may one day make it to Western markets. For example.113 units were soon en route to Germany.9 trillion a year. All in all.112 GE developed a low-cost electrocardiograph machine for rural India. they will earn US$4 trillion annually by 2015. similar initiatives have built a refrigerator from clay (which uses no electricity yet keeps vegetables fresh for several days) and a cheap crop duster (a sprayer mounted on a motorcycle). high-powered. and designed $20-a-night lodging for frugal travelers. At the grassroots level. prototyped a $500 house that can be bought in a shop. they see opportunity. the middle class includes about two billion people in a dozen emerging economies who collectively spend $6. consumption. easily used. a surge unseen since the Industrial Revolution that will reset economic environments around the world.Page 47 of 63
less had an aggregate income of nearly US$3 trillion in 2011. eco-sensitive products that work in harsh environments. Kenya¶s Safaricom takes these technologies to the next level.
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Margin Note 38 THE BALANCE OF PAYMENTS A country¶s balance of payments (BOP), officially known as the Statement of International Transactions, reports its trade and financial transactions (as conducted by individuals, businesses, and government agencies) with the rest of the world.115 The BOP has two main accounts: y y The current account, which tracks merchandise trade The capital account, which tracks both loans given to foreigners and loans received by citizens.
Table 4.6 lists the components of each account. Mechanically, exports generate positive sales abroad while imports generate negative sales domestically. Positive net sales, resulting when exports exceed imports, create a current account surplus. Conversely, importing more than exporting creates a current account deficit. Table 4.7 lists the five countries with the largest current account surpluses and those with the largest current account deficits.116 Margin Note 39
TABLE 4.6 Components of a Country¶s Balance of Payments Current Account Value of exports and imports of physical goods, such as oil, grain, or computers (also referred to as visible trade) Receipts and payments for services, such as banking or advertising, and other intangible goods, such as copyrights and cross-border dividend and interest payments (also referred to as invisible trade) Private transfers, such as money sent home by expatriate workers Official transfers, such as international aid, on which the government expects no returns
Capital Account Long-term capital flows (i.e., money invested in foreign firms as well as profits made by selling those investments and returning the money home) Short-term capital flows (i.e., money invested in foreign currencies by international traders as well as funds moved around the world for business purposes by companies with international operations)
TABLE 4.7 Current Account Balances: The Top and the Bottom Five
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Current Account Surplus (in millions of US$)
1 2 3 4 5
China Japan Germany Russia Norway
$272,500 $166,500 $162,300 $68,850 $60,230
Current Account Deficit (in millions of US$)
159 160 161 162 163
Brazil France Italy Spain
-$52,730 -$53,290 -$61,980 -$66,740 -$561,000
Source: Central Intelligence Agency, ³Country Comparison²Current Account Balance,´ The World Factbook (2011), at www.cia.gov (accessed June 2, 2011).
Case: Causes and Consequences of the Global Credit Crisis No other economic event, since perhaps the 1930s' Great Depression, has proven more decisive than the global financial crisis of 2008. Although we are now down the road a bit, its legacies continue shaping economic policy, influencing market performance, and shaping countries' long-term potential. Managers grapple with events and outcomes, trying to come up with reasonable interpretations. Increasingly, as events play out, three scenarios capture attention. Some argue that liquidity
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is the problem, others point toward balance sheets and solvency, and still others argue the need to reboot the system. Each has significantly different implications for MNEs' investment choices and operating decisions. Let's take a closer look at each.
Scenario One: Leaky Pipes Initial crisis analysis focused on the immediate realization that something had gone terribly awry with the financial plumbing of world¶s economy. Panic hit a high point in Fall of 2008 as the expanding liquidity freeze, owing to rising panic, fear, and mistrust, increasingly stopped money moving from institution to institution and from country to country. In the first few months, some argued that the credit crisis was not systemic. Certainly, countries' economies were shaken. Problems were, they said, contained within the financial system. Critically, the crisis revealed problems in the pipes that move money. However, it did not indicate structural flaws in the financial system. Problems followed from distorted flow dynamics--money was not moving efficiently or effectively through the elaborate channels that connect markets. So, like water moving through leaky pipes in a house, money was being lost along the way. Now, granted, leaky pipes are not a big deal if fixed. If neglected, they will bring down the house. Officials and agencies quickly turned to fixing the financial pipes, resetting regulatory standards, applying technical solutions, reevaluating the linkages among economies and capital markets, and patching holes in the system. Then, restoring economic vitality and getting countries moving again required refilling the money pipes with, in the words of U.S. Treasury Secretary Geithner, ³capital, capital, capital."117 Subsequently, countries injected massive capital flows into financial markets. The United States launched its Troubled Asset Relief Program and purchased $700 billion of troubled asset from banks and other financial institutions. The European Union added ¼500 billion of liquidity to their banking system. The Federal Reserve acted in kind, expanding its balance sheet by trillions as it bought troubled assets from banks around the world. As Chairman Bernanke explained, "a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum." Slowly, the financial pipes were patched, stabilized and apparently returning to normality. Nevertheless, years later, consumers, companies, and countries wondered why capital flows still moved slowly. Scenario Two: Broken Pumps As markets struggled for traction, some argued the financial system was more deeply broken. No one doubted that the pipes had been leaking. Now, some questioned whether problems followed from the failure of the money pumps to restore capital flows. Driving this line of thought was that, in the past, countries usually rebounded from a recession within a year or two. Now some four years later, and despite massive governmental intervention, economic prospects remained bleak for many.
had been the result of exceptionally loose monetary policy. UBS. namely the house itself was collapsing. Unquestionably. however. The financial system. for whatever reason. while still fixing the pipes. Morgan Chase. Competencies. as the eye slowly passed and the second half began unfolding. That¶s a mistake. it did not solely determine it. capital. that culminated in the epic global crisis. began overhauling the money pumps. and agency conflicts. drives the ruthless efficiency of capitalism. and the recession ending. Some believed they were again taking excessive risks in the expectation that they would be then backstopped. Now. the crisis suggested. if their bets went bad. there was the troubling resignation that there might be something dreadfully wrong with the economic system. "We created a situation that caused a recession that wiped out the net worth of about 15 million households. Running too free. it pales in comparison to the third scenario. capital" did not seem to do the trick. allowed to run free. Now. For now. delivered the front half of the hurricane.118 The aftermath of the crisis highlighted these problems. not by government protection. skewed income distribution. not connections. The post-2007 recession however. Goldman Sachs. Noted a leading analyst.Page 51 of 63
Explanation centered on the fact that most past recessions had been caused by high interest rates associated with tight monetary policy. Many of these people have virtually no other savings. showing that free markets poorly protected social values. In the United States. and concentrated vast wealth and powerful self-interests that threatened social harmony. amplified it into a destructive psychosis that accentuated existing structural distortions. economies growing. the DoddFrank financial reform legislation tackled issues that precipitated the crisis and seemed to confound the recovery. So there was something wrong with the system. was the philosophical quandary of the "too-big-to-fail" status of financial players. A precept of capitalism is that all firms. J. and HSBC were seen as too big to fail aggravated incentive problems. Scenario Three: The House is Collapsing As awful as the broken pumps scenario sounds. further aggravated by aggressive leveraging. Slowing progress.119
. Rather. flooding markets with "capital. as they had in 2007. Its passage resulted in the most sweeping change to financial regulation in the United States since the Great Depression. Attention shifted to whether the pumps that powered financial systems had been deeply broken. no matter how big or small. given its extreme leverage and exposure. live or die by their wits. perverse incentives. Officials. Capitalism. the financial system accelerated the global collapse. However. promotes the psychology that greed is good.P. Similar legislation elsewhere tried to correct flaws in the financial system by regulating opportunistic behaviors. that fact that institutions like Citibank. Loosening monetary policy typically led to demand rebounding. this view held that the collapse was a systemic crisis.
2010.123 It found financial fallouts strike with surprisingly consistent frequency." said the S&P. U.Page 52 of 63
Concerns. All continued underperforming past recovery benchmarks. and signaled the advent of state capitalism.122 Instead. . Elsewhere. . might struggle for years. particularly those in the West that were caught in the bubble dynamics of the global financial crisis. . "this time is different. were in the same. we have been here before. threatened free market capitalism. the experts had chimed. and Questions In Fall.121 "More than two years after the beginning of the recent crisis. Housing problems highlighted the dangers of the credit bubble. Japan. Historical Precedents Scholars began studying analogous situations. duration. . the outgoing chair of the U. economies. . Furthermore. Global labor markets made it become harder for people with low skills to build a secure middle-class future for their families. Spain. Dramatically below trend. This Time is Different: Eight Centuries of Financial Folly assessed economic crises from 66 countries across five continents over the past 800 years.S. through quantitative easing programs. "claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. Great Britain. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures.still does not understand exactly why it was so bad«and doesn't have much of an idea about how to fix things. something a decade earlier most would have thought impossible. and these recessions are followed by slow. she remarked. and even though the situation appears unprecedented. Greece. . Financial crises are typically followed by deep recessions.124 Possibly Something More Others argued that ongoing shortfalls and struggles are the outcome of deep structural problems." Characterizing situations in the United States as well as throughout the West. . . . in April 2011. disappointing recoveries. and unscrupulous lenders who exploited their insecurities all came to a head in the worldwide housing bubble. The data proved this thesis wrong. and long.S. Technologies proved wonderful in entertaining us but less than ideal in generating
. Each time. there are remarkable similarities with many previous experiences. Portugal. Italy. Economic nightmare. confirming a very basic message: the rules are the same. and ferocity. Standard & Poor¶s put a ³negative´ outlook on the U. brutish.. Incredibly searing. if not worse shape. No matter how different the latest financial crisis always appears. the United States. confessed that she had "no idea how bad the economic collapse would be«. identifying insights and lessons learned from previous crises. Risk of making high unemployment permanent. among others. . . In particular. . . of a credible plan. . Analysis found a recurring lesson across countries and across centuries: Debt is always dangerous and excessive debt accumulation is perilous. had opted to print money to solve its problems. the United States' debt headed higher. citing rising budget deficits and debt. Ireland. prolonged income inequality. Precedents. especially given the unprecedented amount of policy stimulus. .S. Excessive consumer debt."120 Then.. AAA credit rating. "Terrible recession. the aftermath of financial crises tends to be nasty. Council of Economic Advisers. Already the largest indebted nation in history. As such. Suffering terribly.
rising government debt will compound the fact that economies take a significant number of years to regain momentum following financial crises. "Things were falling apart. healthcare. Cuts in public support. trade and financial health as well as excessive levels of. Only 45. Spring 2011 saw both gloomy and optimistic views. slowing growth. Regarding the gloomy take. in emerging economies. pension benefits. In the United States. billions of people feverishly worked to get ahead. the sovereign debt crises question the fate of the Monetary Union. wealth. the great financial crisis reinforced strong tendencies toward state capitalism in many emerging markets. earnings. Portugal shrank. and potential opportunities triggered protests worldwide. To top it off. rising inflation. We had no good choices«We allowed this huge financial system to emerge without any meaningful constraints«The size of the shock was larger than what precipitated the Great Depression.S. 127 Unless abated. 16 percent saying it is "slowing down. Developing countries throughout Asia and Africa faced rising food prices given inflationary policies in the West. and nuclear plant failure. Greeks took to the streets and rioted. diminishing dollar. the lowest rate since 1983 and down from a peak of 49. the issues leading to the crises were still present and worsening in some places. Moreover. well-paying assembly line work and prosperous small-business niches faded. the fact that the financial sector of the economy had grown from below a tenth to more than a third of total economic activity did not bode well. Japan faced monumental challenges due to earthquake. and 29 percent said the economy is in a depression. waning consumer confidence."129 The world was still stuck with large global. perhaps unavoidably given the scale and scope of the crisis. saying it could drag down growth needed for economic recovery. successive rounds of quantitative easing. Countries warned of austerity. Which Scenario? The crystal ball remains cloudy as of this writing. Said U.128 In Europe. and excessively narrow concentrations of. and national imbalances in matters of incomes. a fragile recovery. Spain's jobless rate surged pass 20 percent. Decisions made had not turned out as planned. tsunami. Similar problems existed elsewhere.3 percent in 2000. debt in Western economies. We had no playbook and no tools«Life¶s about choices. Treasury Secretary Geithner. In wealthier Western countries. In many countries.4 percent of Americans had jobs in 2010. unionized jobs. persistent unemployment. and Italy's manufacturing sector declined. Regional growth was steadily slowing as the European Union reined in government spending. regional.Page 53 of 63
jobs. risks ahead are glaring and global.126 The IMF warned the world¶s wealthiest nations to curb their surging public debt. hit but not hurt by the fury of the crisis. some 27 percent believed the economy is growing. To some. Public sentiment seems to think along those lines. Ireland fell into a funk."26 percent said it is in a recession. In the United States. and escalating government debt suggested tough times ahead. the share of the working population fell to its lowest level since women started entering the workforce three decades ago. The Middle East uprisings fanned political turmoil. German inflation accelerated. sectoral. some argued the apparent solution to the crisis has been to implement many of the same
. Swedish sentiment slumped. French consumer spending dropped.125 Meanwhile.
and positioning the firm to prosper are the jobs of managers worldwide. 2. or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty. while bumpy. Secretary Geithner suggested was not far-fetched. while Sweden. y The global financial crisis challenges the legitimacy of free markets. Stable market conditions and improving growth prospects were apparent in many countries. and the choices that consumers make? How might the various scenarios influence economic freedom? The case points out the crises produce winners and losers. These include how the government regulates the economy. 6. Which scenario do you think best explains the global financial crisis? Why? How does each scenario influence the policies that governments adopt. was evident. Which would you nominate? Reverse your logic and identify the indicator that confirms the crisis continues. analyst anticipated accelerating industrial production and improving consumer confidence. and enforces antitrust regulation. 3. France. estimating scenarios. Governments in many countries have expanded their regulation of the economy.Page 54 of 63
policies that caused the cirsis. conceding. There will be another storm. sets fiscal and monetary policies. but it¶s not going to come for a while. Loose monetary policy promised to keep economies growing. and enjoyed a powerful stock market rally.
. and others gained traction. the strategies that companies pursue. protects property rights. This concern. 5. The road to recovery. for example. and social stability than do less-free or repressed countries. y Economically free countries tend to have higher per capita income. the United States. Questions 1.´130 Rays of optimism pierced the gloom. How would you advise one to do so with respect to the global financial crisis?
SUMMARY y Economic freedom reflects the absence of government coercion or constraint on the production. "It will come again. Interpreting economic environments. distribution. standards of living. Who are the winners and losers for Scenario 1? What of Scenario 2? What of Scenario 3? Say you were asked which economic indicator would confirm the end of the crisis. Germany had rebounded strongly. y Managers watch key events to gauge the contest between economic freedom and state control. 4. was watching its unemployment rate steadily drop. by midyear 2011 had recorded seven straight consecutive quarters of economic growth. Great Britain. The United States.
) economic freedom (p. ) debt (p. income distribution. balance of payments. ) capitalism (p. y A command economy requires accepting the doctrine of communism. y A market economy requires accepting the doctrine of capitalism.Page 55 of 63
y In a market economy. y Green measures of economic performance call for considering ecological aspects that support sustainable development. and the goal of regulating economic freedom. Although poor in terms of individual wealth. y Managers assess markets in terms of size (GNI. GNP. GPI). unemployment. but poorest socio-economic group in the world. private interests own resources. and sustainability (NNP. conveyed via the invisible hand. the government plans what goods and services a country produces. GNP. including. debt. y A mixed economy requires accepting the doctrine of socialism. ) command economy (p. stability (HDI. determine supply and demand. y Concern that monetary measures misestimate economic performance leads to calls to move from the concept of financial prosperity to notions of happiness. the collective income of the Base arguably makes it the next market frontier. y State capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. )
. Both influence investment activities and consumption behavior. and poverty y The Base of the Pyramid is the largest. HPI). and the goal of maximizing economic freedom. its principles of the invisible hand and laissez faire. and price and quantity. and the goal of constraining economic freedom. the quantity in which they are produced. inflation. its principle of the partly visible hand of an activist government that commands and controls some factors of production. y Managers use several indicators to assess the performance and potential of an economy. GDP). income (GNI. its principle of an activist government that commands and controls most if not all factors of production. y A mixed economy includes some elements of market and command economies.
KEY TERMS Base of the Pyramid (p. or GDP per capita). and the price at which they are sold. y In a command economy.
(Retrieved May 7." | The Economist. (London: Oxford University Press.com/displaystory. Krueger. )
Sources include the following: Thomas Friedman. 2006). (www. Kenneth Rogoff. ³BRICs.org/ newshour/bb/economy/july-dec05/prestowitz_8-15. ³A special report on innovation in emerging markets: The world turned upside down. 2001). ³Government v. ) happynomics (p. Farrar.´ www. 2009): 25±28. (May 28. ) economic system (p. (Paris: Development Centre.com/node/15879369). ) misery index poverty (p. The World Economy.html). Prestowitz. 2007). and Prosperity: The Global Economy and the IMF.economist. (August 15. 2007).project-syndicate.defence. 2009). Clyde V. ) mixed economy (p.´ Farrar. 2003). ) market economy (p. ) laissez-faire (p. 2006).html. 2010).htm . 1±2030 AD. (New York: Basic Books. 2011. ) sustainability (p.pbs. Strauss and Giroux.pk/forums/china-defence/55892-china-claims-9-rank-united-states-patents. ³China Claims #9 Rank In United States Patents!´ (Retrieved April 23. Ian Morris. 2011.
." (Retrieved April 21. ) stability (p. (New York.´ video transcript. Anne O.economist. (Paris: Development Centre. Why the West Rules « For Now. Volume 2: Historical Statistics. ) inflation (p. News Hour. Straus. The World Economy: Volume 1: A Millennial Perspective.( www. 2005).´ The Economist.imf. www. Clyde Prestowitz. Three Billion New Capitalists: The Great Shift of Wealth and Power to the East. Growth. ³The World Is Flat: A Brief History of the Twentyfirst Century. www. ³Betting with the House¶s Money. (Retrieved August 12.org/commentary/rogoff27 . Market in America: The Visible Hand.org/ external/np/speeches/2006/060706. and Giroux. ) socialism (p. ³Stability. www.´ Project Syndicate. ) global financial crisis green economics (p.Page 56 of 63
economic geography (p. 2005. The Next Billions: Unleashing Business Potential in Untapped Markets.cfm?story_id=13743310 . (June 18. Emerging Markets and the World Economy: Not Just Straw Men.´ The Economist. Angus Maddison. ³Three Billion New Capitalists. ) state capitalism (p. (January 2009): 44. (Retrieved June 7. ) income distribution (p. World Economic Forum. 2009): 45.
17 Simon Wilson.org/research/features/index/chapters/pdf/index2008_execsum. Chinese central bank governor Zhou Xiaochuan said "The new IMF leadership needs to reflect changes in the world economic order and be more representative of emerging market economies.heritage.com. (Retrieved February 4 2008).org/newshour/bb/economy/july-dec05/prestowitz_815.economyincrisis. www. 9 Ibid." (Farrar.pbs. in May 2011.Page 57 of 63
Thomas Friedman. Prestowitz.html. www. 25 Counts for 2009 were: 7 countries had free economies.org/library/Enc/BehavioralEconomics. 21 See. Beach and Marc A.´ www." 6 ³A Special Report On Innovation In Emerging Markets: The World Turned Upside Down.´ The Conference Board. Andrew Browne and Shai Oster.com/news-and-charts/economics/global-trade-the-opening-of-the-northeastpassage-45402. 13 Ibid.com/node/15879369. 2005). News Hour.´ video transcript. (May 17.Arctic Ice Gets a Check Up. 23 Quotation extracted from ³The Wealth of Nations. (Retrieved April 18. 2010). 18 Ships attempting the Northeast or Northwest Passages face hundred-mile long swathes of shifting pack ice. World Bank sees end to dollar¶s hegemony. ³A Special Report On Innovation In Emerging Markets: The World Turned Upside Down. See also ³How Many Countries Are in the World?´ geography.html . 2011). 2011). 2009). (Retrieved July 18. 24 The 2011 Index of Economic Freedom. for example. 14 Ibid. (October 13. 2011). (Retrieved April 21.conferenceboard. (August 15. and Giroux. ³China Takes the Crown. www. 5.econlib.moneyweek. ³The World Is Flat: A Brief History of the Twenty-first Century. 2011." (November 16. ³Explaining the Factors of the Index of Economic Freedom.pewglobal.economist. 23 were rated mostly free.4 percent in 2010. 2011). 3 Clyde V.heritage. (Retrieved April 17.´ www. ³Global Development Horizons 2011²Multipolarity: The New Global Economy. ³China¶s µState Capitalism¶ Sparks a Global Backlash WSJ. 67 were mostly nonfree." Los Angeles Times." www.org/data/ databytopic/class. 4 ³Global Economic Outlook.org/content/chinatakes-crown. www.html. 2006):33. 5 So. Miles. 16 Kim Murphy. Straus. 8 Dustin Ensinger." MoneyWeek. 2010. 10 Specific query: "Is the country's economic situation good or bad?" www. 22 William W. and 29 were repressed.´ www. ³Three Billion New Capitalists. www. 16. 19 ³NASA .worldbank. 2011). 2009). (Retrieved April 11. even during the two months or so each summer when safe passage is feasible.´ 2005 Index of Economic Freedom. (New York: Basic Books. ³Global trade: The opening of the Northeast Passage. Sample was 179 countries. 53 were moderately free.
. 2011).heritage. Economy in Crisis. www. (Retrieved August 14.htm. Losing Control: The Emerging Threats to Western Prosperity.org/Index/. Three Billion New Capitalists: The Great Shift of Wealth and Power to the East. ³Melting ice caps open up shipping routes.gov/mission_pages/icebridge/multimedia/arcticseaicemax2011.nasa.htm." Index of Economic Freedom. 7 Ibid. 11 Clyde Prestowitz. 12 Jason Dean." 15 Stephen King.com/cs/countries/a/ numbercountries.org/data/globaloutlook. (September 25.about. (Retrieved July 24. (Retrieved April 21.org/database/?indicator=5&survey=12&response=Good&mode=chart.org/research/features/index. Yale University Press. 20 The World Bank Group. 2006). (15 January 2008). (Retrieved May 19.They moved to 50. 2011). (Retrieved April 13. 2007).cfm. 2009)." The World Bank. www. for example.pdf." The Economist. James Politi.´ Financial Times." Reported in "Executive Summary. 2005).
2011). (Retrieved April 19. ³Capitalism's waning popularity. ³Sharp Drop in American Enthusiasm for Free Market. once a crisis passes. 38 Michael Todaro. government violated creditors¶ property rights.globescan. ³Going Dutch: How I learned to love the welfare state. 2011).com/Commentary/Global-Viewpoint/2011/0428/How-China-broke-the-West-s-monopolyon-modernization. ³Capitalism's waning popularity. O¶Rourke.globescan. 6th edition. Economic Development. 2009).com/2009/05/03/magazine/03european-. MA: Addison Wesley." freedomhouse." CSMonitor. Upon Chrysler¶s filing for bankruptcy.stm. it survived indefinitely.com.org/index. 29 Data drawn from 12. (Retrieved April 19. State-run Firms Rule. 40 Denmark 'happiest place on earth.
. See also Russell Shorto.economist.cfm?page=139&edition=9. 37 "The global revival of industrial policy: Picking winners.com/news_archives/radar10w2_free_market/ .foreignaffairs. 31 Anatole Kaletsky. as well as a majority stake in the restructured firm.. government control sometimes shrinks. 36 Companies in centrally planned economies exhibited a particular quirk. as Marx prophesied. (the social class that owns the factors of production). 2011). but it never returns to its original size. 34 For example. Indeed. 2010).884 interviews across 25 countries. In contrast. Robert Lawson ³Measuring Economic Freedom. 33 Ronald Reagan¶s then heretical declaration. 2011). 44 The state essentially prevents systemic distortions threatening the stability of the system and promoting societal welfare²or." Cato Institute. www. The New York Times. 2011). 2011).´ The Economist. 2009): 83. 2011). 2009).com/news_archives/radar10w2_free_market/ ." Globescan. New York Times. (August 31. www.uk/2/hi/health/5224306. 28 Data drawn from 12. (operated by the United Auto Workers union and ranking lower in the capital structure) received 43 cents on its $11 billion-odd of claims. 1996): 705. 43 Michael Wines. (Retrieved April 18. 46 Eric Li. an employee health-care trust. capitalism eventually is destroyed by its own contradictions 45 "Countries at the Crossroads. (the social class that does manual labor or work for wages) protected from exploitation by the bourgeois. www. their historic advocacy of economic freedom endorses the philosophy of capitalism and the principle of laissez-faire. (June 4.com/node/18527446?story_id=18527446&CFID=168796516&CFTOKEN=46679551 .economist. (Retrieved April 27. 32 Strictly speaking. 2011).freedomhouse. 2011). are the proletariat. (Retrieved April 18. The absence of competition and bankruptcy in this sort of economic system meant that once an enterprise was up and running. (May 9. Still.org. 27 A Tale of Two Depressions.org/pub_display. www. www.Page 58 of 63
E. (Retrieved April 19. 35 Only then. May 7 2009. 28 July 2006.economist. in its rush to stabilize Detroit during the recent economic crisis.com/node/16741043. ³Make no mistake: In China. www." Foreign Affairs.com/node/18527446?story_id=18527446&CFID=168796516&CFTOKEN=46679551 .voxeu. Barry Eichengreen and Kevin H. (Retrieved April 13. 2011).nytimes. ³How China broke the West¶s monopoly on modernization.´ The Economist." Globescan. (Reading. www. some argue that a mixed economy is essentially a move toward a socialist state.g.php?pub_id=6101. 2010). 30 Ibid. ³An Offer You Can¶t Refuse. (Retrieved April 17. (Retrieved April 28.884 interviews across 25 countries. saving losers. www.co. some argue the U. the thinking goes. irrespective of performance.csmonitor. secured creditors² owed some $7 billion²recovered 28 cents per dollar.cato. 42 ³Q&A with Ian Bremmer on State Capitalism.html.´ The Economist. made in his 1981 inaugural address. (Retrieved June 5. (Retrieved April 19.' BBC News. www.0: The Birth of a New Economy in the Aftermath of Crisis.bbc. www. 39 "The French Model: Vive la Différence!" The Economist." The Economist.php?q=node/ 3421. 41 Most worrisome to free market proponents is that. ³Sharp Drop in American Enthusiasm for Free Market. ³Capitalism 4. (Public Affairs. (Retrieved April 13 2011).S.com/discussions/interviews/qa-with-ian-bremmer-on-state-capitalism?page=show. none of them is a ³pure´ market economy because their governments intervene in the marketplace. www. news.org/template.
(Retrieved July 16. these choices can be infinite and can change over time. eds. 1983). Stefan Halper.2 percent in 2009.html. www.com/article/SB10001424052748704064504576070343252409876. Statement by Dr. (Retrieved May 27. with Amartya Sen of HDI 61 62 Richard Easterlin. (April 23. 2011). Reder.3 percent a year but the economy "grew" -2. 59 ³Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond. Latin America has seen income per capita drop five times since the 1980s. satisfying leisure hours. but institutions such as the World Bank and International Monetary Fund now use the term GNI. 55 See U.html . and sense of participation in community activities. (Retrieved January 17. David and Melvin W." The Economic Journal. 2010). healthy. 61 Some maintain that the purpose of development is to enlarge people¶s choices. 58 The most common PPP exchange rate comes from comparing a basket of goods and services in a country with an equivalent basket in the United States. The definition and measurement of GNI and GNP are analogous.S.org/documents/ga/res/38/ a38r161htm.S.com/2008/04/23/happiest-places-world-opedcx_ewe_0423happiest. more secure livelihoods. "Does Economic Growth Improve the Human Lot?" in Paul A. price-adjusted conversion. Mahbub ul Haq. co-conceiver. GNI was referred to as gross national product. a net outflow). 2009). ³GDP Can Be a Poor Measure of Success.com.un. Easterlin. The End of the Free Market: Who Wins the War Between States and Corporations? (New York. 2011). the prices of many goods are considered and weighted according to their importance in the economy of the particular country. we compute per capita GNI by taking the GNI of a country and converting it into a standard currency²say. 52 Ibid.´ Forbes.88 trillion.84 trillion. As expected. Since GNI takes net flows into account. 60 Joseph Stiglitz. 2007 Survey. The current global credit crisis has triggered a sixth occurrence²population in the region is growing 1. The objective of development is to create an enabling environment for people to enjoy long. Basic Books. 64 Mark Whitehouse. (September 25. 56 Exchanges rates as of April 11. or not immediately.gov/main/www/popclock. Indonesia¶s GNP is larger than its GNI²the former was $432 billion in 2007. the U. (i. (New York. security against crime and physical violence. 2011www. www. 50 For example. for current estimate.wsj. The Beijing Consensus: How China¶s Authoritarian Model Will Dominate the Twenty-First Century. The same held for its neighbor.´ General Assembly Resolution 38/161. 53 For example. with a GNI of $217 billion versus GNP of $246 billion the same year.html. 2009):4.. In contrast. ³The Happiest Places in the World. at least 60 developing markets suffered income drops in 2009. dollar at prevailing exchange rates²and then dividing this sum by population size. 2011. while the latter was $372 billion. consumer demand. 2008). "Income and Happiness: Towards a Unified Theory. This calamity is not unique to Latin America. public finances. better nutrition and health services. 63 Eric Weiner. "State Capitalism and the Crisis. (Retrieved June 2. many developing countries produce more value than they receive as income. As a rule. and creative lives. This discrepancy results from the fact that the net foreign factor income was negative for Indonesia and Thailand. (December 19.. (New York: Academic Press. the GNI of the United States in 2008 was $13.´ Fortune. Typically.census. we have the resulting variance between GNI and GNP. financial reserves. Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz. 5.Page 59 of 63
Ian Bremmer. but roughly balanced for the United States. and currency valuations tumbled. People often value achievements that do not show up at all. 57 World Bank. (July.53 54 Technically." McKinsey Quarterly. http://online. Portfolio. 51 Historically. (Atlas methodology for GNI per capita). 2010). Ian Bremmer. in income or growth figures: greater access to knowledge. (2001): 465±484. In principle.
. 1974). thereby leading to a higher GNP than GNI. 49 Data calculated with the Atlas Method. and World Population Clocks²POPClocks.forbes. political and cultural freedoms. Richard. ³Good Numbers Gone Bad: Why Relying on GDP as a Leading Economic Gauge Can Lead to Poor Decision-Making. while its GNP was $13. 2007). Thailand. which smoothes exchange rate fluctuations by applying a threeyear moving average. 2006). with especially hard times for Central and Eastern Europe and sub-Saharan Africa." WSJ.e.
71 Ibid. 2011). www. Kwok.S. 76 Economists use different types of indexes to measure inÀation. as of 2003. ³Numbers racket: Why the economy is worse than we know. 2009). Moreover. inÀation in many middle. ³Ludwig von Mises. ³Economics focus: Botox and bean counting. (Spring/Summer 2009). ³U. (January/February 2003): 39±48. The Millennium Project. 66 Charles Jones & Peter Klenow. 1983).´ The Economist. 2009): 25±28.Page 60 of 63
Roger Cohen. 2009 State of the Future. the population above the age of 16 will grow by 5.html?_r=1.com/2011/03/13/opinion/13cohen. See Ken Rogoff. with rates twice that of adult. "Beyond GDP? Welfare across Countries and Time.com/frequently-asked-questions-faqs/. the wealthier countries of the world are watching their workingage population shrink from approximately 740 to 690 million people between 2000 and 2025. (2010).un. All major industrial countries had inÀation under 3 percent. However. Many credited the fall in inÀation to a combination of the price pressures of globalization along with more vigilant central bankers and economic policymakers. had fallen well into single digits in the early twenty-first century. 2011). AFP. 67 ³OECD Launches Happiness Index. the youth of the world suffer the highest rates of unemployment in most countries." www. (ages 25±65) unemployment. (Retrieved May 27. A rise in the index indicates inÀation. (Retrieved December 29. the working-age population will increase across poorer countries from about 3 to 4 billion people.´ Bloomberg. Rick Hampson. 2006):B1.html.harpers.´ www.1 percent. Cato Journal. sees the age structure of its population creating severe employment pressure within the next two decades.5 million annually on average in the next 20 years.millenniumproject. 73 Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond. the level above which it is generally considered to be acutely damaging to an economy." NYTimes. Mishan. (Retrieved May 26.asp. The CPI measures a fixed basket of goods and compares its price from one period to the next. only three countries had annual inÀation rates in excess of 40 percent.bloomberg. 70 E. China." April 30. 2009). ³Humans using Earth¶s Resources at Unsustainable Rate. 68 The Happiest Countries in the World. 2011). 79 www.com/apps/news?pid=newsarchive&sid=aaQyqjERBorM. General Assembly Resolution 38/161.org/archive/2008/05/0082023 .com. (Retrieved June 2. F.mises. National Bureau of Economic Research. (Retrieved May 15.org/content/mises.com/2011/06/01/the-happiestcountries-in-the-world/2/.and lower-income countries. Inc. (Retrieved May 27. but the one they use the most is the Consumer Price Index.´ Foreign Policy. 72 Jerome Glenn. Chief Japan economist at RBS Securities Japan Ltd. The total population of working-age Chinese will reach 940 million by 2020. 2007). 69 ³Government v. once stuck with extreme inÀation pressure. (Retrieved April 26. www. 2011. (Retrieved April 27. 83 Ibid. 2011)." 24/7 Wall St.com. p. (CPI). (Retrieved June 29. (December 19. Hanke and Alex K. 78 Michael Wines. The Costs of Economic Growth.´ ww.html. ³The IMF Strikes Back.usinflationcalculator.´ Harper's Magazine. ³How Bad Is InÀation in Zimbabwe?. (New York: Praeger.com/hostednews/afp/article/ALeqM5jj15a9ZCL9ETVD9UAn18y7MlrG_g?docId=CNG.84. 1967).
Ibid. (May 2. www. and Elizabeth Florescu. nytimes. Presently. in Tokyo.com/020873. 84 The working-age population: Presently. 75 See www. 74 Murray Rothbard. 80 Kevin Phillips. 82 View of Junko Nishioka.org/millennium/sof2009. 77 Steve H. On the Measurement of Zimbabwe¶s Hyperinflation. 81 For instance. (Retrieved June 4. ³The Happynomics of Life. (1881±1973). (and in Japan. The Economist. From ³Japan Succumbs to DeÀation as Consumer Prices Fall Record 1.
. 2011). 60.´ New York Times.naturalnews.usinflationcalculator. In China alone. 2011). Conservation Group Claims.com.google.b865 06f095cbf61164e88f98b0d5d21c. Changes how it Measures Long-Term Unemployment" USATODAY. for example.com/." NBER Working Papers 16352. http://247wallst. (May 28.org/documents/ga/res/38/a38r161htm. 2010). deÀation persisted). Theodore Gordon. over the same time. Market in America: The Visible Hand. www.2a1.
arguably the U. for example CEOs of the 15 largest companies earned 520 times more than the average worker.com/articles/2007/10/16235421/80-of-Indians-live-on-less-th." www. 97 Joseph Stiglitz. (China). (Retrieved May 27.html . 2007): B-2.com/node/16693283). 93 Growing Income Inequality in OECD Countries: What Drives It and How Can Policy Tackle It?.org/els/social/inequality. 88 See U. (Retrieved April 12.com/news/2011-02-15/food-price-jump-pushes-44-million-into-extreme-poverty-worldbank-says. ³Transcript. 94 ³Inequality: Unbottled Gini. ww.cn/90001/90778/90862/6875693. Hart. (Go to www. (Retrieved May 5. 98 Ibid." Vanity Fair." The Economist.000 per person and $300 per person.NYTimes.org/en/portada. 2006).org.html. (Retrieved April 17." www. 2007).nytimes." The Economist.bloomberg.S.´ The Economist. 104 Sandrine Rastello and Wendy Pugh. Episode Three: The New Rules of the Game. made 343 times more money than the average American did last year. 2011).fao.livemint.infoplease. rural income gap widens despite economic recovery´ People's Daily Online.S. www. And that¶s absolutely astounding to be on the same planet and to have that extreme variation in material well-being.economist. 96 ³China's urban. fiscal system is plugged with many tax loopholes that cause inefficiencies. 100 ³A wealth of data: A useful new way to capture the many aspects of poverty. and Power. 44.html.com.´ Vanity Fair.´ Social Watch Report 2006. World Bank Says. ³Of the 1 percent.brillig. (Retrieved June 28.) 106 Donald McNeil Jr.com/politics/features/2009/07/third-worlddebt200907.com/ipa/A0908770.edu/whorulesamerica/power/wealth. maybe a gap of $30. www. There¶s a basic reason for that which is that 200 years ago everybody was poor. 2011). (May. Chapter 18. www. /www.´ Sina. ³The Fortune at the Bottom of the Pyramid. ³Food Surge Is Exacerbating Poverty. 102 Noted Jeffery Sachs. (Retrieved April 19. 2011). 107 ³The Next Billions: Unleashing Business Potential in Untapped Markets. ³Losing Our Way . ³Design That Solves Problems for the World¶s Poor. 2009). 2011). National Debt Clock.Page 61 of 63
See Constance Sorrentino. 2009). Hong Kong. 2007). 105 The Food and Agriculture Organization of the United Nations translates the food commodities available for human consumption in a country into their protein equivalent. (Retrieved June 15.
. eliminating the deficit requires eliminating these distortions 90 GNI data is adjusted by purchasing power parity. english.ucsc. misallocation of resources and lost revenues. and five-sixths of humanity is what we call the developing world.htm.pbs.html." livemint. C. 101 ³Impossible Architecture. 89 For example.S. "Wealth. (June 18. This is up from 360 times more in 2003. Finally. 2011). ³International Unemployment Rates: How Comparable Are They?´ Monthly Labor Review. This measure compensates for differences in protein supplied by different foods across countries. 103 ³Joseph Stiglitz.´ New York Times. 2010).html. 2009).´ Commanding Heights: The Battle for the World Economy. In 2010.com/china/1/2005/0822/ 43237. the average CEO in the U. (2002) 26: 54±67. (May 29.´ Strategy+Business. 91 Bob Herbert. In 2007.com/debt_clock.socialwatch.html. Prahalad and S. (Retrieved July 14. K. the Netherlands and South Africa." sociology. ³The Poor and the Global Crisis: The Trail of Disaster.org/wgbh/commandingheights/lo/index.htm. (data as of April 26. (Retrieved May 10. 2011.com. (May 2011). A relatively small part of the world achieved what the economists call a modern economic growth. 92 William Domhoff. Hence. The gap can be 100 to 1. for the 1 percent.com. Those countries represent only about onesixth of humanity." World Economic Forum.people. Income.´ www. 95 ³Chinese Scholars Warn Growing Wealth Gap Likely to Trigger Social Instability. (January 2009).sina. english.com/node/17957381.. 99 ³80 percent of Indians live on less than $2 a day--World Bank. www. 2009): 24. (Retrieved July 8. Wall Street¶s Toxic Message. income inequality is accelerating between top executives and the average employee.oecd.html?_r=1 .vanityfair. www.com/2011/03/26/opinion/26herbert. It¶s the vast majority of the world. We see similar patterns Australia.economist." (Retrieved April 18. by the 1 percent. "The world is more unequal than at any time in world history. Germany. (Retrieved April 18. L." www. 2011). (June 2000): 3-20. See ³Gap between Rich and Poor: World Income Inequality. 26.
com/node/17963427 . (Retrieved June 9.kiplinger. all signs point to a secular shift from over-leveraged. Closer Inspection of 15 severe financial crises since World War II as well as the worldwide economic contractions that followed the 1929 stock market crash.com/wpdyn/content/article/2010/09/01/AR2010090106148.´ The Economist. 111 See. 110 Jane Fraser and Jeremy Oppenheim." www.com/columns/dekaser-practical-economics/archives/robert-shiller-shares-his-view-on-thehousing-market." Kiplinger's Personal Finance. new homes will do the same falling from 320K in 2007 to 125K by 2030. 109 David Court and Laxman Narasimhan. 2010.´ www. a country might have a surplus in merchandise trade. in the United States. such as its investment income.com." CSMonitor.bloomberg. In other words. (Retrieved April 28. For instance. (Retrieved April 19. 119 Jennifer Schonberger.lewrockwell.054 on 10 March 2009. This sounds utterly inconceivable until one considers that the Nikkei fell from its all-time high 38.washingtonpost. "Economist Christina Romer serves up dismal news at her farewell luncheon. www.html. (Retrieved May 25. 122 ³Jim Rogers Says the US Will Certainly Lose Its AAA Credit Rating. And. www. 2009). 2011).
³Innovations to Create New Streams of Profitable Growth. www. credit-driven consumption to compelling frugality that border for many on raw austerity. 116 See www. growth
." McKinsey Quarterly. 2011). Interest rates will remain low for a long time.´ www. http://www. (May 1997): 178. A deficit or surplus in the current account cannot be explained or evaluated without simultaneous explanation and evaluation of an equal surplus or deficit in the capital account. the 1973 oil shock and the 2007 implosion of the subprime mortgage market clarifies likely events and trends.Page 62 of 63
Christa Case Bryant. (from 240k in 2006) before 2030. Persistently high unemployment will reflect persistently sluggish growth. The Dow Jones Industrial Average. 2011).com/rogers-j/rogers-j139. ³Capturing the World¶s Emerging Middle Class. This Time Is Different: Eight Centuries of Financial Folly. www. In the United States.com/news/2011-04-18/standard-poor-s-puts-negative-outlook-on-u-s-aaarating.com/in-en/outlook/Pages/outlook-journal-2010-less-is-new-moreinnovation. (July 2010): 67. 2011). 118 The state essentially prevents systemic distortions threatening the stability of the system and promoting societal welfare²or. (Retrieved April 13. 2011).cia. 2011).
³The Tata Group: Out of India. 112 ³Medical technology: Frugal healing. 124 Most will average annual real GDP growth in the low single digits for a decade or more.aspx. Combined.php?storyId=102416414. Key cause of the 82 percent drop--the Japanese housing bubble of the 1980s.´ Business Intelligence Middle East. (Retrieved October 2. as Marx prophesied.5 percent until at least 2020. 121 Shannon D.npr.´ The McKinsey Quarterly. (March 5.csmonitor.nextbillion. 120 Dana Milbank.net. 2010).accenture.gov/library/publications/the-world-factbook/ rankorder/2187rank. 2011).html?hpid=news-col-blog. (Retrieved April 13. capitalism eventually is destroyed by its own contradictions.com/World/2011/0517/Surging-BRIC-middle-classes-are-eclipsing-global-poverty. ³Robert Shiller Sees More Housing Pain Ahead. Cycles of falling prices and wages will power deflationary dynamics. (indicating that it is exporting more than it is importing) but may then report a deficit in another area. for example. ³Standard & Poor¶s Puts µNegative¶ Outlook on U. (Retrieved April 18. (Retrieved April 13. the average home prices around the world will crater. GOP Skeptical: NPR. In the decade following the crises. for example.S. 2011):76-78." September 1. Stock markets will drop 50 to 80 percent in real value. to top it off. (Princeton University Press.org/templates/story/story.
³Geithner Pushes New Financial Rules. we will see the federal funds rate below 0.´ The Economist. washingtonpost.html. AAA Rating. Harrington and Cordell Eddings. look for existing homes to fall to $100k. www.economist." Accenture Outlook.html.html. ³Surging BRIC middle classes are eclipsing global poverty. will see 4000 before 2030.915 on 12 December 1989 to 7. The notion of balance means that all BOP transactions have an offsetting receipt. 2011). ³What¶s New about Globalization. because the current account and the capital account add up to the total account²which is necessarily balanced²a deficit in the current account is accompanied by an equal surplus in the capital account and vice versa. 123 Carmen Reinhart and Kenneth Rogoff.
³Most Americans say U.. at a time when debt levels in the U.S. Results from April 20-23 Gallup survey of 1. Gross government debt in the U. and were followed by lengthy periods of retrenchment that lasted nearly as long.S.com/article/2011/04/28/us-usa-economy-gallupidUSTRE73R3WW20110428?feedType=RSS&feedName=domesticNews. 126 David Morgan.
Lloyd Grove. French Consumer Spending Drops.thedailybeast.com/market-update/German-Jobless-Rate-at-Record-Low.´ The Daily Beast. ³German Jobless Rate at Record Low." Reuters. Housing prices took years to recover. Consistently. according to IMF projections. 2011).Page 63 of 63
rates were significantly lower and unemployment rates were significantly higher. in recession despite data: poll.telegraph. 128 "No full recovery until 2015. stood at 85 percent of GDP in 2009 and will reach 108 percent of GDP by 2014.¶s gross government debt stood at 69 percent of GDP in 2009 and is expected to reach 98 percent of GDP by 2013.reuters.-French-Consumer-SpendingDrops/44005/. The U.S." The Telegraph. 2011).123jump. (Retrieved September 22. 125 Arthi Gupta.
. ³Too Big to Fail? Timothy Geithner Says No.013 U. 2011).K. (Retrieved April 28.´ www. the crises were preceded by decade(s)-long expansions of credit and borrowing." Market Update.
Ibid. (Retrieved May 19. www.S.html. www. 2009).com/blogs-and-stories/2011-05-18/too-big-to-fail-timothy-geithner-says-no-at-hbomovie-screening/#. 127 Ominously.uk/finance/financetopics/ recession/6220089/No-full-recovery-until-2015-says-theIMF. www. says the IMF. for example. adults. It took households and companies about seven years on average for to reduce their debts and restore their balance sheets. and other countries at the center of the financial crisis are rapidly approaching the 90 percent threshold.co. (Retrieved April 28.