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Chapter 4: The Economic Environments Facing Businesses A man is rich who owes nothing. ²French proverb
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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
. From 1000 to the mid-1880s.1). China alone generated one-third of the world¶s gross domestic product in 1820. FIGURE 4. the United States. spurred isolationism and xenophobia. They lost their lead (temporarily trends now suggest) as internal political failure. Angus Maddison.8 percent of all the goods consumed in the world in 2009. coupled with the accelerating scope of emerging economies. and monetary patterns. their ambition is straightforward: Restore their historic stature as the engine of the global economy. China reclaimed the top spot it last held in 1850--it produced 19. Today. emerging economies¶ share of global output had fallen to 40 percent. in 20 years or so. with 40 percent coming from China and India and another 15 percent from Brazil. 70 to 80 percent of world output (see Figure 4. changes investment. Since 2001. Consequently. annual growth in emerging markets has averaged 6. generated more than half of global economic output. today¶s emerging economies dominated world output. If these trends persist.4 percent. emerging economies will grow at an average of 6.7 Symbolizing this process.6 percent. By the twentieth century. the global financial crisis slows and shrinks many developed economies. 13th Edition New Caption Over most of the past millennium. and Japan. the Industrial Revolution benefited the West while bypassing them.4 percent and fell to second. soon claimed this title before ceding the top spot to the United States around the beginning of the 20th Century. For . wealth. if not sooner.8 The diminishing role of today¶s rich economies. Sources: Compiled from The World Economy: A Millennial Perspective. China and India were the world¶s two biggest economies. While they expand. poverty. Over the next decade. Britain. By 1950. most developed economies will be fortunate just to grow. trade. In addition. today¶s emerging economies. consumption. 2001. China produced the highest percent of all the goods consumed in the world. today¶s developed economies. Over this span. IMF. fiscal. emerging economies will again account for more than 70 percent of global economic output. Germany. nearly 70 percent of the world growth over the next few years will come from emerging markets. on the basis of the Industrial Revolution. by 2050. China¶s share had fallen to 5 percent.Page 4 of 63 the power loom drove the transfer of economic might from Asia to the West. such as the United States. Trends suggest that. In 1850. and South Korea. accounted for about 70 percent of global economic output. Paris: OECD Development Centre Studies. on average. today¶s emerging economies will complete their comeback.8 percent a year. thereby culminating their comeback. produced 19. the rich economies have averaged 1.1 Emerging Markets Make a Comeback Pick up from page 134. again accounting for more than 70 percent of global output. most notably China and India.6 In contrast. in contrast. aggravated by colonial exploitation and unfair trade agreements. Russia. The Economist. leader for the previous 110 years. Indonesia. they produced.
executives. new world. strategic inflection points do not necessarily lead to disaster. Against this backdrop. particularly if his starting point is the recession-racked West« [emerging markets] see opportunities in every difficulty rather than difficulties in every opportunity. these shifts pose threats. and investors will wrestle with this shift for decades. "No visitor to the emerging world can fail to be struck by its prevailing optimism.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 Emerging Economies Germany United States Britain France Japan Developed Economies 0 20 40 2010 60 2002 80 100 Source: Adapted from Pew Global Attitudes Project: Country's Economic Situation. Noted one observer. workers. For others. and assess the potential of economic environments. particularly the sort we have seen during the global financial crisis.Page 5 of 63 some. as this chapter shows. evaluate the performance. Policymakers. Economic change. Change creates prospects for players. Chart 4. 2011. as cell-phones to land lines or the Internet to printcentric newspapers. who are adept at operating in the new economy. whether newcomers or incumbents.10 Still."9 Put differently.1 gives an indication of who sees which. CRN . there is rhyme and reason that helps managers interpret the development. Chart 4. this chapter profiles the frameworks that interpret the brave. seems unpredictable. such as those who applied computer chips to cell phones or publishers that migrated to the Web. megatrends such as the Comeback are rare events. they create opportunities. Nevertheless.
Margin Note 2 Economic and political changes alter market circumstances Although the pace varies from country to country. some prospered more than others. 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. this task has perhaps not been more important in our lifetimes given the opportunities and challenges currently facing individuals. Different reasons explained success and failures in different countries.12 Rather than an isolated situation. This chapter completes our macro-profile. and countries. anticipate. and potential. Emerging economies are reinventing systems of production and distribution as well as experimenting with entirely new business models. Managers track changes. companies. and started production within 15 months. Globalization seemingly expanded the economy for all. when. Beijing's response was swift: the development of domestic polysilicon supplies was declared a national priority. GCL-Poly Energy--which counts China's sovereign wealth fund as a key owner. Political and economic processes require anticipating new situations. As a result. and a few not at all. Since then. Today. in absolute terms. Zhu Gongshan raised $1 billion for a plant. once there. adding this or taking away that in order to boost performance. he has created one of the world's biggest polysilicon makers. built it. It presents the perspectives and tools that managers use to interpret economic environments.11 Although easily overdramatized. and how to do business. many countries prospered. poured money into local polysilicon manufacturers. and adapt to its economic environment. shortage of polycrystalline silicon²the main raw material for solar panels²threatened China's nascent solar-energy industry. For example. gross world output more than quintupled between 1970 and 2010. In relative terms. State-owned banks. Policymakers worldwide watch the game. forecasting China's response to polycrystalline silicon shortages would have encouraged some options while rejecting others. growing from $12 to $61 trillion. Local governments expedited approvals for new plants. For instance. hitting $450 a kilogram in 2008. Polysilicon prices soared tenfold in a year. companies enjoyed opportunities as nations . along with China's sovereign-wealth fund.Page 6 of 63 Introduction Cultural. and legal systems influence a company¶s decisions on where. Foreign companies then dominated production and passed high costs onto Chinese producers. In 2007. performance. China makes about a quarter of the world's polysilicon and supplies roughly half the global market for finished solar-power equipment. Estimating the attractiveness of a country as a place to do business and. political. In China. making prudent investment and operational decisions depends on how well managers understand. For example. the tale of GCL-Poly Energy increasingly is the norm. economic environments change. Since the 1980s. In the West. consider the following situation. Western MNEs rethink strategies and reposition assets. polysilicon factories require lengthy reviews that results in years to build a plant.
PetroChina. managers study changes. Change in one country has consequences in others. and Institutions Economics is vital to citizens. They also spotlight implications for economic freedom. in mid 2011. the apparent triumph of free markets over state-controlled economies had led . In the East.000 multinationals based in the emerging world. for example. Executives worldwide had to determine if this was an isolated example or the start of a trend. and shifted production to a joint venture with a Chinese company in Wuhan. Thailand. few of these existed 10 years ago. By 2000. Evergreen Solar became one of the largest makers of solar panels in the United States by 2009.14 The number of companies from Brazil. too expensive there. Companies also monitor changes in countries where improving performance or revised policies strengthen local competitors. globalization connects countries. largely foreign owned mining companies. adapt to the changing. both big and small. China. impossible in 1980. In the least. Consequently. aided by $43 million in public assistance. CRN Choices of Citizens. Bolivia dismantled its privatization model that governed the mining industry and expropriated all assets owned by private. Too. more people are working worldwide but poverty is increasing. changing economic policies reveal government ambitions. Challenges of the Comeback The rise of emerging economies distorts traditional economic indicators. dethroned Exxon Mobil as the world¶s most valuable company. for the first time. CRN In both worlds. Policymakers. In Boston. In the West. Managers' macroeconomic instincts.15 More than 70 percent of the world's growth over the next few years will be in emerging markets. triggering market reforms and tighter regulation. and Consequences Besides assessing the foreign markets in which they operate. in the back of their minds. In 2011. And. Change. the United Nations estimates there are approximately 22. managers realize that steps taken in Ireland. Evergreen Solar cited the superior location economics and higher government support for solar activity in China. For example. that shape economic environments. or Mexico differ from those taken in China. policymakers. Concept Check 1 Connections. Brazil. tried and tested for the past decades in the West. Greater competition for scarce resources increases prices of commodities but decreases costs of manufactured goods. China or Russia on the Financial Times 500 moved from 15 in 2006 to 77 in 2010. the global financial crisis has reset the game. The task is distinguishing common trends from unique events. managers monitor those in which they do not. a Chinese company. it shut its Massachusetts factory. India. laid-off 800 workers.Page 7 of 63 adopted the principles of capitalism and practices of free markets. moved it from the periphery to the center of the solar power industry in 2010. both here and there. sometimes confusing. Australia. and recycling massive foreign exchange reserves means capital is too cheap here. circumstances. China fast tracking its polysilicon factories. Estonia. and institutions. or South Africa. it has endorsed growing government involvement in allocating resources.13 On the larger scale.
rapidly happened in the solar power industry. 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). the global financial crisis cast doubt on the sustainability of market led change. 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. Northern Europe. Free market reforms increased investment. as we see. cut past Singapore. just as the Panama and Suez Canal changed the flow of trade.nasa. employment. For example. However. so too might global warming do the same. .16 Passage through the Arctic Sea Ice Source: Adapted from NASA satellite image taken September 2010. distribution. particularly those in the West. the bulk of goods between Eastern United States. All of which. The record shrinking of the polar ice cap is turning the forbidding waters at the top of the world into new shipping routes. and Asia travel through the Panama Canal to navigate between the Atlantic and the Pacific. Free markets. the crisis showed. also misallocate capital and over-promote consumption and opportunism. However. and head up the west coast of Europe. and spatial organization of economic activities across the earth. and institutions make better decisions.html. Today. pass through the Suez Canal.gov/topics/earth/features/ice-min-approach. a fuller understanding of economic transitions and market evolution helps citizens. http://www. reshape trade and investment. Satellite images show the consequences of global warming in northerly latitudes. round the bottom of India. and wealth. increasingly constrain the animal spirits of unbridled capitalism through expanding regulations. and reconfigure industries. for both good and bad reasons. most goods between Asia and southern Europe travel through the South China Sea. Today.Page 8 of 63 countries to launch bold development programs. policymakers. Similarly. economic geography is the study of the location. 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. Governments. cross the Mediterranean. we see interesting developments in the geography of globalization. consumption. Hence. New market standards reset asset valuation and resource allocation.
ships can feasibly ply the Northwest or Northeast Passage at the end of the summer melt season."19 The shrinking Arctic ice is. markets. Similarly. The traditional route through the Panama Canal runs at least 6 weeks.000 nautical miles (about 15. Accelerating ice loss may bring that date forward. an increasingly hotter world poses innumerable side effects that likely trump the benefits of shorter trade routes. shipping goods from South Korea to the Netherlands via the Suez Canal travels 14. Germany via the Northeast Passage takes less than a month. The voyage from Vladivostok in the Russian Far East to Rotterdam. to say nothing of radically redrawing the world's coastlines. alters shipping logistics and trade routes. it yields new trade routes. "For the first 20 years of the satellite record. Nevertheless. the Arctic Ocean's ice cover shrinks dramatically. And since time is money. in 2011. the shorter trip significantly reduces the cost per ship per trip. Traveling the Northwest Passage shaves around 3.000 nautical miles (3. rather than the Panama or Suez Canals. However. Scientists tracking the annual maximum extent of Arctic sea ice reported that 2011 was among the lowest ice extents measured. at best." said NASA. a mixed blessing.17 Presently. by mid-century. scientists predict these waterways could remain ice-free year round.18 For a couple of months or so.000 miles).452 miles) and ten days off the journey. "Then. As climate change resets the Arctic ice cap. the average annual maximum was basically uniform. we see an abrupt decline. Improving conditions for traveling the Northwest or Northeast Passages depend upon worsening conditions for the planet.Page 9 of 63 Traveling these fabled Passages. . and resources.
2 Indicators of an Economy: A Partial Profile Source: http://www. Improving decisions depends on assessing the development.usdebtclock. it excludes important indicators like inflation. this a partial selection.21As a result. For example. Marketplace dynamism means that today¶s valid measures may prove invalid tomorrow.2 reports aspects of the U. 3. income distribution. Figure 4. The complexity of even the simplest economic system defies straightforward classification. The consequence of connections is an integrated system of markets in which actions in one influences outcomes in others. unemployment. In the wake of the global financial crisis. Resource constraints mean managers must prioritize their options. Mind you. Just as no man is an island. it highlight the complexity of an economy. although economics champions many scientific principles it still relies on a variety of behavioral assumptions to interpret activity. In particular. 2.S. Adjusting analysis for actions and reactions across a broad scope of markets is difficult. operating in countries that offer the greatest return with the least risk.000. Still. performance. economy that profile its outstanding debt and obligations. assessments are often more conditional than universal because: Margin Note 3 1. indicators that worked in 2009 were flawed by 2010 and remained dubious in 2011. Figure 4.org/ . and balance of trade. Stipulating indicators that definitively represent a country¶s economic performance and potential is difficult.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. Interdependencies complicate interpretations. no country is isolated. and potential of an economy.20 Few MNEs can fund and run operations in all 208 markets.
where they should not. assessing the conditions that moderate economic freedom as well as move a country from one economic system to another. Collectively. perhaps more importantly. Clarifying interactions among elements of an economy help estimate its development path and performance potential. Therefore.3 Economic Factors Affecting International Business Operations Pickup figure 4.2 from page 144 of 12th edition. it highlights elements. Lastly. Concept Check 3 FIGURE 4. managers apply three perspectives to help make sense of situations. performance. therefore. Second. a systems perspective. 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. Too. The third investigates the points of change that drive economic change. they evaluate the type of economic system in the country. the insights help managers pinpoint where investments should go and. which guide assessment. proves useful. the consequences of a reduction in interest rates. they estimate how much freedom they will have to make investments and run operations as they see fit. and potential. analysts¶ reports.Page 11 of 63 Figure 4. . studying how current policies shape development and performance. managers typically integrate insights from company activities. namely economic freedom and system type. Consider. for example. Replace sidebar contents as indicated here. Figure 4.3 also suggests that linkages among elements mean that a change in one affects others. and news articles in developing a mosaic profile that represents an economy's features and estimates its interactions. It identifies economic conditions that shape a country¶s development. First.3 shows how managers overcome these constraints.
these sorts of freedoms are taken so for granted. individuals decide how they wish to work.Page 12 of 63 ECONOMIC FREEDOM Chapter 3 used political freedom to organize discussion for a simple reason: any discussion of politics. however. Trade Freedom The absence of tariff and non-tariff barriers that affect imports and exports of goods and services. Freedom House applies this index to 183 countries. 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.´23 The Economic Freedom Index is made up of 50 indicators organized into 10 dimensions (see Table 4." 22 Rather than the state. operate. no matter the terminology. . that freedom is both protected by the state as well as unconstrained by the state. Although managers monitor a range of economic issues. save. the higher the degree of economic freedom (or. consume. these freedoms are so rare.1). and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself. We reapply the same logic here. and goods. they are ongoing points of fascination and conflict. ultimately takes one to the issue of what one is free to do in a political system. 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. 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. conversely. capital. dimensions. Margin Note 4 Against this backdrop. grading each's performance. and invest. fully realized freedoms of movement for labor. safety. Importantly. within the range of 0 to 100 percent. or dynamics. The higher the score on a factor. secured by clear laws that are fully enforced by the state. Property Rights Ability of individuals to accumulate private property. and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process. the lower the level of government interference) Table 4. economic freedom is the ³absolute right of property ownership. Monetary Freedom The degree of price stability and the extent to price controls. they rarely cross one's minds. In many others. and efficiency.1 Dimensions of the Economic Freedom Index Business Freedom The ability to start. liberty. produce.
Labor Freedom Aspects of the legal and policy framework that regulates the country¶s labor market. Investment Freedom Ability of individuals and firms to move resources. regulatory reform. Nevertheless. Economic freedom varies across regions.4 in 2010. economic freedom remains down from the pre-crisis high of 60.7 percent. up from 59. The Heritage Foundation and the Wall Street Journal.Page 13 of 63 Fiscal Freedom Tax burden imposed by government on its citizens. Source: Adapted from The Economic Freedom Index.4 Economic Freedom by Region . The population data indicate that most people of the world live in countries with lower degrees of economic freedom (See Figure 4. Worldwide.2 percent in 2007. without restriction.2 billion people live with high to moderate degrees of economic freedom. economic freedom advanced in 2011. Approximately 1. In 2011.2 billion people. The majority of the world. the average freedom score was 59. roughly 5.24 More governments reiterated the importance of sound finances. open markets. Government Size Government expenditures as a percentage of GDP. into and out of activities both internally and across the country¶s borders. FIGURE 4. and property rights. with people in North America and Europe enjoying more than do others elsewhere.4). Financial Freedom Efficiency of banking as well as the independence of the financial sector from government control and interference. regaining some momentum it had lost during the great financial crisis and ensuing global recession. lives in countries where the state grants them low degrees of economic freedom. Economic freedom on a regional basis shows higher degrees in Western countries and lower degrees in Eastern countries. Freedom From Corruption Degree that corruption introduces insecurity and uncertainty into economic relationships.
mostly free. Switzerland. Inc. The least free economies include North Korea. Margin Note 5 MAP 4. 2011 Index of Economic Freedom. Eritrea. Singapore.8 placed it in the ³mostly free´ category. and repressed given the degree to which its government regulates individual's economic choices. New Zealand. retrieved June 1. 57 are mostly not free. The United States dropped to 9th place in 2011 largely due to increased government spending. Map 4. In 2007.2 profiles economic freedom around the world. moderately free. mostly unfree. and 32 are repressed. Reprinted by permission of The Heritage Foundation. It indicates 6 countries have free economies. 2011 (www. 27 are rated mostly free. Cuba.heritage. Australia. 2011). 57 are moderately free. the United States ranked fifth with a score of 81. and regulations. debt.. . and Venezuela. Zimbabwe.2 and placed in the "Free" category.2 Global Distribution of Economic Freedom The Index of Economic Freedom classifies a country as either: free.Page 14 of 63 Source: Terry Miller and Kim Holmes.25 The freest economies are Hong Kong. Washington. and Canada. Its score of 77. DC: The Heritage Foundation and Dow Jones & Co.org.
2011). Income is higher in countries with higher economic freedom. Higher-rated countries generally outperform laggards on a variety of measures. it more than doubles the worldwide average and is 7 times higher than in mostly unfree and repressed . 2011 Index of Economic Freedom.org. 2011 (www. Inc. DC: The Heritage Foundation and Dow Jones & Co.Page 15 of 63 Freedom Map Design Info: Map Source: http://www.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. Washington. performance. Margin Note 6 The Value of Economic Freedom: Economic freedom helps explain a country's development. retrieved June 1.. and potential. Countries with high economic freedom have higher rates of growth and productivity. Reprinted by permission of The Heritage Foundation.heritage.heritage.org/index/pdf/2011/Index2011_map.
Repressed.464 GDP Per Capita. 26 The data support the argument that liberating resources from government control improves financial performance. 33.Page 16 of 63 economies (See Chart 4. Mostly Free. Mostly Free. 0. Collectively. data indicate a positive relationship between economic freedom and various measures of economic performance and quality of life. 39. Mostly Unfree.9 . 6. 3. Mostly Unfree. Margin Note 7 CHART 4. Free.9 Inflation Rate. and environmental sustainability show positive relationships with economic freedom.8 Inflation Rate. Positive relationships exist between economic freedom inflation.770 GDP Per Capita.253 Inflation Rate Inflation Rate. and standards of living.987 GDP Per Capita ($) GDP Per Capita. 4.2 Inflation Rate. and employment. Free. 10 . literacy. Life expectancy. 0.495 GDP Per Capita. economic stability.6 Inflation Rate. political openness. 5. ModFree. Mostly Free. 1 4. Economic freedom pays social dividends.2). Repressed.2 Economic Freedom and Leading Economic Indicators GDP Per Capita.
and spurred rethinking government¶s role in the economy. 8. 12 Source: Adapted from data reported by the Heritage Foundation and the Wall Street Journal. 2011). The state. 21 . Repressed. 5. in signifying the triumph of capitalism over communism.27 Downturns in many economies signaled the biggest global economic contraction since the Second World War. and swiftness of the global financial crisis highlighted the limits of a market economy. Free markets had consistently outperformed "not free" countries. Reprinted by permission of The Heritage Foundation.6 Unemployment Rate. 9. some argue. Free.5 Unemployment Rate. symbolized the supremacy of economic freedom. Its immediate aftermath saw industrial production. Increasingly. The scale. Large and growing majorities believed that people¶s lives benefited from more.5 Unemployment Rate. Mostly Unfree. Trends in Economic Freedom For the past few decades. economic freedom. The global financial crisis has disrupted the expansion of economic freedoms. Throughout the world. Margin Note 8 Changing marketplace conditions and unfolding political trends indicate that MNEs face increasingly uncertain economic times. should control the animal . Mostly Free. Mostly Free. and equity valuations tracking or doing worse than during the Great Depression. managers could safely presume that countries would adopt reforms that increased economic freedom.heritage.org (accessed June 6.Page 17 of 63 Unemployment Rate Unemployment Rate. contested the usefulness of market fundamentalism. not less.1 Unemployment Rate. 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. countries abandoned the policies of state control and adopted the principles of capitalism and the practices of economic freedom. scope. The fall of the Berlin Wall in 1989. exports. at www. The 2011 Index of Economic Freedom.
All in all. question the legitimacy of the quest to maximize economic freedom. and sustaining demand. Now. safeguarding citizens. Countries. Dissatisfaction with capitalism prevails across the globe. sovereign debt crises. By 2010. Nominally Communist China is one of the world¶s strongest supporters of free markets. which we evaluate in the closing case of this chapter. sluggish growth. as the world regroups. stabilizing panics. reported that an average of 11 percent across 27 countries held the opinion that capitalism works well. Many called for a new economic system²including 43 percent in France. 35 percent in Brazil. 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. Some 67 percent of Brazilians and 59 percent of Indians see free markets as the best option for the future. This.29 Our opening case cautions qualifying attitudes in developed versus emerging economies. Still. in turn. complicate recovery. support had fallen to 59 percent. 28 Some 23 percent believed capitalism is fatally flawed. five years down the road from the start of the crisis. 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. Fear of Free Markets The causes and consequences of the global financial crisis. A leading survey. CRN In 2002. managers struggle to pinpoint the implication of these market trends to economic freedom.Page 18 of 63 spirits of free and unfettered markets. reduces economic freedom. costly commodities. many economies have stabilized. about half of the "world" reasons that the free market is still the best option. up from 66 percent in 2002. Conversely. show weakening support for free markets. 80 percent of Americans regarded the free market as the best economic system for the future²then the bellwether of support. emerging economies now match or have overtaken the United States in their enthusiasm. rising unemployment. 38 percent in Mexico. and 31 percent in Ukraine. Each and all decreases economic freedom. for example. redistributing wealth. Rather than an ideal to emulate.30 . they are wary of free markets. regulating markets. Today. at 68 percent. They hasten to add that its endemic flaws require reform and regulation.
falls short of missing India's economic surge. prudent public finances. and openness to trade and FDI are telltale signs. apparently. The risk of traveling this way. In summary. Specific link isttp://uncyclopedia.wikia. as citizens seeking stability appeal to politicians. 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. those whose lives are deteriorating. the financial crisis signals a radical shift in the legitimacy of free markets and.jpg The Test The test of any economic system is straightforward: it must apply sound macroeconomic policies that sustain a productive economic system. Continuing skepticism will push for greater state control and.31 In many countries.com/wiki/File:043_overcrowded_train_India. consequently. praise for the virtues of economic freedom has turned to criticism of its deficiencies. Source: Uncyclopedia the content-free encyclopedia that anyone can edit. . Photo is content/royalty-free. Meeting these standards powers performance and boosts potential. if the legacies of the global financial crisis persist or worsen. support it. people on the go need to move. Their evolution and interplay will alter the relationship between markets and governments. In situations like those that we see today. by extension. notably emerging economies. we are likely to see more people question the legitimacy of capitalism and the free market. Here we see Indian passengers hanging onto a crowded local train in ways that defy reason. Dire circumstances inevitably fuel public clamor for government intervention. ultimately the legitimacy of the prevailing economic outlook is tied to how people feel about their particular situation. Those who lives are improving. In others. the exact opposite takes place. Arguably. Presently. Low inflation.Page 19 of 63 Caption: Despite the risk. clamor for change. notably western markets. economic freedom. low unemployment.
implement fiscal and monetary policies. 5) Margin Note 9 Figure 4. Three types of economic systems stand out: the market. authorize property rights. make most economic decisions is a market economy.5 Pick up from PowerPoint file. and ultimately. rather than the government. Managers often begin analysis by evaluating the economic system in a country. mixed.Page 20 of 63 TYPES OF ECONOMIC SYSTEMS Wherever they go. This leads them to investigate the structures and processes that guide resource allocation and business conduct. Market Economy A system whereby individuals. interpret economic freedom. and command economies (See Figure 4. managers question how the host government might regulate the economy. It is anchored in the philosophy of capitalism and its principle that private .
. consumers direct the efficient allocation of resources and the optimal valuation of assets. and provide general safety and security (See Table 4. The need for public goods (e. Consumers. Government is the problem. Australia.. Literally translated. Therefore. Singapore. As Adam Smith observed. Switzerland. spurred by their need to maximize purchasing power. With that said. optimally determine relationships among price. it sees the ³invisible hand´ of self-interested consumers as the foundation of efficient economic activity. how to spend or save money.g. Consequently. what to do and for how long. Privatization. individuals¶ free choice in a market economy powers a country¶s progress toward prosperity. Canada.e. proponents concede that the invisible hand is not infallible. there is an enduring bias toward minimal government intervention in market economies. the less efficiently the market works. The more visible the ³hand´ becomes due to government intervention.Page 21 of 63 ownership confers inalienable property rights that legitimize profits earned by one's initiative. Deregulation Government regulations reduce individual choice²i. spurred by the profit motive. and whether to consume now or later.. Rather. ensure fair and free competition. supply.g. by letting the private sector regulate supply and demand. environmental standards) that preempt those inclined to maximize personal gain at the expense of society¶s welfare requires some governmental involvement. and demand. Margin Note 10 Concept Check 4 The market economy champions the principle of laissez-faire. Margin Note 11 Unquestionably. traffic lights. to make products that consumers. protect property rights. buy. a market economy calls upon the state to enforce contracts. minimum wage." More broadly. regulate certain sorts of economic activities. the anchor of the market economy is the invisible hand of economically free agents driving growth and prosperity. by virtue of what they do and do not buy. investment. and risk. ³Government is not a solution to our problem. it advises "let it be" or "leave it alone. Optimal resource allocation follows from consumers exercising their freedom to choose and producers responding accordingly. a market economy pushes producers. quantity. it opposes government intervention in business affairs. "let do.32 Ultimately. through their interactions with producers." Whatever the translation. improves production and consumption decisions. it suggests.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. Ultimately. and the United States grants people the economic freedom to decide where to work. A market economy of the sort seen in Hong Kong. national defense) and protections (e. Margin Note 12 Table 4.2). financial regulation.´33 Deregulation helps .
35 This reasoning results in a command economy in which the government owns and controls resources. Products are usually in short supply and there are few substitutes. Command Economy In theory. managers operate in economies that exhibit many but not all methods of state control. and in what way. Turkmenistan. Libya. Property Rights Property rights give entrepreneurs ownership of their idea. usually labor. have few resources to upgrade or incentive to innovate. communism calls for an egalitarian. Although nominally a socioeconomic structure and political ideology. communism champions state ownership of resources and control of all economic activity. and Afghanistan during the rule by Soviet occupation and the Taliban. . and Burma. typically large-scale. effort. Iran. will prosper from their ingenuity. Controlling everything and everybody lets the state mobilize idle resources. Above all. in a market economy. inefficient. command economies can perform well for short periods. the visible hand of the government. capital-intensive. the bias toward political stability and social control suppresses economic freedom. with little regard for price. and risk. Concept Check 5 Command economies have included the Soviet Union (which was for a time the world¶s second-largest economy). to generate growth spurts. China during its Great Leap Forward era beginning in 1958. Product quality is erratic and typically deteriorates. North Korea. 34 Antitrust Legislation Antitrust laws prompt industries with as many competing businesses as the market can sustain. it collects taxes and buys computers at market prices. India prior to its economic reforms in 1991. Today. such as Iran. we see few pure examples. not the government. notably Cuba. and ultimately stateless society based on the government¶s command of the economy. Venezuela. These sorts. In a command economy. commanding the authority to decide what products to make.36 Margin Note 13 Making the invisible hand visible means that government officials²not consumers²determine the prices of goods and services. and unprofitable. if the government wants computers. orders state-owned companies to make computers.Page 22 of 63 markets optimize productivity. High productivity continues as long as the state can utilize idle resources. Indisputably. in what quantity. State owned companies. They prevent monopolies from exploiting consumers and restraining market growth. Protection boosts economic freedom by assuring individuals. at what price. classless. More often. For example.
the government permits market forces to influence quantity. in allocating resources. As the economically free U. the slate of officials. Margin Note 14 A country's adoption of the socialist philosophy explains its decision to forsake the market or command economy. More specifically. as does capitalism. Rather than instructing the state-owned firm how many computers to make. At present. the interaction of supply and demand. The aftermath of the global financial crisis corroborated many of these principles."37 The mixed economy integrates elements of the command and market systems. as does communism. Governments.39 As the free market British economy cratered. Russia. It utilizes the market to allocate resources. tougher job-protection laws. S. and generous social safety programs better navigated the economic upheaval than had their free market counterparts.41 Hence. the extent and nature of government intervention differs from country to country. higher taxes. stabilizes the system by responding to market failures. Regarding the latter. are presumed to far more conscientiously instill an egalitarian ethos into the economy. Zimbabwe. broadly labeled mixed economies. . productivity. the state intermingles ownership of some resources. heavier regulation.38 For example. and innovativeness found in free markets yet grants the state the authority to prevent individualism from harming the welfare of society. as opposed to the market. Political agendas. from slightly to extensive. the government may own companies that manufacture computers. and extensively regulates the market. France¶s mixed economy perservered. besides optimizing efficiencies. and protects society by limiting abuses of market power. and social circumstances shape how the government balances economic freedom and state control. countries commonly classified as mixed economies include South Africa. regrouped and wondered what next.40 Advocates of the mixed economy do not unconditionally endorse state intervention as a panacea. A mixed economy is a system in which economic decisions are principally marketdriven and ownership is largely private. the socialism of Denmark supported its steady economic performance and citizens¶ status as the happiest people in the world.S. Ethiopia. Regarding the former. determines production. President Obama reasoned that it is the government's responsibility to make "strategic decisions about strategic industries.Page 23 of 63 Belarus. also defends the weak by supporting low unemployment. but the government intervenes. prevents the consolidation of wealth and power. and China. but it subjects investment to social control largely directed by the government. signaled to producers through the price system. centralizes economic planning. fall between the market and command economies. U. Vietnam. Countries that favoured a strong state presence. Socialism holds that a fair and just economy. Mixed Economy Most economies. fall in the "mostly unfree" and "repressed" categories of the Economic Freedom Index. Socialism advocates regulating economic activity with an eye toward social equality and fair distribution of wealth. This mandate requires a country achieve the efficiencies. helps the impoverished by fairly distributing income.
regulating performance. Notwithstanding the dividends of economic freedom. The rest do not. thereby creating the prosperity and wealth that maximize state power and supports its continued rule. and broad governmental support to build a world-class company in 15 months. grant individuals substantial economic freedom. 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. it is not. some. world-class economy that unconditionally reinforces the power of the typically one-party state. in many others. North Korea and Cuba. They typically fall in the "mostly" and "moderately" free categories of the Economic Freedom Index. Margin Note 15 Looking to the Future: Is State Capitalism a Detour or Destination? Managers question will free markets prevail. State Capitalism is an economic system whereby the State decides how. taking control of development. so few countries maximize it. many reflect on a perplexing feature of the economic environment. Recall our earlier profile of GCL-Poly Energy of China. However. State Capitalism relies upon skilled technocrats whose goal is developing a powerful. Mexico. and where assets will be valued and resources allocated. State Capitalism does not have an ideological component--the government manages markets for long-term political survival and power projection. Now. In some ways it is. will governments reclaim the commanding heights of the economy. China's disruption of the solar power industry prompted many firms to shut down. economies had steadily adopted the free market model given the success of countries that had migrated from command and mixed to market economies. Germany. manages trade relations and exchange rates to promote exports and punish imports. Map 4. relocated to China. Most. not to enforce an abstract ideal or promote the cult of personality. Some of these have a command economy--notably. But. the owner. and maintains accommodative legal and regulatory systems. The government uses markets to promote stability and growth. France. Instead of politicized revolutionaries promising a brighter future.Page 24 of 63 Japan. Russia. such as Evergreen Solar. Swede. the global financial crisis has thrown markets into disarray.42 The State develops national champions. As they do. leverages control of the financial system to provide low-cost capital to domestic industries. Austria. protecting hard-won economic freedoms? Or. cheap government loans. 33 countries. State Capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. or 18 percent of all. and determining potential? For decades. Politics has a profound and pervasive impact on the performance of markets. Zhu Gongshan. United Arab Emirate. South Korea. Brazil. when. Some may contend that State Capitalism sounds a lot like a mixed or command economy. we see countries enforcing greater state control of the economy. and Saudi Arabia. Venezuela. . buffeted by the meltdown.2 shows that 6 of 183 countries have free economies while another 27 are mostly free. like China. Put differently. relied on quick approvals. and India. practice State Capitalism. So. Foremost.
S. and local officials control resources to fund investments. and stable industry settings.44 Presently. and so on answer directly to the Chinese central government. Officials install barriers to trade and investment in order to generate local development and prosperity. In the event plans go awry. metals. Countries that favored a larger state presence. State Capitalism has little need for an independent judiciary. its policies. and more generous social safety programs dealt more successfully with market disruptions than did their free-market counterparts. Gaining Momentum The global credit crisis has expanded the scale and scope of State Capitalism. stops it from devolving into psychosis. including all major banks. many will follow. State Capitalism professes to better protect protected social values. revises policies. provincial. Eastern Europe. Over the past 32 years. National. Bolstering its developing solar power industry. public wealth. or South America. a technology rich U. and prevent the accumulation of vast wealth and powerful selfinterests that threaten social harmony. and its major media firms. The State promotes domestic markets as sanctuaries for national champions. and public enterprise prevail. No matter the question. mining. for example. Public investment. using state-owned banks to provide cheap loans. China's provinces and cities run thousands of medium-sized and smaller ones.45 Whether they advocate economic freedom or state capitalism remains to be seen. For the most part. State capitalist economies. Only a strong state. Allowed to run free. whether in the Middle East. Officials fan economic nationalism. equalize income distribution. goes the reasoning. led China to recruit Evergreen Solar. market economies encourage the psychology that greed is good. More fundamentally. For instance. both good and bad. Many see China as the bellwether. favorable regulations. China is the majority owner of 99 of the 100 largest publicly listed Chinese companies. Regulations restrict foreign companies from entering strategic industries. The State games the system. the State steps in. the Chinese renaissance has shown that Western-style economics is no longer the only viable route to modernization. and direct market development. influencing activities and shaping outcomes. The government explicitly promotes the growth of particular industrial sectors and companies in order to speed economic development. the State favors local companies at the expense of their foreign competitors. company. Under normal circumstances. where it goes. Collectively. media. its three major oil companies. shape operations. its three telecom carriers. some 70 strategically important countries worldwide are at a critical crossroads in determining their political and economic future. higher taxes. most extensive rise out of poverty any . capturing competitive advantages through whatever means necessary. If need be. have telltale marks. and redirects activities.43 Furthermore. heavier regulation. communication. Asia. resets funding.46 China has used its brand of capitalism to develop and direct the world's fastest-growing economy that has powered the swiftest. transportation.Page 25 of 63 Moreover. the State stays in the shadows. 129 huge conglomerates in finance. the invisible hand is visible--but only when necessary. the State owns its national champions. tougher job-protection laws. Its goal is developing national companies into global leaders. the state attracts technology rich foreign companies. as needed. the state typically treats the legal system as an apparatus that legitimates.
MEASURING ECONOMIC DEVELOPMENT.. Managers elaborate their analyses with indicators of sustainability and stability. domestic tranquility. covered in Chapter 3.e. The vast majority of their citizens have a low standard of living with limited access to few goods and services. Africa. AND POTENTIAL Managers use various measures to assess a country¶s economic development.and middle-income nations as developing countries.48 Democracy's retreat. amount of electrical power generated. Hu Jintao. and Latin America. not just surviving but prospering during the great financial crisis. Leaders of the BRIC cohort. Developing countries comprise the largest number of countries (151 or so. of China. Some measures may be informal or idiosyncratic: i. number of wireless subscriptions. Arcing though Asia.Page 26 of 63 nation has ever seen. authoritarian governments emulate China¶s model of State Capitalism. one-party political systems. at their Second Summit Brasilia. performance. newspaper circulation patterns. convention dominates practice. a brief note regarding how we classify countries is in order. therefore. one should not be surprised if others. Margin Note 16 Before reviewing each. They also monitor indicators of the direction and dynamic of transition from one type of economic system to another. helps explain why 80 percent of the countries in the world are moderately free. or military officers running companies.5 billion) in the world. the Middle East. according to the World Bank) and have the highest number of inhabitants (a combined 5."47 Given economic circumstances in the world today. and Manmohan Singh of India. Typically. We follow the World Bank¶s lead in labeling low. . along with the surging success of State Capitalism. or repressed in terms of economic freedom. particularly authoritarian. mostly unfree. further "persuaded the Chinese leadership that state control of much of the country's economic development is the steadiest path toward prosperity--and.963 in 2009. This type has low per capita income--an average of $2. Luiz Inácio Lula da Silv of Brazil. PERFORMANCE. It relative success. Brazil. Matters of income and wealth often anchor analysis. find State Capitalism attractive. and potential. Dmitri Medvedev of Russia.
I for India. Philippines.wikimedia. Brazil. Canada. Their citizens have a high standard of living with access to a variety of goods and services. these countries are called high-income countries. given their high per capita income. the core group consistently includes Brazil. Qatar. India. Russia. S for South Africa Acronym BRIC BRICS BRICK BRICIT BRIMC BRICET BRICA In contrast. T for Turkey Adds A for Arab countries--Saudi Arabia. high standard of living. Australia. E for Egypt. Egypt. Table 4. the BRICs are the vanguard of change. Indonesia. R for Russia. Typically. we may see United States and similar countries called established market economies (EMEs). C for China Add S for South Africa Adds K for South Korea Adds I for Indonesia.3 lists some of the acronym used to sort them. Mexico. Bahrain. or industrial countries. others will follow. Notwithstanding the variability. Currently.970 in 2009.1). Nigeria. Turkey and Vietnam CIVETS C for Colombia. (See Map 4. Oman and the United Arab Emirates N-11 (The Next 11) Bangladesh. Table 4. Concept Check 6 . the United States.jpg The faster growing. and many in Western Europe.an average of $37. advanced markets. I for Indonesia. Iran. Although much larger in scale and scope than other emerging economies. and India are referred to as emerging markets or emerging economies. both good and bad. Kuwait. there are approximately 30 or so emerging economies in the world. and China.Page 27 of 63 Direct link to high resolution photo: http://upload. Many presume that where the BRICs go. relatively prosperous developing countries such as China. V for Vietnam.jpg Source file that contains links to high res photo: https://secure. and sophisticated institutional framework but comparatively slower growth. when one speaks of the emerging economies. New Zealand. Pakistan. one speaks principally of the BRICs. In the future. developed countries are those with high per capita income-. Less commonly. Developed countries include Japan.wikimedia. T for Turkey.org/wikipedia/en/wiki/File:BRIC2010. South Korea. T for Turkey Adds M for Mexico Adds E for Eastern Europe.3 The Emerging Economy Alphabet Members B for Brazil.org/wikipedia/commons/d/da/BRIC2010.
Margin Note 17 TABLE 4. Mexico Australia World GNI (US$. Table 4. 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). Reproduced with permission of the World Bank. billions)49 14. Lastly. Copyright 2011 by the World Bank. say. 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. if Samsung's Malaysian subsidiary repatriates profits to headquarters in Seoul.367 1.4 The 15 Largest Economies by GNI.476 1. the portion of the value of a Sony TV built in South Korea using Malaysian resources counts in the GNI of Malaysia.750 2.856 3. .558 2. 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.557 1.857 4. less similar payments it has made to other countries.416 1.324 966 962 957 $59. the value of.Page 28 of 63 GROSS NATIONAL INCOME Gross national income (GNI) is the broadest measure of a country¶s economy. Similarly.476 2. it increases South Korea's GNI.132 Source: World Bank Development Indicators 2009.233 4.4 identifies the 15 largest economies in the world in terms of GNI. Rep.114 1. Thus.
size of the population. the opposite is true.3 GDP±±Real Growth Rate Nominal GDP increases from year to year partly because a country produces more goods and services and . Often. but TVs made in Malaysia by Samsung do not. economic powers like the United States. Margin Note 19 Gross Domestic Product (GDP) The total value of all goods and services produced within a nation¶s borders. Improving Analysis GNI and its offshoots estimate an economy¶s absolute performance. Margin Note 20 Rate of Economic Growth Gross figures are a snapshot of one year. Japan. between 2000 and 2008. managers crosscheck their analysis. not GNI. Conceptually. minus the income earned by foreigners from domestic production. their slightly calculation can result in small discrepancy at the country level. and the international operations of a nation¶s companies equals GNI. For example. Looking at countries in terms of their growth rate shows a wide range. Therefore. Managers improve GNI's usefulness by adjusting for the rate of economic growth. world GNP and world GNI are equal. and Germany consistently claim the top rankings when sorted by GNI. They can mislead managers when comparing countries. almost 90 percent of Irish exports are made by foreign-owned firms. For example. China grew more than 11 percent per annum.50 Consequently.3 reports the real GDP growth rates for various developed and developing economies. Japan averaged 1. more accurately measure its performance. is the gross domestic product. They do not measure the rate of change in an indicator. GDP.51 GDP helps assess countries in which the output of the multinational sector is a significant share of activity. Meanwhile. plus the income earned by its citizens abroad. Technically. both Samsung and Sony TVs made in South Korea contribute to South Korea's GDP. For example. Interpreting present and forecasting future performance requires pinpointing an economy's growth rate.52 Chart 4. no matter whether domestic or foreign-owned companies make the product. GDP plus the income generated from exports.CRN. Some may mistakenly presume that they are also more productive and faster growing than lower-ranked countries. imports. and purchasing power of the local currency.2 percent growth over the same span. However. noting the assumptions of the measure and characteristics of a particular country.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. Chart 4.
Chart 4.3 Real Growth Rates for Select Countries. Real GDP strips out price effects in order to estimate the annual growth in the actual production of goods and services. This conversion shows that many emerging markets are growing faster than developed markets.Page 30 of 63 partly because prices increase. 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 .
650). For example. It has seen the swiftest. and India 154th ($1. For instance. such as is the case for Monaco whose 33. A country with a high rank for GNI may rank lower for GNI per capita. up from $7.180). 2011). given how unevenly the world¶s population of 6. thereby attracting foreign investment CRN.728 in 2009.922.409 (as of June 2011) is distributed across countries.55 From the high of 1. However.995 in 2007. Box title GNI per capita. at www. there is a tremendous range.53 It also indicates business opportunities. China has been one of the fastest-growing economies over the past 30 years. Legend for Map 4. Monaco ranked first in the world by GNI per capita in 2009. 2009.3 y Please pick up the insert box shown in the lower left corner on page 139 of the 13th edition. The growth rate of GNI indicates a country's economic potential: if it grows faster (or slower) than its population.360).000 citizens puts it among the smaller economies of the world.945 upper-middle countries $3. adjusting GNI by population measures a country¶s relative performance. Brazil 84th ($8.cia.195 . the country's standards of living are rising (or falling).011 in 2005 and $5.34 billion in China to the low of 50 in the Pitcairn Islands.3 GNI per Capita.54 This conversion is common sense. The World Factbook. most extensive rise out of poverty in history. Therefore. China is the world¶s second largest economy according to GNI. Worldwide GNI per capita was $8. Population Size Managers adjust GNI. averaging double-digit growth for many. y The new data for the box are : o o o low-income countries $995 or less lower-middle countries is $996 to $3. with a value of $203.68 trillion in 2000 to $4.946 to $12. It ranks in the lower-middle income tier for GNI per capita given its immense population. the United States ranked 18th ($46. $7. GNI may be low in absolute terms. China's GNI has gone from $1. like many other economic indicators.201. Rising income has fueled consumer demand.080). MAP 4.900. In comparison. 2009 GNI per capita measures a country¶s performance in terms of its population. by the number of people who live in a country. Commensurately. For example.040).857 trillion in 2009.500 in 2003. Japan 32nd ($38. World Bank income groupings.gov (accessed June 1. China 125th (3.Page 31 of 63 Source: Central Intelligence Agency.
PPP reduces some of the otherwise extreme variability in many country-to-country comparisons. Mexico.56 Table 4. the United Kingdom.5 The 15 Largest Economies. For example. for instance. even though the cost of living differs between the United States and India. Its GNI per capita falls from $203. managers adjust GNI per capita for a country in terms of purchasing power parity (PPP). a loaf of bread that sells for 44. China. Margin Note 21 We calculate PPP between countries by estimating the value of a universal ³basket´ of goods (e. First off. Though comprising a large share of world population.196 or more Map 4. the unadjusted rankings reported in Table 4.g. Revisiting our comparison of the United States and India finds that India¶s GNI per capita in 2009 is $1.57 The opposite occurs in the case of countries with expensive standards of living. On average. Japan.00 in the United States given an exchange rate between India and the United States of 44. Alternatively. 2009: GNI Adjusted for PPP . Map 4. telephone and electricity) that can be purchased with one unit of a country¶s currency. India.694 when adjusted for the reduced purchasing power a unit of currency has in high-priced Monaco. World Bank.5 shows the impact of adjusting a country¶s performance for PPP. and Canada.Page 32 of 63 o y Source: World Development Indicators database. move up.250 when adjusted for local purchasing power.3 shows that high-income countries are clustered in a few regions of the world. Second. such as Monaco.4 change. it lets us determine how much "stuff" a dollar will buy in a particular country. Russia. Purchasing Power Parity The calculation of GNI per capita does not account for the cost of living from one country to another. high-income countries $12. soap and bread) and services (e.. they have a small share of the world¶s GNI and report GNI per capita from the mid-hundreds to low thousands. and Italy drop down.38 INR to US$1. Lower-income countries are spread throughout the world.180 but rises to $3. they report an average GNI per capita in the mid-tens of thousands. it presumes that a dollar of income in Minneapolis has the same purchasing power as a dollar of income in Mumbai.38 rupees in India should cost US$1.. Therefore. France. 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. 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. 58 TABLE 4. Instead. May 1.900 to $131.4 profiles the countries of the world in terms of GNI per capita adjusted for PPP.g. Currently they account for about 15 percent of world population but more than 70 percent of global GNI. Consequently. 2011.
514 $1. Canada Turkey World $14.011 $2.758 $3. 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.845 Source: World Bank Development Indicators 2009.4 y Please pick up box in the lower left corner of the 4.464 $1. Reproduced with permission of the World Bank. May 1. Rep.302 $2. . Box title is GNI (PPP) per capita Source: Source: World Development Indicators database.976 $1. It lets managers compare economic differences between nations by taking into account the relative cost of living.Page 33 of 63 Rank Country GNI by PPP (US$.603 $2.4 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.025 $71.170 $4.011 $9.3 shown on page 143 of the 13h edition. MAP 4.189 $1. 2011.269 $3.262 $1. Copyright 2011 by the World Bank.331 $1. Legend for Map 4.888 $1. World Bank.
there is no consensus on how to adjust GNI. narrow indicators. and GDP. Furthermore. intellectual. notably GNI. GNP. 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. as measured by life expectancy at birth. For example. NNP does so by depreciating the country¶s assets commensurate with their use to generate growth. GNI. goes this reasoning. and subtracts the costs of crime. pollution. Measuring the monetary quantity of market activity without accounting for the associated social and ecological costs misrepresents performance. estimating a country¶s degree of human development in terms of the physical. the reasoning goes. and family breakdown. So. including adjustments for growth. Presently. and educational attainment. and family breakdown. Margin Note 23 Consequently. Green economics holds that a country¶s is a component of. so too should countries.´59 As such.Page 34 of 63 Broader Conceptions of Performance and Potential Measures of gross national income emphasize monetary aggregates. 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.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. only partially represent current performance and long-term potential. the natural world. GPI will be zero if the costs of pollution. free time. partially profile a country¶s performance and potential. GPI values unpaid voluntary and household work as paid work. Ultimately. y Human Development Index (HDI) Matters of human development do not show up immediately in income or growth figures. or GDP for green economics. Managers enrich assessment by estimating sustainability and stability. and cost-of-living. As must a company depreciate its tangible and intangible assets when making a product. livelihood security. 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. and GDP. Knowledge. However. Accordingly. crime. GNP. 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. unlike GDP. holding all other factors constant. population health. Effectively. Longevity. it endorses a broader accounting of the gains and costs of growth²as seen in this chapter¶s Point-Counterpoint--to better gauge an economy. as . 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. population size. GNP. they will given that improving the human condition inevitably improves economic performance. and dependent on. equity. equal the monetary gains from the production of goods and services.
63 Consequently. Margin Note 24 Presently. such as love. there is growing criticism that GNI and its offshoots are at best. Furthermore. y Happy Planet Index (HPI): Reflects the utilitarian view that most people wish to live long. as measured by GNI per capita expressed in PPP for U. Potential items. however.62 Namely. and at worst."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.S. preserving and promoting cultural values. rated just on monetary measures. Accounting for life expectancy. the United States is far in front of France and Germany. and Standard of living. 64 "Happynomics" calls for moving ³from the concept of financial prosperity to the idea of emotional prosperity. insight should clarify measures. is often in the eye of the beholder. healthy. and income equality. No matter how high income rose. leisure time. misleading. an unhappy citizenry may be a leading indicator of a significant change in government policy that alters the economic environment. one must reinforce the other or both suffer. not by economic output or wealth creation. friendship. and establishing good governance. some may say worrying about happiness unnecessarily confuses economic analysis. like beauty.Page 35 of 63 measured by the adult literacy rate and the combined primary. policy makers have puzzled over a paradox that casts doubt on the validity of monetary aggregates as measures of performance. there has been little evidence that it improved peoples' reported happiness. and tertiary gross enrollment ratio. estimation is difficult. are tough to pin down. the emerging science of happiness reports that nearly 70 percent of personal satisfaction is determined by the quantity and quality of relationships. conserving the natural environment. like safe streets and clean air. Therefore. and actualization. which can be measured? The intricacies of happiness capture increasing attention. GNH measures a country's ability to promote equitable and sustainable socioeconomic development. secondary. makes living standards in France and Germany about the same as those in the United States. happy lives. how does one value elements. In the meantime. dollars.66 Granted. rather than simply emphasizing financial performance. Defining happiness. people in rich countries do not appear to be any happier than people in poor countries. managers can consider: y Gross National Happiness (GNH): Progressive society presumes material and spiritual development occur side by side. For example. flawed. a country's economic performance and potential is represented by how well it . In addition. Concept Check 7 Stability Measures For several decades. family relations. However.
and people in other countries. It liberates those trapped in poverty. and society. institutions. Switzerland. Finland. incomes. Growth is life. It raises living standards. It funds safety nets and government backstops. health. it is a fundamental necessity. education. 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. It creates material improvements . Developed by the Organization for Economic Cooperation and Development (OECD). Growth provides long-term benefits to everyone in every country. Israel. Canada. 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. Sweden. employment. It reduces violent conflict. the environment. Said OECD secretary general. from number one through number 10. is the objective. It morally stabilizes society. the Netherlands."67 This index indicates that the 10 happiest countries in the world. communities. and Austria. social relationships. Australia. the administration of institutions. creating the basis for individuals.Page 36 of 63 helps its citizens do so while not infringing on the opportunity of future generations. general satisfaction. Norway. to do the same. not monetary wealth. The HPI advocates measuring the environmental costs of growth while emphasizing that maximizing happiness and health. security and the balance between work and family. are Denmark. y Your Better Life Index (YBLI) This index measures well-being and perceptions of living conditions by evaluating 11 areas: housing.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.
Billions. freer markets had fueled economic growth. 34 percent of the global population survived on less than $1 a day. for example. People experiencing rising incomes and economic improvement are commensurately tolerant of and benevolent toward each other. humanity loses the war against poverty. more inclined to settle conflicts peacefully. in the face of the growing abundance of goods and services. these drive the efficient allocation of resources. thereby providing local. Poverty Reduction Notwithstanding the kindness of strangers. Moving poor people into the middle class.Page 37 of 63 that comfort life. Growth in many impoverished countries has reduced the number of people living in abject poverty. stabilizing wealth effects. By 2008. and resolute confidence in surviving tough times supports the prosperity of individuals and companies. wealth. they become more open-minded.6 billion people. reducing it to 22 percent of the world--about 1. and virtues of democracy. The falling ratio of energy consumption per unit of GDP over the past 40 years. growth is the only means to alleviate poverty for the billions struggling to sustain life. enables them to think and behave differently. history shows cheap government does not translate into good government. Some 76 percent of Americans agreed that U. A thriving economy boosts tax revenues. It creates jobs. more concerned about their children¶s future. province. and sustain society. Rising asset valuations. Let¶s take a closer look at the dividends of growth. more influenced by abstract values than traditional norms. enrich. state. Environmental Benefits Growth encourages innovations. People specialize in what they do best and. more supportive of free markets and democracy. and profits. Moreover. Growth creates the resources that promote transparency of authority. and prosperity for individuals and society. Although appealing. and more inclined to have faith in the future. and national governments the monies to finance spending projects that support. People who see the potential for prosperity behave peacefully. amidst the panic of the recent global crisis. pathways of social mobility. regional. the keystone to the moral stability of society. usiness Dividend Growth stimulates higher employment. In 1990. income."69 Fiscal Dividend Government finances are ultimately at the mercy of growth. Without growth. growth spurs us to consume them wisely. testifies to the benefits of growth. Free from the tyranny of ceaselessly seeking sustenance and shelter. In a word. . wealth engenders humanity. presuming they survive. openness of opportunity.S. courtesy of pro-growth public policy. fair and just laws. Peace Dividend Growth creates more opportunities for more people in more places. people endorsed the virtue of growth. tolerance of diversity. capital investment.'s strength is "mostly based on the success of American business" and that 90 percent admired people who "get rich by working hard. suffer physically and psychologically. By making resources valuable. Together. outsource the rest. Moral Stability Growth affects social attitudes and political institutions.
and liberty. falsehoods.´ In theory. it generates higher wages. shinier. the promise of endless milk and honey for all devolves into a bitter delusion. cooler products to enable self-fulfillment but then restarts a never-ending cycle of hope and deception. However. Pushing back the frontier of human experience²whether it involves the trivial (e.g. fostering morality. Growth Is Inefficient The defining benefit of growth is that ³a rising tide lifts all boats. It liberates people from old routines but enslaves them to new habits. it was 78. creating extreme inequalities of income. In reality. each strikes society hard. relying on new tools to boost productivity. many struggle to keep their leaky boats afloat. income. and wealth for all. mobility. Life Growth supports longer lives. Growth Is Misleading Despite the hype and hoopla. and their industriousness to find a better way. wealth. and taking solace in improving health care. transparency. It promises newer. economic growth oversells and underdelivers. growth imposes costs on individuals. finding comfort in the rising quality-of-life standards. Moreover. bigger. Where one stops and the other starts is tough to pinpoint. their imagination.. they pale in comparison to the unacceptable price of not growing. In a phrase. Unquestionably. forms of entertainment) or the substantive (e. Once you untangle the strands of half-truths. the costs of these benefits² costs that seem to grow faster than growth itself²imperils civil society and. as an economy grows. the benefits of growth are unevenly distributed. However.g. when growth stops. to make a difference. a share of the global population have seen their patchwork-rafts capsize. increasing growth has lifted the tide. trapped on hedonic treadmills in the quest for newer. tolerance. Moreover. denying. and a minute fraction upgraded their yachts. life expectancy at birth was 47 years in the United States. growth does not deliver the benefits it promises. after a century of growth. The problems of growth span the immediate and the future. better. It rewards the financially strong but punishes the economically weak. we fully agree that these costs are striking. By 2011. ignoring or worse. Eliminating the pursuit of progress leaves society stuck in sloth. in actuality. In 1900. and power. alternative energy)²is powered by the quest to grow. Put bluntly. the survival of humanity and the planet.´70 People. justice. or fancier. and the planet. condemning people to ³spiritual despair scarcely concealed by the frantic pace of life. We agree that over the long run. . every day. people now need work just half the time they once had to. ultimately.. Still. humanity. the destination is alienation. faster. decay starts. as the Counterpoint argues. our position is crystal clear: No matter the costs of growth.Page 38 of 63 Quest to Excel Growth incents people to bring to bear their ingenuity.4 years. and self-interests that lace insidious pro-growth arguments. It creates free time to spend with family and community but then demands mobility and migration that fracture groups. as this list shows. Still. Counterpoint > No We accept the premise that growth supports life. confuse consumption of the latest and greatest as the path toward actualization when.
Managers also ." understood to impact society but conveniently excluded while we sing praise of the wondrous ³benefits´ of growth. and so on.´ warned the Worldwatch Institute. Ironically. 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. Mother Earth is going to stop current growth patterns sooner than later.. we need some production and consumption. of eccentricity and character. Effectively. lost in the endless rush of apparent gains but continually surprised by inevitable and underestimated externalities. biodiversity collapse. HPI. and financial servitude. NPP) estimators profile absolute and relative conditions in a country. Presently.g. Alternatively. and the transformation of nominal democracies into functional oligarchies puts the world at the proverbial fork in the road. when we measure the value created by an economy²say. however. humanity will require five planets of natural resources just to keep the game going. in GNI²no costs are tallied. the alienation of binge-buying. the loss of intimacy and atmosphere. and toxic land²let alone global warming. They meaningfully indicate its performance and potential. Ultimately. the loss of craftsmanship. HDI. agriculture.Page 39 of 63 Growth Threatens Life Polluted air. Rather. 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. mass media. and GNP) and broad (e. since "nobody" is responsible for the costs of externalities. at current trends. poisoned water. and the growth engine chugs merrily along. "nobody" pays for them.72 Barring black-swan innovation in mining. warped society. uniqueness and flavor.´71 Current Growth Is Unsustainable Humanity plunders the earth at an unprecedented rate. but at high cost. Noted one observer. our position is straightforward. and resource depletion²are the byproducts of growth. We can remain blissfully ignorant of the price of growth. and manufacturing. false hope of actualization by consumption. 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. no matter how hard we wish otherwise.g. GDP. In summary. Massification delivers great benefits. "everybody" pays the price of those costs with a despoiled environment.. they are mysteriously called ³externalities. mass markets. GNI. local variety and richness. Granted. Growth Destroys Individuality Growth¶s mandate to optimize efficiency requires massification²mass production. slow-motion death spiral of the ecosystem. Epic poverty for billions. mass consumption. mass distribution. human consumption is 30 percent larger than nature¶s capacity to regenerate. overproduction and overconsumption destabilize the basis for life.´73 FEATURES OF AN ECONOMY Narrow (e. By 2050.
too many people try to buy too few goods.´78 Even in normal circumstances. inflation in the United States. income distribution. thereby creating demand that exceeds supply that increases prices faster than incomes. Chronic inflation has bleak implications for companies. There is no incentive to save. 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. poverty. interest rates. annual inflation of 10 to 30 percent²erodes confidence in a country¶s currency and spurs people to seek other ways to store value. and the balance of payments. during periods of rapid inflation. Neither they nor their customers can plan long-term investments. an item that cost $10. or $13. consumer confidence. through policies that raise interest rates. because tomorrow it¶s going to be worth 5 percent less. some define inflation as the continuous fall in the value of the currency.76 Inflation and the Cost of Living Consider the impact of inflation on the cost of living.06 in 2011. regulate wages and prices. For example.600. Other theories. For instance. Normal horizons don¶t exist here. $57. you buy it. and political stability. prices increased up to 95 percent per day. like most Western markets. Yugoslavia. unemployment.000. significantly changes the cost of products. $227. If you need something and have cash.79 Margin Note 25 History shows that chronic inflation²essentially. Sometimes just buying stuff is practically impossible. These measures slow performance and erode potential. the annual inflation rate hit an astounding 79. you spend it today. INFLATION Margin Note 24 Inflation is the sustained rise in prices measured against a standard level of purchasing power. managers watch inflation given its influence on. Mainstream economics holds that inflation results when aggregate demand grows faster than aggregate supply²essentially. and Turkmenistan in the 1990s. such as the Austrian School of Economics. Unless incomes rise at the same pace or faster. in Zimbabwe over the past few years. and so forth. or impose protectionism. 75 No matter the explanation. or ³hyperinflation´ as seen in Brazil. respectively. 1960. living costs. inflation is a decisive economic condition.74 Lastly. by 2009.Page 40 of 63 study other features of an economy to refine analyses and elaborate interpretation. gas. . More pointedly. hold that inflation results from increasing supply of money by central banking authorities.97. ³There¶s a surrealism here that¶s hard to get across to people.000 percent and prices doubled every 25 hours. If you have cash. Leading indicators include inflation. among others.18. or 2000 would cost you.77 The chair of the Combined Harare Residents Association in Zimbabwe noted. consumers struggle to buy groceries.00 in 1913. Inflation pressures governments to control it. and ordinary investment instrument like insurance policies and long-term bonds become speculative. debt. consumers spent their money as fast as they got it or else watched it turn worthless.
not up. and so on. companies lower prices. declining real estate values. managers mind the estimation process. it is the Harmonized Index of Consumer Prices (HICP). poses a menacing risk. central banks and governments rely on reflation²increasing the money supply and reducing taxes²to combat deflation. Deflation is the opposite of inflation--prices for products go down. Lower demand slows company activity.. Unlike the CPI. deflation. the HICP surveys the rural population and excludes owner-occupied housing.´82 Deflation and unemployment are intricately linked. then consumers stop shopping. they discount prices to appeal to consumers who delay purchases in order to exploit tomorrow's cheaper price. not just inflation. shrinking credit.´83 Likewise. Consequently. reduced corporate spending. Margin Note 27 . Explained a Japanese analyst. In recourse.. what a country measures when estimating an economic variable. Margin Note 26 Deflation results from rather ordinary circumstances. In the European Union. And because people aren¶t shopping. Reduction in the money or credit supply contracts personal and investment spending.Page 41 of 63 Measuring Inflation The measurement of inflation highlights a common difficulty: namely. Overcapacity. economies fall into deflationary spirals wherein companies increasingly struggle to sell products. For example.81 If Not Inflation. Declining demand and growing supply trigger increasing quantity and falling prices. the Federal Reserve of the United States has implemented quantitative easing programs. essentially printing money to stimulate demand in order to achieve inflation targets. and political instability. it occurs when the annual inflation rate is less than zero. People gainfully employed testify to the competency of policymakers to sustain a productive economy. Countries that cannot create jobs suffer sluggish growth. Technically. then wages come down. At present. the OECD urged the Bank of Japan to keep pumping cash into the economy ³until underlying inflation is firmly positive. Price indices are sensitive to decisions about their scope and the calculations applied. Persistent unemployment symbolizes the ineptitude of the government in managing domestic affairs. UNEMPLOYMENT The unemployment rate is the share of unemployed workers seeking employment for pay relative to the total civilian labor force. Then Deflation A nagging consequence of the global financial crisis has been the movement of deflation from conjecture to concern. which then lowers demand. which then fires workers. It isn¶t easy to break out of. social pressures. The proportion of employed workers in a country shows how well it productively uses its human resources.80 The United States uses the Consumer Price Index (CPI). For the first time in generations. Unchecked. ³Profits fall. and falling consumer demand fan deflationary dynamics.
lowering incomes. more significantly. whereas countries like China. That is. Company bailouts. worker productivity. and international institutions. Technically. albeit slowly. Regarding the future. In addition. such as crime. Besides measurement issues. In the present. foreign governments. interest expenses divert money from more productive uses. 85 Often. The national debt for many countries had been steadily. Kenya. The larger the total debt.84 Measuring Unemployment As with inflation. these governments.Page 42 of 63 Some economists advise tracking the misery index. and macroeconomic stimulus led to unprecedented debt creation. or have stopped looking for work. 86 Countries in Asia. and South America face economic.88 Our closing case--The Global Financial Crisis: Causes and Consequences--develops these issues. worries about the ability of coming generations to repay saps consumer confidence and constrains government activity. Africa. and the more likely consumers and companies curtail spending and investment. increasing. or Jordan offer little to none. Unemployment measures in many poorer nations routinely underestimate the true degree of joblessness and. such as France and Germany. Deficits occur for several reasons. the greater the economic misery. foreign organizations. such as . the unemployment rate underestimates the scale and scope of the jobless.000 for each citizen. the more uncertain an economy¶s performance and potential. This changed dramatically as governments responded to the global financial crisis. Margin Note 29 Internal and External Debt A country¶s debt has two parts: internal and external. it does not count the number of people who are not working at all. Margin Note 28 DEBT Debt. unemployment benefits. despondency. measures what the state borrows from its citizens. on average. researchers confirm that misery loves company. However. measuring the number of unemployed workers seeking work in various countries is difficult. are working without pay. people work only part time. provide generous unemployment protection. Different assumptions and exclusions alter measurements. the unemployment rate means different things in different countries due to different social policies. thereby reducing productivity. it indicates how many are not working for pay but seeking employment for pay. will then owe approximately $50. which is the sum of a country¶s inflation and unemployment rates. and social problems due to underemployment.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. and decreasing social stability. as the misery index increases so too does social cost indicators. and family stress. The higher the sum.87 Some countries. political. the total of a government¶s financial obligations. even though officially employed. Internal debt results when the government spends more than it collects in revenues.
That is. Crime and Punishment Protesters march in London against the governmentµs spending cuts and austerity measures. or state-owned enterprises run deficits. the richest one percent of Americans . such as private commercial banks. or international financial institutions (e. Escalating public debt increasingly constrains Britain's economy. Hence. economic. GNI per capita reports how much income the average person earns. Stress and loss usually precede its reboot to an efficient. Presently.g. In this situation. the performance of United States looks less aweinspiring when qualified by its income distribution. budget management. the GNI of the United States exceeds $14 trillion. 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.640 in 2009. even when adjusted for population size or purchasing power. and social cost. is repaid in the currency in which the loan was made. the economy grinds to a halt. Similarly. governments struggle with spending priorities. or can do so only at high political. Interest on the debt. For consumers. For example. GNI. External debt results when a government borrows money from lenders outside the country. can misestimate the relative wealth of a nation¶s citizens. other governments. investors. growing public debt is usually an early indicator of austerity measures and tax increases. smaller-scale version. and eventually the debt itself. it does not tell us what share of income goes to what segments of the population. its GNI per capita is an impressive $45. Dreaded debt crises often occur when a weak economy is unable to do this. and companies. a performance that ranks first among nations.89 Consequently.. But.90 However.Page 43 of 63 when an imperfect tax system under-collects revenue. Margin Note 30 INCOME DISTRIBUTION Income distribution often defines a market¶s performance and potential. Pressures to revise policies to deal with growing internal debt create economic uncertainties for consumers. and tax policy. since not everyone is average. the IMF or World Bank). security and social programs exceed tax revenues.
In addition. Lamborghini. The top 1 percent own 37 percent of all privately held stock.000 are more likely to have lost faith in the free market. .96 Whereas one sees Lexus. Margin Note 31 Inequality.Page 44 of 63 receives more income than the bottom 40 percent²the widest gap in 70 years. the 50 million richest people in the world received as much income as did the 3. the United States.97 Ultimately. One controls for this error by assessing the scale and scope of poverty. approximately 10 percent of U. Chile. in which fair play and equality of opportunity power economic performance and unleashes productive potential. This grew to 32 times in 1970. support dropped from 76 per cent to 44 per cent between 2009 and 2010. and over 75 percent of non-home real estate. Turkey. and innovation.´ for instance.91 The top 10 percent of Americans own 85 to 90 percent of stocks. A score of one implies perfect inequality (one person has all the income). then it partially represents income distribution. Americans with incomes below $20."94 Countries that are more unequal have worse social indicators. widening inequality threatens the stability that supports growth as it ³fans tensions that wear down the social fabric. including shrinking opportunity. The average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent. The Gini coefficient presumes that there is a reasonable degree of income within a country. trust funds. and excessive individualism. 60 times in 1990. Most countries range between 25 and 60 percent.92 The United States is not the exception.95 China¶s steadfast commitment to a ³harmonious society.93 Margin Note 32 Benefits and Costs Some income inequality is useful in rewarding effort. and Mexico. However. citizens ³own´ the country. 45 times in 1980. Data indicate such. Widening inequality eventually triggers destructive outcomes. Rising income disparities between booming cities and impoverished countryside threaten social stability and economic performance. talent. poorer human-development records. the wealthiest 20 percent of the world¶s population had 30 times the income of the poorest 20 percent. 65 percent of financial securities. and 75 times in 2000. with much bigger multiples in Israel. and Bentley dealerships in Beijing. and higher degrees of insecurity.S. income inequality erodes a country sense of identity. and business equity.8 billion poorest people. grows. A score of zero implies perfect equality (everybody has the same income). In 1960. 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. resource inefficiencies. Essentially. and 62 percent of business equity.98 Gini Coefficient Managers estimate the degree of inequality in the distribution of family income in a country with the Gini coefficient. If not. dozens of countries exhibit similar or worse income distributions. the richest 1 percent claimed as much income as the bottom 57 percent²in other words. many in rural China rely on bicycles and animals for transportation. bonds. as in the United States.
Removing China from the tally reveals that the number of poor in the developing world has remained constant. Margin Note 33 Concept Check 8 POVERTY Poverty prevails throughout the world. clothing. and shelter. However.104 Margin Note 35 Consequences Poverty shapes economic environments. Rather. although extreme. mental illness.99 So income may be distributed evenly on a relative basis. 38. death. security. Granted. to say nothing of safety. 102 Prevalence of Poverty Poverty grows worldwide. Managers fine-tune their study of income and wealth by considering its conditions and consequences. and Brazil. People struggle for food. Japan. according to the World Bank. widespread poverty is not.2 billion between 1981 and 2005. the per capita dietary protein supply in the United States is 121 grams but 32 grams in Mozambique.5 billion people live in extreme poverty. they may be the opportunity to sustain extended families or connect with people to build communities. China. malnutrition. epidemics. respectively. roughly 1. While dramatic income inequality is a recent phenomenon. The global financial crisis has threatened many more. is living on less than $1.101 Today. The historical record adds an important perspective. famine. India's score does not reflect enlightens ideals of equality. 103 Presently. is not the exception.8 percent (Sweden. Moderate poverty is less than $2 per day (PPP). . 45. Margin Note 34 Extreme poverty. and education. and 56. it represents the cheerless fact that most Indians are poor: 80 percent of its population lives on less than $2 per day.5. 10 percent middle income. education. but there is very little to distribute in absolute terms. India. clean water.7 percent). and health care.Page 45 of 63 Consider India. this reduction has been concentrated in essentially one country.1. and war.100 These essentials can be life-sustaining resources such as food. 100 percent of Canadians have access to clean water.25 per day (PPP). they may be social resources such as access to information. shelter. the average life expectancy is 83 years in Japan yet 32 years in Swaziland. clean water. 41. report 23. rising food prices imperil millions more. and 10 percent rich.105 The daunting gap between the rich and poor challenges the country's economic performance and fundamentally shapes its potential. some saw it pushing 200 million people deeper into poverty. estimates of the number of people in extreme poverty have fallen by approximately 200 million since 1990. It reports a Gini coefficient of 36. the world population is roughly 80 percent poor. Failure to find them results in. Approximately 1. For example. Poverty is a multidimensional condition in which a person or community lacks the essentials for a minimum standard of well-being and life. United States. and health services. compared to 13 percent of Afghans.
By 2006.50 per day. however. For example. the Base includes the 2. and a $100 house.107 Narrowly defined. Margin Note 36 The Potential of the Poor Managers monitor the buying potential of today¶s poor.500) highlight finding opportunities in the face of dire circumstances.900) and housing (Idealab's program to provide functional homes for about $2. 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. For example. Indian companies offer the cheapest mobile services in the world while still earning profits. one manager noted. It was fast approaching 700 million by 2011 even though more than 80 percent of Indians are poor. Market systems may not exist.´106 Caption: The Tata "Nano" is the world's least expensive production car. in 2002. 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. it had 136 million subscribers.g. Similar developments with computers (e. the XO-1 programs of low-cost laptops for children) and automobiles (the development of functional cars such as Tata¶s Nano.Page 46 of 63 The growth of business activity and economic progress ultimately depends on alleviating poverty. ³A billion customers in the world are waiting for a $2 pair of eyeglasses. Boosting the threshold highlights its potential.5 billion people who live on less than $2. and governments may struggle to regulate society consistently or adopt prudent economic policies. a $10 solar lantern. crime may be pervasive. national infrastructures may not work. India had fewer than 15 million mobile phone subscribers. Today. priced at US$2. More dramatically. people earning US$8 per day or . scraping by on less than $2 a day. Economies experiencing extreme poverty require MNEs reassess many taken-for-granted aspects of an economy. It symbolizes how frugal engineering speaks to the economics of the Base of the Pyramid..
Accelerating income growth in emerging economies will move many of today's poor into their already expanding middle class. process it in a different way. they see a cornucopia of choices. come to different conclusions. use no internal lamp. and Motorola offer phones with sealed faceplates (for water and dirt resistance). At the grassroots level. Tata¶s various businesses have co-produced a cheap water filter. they see opportunity. During the next decade. these changes benefit the rich.S. Serving the Base of the Pyramid has two preconditions. prototyped a $500 house that can be bought in a shop. Its efficiency and performance soon led to units marketed in Germany and the United States. eco-sensitive products that work in harsh environments. resource-minimizing. and are specially enabled for text messaging. First.´110 Second. Kenya¶s Safaricom takes these technologies to the next level. Samsung. Where others see a barren landscape. Where others see threats and complexity. This multi-year process creates immense opportunities.109 By 2030. the middle class includes about two billion people in a dozen emerging economies who collectively spend $6. high-powered. consumption. 400 hours of standby time on one battery charge. and larger screens that work in reflected light.108 Presently. 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). lifestyle-sensitive innovations²both here and there. MNEs translate frugal innovations into new product that serve Western consumers.111 Increasingly. and designed $20-a-night lodging for frugal travelers.Page 47 of 63 less had an aggregate income of nearly US$3 trillion in 2011. ³When you look behind the success stories of leading globalizers. If growth rates remain steady. disposable ones²as well as heart stents that run 40 percent cheaper than those in the West. They seek out different information. Too. movements afoot may one day make it to Western markets. the Base of the Pyramid sets new standards: low-cost. CRN Concept Check 9 Success Standards As the world moves from being mostly poor to mostly middle-class. pioneering money-transfer by mobile phone in remote locations that lack efficient means to exchange funds. Chinese firms have introduced reusable sutures--versus the old approach of higher cost. the task at hand is developing affordable. More pointedly.114 . All in all. Nokia. easily used. and make different decisions.113 units were soon en route to Germany. they will earn US$4 trillion annually by 2015.9 trillion a year. ³seeing´ opportunity calls for market pioneers that have a particular mind-set. a surge unseen since the Industrial Revolution that will reset economic environments around the world. the global middle class will include 5 billion people. you find companies that have learned how to think differently from the herd. their annual spending will rise to $20 trillion--twice-current U. For example.112 GE developed a low-cost electrocardiograph machine for rural India. the contours of the Base of the Pyramid will change.
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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.
perverse incentives. capital" did not seem to do the trick. So there was something wrong with the system. Unquestionably. for whatever reason. the DoddFrank financial reform legislation tackled issues that precipitated the crisis and seemed to confound the recovery. allowed to run free. it pales in comparison to the third scenario. The post-2007 recession however. Noted a leading analyst. and the recession ending. Competencies. Now. Running too free. as the eye slowly passed and the second half began unfolding. UBS.118 The aftermath of the crisis highlighted these problems. not by government protection. A precept of capitalism is that all firms. began overhauling the money pumps.119 . In the United States. the financial system accelerated the global collapse. the crisis suggested. Now. Morgan Chase. was the philosophical quandary of the "too-big-to-fail" status of financial players. Its passage resulted in the most sweeping change to financial regulation in the United States since the Great Depression. Some believed they were again taking excessive risks in the expectation that they would be then backstopped. no matter how big or small. delivered the front half of the hurricane. showing that free markets poorly protected social values. if their bets went bad. it did not solely determine it. drives the ruthless efficiency of capitalism. namely the house itself was collapsing. Loosening monetary policy typically led to demand rebounding. and concentrated vast wealth and powerful self-interests that threatened social harmony. and HSBC were seen as too big to fail aggravated incentive problems.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. Scenario Three: The House is Collapsing As awful as the broken pumps scenario sounds. amplified it into a destructive psychosis that accentuated existing structural distortions. Many of these people have virtually no other savings. However. "We created a situation that caused a recession that wiped out the net worth of about 15 million households. Rather. Officials. further aggravated by aggressive leveraging. live or die by their wits. promotes the psychology that greed is good. that fact that institutions like Citibank. that culminated in the epic global crisis. not connections. Similar legislation elsewhere tried to correct flaws in the financial system by regulating opportunistic behaviors. That¶s a mistake. had been the result of exceptionally loose monetary policy. and agency conflicts. Goldman Sachs. this view held that the collapse was a systemic crisis. Slowing progress. J. however. as they had in 2007. For now.P. skewed income distribution. given its extreme leverage and exposure. flooding markets with "capital. there was the troubling resignation that there might be something dreadfully wrong with the economic system. The financial system. Attention shifted to whether the pumps that powered financial systems had been deeply broken. Capitalism. while still fixing the pipes. economies growing. capital.
the outgoing chair of the U."120 Then. there are remarkable similarities with many previous experiences. Elsewhere. Risk of making high unemployment permanent.121 "More than two years after the beginning of the recent crisis. Great Britain. had opted to print money to solve its problems. Each time. Spain..123 It found financial fallouts strike with surprisingly consistent frequency. might struggle for years. confessed that she had "no idea how bad the economic collapse would be«. All continued underperforming past recovery benchmarks. disappointing recoveries. Housing problems highlighted the dangers of the credit bubble. brutish. threatened free market capitalism." said the S&P. citing rising budget deficits and debt. Global labor markets made it become harder for people with low skills to build a secure middle-class future for their families. Italy. Economic nightmare. Incredibly searing. and long. "this time is different. Greece. and these recessions are followed by slow. 2010. Already the largest indebted nation in history. . . and ferocity. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures.124 Possibly Something More Others argued that ongoing shortfalls and struggles are the outcome of deep structural problems. economies.S. we have been here before.still does not understand exactly why it was so bad«and doesn't have much of an idea about how to fix things. in April 2011. ." Characterizing situations in the United States as well as throughout the West. and Questions In Fall. something a decade earlier most would have thought impossible. Excessive consumer debt. Japan. Financial crises are typically followed by deep recessions. . particularly those in the West that were caught in the bubble dynamics of the global financial crisis. prolonged income inequality. Technologies proved wonderful in entertaining us but less than ideal in generating . Historical Precedents Scholars began studying analogous situations. Standard & Poor¶s put a ³negative´ outlook on the U. and even though the situation appears unprecedented. if not worse shape. she remarked. . identifying insights and lessons learned from previous crises. Furthermore. the United States. . Precedents. "Terrible recession.122 Instead. . AAA credit rating. and signaled the advent of state capitalism. Dramatically below trend. the United States' debt headed higher. of a credible plan. duration. Ireland. Analysis found a recurring lesson across countries and across centuries: Debt is always dangerous and excessive debt accumulation is perilous. .S. As such. In particular. through quantitative easing programs. Suffering terribly. Portugal. were in the same. and unscrupulous lenders who exploited their insecurities all came to a head in the worldwide housing bubble. . . the aftermath of financial crises tends to be nasty. The data proved this thesis wrong. Council of Economic Advisers.Page 52 of 63 Concerns. . confirming a very basic message: the rules are the same. U. . . the experts had chimed. This Time is Different: Eight Centuries of Financial Folly assessed economic crises from 66 countries across five continents over the past 800 years. among others. "claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters.S.. . especially given the unprecedented amount of policy stimulus. . No matter how different the latest financial crisis always appears.
and 29 percent said the economy is in a depression. Only 45. Countries warned of austerity. wealth. In the United States. the share of the working population fell to its lowest level since women started entering the workforce three decades ago. healthcare. 16 percent saying it is "slowing down. Japan faced monumental challenges due to earthquake. saying it could drag down growth needed for economic recovery. To top it off. In wealthier Western countries. some 27 percent believed the economy is growing. perhaps unavoidably given the scale and scope of the crisis. and escalating government debt suggested tough times ahead. in emerging economies. Greeks took to the streets and rioted. 127 Unless abated. Spain's jobless rate surged pass 20 percent. Swedish sentiment slumped. Developing countries throughout Asia and Africa faced rising food prices given inflationary policies in the West. the lowest rate since 1983 and down from a peak of 49. Cuts in public support. German inflation accelerated. Said U.125 Meanwhile. Spring 2011 saw both gloomy and optimistic views. earnings. Ireland fell into a funk. some argued the apparent solution to the crisis has been to implement many of the same . and Italy's manufacturing sector declined. well-paying assembly line work and prosperous small-business niches faded. Regarding the gloomy take. Decisions made had not turned out as planned.128 In Europe. In many countries. the sovereign debt crises question the fate of the Monetary Union. waning consumer confidence. To some. unionized jobs. and national imbalances in matters of incomes.Page 53 of 63 jobs. and excessively narrow concentrations of. Which Scenario? The crystal ball remains cloudy as of this writing. trade and financial health as well as excessive levels of. tsunami. diminishing dollar. the issues leading to the crises were still present and worsening in some places. hit but not hurt by the fury of the crisis. Moreover. The Middle East uprisings fanned political turmoil. and potential opportunities triggered protests worldwide. risks ahead are glaring and global. regional. 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. successive rounds of quantitative easing. 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. billions of people feverishly worked to get ahead."129 The world was still stuck with large global. Similar problems existed elsewhere. Regional growth was steadily slowing as the European Union reined in government spending.4 percent of Americans had jobs in 2010. rising government debt will compound the fact that economies take a significant number of years to regain momentum following financial crises.3 percent in 2000.126 The IMF warned the world¶s wealthiest nations to curb their surging public debt. pension benefits. and nuclear plant failure. sectoral. the great financial crisis reinforced strong tendencies toward state capitalism in many emerging markets. We had no playbook and no tools«Life¶s about choices.S. "Things were falling apart. debt in Western economies. Treasury Secretary Geithner. In the United States."26 percent said it is in a recession. Public sentiment seems to think along those lines. Portugal shrank. French consumer spending dropped. rising inflation. a fragile recovery. slowing growth. persistent unemployment.
3. Germany had rebounded strongly. The road to recovery. Interpreting economic environments. by midyear 2011 had recorded seven straight consecutive quarters of economic growth. Which would you nominate? Reverse your logic and identify the indicator that confirms the crisis continues. 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. while bumpy. Questions 1. or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty. 6. Governments in many countries have expanded their regulation of the economy. y Managers watch key events to gauge the contest between economic freedom and state control. Stable market conditions and improving growth prospects were apparent in many countries. Loose monetary policy promised to keep economies growing. This concern. and others gained traction. France. 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. There will be another storm. the strategies that companies pursue. The United States. protects property rights. distribution. Secretary Geithner suggested was not far-fetched. Which scenario do you think best explains the global financial crisis? Why? How does each scenario influence the policies that governments adopt. standards of living. and the choices that consumers make? How might the various scenarios influence economic freedom? The case points out the crises produce winners and losers. sets fiscal and monetary policies. for example. and enjoyed a powerful stock market rally. was watching its unemployment rate steadily drop. 2. y Economically free countries tend to have higher per capita income. analyst anticipated accelerating industrial production and improving consumer confidence. the United States. y The global financial crisis challenges the legitimacy of free markets. while Sweden. 4. was evident. Great Britain. and enforces antitrust regulation. . These include how the government regulates the economy. estimating scenarios. "It will come again.Page 54 of 63 policies that caused the cirsis. conceding.´130 Rays of optimism pierced the gloom. but it¶s not going to come for a while. 5. and positioning the firm to prosper are the jobs of managers worldwide. and social stability than do less-free or repressed countries.
HPI). y In a command economy. Although poor in terms of individual wealth. GNP. y State capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. and the goal of maximizing economic freedom. conveyed via the invisible hand. ) capitalism (p. y A market economy requires accepting the doctrine of capitalism.) economic freedom (p. unemployment. ) command economy (p. its principles of the invisible hand and laissez faire. and price and quantity. or GDP per capita). debt. stability (HDI.Page 55 of 63 y In a market economy. 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. inflation. the collective income of the Base arguably makes it the next market frontier. and poverty y The Base of the Pyramid is the largest. y Concern that monetary measures misestimate economic performance leads to calls to move from the concept of financial prosperity to notions of happiness. GDP). and sustainability (NNP. GPI). y A mixed economy requires accepting the doctrine of socialism. but poorest socio-economic group in the world. determine supply and demand. ) debt (p. GNP. and the price at which they are sold. and the goal of regulating economic freedom. private interests own resources. and the goal of constraining economic freedom. y A command economy requires accepting the doctrine of communism. y Managers assess markets in terms of size (GNI. income (GNI. its principle of an activist government that commands and controls most if not all factors of production. y Green measures of economic performance call for considering ecological aspects that support sustainable development. including. income distribution. Both influence investment activities and consumption behavior. y A mixed economy includes some elements of market and command economies. the government plans what goods and services a country produces. KEY TERMS Base of the Pyramid (p. the quantity in which they are produced. balance of payments.
Strauss and Giroux. ) inflation (p. Clyde Prestowitz. The World Economy. ) income distribution (p. 2005). ) state capitalism (p.com/displaystory. 2001). 2007).´ Farrar. www.´ www. Why the West Rules « For Now. 2009). Volume 2: Historical Statistics. Prestowitz. (May 28.Page 56 of 63 economic geography (p.pbs.cfm?story_id=13743310 . The Next Billions: Unleashing Business Potential in Untapped Markets. 2011. ) happynomics (p.imf. Emerging Markets and the World Economy: Not Just Straw Men.´ The Economist. World Economic Forum. 2009): 25±28. 2010).html). and Prosperity: The Global Economy and the IMF.´ Project Syndicate. www.economist. News Hour. 2009): 45.project-syndicate. ³Stability. Market in America: The Visible Hand. Straus. (August 15." | The Economist. (Retrieved May 7. and Giroux.defence. The World Economy: Volume 1: A Millennial Perspective.org/commentary/rogoff27 . (Retrieved June 7.com/node/15879369)." (Retrieved April 21. www. 2011.org/ external/np/speeches/2006/060706. ) market economy (p. ) sustainability (p. (New York: Basic Books. (January 2009): 44. ) economic system (p. 1±2030 AD. (Retrieved August 12.economist.pk/forums/china-defence/55892-china-claims-9-rank-united-states-patents. Angus Maddison. (June 18. ) mixed economy (p. Three Billion New Capitalists: The Great Shift of Wealth and Power to the East. ³BRICs. ³Betting with the House¶s Money. 2006). Growth. 2006). Kenneth Rogoff. ³Three Billion New Capitalists. 2005.htm . Clyde V. (Paris: Development Centre. (Paris: Development Centre. ) global financial crisis green economics (p. (www. ) laissez-faire (p. 1 . ) stability (p. ³A special report on innovation in emerging markets: The world turned upside down. Farrar. Krueger. ) misery index poverty (p.org/ newshour/bb/economy/july-dec05/prestowitz_8-15. ) socialism (p. 2003). (London: Oxford University Press. ³Government v. Ian Morris.( www. ³China Claims #9 Rank In United States Patents!´ (Retrieved April 23.´ video transcript.html. ³The World Is Flat: A Brief History of the Twentyfirst Century. 2007). (New York. ) ENDNOTES Sources include the following: Thomas Friedman. Anne O.´ The Economist.
cfm. Yale University Press. 2006):33.about. (Retrieved April 13. 25 Counts for 2009 were: 7 countries had free economies. Straus. Economy in Crisis. 2011). 2010.com. 19 ³NASA . www. 2009).´ 2005 Index of Economic Freedom.org/Index/. James Politi. www." The Economist. (Retrieved August 14." MoneyWeek. Miles. ³China¶s µState Capitalism¶ Sparks a Global Backlash WSJ. 24 The 2011 Index of Economic Freedom. (Retrieved April 18." (November 16.econlib. 2005).htm. 21 See. 9 Ibid.4 percent in 2010. ³China Takes the Crown.heritage. 4 ³Global Economic Outlook. 2011).org/data/ databytopic/class." The World Bank. ³The World Is Flat: A Brief History of the Twenty-first Century. (September 25." Los Angeles Times.´ The Conference Board.org/library/Enc/BehavioralEconomics.org/content/chinatakes-crown.com/cs/countries/a/ numbercountries. 17 Simon Wilson. (Retrieved April 11. Beach and Marc A. www.worldbank. 2011). 3 Clyde V. 2009). 2011).org/newshour/bb/economy/july-dec05/prestowitz_815.´ www. 2011). in May 2011. www.´ www. (May 17.com/news-and-charts/economics/global-trade-the-opening-of-the-northeastpassage-45402. See also ³How Many Countries Are in the World?´ geography. Prestowitz. 2010). Andrew Browne and Shai Oster.economist. 7 Ibid. World Bank sees end to dollar¶s hegemony. (Retrieved April 17. 2006).conferenceboard.pbs. 22 William W.com/node/15879369. 23 were rated mostly free. 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. 2 .org/database/?indicator=5&survey=12&response=Good&mode=chart.gov/mission_pages/icebridge/multimedia/arcticseaicemax2011. 10 Specific query: "Is the country's economic situation good or bad?" www. (Retrieved May 19." www. for example.pewglobal. 12 Jason Dean.´ video transcript.Page 57 of 63 Thomas Friedman. 2011). ³Global Development Horizons 2011²Multipolarity: The New Global Economy. ³Three Billion New Capitalists. (August 15.org/data/globaloutlook. 8 Dustin Ensinger.org/research/features/index/chapters/pdf/index2008_execsum. (Retrieved April 21.´ www.html. for example. Sample was 179 countries.heritage. 2009). ³Explaining the Factors of the Index of Economic Freedom. www.html .nasa. ³Melting ice caps open up shipping routes. (Retrieved February 4 2008)." Index of Economic Freedom. 18 Ships attempting the Northeast or Northwest Passages face hundred-mile long swathes of shifting pack ice. 16 Kim Murphy. ³Global trade: The opening of the Northeast Passage. 5.heritage. 5 So. 67 were mostly nonfree.economyincrisis. and 29 were repressed.They moved to 50.´ Financial Times. 11 Clyde Prestowitz. 2007). Three Billion New Capitalists: The Great Shift of Wealth and Power to the East." 15 Stephen King. Losing Control: The Emerging Threats to Western Prosperity. 14 Ibid. (Retrieved April 21.moneyweek. (October 13. 16." 6 ³A Special Report On Innovation In Emerging Markets: The World Turned Upside Down. 2011. 20 The World Bank Group." Reported in "Executive Summary.html. 53 were moderately free. 23 Quotation extracted from ³The Wealth of Nations. www. and Giroux. (Retrieved July 24.htm. www. (Retrieved July 18. 13 Ibid. (New York: Basic Books.pdf. even during the two months or so each summer when safe passage is feasible. 2011).Arctic Ice Gets a Check Up. News Hour." (Farrar. 2005). (15 January 2008).org/research/features/index. ³A Special Report On Innovation In Emerging Markets: The World Turned Upside Down.
foreignaffairs." CSMonitor. Still. 2011). 41 Most worrisome to free market proponents is that. 32 Strictly speaking. ³Make no mistake: In China. 2011). www. irrespective of performance." The Economist. 2011). 37 "The global revival of industrial policy: Picking winners.Page 58 of 63 E.com/discussions/interviews/qa-with-ian-bremmer-on-state-capitalism?page=show. (June 4. (Retrieved April 13 2011). 2010). www. The New York Times. The absence of competition and bankruptcy in this sort of economic system meant that once an enterprise was up and running. are the proletariat.php?q=node/ 3421. 28 July 2006. 2010). 43 Michael Wines. (the social class that does manual labor or work for wages) protected from exploitation by the bourgeois. but it never returns to its original size. 2009). secured creditors² owed some $7 billion²recovered 28 cents per dollar. capitalism eventually is destroyed by its own contradictions 45 "Countries at the Crossroads. as Marx prophesied. State-run Firms Rule.economist. Barry Eichengreen and Kevin H. (Reading. ³Capitalism 4. 2011). www. MA: Addison Wesley. www.com/2009/05/03/magazine/03european-. 27 A Tale of Two Depressions. 2011). www.S. May 7 2009. 28 Data drawn from 12.html.globescan. ³Capitalism's waning popularity. their historic advocacy of economic freedom endorses the philosophy of capitalism and the principle of laissez-faire. Robert Lawson ³Measuring Economic Freedom. (Public Affairs.org/pub_display." Cato Institute. (Retrieved April 19. 2011). saving losers. (Retrieved April 27.globescan. once a crisis passes. 26 . 36 Companies in centrally planned economies exhibited a particular quirk. See also Russell Shorto.co. some argue the U. in its rush to stabilize Detroit during the recent economic crisis.uk/2/hi/health/5224306.com/node/18527446?story_id=18527446&CFID=168796516&CFTOKEN=46679551 . (Retrieved April 28. government control sometimes shrinks. an employee health-care trust. (Retrieved April 18.economist. 31 Anatole Kaletsky. some argue that a mixed economy is essentially a move toward a socialist state. ³Going Dutch: How I learned to love the welfare state.org/index.0: The Birth of a New Economy in the Aftermath of Crisis. Economic Development.voxeu. Upon Chrysler¶s filing for bankruptcy.. none of them is a ³pure´ market economy because their governments intervene in the marketplace. made in his 1981 inaugural address. 34 For example.stm. (Retrieved April 19. 2011). 38 Michael Todaro. www.bbc. (Retrieved April 13. 2009). 42 ³Q&A with Ian Bremmer on State Capitalism.com/node/16741043. (Retrieved April 19. www.com/news_archives/radar10w2_free_market/ . 46 Eric Li. the thinking goes. 6th edition. ³Sharp Drop in American Enthusiasm for Free Market. 2011)." Globescan.nytimes. 2011).com/Commentary/Global-Viewpoint/2011/0428/How-China-broke-the-West-s-monopolyon-modernization.economist. New York Times. (the social class that owns the factors of production)." freedomhouse. 30 Ibid. www. 33 Ronald Reagan¶s then heretical declaration.com/node/18527446?story_id=18527446&CFID=168796516&CFTOKEN=46679551 .' BBC News. 44 The state essentially prevents systemic distortions threatening the stability of the system and promoting societal welfare²or. (August 31.org/template. Indeed. www.org. (operated by the United Auto Workers union and ranking lower in the capital structure) received 43 cents on its $11 billion-odd of claims. (May 9. In contrast.com.´ The Economist. 35 Only then. (Retrieved June 5.csmonitor. www.´ The Economist. ³Sharp Drop in American Enthusiasm for Free Market. 29 Data drawn from 12. O¶Rourke.com/news_archives/radar10w2_free_market/ . as well as a majority stake in the restructured firm. news.´ The Economist. 2009): 83. government violated creditors¶ property rights.884 interviews across 25 countries. (Retrieved April 17. ³An Offer You Can¶t Refuse. ³Capitalism's waning popularity.freedomhouse." Globescan. it survived indefinitely.cato. 39 "The French Model: Vive la Différence!" The Economist. 2011).cfm?page=139&edition=9.884 interviews across 25 countries. (Retrieved April 19." Foreign Affairs. 1996): 705.g. 40 Denmark 'happiest place on earth. ³How China broke the West¶s monopoly on modernization.php?pub_id=6101. www. (Retrieved April 18.
eds. the prices of many goods are considered and weighted according to their importance in the economy of the particular country. 55 See U." McKinsey Quarterly. public finances. (New York. 57 World Bank. we compute per capita GNI by taking the GNI of a country and converting it into a standard currency²say. 2008)..S. while its GNP was $13.com/2008/04/23/happiest-places-world-opedcx_ewe_0423happiest. 50 For example.html . Statement by Dr. (New York: Academic Press. a net outflow). political and cultural freedoms. "Income and Happiness: Towards a Unified Theory. The definition and measurement of GNI and GNP are analogous.html.org/documents/ga/res/38/ a38r161htm.3 percent a year but the economy "grew" -2. Easterlin. 56 Exchanges rates as of April 11.com/article/SB10001424052748704064504576070343252409876. People often value achievements that do not show up at all.´ Forbes. ³Good Numbers Gone Bad: Why Relying on GDP as a Leading Economic Gauge Can Lead to Poor Decision-Making. 2011. The same held for its neighbor.88 trillion. 2009). more secure livelihoods.gov/main/www/popclock. GNI was referred to as gross national product. security against crime and physical violence. This calamity is not unique to Latin America. Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz. 1974). (Retrieved June 2. many developing countries produce more value than they receive as income. Basic Books.forbes. with especially hard times for Central and Eastern Europe and sub-Saharan Africa." The Economic Journal.84 trillion. (December 19. 48 47 . 63 Eric Weiner. healthy. Typically. (Retrieved May 27. Stefan Halper. (Retrieved July 16. 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. financial reserves. 2006). 2011). "State Capitalism and the Crisis. As a rule. Portfolio. ³The Happiest Places in the World. 2007).wsj. 2011www. 59 ³Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond. 2009):4. the GNI of the United States in 2008 was $13. Reder. 49 Data calculated with the Atlas Method. Richard. (Retrieved January 17. for current estimate. 5. the U.2 percent in 2009. In principle. ³GDP Can Be a Poor Measure of Success. (April 23. but roughly balanced for the United States. Mahbub ul Haq. thereby leading to a higher GNP than GNI. and sense of participation in community activities. and currency valuations tumbled. David and Melvin W. (September 25.com.. Indonesia¶s GNP is larger than its GNI²the former was $432 billion in 2007. (Atlas methodology for GNI per capita).html. Thailand. which smoothes exchange rate fluctuations by applying a threeyear moving average. www. in income or growth figures: greater access to knowledge. with a GNI of $217 billion versus GNP of $246 billion the same year. co-conceiver. 2010). 64 Mark Whitehouse. we have the resulting variance between GNI and GNP. better nutrition and health services. Since GNI takes net flows into account. 1983).´ General Assembly Resolution 38/161. while the latter was $372 billion. consumer demand. 53 For example. The Beijing Consensus: How China¶s Authoritarian Model Will Dominate the Twenty-First Century. at least 60 developing markets suffered income drops in 2009.Page 59 of 63 Ian Bremmer. but institutions such as the World Bank and International Monetary Fund now use the term GNI. 51 Historically. 2011). these choices can be infinite and can change over time. and creative lives. price-adjusted conversion. As expected. (2001): 465±484. The current global credit crisis has triggered a sixth occurrence²population in the region is growing 1. This discrepancy results from the fact that the net foreign factor income was negative for Indonesia and Thailand. http://online." WSJ. 60 Joseph Stiglitz. The objective of development is to create an enabling environment for people to enjoy long. 61 Some maintain that the purpose of development is to enlarge people¶s choices. Latin America has seen income per capita drop five times since the 1980s. 2007 Survey. Ian Bremmer.´ Fortune.53 54 Technically. (July. 2010). and World Population Clocks²POPClocks. with Amartya Sen of HDI 61 62 Richard Easterlin. satisfying leisure hours.un. www. or not immediately. 52 Ibid. (i. "Does Economic Growth Improve the Human Lot?" in Paul A. dollar at prevailing exchange rates²and then dividing this sum by population size. In contrast.S.census. The End of the Free Market: Who Wins the War Between States and Corporations? (New York.e.
73 Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond.´ www. (New York: Praeger. www. (Retrieved June 29. 79 www. 75 See www.84. but the one they use the most is the Consumer Price Index. 80 Kevin Phillips. had fallen well into single digits in the early twenty-first century. (Retrieved May 26. (Retrieved April 26. AFP. (January/February 2003): 39±48. www. 2011). China. Changes how it Measures Long-Term Unemployment" USATODAY. ³Numbers racket: Why the economy is worse than we know.org/content/mises. Presently. the youth of the world suffer the highest rates of unemployment in most countries.com/.com/apps/news?pid=newsarchive&sid=aaQyqjERBorM. Moreover. ³Humans using Earth¶s Resources at Unsustainable Rate. In China alone. (May 2. 71 Ibid. 1967). 81 For instance. 2010). However.S. Kwok.un. 68 The Happiest Countries in the World. ³U.com/2011/03/13/opinion/13cohen.org/archive/2008/05/0082023 . once stuck with extreme inÀation pressure.google. 2009 State of the Future. The total population of working-age Chinese will reach 940 million by 2020. The Millennium Project. Chief Japan economist at RBS Securities Japan Ltd. 1983).html?_r=1. 84 The working-age population: Presently. F. (May 28. 2009)." NYTimes." www. ³Economics focus: Botox and bean counting. 2011). 74 Murray Rothbard. Many credited the fall in inÀation to a combination of the price pressures of globalization along with more vigilant central bankers and economic policymakers.1 percent.com/020873. ³How Bad Is InÀation in Zimbabwe?. www. 2011). p.´ Foreign Policy. the population above the age of 16 will grow by 5. for example.naturalnews. (Retrieved June 2. 2006):B1. (Retrieved April 27.´ ww. 78 Michael Wines.Page 60 of 63 Roger Cohen. From ³Japan Succumbs to DeÀation as Consumer Prices Fall Record 1. 70 E.com. inÀation in many middle.asp. (Retrieved May 15. (ages 25±65) unemployment. Inc. Theodore Gordon. All major industrial countries had inÀation under 3 percent. with rates twice that of adult. On the Measurement of Zimbabwe¶s Hyperinflation. ³Ludwig von Mises. 2011).com/2011/06/01/the-happiestcountries-in-the-world/2/.html. Rick Hampson. (and in Japan." April 30.2a1. (Spring/Summer 2009). . (2010).usinflationcalculator. 2011). nytimes." NBER Working Papers 16352. National Bureau of Economic Research. (Retrieved May 27. in Tokyo. See Ken Rogoff.´ Harper's Magazine.org/documents/ga/res/38/a38r161htm.5 million annually on average in the next 20 years. http://247wallst.´ The Economist. The CPI measures a fixed basket of goods and compares its price from one period to the next.mises. The Economist.´ Bloomberg. (Retrieved May 27. 76 Economists use different types of indexes to measure inÀation. (1881±1973).b865 06f095cbf61164e88f98b0d5d21c. (CPI).com.org/millennium/sof2009. the wealthier countries of the world are watching their workingage population shrink from approximately 740 to 690 million people between 2000 and 2025. 77 Steve H. and Elizabeth Florescu.html. ³The IMF Strikes Back. the working-age population will increase across poorer countries from about 3 to 4 billion people. ³The Happynomics of Life.harpers. Market in America: The Visible Hand. The Costs of Economic Growth. 82 View of Junko Nishioka. General Assembly Resolution 38/161.and lower-income countries. 83 Ibid. 69 ³Government v. sees the age structure of its population creating severe employment pressure within the next two decades. 67 ³OECD Launches Happiness Index. 60. Hanke and Alex K.millenniumproject. (December 19. (Retrieved June 4. Mishan. Conservation Group Claims. 2007).com/frequently-asked-questions-faqs/.bloomberg. 2011)." 24/7 Wall St. www. 86 65 Ibid.com/hostednews/afp/article/ALeqM5jj15a9ZCL9ETVD9UAn18y7MlrG_g?docId=CNG.usinflationcalculator. 72 Jerome Glenn.com. only three countries had annual inÀation rates in excess of 40 percent. (Retrieved December 29. over the same time.´ New York Times. 2009): 25±28. A rise in the index indicates inÀation. "Beyond GDP? Welfare across Countries and Time. Cato Journal. 66 Charles Jones & Peter Klenow. 2011. the level above which it is generally considered to be acutely damaging to an economy. deÀation persisted). 2009). as of 2003.
nytimes. (June 2000): 3-20. 102 Noted Jeffery Sachs.html." www. In 2007.economist. 103 ³Joseph Stiglitz. (data as of April 26. Hart. www. (Retrieved May 5." The Economist. 96 ³China's urban.html?_r=1 . 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. rural income gap widens despite economic recovery´ People's Daily Online." www. Hence. 88 See U. 2011). the Netherlands and South Africa. (Retrieved July 14. 2006). 87 .sina. 2011.com. 2011).org/wgbh/commandingheights/lo/index.´ Strategy+Business. See ³Gap between Rich and Poor: World Income Inequality.org/en/portada. ww.´ Social Watch Report 2006. english. ³Transcript. ³Losing Our Way .edu/whorulesamerica/power/wealth.S. 2007). income inequality is accelerating between top executives and the average employee. There¶s a basic reason for that which is that 200 years ago everybody was poor. www. The gap can be 100 to 1. World Bank Says. misallocation of resources and lost revenues. And that¶s absolutely astounding to be on the same planet and to have that extreme variation in material well-being." sociology.NYTimes.oecd. This measure compensates for differences in protein supplied by different foods across countries. 92 William Domhoff. 2009).html . Wall Street¶s Toxic Message." World Economic Forum. by the 1 percent. (Retrieved April 12.com/politics/features/2009/07/third-worlddebt200907. /www. It¶s the vast majority of the world. (Go to www. We see similar patterns Australia. 89 For example.´ The Economist.com. Episode Three: The New Rules of the Game.infoplease.pbs." (Retrieved April 18. 97 Joseph Stiglitz. 2011). (Retrieved May 10.htm. 107 ³The Next Billions: Unleashing Business Potential in Untapped Markets. 91 Bob Herbert. (Retrieved July 8.´ www. 93 Growing Income Inequality in OECD Countries: What Drives It and How Can Policy Tackle It?.livemint.com/2011/03/26/opinion/26herbert. Those countries represent only about onesixth of humanity. the average CEO in the U. (Retrieved May 27. www. Hong Kong. and five-sixths of humanity is what we call the developing world. (May 2011).S. Finally. 95 ³Chinese Scholars Warn Growing Wealth Gap Likely to Trigger Social Instability.com/news/2011-02-15/food-price-jump-pushes-44-million-into-extreme-poverty-worldbank-says.com/china/1/2005/0822/ 43237. Income. "The world is more unequal than at any time in world history. ³The Fortune at the Bottom of the Pyramid. "Wealth.com/node/17957381.htm. 2007): B-2." Vanity Fair." www. (Retrieved June 15. 2009): 24." The Economist.ucsc. (2002) 26: 54±67. 2009). 104 Sandrine Rastello and Wendy Pugh. 101 ³Impossible Architecture.economist. Germany. ³The Poor and the Global Crisis: The Trail of Disaster.fao. for the 1 percent.people. (May. 26. 2007). K. ³Food Surge Is Exacerbating Poverty.cn/90001/90778/90862/6875693. This is up from 360 times more in 2003. 44. 2011).com/articles/2007/10/16235421/80-of-Indians-live-on-less-th. 2011).´ Commanding Heights: The Battle for the World Economy. L.html. In 2010." livemint. (Retrieved April 19. (Retrieved April 18. ³Of the 1 percent. fiscal system is plugged with many tax loopholes that cause inefficiencies. 99 ³80 percent of Indians live on less than $2 a day--World Bank.com/debt_clock. Prahalad and S.com/ipa/A0908770.´ New York Times. National Debt Clock.´ Sina. maybe a gap of $30. www. (June 18. C. 2011).. ³International Unemployment Rates: How Comparable Are They?´ Monthly Labor Review.) 106 Donald McNeil Jr. english.S.brillig. for example CEOs of the 15 largest companies earned 520 times more than the average worker. 94 ³Inequality: Unbottled Gini. made 343 times more money than the average American did last year.000 per person and $300 per person. ³Design That Solves Problems for the World¶s Poor. (January 2009). 2009). (Retrieved June 28. www. 2010).org. (Retrieved April 17.org/els/social/inequality.vanityfair. Chapter 18.bloomberg.html. 100 ³A wealth of data: A useful new way to capture the many aspects of poverty.´ Vanity Fair. arguably the U. (China). 98 Ibid. A relatively small part of the world achieved what the economists call a modern economic growth.html.socialwatch. (May 29. eliminating the deficit requires eliminating these distortions 90 GNI data is adjusted by purchasing power parity. and Power.com/node/16693283).html.Page 61 of 63 See Constance Sorrentino.com.
(Retrieved April 13. 110 Jane Fraser and Jeremy Oppenheim.bloomberg. ³Surging BRIC middle classes are eclipsing global poverty. In the United States.´ The McKinsey Quarterly. 121 Shannon D.com.com/in-en/outlook/Pages/outlook-journal-2010-less-is-new-moreinnovation. capitalism eventually is destroyed by its own contradictions.gov/library/publications/the-world-factbook/ rankorder/2187rank. 2011). the average home prices around the world will crater. (Retrieved April 18. ³Standard & Poor¶s Puts µNegative¶ Outlook on U. 2011). 2011). new homes will do the same falling from 320K in 2007 to 125K by 2030. ³Capturing the World¶s Emerging Middle Class.lewrockwell. This sounds utterly inconceivable until one considers that the Nikkei fell from its all-time high 38. (Retrieved June 9." www. 119 Jennifer Schonberger. as Marx prophesied. In the decade following the crises.org/templates/story/story. (Retrieved May 25. washingtonpost. This Time Is Different: Eight Centuries of Financial Folly. 2011). 117 ³Geithner Pushes New Financial Rules.com/news/2011-04-18/standard-poor-s-puts-negative-outlook-on-u-s-aaarating. will see 4000 before 2030. look for existing homes to fall to $100k. 2011). 2011). 2009).html.net. 120 Dana Milbank. 118 The state essentially prevents systemic distortions threatening the stability of the system and promoting societal welfare²or.accenture. credit-driven consumption to compelling frugality that border for many on raw austerity." Accenture Outlook. For instance." Kiplinger's Personal Finance. all signs point to a secular shift from over-leveraged. (March 5." CSMonitor.washingtonpost. (July 2010): 67. 114 115 113 ³The Tata Group: Out of India.csmonitor. we will see the federal funds rate below 0. 112 ³Medical technology: Frugal healing. 124 Most will average annual real GDP growth in the low single digits for a decade or more.´ The Economist. 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. 122 ³Jim Rogers Says the US Will Certainly Lose Its AAA Credit Rating. Stock markets will drop 50 to 80 percent in real value.com/rogers-j/rogers-j139. The Dow Jones Industrial Average.com/columns/dekaser-practical-economics/archives/robert-shiller-shares-his-view-on-thehousing-market. 2010. for example. www. ³Robert Shiller Sees More Housing Pain Ahead." September 1. 111 See. www.html. (Retrieved October 2. And. 2011). Cycles of falling prices and wages will power deflationary dynamics.´ www.com/wpdyn/content/article/2010/09/01/AR2010090106148.html.kiplinger.Page 62 of 63 108 Christa Case Bryant. www.html?hpid=news-col-blog. 109 David Court and Laxman Narasimhan.´ Business Intelligence Middle East. GOP Skeptical: NPR.cia.915 on 12 December 1989 to 7. (Princeton University Press. Combined. a country might have a surplus in merchandise trade. (Retrieved April 13. for example. (Retrieved April 19. 2010). (May 1997): 178. Harrington and Cordell Eddings. to top it off. In other words. AAA Rating.npr.S. www. (Retrieved April 13.economist. 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. in the United States. (Retrieved April 28.nextbillion. the 1973 oil shock and the 2007 implosion of the subprime mortgage market clarifies likely events and trends.054 on 10 March 2009. such as its investment income. http://www. Key cause of the 82 percent drop--the Japanese housing bubble of the 1980s.com/World/2011/0517/Surging-BRIC-middle-classes-are-eclipsing-global-poverty. ³Innovations to Create New Streams of Profitable Growth. 2011). www. 2011):76-78. Interest rates will remain low for a long time.´ www.5 percent until at least 2020. (from 240k in 2006) before 2030.html." McKinsey Quarterly.php?storyId=102416414. The notion of balance means that all BOP transactions have an offsetting receipt. Persistently high unemployment will reflect persistently sluggish growth. 123 Carmen Reinhart and Kenneth Rogoff. 116 See www.´ The Economist. "Economist Christina Romer serves up dismal news at her farewell luncheon.aspx. 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.com/node/17963427 . (indicating that it is exporting more than it is importing) but may then report a deficit in another area. growth .
Page 63 of 63 rates were significantly lower and unemployment rates were significantly higher." Reuters. the crises were preceded by decade(s)-long expansions of credit and borrowing.reuters.013 U.´ www. adults. Housing prices took years to recover. ³Too Big to Fail? Timothy Geithner Says No. stood at 85 percent of GDP in 2009 and will reach 108 percent of GDP by 2014. says the IMF. (Retrieved April 28. at a time when debt levels in the U.K.." Market Update. according to IMF projections. www.S.´ The Daily Beast.123jump.S. 2009). Results from April 20-23 Gallup survey of 1.com/article/2011/04/28/us-usa-economy-gallupidUSTRE73R3WW20110428?feedType=RSS&feedName=domesticNews." The Telegraph. Consistently. 128 "No full recovery until 2015. 125 Arthi Gupta. and were followed by lengthy periods of retrenchment that lasted nearly as long. for example.telegraph.co. 2011). . (Retrieved April 28. www. www. 126 David Morgan. ³Most Americans say U. 129 Lloyd Grove. and other countries at the center of the financial crisis are rapidly approaching the 90 percent threshold. ³German Jobless Rate at Record Low. (Retrieved May 19. 2011).com/market-update/German-Jobless-Rate-at-Record-Low.html.S. Gross government debt in the U. The U.-French-Consumer-SpendingDrops/44005/.thedailybeast. French Consumer Spending Drops. (Retrieved September 22. 130 Ibid. 2011). 127 Ominously.com/blogs-and-stories/2011-05-18/too-big-to-fail-timothy-geithner-says-no-at-hbomovie-screening/#.¶s gross government debt stood at 69 percent of GDP in 2009 and is expected to reach 98 percent of GDP by 2013.S. It took households and companies about seven years on average for to reduce their debts and restore their balance sheets. in recession despite data: poll.uk/finance/financetopics/ recession/6220089/No-full-recovery-until-2015-says-theIMF.