This action might not be possible to undo. Are you sure you want to continue?
8/28/2011 9:08:41 AM
Chapter 4: The Economic Environments Facing Businesses A man is rich who owes nothing. ²French proverb
Chapter Opening Photo
Direct link http://upload.wikimedia.org/wikipedia/commons/c/cf/Aeroporto_do_recife.jpg Source Link https://secure.wikimedia.org/wikipedia/en/wiki/Brazil This is a file from the Wikimedia Commons . Information from its description page there is shown below. Commons is a freely licensed media file repository
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
Page 2 of 63
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
Page 3 of 63
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
and monetary patterns. China produced the highest percent of all the goods consumed in the world. China and India were the world¶s two biggest economies. if not sooner. most developed economies will be fortunate just to grow.1 Emerging Markets Make a Comeback Pick up from page 134. the global financial crisis slows and shrinks many developed economies. Consequently. today¶s developed economies. fiscal. consumption. Paris: OECD Development Centre Studies. They lost their lead (temporarily trends now suggest) as internal political failure. In 1850. Trends suggest that. today¶s emerging economies dominated world output. Over the next decade. again accounting for more than 70 percent of global output..8 percent of all the goods consumed in the world in 2009. trade. most notably China and India. accounted for about 70 percent of global economic output. with 40 percent coming from China and India and another 15 percent from Brazil. Germany. annual growth in emerging markets has averaged 6. poverty. 70 to 80 percent of world output (see Figure 4. China reclaimed the top spot it last held in 1850--it produced 19. Since 2001. Today. they produced. Over this span. emerging economies will again account for more than 70 percent of global economic output. nearly 70 percent of the world growth over the next few years will come from emerging markets.6 In contrast. 13th Edition New Caption Over most of the past millennium. the United States. Angus Maddison. China¶s share had fallen to 5 percent. the rich economies have averaged 1. and South Korea. generated more than half of global economic output. today¶s emerging economies. If these trends persist. For . spurred isolationism and xenophobia. Russia. emerging economies will grow at an average of 6. thereby culminating their comeback. 2001. emerging economies¶ share of global output had fallen to 40 percent. Sources: Compiled from The World Economy: A Millennial Perspective. soon claimed this title before ceding the top spot to the United States around the beginning of the 20th Century. aggravated by colonial exploitation and unfair trade agreements. FIGURE 4.Page 4 of 63 the power loom drove the transfer of economic might from Asia to the West. From 1000 to the mid-1880s. on average. and Japan. IMF. China alone generated one-third of the world¶s gross domestic product in 1820.6 percent. The Economist. By the twentieth century. produced 19. While they expand. By 1950. such as the United States. In addition.7 Symbolizing this process.1). Indonesia.8 percent a year. Britain.4 percent. in contrast.4 percent and fell to second. the Industrial Revolution benefited the West while bypassing them. coupled with the accelerating scope of emerging economies. on the basis of the Industrial Revolution. today¶s emerging economies will complete their comeback. changes investment.8 The diminishing role of today¶s rich economies. by 2050. their ambition is straightforward: Restore their historic stature as the engine of the global economy. wealth. leader for the previous 110 years. in 20 years or so.
10 Still. CRN . and investors will wrestle with this shift for decades. Nevertheless. 2011. they create opportunities. as this chapter shows. there is rhyme and reason that helps managers interpret the development. For others. these shifts pose threats. seems unpredictable. Noted one observer. Policymakers. executives. Change creates prospects for players. strategic inflection points do not necessarily lead to disaster. particularly the sort we have seen during the global financial crisis. Against this backdrop. as cell-phones to land lines or the Internet to printcentric newspapers. whether newcomers or incumbents.Page 5 of 63 some."9 Put differently. evaluate the performance. particularly if his starting point is the recession-racked West« [emerging markets] see opportunities in every difficulty rather than difficulties in every opportunity. megatrends such as the Comeback are rare events. Chart 4. new world.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. workers. such as those who applied computer chips to cell phones or publishers that migrated to the Web. "No visitor to the emerging world can fail to be struck by its prevailing optimism. who are adept at operating in the new economy. Chart 4.1 gives an indication of who sees which. and assess the potential of economic environments. this chapter profiles the frameworks that interpret the brave. Economic change.
12 Rather than an isolated situation. Polysilicon prices soared tenfold in a year.Page 6 of 63 Introduction Cultural. built it. political. polysilicon factories require lengthy reviews that results in years to build a plant. anticipate. and legal systems influence a company¶s decisions on where. shortage of polycrystalline silicon²the main raw material for solar panels²threatened China's nascent solar-energy industry. once there. he has created one of the world's biggest polysilicon makers. 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. Political and economic processes require anticipating new situations. In 2007. hitting $450 a kilogram in 2008. adding this or taking away that in order to boost performance. and countries. many countries prospered. along with China's sovereign-wealth fund. This chapter completes our macro-profile. and a few not at all. the tale of GCL-Poly Energy increasingly is the norm. Today. companies enjoyed opportunities as nations . GCL-Poly Energy--which counts China's sovereign wealth fund as a key owner. Margin Note 2 Economic and political changes alter market circumstances Although the pace varies from country to country. Different reasons explained success and failures in different countries. companies. Since then. In the West. Estimating the attractiveness of a country as a place to do business and. making prudent investment and operational decisions depends on how well managers understand. and started production within 15 months. Local governments expedited approvals for new plants. this task has perhaps not been more important in our lifetimes given the opportunities and challenges currently facing individuals. gross world output more than quintupled between 1970 and 2010. In China. Zhu Gongshan raised $1 billion for a plant. poured money into local polysilicon manufacturers. performance. forecasting China's response to polycrystalline silicon shortages would have encouraged some options while rejecting others. Managers track changes. Policymakers worldwide watch the game.11 Although easily overdramatized. State-owned banks. As a result. Foreign companies then dominated production and passed high costs onto Chinese producers. and adapt to its economic environment. economic environments change. Beijing's response was swift: the development of domestic polysilicon supplies was declared a national priority. Western MNEs rethink strategies and reposition assets. consider the following situation. For example. China makes about a quarter of the world's polysilicon and supplies roughly half the global market for finished solar-power equipment. It presents the perspectives and tools that managers use to interpret economic environments. when. For example. Globalization seemingly expanded the economy for all. Since the 1980s. in absolute terms. and how to do business. In relative terms. growing from $12 to $61 trillion. some prospered more than others. and potential. Emerging economies are reinventing systems of production and distribution as well as experimenting with entirely new business models. For instance.
or Mexico differ from those taken in China. managers study changes. dethroned Exxon Mobil as the world¶s most valuable company. few of these existed 10 years ago.15 More than 70 percent of the world's growth over the next few years will be in emerging markets. Challenges of the Comeback The rise of emerging economies distorts traditional economic indicators. Evergreen Solar cited the superior location economics and higher government support for solar activity in China. aided by $43 million in public assistance. In 2011.Page 7 of 63 adopted the principles of capitalism and practices of free markets. Evergreen Solar became one of the largest makers of solar panels in the United States by 2009. Bolivia dismantled its privatization model that governed the mining industry and expropriated all assets owned by private. circumstances. for the first time. it has endorsed growing government involvement in allocating resources. They also spotlight implications for economic freedom. sometimes confusing. Change. Concept Check 1 Connections. both here and there. and institutions. Brazil. Estonia. that shape economic environments. impossible in 1980. the apparent triumph of free markets over state-controlled economies had led . too expensive there. triggering market reforms and tighter regulation. the global financial crisis has reset the game. policymakers. China fast tracking its polysilicon factories.14 The number of companies from Brazil. managers realize that steps taken in Ireland. Consequently.13 On the larger scale. In the East. The task is distinguishing common trends from unique events. Thailand. both big and small. Policymakers. largely foreign owned mining companies. globalization connects countries. and Institutions Economics is vital to citizens. and shifted production to a joint venture with a Chinese company in Wuhan. And. CRN In both worlds. Companies also monitor changes in countries where improving performance or revised policies strengthen local competitors. For example. tried and tested for the past decades in the West. China. managers monitor those in which they do not. China or Russia on the Financial Times 500 moved from 15 in 2006 to 77 in 2010. changing economic policies reveal government ambitions. a Chinese company. more people are working worldwide but poverty is increasing. Executives worldwide had to determine if this was an isolated example or the start of a trend. adapt to the changing. Change in one country has consequences in others. and recycling massive foreign exchange reserves means capital is too cheap here. PetroChina. Too. the United Nations estimates there are approximately 22. laid-off 800 workers. it shut its Massachusetts factory. Managers' macroeconomic instincts. moved it from the periphery to the center of the solar power industry in 2010. India. By 2000. In the least. and Consequences Besides assessing the foreign markets in which they operate. in mid 2011. or South Africa. for example. In the West. Australia. In Boston.000 multinationals based in the emerging world. CRN Choices of Citizens. in the back of their minds. Greater competition for scarce resources increases prices of commodities but decreases costs of manufactured goods.
consumption. and Asia travel through the Panama Canal to navigate between the Atlantic and the Pacific. employment. just as the Panama and Suez Canal changed the flow of trade.nasa. a fuller understanding of economic transitions and market evolution helps citizens. increasingly constrain the animal spirits of unbridled capitalism through expanding regulations. the crisis showed. and head up the west coast of Europe. we see interesting developments in the geography of globalization. and wealth. However. Free markets. New market standards reset asset valuation and resource allocation. distribution. economic geography is the study of the location. Satellite images show the consequences of global warming in northerly latitudes. most goods between Asia and southern Europe travel through the South China Sea.Page 8 of 63 countries to launch bold development programs. Similarly. 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 record shrinking of the polar ice cap is turning the forbidding waters at the top of the world into new shipping routes. http://www. All of which. as we see. particularly those in the West. Free market reforms increased investment. and institutions make better decisions. For example. pass through the Suez Canal. Governments. 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. Hence. However. cross the Mediterranean. cut past Singapore. Northern Europe. policymakers. the bulk of goods between Eastern United States. Today. 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. reshape trade and investment. Today. for both good and bad reasons.html. the global financial crisis cast doubt on the sustainability of market led change. also misallocate capital and over-promote consumption and opportunism. so too might global warming do the same. rapidly happened in the solar power industry.16 Passage through the Arctic Sea Ice Source: Adapted from NASA satellite image taken September 2010. and spatial organization of economic activities across the earth. .gov/topics/earth/features/ice-min-approach. and reconfigure industries. round the bottom of India.
Traveling the Northwest Passage shaves around 3. we see an abrupt decline. Similarly. the average annual maximum was basically uniform. shipping goods from South Korea to the Netherlands via the Suez Canal travels 14. The voyage from Vladivostok in the Russian Far East to Rotterdam. at best. by mid-century. alters shipping logistics and trade routes. the shorter trip significantly reduces the cost per ship per trip. Germany via the Northeast Passage takes less than a month.000 nautical miles (3. in 2011.000 miles). the Arctic Ocean's ice cover shrinks dramatically. markets. and resources. The traditional route through the Panama Canal runs at least 6 weeks. However. And since time is money. "For the first 20 years of the satellite record. rather than the Panama or Suez Canals.452 miles) and ten days off the journey. it yields new trade routes. to say nothing of radically redrawing the world's coastlines.17 Presently.000 nautical miles (about 15. Accelerating ice loss may bring that date forward. As climate change resets the Arctic ice cap. Nevertheless."19 The shrinking Arctic ice is. an increasingly hotter world poses innumerable side effects that likely trump the benefits of shorter trade routes." said NASA.Page 9 of 63 Traveling these fabled Passages. Scientists tracking the annual maximum extent of Arctic sea ice reported that 2011 was among the lowest ice extents measured. . scientists predict these waterways could remain ice-free year round. a mixed blessing. ships can feasibly ply the Northwest or Northeast Passage at the end of the summer melt season. Improving conditions for traveling the Northwest or Northeast Passages depend upon worsening conditions for the planet.18 For a couple of months or so. "Then.
this a partial selection. although economics champions many scientific principles it still relies on a variety of behavioral assumptions to interpret activity. it excludes important indicators like inflation. and potential of an economy. Resource constraints mean managers must prioritize their options. Figure 4. unemployment. income distribution. economy that profile its outstanding debt and obligations. Interdependencies complicate interpretations.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. assessments are often more conditional than universal because: Margin Note 3 1. 3. Marketplace dynamism means that today¶s valid measures may prove invalid tomorrow. Adjusting analysis for actions and reactions across a broad scope of markets is difficult. The complexity of even the simplest economic system defies straightforward classification. operating in countries that offer the greatest return with the least risk.S. it highlight the complexity of an economy. no country is isolated.2 reports aspects of the U. In the wake of the global financial crisis.20 Few MNEs can fund and run operations in all 208 markets.2 Indicators of an Economy: A Partial Profile Source: http://www. performance. Figure 4. Improving decisions depends on assessing the development.21As a result. Stipulating indicators that definitively represent a country¶s economic performance and potential is difficult. For example. Mind you. 2. indicators that worked in 2009 were flawed by 2010 and remained dubious in 2011. Just as no man is an island.org/ . Still. and balance of trade.usdebtclock.000. In particular. The consequence of connections is an integrated system of markets in which actions in one influences outcomes in others.
the insights help managers pinpoint where investments should go and. which guide assessment. and news articles in developing a mosaic profile that represents an economy's features and estimates its interactions. Replace sidebar contents as indicated here.Page 11 of 63 Figure 4.3 also suggests that linkages among elements mean that a change in one affects others.3 shows how managers overcome these constraints. Collectively. a systems perspective. Consider. Second. . and potential. for example. It identifies economic conditions that shape a country¶s development. studying how current policies shape development and performance. performance. analysts¶ reports. Therefore. Concept Check 3 FIGURE 4. they evaluate the type of economic system in the country. Too. Lastly.2 from page 144 of 12th edition. 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. where they should not. perhaps more importantly. managers apply three perspectives to help make sense of situations. Clarifying interactions among elements of an economy help estimate its development path and performance potential. therefore. The third investigates the points of change that drive economic change. managers typically integrate insights from company activities.3 Economic Factors Affecting International Business Operations Pickup figure 4. namely economic freedom and system type. it highlights elements. proves useful. they estimate how much freedom they will have to make investments and run operations as they see fit. First. assessing the conditions that moderate economic freedom as well as move a country from one economic system to another. Figure 4. the consequences of a reduction in interest rates.
conversely. dimensions. Freedom House applies this index to 183 countries. In many others. and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process.´23 The Economic Freedom Index is made up of 50 indicators organized into 10 dimensions (see Table 4. Although managers monitor a range of economic issues. and efficiency. safety. 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. 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. they rarely cross one's minds. consume. save.1 Dimensions of the Economic Freedom Index Business Freedom The ability to start. Margin Note 4 Against this backdrop. individuals decide how they wish to work. The higher the score on a factor. We reapply the same logic here. . Trade Freedom The absence of tariff and non-tariff barriers that affect imports and exports of goods and services. and goods. capital. however.1). no matter the terminology. that freedom is both protected by the state as well as unconstrained by the state. produce. secured by clear laws that are fully enforced by the state. and invest. these sorts of freedoms are taken so for granted. Importantly. Property Rights Ability of individuals to accumulate private property. ultimately takes one to the issue of what one is free to do in a political system. and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself. the lower the level of government interference) Table 4. the higher the degree of economic freedom (or. operate. these freedoms are so rare. they are ongoing points of fascination and conflict.Page 12 of 63 ECONOMIC FREEDOM Chapter 3 used political freedom to organize discussion for a simple reason: any discussion of politics. 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. liberty. fully realized freedoms of movement for labor. economic freedom is the ³absolute right of property ownership. Monetary Freedom The degree of price stability and the extent to price controls. within the range of 0 to 100 percent." 22 Rather than the state. or dynamics. grading each's performance.
2 percent in 2007. Investment Freedom Ability of individuals and firms to move resources. In 2011.Page 13 of 63 Fiscal Freedom Tax burden imposed by government on its citizens. economic freedom advanced in 2011. Economic freedom varies across regions. without restriction. Source: Adapted from The Economic Freedom Index. regulatory reform. FIGURE 4. lives in countries where the state grants them low degrees of economic freedom.24 More governments reiterated the importance of sound finances. Freedom From Corruption Degree that corruption introduces insecurity and uncertainty into economic relationships.2 billion people live with high to moderate degrees of economic freedom. Approximately 1. The population data indicate that most people of the world live in countries with lower degrees of economic freedom (See Figure 4. and property rights. Government Size Government expenditures as a percentage of GDP. regaining some momentum it had lost during the great financial crisis and ensuing global recession. with people in North America and Europe enjoying more than do others elsewhere. up from 59.4 Economic Freedom by Region . Nevertheless.4 in 2010. open markets. economic freedom remains down from the pre-crisis high of 60. The majority of the world.4). Economic freedom on a regional basis shows higher degrees in Western countries and lower degrees in Eastern countries. Financial Freedom Efficiency of banking as well as the independence of the financial sector from government control and interference. The Heritage Foundation and the Wall Street Journal.2 billion people. Worldwide. Labor Freedom Aspects of the legal and policy framework that regulates the country¶s labor market. roughly 5. into and out of activities both internally and across the country¶s borders. the average freedom score was 59.7 percent.
. 57 are moderately free. and Canada. Singapore. New Zealand. Zimbabwe. and regulations.2 Global Distribution of Economic Freedom The Index of Economic Freedom classifies a country as either: free. Map 4. Reprinted by permission of The Heritage Foundation.2 profiles economic freedom around the world. mostly free. Margin Note 5 MAP 4.8 placed it in the ³mostly free´ category. Inc. 57 are mostly not free.2 and placed in the "Free" category. It indicates 6 countries have free economies. and repressed given the degree to which its government regulates individual's economic choices.25 The freest economies are Hong Kong. The least free economies include North Korea. and 32 are repressed. retrieved June 1. the United States ranked fifth with a score of 81. Australia.heritage. Switzerland. The United States dropped to 9th place in 2011 largely due to increased government spending. moderately free. .org. Cuba.Page 14 of 63 Source: Terry Miller and Kim Holmes. 2011). Its score of 77. 2011 (www. debt. In 2007. DC: The Heritage Foundation and Dow Jones & Co. mostly unfree. 2011 Index of Economic Freedom. and Venezuela. 27 are rated mostly free. Eritrea. Washington.
Higher-rated countries generally outperform laggards on a variety of measures. Income is higher in countries with higher economic freedom. DC: The Heritage Foundation and Dow Jones & Co.org/index/pdf/2011/Index2011_map. 2011).Page 15 of 63 Freedom Map Design Info: Map Source: http://www. Countries with high economic freedom have higher rates of growth and productivity.. retrieved June 1.heritage.heritage. 2011 (www. and potential. 2011 Index of Economic Freedom. Reprinted by permission of The Heritage Foundation. Washington. it more than doubles the worldwide average and is 7 times higher than in mostly unfree and repressed . Inc. Margin Note 6 The Value of Economic Freedom: Economic freedom helps explain a country's development.org.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. performance.
Life expectancy. Mostly Free. Margin Note 7 CHART 4.6 Inflation Rate. 26 The data support the argument that liberating resources from government control improves financial performance.2). political openness.9 Inflation Rate. Mostly Free. Mostly Unfree.Page 16 of 63 economies (See Chart 4. and standards of living. Positive relationships exist between economic freedom inflation. and environmental sustainability show positive relationships with economic freedom.770 GDP Per Capita. Mostly Free. ModFree. Free.9 . 33.495 GDP Per Capita. Collectively. 10 . economic stability.987 GDP Per Capita ($) GDP Per Capita. Repressed.8 Inflation Rate.253 Inflation Rate Inflation Rate. 6. 4. 0.464 GDP Per Capita. 39. and employment. 0. 1 4. literacy.2 Inflation Rate. 5. Economic freedom pays social dividends. Free. Mostly Unfree. data indicate a positive relationship between economic freedom and various measures of economic performance and quality of life. 3. Repressed.2 Economic Freedom and Leading Economic Indicators GDP Per Capita.
The scale. Margin Note 8 Changing marketplace conditions and unfolding political trends indicate that MNEs face increasingly uncertain economic times. some argue. 12 Source: Adapted from data reported by the Heritage Foundation and the Wall Street Journal. and spurred rethinking government¶s role in the economy. Its immediate aftermath saw industrial production. and equity valuations tracking or doing worse than during the Great Depression. The state. 9. Trends in Economic Freedom For the past few decades. Free. managers could safely presume that countries would adopt reforms that increased economic freedom. The fall of the Berlin Wall in 1989. should control the animal .org (accessed June 6. Mostly Free.heritage.6 Unemployment Rate. Mostly Free. Throughout the world. Mostly Unfree.1 Unemployment Rate. Increasingly. 8. The 2011 Index of Economic Freedom. economic freedom. not less. 2011). in signifying the triumph of capitalism over communism. The global financial crisis has disrupted the expansion of economic freedoms. countries abandoned the policies of state control and adopted the principles of capitalism and the practices of economic freedom.5 Unemployment Rate. exports.5 Unemployment Rate. and swiftness of the global financial crisis highlighted the limits of a market economy. Reprinted by permission of The Heritage Foundation. 21 . at www. 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. symbolized the supremacy of economic freedom. Repressed.27 Downturns in many economies signaled the biggest global economic contraction since the Second World War. Free markets had consistently outperformed "not free" countries. contested the usefulness of market fundamentalism.Page 17 of 63 Unemployment Rate Unemployment Rate. scope. Large and growing majorities believed that people¶s lives benefited from more. 5.
Today. up from 66 percent in 2002. Dissatisfaction with capitalism prevails across the globe. reported that an average of 11 percent across 27 countries held the opinion that capitalism works well. 35 percent in Brazil.29 Our opening case cautions qualifying attitudes in developed versus emerging economies. Conversely. Countries. All in all. costly commodities. They hasten to add that its endemic flaws require reform and regulation. especially those initially hit hardest by the global financial crisis and still experiencing anemic growth. which we evaluate in the closing case of this chapter. Still. complicate recovery. in turn. Nominally Communist China is one of the world¶s strongest supporters of free markets. Now. safeguarding citizens. show weakening support for free markets. 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. they are wary of free markets. stabilizing panics. Many called for a new economic system²including 43 percent in France. 80 percent of Americans regarded the free market as the best economic system for the future²then the bellwether of support. at 68 percent. 38 percent in Mexico. rising unemployment. Rather than an ideal to emulate. Each and all decreases economic freedom. 28 Some 23 percent believed capitalism is fatally flawed. By 2010. managers struggle to pinpoint the implication of these market trends to economic freedom. CRN In 2002. emerging economies now match or have overtaken the United States in their enthusiasm. A leading survey. as the world regroups. Some 67 percent of Brazilians and 59 percent of Indians see free markets as the best option for the future.Page 18 of 63 spirits of free and unfettered markets. support had fallen to 59 percent. Fear of Free Markets The causes and consequences of the global financial crisis.30 . many economies have stabilized. regulating markets. redistributing wealth. reduces economic freedom. about half of the "world" reasons that the free market is still the best option. for example. and sustaining demand. question the legitimacy of the quest to maximize economic freedom. sluggish growth. sovereign debt crises. Installing safeguards to prevent another round of the crisis has increased state control of economic affairs. This. and 31 percent in Ukraine. five years down the road from the start of the crisis.
jpg The Test The test of any economic system is straightforward: it must apply sound macroeconomic policies that sustain a productive economic system. Presently.Page 19 of 63 Caption: Despite the risk. falls short of missing India's economic surge. Their evolution and interplay will alter the relationship between markets and governments. In others.wikia. the financial crisis signals a radical shift in the legitimacy of free markets and. by extension. those whose lives are deteriorating. clamor for change. Photo is content/royalty-free. consequently. we are likely to see more people question the legitimacy of capitalism and the free market. ultimately the legitimacy of the prevailing economic outlook is tied to how people feel about their particular situation. Dire circumstances inevitably fuel public clamor for government intervention. Specific link isttp://uncyclopedia. Low inflation. Meeting these standards powers performance and boosts potential. Source: Uncyclopedia the content-free encyclopedia that anyone can edit. Here we see Indian passengers hanging onto a crowded local train in ways that defy reason. praise for the virtues of economic freedom has turned to criticism of its deficiencies. low unemployment. less economic freedom. people on the go need to move. The risk of traveling this way. . support it. In summary. In situations like those that we see today.31 In many countries. Continuing skepticism will push for greater state control and. as citizens seeking stability appeal to politicians. prudent public finances. apparently. economic freedom. if the legacies of the global financial crisis persist or worsen. Those who lives are improving. Arguably. notably emerging economies. the exact opposite takes place. and openness to trade and FDI are telltale signs.com/wiki/File:043_overcrowded_train_India. the question of whether free markets and their endorsement of maximum economic freedom create the superior economic system is no longer a strawman. notably western markets.
This leads them to investigate the structures and processes that guide resource allocation and business conduct. Market Economy A system whereby individuals. implement fiscal and monetary policies. managers question how the host government might regulate the economy. authorize property rights.5 Pick up from PowerPoint file. Three types of economic systems stand out: the market. make most economic decisions is a market economy. It is anchored in the philosophy of capitalism and its principle that private . and command economies (See Figure 4. 5) Margin Note 9 Figure 4. Managers often begin analysis by evaluating the economic system in a country. and ultimately.Page 20 of 63 TYPES OF ECONOMIC SYSTEMS Wherever they go. interpret economic freedom. rather than the government. mixed.
environmental standards) that preempt those inclined to maximize personal gain at the expense of society¶s welfare requires some governmental involvement. and the United States grants people the economic freedom to decide where to work. Ultimately. a market economy calls upon the state to enforce contracts. and whether to consume now or later.g." More broadly. optimally determine relationships among price. traffic lights. through their interactions with producers. Rather. "let do. Margin Note 12 Table 4. individuals¶ free choice in a market economy powers a country¶s progress toward prosperity. minimum wage.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. regulate certain sorts of economic activities. Privatization.. Margin Note 11 Unquestionably. Optimal resource allocation follows from consumers exercising their freedom to choose and producers responding accordingly. The need for public goods (e. how to spend or save money. it opposes government intervention in business affairs. quantity. With that said. ensure fair and free competition." Whatever the translation. As Adam Smith observed.. ³Government is not a solution to our problem. by letting the private sector regulate supply and demand. Singapore. and provide general safety and security (See Table 4. there is an enduring bias toward minimal government intervention in market economies. it advises "let it be" or "leave it alone. Therefore. consumers direct the efficient allocation of resources and the optimal valuation of assets. Australia. Government is the problem. Margin Note 10 Concept Check 4 The market economy champions the principle of laissez-faire. protect property rights. it suggests. spurred by their need to maximize purchasing power. national defense) and protections (e. what to do and for how long. the anchor of the market economy is the invisible hand of economically free agents driving growth and prosperity. and demand.g.e. The more visible the ³hand´ becomes due to government intervention. by virtue of what they do and do not buy. Consequently.´33 Deregulation helps . Canada. proponents concede that the invisible hand is not infallible. Deregulation Government regulations reduce individual choice²i. financial regulation. it sees the ³invisible hand´ of self-interested consumers as the foundation of efficient economic activity. to make products that consumers. a market economy pushes producers. improves production and consumption decisions. supply. Consumers.32 Ultimately. A market economy of the sort seen in Hong Kong.. and risk. spurred by the profit motive.2).Page 21 of 63 ownership confers inalienable property rights that legitimize profits earned by one's initiative. buy. Literally translated. the less efficiently the market works. investment. Switzerland.
Iran. Products are usually in short supply and there are few substitutes. will prosper from their ingenuity. These sorts. They prevent monopolies from exploiting consumers and restraining market growth. commanding the authority to decide what products to make. and Burma. to generate growth spurts.36 Margin Note 13 Making the invisible hand visible means that government officials²not consumers²determine the prices of goods and services. More often. capital-intensive. Although nominally a socioeconomic structure and political ideology. communism champions state ownership of resources and control of all economic activity. Today. such as Iran. and Afghanistan during the rule by Soviet occupation and the Taliban.Page 22 of 63 markets optimize productivity. have few resources to upgrade or incentive to innovate. High productivity continues as long as the state can utilize idle resources. Concept Check 5 Command economies have included the Soviet Union (which was for a time the world¶s second-largest economy). Turkmenistan. Above all. command economies can perform well for short periods. North Korea. and risk. in what quantity. Venezuela. not the government. orders state-owned companies to make computers. notably Cuba. Libya. in a market economy. if the government wants computers. Controlling everything and everybody lets the state mobilize idle resources. classless. the bias toward political stability and social control suppresses economic freedom. with little regard for price. managers operate in economies that exhibit many but not all methods of state control. at what price. Command Economy In theory. it collects taxes and buys computers at market prices. communism calls for an egalitarian. India prior to its economic reforms in 1991. Property Rights Property rights give entrepreneurs ownership of their idea. and in what way. the visible hand of the government. Product quality is erratic and typically deteriorates. inefficient. Indisputably. and ultimately stateless society based on the government¶s command of the economy. typically large-scale. and unprofitable. usually labor. China during its Great Leap Forward era beginning in 1958. . Protection boosts economic freedom by assuring individuals. State owned companies. For example. 34 Antitrust Legislation Antitrust laws prompt industries with as many competing businesses as the market can sustain. effort. In a command economy. we see few pure examples. 35 This reasoning results in a command economy in which the government owns and controls resources.
helps the impoverished by fairly distributing income.39 As the free market British economy cratered. centralizes economic planning. tougher job-protection laws.S. broadly labeled mixed economies."37 The mixed economy integrates elements of the command and market systems. signaled to producers through the price system. Mixed Economy Most economies. and innovativeness found in free markets yet grants the state the authority to prevent individualism from harming the welfare of society. also defends the weak by supporting low unemployment. At present. the interaction of supply and demand. in allocating resources. higher taxes. Vietnam. It utilizes the market to allocate resources. regrouped and wondered what next. France¶s mixed economy perservered. The aftermath of the global financial crisis corroborated many of these principles. and protects society by limiting abuses of market power.38 For example. Countries that favoured a strong state presence. the government permits market forces to influence quantity. Political agendas. besides optimizing efficiencies. Regarding the former. as does capitalism. Socialism holds that a fair and just economy. the state intermingles ownership of some resources. the extent and nature of government intervention differs from country to country. and extensively regulates the market. stabilizes the system by responding to market failures. Margin Note 14 A country's adoption of the socialist philosophy explains its decision to forsake the market or command economy. the slate of officials. fall in the "mostly unfree" and "repressed" categories of the Economic Freedom Index. More specifically. Socialism advocates regulating economic activity with an eye toward social equality and fair distribution of wealth. President Obama reasoned that it is the government's responsibility to make "strategic decisions about strategic industries. countries commonly classified as mixed economies include South Africa. A mixed economy is a system in which economic decisions are principally marketdriven and ownership is largely private. prevents the consolidation of wealth and power. This mandate requires a country achieve the efficiencies. the government may own companies that manufacture computers. the socialism of Denmark supported its steady economic performance and citizens¶ status as the happiest people in the world.40 Advocates of the mixed economy do not unconditionally endorse state intervention as a panacea. are presumed to far more conscientiously instill an egalitarian ethos into the economy.41 Hence. heavier regulation.Page 23 of 63 Belarus. . U. fall between the market and command economies. productivity. Russia. and China. but it subjects investment to social control largely directed by the government. and generous social safety programs better navigated the economic upheaval than had their free market counterparts. Rather than instructing the state-owned firm how many computers to make. but the government intervenes. and social circumstances shape how the government balances economic freedom and state control. Zimbabwe. S. as does communism. determines production. Regarding the latter. as opposed to the market. Ethiopia. from slightly to extensive. As the economically free U. Governments.
State Capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. regulating performance. Politics has a profound and pervasive impact on the performance of markets. But. grant individuals substantial economic freedom. and maintains accommodative legal and regulatory systems. relocated to China. So. Put differently. practice State Capitalism. However. it is not. some. State Capitalism relies upon skilled technocrats whose goal is developing a powerful. or 18 percent of all. Some of these have a command economy--notably. State Capitalism is an economic system whereby the State decides how. Swede.Page 24 of 63 Japan. In some ways it is. The rest do not. so few countries maximize it. Mexico. buffeted by the meltdown. North Korea and Cuba. Foremost. Instead of politicized revolutionaries promising a brighter future. Germany. 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. relied on quick approvals. Venezuela. As they do. The government uses markets to promote stability and growth. United Arab Emirate. manages trade relations and exchange rates to promote exports and punish imports. in many others. economies had steadily adopted the free market model given the success of countries that had migrated from command and mixed to market economies. State Capitalism does not have an ideological component--the government manages markets for long-term political survival and power projection. world-class economy that unconditionally reinforces the power of the typically one-party state. the owner. Now. such as Evergreen Solar.2 shows that 6 of 183 countries have free economies while another 27 are mostly free. Some may contend that State Capitalism sounds a lot like a mixed or command economy. Russia. 33 countries. Map 4. . and determining potential? For decades. Brazil. Most. Notwithstanding the dividends of economic freedom. protecting hard-won economic freedoms? Or. cheap government loans. many reflect on a perplexing feature of the economic environment. will governments reclaim the commanding heights of the economy. Recall our earlier profile of GCL-Poly Energy of China. leverages control of the financial system to provide low-cost capital to domestic industries. France. when. not to enforce an abstract ideal or promote the cult of personality. taking control of development. Margin Note 15 Looking to the Future: Is State Capitalism a Detour or Destination? Managers question will free markets prevail. the global financial crisis has thrown markets into disarray. we see countries enforcing greater state control of the economy. like China. 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. Austria. and where assets will be valued and resources allocated. Zhu Gongshan.42 The State develops national champions. They typically fall in the "mostly" and "moderately" free categories of the Economic Freedom Index. China's disruption of the solar power industry prompted many firms to shut down. and Saudi Arabia. and India. South Korea.
Page 25 of 63 Moreover. and direct market development. Asia. revises policies. equalize income distribution. and so on answer directly to the Chinese central government. goes the reasoning. heavier regulation. Gaining Momentum The global credit crisis has expanded the scale and scope of State Capitalism. a technology rich U. stops it from devolving into psychosis. both good and bad. where it goes. higher taxes. led China to recruit Evergreen Solar. and public enterprise prevail. influencing activities and shaping outcomes. Officials install barriers to trade and investment in order to generate local development and prosperity.46 China has used its brand of capitalism to develop and direct the world's fastest-growing economy that has powered the swiftest. The government explicitly promotes the growth of particular industrial sectors and companies in order to speed economic development. for example. Over the past 32 years. some 70 strategically important countries worldwide are at a critical crossroads in determining their political and economic future. transportation. Collectively. metals. its three telecom carriers. public wealth. Only a strong state. or South America. the State favors local companies at the expense of their foreign competitors. State Capitalism has little need for an independent judiciary.43 Furthermore. The State games the system. and its major media firms. Its goal is developing national companies into global leaders. Bolstering its developing solar power industry. and more generous social safety programs dealt more successfully with market disruptions than did their free-market counterparts. the State stays in the shadows. Countries that favored a larger state presence. More fundamentally. using state-owned banks to provide cheap loans. China is the majority owner of 99 of the 100 largest publicly listed Chinese companies. National. many will follow. 129 huge conglomerates in finance.S. the invisible hand is visible--but only when necessary. Eastern Europe. the State owns its national champions. company. The State promotes domestic markets as sanctuaries for national champions. market economies encourage the psychology that greed is good. media. resets funding. No matter the question. State capitalist economies.45 Whether they advocate economic freedom or state capitalism remains to be seen. Officials fan economic nationalism. Many see China as the bellwether. the state typically treats the legal system as an apparatus that legitimates. most extensive rise out of poverty any . For instance. the State steps in. the state attracts technology rich foreign companies. Under normal circumstances. tougher job-protection laws. Public investment. communication. Regulations restrict foreign companies from entering strategic industries. provincial. mining. If need be. and stable industry settings. its three major oil companies. the Chinese renaissance has shown that Western-style economics is no longer the only viable route to modernization. For the most part. and prevent the accumulation of vast wealth and powerful selfinterests that threaten social harmony. as needed. its policies. whether in the Middle East. and local officials control resources to fund investments. have telltale marks. China's provinces and cities run thousands of medium-sized and smaller ones. shape operations.44 Presently. Allowed to run free. including all major banks. In the event plans go awry. State Capitalism professes to better protect protected social values. capturing competitive advantages through whatever means necessary. and redirects activities. favorable regulations.
performance. The vast majority of their citizens have a low standard of living with limited access to few goods and services. AND POTENTIAL Managers use various measures to assess a country¶s economic development. They also monitor indicators of the direction and dynamic of transition from one type of economic system to another. particularly authoritarian. and Manmohan Singh of India. mostly unfree. according to the World Bank) and have the highest number of inhabitants (a combined 5. one-party political systems. Dmitri Medvedev of Russia. not just surviving but prospering during the great financial crisis. Managers elaborate their analyses with indicators of sustainability and stability. Africa. domestic tranquility. or repressed in terms of economic freedom. a brief note regarding how we classify countries is in order. Brazil.and middle-income nations as developing countries. at their Second Summit Brasilia.Page 26 of 63 nation has ever seen. Matters of income and wealth often anchor analysis. find State Capitalism attractive. PERFORMANCE. along with the surging success of State Capitalism. Developing countries comprise the largest number of countries (151 or so. Margin Note 16 Before reviewing each. and Latin America. Hu Jintao. of China. . amount of electrical power generated. Typically. number of wireless subscriptions.963 in 2009. Arcing though Asia. Leaders of the BRIC cohort. the Middle East. or military officers running companies.e. newspaper circulation patterns. and potential."47 Given economic circumstances in the world today. We follow the World Bank¶s lead in labeling low. authoritarian governments emulate China¶s model of State Capitalism.. MEASURING ECONOMIC DEVELOPMENT. Luiz Inácio Lula da Silv of Brazil. convention dominates practice. It relative success. This type has low per capita income--an average of $2. helps explain why 80 percent of the countries in the world are moderately free. one should not be surprised if others. further "persuaded the Chinese leadership that state control of much of the country's economic development is the steadiest path toward prosperity--and.48 Democracy's retreat. Some measures may be informal or idiosyncratic: i.5 billion) in the world. therefore. covered in Chapter 3.
both good and bad. Turkey and Vietnam CIVETS C for Colombia. I for India. Typically. Australia. Oman and the United Arab Emirates N-11 (The Next 11) Bangladesh.org/wikipedia/en/wiki/File:BRIC2010. South Korea. and India are referred to as emerging markets or emerging economies. (See Map 4. Their citizens have a high standard of living with access to a variety of goods and services. T for Turkey Adds A for Arab countries--Saudi Arabia. New Zealand. V for Vietnam. Kuwait. In the future. or industrial countries. Nigeria. high standard of living. relatively prosperous developing countries such as China. Qatar. there are approximately 30 or so emerging economies in the world. Table 4. Notwithstanding the variability. and China.1). given their high per capita income.wikimedia. Developed countries include Japan. India. the core group consistently includes Brazil. these countries are called high-income countries.an average of $37. Although much larger in scale and scope than other emerging economies.Page 27 of 63 Direct link to high resolution photo: http://upload. Canada. one speaks principally of the BRICs. Currently. E for Egypt. Mexico. and many in Western Europe. others will follow. Pakistan.jpg The faster growing. Indonesia. we may see United States and similar countries called established market economies (EMEs). advanced markets. Philippines. S for South Africa Acronym BRIC BRICS BRICK BRICIT BRIMC BRICET BRICA In contrast.3 The Emerging Economy Alphabet Members B for Brazil.970 in 2009. Many presume that where the BRICs go. Concept Check 6 . C for China Add S for South Africa Adds K for South Korea Adds I for Indonesia. when one speaks of the emerging economies.org/wikipedia/commons/d/da/BRIC2010.jpg Source file that contains links to high res photo: https://secure. Bahrain.3 lists some of the acronym used to sort them. and sophisticated institutional framework but comparatively slower growth. developed countries are those with high per capita income-. Egypt.wikimedia. T for Turkey Adds M for Mexico Adds E for Eastern Europe. Less commonly. the United States. R for Russia. T for Turkey. the BRICs are the vanguard of change. I for Indonesia. Brazil. Russia. Iran. Table 4.
Similarly.132 Source: World Bank Development Indicators 2009.416 1.856 3. Lastly.114 1.4 identifies the 15 largest economies in the world in terms of GNI. 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). Table 4.476 2.557 1. the portion of the value of a Sony TV built in South Korea using Malaysian resources counts in the GNI of Malaysia. billions)49 14.4 The 15 Largest Economies by GNI. . less similar payments it has made to other countries.558 2.324 966 962 957 $59.857 4. Rep. the value of.476 1.233 4. say. if Samsung's Malaysian subsidiary repatriates profits to headquarters in Seoul. 2009 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 ** Country United States Japan China Germany France United Kingdom Italy Brazil Spain Canada India Russian Federation Korea.Page 28 of 63 GROSS NATIONAL INCOME Gross national income (GNI) is the broadest measure of a country¶s economy. Mexico Australia World GNI (US$.367 1.750 2. Margin Note 17 TABLE 4. Thus. it increases South Korea's GNI. 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. Copyright 2011 by the World Bank. Reproduced with permission of the World Bank.
52 Chart 4. Margin Note 20 Rate of Economic Growth Gross figures are a snapshot of one year.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. They can mislead managers when comparing countries. not GNI. Looking at countries in terms of their growth rate shows a wide range. plus the income earned by its citizens abroad.50 Consequently. China grew more than 11 percent per annum. almost 90 percent of Irish exports are made by foreign-owned firms.3 reports the real GDP growth rates for various developed and developing economies. GDP plus the income generated from exports. minus the income earned by foreigners from domestic production.51 GDP helps assess countries in which the output of the multinational sector is a significant share of activity. For example. both Samsung and Sony TVs made in South Korea contribute to South Korea's GDP. their slightly calculation can result in small discrepancy at the country level. Often. Japan. and Germany consistently claim the top rankings when sorted by GNI. no matter whether domestic or foreign-owned companies make the product. Some may mistakenly presume that they are also more productive and faster growing than lower-ranked countries. However. managers crosscheck their analysis. is the gross domestic product. Meanwhile. more accurately measure its performance. size of the population. Therefore. GDP. between 2000 and 2008. imports. They do not measure the rate of change in an indicator. Margin Note 19 Gross Domestic Product (GDP) The total value of all goods and services produced within a nation¶s borders. and the international operations of a nation¶s companies equals GNI. For example. economic powers like the United States.2 percent growth over the same span. Managers improve GNI's usefulness by adjusting for the rate of economic growth. Technically. Conceptually.CRN. world GNP and world GNI are equal. noting the assumptions of the measure and characteristics of a particular country. Interpreting present and forecasting future performance requires pinpointing an economy's growth rate. Japan averaged 1. but TVs made in Malaysia by Samsung do not. Chart 4.3 GDP±±Real Growth Rate Nominal GDP increases from year to year partly because a country produces more goods and services and . the opposite is true. Improving Analysis GNI and its offshoots estimate an economy¶s absolute performance. and purchasing power of the local currency. For example.
Chart 4.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 . 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.3 Real Growth Rates for Select Countries.
55 From the high of 1.946 to $12.gov (accessed June 1.3 y Please pick up the insert box shown in the lower left corner on page 139 of the 13th edition.900. Legend for Map 4. Therefore. thereby attracting foreign investment CRN. most extensive rise out of poverty in history. Population Size Managers adjust GNI. MAP 4. $7.409 (as of June 2011) is distributed across countries.040). China's GNI has gone from $1.195 . averaging double-digit growth for many. Brazil 84th ($8. For example.360).000 citizens puts it among the smaller economies of the world. World Bank income groupings.201.500 in 2003. at www. there is a tremendous range. It has seen the swiftest. The World Factbook. The growth rate of GNI indicates a country's economic potential: if it grows faster (or slower) than its population.995 in 2007.945 upper-middle countries $3.34 billion in China to the low of 50 in the Pitcairn Islands. Rising income has fueled consumer demand. China 125th (3. For instance. 2011). such as is the case for Monaco whose 33. the country's standards of living are rising (or falling). For example. adjusting GNI by population measures a country¶s relative performance. Monaco ranked first in the world by GNI per capita in 2009.Page 31 of 63 Source: Central Intelligence Agency. It ranks in the lower-middle income tier for GNI per capita given its immense population. with a value of $203. However.922. like many other economic indicators.3 GNI per Capita.180). 2009.54 This conversion is common sense.857 trillion in 2009. Japan 32nd ($38.53 It also indicates business opportunities. y The new data for the box are : o o o low-income countries $995 or less lower-middle countries is $996 to $3. by the number of people who live in a country. and India 154th ($1. Commensurately. China is the world¶s second largest economy according to GNI.cia.728 in 2009. the United States ranked 18th ($46. In comparison.011 in 2005 and $5.68 trillion in 2000 to $4. Box title GNI per capita.080). China has been one of the fastest-growing economies over the past 30 years. A country with a high rank for GNI may rank lower for GNI per capita. Worldwide GNI per capita was $8. given how unevenly the world¶s population of 6.650). GNI may be low in absolute terms. up from $7. 2009 GNI per capita measures a country¶s performance in terms of its population.
38 rupees in India should cost US$1. Alternatively.4 profiles the countries of the world in terms of GNI per capita adjusted for PPP. managers adjust GNI per capita for a country in terms of purchasing power parity (PPP). telephone and electricity) that can be purchased with one unit of a country¶s currency. On average. Instead. and Canada. move up. First off. Japan. and Italy drop down. 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. for instance.5 shows the impact of adjusting a country¶s performance for PPP. China.180 but rises to $3.250 when adjusted for local purchasing power. 2011. Purchasing Power Parity The calculation of GNI per capita does not account for the cost of living from one country to another. even though the cost of living differs between the United States and India..57 The opposite occurs in the case of countries with expensive standards of living. France. a loaf of bread that sells for 44. the unadjusted rankings reported in Table 4. Second. Margin Note 21 We calculate PPP between countries by estimating the value of a universal ³basket´ of goods (e. Consequently. it lets us determine how much "stuff" a dollar will buy in a particular country.56 Table 4. PPP reduces some of the otherwise extreme variability in many country-to-country comparisons. such as Monaco.3 shows that high-income countries are clustered in a few regions of the world. May 1. Mexico.Page 32 of 63 o y Source: World Development Indicators database.4 change.38 INR to US$1. high-income countries $12.5 The 15 Largest Economies.900 to $131. Lower-income countries are spread throughout the world. Though comprising a large share of world population. Russia. Revisiting our comparison of the United States and India finds that India¶s GNI per capita in 2009 is $1. Its GNI per capita falls from $203.g. World Bank. it presumes that a dollar of income in Minneapolis has the same purchasing power as a dollar of income in Mumbai. 2009: GNI Adjusted for PPP . For example. soap and bread) and services (e. the United Kingdom. they have a small share of the world¶s GNI and report GNI per capita from the mid-hundreds to low thousands.694 when adjusted for the reduced purchasing power a unit of currency has in high-priced Monaco.g. India.196 or more Map 4. Currently they account for about 15 percent of world population but more than 70 percent of global GNI. they report an average GNI per capita in the mid-tens of thousands.. 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. Therefore.00 in the United States given an exchange rate between India and the United States of 44. 58 TABLE 4. Map 4.
262 $1.758 $3.011 $9.464 $1.331 $1. MAP 4. World Bank. It lets managers compare economic differences between nations by taking into account the relative cost of living. Box title is GNI (PPP) per capita Source: Source: World Development Indicators database.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.3 shown on page 143 of the 13h edition.025 $71.011 $2.4 y Please pick up box in the lower left corner of the 4. Rep. Legend for Map 4. 2011.514 $1.976 $1.Page 33 of 63 Rank Country GNI by PPP (US$.189 $1.170 $4. Canada Turkey World $14.302 $2. 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.888 $1.845 Source: World Bank Development Indicators 2009.269 $3. Reproduced with permission of the World Bank. May 1. Copyright 2011 by the World Bank.
´59 As such. or GDP for green economics. partially profile a country¶s performance and potential. unlike GDP. Margin Note 23 Consequently. and GDP. Longevity.Page 34 of 63 Broader Conceptions of Performance and Potential Measures of gross national income emphasize monetary aggregates. GNP. For example. the natural world. 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. GPI values unpaid voluntary and household work as paid work. the reasoning goes. However. including adjustments for growth. holding all other factors constant.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. and cost-of-living. and educational attainment. equity. only partially represent current performance and long-term potential. GNI. free time. Presently. As must a company depreciate its tangible and intangible assets when making a product. intellectual. Ultimately. population health. Green economics holds that a country¶s is a component of. it endorses a broader accounting of the gains and costs of growth²as seen in this chapter¶s Point-Counterpoint--to better gauge an economy. they will given that improving the human condition inevitably improves economic performance. as . Measuring the monetary quantity of market activity without accounting for the associated social and ecological costs misrepresents performance. NNP does so by depreciating the country¶s assets commensurate with their use to generate growth. population size. Knowledge. notably GNI. GDP versus GPI is analogous to the difference between the gross profits versus net profits of a company--net is gross less the costs incurred. estimating a country¶s degree of human development in terms of the physical. and dependent on. Managers enrich assessment by estimating sustainability and stability. equal the monetary gains from the production of goods and services. there is no consensus on how to adjust GNI. so too should countries. and family breakdown. and GDP. y Human Development Index (HDI) Matters of human development do not show up immediately in income or growth figures. livelihood security. 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. and subtracts the costs of crime. Furthermore. 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. Current candidates include: y Net National Product (NNP): Calls for measuring the depletion of natural resources and degradation of the environment that results from generating GNI. GNP. Effectively. GPI will be zero if the costs of pollution. So. as measured by life expectancy at birth. Accordingly. and family breakdown. goes this reasoning. pollution. narrow indicators. crime. GNP.
Accounting for life expectancy. insight should clarify measures. like safe streets and clean air. policy makers have puzzled over a paradox that casts doubt on the validity of monetary aggregates as measures of performance. the emerging science of happiness reports that nearly 70 percent of personal satisfaction is determined by the quantity and quality of relationships. happy lives. In addition. an unhappy citizenry may be a leading indicator of a significant change in government policy that alters the economic environment. and actualization. Concept Check 7 Stability Measures For several decades.66 Granted. y Happy Planet Index (HPI): Reflects the utilitarian view that most people wish to live long. Potential items. and tertiary gross enrollment ratio.S. are tough to pin down. Defining happiness. friendship. and at worst. rather than simply emphasizing financial performance. not by economic output or wealth creation. Furthermore. people in rich countries do not appear to be any happier than people in poor countries. GNH measures a country's ability to promote equitable and sustainable socioeconomic development. No matter how high income rose."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. there is growing criticism that GNI and its offshoots are at best. the United States is far in front of France and Germany. however. some may say worrying about happiness unnecessarily confuses economic analysis. secondary. there has been little evidence that it improved peoples' reported happiness. and income equality. preserving and promoting cultural values. as measured by GNI per capita expressed in PPP for U. In the meantime. misleading. and Standard of living. flawed. leisure time.62 Namely. a country's economic performance and potential is represented by how well it . conserving the natural environment. Margin Note 24 Presently. is often in the eye of the beholder. one must reinforce the other or both suffer. For example. makes living standards in France and Germany about the same as those in the United States. how does one value elements. estimation is difficult. such as love. managers can consider: y Gross National Happiness (GNH): Progressive society presumes material and spiritual development occur side by side. and establishing good governance. healthy. Therefore. 64 "Happynomics" calls for moving ³from the concept of financial prosperity to the idea of emotional prosperity.63 Consequently.Page 35 of 63 measured by the adult literacy rate and the combined primary. which can be measured? The intricacies of happiness capture increasing attention. dollars. However. like beauty. family relations. rated just on monetary measures.
It creates material improvements . to do the same."67 This index indicates that the 10 happiest countries in the world. Switzerland. social relationships. Finland. and people in other countries. Said OECD secretary general. Norway.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. health. it is a fundamental necessity. Canada. 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. general satisfaction. y Your Better Life Index (YBLI) This index measures well-being and perceptions of living conditions by evaluating 11 areas: housing. Developed by the Organization for Economic Cooperation and Development (OECD). creating the basis for individuals. 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. and society. Australia. communities. is the objective. the administration of institutions. It raises living standards. It morally stabilizes society. not monetary wealth. the environment. Israel. employment. The HPI advocates measuring the environmental costs of growth while emphasizing that maximizing happiness and health. are Denmark. Growth provides long-term benefits to everyone in every country. It reduces violent conflict. It liberates those trapped in poverty. the Netherlands.Page 36 of 63 helps its citizens do so while not infringing on the opportunity of future generations. education. incomes. It funds safety nets and government backstops. and Austria. security and the balance between work and family. from number one through number 10. Growth is life. institutions.
history shows cheap government does not translate into good government. People who see the potential for prosperity behave peacefully. suffer physically and psychologically. wealth. fair and just laws. and prosperity for individuals and society. people endorsed the virtue of growth. capital investment. Poverty Reduction Notwithstanding the kindness of strangers. more supportive of free markets and democracy. Peace Dividend Growth creates more opportunities for more people in more places. In a word. more influenced by abstract values than traditional norms. freer markets had fueled economic growth. By 2008. tolerance of diversity. In 1990.6 billion people. state. reducing it to 22 percent of the world--about 1. The falling ratio of energy consumption per unit of GDP over the past 40 years. thereby providing local. Together. Although appealing.'s strength is "mostly based on the success of American business" and that 90 percent admired people who "get rich by working hard. A thriving economy boosts tax revenues. By making resources valuable. humanity loses the war against poverty. enables them to think and behave differently. Let¶s take a closer look at the dividends of growth. Some 76 percent of Americans agreed that U. Environmental Benefits Growth encourages innovations. Moral Stability Growth affects social attitudes and political institutions. It creates jobs. enrich. amidst the panic of the recent global crisis. growth spurs us to consume them wisely. Moving poor people into the middle class. growth is the only means to alleviate poverty for the billions struggling to sustain life. 34 percent of the global population survived on less than $1 a day.S. more concerned about their children¶s future. and resolute confidence in surviving tough times supports the prosperity of individuals and companies. for example. outsource the rest. People specialize in what they do best and. Moreover. Rising asset valuations. these drive the efficient allocation of resources. and virtues of democracy."69 Fiscal Dividend Government finances are ultimately at the mercy of growth. presuming they survive. Growth creates the resources that promote transparency of authority. . they become more open-minded. income. stabilizing wealth effects. Without growth. in the face of the growing abundance of goods and services. and profits. and national governments the monies to finance spending projects that support.Page 37 of 63 that comfort life. pathways of social mobility. Growth in many impoverished countries has reduced the number of people living in abject poverty. the keystone to the moral stability of society. province. People experiencing rising incomes and economic improvement are commensurately tolerant of and benevolent toward each other. and sustain society. testifies to the benefits of growth. courtesy of pro-growth public policy. more inclined to settle conflicts peacefully. regional. Billions. wealth engenders humanity. usiness Dividend Growth stimulates higher employment. Free from the tyranny of ceaselessly seeking sustenance and shelter. and more inclined to have faith in the future. openness of opportunity.
fostering morality. ignoring or worse. By 2011. The problems of growth span the immediate and the future. shinier. wealth. justice. mobility. and a minute fraction upgraded their yachts. and wealth for all. life expectancy at birth was 47 years in the United States. alternative energy)²is powered by the quest to grow. and self-interests that lace insidious pro-growth arguments. It rewards the financially strong but punishes the economically weak. Moreover. a share of the global population have seen their patchwork-rafts capsize. as the Counterpoint argues. Counterpoint > No We accept the premise that growth supports life. Moreover. relying on new tools to boost productivity. growth imposes costs on individuals. ultimately. to make a difference.. our position is crystal clear: No matter the costs of growth. We agree that over the long run. each strikes society hard. cooler products to enable self-fulfillment but then restarts a never-ending cycle of hope and deception. as this list shows. denying. creating extreme inequalities of income. It promises newer. the survival of humanity and the planet. Unquestionably.. finding comfort in the rising quality-of-life standards. and their industriousness to find a better way. transparency. the costs of these benefits² costs that seem to grow faster than growth itself²imperils civil society and. income. tolerance. Where one stops and the other starts is tough to pinpoint. falsehoods. better. Still. Eliminating the pursuit of progress leaves society stuck in sloth. economic growth oversells and underdelivers. Still. Growth Is Inefficient The defining benefit of growth is that ³a rising tide lifts all boats. people now need work just half the time they once had to.Page 38 of 63 Quest to Excel Growth incents people to bring to bear their ingenuity. they pale in comparison to the unacceptable price of not growing. many struggle to keep their leaky boats afloat.´70 People. or fancier. and the planet. it generates higher wages. as an economy grows. their imagination. increasing growth has lifted the tide. in actuality. bigger. and taking solace in improving health care. the benefits of growth are unevenly distributed. every day. Pushing back the frontier of human experience²whether it involves the trivial (e. it was 78. we fully agree that these costs are striking. when growth stops. It creates free time to spend with family and community but then demands mobility and migration that fracture groups. Life Growth supports longer lives. the destination is alienation. In reality. after a century of growth. growth does not deliver the benefits it promises. the promise of endless milk and honey for all devolves into a bitter delusion. faster.g. Put bluntly. confuse consumption of the latest and greatest as the path toward actualization when. It liberates people from old routines but enslaves them to new habits. and power.´ In theory. Growth Is Misleading Despite the hype and hoopla. condemning people to ³spiritual despair scarcely concealed by the frantic pace of life. decay starts.4 years. In 1900. trapped on hedonic treadmills in the quest for newer.g. Once you untangle the strands of half-truths. and liberty. . However. In a phrase. humanity. forms of entertainment) or the substantive (e. However.
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. Granted. at current trends. Noted one observer. uniqueness and flavor. mass media. NPP) estimators profile absolute and relative conditions in a country. and the growth engine chugs merrily along. agriculture. human consumption is 30 percent larger than nature¶s capacity to regenerate.g.Page 39 of 63 Growth Threatens Life Polluted air.´71 Current Growth Is Unsustainable Humanity plunders the earth at an unprecedented rate. in GNI²no costs are tallied." understood to impact society but conveniently excluded while we sing praise of the wondrous ³benefits´ of growth. We can remain blissfully ignorant of the price of growth. and manufacturing. poisoned water. "everybody" pays the price of those costs with a despoiled environment. biodiversity collapse. however. Mother Earth is going to stop current growth patterns sooner than later. since "nobody" is responsible for the costs of externalities.´73 FEATURES OF AN ECONOMY Narrow (e. Epic poverty for billions. our position is straightforward. mass distribution. and toxic land²let alone global warming. By 2050. HDI. slow-motion death spiral of the ecosystem. lost in the endless rush of apparent gains but continually surprised by inevitable and underestimated externalities. Growth Destroys Individuality Growth¶s mandate to optimize efficiency requires massification²mass production. and so on. and financial servitude. the loss of craftsmanship. warped society. no matter how hard we wish otherwise. but at high cost. local variety and richness. humanity will require five planets of natural resources just to keep the game going. Alternatively. we need some production and consumption. GDP. the loss of intimacy and atmosphere. mass consumption. they are mysteriously called ³externalities. and resource depletion²are the byproducts of growth. Massification delivers great benefits. Ironically. Ultimately. and GNP) and broad (e. 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. Rather. false hope of actualization by consumption. when we measure the value created by an economy²say. GNI.. Effectively. of eccentricity and character. 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.. "nobody" pays for them. overproduction and overconsumption destabilize the basis for life. and the transformation of nominal democracies into functional oligarchies puts the world at the proverbial fork in the road.72 Barring black-swan innovation in mining.g. the alienation of binge-buying. mass markets.´ warned the Worldwatch Institute. Presently. They meaningfully indicate its performance and potential. In summary. HPI. Managers also .
living costs. 75 No matter the explanation.000 percent and prices doubled every 25 hours. Leading indicators include inflation. some define inflation as the continuous fall in the value of the currency. Other theories. among others. such as the Austrian School of Economics. INFLATION Margin Note 24 Inflation is the sustained rise in prices measured against a standard level of purchasing power. Neither they nor their customers can plan long-term investments.97. debt. too many people try to buy too few goods. Yugoslavia. like most Western markets. unemployment. $57. and Turkmenistan in the 1990s. you buy it. prices increased up to 95 percent per day. because tomorrow it¶s going to be worth 5 percent less. an item that cost $10. respectively. or $13. significantly changes the cost of products.´78 Even in normal circumstances. $227. consumer confidence. and the balance of payments. For instance.000. Inflation pressures governments to control it. For example. Normal horizons don¶t exist here. 1960. Sometimes just buying stuff is practically impossible. These measures slow performance and erode potential. More pointedly. inflation is a decisive economic condition. Chronic inflation has bleak implications for companies. by 2009.600. and political stability. . consumers struggle to buy groceries. consumers spent their money as fast as they got it or else watched it turn worthless.74 Lastly. If you have cash. or impose protectionism. and so forth. regulate wages and prices. hold that inflation results from increasing supply of money by central banking authorities.76 Inflation and the Cost of Living Consider the impact of inflation on the cost of living. poverty. through policies that raise interest rates.18. If you need something and have cash. or 2000 would cost you. There is no incentive to save. thereby creating demand that exceeds supply that increases prices faster than incomes. or ³hyperinflation´ as seen in Brazil. during periods of rapid inflation. inflation in the United States.06 in 2011. you spend it today. annual inflation of 10 to 30 percent²erodes confidence in a country¶s currency and spurs people to seek other ways to store value. Unless incomes rise at the same pace or faster. managers watch inflation given its influence on. For example.77 The chair of the Combined Harare Residents Association in Zimbabwe noted. in Zimbabwe over the past few years. income distribution.Page 40 of 63 study other features of an economy to refine analyses and elaborate interpretation. gas. ³There¶s a surrealism here that¶s hard to get across to people.00 in 1913. the annual inflation rate hit an astounding 79. Mainstream economics holds that inflation results when aggregate demand grows faster than aggregate supply²essentially. interest rates. 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.79 Margin Note 25 History shows that chronic inflation²essentially. and ordinary investment instrument like insurance policies and long-term bonds become speculative.
shrinking credit. what a country measures when estimating an economic variable. Margin Note 27 . not up. Declining demand and growing supply trigger increasing quantity and falling prices. the Federal Reserve of the United States has implemented quantitative easing programs. managers mind the estimation process. they discount prices to appeal to consumers who delay purchases in order to exploit tomorrow's cheaper price. In the European Union. It isn¶t easy to break out of. Overcapacity. which then fires workers. Lower demand slows company activity.. Explained a Japanese analyst.81 If Not Inflation. it occurs when the annual inflation rate is less than zero. which then lowers demand. And because people aren¶t shopping.´82 Deflation and unemployment are intricately linked. The proportion of employed workers in a country shows how well it productively uses its human resources. Unchecked. essentially printing money to stimulate demand in order to achieve inflation targets. economies fall into deflationary spirals wherein companies increasingly struggle to sell products. then consumers stop shopping.´83 Likewise. Margin Note 26 Deflation results from rather ordinary circumstances. declining real estate values. Unlike the CPI. Reduction in the money or credit supply contracts personal and investment spending. social pressures. then wages come down.80 The United States uses the Consumer Price Index (CPI). deflation. it is the Harmonized Index of Consumer Prices (HICP). central banks and governments rely on reflation²increasing the money supply and reducing taxes²to combat deflation. Price indices are sensitive to decisions about their scope and the calculations applied. and political instability. poses a menacing risk. Technically. In recourse. Countries that cannot create jobs suffer sluggish growth. reduced corporate spending. Persistent unemployment symbolizes the ineptitude of the government in managing domestic affairs. the HICP surveys the rural population and excludes owner-occupied housing.. and so on. At present. the OECD urged the Bank of Japan to keep pumping cash into the economy ³until underlying inflation is firmly positive. ³Profits fall. not just inflation. For the first time in generations. UNEMPLOYMENT The unemployment rate is the share of unemployed workers seeking employment for pay relative to the total civilian labor force. Consequently. For example. Then Deflation A nagging consequence of the global financial crisis has been the movement of deflation from conjecture to concern. People gainfully employed testify to the competency of policymakers to sustain a productive economy. companies lower prices.Page 41 of 63 Measuring Inflation The measurement of inflation highlights a common difficulty: namely. Deflation is the opposite of inflation--prices for products go down. and falling consumer demand fan deflationary dynamics.
000 for each citizen. are working without pay. thereby reducing productivity. Margin Note 29 Internal and External Debt A country¶s debt has two parts: internal and external. 85 Often. will then owe approximately $50. more significantly. such as . or have stopped looking for work. Besides measurement issues. Deficits occur for several reasons. the greater the economic misery. whereas countries like China. and macroeconomic stimulus led to unprecedented debt creation. provide generous unemployment protection. it indicates how many are not working for pay but seeking employment for pay.87 Some countries.88 Our closing case--The Global Financial Crisis: Causes and Consequences--develops these issues. even though officially employed. This changed dramatically as governments responded to the global financial crisis. unemployment benefits. on average. That is. The national debt for many countries had been steadily. In the present.Page 42 of 63 Some economists advise tracking the misery index. However. researchers confirm that misery loves company. Different assumptions and exclusions alter measurements. In addition. 86 Countries in Asia. which is the sum of a country¶s inflation and unemployment rates. these governments. Unemployment measures in many poorer nations routinely underestimate the true degree of joblessness and.84 Measuring Unemployment As with inflation. foreign organizations. worries about the ability of coming generations to repay saps consumer confidence and constrains government activity. interest expenses divert money from more productive uses. people work only part time. the more uncertain an economy¶s performance and potential. The larger the total debt. the unemployment rate means different things in different countries due to different social policies. worker productivity. measures what the state borrows from its citizens. Company bailouts. and family stress. the unemployment rate underestimates the scale and scope of the jobless. and decreasing social stability. Technically. the total of a government¶s financial obligations. despondency. Internal debt results when the government spends more than it collects in revenues. such as crime. and the more likely consumers and companies curtail spending and investment. measuring the number of unemployed workers seeking work in various countries is difficult. political. it does not count the number of people who are not working at all. Margin Note 28 DEBT Debt.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. or Jordan offer little to none. albeit slowly. The higher the sum. Africa. as the misery index increases so too does social cost indicators. such as France and Germany. and social problems due to underemployment. foreign governments. increasing. Regarding the future. and international institutions. Kenya. lowering incomes. and South America face economic.
budget management. such as private commercial banks. GNI. Crime and Punishment Protesters march in London against the governmentµs spending cuts and austerity measures. In this situation. it does not tell us what share of income goes to what segments of the population.Page 43 of 63 when an imperfect tax system under-collects revenue. Presently. For consumers. 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. That is. even when adjusted for population size or purchasing power. Escalating public debt increasingly constrains Britain's economy. is repaid in the currency in which the loan was made. Stress and loss usually precede its reboot to an efficient. a performance that ranks first among nations. the GNI of the United States exceeds $14 trillion. other governments. and tax policy. Dreaded debt crises often occur when a weak economy is unable to do this. For example. Hence. the performance of United States looks less aweinspiring when qualified by its income distribution.90 However. Interest on the debt. and social cost. Pressures to revise policies to deal with growing internal debt create economic uncertainties for consumers. Margin Note 30 INCOME DISTRIBUTION Income distribution often defines a market¶s performance and potential. governments struggle with spending priorities. since not everyone is average. economic. and companies. can misestimate the relative wealth of a nation¶s citizens.89 Consequently. and eventually the debt itself. security and social programs exceed tax revenues.. smaller-scale version. or international financial institutions (e. the IMF or World Bank).g. growing public debt is usually an early indicator of austerity measures and tax increases. External debt results when a government borrows money from lenders outside the country. Similarly. the richest one percent of Americans . or can do so only at high political. or state-owned enterprises run deficits. But. investors. its GNI per capita is an impressive $45. GNI per capita reports how much income the average person earns. the economy grinds to a halt.640 in 2009.
000 are more likely to have lost faith in the free market. many in rural China rely on bicycles and animals for transportation. The average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent. dozens of countries exhibit similar or worse income distributions. Chile. Essentially. then it partially represents income distribution. and 75 times in 2000. as in the United States.´ for instance. One controls for this error by assessing the scale and scope of poverty. the United States. talent. and Mexico. This grew to 32 times in 1970. and business equity. In 1960. 65 percent of financial securities. Data indicate such. Margin Note 31 Inequality. 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. 60 times in 1990. .S. resource inefficiencies. the wealthiest 20 percent of the world¶s population had 30 times the income of the poorest 20 percent. poorer human-development records. widening inequality threatens the stability that supports growth as it ³fans tensions that wear down the social fabric. Widening inequality eventually triggers destructive outcomes.93 Margin Note 32 Benefits and Costs Some income inequality is useful in rewarding effort.92 The United States is not the exception. The Gini coefficient presumes that there is a reasonable degree of income within a country. in which fair play and equality of opportunity power economic performance and unleashes productive potential. and 62 percent of business equity. In addition. Most countries range between 25 and 60 percent. A score of zero implies perfect equality (everybody has the same income). The top 1 percent own 37 percent of all privately held stock. Americans with incomes below $20. grows. Turkey. A score of one implies perfect inequality (one person has all the income).91 The top 10 percent of Americans own 85 to 90 percent of stocks.98 Gini Coefficient Managers estimate the degree of inequality in the distribution of family income in a country with the Gini coefficient. and Bentley dealerships in Beijing."94 Countries that are more unequal have worse social indicators.95 China¶s steadfast commitment to a ³harmonious society. and higher degrees of insecurity.96 Whereas one sees Lexus. the richest 1 percent claimed as much income as the bottom 57 percent²in other words.Page 44 of 63 receives more income than the bottom 40 percent²the widest gap in 70 years. trust funds. citizens ³own´ the country.97 Ultimately. If not. bonds. and over 75 percent of non-home real estate. However. with much bigger multiples in Israel. and excessive individualism. income inequality erodes a country sense of identity.8 billion poorest people. 45 times in 1980. and innovation. approximately 10 percent of U. the 50 million richest people in the world received as much income as did the 3. including shrinking opportunity. Lamborghini. Rising income disparities between booming cities and impoverished countryside threaten social stability and economic performance. support dropped from 76 per cent to 44 per cent between 2009 and 2010.
but there is very little to distribute in absolute terms. according to the World Bank. United States. education. and shelter. famine. and 56. People struggle for food. the average life expectancy is 83 years in Japan yet 32 years in Swaziland. China. However. clean water. clothing. they may be the opportunity to sustain extended families or connect with people to build communities. India's score does not reflect enlightens ideals of equality. 41. the per capita dietary protein supply in the United States is 121 grams but 32 grams in Mozambique. and education. The historical record adds an important perspective. 103 Presently. death. malnutrition.1.7 percent). Managers fine-tune their study of income and wealth by considering its conditions and consequences.5 billion people live in extreme poverty. is not the exception. shelter. 100 percent of Canadians have access to clean water.2 billion between 1981 and 2005. epidemics. and Brazil. Granted. estimates of the number of people in extreme poverty have fallen by approximately 200 million since 1990. Margin Note 33 Concept Check 8 POVERTY Poverty prevails throughout the world. and health services. Margin Note 34 Extreme poverty.5. although extreme. Poverty is a multidimensional condition in which a person or community lacks the essentials for a minimum standard of well-being and life. 38.8 percent (Sweden. . this reduction has been concentrated in essentially one country.100 These essentials can be life-sustaining resources such as food. Approximately 1. and war. India. report 23. the world population is roughly 80 percent poor. clean water. Moderate poverty is less than $2 per day (PPP). Japan. It reports a Gini coefficient of 36. security. While dramatic income inequality is a recent phenomenon. The global financial crisis has threatened many more.25 per day (PPP). Failure to find them results in. and health care. For example.105 The daunting gap between the rich and poor challenges the country's economic performance and fundamentally shapes its potential. they may be social resources such as access to information.104 Margin Note 35 Consequences Poverty shapes economic environments. 45. respectively. Removing China from the tally reveals that the number of poor in the developing world has remained constant. some saw it pushing 200 million people deeper into poverty. and 10 percent rich. mental illness. roughly 1. to say nothing of safety. Rather. compared to 13 percent of Afghans. it represents the cheerless fact that most Indians are poor: 80 percent of its population lives on less than $2 per day.Page 45 of 63 Consider India.99 So income may be distributed evenly on a relative basis.101 Today. is living on less than $1. widespread poverty is not. rising food prices imperil millions more. 10 percent middle income. 102 Prevalence of Poverty Poverty grows worldwide.
´106 Caption: The Tata "Nano" is the world's least expensive production car. Similar developments with computers (e. Margin Note 36 The Potential of the Poor Managers monitor the buying potential of today¶s poor.Page 46 of 63 The growth of business activity and economic progress ultimately depends on alleviating poverty. 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. scraping by on less than $2 a day. and a $100 house.50 per day.107 Narrowly defined. India had fewer than 15 million mobile phone subscribers. For example. By 2006. crime may be pervasive. one manager noted. the XO-1 programs of low-cost laptops for children) and automobiles (the development of functional cars such as Tata¶s Nano. national infrastructures may not work.5 billion people who live on less than $2. people earning US$8 per day or . For example. Boosting the threshold highlights its potential. and governments may struggle to regulate society consistently or adopt prudent economic policies. Today. It was fast approaching 700 million by 2011 even though more than 80 percent of Indians are poor. it had 136 million subscribers.900) and housing (Idealab's program to provide functional homes for about $2. however. Indian companies offer the cheapest mobile services in the world while still earning profits. priced at US$2. More dramatically. in 2002. Market systems may not exist.. It symbolizes how frugal engineering speaks to the economics of the Base of the Pyramid. 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.g.500) highlight finding opportunities in the face of dire circumstances. the Base includes the 2. ³A billion customers in the world are waiting for a $2 pair of eyeglasses. a $10 solar lantern. Economies experiencing extreme poverty require MNEs reassess many taken-for-granted aspects of an economy.
111 Increasingly. high-powered. Accelerating income growth in emerging economies will move many of today's poor into their already expanding middle class. eco-sensitive products that work in harsh environments. During the next decade. movements afoot may one day make it to Western markets.112 GE developed a low-cost electrocardiograph machine for rural India. you find companies that have learned how to think differently from the herd. come to different conclusions. they see opportunity.113 units were soon en route to Germany. Samsung. 400 hours of standby time on one battery charge. Kenya¶s Safaricom takes these technologies to the next level.108 Presently. their annual spending will rise to $20 trillion--twice-current U.114 . Where others see threats and complexity.S. For example. Tata¶s various businesses have co-produced a cheap water filter. process it in a different way. and Motorola offer phones with sealed faceplates (for water and dirt resistance). Chinese firms have introduced reusable sutures--versus the old approach of higher cost. easily used. pioneering money-transfer by mobile phone in remote locations that lack efficient means to exchange funds. they will earn US$4 trillion annually by 2015. prototyped a $500 house that can be bought in a shop. the contours of the Base of the Pyramid will change. They seek out different information. At the grassroots level. ³When you look behind the success stories of leading globalizers. the middle class includes about two billion people in a dozen emerging economies who collectively spend $6. lifestyle-sensitive innovations²both here and there. All in all.´110 Second. CRN Concept Check 9 Success Standards As the world moves from being mostly poor to mostly middle-class.9 trillion a year. the Base of the Pyramid sets new standards: low-cost. disposable ones²as well as heart stents that run 40 percent cheaper than those in the West. 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). This multi-year process creates immense opportunities. consumption. More pointedly. ³seeing´ opportunity calls for market pioneers that have a particular mind-set. the global middle class will include 5 billion people. Its efficiency and performance soon led to units marketed in Germany and the United States. First. these changes benefit the rich. a surge unseen since the Industrial Revolution that will reset economic environments around the world. and are specially enabled for text messaging. resource-minimizing. use no internal lamp. and larger screens that work in reflected light.109 By 2030. If growth rates remain steady. the task at hand is developing affordable. 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. Nokia. Too. and make different decisions. they see a cornucopia of choices. Where others see a barren landscape. Serving the Base of the Pyramid has two preconditions. MNEs translate frugal innovations into new product that serve Western consumers.
Page 48 of 63
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
Page 49 of 63
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
Page 50 of 63
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.
Officials. not by government protection. if their bets went bad. perverse incentives. and concentrated vast wealth and powerful self-interests that threatened social harmony. while still fixing the pipes. Competencies. capital. So there was something wrong with the system.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. J. delivered the front half of the hurricane. "We created a situation that caused a recession that wiped out the net worth of about 15 million households. For now. economies growing. Scenario Three: The House is Collapsing As awful as the broken pumps scenario sounds. allowed to run free. and HSBC were seen as too big to fail aggravated incentive problems. amplified it into a destructive psychosis that accentuated existing structural distortions. Now. Noted a leading analyst. Attention shifted to whether the pumps that powered financial systems had been deeply broken. promotes the psychology that greed is good. Now. however. had been the result of exceptionally loose monetary policy. as the eye slowly passed and the second half began unfolding. Loosening monetary policy typically led to demand rebounding. Capitalism.118 The aftermath of the crisis highlighted these problems.119 . and agency conflicts. Similar legislation elsewhere tried to correct flaws in the financial system by regulating opportunistic behaviors. for whatever reason. given its extreme leverage and exposure.P. A precept of capitalism is that all firms. However. as they had in 2007. The post-2007 recession however. Its passage resulted in the most sweeping change to financial regulation in the United States since the Great Depression. Many of these people have virtually no other savings. it pales in comparison to the third scenario. was the philosophical quandary of the "too-big-to-fail" status of financial players. it did not solely determine it. there was the troubling resignation that there might be something dreadfully wrong with the economic system. not connections. UBS. further aggravated by aggressive leveraging. began overhauling the money pumps. Unquestionably. no matter how big or small. the financial system accelerated the global collapse. the DoddFrank financial reform legislation tackled issues that precipitated the crisis and seemed to confound the recovery. In the United States. Goldman Sachs. that fact that institutions like Citibank. showing that free markets poorly protected social values. that culminated in the epic global crisis. Slowing progress. namely the house itself was collapsing. capital" did not seem to do the trick. Running too free. live or die by their wits. The financial system. flooding markets with "capital. drives the ruthless efficiency of capitalism. Rather. Some believed they were again taking excessive risks in the expectation that they would be then backstopped. the crisis suggested. Morgan Chase. That¶s a mistake. and the recession ending. this view held that the collapse was a systemic crisis. skewed income distribution.
Japan. in April 2011. ."120 Then. "this time is different. confirming a very basic message: the rules are the same. No matter how different the latest financial crisis always appears. and even though the situation appears unprecedented. confessed that she had "no idea how bad the economic collapse would be«. "claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. . Global labor markets made it become harder for people with low skills to build a secure middle-class future for their families. . . disappointing recoveries. Portugal. Housing problems highlighted the dangers of the credit bubble. were in the same. Dramatically below trend. and long. had opted to print money to solve its problems.Page 52 of 63 Concerns. In particular. . 2010. among others. and unscrupulous lenders who exploited their insecurities all came to a head in the worldwide housing bubble.121 "More than two years after the beginning of the recent crisis. Greece. the United States. economies. something a decade earlier most would have thought impossible. All continued underperforming past recovery benchmarks. citing rising budget deficits and debt. we have been here before. especially given the unprecedented amount of policy stimulus. identifying insights and lessons learned from previous crises.S. and these recessions are followed by slow. Analysis found a recurring lesson across countries and across centuries: Debt is always dangerous and excessive debt accumulation is perilous. As such. she remarked. particularly those in the West that were caught in the bubble dynamics of the global financial crisis. . the aftermath of financial crises tends to be nasty. Precedents.still does not understand exactly why it was so bad«and doesn't have much of an idea about how to fix things. Economic nightmare. Each time. This Time is Different: Eight Centuries of Financial Folly assessed economic crises from 66 countries across five continents over the past 800 years.123 It found financial fallouts strike with surprisingly consistent frequency. Italy. Elsewhere. brutish. if not worse shape.." said the S&P. and ferocity. . Standard & Poor¶s put a ³negative´ outlook on the U. Suffering terribly. Council of Economic Advisers. threatened free market capitalism. The data proved this thesis wrong. there are remarkable similarities with many previous experiences. U. Historical Precedents Scholars began studying analogous situations. ." Characterizing situations in the United States as well as throughout the West. Incredibly searing. Excessive consumer debt. of a credible plan. . AAA credit rating. prolonged income inequality. through quantitative easing programs.S. Financial crises are typically followed by deep recessions. .122 Instead. Great Britain. . .124 Possibly Something More Others argued that ongoing shortfalls and struggles are the outcome of deep structural problems. the experts had chimed. . "Terrible recession. and Questions In Fall. Ireland. Furthermore. the United States' debt headed higher.. and signaled the advent of state capitalism. Technologies proved wonderful in entertaining us but less than ideal in generating . Risk of making high unemployment permanent. . .S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures. Spain. Already the largest indebted nation in history. might struggle for years. duration. the outgoing chair of the U.
Japan faced monumental challenges due to earthquake. and escalating government debt suggested tough times ahead. the lowest rate since 1983 and down from a peak of 49. hit but not hurt by the fury of the crisis. Only 45. In many countries. earnings. Regional growth was steadily slowing as the European Union reined in government spending. 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. unionized jobs. Moreover.S. risks ahead are glaring and global. healthcare. the issues leading to the crises were still present and worsening in some places. waning consumer confidence. In the United States. French consumer spending dropped.Page 53 of 63 jobs. 127 Unless abated. some argued the apparent solution to the crisis has been to implement many of the same . debt in Western economies. Greeks took to the streets and rioted. In the United States. and potential opportunities triggered protests worldwide. To some. the share of the working population fell to its lowest level since women started entering the workforce three decades ago. a fragile recovery. and excessively narrow concentrations of. the great financial crisis reinforced strong tendencies toward state capitalism in many emerging markets. rising government debt will compound the fact that economies take a significant number of years to regain momentum following financial crises. In wealthier Western countries. slowing growth. wealth. well-paying assembly line work and prosperous small-business niches faded. in emerging economies. saying it could drag down growth needed for economic recovery. and 29 percent said the economy is in a depression. Regarding the gloomy take."129 The world was still stuck with large global. We had no playbook and no tools«Life¶s about choices. and national imbalances in matters of incomes. Similar problems existed elsewhere. Developing countries throughout Asia and Africa faced rising food prices given inflationary policies in the West. perhaps unavoidably given the scale and scope of the crisis.128 In Europe. Swedish sentiment slumped. billions of people feverishly worked to get ahead. sectoral. Ireland fell into a funk. pension benefits."26 percent said it is in a recession. 16 percent saying it is "slowing down. Decisions made had not turned out as planned. diminishing dollar. Portugal shrank. To top it off. Said U.4 percent of Americans had jobs in 2010. regional. 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. Spring 2011 saw both gloomy and optimistic views. rising inflation. Public sentiment seems to think along those lines. some 27 percent believed the economy is growing. successive rounds of quantitative easing. and nuclear plant failure. persistent unemployment. Which Scenario? The crystal ball remains cloudy as of this writing. Treasury Secretary Geithner. The Middle East uprisings fanned political turmoil. trade and financial health as well as excessive levels of. Cuts in public support.126 The IMF warned the world¶s wealthiest nations to curb their surging public debt.125 Meanwhile. and Italy's manufacturing sector declined. German inflation accelerated. Countries warned of austerity. the sovereign debt crises question the fate of the Monetary Union. Spain's jobless rate surged pass 20 percent. tsunami.3 percent in 2000. "Things were falling apart.
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. These include how the government regulates the economy. Secretary Geithner suggested was not far-fetched. conceding. was watching its unemployment rate steadily drop. y The global financial crisis challenges the legitimacy of free markets. while bumpy. sets fiscal and monetary policies.´130 Rays of optimism pierced the gloom. or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty. 5. while Sweden. and positioning the firm to prosper are the jobs of managers worldwide. 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. and enjoyed a powerful stock market rally. There will be another storm. but it¶s not going to come for a while. Questions 1. Loose monetary policy promised to keep economies growing. the United States. protects property rights. . 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. 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. by midyear 2011 had recorded seven straight consecutive quarters of economic growth. Germany had rebounded strongly.Page 54 of 63 policies that caused the cirsis. the strategies that companies pursue. estimating scenarios. Governments in many countries have expanded their regulation of the economy. 2. 3. Great Britain. Interpreting economic environments. "It will come again. y Economically free countries tend to have higher per capita income. analyst anticipated accelerating industrial production and improving consumer confidence. and social stability than do less-free or repressed countries. was evident. The United States. distribution. Which would you nominate? Reverse your logic and identify the indicator that confirms the crisis continues. France. and enforces antitrust regulation. and others gained traction. The road to recovery. This concern. 6. for example. 4. Which scenario do you think best explains the global financial crisis? Why? How does each scenario influence the policies that governments adopt.
inflation. income distribution. y Green measures of economic performance call for considering ecological aspects that support sustainable development. including. determine supply and demand. and the price at which they are sold. private interests own resources. but poorest socio-economic group in the world. y In a command economy. debt.Page 55 of 63 y In a market economy. KEY TERMS Base of the Pyramid (p. and the goal of maximizing economic freedom. unemployment. GDP). its principles of the invisible hand and laissez faire.) economic freedom (p. y Managers use several indicators to assess the performance and potential of an economy. and poverty y The Base of the Pyramid is the largest. the government plans what goods and services a country produces. HPI). ) capitalism (p. y A mixed economy includes some elements of market and command economies. conveyed via the invisible hand. stability (HDI. income (GNI. y A mixed economy requires accepting the doctrine of socialism. and the goal of regulating economic freedom. ) debt (p. Although poor in terms of individual wealth. y Managers assess markets in terms of size (GNI. y State capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. GPI). Both influence investment activities and consumption behavior. y Concern that monetary measures misestimate economic performance leads to calls to move from the concept of financial prosperity to notions of happiness. ) command economy (p. y A command economy requires accepting the doctrine of communism. its principle of the partly visible hand of an activist government that commands and controls some factors of production. and price and quantity. its principle of an activist government that commands and controls most if not all factors of production. or GDP per capita). balance of payments. the quantity in which they are produced. GNP. and sustainability (NNP. GNP. ) . and the goal of constraining economic freedom. the collective income of the Base arguably makes it the next market frontier. y A market economy requires accepting the doctrine of capitalism.
Straus. ) economic system (p. Anne O. 2009). 2006). Prestowitz. 2009): 45. ) mixed economy (p. and Prosperity: The Global Economy and the IMF. (Paris: Development Centre.´ Project Syndicate. (Paris: Development Centre." | The Economist. ) misery index poverty (p.pk/forums/china-defence/55892-china-claims-9-rank-united-states-patents. ) happynomics (p. 2011. 2011. ) sustainability (p. 2010). 2006). www.´ video transcript.´ www. Farrar. Why the West Rules « For Now.economist. Clyde Prestowitz.org/ external/np/speeches/2006/060706. ³Betting with the House¶s Money. and Giroux. ³BRICs.( www.html)." (Retrieved April 21.imf. ³Three Billion New Capitalists. Strauss and Giroux. 2009): 25±28. ) state capitalism (p.Page 56 of 63 economic geography (p. (Retrieved August 12. ³China Claims #9 Rank In United States Patents!´ (Retrieved April 23. (New York: Basic Books. Clyde V. Emerging Markets and the World Economy: Not Just Straw Men.´ The Economist. ) global financial crisis green economics (p. (London: Oxford University Press.´ The Economist. Angus Maddison.pbs. ) market economy (p. www. ³The World Is Flat: A Brief History of the Twentyfirst Century. (June 18. 2003). (May 28. The Next Billions: Unleashing Business Potential in Untapped Markets. 2007).html. (www.org/ newshour/bb/economy/july-dec05/prestowitz_8-15. ³Stability. News Hour. Kenneth Rogoff. www. (Retrieved May 7. (January 2009): 44. ) income distribution (p. Ian Morris. World Economic Forum.defence. Volume 2: Historical Statistics. (Retrieved June 7.economist.com/displaystory. The World Economy. ³A special report on innovation in emerging markets: The world turned upside down. Krueger. ³Government v. The World Economy: Volume 1: A Millennial Perspective. ) socialism (p.org/commentary/rogoff27 . 2007). (New York. (August 15.cfm?story_id=13743310 . ) laissez-faire (p. ) ENDNOTES Sources include the following: Thomas Friedman. Three Billion New Capitalists: The Great Shift of Wealth and Power to the East. ) inflation (p. Market in America: The Visible Hand. 2005.´ Farrar.htm . 1 . 2005).project-syndicate. ) stability (p. 1±2030 AD. 2001). Growth.com/node/15879369).
(Retrieved August 14." MoneyWeek. 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.4 percent in 2010. 2010.economyincrisis.org/data/globaloutlook." Index of Economic Freedom. 23 Quotation extracted from ³The Wealth of Nations. 22 William W. in May 2011.org/research/features/index. James Politi.´ The Conference Board." 15 Stephen King.com.com/cs/countries/a/ numbercountries. 53 were moderately free. 2009). 4 ³Global Economic Outlook.economist. Beach and Marc A. Three Billion New Capitalists: The Great Shift of Wealth and Power to the East.org/content/chinatakes-crown. 2011).gov/mission_pages/icebridge/multimedia/arcticseaicemax2011. 2011). 2011). Prestowitz. 2005). (Retrieved February 4 2008).org/Index/.´ Financial Times. even during the two months or so each summer when safe passage is feasible. 2005).´ 2005 Index of Economic Freedom.econlib. www. (Retrieved April 13." (Farrar. 2006). www. for example.cfm. (Retrieved July 18. (Retrieved July 24.Arctic Ice Gets a Check Up. (15 January 2008). Andrew Browne and Shai Oster. 3 Clyde V. ³Melting ice caps open up shipping routes. 23 were rated mostly free. 2011)." 6 ³A Special Report On Innovation In Emerging Markets: The World Turned Upside Down. 18 Ships attempting the Northeast or Northwest Passages face hundred-mile long swathes of shifting pack ice.worldbank.org/newshour/bb/economy/july-dec05/prestowitz_815. (Retrieved April 18.org/database/?indicator=5&survey=12&response=Good&mode=chart.heritage. 2007). (September 25. ³China Takes the Crown.heritage." Los Angeles Times. 2010). (New York: Basic Books. 7 Ibid. (May 17.html.´ video transcript.html." www. 2006):33. (Retrieved April 11. ³Explaining the Factors of the Index of Economic Freedom.heritage. www. www. (Retrieved April 21. (Retrieved May 19. 67 were mostly nonfree.org/library/Enc/BehavioralEconomics.org/data/ databytopic/class." Reported in "Executive Summary. World Bank sees end to dollar¶s hegemony.com/news-and-charts/economics/global-trade-the-opening-of-the-northeastpassage-45402. www. 24 The 2011 Index of Economic Freedom. 17 Simon Wilson.They moved to 50.org/research/features/index/chapters/pdf/index2008_execsum. 16 Kim Murphy. www. and 29 were repressed.conferenceboard. ³China¶s µState Capitalism¶ Sparks a Global Backlash WSJ. 20 The World Bank Group. Sample was 179 countries. 2009).pbs. 25 Counts for 2009 were: 7 countries had free economies. 2009). Yale University Press. 21 See. 16. 12 Jason Dean. 9 Ibid. 5 So. 2 .pewglobal. ³Three Billion New Capitalists. 2011.moneyweek. Miles." The Economist. for example. Losing Control: The Emerging Threats to Western Prosperity.com/node/15879369. (August 15. 2011). and Giroux.about." The World Bank.nasa. 19 ³NASA . ³Global trade: The opening of the Northeast Passage.html . 13 Ibid. Straus.´ www. (October 13. 14 Ibid.´ www. www. News Hour. 5. 11 Clyde Prestowitz. ³A Special Report On Innovation In Emerging Markets: The World Turned Upside Down.htm. Economy in Crisis. 8 Dustin Ensinger. 2011). (Retrieved April 21. ³Global Development Horizons 2011²Multipolarity: The New Global Economy. See also ³How Many Countries Are in the World?´ geography. 10 Specific query: "Is the country's economic situation good or bad?" www.´ www. ³The World Is Flat: A Brief History of the Twenty-first Century.htm." (November 16. 2011).pdf. (Retrieved April 17.Page 57 of 63 Thomas Friedman.
46 Eric Li. 44 The state essentially prevents systemic distortions threatening the stability of the system and promoting societal welfare²or.cfm?page=139&edition=9. In contrast. it survived indefinitely. in its rush to stabilize Detroit during the recent economic crisis. (May 9. 2011). 28 Data drawn from 12. 6th edition. ³Sharp Drop in American Enthusiasm for Free Market.economist. 40 Denmark 'happiest place on earth. (Retrieved April 19. but it never returns to its original size.com/news_archives/radar10w2_free_market/ . (August 31. government violated creditors¶ property rights.co.´ The Economist. www. the thinking goes." Cato Institute. 2011). www.org/template. www. May 7 2009." Foreign Affairs. Upon Chrysler¶s filing for bankruptcy. 2011). as well as a majority stake in the restructured firm.´ The Economist. (Retrieved April 17. (Retrieved April 13. ³Capitalism 4..com/node/16741043. (Retrieved April 27.economist.globescan.nytimes. (Retrieved April 13 2011). 31 Anatole Kaletsky.com/Commentary/Global-Viewpoint/2011/0428/How-China-broke-the-West-s-monopolyon-modernization.php?q=node/ 3421.884 interviews across 25 countries." Globescan." CSMonitor.Page 58 of 63 E. (Retrieved April 28. 2011). www. 41 Most worrisome to free market proponents is that. 2011)." Globescan. 37 "The global revival of industrial policy: Picking winners. ³Make no mistake: In China. Barry Eichengreen and Kevin H. an employee health-care trust. capitalism eventually is destroyed by its own contradictions 45 "Countries at the Crossroads. 39 "The French Model: Vive la Différence!" The Economist.' BBC News. New York Times. (Retrieved April 19. The New York Times.884 interviews across 25 countries. 43 Michael Wines. O¶Rourke. (Retrieved April 19.com/discussions/interviews/qa-with-ian-bremmer-on-state-capitalism?page=show.csmonitor. 29 Data drawn from 12.globescan. (the social class that owns the factors of production).html. 36 Companies in centrally planned economies exhibited a particular quirk. (the social class that does manual labor or work for wages) protected from exploitation by the bourgeois. ³Capitalism's waning popularity. none of them is a ³pure´ market economy because their governments intervene in the marketplace. their historic advocacy of economic freedom endorses the philosophy of capitalism and the principle of laissez-faire.freedomhouse.bbc.org.php?pub_id=6101. www. 2009). (Public Affairs. www. ³Going Dutch: How I learned to love the welfare state. made in his 1981 inaugural address.S. 28 July 2006. www. 2010). ³Capitalism's waning popularity. (Reading.stm.uk/2/hi/health/5224306. 32 Strictly speaking. once a crisis passes. 2011). 2011). (June 4. 26 . ³An Offer You Can¶t Refuse. (Retrieved June 5.g.com/2009/05/03/magazine/03european-. Still.´ The Economist. 2010).com/node/18527446?story_id=18527446&CFID=168796516&CFTOKEN=46679551 . 35 Only then. 30 Ibid. 2011). 34 For example. government control sometimes shrinks. 38 Michael Todaro. 2011). Economic Development. secured creditors² owed some $7 billion²recovered 28 cents per dollar. some argue that a mixed economy is essentially a move toward a socialist state. (operated by the United Auto Workers union and ranking lower in the capital structure) received 43 cents on its $11 billion-odd of claims. some argue the U.0: The Birth of a New Economy in the Aftermath of Crisis. (Retrieved April 18." freedomhouse. ³Sharp Drop in American Enthusiasm for Free Market. MA: Addison Wesley. 2009): 83. as Marx prophesied. www.cato. www.org/pub_display.economist." The Economist. 1996): 705. irrespective of performance. Indeed. www. Robert Lawson ³Measuring Economic Freedom. The absence of competition and bankruptcy in this sort of economic system meant that once an enterprise was up and running. (Retrieved April 19. 42 ³Q&A with Ian Bremmer on State Capitalism. 2011).org/index. saving losers. 27 A Tale of Two Depressions. See also Russell Shorto. are the proletariat. 2009).com/node/18527446?story_id=18527446&CFID=168796516&CFTOKEN=46679551 . State-run Firms Rule. ³How China broke the West¶s monopoly on modernization.voxeu.com/news_archives/radar10w2_free_market/ . www. news. (Retrieved April 18. 33 Ronald Reagan¶s then heretical declaration.foreignaffairs.com.
we compute per capita GNI by taking the GNI of a country and converting it into a standard currency²say. with especially hard times for Central and Eastern Europe and sub-Saharan Africa. and creative lives. "Income and Happiness: Towards a Unified Theory. and currency valuations tumbled. 51 Historically. This discrepancy results from the fact that the net foreign factor income was negative for Indonesia and Thailand. (2001): 465±484. (Retrieved July 16. we have the resulting variance between GNI and GNP. www. This calamity is not unique to Latin America.53 54 Technically. (Retrieved June 2. 56 Exchanges rates as of April 11. 2009):4. 2008). and sense of participation in community activities. while the latter was $372 billion. these choices can be infinite and can change over time. The Beijing Consensus: How China¶s Authoritarian Model Will Dominate the Twenty-First Century. Since GNI takes net flows into account. 63 Eric Weiner. (September 25. The definition and measurement of GNI and GNP are analogous. for current estimate. at least 60 developing markets suffered income drops in 2009. satisfying leisure hours.´ Fortune. David and Melvin W. 2010).forbes. 2010).html. Easterlin. In principle. As expected. 2011). thereby leading to a higher GNP than GNI.´ General Assembly Resolution 38/161.wsj. "State Capitalism and the Crisis. 2009). 53 For example. 60 Joseph Stiglitz. As a rule.Page 59 of 63 Ian Bremmer.html. but institutions such as the World Bank and International Monetary Fund now use the term GNI. 52 Ibid. (i. the GNI of the United States in 2008 was $13..84 trillion. ³The Happiest Places in the World. political and cultural freedoms. Indonesia¶s GNP is larger than its GNI²the former was $432 billion in 2007. (April 23.88 trillion. (July. (New York. (December 19. 2007 Survey. 64 Mark Whitehouse. financial reserves. co-conceiver. or not immediately. 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. better nutrition and health services. (Retrieved May 27. (Atlas methodology for GNI per capita). which smoothes exchange rate fluctuations by applying a threeyear moving average. 57 World Bank. 59 ³Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond. Mahbub ul Haq. ³Good Numbers Gone Bad: Why Relying on GDP as a Leading Economic Gauge Can Lead to Poor Decision-Making. The same held for its neighbor." The Economic Journal. while its GNP was $13. GNI was referred to as gross national product. 2011).com. (New York: Academic Press.S. 2007). eds. (Retrieved January 17. with Amartya Sen of HDI 61 62 Richard Easterlin. more secure livelihoods. the prices of many goods are considered and weighted according to their importance in the economy of the particular country. public finances. Portfolio. Richard. 2006).un. 2011www.S.2 percent in 2009. 1974). 61 Some maintain that the purpose of development is to enlarge people¶s choices. Ian Bremmer. 55 See U.e. but roughly balanced for the United States. with a GNI of $217 billion versus GNP of $246 billion the same year.com/article/SB10001424052748704064504576070343252409876. 5. Latin America has seen income per capita drop five times since the 1980s. dollar at prevailing exchange rates²and then dividing this sum by population size. Thailand. In contrast. the U..org/documents/ga/res/38/ a38r161htm. price-adjusted conversion. The current global credit crisis has triggered a sixth occurrence²population in the region is growing 1. The objective of development is to create an enabling environment for people to enjoy long. in income or growth figures: greater access to knowledge.com/2008/04/23/happiest-places-world-opedcx_ewe_0423happiest. ³GDP Can Be a Poor Measure of Success. Statement by Dr. 2011.html . consumer demand." WSJ. The End of the Free Market: Who Wins the War Between States and Corporations? (New York. Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz. 48 47 . Reder. and World Population Clocks²POPClocks. Stefan Halper. security against crime and physical violence.´ Forbes. Basic Books.gov/main/www/popclock.census. 49 Data calculated with the Atlas Method. a net outflow). healthy.3 percent a year but the economy "grew" -2. Typically. many developing countries produce more value than they receive as income. www. People often value achievements that do not show up at all. 1983). 50 For example. http://online." McKinsey Quarterly. "Does Economic Growth Improve the Human Lot?" in Paul A.
2009).5 million annually on average in the next 20 years. (1881±1973).´ www.naturalnews. (Retrieved April 26. www. On the Measurement of Zimbabwe¶s Hyperinflation.´ Foreign Policy. ³Ludwig von Mises. General Assembly Resolution 38/161. 80 Kevin Phillips.com/.S. 2011). (January/February 2003): 39±48. and Elizabeth Florescu. www.Page 60 of 63 Roger Cohen. 2006):B1.com. 2007). (Retrieved December 29. 83 Ibid. 74 Murray Rothbard.google. 1967). "Beyond GDP? Welfare across Countries and Time. A rise in the index indicates inÀation. Changes how it Measures Long-Term Unemployment" USATODAY. (2010). 2009 State of the Future.org/millennium/sof2009. Chief Japan economist at RBS Securities Japan Ltd.millenniumproject. 78 Michael Wines. but the one they use the most is the Consumer Price Index.´ New York Times. nytimes. (CPI). 67 ³OECD Launches Happiness Index. ³Economics focus: Botox and bean counting. 82 View of Junko Nishioka. (Retrieved May 15. Presently." 24/7 Wall St.usinflationcalculator. 76 Economists use different types of indexes to measure inÀation." NBER Working Papers 16352.com/hostednews/afp/article/ALeqM5jj15a9ZCL9ETVD9UAn18y7MlrG_g?docId=CNG.com/020873. 84 The working-age population: Presently. Theodore Gordon. The Economist. 2011). in Tokyo. F. as of 2003. (May 28. had fallen well into single digits in the early twenty-first century.usinflationcalculator. (May 2. 72 Jerome Glenn. (Retrieved June 29. 75 See www.com. 2011). The CPI measures a fixed basket of goods and compares its price from one period to the next. The Millennium Project. 68 The Happiest Countries in the World. the level above which it is generally considered to be acutely damaging to an economy." www. (Retrieved June 4. (Retrieved May 27.b865 06f095cbf61164e88f98b0d5d21c.org/archive/2008/05/0082023 . the population above the age of 16 will grow by 5. Rick Hampson. Mishan. (New York: Praeger. 66 Charles Jones & Peter Klenow.and lower-income countries. 77 Steve H.org/documents/ga/res/38/a38r161htm.com. the youth of the world suffer the highest rates of unemployment in most countries. ³U. 81 For instance. However. (Retrieved May 27.html?_r=1. the working-age population will increase across poorer countries from about 3 to 4 billion people. p. National Bureau of Economic Research. http://247wallst. (Retrieved May 26. From ³Japan Succumbs to DeÀation as Consumer Prices Fall Record 1. 2009).com/apps/news?pid=newsarchive&sid=aaQyqjERBorM. once stuck with extreme inÀation pressure.bloomberg. ³Numbers racket: Why the economy is worse than we know. sees the age structure of its population creating severe employment pressure within the next two decades.84. ³The IMF Strikes Back.2a1. Inc. www. Conservation Group Claims.´ Bloomberg. 1983).mises. 71 Ibid. In China alone. See Ken Rogoff.´ The Economist.´ ww. (December 19. Kwok. Market in America: The Visible Hand.asp. The total population of working-age Chinese will reach 940 million by 2020.com/frequently-asked-questions-faqs/. Many credited the fall in inÀation to a combination of the price pressures of globalization along with more vigilant central bankers and economic policymakers. 79 www." NYTimes. ³The Happynomics of Life. (Spring/Summer 2009). deÀation persisted)." April 30. .html. 86 65 Ibid. The Costs of Economic Growth. (ages 25±65) unemployment. Hanke and Alex K. with rates twice that of adult. 2011). China. AFP. inÀation in many middle. www. 2011. (and in Japan. only three countries had annual inÀation rates in excess of 40 percent. 2011). 70 E. 60. ³How Bad Is InÀation in Zimbabwe?. All major industrial countries had inÀation under 3 percent. over the same time. for example.com/2011/03/13/opinion/13cohen. 2011). (Retrieved April 27. 69 ³Government v.un.harpers.html. 73 Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond. Moreover. 2009): 25±28.1 percent.org/content/mises. (Retrieved June 2. ³Humans using Earth¶s Resources at Unsustainable Rate. Cato Journal.´ Harper's Magazine. the wealthier countries of the world are watching their workingage population shrink from approximately 740 to 690 million people between 2000 and 2025. 2010).com/2011/06/01/the-happiestcountries-in-the-world/2/.
org/en/portada. There¶s a basic reason for that which is that 200 years ago everybody was poor. 2011. 2011). 93 Growing Income Inequality in OECD Countries: What Drives It and How Can Policy Tackle It?. L. 87 .com.edu/whorulesamerica/power/wealth.) 106 Donald McNeil Jr. Those countries represent only about onesixth of humanity.economist. (2002) 26: 54±67.´ New York Times. And that¶s absolutely astounding to be on the same planet and to have that extreme variation in material well-being. 100 ³A wealth of data: A useful new way to capture the many aspects of poverty. 44. (Retrieved May 27. rural income gap widens despite economic recovery´ People's Daily Online. ww. (May 29. (June 2000): 3-20. by the 1 percent. Wall Street¶s Toxic Message. ³Of the 1 percent.´ Strategy+Business.com/debt_clock. www. 107 ³The Next Billions: Unleashing Business Potential in Untapped Markets. (Retrieved June 15. Finally. 103 ³Joseph Stiglitz. www. (Go to www.com/china/1/2005/0822/ 43237. 26.html . (Retrieved May 5. ³The Poor and the Global Crisis: The Trail of Disaster. english. "Wealth. 89 For example. /www.fao.nytimes. 2010). fiscal system is plugged with many tax loopholes that cause inefficiencies. 2007).´ Vanity Fair. for example CEOs of the 15 largest companies earned 520 times more than the average worker." sociology.com/2011/03/26/opinion/26herbert. The gap can be 100 to 1.htm. and Power. 97 Joseph Stiglitz. 102 Noted Jeffery Sachs. www. 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.oecd." www.bloomberg.ucsc. for the 1 percent.pbs. the Netherlands and South Africa.cn/90001/90778/90862/6875693. 2009)." Vanity Fair. the average CEO in the U. (January 2009). made 343 times more money than the average American did last year." The Economist. This is up from 360 times more in 2003. "The world is more unequal than at any time in world history.html. (Retrieved June 28. (data as of April 26." www.com. (June 18.com/news/2011-02-15/food-price-jump-pushes-44-million-into-extreme-poverty-worldbank-says. In 2010.com/node/16693283). Episode Three: The New Rules of the Game. ³Food Surge Is Exacerbating Poverty. (May 2011). eliminating the deficit requires eliminating these distortions 90 GNI data is adjusted by purchasing power parity. Prahalad and S. See ³Gap between Rich and Poor: World Income Inequality. 2007).brillig. 2009). 99 ³80 percent of Indians live on less than $2 a day--World Bank. 101 ³Impossible Architecture.´ Sina. maybe a gap of $30. K.economist.S.org/els/social/inequality. Hence. Chapter 18.com. ³Losing Our Way . (Retrieved May 10." (Retrieved April 18. 104 Sandrine Rastello and Wendy Pugh. english. (Retrieved April 17.org/wgbh/commandingheights/lo/index.html.sina.´ www. This measure compensates for differences in protein supplied by different foods across countries." livemint. 2006).´ Commanding Heights: The Battle for the World Economy.com/ipa/A0908770. (May. ³The Fortune at the Bottom of the Pyramid. (Retrieved April 18. Hong Kong. 2009): 24. In 2007.´ The Economist. 92 William Domhoff. (Retrieved April 19.html. Income.S.S.. 2011).html. www.socialwatch.vanityfair. (Retrieved July 8. ³Design That Solves Problems for the World¶s Poor. misallocation of resources and lost revenues. Germany. 2007): B-2. 96 ³China's urban. 98 Ibid. and five-sixths of humanity is what we call the developing world. (China).org. ³Transcript. C. 95 ³Chinese Scholars Warn Growing Wealth Gap Likely to Trigger Social Instability. 94 ³Inequality: Unbottled Gini. World Bank Says.com/node/17957381. 2011). 2011). National Debt Clock. 2009).livemint.com/articles/2007/10/16235421/80-of-Indians-live-on-less-th. A relatively small part of the world achieved what the economists call a modern economic growth.infoplease.com/politics/features/2009/07/third-worlddebt200907. (Retrieved April 12.NYTimes. We see similar patterns Australia.html." www.people. 91 Bob Herbert. arguably the U. It¶s the vast majority of the world.´ Social Watch Report 2006.htm.000 per person and $300 per person. Hart.Page 61 of 63 See Constance Sorrentino. income inequality is accelerating between top executives and the average employee." World Economic Forum. ³International Unemployment Rates: How Comparable Are They?´ Monthly Labor Review. 2011). (Retrieved July 14. 88 See U. 2011).html?_r=1 . www." The Economist.
new homes will do the same falling from 320K in 2007 to 125K by 2030.lewrockwell. In the decade following the crises. www. the 1973 oil shock and the 2007 implosion of the subprime mortgage market clarifies likely events and trends. 2011):76-78.kiplinger." www. 112 ³Medical technology: Frugal healing. 2011). 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.com/World/2011/0517/Surging-BRIC-middle-classes-are-eclipsing-global-poverty. Interest rates will remain low for a long time.economist. The Dow Jones Industrial Average. This sounds utterly inconceivable until one considers that the Nikkei fell from its all-time high 38. a country might have a surplus in merchandise trade. (Retrieved April 28.´ The Economist.net. (March 5. "Economist Christina Romer serves up dismal news at her farewell luncheon. for example.bloomberg. ³Standard & Poor¶s Puts µNegative¶ Outlook on U. washingtonpost.nextbillion.com. (Retrieved April 13. 111 See. 110 Jane Fraser and Jeremy Oppenheim. Key cause of the 82 percent drop--the Japanese housing bubble of the 1980s. Harrington and Cordell Eddings. And.´ The Economist." Accenture Outlook. ³Innovations to Create New Streams of Profitable Growth.washingtonpost. 122 ³Jim Rogers Says the US Will Certainly Lose Its AAA Credit Rating. 117 ³Geithner Pushes New Financial Rules. as Marx prophesied. (Retrieved April 13. ³Capturing the World¶s Emerging Middle Class.cia.gov/library/publications/the-world-factbook/ rankorder/2187rank.csmonitor. For instance.Page 62 of 63 108 Christa Case Bryant.´ The McKinsey Quarterly. (Retrieved May 25.com/wpdyn/content/article/2010/09/01/AR2010090106148. in the United States. www. (Retrieved April 18. 119 Jennifer Schonberger.com/in-en/outlook/Pages/outlook-journal-2010-less-is-new-moreinnovation. 2010). will see 4000 before 2030. In other words. ³Surging BRIC middle classes are eclipsing global poverty. all signs point to a secular shift from over-leveraged.S. 114 115 113 ³The Tata Group: Out of India. (indicating that it is exporting more than it is importing) but may then report a deficit in another area. 2011). 116 See www." September 1. (from 240k in 2006) before 2030." CSMonitor. In the United States.915 on 12 December 1989 to 7. the average home prices around the world will crater. 2011). 121 Shannon D.html.´ Business Intelligence Middle East. Persistently high unemployment will reflect persistently sluggish growth.accenture. Cycles of falling prices and wages will power deflationary dynamics. for example." McKinsey Quarterly. (July 2010): 67. 109 David Court and Laxman Narasimhan." Kiplinger's Personal Finance. AAA Rating.com/columns/dekaser-practical-economics/archives/robert-shiller-shares-his-view-on-thehousing-market. 124 Most will average annual real GDP growth in the low single digits for a decade or more.´ www. 2011). 120 Dana Milbank. 2010. such as its investment income. Stock markets will drop 50 to 80 percent in real value. (Retrieved April 13. to top it off.html. 2011). 2011).054 on 10 March 2009. This Time Is Different: Eight Centuries of Financial Folly. www. http://www. The notion of balance means that all BOP transactions have an offsetting receipt.com/rogers-j/rogers-j139. credit-driven consumption to compelling frugality that border for many on raw austerity. look for existing homes to fall to $100k. ³What¶s New about Globalization. Combined. www. (May 1997): 178. ³Robert Shiller Sees More Housing Pain Ahead. 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.html.´ www. (Retrieved June 9.com/news/2011-04-18/standard-poor-s-puts-negative-outlook-on-u-s-aaarating. growth .org/templates/story/story. 2011). www. 118 The state essentially prevents systemic distortions threatening the stability of the system and promoting societal welfare²or.npr. 2009). because the current account and the capital account add up to the total account²which is necessarily balanced²a deficit in the current account is accompanied by an equal surplus in the capital account and vice versa. 123 Carmen Reinhart and Kenneth Rogoff. GOP Skeptical: NPR.com/node/17963427 .html?hpid=news-col-blog. (Retrieved April 19. we will see the federal funds rate below 0.html.php?storyId=102416414. 2011). (Princeton University Press.5 percent until at least 2020.aspx. (Retrieved October 2. capitalism eventually is destroyed by its own contradictions.
www.´ www. in recession despite data: poll. (Retrieved April 28. Results from April 20-23 Gallup survey of 1. ³Too Big to Fail? Timothy Geithner Says No.html.S.Page 63 of 63 rates were significantly lower and unemployment rates were significantly higher. It took households and companies about seven years on average for to reduce their debts and restore their balance sheets.S.co. stood at 85 percent of GDP in 2009 and will reach 108 percent of GDP by 2014. says the IMF. French Consumer Spending Drops. . 129 Lloyd Grove.123jump.S.com/blogs-and-stories/2011-05-18/too-big-to-fail-timothy-geithner-says-no-at-hbomovie-screening/#. The U.K. for example. Consistently. 2009). the crises were preceded by decade(s)-long expansions of credit and borrowing. www.thedailybeast." The Telegraph.S." Market Update. 128 "No full recovery until 2015.013 U. according to IMF projections.uk/finance/financetopics/ recession/6220089/No-full-recovery-until-2015-says-theIMF." Reuters.-French-Consumer-SpendingDrops/44005/. Gross government debt in the U. www. (Retrieved April 28. and were followed by lengthy periods of retrenchment that lasted nearly as long. adults.´ The Daily Beast. 125 Arthi Gupta..¶s gross government debt stood at 69 percent of GDP in 2009 and is expected to reach 98 percent of GDP by 2013. ³German Jobless Rate at Record Low. 126 David Morgan. ³Most Americans say U.com/market-update/German-Jobless-Rate-at-Record-Low. Housing prices took years to recover. and other countries at the center of the financial crisis are rapidly approaching the 90 percent threshold.telegraph. 130 Ibid.com/article/2011/04/28/us-usa-economy-gallupidUSTRE73R3WW20110428?feedType=RSS&feedName=domesticNews. 127 Ominously. (Retrieved May 19. 2011). 2011). (Retrieved September 22.reuters. 2011). at a time when debt levels in the U.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.