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Chapter 4: The Economic Environments Facing Businesses A man is rich who owes nothing. ²French proverb
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Objectives y y y y y To communicate the importance of economic analysis To discuss the idea of economic freedom To profile the characteristics of the types of economic systems To introduce the notion of state capitalism To profile indicators of economic development, performance, and potential
CASE: The Comeback Accelerates1
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In the world of globalization, one often struggles to separate the rhetoric from reality. Some view it in the extreme, as in the transformation of everything. Others see it as just the latest stage in the evolution of the market. Some see it as the final phase before forces of deglobalization usher in the inevitable return to local enterprise. Despite wide-ranging opinions, the ongoing integration of national economies into the global market resets the business environment. Discussions have taken a far more dramatic tone the past few years. Some commentators see the flattening of the world whereby advances in institutions, communications, and technology fundamentally change the economics of globalization. They speak of ³distributed tools of innovation and connectivity empowering individuals from anywhere to compete, connect, and collaborate.´ 2 Powered by hardware and software innovations, companies operate anywhere, anytime. Others emphasize the entry of billions of people into the global marketplace. They reason that the world is in the ³middle of a two-part revolution. Three billion new people²billion and a half Chinese, billion Indians, half a billion people from former Soviet bloc²have suddenly come into the global economy all at one time. Within these three billion people is a population as big as the United States, bigger than anybody in Europe or Japan, who are every bit as skilled and can do anything that could be done in the U.S. or Japan or any of the developed countries for ten cents on the dollar.´3 Billions of low-wage, skilled workers radically resets how we interpret capital and labor in the production of goods and services. Finally, the consequences of the global economic meltdown raised the specter of slowing markets triggering deglobalization. Rising trade barriers, risk-adverse companies, and nationalistic consumers slow the cross-national movement of information, people, products, capital, and jobs. Governments constrain the animal spirits of capitalism, regulating what had become hazardously free markets. Economic freedom, as we saw with political freedom in Chapter 3, is under siege from surging state intervention.
MAP 4.1 Leading Emerging Markets Pick up from page 132, 13th Edition Source: Compiled from The Economist and the Morgan Stanley Emerging Markets Index.
What's Next? Provocative in their own right, these interpretations suggest that, in the first decade of the twenty-first century, globalization reinforced long-running developments and initiated powerful trends. Combined, they challenge one¶s lifestyle, job, company, country, and future. The possibility that globalization has reached an inflection point²namely a time where old strategic patterns give way to the new²signals the need for managers to rethink economic principles and practices. Understanding where we are heading calls for highlighting where we have come from. Initially, attention turns to how the world economy evolved from 1950 through 2000. During this time, the diffusion of democracy and free market principles powered growing trade among the richer, developed nations. It
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also spilled over to many poorer, developing countries. Institutions like the IMF, WTO, and World Bank stabilized the playing field. Companies from the United States, Western Europe, and Japan²the so-called Triad²ruled international business and globalized the world in their image. The precedents from this era increasingly fall short in helping managers interpret today¶s puzzles. Indeed, focusing on the tried-and-true indicators of the past distort interpreting today¶s global economy. Unquestionably, measures of the performance and potential in developed countries matter. However, they no longer matter decisively. Unfolding trends direct attention toward an epochal shift in the center of gravity of the global economy. The Emergence By 2050, four of the six largest economies in the world²Japan, China, India, and Russia²will be in greater Asia. Their growth will create a second tier of robust economies among their Asian neighbors, such as Singapore, South Korea, Indonesia, Taiwan, Kyrgyzstan, Vietnam, Thailand, and Australia. Countries in other parts of the world, like Brazil in South America, South Africa in Africa, and Israel and Saudi Arabia in the Middle East, will develop in-step with their Asian counterparts. (See Map 4.1). All, although each at a different pace, are inexorably moving from the periphery to the center of the global economy. Extrapolating from 2012 out to 2050 is, unquestionably, more speculation than estimation. Still, these countries are implementing powerful pro-growth policies. Hard data confirm their success so far. In 1980, the combined output of emerging economies accounted for 36 percent of global GDP. They crossed a milestone in 2009, accounting for more than half of total world GDP.4 Similarly, emerging economies¶ share of world exports is nearly 50 percent (up from 20 percent in 1970). Their share of the world¶s foreign-exchange reserves is 70 percent (up from net deficits in the mid-1990s). China alone holds more than 28 percent of total reserves in the world. Institutionally, the G-7 expanded into the G-20, thereby giving new members, like China, India, Brazil, Mexico, and South Korea, greater say in the premier global policy forum. These new stakeholders advocate different views of trade and investment regulation. Collectively, the accelerating rise of emerging economies signaled that the wealthy countries of the twentieth century would not dominate the global economy in the twenty-first century.5 The economics in emerging markets suggests the revolution has only begun. Ambition to improve infrastructure, increase productivity, create jobs, and alleviate poverty has put into motion what will likely be the biggest economic stimulus in history. The last transformation of similar magnitude²the Industrial Revolution²involved far fewer people in far fewer nations but still produced a century-and-a-half economic expansion that altered lives everywhere. Today's revolution spans the globe and includes far more people in far more countries. The transfer of the leadership baton from wealthy countries to emerging markets, for better and for worse, resets our interpretation of economic environments. PRECEDENTS AND PREDICTIONS Making sense of the situation moves some to review a broader span of history. One need only track the past millennium, they say, to put the current economic drama into perspective. Before the steam engine and
the Industrial Revolution benefited the West while bypassing them. on average. and monetary patterns. Today. China produced the highest percent of all the goods consumed in the world. While they expand. generated more than half of global economic output. Angus Maddison. China alone generated one-third of the world¶s gross domestic product in 1820. China and India were the world¶s two biggest economies. Trends suggest that. thereby culminating their comeback. fiscal. Paris: OECD Development Centre Studies. Britain. 13th Edition New Caption Over most of the past millennium. annual growth in emerging markets has averaged 6.. changes investment. trade. and South Korea. spurred isolationism and xenophobia. accounted for about 70 percent of global economic output. today¶s emerging economies dominated world output. today¶s developed economies. the global financial crisis slows and shrinks many developed economies. FIGURE 4.8 percent of all the goods consumed in the world in 2009. For . if not sooner. 2001. their ambition is straightforward: Restore their historic stature as the engine of the global economy. produced 19.8 The diminishing role of today¶s rich economies. they produced. In addition. The Economist.6 In contrast. today¶s emerging economies will complete their comeback. most notably China and India. aggravated by colonial exploitation and unfair trade agreements. the rich economies have averaged 1. again accounting for more than 70 percent of global output.4 percent. most developed economies will be fortunate just to grow. They lost their lead (temporarily trends now suggest) as internal political failure.8 percent a year. emerging economies will grow at an average of 6. soon claimed this title before ceding the top spot to the United States around the beginning of the 20th Century. Since 2001. Indonesia. Germany. poverty. In 1850.1 Emerging Markets Make a Comeback Pick up from page 134. 70 to 80 percent of world output (see Figure 4. today¶s emerging economies.Page 4 of 63 the power loom drove the transfer of economic might from Asia to the West. From 1000 to the mid-1880s.7 Symbolizing this process. the United States. wealth. Sources: Compiled from The World Economy: A Millennial Perspective. Russia. leader for the previous 110 years. emerging economies will again account for more than 70 percent of global economic output. and Japan. consumption. by 2050. Over this span. China¶s share had fallen to 5 percent. Over the next decade. nearly 70 percent of the world growth over the next few years will come from emerging markets. such as the United States. coupled with the accelerating scope of emerging economies.4 percent and fell to second. in contrast. By the twentieth century. in 20 years or so. By 1950.6 percent. with 40 percent coming from China and India and another 15 percent from Brazil. Consequently. on the basis of the Industrial Revolution. IMF.1). If these trends persist. emerging economies¶ share of global output had fallen to 40 percent. China reclaimed the top spot it last held in 1850--it produced 19.
Economic change. workers. who are adept at operating in the new economy. CRN . Chart 4. particularly if his starting point is the recession-racked West« [emerging markets] see opportunities in every difficulty rather than difficulties in every opportunity. as cell-phones to land lines or the Internet to printcentric newspapers. Change creates prospects for players. there is rhyme and reason that helps managers interpret the development. megatrends such as the Comeback are rare events.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. they create opportunities. "No visitor to the emerging world can fail to be struck by its prevailing optimism. particularly the sort we have seen during the global financial crisis. Against this backdrop. executives. whether newcomers or incumbents. these shifts pose threats. new world. as this chapter shows. Nevertheless. Noted one observer.1 gives an indication of who sees which. and assess the potential of economic environments. 2011.10 Still. For others. such as those who applied computer chips to cell phones or publishers that migrated to the Web. and investors will wrestle with this shift for decades. strategic inflection points do not necessarily lead to disaster. evaluate the performance. this chapter profiles the frameworks that interpret the brave.Page 5 of 63 some. Chart 4. seems unpredictable."9 Put differently. Policymakers.
performance. adding this or taking away that in order to boost performance. In relative terms. companies. Beijing's response was swift: the development of domestic polysilicon supplies was declared a national priority. Different reasons explained success and failures in different countries. China makes about a quarter of the world's polysilicon and supplies roughly half the global market for finished solar-power equipment. Today. and legal systems influence a company¶s decisions on where. Policymakers worldwide watch the game. Since the 1980s. and started production within 15 months. Zhu Gongshan raised $1 billion for a plant. polysilicon factories require lengthy reviews that results in years to build a plant. As a result. This chapter completes our macro-profile. In 2007. For instance. Since then.12 Rather than an isolated situation. Emerging economies are reinventing systems of production and distribution as well as experimenting with entirely new business models. It presents the perspectives and tools that managers use to interpret economic environments. once there.11 Although easily overdramatized. economic environments change. gross world output more than quintupled between 1970 and 2010. Margin Note 2 Economic and political changes alter market circumstances Although the pace varies from country to country. For example. this task has perhaps not been more important in our lifetimes given the opportunities and challenges currently facing individuals. and how to do business. he has created one of the world's biggest polysilicon makers. many countries prospered. Managers track changes. anticipate. and potential. poured money into local polysilicon manufacturers. and countries. Estimating the attractiveness of a country as a place to do business and. when. Globalization seemingly expanded the economy for all. hitting $450 a kilogram in 2008. Political and economic processes require anticipating new situations.Page 6 of 63 Introduction Cultural. companies enjoyed opportunities as nations . and a few not at all. along with China's sovereign-wealth fund. Foreign companies then dominated production and passed high costs onto Chinese producers. shortage of polycrystalline silicon²the main raw material for solar panels²threatened China's nascent solar-energy industry. consider the following situation. In China. in absolute terms. political. Polysilicon prices soared tenfold in a year. For example. the tale of GCL-Poly Energy increasingly is the norm. State-owned banks. Local governments expedited approvals for new plants. 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. some prospered more than others. Western MNEs rethink strategies and reposition assets. In the West. making prudent investment and operational decisions depends on how well managers understand. forecasting China's response to polycrystalline silicon shortages would have encouraged some options while rejecting others. GCL-Poly Energy--which counts China's sovereign wealth fund as a key owner. growing from $12 to $61 trillion. built it. and adapt to its economic environment.
15 More than 70 percent of the world's growth over the next few years will be in emerging markets. the global financial crisis has reset the game. Companies also monitor changes in countries where improving performance or revised policies strengthen local competitors. Australia. for example. managers study changes. The task is distinguishing common trends from unique events. for the first time. Estonia. laid-off 800 workers.000 multinationals based in the emerging world. Evergreen Solar became one of the largest makers of solar panels in the United States by 2009. And. it shut its Massachusetts factory. a Chinese company. China fast tracking its polysilicon factories. it has endorsed growing government involvement in allocating resources. adapt to the changing. or Mexico differ from those taken in China. China or Russia on the Financial Times 500 moved from 15 in 2006 to 77 in 2010. They also spotlight implications for economic freedom. that shape economic environments. and institutions. few of these existed 10 years ago. the United Nations estimates there are approximately 22. and Institutions Economics is vital to citizens.14 The number of companies from Brazil. more people are working worldwide but poverty is increasing. Consequently. the apparent triumph of free markets over state-controlled economies had led . In the least. and shifted production to a joint venture with a Chinese company in Wuhan. in mid 2011. China. In Boston. policymakers. Thailand. Change in one country has consequences in others. in the back of their minds.Page 7 of 63 adopted the principles of capitalism and practices of free markets. Brazil. Executives worldwide had to determine if this was an isolated example or the start of a trend. or South Africa. largely foreign owned mining companies. changing economic policies reveal government ambitions. managers monitor those in which they do not. Change. India. Challenges of the Comeback The rise of emerging economies distorts traditional economic indicators. CRN Choices of Citizens. globalization connects countries. For example. Policymakers. impossible in 1980. In the East. Concept Check 1 Connections. CRN In both worlds. aided by $43 million in public assistance. both here and there. too expensive there. Greater competition for scarce resources increases prices of commodities but decreases costs of manufactured goods. circumstances. In 2011. both big and small. Managers' macroeconomic instincts. Evergreen Solar cited the superior location economics and higher government support for solar activity in China.13 On the larger scale. By 2000. and recycling massive foreign exchange reserves means capital is too cheap here. In the West. Too. managers realize that steps taken in Ireland. moved it from the periphery to the center of the solar power industry in 2010. tried and tested for the past decades in the West. Bolivia dismantled its privatization model that governed the mining industry and expropriated all assets owned by private. triggering market reforms and tighter regulation. and Consequences Besides assessing the foreign markets in which they operate. PetroChina. sometimes confusing. dethroned Exxon Mobil as the world¶s most valuable company.
Today. Hence. and reconfigure industries. the crisis showed. the bulk of goods between Eastern United States. as we see. Free market reforms increased investment. distribution. Today.html.16 Passage through the Arctic Sea Ice Source: Adapted from NASA satellite image taken September 2010. the global financial crisis cast doubt on the sustainability of market led change. and spatial organization of economic activities across the earth. . All of which.Page 8 of 63 countries to launch bold development programs.nasa. just as the Panama and Suez Canal changed the flow of trade. and institutions make better decisions. However. reshape trade and investment. economic geography is the study of the location. However. also misallocate capital and over-promote consumption and opportunism. round the bottom of India. Similarly. employment. Free markets. rapidly happened in the solar power industry. Governments. particularly those in the West. most goods between Asia and southern Europe travel through the South China Sea. New market standards reset asset valuation and resource allocation. and head up the west coast of Europe. cross the Mediterranean. for both good and bad reasons. and wealth. The record shrinking of the polar ice cap is turning the forbidding waters at the top of the world into new shipping routes. Satellite images show the consequences of global warming in northerly latitudes. 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. 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. consumption. For example. http://www. we see interesting developments in the geography of globalization. a fuller understanding of economic transitions and market evolution helps citizens. 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). Northern Europe. so too might global warming do the same. cut past Singapore. pass through the Suez Canal. policymakers. increasingly constrain the animal spirits of unbridled capitalism through expanding regulations.gov/topics/earth/features/ice-min-approach. and Asia travel through the Panama Canal to navigate between the Atlantic and the Pacific.
And since time is money. in 2011. Scientists tracking the annual maximum extent of Arctic sea ice reported that 2011 was among the lowest ice extents measured. at best. However.000 miles). the shorter trip significantly reduces the cost per ship per trip.452 miles) and ten days off the journey. we see an abrupt decline. alters shipping logistics and trade routes. Improving conditions for traveling the Northwest or Northeast Passages depend upon worsening conditions for the planet. a mixed blessing. by mid-century." said NASA. The voyage from Vladivostok in the Russian Far East to Rotterdam. rather than the Panama or Suez Canals. .17 Presently. "Then. "For the first 20 years of the satellite record. Traveling the Northwest Passage shaves around 3. the average annual maximum was basically uniform.18 For a couple of months or so. The traditional route through the Panama Canal runs at least 6 weeks. and resources. Nevertheless. ships can feasibly ply the Northwest or Northeast Passage at the end of the summer melt season. As climate change resets the Arctic ice cap. it yields new trade routes. shipping goods from South Korea to the Netherlands via the Suez Canal travels 14. Accelerating ice loss may bring that date forward. to say nothing of radically redrawing the world's coastlines.Page 9 of 63 Traveling these fabled Passages. the Arctic Ocean's ice cover shrinks dramatically.000 nautical miles (about 15."19 The shrinking Arctic ice is. scientists predict these waterways could remain ice-free year round. Similarly. markets. Germany via the Northeast Passage takes less than a month.000 nautical miles (3. an increasingly hotter world poses innumerable side effects that likely trump the benefits of shorter trade routes.
In the wake of the global financial crisis. assessments are often more conditional than universal because: Margin Note 3 1.2 Indicators of an Economy: A Partial Profile Source: http://www. Mind you. Stipulating indicators that definitively represent a country¶s economic performance and potential is difficult. Figure 4. Improving decisions depends on assessing the development.S.000. In particular. For example. it excludes important indicators like inflation. it highlight the complexity of an economy. income distribution. this a partial selection. operating in countries that offer the greatest return with the least risk. although economics champions many scientific principles it still relies on a variety of behavioral assumptions to interpret activity.21As a result. no country is isolated. Resource constraints mean managers must prioritize their options. The complexity of even the simplest economic system defies straightforward classification.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. and potential of an economy. unemployment. indicators that worked in 2009 were flawed by 2010 and remained dubious in 2011.org/ . Adjusting analysis for actions and reactions across a broad scope of markets is difficult. and balance of trade.20 Few MNEs can fund and run operations in all 208 markets. Marketplace dynamism means that today¶s valid measures may prove invalid tomorrow. 2.2 reports aspects of the U. The consequence of connections is an integrated system of markets in which actions in one influences outcomes in others. Just as no man is an island.usdebtclock. 3. Still. economy that profile its outstanding debt and obligations. Figure 4. Interdependencies complicate interpretations. performance.
it highlights elements. managers typically integrate insights from company activities. proves useful. 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. Replace sidebar contents as indicated here. It identifies economic conditions that shape a country¶s development. Lastly. managers apply three perspectives to help make sense of situations. analysts¶ reports. Too. First. assessing the conditions that moderate economic freedom as well as move a country from one economic system to another.3 also suggests that linkages among elements mean that a change in one affects others. .3 Economic Factors Affecting International Business Operations Pickup figure 4. they estimate how much freedom they will have to make investments and run operations as they see fit. Therefore.3 shows how managers overcome these constraints. which guide assessment. they evaluate the type of economic system in the country. Clarifying interactions among elements of an economy help estimate its development path and performance potential. Figure 4. where they should not. therefore. The third investigates the points of change that drive economic change. for example. the insights help managers pinpoint where investments should go and. Second. and potential.Page 11 of 63 Figure 4. Collectively. a systems perspective.2 from page 144 of 12th edition. and news articles in developing a mosaic profile that represents an economy's features and estimates its interactions. studying how current policies shape development and performance. performance. namely economic freedom and system type. Consider. the consequences of a reduction in interest rates. perhaps more importantly. Concept Check 3 FIGURE 4.
produce. 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. within the range of 0 to 100 percent. 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. that freedom is both protected by the state as well as unconstrained by the state. the lower the level of government interference) Table 4. We reapply the same logic here. In many others. .´23 The Economic Freedom Index is made up of 50 indicators organized into 10 dimensions (see Table 4. The higher the score on a factor. these sorts of freedoms are taken so for granted. secured by clear laws that are fully enforced by the state. Although managers monitor a range of economic issues. save. or dynamics.Page 12 of 63 ECONOMIC FREEDOM Chapter 3 used political freedom to organize discussion for a simple reason: any discussion of politics. economic freedom is the ³absolute right of property ownership. fully realized freedoms of movement for labor. Importantly. operate. they rarely cross one's minds. they are ongoing points of fascination and conflict. Trade Freedom The absence of tariff and non-tariff barriers that affect imports and exports of goods and services. and invest. safety. and goods. Freedom House applies this index to 183 countries. This index rests on Adam Smith's notion that "basic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society. individuals decide how they wish to work. and efficiency. and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process. Monetary Freedom The degree of price stability and the extent to price controls." 22 Rather than the state.1). 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. consume. however. no matter the terminology. capital. dimensions. the higher the degree of economic freedom (or. Property Rights Ability of individuals to accumulate private property. Margin Note 4 Against this backdrop. grading each's performance. conversely. these freedoms are so rare.1 Dimensions of the Economic Freedom Index Business Freedom The ability to start. liberty.
FIGURE 4. The Heritage Foundation and the Wall Street Journal. Freedom From Corruption Degree that corruption introduces insecurity and uncertainty into economic relationships.4 Economic Freedom by Region . In 2011. 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. Nevertheless.2 billion people live with high to moderate degrees of economic freedom.4 in 2010. economic freedom remains down from the pre-crisis high of 60. Government Size Government expenditures as a percentage of GDP.Page 13 of 63 Fiscal Freedom Tax burden imposed by government on its citizens. Investment Freedom Ability of individuals and firms to move resources. The majority of the world. Labor Freedom Aspects of the legal and policy framework that regulates the country¶s labor market. up from 59.7 percent. Source: Adapted from The Economic Freedom Index. roughly 5. economic freedom advanced in 2011. and property rights. the average freedom score was 59. without restriction.4).2 billion people. open markets.2 percent in 2007. with people in North America and Europe enjoying more than do others elsewhere. lives in countries where the state grants them low degrees of economic freedom. The population data indicate that most people of the world live in countries with lower degrees of economic freedom (See Figure 4. into and out of activities both internally and across the country¶s borders. Worldwide.24 More governments reiterated the importance of sound finances. regaining some momentum it had lost during the great financial crisis and ensuing global recession. Economic freedom varies across regions. regulatory reform. Approximately 1.
2 and placed in the "Free" category. moderately free. Its score of 77. debt. and repressed given the degree to which its government regulates individual's economic choices. 2011 Index of Economic Freedom. mostly unfree..2 profiles economic freedom around the world. and Venezuela. 2011). and Canada. Reprinted by permission of The Heritage Foundation. Switzerland.heritage. It indicates 6 countries have free economies. 57 are mostly not free. Singapore. 2011 (www.8 placed it in the ³mostly free´ category. Washington.2 Global Distribution of Economic Freedom The Index of Economic Freedom classifies a country as either: free.25 The freest economies are Hong Kong. The United States dropped to 9th place in 2011 largely due to increased government spending. retrieved June 1. Inc. and regulations. the United States ranked fifth with a score of 81.org. Cuba. Zimbabwe. In 2007. New Zealand. 27 are rated mostly free. 57 are moderately free. . mostly free. Eritrea. DC: The Heritage Foundation and Dow Jones & Co.Page 14 of 63 Source: Terry Miller and Kim Holmes. Margin Note 5 MAP 4. The least free economies include North Korea. Australia. and 32 are repressed. Map 4.
org/index/pdf/2011/Index2011_map. Inc.heritage. retrieved June 1. performance. 2011). 2011 Index of Economic Freedom. Income is higher in countries with higher economic freedom. Countries with high economic freedom have higher rates of growth and productivity. Reprinted by permission of The Heritage Foundation.. Washington. and potential. it more than doubles the worldwide average and is 7 times higher than in mostly unfree and repressed . Margin Note 6 The Value of Economic Freedom: Economic freedom helps explain a country's development. Higher-rated countries generally outperform laggards on a variety of measures. 2011 (www.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. DC: The Heritage Foundation and Dow Jones & Co.Page 15 of 63 Freedom Map Design Info: Map Source: http://www.heritage.
data indicate a positive relationship between economic freedom and various measures of economic performance and quality of life. Free.253 Inflation Rate Inflation Rate. 1 4. Positive relationships exist between economic freedom inflation. Repressed.464 GDP Per Capita. 0. Mostly Unfree. Mostly Free. ModFree. and employment. Mostly Free. 3.2 Inflation Rate. 10 .Page 16 of 63 economies (See Chart 4. political openness.2). Economic freedom pays social dividends.2 Economic Freedom and Leading Economic Indicators GDP Per Capita.987 GDP Per Capita ($) GDP Per Capita.6 Inflation Rate. 0.8 Inflation Rate. Margin Note 7 CHART 4. Collectively. 39. 33. economic stability. literacy.9 . 6. 26 The data support the argument that liberating resources from government control improves financial performance. and standards of living. Mostly Unfree. Repressed.495 GDP Per Capita. 4. Free.9 Inflation Rate.770 GDP Per Capita. 5. Mostly Free. and environmental sustainability show positive relationships with economic freedom. Life expectancy.
1 Unemployment Rate. 2011). 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.5 Unemployment Rate. contested the usefulness of market fundamentalism. Margin Note 8 Changing marketplace conditions and unfolding political trends indicate that MNEs face increasingly uncertain economic times. 8. Throughout the world. 5. and spurred rethinking government¶s role in the economy. should control the animal .27 Downturns in many economies signaled the biggest global economic contraction since the Second World War. The scale. Reprinted by permission of The Heritage Foundation. some argue. Mostly Unfree. 21 . The global financial crisis has disrupted the expansion of economic freedoms.6 Unemployment Rate. 12 Source: Adapted from data reported by the Heritage Foundation and the Wall Street Journal. Increasingly. symbolized the supremacy of economic freedom. economic freedom. Free. and equity valuations tracking or doing worse than during the Great Depression.5 Unemployment Rate.Page 17 of 63 Unemployment Rate Unemployment Rate. Mostly Free.heritage. managers could safely presume that countries would adopt reforms that increased economic freedom. countries abandoned the policies of state control and adopted the principles of capitalism and the practices of economic freedom. Repressed. scope. Its immediate aftermath saw industrial production. not less. in signifying the triumph of capitalism over communism. Free markets had consistently outperformed "not free" countries. 9. Trends in Economic Freedom For the past few decades.org (accessed June 6. and swiftness of the global financial crisis highlighted the limits of a market economy. The state. The fall of the Berlin Wall in 1989. at www. exports. Large and growing majorities believed that people¶s lives benefited from more. Mostly Free. The 2011 Index of Economic Freedom.
Page 18 of 63 spirits of free and unfettered markets. 80 percent of Americans regarded the free market as the best economic system for the future²then the bellwether of support. redistributing wealth. costly commodities. many economies have stabilized. Conversely. A leading survey. complicate recovery. Installing safeguards to prevent another round of the crisis has increased state control of economic affairs. Today. 28 Some 23 percent believed capitalism is fatally flawed. safeguarding citizens. Rather than an ideal to emulate.30 . managers struggle to pinpoint the implication of these market trends to economic freedom. stabilizing panics. Countries. Each and all decreases economic freedom. support had fallen to 59 percent. five years down the road from the start of the crisis. sluggish growth. CRN In 2002. 38 percent in Mexico. they are wary of free markets. Still. question the legitimacy of the quest to maximize economic freedom. 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. in turn. reduces economic freedom. 35 percent in Brazil. Dissatisfaction with capitalism prevails across the globe. Now. emerging economies now match or have overtaken the United States in their enthusiasm. Many called for a new economic system²including 43 percent in France. regulating markets. Nominally Communist China is one of the world¶s strongest supporters of free markets. show weakening support for free markets. especially those initially hit hardest by the global financial crisis and still experiencing anemic growth. reported that an average of 11 percent across 27 countries held the opinion that capitalism works well. By 2010. as the world regroups.29 Our opening case cautions qualifying attitudes in developed versus emerging economies. which we evaluate in the closing case of this chapter. and sustaining demand. for example. All in all. and 31 percent in Ukraine. sovereign debt crises. at 68 percent. up from 66 percent in 2002. Fear of Free Markets The causes and consequences of the global financial crisis. Some 67 percent of Brazilians and 59 percent of Indians see free markets as the best option for the future. about half of the "world" reasons that the free market is still the best option. This. They hasten to add that its endemic flaws require reform and regulation. rising unemployment.
Here we see Indian passengers hanging onto a crowded local train in ways that defy reason. consequently. Dire circumstances inevitably fuel public clamor for government intervention. support it. and openness to trade and FDI are telltale signs. In summary. people on the go need to move. clamor for change. the question of whether free markets and their endorsement of maximum economic freedom create the superior economic system is no longer a strawman. Arguably. Low inflation.wikia. less economic freedom. In others. falls short of missing India's economic surge. Those who lives are improving. Meeting these standards powers performance and boosts potential. notably western markets. we are likely to see more people question the legitimacy of capitalism and the free market.31 In many countries.com/wiki/File:043_overcrowded_train_India. prudent public finances. the exact opposite takes place.Page 19 of 63 Caption: Despite the risk. the financial crisis signals a radical shift in the legitimacy of free markets and. by extension. economic freedom. Continuing skepticism will push for greater state control and.jpg The Test The test of any economic system is straightforward: it must apply sound macroeconomic policies that sustain a productive economic system. Presently. The risk of traveling this way. as citizens seeking stability appeal to politicians. if the legacies of the global financial crisis persist or worsen. praise for the virtues of economic freedom has turned to criticism of its deficiencies. notably emerging economies. Specific link isttp://uncyclopedia. Photo is content/royalty-free. apparently. Source: Uncyclopedia the content-free encyclopedia that anyone can edit. those whose lives are deteriorating. low unemployment. . In situations like those that we see today. Their evolution and interplay will alter the relationship between markets and governments. ultimately the legitimacy of the prevailing economic outlook is tied to how people feel about their particular situation.
5 Pick up from PowerPoint file. implement fiscal and monetary policies. and ultimately. authorize property rights. Three types of economic systems stand out: the market. make most economic decisions is a market economy. mixed. Market Economy A system whereby individuals.Page 20 of 63 TYPES OF ECONOMIC SYSTEMS Wherever they go. Managers often begin analysis by evaluating the economic system in a country. 5) Margin Note 9 Figure 4. This leads them to investigate the structures and processes that guide resource allocation and business conduct. and command economies (See Figure 4. It is anchored in the philosophy of capitalism and its principle that private . managers question how the host government might regulate the economy. rather than the government. interpret economic freedom.
Switzerland. As Adam Smith observed. buy.´33 Deregulation helps . proponents concede that the invisible hand is not infallible.g. Margin Note 10 Concept Check 4 The market economy champions the principle of laissez-faire." Whatever the translation. the anchor of the market economy is the invisible hand of economically free agents driving growth and prosperity. Singapore. spurred by their need to maximize purchasing power. protect property rights. and the United States grants people the economic freedom to decide where to work. and risk. a market economy pushes producers. Margin Note 12 Table 4. Margin Note 11 Unquestionably. how to spend or save money. investment. national defense) and protections (e.2). Optimal resource allocation follows from consumers exercising their freedom to choose and producers responding accordingly. it suggests. there is an enduring bias toward minimal government intervention in market economies. it opposes government intervention in business affairs. environmental standards) that preempt those inclined to maximize personal gain at the expense of society¶s welfare requires some governmental involvement. Literally translated.. Deregulation Government regulations reduce individual choice²i. The more visible the ³hand´ becomes due to government intervention. quantity. and demand.32 Ultimately. what to do and for how long. the less efficiently the market works.. Government is the problem." More broadly. Australia. through their interactions with producers. Ultimately.Page 21 of 63 ownership confers inalienable property rights that legitimize profits earned by one's initiative. minimum wage. Therefore. it sees the ³invisible hand´ of self-interested consumers as the foundation of efficient economic activity. by letting the private sector regulate supply and demand. Rather. consumers direct the efficient allocation of resources and the optimal valuation of assets. to make products that consumers. improves production and consumption decisions. With that said. Consumers. optimally determine relationships among price. supply. The need for public goods (e. by virtue of what they do and do not buy.e. spurred by the profit motive. it advises "let it be" or "leave it alone. "let do. traffic lights.. individuals¶ free choice in a market economy powers a country¶s progress toward prosperity. regulate certain sorts of economic activities. and whether to consume now or later. Consequently.g. Canada. ensure fair and free competition. a market economy calls upon the state to enforce contracts. Privatization. A market economy of the sort seen in Hong Kong. financial regulation. ³Government is not a solution to our problem.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. and provide general safety and security (See Table 4.
managers operate in economies that exhibit many but not all methods of state control. to generate growth spurts. and ultimately stateless society based on the government¶s command of the economy. Libya. orders state-owned companies to make computers.Page 22 of 63 markets optimize productivity. Concept Check 5 Command economies have included the Soviet Union (which was for a time the world¶s second-largest economy). typically large-scale. 35 This reasoning results in a command economy in which the government owns and controls resources. classless. For example. and Burma. the visible hand of the government. India prior to its economic reforms in 1991. Turkmenistan.36 Margin Note 13 Making the invisible hand visible means that government officials²not consumers²determine the prices of goods and services. Although nominally a socioeconomic structure and political ideology. if the government wants computers. High productivity continues as long as the state can utilize idle resources. and unprofitable. it collects taxes and buys computers at market prices. capital-intensive. usually labor. North Korea. These sorts. State owned companies. Iran. inefficient. at what price. command economies can perform well for short periods. Command Economy In theory. More often. in a market economy. . with little regard for price. effort. and in what way. commanding the authority to decide what products to make. and risk. not the government. China during its Great Leap Forward era beginning in 1958. communism champions state ownership of resources and control of all economic activity. have few resources to upgrade or incentive to innovate. 34 Antitrust Legislation Antitrust laws prompt industries with as many competing businesses as the market can sustain. communism calls for an egalitarian. we see few pure examples. Above all. Products are usually in short supply and there are few substitutes. Controlling everything and everybody lets the state mobilize idle resources. Property Rights Property rights give entrepreneurs ownership of their idea. Indisputably. will prosper from their ingenuity. Product quality is erratic and typically deteriorates. Today. Venezuela. notably Cuba. In a command economy. in what quantity. Protection boosts economic freedom by assuring individuals. the bias toward political stability and social control suppresses economic freedom. such as Iran. They prevent monopolies from exploiting consumers and restraining market growth. and Afghanistan during the rule by Soviet occupation and the Taliban.
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. helps the impoverished by fairly distributing income. Vietnam. U. fall between the market and command economies. Regarding the former. prevents the consolidation of wealth and power.39 As the free market British economy cratered. the government may own companies that manufacture computers. as opposed to the market. Political agendas. France¶s mixed economy perservered. and extensively regulates the market. Russia. S. and generous social safety programs better navigated the economic upheaval than had their free market counterparts. regrouped and wondered what next. It utilizes the market to allocate resources. the state intermingles ownership of some resources. the socialism of Denmark supported its steady economic performance and citizens¶ status as the happiest people in the world. are presumed to far more conscientiously instill an egalitarian ethos into the economy. in allocating resources. as does communism. Zimbabwe. tougher job-protection laws. A mixed economy is a system in which economic decisions are principally marketdriven and ownership is largely private. Mixed Economy Most economies. but it subjects investment to social control largely directed by the government.38 For example. and protects society by limiting abuses of market power. besides optimizing efficiencies. broadly labeled mixed economies. Countries that favoured a strong state presence.40 Advocates of the mixed economy do not unconditionally endorse state intervention as a panacea. also defends the weak by supporting low unemployment. Socialism holds that a fair and just economy. and innovativeness found in free markets yet grants the state the authority to prevent individualism from harming the welfare of society. fall in the "mostly unfree" and "repressed" categories of the Economic Freedom Index. signaled to producers through the price system. More specifically. This mandate requires a country achieve the efficiencies. Margin Note 14 A country's adoption of the socialist philosophy explains its decision to forsake the market or command economy. . Socialism advocates regulating economic activity with an eye toward social equality and fair distribution of wealth. Governments."37 The mixed economy integrates elements of the command and market systems. the slate of officials. As the economically free U.Page 23 of 63 Belarus. Ethiopia. determines production.41 Hence. centralizes economic planning. higher taxes. the interaction of supply and demand. as does capitalism. the government permits market forces to influence quantity. The aftermath of the global financial crisis corroborated many of these principles. productivity. but the government intervenes. the extent and nature of government intervention differs from country to country. Rather than instructing the state-owned firm how many computers to make. and social circumstances shape how the government balances economic freedom and state control. and China. from slightly to extensive. stabilizes the system by responding to market failures. heavier regulation. Regarding the latter. At present.S.
But. . relocated to China. Instead of politicized revolutionaries promising a brighter future. Brazil. leverages control of the financial system to provide low-cost capital to domestic industries. like China. The rest do not. when. some. China's disruption of the solar power industry prompted many firms to shut down. 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. such as Evergreen Solar. Germany. or 18 percent of all. Politics has a profound and pervasive impact on the performance of markets. and Saudi Arabia. Now. will governments reclaim the commanding heights of the economy.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. State Capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. Recall our earlier profile of GCL-Poly Energy of China.Page 24 of 63 Japan. 33 countries. it is not. Venezuela. France. practice State Capitalism. Map 4. manages trade relations and exchange rates to promote exports and punish imports. State Capitalism relies upon skilled technocrats whose goal is developing a powerful. Swede. and determining potential? For decades. They typically fall in the "mostly" and "moderately" free categories of the Economic Freedom Index. State Capitalism does not have an ideological component--the government manages markets for long-term political survival and power projection. the global financial crisis has thrown markets into disarray. In some ways it is. Notwithstanding the dividends of economic freedom. in many others. world-class economy that unconditionally reinforces the power of the typically one-party state. Most. United Arab Emirate. North Korea and Cuba. and India. economies had steadily adopted the free market model given the success of countries that had migrated from command and mixed to market economies. protecting hard-won economic freedoms? Or. The government uses markets to promote stability and growth. Austria. Margin Note 15 Looking to the Future: Is State Capitalism a Detour or Destination? Managers question will free markets prevail. so few countries maximize it. State Capitalism is an economic system whereby the State decides how. taking control of development. regulating performance.42 The State develops national champions. we see countries enforcing greater state control of the economy. relied on quick approvals. Russia. and maintains accommodative legal and regulatory systems. So. and where assets will be valued and resources allocated. cheap government loans. Put differently. Zhu Gongshan. and broad governmental support to build a world-class company in 15 months. the owner. grant individuals substantial economic freedom. many reflect on a perplexing feature of the economic environment. Some of these have a command economy--notably. not to enforce an abstract ideal or promote the cult of personality. thereby creating the prosperity and wealth that maximize state power and supports its continued rule. South Korea. buffeted by the meltdown. Mexico. Foremost. As they do. However.
State Capitalism has little need for an independent judiciary. the State owns its national champions. Officials fan economic nationalism. Gaining Momentum The global credit crisis has expanded the scale and scope of State Capitalism.Page 25 of 63 Moreover.45 Whether they advocate economic freedom or state capitalism remains to be seen. including all major banks. National. transportation. the State favors local companies at the expense of their foreign competitors. many will follow. Asia. communication. China's provinces and cities run thousands of medium-sized and smaller ones. led China to recruit Evergreen Solar. the State stays in the shadows. resets funding. and public enterprise prevail. public wealth. and stable industry settings. goes the reasoning. media. If need be. In the event plans go awry. its three telecom carriers. The State games the system. where it goes. Public investment. mining. most extensive rise out of poverty any . More fundamentally. and direct market development. a technology rich U. whether in the Middle East. revises policies. Under normal circumstances. and prevent the accumulation of vast wealth and powerful selfinterests that threaten social harmony. China is the majority owner of 99 of the 100 largest publicly listed Chinese companies. or South America. State Capitalism professes to better protect protected social values. as needed. higher taxes. favorable regulations.44 Presently. metals. its policies. Allowed to run free.S. shape operations.43 Furthermore. market economies encourage the psychology that greed is good. Eastern Europe. both good and bad. Only a strong state. the State steps in. influencing activities and shaping outcomes. the state attracts technology rich foreign companies. the Chinese renaissance has shown that Western-style economics is no longer the only viable route to modernization. the state typically treats the legal system as an apparatus that legitimates. Bolstering its developing solar power industry. the invisible hand is visible--but only when necessary. company. equalize income distribution. State capitalist economies. and more generous social safety programs dealt more successfully with market disruptions than did their free-market counterparts. capturing competitive advantages through whatever means necessary. The State promotes domestic markets as sanctuaries for national champions. for example. Countries that favored a larger state presence. using state-owned banks to provide cheap loans. Collectively. Many see China as the bellwether. 129 huge conglomerates in finance. For the most part. tougher job-protection laws. its three major oil companies. The government explicitly promotes the growth of particular industrial sectors and companies in order to speed economic development.46 China has used its brand of capitalism to develop and direct the world's fastest-growing economy that has powered the swiftest. For instance. and its major media firms. some 70 strategically important countries worldwide are at a critical crossroads in determining their political and economic future. Its goal is developing national companies into global leaders. No matter the question. have telltale marks. provincial. Over the past 32 years. and redirects activities. stops it from devolving into psychosis. Officials install barriers to trade and investment in order to generate local development and prosperity. and local officials control resources to fund investments. and so on answer directly to the Chinese central government. heavier regulation. Regulations restrict foreign companies from entering strategic industries.
e. along with the surging success of State Capitalism. helps explain why 80 percent of the countries in the world are moderately free."47 Given economic circumstances in the world today. covered in Chapter 3. Africa. a brief note regarding how we classify countries is in order. . This type has low per capita income--an average of $2. The vast majority of their citizens have a low standard of living with limited access to few goods and services. and Manmohan Singh of India. Matters of income and wealth often anchor analysis. mostly unfree. AND POTENTIAL Managers use various measures to assess a country¶s economic development. Luiz Inácio Lula da Silv of Brazil. find State Capitalism attractive. amount of electrical power generated. Leaders of the BRIC cohort. further "persuaded the Chinese leadership that state control of much of the country's economic development is the steadiest path toward prosperity--and. Arcing though Asia. They also monitor indicators of the direction and dynamic of transition from one type of economic system to another. Hu Jintao. convention dominates practice. at their Second Summit Brasilia. one-party political systems.963 in 2009. and Latin America.. newspaper circulation patterns. the Middle East. number of wireless subscriptions. domestic tranquility. one should not be surprised if others. and potential. It relative success. Managers elaborate their analyses with indicators of sustainability and stability. Developing countries comprise the largest number of countries (151 or so. not just surviving but prospering during the great financial crisis. therefore. authoritarian governments emulate China¶s model of State Capitalism. Dmitri Medvedev of Russia. particularly authoritarian. performance. of China. MEASURING ECONOMIC DEVELOPMENT.Page 26 of 63 nation has ever seen. or repressed in terms of economic freedom.48 Democracy's retreat. PERFORMANCE. Margin Note 16 Before reviewing each.5 billion) in the world. We follow the World Bank¶s lead in labeling low. Some measures may be informal or idiosyncratic: i. or military officers running companies.and middle-income nations as developing countries. Brazil. according to the World Bank) and have the highest number of inhabitants (a combined 5. Typically.
we may see United States and similar countries called established market economies (EMEs).1).wikimedia. when one speaks of the emerging economies. Their citizens have a high standard of living with access to a variety of goods and services. advanced markets. the BRICs are the vanguard of change. Russia. others will follow. New Zealand. Concept Check 6 .Page 27 of 63 Direct link to high resolution photo: http://upload. Indonesia. Notwithstanding the variability. Bahrain. Table 4. In the future. Developed countries include Japan. E for Egypt. C for China Add S for South Africa Adds K for South Korea Adds I for Indonesia. Brazil. Oman and the United Arab Emirates N-11 (The Next 11) Bangladesh. V for Vietnam. South Korea.970 in 2009. there are approximately 30 or so emerging economies in the world. Mexico. Many presume that where the BRICs go.org/wikipedia/en/wiki/File:BRIC2010.jpg Source file that contains links to high res photo: https://secure. Pakistan. developed countries are those with high per capita income-. Canada. T for Turkey Adds M for Mexico Adds E for Eastern Europe. (See Map 4.3 lists some of the acronym used to sort them. and sophisticated institutional framework but comparatively slower growth. Australia. Table 4. T for Turkey. relatively prosperous developing countries such as China. both good and bad. Currently. Nigeria. R for Russia.3 The Emerging Economy Alphabet Members B for Brazil. Although much larger in scale and scope than other emerging economies. I for Indonesia. and China. Kuwait. the United States. Less commonly. T for Turkey Adds A for Arab countries--Saudi Arabia. and many in Western Europe. the core group consistently includes Brazil. high standard of living. Egypt. these countries are called high-income countries.jpg The faster growing. Typically. I for India. India. Philippines. or industrial countries. Iran. Turkey and Vietnam CIVETS C for Colombia. and India are referred to as emerging markets or emerging economies.an average of $37. S for South Africa Acronym BRIC BRICS BRICK BRICIT BRIMC BRICET BRICA In contrast.wikimedia. Qatar. given their high per capita income.org/wikipedia/commons/d/da/BRIC2010. one speaks principally of the BRICs.
4 The 15 Largest Economies by GNI.476 2. Table 4. Thus.Page 28 of 63 GROSS NATIONAL INCOME Gross national income (GNI) is the broadest measure of a country¶s economy.114 1. billions)49 14. less similar payments it has made to other countries. . Reproduced with permission of the World Bank. it increases South Korea's GNI. Copyright 2011 by the World Bank. 2009 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 ** Country United States Japan China Germany France United Kingdom Italy Brazil Spain Canada India Russian Federation Korea. It measures the value of all production in the domestic economy together with the income that the country receives from other countries (mainly interest and dividends). the value of.416 1.476 1.558 2. a Samsung TV built in South Korea as well as the portion of the value of a Samsung TV made in Malaysia using Samsung's resources is counted in South Korea's GNI. if Samsung's Malaysian subsidiary repatriates profits to headquarters in Seoul. Mexico Australia World GNI (US$.857 4.750 2.324 966 962 957 $59.233 4.367 1. Similarly. Margin Note 17 TABLE 4. the portion of the value of a Sony TV built in South Korea using Malaysian resources counts in the GNI of Malaysia.4 identifies the 15 largest economies in the world in terms of GNI. Rep. Lastly. say.856 3.132 Source: World Bank Development Indicators 2009.557 1.
For example.CRN.52 Chart 4. Often. size of the population.51 GDP helps assess countries in which the output of the multinational sector is a significant share of activity. not GNI. Improving Analysis GNI and its offshoots estimate an economy¶s absolute performance. They do not measure the rate of change in an indicator. the opposite is true. Looking at countries in terms of their growth rate shows a wide range. almost 90 percent of Irish exports are made by foreign-owned firms. Margin Note 20 Rate of Economic Growth Gross figures are a snapshot of one year. and purchasing power of the local currency. China grew more than 11 percent per annum.3 GDP±±Real Growth Rate Nominal GDP increases from year to year partly because a country produces more goods and services and . imports. no matter whether domestic or foreign-owned companies make the product. GDP plus the income generated from exports. but TVs made in Malaysia by Samsung do not. However. minus the income earned by foreigners from domestic production. Some may mistakenly presume that they are also more productive and faster growing than lower-ranked countries. They can mislead managers when comparing countries.50 Consequently.3 reports the real GDP growth rates for various developed and developing economies. Meanwhile. world GNP and world GNI are equal. economic powers like the United States. and Germany consistently claim the top rankings when sorted by GNI. more accurately measure its performance. noting the assumptions of the measure and characteristics of a particular country.2 percent growth over the same span. managers crosscheck their analysis. Managers improve GNI's usefulness by adjusting for the rate of economic growth. both Samsung and Sony TVs made in South Korea contribute to South Korea's GDP. GDP. plus the income earned by its citizens abroad. For example. between 2000 and 2008. Japan. Margin Note 19 Gross Domestic Product (GDP) The total value of all goods and services produced within a nation¶s borders. Chart 4. is the gross domestic product.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. Technically. Interpreting present and forecasting future performance requires pinpointing an economy's growth rate. and the international operations of a nation¶s companies equals GNI. Therefore. Japan averaged 1. their slightly calculation can result in small discrepancy at the country level. For example. Conceptually.
Page 30 of 63 partly because prices increase. Chart 4.3 Real Growth Rates for Select Countries. Real GDP strips out price effects in order to estimate the annual growth in the actual production of goods and services. 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 . This conversion shows that many emerging markets are growing faster than developed markets.
$7.900.995 in 2007. However. China is the world¶s second largest economy according to GNI. China has been one of the fastest-growing economies over the past 30 years.68 trillion in 2000 to $4. Brazil 84th ($8. with a value of $203. y The new data for the box are : o o o low-income countries $995 or less lower-middle countries is $996 to $3.360).gov (accessed June 1. at www.040). Japan 32nd ($38. like many other economic indicators. China 125th (3.080).409 (as of June 2011) is distributed across countries.945 upper-middle countries $3. most extensive rise out of poverty in history.946 to $12. by the number of people who live in a country.55 From the high of 1.180). 2009 GNI per capita measures a country¶s performance in terms of its population.500 in 2003. Monaco ranked first in the world by GNI per capita in 2009. there is a tremendous range.54 This conversion is common sense. GNI may be low in absolute terms. Legend for Map 4. For example.cia. For example.3 y Please pick up the insert box shown in the lower left corner on page 139 of the 13th edition.000 citizens puts it among the smaller economies of the world. The growth rate of GNI indicates a country's economic potential: if it grows faster (or slower) than its population.728 in 2009. It ranks in the lower-middle income tier for GNI per capita given its immense population. 2009. Worldwide GNI per capita was $8.Page 31 of 63 Source: Central Intelligence Agency. Box title GNI per capita. adjusting GNI by population measures a country¶s relative performance. In comparison.3 GNI per Capita.011 in 2005 and $5.53 It also indicates business opportunities. Therefore.195 . Commensurately. 2011). the country's standards of living are rising (or falling). A country with a high rank for GNI may rank lower for GNI per capita. such as is the case for Monaco whose 33. up from $7.650). The World Factbook.34 billion in China to the low of 50 in the Pitcairn Islands.857 trillion in 2009. and India 154th ($1. averaging double-digit growth for many. China's GNI has gone from $1. It has seen the swiftest. Rising income has fueled consumer demand.922. World Bank income groupings. the United States ranked 18th ($46.201. given how unevenly the world¶s population of 6. Population Size Managers adjust GNI. MAP 4. thereby attracting foreign investment CRN. For instance.
Alternatively. Revisiting our comparison of the United States and India finds that India¶s GNI per capita in 2009 is $1. Therefore.00 in the United States given an exchange rate between India and the United States of 44.5 shows the impact of adjusting a country¶s performance for PPP. they report an average GNI per capita in the mid-tens of thousands. Russia.900 to $131. Japan.4 change. and Canada. a loaf of bread that sells for 44. 58 TABLE 4. Currently they account for about 15 percent of world population but more than 70 percent of global GNI. Map 4. France.38 INR to US$1. Its GNI per capita falls from $203.56 Table 4. 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. Margin Note 21 We calculate PPP between countries by estimating the value of a universal ³basket´ of goods (e.694 when adjusted for the reduced purchasing power a unit of currency has in high-priced Monaco. PPP reduces some of the otherwise extreme variability in many country-to-country comparisons.57 The opposite occurs in the case of countries with expensive standards of living.g. 2009: GNI Adjusted for PPP . it lets us determine how much "stuff" a dollar will buy in a particular country. For example. China.5 The 15 Largest Economies. managers adjust GNI per capita for a country in terms of purchasing power parity (PPP).38 rupees in India should cost US$1.196 or more Map 4. On average. such as Monaco. move up.4 profiles the countries of the world in terms of GNI per capita adjusted for PPP. Though comprising a large share of world population.180 but rises to $3.. Instead. May 1. 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. Consequently.g. for instance. soap and bread) and services (e. it presumes that a dollar of income in Minneapolis has the same purchasing power as a dollar of income in Mumbai. high-income countries $12.3 shows that high-income countries are clustered in a few regions of the world. the unadjusted rankings reported in Table 4. even though the cost of living differs between the United States and India.250 when adjusted for local purchasing power. the United Kingdom. Second. World Bank. telephone and electricity) that can be purchased with one unit of a country¶s currency. they have a small share of the world¶s GNI and report GNI per capita from the mid-hundreds to low thousands. First off. Lower-income countries are spread throughout the world. and Italy drop down.Page 32 of 63 o y Source: World Development Indicators database. 2011. India.. Mexico. Purchasing Power Parity The calculation of GNI per capita does not account for the cost of living from one country to another.
. Rep.3 shown on page 143 of the 13h edition.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.262 $1.603 $2. World Bank.170 $4.514 $1. It lets managers compare economic differences between nations by taking into account the relative cost of living.464 $1. Copyright 2011 by the World Bank.888 $1.758 $3.Page 33 of 63 Rank Country GNI by PPP (US$. 2011.331 $1.845 Source: World Bank Development Indicators 2009.189 $1.011 $2.025 $71.269 $3. 000 trillions) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 ** United States China Japan India Germany Russian Federation United Kingdom France Brazil Italy Mexico Spain Korea.302 $2. Canada Turkey World $14. Reproduced with permission of the World Bank.4 y Please pick up box in the lower left corner of the 4. Box title is GNI (PPP) per capita Source: Source: World Development Indicators database.011 $9.976 $1. MAP 4. Legend for Map 4. May 1.
and dependent on. it endorses a broader accounting of the gains and costs of growth²as seen in this chapter¶s Point-Counterpoint--to better gauge an economy. partially profile a country¶s performance and potential. GNP. Margin Note 23 Consequently. the reasoning goes. and subtracts the costs of crime. the natural world. and cost-of-living. free time. livelihood security. For example. and family breakdown. and family breakdown.´59 As such. or GDP for green economics. population health. unlike GDP. intellectual. there is no consensus on how to adjust GNI. goes this reasoning. GPI values unpaid voluntary and household work as paid work. GNI. Knowledge. and educational attainment. including adjustments for growth. narrow indicators. they will given that improving the human condition inevitably improves economic performance. 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. as . population size. 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. Ultimately. and GDP. Presently. Effectively. NNP does so by depreciating the country¶s assets commensurate with their use to generate growth.Page 34 of 63 Broader Conceptions of Performance and Potential Measures of gross national income emphasize monetary aggregates. GDP versus GPI is analogous to the difference between the gross profits versus net profits of a company--net is gross less the costs incurred. Longevity. as measured by life expectancy at birth. GPI will be zero if the costs of pollution. Accordingly. so too should countries. holding all other factors constant. y Human Development Index (HDI) Matters of human development do not show up immediately in income or growth figures. Green economics holds that a country¶s is a component of. and GDP. equal the monetary gains from the production of goods and services. Furthermore. pollution. As must a company depreciate its tangible and intangible assets when making a product. 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. So. notably GNI. 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. GNP. However. estimating a country¶s degree of human development in terms of the physical. only partially represent current performance and long-term potential. Measuring the monetary quantity of market activity without accounting for the associated social and ecological costs misrepresents performance. Managers enrich assessment by estimating sustainability and stability. equity. crime.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.
GNH measures a country's ability to promote equitable and sustainable socioeconomic development. No matter how high income rose. the United States is far in front of France and Germany. like beauty. people in rich countries do not appear to be any happier than people in poor countries. the emerging science of happiness reports that nearly 70 percent of personal satisfaction is determined by the quantity and quality of relationships. Accounting for life expectancy. however. there is growing criticism that GNI and its offshoots are at best. family relations. 64 "Happynomics" calls for moving ³from the concept of financial prosperity to the idea of emotional prosperity. secondary. as measured by GNI per capita expressed in PPP for U. friendship. and at worst. However. and actualization. and income equality. conserving the natural environment. such as love."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. insight should clarify measures. In addition. there has been little evidence that it improved peoples' reported happiness. Potential items. a country's economic performance and potential is represented by how well it . rated just on monetary measures. estimation is difficult. dollars.S. rather than simply emphasizing financial performance. and Standard of living. policy makers have puzzled over a paradox that casts doubt on the validity of monetary aggregates as measures of performance. some may say worrying about happiness unnecessarily confuses economic analysis. In the meantime. is often in the eye of the beholder.66 Granted. like safe streets and clean air. managers can consider: y Gross National Happiness (GNH): Progressive society presumes material and spiritual development occur side by side. flawed. makes living standards in France and Germany about the same as those in the United States. one must reinforce the other or both suffer. and tertiary gross enrollment ratio. which can be measured? The intricacies of happiness capture increasing attention.62 Namely. leisure time. Therefore. Defining happiness.63 Consequently. and establishing good governance. preserving and promoting cultural values. misleading. Concept Check 7 Stability Measures For several decades. Furthermore. how does one value elements. are tough to pin down. y Happy Planet Index (HPI): Reflects the utilitarian view that most people wish to live long. Margin Note 24 Presently. healthy. an unhappy citizenry may be a leading indicator of a significant change in government policy that alters the economic environment.Page 35 of 63 measured by the adult literacy rate and the combined primary. For example. happy lives. not by economic output or wealth creation.
and Austria. is the objective. from number one through number 10. and people in other countries. social relationships. Sweden. y Your Better Life Index (YBLI) This index measures well-being and perceptions of living conditions by evaluating 11 areas: housing. the environment. education. incomes. Israel. Switzerland.Page 36 of 63 helps its citizens do so while not infringing on the opportunity of future generations. Canada. YBLI pushes the "boundaries of knowledge and understanding in a pioneering and innovative manner«It has extraordinary potential to help us deliver better policies for better lives. Australia. communities. It funds safety nets and government backstops. It reduces violent conflict. institutions. security and the balance between work and family. it recognizes increasing interest in evaluating performance in terms of matters that people worldwide believe are important but which fall beyond the narrow scope of monetary measures. It creates material improvements . It raises living standards. It morally stabilizes society. health. Growth provides long-term benefits to everyone in every country. Said OECD secretary general. the administration of institutions. and society. to do the same. It liberates those trapped in poverty."67 This index indicates that the 10 happiest countries in the world. The HPI advocates measuring the environmental costs of growth while emphasizing that maximizing happiness and health. the Netherlands. Developed by the Organization for Economic Cooperation and Development (OECD). creating the basis for individuals. are Denmark. employment. Growth is life. not monetary wealth.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. Norway. Finland. general satisfaction. it is a fundamental necessity.
more concerned about their children¶s future. usiness Dividend Growth stimulates higher employment.Page 37 of 63 that comfort life. and virtues of democracy. state. regional. People specialize in what they do best and. 34 percent of the global population survived on less than $1 a day. history shows cheap government does not translate into good government. freer markets had fueled economic growth. and sustain society. Rising asset valuations. province. tolerance of diversity. Without growth. Moreover. growth spurs us to consume them wisely. In 1990. for example.'s strength is "mostly based on the success of American business" and that 90 percent admired people who "get rich by working hard. Growth creates the resources that promote transparency of authority. people endorsed the virtue of growth. reducing it to 22 percent of the world--about 1. they become more open-minded. more influenced by abstract values than traditional norms. wealth engenders humanity. income. the keystone to the moral stability of society. pathways of social mobility. presuming they survive. these drive the efficient allocation of resources. suffer physically and psychologically. Together. It creates jobs. People experiencing rising incomes and economic improvement are commensurately tolerant of and benevolent toward each other. Growth in many impoverished countries has reduced the number of people living in abject poverty. outsource the rest.6 billion people. thereby providing local. Moral Stability Growth affects social attitudes and political institutions. A thriving economy boosts tax revenues. Poverty Reduction Notwithstanding the kindness of strangers. enrich. By making resources valuable. and resolute confidence in surviving tough times supports the prosperity of individuals and companies. wealth. In a word. and more inclined to have faith in the future. Let¶s take a closer look at the dividends of growth. humanity loses the war against poverty. Free from the tyranny of ceaselessly seeking sustenance and shelter. more supportive of free markets and democracy. Peace Dividend Growth creates more opportunities for more people in more places. People who see the potential for prosperity behave peacefully. Environmental Benefits Growth encourages innovations. in the face of the growing abundance of goods and services. Billions. Although appealing. stabilizing wealth effects. courtesy of pro-growth public policy. openness of opportunity. capital investment. . and national governments the monies to finance spending projects that support. fair and just laws. growth is the only means to alleviate poverty for the billions struggling to sustain life. more inclined to settle conflicts peacefully. The falling ratio of energy consumption per unit of GDP over the past 40 years. amidst the panic of the recent global crisis. Some 76 percent of Americans agreed that U. enables them to think and behave differently.S. Moving poor people into the middle class. By 2008."69 Fiscal Dividend Government finances are ultimately at the mercy of growth. testifies to the benefits of growth. and profits. and prosperity for individuals and society.
their imagination. In 1900.´ In theory. faster. our position is crystal clear: No matter the costs of growth. denying. they pale in comparison to the unacceptable price of not growing. the promise of endless milk and honey for all devolves into a bitter delusion. trapped on hedonic treadmills in the quest for newer. . Unquestionably.´70 People. growth imposes costs on individuals. life expectancy at birth was 47 years in the United States. Still. creating extreme inequalities of income. Put bluntly. It rewards the financially strong but punishes the economically weak. and their industriousness to find a better way. income. Where one stops and the other starts is tough to pinpoint. In a phrase. Eliminating the pursuit of progress leaves society stuck in sloth. ultimately. alternative energy)²is powered by the quest to grow. However. finding comfort in the rising quality-of-life standards. and liberty. Still.. shinier. falsehoods. economic growth oversells and underdelivers. people now need work just half the time they once had to. fostering morality. Counterpoint > No We accept the premise that growth supports life.g. and taking solace in improving health care. Once you untangle the strands of half-truths. many struggle to keep their leaky boats afloat. It creates free time to spend with family and community but then demands mobility and migration that fracture groups. wealth. growth does not deliver the benefits it promises. or fancier. relying on new tools to boost productivity. transparency. the survival of humanity and the planet. Life Growth supports longer lives. after a century of growth. as the Counterpoint argues.Page 38 of 63 Quest to Excel Growth incents people to bring to bear their ingenuity. better. It promises newer. and the planet. the costs of these benefits² costs that seem to grow faster than growth itself²imperils civil society and. However. tolerance. justice. humanity. Pushing back the frontier of human experience²whether it involves the trivial (e. and self-interests that lace insidious pro-growth arguments. confuse consumption of the latest and greatest as the path toward actualization when. mobility. It liberates people from old routines but enslaves them to new habits. as an economy grows. the benefits of growth are unevenly distributed. In reality. when growth stops. bigger. The problems of growth span the immediate and the future. Growth Is Inefficient The defining benefit of growth is that ³a rising tide lifts all boats. By 2011. as this list shows. cooler products to enable self-fulfillment but then restarts a never-ending cycle of hope and deception. We agree that over the long run. in actuality. Moreover. Growth Is Misleading Despite the hype and hoopla.g. forms of entertainment) or the substantive (e. and power. the destination is alienation. a share of the global population have seen their patchwork-rafts capsize. condemning people to ³spiritual despair scarcely concealed by the frantic pace of life. ignoring or worse. Moreover. and wealth for all.4 years. it generates higher wages. every day. each strikes society hard.. it was 78. increasing growth has lifted the tide. we fully agree that these costs are striking. and a minute fraction upgraded their yachts. to make a difference. decay starts.
"everybody" pays the price of those costs with a despoiled environment. Growth Destroys Individuality Growth¶s mandate to optimize efficiency requires massification²mass production. but at high cost. and so on. humanity will require five planets of natural resources just to keep the game going. warped society. slow-motion death spiral of the ecosystem. Ironically. Managers also . Mother Earth is going to stop current growth patterns sooner than later. and the transformation of nominal democracies into functional oligarchies puts the world at the proverbial fork in the road. GNI. however. HDI. mass markets. and toxic land²let alone global warming. GDP. human consumption is 30 percent larger than nature¶s capacity to regenerate. and financial servitude. mass distribution. our position is straightforward. when we measure the value created by an economy²say. agriculture. and GNP) and broad (e.. false hope of actualization by consumption. In summary. Ultimately. mass media. NPP) estimators profile absolute and relative conditions in a country. Presently. the alienation of binge-buying. and resource depletion²are the byproducts of growth. Granted. HPI. 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. They meaningfully indicate its performance and potential. in GNI²no costs are tallied. of eccentricity and character.g. the loss of craftsmanship. Epic poverty for billions. 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. local variety and richness. we need some production and consumption. Effectively. Noted one observer. Massification delivers great benefits.´ warned the Worldwatch Institute. 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. since "nobody" is responsible for the costs of externalities.Page 39 of 63 Growth Threatens Life Polluted air. no matter how hard we wish otherwise. they are mysteriously called ³externalities. mass consumption. By 2050. We can remain blissfully ignorant of the price of growth.´73 FEATURES OF AN ECONOMY Narrow (e. overproduction and overconsumption destabilize the basis for life. at current trends. poisoned water. Rather.g.´71 Current Growth Is Unsustainable Humanity plunders the earth at an unprecedented rate. Alternatively. the loss of intimacy and atmosphere.72 Barring black-swan innovation in mining.. "nobody" pays for them. biodiversity collapse. and manufacturing. lost in the endless rush of apparent gains but continually surprised by inevitable and underestimated externalities." understood to impact society but conveniently excluded while we sing praise of the wondrous ³benefits´ of growth. uniqueness and flavor. and the growth engine chugs merrily along.
like most Western markets. income distribution.97. Chronic inflation has bleak implications for companies.18. Normal horizons don¶t exist here. thereby creating demand that exceeds supply that increases prices faster than incomes. 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. poverty. or $13. Other theories. prices increased up to 95 percent per day. in Zimbabwe over the past few years. debt. interest rates.06 in 2011. or 2000 would cost you. significantly changes the cost of products. consumers spent their money as fast as they got it or else watched it turn worthless.´78 Even in normal circumstances. respectively. among others. Sometimes just buying stuff is practically impossible. 75 No matter the explanation. unemployment.000 percent and prices doubled every 25 hours.000. an item that cost $10. Inflation pressures governments to control it. consumers struggle to buy groceries. If you need something and have cash.79 Margin Note 25 History shows that chronic inflation²essentially. inflation is a decisive economic condition. too many people try to buy too few goods. or impose protectionism. hold that inflation results from increasing supply of money by central banking authorities. $57. 1960. regulate wages and prices. $227. Leading indicators include inflation. INFLATION Margin Note 24 Inflation is the sustained rise in prices measured against a standard level of purchasing power.76 Inflation and the Cost of Living Consider the impact of inflation on the cost of living.600. More pointedly.Page 40 of 63 study other features of an economy to refine analyses and elaborate interpretation.74 Lastly. such as the Austrian School of Economics. by 2009. For example. or ³hyperinflation´ as seen in Brazil. some define inflation as the continuous fall in the value of the currency. Mainstream economics holds that inflation results when aggregate demand grows faster than aggregate supply²essentially. If you have cash.77 The chair of the Combined Harare Residents Association in Zimbabwe noted. and political stability. and the balance of payments. and Turkmenistan in the 1990s. living costs. These measures slow performance and erode potential. Neither they nor their customers can plan long-term investments. you buy it.00 in 1913. you spend it today. For example. Unless incomes rise at the same pace or faster. and so forth. . ³There¶s a surrealism here that¶s hard to get across to people. the annual inflation rate hit an astounding 79. and ordinary investment instrument like insurance policies and long-term bonds become speculative. because tomorrow it¶s going to be worth 5 percent less. managers watch inflation given its influence on. consumer confidence. gas. through policies that raise interest rates. annual inflation of 10 to 30 percent²erodes confidence in a country¶s currency and spurs people to seek other ways to store value. inflation in the United States. Yugoslavia. For instance. There is no incentive to save. during periods of rapid inflation.
what a country measures when estimating an economic variable. and falling consumer demand fan deflationary dynamics. In recourse. Price indices are sensitive to decisions about their scope and the calculations applied... Unchecked. UNEMPLOYMENT The unemployment rate is the share of unemployed workers seeking employment for pay relative to the total civilian labor force. It isn¶t easy to break out of. it occurs when the annual inflation rate is less than zero. the Federal Reserve of the United States has implemented quantitative easing programs. and political instability. essentially printing money to stimulate demand in order to achieve inflation targets. they discount prices to appeal to consumers who delay purchases in order to exploit tomorrow's cheaper price. Consequently. then wages come down. Technically. managers mind the estimation process. At present. shrinking credit. The proportion of employed workers in a country shows how well it productively uses its human resources. not just inflation. Deflation is the opposite of inflation--prices for products go down. And because people aren¶t shopping. it is the Harmonized Index of Consumer Prices (HICP). which then fires workers. For the first time in generations.80 The United States uses the Consumer Price Index (CPI). the HICP surveys the rural population and excludes owner-occupied housing. not up. then consumers stop shopping. reduced corporate spending. People gainfully employed testify to the competency of policymakers to sustain a productive economy.81 If Not Inflation. economies fall into deflationary spirals wherein companies increasingly struggle to sell products. central banks and governments rely on reflation²increasing the money supply and reducing taxes²to combat deflation.´83 Likewise. For example. Reduction in the money or credit supply contracts personal and investment spending. declining real estate values. In the European Union. and so on. Then Deflation A nagging consequence of the global financial crisis has been the movement of deflation from conjecture to concern.´82 Deflation and unemployment are intricately linked. deflation. companies lower prices.Page 41 of 63 Measuring Inflation The measurement of inflation highlights a common difficulty: namely. which then lowers demand. Declining demand and growing supply trigger increasing quantity and falling prices. Overcapacity. Margin Note 27 . poses a menacing risk. social pressures. the OECD urged the Bank of Japan to keep pumping cash into the economy ³until underlying inflation is firmly positive. Explained a Japanese analyst. Lower demand slows company activity. Countries that cannot create jobs suffer sluggish growth. ³Profits fall. Unlike the CPI. Persistent unemployment symbolizes the ineptitude of the government in managing domestic affairs. Margin Note 26 Deflation results from rather ordinary circumstances.
and South America face economic. and social problems due to underemployment. Margin Note 29 Internal and External Debt A country¶s debt has two parts: internal and external. and decreasing social stability. Unemployment measures in many poorer nations routinely underestimate the true degree of joblessness and. even though officially employed. Technically.Page 42 of 63 Some economists advise tracking the misery index. measuring the number of unemployed workers seeking work in various countries is difficult. such as crime. albeit slowly. Margin Note 28 DEBT Debt. and international institutions. Africa. 86 Countries in Asia.000 for each citizen. Internal debt results when the government spends more than it collects in revenues. which is the sum of a country¶s inflation and unemployment rates. and the more likely consumers and companies curtail spending and investment. the more uncertain an economy¶s performance and potential.87 Some countries. Kenya. the total of a government¶s financial obligations. foreign organizations. more significantly. lowering incomes. Deficits occur for several reasons. political. the unemployment rate means different things in different countries due to different social policies.84 Measuring Unemployment As with inflation.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. are working without pay. However. people work only part time. In addition. This changed dramatically as governments responded to the global financial crisis. as the misery index increases so too does social cost indicators. The national debt for many countries had been steadily. measures what the state borrows from its citizens.88 Our closing case--The Global Financial Crisis: Causes and Consequences--develops these issues. the unemployment rate underestimates the scale and scope of the jobless. whereas countries like China. worker productivity. That is. such as France and Germany. on average. will then owe approximately $50. and family stress. In the present. the greater the economic misery. The higher the sum. Different assumptions and exclusions alter measurements. despondency. provide generous unemployment protection. such as . researchers confirm that misery loves company. and macroeconomic stimulus led to unprecedented debt creation. The larger the total debt. Regarding the future. interest expenses divert money from more productive uses. foreign governments. it indicates how many are not working for pay but seeking employment for pay. worries about the ability of coming generations to repay saps consumer confidence and constrains government activity. Company bailouts. or Jordan offer little to none. or have stopped looking for work. thereby reducing productivity. 85 Often. unemployment benefits. it does not count the number of people who are not working at all. these governments. increasing. Besides measurement issues.
Page 43 of 63 when an imperfect tax system under-collects revenue. it does not tell us what share of income goes to what segments of the population. the IMF or World Bank). a performance that ranks first among nations. or can do so only at high political. is repaid in the currency in which the loan was made. Hence. or international financial institutions (e.90 However. For example.g. Presently.89 Consequently. the GNI of the United States exceeds $14 trillion. governments struggle with spending priorities. Crime and Punishment Protesters march in London against the governmentµs spending cuts and austerity measures. since not everyone is average. and social cost. smaller-scale version. and companies. budget management. Dreaded debt crises often occur when a weak economy is unable to do this. growing public debt is usually an early indicator of austerity measures and tax increases. or state-owned enterprises run deficits. the performance of United States looks less aweinspiring when qualified by its income distribution. Margin Note 30 INCOME DISTRIBUTION Income distribution often defines a market¶s performance and potential. Escalating public debt increasingly constrains Britain's economy. Stress and loss usually precede its reboot to an efficient.640 in 2009. Interest on the debt. such as private commercial banks. Similarly. Pressures to revise policies to deal with growing internal debt create economic uncertainties for consumers. security and social programs exceed tax revenues. That is. its GNI per capita is an impressive $45. even when adjusted for population size or purchasing power. investors. 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. In this situation.. can misestimate the relative wealth of a nation¶s citizens. other governments. GNI per capita reports how much income the average person earns. and eventually the debt itself. But. the richest one percent of Americans . and tax policy. economic. For consumers. GNI. External debt results when a government borrows money from lenders outside the country. the economy grinds to a halt.
This grew to 32 times in 1970. and innovation. In addition. the richest 1 percent claimed as much income as the bottom 57 percent²in other words.000 are more likely to have lost faith in the free market. 65 percent of financial securities. Turkey.98 Gini Coefficient Managers estimate the degree of inequality in the distribution of family income in a country with the Gini coefficient. and 75 times in 2000. .91 The top 10 percent of Americans own 85 to 90 percent of stocks."94 Countries that are more unequal have worse social indicators. The Gini coefficient presumes that there is a reasonable degree of income within a country. income inequality erodes a country sense of identity. 60 times in 1990. approximately 10 percent of U. Chile. If not. Americans with incomes below $20.´ for instance. and 62 percent of business equity. However.95 China¶s steadfast commitment to a ³harmonious society. resource inefficiencies. with much bigger multiples in Israel. including shrinking opportunity. the 50 million richest people in the world received as much income as did the 3. and excessive individualism. widening inequality threatens the stability that supports growth as it ³fans tensions that wear down the social fabric. the wealthiest 20 percent of the world¶s population had 30 times the income of the poorest 20 percent. Rising income disparities between booming cities and impoverished countryside threaten social stability and economic performance. Margin Note 31 Inequality. dozens of countries exhibit similar or worse income distributions. In 1960. then it partially represents income distribution. in which fair play and equality of opportunity power economic performance and unleashes productive potential. A score of one implies perfect inequality (one person has all the income). A score of zero implies perfect equality (everybody has the same income). and higher degrees of insecurity. Most countries range between 25 and 60 percent.92 The United States is not the exception. 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. grows. support dropped from 76 per cent to 44 per cent between 2009 and 2010.8 billion poorest people. The average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent. and business equity. bonds. 45 times in 1980. citizens ³own´ the country. and Bentley dealerships in Beijing.96 Whereas one sees Lexus. trust funds.93 Margin Note 32 Benefits and Costs Some income inequality is useful in rewarding effort. Data indicate such. One controls for this error by assessing the scale and scope of poverty. many in rural China rely on bicycles and animals for transportation.S. as in the United States. talent. Widening inequality eventually triggers destructive outcomes. poorer human-development records. Essentially. the United States. and over 75 percent of non-home real estate.Page 44 of 63 receives more income than the bottom 40 percent²the widest gap in 70 years. The top 1 percent own 37 percent of all privately held stock. Lamborghini.97 Ultimately. and Mexico.
education. report 23. and Brazil. For example. and education. It reports a Gini coefficient of 36. epidemics. roughly 1. The historical record adds an important perspective. and health services. . death. Rather. and health care. and 56. malnutrition. India. 41. 100 percent of Canadians have access to clean water.7 percent). 45. famine. 38.5 billion people live in extreme poverty.25 per day (PPP). and 10 percent rich. is living on less than $1. Granted.8 percent (Sweden.105 The daunting gap between the rich and poor challenges the country's economic performance and fundamentally shapes its potential. Removing China from the tally reveals that the number of poor in the developing world has remained constant. is not the exception. and shelter.101 Today. they may be social resources such as access to information.1. widespread poverty is not. this reduction has been concentrated in essentially one country. some saw it pushing 200 million people deeper into poverty. they may be the opportunity to sustain extended families or connect with people to build communities. Moderate poverty is less than $2 per day (PPP). People struggle for food. estimates of the number of people in extreme poverty have fallen by approximately 200 million since 1990. India's score does not reflect enlightens ideals of equality. according to the World Bank. United States. 102 Prevalence of Poverty Poverty grows worldwide. security. clothing. While dramatic income inequality is a recent phenomenon. Margin Note 34 Extreme poverty. clean water. Managers fine-tune their study of income and wealth by considering its conditions and consequences. clean water. Japan. the average life expectancy is 83 years in Japan yet 32 years in Swaziland. rising food prices imperil millions more. 103 Presently. Approximately 1. Failure to find them results in. shelter. 10 percent middle income. the world population is roughly 80 percent poor.100 These essentials can be life-sustaining resources such as food. However.Page 45 of 63 Consider India. compared to 13 percent of Afghans. the per capita dietary protein supply in the United States is 121 grams but 32 grams in Mozambique. Margin Note 33 Concept Check 8 POVERTY Poverty prevails throughout the world. China. but there is very little to distribute in absolute terms.5. mental illness. Poverty is a multidimensional condition in which a person or community lacks the essentials for a minimum standard of well-being and life. it represents the cheerless fact that most Indians are poor: 80 percent of its population lives on less than $2 per day. and war.99 So income may be distributed evenly on a relative basis. respectively.2 billion between 1981 and 2005. although extreme. to say nothing of safety.104 Margin Note 35 Consequences Poverty shapes economic environments. The global financial crisis has threatened many more.
5 billion people who live on less than $2. Market systems may not exist.107 Narrowly defined. and a $100 house. Indian companies offer the cheapest mobile services in the world while still earning profits. It symbolizes how frugal engineering speaks to the economics of the Base of the Pyramid.Page 46 of 63 The growth of business activity and economic progress ultimately depends on alleviating poverty. however.g. the Base includes the 2. For example. crime may be pervasive.. ³A billion customers in the world are waiting for a $2 pair of eyeglasses. Source: Shutterstock ---------------------------------------------------------------------------------------------------------------- Margin Note 37 This perspective alerts managers to the Base of the Pyramid phenomenon²the billions of poor people that have been seen as inaccessible and unprofitable yet arguably represent the next market frontier of the global economy. Boosting the threshold highlights its potential. a $10 solar lantern.900) and housing (Idealab's program to provide functional homes for about $2. More dramatically.´106 Caption: The Tata "Nano" is the world's least expensive production car. in 2002. people earning US$8 per day or . Margin Note 36 The Potential of the Poor Managers monitor the buying potential of today¶s poor. and governments may struggle to regulate society consistently or adopt prudent economic policies. the XO-1 programs of low-cost laptops for children) and automobiles (the development of functional cars such as Tata¶s Nano. national infrastructures may not work.50 per day. scraping by on less than $2 a day. 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. it had 136 million subscribers. Economies experiencing extreme poverty require MNEs reassess many taken-for-granted aspects of an economy.500) highlight finding opportunities in the face of dire circumstances. By 2006. Similar developments with computers (e. For example. priced at US$2. one manager noted. It was fast approaching 700 million by 2011 even though more than 80 percent of Indians are poor. Today. India had fewer than 15 million mobile phone subscribers.
S. lifestyle-sensitive innovations²both here and there. the Base of the Pyramid sets new standards: low-cost. and make different decisions. you find companies that have learned how to think differently from the herd. Tata¶s various businesses have co-produced a cheap water filter.112 GE developed a low-cost electrocardiograph machine for rural India. use no internal lamp. similar initiatives have built a refrigerator from clay (which uses no electricity yet keeps vegetables fresh for several days) and a cheap crop duster (a sprayer mounted on a motorcycle). high-powered. pioneering money-transfer by mobile phone in remote locations that lack efficient means to exchange funds. eco-sensitive products that work in harsh environments. they see a cornucopia of choices. the contours of the Base of the Pyramid will change. MNEs translate frugal innovations into new product that serve Western consumers. movements afoot may one day make it to Western markets. the middle class includes about two billion people in a dozen emerging economies who collectively spend $6. Too. CRN Concept Check 9 Success Standards As the world moves from being mostly poor to mostly middle-class. the task at hand is developing affordable. easily used. resource-minimizing.114 . disposable ones²as well as heart stents that run 40 percent cheaper than those in the West.Page 47 of 63 less had an aggregate income of nearly US$3 trillion in 2011. come to different conclusions. process it in a different way. Serving the Base of the Pyramid has two preconditions. Nokia. First.111 Increasingly. Samsung. they see opportunity. Where others see threats and complexity. and are specially enabled for text messaging. Its efficiency and performance soon led to units marketed in Germany and the United States. prototyped a $500 house that can be bought in a shop. consumption. If growth rates remain steady. This multi-year process creates immense opportunities. They seek out different information.108 Presently. their annual spending will rise to $20 trillion--twice-current U.113 units were soon en route to Germany. ³seeing´ opportunity calls for market pioneers that have a particular mind-set. 400 hours of standby time on one battery charge.9 trillion a year. At the grassroots level. Kenya¶s Safaricom takes these technologies to the next level. these changes benefit the rich. Where others see a barren landscape. and larger screens that work in reflected light. Accelerating income growth in emerging economies will move many of today's poor into their already expanding middle class. For example. More pointedly. they will earn US$4 trillion annually by 2015. All in all.´110 Second. and designed $20-a-night lodging for frugal travelers. ³When you look behind the success stories of leading globalizers. Chinese firms have introduced reusable sutures--versus the old approach of higher cost. and Motorola offer phones with sealed faceplates (for water and dirt resistance). the global middle class will include 5 billion people. a surge unseen since the Industrial Revolution that will reset economic environments around the world. During the next decade.109 By 2030.
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Margin Note 38 THE BALANCE OF PAYMENTS A country¶s balance of payments (BOP), officially known as the Statement of International Transactions, reports its trade and financial transactions (as conducted by individuals, businesses, and government agencies) with the rest of the world.115 The BOP has two main accounts: y y The current account, which tracks merchandise trade The capital account, which tracks both loans given to foreigners and loans received by citizens.
Table 4.6 lists the components of each account. Mechanically, exports generate positive sales abroad while imports generate negative sales domestically. Positive net sales, resulting when exports exceed imports, create a current account surplus. Conversely, importing more than exporting creates a current account deficit. Table 4.7 lists the five countries with the largest current account surpluses and those with the largest current account deficits.116 Margin Note 39
TABLE 4.6 Components of a Country¶s Balance of Payments Current Account Value of exports and imports of physical goods, such as oil, grain, or computers (also referred to as visible trade) Receipts and payments for services, such as banking or advertising, and other intangible goods, such as copyrights and cross-border dividend and interest payments (also referred to as invisible trade) Private transfers, such as money sent home by expatriate workers Official transfers, such as international aid, on which the government expects no returns
Capital Account Long-term capital flows (i.e., money invested in foreign firms as well as profits made by selling those investments and returning the money home) Short-term capital flows (i.e., money invested in foreign currencies by international traders as well as funds moved around the world for business purposes by companies with international operations)
TABLE 4.7 Current Account Balances: The Top and the Bottom Five
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Current Account Surplus (in millions of US$)
1 2 3 4 5
China Japan Germany Russia Norway
$272,500 $166,500 $162,300 $68,850 $60,230
Current Account Deficit (in millions of US$)
159 160 161 162 163
Brazil France Italy Spain
-$52,730 -$53,290 -$61,980 -$66,740 -$561,000
Source: Central Intelligence Agency, ³Country Comparison²Current Account Balance,´ The World Factbook (2011), at www.cia.gov (accessed June 2, 2011).
Case: Causes and Consequences of the Global Credit Crisis No other economic event, since perhaps the 1930s' Great Depression, has proven more decisive than the global financial crisis of 2008. Although we are now down the road a bit, its legacies continue shaping economic policy, influencing market performance, and shaping countries' long-term potential. Managers grapple with events and outcomes, trying to come up with reasonable interpretations. Increasingly, as events play out, three scenarios capture attention. Some argue that liquidity
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is the problem, others point toward balance sheets and solvency, and still others argue the need to reboot the system. Each has significantly different implications for MNEs' investment choices and operating decisions. Let's take a closer look at each.
Scenario One: Leaky Pipes Initial crisis analysis focused on the immediate realization that something had gone terribly awry with the financial plumbing of world¶s economy. Panic hit a high point in Fall of 2008 as the expanding liquidity freeze, owing to rising panic, fear, and mistrust, increasingly stopped money moving from institution to institution and from country to country. In the first few months, some argued that the credit crisis was not systemic. Certainly, countries' economies were shaken. Problems were, they said, contained within the financial system. Critically, the crisis revealed problems in the pipes that move money. However, it did not indicate structural flaws in the financial system. Problems followed from distorted flow dynamics--money was not moving efficiently or effectively through the elaborate channels that connect markets. So, like water moving through leaky pipes in a house, money was being lost along the way. Now, granted, leaky pipes are not a big deal if fixed. If neglected, they will bring down the house. Officials and agencies quickly turned to fixing the financial pipes, resetting regulatory standards, applying technical solutions, reevaluating the linkages among economies and capital markets, and patching holes in the system. Then, restoring economic vitality and getting countries moving again required refilling the money pipes with, in the words of U.S. Treasury Secretary Geithner, ³capital, capital, capital."117 Subsequently, countries injected massive capital flows into financial markets. The United States launched its Troubled Asset Relief Program and purchased $700 billion of troubled asset from banks and other financial institutions. The European Union added ¼500 billion of liquidity to their banking system. The Federal Reserve acted in kind, expanding its balance sheet by trillions as it bought troubled assets from banks around the world. As Chairman Bernanke explained, "a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum." Slowly, the financial pipes were patched, stabilized and apparently returning to normality. Nevertheless, years later, consumers, companies, and countries wondered why capital flows still moved slowly. Scenario Two: Broken Pumps As markets struggled for traction, some argued the financial system was more deeply broken. No one doubted that the pipes had been leaking. Now, some questioned whether problems followed from the failure of the money pumps to restore capital flows. Driving this line of thought was that, in the past, countries usually rebounded from a recession within a year or two. Now some four years later, and despite massive governmental intervention, economic prospects remained bleak for many.
and the recession ending. Officials.119 . and agency conflicts. not by government protection. began overhauling the money pumps. The financial system. Competencies. That¶s a mistake. However. Unquestionably. that culminated in the epic global crisis. "We created a situation that caused a recession that wiped out the net worth of about 15 million households. economies growing. had been the result of exceptionally loose monetary policy. Some believed they were again taking excessive risks in the expectation that they would be then backstopped. there was the troubling resignation that there might be something dreadfully wrong with the economic system. for whatever reason. For now. capital. Capitalism. flooding markets with "capital. not connections. further aggravated by aggressive leveraging. Noted a leading analyst. the financial system accelerated the global collapse.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. Now. Many of these people have virtually no other savings. this view held that the collapse was a systemic crisis. as they had in 2007. skewed income distribution. A precept of capitalism is that all firms. given its extreme leverage and exposure. it pales in comparison to the third scenario. it did not solely determine it. Rather. capital" did not seem to do the trick. the DoddFrank financial reform legislation tackled issues that precipitated the crisis and seemed to confound the recovery. UBS. Loosening monetary policy typically led to demand rebounding. however. promotes the psychology that greed is good. if their bets went bad. no matter how big or small. while still fixing the pipes. amplified it into a destructive psychosis that accentuated existing structural distortions.P. was the philosophical quandary of the "too-big-to-fail" status of financial players. Its passage resulted in the most sweeping change to financial regulation in the United States since the Great Depression. allowed to run free. perverse incentives. showing that free markets poorly protected social values. drives the ruthless efficiency of capitalism. Similar legislation elsewhere tried to correct flaws in the financial system by regulating opportunistic behaviors. that fact that institutions like Citibank. Now. the crisis suggested. J. Slowing progress. Running too free. In the United States. live or die by their wits. Goldman Sachs. as the eye slowly passed and the second half began unfolding. namely the house itself was collapsing. Morgan Chase. and HSBC were seen as too big to fail aggravated incentive problems. Attention shifted to whether the pumps that powered financial systems had been deeply broken. and concentrated vast wealth and powerful self-interests that threatened social harmony. So there was something wrong with the system.118 The aftermath of the crisis highlighted these problems. delivered the front half of the hurricane. Scenario Three: The House is Collapsing As awful as the broken pumps scenario sounds. The post-2007 recession however.
confessed that she had "no idea how bad the economic collapse would be«. . AAA credit rating. "this time is different.123 It found financial fallouts strike with surprisingly consistent frequency. economies. Already the largest indebted nation in history. "Terrible recession.."120 Then. particularly those in the West that were caught in the bubble dynamics of the global financial crisis.124 Possibly Something More Others argued that ongoing shortfalls and struggles are the outcome of deep structural problems. Standard & Poor¶s put a ³negative´ outlook on the U.S. if not worse shape. . In particular. . and Questions In Fall. Japan. identifying insights and lessons learned from previous crises. Economic nightmare. the aftermath of financial crises tends to be nasty. .S.. might struggle for years. of a credible plan. in April 2011. and long. Incredibly searing. Elsewhere. the experts had chimed. citing rising budget deficits and debt. . . Furthermore.still does not understand exactly why it was so bad«and doesn't have much of an idea about how to fix things. there are remarkable similarities with many previous experiences. and signaled the advent of state capitalism. and unscrupulous lenders who exploited their insecurities all came to a head in the worldwide housing bubble.Page 52 of 63 Concerns. . and these recessions are followed by slow. Council of Economic Advisers.122 Instead. The data proved this thesis wrong. All continued underperforming past recovery benchmarks. especially given the unprecedented amount of policy stimulus. Housing problems highlighted the dangers of the credit bubble. Italy. . Greece. Precedents. Excessive consumer debt. No matter how different the latest financial crisis always appears. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures. had opted to print money to solve its problems. she remarked. and ferocity. . we have been here before.S. . "claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. Financial crises are typically followed by deep recessions. through quantitative easing programs. duration. Spain. were in the same. Historical Precedents Scholars began studying analogous situations. Global labor markets made it become harder for people with low skills to build a secure middle-class future for their families. . the outgoing chair of the U. among others. something a decade earlier most would have thought impossible. ." said the S&P. and even though the situation appears unprecedented. Risk of making high unemployment permanent. threatened free market capitalism. brutish. Suffering terribly. disappointing recoveries. the United States. Each time. . Analysis found a recurring lesson across countries and across centuries: Debt is always dangerous and excessive debt accumulation is perilous. Technologies proved wonderful in entertaining us but less than ideal in generating . 2010. . As such. confirming a very basic message: the rules are the same. Great Britain. Dramatically below trend. Portugal. . U. the United States' debt headed higher. prolonged income inequality." Characterizing situations in the United States as well as throughout the West.121 "More than two years after the beginning of the recent crisis. This Time is Different: Eight Centuries of Financial Folly assessed economic crises from 66 countries across five continents over the past 800 years. Ireland.
In the United States. regional. rising inflation. and potential opportunities triggered protests worldwide. well-paying assembly line work and prosperous small-business niches faded. Ireland fell into a funk. wealth. sectoral. 127 Unless abated. tsunami. To some. Japan faced monumental challenges due to earthquake. 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. some argued the apparent solution to the crisis has been to implement many of the same . debt in Western economies. Swedish sentiment slumped.128 In Europe. German inflation accelerated. In many countries. Decisions made had not turned out as planned. Public sentiment seems to think along those lines.4 percent of Americans had jobs in 2010. and Italy's manufacturing sector declined. and excessively narrow concentrations of. trade and financial health as well as excessive levels of. waning consumer confidence. Said U. perhaps unavoidably given the scale and scope of the crisis. the sovereign debt crises question the fate of the Monetary Union. Treasury Secretary Geithner. Greeks took to the streets and rioted. In wealthier Western countries. earnings. Developing countries throughout Asia and Africa faced rising food prices given inflationary policies in the West. the share of the working population fell to its lowest level since women started entering the workforce three decades ago. Similar problems existed elsewhere. a fragile recovery. The Middle East uprisings fanned political turmoil. Spain's jobless rate surged pass 20 percent. Regarding the gloomy take.Page 53 of 63 jobs. In the United States.125 Meanwhile. Which Scenario? The crystal ball remains cloudy as of this writing."26 percent said it is in a recession. Spring 2011 saw both gloomy and optimistic views. and escalating government debt suggested tough times ahead.S. unionized jobs. rising government debt will compound the fact that economies take a significant number of years to regain momentum following financial crises. hit but not hurt by the fury of the crisis. French consumer spending dropped. pension benefits. Countries warned of austerity. in emerging economies. the great financial crisis reinforced strong tendencies toward state capitalism in many emerging markets. and national imbalances in matters of incomes. "Things were falling apart. Only 45. the issues leading to the crises were still present and worsening in some places. slowing growth. and 29 percent said the economy is in a depression.3 percent in 2000.126 The IMF warned the world¶s wealthiest nations to curb their surging public debt. risks ahead are glaring and global. Cuts in public support. persistent unemployment. 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. successive rounds of quantitative easing. some 27 percent believed the economy is growing. healthcare. Regional growth was steadily slowing as the European Union reined in government spending. saying it could drag down growth needed for economic recovery. the lowest rate since 1983 and down from a peak of 49. To top it off. Moreover. We had no playbook and no tools«Life¶s about choices."129 The world was still stuck with large global. 16 percent saying it is "slowing down. billions of people feverishly worked to get ahead. Portugal shrank. and nuclear plant failure. diminishing dollar.
6. 2. "It will come again. and positioning the firm to prosper are the jobs of managers worldwide. 3. 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. Governments in many countries have expanded their regulation of the economy. Interpreting economic environments. conceding. the United States. Great Britain. and enforces antitrust regulation. This concern. Stable market conditions and improving growth prospects were apparent in many countries. . and social stability than do less-free or repressed countries. Secretary Geithner suggested was not far-fetched. estimating scenarios. or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty. Which scenario do you think best explains the global financial crisis? Why? How does each scenario influence the policies that governments adopt. for example. 4. was evident. France. while bumpy. sets fiscal and monetary policies.Page 54 of 63 policies that caused the cirsis. The United States. Loose monetary policy promised to keep economies growing. These include how the government regulates the economy. How would you advise one to do so with respect to the global financial crisis? SUMMARY y Economic freedom reflects the absence of government coercion or constraint on the production. There will be another storm. by midyear 2011 had recorded seven straight consecutive quarters of economic growth. distribution. 5. standards of living. while Sweden. Which would you nominate? Reverse your logic and identify the indicator that confirms the crisis continues. protects property rights. but it¶s not going to come for a while. and others gained traction. analyst anticipated accelerating industrial production and improving consumer confidence. Germany had rebounded strongly. and enjoyed a powerful stock market rally. The road to recovery. and the choices that consumers make? How might the various scenarios influence economic freedom? The case points out the crises produce winners and losers. Questions 1. the strategies that companies pursue. y Economically free countries tend to have higher per capita income. was watching its unemployment rate steadily drop. y The global financial crisis challenges the legitimacy of free markets. y Managers watch key events to gauge the contest between economic freedom and state control.´130 Rays of optimism pierced the gloom.
y A mixed economy requires accepting the doctrine of socialism. debt. GPI). HPI). its principle of an activist government that commands and controls most if not all factors of production. y A mixed economy includes some elements of market and command economies. or GDP per capita). GDP). and poverty y The Base of the Pyramid is the largest. determine supply and demand. balance of payments. y A command economy requires accepting the doctrine of communism. unemployment. the collective income of the Base arguably makes it the next market frontier. y A market economy requires accepting the doctrine of capitalism. y Managers use several indicators to assess the performance and potential of an economy. including. and price and quantity. GNP. inflation. y State capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. Both influence investment activities and consumption behavior. and the goal of maximizing economic freedom. conveyed via the invisible hand. ) . GNP.Page 55 of 63 y In a market economy. the government plans what goods and services a country produces. ) debt (p. ) capitalism (p.) economic freedom (p. and the price at which they are sold. and the goal of constraining economic freedom. y Concern that monetary measures misestimate economic performance leads to calls to move from the concept of financial prosperity to notions of happiness. its principle of the partly visible hand of an activist government that commands and controls some factors of production. and sustainability (NNP. private interests own resources. income distribution. Although poor in terms of individual wealth. y In a command economy. ) command economy (p. the quantity in which they are produced. y Managers assess markets in terms of size (GNI. stability (HDI. its principles of the invisible hand and laissez faire. y Green measures of economic performance call for considering ecological aspects that support sustainable development. but poorest socio-economic group in the world. and the goal of regulating economic freedom. KEY TERMS Base of the Pyramid (p. income (GNI.
³Stability. ) ENDNOTES Sources include the following: Thomas Friedman.org/commentary/rogoff27 . 2009): 25±28. ) laissez-faire (p. 2011.html). (May 28. The Next Billions: Unleashing Business Potential in Untapped Markets. 2010). (August 15. Three Billion New Capitalists: The Great Shift of Wealth and Power to the East. 2009). www. (London: Oxford University Press. Strauss and Giroux. 2007). ³Three Billion New Capitalists.imf. News Hour.economist. 2005). Anne O. (Paris: Development Centre. Market in America: The Visible Hand. Farrar." (Retrieved April 21.( www. 2011.´ www.pbs. (Paris: Development Centre. Straus. 2001). ³BRICs. ³A special report on innovation in emerging markets: The world turned upside down. ) happynomics (p. (New York: Basic Books. Emerging Markets and the World Economy: Not Just Straw Men.pk/forums/china-defence/55892-china-claims-9-rank-united-states-patents. www. and Giroux. (Retrieved June 7. 2003).economist.´ The Economist. Clyde V. Why the West Rules « For Now. Clyde Prestowitz. 2006).´ Project Syndicate.cfm?story_id=13743310 . ) inflation (p.defence.htm . (Retrieved August 12. ) misery index poverty (p. Krueger.org/ newshour/bb/economy/july-dec05/prestowitz_8-15. ) mixed economy (p.´ The Economist. ³Betting with the House¶s Money. (January 2009): 44. ) stability (p. ) income distribution (p.´ video transcript. Angus Maddison. Volume 2: Historical Statistics.project-syndicate. Growth.Page 56 of 63 economic geography (p. 2007).html.com/displaystory. 2005.com/node/15879369).´ Farrar. ) economic system (p. (www. ³Government v. (Retrieved May 7. The World Economy: Volume 1: A Millennial Perspective. ) market economy (p. ) socialism (p. and Prosperity: The Global Economy and the IMF." | The Economist. ) state capitalism (p. ) sustainability (p. (June 18. (New York. www. ³China Claims #9 Rank In United States Patents!´ (Retrieved April 23. 2009): 45. 2006). 1±2030 AD.org/ external/np/speeches/2006/060706. ³The World Is Flat: A Brief History of the Twentyfirst Century. Ian Morris. Kenneth Rogoff. World Economic Forum. ) global financial crisis green economics (p. The World Economy. Prestowitz. 1 .
³The World Is Flat: A Brief History of the Twenty-first Century.org/content/chinatakes-crown.´ The Conference Board. World Bank sees end to dollar¶s hegemony. 5 So. (Retrieved May 19. ³A Special Report On Innovation In Emerging Markets: The World Turned Upside Down. and 29 were repressed.´ Financial Times. (Retrieved July 18. ³Explaining the Factors of the Index of Economic Freedom.html. 8 Dustin Ensinger. www.com." www. www. ³China¶s µState Capitalism¶ Sparks a Global Backlash WSJ.Arctic Ice Gets a Check Up. 18 Ships attempting the Northeast or Northwest Passages face hundred-mile long swathes of shifting pack ice.gov/mission_pages/icebridge/multimedia/arcticseaicemax2011. 2011. Miles. (Retrieved April 21.They moved to 50.´ www. 2010. 13 Ibid." (Farrar. 2011)." Index of Economic Freedom. 2011). ³China Takes the Crown. 2009).cfm. www. 21 See.heritage. 2011)." MoneyWeek. 25 Counts for 2009 were: 7 countries had free economies. (Retrieved July 24.org/research/features/index. (Retrieved April 17.moneyweek. 4 ³Global Economic Outlook. 17 Simon Wilson. www. (New York: Basic Books. in May 2011.Page 57 of 63 Thomas Friedman.htm.´ 2005 Index of Economic Freedom. 5.economyincrisis." The World Bank. (15 January 2008).pbs. 2010). 10 Specific query: "Is the country's economic situation good or bad?" www. News Hour." The Economist. Beach and Marc A.html. 22 William W. 2006):33. 2009). 16 Kim Murphy. Sample was 179 countries. (August 15. James Politi. 14 Ibid. (Retrieved April 13.nasa. 53 were moderately free.´ www. 16.org/data/globaloutlook. 23 were rated mostly free. 2011).economist. 11 Clyde Prestowitz." Los Angeles Times. for example." Reported in "Executive Summary. 19 ³NASA .´ www. for example.pdf.com/news-and-charts/economics/global-trade-the-opening-of-the-northeastpassage-45402. ³Global trade: The opening of the Northeast Passage.html . Three Billion New Capitalists: The Great Shift of Wealth and Power to the East. 2011)." 15 Stephen King. ³Melting ice caps open up shipping routes. 12 Jason Dean.org/newshour/bb/economy/july-dec05/prestowitz_815. (October 13.com/cs/countries/a/ numbercountries.org/database/?indicator=5&survey=12&response=Good&mode=chart. 2011). 2007). (May 17. See also ³How Many Countries Are in the World?´ geography.com/node/15879369." 6 ³A Special Report On Innovation In Emerging Markets: The World Turned Upside Down.org/research/features/index/chapters/pdf/index2008_execsum. even during the two months or so each summer when safe passage is feasible. and Giroux. Straus. 2005). www.´ video transcript. 67 were mostly nonfree. (Retrieved April 18. 2011). 2005). Economy in Crisis. 3 Clyde V. (Retrieved April 21. 24 The 2011 Index of Economic Freedom.org/data/ databytopic/class. 2 .worldbank. Losing Control: The Emerging Threats to Western Prosperity.heritage.conferenceboard. www. (Retrieved August 14.pewglobal.org/library/Enc/BehavioralEconomics.heritage. 7 Ibid. 9 Ibid. (Retrieved February 4 2008).about. Andrew Browne and Shai Oster.econlib." (November 16. Yale University Press.4 percent in 2010. ³Global Development Horizons 2011²Multipolarity: The New Global Economy. 2009). 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. 2006).org/Index/. Prestowitz. (September 25. www. (Retrieved April 11. ³Three Billion New Capitalists. 20 The World Bank Group.htm. 23 Quotation extracted from ³The Wealth of Nations.
it survived indefinitely.voxeu. as Marx prophesied. some argue the U. The New York Times.com/news_archives/radar10w2_free_market/ . www.org/template. www. ³Capitalism's waning popularity. 38 Michael Todaro. 26 ." The Economist. (Reading. State-run Firms Rule. 2009). The absence of competition and bankruptcy in this sort of economic system meant that once an enterprise was up and running. See also Russell Shorto. 40 Denmark 'happiest place on earth. news.economist.php?q=node/ 3421.884 interviews across 25 countries. 1996): 705. Indeed. Still. 34 For example. 41 Most worrisome to free market proponents is that. 2011).´ The Economist. (Retrieved April 19. Economic Development.uk/2/hi/health/5224306. 33 Ronald Reagan¶s then heretical declaration. ³Capitalism 4.html.org. 2011). ³Sharp Drop in American Enthusiasm for Free Market. 2011)." Globescan. an employee health-care trust. 29 Data drawn from 12.cfm?page=139&edition=9. government violated creditors¶ property rights.0: The Birth of a New Economy in the Aftermath of Crisis. (Retrieved April 13. (Retrieved April 19. 30 Ibid. 43 Michael Wines." freedomhouse. 2011).globescan. 32 Strictly speaking. O¶Rourke. 2009). In contrast. (Retrieved April 17. Robert Lawson ³Measuring Economic Freedom. 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.´ The Economist. once a crisis passes." Globescan. government control sometimes shrinks. 2010). 2011). New York Times. secured creditors² owed some $7 billion²recovered 28 cents per dollar. (May 9. ³Capitalism's waning popularity.csmonitor. (Public Affairs. www. 2010).org/index.economist. 2009): 83. are the proletariat. (Retrieved June 5. (Retrieved April 19. www.com/node/16741043.economist.php?pub_id=6101. made in his 1981 inaugural address. www.stm. MA: Addison Wesley. in its rush to stabilize Detroit during the recent economic crisis. ³Sharp Drop in American Enthusiasm for Free Market.Page 58 of 63 E. ³Make no mistake: In China. (Retrieved April 27. 28 July 2006. (Retrieved April 28. (Retrieved April 18. www. none of them is a ³pure´ market economy because their governments intervene in the marketplace. ³An Offer You Can¶t Refuse. 27 A Tale of Two Depressions. 42 ³Q&A with Ian Bremmer on State Capitalism.com/news_archives/radar10w2_free_market/ .g.nytimes.co.´ The Economist. 2011). Barry Eichengreen and Kevin H. (August 31. irrespective of performance. www. their historic advocacy of economic freedom endorses the philosophy of capitalism and the principle of laissez-faire. www. as well as a majority stake in the restructured firm.org/pub_display. 46 Eric Li. 2011).. Upon Chrysler¶s filing for bankruptcy.com/node/18527446?story_id=18527446&CFID=168796516&CFTOKEN=46679551 .com/Commentary/Global-Viewpoint/2011/0428/How-China-broke-the-West-s-monopolyon-modernization. 37 "The global revival of industrial policy: Picking winners. 35 Only then.bbc. (the social class that does manual labor or work for wages) protected from exploitation by the bourgeois." Foreign Affairs. 2011).globescan. May 7 2009.cato.com/2009/05/03/magazine/03european-. (the social class that owns the factors of production).com. (Retrieved April 13 2011). 28 Data drawn from 12. 2011). ³How China broke the West¶s monopoly on modernization. the thinking goes. (Retrieved April 19. (June 4.' BBC News. www. saving losers.S." Cato Institute. (Retrieved April 18." CSMonitor.foreignaffairs.freedomhouse. www. 2011).com/discussions/interviews/qa-with-ian-bremmer-on-state-capitalism?page=show. 6th edition. but it never returns to its original size. ³Going Dutch: How I learned to love the welfare state. www. 36 Companies in centrally planned economies exhibited a particular quirk. capitalism eventually is destroyed by its own contradictions 45 "Countries at the Crossroads.com/node/18527446?story_id=18527446&CFID=168796516&CFTOKEN=46679551 .884 interviews across 25 countries. 31 Anatole Kaletsky. 44 The state essentially prevents systemic distortions threatening the stability of the system and promoting societal welfare²or. 39 "The French Model: Vive la Différence!" The Economist.
59 ³Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond. Mahbub ul Haq. Latin America has seen income per capita drop five times since the 1980s. ³Good Numbers Gone Bad: Why Relying on GDP as a Leading Economic Gauge Can Lead to Poor Decision-Making.84 trillion. The definition and measurement of GNI and GNP are analogous. but institutions such as the World Bank and International Monetary Fund now use the term GNI. we compute per capita GNI by taking the GNI of a country and converting it into a standard currency²say. (New York: Academic Press. Richard. the U.Page 59 of 63 Ian Bremmer. 56 Exchanges rates as of April 11. Since GNI takes net flows into account. Thailand. Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz. which smoothes exchange rate fluctuations by applying a threeyear moving average. or not immediately.org/documents/ga/res/38/ a38r161htm. 48 47 . "Income and Happiness: Towards a Unified Theory. www. 61 Some maintain that the purpose of development is to enlarge people¶s choices.html." WSJ. thereby leading to a higher GNP than GNI. and currency valuations tumbled. with a GNI of $217 billion versus GNP of $246 billion the same year. The Beijing Consensus: How China¶s Authoritarian Model Will Dominate the Twenty-First Century. 2011www.un. public finances. Basic Books. (Atlas methodology for GNI per capita). satisfying leisure hours.gov/main/www/popclock. Easterlin.. The current global credit crisis has triggered a sixth occurrence²population in the region is growing 1. 2006). more secure livelihoods. 2011). financial reserves. ³GDP Can Be a Poor Measure of Success. 57 World Bank.´ Forbes." McKinsey Quarterly. 52 Ibid. As expected. www.53 54 Technically. healthy. with especially hard times for Central and Eastern Europe and sub-Saharan Africa. security against crime and physical violence. As a rule. (April 23. (i. while the latter was $372 billion. in income or growth figures: greater access to knowledge. and sense of participation in community activities. we have the resulting variance between GNI and GNP. (September 25. a net outflow). these choices can be infinite and can change over time. (Retrieved July 16. Indonesia¶s GNP is larger than its GNI²the former was $432 billion in 2007. 1974). many developing countries produce more value than they receive as income.wsj. GNI was referred to as gross national product. Portfolio.2 percent in 2009. 55 See U. (2001): 465±484. 2009):4. dollar at prevailing exchange rates²and then dividing this sum by population size. This discrepancy results from the fact that the net foreign factor income was negative for Indonesia and Thailand. 50 For example.S. at least 60 developing markets suffered income drops in 2009. for current estimate. Statement by Dr. David and Melvin W. Typically. 5. better nutrition and health services. People often value achievements that do not show up at all. (New York.3 percent a year but the economy "grew" -2. 60 Joseph Stiglitz.com/article/SB10001424052748704064504576070343252409876. 2010).census. 2011). "Does Economic Growth Improve the Human Lot?" in Paul A. 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. 2007).com.´ Fortune.88 trillion. http://online.forbes. Stefan Halper. and creative lives. with Amartya Sen of HDI 61 62 Richard Easterlin. 2008). 51 Historically. 64 Mark Whitehouse. 53 For example. ³The Happiest Places in the World. (Retrieved June 2. In principle. and World Population Clocks²POPClocks. The objective of development is to create an enabling environment for people to enjoy long. The same held for its neighbor. In contrast. price-adjusted conversion.html . but roughly balanced for the United States.html. Ian Bremmer. 1983).. consumer demand. co-conceiver. (December 19. 2011." The Economic Journal.e. the prices of many goods are considered and weighted according to their importance in the economy of the particular country. 2007 Survey. "State Capitalism and the Crisis.com/2008/04/23/happiest-places-world-opedcx_ewe_0423happiest. (Retrieved May 27. 49 Data calculated with the Atlas Method. while its GNP was $13. 2009).S. (July. political and cultural freedoms. Reder. The End of the Free Market: Who Wins the War Between States and Corporations? (New York. 63 Eric Weiner.´ General Assembly Resolution 38/161. the GNI of the United States in 2008 was $13. eds. 2010). (Retrieved January 17. This calamity is not unique to Latin America.
2009 State of the Future. ³How Bad Is InÀation in Zimbabwe?. Inc.com. over the same time.html. http://247wallst. 60.org/documents/ga/res/38/a38r161htm. 66 Charles Jones & Peter Klenow. but the one they use the most is the Consumer Price Index. as of 2003.org/archive/2008/05/0082023 . 68 The Happiest Countries in the World. 82 View of Junko Nishioka. Hanke and Alex K. (Retrieved May 15. From ³Japan Succumbs to DeÀation as Consumer Prices Fall Record 1. 69 ³Government v. (Retrieved May 27. (Retrieved June 29.´ New York Times. 2009): 25±28. sees the age structure of its population creating severe employment pressure within the next two decades. (Retrieved May 26. (May 2. www.html?_r=1. 1983). (CPI). The Millennium Project." NBER Working Papers 16352. 2011). F.naturalnews. (Spring/Summer 2009). Presently.google. 2011). 2009). General Assembly Resolution 38/161. nytimes." 24/7 Wall St. Cato Journal. 2011). Moreover. www. (and in Japan. 81 For instance.com/frequently-asked-questions-faqs/. p. (Retrieved December 29. Mishan. 2011. Market in America: The Visible Hand. (January/February 2003): 39±48. Theodore Gordon. 86 65 Ibid. "Beyond GDP? Welfare across Countries and Time. deÀation persisted). 2010). (May 28. www. 77 Steve H. (Retrieved June 2. Kwok. 1967). 83 Ibid. ³Numbers racket: Why the economy is worse than we know. (Retrieved June 4. 67 ³OECD Launches Happiness Index.harpers. 80 Kevin Phillips. in Tokyo. and Elizabeth Florescu. The CPI measures a fixed basket of goods and compares its price from one period to the next. Chief Japan economist at RBS Securities Japan Ltd.com. (Retrieved April 26. 2011).Page 60 of 63 Roger Cohen.S.asp. 2006):B1. 71 Ibid. 2007).usinflationcalculator." www. had fallen well into single digits in the early twenty-first century.mises.html. ³The Happynomics of Life. 84 The working-age population: Presently. 2011). 2009). ³Economics focus: Botox and bean counting. (Retrieved April 27. (2010). The Costs of Economic Growth.2a1. with rates twice that of adult. National Bureau of Economic Research.millenniumproject.com/020873.org/millennium/sof2009. .com/2011/06/01/the-happiestcountries-in-the-world/2/.´ Foreign Policy. In China alone.bloomberg. only three countries had annual inÀation rates in excess of 40 percent.b865 06f095cbf61164e88f98b0d5d21c. On the Measurement of Zimbabwe¶s Hyperinflation. ³Ludwig von Mises.´ www. See Ken Rogoff. China. once stuck with extreme inÀation pressure. 72 Jerome Glenn. (1881±1973). the level above which it is generally considered to be acutely damaging to an economy.´ ww. The total population of working-age Chinese will reach 940 million by 2020. Conservation Group Claims.com/2011/03/13/opinion/13cohen. 79 www. www." NYTimes. the working-age population will increase across poorer countries from about 3 to 4 billion people.and lower-income countries. ³Humans using Earth¶s Resources at Unsustainable Rate. 75 See www. 73 Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond. Changes how it Measures Long-Term Unemployment" USATODAY.´ Bloomberg.org/content/mises. ³U. (Retrieved May 27.un.84. 70 E. (New York: Praeger. inÀation in many middle. the youth of the world suffer the highest rates of unemployment in most countries. AFP.com. Rick Hampson. A rise in the index indicates inÀation." April 30.5 million annually on average in the next 20 years. the wealthier countries of the world are watching their workingage population shrink from approximately 740 to 690 million people between 2000 and 2025.com/hostednews/afp/article/ALeqM5jj15a9ZCL9ETVD9UAn18y7MlrG_g?docId=CNG. 2011). (December 19. 76 Economists use different types of indexes to measure inÀation.1 percent. However. Many credited the fall in inÀation to a combination of the price pressures of globalization along with more vigilant central bankers and economic policymakers.com/.usinflationcalculator. (ages 25±65) unemployment. 78 Michael Wines.com/apps/news?pid=newsarchive&sid=aaQyqjERBorM. ³The IMF Strikes Back. The Economist. the population above the age of 16 will grow by 5.´ Harper's Magazine. for example. All major industrial countries had inÀation under 3 percent.´ The Economist. 74 Murray Rothbard.
There¶s a basic reason for that which is that 200 years ago everybody was poor. and Power.) 106 Donald McNeil Jr." World Economic Forum. (June 2000): 3-20. (Retrieved April 12.org/els/social/inequality. 100 ³A wealth of data: A useful new way to capture the many aspects of poverty. english. Chapter 18. We see similar patterns Australia. This measure compensates for differences in protein supplied by different foods across countries.org/wgbh/commandingheights/lo/index. www. 99 ³80 percent of Indians live on less than $2 a day--World Bank.sina. Hong Kong. 2007). 2011). 104 Sandrine Rastello and Wendy Pugh. Hence.com/politics/features/2009/07/third-worlddebt200907. 89 For example.fao.000 per person and $300 per person. Germany. Episode Three: The New Rules of the Game.html?_r=1 . 2011. the Netherlands and South Africa. ³Food Surge Is Exacerbating Poverty. 2011). 91 Bob Herbert. maybe a gap of $30.livemint. 95 ³Chinese Scholars Warn Growing Wealth Gap Likely to Trigger Social Instability. for example CEOs of the 15 largest companies earned 520 times more than the average worker.´ Vanity Fair. (Retrieved June 28. (China)." sociology. ww.S. "Wealth.com. 2011).htm." livemint. (January 2009). K. fiscal system is plugged with many tax loopholes that cause inefficiencies.com.com.html. 96 ³China's urban. 88 See U. In 2007.html. (May 2011).socialwatch.com/2011/03/26/opinion/26herbert. Hart.htm.vanityfair.ucsc.com/node/17957381. www. (Retrieved April 19. 44. The gap can be 100 to 1." www. 87 . 107 ³The Next Billions: Unleashing Business Potential in Untapped Markets. It¶s the vast majority of the world. This is up from 360 times more in 2003." www. www.html. 2011).. See ³Gap between Rich and Poor: World Income Inequality. (Retrieved April 17.economist.´ New York Times. (Retrieved July 14. "The world is more unequal than at any time in world history.´ Social Watch Report 2006. Income. World Bank Says. (data as of April 26.com/articles/2007/10/16235421/80-of-Indians-live-on-less-th.´ 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. A relatively small part of the world achieved what the economists call a modern economic growth. 2011). ³The Fortune at the Bottom of the Pyramid. 2010). /www. 2009). misallocation of resources and lost revenues." (Retrieved April 18. (Go to www. 2007). C. (May 29.S.cn/90001/90778/90862/6875693. 2006). www." Vanity Fair." The Economist. L. 2009).com/debt_clock.bloomberg. arguably the U. ³Transcript.nytimes. (May. (Retrieved April 18. (June 18. 102 Noted Jeffery Sachs.´ Sina. for the 1 percent. ³Losing Our Way . 101 ³Impossible Architecture. Finally.people.edu/whorulesamerica/power/wealth. ³The Poor and the Global Crisis: The Trail of Disaster. rural income gap widens despite economic recovery´ People's Daily Online." www. (Retrieved May 27.oecd. 98 Ibid. Wall Street¶s Toxic Message.com/ipa/A0908770. (Retrieved June 15. 103 ³Joseph Stiglitz.html.pbs. 2011). (Retrieved July 8.com/news/2011-02-15/food-price-jump-pushes-44-million-into-extreme-poverty-worldbank-says.´ Strategy+Business. eliminating the deficit requires eliminating these distortions 90 GNI data is adjusted by purchasing power parity. income inequality is accelerating between top executives and the average employee. 92 William Domhoff. 94 ³Inequality: Unbottled Gini." The Economist. And that¶s absolutely astounding to be on the same planet and to have that extreme variation in material well-being. ³Of the 1 percent.´ The Economist. the average CEO in the U. 2009). In 2010. ³International Unemployment Rates: How Comparable Are They?´ Monthly Labor Review.html .infoplease. 97 Joseph Stiglitz. by the 1 percent. 2009): 24. and five-sixths of humanity is what we call the developing world. National Debt Clock.economist.com/china/1/2005/0822/ 43237. Those countries represent only about onesixth of humanity. english. (Retrieved May 5.html. (2002) 26: 54±67.org.´ Commanding Heights: The Battle for the World Economy. (Retrieved May 10.Page 61 of 63 See Constance Sorrentino.org/en/portada.com/node/16693283). ³Design That Solves Problems for the World¶s Poor. made 343 times more money than the average American did last year. 93 Growing Income Inequality in OECD Countries: What Drives It and How Can Policy Tackle It?. www. 2007): B-2.NYTimes. Prahalad and S.S.brillig. 26.
This sounds utterly inconceivable until one considers that the Nikkei fell from its all-time high 38.csmonitor.nextbillion.gov/library/publications/the-world-factbook/ rankorder/2187rank. capitalism eventually is destroyed by its own contradictions. AAA Rating.html. Stock markets will drop 50 to 80 percent in real value. The Dow Jones Industrial Average. ³Standard & Poor¶s Puts µNegative¶ Outlook on U. 124 Most will average annual real GDP growth in the low single digits for a decade or more.´ www. (Retrieved April 13. to top it off. 2011):76-78. For instance. (Retrieved May 25.´ Business Intelligence Middle East. www. for example. (March 5. Combined. 117 ³Geithner Pushes New Financial Rules." Accenture Outlook. 2009).washingtonpost. In the decade following the crises. 2011).php?storyId=102416414.npr. 116 See www. (July 2010): 67. 2011). (Retrieved June 9. 111 See. (Retrieved October 2.net. 2010). for example. (indicating that it is exporting more than it is importing) but may then report a deficit in another area. 109 David Court and Laxman Narasimhan. credit-driven consumption to compelling frugality that border for many on raw austerity. the 1973 oil shock and the 2007 implosion of the subprime mortgage market clarifies likely events and trends.5 percent until at least 2020. "Economist Christina Romer serves up dismal news at her farewell luncheon. 2011). 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. 110 Jane Fraser and Jeremy Oppenheim.´ The Economist.com/columns/dekaser-practical-economics/archives/robert-shiller-shares-his-view-on-thehousing-market.com. Key cause of the 82 percent drop--the Japanese housing bubble of the 1980s. In other words. a country might have a surplus in merchandise trade. www. And. 118 The state essentially prevents systemic distortions threatening the stability of the system and promoting societal welfare²or.html. ³What¶s New about Globalization.Page 62 of 63 108 Christa Case Bryant.com/World/2011/0517/Surging-BRIC-middle-classes-are-eclipsing-global-poverty.bloomberg. 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. 2011)." Kiplinger's Personal Finance. Persistently high unemployment will reflect persistently sluggish growth. look for existing homes to fall to $100k. ³Capturing the World¶s Emerging Middle Class.lewrockwell.org/templates/story/story.accenture. (Retrieved April 18. Harrington and Cordell Eddings. all signs point to a secular shift from over-leveraged.´ The McKinsey Quarterly. such as its investment income.915 on 12 December 1989 to 7. www. 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. 112 ³Medical technology: Frugal healing.´ www. 120 Dana Milbank. (Retrieved April 13. This Time Is Different: Eight Centuries of Financial Folly. growth .cia.com/node/17963427 . GOP Skeptical: NPR.com/in-en/outlook/Pages/outlook-journal-2010-less-is-new-moreinnovation. (May 1997): 178.aspx. Interest rates will remain low for a long time. ³Surging BRIC middle classes are eclipsing global poverty." www. we will see the federal funds rate below 0. 2011).054 on 10 March 2009. (Princeton University Press. 122 ³Jim Rogers Says the US Will Certainly Lose Its AAA Credit Rating. 114 115 113 ³The Tata Group: Out of India. In the United States. 2011). (Retrieved April 28. www. washingtonpost.html?hpid=news-col-blog.com/wpdyn/content/article/2010/09/01/AR2010090106148.S.kiplinger. 123 Carmen Reinhart and Kenneth Rogoff. will see 4000 before 2030.com/rogers-j/rogers-j139. (Retrieved April 13. 2011)." McKinsey Quarterly. 121 Shannon D. www." CSMonitor. 2010." September 1.economist. as Marx prophesied. Cycles of falling prices and wages will power deflationary dynamics. (from 240k in 2006) before 2030.´ The Economist.html. new homes will do the same falling from 320K in 2007 to 125K by 2030.com/news/2011-04-18/standard-poor-s-puts-negative-outlook-on-u-s-aaarating. in the United States. The notion of balance means that all BOP transactions have an offsetting receipt. the average home prices around the world will crater. ³Innovations to Create New Streams of Profitable Growth. http://www. 119 Jennifer Schonberger. (Retrieved April 19. ³Robert Shiller Sees More Housing Pain Ahead. 2011).
thedailybeast.com/blogs-and-stories/2011-05-18/too-big-to-fail-timothy-geithner-says-no-at-hbomovie-screening/#.¶s gross government debt stood at 69 percent of GDP in 2009 and is expected to reach 98 percent of GDP by 2013. It took households and companies about seven years on average for to reduce their debts and restore their balance sheets. says the IMF.S. (Retrieved September 22.co. 2011). according to IMF projections.013 U. and were followed by lengthy periods of retrenchment that lasted nearly as long. and other countries at the center of the financial crisis are rapidly approaching the 90 percent threshold. 129 Lloyd Grove. adults. 126 David Morgan. 2011)." The Telegraph. at a time when debt levels in the U.K. 127 Ominously.-French-Consumer-SpendingDrops/44005/." Reuters.´ www.S. (Retrieved May 19. 2011).uk/finance/financetopics/ recession/6220089/No-full-recovery-until-2015-says-theIMF. ³Too Big to Fail? Timothy Geithner Says No.. Gross government debt in the U. www. stood at 85 percent of GDP in 2009 and will reach 108 percent of GDP by 2014.telegraph.´ The Daily Beast.html. 2009).S. The U.123jump. French Consumer Spending Drops.com/market-update/German-Jobless-Rate-at-Record-Low. in recession despite data: poll. 130 Ibid. for example." Market Update. 128 "No full recovery until 2015. (Retrieved April 28. Consistently.S. . www.Page 63 of 63 rates were significantly lower and unemployment rates were significantly higher. www. ³Most Americans say U. Housing prices took years to recover. ³German Jobless Rate at Record Low. 125 Arthi Gupta. Results from April 20-23 Gallup survey of 1.reuters. the crises were preceded by decade(s)-long expansions of credit and borrowing. (Retrieved April 28.com/article/2011/04/28/us-usa-economy-gallupidUSTRE73R3WW20110428?feedType=RSS&feedName=domesticNews.
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