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Strategic Management Assignment # 1

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Economic History of World

Before the mid-19th century, Japan's economy was supported by a rural, agrarian society. Japan
had maintained a policy of isolation, preferring to keep some distance between itself and the rest
of the world. With the visit of U.S. Naval Commander Matthew Perry, this situation changed
dramatically. The Japanese also did several things within their own country. They officially
abolished the class system and established a free and compulsory education system. They began
a policy of offering government subsidies to encourage people to start private businesses. They
also began putting money into key industries such as textiles. Along with these changes they
developed systems of modern communication and transportation. Railroad and telegraph lines, as
well as a postal system, were established. The Japanese began to import machinery for their
factories. Silk and cotton milling became an important industry. With the assistance of Western
technology and advice, mining also began to take on some importance. Modernization depended
on traditional factors of production - a labor force, raw materials, food supply, and an industrial
World War 2 changed many things in Japan. The war left the Japanese economy destroyed. Its
roads, cities, factories, hospitals, etc. had been systematically destroyed by the bombing. Over 8
million people were dead or injured. Japan was occupied by U.S. armed forces and did not have
sufficient resources to rebuild on its own. It was completely dependent on western nations for
economic aid. Japan's occupation by the U.S. resulted in many changes. Before World War II
Japan's early economic system had been controlled by what were known as "zaibatsu". These
were large, powerful financial organizations owned by single families who were very wealthy,
conservative elites. They controlled and operated such things as banks, factories, mines and so
on in ways which were often of more benefit to the family than to Japan. Japan also benefited
from a number of American policies toward Japan following the war. Japan was not forced to
pay for war damages to the U.S. and other countries. The U.S. gave $2 billion in direct aid to
Japan. The terms of Japan's peace treaty stated that Japan could no longer have a large military.
The Japanese concentrated on new technology in such areas as steel production, shipbuilding,
electronics, household appliances, and the automotive industries. The Japanese government
established protectionist systems which made it very difficult for any other nation to sell in the
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Japanese market. During this time, Japan concentrated on international trade, rather than the
territorial expansionism they had been practicing. By the mid-1950's, industrial production had
risen dramatically and economic output began to increase by over 10% each year. There were
two things that helped Japan during this time. First, it began to produce things for export in the
international market, and second, world trade began to accelerate making it easy to sell on the
world markets. The work force, of course, was as disciplined and hard-working as ever and so
was able to turn out large quantities of inexpensive goods.
Today, Japan is successful to the point where western nations are either complaining about its
trading practices or looking to it to discover the secrets of economic growth. Japan still makes it
extremely difficult for nations to export goods to Japan. Despite the fact that it has few natural
resources, Japan has the strongest economy of all industrialized nations. Most observers agree
that Japan's commitment to quality products, good education, and an emphasis on hard work,
protectionism, and little military spending are the reasons for Japan's success.
Medieval Germany, lying on the open Central European Plain, was divided into hundreds of
contending kingdoms, principalities, dukedoms, bishoprics, and free cities. Economic survival in
that environment, like political or even physical survival, did not mean expanding across
unlimited terrain, as in the United States. Even under these difficult conditions, Germany had
already developed a strong economy during the middle Ages. It was based on guild and craft
production, but with elements of merchant capitalism and mercantilism and Germany as a whole
often had trade surpluses with neighboring states. The Industrial Revolution reached Germany
long after it had flowered in Britain, and the governments of the German states supported local
industry because they did not want to be left behind. Many enterprises were government
initiated, government financed, government managed, or government subsidized. As industry
grew and prospered in the nineteenth century, Prussia and other German states consciously
supported all economic development and especially transportation and industry. German banks
played central roles in financing German industry. They also shaped industry wide producer
cooperatives, known as cartels. Different banks formed cartels in different industries. The first
German cartel was a salt cartel, the Neckar Salt Union of 1828, formed in Wrttemberg and
Baden. The process of cartelization began slowly, but the cartel movement took hold after 1873
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in the economic depression that followed the post-unification speculative bubble. It began in
heavy industry and spread throughout other industries. By 1900 there were 275 cartels in
operation; by 1908, over 500.
From the prosperity of the empire during the 1890-1914, Germany plunged into World War I, a
war it was to lose and one that spawned many of the economic crises that would destroy and
ruinous to German and global prosperity. The war and the treaty were followed by the Great
Inflation of the early 1920s that wreaked havoc on Germany's social structure and political
stability. During that inflation, the value of the nation's currency, collapsed from 8.9 per US$1 in
1918 to 4.2 trillion per US$1 by November 1923. Then, after a brief period of prosperity during
the mid-1920s, came the Great Depression, which destroyed what remained of the German
middle class and paved the way for the dictatorship of Adolf Hitler. During the Hitler era (1933-
45), the economy developed a hothouse prosperity, supported with high government subsidies to
those sectors that Hitler favored because they gave Germany military power and economic
autarchy, that is, economic independence from the global economy. Finally, the entire enterprise
collapsed, when Germany lay in ruins at the end of World War II in May 1945 and when every
German knew that he or she had to begin life all over again. The first several years after World
War II were years of bitter penury for the Germans. Their land, their homes, and their property
lay in ruin. Millions were forced to flee with nothing but the clothes on their backs. As
Germany's postwar economic and political leaders shaped their plans for the future German
economy, they saw in ruin a new beginning, an opportunity to position Germany on a new and
totally different path. First step was currency reform: the abolition of the Reichsmark and the
creation of a new currency, the deutsche mark. The German economy as it is known today is an
outgrowth of the 1990 merger between the dominant economy of the Federal Republic of
Germany (West Germany) and that of the German Democratic Republic (East Germany). This
merger will one day produce a massive economic entity that will constitute the fulcrum of
Europe as a production center, as well as a transportation and communications center. The record
of the West German economy during the four decades before unification shows a signal
achievement. The first decade, that of the 1950s, had been that of the "economic miracle." The
second decade that of the 1960s had seen consolidation and the first signs of trouble. The 1970s
had brought the oil shocks, the generous social programs, the rising deficits, and finally a loss of
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control. In the 1980s, new policies at home and a more stable environment abroad had combined
to put West Germany back on the path of growth.
Subsequently, the country was ruled by a series of monarchies belonging to the Germanic,
Capetian, Valois, Bourbon, and Orlean dynasties until the French Revolution erupted in 1789.
The aristocracy promoted an unequal society by systematically extending socio-economic
privileges to the feudalistic nobility and the clergy at the cost of the common man. The
revolution, which lasted a decade, crushed the monarchy and virtually transformed the social and
political landscape of France. Other European powers, viewing the uprising as a threat to their
own regimes, attempted to stifle the movement. The country, which has a rather tumultuous
economic history, is today the fifth largest economy in the world and the third largest in Europe.
However, in the middle ages, from the 14
century to the 17
century, France was
predominantly a rural economy that used medieval agricultural techniques. It did have some
amount of trade and commerce, but frequent wars and harsh weather proved to be its nemesis.
By the end of the 17
century, innumerable people had lost their lives and the economy lay in
ruins. Things changed for the better after the 1730s when the nation saw 30 continuous years of
population as well as economic growth. During this phase, France emerged as the richest country
in Europe and its growth rate was only second to the United Kingdoms. Prices and wages rose,
agriculture and industry were modernized, and trade increased. Despite competition from British
industry, especially in textiles and cotton, French industries saw a period of steady growth until
the end of the 18th century. In the 19
century, the French economy was influenced by three
watershed events - Napoleon Bonapartes rule, a phase of rapid industrialization, and the wars in
late 19
century and early 20
century. France experienced broad-based economic expansion as
an imperial power under the reign of Napoleon (1795-1815). However, the Napoleonic era
culminated with the defeat of the French forces by the British army, putting the economy in the
doldrums yet again. Nevertheless, the products of the elite schools of France came to the rescue
and became the architects of French industrialization. The country greatly benefited from the
industrial techniques it had developed for the wars. Through most of the 19
century, France
experienced industrial development, which was bolstered by rapid urbanization as well as an
emphasis on education and workers skill development. The end of the 19
century saw France
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in the league of industrialized nations, rubbing shoulders with the likes of Germany and Great
Britain. Thereafter, in late 19
century and the first half of the 20
century, wars played havoc
with the economy of France. The hostilities that stemmed from Bismarcks re-united Germany
and later Hitlers Nazi Germany were particularly debilitating.
The post-war period or the latter half of the 20
century is often referred to as Les Trente
Glorieuses, or the 30 glorious years. This period witnessed the emergence of France as a modern
global economic power. Interestingly, though we see France as a capitalist or a free-market
economy today, it is actually a blend of interventionist and free market policies that have
propelled the economy to the global center stage. France played a key role in fostering co-
operation among members of the European Community. This eventually led to the formation of
the European Union in 1993. The economic and monetary integration actually took place over a
period of five decades and France was one of the six founding members of the geo-political
entity. France has successfully sustained a reasonable pace of economic growth since the mid -
1980s. Between 1984 and 1991, its GDP grew at an annual average rate of 2.5%, but moderated
to around 2% in the early 1990s. After expanding at an impressive rate of 3.3% in 1998, and 4%
in 2000, the GDP expansion decelerated to 1.4% in 2000 because of a global economic
slowdown. During 2004-2007, the French economy has been averaging 2% growth.
Accordingly, Russian economic thought of Muscovy in the sixteenth and seventeenth centuries
oscillated between the doctrines of mercantilism and those of the Middle Ages. The ideas of
some authors remained subordinated to religious, legal and political discourses, especially the
vast fusion of state and church which tended to strictly limit the range of independent
thinking. Nonetheless, the principal topics were the system of land ownership, money and trade.
The eighteenth century manifested the conflict between the radical economic reforms of Peter
the Great and Catherine II, on the one hand, and the continuing medieval social structure, on the
other. Liberal rhetoric was silenced by autocratic claims for enforcement of absolute power.
Later thinkers and statesmen helped to develop the system of finance and banking,
unintentionally, one supposes, establishing some of the institutional foundations of the initial
Russian industrial economy of the late nineteenth century. The largest republic of the erstwhile
Soviet Union, Russia has also been witness to contrasting political structures. As a part of the
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Soviet Union, it experienced an authoritarian one-party communist regime from 1917-1990.
Under its rule, critical decisions related to production, consumption, and distribution were
centrally planned and enforced. The period also marked the genesis and build-up of the Cold
War, characterized by the rivalry between the U.S. and the former Soviet Union, the two
superpowers who battled each other on numerous turfs, whether it be ideological, political,
economic, technological, industrial, or military. While Joseph Stalin, who assumed power as the
communist leader of Russia in 1922, rapidly transformed the Soviet Union into an industrial
powerhouse, his policies were inward-oriented, and led to increasing isolation of Russia from the
rest of the world. A country that derives its economic strength substantially from its natural
resources, especially oil and petroleum products, Russia has been successfully riding the high oil
price wave since the onset of the decade. Moreover, Russia surpassed Saudi Arabia in oil exports
recently for the first time since the Soviet Unions collapse. Over 70% of Russian crude oil
production is exported, while the remaining 30% is refined locally. After the tumultuous
transition years from communism to capitalism spanning the 1990s, the Russian economy has
been on a steady growth path since the onset of the 21st century, barring the recessionary phase
during the latter half of 2008.
Before 1911, China was still characterized as a feudalistic economy run by the Qing authorities.
Even by 1949, China was primarily an agricultural economy. However, colonial capitalism did
have a long and significant impact in some coastal cities, Shanghai and Guangzhou in particular.
The general economic condition of the nation was terribly bad because of the World War II and
continuous civil wars. A crucial reason why Jiang Jieshi did not defeat Mao Zedong was that the
capitalist economy was just forming and the industrial power was still very weak in most parts of
China. From 1949 1978, China, for the first time, systematically built its industrial base and
transformed itself from an agricultural economy to an industrial one. The period between 1949
and 1956 was recognized as the golden period of Chinese industrialization, as the country
established its primary industries including steel, automobile, textile, chemical, and defense.
The GDP grew at the rate of over 20% per year. Because of over-optimism, Mao made his first
huge mistake by summoning his nation to speed up the industrialization. This was the Great
Leap, which resulted in the significant economic recession in 1958 and 1959 and also the
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disaster in early 1960s. The economy recovered, however, under the leadership of Liu Shaoqi in
the early 1960s. Nevertheless, it was during this period when China as a nation, rather than in a
few cities, started its industrialization, though a lot of ups and downs. China created its college
system and built hundreds of national labs throughout the country, and developed its most
advanced technology under Maos dictation, such as nuclear weapons, satellites and rocket
science, and super computers. Under his dictation, the most talented Chinese students chose
science and engineering majors instead of law or economics, which Mao saw as trouble-making
majors. This, maybe unintentionally, prepared todays China with many talented scientists and
engineers, many of whom became the technocrats in the government. If Mao was the person who
led the Chinese to the entrance of the industrial highway, Deng was the one who led the Chinese
to drive on the highway. During this period, China has grown at a rate of over 10% per year.
During this period, China started to migrate from the economy of import-substituting to export-
led. Like Japan and the US, the power of China was not built overnight, but was a cumulative
growth over the past 50 years. Though China has experienced rapid economic growth for over 25
years, most western countries paid attention to it only after its entry into WTO and the hosting of
the 2008 Olympics.
The restructuring of the economy and resulting efficiency gains have contributed to a more than
tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis, China
in 2005 stood as the second-largest economy in the world after the US, although in per capita
terms the country is still lower middle-income and 150 million Chinese fall below international
poverty lines. Economic development has generally been more rapid in coastal provinces than in
the interior, and there are large disparities in per capita income between regions. The government
has struggled to: sustain adequate job growth for tens of millions of workers laid off from state-
owned enterprises, migrants, and new entrants to the work force; reduce corruption and other
economic crimes; and contain environmental damage and social strife related to the economys
rapid transformation.
One demographic consequence of the one child policy is that China is now one of the most
rapidly aging countries in the world. Another long-term threat to growth is the deterioration in
the environment notably air pollution, soil erosion, and the steady fall of the water table,
especially in the north. China continues to lose arable land because of erosion and economic
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development. China has benefited from a huge expansion in computer Internet use, with more
than 100 million users at the end of 2005. Foreign investment remains a strong element in
Chinas remarkable expansion in world trade and has been an important factor in the growth of
urban jobs. In July 2005, China revalued its currency by 2.1% against the US dollar and moved
to an exchange rate system that references a basket of currencies. Reports of shortages of electric
power in the summer of 2005 in southern China receded by September-October and did not have
a substantial impact on Chinas economy. More power generating capacity is scheduled to come
on line in 2006 as large scale investments are completed. Thirteen years in construction at a cost
of $24 billion, the immense Three Gorges Dam across the Yangtze River will be essentially
completed in 2006 and will revolutionize electrification and flood control in the area. The
Central Committee of the Chinese Communist Party in October 2005 approved the draft 11th
Five-Year Plan and the National Peoples Congress is expected to give final approval in March
2006. The plan calls for a 20% reduction in energy consumption per unit of GDP by 2010 and an
estimated 45% increase in GDP by 2010. The plan states that conserving resources and
protecting the environment are basic goals, but it lacks details on the policies and reforms
necessary to achieve these goals.