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In this chapter, you will learn about different economic systems and their effect on international business. You will also: Recognize the importance of economic development; understand how nations are classified as developing, newly industrialized, emerging, or developed; and learn about the process of economic transition and how countries implement market-based economic reforms.
4 Economics and Emerging Markets Copyright © 2014 Pearson Education, Inc Chapter Objectives • Describe what is meant by a centrally planned economy and explain why its use is declining • Identify the main characteristics of a mixed economy and explain the emphasis on privatization • Explain how a market economy functions and identify its distinguishing features • Describe the different ways to measure a nation’s level of development • Discuss the process of economic transition and identify the obstacles for business Copyright â 2014 Pearson Education, Inc 4-2 Infosys Infosys is a global provider of IT services • India has organic-led path to development • Brainpower is driving development Copyright © 2014 Pearson Education, Inc 4-3 Economic Systems Centrally Planned Mixed Market Government ownership of Mostly private (individual economic resources and or business) ownership of state planning economic resources Government and private ownership of economic resoures split rather evenly Copyright © 2014 Pearson Education, Inc 4-4 Range of Economic Systems Copyright © 2014 Pearson Education, Inc 4-5 Centrally Planned Economy Government owns most land, factories, and other economic resources and plans nearly all economic activity Welfare of the group is paramount Economic and social equality is the goal Asia Central Europe Eastern Europe Latin America Russia (1917) China (1949) Cuba (1959) “Communist” system is needed Copyright © 2014 Pearson Education, Inc 4-6 Decline of Central Planning Central planning failed to: Create economic value Provide incentives Achieve rapid growth Satisfy consumer needs Copyright © 2014 Pearson Education, Inc 4-7 North Korea Copyright © 2014 Pearson Education, Inc 4-8 Focus on China Socialism with Chinese characteristics: Challenges ahead: Communist after civil war ended in 1949 Political problems and social unrest Agricultural reforms began in 1979 Unemployment and migrant labor Township and Village Enterprises legal in 1984 Eventual(?) reunification with Taiwan Aggressive reforms since Copyright © 2014 Pearson Education, Inc 4-9 Mixed Economy Government and private parties share ownership of land, factories, and other economic resources rather evenly Noble goals: But stagnant: Low unemployment and poverty State-owned businesses less competitive Steady economic growth Prices and taxes higher, living standards mixed Equitable distribution of wealth Copyright © 2014 Pearson Education, Inc - 10 Economic Freedom & Wealth Source: Index of Economic Freedom (Washington, D.C.: Heritage Foundation, 2006), (www.heritage.org) Copyright © 2014 Pearson Education, Inc - 23 Economic Development Economic well-being of one nation’s people relative to another nation’s people Economic output (agricultural, industrial, and service) Infrastructure (communications, transportation, and power) People (physical health and education level) Copyright © 2014 Pearson Education, Inc Productivity Ratio of outputs (that are created) to inputs (resources used to create output) - 24 National Production GDP is the value of goods and services that a nation produces during a one-year period (GNP adds international activities) * POTENTIAL PROBLEMS * Overlook certain transactions Ignore economic growth rates Averages can disguise regions May ignore purchasing power Copyright © 2014 Pearson Education, Inc - 25 Purchasing Power Parity Relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries Copyright © 2014 Pearson Education, Inc - 26 National Wealth at PPP Country United States Switzerland Australia Canada United Kingdom Japan Czech Republic Hungary Mexico Turkey GDP per Capita (U.S $) 39,700 47,900 32,400 30,600 35,600 36,500 10,600 10,000 6,600 4,200 PPP Estimate of GDP per Capita (U.S = 100) 39,700 34,700 32,400 31,800 30,800 29,600 18,600 15,900 10,200 7,600 Source: Based on data from Organization for Economic Cooperation and Development (OECD), “Statistics” section (www.oecd.org) Copyright © 2014 Pearson Education, Inc - 27 Human Development Index Copyright © 2014 Pearson Education, Inc - 28 Classifying Countries Developed Country Highly industrialized, highly efficient, and whose people enjoy a high quality of life Emerging Market Newly industrialized countries plus those with potential to be newly industrialized Newly Industrialized Recently greater national production and Country exports from industrial operations Developing Country Poor infrastructure and extremely low personal income Copyright © 2014 Pearson Education, Inc - 29 Discussion Question _ is the relative ability of two countries’ currencies to buy the same basket of goods in those two countries a Productivity b Purchasing Power c Purchasing Power Parity Copyright © 2014 Pearson Education, Inc - 30 Answer to Discussion Question _ is the relative ability of two countries’ currencies to buy the same basket of goods in those two countries a Productivity b Purchasing Power c Purchasing Power Parity Copyright © 2014 Pearson Education, Inc - 31 Economic Transition Fundamental reorganization of an economy and the creation of new free-market institutions Reforms: Reduce budget deficits and expand credit Allow the “price mechanism” to determine prices and economic activity Legalize private firms and privatize state-owned assets within a property rights framework Remove barriers to trade and investment and eliminate currency controls Copyright © 2014 Pearson Education, Inc - 32 Obstacles to Transition Lack of managerial expertise Capital shortage Environmental degradation Cultural changes Copyright © 2014 Pearson Education, Inc - 33 Focus on Russia Operated under a staunchly communist system for about 75 years Underwent a rough transition of simultaneous economic and political reform But the economy is improving and foreign investment is returning Challenges include developing managerial talent and fostering political and social stability Copyright © 2014 Pearson Education, Inc - 34 Discussion Question What is economic transition and what are the remaining obstacles in postcommunist countries? Copyright © 2014 Pearson Education, Inc - 35 Answer to Discussion Question Economic transition: Changing a nation’s fundamental economic organization and creating new free-market institutions A country must: Stabilize the economy, reduce budget deficits, and expand credit availability; Allow prices to reflect supply and demand; Legalize private business, sell state-owned companies, and support property rights; and Reduce barriers to trade and investment and allow currency convertibility Remaining obstacles: Lack of managerial expertise, Shortage of capital, Cultural changes, and Environmental degradation Copyright © 2014 Pearson Education, Inc - 36 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2014 Pearson Education, Inc - 37 ... Inc 4-5 Centrally Planned Economy Government owns most land, factories, and other economic resources and plans nearly all economic activity Welfare of the group is paramount Economic and social... Education, Inc 4-9 Mixed Economy Government and private parties share ownership of land, factories, and other economic resources rather evenly Noble goals: But stagnant: Low unemployment and poverty... State-owned businesses less competitive Steady economic growth Prices and taxes higher, living standards mixed Equitable distribution of wealth Copyright © 2014 Pearson Education, Inc - 10