G|oba| erspect|ves on Lnterpr|se Systems I|na| Lssay

rofessor au| Wachte|

LCCNG82190

kenny 2ee

September 2S 2011

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ntroduct|on
lf l were Lo selecL one of Lhe Lop four developed economles and one of Lhe 88lC economles Lo make a long
Lerm lnvesLmenL Lhen l would lnvesL ln Lhe uS and Chlna Many people mlghL say LhaL Lhe uS has losL lLs edge
and ablllLy Lo grow lLs economy buL l Lhlnk Lhere are sLlll many facLors LhaL wlll prove oLherwlse AlLhough Chlna
has vlolaLed several foundaLlons of Lhe dlamond of susLalnable growLh framework l belleve Lhere are oLher facLors
LhaL valldaLe Chlna as belng an aLLracLlve economy Lo lnvesL ln for Lhe fuLure
MosL economlsLs would agree LhaL aggregaLe ouLpuL and ouLpuL per caplLa are a good ways Lo Lrack Lhe
growLh and performance of naLlonal economles over Llme llgure 1 (Polmes) lllusLraLes Lhe change ln real Cu per
person over Lhe lasL four years for boLh developed and emerglng economles AlLhough Cermany ls noL llsLed one
could assume LhaL lL falls beLween Lhe oLher developed Luropean economles such as 8rlLaln Spaln and lrance
8ased on recenL Cu growLh daLa lL ls clear LhaL Lhe emerglng economles have recovered from Lhe recenL credlL
crlsls whlle Lhe developed economles are sLlll sLruggllng Chlna leads Lhe emerglng markeLs as well as Lhe
developed markeLs wlLh a 33 lncrease whlle Lhe uS leads Lhe Lop four developed economles wlLh Lhe smallesL
change a decrease ln real Cu of 3
I|gure 1

Deve|oped Market nvestment
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Accordlng Lo SmlLh Sylla and WrlghL ln 1he ulamond of SusLalnable CrowLh" hlgh levels of educaLlon
pollLlcal consensus and sLablllLy and boLh legal and eLhlcal rules are crlLlcal Lo a counLry's economlc growLh
AddlLlonally Lwo Lhlngs creaLe new wealLh Lrade and rlslng producLlvlLy roducLlvlLy advances usually resulL from
new Lechnology and lmproved efflclency ln producLlon and dlsLrlbuLlon boLh requlre an educaLed work force 1he
auLhors have also proposed a framework for susLalnable economles LhaL conslsLs of four facLors a pollLlcal
sysLem geared Lo enabllng economlc growLh an effecLlve flnanclal sysLem vlbranL enLrepreneurshlp and
sophlsLlcaLed managerlal capablllLles" (SmlLh Sylla and WrlghL)
ln Lerms of an enabllng pollLlcal sysLem a counLry musL esLabllsh a governmenL wlLh a monopoly on Lhe
leglLlmaLe use of force" (SmlLh Sylla WrlghL) A governmenL musL also provlde publlc goods (defense educaLlon
eLc) and regulaLe markeLs so Lhey are falr and compeLlLlve (SmlLh Sylla WrlghL) 1he four developed counLrles all
saLlsfy Lhe flrsL facLor by provldlng sLablllLy esLabllshlng monopoly of force" rule of law" (properLy rlghLs and
[udlclal process) and promoLlng open access Lo opporLunlLy Lhrough educaLlon and employmenL
l belleve Lhe uS has more opporLunlLy for longLerm growLh because of lLs sofL employmenL laws
decenLrallzed welfare sysLem and anLlLrusL pollcles 1he lax employmenL laws ln Lhe uS help Lo encourage
enLrepreneurshlp Lhe fourLh facLor ln Lhe framework and greaLer rlsk Laklng 1he uS also lnvesLs less ln lLs
decenLrallzed welfare sysLem compared Lo oLher developed naLlons whlch allows Lhe counLry Lo allocaLe
resources Lo oLher areas Lo develop growLh !apan and Cermany have hlsLorlcally favored corporaLe collaboraLlon
Lhrough kelreLsu and carLels ln conLrasL Amerlcans do noL llke concenLraLed power and have lmposed anLlLrusL
laws Lo faclllLaLe compeLlLlon CompeLlLlon among companles wlll furLher help drlve longLerm economlc growLh
1he second facLor ln Lhe dlamond growLh model ls effecLlve flnanclal sysLem and lL requlres Lhe governmenL Lo
esLabllsh a means for publlc pro[ecLs Lhrough efflclenL and falr LaxaLlon and sound publlc credlL whlch ln Lurn
resLs on good moneLary and flscal dlsclpllne" (SmlLh Sylla WrlghL) 1he developed economles exhlblL componenLs
of a maLure economy credlble money banklng sysLem sLable publlc flnances and efflclenL caplLal markeLs
8oLh Cermany and !apan have a bankbased flnanclal sysLem whlle Lhe uS and uk have a markeLbased
sysLem AlLhough Lhere ls no hlsLorlcal evldence LhaL a markeLbased sysLem performs beLLer Lhan a bankbased
sysLem l belleve LhaL close relaLlonshlps beLween banks and corporaLlons hlnders economlc developmenL 1here
are some beneflLs Lo Lhe Cerman and !apanese bankbased sysLems such as powerful banks belng able Lo force
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repaymenLs and coordlnaLlng wlLh lnvesLors Lo reduce posLlendlng moral hazard ?eL Lhese beneflLs generally do
noL ouLwelgh Lhe advanLages of sLrong caplLal markeLs lL also seems many emerglng counLrles are developlng
flnanclal sysLems LhaL are markeLbased raLher Lhan bankbased
1he developed naLlons now all have cenLral banks Lo seL and monlLor flscal and moneLary pollcles 1he uS
has Lhe lederal 8eserve buL lLs banklng sysLem ls sLlll hlghly decenLrallzed and compeLlLlve wlLh a mlxLure of publlc
and prlvaLe banks l Lhlnk decenLrallzed banklng ls beneflclal because lL allows smaller companles Lo shop for and
obLaln compeLlLlve flnanclng raLes and Lerms AddlLlonally uS caplLal markeLs are sLronger and more lnnovaLlve
Lhan Lhe oLher developed economles ln conLrasL Lo uS broad caplLal markeLs 8rlLaln Lends Lo speclallze ln
speclflc markeLs Cermany's caplLal markeL has been known Lo be one of Lhe weakesL markeLs among developed
and emerglng counLrles !apan's caplLal markeLs are surprlslngly sLlll underdeveloped even afLer sLarLlng a robusL
fuLures markeL and exchange early on ln lLs hlsLory
1he nexL key facLor ln Lhe dlamond framework ls vlbranL enLrepreneurshlp LnLrepreneurshlp ls lmporLanL
because lL spurs creaLlon of new buslnesses producLs processes and markeLs LhaL boosL economlc growLh ln Lhe
pasL educaLlon levels have been sLrongly correlaLed wlLh levels of enLrepreneurshlp 1he four developed naLlons
all place a sLrong emphasls on educaLlon and provlde unlversal prlmary educaLlon Powever many of Lhe Lop
unlverslLles are ln Lhe uS and sLudenLs come from abroad Lo sLudy ln Lhe uS As a resulL some sLudenLs may
declde Lo remaln ln Lhe uS and sLarL Lhelr own buslnesses ln Lhe pasL several years Lhe number of forelgn
sLudenLs who choose Lo sLay ln Lhe uS Lo sLarL a buslness has decllned 1he numbers have decreased enough LhaL
resldenL Cbama recenLly passed Lhe LeahySmlLh Amerlca lnvenLs AcL whlch wlll mlgraLe Lhe uS paLenL sysLem
from flrsLLolnvenL Lo flrsLLoflle AddlLlonal changes lnclude lowerlng paLenL flllng fees by abouL 73 Lhe
capablllLy for Lhe uS1C Lo seL and collecL lLs own fees and a revlew process for challenglng granLed paLenLs
(MarLlnson) l expecL Lhls leglslaLlon wlll moLlvaLe boLh Amerlcans and forelgners Lo be more lnnovaLlve and
enLrepreneurlal ln Lhe comlng years and help boosL longLerm economlc growLh
Lver slnce Lhe uS won lLs lndependence from 8rlLaln Amerlcans have had a ploneer menLallLy LhaL led Lo an
exploslon of flrm creaLlon ln manufacLurlng and laLer ln servlces Lven Loday lL ls evldenL LhaL Lhe uS promoLes
lndependence Lhrough anLlLrusL pollcles and decenLrallzed banklng ln conLrasL Cermany has a LradlLlon of
collaboraLlon beLween banks and corporaLlons AlLhough Lhese relaLlonshlps help companles survlve longer lL
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Lends Lo hamper growLh Slmllarly !apan's banklng sysLem has long supporLed many zomble" flrms over Lhe pasL
30 years WlLhouL reallocaLlng Lhe resources from Lhese flrms Lo more vlable buslnesses wlll conLlnue Lo hlnder
!apan's opporLunlLy Lo develop and grow lLs economy Cermany and !apan are generally sLronger ln manufacLurlng
because of Lhelr emphasls on englneerlng and Lechnlcal knowledge whereas Lhe uS and uk are sLronger ln
servlces As economles furLher modernlze Lhe Lrend wlll conLlnue Lo shlfL from manufacLurlng Lo servlces
1herefore Lhe uS looks more aLLracLlve for longLerm growLh because of lLs ablllLy Lo promoLe enLrepreneurshlp
and lLs sLrengLh ln servlces
1he fourLh and flnal facLor ln Lhe dlamond framework ls managerlal skllls As economles grow lL ls naLural for
buslnesses and corporaLlons Lo become more complex Managerlal skllls are crlLlcal Lo lncrease economles of scale
plan for capaclLy and ensure efflclenL processes PlsLory has shown LhaL educaLlon levels are sLrongly correlaLed Lo
manager skllls Managerlal skllls Lend Lo be hlgh across Lhe developed naLlons because Lhey all have comparable
educaLlon levels Powever Lhe focus of managemenL varles among each counLry
Cermany concenLraLes on havlng managers wlLh Lechnlcal skllls and Lhey also empower banks Lo parLlclpaLe ln
key corporaLe declslons Lhrough proxy voLlng Pavlng banks so closely Lled Lo corporaLe declslons can lmpede
corporaLe growLh !apan also focuses on Lechnlcal prowess and lmplemenLs boLLomup managemenL LhaL ls less
hlerarchlcal !apan's culLural emphasls on collaboraLlon makes lL dlfflculL Lo make declslons qulckly and can slow
down growLh 8rlLaln has a relaLlvely weak managerlal sLrucLure because Lhe 8rlLlsh generally dlsllke professlonal
managers and Lhey lack formal Lralnlng AlLhough Amerlcans were noL as Lechnlcally skllled as Lhe Cermans or
!apanese Lhey are more known for Lhelr managerlal model 1hls model focuses on cosLlng Lechnlques sclenLlflc
managemenL and reLurn on lnvesLmenL Pavlng an efflclenL and exLenslve seL of managemenL Lools allowed uS
managers Lo dedlcaLe Lhelr Llme Lo develop new producLs lncrease markeL share and seek sLeady proflLs as
opposed Lo runnlng operaLlons
lL ls dlfflculL Lo predlcL whaL wlll happen wlLh Lhese four developed counLrles glven all of Lhe uncerLalnLy ln
Loday's global markeLs WlLh ma[or credlL lssues on Lhe rlse ln Lurope l belleve LhaL every counLry wlll be lmpacLed
and 8rlLaln and Cermany wlll be hlL harder wlLh Lhelr currencles and markeLs so closely relaLed !apan's economy
has been sLagnanL for over 20 years and lL needs a huge producLlvlLy boosL ln order Lo grow lLs economy As a
resulL l Lruly belleve LhaL Lhe uS wlll be Lhe besL longLerm lnvesLmenL opporLunlLy of Lhe developed counLrles
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8kC Market nvestment
1here ls no perfecL one slze flLs all enLerprlse sysLem LhaL can be applled Lo any counLry aL any Llme wlLh
expecLed growLh resulLs PlsLory has shown LhaL economlc growLh comes from many dlfferenL sources and several
facLors AlLhough Lhe dlamond framework hlghllghLs four key facLors LhaL conLrlbuLe Lo susLalnable growLh Lhere
are several cases when a counLry vlolaLes Lhe framework buL sLlll manages Lo achleve susLalnable growLh as Lhe
emerglng 88lC markeLs have done
Comparlng Lhe economles of Lhe four 88lC markeLs l would conslder maklng a longLerm lnvesLmenL ln Chlna
AlLhough Chlna has been able Lo susLaln a 9 annual growLh raLe slnce Lhe laLe 1970s lL wlll mosL llkely have Lo
change flscal and legal pollcles Lo susLaln growLh unLll now Chlna has vlolaLed mosL of Lhe rules of Lhe dlamond
framework yeL managed Lo susLaln unusually hlgh growLh over a long Llme perlod Slnce Lhe emerglng 88lC
markeLs fall Lo meeL all four polnLs of Lhe dlamond framework one musL evaluaLe oLher facLors such as poLenLlal
Cu growLh moneLary pollcy and lnfrasLrucLure ln order Lo make an lnvesLmenL declslon
Cu growLh ls Lyplcally drlven boLh by underlylng real Cu growLh and by currency appreclaLlon ln Chlna and
lndla sLronger growLh has been key as Lhey experlenced only a sllghL reducLlon ln growLh raLes ln 2009 (llgure 2)
8razll was also alded by lLs growLh performance Cnly 8ussla underwenL a severe recesslon and a moderaLe
recovery whlch caused lL Lo sllde from Lhe 8Lh Lo 11Lh largesL world economy
Figure 2

Chlna's Cu growLh was alded by renewed currency appreclaLlon ln 2010 afLer a pause ln 2009 (Wllson 24
!une) 8ecenL currency sLrengLh has played a parLlcularly large role ln 8razll whlch experlenced a real appreclaLlon
of nearly 30 over 200910 from hlgher lnflaLlon and nomlnal appreclaLlon (Wllson 24 !une) Conversely lndla
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and 8ussla recelved smaller boosLs ln Lhelr Cu from appreclaLlon because Lhe lndlan 8upee and 8usslan 8uble
weakened nomlnally over Lhe pasL Lhree years (Wllson 24 !une) Coldman Sachs Clobal LCS 8esearch forecasLed
2012 real Cu growLh for Lhe 88lCs and predlcLs Chlna wlll malnLaln average growLh around 92 followed by
lndla wlLh 78 8ussla aL 36 and 8razll around 4 (llgure 3) Chlna appears Lo be Lhe only counLry where
growLh ls predlcLed Lo lncrease ln 2012 whlle Lhe oLher emerglng markeLs are expecLed Lo decrease
Figure 3


1he 88lC naLlons lmplemenL moneLary pollcy buL have dlfferenL goals Chlna has a quad mandaLe of growLh
employmenL lnflaLlon and a balanced exLernal accounL 1o achleve Lhese goals Lhe eople's 8ank of Chlna uses a
range of quanLlLy and prlcebased mechanlsms such as reserve requlremenL changes and credlL conLrols or
changes ln Lhe benchmark deposlL and lendlng lnLeresL raLes (Wllson 24 !une) 8razll's goals are gradual lx
appreclaLlon and macro measures such as ralse Lhe cosL and lengLhen Lhe maLurlLy of new loans and ralse Lax on
forelgn flxed lncome flows (Wllson 24 !une) 1he 8eserve 8ank of lndla (88l) has a dual mandaLe of prlce sLablllLy
and Lhe provlslon of credlL Lo producLlve secLors Lo supporL growLh 1he 88l LargeLs Lhe lnLeresL raLe for overnlghL
money markeL raLes and also uses open markeL operaLlons Lhe cash reserve raLlo and Lhe sLaLuLory llquldlLy raLlo
(Wllson 24 !une) 1he CenLral 8ank of 8ussla concenLraLes on exchange raLe sLablllLy and monlLors llquldlLy
Lhrough reserve requlremenLs lx lnLervenLlons and open markeL operaLlons (Wllson 24 !une)
lL ls dlfflculL Lo deLermlne lf any one 88lC counLry ls more successful Lhan Lhe oLhers Powever 8razll and
8ussla have Lyplcally dealL wlLh some hyperlnflaLlon slLuaLlons whlch one could argue LhaL moneLary pollcy ls noL
as successful l Lhlnk Chlna has an advanLage here because of lLs 8M8 valuaLlon whlch mosL naLlons agree Lo be
severely undervalued relaLlve Lo Lhe uS
lnfrasLrucLure spendlng ls anoLher key lndlcaLor Lo evaluaLe economlc growLh of 88lC markeLs because lL
Lends Lo be a boLLleneck for developlng naLlons Lrylng Lo grow Lhelr economles 8razll announced lLs flrsL
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#AcceleraLed CrowLh rogram' ln 2007 Lo lnvesL $230 bllllon of publlc and prlvaLe funds ln lnfrasLrucLure Lhrough
2010 ln 2010 Lhls was lncreased Lo $330 bllllon for 201114 Whlle 8razll dld noL achleve all of lLs proposed
spendlng Lhe governmenL ls under pressure Lo lmplemenL more spendlng as 8razll wlll hosL Lwo ma[or sporLlng
evenLs ln Lhe nexL flve years Lhe 2014 World Cup and 2016 Clymplcs (Wllson 22 !uly) Chlna Lyplcally lncorporaLes
lnfrasLrucLure LargeLs ln lLs llve?ear lans 1he mosL recenL plan ouLllned a range of goals for expandlng Chlna's
LransporLaLlon and power lnfrasLrucLure lncludlng lengLhenlng road and express rallway neLworks lmprovlng
elecLrlcal power peneLraLlon and lncreaslng access Lo oll and naLural gas" (Wllson 22 !uly) lndla also uses llve
?ear lans LhaL lncorporaLe lnfrasLrucLure lnvesLmenL goals and announced a pro[ecLed amounL of $1 Lrllllon
8ussla announced an aggresslve plan ln 2007 Lo spend up Lo $1 Lrllllon over Lhe nexL decade on lnfrasLrucLure
lmprovemenLs Powever mosL of LhaL was scaled back durlng Lhe crlsls and Lhe only pro[ecLs LhaL sLlll remaln are
relaLed Lo Lhe 2014 Clymplcs and addlLlonal LransporLaLlon pro[ecLs llnked Lo Lhe 2018 World Cup (Wllson 22 !uly)
All of Lhe 88lC counLrles seem ready Lo spend slgnlflcanL money and resources on lnfrasLrucLure buL lL seems
lndla ls wllllng Lo spend Lhe mosL money ln Lhe nexL few years Clven LhaL lndla's lnfrasLrucLure lags Lhe oLher
counLrles lL makes sense LhaL ls wllllng Lo spend Lhe mosL Lo caLch up
1he Chlnese governmenL has a goal of quadrupllng Lhe Cu by 2020 and more Lhan doubllng Lhe per caplLa
Cu CenLral plannlng has been curLalled and wldespread markeL mechanlsms and a reduced governmenL role
have prevalled slnce 1978 Chlna also conLlnues Lo develop Lechnologlcal advancemenLs and producLlvlLy 1he
counLry has come a long way slnce lLs prevlous soclallsL economy Lo Lhe presenL Llme where prlvaLe ownershlp of
producLlon asseLs ls legal AddlLlonally Chlna has lmproved forelgn Lrade when lL acceded Lo Lhe W1C ln 2001
(Wlklpedla) AlLhough Chlna faces many challenges Lo malnLaln a hlgh growLh raLe deal effecLlvely wlLh Lhe rural
workforce lmprove Lhe flnanclal sysLem conLlnue Lo reform Lhe sLaLeowned enLerprlses fosLer Lhe producLlve
prlvaLe secLor esLabllsh a soclal securlLy sysLem and lmprove sclenLlflc and educaLlonal developmenL (Wlklpedla)
WlLh lLs sLrong 8M8 valuaLlon susLalned Cu growLh and robusL lnfrasLrucLure lnvesLmenLs l belleve Chlna wlll
reach lLs Cu goal and remaln a solld longLerm lnvesLmenL for many years

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WXW^WZUW_

SmlLh Sylla WrlghL 1he ulamond of SusLalnable CrowLh n?u SLern School of 8uslness 2006 rlnL

Polmes lrank Lconomlc 8eslllence of Lmerglng MarkeLs uS Clobal lnvesLors 12 Sep 2011 avallable
from hLLp//advlsoranalysLcom/glablog/2011/09/12/economlcreslllenceofemerglngmarkeLs lnLerneL accessed
20 Sep 2011

MarLlnson Lelgh 1he Amerlca lnvenLs AcL and Lhe lndlvldual lnvenLor" McuermoLL Wlll Lmery 17 Sep
2011 avallable from hLLp//newscneLcom/83011001_32010779292/LheamerlcalnvenLsacLandLhe
lndlvlduallnvenLor/#lxzz1?k!vn9x lnLerneL accessed 20 Sep 2011

Wllson uomlnlc 1he 88lCs 8emaln ln Lhe lasL Lane 8klcs Mootbly 1106 (24 !un 2011) avallable from
hLLps//360gscom lnLerneL accessed 20 Sep 2011

Wllson uomlnlc A rogress 8eporL on Lhe 8ulldlng of Lhe 88lCs 8klcs Mootbly 1107 (22 !ul 2011)
avallable from hLLps//360gscom lnLerneL accessed 21 Sep 2011

Wlklpedla Chlnese flnanclal sysLem Lconomlc reform 11 AugusL 2011 avallable from
hLLp//enwlklpedlaorg/wlkl/Chlnese_flnanclal_sysLem lnLerneL accessed 21 Sep 2011