ECONOMIC SYSTEMS

DEFINITIONS & CLASSIFICATIONS

Dr. Shibly Noman Khan

Chapter Objectives

To understand the importance of economic analysis of foreign markets To identify the major dimensions of international economic analysis To compare and contrast macroeconomic indicators To profile the characteristics of the types of economic systems To discuss the idea of economic freedom To profile the idea, drivers, and constraints of economic transition

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What is an economic system?

is a set of institutional arrangements use to allocate scarce resources. The more limited the resources are (land, labor, capital, & entrepreneurship) the more scarce they are and a higher price is commanded. Because of scarcity, society has to answer: What? How? And For Whom? If there is not a system (arrangement) anarchy and chaos may prevail
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Economic system:
is the institutional structure through which individuals in a society coordinate their diverse wants and desires. is the means by which a society is organized. is an institutional arraignment use to allocate the scarce resources . is a set of mechanisms and institutions for decision making and for implementation of decisions concerning production, consumption, distribution, standard of living, technology, etc., within a given sovereign geographic area and consists of mechanisms, organizational arraignments, and decision making rules.
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ECONOMICS
Economics is the study of how society chooses to allocate efficiently its limited economics resources and how productive, consumption, and distributive aspects of life are allocated and organized efficiently with technology through the price system in order to satisfy unlimited human material wants/needs/desires.
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Classification of Economic Systems

Basic characteristics for classification of countries: 1. Ownership of resources: Private vs. Public. 2. Information mechanism: market vs. plan. 3. Level of decision making, authority responsibility: centralized vs. decentralized. 4. Incentive arrangements: material vs. moral. 5. Utility Maximization: self interest (individualism) vs. altruism (communitarianism).
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Spectrum Arrangement of Economic Systems

1. 2. 1. 2. 3. 4. 5. Economic systems are construct based on spectrum ranging from: Decentralized market driven incentive based capitalist system. Centralized plan directed socialism This dichotomy changes over time, therefore spectrum changes: Market capitalism, centrally plan capitalism, market socialism, vs. centrally plan socialism. Individualism capitalism vs. communitarian capitalism. internationalism vs. globalism. East vs. West. North vs. South. Economic integration vs. non integration. The events of 1980s, 90s, and 2000s have created much diversity that simple models and labels are less relevant.
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Historical Classification of Economic systems:

1. Nomadic societies 2. Sedentary societies 3. Slave societies 4. Feudalism Serf/Lord 5. Mercantilism 6. Colonialism 7. Agricultural societies 8. Capitalism/Imperialism 9. Socialism/Marxism 10. Technological societies service information 11. globalization.
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Importance of Economic Environments

Company managers study economic environments to estimate how trends affect their performance A countrys economic policies are a leading indicator of governments goals and its planned use of economic tools and market reforms. Economic development directly impacts citizens, managers, policymakers, and institutions.

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Economic Factors Affecting International Business Operations

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Elements of the Economic Environment

Gross national income (GNI): the income generated both by total domestic production as well as the international production activities of national companies Gross domestic product (GDP): the total value of all goods and services produced within a nations borders over one year, no matter whether domestic or foreign-owned companies make the product.

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Adjustments to GNI
Number of people in a country Growth rate Local cost of living Economic sustainability

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Other features of an economy

Inflation Unemployment Debt Income distribution Poverty Labor costs Productivity Balance of payments

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Components of a Countrys Balance of Payments

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Multinationalism and Globalism

The 1980s and 1990s saw a strong economic expansion of economic systems of internationalism and expanding role of the multinational corporations. Europe established a united European Union and now has one currency: Euro. United States, Canada, and Mexico established a barrier free NAFTA in 1994. Move towards economic integration has raised the issue of multinationalist economic system versus national economic systems. Criticism: threatens national identity and weakens sovereign control over economic destiny and system.
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Multinationalism and Globalism

Globalism is the increased integration of the world economic systems. Major industrial firms of the West are no longer constrained by national boundaries. No longer national companies but multinational and global corporations. Globalistic economic system is the increasing interconnectness of peoples, societies, and sovereignties and the interdependence of economies, governments, environments, and international organizations. Globalization implies standardization and homogeneity of products, production, financial markets, management, practices and markets, with relatively low costs.
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Economic Systems in the 21th. Century

Changes from 1990s which rose new and challenging issues: End of Cold War. German Unification Fall of communist political and economic systems in Eastern Europe Dissolution of the Soviet Union. Dominance of market capitalism in North America, Australasia, Europe, Latin America, and Japan. In 2002, Russia, the most populous country of Europe, was officially declared a market economy. Five Tigers of Southeast Asia experienced phenomenal economic growth. Efficient of USA economic performance in this century is attributed to efficient capital, flexible labor, and technology advances.
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Economic Systems in the 21th. Century

History shows that we do not have choice of economic systems. The FSU, Eastern European countries, and many economies in transition are actively searching for their economic systems. Industrialized West has operated with fairly stable economic systems for decades, if not centuries. Emerging world of Asia and Latin America must make crucial choices concerning the economic systems that will bring appropriate level of affluence. Just as individuals learn from the successes and failures of others, so do countries. Ultimate goals is to learn what works, what influences, and in what settings
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Economic Systems in The New World

Changes in economic systems will occur by using elements of the market system to improve exiting systems. However, changes could be as drastically as changing from one economic system to another. Recent systematic changes have become important but there are still more, new and complicated avenues of exploration. All countries have forces beyond their economic systems control such as culture, historical developments, foreign relations and trade, levels of technology, and cultural identities which affect the nature and outcome of their transition.
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Economic Systems in The New World

Economic systems and components are not neutral to the settings in which they arise. Economists prefer to study general principles rather than to become historical, political, or sociological experts of each country/economy. Cultural economists study the social and economic life of individuals and groups. Preconditions affect the pattern and pace of transition, therefore, cultural economics try to avoid generalizations and deals with special circumstances, mostly cultural motivated.
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The rich and the rest

The gap between rich and poor has risen in other emerging economies (notably China and India) as well as in many rich countries (especially America, but also in places with a reputation for being more egalitarian, such as Germany).

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Stranger than fiction

Nervous Americans peg their greenbacks to the yuan (worth about $4.9), not the other way around.
In June it allowed most of the country to pay for imports in yuan and 365 Chinese companies to sell exports for the currency. Last month, it expanded the number to 67,359. By the end of November, trade worth 385 billion yuan ($58 billion) had been settled in Chinas currency

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DUBAI OR NOT DUBAI

Its remarkable wealth and its embrace of immigrants stand out against the anticolonial sentiment and xenophobia found in much of the rest of the Middle East. Its efficient business environment and high quality of life make the emirate a more attractive base for Western expatriates than any other place in the Middle East, and its can-do business culture makes it a place where even Arab businesspeople often go to broker deals. Iranians flock in, too, to trade and to party; by some estimates, there are four times as many Iranians in Dubai as native Dubaians. The city has become a safe harbor from the battles that rage throughout the Middle East over money, politics, and religion. Dubai is not about a clash of civilizations. It is about modernity, comfort, and profit.

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Center Stage for the Twenty-first Century Power Plays in the Indian Ocean
Americans, in particular, concentrate on the Atlantic and Pacific Oceans

The Indian Ocean is dominated by two immense bays, the Arabian Sea and the Bay of Bengal

Trade in frankincense, spices, precious stones, and textiles brought together the peoples flung along its long shoreline during the Middle Ages.
Throughout history, sea routes have mattered more than land routes, writes the historian Felipe Fernndez-Armesto, because they carry more goods more economically. "Whoever is lord of Malacca has his hand on the throat of Venice," if the world were an egg, Hormuz would be its yolk, went another.

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Even today, in the jet and information age, 90 percent of global commerce and about 65 percent of all oil travel by sea.
Moreover, 70 percent of the total traffic of petroleum products passes through the Indian Ocean, on its way from the Middle East to the Pacific. Global energy needs are expected to rise by 45 percent between 2006 and 2030, and almost half of the growth in demand will come from India and China. China's demand for crude oil doubled between 1995 and 2005 and will double again in the coming 15 years or so; by 2020, China is expected to import 7.3 million barrels of crude per day -half of Saudi Arabia's planned output. More than 85 percent of the oil and oil products bound for China cross the Indian Ocean and pass through the Strait of Malacca. Indias coal imports from far-off Mozambique are set to increase substantially, adding to the coal that India already imports from other Indian Ocean countries, such as South Africa, Indonesia, and Australia. In the future, India-bound ships will also be carrying increasingly large quantities of liquefied natural gas (LNG) across the seas from southern Africa, even as it continues importing LNG from Qatar, Malaysia, and Indonesia.
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State Capitalism Comes of Age The End of the Free Market?

Across the United States, Europe, and much of the rest of the developed world, the recent wave of state interventionism is meant to the state's heavy hand in the economy is signaling a strategic rejection of free-market doctrine.

PRINCIPAL ACTORS
State capitalism has four primary actors: national oil corporations, state-owned enterprises, privately owned national champions, and sovereign wealth funds (SWFs).
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When thinking of "big oil," most Americans think first of multinational corporations such as BP, Chevron, ExxonMobil, Shell, or Total. But the 13 largest oil companies in the world, measured by their reserves, are owned and operated by governments -- companies such as Saudi Arabia's Saudi Aramco; the National Iranian Oil Company; Petrleos de Venezuela, S.A.; Russia's Gazprom and Rosneft; the China National Petroleum Corporation; Malaysia's Petronas; and Brazil's Petrobras.

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State-owned companies such as these control more than 75 percent of global oil reserves and production. Instead, they want to use the market to bolster their own domestic political positions. State-owned enterprises help them do this, in part by consolidating whole industrial sectors.
Angola's Endiama (diamonds), Azerbaijan's AzerEnerji (electricity generation), Kazakhstan's Kazatomprom (uranium), and Morocco's Office Chrifien des Phosphates -- all of these state-owned firms are by far the largest domestic players in their respective sectors. Some state-owned enterprises have grown particularly enormous, most notably Russia's fixed-line-telephone and armsexport monopolies; China's aluminum monopoly, power-transmission duopoly, and major telecommunications companies and airlines; and India's national railway, which is among the world's largest nonmilitary employers, with over 1.4 million employees.
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A more recent trend has complicated this phenomenon. In some developing countries, large companies that remain in private hands rely on government patronage in the form of credit, contracts, and subsidies.

These privately owned but government-favored national champions get breaks from the government, which sees them as a means of competing with purely commercial foreign rivals, and they are thus able to carve out a dominant role in the domestic economy and in export markets. In turn, these companies use their clout with their governments to gobble up smaller domestic rivals, reinforcing the companies' strength as pillars of state capitalism.

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The largest SWFs are those in the emirate of Abu Dhabi, Saudi Arabia, and China, with Russia playing catch-up. The only democracy represented among the ten largest SWFs is Norway.

The task of financing these companies has fallen in part to SWFs, and this has greatly expanded those funds' size and significance. They act as repositories for excess foreign currency earned from the export of commodities or manufactured goods. But SWFs are more than just bank accounts. They are state-owned investment funds with mixed portfolios of foreign currencies, government bonds, real estate, precious metals, and direct stakes in -- and sometimes majority ownership of -- a host of domestic and foreign firms. Like all investment funds, SWFs look to maximize returns. But for state capitalists, these returns can be political as well as economic.
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In short, despite the global financial crisis, national oil companies still control three-quarters of the world's primary strategic resources, state-owned enterprises and privately owned national champions still enjoy substantial competitive advantages over their private-sector rivals, and SWFs are still flush with cash. These companies and institutions are truly too big to fail. Other protectionist initiatives have begun to weigh on global commerce. China has reinstated tax relief for certain exporters. Russia has limited foreign investment in 42 "strategic sectors" and imposed new duties on imported cars, pork, and poultry. Indonesia has imposed import tariffs and licensing restrictions on over 500 types of foreign products. India has added a 20 percent levy on soybean oil imports. Argentina and Brazil are publicly considering new tariffs on imported textiles and wine. South Korea refuses to drop its trade barriers against U.S. auto imports. France has announced the creation of a state fund to protect domestic companies from foreign takeover.

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Inside the United States, the international prominence of the dollar is widely seen as serving the country's national interests. Because of this global role and the foreign money it attracts to the United States, the dollar allows Americans to live beyond their means, as exemplified by the cheap Chinese goods at Wal-Mart, affordable vacations on the French Riviera, and U.S. budget deficits financed by Middle Eastern countries.

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Last year China Construction Bank's net profit soared 10% to $11.9 billion. In the same period, Bank of America, which at the time owned some 19% of the Chinese lender, earned just $4 billion, down 73% from 2007. That's all you need to know to understand why Bank of America in May sold a 5.8% stake in China Construction Bank for $7.3 billion. Bank of America has been so badly hurt by the U.S. financial crisis that it needs to raise billions of dollars to recapitalize. Meanwhile, Chinese banks are making money hand over fist as China's economy continues to expand.

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In Russia, any large business must have favorable relations with the state in order to succeed. The national champions are controlled by a small group of oligarchs who are personally in favor with the Kremlin. The companies Norilsk Nickel (mining); Novolipetsk Steel and NMK Holding (metallurgy); and Evraz, SeverStal, and Metalloinvest (steel) fall into this category. In China, the same applies, albeit with a wider, less high-profile ownership base: the AVIC empire (aircraft), Huawei (telecommunications), and Lenovo (computers) have all become state-favored giants run by a small circle of well-connected businesspeople. Variations of the privately owned but government-favored national champions have cropped up elsewhere, including in still relatively free-market economies: Cevital (agroindustries) in Algeria, Vale (mining) in Brazil, Tata (cars, steel, and chemicals) in India, Tnuva (meat and dairy) in Israel, Solidere (construction) in Lebanon, and the San Miguel Corporation (food and beverage) in the Philippines.

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First, commercial decisions are often left to political bureaucrats, who have little experience in efficiently managing commercial operations. Second, the motivations behind investment decisions may be political rather than economic. The leadership of the Chinese Communist Party, for example, knows that generating economic prosperity is essential to maintaining political power.

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A growing number of Americans have come to believe that globalization moves their jobs to other countries, depresses their wages, and exposes U.S. consumers to shoddy foreign products. If U.S. would do well to relearn the lessons of the 1930 SmootHawley Tariff Act, which raised tariffs on 20,000 imported goods to record levels, prompted retaliation in kind, and thus deepened and lengthened the Great Depression.
The global financial crisis has created an illusion of international unity based on the mistaken fear that everyone is sinking in the same boat. A year ago, the talk in policy circles was of "decoupling," the process by which emerging economies develop a domestic base for growth broad enough to free them from dependence on consumer demand in the United States and Europe. Predictions of decoupling have proved premature. Economic problems originating largely in the United States have forced a hard landing in dozens of developing countries by crushing demand for their exports.

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Bangladesh Business Community

1972-75 Mojib Socialistic Approach War 1976-81 1981-90 Jia Ershad Mixed Mixed Stability Corruption

1991-95

Khaleda

Open market

Corruption
And World Market

1996-2001

Hasina

FDI

Corruption And World Market

2001-2006

Khaleda

FDI and Corruption

Corruption

2007-2008 2009-till

CaG Hasina

ICU Global Financial Crisis & PPP

Emergency Merger, Acquisition & Confusion

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Economic Systems and Islam

However, its proponents argue that the practice of Islamic economics could unite the strengths of both capitalism and socialism. It is based on three fundamental precepts: (1) an opposition to the use of interest, based on an interpretation of the Qur'an; (2) the adoption of the zakat, a form of voluntary redistribution, and (3) the filtering of all economic decisions through Islamic moral norms. The most important of these ideas in practice is the prohibition on interest. Other societies attempted to do without the use of interest but none very successfully. Similar restrictions on usury were placed by the Roman Catholic Church and also US laws. The Islamic economist solution is to rely on the sharing of risk through equity, rather than a secure lender advancing investment funds to a borrower.
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Definition of Economic System

A mechanism that deals with the production, distribution, and consumption of goods and services Types:
- Market economy - Command economy - Mixed economy

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The Economic Freedom Index

Approximates the extent to which a government intervenes in the areas of free choice, free enterprise, and market-driven prices for reasons that go beyond the basic need to protect property, liberty, citizen safety, and market efficiency Countries with the freest economies have had the highest annual growth and a greater degree of wealth creation.

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Dimensions of The Economic Freedom Index

Business freedom Trade freedom Monetary freedom Freedom from government Fiscal freedom Property rights Investment freedom Financial freedom Freedom from corruption Labor freedom

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Transition to a Market Economy

Liberalizing economic activity Reforming business activity Establishing legal and institutional frameworks Success is linked to how well the government deals with:
Privatization Deregulation Property right protection Fiscal and monetary reform Antitrust legislation

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Reforms and Economic Progress

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Evaluating the Impact of FDI

FDI is Foreign Direct Investment The large size of some MNEs causes concern for some countries MNEs and countries need to understand the impact of FDI in home and host countries

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Home and Host Country Influences on the Allocation of FDI

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What MNEs Have To Offer

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Considering the Logic of FDI

Need to consider relationship between those who make foreign investments (MNEs) and possible effects on receiving countries Areas to consider:
- Stakeholder trade-offs - Cause-and-effect relationships - Individual and aggregate effects

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The Economic Impact of the MNE

Balance-of-Payments effects:
- Net import effect - Net capital flow

Growth and Employment effects:

- Home-country losses - Host-country gains - Host-country losses

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Why Companies Care About Ethical Behavior

Instrumental in achieving two objectives:
- To develop competitive advantage - To avoid being perceived as irresponsible

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The Cultural Foundations of Ethical Behavior

Relativism vs. Normativism: do truths depend on the values of the groups or are there universal standards Negotiating between evils Respecting cultural identity

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The Legal Foundations of Ethical Behavior

Legal justification for ethical behavior may not be sufficient because not everything that is unethical is illegal The law is a good basis because it embodies local cultural values Laws will become similar in different countries

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Ethics and Bribery

Bribes are payments or promises to pay cash or anything of value Bribes used to get government contracts or to get officials to do what they should be doing anyway Problems with bribery:
Affects performance of company & country Erodes government authority Damage reputations when disclosed Increases cost of doing business

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Where Bribes Are (and Are Not) Business as Usual

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Whats Being Done About Corruption?

Cross-National Accords: The OECD, the ICC and the UN The U.S. Foreign Corrupt Properties Act Industry Initiatives Relativism, the Rule of Law, and Responsibility

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Ethics and the Environment

Sustainability Global Warming and The Kyoto Protocol - National and Regional Initiatives - Company-Specific Initiatives

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Ethical Dilemmas and the Pharmaceutical Industry

Tiered pricing and other price-related issues WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) R&D and the Bottom Line

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Sources of Worker-Related Pressures in the Global Supply Chain

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Ethical Dimensions of Labor Conditions

Ethical Trading Initiative The Problem of Child Labor What MNEs Can and Cant Do

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Corporate Codes of Ethics

Motivations for Corporate Responsibility Developing a good Code of Conduct

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