Political Economy and Economic Development: India vs China, Resúmenes de Economía Internacional

¡Descarga Political Economy and Economic Development: India vs China y más Resúmenes en PDF de Economía Internacional solo en Docsity! CHAPTER 4 ECONOMIC DEVELOPMENT OF NATIONS INDIA’S TECH KING Bangalore- Infosys is one of india’s top providers of information techonology services. Just as china drove down prices worldwide in manufacturing, india is doing the same in sevices. BUT China and India are following two distinct paths to developed its economy by throwing open its economy by throwing open its doors to investment. India’s commitment to free markets was ambiguous and made international companies wary. So India underwent organic growth and spawned homegrown firms in knowledge-based industries, such as Infosys. Despite its reputation for high taxes and burdensome regulations, India long had some of the most basic foundations of a market economy. including private enterprise, democratic government, and Western accounting practices. Its capital markets are also more efficient and transparent than China’s, and its legal system is more advanced. The fact that China is following a top-down approach to development while India pursues a bottomup approach reflects their opposing political systems: India is a democracy, and China is not. appears to be the first developing nation to advance economically by relying on the brainpower of its people instead of a manufacturing base. China, by contrast, is relying on its natural resources and inexpensive factory labor to develop its economy by manufacturing all sorts of products. The best growth strategy—the organic-led path of India versus the investment-led path of China—depends on a nation’s circumstances. (IMP to notice the importance of economic development and how companies can help to improve a nation’s standard of living. this chapter, we investigate the linkages between political economy and economic development—an increase in the economic well-being, quality of life, and general welfare of a nation’s people. National culture can have a strong impact on a nation’s economic development. In turn, the development of a country’s economy can dramatically influence many aspects of its culture. Economic systems in individualist cultures tend to provide incentives and rewards for individual business initiative. Collectivist cultures tend to offer fewer such incentives and rewards. EX. In individual cultures entrepreneurs. Tend to be rewarded with relatively low taxes _nm,-.ççrates that encourage their activities. ECONOMIC DEVELOPMENT Includes economic improvements in people’s lives as well as progress on physical health, safety, life expectancy, education and literacy, poverty, critical infrastructure, environmental sustainability. incorporates both quantitative and qualitative features. economic development requires economic growth, which is a quantifiable increase in the goods and services that a society produces. Economic growth, in turn, depends on gains in productivity, which is simply the ratio of outputs (what is created) to inputs (resources used to create output). Businesses increase their productivity through entrepreneurial activities and innovation, in all their forms. CLASSIFYING COUNTRIES (3) Differences in political economy among nations can cause great differences in economic development. Development is an increasingly important topic as international companies pursue business opportunities in emerging markets. Although much of the population in these countries is poor, there is often a thriving middle class and ambitious programs toward economic development. Nations are commonly classified as being developed, newly industrialized, or developing based on a quantifiable economic measure. Such measures include figures on national production, the portion of the economy devoted to agriculture, the amount of exports in the form of industrial goods, and overall economic structure. There is no single, agreed-on list of countries in each category, however, and borderline countries are often classified differently in different listings. 1. Developed countries- Countries that are highly industrialized and highly efficient, and whose people enjoy a high quality of life. People usually receive the finest health care and benefit from the best educational systems in the world. also support aid programs for helping poorer nations to improve their economies and standards of living. EX. Autralia, canada, japan, new zealand, the United States and all western european narions. 2. Newly industrialized countries- countries that recently increased the portion of their national production and exports derived from industrial operations. located primarily in Asia and Latin America. Include Asia’s ‘FOUR TIGERS’ (Hong Kong, south korea, singapore and taiwan), Brazil, china, india, malaysia, mexico, south africa and thailand. Depending on the pivotal criteria used for classification, a number of other countries could be placed in this category, including Argentina, Brunei, Chile, the Czech Republic, Hungary, Indonesia, the Philippines, Poland, Russia, Slovakia, Turkey, and Vietnam. When we combine newly industrialized countries with countries that have the potential to become newly industrialized, we arrive at a category often called emerging markets. have developed some (but not all) of the operations and export capabilities associated with NICs. 3. Developing countries- poorest infrastructures and lowest personal incomes. (less developed countries). often rely heavily on one or a few sectors of production, such as agriculture, mineral mining, or oil drilling. They might show potential for becoming newly industrialized countries, but typically lack the necessary resources and skills to do so. Most lists of developing countries Transition from central planning to free-market economies generates tremendous international business opportunities. Yet, difficulties arising from years of socialist economic principles hamper development efforts from the start, and some countries still endure high unemployment rates. Governments of former centrally planned economies in Eastern Europe continue to sell. state-owned companies in order to boost productivity and competitiveness and to raise living standards. MANAGERIAL EXPERTISE central planning, there was little need for production, distribution, and marketing strategies or for trained individuals to devise them. Central planners decided all aspects of the nation’s commercial activities. There was no need to investigate consumer wants and no need for market research. Little thought was given to product pricing or to the need for experts in operations, inventory, distribution, or logistics. Factory managers at government-owned firms had only to meet production requirements set by central planners. In fact, some products rolled off assembly lines merely to be stacked outside the factory because knowing where they were to go after production—and who took them there—was not the factory manager’s job. Recent years, however, are seeing higher-quality management in transition countries. Reasons for this trend include improved education, opportunities to study and work abroad, and changes in work habits caused by foreign companies investing locally. Some managers from former communist nations are even finding managerial opportunities in Western Europe and the United States with large multinational corporations. SHORTAGE OF CAPITAL economic transition and development are expensive undertakings. To facilitate the process and ease the pain, governments usually spend a great deal of money to: - Develop a telecommunications and infrastructure system, including highways, bridges, rail networks, and sometimes subways. - Create financial institutions, including stock markets and a banking system. - Educate people in the ways of market economics. governments of many countries in transition cannot afford all the investments required of them. Outside sources of capital are available, however, including national and international companies, other governments, and international financial institutions, such as the World Bank, the International Monetary Fund (IMF), and the Asian Development Bank. CULTURAL DIFFERENCES Economic transition and development reforms make deep cultural impressions on a nation’s people. certain cultures welcome economic change more easily than others do. Transition replaces dependence on the government with greater emphasis on individual responsibility, incentives, and rights. But sudden deep cuts in welfare payments, unemployment benefits, and guaranteed government jobs can present a major shock to a nation’s people. Importing modern management practices into the culture of a transition country can be difficult. CULTURE CLASH SUSTAINABILITY economic and social policies of former communist governments in Central and Eastern Europe were disastrous for the natural environment. direct effects- evident in high levels of sickness and disease, including asthma, blood deficiencies, and cancer—which lowered productivity in the workplace. Countries in transition often suffer periods during which the negative effects of a market economy seem to outweigh its benefits. But as transition and development efforts continue, the wider population begins to enjoy the benefits of a market economy. POLITICAL RISK All companies doing business domestically or internationally confront political risk—the likelihood that a society will undergo political change that negatively affects local business activity. Political risk abroad affects different types of companies in different ways. It can threaten the market of an exporter, the production facilities owned by a foreign manufacturer, or the ability of a firm to extract a profit from a country in which it was earned. A solid grasp of local values, customs, and traditions can help reduce a company’s exposure to political risk. 3 COMMUNICABLE DISEASES put a drag on economic development and social sustainability. - HV/AIDS - TUBERCULOSIS - MALARIA The challenge: to combat HIV/AIDS , rich nations could donate money to train doctors and nurses in poor nations and could invest more in research . Two broad categories of political risk reflect the range of companies each affects. Macro risk threatens the activities of all domestic and international companies in every industry. EX. ongoing threat of violence against corporate assets in a nation and a rising level of government corruption. Micro risk threatens companies only within a particular industry. EX. an international trade war in steel affects the operations of steel producers and companies that require steel as an input to their business activities. main sources of political risk include: - Conflict and violence - Terrorism and kidnapping - Property seizure - Policy changes - Local content requirements CONFLICT AND VIOLENCE Local conflict can discourage international companies from investing in a nation and set back economic development significantly. Violent disturbances impair a company’s ability to manufacture and distribute products, obtain materials and equipment, and recruit talented personnel. Open conflict threatens a company’s physical assets and the lives of its employees. Conflict also harms the economic development of nations. There are at least three main origins of conflict. First, it may arise from people’s resentment toward their own government. Second conflict arise over territorial disputes between countries. EX. border dispute between Ecuador and Peru caused these South American nations to go to war three times. Third, disputes among ethnic, racial, and religious groups may erupt in violent conflict. Terrorism and Kidnapping Terrorist activities are a means of making political statements. Groups dissatisfied with the current political or social situation sometimes resort to terrorist tactics to force change through fear and destruction. Kidnapping and the taking of hostages for ransom may be used to fund a terrorist group’s activities. Executives of large international companies are often prime targets for kidnappers because their employers have “deep pockets” to pay large ransoms. Latin American countries have some of the world’s highest kidnapping rates, and Mexico City is at or near the top of the list of cities with the highest kidnapping rates. PROPERTY SEIZURE Governments sometimes seize the assets of companies doing business within their borders. three categories: confiscation, expropriation, or nationalization. The forced transfer of assets from a company to the government without compensation is called confiscation. The former owners typically have no legal basis for requesting compensation or the return of assets. The forced transfer of assets from a company to the government with compensation is called expropriation. The expropriating government normally determines the amount of compensation. There is no framework for legal appeal, and compensation is typically far below market value. Lobbying- is the policy of hiring people to represent a company’s views on political matters. Lobbyist meet with a local public official to influence his or her position on issues relevant to the company. The ultimate goal of the lobbyists is to get favorable legislation enacted and unfavorable legislation rejected. Lobbyists also work to convince local officials that a company benefits economic development, sustainability efforts, workforce skills and so on. INTERNATIONAL RELATIONS. Relations between countries can influence the political economy of nations and the pace of economic development. Although governments directly responsible for managing international relations, the actions of business can cause relations to improve or worsen. So in this sense, managers do have a role to play in helping to manage international relations. Favorable and strong political relationships foster stable business environments. Stability then enhances international cooperation in sectors such as the development of international communications and distribution infrastructures. Strong legal systems disputes resolved quickly and further promote stability and cooperation. Favorable political relations among countries expand business opportunities, lower risk, and promote economic development. To generate stable business environments, some countries have turned to multilateral agreements. European union’s founding treaty, goods, services, and citizens of member nations are free to move across member’s borders. THE UNITED NATIONS (UN) Although individual nations sometimes have the power to influence the course of events in certain parts of the world, they cannot monitor political activities everywhere at once. UN was formed after the Second World War to provide leadership in fostering peace and stability around the world. provide food and medical supplies, educational supplies and training, and financial resources to poorer member nations. UN receives its funding from member contributions based primarily on gross national product (GNP). Practically all nations in the world are UN members, except for several small countries and territories that have observer status. All members have an equal cote - The security council consist of 15 members. 5 (china, France, the UK, Russia and USA) are permanent. 10 others are elected by the general assembly for two-year terms. The council is responsible for ensuring international peace and security. - Economic and Social Council- , human rights, and social matters, administers a host of smaller organizations and specialized agencies. - Trusteeship Council- five permanent members of the Security Council - International Court of Justice- 15 judges elected by the General Assembly and Security Council. It can hear disputes only between nations, not cases brought against individuals or corporations. It has no compulsory jurisdiction, and its decisions can be, and have been, disregarded by specific nations. EMERGING MARKETS AND ECONOMIC TRANSITION two emerging markets that are transforming their political economies. Both China and Russia continue to undergo economic transition away from central planning and toward more market-based economies CHINA’S PROFILE began its experiment with central planning in 1949, after the communists defeated nationalists in a long and bloody civil war. Following the war, China imprisoned or exiled most of its capitalists. From 1949 until reforms were initiated in the late 1970s, China had a unique economic system. Agricultural production was organized into groups of people who formed production “brigades” and production “units.” Communes were larger entities responsible for planning agricultural production quotas and industrial production schedules. Rural families owned their homes and parcels of land on which to produce particular crops. Production surpluses could be consumed by the family or sold at a profit on the open market. 1979, China initiated agricultural reforms that strengthened work incentives in this sector. Family units could then grow whatever crops they chose and could sell the produce at market prices. At about the same time, township and village enterprises (TVEs) began to appear. Each TVE relied on the open market for materials, labor, and capital and used a nongovernmental distribution system. Each TVE employed managers who were directly responsible for profits and losses. The government initially regarded TVEs as illegal and unrelated to the officially sanctioned communes. But they were legalized in 1984 and helped lay additional groundwork for a market economy. Today, private businesspeople can even join China’s Communist Party, and workers can elect local representatives to the official trade unión. The country’s immense population, rising incomes, and expanding opportunities attract huge sums of investment private property is an accepted concept and encourages Chinese companies to invest in innovation. EX. Huawei is now the world’s fourth-largest applicant for patents. guanxi—the Chinese term for “personal relationships.” China’s approach to innovation. First, flexible networks fueled by guanxi help companies to reduce costs and increase flexibility. Chinese companies spread their production contracts over a large number of parts suppliers and can then increase or decrease orders as demand dictates. Second, some companies exploit China’s lax enforcement of property rights to quickly copy new, pricey global products and make cheaper versions available to Chinese consumers. These companies employ bandit or guerilla innovation to continually learn innovative ways to produce goods at lower cost, though they are clearly violating the original producer’s property rights. personal touch is a necessary ingredient for foreign companies to achieve success in China. Initially, and in line with communist ideology, non-Chinese companies were restricted from participating in China’s economy. But today, outsiders enjoy ever-greater opportunities to create joint ventures with local partners. To learn more about the need for personal relationships, or guanxi, in China, see this chapter’s Culture Matters feature, titled “Guidelines for Good Guanxi.” CHINA CHALLENGES must deal with increasingly rapid economic and social change. Although China’s economy grew through the global recession at rates of between 7 and 9 percent, political and social problems pose threats to China’s future economic performance. The nation’s leadership has poor relations with ethnic minorities and skirmishes between secular and Muslim Chinese in western provinces still occur, although less frequently today. Meanwhile, for the most part, political leaders restrict advanced democratic reforms. Another potential problem is unemployment, largely the result of the collapse of state owned industry, intensified competition, and the entry of international companies. The biggest contributor to the unemployed sector seems to be migrant workers. Hundreds of thousands of workers have left their farms and now go from city to city searching for better- paying factory work or construction jobs. Unhappiness with economic progress in the countryside and the misery of migrant workers are serious potential sources of social unrest for the Chinese government. Another key issue is reunification of “greater China.” China regained control of Hong Kong in 1997 after 99 years under British rule. For the most part, China has kept its promise of “one country, two systems.” Although the economic (and, to a lesser extent, political) freedoms of people in Hong Kong would remain largely intact, the rest of China would continue along lines drawn by the communist leadership. RUSSIA’S PROFILE experience with communism began in 1917. For the next 75 years, factories, distribution, and all other facets of operations, including the prices of labor, capital, and products, were controlled by Russia’s government. While China was experimenting with private farm ownership and a limited market-price system, Russia and other nations in the Soviet Union remained staunchly communist under a system of complete government ownership. ordinary people had difficulty maintaining their standard of living and affording many basic items. Some Russians are now doing well financially because they were factory managers under the old system and retained their jobs in the new system. Others have turned to the black market to amass personal wealth. Still others are working hard to build legitimate companies but find themselves forced into making “protection” payments to organized crime. An opaque legal system, rampant corruption, and shifting business laws make Russia a place where non-Russian businesspeople must operate cautiously Years of central planning delayed the development of managerial skills needed in a market- based economy. Russian managers could do well to advance their skills in every facet of management practice, including financial control, research and development, human resource management, and marketing strategy. Political instability, especially in the form of intensified nationalist sentiment, is another potential threat to progress Russia’s unstable investment climate is another concern among international businesses. Tense uneasiness between Russia’s government and its business community stems from the government’s attacks on business owners who disagree with official policy and on firms that it wants to control. The root of many of Russia’s problems appears to be corrupt law enforcement. Officials of the government accused of raiding the offices of companies for documents and computer. If Russia truly wishes to become a location of choice for international companies, it will need to meddle less in business and begin to safeguard property rights.