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Economic Systems and National Development

Doing Global Business Course

David Timis

on 24 November 2013

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Transcript of Economic Systems and National Development

Economic Systems and National Development
by: Anton, Boris, David, Irina and Oana
Market Economy

Planned Economy

Mixed Economy

Development of Nations

Economic Transition
Market Economy
The majority of a nation’s land, factories, and other economic resources are privately owned, either by individuals or businesses.

Market mechanism dictated by two key forces:

Planned Economy
Mixed Economy

“Centrally planned economy is a system in which a nation’s land, factories, and other economic resources are owned by the government. The government makes nearly all economy-related decisions – including who produces what and the prices of products, labor, and capital”.

Wild and Wild (2012)
Wild and Wild (2012)
“A mixed economy is a system in which land, factories, and other economic resources are rather equally split between private and government ownership.”

Ideological Background

Adam Smith – ‘‘the father of modern economics’’ was the first to analyse free markets

‘‘An Inquiry into the Nature and Causes of the Wealth of Nations’’ – 1776

Contemporary Examples
Laissez-faire (‘‘allow them to do’’) system: less governmental control and greater individual economic freedom

Absolutely Free Economies?
Government Role

Free choice: on alternative purchase options

Free enterprise: which goods and services to produce and in which markets to compete

Price flexibility: prices rise and fall to reflect changes in supply and demand

Enforcing antitrust laws

Preserving property rights

Providing a stable fiscal and monetary environment

Preserving political stability

Little direct involvement, but 4 important roles:
IEF 2013 by The Wall Street Journal and The Heritage Foundation (think tank)

185 countries measured on 10 criteria

Inherently creating class division (capitalism)

Unequal distribution of empowering work ultimately leads to uneven exchanges and incomes

Survival of the fittest

No economic freedom due to greed and overproduction (recessions)

Does it actually exist?

Ideological Background

The First Communist State
of Communism

"From each according to his abilities, to each according to his needs.”
- Karl Marx

Avant-garde art by El Lissitzky, 1919

1920s and 1930s

1940s and 1950s

1960s and 1970s
Failure of Central Planning
Failure of co-ordination

Failure to create economic value

Failure to achieve growth

Lack of incentives

Environmental degradation

Failure of Coordination
Impossible to predict/plan ahead all economic transactions

Inefficient management:

Failure to Create Economic Value
Central planners paid little attention to producing quality goods and services at the lowest possible prices, thus failing to bring a good value to the consumers.

Scarce resources were wasted in the pursuit of activities that were not self-sustaining.

Failure to Achieve Growth
Lack of Incentives
Due to the government ownership of resources, the command economy
offers little incentives for individuals to work hard.

i.e. produce maximum
output from a given input

Environmental Degradation
Chernobyl. Photo by Thomas Szlukovenyi/Reuters.

Shortages of production inputs and consumer goods

Emergence of black markets (with higher prices)

Ideological Background
Welfare Capitalism
OECD Countries
In light of the economic crisis we have been able to directly perceive varied government absorption of financial institutions.
This is called...

General trend towards privatization

Sweden - less government control and influence

Outcomes: Rapid rise in inequality
Term originates from the post Great War political debate in the UK

Historical example:
The American school or National system of economic organisation

Propelled the United States to overtake the United Kingdom as the leading world economy

"Socialism and the mixed economy are entirely compatible. There is belief of public ownership equating to socialism, and by extension also that true socialism is impossible within the mixed economy. The great ideal of democratic socialism can neither be expressed nor achieved by a doctrine solely concerned with economic organisation."

Hon. Roy Hattersley

Hon. Roy Hattersley, MP, 1979
The Nordic Model

Social market economy

Welfare capitalism

Christian Democratic
Social Democratic
Grey Areas
2008 Germany: Renationalisation of the Bundesdruckereri (federal print office)
privatized in 2001
1972 Chile: Chilean nationalization of copper mining industry
2008 Iceland: Renationalisation of Iceland’s largest commercial banks
Market Economy
Planned Economy
Mixed Economy
Economic Development
Economic Development
Comparison measure of well-being for different nations through:

-cultural differences


Key factor: Productivity – ratio of outputs to inputs

Increased levels of productivity = Increased living standards
Welfare Indicators
Value of goods and services produced over one year period of a country`s domestic and international activities

-allocates production based on ownership

Value of goods and services produced over one year within a country`s border

-allocates production based on location


-uncounted transactions

-growth questions

-averages problems

-comparison pitfalls

Global Outlook for Growth of GDP 2013-2025
*Europe includes all 27 current members of the European Union, as well as Iceland, Norway, and Switzerland.

**Other mature includes Canada, Israel, Korea, Australia, Taiwan, Hong Kong, Singapore, and New Zealand.

***Southeast Europe includes Albania, Bosnia & Herzegovina, Croatia, Macedonia, Serbia & Montenegro, and Turkey.
Purchasing Power Parity (PPP)
BIG MAC Index (The Economist)
China Analysis
Experienced high economic growth due to economic reform in 1978 driven mainly by:

Labour-intensive/export-oriented manufacturing activities


Rapid industrialization

Technique used to determine relative value of different currencies
Have you ever experienced a situation based on the above-mentioned? If so, explain and analyse the factors driven to such outcome.

Method of currency comparison comparing wealth of two countries by adjusting GDP per capita at PPP would show that one country has higher living standards
Human Development
Economic Transition
Economic Transition
Changes in current economic organization towards a new free market institution:
Large and small scale privatization

Macroeconomic stabilization; credit availability expansion

Economic Activity liberalization

Trade/Investment barriers removal

Social-welfare system development

Lack of Managerial Expertise

Capital Shortage
Lack of Managerial Expertise
Capital Shortage
Competitive enterprise
Invention and innovation
Manufacturing raw material commodities
Africa Outlook
Lack of:
Strong graduate business schools as part of the African Management Initiative
Career-long continuing education
Good quality management training programmes
Expensive as it does involve investments into developing:
Human Development Index
Contemporary Examples
Ideological Background
Mahbub ul Haq (1934-1998) - Pakistani Economist, Advisor to United Nations Development Programme (UNDP) (1989-1995) and Founder of the Human Development Report (1990).

"The basic purpose of development is to enlarge people's choices.

People often value achievements that do not show up at all, or not immediately, in income or growth figures: greater access to knowledge, better nutrition and health services, more secure livelihoods, etc.

The objective of development is to create an enabling environment for people to enjoy long, healthy and creative lives."

Mahbub ul Haq (1934-1998)
A tool developed by the United Nations to measure the extent to which a people’s needs are satisfied and addressed equally across a nation’s entire population.

Wide divergence within countries

HDI reflects long-term changes and may not respond to recent short-term changes

Higher national wealth (GDI) may not necessarily increase economic welfare, it depends how the money is spent

Measures chosen are easy and cheap to collect

Use of education and health is a sign of successful government policies

A fairly reliable indication of a nation's welfare in the future
Classifying Countries
Food for Thought
Developed Country
= Country that is highly industrialized, highly efficient and whose people enjoy a high quality of life.
Developing Country
= Nation that has a poor infrastructure and low personal incomes.

Classifying Countries

-Christian Democratic

-Social Democratic

-Grey Area
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