The Global Economic Environment
The Global Economic Environment
Overview of the World Economy
Economic Integration:
Early 20th century: Economic integration was 10%.
Present day: Economic integration has increased to 50%.
Key Economic Partnerships:
European Union (EU) and North American Free Trade Agreement (NAFTA), now referred to as the United States-Mexico-Canada Agreement (USMCA), are significant examples of integrated economies.
Global Competition:
Global competitors have begun to displace or absorb local competitors in various markets.
Economic Systems
Considerations When Analyzing Economic Systems
Types of Economies:
Categories include advanced industrial states, emerging economies, transitioning economies, and developing nations.
Government Types:
Examples include monarchy, dictatorship, one-party systems, democracies, or states dominated by terrorism or other countries.
Trade and Capital Flows:
Analyze trade policy: Is it free trade or part of a trading bloc?
Consider any currency board or exchange controls affecting capital flows.
Ownership of Key Sectors:
Review who owns the commanding heights of the economy, specifically the transportation, communications, and energy sectors (state, private, or a mixed-ownership model).
Role of the State and Market in Economies
State Services:
Services provided or funded by the state include pensions, healthcare, and education.
Institutional Characteristics:
Is the country characterized by transparency, high standards, and an absence of corruption?
Or is it marked by a compromised court system and ignored standards?
Market Characteristics:
Are there opportunities for high-risk/high-reward entrepreneurial ventures?
Is the market socialized with government-dominated pricing and wage controls?
Economic Systems Diagram
Types of Economic Systems:
A diagram should illustrate the relationships between resource ownership, resource allocation in the following models:
Market Capitalism: Private resource ownership and market resource allocation.
Centrally Planned Capitalism: Command resource allocation within an environment of private resource ownership.
Centrally Planned Socialism: State owns resources and controls allocation entirely.
Market Socialism: Market allocation allowed alongside state ownership.
Detailing Economic Systems
Market Capitalism
Resource Allocation:
Individuals and firms allocate resources based on market demand.
Ownership:
Resources are privately owned.
Market Drive:
Driven by consumer demand and competition.
Government Role:
The government promotes competition and protects consumers.
Centrally Planned Socialism
Opposition to Market Capitalism:
Characterized by the state taking broad authoritative powers to serve the public interest, where the government decides what is produced and in what quantities.
Ownership:
The government owns entire industries and controls their distribution.
Market Dynamics:
Typically, demand exceeds supply, with little emphasis on product differentiation or innovative marketing strategies.
Centrally Planned Capitalism
Description:
A system where resource allocation is primarily through central command despite private ownership of resources.
Market Socialism
Description:
Policies allow market allocation of goods within a framework of state ownership.
Example:
Sweden: The government controls two-thirds of all spending, illustrating a blend of centrally planned socialism and market capitalism.
Stages of Market Development
World Bank Classification:
High-Income:
Upper Middle Income:
Lower Middle Income:
Low Income:
Measurement:
The World Bank categorizes economies based on Gross National Income (GNI).
Characteristics of Low-Income Countries
GNI per Capita: $1,005 or less.
Common Features:
Limited industrialization and a high percentage of the population engaged in farming.
High birth rates coupled with low literacy rates.
Heavy reliance on foreign aid and facing political instability.
Many are concentrated in the Sub-Saharan African region.
Misconceptions about Bottom of the Pyramid (BOP) Markets
Supply of Money: There is a belief that the poor have no money.
Consumer Behavior: The poor are too focused on basic needs to spend money on non-essentials.
Market Viability: Entering BOP markets is often seen as unprofitable due to low price points.
Technology Use: There is a misconception that individuals in BOP markets cannot utilize technology.
Exploitation Accusations: Global companies are often criticized for allegedly exploiting the poor when attempting to enter these markets.
Characteristics of Lower-Middle-Income Countries
GNI per Capita: $1,006 to $3,955.
Features:
Rapidly expanding consumer markets, motivated labor force, and established labor-intensive industries like footwear and textiles.
The bottom 50 ranked countries are classified as Least Developed Countries (LDCs).
India is categorized as the only BRICS nation among these.
Emerging opportunities in countries like Tajikistan and Uzbekistan.
Characteristics of Upper-Middle-Income Countries
GNI per Capita: $3,956 to $12,235.
Common Traits:
Rapid industrialization with decreasing reliance on agricultural employment.
Increased rates of urbanization, rising wages, and high literacy and education levels.
Lower wage costs compared to developed countries.
Countries included in this classification are part of the BRICS group (Brazil, Russia, China, South Africa).
Example: Nestle's investment in Brazil, amounting to $83 billion for a plant and additional investment across the country.
Characteristics of High-Income Countries
GNI per Capita: $12,236 or more.
Alternate Labels: Also referred to as advanced, developed, industrialized, or post-industrial countries.
Economic Dynamics:
Characterized by sustained economic growth through disciplined innovation and high consumer ownership of essential services/products.
Economic Freedom Indicators
Ranking Categories:
Countries are rated as “free,” “mostly free,” “mostly unfree,” or “repressed.”
Variables for Evaluation:
Trade policies, taxation, capital flows, foreign investment, banking policies, wage, and price controls, as well as property rights and the black market.
2017 Economic Freedom Rankings
Free Countries:
Hong Kong
Singapore
New Zealand
Australia
Switzerland
Mostly Free Countries:
Estonia
Canada
United Arab Emirates
Ireland
Chile
United States ranking: 17.
Repressed Countries:
Turkmenistan
Djibouti
Algeria
Timor-Leste
Equatorial Guinea
Zimbabwe
Eritrea
Republic of Congo
Cuba
Venezuela
North Korea
Unranked Countries:
Iraq, Libya, Liechtenstein, Somalia, Syria, Yemen.
Global Economic Groups
G-7 (Group of Seven)
Membership:
U.S., Japan, Germany, France, Britain, Canada, and Italy.
Goal: Achieve global economic stability and prosperity.
Russia was included from 1998, altering it to G-8, but was suspended from membership in 2014 following the annexation of Crimea.
G-20 (Group of Twenty)
Formation: Established in 1999.
Composition:
Features finance ministers and central bank governors from 19 countries and the European Union.
Noteworthy for including developing countries such as Argentina, Brazil, India, Indonesia, and Turkey.
Russia remains part of this group despite its suspension from G-7.
OECD (Organisation for Economic Cooperation and Development)
Composition:
Consists of 35 nations; origins trace back to post-World War II Europe (Paris-based).
Notable members include Canada, U.S. (joined in 1961), and Japan (joined in 1964).
Objectives:
Promote economic growth and social well-being, focusing on world trade and addressing global economic issues, including labor market deregulation and anti-bribery conventions.