CH. 19, 20, 21 – DIFFERENT ECONOMIC SYSTEMS, DEVELOPING NATIONS, GLOBALIZATION

Pure Capitalism Pure Market Capitalism – Operates

on the basis of the three P’s: Prices Profits Private Property

Gov’t in pure capitalism provides only public goods such as national defense and police protection

Pure Socialism

Economic System with little private property Virtually all factors of production are

owned and controlled by gov’t Karl Marx – Father of Communism

Believed history was a struggle between capitalists and proletariat (working man)

Predicted the fall of Capitalism and the evolution of socialism into Communism

Communist economies today are very different than Marx’s theory

Socialism and 20th Century

Splits into two trends:

Democratic – Gov’t controls only part of the economy

Authoritarian – Central gov’t controls the entire economy

Present day Communism is Authoritarian

Benefits of Capitalism Individual values play a major role Capitalism allows more freedom and

personal initiative Provides for more efficiency in economy

and greater rates of growth Both require planning, the difference

is who does the planning Capitalism can lead to inequality. Communism does not provide enough

social programs such as schools and museums

China’s Economic System Communists won Chinese Civil War following

WWII Created a state-run economic system Citizens held little power

1970s and 1980s – Reforms allowed for more independent control of economy Pure Capitalism cannot be achieved b/c the gov’t

owns most major industries and farmland. Citizens hold no property rights Leads to corruption

China admitted to the WTO (World Trade Organization) in 2000 Opened to the world market China is a large market for many businesses.

Russian Economy Privatization – Change from state

ownership of business, land, and buildings to private ownership Leads to increased unemployment and

other economic difficulties, many protest the change

Prices in Russia now determined by Supply and Demand Russian factories still run inefficiently Gov’t owned businesses sold to “friends of

gov’t” People barter b/c they have no faith in the

Russian currency and to avoid taxes

Changes in Sweden Welfare State – Blends capitalism with

socialism Combines private ownership of the means of

production and competitive allocation of resources w/ the goal of social equality

Highest per-capita incomes in the world Sweden’s gov’t almost guarantees life-

long employment Gov’t spending and taxes represents about

54% of country’s annual economic activity Gov’t is cutting taxes and removing some

gov’t jobs, easing regulations on business, and privatizing some gov’t owned businesses.

Latin American Changes

Many countries are capitalist but have large government sectors

1985 – Many gov’t ventures are being privatized

Many countries follow the example of Mexico but are frequently stopped by political disputes

Chile, Argentina, and Brazil have successfully privatized many sectors

Developed Nations v. Developing Nations

Developed vs. Developing

Only 35 of more than 192 world nations are considered developed nations

The rest are developing Only common factors of undeveloped

nations are that they have less industrial development and relatively low standards of living

Economic Characteristics

Very low GDP Not enough capital or knowledge to

use resources to full potential Agricultural economies Poor health conditions Low literacy rates Rapid population growth

Weak Property Rights

Less well-defined, government-protected private property rights EX: Peru – 80% of land has no private

owner No large scale farming since people

cannot afford land Peasant farmers have little incentive to

improve value of property

Economic Development Basic problem for many developing

nations is how to finance the equipment and training necessary for growth Foreign corporations set up branch offices or

companies in developing nations Several forms of foreign aid:

Economic Assistance: Providing loans and money/capital donations

Technical Assistance: Providing professionals to train and teach skills to local population

Military Assistance: Providing the nation’s armed forces with money or people who teach and train.

Who supplies foreign aid?

US channels most of its aid through the Agency for International Development (AID)

United Nations has agencies that distribute funds to developing nations

International Monetary Fund (IMF) has recently become a major foreign aid supplier

Many developing nations are unable to repay loans they receive as foreign aid

Reasons for giving Foreign Aid Humanitarianism – Desire to relieve

human suffering Best interest of developed nations to

help, since it will create more trading partners

Political Objectives – Create allies Develop military alliance

Four Obstacles of Growth

People don’t trust new technology Population growing faster than the

GDP Corrupt gov’ts Trade restrictions

Example: Indonesia Large population, rich natural resources Received $2 billion dollars in aid, but

economy remained a disaster No identity – People identified with their

religion, politics, or tribe Bad leadership

Suharto, leader, improved some economic reforms but relied much to heavily on oil

Depending on only one or two products leads to only a temporary economic growth

Problems w/ Rapid Industrialization Unwise investments

No time for citizens to adapt to new living and working patterns

Countries need to use technology that’s best suited for their culture

Economy itself needs time to adapt to change

Economic Development Many factors influence economic

development Trade w/ outside world Gov’t structure that provides for

economic incentives Natural resources Entrepreneurship Private Property Rights

Lack of one of these factors does not necessarily mean the country will fall into poverty

The Power of Information

Media and Internet transport info to developing nations

Developing nations can see the benefit of working together

Alone, one developing nation has little power, but as a group they can influence the world

Developing nations now partner with developed nations

Globalization: Good or Bad?

Cause and Effect of Globalization

Cause Improved Telecommunications

Effect Countries more economically

interdependent World is one big financial market

Spending habits changed Isolated cultures exposed to new ideas

Globalization

Began in 1970s and 1980s when US banks created worldwide branches

US stock crashes now effect other economies

One nation’s financial panic is everybody’s financial panic.

Foreign Investment

Direct Foreign Investment (DFI) – Purchase of real estate and businesses by foreigners EX: China

Foreign investors subject to US law and policy

Can indirectly effect the gov’t, since the gov’t does not want to lose the business.

Americanization?

6% of American industries owned by foreigners

40% of foreign industries controlled by American industries

Americanization – Spread of American culture People are concerned about spread of

American culture in their traditional culture EX: McDonalds, Burger King, Coca-Cola,

US sports

Multinationals

Multinationals – Companies operating in several countries 2003 – 60,000 multinationals w/ about

620,000 foreign branches Largest 500 multinationals = $9 trillion

in sales Most are based in US, Japan,

Germany, Switzerland, Taiwan, Malaysia, and South Korea.

Cross-Border Investments

Most MNs invest in regions that are close to home The separation of sales from home and

abroad is becoming less important

Alliances

Multinational firms are creating alliances Might be in the forms of joint ventures or

licensing deals with national companies Companies lack certain financial,

technological, or geographical strengths and find partners that have those strengths

Global Village and Tolerance Increased Immigration

Diversity in Public Schools Diversity shows the need for tolerance

and open-mindedness