Eleven Chapter Globalization and Economic Systems
Images of Capitalism
Images of Communism
Capitalism or the market economy
Capitalism is an economic system in which private individuals control the "factors of production"....
Workers decide for whom to work... banks and financiers decide in whom to invest... and the owners of the means of production decide what to produce...
...and where the "market" (i.e. the cumulative actions of individual buyers and sellers) determines what goods and services are to be offered, in what quantity and at what prices.
...through Adam Smith's so-called "invisible hand".
Economic and political systems often operate "hand-in-glove". Market economies, for example, are mostly associated with democracy and individuals rights.
Characteristics of capitalism
Capitalism leads to the most efficient use of a nation's resources. Capitalist economies are driven by consumers ("the buyers") and entrepreneurs ("the sellers"). The role of government is to ensure that the efficient use of resources is in keeping with social needs.
i.e. a balancing act between efficiency and fairness. e.g. worker safety and rights, pollution and the community, etc.
In a free market economy, government has a limited role in the economy (next slide) and government spending is the lesser component of GDP.
e.g. government spending accounts for about a third of U.S. GDP while consumers account for two-thirds.
Specific roles of government in a market economy
According to Milton Friedman, the economist and great proponent of free market capitalism, the role of government intervention should be limited to protecting (weak) consumers from (strong) suppliers by:
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Protecting individuals from coercion
e.g. by ensuring workers rights, by legislating a safe work environment, safe products, etc.
1. 2. 3.
Enforcing contracts to ensure that commitments are met. Preventing monopoly action by powerful or colluding suppliers. Mitigating "neighborhood effects"
e.g. the impact of pollution on a local community.
The centrally planned or command economy
This type of economy is characteristic of communist societies (and an absence of individual democracy). The means of production are owned by the state and planners (bureaucrats) plan out every single aspect of economic activity, i.e.
who produces what, how, when, where... ...including who works where... ..who supplies what... ...and what prices are charged.
This system ultimately fails because of inflexibility and a lack of accountability
Planners replace consumers and market competition in determining what should be produced. Quantity rather than quality becomes the yardstick. In the absence popular democracy, there is no mechanism for complaint, and hence improvement.
With the collapse of the former Soviet Union, the command economy has been seen for what it is and has been largely discredited as inefficient and easily corrupted.
Aside: China and India chicken and egg?
As discussed, political and economic systems are inextricably linked:
Democracy and the free market economy. Communism and the command economy.
Historically, China, being communist, operated with a command economy. India on the other hand, the world's largest democracy had a closed economy with significant trade barriers, tariffs, quotas and duties. Which should come first economic or political liberalization? China and India's recent relative economic performance suggests that economic liberalization is initially more important than political reform and indeed leads to political reform as totalitarian (communist) China has significantly outgrown the democratic but closed India.
Mixed economies
Many societies, while recognizing the strengths of the capitalist system (and the failings of command economies), also recognize the duty of society (through government) to care for all of its members. This leads to mixed economies (called social democracies in Europe) in which the state may have control of certain key strategic industries through "state owned enterprises" or otherwise provides extensive welfare programs (e.g. education, healthcare). The most successful example of a mixed economy is Singapore. The political debate in capitalist and mixed economies revolves around levels of taxation and which services are best provided by the state and which by the market: i.e. how much of an individual's earnings should go to the government for "common goods" and which common goods.
There is a large difference for example even between the UK and the U.S. (both market economies) in regards to who bears the cost of university education and of healthcare. France, for example, differs from both in having much more state ownership of industry and banking.
Other types of national economy
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Statist:
The government has an indirect but powerful role in that it provides "guidance" to private companies, workers unions, banks, etc. by telling them what to do and by setting ground rules on acceptable behavior/outcomes. Typical of collectivist countries that favor harmony, e.g. Japan, Korea.
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Kleptocratic:
Typical of LDCs and Africa. Corruption and mismanagement are rife with politicians and civil servants abusing power to enrich themselves at their fellow citizens expense.
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"Brazilianization":
Historically, typical of Brazil and hence its name. Government and wealthy companies have close ties, resulting in anti-competitive legislation that distorts the market place, enriching the companies and politicians, and defrauding consumers through higher prices and reduced offerings.
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"Cowboy capitalism":
E.g. Russia. "Frontier" capitalism with limited recourse to law.
The current crisis of faith in capitalism
Following the end of the Second World War, government spending in the Western democracies mushroomed, first to rebuild Europe and Japan, and secondly, to "fight" "Cold the War". An ideological shift took over in the 1980's under Margaret Thatcher in Britain and Ronald Reagan in the U.S. While Thatcher set about privatizing (previously nationalized) state owned companies, Reagan initiated a program of deregulation to lessen the regulatory burden on companies. These measures spurred economic growth and were emulated around the world, resulting in a decade of peace and prosperity. An environment of reduced regulations and monitoring however, accompanied by low interest rates following "9/11" and rising stock markets, led to many abuses and excesses, notably Enron, WorldCom, Tyco, a pay scandal at the NYSE, and the Bernie Madoff and Allan Stanford ponzi schemes. The relaxed regulatory framework also spurred a boom in lax credit (mortgages, credit cards, real estate development); mergers and acquisitions; hedge funds; and exotic new financially engineering products (the derivatives industry). As global demand accelerated, commodity prices rose sharply, forcing central banks to raise interest rates to control inflation. This in turn precipitated a "sub-prime" mortgage crisis in the U.S. that led to a global banking and insurance crisis; a severe global recession, and record levels of unemployment. Social unrest had already resulted in changes of government in several developing countries (most notably Brazil and Venezuela) as it became clear that the benefits of globalization were not being shared by all. This backlash continues around the world today.
The current crisis of faith in capitalism (continued)
Governments around the world have had to step in with large stimulus spending plans in an attempt to restart the global economy and create (maintain) employment. Consumer spending in the U.S. which underpinned the demand that drove global economic growth is likely to stay depressed for an prolonged period as a generation of now wary American consumers scale back and (finally!) switch to saving and reducing debt instead. The Chinese government on the other hand is at last trying to spur domestic consumption to replace the lost export demand. The American model of globalization trade and finance has come in for severe criticism. Many are calling for the dollar to be replaced as the world's reserve currency. While this is unlikely in the short-term, it may be inevitable in the long-run as U.S. deficits mushroom and the U.S. share of world GDP continues to fall. In addition, many around the world (including some in the U.S.) are concerned about income disparity and excessive executive compensation on the one hand, and the failings of the market system to address, for example, climate change on the other hand. Learning from the 1930's however, governments around the world have so far been careful to warn against the perils of protectionism and the closing off of national economies. In the meantime, the plight of the LDC's (least developed countries) continues to worsen as developed and developing nations alike focus on their own internal economic and social problems. It is unlikely that the UN Millennium Goals will be met (next slide).
United Nations Millennium Development Goals
The UN formulated the Millennium Development Goals in 2000 to focus the rich world on the plight of the poor. There are nine goals:
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The eradication of extreme poverty.
Halving the number of people living on <$1/day by 2015.
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Reducing hunger and malnutrition.
Ditto, halving undernourishment by 2015.
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Achieving universal primary education.
Having all children complete elementary education by 2015.
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Promoting gender equality and empowering women.
By focusing on equal rights/access to education.
UN Millennium Development Goals (continued)
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Reducing child mortality.
Child mortality rates in the LDCs are 15 to 20 times those in the developed world. A concerted, multi-pronged improvement in healthcare is required.
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Improving the health of mothers.
The mortality rate of mothers during childbirth in the LDCs is 200 times that of the developed world. Half a million women die each year, ten times the total of U.S. servicemen killed during the whole of the Vietnam War. The goal is a 75% reduction by 2015.
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Combating major infectious diseases.
HIV/AIDS, tuberculosis, malaria, etc. More than a million people die each year due to tuberculosis; more than two million due to malaria.
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Ensuring environmental sustainability.
The goal is to halve the number of people without access to sustainable drinking water.
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Developing a global partnership for development.
Investment, infrastructure, education, healthcare and empowerment in the development process.
Summary - world economic systems
Capitalism the market economy has been seen as inevitable in a globalizing world as it presents the best means for a country to accelerate its economic growth and not be left behind.
While the influence of command economies will continue to wane, the American model of globalization (trade and capital) is now also coming in for severe criticism as a result of the global recession following the sub-prime meltdown. There are many forms of capitalism however incorporating different mixes of pure capitalism and state intervention. These will continue to proliferate, according to the needs, cultures and views of the citizens of individual countries. The critical economic challenges for globalization are restarting the world economy, creating jobs, and raising the income of the poor, both within poor and rich nations. The solutions are as much political as economic. The United Nations through its Millennium Development Goals has provided the rich nations with an opportunity/challenge to share the wealth that globalization has brought them with the poorest countries that have been left behind. Poverty breeds social unrest and extreme poverty can lead to resentment culminating in terrorism. It is in the best interests of the U.S. and the West to eradicate global poverty.