Comparative International Economics

COMPARATIVE INT'L ECONOMICS
~ most corresponds to Georgetown's summer Comparative Int'l Economics course, "Uncle George" ~

LENIN

- socialism in one country since capitalism took over rest of world
- role of party cadres task to implant a socialist consciousness in the society as a whole
- system of thought control
1. subordination of all other goals to keeping the Communist party in power
2. law of uneven development socialism can initially emerge as the result of a political revolution in an underdeveloped country
3. growing distinction between the lower stage of socialism as the higher one of full communism
- land reform and nationalization, secret police, NEP
- scientific management, Taylorism, time-and-motion studies, output quotas

Rightists

Bukharin gradualism and balanced growth, emphasis on market mechanisms
Greater economic interdependence if need be
Leftists
Trotsky unbalanced growth, emphasis on heavy industry, countrys infrastructure
High level of investment and savings (savings rate determined by country)
Autarky: emphasis on self-sufficiency, minimizing foreign contacts
Turnpike theorem Feldman (assumes closed economy and zero interest rate) input-output linkages to plan economic growth
treatment of agriculture as an internal colony (kulaks)

STALIN

- model of rapid industrialization developed by Preobrazhensky
- First five year plan substantial but uneven progress
- future plans in term of physical output targets, delivery times and quotas
- quality of output deteriorated
- socialist competition exploited working class (shock workers), Stakhanovites
incentives of Stahkanovites: raised bonuses for plan over fulfillment, special privileges in form of gods and services, national publicity, much higher wages
- collectivization: kolkhoz (collective farm)), sovkhoz (state farm); social disaster
- price scissors: keeping agricultural prices low, while allowing prices of products bought by rural population to go up.
- Machine Tractor System; Gulag Archipelago, purges
- Second five year plan development of infrastructure; Third fit military requirements of WW2, Fourth thorough currency reform
- Growth rapid, based on high savings rate, slave laborers; investment fund allocated to military, heavy industry, and infrastructure

Problems of relying on physical success indicators:
overinvestment in plant and equipment, with considerable amount of machinery
hiding true output capacity, due to a fear output quota would be increased
hoarding of labor and other inputs b/c storming of targets would be required
low quality of output and inflexible pricing polices
lack of attention to negative externalities pollution, safety etc
resistance to innovation and technological progress

Systemic problem areas of Stalinism:
additional investments were needed in agriculture, where productivity was very low and living conditions were miserable
allocation of investment on the basis of engineering considerations was encountering diminishing returns necessary to seek greater economic rationality
output gains due to he use of more extensive factor inputs were slowing; efforts needed to be made to increase productivity
the USSR found it necessary to increase its foreign trade contacts with the West (food, feed grains, machinery)

CHAPTER 7

- Net Material Product concept NMP instead of GNP; although GNP also ignored the using-up of resources
- Engels Law: as income rises, percentage of family income spent on food falls
- Comparisons are relative: goods might be cheaper, but in terms of labor time spent turn out more expensive; also problems of measurement, data availability, and disagreement among scholars; problem of pre-tax vs post-tax income
- Nomenklatura: a list of party-controlled positions and influence
- social contract between Soviet people and party rulers
- USSR not = Russia; prison of nations, Baltic states by force in USSR
- Triangle Problem
1) jobs were in the West in European part of Trans-Caucasus republics, in captive nations worried about their ethnic survival, or in Russia itself;
2) resources were in the North, in Siberia and Kazakhstan, had to be transported over time zones;
3) 3) people were in the South, with increases in population taking place only there

Developments:
1. communication revolution era of access to information
2. shift in leadership in America and England USSR referred to as the evil empire
3. began to be clear that USSR was lagging behind in science and technology

GORBACHEV

- Law on State Enterprises: replaced obligatory output targets with so-called state orders (goszakaz); gave managers more autonomy, legalization of private economic activity, horizontal contacts with other enterprises
- Economic reform: perestroika split up Gosbank into 5 specialized institutions, weakened the control system
- Political reform: glasnost and demokratizatsiia Solidarity in Poland, Berlin wall fall in Germany, led o political liberalization.
- Why? Maybe he thought political liberalization would lead to economic efficiency, or that people would become more optimistic and become more productive

TRANSITION

- institutions tend to resist change
- Cumulative Liberalization Index: advanced reformers (Slovenia, Poland, Hungary, Czech, Slovakia); high intermediate (Bulgaria, Estonia, Lithuania, Latvia, Romania, Albania, Mongolia)
- Reform measures (Vaclav Klaus, Kornai):
Early, rapid and massive privatization
price deregulation
foreign trade liberalization and currency convertibility
monetary and fiscal conservatism

Kornai's tendencies:

1. marketization have allowed supply and demand to determine price levels, but no advance toward perfect competition (state regulates, but at wrong times)
2. evolution of the private sector no third choice after socialism and capitalism. So it is necessary to permit the state sector to contract
3. reproduction of the macro-disequilibria at the turning point, 4 problems: chronic shortage, open or repressed inflation, budgetary deficit, and foreign debt. These also may worsen for a long time to come
4. development of a constitutional state must have legislation, enforcement of the law, and alteration of mentality of the citizens
5. development of democratic institutions communist party must be destroyed, economic system must be based on private property and contracts, people must stand up for democracy
6. the redefinition of a national community communist countries show resistance to integration influential groups stir up feelings against westernization and appeal to nationalism
7. an unequal increase in welfare- smaller group becomes very rich very quickly; deep dissatisfaction, unemployment increase, decrease in social security

LESS DEVELOPED COUNTRIES

- Economic Development and Cultural Change first book on this subject
- LDC: countries that are still eligible for offical World Bank assistance, or have received it since the founding of it. 51 countries. Per capita GNP below $750 in 1994
- Middle income economies: 1994 GNP per capita of $2520. 39 countries.
- Upper middle-income economies: GNP 2970-8260, aid donors.

W.W Rostow, Stages of Economic Growth
the economic growth experience historically was uniform and inevitable all countries experienced 5 stages:
1. traditional society value system of society was fatalistic, assumptions that new possibilities wont exist, lot of people in agriculture by necessity
2. preconditions for the takeoff society challenges fatalism, social and political changes, development of effective centralized national state and entrepreneurial class
3. the take-off ratio of national saving and/or investment increases, yielding profits, new industries stimulate, expansion in modern sector, increase in income, entrepreneurs expand
4. drive to economic maturity 50 years after takeoff, profits are still invested productively, science and technology advance, financial institutions, savings and investment.
5. high mass-consumption society increases in output, demands of society taken care of

ICOR Incremental Capital-Output Ration
ratio of the previous years investment or capital formation to this years change in GNP. (enables a linkage of growth rate targets to capital requirements)
- Many simple growth models such as ICOR greatly oversimplified, linking all progress exclusively to capital formation
- Limits to Growth growth his impossible incorporation into world economy is harmful, etc (pessimistic model). Further growth his impossible as well as dangerous to the world as a whole. Only way to prevent collapse is to slow down population.

Rebuttals of Limits to Growth:
Not really precise knowledge of quantities and relationships
Neglect of factors which are difficult to quantify (policy and value changes)
Grow over-simplification aggregation problem
Treating some features of the model as rigid and immutable
Those who dont have computers cant rebut numbers.

WORLD ECONOMY VIEW

- focuses on historical and external constraints impeding growth and development
- Karl Marx: capitalism necessary, but will fail, violent business cycles; might be delayed by imperialism.
- Center rich countries, who exploit the periphery (poor countries); the center needs periphery in order for capitalism to exist longer
- Our wealth is result of exploitation of 3rld world, we are rich because we they are poor

3 arguments in world economy model:

1. legacy of colonialism center vs. periphery argument, unequal exchange (government grants monopoly rights to their own companies), doesnt assume the theory of comparative advantage (the two countries are instead fairly even); bias in infrastructure; gold standard itself (major currencies defined in gold content, BOP enforced conservative monetary and fiscal policies, stable exchange rates facilitated foreign trade and investment, low nominal interest rate, long-term investment). Finally, past penetration of 3rld world countries leads to their continued economic subjugation

2. the world trade system integration of poor countries into the capitalist world economy is harmful to their growth and development
- commercial policy of the industrialized country: trade restrictions, structure of protectionist controls dismantle slowly; tariff rates fall. Liberalization had great take off but is not proceeding very slowly. Non-tariff barriers now used. Countrys integration into world economies carries danger that the rules of game will change; they are more vulnerable to external shocks
- export-earnings instability: production structures are rigid, factors of production immobile, capital investments hard to liquidate, hoarders and speculators, (although, question whether this instability is harmful to economic growth)
- Prebish-Singer thesis that terms of trade decline against primary producers: there is an inevitable, long-run tendency for the terms of trade to turn against primary product producers. Terms of trade: ration of average export price to average import price index. Thesis: this ratio will decline secularly. Prices under imperfect competition are rigid and sticky.
(although there is a index-number bias L and P, computed in terms of trade, both will tend to show higher price inflation than actually happened)

Prebisch Thesis: there is a long run tendency for prices of primary products to decline in relation to manufactured products. Declining terms of trade for developing countries (and improving terms for rich ones) is one possible explanation for the growing inequality between countries. Prebisch argued that international trade only reinforcing this "bad development" path.
With distorted national institutions and economic structures, Third World countries were defenseless to the distortionary development implied by trade-induced interaction with heavily-financed First World monopolistic capitalism. As a result, Third World countries, were being dragged into a state of "dependency" upon the First World, becoming the producers of raw material for First World manufacturing development - a "center-periphery" relationship.

3. finance-investment aid institutions against MNCs: 1) large corporations tend to monopolize technical knowledge and dominate r & d. 2) they often take over existing businesses, using funds raised locally, local affiliates of foreign firms have favored access to local capital market; 3) employment - MNCs introduce both inappropriate products and techniques of production; 4) direct foreign investment influences political problems in recipient countries

Bumiputraization in Malaysia sons of the soil. In 1969, they developed a NEP with goal of reducing and eliminating the identification of race with economic function. Centerpiece shifting business ownership from foreign and Chinese hands to ethnic Malays.

LDCs:
1. in 70s, direct private investment was , in 1980, only 1/7, while bank lending rose to .
2. in 86, private investment was 1/3; bank lending was cut in half and was at same level as direct equity investment
3. foreign investors are not attracted by low wages or cheap resources (Latin America, Canada, not Ethiopia)
4. in recent years the share of US based companies in LDS investments has been declining (Europe and Japan increasing)
5. there is no significant different between earnings in developing and developed country operations

TRADITIONAL SOCIETY VIEW

- identifies presently-existing internal bottlenecks as principal reason for difficulties little to do with economic variables
- factors obstructing economic progress:

1. physiological demographic
- labor force, unemployment savings investment do not have too much meaning in very poor countries
- human capital malnourished people, average worker weak and ill
- malaria and other diseases, life expectancy very low
- population explosion; disguised unemployment problem or creating jobs huge.
- Harrod-Domar model: savings provide the funds which are borrowed for investment purposes. Economy's rate of growth depends on: the level of saving and the productivity of investment i.e. the capital output ratio.
Economic growth depends on the amount of labor and capital; As LDCs often have an abundant supply of labor it is a lack of physical capital that holds back economic growth and development; More physical capital generates economic growth; Net investment leads to more capital accumulation, which generates higher output and income; Higher income allows higher levels of saving.

2. political-administrative factors
- target was political enrichment of leaders
- prebendalism: various office holders receive prebends, income in kind as the result of having a particular job. This discourages innovation
- issue of national unity: dozens of languages, unification difficult, politically vulnerable
- urban bias sum total of popular attitudes and government policies which generally encourages economic activity in urban areas and discourages it in villages and small towns of the Third world.

3. sociological-psychological factors
- families different from nuclear family, usually also extended family or tribal unit
- rigid social stratification that tends to impede modernization and economic progress
- need for achievement index (McClelland); responsibility for own actions; beliefs in myths, spirits etc

4. technological-educational factors
there isnt much of either readily available what is is not relevant or appropriate
western countries focus on large scale standardize production in a labor-scarcity environment, but results in LDS with same model are disappointing
Shumacher guru of intermediate technology. Book Small is Beautiful essence: economics from the heart rather than from the bottom line. Man's current pursuit of profit and progress, which promotes giant organizations and increased specialization, has in fact resulted in gross economic inefficiency, environmental pollution, and inhumane working conditions.
Educational system suffers in quantity and quality; not democratic and egalitarian
Many 3rd world education system were constructed by colonial powers and inherited their models in education

5. environmental-climactic factors
- problems of deforestation and desertification: slash-and-burn agriculture
- tropical forests not a renewable resource
- climate is not conduce to economic activity
- natural disasters greater, risks of living are higher

CHINA

- Frances Moulder, Japan, China, and the Modern World Economy:
Internal conditions in China and Japan were essential the same around the turn at the century
Chinas subsequent backwardness due to greater external economic contacts during the 19th century, more extensive trade etc
- China was classic example of traditional society view
- Alexander Ekstein: 22% of Japans population in cities, only 4% of Chinas.
- Meji restoration (1868) took land from feudal lords (hereditary rights), laid 1000km railroad track
- No central bank in china until 1950 now HSBC Hong Kong Shanghai Banking Coropraation dealt with foreign exchange
- Little Red Book Mao Zedong 1976 emphasis on normative organizing principles, deliberate de-emphasis on remunerative signals
- 4 problems China had to struggle with:
population policy, (Mao favored pro-natalist policy), but lately emphasizes late marriage, one child per family etc
rate and pattern of investment (during 10 great years from 49-50, received assistance from Soviet union, followed Stalinist model; led to a famine. Then the great leap, with higher planned investment level.)
role of material incentives (salary differences etc)
role of professionalism and technology (red vs. expert debate: money was less important indicator of success as power and influence were; the red guards)
- general decollectivization of Chinas agriculture. Shortages and threat of famine replaced by very large surplus
- market-oriented reforms led to greater productivity
- tendency toward increased capitalism; but still threats of communist domination

Great Leap Forward large investment projects and labor intensive maximum labor. Led to famine, 35 million deaths. Central market plan was doomed to fail through famine.
In 1962, agriculture was placed first. Lowering of the investment target. Private plots slowly re-established; modern agricultural inputs provided to the richest 20% of provinces that grew rice; industries steel, elasticity, tractors, etc.
1966 beginning of cultural revolution: Gang of Four (Maos wife and three friends); reign of terror by red guards fought for culture, habit, ideas, and customs. hsia fang go down, send down motto of forcible fructification; all universities shot down 1966-72
since 1978, rapid reform Deng Xio-Peng: economic reforms of 1978 (attacking excess centralization in economic management; reforming communes system, improper farm incentives; raising living standards), agriculture improved immediately.

- Economic efficiency criteria vs. 2Q principle: quota two to a consumer, if they got more they would have to go to en d of the queue.

5 characteristics of Maoist system:
1. emphasis on heavy industry and agriculture
2. high savings rate (24%)
3. central planning, single bank PBC
4. treatment of agriculture as an internal colony
5. no trade (autarky) no growth in trade 60-70

China vs. Russia
- USSR was prison of nations, China is homogenous. Gorbachev felt political liberalization was precondition to economic reform, China has not developed political pluralism.

3 major areas of contrast:
1. agriculture - China has decollectivized, while Russia is going very slow with it.
- Impediments to private farming in Russia:
High cost of equipment and building materials
Shortage of material-technical resources, including seeds and fertilizer
High interest rates on credit
Uncertainly about long term land and agrarian laws
Difficulties in obtaining credit
Lack of legal protection
Lack of transport and other utilities-connections
Local leadership obstacles
Difficulties in getting land
Rural populations negative attitude towards those on private farms
Lack on knowledge
Problems with health and education access, lack of stores etc
2. foreign trade and investment Great Leap Outward in China, enormous rise in imports, setting up of Special economic Zones, opening up to foreign investment. Inflation rate brought down to 8% in China, compared to 37% in Russia
3. macroeconomics monetary and fiscal policy. China more successful in bringing inflation under control. Tax avoidances in Russia. Both countries financial system developing slowly. Russia more inflation-prone.

Areas of Progress:
- productivity per acre very high
- average production unit is hector
- poverty fell from 270 million in 1978 to 98 million in 1882
- agriculture: decollectivization, but no private ownership

JAPAN

- followers of free trade have been hoping that market mechanism would restore balance between US and Japan, but deficit is growing larger
- Japanese view of trade surplus is that it reflects their societys inborn frugality, moderation and unsurpassed skill, while Americans are lazy and lack discipline
- Japans trade growth after opening up to the west was spectacular. Reasons:
government commitment to economic growth and technological modernization, willingness to use drastic fiscal policy and monetary measures; paternalistic role played by Japanese government
opening of a previously closed country to benefits of foreign trade let do development of economies of specialization (textile etc). wasnt blocked by anti-trust laws or labor unions
Japanese population showed greater discipline and loyalty as workers, and capacity to abstain from consumption. Financial system was able to mobilize funds for investment effectively.
- Olson Thesis: main causes of economic growth tend to be political. Excessive political stability may be impediment to economic progress, because increasingly powerful interest groups bid for a larger share in the political distribution process deny newcomers their chance.
- High Economic Growth Period: 1955-70 real GNP growth 10%. Growth rate rose, investment and personal savings rose, progress made in overall efficiency.

Similarities between Japan and USSR
1. High Savings and Investment 30% of national income
2. Xenophobia or intense nationalism
3. Disciplined labor force and emphasis on education
4. War time mobilization

Differences:
1. Private Property and Market incentives
2. Resources, USSR had a lot, Japan not.
3. Homogeneous nature of Japan population, in USSR homogeneous

8 reasons to account for Japan superior economic performance:

1. Japans planning agencies are more influential than in any other market-type economy. The government sets out general goals, but allocative details are left to forces of the market. Amakudari senior government officials take retirement from the jobs at 55 to join business firms or financial institutions as directors.
2. macroeconomic policy instruments tend to me more effective and less influenced by short-term political considerations . monetary policy influences total spending directly.
3. labor unions in Japan appear to me more responsible and more conscious of their dependence of the companys well being : closely tied to their remaining competitive in the export market. Emphasis on the adjustment of wages to overall economic conditions.
4. role of Japanese government in control of the BOT and payments - great surveillance of foreign exchange availability. Government limited non-essential imports as well as a buy-Japanese campaign. Investment flows also subject to complex system of approvals and regulations.
5. statistical indicators and economic intelligence in Japan is superior to that of the west. Japanese data sets standards for precision.
6. Japanese educational system functional and growth-promoting. Very competitive, degrees prestigious. System of life-time employment forces Japanese firms to be selective in their hiring process.
7. & 8. R & D expenditures and government investment. Very commercially oriented and directed toward tangible results. Didnt waste on military etc. not theoretical nature research, but practical application.

Early 20th Century
1. Increase government spending 20% of GNP (In US 3%)
2. Ministry of education set up in 1871 school enrolment=100% by 1911 (6yrs mandatory schooling). Statewide univ. foundation.
3. GINI coefficient narrowed
4. Foreign technicians and study abroad were 6% of the budget
5. Finance 1872: giving monopoly over note-issue to centrally charted banks.
6. 1882 Bank of Japan est. and there were also the Yokuhuma Specie Bank and the Nippon Kogyo Ginkoindustrial development bank of Japan, in operation in 1900 when Japan joined the gold standard. Government owned industrial bank in each of the 47 prefectures.
7. 1880-1913 rapid export growth 8% annually.
8. Nixons Shocks to Japan: (a) Opened relations with China (b) Went off the Gold Standard (c) Placed embargo on Soy Beans

6 reasons why Japanese personal saving rate is higher than in the US:
1. formal pension system is relatively undeveloped
2. Japanese workers retire at a earlier age
3. a significant portion of Japanese salary income comes in the form of annual or twice-yearly bonus, of which a significant portion is generally saved
4. Japanese consumer credit system differs greatly from the plastic-payment society
5. saving for expenditures associated with getting married or sending children to good university
6. general psychological attitude of saving for a rainy day

Kosai & Ognio four rules to be obeyed during the period of high economic growth:
1. exchange rate of 260 yen for the US dollar had to be maintained
2. monetary policy was dictated by changes in the BOP
3. the central government budget should be kept as close to balance as possible
4. the tax burden should not exceed 30% of national income

-->Economic growth slowed in the 1970s.
External factors:
resource problems various commodity prices, crude oil etc rose
competition from NICs in Asia
growing protectionism and slowing of demand in Japans traditional markets
appreciation of the yen produced a lessening of the international competitiveness off Japanese exports
Internal factors:
various changes in the labor force structure, labor shortages in some areas, female participation rates, rapid aging of workers, bottlenecks in educational system
greater sensitivity to pollution an quality of life issues, led to rise in outward flows for some industries
Japan had caught up with the West, so could afford to modify its emphasis on grothwmanship

- Japanese groupism: village survival mentality; requirement that individual interests remain subordinate to those of the group (great emphasis on family, harmony, participation, high morale). Also role of women (where groupism and consensus dont apply)

- Negative aspects: lifetime employment only alternative, Japan goes too far in demanding individual loyalty to the company, etc.

Review of 6 reasons for high savings rate:
1. early retirement, high life expectancy, underdeveloped structure of pensions
2. housing prices high, while long-term mortgages not common
3. Japanese still prefer to pay full at time of purchase
4. getting engaged and marries is very costly
5. saving for education of children
6. well developed and competitive banking system, tax aspects of saving, culture stresses prudence etc.

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