Economic Systems

/>Welcome friends to the course of International Business. So, in the last lecture, we werediscussing about the economic factors and how they affect international business. Priorto that we have been covering some we covered some of the facts like the effect of legalaspects on business, then political stability and political condition of a country on theinternational business, and the effect of culture.So, now we have been carrying on the economic factors, and like for example, the GDPof a country, the GNP of a country, then we talked about the unemployment rates, andthen we talked about inflation, we talked about productivity. So, how these factors affectany international firm who enters into a new market ok.So, we have seen for example, like in the human development index, India is now rankedat, for example 130. So, this is an indication this tells about the development conditionsof the people right. So, when a firm would like to get into a new country, it would like toknow its labour policies, its people, its and its and their conditions right. So, these aresome of the things which we have discussed in the last lecture.(Refer Slide Time: 01:38)Today we will understand the types of economy or the systems of economy right. So,when we are saying economic system, what it says is a set of structures and processesthat guide the allocation of resources and shapes the conduct of business activities in acountry – what kind of you know policies are there, how would you allocate at theresources. It exists in terms of ownership and control of factor of production and also thefreedom of price to balance supply and demand right. So, economic system is necessarilya set of structures and processes that guide the allocation of resources right.It is also says sometimes understood as a mechanism that deals with the production,distribution, and consumption of goods and services. Now, what is that mechanism thatis what makes the different economic systems ok. So, when we are talking about thefactors of production – labor, land and capital, so what are the regulations, how is themanufacturing you know structure, and what is the distribution structure? So, these areall that is counted.(Refer Slide Time: 02:41)So, how this thing happens? The economic systems have to answer three basic questionsright, to decide judge what kind of economic system they are. The first one – what toproduce right? Second one – how to produce? And third one – for whom to produce? So,when you look at the on basis of the answers given here, we have four types of economyright systems.The first one is the traditional economy so right, you can look at this, then the commandeconomy, then the market economy and then the fourth is the mixed economy right.Now, let us go one by one. So, as you say the name traditional, traditional meanssomething that has been there in the past ok. So, what does it say? It is an economicsystem in which traditions, customs, and beliefs help shape the goods and services theeconomic producers, as well as the rules and manners of the distribution right.So, you be one tends to behave in the manner that they have been accustomed with right.So, these are generally rural and farm based. So, we have been you know in the past inthe earlier you know days, it has been largely agricultural based. So, we have followed abarter system, then we slowly evolved from there. So, what the traditional economy saysit is largely farm based and rural based which is agricultural driven right.Although traditional economies are now rare, they are not much therefore to be found,because most of the you know developed or the developing nations have moved awayfrom the traditional economy. Some still exist, but for example, in Papua New Guinearight, villages in some of the African countries, South America, and in some places inIndia also till date you find the traditional economy is still prevalent right, where peoplefor example, take you know give like a barter system right, where they exchange forgoods one thing against the other right, in India also it is to be found.(Refer Slide Time: 04:45)Then the next one is the command economy. So, what does it say? It is also known as acentrally planned economy right. Describes the economic system whereby thegovernment owns and controls all the resources. Now, this is as the name suggestscommand. So, there is like a commander, the commander commands; and according tohis command whatever he commands that is the rule of the place.So, the command economy is a key feature of any communist society right. Example forexample, being Cuba, North Korea, the former Soviet Union, and an examples ofcountries that have command economies right. So, these are some of the commandeconomies. So, where there is a ruler or a type of a dictator who generally dictate dictatesright.So, you see what happens in the command economy. Now, the what to produce? Thedetermined by the government preferences, the government decides what should beproduced. Now, how to produce? Again the government and their employees they decidehow to produce it right, what is the best way and they will decide the best way. And forwhom? The government again decides according to the preferences of the governmentright. So, everything is being decided by the government or the ruler.(Refer Slide Time: 06:05)The third is the market economy. Now, the market is a very you know is a very differentkind of word, because the market believes in more dynamism and openness right. So, amarket economy encourages open exchange of goods and services between the producersand consumers, and in which individuals rather than the government make the majorityof the economic decisions.So, here it is not a one person like a command economy, and rather the people togetherright, the people, the government, everybody together they take the majority of theeconomic decisions right. Maybe there are few decisions which are very sensitive, andhave to be done by a high level committee or something that is a separate thing by thegovernment. But otherwise everybody is involved because the people have theirrepresentatives and these representatives again a part of the process right. And invisiblehand seems to coordinate the economic activity.Adam Smith had said that in his invisible hand theory that when everybody tends to dowell for himself or herself, the nation automatically grows. So that means, in the openmarket economy, it largely believes in the philosophy that when openness is there andpeople tend to try optimize their production, their productivity, their efficiency level andall, so automatically it is the summation of the efforts of all the individuals in the countrywill tend to have a very large symbiotic you know effect right.The government plays little if any role in the marketplace. So, today you see forexample, the Indian government at the moment is seriously thinking about disinvestmentand even divesting many of its PSUs right. So, they are thinking that the government isnot the best person to run the PSUs right. So, it should go to private hands. So, now, thisthere is a debate people, sometimes people say , no, it is not necessary that all theprivates are good, and all the PSUs or the government control are bad.But whatever it is right, the government if at the end of the day it has been seen acrossthe world, the majority of the you know success stories are with the private right. So,looking into that the government feels, it is better for the government to think on or youknow work on social related issues, and not get into the economic or running a company,for example, right.A purely capitalist economy is a free market economy. So, you can understand from thatcapitalist economies are like the US right so which has done pretty well right. Marketeconomy can be identified on the basis of the economic freedom index. So, let us see thecoming slide. So, this is how it looks like you know some characteristics of a marketeconomy, limited government, system of market and prices, so supply and demand, thereis a balance, freedom of choice, people have a choice to select anything. So, motive ofself interest, there is a competition in the market, and so the best one will tend to do well,private properties are there, so people tend to do on more money and they have their ownproperties, so this, this naturally drives the economy ok.(Refer Slide Time: 09:26)So, based on the 2019 Index of Economic Freedom, Hong Kong, with its extremely lowtax rates minimal regulations on business and highly capitalist system of economics,ranks as 90.2 percent economically free right, which is the highest in the world.Singapore ranks second and is 89.4 percent free right. The country imposes no tariff andthere are few restrictions on investments. Singapore also features strong in the privateproperty rights ok.New Zealand which ranks third at 89.4 percent free, which was very close to theSingapore value, also has very low tariffs and strong private property rights. Thegovernment provides businesses with lots of flexibility and does not constrict them withoverly complicated regulations or licensing procedures.So, that is what you know today India for example, has been advocating and trying to saythat we have a single window clearance system right. We are moving into a singlewindow clearance system. We do not want to have too much of regulations. We want tominimal; we have to have minimal policies and more free governance right. So, that iswhat the government is thinking.And at the moment, we are doing pretty well also in terms of the change in rank of easeof doing business as I started with we have moved from 77 rank to 63rd which is a 14rank jump, so pretty good in that way, but then there is a lot to do yet.(Refer Slide Time: 11:01)Finally is the mixed economy – the last one. It combines elements of the market andcommand economic system whereby both so there are it combine elements of the marketand command economic system right. So, this is the market economy open, and this is hecommand economy where this is a ruler.And private enterprises, whereby both the government and the private enterprisesinfluence production, consumption, investment and saving right. So, market pluscommand is equal to mixed. There are no pure command or market economies. To somedegree all modern economies show characteristics of both systems and are often referredto as mixed economies. India is a bright example.For example, businesses own resources and determine what and how to produce, but thegovernment regulates certain industries. So, we feel for the safety and the benefit of theindividual citizens in the country, the government has to keep them in some control;otherwise the private may go for maximum profit maximization, and this may lead toexploitation of the individuals. So, to avoid such situation, the government comes inbetween and regulates these industries. So, this is a mixed economy. Most democraticcountries fall in this category. There are no truly pure market or command, commandeconomies right, so some of the examples US, Brazil, Mexico, Canada, UK, India right.(Refer Slide Time: 12:27)So, how does the continuum of economies look like, pure planned economy, pure freeeconomy right. So, planned means here we are seeing the command economy, socommunism, socialist leaning, capitalist leaning, and pure capitalist or pure competitionright. So, from each end, if we see so this side, so North Korea, then socialist leaning –China, Venezuela right; then for a capitalists leaning – France and Sweden, and thenpurely a you know kind of a capitalist a pure competition right is being followed byUnited States and Japan.(Refer Slide Time: 13:04)Economic freedom and market transition, now what is this connect? Countries with thefreest economies have had the highest annual growth and a greater degree of wealthcreation, it has been observed. In addition, reports find positive correlation betweeneconomic freedom and higher average income per person, higher income for the poor,higher life expectancy, higher literacy, lower infant mortality, and less corruption.This is simple because when if there is a free economy, there is a competition everybodytends to do try to achieve more or maximize their potential right, maximum utilization oftheir potential. As a result of it, everybody grows from the position they are in at themoment right.So, what does it defined as? Defined as the absence economic freedom index is definedas the absence of government coercion or constraint on the production, distribution, orconsumption of goods and services beyond the extent necessary for citizens to protectand maintain liberty itself right. Higher the degree of economic freedom, the stronger theperformance of the economy right.(Refer Slide Time: 14:11)So, what are the dimensions of the economic freedom index? So, 12 aspects of economicfreedom measured in the index are grouped into four broad categories, there are 12aspects. So, over the 12, rules of law. So, what does it contain? Property rights, judicialeffectiveness, government integrity. Then government size – tax burden, governmentspending, physical health. Regulatory efficiency – business freedom, labour freedom andmonetary freedom. And finally, market openness – trade freedom, investment freedomand financial freedom. So, these 12 aspects have been covered into four clusters or fourgroups ok.(Refer Slide Time: 14:51)So, you can look at it in terms of the 2019 index of economic freedom world rankingsare given to you. So, for example, this is the at the extreme end is the world ranking, thenthe regional rank. So, the world rank in terms of world rank Hong Kong, Singapore, thenfollowed by New Zealand, Switzerland, Australia, Ireland, United Kingdom, Canada, itgoes on right. And if you go come here right, then you come to let us say let us see; let ussee Morocco, so and third here, if you come India should be somewhere maybe, this ahIndia, so 129th rank.(Refer Slide Time: 15:32)India is on the 129th rank right. And the followed last on the last numbers are NorthKorea, Iraq, Libya. So, these countries they do not have a economic freedom as good asthat understanding that right.(Refer Slide Time: 15:54)So, the correlations of economic freedom you see, economic freedom and theenvironment. So, if it is high, then we say free. And 69.5 mostly free, and 49.5 isrepressed for. So, these are some of the values how they understand, mostly unfree right.So, the category the values right, I think there is a small I think this is it should be 47.5because or this should be a little more than that.Maybe this is small data; this should be little higher, anyway maybe it does not matterbecause these two anyway are on the dangerous side right, no so good side. And thesethree this is on the you know on the neutral side. And these two are basically on thepositive side. So, positive, negative, neutral right.Similarly, you can look at economic freedom and human development right. So,repressed, mostly unfree, moderately free, mostly free and free. So, how humandevelopment happens when there is an economic freedom.So, these are some of the things. And look at the purchasing power parity, GDP percapita purchasing power parity how this moves when the country is free. Always if youlook at these diagrams, then it will give you a very clear picture that when there is aneconomic freedom, automatically the environmental condition improves, the humandevelopment condition improves, the purchasing power of people improves. So, that is avery positive sign right.(Refer Slide Time: 17:18)As economic freedom rises, the global economy expands and poverty falls. I think I inone of the lectures we discussed about it how in India the poverty level has fallendrastically right. India has been able to shift almost 20 crores of people from the povertyline. So, this is something it talks about right. Average score in the index of freedomindex of economic freedom as it grows right, the global GDP in trillions of US dollarsright how it is grown, and how poverty has fallen this connection right.(Refer Slide Time: 17:52)Transition economies, now these are involved in the process of moving from a centrallyplanned economy to a mixed or a free market economy. So, what is the how in thetransition, what is happening? So, liberalization of markets to give prices a bigger role inallocating scarce resources between the competition in the competing uses. So, there aresome resources, and they have to be used can be used in several ways.So, in this you know the allocation of resources happens. For example, if you look at thehow coal is being allocated in India to different users right. Privatization of governmentassets transfer to the private sector. Reduction in tariff and other trade barriers, so thatthe economy becomes more open right. Reduction in the scale and scope of governmentsubsidies, example to loss making. So, during it in the transition economy, thegovernment tends to reduce the subsidies to the loss making right.There is a lot of legal reforms to protect the private property rights. For example, if youare not protecting the private the people’s property, then there would be a fear and theywould not try to utilize their money in building assets, and that is not then that is thatmeans, they are not consuming right. So, that again will have an impact on theunemployment, and thus everything will have a very vicious effect. Banking reform andinterest rate, for example, you know India is can be considered as a very interestingexample for the transition economy ok.(Refer Slide Time: 19:26)Now, if you look at the classifications, there are some classifications, for example, CEEwhere Central and East European economies come into, then Baltics the states inNorthern Europe, CIS – Commonwealth of Independent States, where you have thesecountries. And the transition economies in Asia right. So, these are the classification ofthe transition economies.(Refer Slide Time: 19:49)India is a classic case as I say. The investment climate in India has improvedconsiderably since the opening up of the economy 1991, the globalization the LPG whenwe had during Manmohan Singh’s time when he was the prime minister finance ministerright.So, important points India maintains several export subsidy programs includingexemption from taxes for certain export oriented enterprises and for exporters in theSEZs. Numerous sectors like these receive various forms of subsidies includingexemptions from customs duties and internal taxes, which are tied to the exportperformance right.India’s midterm review right outlined right of its foreign trade policy outlined a renewedfocus on promoting Indian exports while highlighting the need to move away fromexport subsidies consistent with the WTO - World Trade Organization commitment.Now, there is a pressure on India to come out of the subsidies, so that they should notgive subsidies because that makes unbalanced competition right.According to Department of Promotion of Industry and Internal Trade, FDI equity inflows in India was in 2018-19 should at 44.37 billion indicating the government’s effortto improve ease of doing business which has yielded result, and India has moved 14places as I said right.(Refer Slide Time: 21:14)So, this is how it looks. So, you can have a look at it right. So, the top five sectors whichare attracting FDI in India right.(Refer Slide Time: 21:21)And so central government invited bids of privatization of 6 airports. So, these are someof the events which has happened and which tells about India’s transition righteconomical transition. So, intellectual property rights in India is governed under thefollowing acts. So, intellectual property rights is another major issue. So, when you aretalking about economic factors, companies tend to get scared that their intellectualproperty would be protected or not right.So, the Trademark Acts 1999, Patents Act, Copyright Act, Designs Act, so these aresome of the acts which have been some changes have been made right. So, and they areruled by basically these but there is a lot to improve there is not there are lot of criticismson this acts also, because sometimes it is being taught that archaic and old, and newformulations have to be done new changes have to be done right.(Refer Slide Time: 22:13)So, for example, the IPRI is a flagship publication of Property Rights Alliance, it scoresthe underlying institutions of a strong property rights regime, the legal, political, physicaland intellectual property rights. Interestingly, India ranks 36th among 50 countries in2019. So, that is not a very nice thing, because if there is an IPR violation the foreigncompanies would be scared to do business in India. So, however, you know you maymake policies which are conducive, but still there would be a fear of you know exposingor taking away their knowledge right, somebody copying their knowledge.(Refer Slide Time: 22:57)So, you can look at this. And this is a example which I have brought. So, this is the IPRdispute case of Napster. So, Napster is a company in the let us let me read out for you. Inone of the internet’s the most well known IPR cases, the Recording Industry MusicAssociation of America sued Napster right, a file-sharing site founded in 1999.What happened? Napster allowed users to share music files and thousands of peoplebegan downloading songs for free rather than buying the CDs ok, so that was kind ofpiracy started. It is a case of piracy also people downloaded free. And so what happenedas a result of all this?However, Napster did not own the rights to the music that people were uploading to itsservers right, where the music was stored and ultimately shared. The rights were ownedby the recording artists and the recording studios right. Now, the association suedNapster and won the case. Napster had to close its doors – its servers, as the case may be.Napster now operates as a fee-based music download site and pays the licensing fees forthe music it sells.So, you can understand that how IPR also has a major influence on the international orthe business in any country. So, the kind of protection the government gives, the kind ofpolicies you have, basically if you look at it all these factors that we are discussing theyhave in totality they have an effect on the international businesses right. So, instead oflooking at a one-sided effect you know or one aspect of it like economic or legal orpolitical, we need to have a holistic effect check the holistic effect right.(Refer Slide Time: 24:51)So, there is one more case I have brought you can look at it in your free time, you can gothrough it. So, this is the case of Barbie. How Barbie also had to go through condition.And the other company Bratz, the company is Carter Bryant, so the he was a designer.So, what happened in this case you can look at it. So, this is all we have it for the day.And thank you very much.