Country Comparison

Factor Detail

Ratings = Postive (+), Negative (-), Mix, Nuetral

China
Details Rating Details

Brazil
Rating

Spain
Details
Between 2008 and 2012 the economic boom of the 2000s was reversed, leaving a quarter of Spain's workforce unemployed by 2012. The impact of the crisis has lasted longer in Spain than in most OECD economies. Its main effects included the collapse of the construction sector, higher unemployment and a larger government deficit.

Japan
Rating Details Rating

Economic

Headline

Economy is based on 1) exports and 2) FDI. 2001 WTO accession catalyzed 3 major reforms - facilitating foreign enterprise, promoting free trade, and improving legal transparency and predictablity (see write up, p1)- which spurred strong growth; now 2nd largest economy after US

Pos

High growth: Forecaseted to be among 5 largest global economies by 2030

Pos

Neg

Late 1980's and 1990's growth bubble popped, since have moderate economic reforms with mixed results

Mix

GDP

Size, breakdown by segment

$7.2T (2nd largest, after US) Growth Rate highest in the world: 8-9% prior to WTO accession, 10-11% after)

Pos

2002: $504B, 2011: $2.48T (20% growth in 9 yrs). Household consumption: 60%, High public debt: 54%;

Mix

$1.49 Trillion in 2011 (1.38T in 2010) Large amount of sustained growth over past 50 years until recently

Pos

4.9T (2.5% growthfrom 2010 to 2011)

Labor productivity

Annual growth rate (GDP/ppp)

Highest growth rate in world (1995-2005 average 8.43% annual growth (US: 2.8%)); spurred by migration from rural to urban areas, FDI brought new technologies and management practices, massive infrastructure investments, increased access to international markets incentivized entreprenuership and investment

Pos

Low growth rate, hampered by poor inftastructure, low skilled workforce (1995-2005: .3% annual growth; US: 2.8%)

Neg

The Spanish economy experienced significantly weaker labour productivity growth than other OECD economies and failed to catch up with the most advanced economies in the period 19962007. In recent years labour productivity growth has accelerated, but this recovery is likely to be due to cyclical and temporary factors.

Neg

Moving to part time labor force post economic reforms has helped improve the cost structure. Also a hange Mix from lifetime employment to job movement is a plus.

Leading industries

General manufactoring (44% of GDP); technology manufactoring, construction, power

Pos

Primarily agricultural commodiity exports. Oil and other extraction industries; airplanes, tech goods, tourism, ship building, manufactoring, and telecom equipment also ranked high (though free trade is pushing them back to commodiy exports)

Mix

Agriculture - 3.3%; Industry 25.8%; Services 70.9% in 2011

Mix

Used debt to finance economy post bubble (debt is at 220% of GDP) but less risky than greece and held domestically

Fiscal policy

Budget: balanced, surplus, deficit?

2011: deficit (1.1% of GDP)

Nuetral

With permanent budget deficits between 2% and 3% of GDP and public debt almost 60% of GDP, government has to pay high interest rates to borrow domestically, crowding out private borrowers.

Neg

Spain is one of the EU countries that has had to implement spending reductions and higher tax rates as a result of its budget deficit. These austerity measures seem to be the reasons why the Spanish economy has had two quarters of negative real growth, putting them in a recession.

Float, but the strength of the Yen has increased from the early 80's to now. High of 250 per USD in 1985 to a low of 75.5 in Oct of 2012. Exports were price suppressed to keep their competitiveness.

Exchange rate controls

Rate? Float freely or manage?

Fixed to the dollar; large FDI triggered by WTO accession caused exchange rate to soar; as a result, government established the China Investment Group ($200B) to invest in foreign equities. (High rate improved their purchasing power of foreign assets; however, puts a drag on their export-based economy

(Mostly) Pos

Late 1990s: Asian crisis led to global pullout of emerging economies. Led to 33% crash of Brazilian stock market 50% reduction in cash reserves due to fixed exchange rate. 1999 - IMF forced a floating rate. It remains high, which hurts exports

Pos

Used interest rates to attempt to control inflation. Spurred investment through cheap capital to improve economy but created inflation

Inflation rate (rate, how control?) Monetary Policy Interst rates

Generally well-controlled inflation rate (3.3% in 2011)

Pos

History of high inflation (ended "Brazilian miracle" of 1960s and 70s) and continued for many years.

Neg

2.6% in 01/2013.

Controlled inteerest rates closesly

Generally well-controlled interest rate (6.2% in 2011) Promoted export focused economy. WTO reforms brought about 27% and 24% annual growth in exports and imports, respectively. Trade surplus grew to $360B by 2010 - China ran a trade deficit with Asian countries but large surpluses with EU, Japan and US Strong state ownership of businesses (Sharp decline over years to 48% in 2002)

Pos

Rose interest rates ("Plano Real") to restrain high inflation Historically (as of 1960s) high tariffs to protect domestic firms. In 1995, dramtically reduced tariffs and joined WTO ; domestic firms became international players, and in 2008 Brazil climbed into top 20 countries for international trade. Took a lead role in WTO negotitions (Doha round, US cotton dispute) Strong state ownership of businesses (need list)

Neg

Interest rates have dropped from 4.8% in 2000 to 0.8% in july 2012 trade policy is the same as that of other members of the European Union, with the common EU weighted average tariff rate standing at 1.6 percent, and some additional non-tariff barriers interfere with trade.

Trade policy

Tarffs, quotas, and other restrictive agreements

Pos

Pos

Nationalization v.s privatization

Mixed

Mix

FDI

Financing

FDI, domestic, debt, etc.

Due to WTO acession: Strong reliance on FDI (FDI exploded to $148B annually by 2008). A pillar of this were the SEZs ($14B annually); debt is held domestically. National debt not a concern - holds debt domestically & has "piles of excess deposits"

Pos

Mix of FDI, high foreign debt, & domestic "cheap" funding (government subsidized loans) and government influenced investments/divestitures of partly state owned companies. High public debt: 54.2% of GDP

Mix

The national government deficit was brought down from 11.4% to 9.2% of GDP in 2010, in line with the target; and the government has put an ambitious consolidation programme in place, mostly involving expenditure cuts, to reduce the deficit progressively to 6% in 2011, 4.4% in 2012 and 3% of GDP in 2013. Nonetheless, measures to fully achieve these targets still need to be defined. It is also important to require regional governments that have failed to meet their deficit targets to take further measures and strengthen supervision of their finances.

Subsidies

Government subsidize? If so, Strong govt subsidies, mostly in SEZs - been highly effective in attracting business investment what?

Pos

High industry subsidies: cheap loans and direct control over stateowned companiess, with mixed success

Mix

Pension system

Highly regulated

Economic regulation

As viewed through recent global financial crisis

2008: Caused value of Chinese exports and imports to reverse which shrank ecoomy from 25% growth to -1.65%. Swift govt intervention was very successful: central bank cut interest rates, halted currency appreciation, increased export tax rebate on labor-intensive goods to support exports. Also invested larger stimulus package than US and EU, resulting in expanded consumer spending, rapid investment growth, strengthened agriculture, and by 2009 GDP grew by 8.7%.

Pos

While policies enacted during the global recession increased short term aggregate demand, their long-term benefits to Brazils growth were questionable. Jorge Gerdau Johannpeter, president of the steel group Gerdau, explained: Lula was a visionary for making everyone increase consumption and getting banks to expand credit during the crisis, but with our level of savings it is hard to grow above 5% per year. The problem is cultural; when you grow at 2.5% per year things work themselves out, [but] to grow at 5% you need to plan for the next ten years. We do not have the capacity to plan that far ahead. In early 2010, Arminio Fraga, former president of the Central Bank of Brazil, warned, Brazils infrastructure is in terrible shape and the country isnt saving and investing enough

Fairly pos in short term, negative in longer term

See financing section

Natural resources

Abundance

Limited abundance - requires signficant importing, particularly from Brazil, to fuel its export-led growth strategy and growth in domestic consumption

Neg

Strong abundance and reliance on nat resources

Pos

Abundance of natural resources, with the largest being mineral resources

Limited resources as they are an island

Relationshp with international institutions

IMF, WTO, etc

WTO accession sparked economic boom

Pos

WTO win againt US cotton subsidies; earned membership in G-20; leader of LATAM; trying to enter UN security council

Pos

Member of IMF and WTO

Member and active participant in WTO, no wins/losses

Government

One line headline

High government role in leading growth through authoritarain control; quickly adoption capitalist fundamentals; been highly effective in driving growth, but at high social cost

Mixed

High government role in leading growth via influencing large state owned enterprises and cheap funding (see "Financing"). Also funded research.

Pro

Structured government with a history of corruption

Single party run with many prime ministers in a short amount of time. History of corruption.

Structure

Socialist, democratic, etc

Single party authoritarian republic; communist with capitalist elements.

Neg

From military regime to a democracy (late 1980s - created constitution in 1988). Known for high corruption.

Pro

With a population of 46.5 million, Spain is a constitutional monarchy in the form of a multi-party parliamentary democracy. The parliament is bicameral (Congress and Senate) and the last general elections were held in November 2011

Democratic but single party

Protection

IP, contracts

Extremely weak IP protection, corruption

Neg

Weak IP protection -shortened copyright terms, allowed IP infringement (particulary against pharma - HIV meds)

Neg

Spanish IPR legislation is consistent with EU directives and main international treaties. This legislation specifies that intellectual property is subject to protection, and the owner may seek protection either under civil or criminal codes. They have police and army since they are a developed country

Strong IP protection, but corruption

Security

Policing, army, etc

Low crime rate; largest military in Asia, #3 in world

Pos

High crime rate, strong military (#10 in the world)

Mix

No army, US military provides staility

Backs risk

Back extraordinary risk (e.g. unemployment insurance, retirment pensions, etc)?

Significant state control assumes risk across several areas, though a number of services are limited (e.g. pension, healthcare)

Mixed

Backs a variety of entitlements through mostly direct state control (e.g. unemployment, retirment, healthcare)

Mixed

Large pension system in place as well as high unemployement benefits

NGOs

Role, degree of reliance

Historically immature sector is now growing, though government censorship continues to challenge their progress.

Mixed

High reliance on NGOs - with India, leads developing world in terms of degree of NGO influence

Pos

The government funds NGO's and puts a high value on them

International strategy

Vying to become #1 global superpower. Working with WTO and other global instutions to improve positioning. Encouarging high FDI as cornertone of economic development (mostlylow cost manufactoring). Investing heavily in: a) oversease assets to secure global supply chain due to high resource importation needs and b) military to solidify regional and global power

Pos

Aggressively positioning itself as major global player by aligning with developing countries (through talks and $1.5B in loans) See relationships with internal institutsions above

Pos

Institutional

One line headline How deveoped are its institutions? Leading areas Deficits

Covered in other sections. Home ownershiop purchased with personal/family savings

Do you think this section is covered already?

Very developed

Maturation of institutions

How developed is its infrastructure? Infrastructure Leading areas

Improving at an accelerated rate due to high investment, particularly in SEZs. Rapidly reducing transaction costs for business, though leading to significant envrionment challenges. Good ports.

Pos

Weak infrastructure leads to high transaction costs

Neg

Developed but could use improvements. Lots of traffic, and half of electricity coming from fossil fuels.

Highly developed

Energy (mostly coal), transportation, communications

Pos

Poor all around, though making large investments (2006-2010: paid $1013B more on infrastructure and increased loans from 2.9-4.2% of GDP). Telecom is lagging but in moderate shape. Domestic transportation, ports

Neg

Train - One of the best in western europe

High quality infrastructure, bullet train, etc.

Deficits

Rural, interior infastructure Rising middle class, but enormous inequalities remain leading to increased tension. Aging population and slow population growth (due to one child policy) pose signficant challenges High income inequality: .48 Low skilled, still mostly blue collar Growing middle and uppper class with strong consumer culture in urban areas. High savings rate due to concern for future - this will drag consumption Strong economic disparity, particulary between rich coastal urban and poor rural farming interior. Perceived lack of gov't effort to address this leading to significant social tension - when will the country "snap"?

Neg

Neg

Internet / Cable

Neg

Social

One line headline

Mix

Rising middle class (30M over last 10 years)

Pos

25% Unemployed. The country is in a terrible position and skilled workers are leaving the country looking for jobs abroad

Shrinking workforce as reitirees grow. Also high cost of living leads to lower population.

GINI Coefficient Workforce Consumer base

Baseline: US is .477 Level of skill, blue vs. white collar Purchasing power, degree of consumerism

Neg Neg Pos

High income inequality: .548 Low skilled, still mostly blue collar Growing middle and upper class with strong consumer culture. Raising minimum wage, good for earners (though adds business expense)

Neg Neg Pos

0.325 Skilled workers are leaving Spain. Unskilled workers remain. The country has a high level of purchasing power (#14 out of 262 countries) Neg Pos Varying degree but redundency in management

0.357

Previous high purchasing power but as economy bubble 'popped' focus on savings and reduction in consumer spending.

Social strife/conflict

Religious, racial, etc

Neg

Strong economic disparity, particulary between urban and rural. Generous entitlements help curb social unrest, though

Mixed

25% of people have no job. This is creating a large amount of social issues within Spain

Entitlements

Quality of healthcare, education, retirment, etc

Outdated Hukuo system controlled population movement to maintain farming population. Skills, capital and education were required to move to leave farming to affluent cities. This outdated system is limiting education, retirment, housing and healthcare access. Economic reforms led to healthcare price inflation, further decreasing access and affordability. Govt pensions are inadequate, with great disparity between urban and rural.

Neg

Poor education; generous retirement & ambitious universal healtcare unsustainable. Infringes on HIV drug patents to provide easy access to meds (good from a healthcare perspective)

Mixed

Healthcare system in Spain is pretty good if you are in a central location. Otherwise, you will have a problem. The same goes for education, which overall is not great, but gets worse the further away you go from central areas.

Mixed

Overall favorability

High favorabilty for many businesses

High growth potential, but has a number of challenges

High unemployed percentage, possibilities of corruption in government, and a lot of restructuring going on. I would steer clear of doing business in Spain until restructure is complete and country is more stable

Business Risk/Challenges Worth Doing Business?

Lack of IP protection, unskilled workforce, poor GINI score and human rights could lead to social unrest, high state involvement (e.g. media restrictions), lack of natural resources, limited access to resources in several key areas (e.g. business analysis, architecture) (ranked 91/185 easiest place to start a business)

Hi cost of capital and interest rates, poor exchange rates (which hurts exports), weak IP protection, regulations to raise wages is increasing cost of business, and lower skilled workforce, poor infrastructure; a lot of buerocracy and complex tax code: 120/138 globally in ease of starting a new business

Low R&D expenditure, government is restructuring, 136/138 globally in ease of starting a new business

Business Opportunities/Strengths

Signficant incentives for FDI (e.g. SEZs), cheap labor, weak regulations (this has an eventual downside), high subsidies; strong work ethics of the workforce, well organized / highly disciplined organizations, workforce desire to succeed (learning and becoming stronger professionally rather than pure career move)

Most interest is based on anticipation of future: Brazil has quickly growing economy (now 10th largest, soon be 5th). High natural resources, agriculture, large population, and availability of cheap funding and other incentives all pluses. Also 3rd most advanced industrial sector in Americas, and close to US. Favorble if investing in one of their leading industries (see above)

Spain is currently focused on green energy growth. Shifting workers out of the crisis-hit construction and tourism sectors and into green and ecological jobs is a priority; and this transition needs to be accomplished by implementing well-designed policies.

Learnings: What does each country teach us?

China

Open your markets: Key to catalyzing strong GDP growth can be to focus on an export economy and foreign investment Avoid foreign debt If lacking domestic innovation, import it through FDI Trade offs: Policies enabling strong economic growth can come at a social cost, which can backfire. Chinas policies are sending the wrong signal to the have not segments of its populous that it is not willing to invest in their well-being (e.g. retirement, healthcare), leading to growing discontent. In contrast, Brazil makes heavy social investments but at a high economic cost (note: interestingly, Brazil nonetheless has a higher GINI). If lacking natural resources, build strong trade relations and purchase foreign assets (e.g. oil production capacity in middle east) Responded well to global recession Send clear signals to market regarding intention on economic policy Future growth will hinge in part on to important factors: (1) labor investments - they have done well with minimal investment so far, but soon their markets will mature to the point where this will be a must; and (2) protecting IP: a variety of favorable conditions allure business to China (mostly, cheap labor) so investors have largely overlooked this; however, labor costs will rise as their economy matures, thus making IP protection more important to sustain investment

Despite rapid growth, Brazil was the underperformer of the BRICs in many areas. It ranked among the most challenging countries in which to do business, and the governments development strategy imposed obstacles on entrepreneurs.66 Red tape and poor infrastructure made it difficult for Brazilians to start companies, and labor laws made it costly for companies to hire or fire workers (see Exhibit 7). Global analysts suggested that to grow at the same pace as China or India, Brazil had to tackle the so-called Brazil costshorthand for Brazils poor infrastructure, large informal sector, high real interest rates, and cumbersome red tape. High interest rates and barriers to borrowing blocked market entry for entrepreneurial Brazilians. The government provided subsidized loans through BNDES, while commercial bank rates were 40% or higher. But start-up firms found it impossible to access BNDES funding. Economy: History of economic boom and bust, hampered by high foreign debt and inflation. Lesson: reforms of 90's (Plano Real) generated some real stability, paving the way for large GDP growth in 2002-201 International Build international coalitions, particularly among equal or lesser countries - position yourself as their leader on global stage. Leverage international agreement policies to gain advantage (WTO, cotton dispute) Careful not to align with "wrong countries" (Iran) - could hurt relationship with stakeholder countries Brazil Need to improve workforce and infrastructure Related thought: government is trying to create more sophisticated (e.g. high tech) industries and does this through a great deal of state ownership and intervention. However, they are pushing these industries beyond their workforces skill set. How manage pace of development? Labor productivity is a leading indicator of long-term country stability/growth, and this figure is closely tied to infrastructure. Social: Invest in your people (e.g. healthcare, retirement), even if fails to meet full scope of need. It sends the right signal and helps mitigate social unrest and instability. Populous believes you are trying to help them (vs. abandon them e.g. China) Democracy ensures public voice in politics. Government: Watch out for government corruption and bureaucracy it will impede business growth and investment What do we want to say about business incentives? They have some generous incentives, but overall cost of business is still high Need to mind you overall ease of starting a business score build policy around this.

 Spains banking problems lie with the regional banks (the cajas) that lent all the money to property developers to fuel the boom times. In theory, the cajas sound good they are small, local and focus entirely on retail and commercial banking, lending to local businesses. Almost all of these banks were controlled or influenced by one of Spains local governments. The politicians in power would have voting rights in its local cajas and would also sit on the board of the bank and nobody in Madrid bothered too much about it whilst all was well. There were about fifty cajas now reduced to ten. It is now becoming clear that the local developers were in cahoots with the local politicians. Public sector construction works would be won by favoured contractors who would receive loans from the bank. 2008-5th largest economy in the world Population 46 million GDP: 5% agriculture, 29% industry and 67% services, tourism (2nd highest in the world) 10.7% and construction 11% Trade: 61% imports and 72% exports Democracy (since 1978), governed by parliamentary system under a constitutional monarchy Decentralized- autonomous communities had their own elected parliament/government Universal healthcare GIni coefficient 34.7%

Spain

Japan

How Countries Compete: Strategy, Structure, and Context

Introduction Every country has a (1) strategy for economic development. It may be explicit or it may be implicit-a loose collection of goals and policies that merely appears as strategy after the fact. Strategy alone is not enough. Countries must have an (2) organizational structure that can effectively implement their strategy. A mismatch between strategy and structure invariably leads to slow growth or no growth at all. The strategy and structure must fit each country's (3) context - the national and international conditions in which the country operates. In business, context would be analogous to the market. The country's culture, level of corruption, natural resources, education, income distribution, and international security are key among these contextual factors. 1. Ten Strategies Category Types of Strategy Fiscal policy Monetary policy Macroeconomic Strategies Description The governments budgetary stance: surplus, deficit, balanced. Managed through spending and taxation policies. Controls supply of money via interest rates, open market operations, and reserves to ensure healthy economic growth w/out inflation and to sustain reserves of foreign exchange. Some countries allow their currency to float freely (open market) while others fix the price or manage their appreciation/depreciation. Countries that do not manage their currencies instead control flow of capital in and out of the country (capital accounts) Direct control over wages and prices: rarely used and rarely effective. Used primarily in emergencies inflationary situations (e.g. Nixon in 1971). Use of tariffs, quotas, and other restrictive agreements. Most common microeconomic policy. Designed to protect domestic firms from foreign ownership or from foreign competition. Historically, countries (e.g. Mexico and India) virtually prohibited foreign direct investment. Today, most countries have significantly lowered the barriers to FDI, following the success of Singapore, China, and Canada. In fact, many countries eagerly encourage FDI by offering tax remissions and creating industrial parks or business clusters. Mirror policies deployed by countries wishing to affect the ownership of firms. Historically, often include utilities, banking and heavy industry. Since 1970s, trend has been to privatize. Economic regulation, which is usually implemented to correct some perceived economic flaw (such as a natural monopoly, a moral hazard, or externalities), has a major impact on development. Has been applied to many vital industries: transportation, energy; telecommunications, and financial services (together these can amount to 25% of an economy and have large affects on infrastructure). Large affects on national output. Can range from strong antitrust provisions designed to encourage competition (e.g. US and EU) to cartel policies and monopoly pricing, as in Japan before the 1970s. There is a wide range of subsidies, varying from direct grants, to tax reimbursements to help with inputs (e.g. land trained workers, acquired technology) to defense contracting and government purchasing. When such policies are coordinated with a broad developmental rationale, they are referred to as industrial policy.

Control exchange rates

Income policy Trade policy Restriction or promotion of federal direct investment (FDI) Nationalization and privatization Microeconomic Strategies Economic regulation

Competitive policy

Provision of subsidy

2. Structures Types of Structure Political

Description Foremost structure to differ across countries: democratic, communist, autocratic, etc. Can be a two party system (U.S., UK) or dozens (Italy, India). Each party can have several factions. The more parties, the more difficult to enact broad policy changes. The fewer parties, the more likely to see sharp policy changes with each new administration (which can be detrimental for long term objectives) At a macro-level, deals with relative weight of consumption, investment, government and trade (in U.S, consumption is 70% of GDP; in Singapore, 42%; in Europe, government may absorb 50%). At a micro-level, economic structure varies sharply with private v. public ownership, concentrated v. fragmented incomes, and manufacturing v. agriculture v. services.

Economic

Institutional

Includes structure of banking system, court systems, policy and military, and rule of law (particularly property rights). Further, several institutional arrangements need to work effectively for the country to develop: labor management, savings systems, nature of bureaucracies, separation of power between legislative and executive branches, and different power of the federal government and states. e.g. Singapores Central Provident Fund guaranteed high enough savings to fund domestic investment, medical expenditures, and social security. The U.S. has no such system, therefore savings are among lowest in the world.

3. Context Developing Resources To grow, every country must make choices about the use of scarce resources. If economic growth is to occur, these must be increased and must be used efficiently.

Resource Natural

Description

Abundance varies greatly across countries. Regardless, it must be managed very carefully to avoid excessive environmental damage, waste, and collateral economic damage. China: Limited arable land to feed large population. If land is deforested, over fertilized, or allowed to erode, it will adversely affect the countrys future. Likewise, China has an abundance of coal for energy, but is now suffering from significant air quality issues. U.S.: Has one of the largest abundances of resources in the world, particularly fossil fuels. Years of underpricing and overuse have greatly diminished domestic oil reserves. Carbon emissions are most inefficient in the world (per capita) Saudi Arabia: Abundant oil has fueled a wealthy, powerful monarchy that sustains power by subsidizing critics and opposition groups and by buying strong international defense (U.S.). Wealth is concentrated, resulting in weak GDP growth (1.8%). South Africa: Great abundance led to over-reliance on raw material exports UK and Singapore: Small islands with minimal resources, they compensate by investing in financial and intellectual resources. Human Both quantity and quality are vital: Quantity: Chinas workforce is immense and unskilled, creating downward pressure on wages. In contrast, declining birthrates (e.g. Singapore) requires countries to import workers to keep economy growing. Quality is a bigger issue: Countries with highly developed education system (U.S.) leverage this to drive economy (e.g. scientific advances have sparked whole new industries). Key to Indias economic rise. Aside from formal education, informal education also helps (foreign direct investment by western firms in China has transferred technology and skills to thousands of Chinese workers). Technology Educational institutions, corporate research labs, and patent offices are critical technology drivers (e.g. U.S. and France). Absorbing technological know-how from foreign direct investment is a secondary path (e.g. China).

Capital No country can accelerate economic growth if consumption and imports absorb all available resources, as there would be no surplus capital to invest in growth. Five pathways to acquire capital: 1. Debt from domestic banks: Savings rates vary dramatically across countries. For example, Asians are savers (30-40% of GDP): for retirement, as there are no support programs; tax benefits; cultural trends, legal requirements; saving for big purchases, such as a compulsory 40% down on home mortgages in some countries. Westerns, in contrast, are spenders. Therefore, the structure of institutions is crucial. If equity markets are weak (as they were in japan) or nonexistent (as in China), and if capital controls prevent foreign investment, then savings flow to domestic banks. With a limited number of banks and nationwide branching, it is possible for government to channel savings to banks and then bank loans to the firms and industries targeted for success. 2. Domestic equity: The U.S. has long maintained well-developed equity markets with widespread access through investment banks, discount brokerages, and direct purchasing online. Combined with a healthy venture capital market, raising funds through equity has been far easier than in any other country. Domestic equity benefits from the efficiency of open markets. 3. Foreign direct investment (FDI): Historically, most comes from and goes to developed countries. Since the early 1980s, FDI has increasingly flowed from developed to developing countries -especially as they opened domestic ownership to foreigners and privatized. Canada and Singapore are good examples of sourcing capital through FDI. China is best example via special economic development zones. 4. Intentional foreign debt financing: In many developing countries, where living standards are low and capital scarce, public and private debt has been sold to foreigners (e.g. U.S. financed its railroads and canals by selling bonds to affluent British savers). Foreign debt reliance first took off after oil shock of 1974: oil price increases led to enormous cash inflow to oil producing countries that banked it. The global economic slow down forced countries to borrow heavily from these multi-national banks. This continued through 1980s until many countries went broke, unable to service their debt. This led to expansion of IMF (International Monetary Fund) to become lender of last resort: they lend money with significant condition to push reform. 5. Unintentional foreign borrowing: Some countries (India and Poland) had no intention of borrowing: India aimed for autonomy from the world, while Communist Poland planned on selffinance. But because of the oil shock (in India's case) and asymmetrical trade with the USSR (in Poland's case), both countries began borrowing in the 1970s to finance their balance of payments deficits. The result was the same-debt crisis. As a consequence of these continuing problems, foreign debt became a less acceptable way to finance economic growth. Increasingly, countries and international institutions realized that domestic finance and foreign equity were less leveraged, sounder channels to finance economic growth.

Efficient Usage of Resources Source Description

Foreign competition Countries that expose themselves to international competition experience one of two results: either efficient use of resources or failure. Examples: Italy: developed a host of craft industries in regional clusters that could not have succeeded without constant pressure of foreign competition. South Africa: BMW makes vehicles for export here - foreign competition pushed both the firm and the country to be efficient. Domestic competition

Many larger countries have competitive markets, but U.S. sets the standard. With almost no state-owned firms and a powerful antitrust tradition, survival in domestic U.S. markets puts near constant pressure on firms to innovate, minimize costs, reinvest, and pursue competitive advantages. Countries that seek foreign capital compete in a world market for POI. Examples: Canada: successful in courting U.S. investors, mostly in minerals-related sectors NAFTA: Reduced North America trade barriers and amplified U.S. investment in Mexico China: best example, via economic and technological development zones

Competition for FDI

Administrative allocation Deemed to be wasteful, inefficient and corrupt by many western countries, particularly U.S. and U.K. History has shown, globally, that this is usually an unsustainable practice. Has worked in a few occasions: government owned 25% of GDP in Singapore across many industries, which led to over 9% GDP growth for years.

Role of Government Thought to be crucial in influencing economic development. There are more negative examples than positive ones; however, there are five things all governments must do well to promote economic vitality. Role Security Description Government must provide security-both domestic and international security-so that markets can work. Crime interferes with market transactions. Individual crime makes streets unsafe, and organized crime controls and distorts whole sectors of commerce.

Creating contracts, Every country needs a legal system that is trusted by people and institutions, and that works to settle commercial disputes. Where property rights are uncertain (e.g. Mexico or Poland after protecting property 1990), credit is uncertain, property markets do not function, and investment is damaged. Countries need a system of tax collection that works. Even more, they need a court system that rights, and enforcing works. Securities laws that facilitate investment, banking regulations that secure deposits, and legitimate relations between nation states and provinces are all necessary for a country to laws function. Backing risk Government backs risks of all sorts. While markets can handle ordinary risks through insurance systems, government is needed to absorb extraordinary risk. Thus, incorporation in the eighteenth century and environmental regulation, health insurance, regulation of nuclear facilities, unemployment insurance, and retirement pensions in the twentieth century are a few of the sectors that only government, as the sovereign, can effectively back. Government manages the macro-economy through fiscal and monetary policy. But even more significantly, ALL governments create, legitimize, and distribute money. Commerce cannot occur, and markets cannot work, without a reliable medium of exchange (e.g. managing hyperinflation, bank authority, etc.) Affects change via explicit policy and as an implicit result of microeconomic policy. For example: Tariffs: to manage trade and regulate foreign investment, externalities, and competition Subsidies: to aid particular firms and industries These are often effective, but can also produce conflict internally, weaken productivity, and maldistribute income.

Managing macro economy Implementing industrial policy

Efficient Usage of Resources

Efficiency Source

Description

Countries that expose themselves to international competition experience one of two results: either efficient use of resources or failure. Examples: (1) Italy: developed a host of craft Foreign competition industries in regional clusters that could not have succeeded without constant pressure of foreign competition; (2) South Africa: BMW makes vehicles for export here - foreign competition pushed both the firm and the country to be efficient.

Domestic competition

Many larger countries have competitive markets, but U.S. sets the standard. With almost no state-owned firms and a powerful antitrust tradition, survival in domestic U.S. markets puts near constant pressure on firms to innovate, minimize costs, reinvest, and pursue competitive advantages.

Competition for foreign direct investment

Countries that seek foreign capital compete in a world market for POI. Examples: (1) Canada: successful in courting U.S. investors, mostly in minerals-related sectors; (2) NAFTA: Reduced North America trade barriers and amplified U.S. investment in Mexico; (3) China: best example, via economic and technological development zones

Administrative allocation

Deemed to be wasteful, inefficient and corrupt by many western countries, particularly U.S. and U.K. History has shown, globally, that this is usually an unsustainable practice.

Role of Government Thought to be crucial in influencing economic development. There are more negative examples than positive ones; however, there are five things all governments must do well to promote economic vitality.
Role Description

Security

Government must provide security-both domestic and international security-so that markets can work. Crime interferes with market transactions. Individual crime makes streets unsafe, and organized crime controls and distorts whole sectors of commerce. Every country needs a legal system that is trusted by people and institutions, and that works to settle commercial disputes. Where property rights are uncertain (e.g. Mexico or Poland after 1990), credit is uncertain, property markets do not function, and investment is damaged. Countries need a system of tax collection that works. Even more, they need a court system that works. Securities laws that facilitate investment, banking regulations that secure deposits, and legitimate relations between nation states and provinces are all necessary for a country to function.

Creating contracts, protecting property rights, and enforcing laws

Backing risk

Government backs risks of all sorts. While markets can handle ordinary risks through insurance systems, government is needed to absorb extraordinary risk. Thus, incorporation in the eighteenth century and environmental regulation, health insurance, regulation of nuclear facilities, unemployment insurance, and retirement pensions in the twentieth century are a few of the sectors that only government, as the sovereign, can effectively back. Government manages the macro-economy through fiscal and monetary policy. But even more significantly, ALL governments create, legitimize, and distribute money. Commerce cannot occur, and markets cannot work, without a reliable medium of exchange (e.g. managing hyperinflation, bank authority, etc.)

Managing macro economy

Implements industrial policy

Affects change via explicit policy and as an implicit result of microeconomic policy. For example: (1) Tariffs to manage trade and regulate foreign investment, externalities, and competition; and (2) Subsidies to aid particular firms and industries . These are often effective, but can also produce conflict internally, weaken productivity, and maldistribute income.

Return on Investment Comparison: Short v. long term across each country Short term Brazil Brazil China Spain Japan Long Term Brazil Brazil China Brazil China Brazil Spain Brazil TBD Japan Brazil China TBD (depending on industry) Japan China Brazil Japan China China China Either Spain Brazil China Japan Japan

Japan

Spain Japan

Brazil Brazil

China

Brazil 16th Century Colonized by the Portuguese, exports of lumber, gold, sugar and tobacco and then farme 1822 Brazil declared freedom, still focus on commodity export 1888 Abolition of slavery 1889 Rebellion forming a republican government. Created a coffee cartel 1930 Overthrow of republican government by Getulio Vargas. He became dictator. Instituted exchange rate controls and import tariffs Expanded into mining and oil Restrictive labor market policies made it costly for firms to hire/fire Still relied on agricultural exports for economy 1950s Coffee prices dropped and balance-of-payments crisis occurred, stabilization program driven by 1955 Juscelino Kubitschek continued state run industrialization 1960-1964 Inflation of went from 25% in 1960 to more than 100% in 1964 1964 Military coup, continued the ISI growth strategy but opened it up to direct foreign investment. Ref 1982- disastrous end to Brazilian miracle driven by skyrocketing currency 1985 collapse of military regime Inflationary to Real Growth 1989 Fernando Collor de Melo elected, Inflation rose to over 1,000% 1990 1/3 of population below poverty line 1992 Collor impeached, Fernando Henriques Cardoso introduced Plano Real creating high interest ra 1993 inflation peaked at 2,700% 1994 Cardoso elected on success of Plano Real 1997/1998 Asian crisis and Russian government default led investors to pullout of emerging economie 1999 Cardoso forced by IMF to make the real have a floating (not fixed) exchange rate

Brazil under Lula and Dilma Trade and Globalization

2002 Lula campaigned as a moderate even though he had a left wing background and won the election easily. He

During numerous meetings of trade ministers for more than 140 countries Brazil stood out as a leading 1995 Joined WTO after lowering tarrifs on imported goods. This helped national firms become global a 2001 WTO Doha Brazil took a leading role in negotiations with the WTO and was bogged down in disp 2008 Support disappeared for the Doha round as the US (and then global economy) tanked.

ar and tobacco and then farmed coffee (using slaves from Africa and indigenous people). Exporting of commodities was the fo

me dictator.

stabilization program driven by IMF implemented.

o direct foreign investment. Reforms called Brazilian miracle created GDP growth averaging more than 10%. Elimination of

o Real creating high interest rates to restrain inflation

pullout of emerging economies. Brazils tock market dropped 33% and cash reserves fell from $60B to $35B due to trying to m exchange rate

nd and won the election easily. He came from a poor family, worked in a factory, and climbed the ranks of the metalworkers union. Easily re-

s Brazil stood out as a leading voice of emerging markets. Specifically, Lula led the creation of the WTO G-21, a block of deve national firms become global and it was driven by efficiency. O and was bogged down in disputes over agriculture and Trade Related IP Rights (TRIPS). They were at the forefront instead o al economy) tanked.

rting of commodities was the focus

more than 10%. Elimination of political parties

$60B to $35B due to trying to maintain a fixed exchange rate.

the metalworkers union. Easily re-elected in 2010 and endorsed Dilma. This endorsement gave her the 2010 election as she was behind he

he WTO G-21, a block of developing countries that negotiated collectively at WTO meetings.

y were at the forefront instead of the US etc. One goal of the Doha round was to minimize agricultural subsidies in the US and

010 election as she was behind her competition until then. Her background was different as she was from a middle class family

ultural subsidies in the US and other established countries.

a middle class family

 1970s Japan had recovered from post war devastation and citizens were living comfort 1980s USA had large trade deficits with Japan 1990 Japan economy began to suffer with through economic downturn and corruption

Early 1980s US has large trade deficit with Japan and West Germany. 1985, the 5 leading industrial countries formed the plaza accord to dri 1986, Japan dropped the discount rate to combat the falling growth rate 1987, Discount rate hits 2.5% (its lowest post war level) 1989, Discount rate was raised to 3.5%, which caused the Nikkei to dro 1996, Urban property values fell 56%. 07/1998 Government announced setting up bridge banks to help sick 1999 The discount rate reached 0.1% 07/1998 Japanese Government announced setting up bridge banks to help sick 2002 The economy began to pick up 07/1998 economy Government announced 2005 The was doing well.setting up bridge banks to help sick 07/1998 Government announced setting up bridge banks to help sick 2006 Short term interest rates rose. 07/1998 Government announced setting up bridge banks to help sick 2007 Post war baby boomers began to retire 07/1998 Government setting up bridge banks to help GDP sick 2010 Japan comes out announced of the economic crisis of 2008 with a 4.5% 07/1998 Government announced setting up bridge banks to help sick 2011 GDP then fell by 0.7%. 07/1998 Government announced setting bridge banks to sick 2011, Chinas GDP overtook Japans. China up is also expected to help overtake 07/1998 growth Government announced 2012 The forecast was 2%. setting up bridge banks to help sick

and citizens were living comfortably.

omic downturn and corruption

with Japan and West Germany. ormed the plaza accord to drive down the dollar. o combat the falling growth rate, causing the bubble post war level) which caused the Nikkei to drop from an all-time high of 38,915 by 48%. This was almost a value of $4.9 Trillion in two years.

ng up bridge banks to help sick banks

crisis of 2008 with a 4.5% GDP growth in 2010.

na is also expected to overtake that of the US in 2027. Indias is expected to match Japans in 2012.

ue of $4.9 Trillion in two years.