Global economic environment

Lin Cui, PhD

ANU
 Economy is a
System of

1. Resource allocation
2. Resource utilization
3. Wealth creation
4. Wealth distribution

2
 Learning Objectives

• Measuring the economy

– Measuring economic growth

– Measuring other economic conditions

• Drivers of the economy

• The evolution of economies

• A regional perspective of the global economy

3
 Economy is important because

It can make people happy or unhappy!

Some Happy & Unhappy Countries

4
 China Index of Consumer Sentiment
2 months progressive to November 2015
135
Happy 98 % of last 20 years
130
125
120
115
110
105
100
China has had no recession since 1976
95 (death of Mao Zedong)
90
85
80
75
70
65
60

2011
2013
2015
2017
2019
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Source: Trading Economics/IBISWorld 11/01/16
 Japan Index of Consumer Sentiment
2 months progressive to November 2015
124
Happy 71% of last 30 years
120 61% of last 20 years

116
112
108
104
100
96 Recession Level
92
88
84
80
76
72
1984

1998
2000

2014
2016
1972
1974
1976
1978
1980
1982

1986
1988
1990
1992
1994
1996

2002
2004
2006
2008
2010
2012

2018
2020
Source: OECD / IBISWorld 11/01/16
 Australian Index of Consumer Sentiment
2 months progressive to January 2016
135
Happy 66% of last 40 years
130 74% of last 20 years
125
120
115
110
105
100
95
90
85
80 Recession Level
75
70
65
60
1972
1974

1986
1988

2000
2002

2014
2016
1976
1978
1980
1982
1984

1990
1992
1994
1996
1998

2004
2006
2008
2010
2012

2018
2020
2022
2024
Year commencing June Source: Westpac-Melbourne Institute (IAESR, IBIS estimates 20/01/15
 USA Index of Consumer Sentiment
2 months progressive to December 2015
150
Happy 46% of last 33 years
140
130
120
110
100
90
80
70
60
50 Recession Level

40
30
20
1974

1978

1982

1986
1972

1976

1980

1984

1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Year commencing June Source: Conference Board Consumer Confidence Index, January 2016
 UK Index of Consumer Sentiment
2 months progressive to December 2015
145 Happy 11% of last 40 years
140 15% of last 20 years
135
130
125
120
115
110
105
100
95
90
85
80
75 Recession Level
70
65
60
55
50
45
1980
1982

1990
1992

2000
2002

2012
1972
1974
1976
1978

1984
1986
1988

1994
1996
1998

2004
2006
2008
2010

2014
2016
2018
2020
OECD EC Indicator 11/01/16
 France Index of Consumer Sentiment
2 months progressive to December 2015
130
Happy 7% of last 40 years
125 3% of last 20 years

120
115
110
105
100
95
90
85
80
75
70
65
Recession Level
60
1978
1980

1992
1994

2008
2010
1972
1974
1976

1982
1984
1986
1988
1990

1996
1998
2000
2002
2004
2006

2012
2014
2016
2018
2020
Source: OECD / IBISWorld 11/01/16
 Measuring the economy
• Variable based approach to measure economic status
• What do we measure?
– Size
– Growth
– Openness
– Stability
– Equity of distribution

– Commonly understood categories:

• Developed economies
• Newly industrialized economies
• Mid-range economies
• Emerging economies
• Less and least developed economies
Hoskisson, R. E., Wright, M., Filatotchev, I., & Peng, M. W. 2013. Emerging multinationals from mid-range
economies: The influence of institutions and factor markets. Journal of Management Studies, 50(7): 1295-1321.

12
13
 Economic Indicators
• Gross domestic product (GDP): the total value of all
final goods and services produced in a country in a
given year
• GDP per capita (GDP/Population) = level of economic
development?
• GDP per capita > average income > average consumer
spending
• Shortcomings of GDP as a measure:
– Per capita average takes no account of income
inequality; country may have sizeable middle class
– GDP takes no account of non-market household
production
– No account of quality of life, static measure

14
 World GDP Growth
Real growth (PPP), 1950-2016 (F)
12
Purchasing Power Parity (PPP) terms
10 2012 3.0%
2013 3.1%
2014 3.1%
8 2015 2.7% (F)
2016 2.7% (F)
6

4
1950-1969 growth
in US$ market terms
2
Per cent

-2
* The world decline in 2009 was -2.0% when
-4 measured in $US market price terms

-6

-8

-10

-12
1960

1990

2020
1940
1945
1950
1955

1965
1970
1975
1980
1985

1995
2000
2005
2010
2015

2025
2030
IMF/OECD/Economist//IBISWorld: 12/10/15
 World’s 30 Largest Economies
2016(F)
Nigeria 1.0%
Thailand 1.0%
Poland 0.9% Purchasing Parity Price (PPP) Terms
Egypt 0.9%
Pakistan 0.8%
Argentina 0.8%
Malaysia 0.7%
Netherlands 0.7%
South Africa 0.6%
Colombia 0.6%
Rest of World
(200 nations)
16.9%
17.8% China*
1.9%

15.8% USA
2.3%
2.3%

2.7%

Japan India
2.9%

4.2% 7.4%

Indonesia 2.5%
Italy 1.9%
South Korea 1.6%
Saudi Arabia 1.5%
Spain 1.4%
Canada
Turkey
1.4%
1.4%
World’s 230 nations
* Includes Hong Kong
Iran
Australia
1.2%
1.0%
US$119 trillion Excl. Taiwan
Taiwan 1.0%
IMF/IBISWorld 24/12/15
 Economic Growth: 2015
20 Largest Economies (ppp ranking)
India 7.2
China 6.9
Indonesia 4.7
Poland 3.4
Turkey 3.3
Taiwan 3.2
Spain 3.1
World Growth
World 2.7
2015, 2.7%
S Korea 2.6
USA 2.5
Mexico 2.5
UK 2.4
Australia 2.3
Germany 1.6
Canada 1.1
France 1.1
Italy 0.7
Japan 0.6
Iran 0.5
Brazil -3.4
Russia -3.9

-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Economist/IBISWorld 08/01/16
 Economic Growth: 2016(F)
20 Largest Economies (ppp ranking)
India 7.5
China 6.1
Indonesia 5.0
Poland 3.5
Turkey 3.1
Mexico 2.8
Spain 2.7
World World Growth
2.7
2016 (F), 2.7 %
S Korea 2.6
Taiwan 2.6
Australia 2.5
USA 2.4
UK 2.2
Iran 2.0
Canada 1.9
Germany 1.7
France 1.4
Italy 1.3
Japan 1.1
Russia -0.3
Brazil
-2 -1 0 1 2 3 4 5 6 7 8 9 10
Economist/IBISWorld 08/01/16
 Economic Growth: China
Real growth 1950-2016(F)
22
20
18
16
14
12
10
8 8.2% average

6
4
Per cent

8.6% pa average,
2 past 35 years
0
-2
-4
-6
-8
-10
-12 Actually
-14 -27.3%
-16 in 1961

-18
1950

1954

1958

1962

1966

1970

2012

2016

2020
1952

1956

1960

1964

1968

1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

2014

2018
SSBC/National Bureau of Statistics of China 10/11//15
 Economic Growth: USA
Real growth 1930-2015 (F)
20
18
16
14
12
10
8
6 3.5% average
4
Per cent

2
0
-2
-4
-6
-8
-10
-12
-14
1924

1944

1952

1960

1972

1980

1988

2000

2008

2016
1920

1928
1932
1936
1940

1948

1956

1964
1968

1976

1984

1992
1996

2004

2012

2020
Bureau of Economics/IBISWorld: 05/12/15
 Per cent

-14%
-10%
10%
14%
16%
18%

-12%
12%
20%

0%
2%
6%
8%

-8%
-6%
-2%
4%

-4%
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
Real GDP growth 1950-2016 (F)

1998
2000
2002
Economic Growth Euro 15

2004
2006
2008
2010
2012
2014
2016
2018
2020
OECD/IBISWorld 10/11/15

2022
 Per cent

-8%
-6%
-4%
-2%

-12%
-10%
0%
2%
4%
6%
8%
16%

10%
12%
14%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Real GDP growth 1950-2016 (F)

2000
Economic Growth UK

2002
2004
2006
2008
2010
2012
2014
2016
2.3%

OECD/IBISWorld 10/11/15

2018
average

2020
 Economic Growth Germany
Real GDP growth 1950-2016 (F)
16%
14%
12%
10%
8%
6%
4%
Per cent

2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
1962
1966
1970
1974

1994
1998
2002
2006
1950
1954
1958

1978
1982
1986
1990

2010
2014
2018
2022
OECD/IBISWorld 10/11/15
 Per cent

-4

-8
-6
-2
0
2
4
6
8

-10
-12
12
10
14
16
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968

8.5% pa
1961-1976
1970
1972
1974
1976
1978
1980
1982
1984
1986
3.8% pa
1977-1991

1988
1990
1992
1994
1996
1998
Real GDP growth 1950-2016 (F)

2000
2002
Economic Growth Japan

2004
1.4% pa
1992-2007

2006
2008
2010
2012
2014
2016
2018
SSBC/IBISWorld: 10/11/15

2020
 Per cent

-8
-6
-4
-2
0
2
4
6
8

-12
-10
14
16

10
12
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
Real GDP growth 1950-2016(F)

1998
2000
Economic Growth India

2002
2004
2006
2008
2010
SSBC/IBISWorld:

2012
2014
2016
10/11/15

2018
2020
 Per cent

-6
-4

-8
-2
0
2
4
6
8

-12
-10
10
12
14
16
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
Real growth 1961-2016 (F)

1994
1996
1998
2000
2002
Economic Growth: Australia

2004
2006
2008
2010
2012
2014
2016
2018
3.5% average

SSBC/IBISWorld: 10/11//15

2020
 Other economic Indicators

1. Inflation and deflation

2. Unemployment
3. Debt
4. Income distribution
5. Poverty
6. Labour costs
7. Productivity
8. The balance of payments
27
Inflation
Cost of living
Cost push

Rising price Exchange rate

Demand pull
Uncertainty
Hard Landing
Deflation Declining
price

Declining Declining
demand profit

Unemploy-
ment
 Inflation 2015
Largest economies CPI

Spain -0.6
Poland 0.0
Taiwan 0.1
UK 0.1
France 0.1
Italy 0.2
Germany 0.2
USA 0.2
Netherlands 0.4
Japan 0.7
S. Korea 0.7
Canada 1.2
China 1.5
Australia 1.6
Average 2.6
Mexico 2.8
India 5.1
Indonesia 6.3
Turkey 7.6
Brazil 9.3
Russia 15.2

-2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
The Economist 05/01/16
 Interest Rates
10-year Bond Rate, 2015
Japan 0.5
Germany 0.6
Netherlands 0.7
France 1.0
Canada 1.4
Italy 1.6
Spain 1.9
UK 2.0
S. Korea 2.1
USA 2.2
China 2.7
Australia 2.8
Poland 2.9
AVERAGE 4.4
Mexico 6.3
India 7.8
Greece 8.3
Indonesia 8.8
Russia 9.5
Turkey 10.7
Brazil 16.4
-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
The Economist 05/01/16
 Current Account Balance
(% of GDP basis) 2015

Netherlands 10.6
Germany 7.9
S. Korea 7.3
Russia 4.7
China 3.1
Japan 2.6
Greece 2.5
Italy 1.9
Spain 0.9
AVERAGE 0.6

France -0.3
India -1.2
Poland -1.4
Indonesia -2.4
USA -2.5
Mexico -2.5
Canada -3.2
Australia -4.1
Brazil -3.8
UK -4.5
Turkey -5.0
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12
IBISWorld 05/01/16
 Government Net Debt 2015(F)
Largest nations (+ Greece) % of GDP
Iran 10
Russia 11
Australia Zero in 2007 thanks to the
16
Howard/Costello government
Indonesia 23
China 30
S Korea 29
Turkey 35
Netherlands 39
Canada 39
Brazil 43
Medxico 45
Taiwan 46
Germany 58
Poland 59
World 62
India 73
Spain Trouble 85
UK Trouble 93
USA Trouble 93
France Trouble 94
Italy Serious trouble 112
Japan Diabolical trouble 152
Greece Diabolical trouble 184
0 20 40 60 80 100 120 140 160 180 200 220 240

IBISWorld 05/04/15
 Government Budget Balances: 2015
Largest Economies (+ Greece) (% of GDP basis)

Germany 0.7
S. Korea 0.3
Taiwan -1.0
Poland -1.5
Turkey -1.6
Canada -1.8
Netherlands -1.8
Indonesia -2.0
Australia -2.4
USA -2.6
Average -2.7
China -2.7
Russia -2.8
Italy -2.9
Mexico -3.4
India -3.8
Greece -4.1
Iran -4.1
France -4.1
UK -4.4
Spain -4.4
Brazil -6.0
Japan -6.8
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4
The Economist/IBISWorld 05/01/16
 Taxation In The Major Economies
% of GDP basis 2014
Denmark 49
Belgium 47
Sweden 46
France 45
Finland 44
Austria 43 “Nanny state”
Italy 43 risk?
Germany 41
Netherlands 40
UK 39
Spain OECD average
37
OECD Average 35
NZ 35
Poland 34
Turkey Average 33
AVERAGE 32 Developed
Canada 32 economies
Mexico 30
Russia 30
Switzerland 29
Japan 28
Australia 28
USA 27
Korea S 27
India 18
China 17
Developing
Taiwan 12
Indonsia 12 economies
Iran 6

0 5 10 15 20 25 30 35 40 45 50 55 60 65
Total taxation & other revenue as a share of GDP
Source: IBISWorld 02/09/15
 Unemployment 2015
Significant Economies Mainly November
S Korea 3.2
Japan 3.4 Full employment
Taiwan 3.8 <5% of labour force
China 4.1
Mexico 4.2
India 4.9
USA 5.1
Russia 5.2
Indonesia 5.8
Australia 6.2
Average 6.3
Germany 6.4
Canada 7.1
Brazil 7.6
Netherlands 8.3
Poland 9.7
Turkey 9.8
France 10.7
Iran 11.4
Italy 11.8
Spain 21.6
Greece 25.0

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
The Economist/IBISWorld 05/01/16
 Stockmarket Performance: 2015
% change in local currency , to end 2015

Russia 15.9
Italy 7.4
France 4.9
Germany 4.2
Japan 4.2
China (Shang.) 3.8
USA (NASDAQ) 2.1
Netherlands 1.0
Mexico -3.4
Australia -3.9
USA (DJI) -5.1
World (MSCI) -5.8 World (MSCI)
UK (FTSE) -7.5
Spain -10.8
Poland -12.1
Mexico -12.1
India -12.7
Canada -13.0
Taiwan -14.1
Brazil -12.9
Turkey -16.9
Indonesia -21.7
Greece -25.2

-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30

The Economist/IBISWorld 10/01/16
Distribution: The Gini coefficient
.40
0 1

Harmony Disharmony
Source: Human development index online, UN
38
 What drives the economy?
• Activity of private firms
– Short term: firms mobilise productive resources
– Long term: firms generate technological change (products and
services, processes, strategies, organisations, management
practices)

• Firms need conducive business environment to develop

innovations and deploy entrepreneurship
– Market economy, price mechanism
– Strong property rights

• Key government role: to create conducive preconditions,

although preventing excesses of market economy
• Economic, political and legal systems: attractiveness of a
country as market/production site

39
 The role of the state

• Liberalising economic activity

• Reforming business activity

• Establishing legal and institutional frameworks

• Success is linked to how well the government deals with:

– Privatisation
– Regulation
– Property right protection
– Fiscal and monetary reform
– Antitrust legislation and competition policy

40
 Dimensions of The Economic Freedom
Index
• Business freedom
• Trade freedom
• Monetary freedom
• Freedom from
government
• Fiscal freedom
• Property rights
• Investment freedom
• Financial freedom
• Freedom from corruption
• Labour freedom
Source: Heritage Foundation, 2013
http://www.heritage.org/index/ Index of Economic Freedom,
http://www.heritage.org/index/
41
IP Right Index (2013)

Source: http://www.internationalpropertyrightsindex.org/ranking

42
 Intellectual Property
from a firm’s perspective

Innovation involves the development and constant

improvement in intellectual property (IP). It can best be
described as a “cocktail” of:
• skills, special competencies, unique systems;
• patents, trademarks & brands;
• organisational culture, customer relation protocols;
• vision, plans and documented achievable strategies.

It is the "holy grail" of a enterprise, its core and its most

valuable balance sheet asset, whether recorded as such
in dollar terms or not.
 The Knowledge Pyramid
By Volume By Value

Vision
Vision & Strategy
Vision

Unique Unique
Expert IP
Opinion
Decreasing IP
Value Wisdom Wisdom

Expert Opinion Expert Opinion

Intelligence Intelligence
Increasing
Information Information
Value
Data Data

Hearsay But interesting!

Hearsay, Rumour, Scuttlebut

Source: IBISWorld 18/11/09

 Intellectual Property
What it isn’t

Important as the following are, they are not part of a

firm’s intellectual property:

• good people/human resources (they are not

“owned” by the enterprise!);
• world best practice (this is a condition of survival in
this day and age);
• balance sheet strength (this is prudential finance
management anyway);
• IC&T/Internet (this is the new age “utility” for all
enterprises, households and persons. However, IP
can be expressed via IC&T and always needs to be
captured and distributed in this form).
 Growing Importance Of Intellectual Property
% of share price that is uncounted IP (trend basis)

1960 1970 1980 1990 2000 2010 2020

100%

90% Audited
28.0
Net Assets
80% 40.0
50.0
70% 56.0
63.0
68.0
76.0
60%

50%

40%
72.0 Unrecognised
30% 60.0 IP & Intangibles
50.0
20% 44.0
37.0
32.0
26.0
10%

0%
1 2 3 4 5 6 7
Source: Melbourne Institute & IBISWorld
 The evolution of economies

• The past

– Primary, secondary, and basic tertiary industries

• The present

– Quaternary industries

• The future

– Quinary industries
 Australia’s Ages Of Economic Progress
GDP @ Constant F2011 Prices 1788-2015 and onwards
2200
Hunting Agrarian Industrial Infotronics Enlightenment
2000 Age Age
Age Age Age ?
1800
1600
1400
Hunting,
trapping,
fishing,
crafts,
religion
Agriculture,
Mining,
Banking,
Commerce
Industrial
An Industrial Age is when
Manufacturing and Construction
dominate the economy
(c. 30-50%+ of GDP)
Quaternary
service
industries
Quinary
service
industries

1200
1000
Transport the
major utility Age
Power the major utility
(electricity) and telephony
IC&T
Imbedded
intelligence,

neural network
programs.
800 More electronic
“guardian angels”
600 and other new
technologies

400
200
0
1780
1790
1800

1860
1870
1880

1930
1940
1950
1960

2010
2020
2030
2040

2090
2100
1810
1820
1830
1840
1850

1890
1900
1910
1920

1970
1980
1990
2000

2050
2060
2070
2080
Year, ended June IBISWorld 08/07/15
 Changing Mix of Industries in Australia
Shares of GDP by Industry Division, 1800-2050

1820

1860
1800

1840

1880
1900

1920

1940

1960

1980

2000
2020

2050
100%
Agriculture
Primary Mining
Sector
90% Manufacturing
Utilities
80% Secondary Construction
Sector W’Sale Trade
Retail Trade
70%
Transport, Postal
Tertiary
Sector Media & Telecom
60%
Finance & Insurance
Rental, Hiring. R Estate
50%
Dwelling O’Ship

40% Prof & Tech Services

Quaternary Admin Services
Sector Public Admin/Safety
30%
Ind taxes less subsidies
20% Education
Hospitality
10%
Health & Social Assist
Quinary
Sector Arts & Recreation
0% Personal & Other Serv
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020 2050

Note: At market prices to 1940, at factor cost thereafter Source: N.G Butlin, ABS & IBISWorld 8.01.15
 Australia’s Current Industry Mix
Shares of GDP, in F2014 price terms Year to September 2015
Pers. & Other Serv.
Cult & Rec. Serv. Agriculture
Hospitality 0.8% Mining
2.2% Utilities
8.6% 2.7%

7.7% Construction
Govt. Adm. 5.2%
2.6%

8.7%
Finance &
Insurance

Admin. &
Support
Services
Rental,
Hiring & Info Media & Sectors
Real Estate Communications Primary
Secondary
Tertiary
Quaternary
GDP $1629 billion Quinary

Note 1: Less subsidies, but includes stat. discrepancy (0.2%)

ABS 5206-6B IBISWorld 07/12/15
 Current Industry Mixes, by nations
Shares of GDP

China Canada Australia USA UK

100% 2.3
2.6 1.9 Agriculture
10.1 8.5 8.6 Mining
9.7
90% 12.0 Manufacturing
5.2 2.0
10.5 6.2 Utilities
1.7 6.2
2.7 3.7
80%
2.4 Construction
7.7 6.0
7.2 11.7 Wholesale trade
70%
31.1
3.9 5.8 Retail trade
5.6 4.5 2.9 4.2 Transport & Postal
5.4 4.6 4.6
60% 6.2 Media & Telecom
3.0
4.2 7.2 Finance &insurance
2.2 3.2 7.5
8.7 2.1 Rental & Real Est
50%
6.8 6.8 2.8
2.8
9.7 Dwell O'Ship
3.5 4.7 8.2
40% 8.4 Prof & Tech
6.0
7.9 9.0 8.1 Adm. & Support
4.7 6.0
30% 3.1 Govt admin
5.3 2.7 5.3
5.5 3.2 5.3 6.0 Ind taxes et al
5.0 Education
20% 5.7 6.7 0.0
6.4 6.9
2.1
6.7 Accom, cafes &rest
2.1 5.2 4.6 3.0
3.9 2.1 2.4 2.8
2.8 Health &community
10%
3.1
6.8 6.5 7.2 Cult &recreation
2.0 6.6
1.7
2.0 1.8 2.2
1.6
2.3
Other Services
0%
1 2 3 4 5
2013 2014 2015 2015 2014
IBISWorld 26/10/15
 New Utilities and Outsourcing
Create Most Industries

❖ We outsourced the growing and mining of things to

create the Agrarian Age industry, aided by new
technologies and utility (transport).
❖ We outsourced the making and building of things to
create the industrial Age industries of manufacturing
and construction, aided by new technologies and
utility (electricity).
❖ We are outsourcing services (household services and
business functions) to create the current Infotronics
Age from 1965-2040s, aided by new systems &
technologies and a new utility (IC&T).

$1.5 trillion in extra revenue by F2016

Business Outsourcing: The Virtual Corporation

Traditional Structure New Structure

Multi-layered Corporation Virtual Corporation

Board, CEO and Leader, Senate and

Top Management Top Management

Head Office functions Mostly

outsourced

Implementers
Middle No Longer

Management Mostly
Required
outsourced

Coordinators
& Operatives
Supervisors No Longer

& Employees Required

Mostly outsourced
and /or franchised

Functions provided back to company by

firms in new (specialised) industries (e.g
IT, personnel, legal, accounting, information,
transport, cleaning etc.)
 A regional perspective

• Why geographical proximity matters?

– Transportation costs

– Cultural similarity

– Migration of population

– Psychic distance

– Natural environment

54
The World’s Economic Regions In 2016
Share of World GDP (ppp basis)

Eastern
W&C Europe Europe
North 17.7% 3.9%
America
19.1% Indian
ME S-C
7.2% 8.6%
Asia
Pacific
Africa 32.3%
5.1%
C&S
America
6.1%

2016 World GDP, $118 trillion

IBISWorld 07/01/16
 Importance of World Regions
GDP (ppp terms) 2015
Economy Population
Africa
Middle East %

4.0%
6.0% Africa
11.5%
North
America
23.0%
Indian
Asia S/C
Pacific 23.1%
31.0% Western Asia
E. Europe 3.6%

Europe Pacific
19.1% 33.6%

$US ppp 96.7 trillion 7.2 billion

IBISWorld: 08/05/15
 World Regions Importance
Changing importance, % of World GDP (ppp terms)
1870 1913 1950 1998 2025 Year

12.7%
22.8% 18.0% Nth America
2.0% 24.0%
30.5%
7.0% C & S America
3.5%
6.8%
33.6% 6.7% 14.5% Western Europe

23.5% 4.5% Eastern Europe

35.5% 5.0% Middle East
7.6% 27.3% 4.5% Africa
2.0%
3.6% 3.5% 10.5% Indian S-C
3.1%
12.2% 8.6% 5.0%
9.6%
2.7%
7.6% 3.6% Asia Pacific
4.2% 36.0%
32.1%
26.1%
17.0% 16.3%

1.1 2.7 5.3 33.7 190.0 GDP (trillion)

1870 1913 1950 1998 2025
Source: OECD 31/03/15
 Asia Economy
Asia Pacific + Indian S-C GDP (ppp) 2016

Vietnam Singapore
Singapore
Others
1.0 %
1.3% Others
1.0%1.4%
1.5%

44.7% China
10.5% Japan

18.6%
India
Taiwan

0.9% H/K
2.5%

$US 47 trillion

Wikipedia/IBISWorld 17/01/16
 Asia Growth 2015
Major Asia Pacific and Indian S-C nations (ppp ranking)

Myanmar 8.5
Laos 7.5
India 7.6
Cambodia 7.0
China 6.9
Sri Lanka 6.5
Bangladesh 6.5
Vietnam 6.5
Philippines 6.4
Pakistan 5.7
Malaysia 5.4
Nepal 5.4
ASIA 5.3
Indonesia 4.7
Thailand 3.4
Taiwan 3.2
Mega-Regions Growth
Singapore 2.9 Asia 5.3%
World (8 regions) 2.8%
NZ 2.8 M.E & Africa 2.0%
N America 2.4%
S Korea 2.5 C&S America 0.5%
W&C Europe 1.6%
Hong Kong 2.4 E Europe -3.9%
Australia 2.3
Japan 0.6
-2 -1 0 1 2 3 4 5 6 7 8 9 10
Growth % (GDP)
IMF/IBISWorld: 05/12/15
 Regional Economic Integration
• Regional economic integration – agreements between
countries in a geographic region to reduce tariff and
non-tariff barriers to the free flow of goods, services,
and factors of production between each other

• Overlapping group of nations

• Different degrees of regional economic integration

• Five forms of integration

60
 Five forms of integration
Removal of Coordination Free Members
trade barriers of taxes, movement of do not
within regulations in labour and regulate
resource capital currencies
NAFTA/LAFTA
allocation
Free Trade
Area
Andean Community
Customs
Union
Southern common market
Common
market
EU & the Euro
Monetary/
Economic
union
Political Merger of political barriers
Union

61
 Five Levels of Economic Integration

Political Union
USA (1788)
Australia (1901)
Economic Union

Common Market

EU (1993)
Customs Union
EEC (1957)
NAFTA (1994)
Mercosur (1991)
Free Trade Area

AFTA (2003)

APEC (1989)

62
 Regional Economic Integration: Benefits
• Trade creation
– Trade creation occurs when low cost producers
within the free trade area replace high cost domestic
producers

• New employment opportunities

• New investment opportunities

• Greater consensus e.g. lower risk of violent

conflicts
• Closer political cooperation results in greater
collective influence in dealing with other nations

63
 Regional Economic Integration: Drawbacks

• Trade diversion
– Trade diversion occurs when higher cost
suppliers within the free trade area replace lower
cost external suppliers

• Shifts in employment

• Loss of national sovereignty

64
 Implications for Managers

• Regional economic integration

– Opens new markets
– Allows firms to realise cost economies by centralising
production in those locations where the mix of factor
costs and skills is optimal

• But
– Within each grouping, the business environment
becomes competitive
– There is a risk of being shut out of the single market
by the creation of a “trade fortress”

65
 Re-cap of Key Points

1. Economic conditions are measured by various proxies

2. The rules of the game and good players are what drive
the economic growth

3. Economies evolve over time as industries emerge and

decline

4. The global economy is clustered in regions

5. Regions pursue economic integration which can benefit

and hinder businesses

66