Download Comparative Economic Development

Comparative Economic Systems
and Development
Armenian State University of
Economics
Spring 2016
Outline
• Comparative Systems Analysis
• Markets, Hierarchies, and Economic
Performance
• Some Comparative Data
• Economic Development
• Development Strategies
Economic Systems
• Why do people behave the way they do?
• In this subject we investigate economic
behavior under different economic systems
• What is an economic system?
• Framework of social institutions which
influence the behavior of economic agents
Social Institution
• What is a social institution?
• An arrangement between economic agents
that governs the ways the agents relate to
one another
• A governance mechanism
What are institutions?
• Decision-making arrangements
– Firms, Households
• Coordination and information mechanisms
– Money prices, regulations, markets, internet
• Property Rights
– Private, public
• Goal-setting and incentive mechanisms
– Profit, morality
• Public choice mechanisms
– Government
Economic Systems
• What do we mean by the behavior of
economic agents?
• Every choice people must make due to
existence of scarcity
– What to produce (and consume)
– How to produce
– Who consumes it
• Resource allocation
The simplest economic model
• Robinson Crusoe Economy
• RC has
– labor
– capital (from the ship)
– land
• He needs
– Shelter
– Food
Robinson Crusoe Economy
Food
Highest Indifference Curve
PPF
RC’s Choice
F*
0
S*
Shelter
What kind of economic system is
RC’s?
• Trick Question!
• In a society, resource allocation requires
coordination of activities among 2 or more
people
• Activities are coordinated by means of
transactions.
• Transactions have costs
Transaction Costs
• Identification Cost
– What is the activity and who are the involved
parties?
• Negotiation Cost
– What are the terms of the transaction?
• Enforcement Cost
– Are the terms of the transaction carried out?
• Transactions costs are the resources devoted
to answering these questions
Markets and Hierarchies
• Markets promote voluntary, horizontal,
relationships
– Buyers and sellers make mutually beneficial
exchanges
• Hierarchies promote compulsory, vertical,
relationships
– Superiors order subordinates to carry out tasks
Markets and Hierarchies
• Examples of Markets
– Stock Exchange, Farmer’s market, labor
market, ebay, flowers, Yerevan taxis, …
• Examples of Hierarchies
– Firm, State administration, Army, Police,
Church, …
Markets and Hierarchies
• Markets define horizontal relations
– Voluntary and mutually beneficial exchange
– Save on identification costs because buyers and sellers
reveal opportunity costs
– May have significant negotiation costs
• Markets have an advantage in governing activities that
present identification problems
Markets and Hierarchies
• Hierarchy defines vertical relations
– Superior - Subordinate
– Save on negotiating costs because of unequal
relationship
– May have significant identification costs
• Hierarchies have an advantage in governing
activities that present implementation
problems
Markets and Hierarchies
• Both exist simultaneously in every
economic system
• Why?
Spectrum of Economic Systems
Centralization Increases
anarchy
pure
market
mixed
market
HongKong UK
1997
California
1849
mixed
socialism
Germany
USA
China
France
Sweden
Where is Armenia?
Planned
socialism
USSR
1980
pure
hierarchy
Wartime
Economies
Performance Dimensions
• Output
• Growth
– ExtensiveGrowth
– Intensive Growth (Dynamic Efficiency)
•
•
•
•
•
Composition
Static Efficiency
Stability
Income Distribution
Quality of Life
Comparative Data 2014
USA
Germany
Czech Republic
Russia
China
Armenia
54,900
46,700
30,300
24,700
13,400
8,200
% Services
77.6
69.1
59.2
59.7
48.4
46.7
% Industry
20.8
30.2
38.2
35.8
42.7
30.1
% agriculture
1.6
0.7
2.7
4.4
8.9
23.3
% GDP growth
2.4
1.6
2
0.6
7.3
3.4
Investment/GDP
16.3
20.2
25.1
19.1
42.4
20
%inflation
1.6
0.8
0.4
7.8
2
3
%unemployment
6.2
5
7.7
5.2
4.1
17.8
0.225
0.6
0.67
0.15
0.21
0.19
%-tile ratio
15
6.67
19.4
7.44
17.6
6.7
Gini coeff.
45
27
24.9
42
46.9
30.3
%pop growth
0.78
-0.17
0.16
-0.04
0.45
-0.15
life exp
79.7
80.57
78.5
70.47
75.4
74.37
infant mortality
5.87
3.43
2.63
6.97
12.44
13.51
0.915
0.916
0.87
0.798
0.727
0.733
Econ. Freedom
7.73
7.5
7.33
6.69
6.44
7.67
Security Index
0.594
0.753
0.754
0.645
0.626
0.666
GDP/cap
(M+X)/GDP
HDI
Sources: CIA World Factbook, UNDP, Fraser Institute, Human Security Index
Development Strategy
• How to
–
–
–
–
–
Increase National Income
Improve Public Health
Industrialize
Urbanize
Reduce Population Growth
Development Strategy
• Requires
– Infrastructure
•
•
•
•
Transportation
Communication
Public Health
Education
– Efficient utilization of resources
• Static efficiency
• Dynamic efficiency
Development Strategy
• Extensive Growth
– Increase utilization of inputs and existing technology
– Achieve full employment and a high rate of capital
formation
– Negotiation problem – hierarchies have an advantage
Inputs
Labor
Capital
Materials
Production Function
Q = f(K, L, M)
Final Output
National Income
Development Strategy
• Intensive Growth
– Increase the productivity of existing inputs
– Promote innovation and technological change
– Identification problem – markets have an advantage
Inputs
Labor
Capital
Materials
Production Function
Q = f(K, L, M)
Final Output
National Income
Role of Government
• Provision of Public Goods
–
–
–
–
–
Law and Order
National Security
Transportation and Communication
Public Health Measures
Public Education
• Mobilize Resources?
Role of Markets
• Promote Static Efficiency
– Allocate Resources to highest valued use
– Capital markets promote investment and
savings
• Promote Dynamic Efficiency
– Profit incentive for improvement
– Intellectual property rights promote invention
Development Strategies
• Import Substitution
– Prevailing Model after WWII
– India, Pakistan, Mexico, Africa, Latin America
– Initially successful, later discredited
• Export Promotion
– Japan, Hong Kong, Singapore, South Korea,
Taiwan, Thailand, Malaysia
– Successful in Asia, domestic consumer bears
costs
Asian Development Strategy
• State-led industrialization
• High savings/investment rates
– Physical and Human Capital
•
•
•
•
Borrowed technology
Export promotion
Exchange rate policy
Relational contracting
– Partnership among industry, government, banks