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Globally Free Markets
for theTwenty-First
Century?
Year after year in Washington, . . . debates seem to come
down to an old, tired argument: on one side, those who
want more government regardless of the cost; on the
other, those who want less government, regardless of
the need.
&
& The Economic Toolbox
ç PRESIDENT GEORGE W. BUSH, ADDRESS OF THE PRESIDENT TO THE JOINT
&
Capitalism
SESSION OF CONGRESS, FEBRUARY 27, 2001
&
Socialism
&
Liberalism
&
Economic growth
&
Savings rate
&
Capital gains
&
Consumption tax
&
Labor productivity
&
Economic transition
&
Price decontrol
&
Privatization
&
Safety net
&
Economic reform
&
International debt
&
Capital flight
&
Conditionality
ell, this quotation is a little bit dated, but it is
right on the mark. More government or less
government: that has been the debate
throughout the last century, as well as throughout
this textbook. As we shall see, however, the world has
recently embraced a direction decidedly in favor of globally free markets—markets characterized by minimal
government involvement. But what about the future?
The title of this chapter ends with a question mark.
Although the direction of change has been clear, there is
no reason to expect that free markets will work for all
countries and all times. There is also no reason to
assume that the transition to free markets will go
smoothly for all nations or that a return to policies of
the past will not occur. Indeed, several countries, especially Latin American ones, have begun to shift to the
left. Let’s examine the trends.
R
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W
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Markets
Throughout this book, there have been repeated references to demand and supply and the workings of
markets in general. There have also been repeated
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references to government intervention in the economy. The proper role for
government versus the proper role for the marketplace has prompted heated
discussion among economists and politicians for decades. The respective roles
for government and market have been the focal point for the ViewPoint sections
throughout this text. In terms of economic philosophy and in U.S. terminology,
those who favor a limited role for government are generally referred to as
economic conservatives, whereas those who favor a greater role for government
are regarded as economic liberals. The conservative view maintains that free
markets are efficient and they provide the proper incentives for economic prosperity
and growth to occur. Market failures are believed to be minimal, and government
interference in properly functioning markets can only create inefficiencies and
restrict growth. Limiting the government’s role as much as possible is best.
This conservative view was evident in the discussion of supply-side policy
in Chapter 15. Supply-side economists favor reductions in government regulations, taxes, domestic programs, and transfers. Their view is that the marketplace
works efficiently; we must untie the hands of businesses and consumers to enable
them to make their own private decisions, and the economy will be better as
a result.
Liberals, on the other hand, see the marketplace as imperfect and market failures
as serious. In their view, markets are not necessarily equitable, and sometimes not
even efficient. Furthermore, society has goals, such as environmental protection,
care for the poor and elderly, and economic stabilization, that cannot be met by
the marketplace operating freely on its own. Liberals believe that the government
must intervene in markets to achieve these goals.
Most economies have some combination of markets and government involvement. Some countries are more heavily capitalist, whereas some are predominantly socialist. Under capitalism, the private sector (individuals and private
business) makes economic decisions via the marketplace and owns the means of
production (factories, equipment, and land). Under socialism, by contrast, the
public sector (the government) makes economic decisions and owns and controls
the means of production. Under capitalism, consumers and producers interact
through the marketplace, responding to market-determined prices. Under socialism, the government has a more prominent role in determining which goods will
be produced, how they will be produced, and what their prices will be.
Keep in mind that capitalism and socialism refer to economic systems. They
imply nothing about political systems, such as democracy and communism.
Certainly, a socialist economy may exist under either communism (Vietnam) or
democracy (Chile); and a capitalist economy may exist under communism (Hong
Kong) or democracy (the United States). In this text, we are focusing our attention on economic systems.
The movement toward free markets has been a recent global phenomenon, the
direction entailing different circumstances in different parts of the globe. We will
consider each of the three major regions of the world in turn. We will define the
Western industrialized world as the industrialized capitalist countries of the world,
including the United States, Canada, most of Western Europe, and other countries (including Japan) that have achieved high economic performance through
predominantly stable market conditions. We will define the formerly socialist
industrialized world as the industrialized ex-socialist countries of Eastern Europe.
These countries include the former Soviet Union and much of the rest of Eastern
and Central Europe. Finally, the less-developed world encompasses all of the lessdeveloped countries (LDCs), including most countries of Africa, Asia, and Latin
America. These countries are often referred to as Third World countries.
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Capitalism
An economic system
wherein the economic
decisions are made by the
private sector via the marketplace and the means of
production are owned by
the private sector.
Socialism
An economic system
wherein the economic
decisions are made by the
public (government) sector
and the means of production are owned by the
public sector.
Western industrialized
world
The industrialized capitalist
countries of the world.
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Formerly socialist
industrialized world
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The industrialized exsocialist countries of
Eastern and Central
Europe.
Less-developed world
The less-developed countries of the world.
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Liberalism (or neoliberalism)
A movement toward freer
(more capitalist) markets.
This is another term for
economic reform or economic
transition.
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One more term should be clarified. Economists often refer to the changes
taking place in the formerly socialist and less-developed countries as liberalism
(or sometimes neo-liberalism). This term is confusing, because it refers to a movement toward markets with less government intervention, rather than the traditional liberal philosophy we have described. Do not confuse the words liberal and
liberalism. The first implies government involvement in the economy; the latter
implies change toward free markets.
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The Western Industrialized World:
Economic Growth
Conservative Republicans controlled the U.S. presidency for the 12 years from
1981 to 1992. And although a Democrat became president in 1993, conservative
Republicans took control of both houses of Congress in 1994. A conservative
Republican once again took the presidential office in 2001, with an administration
that includes conservatives from prior Republican administrations. President
George W. Bush’s views toward tax policy, education, health care, the environment, Social Security, and government regulation reflect the familiar undercurrent
of supply-side economics and a philosophy of free markets with a minimal
economic role for government.
This conservative framework has not been unique to the United States. Many
of the larger democracies of the Western industrialized world, including Britain,
France, and Germany, have taken on a conservative philosophy that has resulted
in restricted government involvement in their economies and more focus on free
markets. Domestic social programs have declined, and economic growth is driving
Western Europe in the new century.
Note that Japan is often included with the Western industrialized countries,
despite the fact that it is an eastern (Asian) country.
ECONOMIC GROWTH RATES
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Recall that economic growth is defined as a sustained increase in production. One
standard measure of economic growth is the annual growth rate of GDP, averaged over a period of several years. (An alternative measure, the growth rate of
GDP per capita, was used in Chapter 7.) Table 17-1 displays average annual GDP
growth rates for the Western industrialized nations for the time periods 1990–2000
and 2000–2005 (the latest year for which data are available for all countries).
As revealed by these data, these growth rates for 2000–2005 range from less
than 1 percent to 5 percent per year. In almost all countries, average annual
growth rates are slower during the period 2000–2005 than they were over
1990–2000. This is also the case for the United States, with average annual
growth rates of 3.5 percent from 1990–2000 and 2.8 percent from 2000–2005.
During the more recent time period, the United States has grown faster than
most of the Western industrialized world.
The increase in GDP that underlies the growth rates in Table 17-1, on page 408,
can be discussed in the framework of aggregate supply (in the short run) and
production possibilities (in the long run).
Economic growth
A sustained increase in
production, represented by
an outward shift of the
production possibilities
curve. An increase in GDP
(or GDP per capita) over
an extended time period.
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Supply-side philosophies are based on the idea that reductions in government
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AGGREGATE SUPPLY AND PRODUCTION
POSSIBILITIES
T A B L E
AVER AGE ANNUAL E CONOMIC G ROW TH R ATES , W ES TERN
INDUS TRIALIZED C OUNTRIES AND J APAN, 19 9 0 ^ 2 0 0 0 AND
20 0 0^ 20 05
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4
Country
Average Annual
Growth of GDP (%) 1990–2000
Average Annual
Growth of GDP (%) 2000–2005
Austria
2.4
1.3
Belgium
2.1
1.5
Canada
3.1
2.6
Denmark
2.5
1.5
Finland
2.6
2.4
France
Germany
2.0
1.8
1.5
0.7
Greece
2.2
4.2
Ireland
7.5
5.0
Italy
1.6
0.7
Japan
1.3
1.3
Netherlands
2.9
0.6
Norway
4.0
1.7
Portugal
Spain
2.7
2.6
0.3
3.1
Sweden
2.2
2.2
Switzerland
1.0
0.9
United Kingdom
2.7
2.3
United States
3.5
2.8
Source: World Bank, World Development Indicators 2007, http://www.worldbank.org.
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supply curve would be associated with an increase in gross domestic product.
Supply-side policies and their effects were discussed in Chapter 15. Figure 17-1
summarizes the desired effects of supply-side policy.
Supply-side policies are intended to increase GDP, but a sustained expansion
of GDP requires additional policies that create long-term changes. These fundamental changes can be analyzed in the context of the production possibilities curve
discussed in Chapter 1.
Recall that the production possibilities curve shows the alternative combinations of the maximum amounts of output that an economy can produce if all of its
resources and technology are fully and efficiently utilized. The economy can
achieve higher levels of production if the production possibilities curve shifts
outward over time. We have defined economic growth as a sustained expansion
of output. The factors that cause this outward shift in production possibilities
include an increase in the quantity or quality of society’s resources or an improvement in technology. These factors can generate a sustained expansion of output—
that is, economic growth.
POLICIES TO ACHIEVE ECONOMIC GROWTH
The production possibilities curve from Chapter 1 is repeated in Figure 17-2. Let’s
consider four specific examples of the factors contributing to economic growth.
These are an increase in capital, an improvement in labor productivity, an
improvement in technology, and a decrease in unnecessary regulation. As we
examine these dynamics, we can consider government policy with respect to
each of them.
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EFFECTS OF SUPPLY-SIDE POLICYON THE MACROECONOMY
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P
AS
AS′
P
P′
GDP GDP′
GDP
Supply-side policy is designed to cause an increase in
aggregate supply, as shown by the shift of the aggregate
supply curve AS to AS0. The result is an increase in GDP to
GDP0 and a reduction in the average price level from P to P0.
F I G U R E
17-2
P RODUC TION P OS S IBILITIES CURVE
WITH
E CONOMIC G ROW TH
Quantity of Bread (tons)
210
180
150
A
B
120
C
90
G
D
60
E
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30
0
20
40
60
80
F
100
120
140
Quantity of
Roses (tons)
Points A through F show alternative combinations of bread and roses that the economy
can produce. More of both bread and roses can be produced when the production
possibilities curve shifts outward as a result of economic growth.
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An Increase in Capital
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Economic growth can occur if there is a sustained increase in the quantity of physical
capital: that is, an increase in our nation’s stock of factories, equipment, machinery,
and the like. This increase in capital is made possible by an increase in investment,
and investment is made possible by saving—either private saving by households
and businesses or public saving through government taxes.
High investment activity necessitates a high savings rate, which is defined here
as total savings divided by total GDP. The current U.S. savings rate is around 15
percent. The U.S. savings rate is tied with Portugal and the United Kingdom as
the lowest in the Western industrialized world. Norway, Switzerland, and Japan
have the highest savings rates. These savings rates are displayed in Table 17-2. The
relatively low rate of the United States concerns many economists.
Some expect the U.S. savings rate to increase in the twenty-first century as the
baby-boomer generation grows older, enjoying higher incomes and finishing their
payments for houses and education for their children. However, government
savings and dissavings will play a role as well. When the government spends
less than it brings in through tax revenue, it engages in saving. When it spends
more than its tax revenue, it engages in dissaving. The temporary spate of budget
surpluses at the turn of the century encouraged those who sought a higher U.S.
savings rate. However, the more recent major tax cuts of the Bush administration,
coupled with greatly increased expenditures on the military, imply continued
government dissaving for the foreseeable future.
Numerous efforts and proposals have been made to increase the national
savings rate through supply-side policy. These efforts and proposals have been
Savings rate
Total savings divided by
gross domestic product.
T A B L E
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17-2
S AVINGS R ATE S F OR THE W ES TERN INDUS TRIALIZED
C OUNT RIES , * 2 0 0 4
Country
Savings Rate
Austria
Belgium
24%
24%
Canada
23%
Denmark
23%
Finland
24%
France
19%
Germany
21%
Greece
18%
Ireland
Italy
23%
19%
Japan
27%
Netherlands
23%
Norway
33%
Portugal
15%
Spain
23%
Sweden
24%
Switzerland
United Kingdom
29%
15%
United States
15%
*Calculated as total savings divided by GDP.
Source: World Bank, World Development Indicators 2006, http://www.worldbank.org.
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aimed at increasing incentives for households and businesses to save and invest.
The 1981 tax law accelerated tax write-offs for new investment by businesses,
greatly reducing corporate income taxes. The 1981 and subsequent tax laws provided tax breaks to households placing income into individual retirement accounts
(IRAs) and 401(k) accounts. The capital gains tax has been reduced. As discussed
in Chapter 16 on taxes, a capital gain is the net income earned when one sells an
asset at a higher price than was paid for the asset. Taxes on dividends, received by
shareholders, have also been reduced. The latter two tax cuts have been very
controversial because while the Bush administration states that the cuts contribute
to economic growth, the vast majority of the tax benefits accrue to the wealthiest
Americans, the ones who are more likely to have these types of investment
income.
Finally, there have been repeated proposals for a consumption tax to replace
our current personal income tax. Like a national sales tax, a consumption tax
taxes only the share of household income that is spent on consumer goods and
services; it does not tax the portion of income that is saved. Although the goal is
to provide greater incentives for saving, this tax would place the greatest burden
on low-income individuals, who by necessity must spend virtually all of their
incomes on consumption. This would represent a very regressive tax (recall that
the definition of a regressive tax is one that takes a larger percent of income from
lower-income people).
If these types of policies prove successful in increasing savings, we would expect
to see an expansion in investment in our nation’s stock of physical capital.
The expansion of our nation’s factories, equipment, and machinery would
result in an expansion of gross domestic product—that is, in economic growth.
Although most of the conservative emphasis has been on providing incentives
for increased private saving and investment, liberal interest in increasing government investment should not be overlooked. The government can play an important role by investing in highways and mass transit, as well as schools and health
care facilities. Since all of these forms of investment can improve the business
environment, as well as the productivity of workers, they can enhance both the
physical and human capital of our nation.
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An Improvement in Labor Productivity
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Labor productivity is defined as total output per average work hour, calculated as
gross domestic product divided by the number of work hours performed in the
economy. Annual U.S. labor productivity growth, which lagged in the 1970s and
1980s, has now increased to much higher levels. For example, U.S. value added
per worker in manufacturing was $47,276 in the early 1980s, but $81,353 in the
last decade.1 Labor productivity hinges on the type and amount of capital and
technology used in conjunction with labor, and these, of course, have improved in
recent years. Keep in mind, however, that labor productivity also depends on
human capital. Human capital includes the skills and abilities of people. Once
again, government support for training programs, education, health, and nutrition all remain important for ensuring high levels of human capital.
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An Improvement in Technology
Technology can be thought of as ways of using available resources to produce
output. Improvements in technology enable us to produce more output, given
our limited resources. These improvements are embodied in new and more
efficient machines, new products, and new methods of production.
Capital gains
The net income received
when an asset is bought
at a particular price and
sold at a higher price.
Consumption tax
A hypothetical tax on the
portion of income that is
spent on consumer goods
and services, as opposed
to income that goes into
savings.
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Labor productivity
Total output per average
work hour, calculated as
GDP divided by the
number of work hours.
Technology
Ways of using available
resources to produce
output.
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Technological advance depends on research and development (R&D). Some
4,484 scientists and engineers are engaged in R&D per each million people in the
United States, placing it seventh among the countries of the world. Finland has
the highest number of researchers, with 7,992 for each million people in the
country. The numbers for the top seven countries are shown in Table 17-3.
Government policies can again be used to encourage research and development.
The government can increase university funding available for research and offer
tax breaks for businesses that engage in research and development. The government can also provide patent protection to developers of new products. A patent is
a government grant of exclusive rights to use or sell a new technology for a period
of time. Without patents, other businesses might copy the new technology or
product, thereby creating profits for themselves at the expense of the developer.
Without patents, businesses have little incentive to develop new products. Patents
have been extremely important in areas such as pharmaceuticals, communications
technology, and consumer goods. Recently, patent applications filed by U.S.
residents exceeded 200,000 per year. In comparison, Japan has over 371,000
patent applications per year.
Nowhere has technological advance been more prominent than in the area of
computers. Indeed, investment in information technology, including computers,
software, communications networks, and Internet infrastructure, has contributed
to a large share of economic growth in recent years. Table 17-4 shows data for
many of the top countries in terms of number of personal computers (PCs) and
Internet users. We see that surprisingly (as least to your author) Estonia in Eastern
Europe has the highest number of PCs per 1,000 population (921). The United
States has the fifth largest number of personal computers per 1,000 population
(749). New Zealand has the largest number of Internet users per 1,000 population
(788). The United States ranks sixth in terms of Internet users per 1,000 people
(630). Computer technology helps businesses in the United States and other
countries to produce more and better products at the same or lower costs of
production. It has also been a major factor in improving labor productivity.
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Patent
A government grant of
exclusive rights to use or
sell a new technology or
product for a period of
time.
A Decrease in Regulation
The government regulates business in a variety of ways, including protections
for consumers of pharmaceuticals, food, and manufactured goods; safeguards
for workers in industry; and protection of the environment. In light of recent
T A B L E
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17-3
NUMB ER OF R ES E ARCHER S IN R ES E ARCH AND D EVELOP MENT
( P ER MILLION POPUL ATION ), TOP S EVEN C OUNTRIES IN
ORDER , 19 9 6 TO 2 0 0 4 *
Country
Researchers per Million Population
Finland
7,992
Sweden
5,416
Japan
5,287
Denmark
5,016
Singapore
4,745
Norway
4,587
United States
4,484
*Most recent available year.
Source: World Bank, World Development Indicators 2006, http://www.worldbank.org.
NUMBE R OF P ERSONAL C OMPUTERS AND NUMB ER OF INTERNE T
U S ERS ( P ER THOUS AND POPUL ATION ), 2 0 0 4
Country
PCs
Internet Users
Australia
682
646
Canada
700
626
Denmark
656
696
Estonia
921
497
Finland
481
629
Israel
741
471
Netherlands
New Zealand
682
474
614
788
North Korea
545
657
Singapore
763
571
Sweden
763
756
Switzerland
826
474
United Kingdom
599
628
United States
749
630
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Source: World Bank, World Development Indicators 2006, http://www.worldbank.org.
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deaths caused by unsafe tires and certain pharmaceutical drugs, the necessity for
wisely developed government regulations is clear. On the other hand, unwise and
unnecessary regulation merely increases business costs and decreases output.
Therefore, cutting unwise regulation is a desirable policy and is conducive to
economic growth. The problem, of course, is recognizing which regulations are
harmful and which are beneficial.
Generally speaking, economic conservatives prefer less government regulation,
whereas economic liberals prefer more. The supply-side policies since the
early 1980s include widespread cuts in government regulations. Environmental
protection is a good case in point. President Ronald Reagan and President George
H. W. Bush greatly reduced government regulations in this area. Many of
President Bill Clinton’s proposed regulations met a hostile Congress and were
not passed. President George W. Bush has continued the trend toward less environmental regulation and a more industry friendly environmental policy. Although
this policy may provide some short-run benefit to the economy through a reduction in the compliance costs of business and a resulting increase in aggregate
supply, the long-run costs might outweigh this benefit. Just as an increase in
productive resources will shift the production possibilities curve outward over
time, a decrease in our natural resources caused by environmental damage and
resource depletion will shift the curve inward. The capacity of our nation to
produce and grow will be compromised, and the quality of life of our citizens
will decline.
As suggested in Chapter 3 on the environment, environmental protection is a
global necessity. Deforestation and the burning of fossil fuels contribute to global
warming and loss of precious biodiversity. Acid rain destroys crops, waterways,
and capital structures across countries. Use of certain chemicals destroys the
ozone layer. Air and water pollution know no boundaries.
In the final days of his administration, President Clinton considered but
ultimately decided against an executive order that would have protected nearly
60 million acres of U.S. forested area by prohibiting oil exploration in Alaska’s
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Arctic National Wildlife Refuge. President George W. Bush’s plan for oil exploration in this refuge was a central part of his energy policy. Similarly, President Bush
refused to sign the 1997 Kyoto Accord, approved by President Clinton, which
forces industrial nations to reduce greenhouse gases. This treaty is seen as critical
to reducing the problem of global warming and is discussed in more detail
in Chapter 3 on the environment. Other global environmental issues are discussed
in that chapter as well.
IMPLICATIONS OF GROWTH FOR THE
TWENTY-FIRST CENTURY
The market-oriented growth policies of the Western industrialized world are likely
to persist for at least the near future. However, there may be a cyclical movement
of philosophy from a restricted government role to an expanded government role
and back again, as dissatisfaction with the drawbacks of either extreme becomes
evident. In the United States, post-World War II economic growth did little to
mitigate extremely high poverty rates. The war on poverty and the civil rights
movement of the 1960s addressed the needs of the population to which the prosperity of the 1950s did not trickle down. Yet, the policies of the 1960s and 1970s
brought forth a conservative backlash as many politicians (and Supreme Court
justices) in the 1980s, 1990s, and early 2000s sought to reverse years of affirmative
action and antipoverty policies. In the twenty-first century, concern for the people
left behind from the prosperity of worldwide economic growth may well again
precipitate a greater call for government response.
The Formerly Socialist Industrialized World:
EconomicTransition
Economic transition
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A shift in policies and
institutions that move
economies from socialism
toward capitalism.
The recent changes in Eastern Europe are nothing short of revolutionary. The
Cold War ended. Germany is reunified, and the Berlin Wall is down. The Soviet
Union no longer exists; it has been divided into some 16 independent nations
(the largest of which is Russia). And finally, the former socialist economies of
Eastern and Central Europe are now undergoing an economic transition toward
capitalism.
This transition has achieved varied levels of success, as evidenced by diverse
economic growth rates. Table 17-5 displays the variation in growth rates
for countries of the formerly socialist industrialized world over the period
1990–2000 and 2000–2005. These growth rates are fascinating! First, about
two-thirds of the average annual growth rates for the time period 1990–2000
are negative. This means that GDP declined on average each year during the
time period. Nevertheless, all of these growth rates turned positive over the
time period 2000–2005. Sometimes, the reversal is incredible. For example,
Tajikistan had the largest negative growth rate (–10.4%) from 1990–2000, but
close to the highest average annual growth rate (9.7 percent) over 2000–2005!
Other countries with very high growth rates from 2000–2005 include Armenia,
Azerbaijan, Kazakhstan, the Ukraine, and Estonia. (Recall the high number
of PCs in Estonia—this has likely played an important role.) Russia’s negative
average annual growth rate from 1990–2000 (–4.7%) reversed to a positive rate in
2000–2005 (6.2%). Note that the reversal from negative to positive growth rates for
the formerly socialist industrialized countries is in stark contrast to the Western
industrialized countries, which generally had lower growth rates in the more recent
time period.
AVE R AGE A NNUAL E CONOMIC G ROW TH R ATES , F ORMERLY
S OCIALIS T INDUS T RIALIZED C OUNT RIES , 19 9 0 ^ 2 0 0 0
AND 2 0 0 0 ^ 2 0 0 5
Country
Average Annual
Growth of GDP (%), 1990–2000
Average Annual
Growth of GDP (%), 2000–2005
Albania
3.5
5.3
Armenia
–1.9
12.3
Azerbaijan
Belarus
–6.3
–1.7
12.7
7.6
Bosnia & Herzegovina
N/Aa
5.1
Bulgaria
–1.8
5.0
Croatia
0.6
4.4
Czech Republic
1.1
3.5
Estonia
0.2
7.0b
Georgia
–7.2
7.4
Hungary
Kazakhstan
1.6
–4.1
4.0
10.1
Kyrgyzstan
–4.1
4.0
Latvia
–1.6
7.9
Lithuania
–2.7
7.8
Macedonia
–0.8
1.7
Moldova
–9.6
7.0
4.6
3.1
–0.6
–4.7
5.8
6.2
Poland
Romania
Russia
Serbia & Montenegroc
1.5
5.3
Slovak Republic
1.9
4.9
2.7
3.4
Slovenia
Tajikistan
a
–10.4
9.7
Turkmenistan
–4.8
N/A
Ukraine
–9.3
8.0
Uzbekistan
–0.2
5.3
N/A = Not available.
2000–2004
At the time of publication, Montenegro had just voted to form a country separate from Serbia.
b
c
Source: World Bank, World Development Indicators 2007, http://www.worldbank.org.
R
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The most prominent elements of the transition to capitalism have been the
movement toward market-determined prices and the process of privatization, as
well as the development of entrepreneurship. Russia has experienced some of the
difficulties inherent in the transition process. Nevertheless, in terms of entrepreneurship, there is no question that everyday Russian citizens have embraced
entrepreneurial activities; whether in the form of kiosks lining the streets of
Moscow’s famous Arbat and metro stops, babushkas selling homemade fast
foods and household articles at every metro stop, teenagers selling gasoline
along highways near the long lines at gas stations, professionals moonlighting
as translators and drivers, and residents seeking Western partners in Russian
joint ventures.2 Problems in Russia have been more evident in the areas of
prices and privatization.
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MARKET-DETERMINED PRICES
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Recall the efficiencies associated with market-determined prices. Demand and
supply equate so that shortages and surpluses are eliminated. (It is when the government intervenes by setting rental ceilings in housing or price supports in agriculture, for example, that we end up with shortages or surpluses.) In a free market,
the high prices of scarce goods encourage consumers to be frugal in their use of the
goods and encourage suppliers to expand production of the goods. Shortages do
not result. On the other hand, the low prices of plentiful goods encourage consumers to use the goods more extensively and encourage suppliers to produce fewer of
these goods and shift production away from these goods and toward a greater
number of goods more desirable to consumers. Surpluses are thus prevented.
Under pure socialism, the government sets the prices of goods and services.
Prices had traditionally been set artificially low in the socialist economies of
Eastern Europe. For example, consumers had been able to afford basic items of
food, clothing, and gasoline. Artificially low prices operate like price ceilings,
however, and shortages are the result. So, although people could afford to purchase
needed items, these goods were often unavailable in stores. People would expend
considerable time and energy standing in long lines and leaving their jobs to rush
to stores whenever new supplies arrived.
These shortages are largely relics of the past. Prices of most items have been
allowed to rise to market-determined levels in most Eastern European countries.
In other words, decontrol of prices has occurred. Governments no longer set
prices. However, because wages have not always risen as rapidly as prices, the
purchasing power of consumers has declined. Supplies are now plentiful, but
many people cannot afford the goods. Inflation is always a short run effect of
extensive price decontrol.
Price decontrol in Russia was abrupt. Within days, prices on 80 to 90 percent of
wholesale and retail goods were decontrolled.3 The rise in prices of so many goods
and services naturally caused a sudden rise in the average price level. The inflation
rate soared, peaking at approximately 1,353 percent per year at the height of
price decontrol in 1992. Inflation has since subsided but is still considered to be
a serious problem. (The average annual inflation rate over 1990–2000 was
72 percent and 17 percent over 2000–2005. This is still high, but no way near
the problem it was previously.)
Decontrol of prices
Removal of government
controls on prices.
PRIVATIZATION
Privatization
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The transfer of
government-owned enterprises or responsibilities to
the private sector.
Privatization refers to the sale of government enterprises to the private sector.
Throughout Eastern Europe, governments have owned everything from industry
and businesses to agricultural land, energy facilities, agricultural marketing
boards, and transportation networks. The process of privatization presumes that
private ownership of the means of production enhances efficiency and growth.
Once again, Russia presents an interesting example of this process of privatization. The Russian privatization program started in April 1992 with the sale of
municipally owned shops. At the same time, the government began the process
whereby state and collective farms converted to private ownership. In June, the
government began to convert large- and medium-sized firms into shareholding
companies (meaning that individuals may own shares in the company). Finally, in
October the government began to issue to all Russian citizens a voucher that can
be used to purchase shares in such companies.4 (Your author even managed to
purchase a voucher, a ‘‘piece of Russia,’’ in a secondary market to a secondary
market—that is, a hallway outside of an auction site.)
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The Russian privatization program has not been without difficulty. First,
different elements of the Russian government have disagreed greatly over the
pace of privatization. Second, small businesses, mostly shops and services, have
been sold off more rapidly than larger enterprises. The largest enterprises are far
more difficult to privatize. Third, machinery and equipment in many Russian
enterprises were outmoded and in poor repair. Productivity in these enterprises
was very low. As privatized businesses became more profit oriented, and as
government subsidies to these businesses declined, many firms went bankrupt,
resulting in worker layoffs. Unemployment is always a short run result of extensive
privatization. Fourth, Russian enterprises tended to be monopolies. Before the
transition, Soviet planners had categorized industry into 7,664 ‘‘product
groups.’’ Of these product groups, 77 percent were produced by single firms.5
Even as these government-owned monopolies became privatized, there remained
the problems associated with monopoly that were discussed in Chapter 11.
Finally, nearly 15 percent of Russia’s industries were defense related. Since the
end of the Cold War, Russian demand for defense-related products has been low.6
All of this suggests that Russia will continue to face hurdles in the forms of
privatization, demonopolization, and defense conversion. Despite all this,
Russia has now successfully established many small- and median-sized
private firms. With over 8.5 million such firms, Russia has more than any other
country except China and Indonesia.
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EFFECTS OF THE TRANSITION
The objectives of the transition from socialism to capitalism throughout the
formerly socialist industrialized world are greater efficiency and growth.
But this transition has posed many problems for people. Inflation has made it
difficult for consumers to afford basic necessities. Farmers have been hard hit by
increases in the prices of inputs such as fertilizer, and the prices that they receive
for their food products often still remain artificially low. Workers have been laid
off in defense industries, government jobs, and privatized businesses, and other
workers frequently have not been paid. Corruption is often widespread, and
organized crime is sometimes rampant. Whereas many people have struggled to
make do in light of these difficulties, others have profited from liberalization,
creating blatant inequality. Alcoholism and suicide rates in some countries have
been rising, and life expectancies have even declined. A quotation from a young
Russian woman studying in the United States summarizes some of these
difficulties.
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The situation in Russia is very difficult for the ordinary citizen. My father recently lost his
government job, though he was soon hired into a different job. My mother, who works at
a bank, did not lose her job but she was not paid for seven months. Imagine, a bank with
all that money, and my mother not being paid! Lost jobs and non-payment of wages are
common. People get by by moonlighting. Old women beg or sell homemade food, used
clothing, or anything that anyone will buy. Pensions are often very small, as low as $30
per month or less. This will buy maybe a loaf of bread and a bottle of milk each day, plus
a little bit of meat each week. With wages falling behind prices, it now takes about seven
days of work at a typical wage to purchase a tube of mascara, and two months of work to
purchase a good pair of shoes. Twenty rubles will buy a bottle of bad vodka. Many people
drink. In the meanwhile, middle-aged men flaunt their wealth and drive their Mercedes,
Audis, and BMWs. It is easy to recognize the Mafia.7
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THE TWENTY-FIRST CENTURY?
Safety net
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The twenty-first century is a question mark. Although policies of liberalization
will undoubtedly continue, the struggles and dissatisfactions of ordinary people
may slow down or change the nature of the transition. In some countries, the
transition may even be reversed. In Russia, the rise in power of politicians who
wish to return to the policies of the past exemplifies the dissatisfaction of people
with the current political and economic situation. Opinion polls show that large
shares of the population wish to return to the ‘‘old days,’’ when they were provided with housing, jobs, child care, and health care. In other formerly socialist
countries, some policies of liberalization have been reversed and some socialistleaning politicians have been elected. In still other Eastern European countries,
significant minorities favor the return to socialist economies.
One of the critical issues in the transition to freer-market economies in Eastern
and Central Europe is a safety net for people. Under socialism, governments had
guaranteed jobs, housing, child care, and medical coverage for all citizens. As
ordinary citizens now experience a loss of jobs and purchasing power, governments must ensure that people’s basic needs are met. Otherwise, the transition will
proceed neither smoothly nor successfully.
Government programs,
such as housing, nutrition,
and health care, to maintain the well-being of
people.
The Less-Developed World: Economic Reform
Economic reform
Change in policies and
institutions that moves
economies to freer (more
capitalist) markets.
Much of the less-developed world is undergoing a process referred to as economic
reform. This means that developing countries are adopting policies that move their
economies toward freer markets; or to use another word, they are engaged
in liberalism. The economic growth rates reported in Chapter 7 indicate much
variation in the success of less-developed countries in increasing GDP per capita.
The economic reforms predominant in the 1990s and 2000s have their roots in the
international debt crisis of the 1980s. And that crisis has its roots in the world
economic conditions of the 1970s.
Petrodollars
RE
THE 1970s: OIL CRISIS
FO
R
Money earned from the
sale of petroleum.
(Petroleum prices are
denominated in dollars.)
The most significant economic events of the 1970s revolved around oil: the restriction of oil supplies by the Organization of Petroleum Exporting Countries
(OPEC), the Arab oil embargo in 1973–1974, and the Iranian Revolution in
1979. These events restricted oil supplies to the West and sent world oil prices
skyrocketing. The OPEC countries; including several countries in the Middle
East; as well as Nigeria, Libya, Algeria, and Gabon in Africa; Venezuela and
Ecuador in South America; and Indonesia in Southeast Asia; received massive
increases in their earnings from oil exports. However, the non-oil-exporting countries, including most less-developed countries (LDCs), suffered huge increases in
their spending for oil imports. The effects of the oil shocks were threefold.
First, the OPEC nations began a process of ‘‘recycling’’ their oil revenue; that
is, they deposited much of their oil revenue in U.S. and European financial
institutions. These petrodollars (so named because petroleum prices are denominated in dollars) greatly enhanced the lending capacity of these Western commercial banks and other financial institutions. Second, many less-developed countries
began to borrow heavily. The non-oil-exporting LDCs borrowed to finance their
oil imports; while several of the oil-exporting LDCs, such as Mexico, borrowed to
develop their oil sectors and diversify their economies. Some LDCs borrowed in
order to finance economic development, while others had other purposes in mind
(as we shall see). At the time, the cost of borrowing was low because interest rates
were low and the lending capacity of the Western financial institutions was high.
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Commercial banks were quite willing and able to lend. Third and finally, the rising
oil prices of the decade triggered worldwide inflation. (This was described as an
example of cost-push inflation in Chapter 15.) This inflation set the stage for the
events of the 1980s.
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THE 1980s: DEBT CRISIS
The 1980s began with great concern in the United States over the inflation that
was largely generated by the escalating oil prices. In 1981, the Federal Reserve
engaged in contractionary monetary policy (recall the discussion in Chapter 15
on macro policy in the early 1980s). The consequences of this were several.
(1) Inflation was brought under control, but at the expense of skyrocketing interest rates and consequent U.S. recession that later spread worldwide. (2) Rising
interest rates meant that interest payments by LDC borrowers increased as well.
(3) Rising interest rates in the United States had a secondary effect of pushing up
the value of the dollar. The rising dollar made LDC payments for oil imports even
more difficult because oil is valued in dollars. It also made repaying predominantly dollar-denominated debt more difficult for the LDCs. Less-developedcountry international debt was now a full-blown crisis.
By 1988, the less-developed countries had borrowed more than a trillion
dollars, and the amount was increasing. They borrowed for a variety of reasons,
including those related to the oil market, which we’ve noted. Many LDCs also
borrowed for other laudable purposes, including investment in infrastructure and
industry and development of agricultural and export sectors. In many LDCs,
however, borrowed funds were grossly misused. Banks had so much lending
capacity that they neglected to take adequate care in who they lent to and for
what purpose. Countless stories tell of funds that were squandered on grandiose
but inefficient government projects, on luxury goods for the rich, and on the
coffers of wealthy businesspeople and government officials. For example, Tyler
Bridges, then a writer for the Washington Post, examined Venezuela’s use of
borrowed funds in the mid-1980s. He wrote:
Contractionary monetary policy
Reductions in the nation’s
money supply that serve
to raise interest rates and
reduce aggregate demand.
International debt
The amount of money
owed by one country to a
foreign country or
institution.
I discovered that the government hadn’t kept track of where the money had gone,
though various sources indicated that only a portion of the money was invested in
projects fostering long-term growth. . . . [In one example,] thanks in part to a presidential decree requiring that every public bathroom and elevator have an attendant,
public-sector employment tripled from 1974–1984.8
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Another problem was that of capital flight. Capital flight is a process whereby
borrowed funds are reinvested in financial markets or real estate abroad. Corrupt
government officials or businesspeople with access to borrowed funds often
invested these funds overseas, rather than using them for local projects. Capital
flowed outward, profits and interest earnings accrued to wealthy investors, and
LDCs failed to benefit from the borrowed money. When governments fail to
invest borrowed funds productively, this naturally hampers the ability of borrowing countries to repay their debt. As an analogy, when you borrow money to
finance your education, you are making yourself more productive (recall the discussion of an investment in human capital), and this means that you will eventually earn more money with which to repay your loan. When borrowed funds are
used unproductively, the ability to repay becomes tenuous. In the case of LDC
borrowing, the fault may lie with an inefficient or corrupt government, but it is the
residents of the borrowing countries who then bear the burden of the debt.
The enormous burden of the debt becomes clear when we carefully consider the
process by which a country tries to pay off its debt. First, the amount of money
Capital flight
A process whereby lessdeveloped (or other) countries invest funds in foreign
countries.
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that must be paid on the debt each year (interest payment plus repayment of
principal) may represent a very large expenditure. Since the income of LDCs is
generally low, the demands on this limited income represent a bewildering array
of choices in a typical low-income country trying desperately to develop. Large
expenditures must go to satisfying the basic consumption needs of people:
food, shelter, and medical care. Government expenditures are also necessary for
a variety of social services, public education, and infrastructure. With a population at the margin of subsistence and with a driving need for development, any
expenditures diverted toward repaying the debt will directly harm the well-being
of people. This state of affairs explains a commonly made observation: ‘‘In poor
countries, the debt crisis has a child’s face.’’ The reallocation of spending toward
repaying the debt has harmed the well-being of people, the most vulnerable of whom
are typically the very young.
In addition to finding money to repay the debt, there is the problem of the form
that this money must take. Debt repayment must be made in the form of the
currency initially borrowed; thus, repayment must typically be in U.S. dollars or
in the currency of other major countries. We’ll refer to this currency as ‘‘hard
currency,’’ meaning that it is widely accepted throughout the world. LDCs have
very limited means of obtaining hard currency with which to make their payments. They may earn foreign currency through their exports to other countries.
Typically, these export earnings are very limited, and they declined for many
LDCs over the 1980s as a consequence of the U.S. and worldwide recession.
(Do you recall the problem of LDC declining terms of trade discussed
in Chapter 7?) A country may also acquire foreign currency through foreign
investment by other countries and through international assistance. A final
option, and one that has been increasingly chosen by LDC governments, is to
continually borrow to repay past debts. Obviously, the latter results in a vicious
cycle of continuous borrowing in which LDCs have little hope of becoming debt
free.
In a country with limited opportunity to earn hard currency, such currency
must be carefully spent. When that currency must be used for debt repayment, it
cannot be used for other important activities such as the purchase of foreign
capital or technology or the import of important food and energy products.
Yet, perhaps the most dire implications of debt repayment take place in the
long term. Countries that are desperate for hard currency earnings to repay
their debt will undertake overall development policies that are quite different
from the ones they might otherwise undertake. Countries under pressure to acquire
export earnings may feel forced to expand patterns of export cropping that can
worsen the income distribution, use up limited resources, harm food security, and
cause environmental problems. They may succumb to pressures to encourage indiscriminate foreign investment that may not be the most conducive to their overall
development objectives. They may emphasize industrial over agricultural sector
development. Under more ideal conditions, a country might well pursue very
different, and more beneficial, paths to development. (These were discussed in
more detail in Chapter 7.)
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International Monetary
Fund (IMF)
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An international organization, largely funded by
Western industrialized
countries, that provides
conditional loans and
financial assistance to
needy countries.
FO
Conditionality
The obligation to meet
certain requirements in
exchange for financial
assistance.
THE 1990s: ECONOMIC REFORM
The final phase of the debt crisis occurred as many countries were forced by their
inability to meet payment schedules to seek financial assistance from the
International Monetary Fund (IMF). IMF assistance is helpful, but it has typically
involved conditionality, forcing countries to undertake the economic reforms
referred to earlier (often called ‘‘austerity measures’’) as a condition for assistance.
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In other words, there were ‘‘strings attached’’ to the assistance. These reforms
include requirements that governments reduce their spending and privatize
government enterprises. Governments are also required to allow food and other
prices to rise to market levels and to reduce their controls on foreign trade and
investment. In other words, they must move toward freer markets, reducing the
government’s role in the economy and allowing the market to determine prices.
Some countries have voluntarily adopted economic reforms, but most others have
had these reforms imposed on them. Some of these reforms have created tremendous hardship for governments and residents alike. One African leader expressed
his frustration this way:
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You do not talk of ‘‘austerity’’ to a [person] who has not tasted food for days, who can
conceive of no more ecstatic pleasure than to have a few drops of water to wet his [or
her] lips and tongue. . . . Enforced increases in food prices are meaningless mutterings
to the mother brushing the flies off her baby’s eyes, watching [the child] starve to
death by the minute because there is no food or milk or water.9
THE TWENTY-FIRST CENTURY?
FO
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Less-developed countries have had mixed reactions to economic reforms. In many
countries, such as Nigeria and other African countries, privatization has resulted
in massive layoffs of public-sector employees. The private sector has not yet been
able to restore employment adequately in these countries. In other countries as
diverse as Kenya, Indonesia, and Mexico, rising food prices were met with riots or
demonstrations by urban consumers. In still other countries such as Chile,
economic reforms have created rapid economic growth and national prosperity
despite the fact that large segments of the population have remained abysmally
poor. One thing that is clear is that less developed countries undergoing economic
reform, just as formerly socialist industrialized countries undergoing economic transition, need a safety net to protect those citizens harmed by the changing economy.
Many third world residents are rejecting the notion that economic reform, along
with capitalism and a market-based economy, will ultimately benefit the poor. They
are turning toward modified versions of socialism in reaction to the failures of
conservative economic policy. This is especially true in Latin America, where many
socialist presidents have recently been elected (often with overwhelming victories).
Some examples are Chile, Bolivia, Ecuador, Brazil, Nicaragua, and Venezuela. The
Bush administration has vigorously opposed President Hugo Chavez of Venezuela,
despite the fact that the United States imports much of its oil from Venezuela. As
Chavez began his new six-year term as president in 2006, he pledged to nationalize
(take government ownership of) companies in the telecommunications and electricity industries. Bolivia has very recently nationalized its petroleum and natural
gas sector, and Chile has pledged itself to be an alternative economic model for the
third world. The newly elected president of Ecuador, Rafael Correa, vowed to put
Ecuador’s poor ahead of foreign debt payments as he was sworn into power in
January 2007. In all of these cases, however, it is important to keep in mind that the
shift has not been to pure socialism, with complete government control over the
economy. Most property has remained in the hands of the private sector and most
prices remain market determined.
Mexico provides a very interesting example. After approximately 70 years of
rule by the moderate to conservative PRI party, the citizens of Mexico elected the
conservative PAN party’s candidate Vicente Fox for the presidency in 2000.
(The three major political parties in Mexico are usually referred to by their
initials.) In 2006, residents went again to the polls, giving a very narrow victory
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to the new PAN party candidate, Felipe Calderon. (He won by less than 150,000
votes, which was approximately one-half of 1 percent of the total vote.) His
socialist rival, Manuel Lopez Obrador, claimed that the vote count was dishonest
and called for massive demonstrations. As this text goes to press, most Mexicans
seem to accept the election of Calderon, though the elections have certainly raised
the aspirations of both liberal and conservative Mexicans alike.
Once again, in all of these examples, it is important to keep in mind that we are
seeing neither a total shift to socialism nor a total shift to capitalism. Just as
countries such as Vietnam and Cuba are adopting aspects of capitalism in the
context of socialist economies, countries such as Chile and Venezuela are adopting
aspects of socialism in the context of capitalist economies. In other words, the
world is neither moving toward pure capitalism nor pure socialism, but rather
somewhere in-between. While this may be reassuring to some, it still remains to
be seen how the less-developed countries and the formerly socialist industrialized
countries (as well as the Western industrialized countries, for that matter) will react
to the failures of capitalism and socialism. Will they push forward with even more
conservative policies, hoping that benefits will trickle down to the poor? Or will
they react like the Latin American examples and seek policies to soften, or even
nullify, the market-oriented policies of economic transition and reform? Just as the
title to this chapter ends with a question mark, so too does this final paragraph.
ViewPoint
CONSERVATIVE VERSUS LIBERAL
RE
This chapter has examined a conservative movement throughout the world toward capitalism
and globally freer markets. Economists vary in
their views of this movement. Market economies
often lead to efficiency and growth, but issues of
equity may be neglected. If this is the case, and if
governments fail to provide adequate programs for
the poor and the unemployed, the benefits of a
market economy will fail to trickle down to the
needy. In the new millennium, the disparity
between the rich and the poor may become
greater. Liberals tend to be more concerned than
conservatives about this equity issue.
On the other hand, if socialist interventions go
so far as to reduce the usefulness of the price
system and the incentives of the marketplace,
economies may stagnate and fail to grow.
Conservatives tend to be more concerned than
liberals about these issues of incentives and
efficiency.
The ideal economy will seek a balance between
conservative and liberal. After all, the efficiencies
of the marketplace mean little if shares of the
population fail to benefit from them. Similarly,
the equity achieved by more socialist economies
cannot provide maximum benefits if inefficiencies
prevent economic growth and productivity.
Just where is the balance between conservative
and liberal? You have studied this contrast
throughout the course, whether the issue is agriculture, housing, health care, or the environment. You
now have the information and insight you need to
analyze this issue by yourself and to come to the
policy conclusions that make sense to you.
Summary
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The Western industrialized world, the formerly socialist
industrialized world, and the less-developed world have all
embarked on a movement toward freer markets for their
economies. Much of the Western industrialized world has
embraced conservative economic policies in the hope of
generating economic growth. Most formerly socialist
industrialized countries are experiencing a
revolutionary transition from socialism to capitalism. And
finally, large numbers of less-developed countries have
adopted economic reform policies, voluntarily or involuntarily, that are designed to make their economies more
market oriented. Both socialism and capitalism have their
successes and failures, and the long-term outcomes of these
economic systems remain to be seen.
17
Globally Free Markets for theTwenty-First Century?
Globally
Free Markets
for theTwenty-First Century?
8. How have international conditions outside the
control of less-developed countries exacerbated
the problem of international debt? Do you believe
it is right for the IMF to stipulate conditions when
providing financial assistance to debt-ridden lessdeveloped countries?
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1. Are you an economic liberal or conservative?
What is your view of government social programs,
taxes, and regulation of business?
19
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2. Consider the U.S. supply-side policies and proposals of the 2000s, such as reductions in taxes and
environmental regulations. Do you expect these
policies to achieve efficiency and economic
growth? Do you expect the benefits of these policies to trickle down to all?
3. What do you think about some of the specific
conservative tax policies and proposals, such as
replacing the personal income tax with a consumption tax and reducing the capital gains and
dividends tax? Do you think these would be effective in creating economic growth? How do you feel
about the effect they would have on U.S. income
distribution?
4. How might the U.S. government encourage
greater research and development? How would
R&D benefit the economy?
5. Suppose that the government of a formerly socialist country decontrols prices and permits them to
rise to market levels. How can the government
assist low-income consumers who might be unable
to afford higher food and other prices?
10. Go again to the International Monetary Fund
(IMF) Web site (http://www.imfsite.org) and click
‘‘Conditionality’’ to learn more about the history,
role, operation, and effectiveness of IMF conditionality (in the IMF view).
11. Use the World Bank Web site (http://www.
worldbank.org) to look up debt information on a
less-developed country of your choice. Look for
the debt service ratio, which is the ratio between
debt service (annual repayment of debt plus interest) and export earnings and which is written as
Total Debt Service/Exports.This ratio is the best
indicator of the debt burden of an individual
country.
12. Go to the home page of the World Bank at
http://www.worldbank.org to discover the
wealth of information on worldwide economic
and social indicators, including information on
savings rates, standards of living, and international debt.To obtain data quickly, click a country
of your choice to obtain the most recently available data.
13. What type of safety net is necessary for residents
of formerly socialist and less-developed countries
as they move toward market economies?
14. Do you believe that the global movement toward
freer markets will continue well into the twentyfirst century, or will it reverse itself? Why?
R
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6. Assume that the process of privatization continues
successfully in Russia.Would all the problems of
Russian industry by solved? What other policies
may be necessary?
7. Use the Central Intelligence Agency (CIA) World
Factbook at http://www.cia.gov/cia/publications/
factbook/index.html to look up the current economic situation in any one of the formerly socialist
industrialized countries. Has GDP been increasing
or decreasing? How high is the inflation rate? How
do some of the standards of living (life expectancy,
infant mortality rate, and so on) compare with
those presented in Chapter 7 for less-developed
countries?
9. Go to the International Monetary Fund (IMF) Web
site at http://www.imfsite.org. It provides links to
countless statistics, reports, and other global
information, including the transformation of countries to capitalism.
FO
Notes
1. Value added refers to the additional value placed
on the manufactured product (by each worker in
this case).The World Bank reports these numbers
for the most recent year available during
1980 ^1984 and 1990 ^2004 (World Bank,
World Development Indicators 2006, http://www.
17
Markets for theTwenty-First Century?
Globally
FreeGlobally
MarketsFree
for theTwenty-First
Century?
4. ‘‘Russia Reborn,’’ The Economist, December 5,1992.
5. Ibid.
6. U.S. Department of Commerce,Commercial
Overview of Russia, op cit.
7. Yana S.Yurgelyanis, in a conversation with the
author.
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world bank.org). Unless otherwise indicated, this
or the 2007 version is the source for other data in
this chapter.
2. Jacqueline Brux and Jacques Foust,‘‘Doing Business
in the Russian Economy inTransition’’ (paper presented at the Midwest Economic Association
meetings, Chicago, Illinois, March 1994).
3. U.S. Department of Commerce, Business
Information Service for the Newly Independent
States (BISNIS), International Trade Administration,Commercial Overview of Russia, Moscow,
January 28,1993.
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20
8. Tyler Bridges,‘‘Before BailingThem Out, Plug the
Leaks,’’ Washington Post National Weekly Edition,
March 22^April 7,1989.
9. Bread for the World Institute, Africa: Crisis to
Opportunity,1995, http://www.bread.org.
D
Debt crisis of the 1980s, 15-16
Decontrol of prices, definition, 12
Demand
See also Demand and supply.
Demand and supply
See also Aggregate demand and supply.
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AAI
See American Antitrust Institute (AAI).
Absolute poverty
See also Poverty; Poverty line.
AFDC
See Aid to Families with Dependent Children
(AFDC).
Aggregate supply
production possibilities in Western
industrialized world and. 3-4
American Indian
See also Native Americans.
Arab Oil Embargo, 14
Arctic National Wildlife Refuge, 10
for the twenty-first century. 1-18
GMO
See Genetically modified organisms
(GMOs).
GNI
See Gross national income (GNI).
GNP
See Gross national product (GNP).
US
See Consumer price index (CPI).
A
E
index
E
Benefits
See also Spillover benefits.
Bridges, Tyler, 15
Bush, George H. W., 9
Bush, George W.
administration of. 6
Bush, George W.
administration of
savings rate, 6
EconNews
‘‘Working Longer and Harder’’. 7
Economic conservative, definition
See also Conservative views.
Economic growth
rates. 3
Economic liberal
See also Liberal views.
Economic reform
twenty-first century. 17-18
Economic transition
twenty-first century. 14
Education
See also Higher education.
EITC
See Earned Income Tax Credit (EITC).
C
F
B
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Calderon, Felipe, 17,18
Capital flight, definition, 15
Capital gains, definition, 7
Capital, increase in to achieve economic
growth, 6-7
Capitalism
economic transition of the formerly Socialist
industrialized world towards. 10-14
CCC
See Commodity Credit Corporation.
Chavez, Hugo, 17
Clinton, Bill, 9,10
COLA
See Cost-of-living adjustment (COLA).
Conditionality, definition, 16
Conservative views on
free markets. 2,18
Consumption tax, definition, 7
Contractionary monetary policy, definition, 15
Correa, Rafael, 17
CPI
Farm income
See also Agriculture.
Federal taxes
See also Taxes.
FHA
See Federal Housing Administration (FHA).
Formerly socialist industrialized world
twenty-first century. 14
Fox, Vicente, 17
Free markets
for the twenty-first century, global. 1-18
FTC
See Federal Trade Commission (FTC).
G
G-8
See Group of Eight (G-8).
GATT
See General Agreement on Tariffs and Trade.
GDP
See Gross domestic product (GDP).
Globally free markets
H
Higher education
See also Education.
HUD
See Housing and Urban Development
(HUD).
I
ICC
See Interstate Commerce Commission (ICC).
IMF
See International Monetary Fund (IMF).
International debt, definition, 15
International Monetary Fund (IMF), 16
Iranian Revolution, 14
K
K–12 education
See also Education.
Kyoto Accord, 10
L
Labor productivity
improvement in to achieve economic growth.
7
Law of demand
See also Demand.
Law of supply
See also Supply.
Less-developed countries (LDCs)
See also Less-developed world.
Less-developed world
See also Less-developed countries.
Liberal views on
free markets. 2,18
Liberalism (or neoliberalism), definition, 3
M
Market-determined prices, economic transition,
12
Markets
globally free for the twenty-first century. 118
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Obrador, Manual Lopez, 18
Oil crisis of the 1970s, 14-15
OPEC
See Organization of Petroleum Exporting
Countries (OPEC).
Organization of Petroleum Exporting Countries
(OPEC), 14
P
Patents
definition. 8
Personal income tax
See also Taxes.
Petrodollars, definition, 14
Poor persons
See also Poverty.
Poverty
See also World poverty.
Private higher education
See also Education; Higher education.
Private schools
See also Education.
Privatization, definition
economic transition. 12-13
Progressive taxes
See also Taxes.
Property taxes
See also Taxes.
Proportional taxes
See also Taxes.
Public higher education
See also Education; Higher education.
R
R
RE
Reagan, Ronald, 9
Regulation
decrease in to achieve economic growth. 810
Russia
privatization program in. 12-13
S
US
NAFTA
See North American Free Trade Agreement.
Neoliberalism, 3
Savings rate, definition, 6
Socialism, definition, 2
SSI
See Supplemental Security Income (SSI).
N
E
index
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Safety net, definition, 14
Sales tax
See also Taxes.
TANF
See Temporary Assistance for Needy
Families (TANF).
Technology
improvement in to achieve economic growth.
7-8
Third-World countries
See Lessdeveloped countries; Lessdeveloped world.
Twenty-first century
implications of growth for. 10
W
Western industrialized world
policies to achieve economic growth. 4-10
World poverty
See also Poverty; Poverty line.
WTO
See World Trade Organization (WTO).