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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