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 Background of Global Economic Development  5 Paradoxes:  Trade, Democracy, and Open and Free Markets  Culture and Change

 Economic development is critical to globalization  Controversy  Split paradoxes into 2 categories:  Trade, democracy, and open and free markets  Culture and change

 David Ricardo  19 th century  the ability of a person or a country to produce a particular good or service at a lower marginal and opportunity cost  Economic development from: ▪ Land ▪ Labor ▪ Capital  Theory in question: ▪ Multinational corporations moving home countries ▪ Doing more business and hiring more people outside their home country

 Before Ricardo, was mercantilism  Supported by colonialism  Strict government regulation of economy  Accumulation of wealth from resources  Development of manufacturing and agriculture  Establish foreign trading monopolies  Wealth went to home country, not colony ▪ Lead to independence movements, wars, and creation of self-sufficient countries in the New World

 Economic model for development:  Early stages  Explosive growth  Maturity  Decline (not always)  Rate of development increasing rapidly

 Natural resources  Climate  Good geographical position  Religious-based culture  Strong institutions- banks, police, courts  Clusters of industries  Mix of characteristics for success varies

 Trading partners at disadvantage  Population size vs. rate of economic development  Level playing field?  To grow requires more resources, thus increasing the world price  National budget deficits  Decrease in skilled labor

 Phenomenon stating that “a national economy can suffer dramatically even while growing through accumulating capital or improving productivity”  Producing more could saturate market  Decrease demand  Decrease price  Weaken exporting nation’s profits

 Diversification of products produced  However, not always the case  Competition can lower price as well

 European Union  Provides funds to newly admitted nations  Taxes lend money for next admitted nation  World Bank and International Monetary Fund (IMF)  Some funds not successful  Corruption  Mismanagement  Rivalries between people

 Ranking of economic development potential:  Degree of corruption as perceived by international executives  Degree of trust between citizens and public institutions ▪ Police, courts, etc

 Many organizations state poverty reduction as their mission  However, much of world funds go to nations without will or ability to reduce poverty  George Lodge and Craig Wilson suggest MultiNational Corporations (MNCs) create an organization where they would invest in developing nations and use the profits to invest in other developing nations

 According to World Bank:  Nearly half world population- $2 a day or less  1/6 world population- less than $1 a day  Poverty fallen from 2/3 of developing nations to ½ of population between 1981 and 2001

 149 of 220 nations in the world are members  Tariffs lowered  Many global issues to be addressed  Provides framework to dissolve disputes

Are democracy and free markets antithetical to each other?

 Amy Chua  Communism to Capitalism  Ethnically similar majority  Lack of business and economic experience  Dependence on minority group

 Indonesia  Russia  Malaysia

 Open markets with low tariffs  Inequalities increase  No policy suggestions

 Does trust increase trade among nations? Does increased trade lead to conflict and war among nations?

 Nations prefer trading with similar cultures  Canada’s largest trading partner is US.  Being Geographically close lowers transaction cost and risk

 Researched surveys in the EU focusing on trusting nationalities  Germans most trusted  Italians rank lower  Germans trust British more than French

 Cultural Trust  Religion  History of war  Genetic differences  Increase in trust for any variable between two nations associated with a 30% rise in trade

 U.S. trade with China, India and other developing nations  Historical record is mixed  United States and Great Britain  Great Britain and Germany  Dr. Katherine Barbieri found increased trade is associated with higher incidence of war

 “Change” usually consist of moving from a traditional way of life to modernized way  Individuals accept change if they can see the benefits from it

 Are institutions more important than culture for explaining economic development?

 Institution: an established corporation or corporation (  Court of law, police system, government, etc.  Culture: the act of developing the intellectual and moral faculties (  Beliefs, behavior, knowledge, etc.

 Provide the structure for life at work and outside of work  Need to be trustworthy or people will try to go around the systems  Join groups that also avoid systems (legal, police, tax) ▪ Mafia created in Italy ▪ Douglas North wins Nobel Prize, shows trustworthy institutions critical for economic development

 Mancer Olson (1982)  Work showed that when amounts of interest groups increase in a country, national prosperity decreases  This occurrence is not only in the United States

 Interest groups  Helpful because their existence helps accomplish essential functions (creating diverse views and distribution of their activities, points of view)  Harmful because they can hurt economic growth by drawing the attention of a nation away from good solutions ▪ Citizens of the country will see all institutions as dishonest

 Written by Hernando de Soto (2000)  Capital: in Medieval Latin means “cattle”; symbolizes sources of wealth beyond the meat that can/will become food  It’s difficult, even impossible to create capital without initial capital

 Powerful interest groups declare property rights on settlers living on public land  Create capital by using little cities or “shantytowns” created by residents  San Francisco Solano test  Chinese government enforcing ownership of countryside to create factories, modern cities

 Studied three groups of entrepreneurs  Native Chinese working in China  Chinese Americans  White, Anglo-Saxon Americans  Hypothesis: If culture were more important than institutions, the Chinese in mainland China and Chinese Americans would tend to be significantly different in attitudes from their Anglo-Saxon counterparts.

 Findings: similarities were actually between the Anglo-Saxon and Chinese Americans.  The native Chinese and Chinese Americans were not that similar  Conclusion: Institutions are more important than culture, supporting Douglas North’s original idea

 President Ataturk wanted to separate culture and institutions  Changed Turkey from a theocratic, Muslim nation to secular nation  Separated by:  Closed religious schools and lodges  Used the Roman alphabet and Western calendar  Used European codes of law instead of Islamic

 Both are important and relevant, each case depends on which is more important  China’s development leans towards giving culture more importance  Turkey appears to make institutions more relevant

 Do economic development and globalization lead to individualism?

 Individualism  Considers one self separate from group  Collectivism  Decisions are made in GROUPS best interest

 Power Distance  Level of societal acceptance of equality/inequality  Individualism  Degree of interdependence within society  Uncertainty Avoidance  Extent to which members of society feel threatened by unknown/ambiguous situations  Masculinity/ Femininity  Masculinity- Importance on “being the best”  Femininity-importance on “liking what you do”

 Long Term Orientation  Countries are considered short term oriented or future oriented  Emphasizes ▪ Persistence ▪ Ordering relationship status ▪ Behaving in accordance to order ▪ Stressing thrift ▪ Having sense of shame

 Values of economic growth differ by nation  Different religions have “Confucian” values  Nations are Individualistic and Collectivistic at different time periods  Hofstede’s model proved in the short run  Individualism occurs as economies grow  What matters is a society that encourages individualism and emphasizes contributions to society

 Why do citizens vote for and accept stationary bandits as political leaders?  Stationary bandit-Political leader that resides in the community he eventually weakens or sometimes destroys.

 Argued that a "roving bandit" (under anarchy) has an incentive only to steal and destroy, whilst a "stationary bandit" (a tyrant) has an incentive to encourage a degree of economic success, since he will expect to be in power long enough to take a share of it

 Roving bandit during the 13 th century  Founder and emperor of Mongol Empire  Conquered most of Central Asia and China

 Political leader of communist China  Influence lasted 40 years  Guerrilla warfare  Long March  50 million Chinese died due to collectivization and thoughtless government policies

 German politician and leader of the Nazi Party  Treaty of Versailles  WWII  Franklin D. Roosevelt  April 30, 1945 Hitler committed suicide

 Leader of Russia  Introduced taxation system  The 5 year plan  Actions during and after WWII