economic system 1.1

8/2/2019 Economic System 1.1

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ECONOMIC SYSTEMS

Presented by:

Dharun Prasad R

Gaddu Sneha

Vadivel PalaniappanVignesh Nagarajan

DMS, IIT Delhi batch of 20131


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South Korea and North Korea had been one nation before theKorean war of 1950-53

People speak same languages, but having differentideologies after separation

North and South Korea has had different economic systems

since the Korean War. South Korea operates under a marketeconomy system, in contrast, North Korea adapted centralplanning economy

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Centre planning of North Korea andMarket economy of South Korea

Market economy of South Korea has led to dramatical improvement of the economyfrom less developed nation with severe unemployment, negative savings and the lackof exports to rapidly developing country

The gross national product (GNP) has been growing faster than the population as wellas gross domestic product (GDP) during last 3 decades

Meanwhile, the central planning system of North Korea, around the beginning of the1960s, had faced delays and the economy growth has continued to be slowdown until

1980s.

Source: htt ://econc10.bu.edu/economic s stems/Countr com arisons/Korea North South.htm


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North Koreas economy policy was theself-reliant economy policy and thispolicy had led to their economic failure

This serious economy failure of NorthKorea has resulted in a poor rate ofexports, chronic trade deficits, and asizable debt

This deep slump of North Koreaneconomy has been put far behind of theSouth Korea.

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Overall economy structure of North Korea can be characterized by State ownership of allproduction, command economy and completely closed economic system

This self-reliant economy system made country to imbalance in the distribution ofresources and in the demand and supply of goods

Self-reliant economy in North Korea lead to reject the imports of foreign capital andtechnology and they mostly use their own domestic resources to produce products.

Therefore, this completely closed policy has made the country to more severe economiccondition.

Self Reliant North Korea


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In North Korea, The private sector is not allowed to develop by the subsidization of thestate owned enterprises and only 25 percent is engaged in agriculture

State-owned manufacturing industries employ is more than 56 percent of the work forcein the late 1980s

This State owned industries produced 95 percent of manufactured goods. Economicgrowth was about 2%-3%, whereas output declined by 3%-5% annually during 1980sthrough the early of 1990s

Their manufacturing is heavily concentrated on military industry. As a result, their nationalproduct real growth rate was 0 percent in 1994

The transition to make development of the private sector is hard because of heavilysubsidized state owned enterprise sector and the inefficient labor market.

Workers with state-owned enterprise have no incentive and they use resources ininefficient way

Such economic conditions led North Korea to economic crises and it caused severeproblems such as food-shortage and many people die from mass starvation 4

Why Economic Crisis in North Korea?


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In South Korea, Over the period, the real gross national product expanded by anaverage of more than 8 percent per year from $2.3 billion in 1962 to $204 billion in

1989

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Outward Looking South Korea

Manufacturing sector grew from 14.3 percentof the GNP in 1962 to 30.3 percent in 1987and the ratio of domestic savings to GNP grewfrom 3.3percent to 35.8 percent over thisperiods

This big growth of economy has been possiblebecause of the adoption of an outward-lookingstrategy in the early 1960

South Korea had the lack of natural resource endowments, low saving rates andpoor domestic market, so the government promoted economic growth throughlabor-intensive manufactured exports

The manufactured exports has had big role for the growth of Korean economy and,as a result, the peoples standard of living has enormously improved with rapidindustrialization


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While economy structure has been maintained under state-owned enterprises in North Korea,class structure of South Korean society has been changed by rapid economic growth,industrialization, and urbanization under market economy system

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Transformation of South Korea

New middle class, such as engineers, healthcare professionals,university professor, and journalists, has grown enormously from6.6 percent in 1960 to 17.7 percent in 1980

The proportion of industrial workers grew from 8.9 percent to22.6 percent of labor force during same period

After forty years of market-based growth, real GDP per capita isnow about 17.5 time higher in South Korea compared to itsnorthern neighbor

However, this rapid industrialization in South Korea has been heavily relied on urban areas,such as Seoul, so there exists inequalities between rural and urban area

For example, the population of rural lower class declined from 64 percent in 1960 to 31.3percent in 1980

This heavy tendency of labor force in urban area made the inequality of income anddisparity in living standard between urban and rural area


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Rank Organizations

1 Hyundai

2 Samsung

3 LG7

Top 3 Chaebols of South Korea

GDP Comparison


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Has the transition in the former state socialist countries been a success?

With hindsight, would a transformation of the economy, without a change in the politicalsystem, have secured economic prosperity?

State socialism is a form of economic organization which is set against markets andprivate property

The lack of freely functioning system made the measurements of relative scarcitiesand ranking of preferences very difficult, leading to both shortages and overstocking indifferent sectors

Absence of transparent transactions led to corruption, and due to shortages, blackmarkets would develop where goods could find their own price

Socialism falsely assumed that planners would be altruistic

The only countries to have stuck with such a system till now are Cuba and NorthKorea, both of which have had massive economic difficulties in 1990s, making clearthat market needs to be introduced 8

Transformation of the economy

Source: http://www.stewartmorris.com/essays/16DLane1.pdf


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Poland has made a significant progress in moving from a communist, state

planned economy to a market economy

It was a part of Eastern Bloc countries of Europe

Drop in Performance:1. By 1990, industrial production had fallen to 86%

of the 1980 level, retail sales to 85.2%, and realwages to 75.8%

2. First free elections happened that year and leadto a new non communist government

3. Shock Therapy was used to speed up thetransformation to market economy

Shock Therapy:1. Price controls were lifted for most of the products2. Import restrictions removed

Poland Shift from Communism toFree Market Economy


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The economic transformation of enterprises was performed in three ways:

New private enterprises were established, usually in the form of partnerships and limited

liability companies, with a majority of Polish ownership. These were mainly small but efficient enterprises such as factories, workshops, and trading

and service companies.

Joint ventures were formed with foreign investors, often through wholly owned foreignsubsidiaries. Such enterprises were established mostly by the restructuring of state-ownedcompanies.

There were more than 28,000 of these companies in 1998. After 1991, foreign corporationssuch as Citibank, General Motors, Daewoo, Volkswagen, Goodyear, Procter & Gamble,Coca-Cola, and Pepsi-Cola began forming wholly owned subsidiaries to do business inPoland.

State enterprises were privatized, either by selling them completely (most frequently under

long-term leases) to their employees or management teams (there are 1,040 suchcompanies now) or by maintaining partial state ownership and making the employeesresponsible for financial results and removing governmental subsidies.

This involved the transfer of 1015% of the shares to the employees (1,070 companies).Some of these newly commercialized enterprises were placed under control of nationalinvestment funds, whose shares were later sold for a nominal price to all citizens.

Transformation to Free Mixed Economy


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Poland's gross domestic product increased by 26% from 1992 to 1996, thefastest growth in central Europe.

In 1997 the GDP grew by 6.9%, and in 1998 by nearly 6.5%.

The unemployment rate reached a high of 13.2% in 1996 before dropping to10.5% in 1997, and then to 9.6% in October 1998.

Inflation was 14.9% in 1997, decreasing to 9.9% in October 1998.

The national debt totaled $40.5 billion in 1997, down from $48.5 billion in 1990.

Foreign direct investment reached $20.6 billion by the end of 1997, compared to$17 billion in Hungary and $8.2 billion in the Czech Republic.

U.S. investors have led the way, with almost $4 billion invested by the end of1997.

The largest investment ($505 million) comes from the Polish-American Fundcreated by Congress, followed by Pepsi-Cola, International Paper, and Philip

Morris. Many Americans of Polish descent have established small enterprises in Poland.

Improvements In Performance


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Free market forces

Profit

Private Property

Characteristics of Capitalism :

It transforms itself into two forms: Leads to development of large-scale multinational organizations, Rationalizes values, attitudes &behaviors with corporate goals to make

abnormal profit

The crucial point here is whether the expanding capitalism and its rationale apositive or negative impact on the economy

CAPITALISM


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History:

Emerged in early 19th century in Western Europe and by the end of 20thcentury has become truly global due to its dynamic nature

Though by the end of twentieth century almost all nations have adopted thebasic framework of capitalism it continues to be considered as a system of

exploitation rather than path to prosperity

1973 Overturning of left wing government led to market reforms

1991 India had a shortage of foreign exchange reserves

Sub-saharan countries IMF-World bank structural adjustment programmes

Trade liberalization, financial deregulation and advent of informationtechnology set the ball rolling in developing countries like India and China

CAPITALISM - History


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Cross border capital flows

The Asian currency crisis, Mexican peso crisis are cases in point thatdemonstrate how it can be a double edged sword

Hence this must be implemented only after market distortions are eliminatedsuch as in the case of developed countries

Benefits Meagre domestic savings supplemented by global pool of saving

Financial institutions can borrow in times of economic downturn

FDI by MNCs

Export oriented industrialization cited as a result of capital accounts

The distortions caused are classified as:

Policy ineffectiveness (Monetary policy)

Capital flight (Absence of well defined property rights)

Distortions due to financial fragility

Capital Account Convertibility


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Inadequate financial regulation due to liberalized and globalized economy

Sub prime crisis Loans to borrowers with poor credit record due to which the real estateand consumption booms sustained

Risk involved transferred to investors who bought the mortgage backed securities

Conclusion Easy liquidity in a loosely controlled financial system increases the fragility

Surge of capital to developing countries is not due to financing needs but completely supplydriven

MNCs seeking profit investing in the emerging

markets

Increases financial vulnerability

Reduces fiscal and monetary autonomy of

government

Lessons from Sub Prime


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Global recession is off shoot of the concept of free-market global capitalism

South east asian currency crisis South Korea, Thailand, Indonesia etc affected

World striving towards progressive alternatives where is better corporate governancewith corporate social responsibility

Problems of Global Capitalism:

Volatility More than 1.5 million flows across international waters everyday

Race to the bottom Cutting costs to attract mobile capital

Inequality The gap between rich and poor widening

Degradation of democracy Trade agreements restrict the governing of ones owneconomies

Global Capitalism


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Care to be taken by the developing countries:

I. Adopting sound macroeconomic policies

II. Better disclosure of information

III. Sound banking practices

IV. Good corporate governance

V. Institute capital controls

Developing Countries


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USA

Extensive coastline, lakes provide additional shipping access Strong emphasis on technical and vocational training

Top down chain of command in organizations and reflects scientificmanagement principles

Features : Two thirds of the total economic output goes for personal use

Of the opinion that some tasks are better performed by public enterprisessuch as education, road system, defense etc

Govt role : Monitors the economic activity and plays the part of a facilitator

Canada

Vast deposits of natural gas and self sufficient in energy

FTA, NAFTA increased the trade and economic integration with US(economic downturn hence had a negative impact)

Taxation according to the income group

Standard of living, literacy better than US

Monetary policy above that of US

CASES


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Types of Socialism

Socialism

Coordinating

mechanism

Plannedsocialist

MarketSocialist

Ownership

Publicownership

Cooperatives

Commonownership

Based on coordinating mechanism:

Socialist economic systems can be subdivided by their coordinating mechanism(planning and markets) into planned socialist and market socialist systems.

Difference is presence of market or not.19


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Socialism

Socialism is an economic system characterized by social ownership and corporative

management of the economy

Difference between capitalism and socialism:

Capitalism Socialism

Production carried out to maximize privateprofit

Production is carried out to directly satisfyeconomic demand by producing goods and

service for use

Decisions regarding investments are taken byprivate business owners. Production takesplace within the process of capitalaccumulation

Decisions regarding investments are carriedout through a mechanism of inclusivecollective decision making

Means of production are owned primarily byprivate enterprise

Means of production are either publicly owned,or are owned by the workers cooperatively

A socialist economic system would consist of an organization of production todirectly satisfy economic demands and human needs, so that goods and serviceswould be produced directly for use instead of for private profit driven by theaccumulation of capital

Distribution of output would be based on the principle of individual contribution.

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Socialism based on coordinating mechanism

1. Planned socialist or economic planning:

It refers to planning of economic activity outside the mechanism of markets.

Planning is an economic mechanism for resource allocation and decision-making incontrast with the market mechanism

2. Market socialism:

Theyare either publicly owned or cooperatively owned and operated for a profit in amarket economy.

This Socialist economic system that is based on the process of capitalaccumulation, but seeks to control or direct that process through state ownership orcooperative control to ensure stability, equality or expand decision-making power

Theoretically, the fundamental difference between market socialism and a traditionalsocialist economy is the existence of a market for the means of production andcapital goods.

Capital Accumulation:Gathering or amassing of objects of value; the increase in wealth through

concentration; or the creation of wealth

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Socialism based on ownership

1. Worker cooperative:

Cooperative owned and democratically managed by its worker-owners

All shares are held by the workforce with no outside or consumer owners, andeach member has one voting share

Two ways of worker cooperative are given below:

1. A cooperative enterprise may mean a firm where every worker-ownerparticipates in decision making in a democratic fashion

2. Managers and administration is elected by every worker-owner, and finally itcan refer to a situation in which managers are considered, and treated as,workers of the firm

2. Common Ownership:

Common ownership differs from collective ownership.

The former means property open for access to anyone, and the latter meansproperty owned jointly by agreement

Example of common ownership is like public park available to everyone

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Socialism based on ownership

3. Public ownership:

Also called as state ownership, government ownership or state property

Properties that are vested in the state, rather than individual or communities

Public ownership may refer to state ownership or control of any asset, industry, orenterprise

Control can be at any level national, regional or local

Government owns and controls the stake of the shares

Government owned corporation is sometimes called as SOE(state ownedenterprise)

SOE may resemble a not-for-profit organization as it may not be required togenerate profit

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Communism

Communism is articulated by Marx as "second stage Socialism" whereby

economic output is distributed based on need and not simply on the basis of laborcontribution.

Work in order to receive goods would allow people to pursue their own interests anddevelop their own talents without being coerced into performing labor for others

The primary concern for socialist planned economies is to coordinate production todirectly satisfy human needs/economic demand (as opposed to generate profit andsatisfy needs as a byproduct of pursuing profit)

Kinds

Marxism

Marxism leninism

Maoism

Stalinism

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Communism

Marxism and leninism:

Marxism-leninism is the Bolshevik leader Vladimir Lenins variant of marxism

Marx established the general philosophy and Lenin attempted to apply the philosophy inRussia.

Lenin adapted Marxism to a pre-industrial society in which the peasants formed the mainclass of workers.

Marx's main appeal was his ability to express the frustrations of workers enslaved in mines

and factories, and Marx called for the workers (proletariat) to overthrow the industrialcapitalist owners.

Lenin agreed with Marx's call to violent revolution, but some communists (the revisionists)claimed that communism could be achieved through peaceful means

Chief difference between earlier Marxism and Lenin's views was that Lenin believed

socialism could be established in a country which had not passed through the fulldevelopment of industrial capitalism.

Marx viewed the socialist revolution as arising out of the industrial proletariat. Yet Russia atthe time of the Bolshevik Revolution was not primarily an industrial country; its commonpopulace were primarily agricultural peasants, not industrial workers 25


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Communism

Maoism:

Maoism is a variant of marxism-leninism derived from the teachings of the

chinese communist leader Mao zedong

Maoist groups outside China have usually called themselves "Marxist-Leninist"rather than Maoist, a reflection of Mao's view that he did not change, but onlydeveloped, Marxism-Leninism

Maoism talks of a protracted peasantry revolution by eliminating the class enemiesby guerrilla warfare

Maoism believes in extreme violence as the only weapon to seize power

Communism and Marxism:

Communism was Marx theories. Communism is a political theory derived fromKarl Marx

Marxism is an updated version of communism, updated by Karl Marx's followers

Later there were different variant of communism according to lenin, stalin, Mao,etc

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Communism

Stalinism:

Stalinism - Totalitarian communism based on the political methods of Joseph

Stalin

Power is exclusively in the hands of the Communist Party, which is organized onrigidly hierarchical lines

The leader is presented, by state propaganda, as the selfless and benevolentparent of the nation.

The general population is controlled by a vast bureaucracy and all opposition andinternal debate is ruthlessly repressed by the secret police

It is said that Stalin changed marxism to suit his evil objective

Totalitarianism (or totalitarian rule) is a political system where the state recognizesno limits to its authority and strives to regulate every aspect of public and private lifewherever feasible

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Socialist countries

Marxist-Leninist:

These countries are known as communist states, because their ruling parties

generally use the name "Communist Party of [country]. Follows the ideology ofmarxism-leninism and says all power belongs to working class

1) China ( since 1949)2) Vietnam (since 1954)3) Albania (1946-92)4) Peoples republic of Korea (1948-92)5) Poland (1945 89)

Non Marxist-Leninist:These countries make reference to socialism but do not follow marxism-leninism

ideology

1) India (since 1947)2) Korea (since 1992)3) Bangladesh (since 1971)4) Egypt (1952-78)5) Kenya (1963-92)

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Production carried out to maximize profit

Investment decisions by business owners

Mercantilism -> Capitalism

Adam smith, David Ricardo opposed the Mercantilists

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Anarcho-Capitalism

Interventionism

Facism

Capitalism


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Japan Cartels & Keiretsu

USA Proactive and promotional role of state

India Democracy before capitalism, Politics over economics

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Source: US Capitalism Richard WhitleyThe Ele hant Paradi m Gurucharan Das

Capitalism the tinted view


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economic system 1.1

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