Chapter 3National Differences in Economic Development

Berlin Wall torn downNovember 9, 1989

International Trade (FREE)

Available from the U.S. Department of CommerceTrade Finance Guidehttps://www.trade.gov/trade-finance-guide-quick-reference-us-exporters

Export Training Videoshttps://www.export.gov/training

What Determines A Country’s Level Of Economic Development?

Gross domestic product (GDP)Market value of a country’s output attributable to factors of production located in the country (foreign or domestic owned)

Gross national income (GNI) per person Measures total annual income received by residents Japan, Sweden, Switzerland, and the U.S. are in the High

income group GNI per capita China – Upper middle income group GNI per capita India – Lower middle income group GNI per capita

GNI can be misleadingDoes not consider differences in the cost of living

Purchasing power parity (PPP) Adjusting GNI by purchasing power

Comparison - GNI per capita?

Atlas Method (US$) - 2019 PPP Method (US$) - 2019

Source: http://statisticstimes.com/economy/projected-world-gdp-capita-ranking.php

Largest Economies (PPP) 2020 (Top 10)

https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD?most_recent_value_desc=true

Most recent year: 2018

Largest Populations

Video (1 min)

Working Age Population (25-64 year olds)• China peaked in 2016, and is declining …• India will peak in 2050BUT – automation and technology may change the working age …

Accurate GDP Reporting?

http://www.bloomberg.com/news/articles/2016-01-05/is-there-such-thing-as-reliable-gdp-data-

Can we truly trust GDP figures given by countries?

GDP is NOT Quality of LifeGDP does NOT measure Quality of Life -- Good article:Beyond GDP: The Need for New Measures of Progresshttps://www.bu.edu/pardee/files/documents/PP-004-GDP.pdf

Traditional GDP New Expanded Version GDP

Distribution of Economic Freedom in 2007

Notice only a few countries were considered “Free” in 2007 ----------------------------U.S.U.K.AustraliaNew ZealandJapan

Distribution of Economic Freedom in 2010

The U.S. moved from “Free” in 2007 to “Mostly Free” in 2010---------------------------------Why and how did we move in that direction?

- Government spending(bail-outs)

- Fiscal freedom (taxes)

Let’s see for 2019

Distribution of Economic Freedom in 2019

Source: http://www.heritage.org/index/heatmap

The U.S. stayed “Mostly Free” in 2019

“Free”:Hong KongSingaporeNew ZealandSwitzerlandAustraliaIreland

10 Biggest Problems in the World

FILM (3.5 min)

Questions:1. What are the 10 issues brought up (from

around the world)?

2. Which 2 issues are your major concern?

Let’s Talk Taxes –World Bank “Doing Business”

Paying Taxes Methodology:• Profit or corporate income tax • Social & labor taxes paid by the employer• Property taxes• Property transfer taxes• Dividend tax• Capital gains tax• Financial transactions tax• Waste collection taxes• Vehicle and road taxes • and any other small taxes or feesLets see 2020 data from PwC and the World Bank Group …

Rankings - Highest Taxes 2020

Source: https://www.pwc.com/gx/en/services/tax/publications/paying-taxes-2020/overall-ranking-and-data-tables.html

Highest Tax Rates

Rankings - Lowest Taxes 2020

Source: https://www.pwc.com/gx/en/services/tax/publications/paying-taxes-2020/overall-ranking-and-data-tables.html

Tax to GDP Ratio - 2019

Source: https://www.oecd.org/tax/revenue-statistics-united-states.pdf

Lower ratio means lower taxes …

U.S.- State Taxes 2020

Source: taxfoundation.org

Which U.S. States have the highest and lowest

corporate tax rates?

Corporate Tax Rates 2015Bahamas 0.00%Bahrain 0.00%Bermuda 0.00%Bonaire, Saint Eustatius and Saba (owned by Netherlands) 0.00%Cambodia 0.00%Cayman Islands 0.00%Guernsey 0.00%Indonesia 0.00%Isle of Man 0.00%Jersey 0.00%Vanuatu 0.00%Montenegro 9.00%Bosnia and Herzegovina 10.00%Bulgaria 10.00%Gibraltar 10.00%Macedonia 10.00%Paraguay 10.00%Qatar 10.00%Macau 12.00%Moldova 12.00%Oman 12.00%Cyprus 12.50%Ireland 12.50%Liechtenstein 12.50%Serbia 15.00%

Which countries have the lowest corporate tax rates in

the world?(Bottom 10)

French vs. U.S. Tax Rates (2016)

53.9 %84.4 %Corporate Total (as %)7.7 %50 %Social Security – Employer paid

38.9 %34.4 %Corporate Tax (top rate %)Taxes USAFrance

Social Security – Employee paidWealth TaxPersonal Income Tax (top rate %)

7.7 %30 %01.8 %

45.5 %45 %

53.2 %76.8 %Personal Total (as %)9.75 %20 %VAT (France) vs. Sales Tax (LA County)15.4 %45 %Self Employment Tax (% of revenue)

French Health Care – At What Cost ? Video on FRENCH Healthcare (7 min) Great benefits – but at what cost?

France - new 75% tax on all income over €1 million (2013)FILM FILM

Result is many of the richest are fleeing the countryFILM –he has since withdrawn his application …In December 2012 – French Constitutional Council struck it down. Fixed in 2013 for “households” (today) vs “individuals” (2012)

What is your opinion regarding “Tax the Rich”? Will Smith

Social Security – Employee paidWealth TaxPersonal Income Tax (top rate %)

15 %15 %1.8 %1.8 %

75.0 %52.1 %

91.8 %68.9 %FRANCE - Personal Total (as %)

20122009

On Income > €1 Million

French Socialism – Not Working

2019 Most Miserable Countries of the World (Unemployment, Inflation, Lending, & GDP per Capita)

Source:https://www.nationalreview.com/2020/02/what-are-the-worlds-saddest-and-happiest-countries/

Where do you think are the 20 most Miserable Countries of the World

2019?

2019 Least Miserable Countries of the World (Unemployment, Inflation, Lending, & GDP per Capita)

Where do you think are the 20 least Miserable Countries of the World

2019?

Source:https://www.nationalreview.com/2020/02/what-are-the-worlds-saddest-and-happiest-countries/

Country Competitiveness Report 2019

Which country do you think is the MOST competitive (2018-19)?

Source:http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf

Country Competitiveness Report 2018-19

Executive Opinion Survey 2017

United States – most problematic issues ….Taxes & Regulations

Source:http://www3.weforum.org/docs/GCR2017-2018/03CountryProfiles/Standalone2-pagerprofiles/WEF_GCI_2017_2018_Profile_United_States.pdf

Global City - Cost of Living Index 2019

Which city do you think is the MOST expensive to live in (2019)?

Source:https://mobilityexchange.mercer.com/Insights/cost-of-living-rankings

Global Cities - Cost of Living 2019

Cities - Quality of Life Index

Source: http://www.mercer.com

Mercer evaluates local living conditions in all the 420 cities it surveys worldwide. Living conditions are analyzed according to 39 factors, grouped in 10 categories:1. Political and social environment (political stability, crime, law enforcement, etc)2. Economic environment (currency exchange regulations, banking services, etc)3. Socio-cultural environment (censorship, limitations on personal freedom, etc)4. Health and sanitation (medical supplies and services, infectious diseases, sewage,

waste disposal, air pollution, etc)5. Schools and education (standard and availability of international schools, etc)6. Public services and transportation (electricity, water, public transport, traffic

congestion, etc)7. Recreation (restaurants, theatres, cinemas, sports and leisure, etc)8. Consumer goods (availability of food/daily consumption items, cars, etc)9. Housing (housing, household appliances, furniture, maintenance services, etc)10. Natural environment (climate, record of natural disasters)

Cities - 2019 Quality of Living Rankings

Quality of Living Ranking

Which cities do you think rank the 10 HIGHEST?

Which cities do you think rank the 10 LOWEST?

Short FILM

What Determines A Country’s Level Of Economic Development?

Nobel-prize winner Amartya Sen argues: Economic development should be seen as a process

of expanding the real freedoms that people experience Remove impediments to freedom:

Poverty, Tyranny, and Neglect of public facilities Provide basic health care and basic education

Economic progress requires the democratization Give citizens a voice

The United Nations used Sen’s ideas to develop the Human Development Index (HDI) – next slide

Source: http://en.wikipedia.org/wiki/Human_Development_Index

Human Development Index 2019

Human Development Index (HDI)1. Life Expectancy at birth, 2. Educational Attainment, and 3. Whether average incomes are sufficient to meet the basic needs of life

Global Slavery Index 2018

Sources:https://howmuch.net/articles/modern-slavery-map-2018https://www.globalslaveryindex.org/

Forced Organ Harvesting – China 2019

Source: https://chinatribunal.com/

How Does Political Economy Influence Economic Progress?

Innovation and entrepreneurshipEngines of long-run economic growth Innovation includes new products, new processes,

new organizations, new management practices, and new strategies

Entrepreneurs commercialize innovative new products and processes

Create new markets and products Result in more productive labor and capital

So how do we rank innovation?

Global Innovation Index 2017

Which countries do you think top the list?

Global Innovation Index 2018

Air Pollution 2018

Source: World Health Organizationhttps://epi.envirocenter.yale.edu/2018-epi-report/air-pollution

Air Pollution - Quality of Life??

China

India

Worst Air Pollution

Source: http://www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitivenessReport2016-2017_FINAL.pdf

How Is The Political Economy Changing?

Since the late 1980s, two trends have emerged1. Political - Democratic revolution (late 1980s

and early 1990s) democratically elected governments replaced

totalitarian regimes more committed to free market capitalism

Recently gotten worse (worldwide)2. Economic - A move away from centrally

planned and mixed economies more countries have shifted toward the market-

based economic model (even if they keep same political model)

How Free are Countries?Political Freedom

Which countryranked #1(3-way tie)in 2018:-Political Rights-Civil Liberties

Democracy Rank

June 2018

Source: https://freedomhouse.org/countries/freedom-world/scores

What Is The Nature Of Economic Transformation?

The shift toward a market-based system involvesderegulation – removing legal restrictions to

the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate privatization - transfers the ownership of state

property into the hands of private investorsthe creation of a legal system to safeguard

property rights

What Does The Changing Economy Mean For Managers?

• Markets that were formerly off-limits to Western business are now open− firms need to explore opportunities in these markets

• Despite being underdeveloped and poor, some markets have huge potential – growing quickly ...− China -1.3 billion people − India – 1.2 billion people− Latin America – 600 million potential consumers

What Does The Changing Economy Mean For Managers?

However, the potential risks are largewill democracy thrive especially in difficult

economic times?will totalitarian regimes return?will a multi-polar world of different civilizations

emerge?will China’s financial system be stable (debt)?

Benefits of Business

• The benefits of doing business in a country are a function of −Market Size−Consumer Purchasing Power−Likely Future Wealth

Costs of Business• The costs of doing business in a

country are a function of its−Political System - is it necessary to pay

bribes to get market access?−Economic Level - are the necessary

supporting business and infrastructure in place?

−Legal System - it can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights

The risks of doing business in a country are a function of − Political risk - the likelihood that political forces

will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise

− Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise

− Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights

Risks of Business

How Can Managers Determine A Market’s Overall Attractiveness?

More attractive countries have: Political stability Market-based economiesLow inflationLow private-sector debt

Balance: Benefits, Costs & Risks

BenefitsMarket Size

Consumer Purchase PowerLikely Future Wealth

CostsPolitical: Corruption

Economic: InfrastructureLegal: Costs

RisksPolitical: Unrest & Anti-business trendsEconomic: Economic Mismanagement

Legal: Protection of Property Rights

Market’sOverall

Attractiveness

Where to call home? If you could relocate to any country in the world, other than the U.S., to where would you move? Why?Is your answer the same as last time? Did our discussion peak your interest to visit a country? Where would you like to go?To make an informed choice (personal and business) we might like to look at:

• Benefits• Costs• RisksAnother layer of the onion exposed …