Country Analysis: Answering the Economic Questions Bryce Goldbach and Cheng Ye March 21, 2011 1.

1

Country Analysis: Answering the Economic Questions

Bryce Goldbach and Cheng YeMarch 21, 2011

2

Today's Agenda

• Brief history of France, Japan, and Sweden• Analyze the 6 criterion to classify economies• Evaluate economies based upon 9 criterions• Lessons learned• Policy recommendations

Source: CIA World Factbook 3

A brief background..

• France– Leader among European nations– Population: 65,102,179– Government: Republic

• Japan– Economic power– Population: 126,475,664– Government: Parliamentary with a constitutional monarchy

• Sweden– Independent country, conflict averse– Population: 9,088,728– Government: Constitutional Monarchy

4

Classification based upon the six institutional frameworks

1. Allocation mechanism2. Forms of ownership of land and capital3. Role of planning4. Types of incentives5. Income redistribution6. Role of planning

5

1st Criterion: Allocation Mechanism• Japan

– Market• 20th freest country in the world (2011 Economic Freedom Index)

– Traditional• “Feudalistic holdover or “family-like” relationships exist in society and business

– Build trust, social capital, enhance productivity

• Sweden– Market

• Member of EU

– Command• High taxes and extensive safety nets

• France– Market

• Member of the EU

– Command• “Dirigisme” (similar to indicative planning)

– Strong centralized state intervenes in economy– France is in process of shifting from socialism to capitalism

6

2nd Criterion: Forms of ownership of land and capital

• Sweden– Capitalism

• Highest property rights ranking according to 2011 Economic Freedom Index• Becoming more laissez-faire

• Japan– Capitalism

• Government encouraged ownership during growth periods• Considering restricting foreign ownership

– Could further slow economic growth

• France– Capitalism/Socialism Blend

• Large state-owned sector– State ownership of firms or businesses the government deems as a national public service or natural

monopolies

• Rigid labor market– High minimum wage, work weeks limited to 35 hours, firings are subject to bureaucratic restraints

7

3rd Criterion: Role of planning• Japan-

– Planned market economy, indicative planning• Government intervenes to monitor flow of imports/exports• Currency intervention

– Gov. sold yen to depreciate the value of yen, which would help domestic producers

• Trade pact with India– Trying to spur growth by strengthening trade relations with India

• France– Planned market economy, indicative planning

• Election of President Sarkozy in 2007– Sarkozy was pro-capitalism, further showed shift from socialism to capitalism

• Growth of the EU– More market oriented so less indicative planning

• Sweden– Planned market economy, central planning

• High levels of taxation and income redistribution• Joining the EU has helped Sweden become more of a market economy

8

4th Criterion: Types of Incentives• All three countries believe in material and moral incentives• Moral incentivesnationalism

– Japan• Lifetime employment

– Individuals work for company whole life, employees will then do what’s in the best interest of the business/firm

– France• Distrust of outsiders

– Historical context conflict between countries, different ideologies, religions, economic models, leaders– Lowering of barriers allow for people to move freely throughout EU

– Sweden• Artificial nationalism through “cradle-to-grave” safety nets

– Critics believe safety nets take away from material incentives

• Importance of religion?– Little impact

• 64% of French are Roman Catholic, but only 4.5% attend mass regularly• 73% of Swedes are Lutheran, but gov. tax on membership discourages religious involvement

Source: World Bank 9

5th Criterion: Income redistribution• 2010 Tax Rates

– France-33% corporate,40% individual– Japan-50% corporate, 41% individual– Sweden- 28% corporate, 57% individual

• Sweden has been most successful because there GDP per capita is above the European avg.• France welfare program is severely underfunded

• Average annual growth of population and percentage of population over 65 from 1995-2009

• Schools of Thought– Sweden Rawlsian

• Requires substantial redistribution shown through high taxes, gov. involvement

– France Hybrid• Austrian due to market forces, but Rawlsian due to scope and coverage of welfare program

– Japan Austrian

Country Avg. Annual Growth of Population (%)

% of Population Over 65 Years Old

France 0.66 16.4

Japan 0.06 18.5

Sweden 0.49 17.2

Source: Freedom House, Heritage Foundation, Transparency International

10

6th Criterion: Role of politicsIndicator Japan Sweden FranceGovernment Spending (% of GDP)

37.1% 52.5% 52.8%

Property Rights Rating (higher ratings better)

80.0 90.0 80.0

Political Freedom (1=free)

1 1 1

Civil Liberty(1=most liberty)

2 1 1

Evidence of Corruption (Transparency Rating out of 178 countries, lower ratings are better)

17 4 25

11

6th Criterion: Role of politics• Government spending

– Despite being lower, Japans gov. spending has been on the rise• Possibly trying to jumpstart economy

• Civil liberties rating– Japans could be lower due to “press clubs”, which are writers that develop relations

with politicians and are paid to not write critical articles• Treatment of minorities

– In Japan, burakumin do not have equal access to employment and housing– France was warned by European Commission for abusive migrant treatment– Sweden ranked #1 in 2007 Migrant Policy Index

• New law could possibly set quota on number of migrants allowed into Sweden

• Transparency Ratings– France’s could be lower due to reports of corruption during former President Chirac’s

time in office– In 2007, there were reports of bribery scandals involving large Swedish companies.– Japan has experienced corruption in there government

12

Evaluating the Economies Based Upon the 9 Criterion

PART 2

Source: World Bank 13

#1: Level of outputAny observations?1. Sweden saw a significant decline in GDP from 2008 to 20092. Japan has seen limited growth in GDP per capita in the long run3. France saw GDP growth up until 2009What could explain why France and Sweden experienced a significant decline in their GDP’s in 2008-2009, while Japan did

not? Answer: Japan did not experience significant population growth. France and Sweden’s likely dipped due to people moving from Eastern Europe to Western Europe for more opportunity.

2000 2001 2002 2003 2004 2005 2006 2007 2008 200920000

25000

30000

35000

40000

45000

50000

55000

GDP per capita

FranceJapan Sweden

U.S.

$

Source: World Bank 14

#2: GDP GrowthObservations1. Sweden had the highest growth

from 2001 to 20062. In 2007, all 3 countries saw

significant declines3. Trend lines move similarly to one

anotherDoes anything stand out about Japan

in the early 2000’s?- Japan saw significant growth from

2002 to 2005, why?- Quantitative easing

- Government increased money supply.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

-6

-4

-2

0

2

4

6

GDP per capita growth

FranceJapan Sweden

Annu

al g

row

th (%

)

Source: Gapminder.org, World Bank 15

#3: Composition of Output (% of GDP)

Country Agriculture (1998-2007)

Health (1995-2006)

Military (2000-2009)

Imports (2000-2009)

Exports (2000-2009)

France 2.6 10.2 2.5 26.8 26.6

Japan 1.7 7.6 1.0 12.4 13.7

Sweden 1.8 8.6 1.6 40.9 48

16

#3 Composition of output• Agriculture

– France has most fertile land and gov. provides subsidies for agricultural production– Japan is a mountainous island– Sweden is most densely forested country in the EU

• Military– France has one of the largest armies in the EU, member of the Security Council of

the UN– Sweden’s army is composed of volunteers, while France’s is professionals– Japan has limited military ability due to U.S. oversight

• Imports/Exports– Growth of EU and breaking down of trade barriers makes it easier for France and

Sweden to trade– More costly for Japan to import/export due to location and regulation– *Although Japan has smaller percentages, there total GDP is much larger so the

differences may not be as big as they seem

Source: World Bank 17

#4: Degree of Static Efficiency: Efficiency in Production

• How close is the country to operating on their PPF?– Japan is probably closest to their PPF, France is likely below it

• What could explain the low unemployment in Japan?– Lifetime employment

• France has high minimum wage hard for younger citizens to find employment• Sweden has safety nets that discourage Swedes from working minimum wage

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

2

4

6

8

10

12

14

Unemployment Rate (%)

FranceJapan Sweden

Source: World Bank 18

#4: Degree of Static Efficiency: Efficiency in Production

• Business Freedom Scores 2010– France 85.6– Japan 83.8– Sweden 95.0

• Time Required to Start a Business Graph Below

2003 2004 2005 2006 2007 2008 20090

5

10

15

20

25

30

35

40

45

FranceJapanSwedenDa

ys

Source: Heritage.org 19

#4: Degree of Static Efficiency: Efficiency in Consumption

• Level of freedom in the economy– Gini Coefficient

• France=33• Japan, Sweden=25

– Economic Freedom Index• Japan’s index went up in 2005 due to Liberal Democratic Party gaining 2/3 of seats

in Parliament and the Prime Minister pushing for privatization of the national post service.

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20115557596163656769717375

Economic Freedom Index (100=Free)

France JapanSweden

20

#5: Degree of Dynamic Efficiency• GDP Growth

– Japan’s is most consistent over time – Sweden had volatile growth

• Unemployment– Japan has had historically low unemployment– France has the highest unemployment rate

• Wastefulness in the Economy hinders growth and sustainability– Female Labor

• Only 67.4% of women 25-54 in Japan have a job, which is 15 percent lower than Sweden• Pew Research Center found 3 out of 4 French people believe men have more opportunities than women• Sweden is a leader in gender equality

– 47% of Parliament and 50% of government ministers are female

– Social Safety Nets• France heavy regulation is labor market causes high minimum wages and numerous paid leave hrs.• Japan has a lack of protection for part-time workers• Sweden has unlimited sick paid leave that employees will take advantage of and abuse.

• Rankings– Japan– Sweden– France

21

#6: Macroeconomic Stability

• Measures– GDP per capita

• Japan was consistent, but Sweden had most volatile and highest GDP per capita

– Unemployment• France had the highest unemployment, while Japan had the lowest

over time.

– Inflation data• Japan had experienced deflation since 1998what does this

potentially signal?– RECESSION!

• France and Sweden’s rates have moved similarlyBoth are members of the EU

Source: World Bank 22

#6 Macroeconomic Stability• Exchange Rate Volatility

– Euro has been stable against U.S. dollar• Euro 1.20-1.49/1 US dollar from 2004-2011

– Japanese yen has appreciated• 108yen/1 US dollar in 2004 to 84yen/1US dollar in 2011

• LFPR– High costs of hiring/firing workers in France

• Rankings (most to least stable)– Japan– Sweden– France

2000 2001 2002 2003 2004 2005 2006 2007 2008505254565860626466

LFPR (% of pop. ages 15+)

France Japan Sweden

Gapminder.org 23

#7 Economic Security of the Individual

• Unemployment rate– As mentioned before, Japan has lowest and France highest

• Income per capita

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 200924000

25000

26000

27000

28000

29000

30000

31000

32000

33000

34000

Income per person (GDP/per capita, inflation ad-justed)

FranceJapanSweden

US$

24

#7: Economic Security of the Individual

• Annual income growth– Moved similarly except for Japan’s declined in the late 1990’s

• What happened?– Crisis in East Asia hurt Japan

» Japan had trade relations with those countries

• Infant Mortality Rate– France has the highest infant mortality rate of about 3.2 per 1000 live births– Japan and Sweden have a rate of about 2.5

• Life Expectancy– Average life expectancies from 2000-2008

• Japan 82 yrs, Sweden 80.5yrs, and France 80 yrs

• Rankings (most to least secure)– Japan– Sweden– France

25

#8: Degree of Income or Wealth Equality

• Gini coefficients (100=perfect inequality, 0=perfect equality)– France: 33– Japan and Sweden: 25

• Japan and Sweden more evenly distributed

• Quintile Ratios (1=perfect equality)– France: 5.58– Sweden: 3.59– Japan: 3.36

• Rankings (most to least equality)– Japan– Sweden– France

Source: Heritage.org 26

#9: Degree of Economic Freedom• Freedom of individuals/businesses to make decisions

– Japans economic freedom spiked before stabilizing the last 3 years– France and Sweden have seen gradual increases in economic freedom

• It is useful to also look at time required to start a business– France had the shortest time (7 days)

• Rankings (most to least freedom)– Japan– Sweden– France (Even though France has shortest time to start a business, they have a significantly lower Economic Freedom Index score

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20115557596163656769717375

Economic Freedom Index (100=Free)

France JapanSweden

27

Lessons Learned and Potential Policies

PART 3

28

Lessons Learned

• France should model their income redistribution model after Sweden’s– Current French model has built up a lot of debt

• Japan is a role model for France and Sweden due to their stability over time– However, Sweden has more impressive growth– What should Japan do?

• Encourage foreign investment and trade– Develop strong trade relations with a growing China

• Japan is closest to a pure capitalistic economy– France and Sweden are a blend of capitalism and socialism

29

Lessons Learned

• Deeply rooted in Japanese society are long term contracts – EX: lifetime employment, cooperation between business

conglomerates, relationships between business and government

– Potential problems?• Interests of the majority may not be served, but those in powerful

positions• Corruption and bribes• Lack of pure competition creates inefficiency

• Japan has possibly reached the top of their PPF– What about wasted female labor?

30

Lessons Learned

• All three face aging populations– Strains social safety nets and creates income inequality

• France is in danger due to underfunded welfare programs

• Importance of geography– Japan faces limitations on imports/exports due to being an island

nation• Location gives Japan access to China and other growing Asian markets

– France and Sweden have a competitive advantage• Close proximity to other European nations

• Importance of historical context– Tensions exist among countries in EUcan lead to poor treatment of

minorities– Japan still practices long term contracts and keiretsu

31

Potential Policies

• Sweden needs to maintain its social welfare program– Has helped stabilize economy and prevent large income gaps– However, would benefit from lowering individual tax rates and

increasing economic freedom• Will help prevent formation of underground or shadow economy

• Sweden should liberalize their labor market– Employers are faced with high non-salary and dismissing workers

costs– Would allow for market forces to take place

• Potentially more productionmost qualified gets the job

• Sweden needs to transition to the euro but..– Sweden should wait until the financial crisis in Europe calms

32

Potential Policies

• Japan would also benefit from labor market deregulation– Full time workers have a high level of protection from

governmentcostly to fire/hire workers• Could this explain the stagnant growth?

– Few benefits for part-time workers• Part-time workers are paid 40% of the hourly wage of full-time

workers– Little money to spend and put back into economy

• Japan needs to shift away from historical roots– Boundaries for outsiders, lifetime employment, lack of

female equality in workforce

33

Potential Policies

• Japan could accelerate growth through removing barriers for outsiders– Feed of growth in China

• Lowering unemployment rates in France– Lowest LFPR and highest unemployment rate

• Allow more economic freedom and deregulation in the labor market

• Improve France’s welfare program– Find a new model that will not build up so much debt

• Use geographic location to your advantage– France has numerous distribution networks at their disposal

34

Conclusion

• Today we’ve talked about– Brief history of France, Japan, and Sweden– 6 Criterion used to classify an economy– 9 Criterion used to evaluate an economy– Lessons learned– Potential policies

35

Any questions?

36

Review Time!

Jeopardy Review