COUNTRY ANALYSIS REPORT USA - Wikispaces · PDF fileUSA: Country Analysis Report – In-depth PESTLE Insights Published 04/2010

USA: Country Analysis Report – In-depth PESTLE Insights Published 04/2010

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OVERVIEW

Catalyst

This profile analyzes the political, economic, social, technological, legal and environmental structure in the US. Each of the

PESTLE factors is explored on four parameters: current strengths, current challenges, future prospects and future risks.

Summary

Key findings

The US is recognized as a global power but public opinion has turned against some of its international policies

The US has long enjoyed its status as a superpower; by virtue of this status it exerts immense economic and political

influence over national and global policy making. The extent of this influence became evident when the US was able to defy

the UN, declaring the 'war on terror' which was spearheaded by the most recent invasions of Afghanistan and Iraq in 2001

and 2003 respectively. However, the long drawn-out nature of these conflicts combined with the economic slowdown and

corresponding social tensions have increasingly made the US population critical of the government's international policies.

On a number of occasions its actions have been seen as intrusive in the domestic affairs of other countries and as a result,

its credibility and standing have been steadily eroded around the world. At the same time, anti-US feeling has further fueled

Islamic terrorist groups. The US is among the top terrorist targets globally and the threat of terrorist attack is ever present.

President Barack Obama has attempted to reach out to countries such as Iran and has also been toning down the rhetoric

against such nations, which is expected to mollify the perceptions that the US is anti-Islamic. Despite this, the economy and

social security will remain the key areas for policy making.

President Obama’s 2011 budget will cut spending and end tax breaks

President Obama announced a $3.8 trillion budget for 2011 which includes plans to increase spending for the creation of

jobs. However, Obama's administration is expected to save $250 billion by capping a range of domestic programs for three

years and he has suspended plans to send astronauts back to the moon. His 2011 budget also proposes the elimination of

$36.5 billion in tax credits for oil and gas companies such as Exxon, Chevron and ConocoPhillips over the next decade, as

well as the introduction of taxation measures for overseas profits for companies such as Microsoft, the world’s largest

COUNTRY ANALYSIS REPORT

USA

In-depth PESTLE Insights

Publication Date: April 2010

Overview



software maker. The budget is considered to be a delicate balancing act by President Obama, in view of the economic

recession which has destabilized the global economy since 2008. Furthermore the budget calls for an array of regulations,

subsidies and taxes aimed at cutting the emission of greenhouse gases. The inherent strength of the American economy

along with the policy shifts towards cutting greenhouse gases and the creation of jobs is considered to augur well for the

country.

Extensive social security faces the challenges of an aging population and unemployment

The US government has put an extensive social security system in place and is far ahead of other countries in terms of

total health spending per capita, which takes care of pensions as well as disabled and unemployed citizens. However, like

most developed economies the US is facing the problem of an aging population, as the baby boom generation grows old.

According to US census data, half of the population was more than 35.3 years old in 2000, which increased to 36.7 years in

2009. In this scenario, the US faces a risk of slower economic growth, serious labor shortages and rising tax rates over the

next few decades. The government’s social security payments will also put substantial pressure on its finances. Social

security benefits constitute 90% of the income of one third of Americans over the age of 65. At the same time, the number

of people contributing to the social security system has been steadily declining. Under the current law, public spending on

retirement and health programs is expected to rise to 20% of GDP by 2050.

Reliance on the private sector could threaten the country’s status as the global research and development center

The US has maintained its leadership position with respect to technological innovations. Overall spending on research and

development (R&D) in the US totaled $398 billion in 2008, up from $373 billion in 2007 at a growth rate of 6.7%. It has a

well established intellectual property rights protection and enforcement system which encourages innovators from

elsewhere to come to the US. As a result, the R&D climate has been conducive to the country's reputation as a favorite

spot for a large number of multinational corporations. However, the over-dependence on the private sector makes the

technological development vulnerable to the business activities of private enterprises. Although the country presents an

impressive picture of technological advancement, the level of R&D expenditure as a percentage of GDP is less than that

undertaken in a number of other developed nations such as France, Germany and Japan. The R&D expenditure in

educational institutions has been increasing, but also remains comparatively less than that of other technologically

advanced nations.

The investment climate has improved but the multiplicity of regulations acts as a dampener

The US government presents a favorable legal climate. It has maintained its openness towards foreign direct investment

(FDI) and is the world’s largest recipient of such investment. The total stock of FDI in the US in 2009 reached $2.39 trillion

as of December 31, 2009, increasing marginally from $2.36 trillion as of December 31, 2008. In order to retain the US'

attractiveness as an investment destination and as a reaction to the financial crisis, the authorities have begun to take stock

of financial regulations in an attempt to improve transparency.

Although the country’s strict corporate governance rules are hailed for their transparency, they have also been termed a

deterrent for foreign investors. Increasingly, foreign companies are complaining about the directives of the Securities and

Exchange Commission (SEC). Moreover, business enterprises are required to adhere to a large number of state and

federal government regulations, depending on where their businesses are situated. The non-uniformity of business laws

can make operating in the country tough, as it becomes difficult for companies to meet the requirements of more than one

state.

Overview



Measures to cut greenhouse gas emissions have been introduced but a fluctuating renewable energy market

creates cause for concern

President Obama's 2011 budget has initiated the formulation of regulations, subsidies and taxes aimed at cutting the

emission of greenhouse gases. The budget contains an increase of $39 billion in taxes on fossil fuel producers over a

period of 10 years, as well as an end to tax breaks and other incentives for the domestic production of oil, natural gas and

coal. Furthermore the budget proposes to triple federal support for nuclear energy, by adding $36 billion in new loan

authority for a Department of Energy program aimed at accelerating the construction of new reactors. An estimated $1.4

billion will be set aside to help developing countries address the impact of climate change, reduce deforestation and shift to

low-carbon energy sources.

The US renewable energy market has been fluctuating in value over recent years. Decelerated growth is expected for

2010, followed by further fluctuating growth rates throughout the remainder of the forecast period until 2014. The US

renewable energy market generated total revenues of $42.2 billion in 2009, representing a compound annual growth rate

(CAGR) of 1.6% for the period spanning 2005–09. In comparison, the European and Asia Pacific markets grew with

CAGRs of 6.2% and 4.4% respectively over the same period, to reach respective values of $137.7 billion and $102.7 billion

in 2009.

PESTLE highlights

Political landscape

• In the congressional elections that took place on November 4, 2008, the Democratic Party took control of both

houses of the US Congress with a 256–178 advantage in the House of Representatives and a 56–41 advantage

in the Senate. Barack Obama, the party's candidate, assumed the presidency in January 2009.

• The US has a low ranking in terms of political stability and the absence of violence. The country figures high on

the list of nations susceptible to terrorist attacks, while its international policies to fight terrorism have aggravated

the situation.

Economic landscape

• According to the Congressional Budget Office (CBO), the budget deficit is expected to reach $1.3 trillion in fiscal

2010, slightly less than the $1.4 trillion recorded in fiscal 2009. The country’s fiscal deficit in 2009 was almost

10% of its GDP and this is definitely a cause for concern.

• Since December 2008, the central bank has decided to hold benchmark overnight rates in the 0–0.25% range.

The Federal Reserve is likely to increase interest rates as the country’s economy is expected to bounce back,

with a growth rate of 2.5% forecast for 2010.

Social landscape

• The demographic transition of the country poses a challenge. The rapid increase of people who are 65 and over

will begin in 2011, when the baby boom generation reaches age 65. This will then continue for many years.

• The US remains an inequitable society, with the richest quintile making six times as much money as the poorest

quintile in 2007.

Overview



Technological landscape

• The US’ leadership position in innovation is clear due to the fact that it is home to one third of the world’s

scientists and engineers, and accounts for one third of global R&D expenditure.

• Technological innovation within the private and educational sector has been increasing, with each sector

accounting for 70.0% and 14.0% of innovations, respectively.

Legal landscape

• The World Bank’s “Doing Business 2010” report has ranked the US in fourth place with respect to ease of doing

business. The country's economic policies are generally pro-business and it has a very well developed financial

regulatory system, with financial markets being open to competition.

• High tax rates and the differential federal rates of taxes however are major dampeners for business.

Environmental landscape

• With 4.6% of the world's population, the US accounts for 20.9% of global emissions, producing an average of

20.6 tons of carbon dioxide per person in 2007. These emission levels are above those of other high-income

countries.

• President Obama’s 2011 budget proposes tripling federal support for nuclear energy, by adding $36 billion in new

loan authority for a Department of Energy program aimed at accelerating the construction of new reactors.

Key fundamentals

Table 1: The US: key fundamentals

2008 2009 2010e 2011f 2012f 2013f 2014f

GDP, constant 2000 prices ($ billion) 11,807.4 11,518.0 11,801.1 12,169.7 12,506.1 12,840.0 13,127.9

GDP growth rate (%) 0.8 -2.5 2.5 3.1 2.8 2.7 2.2

GDP, constant 2000 prices, per capita ($) 38,811 37,492 38,039 38,852 39,543 40,209 40,716

Exports, total as % of GDP 12.53 11.01 10.60 10.77 10.74 10.72 10.81

Imports, total as % of GDP 17.57 15.40 15.98 16.81 17.01 17.03 17.01

Mid-year population, total (million) 304.06 307.21 310.23 313.23 316.27 319.33 322.42

Unemployment rate (%) 5.80 9.28 10.00 9.17 9.04 8.98 9.12

Doctors per 1,000 people 2.38 2.38 2.37 2.37 2.37 2.37 2.36

Mobile penetration (per 100 people) 84.26 85.76 87.22 88.65 90.04 91.4 92.72

Source: Datamonitor D A T A M O N I T O R

Table of Contents



TABLE OF CONTENTS

Overview 1

Catalyst 1

Summary 1

Key facts and geographical location 9

Key facts 9

Geographical location 10

PESTLE analysis 11

Summary 11

Political analysis 12

Economic analysis 16

Social analysis 20

Technological analysis 23

Legal analysis 27

Environmental analysis 30

Political landscape 33

Summary 33

Evolution 33

Structure and policies 36

Performance 39

Outlook 40

Economic landscape 41

Summary 41

Evolution 41


Performance 45

Outlook 55

Social landscape 56

Summary 56

Evolution 56


Performance 59

Outlook 62

Table of Contents



Technological landscape 63

Summary 63

Evolution 63


Performance 65

Outlook 67

Legal landscape 68

Summary 68

Evolution 68


Performance 72

Outlook 72

Environmental landscape 73

Summary 73

Evolution 73


Performance 74

Outlook 76

APPENDIX 77

Ask the analyst 77

Datamonitor consulting 77

Disclaimer 77

Table of Contents



TABLE OF FIGURES

Figure 1: Map of the US 10

Figure 2: The US: key political events since 1940 34

Figure 3: The US: key political figures 36

Figure 4: The US: historical GDP growth and key economic events (1970–2009) 42

Figure 5: Market capitalization of NYSE, 2001–08 44

Figure 6: GDP and GDP growth rate in the US, 2003–13 (real GDP at constant 2000 prices) 46

Figure 7: GDP composition by sector in the US, 2009 47

Figure 8: Agricultural output of the US, 2003–09 48

Figure 9: Industrial output of the US, 2003–09 49

Figure 10: Service output of the US, 2003–09 50

Figure 11: External trade of the US, 2005–09 51

Figure 12: Consumer price index and inflation in the US, 2003–13f 53

Figure 13: Unemployment rate in the US, 2003–13 55

Figure 14: Major religions in the US, 2009 58

Figure 15: Expenditure on healthcare in the US, 2003–09 60

Figure 16: Government expenditure on education in the US, 2003–09 62

Figure 17: The US court system 69

Figure 18: Carbon dioxide emission in the US, 2003–13 75

Table of Contents



TABLES

Table 1: The US: key fundamentals 4

Table 2: The US: key facts 9

Table 3: Analysis of the US political landscape 12

Table 4: Analysis of the US economy 16

Table 5: Analysis of the US’ social system 20

Table 6: Analysis of the US’ technology landscape 23

Table 7: Analysis of the US’ legal landscape 27

Table 8: Analysis of the US’ environmental landscape 30

Table 9: Mid-year population by age (millions), 2008 57

Table 10: Comparative performance on receipt of patents, 2000–08 (USPTO) 64

Key Facts and Geographical Location



KEY FACTS AND GEOGRAPHICAL LOCATION

Key facts

Table 2: The US: key facts

Country and capital

Full name United States of America

Capital city Washington

Government

Government type Federal Republic

Head of state President Barack Obama

Head of government President Barack Obama

Population 301 million

Currency Dollar

GDP per capita (PPP) $46,400

Internet domain .us

Demographic details

Life expectancy 78.1 years (total population)

75.6 years (men)

80.6 years (women)

Ethnic composition (2003 data) Whites 81.7%, Blacks 12.9%, Asians 4.2%, and others 1.2%

Major religion (2007 data) Protestants 51.3%, Roman Catholics 23.9%, other Christians 1.6%, and others 23.2%

Country area 9,826,630 sq km

Language English

Exports Agricultural products, industrial supplies, capital goods (transistors, aircraft, motor vehicle parts, computers, telecommunications equipment), consumer goods (automobiles, medicines)

Imports Agricultural products, industrial supplies, capital goods (computers, telecommunications equipment, motor vehicle parts, office machines, electric power machinery), consumer goods (automobiles, clothing, medicines, furniture, toys)

Source: CIA D A T A M O N I T O R

Key Facts and Geographical Location



Geographical location

The US is located in North America, bordering both the North Atlantic Ocean and the North Pacific Ocean; it shares its

boundaries with Canada and Mexico.

Figure 1: Map of the US

Source: CIA – The World Factbook D A T A M O N I T O R

PESTLE Analysis



PESTLE ANALYSIS

Summary

Since the middle of the 20th century, the US has been the dominant global power in economic, political, military, scientific,

technological and cultural affairs. The country has successfully become a technological leader through the early adoption

and propagation of information and communication technology. Meanwhile, its military might is absolute, and an extensive

network of regional alliances and security arrangements ensures its diplomatic power. The country not only enjoys

economic supremacy but also a stable political establishment which has witnessed the continuity of certain policies

irrespective of the regime. Barack Obama succeeded George W. Bush as president in January 2009, having defeated John

McCain of the Republican Party in the presidential elections.

With a GDP of more than $11 trillion in 2009 the US has the largest economy in the world, far ahead of the West European

nations and Japan. After the economic boom of the 1990s growth slowed down after 2000, while the events of 9/11 added

to the economic decline. Despite the slowdown, the economy managed a CAGR of 2.8% over 2001−06; however, in the

second half of 2006 the economy started decelerating below the long-term growth trend.

The US economy was in recession in 2009, during which time the country’s economy contracted by 2.5%. In addition to the

$188 billion stimulus package in 2008, the Obama administration initiated a $787 billion stimulus package in February

2009. This has increased the government’s indebtedness. Moreover, the US Congress passed an 8% increase in spending

for the balance of fiscal 2009. Although the government has no problem selling its debt in the current market, there is a

growing concern about its ability to do so in the future; Chinese premier Wen Jiabao voiced his concern about the state of

US credit in 2009. The country’s public debt increased from 39.7% of GDP in 2008 to reach 52.9% of GDP in 2009.

On the social front, as a result of its rapidly aging population the US faces the risk of slower economic growth, serious labor

shortages and rising tax rates over the next few decades. Furthermore, the aging population and rising healthcare costs are

projected to increase the burden on public retirement and healthcare systems.

In the technological sphere, the US has been a leader in adapting and applying technology since its inception. Continued

investment is likely to see the US retain its technological superiority in the near future. Regulatory and legal reforms in a

broad range of industries began in the 1970s and accelerated over the course of the 1980s, resulting in deregulation in

many sectors, which has enhanced competition and improved overall efficiency.

The nation's economic ambitions, however, have meant that it has not achieved a balance between its economic growth

and environmental sustenance, which is reflected in its performance on environmental indicators.

PESTLE Analysis



Political analysis

Overview

The US continues to have a major influence in economic, political, and military spheres. In its domestic policies, it has an

effective judicial system along with prevalence of rule of law. The current economic climate of the country has forced the

government to pursue policies which aim to increase disposable income. The government has been accused of double

standards for its foreign policies, specifically relating to Iraq and Afghanistan.

Table 3: Analysis of the US political landscape

Current strengths Current challenges

■ Strong democratic setup

■ Global influence

■ Internal disagreements in the presidential team

■ Slowdown of economy and social tension

■ Threat of terrorism

Future prospects Future risks

■ Recent negotiations for free trade agreements

■ Emergence of new political classes

■ Rift between Israel and the US

■ Increasing international criticism of interventionist policies

■ Illegal immigration may increase discontent


Current strengths

Strong democratic setup

The US has a robust democratic setup which has also proved to be its inherent strength. The country’s federal character

has been well entrenched, as the states have their own legislative and executive power which are integrated with national

policies. According to the world governance indicators ranking by the World Bank, in 2008 the US had a good percentile

rank of 86.1 in voice and accountability. The principles of democracy are deep-rooted and elections are considered to be

fair and transparent. Furthermore, the election process is transparent, with adequate participation of citizens. The country

also has an active media which functions as an effective pressure group. However, the involvement of business interest

groups in the election process, through the provision of soft funds, occasionally makes the system of policy making biased.

Global influence

Since the end of the Cold War, the US has been recognized as the leading power in the world. By virtue of this status, it

enjoys immense economic and political influence over national and global policy making, having secured the support of a

majority of nations. The extent of this influence became evident when the US declared a 'war on terror', spearheaded by

the invasions of Afghanistan and Iraq.

PESTLE Analysis



Furthermore, according to a survey by the Chicago Council on Global Affairs and the East Asia Institute of South Korea in

2009, the US remains highly regarded in all of the key issues covered: American soft power, economics, culture, human

capital and diplomacy. The report suggests that American soft power was hit by the financial crisis, although it continued to

have significant advantages over China.

Current challenges

Internal disagreements in the presidential team

President Obama has made a serious bid to reach across the partisan divide by appointing high profile experts with an

affiliation to the Republican Party. Because of this the Obama administration faces internal threats, as there are a number

of independent figures and high profile individuals from the Republican Party in his administration. Robert Gates, the

Defense Secretary under Obama's Republican predecessor, George W. Bush, was asked to stay on in his position and

Obama has nominated another Republican, Ray LaHood, as the transport secretary. These choices indicate that the

president especially opted for a team of experts with strong political experience, regardless of partisan preferences, for key

appointments in his administration. Therefore, there is a likelihood of strong internal disagreements and dissension in the

administration, which could be a major challenge.

Slowdown of economy and social tension

The recession in the country has brought many challenges for the US government. The slowdown in the manufacturing

sector and the recessionary trend in housing have continued, which could give rise to labor difficulties and social tension.

The industrial output declined from 1.2% in 2008 to reach a meager 0.3% in 2009. Doubts regarding the outsourcing of

services continue, as such actions are perceived to reduce the employment opportunities for the native population. Due to

the changing economic situation the government has been forced to take measures such as reducing the visa caps on

foreign workers, which was not its original agenda.

Threat of terrorism

The US is among the top terrorist targets globally and the threat of terrorist attack is ever present. Moreover, the US

embassies in many countries have already come under attack from Islamic terrorists. The former Bush government

pursued its 'war on terror' vehemently and secured support from many European nations in this course. Initially, this worked

to the government's favor, increasing its popularity; however, gradually the US population became critical of many of the

actions that the government was carrying out. With the passage of time, the war on terror has lost much of its appeal within

the nation as well as internationally. At the same time, anti-US feeling has further fueled Islamic terrorist groups.

Unfortunately, the sequence of events after 9/11 and the US war on terrorism have made minority groups in the US

vulnerable to attack. Within a week after 9/11, the Council on American-Islamic Relations reported more than 300 cases of

harassment and abuse of Muslims and Southeast Asian minorities, which was nearly half the total number it received in

2000.

Future prospects

Recent negotiations for free trade agreements

The US has propagated free trade agreements (FTAs) with other nations to bolster trade and drive its economy. In a

continuation of this initiative, the country has been negotiating an FTA with South Korea, which is still pending in the US.

PESTLE Analysis



The FTA has been billed as the most noteworthy event in the US-South Korea relationship since the two countries signed

their military accord in 1953. Economically it is expected to enhance two-way trade, which is already worth $79 billion a

year, by as much as $20 billion in the coming years. Apart from bolstering trade between the two nations, the FTA has also

been considered vital in giving thrust to the economic initiatives of the South Korean president, Lee Myung-bak.

The US has also been carrying out negotiations with countries such as Malaysia, although there are a number of political

issues to be ironed out before an FTA can be agreed. Once these agreements are in force, they are expected to enhance

trade between the nations, and the US is keen to leverage the opportunity.

Emergence of new political classes

US society has evolved over the years, witnessing an amalgamation of many social classes into its mainstream. For

example those immigrants who have made the US their home are rising in political circles, with many occupying high

offices at federal and national levels. It is expected that the emergence of these political groups will influence policies in

favor of minorities.

Future risks

Rift between Israel and the US

Historically, the US has had strong relations with Israel. However, there are reports of disagreements between President

Obama and Israeli Prime Minister Benjamin Netanyahu. Although both sides agree that Iran should not develop nuclear

weapons, there are differences with regard to the ways in which they believe Iran should be dealt with. President Obama is

hoping to convince Iran not to go ahead with its weapons program, and has toned down the hawkish remarks against Iran

typical of the shrill rhetoric of the Bush administration. Israel continues to be skeptical with regard to this new approach.

With regard to the Palestine issue, President Obama is in support of the creation of a Palestinian state alongside Israel.

Moreover, he believes that both sides have obligations towards this end. Israel has a right to protect its citizens from the

rocket attacks being launched by Hamas in Gaza. At the same time, President Obama believes that the blockade of

Palestine increases the hardship of Palestinians, which heightens the risk of attack against Israel. However, Prime Minister

Netanyahu does not subscribe to the two state theory. Although he supports the idea of a limited self-government in

Palestine, he believes that Palestinian independence in east Jerusalem and the West Bank could result in a forward missile

base for Hamas and Iran. Therefore, the US and Israeli leaders may be on a collision course. The right wing coalition led by

Mr. Netanyahu is expected to take a hardline stance with regard to continuing expansion of Jewish settlements in occupied

territories, while Obama is expected to reiterate his opposition against the expansion, which is against international law.

Increasing international criticism of the interventionist policies of the US

The former Bush administration's 'war on terror' earned it a great deal of criticism from a number of countries, damaging

both international and domestic public opinion of the US' foreign policy. On a number of occasions its actions have been

perceived as intrusive in the domestic affairs of other countries and as a result, the US’ credibility and standing have been

steadily eroded around the world. Consequently it will be difficult for the incumbent government led by Barack Obama to

take unilateral action in the future.

PESTLE Analysis



Illegal immigration may increase discontent

The US is faced with the problem of dealing with illegal immigrants and as many as 30 states have passed laws or taken

steps to crack down on this problem. It is estimated that there are around 12 million illegal immigrants in the US. Under

federal law, states are expected to provide some services to illegal immigrants, including public education and emergency

medical care. However, illegal immigrants are being dealt with severely in many states, which is souring relations between

the federal and state governments. There are an increasing number of racially motivated attacks against minority groups,

which reflects a growing racial intolerance. It is expected that conditions will deteriorate in the future due to the threat of

terrorism, the influx of illegal immigrants and increasing unemployment.

PESTLE Analysis



Economic analysis

Overview

The US is the largest economy in the world, with a GDP of more than $11.5 trillion and a per capita GDP of $46,400 in

2009. Real GDP contracted by around 2.5% in 2009. The unemployment rate soared to approximately 9.3% in 2009, which

is the highest rate of unemployment in the country since 1983. To help stabilize financial markets, Congress established a

$700 billion Troubled Asset Relief Program (TARP) in October 2008. The government used some of these funds to

purchase equity in US banks and other industrial corporations. In January 2009, Congress passed a bill signed by

President Obama which provided an additional $787 billion fiscal stimulus—two thirds on additional spending and one third

on tax cuts—to create jobs and to help the economy recover. President Obama’s 2011 budget further proposes to create

jobs and cut back spending on several fronts; to increase the resources available, the government has decided to axe the

tax credits for oil and gas companies. The US is expected to bounce back from recession to record a growth rate of 2.5% in

2010.

Table 4: Analysis of the US economy


■ Well developed economy

■ Obama’s 2011 budget plan

■ Recession

■ Rising unemployment


■ Financial stimulus

■ Strong retail savings and investment market

■ Drive towards free market policies may slow down

■ Increasing budget deficit


Current strengths

A well developed economy

The US has one of the most developed economic systems in the world, enabling it to overcome deep global economic

crises. Its GDP in 2009 stood at $11.5 trillion. The economy gathers strength from its diversity and its leadership position in

the manufacturing and services sectors. It is a forerunner in industries such as automotive, aerospace,

telecommunications, chemicals, electronics and information technology (IT). Its traditional industries have also been

strengthened by the adoption of modern technology, while US services companies have managed to remain cost-

competitive by offshoring a number of services. Except for oil, the country is self-sufficient in regards to most raw materials,

which adds to its economic might.

Obama’s budget

President Obama announced a $3.8 trillion budget for 2011 which includes plans to increase spending for the creation of

jobs. However, Obama's administration is expected to save $250 billion by capping a range of domestic programs for three

years and has suspended plans to send astronauts back to the moon. His 2011 budget also proposes to end tax breaks for

PESTLE Analysis



the elimination of $36.5 billion in tax credits for oil and gas companies such as Exxon, Chevron and ConocoPhillips over the

next decade, as well as the introduction of taxation measures for overseas profits by companies such as Microsoft, the

world’s largest software producer. The budget is considered to be a delicate balancing act by President Obama, in view of

the economic recession which has destabilized the global economy since 2008. Furthermore the budget calls for an array

of regulations, subsidies and taxes aimed at cutting the emission of greenhouse gases. The inherent strength of the

American economy along with the policy shifts towards cutting greenhouse gases and the creation of jobs is considered to

augur well for the country.

Current challenges

Recession

The economic slowdown began in 2007 and is not showing any signs of recovery. It was triggered by the 2006 slump in the

housing market, which has subsequently deteriorated. New and existing home sales in January 2008 declined by 34% and

23% respectively, compared to the same period in 2007. Despite a fall in house prices, supply continues to exceed

demand. Manufacturing activities have also slowed down, as the demand for both consumer and capital goods has

declined. The global economic slowdown led to recession in the country with the economy contracting by 2.5% in 2009,

while the country’s real GDP growth came down from 2.1% in 2007 to 0.8% in 2008.

Rising unemployment

According to the Department of Labor's Bureau of Labor Statistics, the number of unemployed individuals grew by 134,000

in March 2010 from February, to reach 15 million. In 2009 the unemployment rate reached 9.2% due to the recession, up

from 5.8% in 2008. According to the International Monetary Fund (IMF), the high degree of financial stress and uncertainty

are impeding a speedy recovery in the supply of jobs in the US, and high levels of unemployment continue to be a major

challenge to the government.

Future prospects

Financial stimulus

Obama’s administration aggressively pushed its $787 billion stimulus package in 2009, a much larger investment compared

to the $188 billion package of 2008. The stimulus package included funds for unemployed benefits ($83 billion), healthcare

($148 billion), tax cuts for both individuals ($237 billion) and businesses ($51 billion), as well as spending on what is

typically thought of as stimulus, such as building roads ($45 billion) and energy infrastructure ($45 billion). By April 2009,

around $54 billion had been "obligated," meaning that municipalities or other recipients could begin drawing from these

funds, while a further $11.7 billion was disbursed. States also began to invest in highways, expecting to receive funds from

the federal Transportation Department as a part of the stimulus package. Moreover, workers began to see bigger pay

cheques as a result of a payroll-tax cut included in the package.

In February 2009, new measures for the financial sector were announced under the Financial Stability Plan (FSP). The

FSP replaced the Troubled Asset Relief Program (TARP, which was criticized due to its lack of effect on lending.

Furthermore, TARP imposed little accountability in terms of disbursements, especially relating to executive pay, which

incensed the American public. The scheme has three parts. Firstly, a public-private investment fund with up to $1 trillion is

to be created. This will take toxic assets off banks' balance sheets (which have been contributing to fears of insolvency).

Secondly, if private funds are insufficient, the remaining $350 billon of TARP funds will be used to improve commercial

PESTLE Analysis



banks' capital reserves. Thirdly, the Term Asset-Backed Securities Loan Facility (TALF), which currently has $200 billon of

funding, is to be extended to $1 trillion. The total cost of these measures could be up to $2.5 trillion. The FSP is expected to

revive the troubled financial sector in the country.

Strong retail savings and investment market

The retail savings and investment market includes four non-life retail savings and investment products: deposits, mutual

funds, direct investment in equity and direct investment in bonds. Following a period of decent growth, the market plunged

into decline in 2008, with the market remaining in such a state in 2009. Recovery is forecast for 2010, followed by

accelerating growth through to 2014.

The US retail savings and investments market had total assets of $20,457 billion in 2009, representing a compound annual

rate of change (CARC) of -1.8% for the period spanning 2005–09. In comparison, the European and Asia Pacific markets

grew with CAGRs of 1.3% and 0.3% respectively over the same period, to reach respective values of $14,585.9 billion and

$10,123.6 billion in 2009.

The deposits segment was the US market's most lucrative in 2009, with a total value of $9,240.4 billion which is equivalent

to 45.2% of the market's overall value. The equities segment contributed a further $4,360 billion in 2009, equating to 21.3%

of the market's aggregate value.

The performance of the market is forecast to accelerate, with an anticipated CAGR of 5.7% for the five-year period 2009–

14; this is expected to drive the market to a value of $27,039.3 billion by the end of 2014. Comparatively, the European and

Asia Pacific markets will grow with CAGRs of 5.8% and 3.4% respectively over the same period, to reach respective values

of $19,363.7 billion and $11,973.2 billion in 2014. This indicates that the US will continue to be far ahead in terms of retail

savings and investment.

Future risks

Drive towards free market policies may slow down

There has been increasing resentment among consumers concerning the globalization and liberalization of trade, which to

make matters worse has received some political support. Such resentment will result in raising protective barriers and a

decline in offshoring services. For example President Obama proposes to cut tax incentives to companies that outsource

jobs in May 2009, stating that companies should record their profits in the home country and not elsewhere. Moreover,

Obama has also reaffirmed his intention to bring in measures which will increase transparency, especially with regard to

American bank accounts in foreign tax havens. Obama’s policies might affect outsourcing and thus increase costs for

companies.

There is also a growing disparity in income between skilled and unskilled workers, partly brought about by technological

development. It is widely believed that immigration and outsourcing have depressed the wages of domestic low-skilled

workers. A small number of states, including North Carolina, Indiana, New Jersey and Michigan, have already introduced

anti-outsourcing laws, while the US Senate passed the first federal law against outsourcing in 2004, barring American

companies from giving out sub-contracts to low cost nations. In view of public opinion, the US may drift away from free

market policies.

PESTLE Analysis



Increasing budget deficit

According to the Congressional Budget Office (CBO), the budget deficit will reach $1.3 trillion in fiscal 2010, slightly less

than the $1.4 trillion recorded in fiscal 2009. The CBO also added that if current government policy does not change,

budget deficits are expected to average $600 billion annually between 2011 and 2020. The government’s debt limit is

expected to reach around $14 trillion by the end of 2010, up from $12 trillion in 2009–10, and is expected to climb to $15

trillion by 2015. Analysts and economists continue to believe that the future economic prosperity of the country is at grave

risk if the budget deficits are not reduced in the future.

PESTLE Analysis



Social analysis

Overview

As a result of a rapidly aging population, the US faces a risk of slower economic growth, serious labor shortages and rising

tax rates over the next few decades. The distribution of income in the US is the most unequal of all major economies, while

poverty and child poverty rates are the highest of all developed nations, as is the infant mortality rate. An aging population

and rising healthcare costs are projected to increase the burden on public retirement and healthcare systems.

The UN's Human Development Index 2009 has ranked the US in 13th place; noticeably, it is ranked below various

developed nations such as Norway, Iceland, Canada and Japan. In April 2010 the US Congress approved an almost six-

week extension of federal jobless benefits and health insurance subsidies for unemployed people. The social security

system has operated successfully in the US for many years, but the decline in economic growth and the aging of the baby

boomer population will cause social security to become a financial burden on the government’s revenue. Expenditure on

pensions and healthcare will increase in the coming years, but there are concerns that the country's revenue will not be

sufficient to match this growth.

Table 5: Analysis of the US’ social system


■ Impressive education system

■ Healthcare and social security policies in place

■ Ageing population

■ Increasing inequality of income


■ Universal healthcare

■ Increase in labor productivity

■ Extension of jobless benefits and health insurance subsidies

■ Social security outgoings to burden government finances


Current Strengths

Impressive education system

The US has an efficient education system with a high level of attainment. The quality of education in the US is among the

best in the world, which is one of the major reasons for the presence of a large number of international students in the

country, particularly in higher education. According to the OECD report Education at a Glance (2009), around 39% of the

adult population in the 25–64 age group is qualified up to the tertiary level in the US, which is above the OECD average of

27%. Other countries are now catching up with the performance of the US, but it is expected to maintain its lead because of

its strong foundation.

Healthcare and social security policies in place

The US healthcare system has evolved over the years to be one of the best in the world. Total government health

expenditure increased from $57.7 billion in 2008 to $59.8 billion in 2009, which is nearly 19% of GDP. Moreover, healthcare

PESTLE Analysis



expenditure in the US is above the average spending of developed nations. The US also ranks far ahead of other countries

in terms of total health spending per capita, as well as having an extensive social security system in place which takes care

of pensions, and disabled and unemployed individuals.

Current challenges

Ageing population

Like most developed economies, the US is facing the problem of an aging population as the baby boomer generation grows

old. According to US census data, half of the population was more than 35.3 years old in 2000, which was the country’s

highest median age to date. In 2000, the majority of the population belonged to the 35–44 years age group. The median

age is estimated to have reached 36.7 years in 2009, which indicates that more than half the population is beyond this

mark. The ongoing trend of an aging population poses a threat as the labor market will experience a dramatic loss of

personnel, as many seniors retire from the workforce.

Increasing inequality of income

The economic progress of the US has also led to inequality of income distribution, which has become a social concern;

according to the United Nations Development Programme (UNDP) report, as measured by the Gini coefficient, the US

ranks 73rd of 126 countries in terms of income equality. The percentage of people below the poverty line is also high at

13%. The main causes of poverty are the low minimum wage and regional imbalance in job opportunities. Although strong

growth benefited low-wage workers and their families, inequality has continued to rise. In the US, growth has not translated

into increased wages or redistributive social policies.

Future prospects

Universal healthcare

President Obama signed into law a new healthcare bill on March 29, 2010, which has overhauled the $2.5 trillion US

healthcare system. The Patient Protection and Affordable Care Act (known as the "Senate bill") became law on March 23,

2010 and was shortly thereafter amended by the Health Care and Education Reconciliation Act of 2010. The legislation is

the most comprehensive shift in US social policy in decades, extending insurance coverage to 32 million previously

uninsured people. The bill also bars insurers from excluding coverage to people with pre-existing medical conditions and

prevents them from arbitrarily dropping policy holders. According to the bill individuals are required to obtain health

insurance, with failure to do so resulting in fines of up to 2.5% of income by 2016. Firms with more than 50 workers which

do not offer medical coverage could face fines of $2,000 per full-time employee. Furthermore, Medicaid, the government

health insurance program for the poor, will be available to everyone with incomes of up to 133% of the poverty level, which

stands at $10,830 for an individual and $22,050, for a family of four. Many states have eligibility requirements below those

levels.

Increase in labor productivity

The US has traditionally enjoyed high labor productivity, although this has declined since 2007. The decline is likely to be

more a result of cyclical factors than structural weakness, and the country's productivity remains higher than that of most

European and Asian countries. It is widely believed that R&D, patents and management innovations have contributed to

productivity growth in the US, while the diffusion of new technologies and their application in more firms and sectors will

PESTLE Analysis



continue to boost productivity gains. The US will continue to remain a leader in terms of innovation and development of new

technologies. Moreover, the increasing demand for such technologies explains the country's competitiveness.

Extension of jobless benefits and health insurance subsidies

In April 2010 the US Congress approved an almost six-week extension of federal jobless benefits and health insurance

subsidies for unemployed people, amounting to $18.2 billion. The bill is expected to extend the maximum total of 99 weeks

of combined federal and state jobless benefits to June 2, 2010. This means that unemployed people who have exhausted

shorter periods of benefits will continue to receive cheques from the federal government. Furthermore, under the bill the

flood-insurance program allows homeowners and businesses to protect against flood-related losses by buying insurance

from the government. The bill is expected to continue healthcare subsidies through the Cobra program and includes funds

to avert a 21% decrease in payments to doctors who see Medicare patients through to the end of May 2010. The bill is

expected to get President Obama’s approval.

Future risks

Social security outgoings to burden government finances

The government’s social security payments will place substantial pressure on its finances. According to a release by the

White House, social security benefits constitute 90% of the income of one third of Americans over the age of 65. At the

same time, the number of people contributing to the social security system has been steadily declining. Under the current

law, public spending on retirement and health programs is expected to rise to 20% of GDP by 2050. Furthermore, the

government estimates that it will pay out more in social security benefits than it collects in payroll taxes by 2017.

The government's finances are increasingly coming under pressure because of the growing needs of an aging population

and declining labor force. To maintain the standard of living for the working and dependent population, labor productivity

has to increase. According to the budget projections, spending on entitlement programs, including social security and

Medicare, will increase by around 1.5% of GDP in each decade through to 2080. The contributions to these programs are

expected to grow much less rapidly and current estimates indicate a 75 year funding gap in the social security and

Medicare systems, at 325% of GDP. The social security system presently runs a cash surplus of 1.5% of GDP, which is

projected to fall into deficit as early as 2017. Unless the growing needs of an aging population are addressed, there will be

an excessive burden on the government's fiscal condition.

PESTLE Analysis



Technological analysis

Overview

Technology and innovation are the cornerstones of the US economy. The country has been a leader in adapting and

applying technology for the betterment of its people since its inception, spending 2.6% of its GDP on R&D. Continued

investment should allow it to retain its technological superiority. However, the US spends less in this sector than a number

of other developed nations such as France, Germany and Japan. Although the US is one of the highest spenders on R&D

activities, it did not figure in the top four patent-receiving countries for 2006. The R&D expenditure in educational

institutions has been increasing, but also remains comparatively less than that of other technologically advanced nations.

It is expected that the US will face increasing competition from emerging nations such as China, which is making a

successful foray into technology-intensive industries. The government’s R&D is focused on defense (58.3% of its R&D

budget) and the trend may continue for the next couple of years, although information and communication technologies

(ICT) will also remain a driving force of the US initiative. There is a need for the government to streamline its efforts to

develop the telecom segment which has been lagging behind that of other developed nations, particularly in mobile and

broadband internet subscription.

Table 6: Analysis of the US’ technology landscape


■ Strong innovation system in place

■ Home to largest global players

■ Intellectual property protection

■ Low expenditure on R&D as percentage of GDP compared to other developed nations

■ Declining level of competence in mathematics and science


■ Rising pharmaceutical market

■ Significant development in emerging technologies

■ Overdependence on the private sector for patents

■ Competition from other nations


Current strengths

Strong innovation system in place

Since the years immediately following World War II, the US has maintained its position of leadership in terms of technology

development and innovation. In 2006, the US was responsible for 45% of total R&D expenditure within the OECD

countries. According to the National Science Board's science and engineering indicators, around 40% of the world’s high

technology manufacturing output came from the US in 2006, which shows an increase since 1998 when the figure stood at

around 30%. This growth has come at the cost of other technologically advanced regions such as the EU and Japan.

PESTLE Analysis



Home to the largest global players

A large number of multinational corporations (MNCs) are based in the US. Out of the Fortune 500 global companies, 170

are based in the US and these companies are significant contributors to the country's economy. The private sector spent an

estimated $289 billion on R&D in 2008, accounting for 73% of R&D funding in the US. Affiliates of other global companies

have also contributed significantly in terms of providing employment, raising wages and boosting exports. In addition to

their contribution to the economy, these US affiliates have been instrumental in bringing new technology and skills to the

US.

Intellectual property protection

The US has a well established intellectual property rights protection and enforcement system which encourages innovators

from other countries to come to the country. Of the 191,933 patents granted by the US Patent Office in 2009, almost 50%

of the applications originated from the US. The US accounts for about 34% of worldwide triadic patents, which are typically

high value patents, taken simultaneously at the European Patent Office (EPO), the Japan Patent Office (JPO), and the US

Patent and Trademark Office (USPTO). It also encourages the commercialization of technology with ease.

Furthermore, the United States Trade Representative office (USTR) uses a number of bilateral and multilateral trade tools

to ensure adherence to intellectual property laws all over the world. Moreover, it also releases the 'Special 301' review

reports annually, which includes reviews of other country’s intellectual property rights (IPR) programs. The defaulting

nations are required to make improvements in their IPR systems, which helps to improve the global IPR environment.

Current challenges

Low expenditure on R&D as a percentage of GDP compared to other developed nations

The expenditure on R&D as a percentage of GDP in the US is low compared to other developed nations. Again, the

expenditure undertaken does not match with the number of patents received. The country's expenditure on R&D stood at

2.6% of GDP in 2007, whereas Japan spent 3.3% of its GDP in the same year. In Europe, countries such as Germany also

have a higher expenditure on R&D. Besides the developed nations, there is the additional challenge from developing

nations, which have begun to catch up in terms of technological innovation. In order to retain its position in the global

market, the US needs to increase the number of patents received and increase its copyrights in fields such as computer

software.

Declining level of competence in mathematics and science

US students' competence in math and science has been declining, lagging behind the average level of competence of

OECD nations. Furthermore there has been a decline in enrolment for math and physical sciences over the past two

decades; this has been recognized as an important area of concern as these subjects are a significant determinant of the

future level of competence in technology. The share of science, engineering, technology and mathematics professionals in

employment has also declined to 5% from 5.6% during 2000–06. The trend is indicative of an apparent loss of interest

among students to build a career in the field of science and technology. This may be problematic going forward as the

country will lose out in terms of R&D personnel.

PESTLE Analysis



Future prospects

Rising pharmaceutical market

Having displayed decelerating growth rates in the period 2005–09, the US pharmaceuticals market is expected to rise quite

vigorously in 2010, followed by a period of fluctuating growth in the years up to 2014.

The US pharmaceuticals market generated total revenues of $276.6 billion in 2009, representing a CAGR of 2.8% for the

period spanning 2005–09. In comparison, the European and Asia Pacific markets grew with CAGRs of 4.1% and 6.3%

respectively over the same period, to reach respective values of $187.3 billion and $124.3 billion in 2009.

Central nervous system sales proved the most lucrative for the US pharmaceuticals market in 2009, generating total

revenues of $65.4 billion which is equivalent to 23.6% of the market's overall value. In comparison, cardiovascular sales

generated revenues of $57.1 billion in 2009, equating to 20.6% of the market's aggregate revenues.

The performance of the market is forecast to decelerate slightly, with an anticipated CAGR of 2.5% for the five-year period

2008–13. This is expected to drive the market to a value of $312.9 billion by the end of 2014. Growth in the European and

Asia Pacific markets is forecast to be slightly higher with CAGRs of 3.1% and 4.2% respectively for the same period,

although their market values will be significantly lower at $218.4 billion and $152.9 billion respectively by 2014. According

to these figures the US pharmaceutical market will continue to be the major market in the medium term.

Significant development in emerging technologies

The US has been at the forefront in developing and enhancing emerging technologies. The emerging areas, such as

biotechnology, nanotechnology and environmental technology, are full of potential, which opens up opportunities for US

companies with expertise in these fields. The US biotechnology industry has been growing at a rate of around 14% and is

expected to touch $132 billion by 2010. The use of biotechnology to develop genetically modified seeds provides a lucrative

business opportunity in developing nations. Similarly, demand for new environmental technology has also been increasing

from third world nations, as these countries become serious about meeting their international environmental commitments.

Future risks

Overdependence on the private sector for patents

More than 70% of the R&D expenditure in the US came from the private sector in 2008. This over-dependence on the

private sector makes technological development vulnerable to the business activities of private enterprises. Furthermore,

the economic slowdown of the US will have an adverse impact on R&D, as there are expectations that there will be a

reduction in the flow of funds. There is a need to reform the government’s R&D financing policies to curtail this dependence

on large business enterprises and encourage small and medium enterprises (SMEs) to invest more in innovative activities.

Competition from other nations

Besides the competition from developed European nations, the US has been facing intense competition from Asian

countries too. The US’ edge in instrumentation and other manufacturing sectors is being slowly overtaken by China. China

was the third largest in terms of R&D expenditure in the world behind the US and Japan in 2008. Furthermore, China has

moved ahead of Germany, France and the UK in terms of R&D expenditure. While the US continues to lead the world in

research output, China has become the second most prolific contributor to the world's peer-reviewed science and

PESTLE Analysis



engineering research articles in 2008, up from 14th place just 10 years earlier. Asian economies, including South Korea,

Taiwan, and Singapore, have witnessed increases in R&D investment, leading to notable increases in the number of

researchers. Similarly in IT services, India has emerged as a cost competitive center. In the high technology segment,

Canada, Germany, Australia, Japan, and South Korea present formidable competition.

PESTLE Analysis



Legal analysis

Overview

The US has a sound legal framework for business entities in the country and an independent judiciary which creates a

positive investment climate. It follows the federal legal system, with individual state laws functioning alongside federal laws.

Regulatory reform efforts in a broad range of industries began in the 1970s and accelerated over the course of the 1980s,

resulting in partial deregulation in many sectors and an increased reliance on competition to improve efficiency. As a result

of the worsening economic scenario, the US government has begun to take protectionist measures. This is a major

challenge as the affected governments are expected to retaliate in a 'tit for tat' move. In view of the slowdown faced by the

economy, the country needs to have structural reforms in place to help increase productivity and employment. These

reforms are required to keep the labor in the workforce for a longer period by doing away with incentives such as the

disability insurance system, or by raising the age limit for full social security benefits.

Table 7: Analysis of the US’ legal landscape


■ Comprehensive legal framework for business entities

■ Favorable policies to promote FDI

■ Rise in protectionist measures

■ Strict corporate governance rule hampers foreign investors

■ Multiplicity of business laws across states


■ Impending financial regulation bill

■ Possible merger of securities and commodities market regulator

■ Employing personnel from other nations


Current strengths

Comprehensive legal framework for business entities

Legal and regulatory aspects are crucial to create a successful business environment in any country. They reflect the policy

framework and the mindset of the governmental structure of that country and ensure that every company is functioning as

per the statutory framework of the country. The US has an independent judiciary and fair business laws. Contractual

agreements are always secure, as long as they meet the requirements of state government. The antitrust policy of the

government promotes competition and economic efficiency and, moreover, the government participates in the market only

as a regulator.

Favorable policies to promote FDI

The US government has maintained its openness towards FDI and is the world’s largest recipient of such investment. The

total stock of direct foreign investment reached $2.39 trillion as of December 31, 2009, up from $2.36 trillion as of

December 31, 2008. The US government does not restrict foreign investment, except in sectors that might pose a threat to

national security. However, in some other strategic sectors, investment proposals have to go through screening by the

PESTLE Analysis



government authority. In these cases, again, there is no bias toward foreign investors and the screening requirements are

the same for foreign and domestic investors.

Current challenges

Rise in protectionist measures

With the worsening economic scenario, the US government has begun to take protectionist measures. For example, it has

withdrawn an agreement which allowed truckers from Mexico to transport goods on US highways. This program was one of

the measures of the North American Free Trade Agreement (NAFTA) which began in 2008 after a long delay. The Mexican

government, in retaliation, has imposed higher tariffs on around 90 goods from the US. The rise in protectionist measures is

a major challenge as the affected governments are expected to retaliate in a 'tit for tat' move.

Strict corporate governance rules hamper foreign investors

The corporate governance rules of the US are extremely strict where the shareholder interests are considered to be at risk.

Although foreign companies listed in the US are subject to the same corporate governance rules as domestic companies,

increasingly foreign companies are complaining about the directives of the SEC. There are concerns that this will work

against the country's status as a global financial center.

Multiplicity of business laws across states

Firms operating in the US have to adhere to a large number of regulations which are enacted by both the state and federal

governments. The non-uniformity of business laws makes it difficult for businesses to meet the requirements of more than

one state. There are specific restrictions on FDI by individual state governments, and these must be taken into

consideration before deciding about investing in a particular region.

Future prospects

Impending financial regulation bill

The Obama administration is expected to push for a financial regulations bill. Senate Banking Committee chairman

Christopher Dodd and House of Representatives Financial Services Committee chairman Barney Frank are leading the

effort to pass the plan in Congress. The proposed bill supports the creation of a financial watchdog, headed by an

independent federal agency. This move has been opposed by Republicans and lobbyists for the banking industry as well as

by Wall Street. Furthermore, in mid-2009 President Obama proposed an independent Consumer Financial Protection

Agency (CFPA) to regulate credit cards and consumer loans such as the subprime mortgages which helped inflate the real

estate bubble behind the financial crisis. This was supported by the White House in its bill of December 2009. To put an

end to the assumption that some financial organizations are "too big to fail," the bill is expected to have a provision to close

down large financial firms. It is also likely to empower government regulators to seize distressed firms and put into a motion

a bankruptcy-like process. This bill is expected to create considerable wrangling in the Senate before it is passed by the

lawmakers.

PESTLE Analysis



Future risks

Possible merger of securities and commodities market regulator

The new financial sector reform measure envisages the merger between the two regulators of the country’s financial

markets: the SEC and the Commodity Futures Trading Commission (CFTC). Currently, the SEC regulates the equity

market while the CFTC regulates the commodities market. There is apprehension about the success of the proposed

merged authority due to the fundamental differences in principles that exist in the equity and commodities market.

Employing personnel from other nations

The employment of laborers from other countries has become difficult, with stricter regulations for entry as well as caps on

visa authorizations. As a result, many foreigners heading to the US find the tight security controls cumbersome, and there

are fears that the continuation of such policies may lead to a shortage of skilled personnel. In addition, public opinion

against the outsourcing of services is also gaining ground. Although it has not received any political approval, there are

concerns that the weight of public disfavor may act as a deterrent for companies in the US.

PESTLE Analysis



Environmental analysis

Overview

The US' leading economic status is not reflected in its performance on environmental indicators. The focus for the US

remains to increase the efficiency of its environmental management and energy use while continuing to yield economic

benefits. Given its superpower status in the world economy, there is a need to be more proactive in relation to international

environmental co-operation, with a focus on climate protection, biodiversity and the use of toxic chemicals.

The Environment Protection Agency (EPA) is the leading federal government agency, with a mandate to protect human

health and the environment. Besides that, each state has its own regulating agency. Since the 1960s, the US government

has recognized the importance of protecting the environment, first drafting the Clean Air Act in 1963. Although the

performance of the country has improved in terms of greenhouse gas (GHG) emissions, it has remained an under-

performer compared to leading industrial countries.

Table 8: Analysis of the US’ environmental landscape


■ Strong environmental policy framework and initiatives

■ Measures to cut greenhouse gas emissions

■ Poor performance on environmental indicators

■ Decelerated growth in the US renewable market


■ Renewed focus on renewable energy

■ Increased co-operation with China

■ International partnerships to promote environmental technologies

■ Ineffective enforcement of laws

■ Unfriendly waste management practices


Current strengths

Strong environmental policy framework and initiatives

The US has a strong environmental policy and legislative framework, with well established institutions at federal and state

levels. The Clean Air Act is one of the major government initiatives to improve air quality. There are different statutes for

water, air, waste management and the preservation of biodiversity, while separate agencies exist under federal and state

governments which are entrusted with the implementation of policies.

The US has taken the initiative to develop clean energy technologies. Moreover, the country is forming several international

partnerships to pursue clean and renewable energy such as the Asia Pacific Partnership on Clean Development and

Climate (APP). These steps will help in improving national and international environmental standards.

PESTLE Analysis



Measures to cut greenhouse gas emissions

President Obama's 2011 budget has initiated the formulation of regulations, subsidies and taxes aimed at cutting the

emission of GHGs. The budget contains an increase of $39 billion in taxes on fossil fuel producers over a period of 10

years, as well as an end to tax breaks and other incentives for the domestic production of oil, natural gas and coal.

Furthermore the budget proposes to triple federal support for nuclear energy, by adding $36 billion in new loan authority for

a Department of Energy program aimed at accelerating the construction of new reactors. An estimated $1.4 billion will be

set aside to help developing countries address the impact of climate change, reduce deforestation and shift to low-carbon

energy sources.

Current challenges

Poor performance on environmental indicators

The US has failed to perform impressively on various economic parameters. With 4.6% of the world's population, the US

accounts for 20.9% of global emissions of carbon dioxide, generating an average of 20.6 tons per person in 2007. These

emission levels are above those of other high-income countries, and emissions are currently increasing in both per capita

and absolute terms. The US is a major contributor to the increase in GHG emissions; despite the existence of a well

developed environmental technology industry, these figures indicate the lack of seriousness and political will to enforce

regulations.

Decelerated growth in the US renewable energy market

The US renewable energy market has fluctuated in value over recent years. Decelerated growth is expected for 2010,

followed by further fluctuating growth rates throughout the remainder of the forecast period until 2014.

The US renewable energy market generated total revenues of $42.2 billion in 2009, representing a CAGR of 1.6% for the

period spanning 2005–09. In comparison, the European and Asia Pacific markets grew with CAGRs of 6.2% and 4.4%

respectively over the same period, to reach respective values of $137.7 billion and $102.7 billion in 2009.

Market consumption volumes increased with a CAGR of 1.4% between 2005 and 2009, to reach a total of 391.7 billion

kilowatt-hours (BkWh) in 2009. The market's volume is expected to rise to 496.6BkWh by the end of 2014, representing a

CAGR of 4.9% for the 2009–14 period.

The performance of the market is forecast to accelerate, with an anticipated CAGR of 1.7% for the five year period 2009–

14. This is expected to drive the market to a value of $45.9 billion by the end of 2014. Comparatively, the European market

will increase with a CAGR of 2.5%, while the Asia Pacific market will decline with a compound annual rate of change

(CARC) of -0.6% over the same period, to reach respective values of $155.6 billion and $99.4 billion by 2014.

Future prospects

Renewed focus on renewable energy

The EPA has declared that the increase in carbon dioxide and other greenhouse gas emissions constitute a health risk,

acknowledging that this will aggravate climate change, worsen air quality and generate heat waves. This marks a

significant change in the position of the US in terms of environmental policy, suggesting that a new approach might soon be

taken which could impact climate change regulation. In April 2009, President Obama went as far as to assert that the US

PESTLE Analysis



was ready to lead the world on climate change. Congress is currently exploring a draft bill for clean energy development

which aims to cut carbon emissions by 20% from their 2005 levels by 2020, boosting reliance on renewable sources of

energy.

Increased co-operation with China

The US and China have reached an agreement on a 10 year co-operation framework for energy and the environment, with

both nations working on a five step action plan. The five initial targets being addressed under the framework include: clean,

efficient and safe electricity production and transmission; clean water; clean air; clean and efficient transportation; and the

preservation of forest and wetland ecosystems. Furthermore, China and the US have also decided to explore the idea of

eco-partnerships as a potential vehicle for implementing the goals of the framework at the next round of discussions. Both

countries are facing similar challenges, as global energy production has remained stagnant for the past decade while

demand for energy has risen constantly.

International partnerships to promote environmental technologies

The US and the EU have submitted a proposal to the World Trade Organization (WTO) to increase global trade in

environmental goods and services. These countries have proposed to eliminate tariff and non-tariff barriers to

environmental technologies and services. A free trade in these technologies will be beneficial to the US, given its

competitive advantage. Moreover, the promotion of trade in environment technologies will enable a number of developing

countries to comply with various national and international environmental directives.

Future risks

Ineffective enforcement of laws

In the US, although the environmental laws and regulations are comprehensive, the serious intention of the political

establishment to implement them in letter and spirit is lacking. More often than not, political parties are pro-industry at the

expense of the environment, which leads to the inept implementation and enforcement of environmental regulations.

Unfriendly waste management practices

The US has also come under scrutiny due to its deleterious waste dumping practices. On a number of occasions, nuclear

and medical waste has been dumped in the sea or on the shores of developing or developed nations. This practice

presents a global hazard, and particularly affects those developing countries without the appropriate technologies to deal

with such waste. The US is also among the few countries not to have ratified some of the instruments under the Basel

Convention, which regulates the trans-boundary disposal of nuclear waste.

Political Landscape



POLITICAL LANDSCAPE

Summary

The US freed itself from British colonial rule to become the longest surviving democratic nation in the world. The

constitution of the US set up the government in the form of a federal republic. There is a division of power between the

federal government and the state governments, with the president controlling the executive branch of the federal

government. In 2001 George W. Bush of the Republican Party became the 43rd president, with Dick Cheney as vice

president. Bush was re-elected in 2004 after defeating his Democratic opponent, Senator John Kerry. Most recently,

Barack Obama was sworn in as the president of the US in January 2009 after he defeated John McCain of the Republican

Party in the presidential elections.

The US has vast economic, political, and military influence on a global scale, which makes its foreign policy a subject of

great interest around the world. The former Bush administration initiated policies towards tax cuts, fair minimum wage laws,

social security schemes and trade liberalization, and has been criticized for the war on terrorism that led to the invasions of

Iraq and Afghanistan. The Obama administration is also expected to offer tax cuts to benefit around 150 million workers.

Obama’s “Making Work Pay” tax cut of up to $500 per worker, or $1,000 per working family for example, is expected to

reduce taxes for over 10 million Americans.

Evolution

Pre 1950s

The modern history of the US dates back to 1775, when 13 British colonies agreed to come together to free themselves

from colonial rule. On July 4, 1776, the declaration of independence was made, announcing the birth of a new nation. In the

aftermath of the proclamation of independence, heavy conflict between the colonies and their colonial rulers continued up

until the peace treaty was signed in 1783 in Paris. The Treaty of Paris acknowledged the independence, freedom, and

sovereignty of the 13 former American colonies, which are now states. At the same time, it also laid the foundation of a

modern democratic nation. The constitution was ratified in 1787, when the states agreed to a loose federal structure.

George Washington was sworn in as the first president of the US on April 30, 1789. In the years that followed the country

was affected by civil wars and sectional conflict, as politicians underwent the difficult task of building a modern democracy.

By the late 19th century, American society had stabilized and the process of industrialization began. During World War I, the

US’ business interests were seriously affected. President Wilson negotiated an end to the conflict based on his 14-point

plan to achieve lasting peace, but this was not accepted by all of the US states. In the post-war period labor unrest and

racial tension proliferated, yet despite these problems the US enjoyed a period of real and broadly distributed prosperity for

a few years during the 1920s. However the economy was soon plunged into a great depression between1929 and 1939.

President Herbert Hoover began the process of rebuilding the economy but his efforts had little impact. He lost the election

to Franklin Roosevelt who took some bold measures and initiated an era of economic and political change. His 'New Deal'

listed many measures to lift Americans out of the depression, a unifying factor for states which led to economic growth.

However, economic prosperity did not last for long in the US, hampered by its involvement with the allied forces in World

War II.

The US played a major role in global affairs in the years immediately after World War II, especially through its influence in

the newly formed United Nations (UN) and North Atlantic Treaty Organization (NATO). The most important political and

Political Landscape



diplomatic challenge in the early post-war period was the Cold War, which grew out of long-standing disagreements

between the US and the Soviet Union.

The figure below gives a snapshot of the US’ political evolution since independence:

Figure 2: The US: key political events since 1940

▪ In the World War II, the US played an active role; led the allied forces to defeat Germany in 1941.

• Japan surrendered following US’s bombing on Hiroshima and Nagasaki in 1945.

• The Cold War with the Soviet Union began in 1947; US initiated the policy of providing aid to countries threatened by communist regime.

• The US also started the program of rebuilding European economies.

• Racial segregation in schools was made unconstitutional in 1954.






▪ Democratic Party

candidate John F Kennedy was elected president in 1960, narrowly defeating his rival Richard Nixon.

• Cuba was invaded by Cuban exiles with support of the US.

• President Kennedy was assassinated in 1963; Lyndon Johnson became the next president.

• The US increased its military intervention in Vietnam in 1964.

• The Republican Party candidate Richard Nixon was elected the president in 1969.

• Public opposition to Vietnam war gathered momentum








• Nixon was re-elected in the 1972 elections; Vietnam ceasefire agreement was signed in 1973.

• Nixon resigned in 1974; Jimmy Carter, of the Democratic Party was elected president in 1976.

• Carter’s popularity declined by 1980 following the 444 days long hostage crisis of the US embassy in Tehran.

• The Republican Party's Ronald Reagan elected president in 1980; he adopted tax-cutting policies which led to a large federal budget deficit.

•Reagan re-elected in 1984






• George Bush, Reagan’s vice president, was elected president in 1988.

• The US forces played dominant role in war against Iraq in 1991.

• The NAFTA treaty was signed in 1992.

• Bill Clinton was elected the president in 1992.

• Mid term elections of 1994 saw Republican Party majority in both houses of parliament.

• Clinton was re-elected in 1996, amidst allegations of financial scandals and sexual harassment case.

• Clinton was acquitted in Senate impeachment trial in 1999.








• George W Bush became the president in 2001 after a closely fought election with Al Gore.

• Following the September 11, 2001 attack on World Trade Center, the US launched an attack against Taliban forces in Afghanistan.

• Attacks on Iraq began in 2003 led to overthrowing of Saddam Hussein’s regime.

• In 2006 mid term elections the Democratic Party got majority in parliament.

•Barack Obama of the Democratic party was sworn in as the 44th

president in January 2009.







1940-55 1956-70 1971-85 1986-2000 2001 onwards





























































1940-55 1956-70 1971-85 1986-2000 2001 onwards


1950–90

During the Cold War era, the US' international political relations were based on the fight against the spread of communism.

Its relations with the Soviet Union were not cordial as the two nations were drawn into indirect confrontations in Turkey,

North Korea, Iran and Afghanistan. In the mid-1960s, the US sent troops to defend South Vietnam against a communist

insurgency based in North Vietnam. The war was unsuccessful and made Americans wary of further foreign

entanglements. During this period, there was an improvement with respect to gender and racial equality, and capitalist

forces were involved in major economic and business decisions.

The liberal activism of the 1960s and 1970s was replaced by conservative policies in the 1980s, dominated by Ronald

Reagan who occupied the office of president during 1981–89. Reagan favored limited government involvement, a firm

stance against communism and tax cuts to spur economic growth. The end of the Cold War and the collapse of the Soviet

Union marked his second term, and his vice president, George Bush, succeeded him.

1991–2009

Bill Clinton was elected as president in 1992 on the promise of youth and change, and completed two terms in the office.

His policies were described as 'centrist', as he favored free trade. Clinton has been credited with immensely successful

Political Landscape



economic policies, which gave the US the longest period of peace-time economic expansion in its history, including a

balanced budget and a reported federal surplus.

Clinton’s term in office was not an easy one. After two years of Democratic Party control under his leadership, the

Democratic Party lost control of both houses of congress in the mid-term elections held in 1994. During Clinton's second

term, the Republican-controlled house voted to impeach him but he was subsequently acquitted by the Senate and

completed his term in 2001.

After a controversial and bitterly fought contest against the incumbent vice president, Al Gore of the Democratic Party,

George W. Bush assumed the office of president in 2001. Bush offered promises of reforms in education, economy and

social security. However, the government’s priorities changed after 9/11 with the announcement of the war against

terrorism. US involvement in Afghanistan and Iraq had public approval initially, but many grew uncomfortable as US

soldiers faced increasing casualties. Despite controversy over the war in Iraq and domestic issues, Bush won a second

term in office. The economy slowed down during his administration.

On November 4, 2008, Congressional and gubernatorial elections took place. All 435 seats in the House of

Representatives and roughly one third of the 100 seats in the Senate were contested in this election. The Democratic Party

took control of both houses of the US Congress with a 256–178 advantage in the House of Representatives and a 56–41

advantage in the Senate. Barack Obama emerged as the presidential candidate of the Democratic Party after winning a

hard fought battle with Hillary Clinton, wife of former president Bill Clinton. Obama defeated John McCain of the Republican

Party in the presidential elections and was sworn in as president of the country in January 2009.

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Structure and policies

Key political figures

Figure 3: The US: key political figures

Barack Obama was sworn in as the 44th president of the US on 20 January, 2009. He is the first

African-American to assume the nation’s highest office. After high school, Obama studied at

Occidental College in Los Angeles for two years. He then went to Columbia University in New

York, graduating in 1983 with a degree in political science. Obama entered Harvard Law School

in 1988. In February 1990, he was elected as the first African–American editor of the Harvard

Law Review. Obama graduated in 1991. Obama became only the third African-American to be

elected to the US Senate since Reconstruction in November 2004. In February 2007, Obama

announced his candidacy for the 2008 Democratic presidential nomination. He became the

nominee after defeating the US Senator from New York, Hillary Rodham Clinton on June 3,

2008. On November 4, 2008, Obama defeated Republican presidential nominee John McCain

for the position of US president.

Joseph Robinette Biden, Jr., is the vice president of the country. He received a bachelor's

degree from the University of Delaware in 1965 and a law degree from Syracuse University in

New York in 1968. Biden was elected to the US Senate in 1972 at the age of 29. As a senator,

Biden focused on foreign relations, criminal justice, and drug policy. Since 1975, he has served

on the Senate's Foreign Relations Committee and he was in the chair of this committee twice.

He chaired the Judiciary Committee during the contentious US Supreme Court nominations of

Robert Bork and Clarence Thomas. Biden unsuccessfully sought the Democratic presidential

nomination in 1988 and 2008, both times dropping out early in the process. Barack Obama

selected Biden to be the Democratic Party nominee for vice president in the 2008 US election.

Barack Obama was sworn in as the 44th president of the US on 20 January, 2009. He is the first

African-American to assume the nation’s highest office. After high school, Obama studied at

Occidental College in Los Angeles for two years. He then went to Columbia University in New

York, graduating in 1983 with a degree in political science. Obama entered Harvard Law School

in 1988. In February 1990, he was elected as the first African–American editor of the Harvard

Law Review. Obama graduated in 1991. Obama became only the third African-American to be

elected to the US Senate since Reconstruction in November 2004. In February 2007, Obama

announced his candidacy for the 2008 Democratic presidential nomination. He became the

nominee after defeating the US Senator from New York, Hillary Rodham Clinton on June 3,

2008. On November 4, 2008, Obama defeated Republican presidential nominee John McCain

for the position of US president.

Joseph Robinette Biden, Jr., is the vice president of the country. He received a bachelor's

degree from the University of Delaware in 1965 and a law degree from Syracuse University in

New York in 1968. Biden was elected to the US Senate in 1972 at the age of 29. As a senator,

Biden focused on foreign relations, criminal justice, and drug policy. Since 1975, he has served

on the Senate's Foreign Relations Committee and he was in the chair of this committee twice.

He chaired the Judiciary Committee during the contentious US Supreme Court nominations of

Robert Bork and Clarence Thomas. Biden unsuccessfully sought the Democratic presidential

nomination in 1988 and 2008, both times dropping out early in the process. Barack Obama

selected Biden to be the Democratic Party nominee for vice president in the 2008 US election.


Structure of government

The president is the head of government as well as head of state. The legislative branch comprises a bicameral parliament

known as Congress. It consists of the House of Representatives (the lower house) and the Senate (the upper house). A

college of representatives, elected directly from each state, carries out the presidential election.

In addition to the federal government, there are 50 state governments and the government of the District of Columbia.

Further down the ladder are still smaller units which govern counties, cities, towns and villages.

Structure of legislature

Key political parties

The Democratic Party

The Democratic Party is one of the two major parties and is the oldest existing political party in both the US and arguably in

the world. It was founded in 1792 by Thomas Jefferson and James Madison, and has placed itself to the left of the

Republican Party on the majority of issues and viewpoints. Franklin D Roosevelt shaped the ideologies and the agendas of

the party, which is pro-people and supportive of the poor. Historically, the party’s support has come from groups of farmers,

workers and trade unions, and it has also supported religious and ethnic minorities. However, when it comes to industry

and economics, the party is opposed to unregulated business and finance, and favors progressive income taxes. In recent

Political Landscape



decades, the party has favored a free enterprise system with some amount of government intervention. Its agenda also

includes promoting civil liberties and equal rights.

Bill Clinton of the Democratic Party was elected to the presidency in 1992 and 1996, but the party lost control of Congress

in the elections of 1994 to the Republican Party. The Democratic Party regained majority control of Congress in 2006. In

the congressional elections that took place in November 2008, the Democratic Party took control of both houses of the US

Congress with a 256–178 advantage in the House of Representatives, also achieving a 56–41 current advantage in the

Senate. Barack Obama became the party’s nominee for the presidency after defeating the US Senator from New York,

Hillary Rodham Clinton on June 3, 2008. Obama was sworn in as the 44th president of the country after he defeated the

Republican Party’s John McCain in the November 2008 elections.

The Republican Party

The Republican Party was founded in 1854. Senator Mel Martinez of Florida is the Republican Party's current general

chairman, and Mike Duncan is the chairman of the Republican National Committee. George W. Bush, the former president,

was the 18th Republican to hold that position. In the elections of 2000, the party gained control of the presidency and both

the houses of Congress for the first time since 1954. The party follows conservative policies in the social sphere and liberal

economic policies. In the 1980s, the party became more conservative than before and openly criticized government

intervention in business. It believes in a lesser role for the courts and the judges in the Supreme Court, and wants to place

greater limitations on federal power and more powers in the hands of states. The Republican Party supports a strong pro-

business platform, with its ideology rooted in economic liberalism. It has always advocated strong national defense and

supports unilateralism in issues of national security. There have been 22 presidents from the Republican Party.

Key policies

The US joined World War II in 1941, during which time the economy received a boost from the heavy capital investments

and the creation of jobs. After the war, the Soviet Union and the US were the two major powers of the world and a rush for

technological superiority began. The election of Ronald Reagan as president in 1980 marked a significant shift towards the

right in American politics. In the late 1980s and 1990s, the Soviet Union's power diminished, leading to its collapse. The

leadership role taken by the US and its allies in the UN allowed it to sanction the Gulf War and the Yugoslav wars, which

helped it to preserve its position as the world's last remaining superpower. President Obama unveiled a new defense policy

in March 2010 significantly curtailing the circumstances in which the US would use nuclear weapons. Furthermore, in

March 2010, Democrats in the House of Representatives narrowly voted to adopt the Senate version of health care reform,

circumventing Republican opposition in the Senate.

Economic policies

The subprime mortgage crisis went on to become a global economic crisis. The pandemic economic downturn has been

concomitant with investment bank failures, falling home prices, and tight credit. All the above factors pushed the US into a

recession by mid-2008. To help stabilize financial markets, the US Congress established a $700 billion Troubled Asset

Relief Program (TARP) in October 2008. The government used some of these funds to purchase equity in US banks and

other industrial corporations. In January 2009, the US Congress passed a bill signed by President Obama, providing an

additional $787 billion fiscal stimulus—two thirds for additional spending and one third for tax cuts—to create jobs and to

help the economy recover.

Political Landscape



In February 2009, new measures for the financial sector were announced under the Financial Stability Plan (FSP). The

FSP replaces the TARP, which was criticized due to its lack of effect on lending. Furthermore, TARP imposes little

accountability in terms of disbursements, especially relating to executive pay, which incensed the American public. The

scheme has three parts. Firstly, a public-private investment fund with up to $1 trillion is to be created. This will take toxic

assets off banks' balance sheets (which have been contributing to fears of insolvency). Secondly, if private funds are

insufficient, the remaining $350 billon of TARP funds will be used to improve commercial banks' capital reserves. Thirdly,

the Term Asset-Backed Securities Loan Facility (TALF), which currently has $200 billon of funding, is to be extended to $1

trillion. The total cost of these measures could be up to $2.5 trillion. The FSP is expected to revive the troubled financial

sector in the country.

Social policies

For over 60 years, social security has been a dependable source of income for millions of Americans during their retirement

years, providing a basic safety net. Millions of workers pay into the social security system with the expectation of receiving

a benefit at retirement, as well as insurance for their family in the event of their death or disability. However the social

security fund has raised concerns among policy makers as the level of expenditure in coming years will far exceed the

contribution to the fund. The budget for 2009 has highlighted the financial challenge facing the social security program. The

new policy has proposed voluntary personal accounts funded by a portion of the worker’s social security payroll taxes.

Account contributions will be capped at 4% of social security taxable earnings, up to a $1,400 limit in 2013, increasing by

$100 more than the average wage growth each year through 2018.

According to a ministry report, by 2018, for the first time, the social security program is expected to bring in less payroll

taxes than it pays in benefits. By 2042 it is estimated that social security will be able to provide only 73% of promised

benefits. The program has come under criticism from the Democrats on the grounds that this would be costly to implement,

and would endanger the savings and earnings of low income individuals. The proposal of privatizing the fund has also been

criticized, as it would not enhance overall effectiveness.

Foreign policies

US foreign trade and global economic policies have changed direction dramatically. In its early days, the government and

business concentrated primarily on developing the domestic economy. Since World War II however, the US has sought to

reduce trade barriers and co-ordinate the world economic system. The country took a lead role in establishing the UN,

becoming a permanent member of the Security Council and host to the organization's headquarters. The US enjoys a

special relationship with the UK and strong ties with Australia, Japan, Israel and fellow NATO members. It also works

closely with its neighbors through various organizations and agreements. The US supported trade liberalization and was

instrumental in the creation of the General Agreement on Tariffs and Trade (GATT). The government supports free trade

policies and legislations, and has signed free trade agreements with several countries including Australia, Chile and

Singapore, as well as many countries in the Eurozone and six other countries under the Central American Free Trade

Agreement. However the former Bush administration faced much criticism for its protectionist policies during the 'war

against terrorism'.

Since the terrorist attacks of 9/11, one of the primary components of US foreign policy has been its efforts related to the

war against terrorism. In late 2001, US forces led a NATO invasion of Afghanistan and removed the Taliban government,

and in late 2002, the Bush administration began to press for regime-change in Iraq. The US invaded Iraq in 2003 and

ousted President Saddam Hussein. The Bush doctrine argued for a policy of pre-emptive war in cases where the US or its

Political Landscape



allies are threatened by terrorists or by rogue states engaged in the production of weapons of mass destruction. The wars

that were entered into during the Bush term also involved reasonable efforts to include other nations in military or

diplomatic actions; however, in the absence of coalition partners the country was willing to take unilateral military action

against perceived threats. The policy document states that: "The US has, and intends to keep, military strength beyond

challenge", indicating that the US intends to take any actions to continue in its role as the world's sole military superpower.

President Obama has decided to refocus American policy to counter the resurgence of al Qaeda and the Taliban in

Afghanistan and Pakistan. Consequently, the US government is expected to augment troop levels in Afghanistan and press

its NATO allies to do the same. Moreover, President Obama has also decided to increase resources to revitalize

Afghanistan’s economic development. Obama and Vice President Biden are expected to demand that the Afghan

government should do more, in terms of cracking down on corruption and the illicit opium trade.

Performance

Governance indicators

The World Bank report on governance uses voice and accountability, political stability and absence of violence,

government effectiveness, regulatory quality, rule of law, and control of corruption as indicators for 212 countries and

territories over the period 1996–2008. The study has been carried out by Daniel Kaufmann and Massimo Mastruzzi of the

World Bank Institute, and Aart Kraay of the World Bank Development Economics Research Group. For any country, a

percentile rank of 0 corresponds to the lowest rank and 100 corresponds to the highest rank.

The US scored a percentile rank of 86.1 in voice and accountability in 2008. Although high, it is behind its neighbor,

Canada, and a few European countries such as the UK in this respect. Voice and accountability measures the extent to

which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom

of association, and a free media. Canada has a 95.7 percentile rank and the UK scores a 92.3 percentile on this parameter.

The principles of democracy are deep-rooted in the US and elections are considered to be fair and transparent. However,

the involvement of business interest groups in the election process, through the provision of soft funds, makes the system

of policy making biased.

On political stability and absence of violence, the US has a ranking of 68.4 percentile. This measures perceptions of the

likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including national

conflict and terrorism. The US figures high on the list of countries susceptible to terrorist attacks and the country's

international policies to fight terrorism have worsened the situation. Canada has a comparatively high rank of 83.7

percentile, but the UK fares poorly, at 65.6 in this parameter.

Most of the developed nations perform well in terms of government effectiveness, which measures the quality of public and

civil services, the degree of governmental independence from political pressures, the quality of policy formulation and

implementation, and the credibility of the government's commitment to such policies. The US has a strong ranking of 92.9

percentile with respect to government effectiveness. However, in comparison, Canada has a percentile rank of 96.2, which

is again higher than the rank of both the US and the UK, ranked at 94.3.

The US has one of the best legal frameworks in the world. It ranks in the 93.2 percentile on regulatory quality in 2008,

which measures the ability of the government to formulate and implement sound policies and regulations that permit and

promote private sector development. Members of both parties have committed themselves to a fair and transparent

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government regime. For years, the US has been considered one of the best places to conduct business. Its ranking on this

measure, however, is less than Canada (97.2) and the UK (98.1) in 2008.

The US has a 91.9 percentile rank on the rule of law in 2008, which indicates that the country has a highly effective judicial

system. Rule of law measures the extent to which agents have confidence in and abide by the rules of society, and in

particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence.

Canada ranks in the 95.2 percentile and the UK has a 92.3 percentile rank, higher than that of the US.

The US has a percentile rank of 91.8 on control of corruption. Control of corruption measures the extent to which public

power is exercised for private gain, including both petty and grand forms of corruption, as well as 'capture' of the state by

elites and private interests. Canada and the UK have higher percentile rankings at 95.7 and 92.8, respectively in 2008.

Outlook

President Obama has a strong majority in Congress, with 257 out of 435 seats in the House of Representatives and 59 out

of 100 seats in the Senate. Moreover, Obama is making a serious effort to reach across the partisan divide. Due to the

support that he enjoys, the president is in a good position to implement his agenda. However, Republicans can use a

filibuster in the Senate, which would result in the blocking of a procedure unless 60 senators vote to close the debate. The

Republicans are unlikely to do so however, as they do not want to come across as impediments to economic recovery. The

president is also making use of the strong goodwill that he had generated throughout his election campaign to push through

his agenda. However, these high expectations are likely to end in disappointment. The serious economic downturn puts

limits on what the president can achieve, especially by the mid-term elections of November 2010 when all the seats for the

House of Representatives and one third of the Senate seats will be up for grabs. Due to the high expectations of the US

people, any partial success achieved by his administration could be perceived as a failure. This may affect the chances of

the Democratic Party’s chances in the mid-term polls.

Obama’s administration is expected to make college affordable for all Americans by creating a new American Opportunity

Tax Credit. This fully refundable credit will provide $4,000 a year for college education, covering two thirds of the cost of

tuition at the average public college or university. Moreover, the incumbent dispensation is expected to eliminate all income

taxes for seniors making less than $50,000 per year. This proposal will eliminate income taxes for seven million senior

citizens of the country and provide them with average savings of $1,400 each year. The government is also expected to

create an “Advanced Manufacturing Fund” to identify and invest in the most compelling advanced manufacturing strategies.

In terms of infrastructure, the Obama administration is expected to its increase spending with the aim of improving the

country’s national transportation system: its highways, bridges, roads, ports, air, and train systems.

Economic Landscape



ECONOMIC LANDSCAPE

Summary

The US is the largest economy in the world, with a GDP of around $11.5 trillion and a per capita GDP of $37,492 in 2009.

The subprime mortgage crisis went on to become a global economic crisis. The pandemic economic downturn has been

concomitant with investment bank failures, falling home prices, and tight credit. All the above factors pushed the US into a

recession by mid-2008. To help stabilize financial markets, the US Congress established a $700 billion Troubled Asset

Relief Program (TARP) in October 2008. The government used some of these funds to purchase equity in US banks and

other industrial corporations. In January 2009, the US Congress passed a bill signed by President Obama, providing an

additional $787 billion fiscal stimulus—two thirds for additional spending and one third for tax cuts—to create jobs and to

help the economy recover.

Evolution

Pre 1940s

The rapid industrialization of the US economy began during the late 19th century, and by the beginning of the 20

th century it

was one of the fastest growing technologically advanced economies in the world. The country also witnessed ample

infrastructural development due to the discovery of coal, iron ore, copper and silver deposits, and a number of steel and

cement factories were set up. There was also a growth in the number of private business enterprises during the 1920s,

although this was marred by the great economic depression of 1929–39 which led to closure of factories and mass

unemployment. The government's involvement in the economy increased most significantly during the New Deal of the

1930s. This represented the economic measures initiated by President Franklin D Roosevelt to alleviate the economic

crisis, creating closer ties between business and government. During this period, the foundations of the modern economic

and financial systems were laid, while regulating agencies such as the SEC and the Federal Deposit Insurance Corporation

were created. The social security system also took effect during this period.

1940–80

During World War II, there was increased intervention of government in business, as most of the manufacturing outlets

were used for the production of war equipment. As consumer goods became increasingly scarce, the government put price

control mechanisms in place due to fears of inflation. In the post-war years consumer demand fueled economic growth,

providing a fillip to the manufacturing sector, with new industries such as aviation and electronics growing rapidly. There

was also a housing boom during this period.

The 1970s marked the beginning of the new world economic order, with the emergence of new nations in Asia and Africa.

US policies were also directed at increasing the nation’s presence in the world economy. During the mid 1970s there was

high inflation, rising unemployment and stagnant business activity. By 1980, the economy had plunged into recession as

the Federal Reserve Bank resorted to a tight money supply resulting in an interest rate rise.

1981–2009

The 1980s was the decade of deregulation. The economy rebounded from recession in the early years of the decade after

tax rates were reduced and consumer demand strengthened, but there were huge budget and trade deficits. With the fall of

the Soviet Union and Eastern European communism in the late 1980s, trade opportunities expanded greatly for the US. In

Economic Landscape



the 1980s, the government relaxed controls on bank interest rates and long-distance telephone service, and in the 1990s it

moved to ease regulation of local telephone services. Throughout the 1990s, the economy was on a growth path. A tax

increase and cuts in spending eased the budget deficits and the real GDP growth declined to 0.75% in 2001. The economy

started to recover slowly in the latter half of 2003 due to increased federal expenditure, military buildup and tax cuts. The

economy had fully recovered by 2004 when GDP growth touched 3.8%, continuing to grow at an average rate of 3.0% per

annum until 2006. There was temporary disruption in growth in 2005 due to Hurricane Katrina and Hurricane Rita, but the

economy continued its growth. However, a slump in the housing market along with the subprime crisis adversely affected

the economy in 2007 when it registered a growth of only 2.2%. The economy grew by 1.3% during 2008, however real GDP

contracted by 2.5% in 2009. The US economy is expected to bounce back and register growth of 2.5% in 2010.

The Figure below shows the evolution of the US economy since 1970:

Figure 4: The US: historical GDP growth and key economic events (1970–2009)

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5.00

1991 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year

Gro

wth

rate

(%

)


Economic Landscape




Financial system

Financial authorities/regulators

Federal Reserve System

The Federal Reserve System (the Fed) is the central bank of the country. Its duties are:

• Conducting the nation’s monetary policy.

• Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking

system.

• Containing systematic risks that may arise in the financial markets.

• Providing financial services to depository institutions, the US government and foreign official institutions,

including playing a major role in operating the nation’s payment system.

Banking is regulated at both the federal and state level, and banking institutions are required to adhere to both sets of

regulations.

Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the federal government which protects the

interest of consumers by insuring their deposits. The FDIC was created in 1933 in response to the thousands of bank

failures that occurred in the 1920s and early 1930s. The FDIC directly examines and supervises about 5,250 banks and

savings banks; more than half the institutions in the banking system. The FDIC is the primary federal regulator of state-

chartered banks that do not join the Fed. In addition, the FDIC is the back-up supervisor for the remaining insured banks

and thrift institutions. However, the FDIC insures only deposits, and does not insure securities, mutual funds or similar

types of investments that banks and thrift institutions may offer.

Securities and Exchange Commission

The SEC is the primary overseer and regulator of the US securities market. The commission's purpose is to protect

investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC works closely with many

other institutions, including Congress, other federal departments and agencies, the self-regulatory organizations (e.g. the

stock exchanges), state securities regulators, and various private sector organizations.

National Association of Insurance Commissioners

Insurance companies in the US are subject to respective state regulations. The National Association of Insurance

Commissioners (NAIC), created by the state insurance regulators in 1871, ensures the uniformity of regulations and co-

ordinates regulation of multi-state insurers.

Economic Landscape



Stock markets

The US has 10 securities exchanges, registered with the SEC. The New York Stock Exchange (NYSE) is one of the

leading exchanges besides the NASDAQ, which is a leader in technology stocks. Some exchanges are registered with the

SEC for the purpose of trading security futures. The market capitalization of NYSE peaked at $15,650 billion in 2007, but

came down after the global financial crisis to around $9,208 billion in 2008.

Figure 5: Market capitalization of NYSE, 2001–08

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

16,000.0

18,000.0

2001 2002 2003 2004 2005 2006 2007 2008

Year

$ b

illi

on


Banking

According to the FDIC, there were 8,430 FDIC-insured commercial banks in the US as of August 2008. At the end of 2007,

FDIC-insured banks in the US held nearly $6.9 trillion in deposits, supported more than 73,000 branches, and employed

1.8 million people. The US has a highly developed but fragmented financial system, with a large number of regional and

community banks. However, the demand for efficient banking services in the US continues at a relatively stable rate. The

US has been seriously affected by the subprime mortgage and liquidity crises that played out in 2007 and 2008, with some

big banks finding themselves in need of rescue and various smaller banks disappearing off the map. The ranking of the

largest competitors in the US is currently in flux. There are numerous financial intermediaries which provide payment,

clearing and settlement services, with over 20,000 deposit-taking institutions also offering some type of payment service.

Privately operated payment systems range from the localized interbank associations that clear cheques for their members

or operate automated teller machine (ATM) or point of sale (POS) networks to the nationwide credit and debit card

Economic Landscape



networks, to a major “large value” electronic funds transfer system. The central bank also plays an important role in

providing a wide range of interbank payment services. In addition, innovation and competition have led to the use of new

instruments and systems that rely increasingly on electronic payment mechanisms.

Insurance

In recent years the gross premium income in the US insurance market had been growing at a fairly fluctuating rate. Decline

is forecast for this market in 2009, with recovery not expected until 2011.

The US insurance market generated a gross premium income of $1,243.9 billion in 2008, representing a CAGR of 2.9% for

the period spanning 2004–08. In comparison, the European and Asia Pacific markets grew with CAGRs of 5.4% and 5.2%

respectively over the same period, to reach respective values of $1,483.6 billion and $845.6 billion in 2008.

Non-life insurance sales proved the most lucrative for the US market in 2008, generating a gross premium income of

$665.7 billion. This is equivalent to 53.5% of the market's overall value. In comparison, sales of life insurance generated a

gross premium income of $578.2 billion in 2008, equating to 46.5% of the market's aggregate income.

The performance of the market is forecast to decelerate with an anticipated CAGR of 0.7% for the five-year period 2008–

13, which is expected to drive the market to a value of $1,289.7 billion by the end of 2013. Comparatively, the European

and Asia Pacific markets will grow with CAGRs of 2.1% and 6.7% respectively over the same period, to reach respective

values of $1,647.4 billion and $1,166.8 billion in 2013.

Asset management

Following a period of decent growth, the market plunged into decline in 2008, with the market remaining in such a state in

2009. Recovery is forecast for 2010, followed by accelerating growth through to 2014.

The US retail savings and investments market had total assets of $20,457 billion in 2009, representing a CARC of -1.8% for

the period spanning 2005–09. In comparison, the European and Asia Pacific markets grew with CAGRs of 1.3% and 0.3%

respectively over the same period, to reach respective values of $14,585.9 billion and $10,123.6 billion in 2009.

The deposits segment was the market's most lucrative in 2009, with a total value of $9,240.4 billion which is equivalent to

45.2% of the market's overall value. The equities segment contributed a further $4,360 billion in 2009, equating to 21.3% of

the market's aggregate value.

The performance of the market is forecast to accelerate with an anticipated CAGR of 5.7% for the five-year period 2009–

14, which is expected to drive the market to a value of $27,039.3 billion by the end of 2014. Comparatively, the European

and Asia Pacific markets will grow with CAGRs of 5.8% and 3.4% respectively over the same period, to reach respective


Performance

GDP and growth rate

The US is the largest economy in the world, with a GDP of more than $11 trillion in 2009. After the economic boom of the

1990s, growth slowed down after 2000. The events of 9/11 further added to the economic slowdown. Despite this, the

economy managed an average growth of 2.6% during 2000–06. In the second half of 2006, however, the US economy

Economic Landscape



started decelerating below the long-term growth trend. The economic slump continued in 2007, mainly due to the slowdown

in the housing market and the subprime crisis. The economy registered a growth of 2.2% during 2007 and 0.8% during

2008, with the real GDP contracting by 2.5% in 2009. The US returned to growth in the third quarter of 2009, with the

economy expanding by 3.5%. The country’s economy is expected to bounce back and register a growth of 2.5% in 2010.

Figure 6: GDP and GDP growth rate in the US, 2003–13 (real GDP at constant 2000 prices)

0.0

2,000.0

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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-3.0

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(%)

GDP Real GDP growth rate

Source: RBI Annual Report 2006–07 D A T A M O N I T O R

GDP composition by sector

In 2009, the services sector was the largest contributor to GDP in the economy (76.9%), followed by industry (21.9%) and

agriculture (1.2%). For the greater part of the twentieth century, the US was the world's top manufacturer and provider of

services.

Economic Landscape



Figure 7: GDP composition by sector in the US, 2009

Agriculture, 1.2%

Industry, 21.9%

Services, 76.9%


Agriculture

In the late 1990s, the agricultural economy of the US was unstable. It grew in 1996 and 1997, and slumped in the next two

years. Agricultural production picked up in 2002 and reached its peak in 2004, only to fall again in 2005 and 2006. Later

agricultural output declined from around $160 billion in 2008 to $155 billion in 2009, with shrinking growth rates in the same

years. Even though agriculture now has a small share of GDP, farmers remain economically and politically powerful forces.

The value of US agricultural production is less than that of China and India. Despite its overall trade deficit, the US has a

surplus in agriculture and about a quarter of US farm output is exported. The major exported agricultural commodities

include dairy products and corn. The next in importance are grains, such as wheat, and oilseeds, such as soybeans. The

dairy industry is dominated by poultry, eggs and milk, produced by a small number of large farms. The activities on these

farms are carried out on a commercial basis.

Economic Landscape



Figure 8: Agricultural output of the US, 2003–09

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Agriculture output Growth rate


Industry

The US is the world's top manufacturing country and the sector accounts for 21.9% of the nation’s GDP. The industrial

output increased from around $2,886 billion in 2008 to reach $2,895 billion in 2009. Successive governments have played

an important role in the industry, having advanced US business goals in international trade within their policies. The federal

government aims to negotiate lower tariffs and remove other barriers to US imports, and it also protects US companies

from unfair foreign competition. Furthermore state governments promote the export of goods produced from the industries

in their respective regions.

Economic Landscape



Figure 9: Industrial output of the US, 2003–09

2,100.0

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Industry output Growth rate


Services

The services sector has been performing marginally better than the manufacturing sector during the economic slowdown.

In 2008, it registered a growth of 3.0%, but the services output declined by 3.6% in 2009. The services provided by the

private sector accounted for 67.8% of GDP in 2006, with real estate and financial services on top. The most rapidly

expanding sectors were financial services; professional, scientific, and technical services; durable goods manufacturing,

particularly computers and electronic products; real estate; and healthcare. However, since the subprime crisis of 2007, the

banking sector has been slowing down and this trend is expected to continue due to the imposition of tighter lending

conditions.

Economic Landscape



Figure 10: Service output of the US, 2003–09

0.0

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-6.0

-4.0

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Services output Growth rate


Fiscal situation

According to the Congressional Budget Office (CBO), the budget deficit is expected to reach $1.3 trillion in fiscal 2010,

slightly less than the $1.4 trillion recorded in fiscal 2009. The country’s fiscal deficit in 2009 was almost 10% of its GDP and

this is definitely a cause for concern. The CBO also added that if current government policy does not change, budget

deficits are expected to average $600 billion annually between 2011 and 2020. The government’s debt limit is expected to

reach around $14 trillion by the end of 2010, up from $12 trillion in 2009–10, and is expected to climb to $15 trillion by

2015. Analysts and economists continue to believe that the future economic prosperity of the country is at grave risk if the

budget deficits are not reduced in the future.

Exports and imports

The total trade of the country fell due to the global economic crisis, shrinking by approximately 15% in 2009. Exports from

the US reduced to reach $1,546 billion in 2009, down from $1,809 billion in 2008. In the same vein, imports too came down

to $2,162 billion in 2009 from $2,537 billion in 2008. . According to the Department of Commerce, the deficit shrank in 2008

for the second time in seven years, down to $681.1 billion from $707.8 billion in 2007. Furthermore, trade deficit came

down in 2009 to reach $615 billion. As a percentage of GDP, the goods and services deficit equaled 4.8% in 2008, down

from 5.1% in 2007. During 2000–07 exports increased at a CAGR of 6.6% but imports went up even faster, recording a

Economic Landscape



CAGR of 8.4%, with the deficit nearly doubling over those years. With stagnating import growth and buoyant export growth,

it is expected that the trade deficit will start to show improvement.

The top imports to the US were industrial supplies, crude oil, capital goods consisting of computers, telecommunications

equipment, motor vehicle parts, office machines, electric power machinery, and consumer goods consisting of automobiles,

clothing, medicines, furniture, and toys. Countries importing most goods to the US were China (16.9%), Canada (15.7%),

Mexico (10.6%), Japan (7.4%), and Germany (4.8%) in 2007. Industrial supplies (organic chemicals), capital goods

(transistors, aircraft, motor vehicle parts, computers, telecommunications equipment), and consumer goods (automobiles

and medicines) were among the top US exports in 2007. The top US export destinations were Canada (21.4%), Mexico

(11.7%), China (5.6%), Japan (5.4%), the UK (4.3%), and Germany (4.3%).

Figure 11: External trade of the US, 2005–09

3,276

3,667

3,983

4,346

3,708

1,2631,435

1,6211,809

1,546

2,0132,233

2,3622,537

2,162

0

500

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2005 2006 2007 2008 2009

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Exports Imports Total trade


Current account

The US has had a negative current account balance since the 1990s. The increase in imports is being partially offset by the

increase in services and the deficit has marginally decreased with an improvement in export performance. The current

account deficit fell from $757.3 billion in 2007 to $707.8 billion in 2008. In the fourth quarter of 2009 this reached $115.6

billion, after recording a low of $98 billion in the second quarter—its lowest level in seven years. Due to increasing import of

goods, the deficit on goods and services increased by $12.5 billion in Q4 2009. With the recovery of the US economy, the

Economic Landscape



swing in the inventory cycle should continue to increase imports; consequently, the goods deficit is expected to increase

throughout 2010. The income surplus fell by $4 billion in the fourth quarter to $25.1 billion as payments of interest,

dividends, and profits on foreign-owned assets in the US rose more than corresponding receipts on US-owned assets

abroad. Despite its substantial net overseas debt, the US continues to enjoy a surplus on investment income. In 2009 the

income surplus totaled $89 billion, down from a record $118 billion in the previous year, and now remains at comfortable

levels.

International investment position

Foreign direct and portfolio investments

The US is the largest foreign direct investor in the world and also the largest recipient of FDI. The large inflows of foreign

investment in the US arise from the relatively better economic growth that occurred in the US, compared to developed

nations. The stock of FDI came down from $758.9 billion in 2007 to reach $576.1 billion as of December 31, 2009.

Foreign exchange position

The US' reserves comprising foreign exchange and gold reached $2.2 trillion as of December 31, 2009, up from $1.9 trillion

as of December 31, 2008.

Credit rating

According to Standard & Poor’s, both local and foreign currencies are stable, with a rating of AAA.

Key monetary indicators

Inflation

The average rate of inflation was 2.7% during the period 2002–07, rising to 4% in 2008. The US recorded deflation of

0.36% in 2009, as a weak economy puts pressure on manufacturers and retailers to reduce prices. The high food and

energy prices which prevailed in 2007 for instance, started to ease in the latter half of 2008. Deflation poses a severe

problem for indebted companies as they would have to reduce the prices of their products. Consequently, revenues from

sales will decline while debt remains at the same level. Nevertheless the growth outlook for 2010 is positive, with the

country expected to record a growth rate of 2.5% and inflation expected to be around 1.94%.

Economic Landscape



Figure 12: Consumer price index and inflation in the US, 2003–13f

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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Infla

tion

(%)

Consumer price index Inflation


Interest rate

The central bank has held benchmark overnight rates in the 0–0.25% range and interest rates have remained at the same

level since December 16, 2008. The Fed announced in March 2009 that it is likely to persist with these interest rates for an

extended period while the country recovers from recession. There is an expectation that rates will be firmed up due to a

modest economic recovery in 2010.

Banking sector

Despite recording strong accelerating growth rates over the past few years, the US banking industry experienced a drop of

5.9% in 2009. The growth rate is expected to drop slightly once again in 2010, before returning to the strong growth rates

previously experienced by the industry for the remainder of the forecast period up to 2014.

The total assets held by the US banking industry reached a value of $10,526.5 billion in 2009, representing a CAGR of

8.6% for the period spanning 2005–09. In comparison, the European and Asia Pacific industries grew with CAGRs of 7.9%

and 10.3% respectively over the same period, to reach respective values of $51,746.6 billion and $24,491 billion in 2009.

The Bank Credit sector was the industry's largest segment in 2009, holding total assets to the value of $8,035.7 billion,

which is equivalent to 76.3% of the industry's overall value. The Cash Assets segment held total assets to the value of

$945.9 billion in 2009, equating to 9.0% of the industry's aggregate revenues.

Economic Landscape



The performance of the industry is forecast to accelerate with an anticipated CAGR of 9.4% for the five year period 2009–

14, which is expected to drive the industry to a value of $16,505.1 billion by the end of 2014. Comparatively, the European

and Asia Pacific industries will grow with CAGRs of 8.6% and 11.2% respectively over the same period, to reach respective


Employment

Through most of the country's history the labor force has grown steadily, sustaining economic expansion. Moreover,

immigrants have been a major source of labor, tending to increase in number during times of low unemployment when

demand for workers goes up.

At the beginning of 2008, total non-farm employment stood at 138.1 million and the unemployment rate was at 5.8%.

Employment has remained on an upward trend since 2004, although the rate of increase has declined since 2005. The

labor force participation rate, after reaching 79.0% in 1996, declined marginally to touch 78.09% in 2006. Employment in

the farm sector has been stagnant at 2% of total employment since 1991. Meanwhile, employment within the secondary

sector has been falling steadily from 26% in 1991 to 23% in 2000, and 21% in 2006. The tertiary sector’s employment

correspondingly shows a steady increase.

The US economy nose-dived in the last quarter of 2008 and the country entered into recession the following year. Real

GDP decreased by around 2.5% in 2009 while domestic demand plunged, resulting in record job losses within the

industries and services sectors. Around 12.5 million Americans were unemployed in February 2009, up from 7.4 million a

year earlier. During November 2008 to February 2009, a monthly average of 646,000 jobs was lost in the country,

approximately 2.6 million jobs in total. The unemployment rate soared to around 9.3% in 2009, the highest rate of

unemployment in the country since 1983. This is expected to reach 10.0% in 2010.

Economic Landscape



Figure 13: Unemployment rate in the US, 2003–13

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Total unemployment Rate of unemployment (%)


Outlook

In 2009 the US economy was in recession, having been hit by a slump in the housing market and a crisis within the

financial sector; however, the country is expected to bounce back in 2010. The financial crisis resulted in the collapse of

Lehman Brothers on September 15, 2008 and the financial sector has continued to face serious issues since then. The

country’s economy contracted by around 2.5% in 2009; however the country is expected to record a growth rate of 2.55%

in 2010. This is mainly due to the considerable fiscal stimulus and a strong monetary policy action.

According to the CBO, the deficit will reach $1.3 trillion in fiscal 2010, slightly less than the $1.4 trillion recorded in fiscal

2009. The CBO also added that if current government policy does not change, budget deficits are expected to average

$600 billion annually between 2011 and 2020. The government’s debt limit is expected to reach around $14 trillion by the

end of 2010, up from around $12 trillion in 2009–10, and is expected to climb to $15 trillion by 2015. Analysts and

economists continue to believe that the future economic prosperity of the country is at grave risk if the budget deficits are

not controlled in the future.

Social landscape



SOCIAL LANDSCAPE

Summary

As a result of the rapid aging of its population the US faces a risk of slower economic growth, serious labor shortages and

rising tax rates over the next few decades. The distribution of income in the US, however, is the most unequal of all major

economies. While income has risen for all US households in recent years, the biggest gains went to the group of top

earners. Poverty and child poverty rates are the highest of all the developed nations in the US. Meanwhile an aging

population and rising healthcare costs are expected to place an ever increasing burden on public retirement and healthcare

systems in the US.

Evolution

In the early 20th century, the federal government played a minimal role with respect to social security measures. There was

an increase in industrial output as well as the availability of farmland, and social welfare was believed to be the

responsibility of local government. Social security measures as they are understood today were introduced during the

1930s, following the great economic depression. Though most of these were temporary relief measures, the social security

system remained in place. The program is funded by deductions from the salaries of working people and ensures that

retired persons receive a modest monthly income, while also providing workers with unemployment insurance, disability

insurance, and other forms of assistance.

There were significant developments in the 1960s, when assistance programs such as Medicaid and Medicare were

established. Housing for lower income groups was provided by federal funds and in later years, with the increasing number

of people below the poverty line, special programs were introduced for the aid of poor families. These families received

welfare payments allowing them to obtain such necessities as food, clothing, and shelter. Social security payments

constitute a large proportion of government expenditure, which was equal to nearly 20% of GDP in 2006.


Demographic composition

Age and gender composition

Around 67% of the US population is in the age group 15–64; the population above 65 years is 12.6% and the remaining

20.4% belongs to the 0–14 year age group. The gender ratio at birth now stands at 1.05 males per female. According to US

census data, half of the population was more than 35.3 years old in 2000, the country’s highest median age to date. By

2000, the largest age group of people was between 35–44 years old. The proportion of the population over 65 declined for

the first time in the 1990s, partly due to the relatively low number of births in the late 1920s and early 1930s. However this

segment of the population will rapidly increase in number in 2011 when the baby boomer generation reaches age 65, a

trend which will continue for many years.

Social landscape



Table 9: Mid-year population by age (millions), 2008

Age Female Male

0–4 10.18 10.64

5–9 9.72 10.16

10–14 9.88 10.36

15–19 10.55 11.11

20–24 10.24 10.79

25–29 10.24 10.57

30–34 9.60 9.79

35–39 10.49 10.56

40–44 11.00 10.88

45–49 11.57 11.28

50–54 10.72 10.27

55–59 9.42 8.85

60–64 7.53 6.89

65–69 5.76 5.03

70–74 4.73 3.86

75–79 4.21 3.08

80+ 7.30 3.89


The female population comprises 50.9% of the total population, with the male population accounting for 49.1%.

Urban/rural composition and migration

In the US, the suburban areas of metropolitan locations account for the most metropolitan growth. Nearly one third of

Americans live in metropolitan areas. The population of the west grew faster than the population in other regions, although

the population density of the north east exceeded the densities elsewhere in the nation. This region also has the highest

percentage of its population living in metropolitan areas.

The percentage of people living in metropolitan areas ranges from 74% in the Midwest to 90% in the north east. In the

states of California, Connecticut, Florida, Massachusetts, New Jersey, New York, and Rhode Island, 90% of the population

were living in metropolitan areas by 2000.

The percentage of the population born outside of the US increased by 57% throughout the twentieth century. According to

the 2000 census, this group constituted 11% of the population. This has led to an increase in the proportion of the male

population to that of the female population. There was also an internal migration to the east and south. Almost two thirds of

immigrants have settled in the gateway states of California, New York, Texas, Florida, Illinois, and New Jersey.

Religious composition

Christianity is the major religion of the US population, with the share of Protestants at 51%, Roman Catholics at 24%, other

religions at 21%, and none at 4%.

Social landscape



Figure 14: Major religions in the US, 2009

Roman Catholics24%

Protestants51%

Others21%

None4%


Education

System of education

The system of education in the US is decentralized, with control and funding of education coming from federal, state and

local governments. The government has provided for a mandatory and universal system of education at primary and

secondary levels. The No Child Left Behind Act of 2002, a piece of federal legislation, calls for an annual assessment of

progress and greater accountability. In particular, it requires states to establish clear content standards and thresholds for

adequate yearly progress against which performance can be assessed. Moreover, the act requires the states to implement

curriculum-based external exit exams.

The different schools that students can opt for are public schools, private schools and home schools. The schooling years

of kindergarten to twelfth grade are divided into elementary school, junior high school (middle school), and senior high

school. Post-secondary education, also known as college or university, is governed separately from the elementary and

high school system. After graduation students may move to higher education, which provides specialized learning. There is

no distinction between 'university level' and 'non-university level' higher education as in many other countries.

Social landscape



Healthcare

Healthcare services

President Obama signed into law a new healthcare bill on March 29, 2010, which has overhauled the $2.5 trillion US

healthcare system. The legislation is the most comprehensive shift in US social policy in decades, extending insurance

coverage to 32 million previously uninsured people. The bill also bars insurers from excluding coverage to people with pre-

existing medical conditions and prevents them from arbitrarily dropping policy holders. According to the bill, individuals are

required to obtain health insurance, with failure to do so resulting in fines of up to 2.5% of income by 2016. Firms with more

than 50 workers which do not offer medical coverage could face fines of $2,000 per full-time employee. Furthermore,

Medicaid, the government health insurance program for the poor, will be available to everyone with incomes of up to 133%

of the poverty level, which stands at $10,830 for an individual and $22,050, for a family of four. Many states have eligibility

requirements below those levels.

Social welfare

US policy makers recognize the potential damage to the economy from stagnant and low incomes. Although the economy

is developed, the distribution of income is not equitable. Consequently, the benefits of economic growth do not reach the

poorest; the richest quintile made six times as much money as the poorest quintile in 2006 and this level of inequality has

continued to rise. Furthermore, an aging population and rising healthcare costs are expected to increase the burden on

social security and health systems, creating a need for reforms to make the programs financially viable.

As the baby boomer generation reaches retirement age, social security will have to be financed by greater taxation of a

smaller base of workers relative to the number of pensioners, or by cuts in the value of social security benefits. Public

expenditure on Medicare is projected to rise even more rapidly. These problems will be magnified unless there is a

significant reversal in the trend towards early retirement.

According to the budget projections, spending on entitlement programs, including social security and Medicare, will

increase by around 1.5% of GDP in each decade through to 2080. The contributions to these programs are expected to

grow much less rapidly; the current estimates indicate a 75 year funding gap in the social security and Medicare systems,

at 325% of GDP. The social security system presently runs a cash surplus of 1.5% of GDP, which is projected to fall into

deficit as early as 2017.

The administration has also been encouraging initiatives to increase the efficiency of the Medicaid program. Moreover,

officials have observed that states are in a better position than the federal government to control health costs through policy

initiatives and experimentation. State representatives have agreed that the federal government was providing significant

flexibility in the Medicaid program, while also tightening the definition of expenses eligible for federal matching grants. In

addition the president has endorsed slowing benefit growth by linking payments to a sliding combination of wage and price

indexing, which would halve the 75 year funding gap

Performance

Healthcare

In a study of 191 member nations, the WHO ranked the US healthcare system first in both responsiveness and

expenditure. However, it was ranked 37th in terms of overall performance and 72

nd in terms of overall level of health. Total

Social landscape



health spending accounted for 19.1% of GDP in 2009, an increase from 17.6% in 2008 and 16.0% in 2007. This indicates

that the country has the highest share in the OECD, with the average being 8.9% in 2007. In comparison, France,

Switzerland and Germany allocated respectively 11.0%, 10.8% and 10.4% of their GDP to health in 2007. The US is far

ahead of other OECD countries in terms of total health spending per capita, spending $7,290 (adjusted for purchasing

power parity), which is almost two-and-a-half times more than the OECD average of $2,964 in 2007.

Life expectancy in the US stood at 78 years in 2009 and the infant mortality rates stood at 6.3 deaths per 1,000 live births in

2009.

Figure 15: Expenditure on healthcare in the US, 2003–09

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Healthcare expenditure Healthcare expenditure as % of GDP


Income distribution

Standard of living

According to the US census report, real median household income rose between 2005 and 2006 for the second

consecutive year. Average household income increased by 0.7%, from $47,845 to $48,201. However OECD estimates

indicate that 13.2% of the population in the US was below the federal poverty threshold in 2008. The main causes of

poverty have been identified as the low minimum wage and regional imbalance in job opportunities. Although strong growth

Social landscape



in the US has benefited low-wage workers and their families, inequality has continued to rise. The growth in the country has

generally not been equitable in terms of wages paid by firms or through redistributive social policies.

The UN Development Program Report 2006 ranks income distribution in the US as the 73rd most equal out of 126

countries, as measured by the Gini Coefficient. The richest quintile made six times as much as the poorest quintile in 2006.

To a large extent, the rise in inequality is due to differences in skill levels. This, in turn, is associated with technological

advancements such as improvements in information technology, which tend to raise the productivity and hence the wages

of high-skilled workers. With skill differential becoming a major source of inequality, improvement in education is of key

importance.

Regional disparity

During 2005–06, households in the north-east and west had the highest median income at $52,057 and $52,249, followed

by households in the Midwest at $47,836. Households in the south have the lowest median income ($43,884). During the

same period, real median income for households inside metropolitan areas rose by 1.1% to $50,616. Households inside

principal cities had a 2006 median income of $42,627, while households outside principal cities had an average income of

$55,775.

Education

The US higher education system is one of the best in the world. The country has a literacy rate of 99.0%, with an equal

number of male and female literates. The number of primary schools grew at a rate of 2.0% in 2000 and 1.33% in 2006.

However, the annual growth in the number of secondary schools was higher, at 3.2% in 2000 and 3.8% for 2006. According

to government statistics, in 2007 86% of all adults (25 and older) had completed at least high school and 29% had at least

a bachelor's degree. The level of educational attainment is marginally in favor of men; while 30% of men have a bachelor’s

degree, only 28% of women have achieved that level of education. Furthermore, the statistics reveal a positive correlation

between the degree obtained and income earned. Adults with advanced degrees earn four times more than those with less

than a high school diploma.

The education expenditure of the country has increased from $20.5 billion in 2003 to reach $52 billion in 2009. As a

percentage of GDP this has come down marginally from 7.8% to 7.6% during the same time period. Workers aged 18 and

above with a master’s, professional or doctoral degree earned an average of $82,320 in 2006, while those with less than a

high school diploma earned $20,873. The level of educational attainment is highest among Asians, with 52% in the age

group 25 and above having a bachelor’s degree or more, compared with 32% of non-Hispanic whites, 19% of African

Americans and 13% of Hispanics.

Social landscape



Figure 16: Government expenditure on education in the US, 2003–09

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Outlook

The UN Human Development Index has ranked the US at 12th place, which is below other developed nations such as

Norway, Iceland, Canada and Japan. The US social security system has run successfully for many years. However, decline

in economic growth and an increase in expenditure on social security due to the aging baby boom generation will become a

burden on the government’s revenues. Therefore, the government’s expenditure on pension and healthcare will increase in

the coming years. The US healthcare system requires greater involvement from the public sector to assure services to all

its citizens

In April 2010 the US Congress approved an almost six-week extension of federal jobless benefits and health insurance

subsidies for unemployed people, amounting to $18.2 billion. The bill is expected to extend the maximum total of 99 weeks

of combined federal and state jobless benefits to June 2, 2010. This means that unemployed people who have exhausted

shorter periods of benefits will continue to receive cheques from the federal government. Furthermore, under the bill the

flood-insurance program allows homeowners and businesses to protect against flood-related losses by buying insurance

from the government. The bill is expected to continue healthcare subsidies through the Cobra program and includes funds

to avert a 21% decrease in payments to doctors who see Medicare patients through to the end of May 2010. The bill is

expected to get President Obama’s approval.




TECHNOLOGICAL LANDSCAPE

Summary

Technology and innovation are the cornerstones of the US economy. Besides maintaining its economic supremacy, the

nation has also guarded its status as a leader in the field of technological advancement. Continued investment in

technology is likely to see this superiority continue. The US spends 2.6% of its GDP on R&D expenditure, demonstrating its

commitment to innovation. However, this is less than that of other developed nations such as Japan, which spends nearly

3.2% of its GDP. The main body for R&D funding in the US is the National Science and Technology Council, which carries

out and supports research in wide areas.

Evolution

In terms of industry and technology, the US made the greatest progress between the end of the 18th century and the early

20th century. The years following the US civil war (1861–65), often termed as the second industrialization, laid the

groundwork for technological advancements. The late 19th century and the early 20th centuries witnessed new discoveries

and inventions: the discovery of oil, and the invention of the typewriter, the telephone, the phonograph and electric light.

Automobiles and airplanes also changed the way people commuted. With increasing demand, new production techniques

were devised to make the country more technology intensive, while the manufacturing industry matured in the post World

War II era.

The next wave of advancements came during the late 1980s and 1990s with the development of IT, contributing to the

unprecedented economic growth of this period. Since the mid-1990s, the IT sector has been vital to the growth of the US

economy and continues to drive it. This is partly because IT has applications in diverse sectors such as healthcare,

transportation, banking and financial services, retail, telecommunication, and media. It has furthered the growth of SMEs,

which invest a quarter of their total capital expenditure on computers and communications equipment; this is comparable to

the investment undertaken by large firms on these heads.

At the beginning of the 21st century, biotechnology was internationally recognized for its potential in human and animal

health, and related areas. In 2002, the Department of Commerce’s Bureau of Industry and Security initiated the first

comprehensive government assessment of the development and adoption of biotechnology in the industry.


Intellectual property

The US Patent and Trademark Office (USPTO) grants patent and trademark protection to inventors and businesses for

their inventions and intellectual property (IP) rights. The huge number of patents filed represents the depth and leadership

of the US in science and technology. Nevertheless, the US’ contribution to global patenting is lower than its contribution to

global R&D efforts. France, Germany, Japan, the UK and the US combined accounted for 83.6% of all triadic patent

families in 2001. The US and the EU account for about 34% of worldwide triadic patents, while Japan accounts for just

under 25% of all triadic patents in 2001.

This increase occurred in the wake of several significant changes that resulted in stronger patent rights. There were a

number of disputes related to patents with regard to genetically engineered bacteria, software and business methods, and

financial services products during the 1980s and 1990s. The associated court orders enhanced the patentability of products




belonging to these categories. In 1982, the Court of Appeals of the Federal Circuit (CAFC) was established, and it has

nationwide jurisdiction in areas such as patents and trademarks. The global Trade-Related Aspects of Intellectual Property

(TRIPS) agreement of 1994 led to a change in the length of a patent’s term, from 17 to 20 years from the filling date of

patent application, with some important exceptions related to pharmaceuticals.

Table 10: Comparative performance on receipt of patents, 2000–08 (USPTO)

Year Canada France Germany Japan US

2000 3,925 4,173 10,824 32,922 97,011

2001 4,063 4,456 11,894 34,890 98,655

2002 3,857 4,421 11,957 36,339 97,125

2003 3,894 4,126 12,140 37,248 98,590

2004 3,781 3,686 11,367 37,032 94,129

2005 3,177 3,106 9,575 31,834 82,586

2006 4,094 3,856 10,889 39,411 102,267

2007 3,970 3,720 10,012 35,942 93,691

2008 4,125 3,813 10,086 36,679 92,000


Research and development

There are a total of 477 research and academic institutions and 191 nonprofit biomedical research institutions in the US as

of 2005, according to the National Science Foundation.

The president’s 2008 budget maintains the commitment to basic research, particularly in areas that promote knowledge

and technologies through the American Competitiveness Initiative. Moreover, there are plans to double investment over the

next decade in the National Science Foundation, the Department of Energy’s Office of Science, and the Department of

Commerce’s National Institute of Standards and Technology laboratories (NIST).

The National Science Foundation is the primary support agency for funding research in the physical sciences through a

competitive and peer-reviewed process. Nanotechnology, advanced networking and information technology, physics,

chemistry, materials science, mathematics, and engineering have been identified as the focus areas of research. The

Department of Energy’s Office of Science supports funding for grants and infrastructure in research related to economically

significant innovations. Finally, the Department of Commerce’s NIST primarily works for research and standards

development to improve manufacturing capabilities and construct newer laboratories.

Research initiatives

The American Competitiveness Initiative has committed $5.9 billion (in 2007) to increase investments in research and

development, strengthen education and encourage entrepreneurship. Over a span of 10 years, the initiative will commit $50

billion to increase funding for R&D and $86 billion for R&D tax incentives; the budget allocation for R&D in 2007 increased

by nearly 50% over 2001 levels. Biomedical research and advanced security technologies are the priority federal funding

areas. The government is also bringing in new investments in physical sciences and engineering, which will generate

scientific and technological discoveries. However, there has been a decline in enrolment for math and physical sciences

degrees over the past two decades. Consequently, proposals to revamp the math and science education system to ensure

children’s interest have been introduced. The program also involves training teachers in these subjects.




Performance

ICT, telecoms and biotechnology are some of the sectors that are driving the US economy. Invest in America has identified

the following sectors, among others, as good opportunities for investment:

Internet access market

• The US internet access market has exhibited strong growth over the previous five years, but will begin to slow

in its growth towards 2013 as internet access approaches saturation.

• The US internet access market generated total revenues of $37.7 billion in 2008, representing a CAGR of

5.7% for the period spanning 2004–08. In comparison, the Canadian and Mexican markets grew with CAGRs

of 9.4% and 19.1% respectively over the same period, to reach respective values of $4.5 billion and $5 billion

in 2008.

• The number of internet subscribers increased with a CAGR of 4.7% between 2004–08, to reach a total of 86.4

million at the end of this period. The number of subscribers is expected to rise to 94.8 million by the end of

2013, representing a CAGR of 1.9% for the 2008–13 period.

• The performance of the market is forecast to decelerate with an anticipated CAGR of 1.9% for the five-year

period 2008–13, which is expected to drive the market to a value of $41.4 billion by the end of 2013.

Comparatively, the Canadian and Mexican markets will grow with CAGRs of 2.7% and 11.9% respectively

over the same period, to reach respective values of $5.1 billion and $8.8 billion in 2013.

E-commerce

• After posting very high growth rates between 2004–07, the US online retail sector is estimated to decelerate by

more than a half in 2008 followed by further deceleration in growth throughout the next consecutive years up to

2013.

• The US online retail sector generated total revenues of $186.7 billion in 2008, representing a CAGR of 28.1%

for the period spanning 2004–08. In comparison, the European sector grew with a CAGR of 25.7% over the

same period, to reach a value of $76.1 billion in 2008.

• Electronics sales proved the most lucrative for the US online retail sector in 2008, generating total revenues of

$40.2 billion which is equivalent to 21.5% of the sector's overall value. In comparison, sales of

apparel/accessories/footwear generated revenues of $26.6 billion in 2008, equating to 14.2% of the sector's

aggregate revenues.

• The performance of the sector is forecast to decelerate with an anticipated CAGR of 11.7% for the five-year

period 2008–13, which is expected to drive the sector to a value of $325.2 billion by the end of 2013.

Comparatively, the European sector will grow with a CAGR of 10.7% over the same period, to reach a value of

$126.2 billion in 2013.

Software market

• The US software market has grown at an uneven pace in recent years. In 2009, the growth rate and value of

the market declined. A steadier rate of growth is expected between 2010 and 2014.




• The US software market generated total revenues of $98.9 billion in 2009, representing a CAGR of 3.1% for

the period spanning 2005–09. In comparison, the European and Asia Pacific markets grew with CAGRs of

6.8% and 7.2% respectively over the same period, to reach respective values of $88.2 billion and $40.8 billion

in 2009.

• Network and database management sales proved the most lucrative for the US software market in 2009,

generating total revenues of $24 billion which is equivalent to 24.3% of the market's overall value. In

comparison, sales of general business productivity and home use applications generated revenues of $23.4

billion in 2009, equating to 23.6% of the market's aggregate revenues.

• The performance of the market is forecast to accelerate with an anticipated CAGR of 5.6% for the five-year


Comparatively, the European and Asia Pacific markets will expand with CAGRs of 5.4% and 9.4%

respectively over the same period, to reach respective values of $114.8 billion and $63.9 billion by 2014.

Control systems

• After reaching its highest growth rate of 8.8% in 2007, the US control systems market is expected to decline in

2008 and 2009 followed by recovery in the years up to 2013.

• The US control systems market generated total revenues of $3.2 billion in 2008, representing a CAGR of 4.5%

for the period spanning 2003–08. In comparison, the European and Asia Pacific markets grew with CAGRs of

3.9% and 3.3% respectively, over the same period, to reach respective values of $7.4 billion and $6.2 billion in

2008.

• Distributed Control Systems (DCS) sales proved the most lucrative for the US control systems market in 2008,

generating total revenues of over $2 billion which is equivalent to 63.6% of the market's overall value. In

comparison, Programmable Logic Controllers (PLC) sales generated revenues of $1.2 billion in 2008,

equating to the remaining 36.4% of the market's aggregate revenues.



Comparatively, the European and Asia Pacific markets will grow with CAGRs of 2.8% and 4.4% respectively

over the same period, to reach respective values of $8.5 billion and $7.6 million in 2013.

Biotechnology

• The US biotechnology market has posted robust rates of growth over the past few years, although a sharp

deceleration is expected in 2009. Forecasts anticipate a return to secure and stable growth in the subsequent

year.

• The US biotechnology market generated total revenues of $91.9 billion in 2008, representing a CAGR of

12.7% for the period spanning 2004–08.

• In comparison, the European and Asia Pacific markets grew with CAGRs of 8.5% and 10.1% respectively over

the same period, to reach respective values of $46.1 billion and $45.1 billion in 2008.




• The medical/healthcare segment proved the most lucrative for the US biotechnology market in 2008,

generating total revenues of $61.7 billion which is equivalent to 67.2% of the market's overall value. In

comparison, the service provider segment generated revenues of $22.6 billion in 2008, equating to 24.6% of

the market's aggregate revenues.



Comparatively, the European and Asia Pacific markets will grow with CAGRs of 5.6% and 6.8% respectively

over the same period, to reach respective values of $60.5 billion and $62.8 billion by 2013.

Research and development

R&D expenditure

The US is among the most technologically advanced nations and leads the world in most of the technological indicators.

The country’s investment in research and development fell by 3.9% in 2009, the first decline since 2002, but it is expected

to rebound slightly in 2010 as the economy gradually improves. After accounting for inflation, spending on R&D is forecast

to rise 1.7% to reach $395.9 billion in 2010 from $382.6 billion in 2009. Expenditure on R&D grew at an average rate of

2.6% of GDP during 2000–06. The share of R&D within the private sector and educational institutions has also been

witnessing an upward trend, with their share at 70.0% and 14.0% respectively. The census report states that R&D is one of

the most significant factors for an increase in economic growth and productivity. Almost two thirds of business sector

expenditure has gone into ICT and biotechnology-related industries. However, government R&D expenditure was mostly

directed towards defense. Moreover, funding for basic research increased by over 32.0% during 2001–07. Nevertheless,

there has been a decline in R&D expenditure as a percentage of GDP. To conclude, the US’ leadership position is clear

due to the fact that it is home to one third of the world’s scientists and engineers, and accounts for one third of global R&D

expenditure.

R&D investment in new medicines and vaccines by the US biopharmaceutical industry was around $65 billion in 2009, an

increase of more than $1.5 billion from the total R&D investment made in 2008. Pharmaceutical companies spent an

estimated $46 billion on R&D in 2009, while non-pharmaceutical research companies spent an estimated $19 billion.

Pharmaceutical research and biotechnology companies are devoted to inventing medicines that allow patients to live

longer, healthier, and more productive lives.

Outlook

After accounting for inflation, expenditure on R&D is forecast to rise 1.7% to reach $395.9 billion in 2010 from $382.6 billion

in 2009. For decades, the US has been able to maintain its leadership position with respect to innovation and investment in

R&D. Increasing R&D expenditure from the corporate sector indicates the innovativeness of the private sector, but the

government's declining share is a matter of concern. R&D expenditure in educational institutes, though increasing, is

comparatively less than that of other technologically advanced nations. Moreover, the US has to prepare itself for the

increasing competition from emerging nations such as China, which are making successful forays in technology intensive

industries. However, the government’s R&D expenditure is currently focused on defense (58.3% of the government’s R&D

budget) and the trend may continue in the next few years.

Legal landscape



LEGAL LANDSCAPE

Summary

The US legal system was originally derived from English law. The country follows a federal legal system, with individual

state laws alongside federal laws. The supreme law of the US is its constitution. Regulatory reforms have been followed in

a broad range of industries, resulting in increased competition in the economy. Moreover, the regulatory reform that began

in the 1970s accelerated over the course of the 1980s, resulting in partial deregulation of many sectors. This led to an

increased reliance on competition to improve efficiency. Although open competition is followed in most sectors, there are a

few sectors of the economy from which competition policy and law are completely excluded due to their sensitive nature.

Evolution

Prior to the adoption of the constitution, the US was governed by the articles of confederation. Under the articles, almost all

functions of the national government were vested in a single-chamber legislature called congress and there was no

separation of executive and legislative powers. Following the ratification of the constitution in 1788, the Judiciary Act of

1789 laid the foundation of the federal judicial system. The act set up a judicial system composed of the following features:

a Supreme Court, consisting of a chief justice and five associate justices; three circuit courts, each comprising two justices

of the Supreme Court and a district judge; and 13 district courts, each presided over by one district judge. As provided by

the act, the congress created two sets of lower courts.

In the initial years, federal-state relations dominated the Supreme Court's rulings and the federal government was favored

at the expense of state governments. Moreover, economic regulations came to dominate the scene with the advent of

capitalism as there were an increasing number of national and state laws aimed at monitoring business activities. Since

1937, the Supreme Court has focused on civil liberties, in particular the constitutional guarantees of freedom of expression

and freedom of religion.


Judicial system

Structure of the system

There are three levels of courts in the US: federal, state and local. Some legal problems are resolved entirely in the state

courts, whereas others are handled entirely in the federal courts, and there are occasions when both of these courts are

involved in a case. The federal Supreme Court deals with matters pertaining to the federal government, disputes between

states, and interpretation of the US constitution.

Legal landscape



Figure 17: The US court system

United States Supreme Court

Court of claims Circuit courts of appeal(11)

US tax Courts and administrative agencies

Direct AppealsCustoms and patents

Appeal court

District courts with federal jurisdiction only (89)

District courts with local and federal jurisdiction (3)

United States Supreme Court

Court of claims Circuit courts of appeal(11)

US tax Courts and administrative agencies

Direct AppealsCustoms and patents

Appeal court

District courts with federal jurisdiction only (89)

District courts with local and federal jurisdiction (3)


Legislation affecting business

Industrial acts, legislations and regulations

In the US, there are four sources of law: constitutional law, administrative law, statutes and common law. Law enforcement

in the US has three components: courts, corrections and policing.

The basic antitrust statutes have remained unchanged for 50 years. The policy has evolved through court decisions

interpreting their general terms, rather than through individual cases of law. The merger policy attempts to prevent market

power while supporting entry and capital mobility. Moreover, the policy regarding horizontal mergers was methodically

elaborated in 1992 and the Sarbanes Oxley Act is being implemented across industries. This act is responsible for

enhancing the disclosure requirements of public companies. The responsibility of executives in financial reporting has also

been enhanced. The Foreign Corrupt Practices Act of 1977 was enacted to prevent corporate bribery of foreign officials.

US pharmaceutical patents receive special treatment because the process regulating drug introductions can take a long

time. The Drug Price Competition and Patent Restoration Act of 1984, known as the Hatch-Waxman Act, was designed to

address this issue and, moreover, it promotes innovation and eases generic drug approval. Moreover, it provides enough

time for pre-market clinical testing and approvals by the Food and Drug Administration (FDA). It also allows generic entry

without the duplication of certain testing. With a view to boost incentives for innovation, intellectual property rights were

strengthened by a series of court decisions in the 1980s and 1990s.

Furthering its openness to foreign competition, the US has continued to pursue further trade liberalization. Most importantly,

negotiations regarding the Doha round are continuing. The US has proposed to eliminate export subsidies in agriculture

and reduce other trade distortions and elimination of industrial and consumer goods tariffs by 2015. Furthermore, efforts

have been made to increase competition in regulated industries through partial deregulation or regulatory reforms between

the mid-1970s and the mid-1990s. Banking services were liberalized in the early 1980s and the transportation sector

Legal landscape



(airlines, trucking, intercity buses and railroads) was deregulated by the mid-1980s. Moreover, regulations in the natural

gas sector were substantially eased in the mid-1980s.

In the case of electricity markets, the Federal Energy Regulatory Commission (FERC) regulates wholesale electric power

sales and the prices charged for transmission services across states, while the state Public Utility Commissions regulate

distribution and retail sales, oversee construction of facilities, and determine prices in the local markets. The 1992 Energy

Policy Act (EP Act) established non-utility generators known as exempt wholesale generators (EWGs). These generators

are exempt from renewable fuel and cogeneration requirements. Furthermore, the EP Act also gives the FERC the

authority to order that utilities provide transmission service to wholesale generators on a reasonable and non-discriminatory

basis. Another positive step taken by FERC has been its proposal regarding a standard market design (SMD) for wholesale

markets.

With regard to telecommunication services, the Federal Communications Commission (FCC) has exclusive jurisdiction over

interstate matters and intra-state issues where legislation pre-empts state authority. The Telecommunications Act of 1996

began the effort to spur competition among local services. Moreover, the act agreed with the view that a local fixed-line

telephone service was not a substitute for alternative telecommunications services. This created a need for a set of

regulatory rules to facilitate competition over the local loop. In particular, universal service goals were expanded as part of

the 1996 act.

Establishing operations as a foreign enterprise

An investor can set up a business enterprise in the US in the following ways: sole proprietorships, partnerships,

corporations or limited liability companies.

Sole proprietorships

The vast majority of small businesses start out as sole proprietorships. These firms are owned by an individual, who is

responsible for conducting the business. Sole proprietors own all the assets of the business and are entitled to the profits

generated by the same.

Partnerships

In a partnership, two or more people share ownership of a single business. Like proprietorships, the law does not

distinguish between the business and its proprietors. The partners should have a legal contract that sets forth how

decisions will be undertaken, profits will be shared, disputes will be resolved, how future partners will be admitted to the

partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed.

Corporation

A corporation is chartered by the state in which it is based and is considered by law to be a unique body. A corporation can

be taxed, it can be sued, and it can enter into contracts. The owners of a corporation are its shareholders. The

shareholders elect a board of directors to supervise the major policies and decisions. The corporation has a 'life' of its own

and does not dissolve when ownership changes.

Legal landscape



Limited Liability Company (LLC)

An LLC is a comparatively new type of hybrid business that is now permissible in most of the states. It is intended to offer

the limited liability features of a corporation, and the tax efficiencies and operational flexibility of a partnership. The method

to form an LLC is more complex and formal than that necessary for a general partnership. The owners are members and

the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if

desired, by a vote of the members at the time of expiration. LLCs should not have more than two of the four features that

define corporations: limited liability to the extent of assets; continuity of life; centralization of management; and free transfer

of ownership interests.

Tax regulations

Income tax and estimated tax

All businesses, except partnerships, must file an annual income tax return. Partnerships file an information return instead.

The federal income tax is a pay-as-you-go tax, which means the business entities must pay the tax as they earn or receive

income during the year. An employee usually has income tax withheld from his or her pay. The tax rates vary in different

states. All forms of income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes

and awards are liable for this tax. The employee may also have to pay estimated tax if the amount of income tax being

withheld from salary, pension, or other income is not enough.

Self-employment tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. The

payment of SE tax contributes toward coverage under the social security system. Social security coverage provides

individuals with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Employment tax

Employers are responsible for paying certain taxes, on behalf of their employees. Employment taxes include the social

security and Medicare taxes, federal income tax withholding, and federal unemployment tax.

Excise tax

Business enterprises are also required to pay for excise taxes if they are involved in the manufacturing or selling of

products, using various kinds of equipment, facilities or products, or receiving payments for certain services.

In addition, quarterly federal excise tax return consists of several broad categories including:

• environmental taxes;

• communications and air transportation taxes;

• fuel taxes;

• tax on the first retail sale of heavy trucks, trailers, and tractors;

• manufacturers’ taxes on the sale or use of a variety of different articles.

Legal landscape



Trade regulations

The US is a supporter of free trade and has entered into free trade agreements with 20 countries. The trade regulations are

in line with international practices.

• Goods entering the US are subject to customs duty, except those exempt by law. The duty on goods varies

according to their categorization.

• The FDA releases the specifications for foods, drugs, medicines and cosmetics which must be followed by

exporters. All other products must comply with the regulations of the Federal Trade Commission (FTC). The

recent legislation on bioterrorism will impact food and drink companies who wish to export to the US.

Performance

Effectiveness of the legal system

According to World Bank’s Doing Business report, the US is ranked in third position with respect to ease of doing business.

A high ranking indicates a favorable legal environment for business, and the ease with which a business can be formed and

operated in the country. The country has followed the rule of law in all matters including business for many years now. US

economic policies are generally pro-business and it has a very well developed financial regulatory system, with financial

markets which are open to competition. The country has an independent, effective and efficient judicial system.

Foreign investment is subject to the same rules as domestic capital. No prior approval is needed from the federal

government although a few states have specific investment regulations. However, foreign investment in banking, mining,

defense contracting, certain energy-related industries, fishing, shipping, communications, and aviation is restricted. The

government also restricts foreign acquisitions which may impair national security. The purchase of real estate is

unrestricted, but the purchase of agricultural land by foreign nationals or companies must be reported to the government.

The US government’s investment in R&D also provides a suitable environment for such practices, and the country sustains

a strong regime of intellectual property rights protection and enforcement. Of the 173,000 patents granted by the US Patent

Office in 2006, almost 50% of the applications originated from a foreign country.

Labor market regulations are also flexible, which enhances overall productivity growth and employment opportunities. The

non-salary cost of employing a worker is low, and dismissing a redundant employee is not cumbersome.

Although businesses in the US can be operated with ease due to minimal government intervention, one of the major

dampeners for the business is the high tax rates and the differential federal rates of taxes.

Outlook

Effective legal and regulatory frameworks are crucial to the creation of a successful business environment in any country.

The US has a sound legal framework for business entities and an independent judiciary, which makes the investment

climate positive. In view of the slowdown in the economy, it is felt that the country needs to have some structural reforms in

place to raise productivity levels and increase employment. Furthermore, the country also has comparatively higher

corporate and personal taxes, and the prevalence of high rates will continue to adversely affect business enterprises. Thus,

the US is likely to lose out to other countries such as Canada and the EU nations which are vying for a larger share of FDI.




ENVIRONMENTAL LANDSCAPE

Summary

The Environment Protection Agency (EPA) is the leading federal government agency, with a mandate to protect human

health and the environment. Each state also has its own regulating agency. Since the 1960s, the US government has

recognized protection of the environment as an important agenda, first drafting the Clean Air Act in 1963. Although the

performance of the country has improved in terms of toxic and greenhouse gas (GHG) emissions, it has remained an

underperformer compared to leading industrial countries.

Evolution

Prior to the 1960s, environmental issues did not attract major attention either from the public or the government. The Clean

Air Act of 1963 was the first significant government policy that linked air pollution with public health. The act was

subsequently amended in 1970, 1977, and 1990, to improve its scope.

Under the Clean Air Act, the EPA has focused on key air pollutants that have a significant impact on public health and the

environment: ozone, carbon monoxide, nitrogen dioxide, sulfur dioxide, and lead. Besides the Clean Air Act, other

environmental programs which have had substantial impact on public health are:

• The removal of lead from gasoline (adopted by EPA in the late 1970s).

• The acid rain program (enacted in 1990 to reduce sulfur dioxide emission from power plants).

• The Clean Air Interstate Rule, adopted by EPA in 2005, to further reduce pollutants.

• The Non-Road Diesel Rule (adopted by EPA in 2004 to reduce particulate matter and nitrogen oxide waste from

construction, farming, and other non-road equipment).

• The heavy-duty highway vehicle and diesel sulfur rule (adopted by EPA in 2000 to reduce particulate matter and

nitrogen oxide waste from diesel trucks, buses and other on-road vehicles).


Environmental regulations

The creation of the Council for Environmental Quality (CEQ) in 1969 and the EPA in 1970 were the two main initiatives

from the US to counter the degradation of the environment. The US, along with most other countries, has not met the

commitment that it made in 1992, following the establishment of the UN Framework Convention on Climate Change

(UNFCCC). The UNFCCC had a stipulation that greenhouse gas emissions would not be higher in the year 2000 than in

1990. The US is also a signatory to the Kyoto Protocol, but has not ratified it. The protocol would commit it to substantial

reductions in emissions by 2008–12, compared with those projected in the absence of policy changes.

The Clean Air Act of 1970 requires the EPA to establish National Ambient Air Quality Standards (NAAQS) which the

country should strive to achieve. In 1997, the EPA promulgated tighter standards for two pollutants: ozone and particulate

matter. The pollution control measures include the sulfur dioxide trading system, embodied in the Acid Rain program which

has been in operation since 1992. The sulfur dioxide trading scheme was provided for in the 1990 amendments to the




Clean Air Act. There are also legislations in place which require the industries to report the release of listed chemicals,

whether accidental or otherwise, as well as information on off-site transfers for disposal. Such information is recorded in the

Toxic Release Inventory (TRI). Therefore, it becomes easy for concerned members of the public to take legal action against

violations, as well as ensuring general adherence to the norms. The government has also initiated steps to control

greenhouse gas emissions, which has reduced consumption of hydrocarbon fuels. Since increasing taxation tends to be

particularly difficult politically in the US, the tendency may be to seek to improve fuel economy by subsidizing research into

more efficient engines. However, without direct incentives to reduce fuel consumption itself, most of these measures will fail

to achieve the desired results.

Part of the program intended to 'reinvent regulation', Project XL (for Excellence and Leadership), was launched in 1995 as

an experiment in trying to make existing approaches more flexible and, therefore, to reduce costs. Regulatory programs are

frequently criticized for not taking sufficient account of local conditions.

Performance

Environmental impact

Since the 1970s, the US has been trying to improve its performance in terms of environmental indicators. With rapid

industrialization and increasing dependence on fossil fuels, the environment took a back seat in US government policies.

For years, the US has had the dubious distinction of being the largest polluter; however China overtook the country in 2007.

The US alone accounted for 36.1% of worldwide greenhouse gas emissions in 1990. With 4.6% of the world's population,

the US still accounts for 20.9% of global emissions, with an average of 20.6 tons of carbon dioxide produced per person in

2007. These emission levels are above those of other high-income countries and the US, with increasing emissions both

per capita and in absolute terms, is a major contributor to increases in global concentrations of greenhouse gases.

On the positive side, the US has made some improvements. Since 1970, the emission of harmful pollutants has been cut

from 273 million metric tons to 133 million metric tons; emissions of lead decreased by 98%; volatile organic compounds

that contribute to ground level smog decreased by 54%; carbon monoxide by 52%; sulfur dioxide by 49%; and nitrogen

oxides by 24% in 2005. Carbon dioxide emission has come down marginally from 5825 million metric tons in 2008 to

around 5809 million metric tons in 2009.

The US has successfully introduced sulfur dioxide trading on a large scale, following a number of smaller scale

experiments in different areas. The nitrogen dioxide scheme among north-eastern states also appears to have started

successfully, and will be enlarged to a number of other states; logically, the inclusion of some Canadian provinces would

also yield cost-effective environmental benefits.




Figure 18: Carbon dioxide emission in the US, 2003–13

5,700.0

5,750.0

5,800.0

5,850.0

5,900.0

5,950.0

6,000.0

6,050.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

Mil

lio

n m

etr

ic t

on

s

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

Gro

wth

(%)

Volume Growth rate


International agreements

The US has not supported important international environmental treaties such as the Kyoto Protocol and Comprehensive

Test Ban Treaty. Although it has signed the Kyoto Protocol, it is yet to ratify the same, which implies that the country is not

committed to meeting the emission standards as required by the act. It is also a signatory to the Montreal Protocol, which

aims at limiting the production of substances which are harmful to the stratospheric ozone layer, such as

chlorofluorocarbons (CFCs).

The US has signed other international treaties with respect to water conservation, biodiversity and wildlife protection.

Copenhagen conference on climate change

The UNFCCC sets an overall framework for intergovernmental efforts to tackle the challenge posed by climate change. It

recognizes that the climate system is a shared resource whose stability can be affected by industrial and other emissions of

carbon dioxide and greenhouse gases. The convention has a universal membership, with 192 countries having ratified the

convention. While no deal could be clinched during the climate conference in Copenhagen, talks on a binding international

climate change pact will continue in 2010.




Outlook

President Obama’s 2011 budget proposals include various measures for the reduction of greenhouse gas emissions. The

budget contains an increase of $39 billion in taxes on fossil fuel producers over a period of 10 years, as well as an end to

tax breaks and other incentives for the domestic production of oil, natural gas and coal. Furthermore the budget proposes

to triple federal support for nuclear energy, by adding $36 billion in new loan authority for a Department of Energy program

aimed at accelerating the construction of new reactors. An estimated $1.4 billion will be set aside to help developing

countries address the impact of climate change, reduce deforestation and shift to low-carbon energy sources.

The EPA has declared carbon dioxide and other greenhouse gases to be a health risk, acknowledging that this will

aggravate climate change, worsen air quality and generate heat waves. This marks a significant change in the position of

the US in terms of environmental policy, suggesting that a new approach might soon be taken which could impact climate

change regulation. President Obama too asserted in April 2009 that the US was ready to lead the world on climate change.

Congress is exploring a draft bill for clean energy development which aims to cut carbon emissions by 20% from their 2005

levels by 2020, boosting reliance on renewable sources of energy.

In 2009 the EPA proposed the first mandatory national system to report the emissions of carbon dioxide and other gases.

The proposal covers around 13,000 facilities, which account for 85–90% of greenhouse gas emissions in the US. This

system includes producers of crude petroleum, coal and oil refineries, ethanol production facilities, natural gas, or any

facility with GHG emissions surpassing 25,000 ton/yr. The EPA believes that the companies will incur an expenditure of

$160m for the first year in order to comply with the reporting requirements, while in subsequent years the cost is likely to be

$127m annually. The EPA is formulating this rule under the Clean Air Act, which will give environment planners an accurate

idea as to the extent of emissions; this will determine the future course of actions to reduce GHG emissions.

Appendix



APPENDIX

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