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ECONOMIC SYSTEMS
Presented by:
Dharun Prasad R
Gaddu Sneha
Vadivel PalaniappanVignesh Nagarajan
DMS, IIT Delhi batch of 20131
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South Korea and North Korea had been one nation before theKorean war of 1950-53
People speak same languages, but having differentideologies after separation
North and South Korea has had different economic systems
since the Korean War. South Korea operates under a marketeconomy system, in contrast, North Korea adapted centralplanning economy
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Centre planning of North Korea andMarket economy of South Korea
Market economy of South Korea has led to dramatical improvement of the economyfrom less developed nation with severe unemployment, negative savings and the lackof exports to rapidly developing country
The gross national product (GNP) has been growing faster than the population as wellas gross domestic product (GDP) during last 3 decades
Meanwhile, the central planning system of North Korea, around the beginning of the1960s, had faced delays and the economy growth has continued to be slowdown until
1980s.
Source: htt ://econc10.bu.edu/economic s stems/Countr com arisons/Korea North South.htm
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North Koreas economy policy was theself-reliant economy policy and thispolicy had led to their economic failure
This serious economy failure of NorthKorea has resulted in a poor rate ofexports, chronic trade deficits, and asizable debt
This deep slump of North Koreaneconomy has been put far behind of theSouth Korea.
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Overall economy structure of North Korea can be characterized by State ownership of allproduction, command economy and completely closed economic system
This self-reliant economy system made country to imbalance in the distribution ofresources and in the demand and supply of goods
Self-reliant economy in North Korea lead to reject the imports of foreign capital andtechnology and they mostly use their own domestic resources to produce products.
Therefore, this completely closed policy has made the country to more severe economiccondition.
Self Reliant North Korea
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In North Korea, The private sector is not allowed to develop by the subsidization of thestate owned enterprises and only 25 percent is engaged in agriculture
State-owned manufacturing industries employ is more than 56 percent of the work forcein the late 1980s
This State owned industries produced 95 percent of manufactured goods. Economicgrowth was about 2%-3%, whereas output declined by 3%-5% annually during 1980sthrough the early of 1990s
Their manufacturing is heavily concentrated on military industry. As a result, their nationalproduct real growth rate was 0 percent in 1994
The transition to make development of the private sector is hard because of heavilysubsidized state owned enterprise sector and the inefficient labor market.
Workers with state-owned enterprise have no incentive and they use resources ininefficient way
Such economic conditions led North Korea to economic crises and it caused severeproblems such as food-shortage and many people die from mass starvation 4
Why Economic Crisis in North Korea?
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In South Korea, Over the period, the real gross national product expanded by anaverage of more than 8 percent per year from $2.3 billion in 1962 to $204 billion in
1989
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Outward Looking South Korea
Manufacturing sector grew from 14.3 percentof the GNP in 1962 to 30.3 percent in 1987and the ratio of domestic savings to GNP grewfrom 3.3percent to 35.8 percent over thisperiods
This big growth of economy has been possiblebecause of the adoption of an outward-lookingstrategy in the early 1960
South Korea had the lack of natural resource endowments, low saving rates andpoor domestic market, so the government promoted economic growth throughlabor-intensive manufactured exports
The manufactured exports has had big role for the growth of Korean economy and,as a result, the peoples standard of living has enormously improved with rapidindustrialization
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While economy structure has been maintained under state-owned enterprises in North Korea,class structure of South Korean society has been changed by rapid economic growth,industrialization, and urbanization under market economy system
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Transformation of South Korea
New middle class, such as engineers, healthcare professionals,university professor, and journalists, has grown enormously from6.6 percent in 1960 to 17.7 percent in 1980
The proportion of industrial workers grew from 8.9 percent to22.6 percent of labor force during same period
After forty years of market-based growth, real GDP per capita isnow about 17.5 time higher in South Korea compared to itsnorthern neighbor
However, this rapid industrialization in South Korea has been heavily relied on urban areas,such as Seoul, so there exists inequalities between rural and urban area
For example, the population of rural lower class declined from 64 percent in 1960 to 31.3percent in 1980
This heavy tendency of labor force in urban area made the inequality of income anddisparity in living standard between urban and rural area
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Rank Organizations
1 Hyundai
2 Samsung
3 LG7
Top 3 Chaebols of South Korea
GDP Comparison
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Has the transition in the former state socialist countries been a success?
With hindsight, would a transformation of the economy, without a change in the politicalsystem, have secured economic prosperity?
State socialism is a form of economic organization which is set against markets andprivate property
The lack of freely functioning system made the measurements of relative scarcitiesand ranking of preferences very difficult, leading to both shortages and overstocking indifferent sectors
Absence of transparent transactions led to corruption, and due to shortages, blackmarkets would develop where goods could find their own price
Socialism falsely assumed that planners would be altruistic
The only countries to have stuck with such a system till now are Cuba and NorthKorea, both of which have had massive economic difficulties in 1990s, making clearthat market needs to be introduced 8
Transformation of the economy
Source: http://www.stewartmorris.com/essays/16DLane1.pdf
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Poland has made a significant progress in moving from a communist, state
planned economy to a market economy
It was a part of Eastern Bloc countries of Europe
Drop in Performance:1. By 1990, industrial production had fallen to 86%
of the 1980 level, retail sales to 85.2%, and realwages to 75.8%
2. First free elections happened that year and leadto a new non communist government
3. Shock Therapy was used to speed up thetransformation to market economy
Shock Therapy:1. Price controls were lifted for most of the products2. Import restrictions removed
Poland Shift from Communism toFree Market Economy
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The economic transformation of enterprises was performed in three ways:
New private enterprises were established, usually in the form of partnerships and limited
liability companies, with a majority of Polish ownership. These were mainly small but efficient enterprises such as factories, workshops, and trading
and service companies.
Joint ventures were formed with foreign investors, often through wholly owned foreignsubsidiaries. Such enterprises were established mostly by the restructuring of state-ownedcompanies.
There were more than 28,000 of these companies in 1998. After 1991, foreign corporationssuch as Citibank, General Motors, Daewoo, Volkswagen, Goodyear, Procter & Gamble,Coca-Cola, and Pepsi-Cola began forming wholly owned subsidiaries to do business inPoland.
State enterprises were privatized, either by selling them completely (most frequently under
long-term leases) to their employees or management teams (there are 1,040 suchcompanies now) or by maintaining partial state ownership and making the employeesresponsible for financial results and removing governmental subsidies.
This involved the transfer of 1015% of the shares to the employees (1,070 companies).Some of these newly commercialized enterprises were placed under control of nationalinvestment funds, whose shares were later sold for a nominal price to all citizens.
Transformation to Free Mixed Economy
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Poland's gross domestic product increased by 26% from 1992 to 1996, thefastest growth in central Europe.
In 1997 the GDP grew by 6.9%, and in 1998 by nearly 6.5%.
The unemployment rate reached a high of 13.2% in 1996 before dropping to10.5% in 1997, and then to 9.6% in October 1998.
Inflation was 14.9% in 1997, decreasing to 9.9% in October 1998.
The national debt totaled $40.5 billion in 1997, down from $48.5 billion in 1990.
Foreign direct investment reached $20.6 billion by the end of 1997, compared to$17 billion in Hungary and $8.2 billion in the Czech Republic.
U.S. investors have led the way, with almost $4 billion invested by the end of1997.
The largest investment ($505 million) comes from the Polish-American Fundcreated by Congress, followed by Pepsi-Cola, International Paper, and Philip
Morris. Many Americans of Polish descent have established small enterprises in Poland.
Improvements In Performance
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Free market forces
Profit
Private Property
Characteristics of Capitalism :
It transforms itself into two forms: Leads to development of large-scale multinational organizations, Rationalizes values, attitudes &behaviors with corporate goals to make
abnormal profit
The crucial point here is whether the expanding capitalism and its rationale apositive or negative impact on the economy
CAPITALISM
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History:
Emerged in early 19th century in Western Europe and by the end of 20thcentury has become truly global due to its dynamic nature
Though by the end of twentieth century almost all nations have adopted thebasic framework of capitalism it continues to be considered as a system of
exploitation rather than path to prosperity
1973 Overturning of left wing government led to market reforms
1991 India had a shortage of foreign exchange reserves
Sub-saharan countries IMF-World bank structural adjustment programmes
Trade liberalization, financial deregulation and advent of informationtechnology set the ball rolling in developing countries like India and China
CAPITALISM - History
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Cross border capital flows
The Asian currency crisis, Mexican peso crisis are cases in point thatdemonstrate how it can be a double edged sword
Hence this must be implemented only after market distortions are eliminatedsuch as in the case of developed countries
Benefits Meagre domestic savings supplemented by global pool of saving
Financial institutions can borrow in times of economic downturn
FDI by MNCs
Export oriented industrialization cited as a result of capital accounts
The distortions caused are classified as:
Policy ineffectiveness (Monetary policy)
Capital flight (Absence of well defined property rights)
Distortions due to financial fragility
Capital Account Convertibility
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Inadequate financial regulation due to liberalized and globalized economy
Sub prime crisis Loans to borrowers with poor credit record due to which the real estateand consumption booms sustained
Risk involved transferred to investors who bought the mortgage backed securities
Conclusion Easy liquidity in a loosely controlled financial system increases the fragility
Surge of capital to developing countries is not due to financing needs but completely supplydriven
MNCs seeking profit investing in the emerging
markets
Increases financial vulnerability
Reduces fiscal and monetary autonomy of
government
Lessons from Sub Prime
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Global recession is off shoot of the concept of free-market global capitalism
South east asian currency crisis South Korea, Thailand, Indonesia etc affected
World striving towards progressive alternatives where is better corporate governancewith corporate social responsibility
Problems of Global Capitalism:
Volatility More than 1.5 million flows across international waters everyday
Race to the bottom Cutting costs to attract mobile capital
Inequality The gap between rich and poor widening
Degradation of democracy Trade agreements restrict the governing of ones owneconomies
Global Capitalism
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Care to be taken by the developing countries:
I. Adopting sound macroeconomic policies
II. Better disclosure of information
III. Sound banking practices
IV. Good corporate governance
V. Institute capital controls
Developing Countries
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USA
Extensive coastline, lakes provide additional shipping access Strong emphasis on technical and vocational training
Top down chain of command in organizations and reflects scientificmanagement principles
Features : Two thirds of the total economic output goes for personal use
Of the opinion that some tasks are better performed by public enterprisessuch as education, road system, defense etc
Govt role : Monitors the economic activity and plays the part of a facilitator
Canada
Vast deposits of natural gas and self sufficient in energy
FTA, NAFTA increased the trade and economic integration with US(economic downturn hence had a negative impact)
Taxation according to the income group
Standard of living, literacy better than US
Monetary policy above that of US
CASES
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Types of Socialism
Socialism
Coordinating
mechanism
Plannedsocialist
MarketSocialist
Ownership
Publicownership
Cooperatives
Commonownership
Based on coordinating mechanism:
Socialist economic systems can be subdivided by their coordinating mechanism(planning and markets) into planned socialist and market socialist systems.
Difference is presence of market or not.19
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Socialism
Socialism is an economic system characterized by social ownership and corporative
management of the economy
Difference between capitalism and socialism:
Capitalism Socialism
Production carried out to maximize privateprofit
Production is carried out to directly satisfyeconomic demand by producing goods and
service for use
Decisions regarding investments are taken byprivate business owners. Production takesplace within the process of capitalaccumulation
Decisions regarding investments are carriedout through a mechanism of inclusivecollective decision making
Means of production are owned primarily byprivate enterprise
Means of production are either publicly owned,or are owned by the workers cooperatively
A socialist economic system would consist of an organization of production todirectly satisfy economic demands and human needs, so that goods and serviceswould be produced directly for use instead of for private profit driven by theaccumulation of capital
Distribution of output would be based on the principle of individual contribution.
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Socialism based on coordinating mechanism
1. Planned socialist or economic planning:
It refers to planning of economic activity outside the mechanism of markets.
Planning is an economic mechanism for resource allocation and decision-making incontrast with the market mechanism
2. Market socialism:
Theyare either publicly owned or cooperatively owned and operated for a profit in amarket economy.
This Socialist economic system that is based on the process of capitalaccumulation, but seeks to control or direct that process through state ownership orcooperative control to ensure stability, equality or expand decision-making power
Theoretically, the fundamental difference between market socialism and a traditionalsocialist economy is the existence of a market for the means of production andcapital goods.
Capital Accumulation:Gathering or amassing of objects of value; the increase in wealth through
concentration; or the creation of wealth
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Socialism based on ownership
1. Worker cooperative:
Cooperative owned and democratically managed by its worker-owners
All shares are held by the workforce with no outside or consumer owners, andeach member has one voting share
Two ways of worker cooperative are given below:
1. A cooperative enterprise may mean a firm where every worker-ownerparticipates in decision making in a democratic fashion
2. Managers and administration is elected by every worker-owner, and finally itcan refer to a situation in which managers are considered, and treated as,workers of the firm
2. Common Ownership:
Common ownership differs from collective ownership.
The former means property open for access to anyone, and the latter meansproperty owned jointly by agreement
Example of common ownership is like public park available to everyone
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Socialism based on ownership
3. Public ownership:
Also called as state ownership, government ownership or state property
Properties that are vested in the state, rather than individual or communities
Public ownership may refer to state ownership or control of any asset, industry, orenterprise
Control can be at any level national, regional or local
Government owns and controls the stake of the shares
Government owned corporation is sometimes called as SOE(state ownedenterprise)
SOE may resemble a not-for-profit organization as it may not be required togenerate profit
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Communism
Communism is articulated by Marx as "second stage Socialism" whereby
economic output is distributed based on need and not simply on the basis of laborcontribution.
Work in order to receive goods would allow people to pursue their own interests anddevelop their own talents without being coerced into performing labor for others
The primary concern for socialist planned economies is to coordinate production todirectly satisfy human needs/economic demand (as opposed to generate profit andsatisfy needs as a byproduct of pursuing profit)
Kinds
Marxism
Marxism leninism
Maoism
Stalinism
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Communism
Marxism and leninism:
Marxism-leninism is the Bolshevik leader Vladimir Lenins variant of marxism
Marx established the general philosophy and Lenin attempted to apply the philosophy inRussia.
Lenin adapted Marxism to a pre-industrial society in which the peasants formed the mainclass of workers.
Marx's main appeal was his ability to express the frustrations of workers enslaved in mines
and factories, and Marx called for the workers (proletariat) to overthrow the industrialcapitalist owners.
Lenin agreed with Marx's call to violent revolution, but some communists (the revisionists)claimed that communism could be achieved through peaceful means
Chief difference between earlier Marxism and Lenin's views was that Lenin believed
socialism could be established in a country which had not passed through the fulldevelopment of industrial capitalism.
Marx viewed the socialist revolution as arising out of the industrial proletariat. Yet Russia atthe time of the Bolshevik Revolution was not primarily an industrial country; its commonpopulace were primarily agricultural peasants, not industrial workers 25
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Communism
Maoism:
Maoism is a variant of marxism-leninism derived from the teachings of the
chinese communist leader Mao zedong
Maoist groups outside China have usually called themselves "Marxist-Leninist"rather than Maoist, a reflection of Mao's view that he did not change, but onlydeveloped, Marxism-Leninism
Maoism talks of a protracted peasantry revolution by eliminating the class enemiesby guerrilla warfare
Maoism believes in extreme violence as the only weapon to seize power
Communism and Marxism:
Communism was Marx theories. Communism is a political theory derived fromKarl Marx
Marxism is an updated version of communism, updated by Karl Marx's followers
Later there were different variant of communism according to lenin, stalin, Mao,etc
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Communism
Stalinism:
Stalinism - Totalitarian communism based on the political methods of Joseph
Stalin
Power is exclusively in the hands of the Communist Party, which is organized onrigidly hierarchical lines
The leader is presented, by state propaganda, as the selfless and benevolentparent of the nation.
The general population is controlled by a vast bureaucracy and all opposition andinternal debate is ruthlessly repressed by the secret police
It is said that Stalin changed marxism to suit his evil objective
Totalitarianism (or totalitarian rule) is a political system where the state recognizesno limits to its authority and strives to regulate every aspect of public and private lifewherever feasible
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Socialist countries
Marxist-Leninist:
These countries are known as communist states, because their ruling parties
generally use the name "Communist Party of [country]. Follows the ideology ofmarxism-leninism and says all power belongs to working class
1) China ( since 1949)2) Vietnam (since 1954)3) Albania (1946-92)4) Peoples republic of Korea (1948-92)5) Poland (1945 89)
Non Marxist-Leninist:These countries make reference to socialism but do not follow marxism-leninism
ideology
1) India (since 1947)2) Korea (since 1992)3) Bangladesh (since 1971)4) Egypt (1952-78)5) Kenya (1963-92)
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Production carried out to maximize profit
Investment decisions by business owners
Mercantilism -> Capitalism
Adam smith, David Ricardo opposed the Mercantilists
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Anarcho-Capitalism
Interventionism
Facism
Capitalism
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Japan Cartels & Keiretsu
USA Proactive and promotional role of state
India Democracy before capitalism, Politics over economics
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Source: US Capitalism Richard WhitleyThe Ele hant Paradi m Gurucharan Das
Capitalism the tinted view
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