Class 11 The Changing Nature of the
International Business Environment
Class 11: Agenda
• Administration
7:00-7:15
• Review Protectionism
7:15-7:30
• Model Practice
7:30-7:50
• Globalization
7:50:8:15
• Break
8:15-8:30
• Review
8:30-9:30
• Q&A
9:30-10:00
Nature of the Business Environment
Outcome
• To be able to discuss the characteristics and
impact of globalization
• To be able to discuss the principles of international
trade and factors that influence favourably and
unfavourably
• To be able to apply course material to exam
Final Exam Info
MAY 26, 2009 @ 7:00 - 10:00 P.M.
IN STUDENT FIELD HOUSE
Final Exam Info

It is a three hour open book final examination. No
sharing of notes and textbooks -- each student is
responsible to bring her/his own notes and textbooks
to the final exam. There is no electronic aids,
including computers and cell phones; advise
students to bring a watch. They will be instructed to
put their cell phones away. Also, students must bring
identification to sign in/out of the exam.
Petro Canada - Suncor
Part 1: The acquisition of Petro
Canada by Suncor. The questions
will focus on the assigned midterm assignment articles from
Wesson as well as Lecture 6.
There will be two (2) questions,
each valued at 25 marks.
Part 2: One of the case studies in
which A General Model of
Government Intervention is
applied. There will be two
questions, each valued at 25
marks that will require applying
the Model.
Petro Canada - Suncor
http://www.cbc.ca/clips/mov/calvert-suncor-090323.mov
Final Exam Info

. The first part of the final examination consists
of two questions on Suncor's acquisition of
Petro Canada using the assigned articles
from the mid-term assignment from Dr. Tom
Wesson's Canada And The New World
Economic Order Third Edition. There has
been a twist in the deal between Suncor and
Petro Canada as now some at Petro Canada
do not want to sell to Suncor.
http://www.canada.com/Business/Business/1555097/story.html
Final Exam Info

Both questions are valued at 25 marks; so,
these are not short answers. Rather answer
the questions fully and completely. You may
recall from the articles that the theme of the
articles is about Canada's global
competitiveness.
Final Exam Info
You might find it helpful to go to the index at the
back of the book and look up "competitiveness".
Make notes to bring to the final examination.
 You will have only three hours to answer four
questions in total on the final examination. you don't
have time to waste copying word for word sentences
or paragraphs from the textbook. So, by creating a
set of notes for each article in your own words
summarizing the theme, arguments. Note source in
notes
 Citations of sources is required in answer
but no bibliography required

Final Exam Info


The second part of the final examination will
consist of two questions each valued at 25
marks. Again, these are not short answers.
Answer fully and completely in as much
detail. One of the case studies that we have
been discussing where A General Model of
Government Intervention has been applied
will be chosen.
Possible Cases
Final Exam Info
Required Case Readings: Between Public and Private
•
•
•
•
•
•
•
•
•
Triple E Senate
Medical Centre
Book Publishing Industry
Canada’s Industrial Strategy
Cultivating Cash
Privatization 407
Solid Waste Management
Commercialization LCBO
Soft Wood Lumber
P. 176-188
P. 325-360
P. 361-378
P. 379-396
P. 397-428
P. 437-442
P. 453-470
P. 443-452
P. 482-514
Final Exam Info


Be certain to present a theoretical explanations for
the Dimensions of the Intervention and Quality
Determinants.
Your answers will be evaluated on the correct use of
the case information and the presentation of your
analyses applying A General Model of Government
Intervention. If your answer has the incorrect Goal
and/or Interventions, then this puts your analyses in
jeopardy. So, read the questions very carefully and
answer what is asked. Remember. the Goal is often
embedded in the question. The Intervention is from
the case study.
Final Exam Info

Grades are only released by the Registrar's
Office; so, do not contact me as I am
prohibited from releasing grades.

I do not keep or have access to your final
examinations. They become the property of
the University so I cannot discuss your exam
after it is marked
Final Exam Info


Once the grades are released, you will have an
opportunity to view your final examination by making
an appointment at the School of Administrative
Studies in room 282 of Atkinson. You will notice that
only grades are provided and no comments are
provided on the final examination.
If you believe that something was overlooked in the
grading of your final examination, then you can
petition on academic grounds for a re-appraisal. But
there's a risk -- grades can be raised, lowered or
confirmed.
Protectionism
A Mixed Economy



Combines private
ownership with
government control
Attempts to eliminate
inefficiencies inherent
in both capitalism and
socialism.
Canada is one example
of a mixed economy.
A Market Economy



Canada is a market
economy.
Prices are determined
in a separate market for
each commodity.
Prices act as the
signaling mechanism to
answer all basic
economic questions.
Competition



In its pure form it refers to the
conditions that are present in the
marketplace when buyers and
sellers interact to establish
prices and exchange goods and
services.
Refers to the means whereby
the self interest of buyers and
sellers acts to serve the needs
of society as well as those of
individual market participants.
Pure Competition does not exist
Desirable Conditions for Workable
Competition
1.
2.
3.
A market structure
with at least two
buyers and two
sellers, but
preferably more
A mixture of large
and small firms
No collusion or
coercion among
sellers
What is Protectionism?

It is the degree to which a
government intervenes in the
operation of the day to day
market in an economy.

Refers to government policies
that shield domestic production
and producers from foreign
competition.

Even in the most right wing of
countries, governments will
inevitably choose to intervene to
protect what they perceive as in
the nation interest.
How does Protectionism Work

Degrees of Intervention
–
–
–
–
–
–
–
Persuasion (Minimum)
Manipulation of the tax
system
Tariffs & Non Tariff Barriers
The awarding of
government contracts
Granting subsidies and tax
concession policies
Government Owned
Entities
Nationalization of industries
Protectionism Interventions Tariffs

Refers to government
policies that shield domestic
production and producers
from foreign competition.

Tariff refers to a tax imposed
by the importing country
when a good crosses an
International boundary
An Example of a Protective Tariff

A Canadian Tariff of
15% is imposed on
foreign automobiles.
The automobile costs
$50,000/ This means
the tariff will be $7500.
When exported to
Canada the Canadian
price will be $57,500.
The Influence of Tariffs
1.
2.
3.
Reduces both imports
and exports
Collapse of trade
when tariff barriers
increase
The decline of tariffs
are often
accompanied by
growth of non-tariff
barriers
Protectionism Interventions Non-Tariffs
•
Non-tariff barrier refers to any action
other than a tariff that restricts
International trade
1.
Quotas
Licensing
Subsidization
Regulations
2.
3.
4.
The Decline of Tariffs was replaced by
Non-Tariff Barriers

Import quotas
–
–

A quantitative restriction on the
import of a particular good.
Marketing Boards
Voluntary Export Restraints
• An agreement between two
countries' governments in which
the government of the exporting
country agrees to restrain the
volume of its exports.
• Softwood Lumber
The Decline of Tariffs was replaced by
Non-Tariff Barriers


Non-tariff barriers are a more
severe impediment to
international trade than tariffs.
When non-tariff barriers and
tariffs are added together for
Canada, the overall amount of
protection increases more
than three-fold.
Redistubutive Policies: Subsidization
as Protectionism

Effect a transfer of resources within a society.
–
–
–
–

Government financing and Infusion of capital
Loans or loan guarantees
Incentive grants
Tax credits
Bailing out a bankrupt corporation
Arguments for Protection





Need to Protect infant industries
Need to diversify domestic industry
Need to protect domestic supply
Need to protect against dumping
National identity
Economic Nationalism





Refers to a movement
aimed at achieving greater
control by Canadians of their
economy.
Protectionism
Dislikes foreign ownership of
business
Examples
Defence against
Dependency Theory
Dependency Theory

Dependency theory is a body of social
science theories, both from developed and
developing nations, that create a worldview
which suggests that poor underdeveloped
states of the periphery are exploited by
wealthy developed nations of the centre, in
order to sustain economic growth and remain
wealthy.
Dependency Theory




Promotion of domestic industry and manufactured goods. By
subsidizing and protecting industries - countries can produce
their own products rather than simply export raw materials.
Import limitations. By limiting the importation of both luxury
goods and manufactured goods that can be produced within the
country, supposedly, the country can reduce the amount of its
capital and resources that are siphoned off.
Forbidding foreign investment. Some governments took steps
to keep foreign companies and individuals from owning or
operating property that draws on the resources of the country.
Nationalization. Some governments have forcibly taken over
foreign-owned companies on behalf of the state, in order to
keep profits within the country.
Consequence of a Protective Tariff




Producers dependent on
protection cannot normally
export since their costs are
often above world prices.
They depend almost entirely
on the domestic market.
No incentive to improve or
innovate
Focus on protecting tariffs
rather than business
Case: Book Publishing
In Northrop Frye’s words,
“In an immature society
culture is an import; for a
mature one it is a native
manufacture which
eventually becomes an
export.” (The Department
of Canadian Heritage: 362)
Case: Book Publishing
A Case of Protection: The Book Publishing
Development Program – Goal: Develop
Canadian Literary and Publishing industries
 From the 1950’s Canada realized that it was a
cultural wasteland with no literary figures nor a
viable publishing industry.
 Canadian culture and heritage was threatened
without a literary representation
 With the development of the Canadian Council
for the Arts in 1957 Canada has achieved
spectacular results.
Case: Book Publishing
Cultural Program
• Writers-in-Residence
• Writers in the Schools
• Wired Writers Program
Led to the development of many Canadian Authors:
Michael Ondaatje, Mordecai Richler, Margaret
Lawrence, Margaret Atwood

Public Lending Right Commission
Pays Canadian Authors to allow their books in libraries.
$8M to 11,151 Authors and covering 44,360 books
Case: Book Publishing
Industry Programs
Loan Program to Save Canadian
Publisher: McClelland and Stewart
 Support program for the sale and
marketing of Canadian Books and
structural support of industry
 Cancopy:Support for authors to get
paid for photocopying of their work

Case: Book Publishing
Key Result Findings
Canadian Books are acknowledged as a major cultural
success
 Industry is active in all major genres but its economic
viability varies greatly
 Canadian Owned publishing is diverse from small to
very large organizations
 Publishing is active in both French and English and in
every region of Canada
 Purchase of Canadian books if fueled by Canadians and
international audiences

Case: Book Publishing
Using the Case: The Book Publishing
Industry Development Program
choose one government intervention
that supports books publishing in
Canada and describe it using the
model of intervention and then
evaluate it using the one quality
determinant the best measures its
effectiveness.
Class 11&12 The Changing Nature of the
International Business Environment
The Interconnected World






The world had gone
international
Money has become an
internationally traded
commodity.
Physical trade has become
international
Service trade is international.
The power of international
markets drives all of these.
The barriers that separated
international markets have
been torn down by policy or
technology.
Financial Services



Exchange Rates are
determined principally by
market forces
As a result of these freedoms,
the financial services industry
has created vast array of
products enabling borrowers
and savers to take advantage
of financial conditions around
the world.
Thus firms have achieved
greater mobility.
Re-Thinking of the Global Economy


The global economy has
changed everything we do.
Costs have gone down and
connectivity had increased.
Distance, time and borders have
eroded because they leave no
country or community
untouched.
–
–
–
International air travel
International communication.
Information and media use.
Impact of Technology





People have been tied
together by the impact of the
global telecommuni-cations
revolution.
People now work and
communicate over vast
distances.
Trade can be executed
much more seamlessly than
in previous generations.
Information is much more
available.
Technology itself has
become a significant product
The Mobile Economy




Capital sweeps across
countries at electronic
speed.
Manufacturing and the
generation of services move
flexibly among countries and
are networked across
borders.
Markets are supplied from a
continually shifting set of
sources.
Ideas, insights, and
techniques are communicated with increasing
ease.
The Mobile Economy




Access to technology
continues to grow.
Borders are eroded as
markets are integrated.
As barriers fall, private
capital seeks new markets.
Government anxious to
reduce deficits and shift
spending to social needs,
increasingly welcomes this
investment.
The New Markets





The integration of financial
markets is significant.
Privatization marked the first
true global offerings of
equity
The distinctions among
national markets have
become lost.
World trade is growing.
Creative Destruction
increases opportunities
World Trade



As world trade grows, trading in
currency is growing at a steeper
rate
There is a greater risk of these
markets causing instability
because they are so large and so
much money is moving around in
them. Sub Prime Market
This can be destabilizing. Many
Asian states have suffered from
currency swings in late 90’s.
Today it is happening on a global
basis
How have Companies Positioned
themselves in a Changing World?
•
•
•
•
There is a presence of wider opportunities and
tougher competition.
Boundaries are coming down.
Computers, alliances and outsourcing are
permeating the walls of companies.
Financial operations are more transparent and
subject to more aggressive scrutiny and demands
by outside investors.
How have Companies Positioned
themselves in a Changing World?






Much wider and more diverse range of
opportunities.
More bracing competition and more risk
along with the pressure generated by
capital markets and customers who have
a broader range of choices.
Companies have to be prepared to meet
these challenges.
Fostering a culture that encourages
alertness, responsiveness and flexibility
and speeding up the cycle time of
processes and decisions.
Emphasizes the importance of employee
knowledge.
Information technology is driving the
process.
What is the Role of Business?




Companies have had to adapt to
become more nimble to meet the
challenges of the rapidly changing
markets. (e.g.. Eastman Kodak)
Entrepreneurial values and
attitudes emphasize initiative and
rapid response.
There is a need for creators and
builders.
Companies have to engage with
the community's interest,
environmental concerns and social
values.
The Characteristic of Globalization: Economics over
Politics
The erosion of borders
does not mean the end of
national politics, national
identity and economic
nationalism.
 A country's history, culture
and definition of national
objectives still shape politics
within each country.

What is the Role of Government?






To reduce intervention.
To retool and refocus intervention to preserve the
public trust.
To buy into the idea of fundamental global change.
To translate that change into policies consistent with
national culture, history and temperament.
To create and maintain the parameters within which
the market operates.
To move from an enforcer role to that of a referee.
Section 2: The Principles that influence
International Trade.

“The benefits of
international trade
result in a more
efficient employment of
the productive
resources of the world.”
John Stuart Mill
International Trade
 The
exchange of goods and
services between or among
countries
 Enables a country to specialize in
those goods it can produce most
cheaply and efficiently
 Enlarges the potential market for
goods of an economy
 Major force of economic relations
among countries
 Is an extension of governmental
policy
Reasons for Trade




Resources are not
completely distributed
across the globe.
The climate and terrain
of a state.
The skills of its labor
force.
The advantages of
specialization
Adam Smith


To specialize in
production leads to
increased output.
To trade internationally
specializing in
producing only those
goods in which a
country has absolute
advantage
David Ricardo (1817) on the Theory of
Comparative Advantage


A country gains from trading
certain goods even though its
trading partners can produce those
goods more cheaply.
Goods and services which a
country should produce and trade
with other countries is the goods
and services that it produces
relatively more efficiently than
other countries. Products that it
can acquire a higher price
externally than it can at home
David Ricardo on the Theory of Comparative
Advantage


A country is said to have a
comparative advantage in the
production of a good if it can
produce it at a lower
opportunity cost than another
country.
The opportunity cost of cloth
production is defined as the
amount of one unit of a product
good that must be given up in
order to produce one more unit
of another product.
Theory of Comparative Advantage
Canada
Beef
100Kg
3 person days
Cheese
100Kg
2 person days
England
6 person days
3 person days
• Canada has an absolute advantage in both beef and cheese
• Canada is relatively more efficient in Beef and therefore that is
Canada’s comparative advantage
• England has a comparative advantage in cheese
Economic Benefits of the Theory of Comparative
Advantage




International trade leads to
more efficient and increased
world production
It results in the expansion of
markets
It leads to growth in
domestic employment
It stimulates the
modernization and
innovation of domestic
companies
Criticism of the Theory of Comparative Advantage






Factors of production are
assumed to be perfectly
mobile.
Encourages dependency
There are no transport
costs.
There are only two
economies producing two
goods.
The theory assumes that
traded goods are identical
There are no tariffs or other
trade barriers.
The Importance of International Trade
•
•
•
Some countries export only to
expand their domestic market or to
aid economically depressed
sectors within the domestic
economy.
Other countries depend on trade
for a large part of their national
income and to supply goods for
domestic consumption.
Canada has the highest proportion
of it GDP depending on exports
than any other G7 country
The Importance of International Trade
International Trade % of GDP
Year Can
2000
2001
2002
2003
2004
2005
42.7%
40.7%
39.4%
36.2%
36.2%
36.0%
Fran
28.1%
27.5%
26.3%
25.1%
25.6%
26.6%
Germ Italy
33.2%
33.8%
33.4%
33.7%
35.7%
38.1%
26.6%
26.4%
25.2%
24.3%
25.0%
26.3%
Japan Korea UK
10.3%
10.3%
10.7%
11.2%
12.4%
13.6%
39.2%
36.7%
34.6%
36.8%
41.9%
41.2%
29.1%
28.7%
27.8%
27.0%
26.9%
28.3%
USA
13.2%
12.1%
11.7%
11.8%
12.7%
13.4%
Section 3: Multilateral Trading Agreements




INTERNATIONAL TRADE
Attempts to improve balance
of payments between
countries.
Use of differential tariffs.
Trade policy has become
the source of many
international disputes.
General Agreement on Tariffs and Trade GATT (1947)




Goal was to minimize new
existing trade barriers
Reduce import tariffs and
quotas
To abolish preferential trade
agreements between
member countries
Tariff concessions were
negotiated on the principle
of reciprocity. (you scratch
my back I’ll scratch yours).
Uruguay Round of GATT
•
•
•
•
•
The goal was the eventual
reduction of tariffs by 33%
Tried to reduce or eliminate
many non-tariff
impediments.
Strengthen protection for
intellectual property.
Open trade in investments
and services
Establish the World Trade
Organization (W.T.O.)
Doha Round
•
•
•
•
•
•
•
•
•
•
•
Began Nov. 2001
Involves 141 Countries
Tariffs
Non-tariff measures
Agriculture
labor standards
Environment
Competition
Investment
Transparency
patents etc
Dawlat Qatar
State of Qatar
WORLD TRADE ORGANIZATION - W.T.O.



Operates a dispute
settlement process
Possesses stronger power
to enforce agreements
Has the authority to issue
trade sanctions against a
country that refuses to
revoke an offending law or
practice.
The GATT Debate
SUPPORTERS
 GATT would improve the
overall business
environment.
 Would create jobs
 Would stimulate trade and
investment.
 Would allow countries to
lever their natural
competitive advantages.
OPPONENTS
 GATT would result in
massive losses of
manufacturing jobs
 Would result in lower pay for
workers in developed
countries.
 Opportunities would
threaten the sovereignty of
countries.
 The powerful W.T.O.
Trading Communities


To promote trade among
countries that have common
economic and political
interest or are located in a
particular region.
They favor member
counties over non-member
countries.
–
–
–
The Commonwealth of
Nations
The North American Free
Trade Agreement
European Union
International Trade

In 1990, International trade
was approximately $8.76
trillion (US), double that of
1980 by 2006 it has risen to
$14.6T
Source: Overseas
Development Institute ODI
The Growth of International Trade





Floating currency exchange rates
were adopted in 1973.
In the 1970s and 1980s, price
competition between trading
partners was augmented by the
resulting fluctuations in exchange
rates.
The depreciation of a country's
currency making exports appear
cheaper and causing imports to
appear more expensive.
This affects a country's balance of
trade.
Canada’s Situation
Section 4: Restrictions on International
Trade




Canada’s Dependence on
Natural Resources
How should Canada determine
the price of its natural resources?
Weighing increased current
income and consumption against
the possibility of lower real
income and consumption in the
future If costs increase.
Opposition to export sales of
natural resources.
Indirect Restrictions on Exports

Policies of diversification on
industrial production
–
–
–
The goal is to reduce
dependence on income from
exports if there is fluctuations
in export sales of
commodities.
To maintain a basic self
sufficiency in essential
commodities to avoid
dependence on other
countries.
National security concerns.
Specialization


Requires the mobility of
labour at high economic
and social cost.
Emphasizes the
broader range of costs
and the distribution of
potential benefits and
costs.
Restrictions on Imports






A tariff or import duty is a tax.
An ad valorem tariff is a tax as a percentage of the price of a
good.
A license fee is required to import specific a good.
Quotas are limitations on the quantity of a good which can be
imported.
Combined with an import license so that the importer is paying
a fee to import a specific amount.
More stringent restrictions
–
Embargo, Sanction, Boycott.
Why Tariffs Exist


Raising the price of imports
maintains domestic industries at a
less efficient level of production
than would occur under free trade
and encourages tariff retaliation
from other countries.
This compounds the loss of real
income and output that would be
realized by specialization and
comparative advantage.
CANADA AND INTERNATIONAL
TRADE




HISTORICAL PERSPECTIVE
From the 16th to the 18th
Century, Canada's leading
exports was fish and fur.
During the 19th century, there
was the exploitation of forests
and timber as they became the
staple export.
In the 20th Century, agriculture,
forestry, mining and
manufacturing was developed.
CANADIAN EXPORT GROWTH
Year
1950
1960
1970
1980
1996
2000
2005
2008
Billions of $
$3.16
$5.39
$16.82
$64.3
$275.82
$412.2
$450.1
$489.5
Goods & Services
Canada’s Export Grwoth
CANADIAN EXPORT GROWTH


March 2009
Canada’s merchandise imports and exports
both declined in March largely due to volume
reductions. Imports decreased more than
twice as fast as exports, leading to the
widening of Canada’s trade surplus with the
world from $262 million in February
to $1.1 billion in March.
Stats Can May 12, 2009
The Purpose of NAFTA



To gradually remove tariffs and
other trade barriers on most
goods produced and sold in
North America.
It was built on the Canada The United States Free Trade
Agreement (1989)
To eliminate or reduce many
tariffs between the two
countries.
The Goals of NAFTA




The Governments of Canada, the United States and
Mexico resolved to strengthen the special bonds of
friendship and cooperation amongst their nations.
To contribute to the harmonious development and
expansion of world trade and provide a catalyst to
broader international cooperation;
To create an expanded and secure market for goods
and services produced in their territories;
To reduce distortions to trade;
The Goals of NAFTA





To establish clear and mutually advantageous rules governing
their trade;
To ensure a predictable commercial framework for business
planning and investment;
To build on their respective rights and obligations under the
G.A.T.T. and other multilateral and bilateral instruments of
cooperation;
To enhance the competitiveness of their firms in global markets;
To foster creativity and innovation and promote trade in goods
and services that are the subject of intellectual property rights;
The Goals of NAFTA






To create new employment opportunities and improve working
conditions and the living standards in their respective territories;
To undertake each of preceding in a manner consistent with
environmental protection and conservation;
To preserve their flexibility to safeguard the public welfare;
To promote sustainable development;
To strengthen the development and enforcement of
environmental laws and regulations;
To protect, enhance and enforce basic workers rights.
National Treatment

Refers to establishing for Canada the United
States and Mexico with respect to a state or
province, treatment no less favorable than
the most favorable treatment accorded by
such state or province to any like, directly
competitive or substitutable goods.
National Treatment


This means that Canadian federal, provincial and
territorial governments cannot treat goods from the
United States and Mexico any differently from the
way that they treat domestic goods with respect to
taxation and regulations for sale, transportation,
distribution or production.
The United States and Mexico cannot discriminate
against Canadian goods.
Tariff and Non-Tariff Barriers




The crux is the reduction of tariffs.
There would be no exception from eventual
elimination of quotas and tariffs.
Tariff negotiations would start from actual or much
lower tariff rates.
Goods placed into four categories based on their
sensitivity to increased imports, reflecting both how
great an impact liberalization of trade would have
and how political powerful its producers were.
NAFTA Commission


The avoidance or settlement of all disputes
regarding the Interpretation or application of this
Agreement or whenever a Party considers that an
actual or proposed measure of the other Party is or
would be inconsistent with the obligations of this
Agreement."
Panels are organized on the basis of industry
sectors.
Dispute Resolution Panels


Anti-dumping refers to goods
that are sold at prices lower
than in their domestic market.
Countervailing refers to a
practice of a government to
decide that manufacturers of
imports have been unfairly
subsidized in some way by
their domestic government.
The Effects of NAFTA
• Created the world's second
largest free trade zone
• Brings together an estimated
number of 440 million
consumers (2008)
In 2006 trade between Mexico, Canada
and the United States accounted for $846
billion, which has represented an annual
increase of 8.6 percent, and an increase
of 193.1 percent from that registered in
1993.
Future Of NAFTA

It's a game where trade deals like
NAFTA ship jobs overseas and force
parents to compete with their
teenagers to work for minimum wage
at Wal-Mart. – Feb. 13, 2008
CLINTON: I think NAFTA was, in principle, a good idea
to try to create a better trading market between Canada
and the United States and Mexico. But I think the terms
that it contained, and how it was negotiated under the
Bush Administration and the failure to have any tough
enforcement mechanism, Jan. 27, 2008
Course Review
Government and the Economy?

How to we see the Economy
–
–
–
–
–
–
News Items
Housing Starts
Trade Figures
Employment Rate
GDP
Balance of Trade
What is government’s role in the
economy?






Regulator
Law Maker
Trade Negotiator
/Deal Maker
Benefactor
Protector/Guardian
Deliverer of Service
$200
$30
200
Political or Social Ideologies

Collectivist
–
Socialism


–
–

Democratic Socialism
Communism
Conservatism
Neo-Conservatism
Individualist
–
–
Liberal
Libertarianism
The Concepts of Capitalism


Refers to an economic
system where the
means of production, or
capital, is owned
primarily by individuals.
Economic decisions are
made by market forces.
The Concept of Capitalism
Focus is on an open system of:
 Pricing
 Profits and Losses
 Private Property Ownership
 Capital Movement
Differing Models of Capitalism
1. Pure Capitalism - Liberalism
 Defined by lack of government regulation
 Laissez-faire approach by government
2. Mixed Economy/Democratic Socialism/Conservatism
 Mostly privately owned, however, some degree of
government intervention
 Most modern developed economies have this element
Economic Liberalism




Laissez-Faire Capitalism.
Adam Smith, The Wealth of
Nations
If man is left to pursue his
own interests, he will
contribute to the common
good.
“Government is best which
governs least”
What is a Mixed Economy?




This is a capitalist ideology
Government regulated competition
Government protects indigenous industries.
(In Canada, timber, fishing, mining,
manufacturing.)
Government protects and develops social
programs.
Class 6: Government and its Effect on the
Private Sector
How do we view the Economy





Can $
Employment Rate
Housing Starts
Jobs Created
GDP Growth
Two Approaches to Running the
Economy

One camp favors government
intervention believing
politicians and bureaucrats
can orchestrate the economy
from above.


The other camp argues for tax
cuts and a reduction of
governments role in the
running of citizens lives.
This they argue is the only way
to achieve productivity.
Economic Principles
Gross Domestic Product
Gross domestic product (GDP), is the
unduplicated value of all goods and services
produced in a year within Canada ’s borders
measured at market prices. It is the standard
measure of the overall size of the economy . .
Economic Principles
Gross Domestic Product
GDP
is divided into four categories, according to
the final purchaser:
GDP
=Consumer Spending+Business and
Residential Investment+Government SpendingTrade Deficit (Exports-Imports)
Economic Principles
Multiplier
The multiplier effect specifically refers to the effect that spending has
when it is circulated through an economy. For example, when the building
of a sports stadium is proposed, one of the suggested benefits is that it
will raise income in the area by more than the amount spent on the
project. (mpc=marginal propensity to consume)
Wikipedia
Economic Principles
Monetary Policy
In any currency there is a supply of money, and an interest rate,
the price at which money can be borrowed.
Monetary policy uses a variety of tools to control one or both of
these, to influence outcomes like economic growth, inflation and
unemployment.
In Canada, monetary policy is the responsibility of the
BANK OF CANADA, a federal crown corporation that
implements its policy decisions largely through its ability
to alter the Canadian money supply.
Fiscal Policy



Fiscal Policy refers to the federal government's use of its
annual budget.
The budget strategy can also influence the achievement of the
government's objectives of internal and external balance and
economic growth.
The two main instruments of fiscal policy are:
–
–

government spending
Taxation
Changes in the level and composition of taxation and
government spending can impact
–
–
–
Aggregate demand and the level of economic activity
The pattern of resource allocation
The distribution of income.
The General Model of Government
Intervention
Canadians Back Government Intervention on Car
Insurance
Poll Reveals Satisfaction With Auto Insurance Is
Higher In Provinces With Public Systems
Types of Government Intervention
• Protectionism
• Deregulation/Regulation
• Privatization
• Law or Policy
• Tax Change
Strategic - Reactive Dimension


Reactive: is defined as one which
responds only to the superficial aspects of
the issue, without visible concern for
underlying root causes.
At the other end of the continuum is the
purely strategic response that would
consider and deal with the underlying root
causes to any issue.
Direct - Indirect Dimension


If the intervention is aimed at the
accomplishment of multiple goals or
objectives, then the measurement of whether
it is direct or indirect may depend upon which
goal is specified.
The same policy may be direct in respect of
one goal, but indirect in respect of another
Coercive - Voluntary Dimension

There is no continuum for this dimension. It
can only be one or the other.

The group or individual which the
intervention (policy) directly affects must
either adhere compulsory to its provisions or
its acceptance is voluntary.
Quality Determinants.


When you evaluate public policy not only
must you identify the type of intervention,
direct/indirect, strategic/reactive and
coercive/voluntary but it is also important to
make a quality assessment.
They are accuracy, precision, efficiency,
time delay and the environmental effects
on the private sector.
Accuracy

The accuracy of an
intervention is simply
the degree to which the
intended or stated
goals are satisfied
when all the effects and
interactions are
substantially complete
or have reached a state
of equilibrium.
Precision


PRECISION is the degree
to which the effect of the
intervention is limited to
only the intended goals.
Does the action result in
unintended consequences?
Efficiency

Efficiency measures the
differences or the
relation between the
resources or utilities
crested (expended) and
those expended
(costs).
Time Delay

Time delay is the period
of time between the
implementation of an
intervention and the
accomplishment of the
desired goals.
Environmental Effect on the Private Sector
of an Intervention


Accounts for who or
which sector has
government targeted
for change and what
will be the response.
Any change could be
deleterious to the
private sector.
The Policy Evaluation Matrix
Tips on Using the Model
 Do
not present a summary or
definition of the model – There are
no marks for this
 Do not summarize the case that is
identified – There are no marks for
this.
Tips on Using the Model
Identify the Goal that the intervention is
to solve or achieve. All aspects of the
model will refer back to this.
 Identify the intervention. Clearly state the
action to be taken whether it is from the
case or one that you are asked to design.
Read the Question

Using the Model: Quality Determinants
Accuracy – Greater/Less
– Precision – Greater/Less
– Efficiency – Greater/Less
– Time Delay – Less/Greater
– Effect on Private Sector/Less or More
Deleterious
–
 Explain
why for each
Part 3: The Rationale for Privatization





Improving Efficiency
Reducing the public sectors borrowing
requirements.
Reducing Government involvement in
enterprise decision making.
Encouraging Employee Share Ownership
Gaining political advantage
Privatization of 407
Quick Facts: From : Highway 407 ETR
1.407 ETR runs east and west just north of Toronto Canada's largest
city. From QEW (in the west) to Highway 7 just east of Brock Road (in
the east) for a total of 108 kilometers.
2. Connects with 6 interchanges on the 400 series highways:401,
403,, 410,, 427, 400, and 404.3.
First day of tolling was October 14, 1997.
4. Over 710,000 transponders have been distributed as of February
2006.
5. Over 12,922,268,218 total vehicle kilometers traveled since
opening 407 ETR in October 1997, as of January 30, 2006.
6. 108.081 kilometers is the total length of 407 ETR.
Case: The Privatization of Highway 407
Why was it done? Goal of Highway
1.
To build safe roads faster.
2.
Increased efficiency
3.
Not use Government Money
4.
To reduce costs. (To protect the environment.
5.
To introduce new technologies and efficiencies.
6.
Political.
Case: The Privatization of Highway 407
Outcomes
1.
2.
3.
4.
5.
6.
7.
To build safe roads faster. (20 years ahead of schedule)
Increase efficiency – Cost $300 M less
Not use Government Money $930M – (Gov. maintained
most of the risk)
To reduce costs. (eventually sold for 3+ billion)
To protect the environment. (Plans for protection
developed)
To introduce new technologies and efficiencies.
(innovative toll system use of concrete rather than asphalt
Political. (to create jobs)
Case: The Privatization of Highway 407
Goal: To build highways more efficiently
Using the case: Privatization of the 407
describe use use the model of intervention to
show why this to explain this intervention
and using one of the quality determinants
show that it was effective.
LCBO in 1927-1987




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

The intent was to promote temperance.
Stop the sin of alcohol.
Not set up as a traditional retail system.
Change of Government and new CEO
Review of the system began as sales began
to slip a 3 key publicized criticisms of LCBO
A new Board led by private sector directors
No money to deliver on that vision.
Commercialization of LCBO
Case: LCBO Privatization
The reasons that government undertake privatizations are as
follows.
1.
To improve efficiency (more stores needed, technology)
2.
To reduce public sector borrowing requirements. (no cost,
revenue increased revenue as well)
3.
To reduce government involvement in decision making.
4.
To ease problems of pay determination. To widen share
ownership.
5.
To gain political advantage. (Satisfied non-urban areas that
supported alcohol control)
LCBO in 1987-2008.



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





New Private Sector Management Team hired
LCBO Focused on Category Management and Retailing a team
Initially change was slow because if the lack of resources
available due to recession and 3 different governments
1994 LCBO Launches Credit and Debit Cards
New Computerization of all major functions
New Buying Function created
By 1997 Profit increased from $598M to $701M
1997-98 LCBO launches Airmiles and Sunday Shopping
LCBO launches new Strategic Plan with a 5 year capital budget
of $222M
Since that time profits have grown from $701M million to 1.4
billion.
Case: LCBO Commercialization
Using one of the reasons Governments
privatize crown corporations and Using the
Model of Intervention and the facts from the
case to Commercial the LCBO develop an
intervention that would be effective. Show
how your intervention is effective by using 2
quality determinants