Capitalism Around the World
Japan
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
WWII destroyed the economy
1952-1986 GDP/N grew 7.5x (75% purchasing power of US)
US
Japan
1.
A
3%
1%
B
5%
7%
Environment
a)
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
b)
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
2.
a)



b)
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
Natural Resources
4 main islands (smaller than CA); ¾ mountainous (expensive land)
import nearly all raw materials/energy
Human Resources
homogenous population (125m)
relationships: trust, loyalty, harmony, consensus, compromise
o vertical: teacher-student; employer-employee
o horizontal: kinship, firm, college; batsu (cliques): zaibatsu, gumbatsu, kambatsu
History
Meiji Restoration (1869-1913)
Perry: Open Door debate
overthrow of shogun feudalism
industrialization movement (zaibatsus)
Post WWII (145-1952)
¼ wealth destroyed; 20-25m homes destroyed; 80% ships lost; 3m people died
US Occupation:
o New Constitution:
 symbolic emperor
 parliamentary democracy
 limit defense spending as 1% GDP
 women suffrage; no primogeniture
o Land Reform
 1/3 land redistributed (1.8m landlords sold 2.7 acres each to 4.3m peasants)
 helped turned potential revolutionaries into political conservatives
o Labor Relations
 legalized labor unions; collective bargaining; right to strike
o Industrial Reforms (to destroy zaibatsus)
 antimonopoly law; fair trade commission
 extraordinary tax program (on capital and inheritance)
3.
Economic Structure
a)
Labor Relations
i)
Lifetime Employment
 tenure!
 mostly in large firms only
Benefits: low turnover; lower training costs; less worker resistance to tech change; more
loyalty
Costs: shirking; less dynamic change
b)
ii)
Seniority Based Wages and Bonuses
 to encourage loyalty
 eroding over time due to shortage of young people
iii)
Enterprise Unions
 25% LF covered
Financial System
i)
Economy relies heavily on banks to allocate funds from net savers to borrowers
 Japanese firms have higher Debt/Equity ratios: US 60% stock; Japan 65% debt
 BOJ: policy arm of Ministry of Finance
ii)
Gov’t kept interest rates below market levels
iii)
Credit has been rationed:
 quotas on loans
 downpayments
 taxbreaks
 subsidies
iv)
High savings rates
 postal savings accounts
 low access to credit

c)

undeveloped welfare system
Industrial Structure
dualism
o large, modern K-intensive with extensive subcontracting
o small, L-intensive
i)
Keiretsu (enterprise groups):
 bank
 trading company
 several enterprises
 cross-holding of equity; interlocking directorates; informal channels
Benefits:
 diversify risks
 access to secure credit
 shared info/experience
 political lobbying power
Costs:
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ii)
d)
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insulated from “market for corporate control”
soft budget constraint
entry barriers for innovators
contagion effects
Trading Companies
 specialize in buying and selling
 market research
 technical advise
 storage
 transportation
 insurance
 absorbs exchange rate risk
Economic Policy
Economic Planning Agency
o indicative plan: forecasts; information; communication
MITI (Ministry of International Trade and Industry)
o industrial policies
 develop new industries
 modernization
 assist declining industries
o policy levers
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

import barriers: quotas, tariffs; foreign exchange controls; informal (red tape,
quality standards)
credit/fiscal control: low cost loans; accelerated depreciation; tax breaks, subsidies
other: patent access; plant location; quality audits
European Capitalism


A)
post WWII economic development initiated by Marshall Plan
laissez faire vs mercantilist (dirigiste) history of France
France
Indicative Planning:
 to improve the planning process by providing better economic info
 avoid public goods problem
 avoid coordination failure
 forecasts and targets are voluntary; boosterism? (self-fulfilling prophesies?) Keynesianism?
 concertation with interest groups: gov't & business & labor & greens & seniors ???
 coherence
Problems:
 incentive incompatibility: producers may overstate their needs in order to strategically manipulate
input prices
 plans are subject to exogenous shocks; open economies more susceptible
 collusion among producers: US steel industry example
 extensive state involvement creates a dependency mindset
5 - year Plans:
 First Plan: Reconstruction: basic industries (steel, coal, electricity, transport, agriculture,
cement)
 Second/Third Plans: macro forecasting and modernization
 Third Plan: Social concerns and regional goals
 Nationalization (Mitterand's 1980s: Renault, banks, utilities, gas, coal, public transport; 25%
of industrial output in public hands)
 Privatization and European integration (1990s)
French Outlook:
 rising unemployment?

shorter work week

earlier retirement
 aging population?
B)
Germany
Social Market Economy
Economic Goals: price stability; stable currency; full employment; trade balance; stable growth
Social Goals: social equity; social security; social progress
German Reunification
 absorption into existing infrastructure; unlike other Soviet satellites that were forced to create
new institutions; social safety net in place; supply of entrepren.; access to markets;
1) Monetary union: 1-OM = 1DM (black market rate was 12-OM = 1DM)


WG: worker earns 20DM
EG: worker earns 10-OM (at black market rates, this is worth about 0.83 DM)
 parity conversion led to over-priced EG workers (they had very low productivity)
 Output collapse in GDR: overvalued worker led to unemployment; old K; cheap WG goods;
loss of CMEA markets
2) Privatization: Treuhand  chose rapid approach with minimal reorganization/investment
note: Privatization Strategies
1.
vouchers
2.
IPOs
3.
Auctions
4.
Negotiated sales  chosen by THA (political corruption?)



EG firms were excessively large (EOS?)
many inefficient firms were ultimately closed: Trabant
total assets sales were less than 25% of total transfer payments to the East! (Not a good
"leveraged buyout"!)
Costs of Reunification
 higher taxes and interest rates for WG
 Inflation
 Environmental damage
The European Union
A)
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History of EU
impetus for change after WWII was damage due to nationalism
Marshall Plan & Organization for EE Cooperation
European Coal and Steel Community (1951) [FTA]
 France, Germany, Benelux, Italy form common market in coal and steel
European Economic Community (Common Market; 1957) [CU]
 allow greater competition and specialization; economies of scale argument for national firms
 labor markets and agricultural markets were areas of difficulty
Maastricht Treaty:
 3 Pillars:

economic matters; monetary union; environment, energy, agric, transport, R&D

common foreign and security policy

common justice and home affairs: crime, drugs, immigration, etc
 Subsidiarity: issues are to be handled at the lowest level that can effectively deal with them;
coordinating hunting seasons?
 Future expansion? Eastern Europe
Note:
1.
Free Trade Area: limited tariffs and quotas [NAFTA]
2.
Customs Union: common external tariff [MERCOSUR: Arg, Braz, Para, Uru, Chile, Bol]
3.
Common Market: free movement of factors of production within member states
B)
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Institutions
European Council: 15 heads of state; 6mo turns at presiding over agendas
European Commission: Brussels bureaucracy; 20 commissioners
European Parliament: Strasbourg; 626 elected members; symbolic
Council of Ministers: 87 votes; based on economic size; qualified majority rule required (62 votes by
at least 10 different states)
15 countries: Table 9.1
B)
Welfare Effects of the Common Market
1.
Static Effects
Pt
Pb
Pc
Q1
Q2
A: domestic country
B: neighbor and partner
C: low cost producer at Pc
Note:
 at Pc, all of A's imports come from C: imports = Q3 - Q1
 tariff raises domestic price to Pt
 imports fall; domestic production rises

CS falls

PS rises

DWL is
 customs union eliminates tariff on B, but maintains tariff on C
 imports from C are eliminated; imports now come from B
 Trade diversion (from C to B)
 Trade creation (from A to B)
 Consumption effect (due to lower Pb < Pt)
 DWL is reduced, but still exists
 expanded market allows greater specialization and division of labor
2.
Dynamic Effects
 effects of competition and innovation
Q3
C)
External Trade Policy of EU
1.
Developed Nations
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2.
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D)
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1.
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2.
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GATT: MFN status
Common External Tariff for EU
Extended Free Trade Areas: eastern and central Europe; Turkey
Trade Wars: primarily in agriculture
Developing Nations
ACP agreements: preference given to former colonies; Banana war (Ecuador)
Single Currency
EMS: fixed exchange rates within Europe; required central bank coordination
German reunification problem: heavy borrowing lead to higher r and mark appreciation; other
countries had to raise their r
Maastricht convergence criteria: low inflation; interest rate targets; low public debt and deficit targets;
stable exchange rate
Benefits
reduced transactions costs: currency conversion
end to exchange rate uncertainty: encourage trade and more efficient resource allocation
elimination of currency holdings
seigniorage
Costs
elimination of exchange rate policy as means of responding to economic shocks
exposure to asymmetrical shock: adjustment costs will be localized and take the form of lower
standards of living: lower real wages causing labor to migrate
Note: European Central Bank
 independent: 8-yr nonrenewable terms; president of ECB serves 4 yr term
E)
1.
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2.
Fiscal Policy
Sources of Revenue
agricultural levies
customs duties
VAT: 1.4%
GDP levy: 1.27%
Expenditures
 Common Agriculture Policy (CAP): price supports
 Structural Funds: regional economic development for social cohesion
F)
Industrial Policy
 national champions that complete on basis of EOS: use of nontariff barriers and subsidies
 policy based on promoting successful competitive strategies and that comparative advantage can be
created by policy initiative rather than factor endowments
 foster collaborative R&D: public goods aspect; standards setting
 Competition policy
 merger reviews: Boeing and McDonnell Douglas; strings attached
 market for corporate control requires publicly traded companies rather than closely held
companies or banks
G)
Social Policy
1.
Unemployment
a)
Causes
 collective bargaining system: EU has more industry-wide wage agreements compared to US (control
hierarchy); introduces more inflexibility
 high reservation wages: generous income support programs
 nonwage costs: payroll taxes
 fragmented labor markets: regional, cultural, language differences?
 antiemployment bias of growth
2.
Redistribution Policies
Economics Impact of Tariff and Customs Union
S
Pt
Pb
Pc
D
Q4
Q1
Imports before tariff:
Imports with tariff on all:
Imports under customs union:
Before
CS
PS
Welfare
DWL
Tariff on all
Customs Union