today’s
developing economies have grown rapidly, wishing to catch up as quickly as possible with the developed world. China is the leading example.

Following are the risks that they face in terms of their sustained growth.

• Rising expectations on the part of their populations for improvements in lifestyles, including housing and consumer goods, risk disappointment if there is fall in global demand for the manufactured products on which export-oriented economies such as China are built.

• Rapid industrialization has led to environmental degradation (such as air pollution) and depletion of national resources such as water. For ordinary Chinese, problems of air pollution and poor water supplies have risen up the agenda, linked as they are to health. They naturally expect human well-being generally to be enhanced by the country’s economic development, but it has deteriorated in these respects.

• Demand from industries in rapidly developing countries for raw materials (such as metals) and energy has led to a global surge in commodity prices. This has benefited producers, but for non-renewable resources (such as oil), there are concerns. These concerns are raised in developed as well as developing countries.

• Industrialization and power generation (especially coal-fired power stations) are contributing to climate change. The most rapid growth in greenhouse gas emissions is taking place in the developing countries – China is now the largest emitter (see Chapter 13). Climate change is a global issue, implying that all countries should bear responsibility for reducing emissions. However, the large developing countries have been reluctant to go along with this view.

• Country A  

Policy-makers here face a situation which has been attributed to globalization. The government could invest in education and training for these semi-skilled workers in their 30s and 40s, but there would need to be employment prospects in other businesses to get them back into employment. Some could well start their own businesses, but only a few would be likely to do so. The government could aim to attract new businesses to the region, by incentives for start-ups. Redundant workers could be encouraged to seek work in other regions of the country, but this may not look appealing to these workers, given their age range and likelihood that they have families; it would probably appeal more to younger workers.
 

• Country B  

This is a very high level of unemployment, and these rural areas could well suffer from social unrest. Workers in the 18-24 age group would probably be willing to go to the cities where jobs are available, but not if jobs are becoming scarcer. Policymakers could encourage businesses to move to rural areas, where these workers would probably work for less than their urban counterparts. They could also live at home, rather than in dormitory accommodation near urban factories. Businesses could reduce costs in terms of wages, but the costs of transport would probably rise, as would delivery times. This situation has occurred in China, where industrial development has been concentrated in the coastal areas.

First define what is meant by equality of opportunity.

Equal access to education is often difficult to achieve for policymakers. In all countries, richer regions are likely to have better schools than poorer ones. In developed countries, the numbers of students going to university is greater in the richer areas than in the poorer, even though, in theory, all have equal access to schooling. In developing countries, poor families which struggle to survive are often unable to send children to school, even for the few years of primary education provided by the state.

Define the distinction between equality of opportunity and equality of outcomes.

This is a highly relevant issue in light of state intervention in financial markets in late 2008. Interventions in the US, UK and other European countries, to shore up banks and keep financial flows moving suggested to some that faith in the liberal market model is perhaps misplaced. Many are therefore more likely now to agree with the statement that, in practice, markets are not very good at serving public welfare goals. Their reasons could include the following: Risk taking in financial markets has been facilitated in an atmosphere of light regulation, which, with hindsight looks to have been a mistake. Indeed, sectors such as derivatives trading, hedge fund activities and private equity buyouts have been essentially unregulated (see Chapter 11). It has been assumed that the benefits of economic growth would ‘trickle down’ to all in society, but this has not happened. Vast wealth has been accumulated by senior executives, especially in financial sectors, which is producing a backlash from ordinary working people. Many would argue, however, that the market model is essentially better than the alternatives, but that better regulation is needed.

• Note that the question asks which factors the foreign investor should look for. What should the foreign investor look for in the economic environment of possible locations?

Summarize what foreign investors tend to look for: government policies which do not discriminate against foreign firms, and possibly offer incentives such as tax holidays; light regulatory systems; relatively low social costs; low taxes; public investment in education, health, infrastructure and other public goods. Some of the items on this list are contradictory, which is why businesses are accused of wanting the best of all worlds. The foreign investor should look for regulatory systems which are not necessarily the lightest, but are fair, transparent and relatively easy to follow. Similarly, the investor should not necessarily be deterred by high social costs, as the social benefits such as education and health indirectly benefit the business.

• Students are invited to choose which developed market economy is the best for doing business of the ones described in the section, and why.

Those favoring the liberal market model can point to the freedom of enterprise in the US, but those favoring the social market model will point to the problems of paying for social welfare in the US, and suggest that the Nordic or European models are fairer, making them better places to do business.

• Poland: Drawing on the strategic crossroads feature, an advantage is the availability of skilled workers at a fraction of the cost in Germany. Another advantage is that Poland’s economy is enjoying reasonable growth, and has attracted a number of foreign investors. It has been in the EU since 2004. Disadvantages are poor infrastructure, burdensome bureaucracy and high levels of corruption.

• Romania: Romania has had slower economic development than Poland, and has lower GDP per capita. It is a transition economy, but its industries have lagged behind those of Poland. It joined the EU in 2007, creating expectations of modernization and stable growth. However, corruption and bureaucracy remain drawbacks for foreign investors.

• Russia: (see CF5.1) Russia is probably the riskiest of the three countries for foreign investors. Its government remains authoritarian despite outward market reforms. Foreign investors have been attracted to its growing numbers of middle-class consumers, but the heavy-handed state is a disadvantage. Russia’s economy suffered a financial crisis in the late 1990s, adversely affecting foreign investors.

China’s capitalism
(page 107)

Contrast China's market reforms with those in the post-communist transition economies. How are the conflicts between open markets and party-dominated bureaucracy likely to be resolved in the future?

China has liberalized its economy, welcoming capitalist enterprises and allowing private businesses to operate. However, it remains dominated by the Communist Party, in contrast to the post-communist countries, most have which have brought in at least some minimal democratic government. In addition, China’s state-owned companies remain influential players in the economy, again in contrast to the transition economies which have privatized many state-owned companies. Many of China’s state-owned companies have listed on domestic stock exchanges, but remain under state/party control.

Many are likely to agree with this view, at least initially. The reasons: Companies look for location advantages for FDI, which has meant that some countries are favored over others. Governments which are keen to attract FDI stress their location advantages, in a kind of competition to attract investors. On the other hand, some countries have pursued policies of economic development which have stressed the nurturing of domestic businesses instead of FDI – India is an example. Of course, India has benefited from globalization, its IT and computing services companies becoming global players. Countries therefore benefit from national economic differences whether they are looking to attract FDI and outsourcing or are pursuing a more national path of economic development.

On the other side of the argument, it should be pointed out that most countries are pursuing market reforms, liberalizing and opening their economies. These reforms attract investors, encourage local firms and promote consumer markets. In this sense, therefore, they are tending to converge along capitalist lines. This chapter has highlighted differing models of capitalism. Students can consider whether these are converging or remaining distinct.