cyrus chronicle journal · editor’s introduction welcome to the premier issue of cyrus chronicle...

ii CYRUS CHRONICLE JOURNAL (CCJ):

Contemporary Economic and Management Studies in Asia and Africa CCJ, V. 1, No. 1- May 2016

CYRUS CHRONICLE JOURNAL (CCJ):

Contemporary Economic and Management Studies in Asia and Africa

An imprint of Cyrus Institute of Knowledge

http://www.cyrusik.org/

May 2016

Table of Contents Editor’s Introduction ...................................................................................................................................................... v

Asgary H. Nader, A Perspective and Summary on the “Role of Institutions in Sustainable and Socially Equitable

Development,” at the CIK 2015 conference at Harvard University. ............................................................................. 1

Walle, Alf H., “Ethnic Distinctiveness and Strategic Choices: Fostering Harmony in the Middle East and

Neighboring Regions” ................................................................................................................................................... 5

Bahmani-Oskooee, Mohsen and Bahmani Sahar “The Rial-Dollar Exchange Rate and the Purchasing Power Parity”

..................................................................................................................................................................................... 18

Chu, Hsiao-Ping; Chang, Tsangyao; and Sagafi-nejad, Tagi, “Globalization and economic growth revisited: A

bootstrap panel causality test” ..................................................................................................................................... 24

Farooqi, Hamidullah and Asgary, H. Nader, “Natural Resources and Economic Development: Case of Afghanistan38

Saraswat, Satya Prakash, “Information Technology in the Global Strategy of a Multinational Bank from an

Emerging Economy” ............................................................................................................................................... 51

Ganideh, Saeb Al., “Reintegrating Iran with the West: Challenges and Opportunities” edited by Mohammad N.

Elahee, Farid Sadrieh and Mike Wilman, Emerald ..................................................................................................... 62

Morin, Jasmine, “The Globalization of Inequality” by Francois Bourguignon. .......................................................... 65

McIntire, Ellen, Office of Ethics and Compliance Raytheon Company, “Business Ethics, A Stakeholder & Issues

Management Approach, by Joseph W. Weiss. ............................................................................................................ 68

Announcements:

CIK 2016 Conference – March, 14-17, 2016, American University in Cairo, Egypt

CIK 2017 Conference – March, 20-23, 2017, Harvard University, Cambridge MA, USA

Guidelines for submission to CCJ


Contemporary Economic and Management Studies in Asia and Africa

The flagship journal of the CYRUS Institute of Knowledge

===========================================================================================================

THE CYRUS CHRONICLE

JOURNAL (CCJ)

Editorial Board

Editor: Tagi Sagafi-nejad,

Professor Emeritus,

Loyola University Maryland, USA

Nancy Black Sagafi-nejad,

Assistant Editor

Editorial Advisory Board:

Sousan Abadian, Ph.D., Massachusetts Institute of Technology, USA

Abdelwehab Alwehab, Ph.D., University of Baghdad, Iraq

Nader Asgary, Ph.D., Bentley University, USA

Reza Askari Moghadam, Ph.D., Tehran University, Iran

Bulent Aybar, Ph.D., Southern New Hampshire University, USA

Mohsen Bahmani-Oskooee, Editor, Journal of Economic Studies, The

University of Wisconsin-Milwaukee,

USA

Gabrielle Bedewi, Ph.D., Former

Global Segmentation Leader, Nielsen, USA

Nada Nasr Bechwati, Ph.D. Bentley University, USA

Mansour Farahani, Ph.D., Harvard University, USA

Farok Contractor, Ph.D., Rutgers University, USA

Maling Ebrahimpour, Ph.D., University of South Florida, USA

Ahmad Etebari, Ph.D.,

University of New Hampshire, USA

Hamidullah Farooqi, University of

Kabul, Former Cabinet Member,

Afghanistan

Bahram Grami, Ph.D.,

Author and Editor, USA

Fariborz Ghadar, Ph. D.,

Penn State University, USA

Purpose:

The CYRUS Institute of Knowledge (CIK) Journal is a refereed interdisciplinary journal. The editorial

objective is to create opportunities for scholars and practitioners to share theoretical and applied

knowledge. The subject fields are management sciences, economic development, sustainable growth, and related disciplines applicable to the Middle East, Central Asia (MENA) and North Africa. Being in

transitional stages, these regions can greatly benefit from applied research relevant to their development.

CCJ provides a platform for dissemination of high quality research about these regions. We welcome contributions from researchers in academia and practitioners in broadly defined areas of management

sciences, economic development, and sustainable growth. The Journal’s scope includes, but is not limited

to, the following:

Business Development and

Governance

Entrepreneurship

Ethics and Social Responsibility

International Business and Cultural

Issues

International Economics

International Finance

Innovation and Development

Institutions and Development

Leadership and Cultural Characteristics

Natural Resources and Sustainable Development

Organization and Cultural Issues

Strategy and Development

Women and Business Development

Authors are responsible for the views expressed and the accuracy of the facts provided. Authors’ opinions do not necessarily reflect the position of the CYRUS Institute of Knowledge, the Editor, or the Editorial

Advisory Board of CCJ.

Editorial Advisory Board Members:

Professor Tagi Sagafi-nejad is the editor of CCJ. Dr. Sagafi-nejad is ex-editor of International Trade Journal, the author, in collaboration with John Dunning of The UN and Transnational Corporations: From

Codes of Conduct to Global Compact, (2008) and “The Evolution of International Business Textbooks”

(2014). He was the Radcliffe Killam Distinguished Professor of International Business, founding Director of the PhD Program in International Business, and Director and Center for the Study of Western

Hemispheric Trade at Texas A&M International University (2003-2013). Dr. Sagafi-nejad is well-known

internationally and has outstanding credentials to develop The Cyrus Chronicle into a high quality publication. He will be assisted by an editorial board consisting of distinguished members from world-class

institutions of higher learning, practice and industry.

Submission Process:

We invite authors to submit their papers and case studies to [email protected]. We will have a quick turn-around review process of less than two months. We intend to begin with two issues per year

consisting of about 5-8 papers and case studies per issue. The first issue is being planned for the fall of

2015. A selected number of papers submitted to the CIK conference will be double-blind reviewed for inclusion in THE CCJ. We intend to have special issues on themes that are within the scope of Journal.

Also, we will have invited guest issues.

mailto:[email protected]

iv CYRUS CHRONICLE JOURNAL (CCJ):


Tarek Hatem, Ph.D., American

University in Cairo, Egypt

Shahriar Khaksari, Ph.D.,

Suffolk University, USA

Noomen Lahimer, Ph.D.,

University of Carthage, Tunis

Tatiana Manolova, Ph.D.,

Bentley University, USA

Farhang Niroomand, Ph.D., University

of Houston, USA

Emerson Maccari, Ph.D. Uninove

University, San Paulo, Brazil

Massood Samii, Ph.D., Southern New

Hampshire University, USA

Jahangir Sultan, Ph.D.,

Bentley University, USA

Alf H. Walle, Ph.D.,

University of Alaska, USA

Joseph Weiss, Ph.D., Bentley University, USA

Willem-Jan van den Heuvel, Ph.D., Tilburg University,

The Netherlands

Constantine Vardavas, Harvard

University, USA

THE CCJ: An imprint of the CYRUS Institute of Knowledge (CIK)

Background:

This is a historical time for the mentioned regions, and The Cyrus Chronicle intends to offer what is most urgently needed. There is no question that organizations and businesses that are capable of analyzing and

applying advanced knowledge in management sciences and development are in high demand, and

especially during transitional periods. It is an unusual time in the target regions and the world, a time which requires active intellectual participation and contributions. It is the era of revolution in terms of

communication, technology and minds for billions of people. It is a time for intellectuals, entrepreneurs,

and philanthropists to help enlighten minds and therefore enrich the quality of life for millions. It is a time to focus intensely on the regions’ historical characteristics, achievements, human and natural resources, and

its significant deficit in development, management sciences, and democracy. CIK’s vision, “to cultivate

the discourse on human capital potentials for better living,” is the appropriate response to current challenges, and the journal is a platform for sharing the perspectives of scholars and practitioner with a

wider audience.

CYRUS associates tend to have a foot in two worlds. First, most of the associates possess a wealth of intellectual and experiential knowledge which is enhanced by their active involvement in business,

consulting and scholarly research and collegiate teaching. Second, some associates are sons and daughters

of the affirmation regions and possess an ethnic identity, language skills, and the insights only embraced by

insiders. Third, most of the CIK board of directors’ members and associates are well-known scholars,

members of editorial boards of journals, and even editors. CYRUS possesses depth, breadth, and a

competitive edge to successfully manage chronicle. CYRUS is committed to developing knowledge that positively contributes to the life of the world citizens,

especially, the target regions. CIK is a charitable, educational, and scientific organization that has been in

operation since 2011. It is a secular and nonpartisan organization that has many scholars and practitioner as member.

For more information on the Institute, please contact: [email protected]; [email protected];

[email protected]. CYRUS Institute of Knowledge (CIK), Box 380003, Cambridge, MA 02238-0003,

USA



Editor’s Introduction

Welcome to the premier issue of Cyrus Chronicle Journal (CCJ): Contemporary Economic and

Management Studies in Asia and Africa. The journal intends to cover scholarship pertaining to the two

vibrant and rapidly growing continents, Asia and Africa. They tend to be either ignored or misunderstood;

and there are limited outlets for scholars who work on these countries to share their scholarly outputs.

Focusing on these two continents will help researchers from both developed countries as well as these two

continents - which together account for the largest portion of the world population and growth. The CCJ

intends to fill these gaps. An examination of our mission may shed some light on this question. The

primary purpose of the journal is four-fold:

1. To share and promote knowledge of economic, management, and development issues facing countries

of Asia and Africa. Focusing on assessment, evaluation, and possible solutions help advance countries

in this two continent which has the largest world habitants. Development challenges are global;

virtually every country faces problems concerning economic development, sustainability, food and

water, population and environmental degradation. Yet no country gains by shunning opportunities that

globalization can provide, with the possible exception of a few countries whose leaders lack a full

understanding of the opportunities that globalization can offer. To take advantage of such

opportunities, knowledge is the primary requisite. And this journal aspires to make a contribution to

this body of knowledge.

2. To encourage the generation and dissemination of knowledge by local scholars whose access to

mainstream academic outlets may be limited? We know many scholars from academic, public and

private sector organizations whose first-hand knowledge of problems and solutions isn’t being shared

for lack of an appropriate outlet for dissemination. The CCJ may provide an opportunity for spreading

such knowledge.

3. To focus on countries that span the northern band of Asia – from China to Turkey – to the northern tier

of Africa, areas that have not previously been the subject of much attention. In the past these countries

have tended to gain the attention of scholars and the media only in times of manmade or natural crises.

But in fact, these nations have many challenges similar to those of others. They wrestle with shortages

of food and water and the growth of population and pollution. Although they have educated their own

citizens, especially in countries that had been under the shackles of dictatorship for decades, now they

have become freer to express ideas in journals such as this.

4. Academic scholarship emanating from the region under the journal’s coverage tend to get lost in the

academic jungle where the pressure of “publish or perish” leaves behind the younger and less

experienced members. This journal will give an opportunity to the scholars with first-hand knowledge

of these areas to publish their research and thereby make important contributions to the management

and development body of scholarship on which the journal will concentrate. We need to know more

about these topics in countries such as Afghanistan, Kazakhstan and Tunisia as well as other countries

covered by this journal. The CCJ will provide a platform for established as well as younger scholars

who might collaborate with them in their research.

On the journal’s operational side, we want to make the publication more accessible to a wide audience

across the world, and so, consistent with the 21st century trend toward electronic media, we will publish

this journal online. To maintain rigor and originality, articles submitted to the journal will undergo the

standard blind review process. Reviewers’ anonymous comments are shared with authors, as appropriate.

vi CYRUS CHRONICLE JOURNAL (CCJ):


Submission guidelines and procedures are delineated on the journal’s website

http://www.cyrusik.org/research/the-cyrus-chronicle/.

As the first editor of the journal, I am pleased and proud to accept this challenge. I bring some experience;

my first editorial assignment was as an undergraduate at then Pahlavi University in Shiraz, Iran, a top

ranking institution in the region. A few students and I founded and published Danesh-Pajouh (knowledge

seeker). In those days when freedom of expression was severely limited, we managed to publish one issue

in March 1965 before the censors put a stop to the enterprise.

Years later, while directing a doctoral program in international business in Texas in the early 2000s, I

also was the co-editor - and eventually editor - of the International Trade Journal (ITJ) until my

retirement in 2013. Under my leadership ITJ acceptance fell below 10%.

As editor of the CCJ, I hope to accomplish the goals of the journal elucidated above. In the premier issue,

we have already reached a threshold of about 20% in acceptance. Still, CCJ needs your support and so I

ask for your help in the following ways:

1. Contribute articles;

2. Encourage your colleagues to do the same;

3. Spread the word, especially in countries where CCJ can be most effective;

4. Cite the articles published in this journal in your own research when applicable;

5. Attend the annual conferences of the CIK (http://www.Cyrusik.org) that serve as a spawning ground

for articles that may ultimately be published in this journal;

6. Give us your feedback by telling us how we can further promote and improve the journal?

Welcome and thank you.

Tagi Sagafi-nejad, Editor

http://www.cyrusik.org/research/the-cyrus-chronicle/

Role of Institutions Nader H. Asgary

7 CYRUS CHRONICLE JOURNAL (CCJ):


Role of Institutions in Sustainable and Socially Equitable Development*

Nader H. Asgary

Cyrus Institute of Knowledge, President

Professor of Management and Economics,

Bentley University, Waltham, MA 02452, USA

INTRODUCTION

The objective of this brief communication is to

start a conversation about critical role that

institutions play for sustainable development and

how each of us as can assist with the development

and nurturing of institutions. Our goal is to

nurture equitable and sustainable economic and

social development. There is so much to be done,

especially when change triggers violence and

tension among those who feel threatened by

progress. Cyrus Institute of Knowledge (CIK)

offers positive and constructive alternatives to

such horrific and counterproductive responses.

CIK is an educational and scientific secular and

nonpartisan institute, dedicated to peace,

cooperation, harmony, and nonviolence. CIK’s

mission and values are shown in the banners put

up in this conference. While here I touch upon a

few issues, there are interesting papers in the

conference which will analyze many issues in-

depth.

*Presented at CIK Conference, Harvard University, April 24-

26, 2015.

WHAT ARE INSTITUTIONS? Social institutions contribute to the problems faced

as well as their solutions. This is true because

institutions provide the rules and guidelines that

people live by. As we know, different beliefs,

traditions, and ways of life often conflict with each

other in ways that lead to tension,

misunderstanding, and even violence. In the

United Stated during the 1960s, for example, the

rival institutions of racial segregation and

integration opposed each other. The conflict

between rival institutions, however, emerged as

the catalyst for positive change.

Strategies of response are also powerful

institutions. Nonviolent methods for advancing

social, economic, and legal equity (as developed

by leaders such as Henry David Thoreau, Gandhi,

Martin Luther King, and Nelson Mandela) are

embraced by millions of people. Unfortunately,

an opposite institution based upon violence,

intimidation, and social tension also exists. In

many parts of the world (including the Middle

East, North Africa, and Central Asia) these two

institutions compete for the loyalty of the people.

Lin and Neugent (1995) defined

institutions as “A set of humanly devised

behavioral rules that govern and shape the

interaction of human beings, in part by helping

them to form expectations of what other people

will do.” The emphasis is on “humanly devised

behavioral rules” and “form expectations of what

other people will do.” Thus institutions are the

rules of the game that shape human interaction.

An expanded view recognizes that institutions “are

systems of established and prevalent social rules

that structure social interactions [including]

Language, money, law, systems of weights and

measures, table manners, and firms…” (Hodgson,

2006). Although some scholars offer more

complex views of social institutions, (Aoki 2001;

Crawford and Ostrom 1995), focusing upon rules

will suffice for this short discussion.

Overt and/or covert rules often exert

multiple impacts and become controversial as a

result. The United Nations Millennium

Development Goals, for example, encourages

social institutions that are designed to eliminate

crushing poverty worldwide. Although doing so is

not controversial, certain tactics can trigger hostile

responses. Advocating educational opportunities

for girls, for example, can be threatening to those

who adhere to a strict division of the sexes and

tightly defined vocational options that are based

upon gender. The resulting tension has resulted in

violence, including the attempt by the Taliban to




murder Malala Yousafzai because she was a

strong advocate for women’s rights.

The kidnapping of school girls in order to

turn them into concubines and wives for

traditional men is another horrific example of

proponents of one institution (a hyper traditional

culture) violently opposing its rival (social

change).

Dani Rodrik (2008) in One Economics, Many

Recipes: Globalization, Institutions, and Economic

Growth affirms that institutions provide the rules

that coordinate people, communities, and

organizations. Institutions can also create

regulations and/or checks and balances that

encourage fairness. In this way, institutions can

foster stability and sustainability.

Rodrik stated that markets need

institutions because they are not self-correcting,

self-regulating, self-stabilizing, or self-

legitimizing. Therefore, institutions are needed to

set some rules. And the market institutions are

embedded in a set of nonmarket institutions; he

asked questions such as “do institutions matter? If

yes, which institutions matter? Here are some of

them that he has highlighted:

1. Provide “rules of the game” of economic life

such as property rights which is underpinning of a

market economy.

2. Improve coordination within and across

citizens, communities, organizations; having

clearer expectations of what other people will do.

3. Restrict coercive, fraudulent and anti-

competitive behavior; by creating regulations;

through checks and balances within a democratic

process.

4. Provide access to opportunities for the broad

population.

5. Constrain the power of elites and managing

conflict.

6. Provide social insurance such as health benefits

and unemployment benefits.

7. Provide predictable macroeconomic stability

such as implementing monetary and fiscal policy

that at its core aims sustainable economic growth.

All democratic societies have addressed

most aspects of the above fundamental institutions

to different degrees. The challenge is for

developing countries to develop and gets buy in

from stakeholders in implementing these

institutions. By merging these institutional factors

into the concept of development, we shall evolve

with fundamental aspects of sustainable

development and civil society. The big problem,

as we saw above, however, is the fact that

different institutions often compete. How can

positive cooperation exist in such an arena? The

point is that as long as people are creative and

cooperative, modern business methods can be

adjusted to mesh with a wide variety of social,

ethical, and beliefs institutions.

UNIVERSAL PERSPECTIVES According to 1998 Nobel prize winner, Amartya

Sen, freedom means the removal of major sources

of poverty, discrimination and inequalities and

other public or private discrimination. He states

that positive social and economic development is

accelerated by the promotion of human rights such

as freedom of the press, freedom of speech, and

the right to assemble because these rights foster

honesty in governmental institutions. Malcolm

Gladwell, who is the author of bestselling books

such as David and Goliath, Tipping Point, Blink,

Outliers, and other manuscripts recent argued that

“People will obey authority when people feel that

authority is acting legitimately,” and when you

increase penalties, you undermine the legitimacy

of the system.

Ultimately, social institutions are the

backbones of democracy and the social equity

upon which it is based. The creation of fair,

balanced, and transparent economic opportunities

for all citizens, furthermore, encourages the

establishment of a balanced and thriving society

and institutions ensure its sustainability.

THE REGIONS AND THEIR CHALLENGES.

The Middle East, North Africa, and Central Asian

faces a wealth of issues that hold progress back.

In a (2013) World Bank report under the title of

“Regional Economic Integration in the Middle

East and North Africa” Mustapha Rouis and

Steven Tabor (2013) reported that.

1. The MENA region has 5.5% of the world’s

population, but only has 3.9% of the world’s GDP.




2. People in the region want to work, but

institutional barriers prevent it. This has resulted

in a crippling regional brain drain.

The United Nations refugee agency,

UNHCR, reported recently that out of the 51.2

million people displaced by 2014, half of them are

children, many of whom were caught up in

conflicts or harassments, the highest figure of

displaced people since World War II. This is a

tragedy and its consequences will be felt for

generations.

3. Economic activities are not adequately

diversified with oil production dominating,

4. Institutionalized constraints on economic

competitiveness is a fundamental problem (World

Bank 2013).

The following problems and challenges are

recognized and require serious attention:

1. High unemployment rates,

2. Low female labor force participation rates,

3. Low levels of private sector development,

4. Weak public sector and corporate governance,

5. Bloated and inefficient public sectors,

6. Pervasive corruption,

7. Weak and limited infrastructures,

8. Low entrepreneurial activities (O’Sullivan and

Galvez 2012)

In this regard, O’Sullivan and Mendez (2012),

Jeffry Sachs (2004) and others suggest that

strategies to promote inclusive economic growth

and employment should be embraced. They

propose:

1. Improving governance, transparency, rule of

law, accountability, and citizen participation in

economic life,

2. Increasing social and economic inclusion,

3. Supporting private sector, particularly SMEs

and entrepreneurial activities aiding job

creation, and developing human capital.

4. Fostering regional and global integration to

reap the benefits of globalization.

These strategies must rely upon strong social and

economic institutions that are supported by a

strong and educated workforce. These institutions

ultimately set the “rules of the games” that lead to

sustainable development and is our generation

challenge and responsibility.

AN ENVIRONMENT FOR CHANGE

In the Middle East, North Africa, and Central

Asia, people are demanding rights, dignity, social

equity, and respect. The biggest challenge facing

moderate citizens is the lack of fully functioning

democracies. The missing link, furthermore, is

education and that is where CIK is aiming to

advance. Although this region possesses

enormous natural resources, most of its countries

rank towards the bottom on human development

indexes. To make matters worse, their

competitiveness is undercut by a chronic brain

drain.

Joseph Nye, Harvard University Professor,

states that in the Middle East, “you're seeing

religious divisions, state divisions, and non- state

groups all battling. And essentially, in that kind of

a situation, there's going to be a lot of fluidity in

terms of what alliances - temporary coalitions are

going to happen…[the United States] is not going

to be able to run that any more… And it takes two

or three decades for these things to work

themselves through. So will we be involved with

one group and then another group and the enemy

of my enemy and so forth? I think yes.” (CNN-

Freed Zakaria, GPS, 3/8/15).

Unfortunately, the future of the region is

uncertain because members of the younger

generations demand a better quality of life,

dignity, and a more representative form of

government. Achieving these goals will take time

and needs education and institutions building.

Above assessment, what we hear on the

news, and what is truly happening in the regions

are sad and depressing; it is beyond words to

explain it. At least, there are two opposite

responses, a) hear the daily depressing news and

move on with our personal life, b) articulate and

initiated activities that can have a positive impact

on the event, as least in the long –run. Our aim at

CIK is the latter.

SUMMARY Social and economic development that is

accepted by insiders and outsiders alike must be

based on practical principles along with a

culturally competent focus. The CIK is poised to

provide leadership in both regards. The CIK

mission involves nurturing and supporting




scholars, visionaries, and practitioners so they can

contribute to the regions in positive and

constructive ways that benefit all.

CIK seeks “Win-Win” situations, not a

“Zero-Sum Game”. By offering equitable and

culturally sensitive options, tensions can be more

effectively abated and true progress can be given

the best chance of success. CIK is in a unique

position to accept a leadership role in this regard

which summed up as “advancement of human

capital”.

Those of us who are here today believe, act, and

represent progressive views regarding human

rights, personal dignity, and equal opportunities.

We are equally respectful of local cultures and

traditions as well as the social equity they deserve.

This culturally competence, coupled with

business, economic, and social expertise, provide

CIK with a unique ability to help strengthen

regional institutions in equitable and productive

ways. I look forward to working with you in this

regard. Thank you!

Developing Appropriate Economic Strategies Alf. H. Walle



Ethnicity in the Middle East and Neighboring Regions: Developing

Appropriate Economic Strategies and Policies.

Alf. H. Walle

University of Alaska at Fairbanks

[email protected]

Abstract

Indigenous people and ethnic minorities face economic and

social pressures that potentially disturb the social order, undercut

cooperation, and spawn distrust. Such pressures can threaten

prosperity, peace, and security for all. Strategies are needed that

help distinctive groups gain parity, self-determinism, and

sustainability. Supplementing neoclassical economic models

with more socially relevant paradigms (such as substantive

economic anthropology and the triple bottom line) are means of

doing so. Regions ethnic groups are showcased to demonstrate

to value of such an approach.

Keywords: Indigenous people, ethnic minorities, Berber, Kurds, Kuchi,

Triple Bottom Line, anomie, cultural stress, mitigation, neoclassical

economics, substantive economics.

INTRODUCTION Increasingly the universal models provided by mainstream

economics and management are being supplemented by more

culturally specific perspectives. Such developments are

especially useful in an era when mainstream businesses are

expanding their operations into hinterland regions such as those

that exist in the Middle East, North Africa, and Central Asia.

Culturally appropriate strategies need to (1) resonate from the

distinctiveness of local cultures and populations (2) while

recognizing differences between the goals of the “mainstream”

world and those of ethnic enclaves. This paper offers useful and

actionable suggestions in this regard. Many conventional

business practitioners and theorists, however, tend to

deemphasize the distinctiveness of atypical circumstances or

social groups in order to focus upon universal strategic principles

that can be routinely applied in an endless assortment of

situations. Although doing so offers greater efficiency, focusing

upon generic “one size fits all” strategies and responses is often

inappropriate when dealing with unique peoples who harbor

idiosyncratic agendas and/or face unusual challenges. Many

conventional business practitioners and theorists, however, tend

to deemphasize the principles that can be routinely applied in an

endless assortment of situations. Although doing so offers

greater efficiency, focusing upon generic “one size fits all”

strategies and responses is often inappropriate when dealing with

unique peoples who harbor idiosyncratic agendas and/or face

unusual challenges.




Embracing the principles of neoclassical

economics, for example, mainstream advisors

tend to view business decisions with reference to

some sort of cost benefit analysis involving (1) the

level of monetary risk or commitment that must

be tolerated (2) in order to achieve an anticipated

goal. Viewing these processes as universal, the

neoclassical paradigm can easily overlook areas of

distinctiveness that need to be recognized and

addressed. The harmful implications of carelessly

employing neoclassical economic models are

discussed in a later section of this paper.

Building upon cultural understanding,

advocates of social sensitivity often transcend

universal tactics in order to respond to the specific

goals, needs, and vulnerabilities of particular

peoples. Doing so can help facilitate equitable

collaboration and cooperation between indigenous

populations and outsiders who seek relationships

with or concessions from particular populations.

This paper begins with a discussion of

indigenous strategies of empowerment that are

emerging as part of a unified worldwide

movement. Having offered this backdrop, a

comparison of neoclassical and substantive

economic theories is presented in order to draw a

distinction between the rational/universal

perspectives of the mainstream business

community vs. the culturally specific orientations

suggested by the qualitative social sciences.

Using this context as a foundation, discussions

regarding (1) the assessment of opportunities

involving indigenous people and (2) mitigating

harmful consequences of outside intrusion and

change are discussed. These thoughts set the

stage to discuss a number of indigenous peoples

from the Middle East and neighboring regions.

THE GROWING SOPHSISTICATION OF

INDIGENOUS PEOPLE

There was a time when indigenous people and

rural ethnic enclaves were naïve and easily

manipulated by outsiders. We have all heard

stories of Western imperialists, colonialists, or

adventurers who extracted gigantic profits by

taking advantage of people who lacked an

understanding of contemporary business and/or

the true value of the assets, rights, knowledge,

andso forth that they carelessly bartered away.

Representative of this tendency is the legend that

Dutch settlers bought Manhattan Island (the

current site of New York City) from a local tribe

for $24.00 worth of beads. Many other less

colorful but more profound examples of

inequitable compensation exist.

At some point in history, however,

indigenous people began to acquire the knowledge

and abilities needed to effectively negotiate. An

example of this growing skill is the success of late

20th century Seneca Indians who renegotiated a

lease agreement made a century before. In the

19th century, a group of investors in central New

York (USA) leased a tract of Seneca land for 99

years. When the original contract was drawing to

an end, the Seneca stated their intention to

significantly raise the rent. The tenets laughed at

first, eventually fought back with lawsuits, and

ultimately lost as the Seneca proved to be tough

negotiators. In the legal battle that followed, non-

compliant residents were evicted for non-payment

of the required rent as the Seneca prevailed. (See

Hogan 1974 for background information.)

The actions of the Seneca are not unique.

Indigenous people throughout the world are

gaining the ability to professionally manage their

affairs and to negotiate on an equal footing with

outsiders. A number of factors contribute to this

increase in savvy including (1) Indigenous people

are better informed, (2) indigenous leaders are

learning from each other, and (3) various

indigenous peoples, in contact with each other, are

collaborating and/or sharing strategies.

Indigenous peoples, furthermore, increasingly

have access to resources such as consultants,

lawyers, and negotiators who act on their behalf.

Each of these issues is discussed below.

Indigenous people are increasingly informed.

There was a time when the leaders of indigenous

peoples and rural ethnic enclaves tended to

possess minimal “mainstream” educations; as a

result, they lacked the ability to function

effectively in the larger, dominant, culture. This

situation gave a significant negotiating advantage

to outsiders.

Such observations fit well with theories of

“neo-colonialism” that explore how countries and

organizations from the developed world

manipulate the people of developing regions in




self-serving ways. Observers of neo-colonialism,

of course, maintain that after the end of the

colonial era (following World War 11) the former

“mother countries” developed techniques to

maintain their economic and political dominance.

In countries (such as the United States) that are

the home to indigenous minorities, furthermore,

old patterns of control by the mainstream society

tended to continue, in a manner that parallels neo-

colonialism. Even when these countries

established legal rights for their indigenous

populations, equity and parity was often slow in

coming.

Critics of this system complain that the

resulting pattern of “rich vs. poor” and/or

“informed vs. ignorant” trapped developing

regions into the roles of supplying raw materials

and cheap laborer. That situation is now being

eclipsed in many places as education is

increasingly available to all people and the image

of indigenous people as unaware, uneducated, and

easily manipulated is becoming passé. Today,

many indigenous individuals are college trained

and possess the skills needed to understand the

full implications of their actions and to negotiate

with savvy.

In this emerging environment, indigenous

leaders often focus upon upgrading the

educational resources available to their people.

The work of Maori (New Zealand indigenous

people) leader Graham Smith is a good example

of this trend. Smith has spent his career helping

the Maori and other indigenous people develop

strategies that (1) provide the skills necessary to

be effective in the larger world while (2)

simultaneously using education to strengthen local

traditions and identities. Smith’s efforts have

resulted in a major initiative designed to help

members of the Maori community earn advanced

degrees so they can contribute to cultural and

economic revitalization. Smith’s work is

internationally recognized and praised.

Not only does Smith’s work have

significance within New Zealand and the Maori

community, he has become an international

spokesman for indigenous education. Speaking to

the Alaska Federation of Natives, Smith (2003)

noted a number of key principles involving

indigenous thinking and action. Below is an

abstraction of these principles (that has been

generalized beyond the Maori focus that Smith

provides):

Self-determination/relative autonomy.

Indigenous peoples need increased control over

their lives and their heritage (including greater

autonomy over decision-making in education.)

Indigenous people should be able to make choices

and decisions that reflect their cultural, political,

economic, and social preferences.

Validating and legitimating cultural

aspirations/identity Smith emphasizes that a common flaw of

educational strategies within indigenous

communities has been an inadequate attention to

the maintenance of the local culture and identity.

This trend needs to be reversed and mitigated.

Incorporating culturally preferred pedagogy In many cases, educational strategies that are

introduced into indigenous communities fail to fit

within the culture and, as a result, they are not

effective. Methods that connect with the

backgrounds and lifestyles of people should be

embraced so students can most effectively learn in

a culturally relevant manner and one that does not

trigger alienation.

Mediate conflicts

Indigenous people need to recognize that

schooling can be a positive experience despite

other social and economic impediments that may

exist in the wider community. Education can help

to mediate or intervene when unequal power

relationships exist between a local community and

the larger, more powerful, outside world.

Emphasize 'collective' as well as 'individual'

identities Indigenous people and cultures possess identities

and needs that transcend beyond the individual.

As a result, simultaneously focusing upon both

personal and group priorities is useful. Centering

only upon individual and/or short term issues can

be counterproductive and weaken indigenous

power and identity. This reality needs to be

recognized.

A shared and collective vision




Indigenous people need to develop and express

their political, social, economic and cultural

aspirations. A well-articulated pronouncement of

these goals can provide direction and a yardstick

that can be used when evaluating options.

Indigenous people increasingly envision

education in ways that are reflective of Smith’s

vision and those who hold similar views. As a

result, not only are indigenous people gaining ad

hoc skills, their educations are being designed to

reinforce, not undercut, cultures, traditional

priorities, and social relationships. Mainstream

negotiators can expect future indigenous

negotiators to be (1) better informed and to be

more effective at the bargaining table as well as

(2) more attuned to their cultural and heritage.

Indigenous people are learning from each

other. Indigenous people are unique. Cultures are

distinct. Different indigenous communities,

furthermore, have often been in conflict with one

another. A key strategy of the old colonial powers

was to systematically pit local groups against

another in ways that (1) weakened their control

(2) in ways that shifted the balance of power to

outsiders.

Although specific indigenous cultures are

distinctive and should be envisioned as such, they

are often subjected to similar challenges and

pressures from the outside world. As a result,

although particular people are distinctive, they

often encounter parallel pressures and tensions

when subjected to outside contact. The common

ground created by these parallel experiences is

increasingly being recognized by indigenous

people from throughout the world.

In the United States, for example, there

has been a great growth in what are called

“intertribal pow-wows” (meetings involving

different indigenous groups.) In the past, tribes

and bands often remained relatively isolated and,

as a result, they did not profit from the

experiences of others. Today, in contrast,

different indigenous groups tend to exchange

information, offer advice, and collaborate with

each other. In some cases, different peoples act in

concert with each other in order to gain the critical

mass needed to effectively pursue a course of

action. In other situations, indigenous people who

have benefited using a specific strategy, share this

information so it can be borrowed and applied

elsewhere.

The rapid diffusion of tactics and strategies

Today’s world, of course, is caught up in a digital

revolution spearheaded by the internet. The

services and advice offered by this technological

advance are quickly and cheaply available. In

earlier eras when indigenous peoples were largely

cut off from the outside world, ideas and

knowledge diffused slowly if at all. Today, in

contrast, few barriers exist to inhibit the free flow

of information; even the desperately poor have

access to the internet and cellular phones.

“Rising tides float all ships”: the digital revolution

is ubiquitous and provides aid to hither to

disenfranchise ethnic group’s ad small hinterland

populations, not merely large corporations and the

mainstream world. Today, a wide range of

indigenous people are communicating via the

internet allowing ideas and strategies to quickly

disseminate. In the past, outsiders often

dominated because indigenous people lacked

knowledge and had trouble communicating.

Those days are largely drawing to a close.

Professional help is available.

Although local people are gaining knowledge and

skills, the aid of outside experts and consultants is

often required. In the past, these experts

championed views that reflected the perspectives

of mainstream outsiders who often depicted the

views of local people as passé and on the wane.

Today, in contrast, the recognition is growing that

specific peoples have their own priorities that

might be legitimate even if such ideas fail to mesh

with the conventional wisdoms and strategic

paradigms embraced by outside corporations.

When acknowledging such alternative

visions, the full impact of a decision is evaluated

with reference to the goals, fears, aspirations, and

so forth held by the local community. This

broader vision allows the full implications of a

business strategy to be perceived in a more robust

manner.

A key point to remember is that

indigenous societies are increasingly informed.

As a result, they are no longer easily manipulated.

The old stereotype of “ignorant savages”, easily




bested in negotiations, is no longer accurate under

most conditions.

The Middle East and neighboring regions

contains a wide number of indigenous peoples,

some of which will be briefly discussed later in

this paper. Many of these peoples harbor specific

priorities that are not reflective of the models

typically embraced by mainstream business

strategists. In order to effectively deal with these

populations, understanding their motivations and

preferred strategies and responding in a

meaningful manner is essential. One way to

envision this issue is to realize that different and

competing models of economics exist.

RIVAL ECONOMIC MODELS

As discussed above, indigenous people are

typically gaining sophistication and developing

the tools needed to successfully negotiate with

outsiders. In many cases, however, these people

envision their lives and options in ways that

conflict with the recommendations of mainstream

consultants and business partners. Outsiders are

likely to write off these deviations as artifacts of

ignorance and fuzzy-minded thinking even when

the people clearly understand their goals. In order

to clarify the situation, a juxtaposition of

neoclassical and substantive economic theory is

useful.

The neoclassical model is the economic

paradigm that long dominated contemporary

business theory and practice. In spite of internal

debates, all neoclassical economists embrace

rational and universal assumptions that assert:

1. Economic decisions are essentially rational in

nature.

2. Individuals seek the most “utility” and/or the

lowest cost.

3. People have access to perfect information.

4. People tend to act independently of each other.

5. Individuals/consumers seek utility,

organizations seek profits.

Although sophisticated economists

understand that complex decisions involve

emotional and/or irrational factors (such as those

raised by behavioral economics), the

neoclassicists assert that the most effective

economic models focus on rational thought that is

geared around some sort of (conscious or

intuitive) cost-benefit analysis. Some key

assumptions of the method are discussed below.

Economic Man Model:

Neoclassical thinkers embrace some version of the

“economic man” model which assumes that

people act in rational ways designed to maximize

benefits and/or minimize costs. Thus, people are

viewed as (1) seeking specific goals (2) while

hoping to gain these benefits at the lowest “cost”

as defined by the context. These assumptions, of

course, do not imply that people’s choices are

inevitably wise, intelligent, or truly in their self-

interest, but merely that economic actions are

triggered by some sort of rational thought that

centers around winning what are perceived to be

maximum benefits and/or minimizing costs.

Perfect Information Model

The neoclassical model often assumes that

economic actors have access to perfect

information and that they interact in an

environment of perfect competition. In other

words, each participant in an economic sphere is

presumed to possess all the facts regarding costs,

product quality, etc. Although this projection is

seldom if ever completely true, the model has

proved useful in many contexts.

Profit Motive Model

The neoclassical model depicts

consumers/customers as seeking to maximize

utility (getting something for a minimal cost)

while firms or suppliers are viewed as seeking

maximizes profits. As a result, there is a tendency

for organizations to offer customers what they

want at a competitive price and for customers to

strategically buy with care.

IN SUMMARY: neoclassical theory simplifies

the analysis of economic behavior by making

certain assumptions that are might not be totally

accurate. Many scholars and practitioners embrace

these imperfect models in the belief that they are

accurate enough to provide useful insights. Under

certain circumstances behavioral economics

tempers these assumptions; nonetheless, the

neoclassical model remains powerful. Economic

perspectives developed by social anthropologists,

in contrast, often view economic (as well as all




other) behavior from within a broader social and

cultural context. Significant differences between

these two approaches need to be discussed.

As suggested above, those who embrace

neoclassical thinking portray it as universal,

rational, and inevitable, even if somewhat

tempered by behavioral economics. This

orientation can lead to the conclusion that

significant variations from this pattern among

hinterland people should be written off as

reactionary, out of touch, backward, and/or due to

ignorance.

An alternative position suggests that

alternative paradigms that address the

social/cultural milieu of economic behavior is

needed. In other words, under certain

circumstances economic behavior might not be

universal as the neoclassicists believe, but

responds for local beliefs, traditions and

perspectives. These perspectives have a long

history in anthropology and deal with local

challenges to the neoclassical model just as

behavioral economics, challenges neoclassicism

using psychological perspectives.

Thus, neoclassical theories often need to

be supplemented by models that are more

culturally specific and emotional in nature, not

universal and rational. In order to consider this

option, we will briefly consider substantive

economic theory (see Plattner 1989 & Wilk, R.

1996.)

The classic statement of the substantive

position, of course, is found in Karl Polayni’s The

Great Transformation which argues that a great

divide in humanity is marked by the transition

from small scale societies (in which people

interact in intimate ways involving face to face

contact) to the environment spawned by the

industrial revolution (that is typified by wage

labor, increasingly impersonal relationships, and

an economy based on money.) Polayni argues

that the transformations triggered by

industrialization creates patterns of life and human

interaction that are profoundly different from what

had been experienced in earlier times and still

exists in various small scale societies (Polanyi

1968.)

Polayni and those who embrace his

perspectives believe that the modern industrial

world is a specific realm where rational actions

and strategic decisions (largely reflective of the

neoclassical model) dominate. People in such a

system are assumed to be striving to advance their

individual situation in overt, rational, and

calculated ways. Thus, these people tend to

function in ways that reflect neoclassical

economics.

The substantivist position, however,

insists that that these patterns of social and

economic response are not universal and that the

neoclassical framework is an artifact of the

industrial age, not a general model that can be

applied to all people.

In specific, the substantivists argue that

within many small scale societies, economic

activity is not a separate and distinct realm of

strategic behavior; instead, it is subtly intertwined

within the entire culture (including kinship

patterns, mores, religion, ceremony, etc.) When

social, cultural, and economic pressures and

responses are enmeshed in such a manner, one-

dimensional neoclassical analysis is not robust

enough to portray economic behavior in all its

complexity. By conceptualizing economics in a

broader substantive manner, the rational and

universal aspects of economic life are no longer

viewed as the only mainsprings influencing

action.

Polayni made significant use of two

terms, “redistribution” and “reciprocity.”

Reciprocity involves a long-term pattern of

mutually exchanging of goods and/or services,

typically among those who are perceived to be

equals. Interacting in this way emerges as part of

the fabric of life and not as payment, charity, or a

calculated “quid pro quo.” Redistribution, in

contrast, takes place when a strong leader or

political force gathers resources that are then

doled out in accordance with some culturally

established formula. Scarce and desirable goods

are dispersed even though the rational

marketplace (that is modeled by neoclassical

theory) is not the mechanism that does so.

Polayni and the substantivists use the term

“embedded” to indicate how this process actually

works. Instead of economic activity being a

distinct and discrete part of life and culture,

distribution and allocation are nested within the

entire cultural and its social framework. Thus,

economic life is not totally dictated by rational




and universal responses that take place in relative

isolation. (For a fuller discussion see

(Granovetter1985.)

Many examples of such non-neoclassical

behavior have been documented. The Inupiaq of

modern day Alaska, for example, continue to hunt

bowhead whales (Walle 2009.) The majority of

the meat is shared with the community, given

away in a traditional fashion. The home of a

successful whaling boat captain is opened to the

public for a feast and everybody goes home with a

sack of whale blubber and meat. At various other

times in the year (such as Thanksgiving)

additional redistributions take place. This

culturally regulated dispersal remains a significant

part of life for the Inupiaq even though they are

increasingly connected with the larger outside

world.

Certainly, neoclassical economists can

portray the acts of these donors as merely seeking

to capture respect (a scarce and desired

commodity) in a manner reminiscent of

philanthropists in the developed world who seek

prestige and notoriety through charity.

Nonetheless, the whole process is much more

complex and it is intimately connected to the

cultural heritage of the people. Attitudes and

behaviors are structured in accord with long

standing traditions. Adherence to these cultural

dictates is not viewed as optional; sharing the

whale is a part of the Inupiaq way of life. Under

such circumstances, economic activities and other

traditions are seamlessly intertwined.

Those who attempt to apply neoclassical

techniques within such a context can inadvertently

act in inappropriate ways. Mental health

professionals (such as substance abuse

counselors), for example, often tap the experience

and wisdom of local healers and elders. Western

trained professionals who have been aided by

such indigenous healers might ask something like:

“How much are you charging for these services?”

The traditional healer might respond by saying,

“Nothing, I never receive payment when I help

someone.”

Hearing this, the Western trained

professional, who embraces a mainstream

economic perspective, might close the

conversation with a hollow “Well, thank you very

much”, sending the healer on his or her way.

Westerners, who may think purely in

financial terms that revolve around services

provided for a demanded price, often fail to

understand that the healers are operating within a

substantive context. No specific benefits are

expected for a particular service; instead,

exchanges take place within an established social

milieu that harbors a number of informal

expectations. Maybe a load of firewood will be

anonymously delivered to the door of the healer;

perhaps, proceeds from a successful hunt

expedition will be shared, and so forth. Healers

are understandably concerned when they help

therapists to earn money while being denied the

benefits and respect that has long been provided

them by local people via the substantive system.

Westerners, however, can easily overlook this

reality and the need to deal with it (Walle 2005-

2008.)

The substantivist paradigm can avoid

such problems by viewing the various institutions

of the culture (family, social structure, religion,

mores, etc.) as combining to create the frame

within which economic response takes place. In a

variety of circumstances, doing so can provide a

much richer and more robust understanding than

neoclassical analysis.

In traditional and small scale societies, a

substantive economic system is likely to exist side

by side with whatever market/cash economy is

simultaneously present. Being attuned to such

substantive responses can help intrusive outsiders

to understand that neoclassical models, although

functioning well under certain conditions, might

not be appropriate in other circumstances. In

short, neoclassical thinking is a specialized tool

(not a universally applicable method.)

As any other paradigm, the substantive model is

not immune to criticisms. Thus, Prattis (1982)

reminds us that the distinction between primitive

and modern economies is largely arbitrary even

though Polanyi seemingly argued in black and

white terms. My rebuttal is that Polayni was

merely using a dialectical style of argumentation

to juxtapose rival points of view. No doubt

Polanyi recognized the obvious: many variants

exist in economic life (as well as in all other

phases of society and culture.)

A further critique of the substantivist

model comes from members of a splinter group




often called the culturalists, such as Steven

Gudeman (1986.) Even more socially focused

than the substantivists, the culturalists focus upon

the way economic behavior is perceived by local

people. Rejecting the paradigms of outsiders, the

culturalists insist that local perspectives should

dominate the way economic activity is envisioned,

modeled, and studied. Gudeman, for example,

uses the phrase “people’s own economic

construction” (1986:1) when doing so.

Although the culturalists make some good

points, their work can best be viewed as a

clarifying refinement of the substantivist approach

and not as a new school of thought.

In summary and conclusion, three distinct means

of modeling and interpreting economic behavior

exist. The neoclassical perspective reflects

conventional business thinking and tends to be

rational and universal. Behavioral economics

emphasizes that psychological variable can

undercut the neoclassical model. The substantive

alternative views the neoclassical model as an

artifact of the industrial revolution that is not

broad enough to be usefully applied in all cultural

and social situations. As an alternative,

substantive analysis looks at economic activity

from within a cultural context.

ASSESSING AND MITIGATING CHANGE

AND DISRUPTION

So far, this paper has argued that indigenous

peoples throughout the world are gaining

increased sophistication and developing the skills

required for negotiating in an effective and

informed manner. Due to this growing savvy, the

old stereotype of indigenous peoples as “ignorant”

and “easily manipulated” dupes is fading. Our

discussions have also acknowledged that universal

and rational models, such as neoclassical

economics, may not be appropriate when dealing

with many indigenous peoples who respond to

cultural specifics, not economic universals.

When strategies are envisioned, they need

to be viewed accordingly and, where necessary,

their impacts may require mitigation that copes

with whatever harmful implications might arise.

Both of these considerations are discussed below.

Assessing

A representative means of assessing and

evaluating economic options (and one that is

increasingly employed in projects receiving

United Nations funding) is commonly called the

“Triple Bottom Line.” Popularized in John

Elkington’s book Cannibals with Forks: The

Triple Bottom Line of 21st Century Business, this

method offers an alternative to neoclassical

models when assessing the full impacts of a

business intervention. Elkington’s model, more

robust than relying solely on financial accounting

data, simultaneously factors in (1) the effects upon

people and (2) the impacts upon the environment.

Elkington argues that these additional measures

need to be considered along with profits if

adequate assessment and evaluation is to take

place.

The “people” component refers to the

impacts of a business decision upon the

population. When thinking in terms of this

variable, mainstream evaluators are likely to focus

upon issues such as good working conditions,

avoiding the use of child labor, etc. When dealing

with indigenous enclaves, however, additional

considerations, such as the amount of cultural

disruption triggered by an initiative, may be

necessary. How much psychological depression,

alienation, etc. can be expected if a project

triggers rapid and uncontrolled change? These are

real and measureable costs that need to be

considered but can be overlooked by models such

as neoclassicism.

In addition to people, Elkington insists

that the health of the environment also needs to be

addressed. Striving towards long term

sustainability (both locally and worldwide) should

also be a goal. Care is required to prevent the

ecological system from being pushed past its

carrying capacity. Strategies for lowering the

consumption of energy, reducing pollution,

minimizing waste, and so forth, are discussed.

Besides of these generic considerations,

indigenous peoples may have special needs and

vulnerabilities because they often live close to the

earth and their ways of life depend upon some sort

of ecological stability. Many indigenous peoples,

for example, reject or oppose lucrative extractive

and mining opportunities that involve

commodities such as oil, coal, gold, copper, etc.

because these activities might undermine




subsistence hunting and fishing which the culture

values and wants to maintain. As a result of these

community priorities, indigenous people often

make decisions that appear to be nonsensical to

those who embrace more mainstream views and

goals.

As a result, the triple bottom line reminds

us that the quest for profits needs to be moderated

by a consideration of human and environmental

issues. Praised in many circles, the approach is

condemned by detractors who are likely to

complain that criteria like “people” and “planet”,

unlike financial accounting notations, are difficult

to measure and/or objectively quantify. Relying

upon fuzzy yardsticks of evaluation like “people”

and “planet”, the logic continues, can lead to

sloppy and non-actionable thinking. As a result,

some critics advocate eliminating these criteria

from the decision making process (Norman and

MacDonald 2003.)

Although critiques such as these might be

legitimate, they should be viewed as suggestions

for refining the triple bottom line, not as evidence

that the approach is fatally flawed. Those

who are concerned with assessing the full impacts

of economic development, cultural changes, etc.,

have long attempted to temper the profit motive

with broader perspectives. Elkington’s model

offers a means of doing so.

In conclusion, the yardsticks needed to

evaluate economic decisions should acknowledge

the possibility that specific people have legitimate

priorities that neoclassical analysis might ignore

or discount. This reality needs to be accepted

along with the realization that such atypical

perspectives might be informed and not naïve.

Mitigating The assessment process is likely to identify

significant changes and stresses that a specific

course of action might trigger. The concept of

anomie provides a useful way to envision the

harmful side effects of a strategy in need of

mitigation. Anomie, as a major concept of the

social sciences, can be traced to 19th century

anthropologist Emile Durkheim who sought a

means of dealing with the impacts of

unprecedented social and economic change and

how it breaks down the rules, norms, and

traditions of society. Discussing the impact of the

Industrial Revolution, for example, Durkheim

argues that the population shifted to urban areas

and the face-to-face subsistence way of life gave

way to a wage-based cash economy. As a result of

these changes, people were forced to live in a

manner that was in conflict with the essence of

their culture and their heritage. Harmful side

effects developed as a result.

Anomie typically creates discomfort when

people become confused regarding how to act and

no longer know what to expect from others. As

the heritage, mores, relationships, and traditions

of earlier times fade or are weakened, shared

norms, beliefs, hopes, and expectations become

increasingly unable to unite people in a positive

and constructive ways. Durkheim linked anomie

to harmful dysfunctions such as a rise in the

suicide rate.

In the mid-20th century, sociologist

Robert Merton expanded the concept of anomie

by arguing that its key cause is a disparity

between (1) the goals that society gives to people,

coupled with (2) an inability to achieve these

objectives in the socially acceptable manner.

When this unhealthy situation arises, anomie is

the likely result (Merton 1957: 121-94.) The

resulting discontinuity and discrepancy can trigger

painful stress and potential dysfunction.

Merton went on to suggest that when

people cannot achieve their goals in socially

acceptable ways, the propensity for deviant and

counterproductive behavior triggered by anomie

increases. Small rural communities that are

experiencing unprecedented social and economic

change are especially likely to be as risk.

In the contemporary era, American

business commentator Alvin Toffler (1970) has

argued that even in the modern industrial world

unrelenting change wrought by snowballing

technological transformations can reap staggering

emotional, cultural, and social costs, especially if

they are left unchecked and unmitigated.

Toffler suggests that the industrialized

West (that has already modernized) is typified by

this kind of alienation and social disruption. In the

developing countries and among indigenous

populations, social change wrought by outside

forces can be even more profound and harmful.

This tendency is demonstrated by Harold

Napoleon’s Yuuyaraq: The Way of Being Human




(1996) which deals with the trauma faced by

indigenous Alaskans due to unanticipated and

unmitigated social change. Napoleon points to the

tragic irony that just as the conditions of material

life began to improve for Native Alaskans, a rash

of dysfunction and suicide arose within

indigenous communities. Napoleon explains this

ironic situation as the product of social change

that created harmful conditions that people were

not prepared to endure. Thus, Napoleon, although

seemingly unaware of the sociological concept of

anomie, independently reinvents many of the

concepts presented by Durkheim and Merton.

As suggested above, outside business

leaders often lack the specific skills needed to

assess and mitigate the unanticipated and harmful

impacts of the interventions they propose.

Applied anthropology, however, has long sought

to predict and cushion change in culturally

specific ways. Applied anthropologists, for

example, are quick to dismiss the tenets of

neoclassical economics that so many business

leaders embrace. Although business leaders often

assume that cultural specifics must inevitably give

way to universal economic laws and trends,

applied anthropologists debate this truism.

Representative of such ideas is David Maybury-

Lewis who observes: “There is no natural or

historic law that militates against small societies.

There are only political [and economic] choices”

(Maybury-Lewis 1977.)

Thus, although the conventional models

often embraced by business leaders might dismiss

small scale, indigenous cultures as remnants

slated for inevitable oblivion, applied

anthropologists realize this decline is not

preordained.

Although change might be inevitable, applied

anthropologists focus upon orderly

transformations coupled with the possibility of

preserving a people’s heritage and their traditional

way of life. On many occasions, this can be

accomplished by helping to bolster the indigenous

culture. G.N. Appell, for example, insists that a

viable cultural heritage can help mitigate the

impacts of traumatic change. He insists: “A

society undergoing change ... has a right to access

its cultural traditions, its language and its social

history” (Appell 1977: 14.) Appell senses that

doing so is important because people are often

victimized by what he calls the social separation

syndrome:

.. [which] involves role conflict and ambiguity,

threat to one’s self esteem, and an impaired social

identity … Social bereavement arising from social

change seems to follow a developmental sequence

similar to personal bereavement ... There is first a

period of denial and numbness accompanied by

anxiety, fear, and feelings of threat to one’s

identity. This is succeeded by a phase of frustrated

searching for the lost world or individual, hoping

for a reversal and then bitter pining and unrelieved

sense of pain … Following this is a period of

depression and apathy ... Finally there is the phase

of reorganization when the bereaved begins to

build new plans and assumptions about the world

(1977: 14.)

Appell’s model parallels the concept of

anomie as discussed by Merton who, as we have

seen, argues that the culture provides the goals

that people should seek as well as a socially

acceptable means of achieving them. Rapid and

unmitigated social and economic change,

however, often creates a situation where sought-

after goals cannot be won in a socially legitimate

manner. This situation can lead to anomie and

alienation, which parallels what Appell describes

as the social separation syndrome.

Thus, change (even when it has positive

aspects) can exert harmful results when it

undercuts the ability of people to legitimately

achieve their goals. This situation can lead to a

multitude of personal and societal dysfunctions.

No wonder many indigenous people are deeply

concerned about preserving their heritage as a

“going concern” even though they realize the

future will trigger inevitable transformations.

Although mainstream outsiders may feel

they know what is best, people have a right to

self-determinism even though the impacts of

stability and change need to be addressed. In this

regard, Ormund Loomis once observed: Proposing

... efforts to stem inevitable change in society

would be pointless. Further, in a free society, even

... to slow the progress would be wrong ... It is

possible, however, to temper change so that it

proceeds in accordance with the will of the

people, and not in response to the pressures of

faddish trends or insensitive public or private

projects (Loomis 1983: 29.)




These tactics are perceived as means by

which stress and disruption triggered by change

and contact can be mitigated in ways that reflect

the will of the people. Doing so can be important

because cultural traditions are often the “ballast”

that prevents people’s lives from being toppled by

a storm of opportunities and obligations that are

centered around the demands of the outside world.

Paying attention to the specific culture and the

priorities of its people can provide strategies

regarding the mitigation of harmful impacts

spawned by contact and growing economic

relationships.

INDIGENOUS PEOPLE OF THE

“GREATER” MIDDLE EAST

The Middle East and neighboring regions are the

home to a wide variety of indigenous populations.

These people tend to possess a distinctiveness that

needs to be recognized as economic and cultural

strategies are implemented. In order to portray

some of the issues demanding attention, a

representative sample of three indigenous groups

are discussed. Going from west to east, these

groups are the Berbers, the Kurds, and the Kuchi.

No specific agenda was in mind when choosing

these groups, except they are well known.

Each indigenous group is briefly

discussed although, due to issues of space, only

the barest and universally known details are

provided in an informal narrative devoid of

complex documentation. Although the struggles

of these peoples are multifaceted and complicated,

it is not the purpose of this paper to take sides; our

goal is merely to point to the fact that indigenous

peoples exist in the Middle East and neighboring

regions and that they have their own needs,

agendas, and desires.

Berbers

The Berbers are a people of North Africa who

began living in the region long before the Arab

conquests that took place over a thousand years

ago. They continue to be a major demographic

and ethnic group in countries such as Algeria and

Morocco.

During the era of European intervention

that reached a high point in the 19th century and

ended after World War 2, colonial administrations

tended to moderate the relationships between

those of Berber and Arab identity so neither group

gained an upper hand. After independence,

however, those of Arab descent and the Arabic

language tended to gain dominance causing many

Berbers to complain that discrimination has risen

as a result. Some of the Berbers in the south,

furthermore, claim that the darker skinned people

living there refuse to treat them in an equitable

manner. Indeed, the regrettable military actions in

recently playing out in Mali are often depicted by

Berbers apologists as an attempt to create a place

for those of Berber descent to live a self-

determined life. Since I am not political

scientists, this paper has no opinion regarding

such claims. Many Berbers, however, hold these

views and act accordingly.

Kurds

The Mohawk Indians live in New York State and

the Province of Ontario (straddling the border of

the United States and Canada.) Both countries

have a history of demanding that members of this

tribe declare their country of citizenship. Many

Mohawk refuse to do so on the grounds that their

identity as Mohawks predates the boundaries of

the current political regimes and, therefore, their

pre-existing nation takes precedence. In doing so,

the Mohawk affirm they are a cultural and

political entity that happens to be located in newer

countries that have been superimposed on their

territory. Various tensions and disruptions have

occurred because of this polemical stance.

The Kurdish people of the Middle East

face a similar situation and make a parallel

argument. Their homeland territory (typically

referred to as Kurdistan) is currently divided

among a number of countries including Turkey,

Iran, Iraq, and Syria. In each of these sovereign

nations, the Kurds are a minority. If Kurdistan

were united as a separate country, however, the

Kurds would be in a solid majority. The Kurds,

furthermore, have long pressured for a country of

their own in a quest going back at least to the 19th

century (and for a short time after World War 1 a

Kurdistan did exist). Up to and including the

present time, tensions and violence have often

broken out over this issue both sides suffering as a

result.

In some cases (such as in Iraq) the

national government has been accused of




committing atrocities against the Kurds because of

their ethnicity. Even when not treated this

harshly, many Kurds believe that their interests

are not best served because of their minority

status.

Many Kurds continue to pressure for the creation

of a country of Kurdistan where the Kurds will

have their own government and not suffer from a

minority status. The countries that would have to

give up territory to accomplish this goal, however,

are unwilling to do so. This situation is the cause

of international tensions.

Kuchi.

The Kuchi of Afghanistan are a nomadic group

that herds animals and tends to migrate into

Pakistan and back to Afghanistan on a seasonal

basis (although more secure national boundaries

make this age-old pattern of movement

increasingly problematic. For many years, the

Kuchi provided the people of Afghanistan with a

large percentage of their meat and other animal

products. The Kuchi have also mastered a

number of skills such as jewelry making in order

to provide services and supplement their incomes.

In recent decades, unfortunately, the Kuchi have

lost a number of important economic concessions,

such as the right to summer pastureland. They

have also suffered due to war and natural

disasters. These events are creating hardships and

placing the people and their way of life in harm’s

way.

In summary, the Middle East and

neighboring regions are not culturally

homogeneous. Great variation exists and many

significant ethnic groups dot this diverse part of

the world. Their actions, furthermore, appear to

be fueled by motivations that clearly expand

beyond purely rational neoclassical economics.

These peoples often show signs of being displaced

and/or cut off from their way of life. As a result,

the pressures and pains of anomie are likely to be

faced. We have briefly discussed three

representative groups that portray this potential;

they are a sampling of a larger reality and in no

way meant to be exhaustive.

These peoples have their own goals and

priorities that tend to transcend mainstream

economic considerations. As a result of this

reality, more robust methods of evaluating these

people and understanding their needs and

demands are required.

DISCUSSION AND CONCLUSION

Outside intruders, such as businesses, are

increasingly interacting with indigenous ethnic

groups. When dealing with these peoples, models

and strategies that transcend neoclassical

economics are often needed.

The amount of cultural disruption faced

by a people typically needs to be considered. The

triple bottom line (that acknowledges the

importance of people and the environment as well

as profit margins) provide a means of advancing

this dialogue. The concept of anomie, (the lack

of an ability to achieve socially acceptable goals

in a culturally sanctioned manner) also needs to be

considered because it has often triggered

unhappiness and dysfunction. Appell uses the

term “cultural separation syndrome” to deal with

such situations. Mainstream methods of analysis

(such as neoclassical economics), however, may

not be robust enough to adequately deal with all

of these important variables. The substantive

alternative, in contrast, offers a more robust

means of understanding.

The Middle East and neighboring regions

are the home to a wide range of indigenous

peoples. These ethnic groups often respond to

business opportunities in a manner that reflects

their culture and traditions. In many cases,

indigenous people harbor a conscious desire to

protect and revitalize their heritage. In essence,

they seek ways to reduce the amount of anomie

faced by stabilizing their cultures, mores, and way

of life. By modeling their responses with this in

mind, the actions of such peoples can be more

readily understood.

The ethnic strife triggered by recent

advances by ISIS and the way in which these

events will impact the ethnic groups and

indigenous people involved also needs to be

considered.

In addition to perceiving these triggers of

response, business scholars and practitioners need

to be aware (1) that indigenous people are gaining

greater sophistication and negotiating skills and

(2) that they tend to be consciously motivated by a

desire for self-determinism. By keeping these

issues in mind, businesses seeking to establish




relationships with indigenous populations are

likely to be more successful.

REFERENCES Appell, G. N. (1977) “The Plight of Indigenous

People: Issues and Dilemmas,” Survival

International Review 2, 3:11-l6

Durkheim, Emile, Elkington, John (1999) Cannibals

with Forks: The Triple Bottom Line of 21st

Century Business (Mankato, MN: Capstone.)

Merton, R.K. (1957) Social Theory and Social

Structure (New York: Free Press of Glencoe.)

Napoleon, H. (1996) Yuuyaraq: The Way of the

Human Being (Fairbanks, AK: Alaska Native

Knowledge Network.)

Norman, W.and C. MacDonald (2003) “Getting to

the Bottom of ‘Triple Bottom Line’,” Business

Ethics Quarterly 14 3: 243-262

www.businessethics.ca/3bl/triple-bottom-line.pdf

on.)

Smith, Graham Hingangaroa (2003) “Indigenous

Struggle for the Transformation of Education and

Schooling” (Keynote Address to the Alaskan

Federation of Natives (AFN) Convention.

Anchorage, Alaska, U.S.)

Walle, Alf H. (2009) In 2009 Alf H. Walle, one of

the authors lived in Barrow, Alaska and

personally witnessed the events discussed.

Walle, Alf H. (2005-2008) Alf H. Walle is a state

certified substance abuse counselor with

significant experience working with Alaska

Native clients. As such, he has had numerous

conversations regarding the use of elders and

native healers within the context of Native

therapy.

Purchasing Power Parity Mohsen Bahmani Oskooee

and Sahar Bahmani



The Rial-Dollar Exchange Rate and Purchasing Power Parity Theory

Mohsen Bahmani-Oskooee

The Center for Research on

International Economics

The Department of Economics

University of Wisconsin-

Milwaukee

Milwaukee, WI 53201

Sahar Bahmani

College of Business, Economics

and Computing

Department of Economics

University of Wisconsin at

Parkside

Kenosha, WI 53141

Abstract

Since the 1979 Islamic Revolution in Iran, Iranian currency has

depreciated from 70 rials per dollar to as low as some 36000 rials

per dollar. Has this movement followed the path predicted by the

well-known Purchasing Power Parity (PPP) theory? In this paper

we show that the answer is in the affirmative and the dominating

factor causing the decline is domestic inflation. Following the

theory, we predict a rate of almost 47000 rials to the dollar.

INTRODUCTION

A review of the value of the Iranian rial against the U.S. dollar

reveals that it has continuously lost value and mostly since the

the 1979 revolution. The free market exchange rate reveals that

from 1933 until 1979, the dollar rose from 11.20 rials in 1933 to

98 rials in January 1979. However, the rate as of early 2013

stood at 36,300 rials per dollar.1 This paper uses the economic

theory of purchasing power parity (PPP) to explain this abnormal

rise in the rial-dollar exchange rate. If we consider the dollar to

be like any other commodity, the price of land, housing, food,

television sets and, cars, has risen, why not the price of the

dollar? Accordingly then the main explanation for the rise in the

dollar must be domestic inflation. Thus, whatever has

contributed to domestic inflation in Iran, has also contributed to

the increase in the value of the dollar.2 The PPP theory theory

explains the link between the exchange rate and relative prices.

This theory is outlined in section II and applied and tested using

monthly price data in the post-revolutionary period from January

1979 to July 2015. The results are summarized in Section III.3

THE PURCHASING POWER PARITY (PPP) AND

TESTING METHOD

Let EX denote the exchange rate between rial and the U.S.

dollar. The purchasing power parity theory (PPP hereafter)

basically claims that in the long run the exchange rate must be

equal to the price ratio of the two countries.4 Denoting the price

level in Iran by PIR and the price level in the U.S. by PUS, the

PPP could be outlined by equation (1):

1 The rate is at the closing on January 31, 2016. 2 Such factors include the Iran-Iraq war, loss of oil revenue, sanctions

by the United Nations and the West, and excess supply of money by the

Central Bank of Iran. 3 For history of Iranian rial see Bahmani-Oskooee (2005). 4 For a review article see Bahmani-Oskooee and Hegerty (2010).


and Sahar Bahmani



)1(PUS

PIREX

In order to see if the two variables follow each

other, we plot each of them in Figure 1.

[Figure 1 here]

From Figure 1 we see that indeed, the two

variables move together most of the time.

However, the relation could be spurious unless we

establish cointegration between the two variables.

If we follow the cointegration concept of Engle

and Granger (1987), we show that the two

variables are integrated of the same order d, but a

linear combination of the two is integrated in an

order less than d.

A common practice is to express (1) in a log-

linear format as in (2):

The results of the ADF (define ADF here

for the first time and then use ADF subsequently)

test applied to the level of both variables as well

as to their first-differences are reported in Table 1.

It is clear that regardless of the number of lags

used in the ADF test, only first-differenced

variables are stationary. Therefore, both Ln EX

and Ln (PIR/PUS) are integrated of order one or

I(1). Now we must show that a linear combination

of the two variables proxied by εt is integrated of

order zero or I(0).5 To that end we estimate

equation (2) and apply the ADF test to the

residuals. The results are as follows:6

5 To see why εt in (2) is a proxy for the linear

combination of two variables, all we need to do is to

solve (2) for εt.. 6 Numbers inside the parentheses for coefficient

estimates are absolute values of the t-ratios. However,

number inside the parenthesis next to ADF statistic is

number of lags in the test. Note that data on price

levels come from International Financial Statistics of

the IMF. Data on the rial-dollar rate are mostly from

61.2)10(96.0

)6.107(842.0ˆ)2.565(63.9ˆ

2

ADFR

If the PPP is to hold, we would expect the

estimate of slope coefficient in (2) to be one

which it is not. We would also expect the

residuals to be stationary. The ADF test statistics

of 2.61 is less than its critical value of 3.76 in

absolute value, implying that the residuals are not

stationary, thus rejecting the PPP theory.7

By assuming the slope coefficient in equation (2)

to be one, we also assume that the inflation rate in

Iran and inflation rate in the US have a similar

impact on the exchange rate, though in opposite

directions. Clearly, this cannot be the case since

very little trade took place between the two

countries during our period of study. To test this

hypothesis, we separate the two terms and

estimate the following specification:

If PPP is to hold, an estimate of b should be one

and that of c negative one. Furthermore, εt should

be I(0). The OLS estimate of (3) is as follows:

64.2)10(97.0

)07.3(13.1ˆ)6.15(88.0ˆ)52.7(77.10ˆ

2

ADFR

cba

It is clear from the results that the

estimate of b is not one and that of c is not

negative-one, although they are close to their

expected values. These estimates are significant,

since the absolute value of the ADF statistic of the

residuals is less than the critical value of 3.76, the

null of unit root in the residuals cannot be

rejected, hence the residuals are non-stationary,

rejecting cointegration. 8

Bahmani-Oskooee (2005) and author’s own collection. 7 Note that we have selected the ADF statistic by

minimizing the AIC criterion. However, the ADF

statistic was insignificant at all lags (1-12). We also

made sure that both Ln PIR and Ln PUS are I(1). 8 For some other studies that have tested the PPP using

the black market exchange rate see Bahmani-Oskooee

)2()( tttPUS

PIRLnLnEX )3(ttt cLnPUSbLnPIRaLnEX


and Sahar Bahmani



The ADF test applied to the residuals of

equation (3) is said to suffer from low power. We

therefore, shift to an alternative approach of testing

for cointegration that incorporates short-run

dynamic adjustment of variables. To this end, we

follow Coe and Serletis (2002) and Pesaran et al.

(2001) bounds testing approach and rewrite

equation (3) in an error-correction format as

follows:

)4('

'''

121110

3

0

2

0

1

1

ttttkt

n

k

k

kt

n

k

k

n

k

ktkt

LnPUSLnPIRLnEXLnPUS

LnPIRLnEXLnEX

Equation (4) is an error-correction model

that is similar to the Engle and Granger (1987)

specification. The difference is that rather than

including lagged error term from (3) we have

included its proxy represented by the linear

combination of lagged level variables. In order to

justify the inclusion of lagged level variables,

Pesaran et al. (2001) propose applying the familiar

F test to establish their joint significance as a sign of

cointegration. However, they demonstrate that the F

test in this application has new critical values that

they tabulate. Since these critical values account for

integrating properties of variables, under this

method there is no need for pre-unit root testing and

variables could be combination of I(0) and I(1),

though our variables are all I(1).

Equation (4) is estimated after imposing 12

lags on each variable. Following the literature, we

use Akaike’s Information Criterion (AIC) to select

an optimum model. The selected model was an

order of (12, 3, 0) and the normalized log-run

coefficients and the F test for joint significance of

lagged level variables were estimated to be:

90.2)30.0(74.0ˆ

ˆ

)10.2(79.0ˆ

ˆ)98.0(46.9'ˆ

0

2

0

1

F

a

(1993), Phylaktis and Kassimatis (1994), El-Sakka and

McNabb (1994), Sanchez-Fung (1999), Kargbo (2003),

Chortareas and Kapetanios (2004), and Bahmani-

Oskooee and Goswami (2005).

From these results it is clear that while the Iranian

price level carries a significant coefficient, the U.S.

price level does not. This implies that the inflation

rate in Iran is more relevant and the main

determinant of the rial-dollar exchange rate in Iran.

However, the F test applied to the joint significance

of lagged level variables is insignificant given its

upper bound critical value of 4.14 at the 10% level

of significance.9 However, according to Bahmani-

Oskooee and Tanku (2008), there is an alternative

way of establishing cointegration. Using the long-

run coefficient estimates and long run model we

generate the error term, usually called error-

correction term labeled as ECM. We then replace

the linear combination of lagged level variables in

(4) by ECMt-1 and estimate the resulting

specification at the same optimum lags. A

significantly negative coefficient for ECMt-1 will

support convergence toward long run or

cointegration. Once this specification was

estimated, the coefficient estimate of ECMt-1 was -

0.03 with a t-ratio of -2.87, supporting

cointegration.

SUMMARY AND CONCLUSION

Since the Islamic Revolution in 1979, the Iranian

rial has been under pressure and has lost much of

its value. The free market rial-dollar rate has

gradually moved from 70 rials per dollar to

36,300 rials per dollar as of February 2013. While

most of the pressure in late 2011 and 2012 is

attributed to economic sanctions by the U.N., and

the U.S. and other Western countries, we

demonstrate that during the last three decades,

inflation in Iran has been the main source of the

devaluation of the rial.

In this paper we tried to establish the link

between the rial-dollar rate and inflation

differential between Iran and the U.S., following

the purchasing power parity theory. Using

monthly data from January 1979 – July 2015, our

empirical results reveal that the dominating factor

in the decline of the rial is domestic inflation.

During the study period, the Iranian Consumer

Price Index has moved up from 0.43 to almost

9 This critical value comes from Pesaran et al. (2001,

Table CI, Case III, p. 300).


and Sahar Bahmani



288, an increase of 670-fold. If we were to

increase the price of the dollar by this ratio, we

would expect a rate of 46,900 rials per dollar.

Thus, the current rate of almost 37,000 rials per

dollar is almost 20% less than the PPP would

predict. Indeed, this is reflected in coefficient

estimates of the Iranian inflation rate in model (4)

and could be due to imperfections in the PPP or

intervention by Iran’s Central Bank.

Figure 1: Plot of the Rial-dollar rate (EX) and Relative Prices (RP).

EX

Months

0

10000

20000

30000

40000

1982M3 1991M5 2000M7 2009M9

1986M10 1995M12 2005M2 2014M4

2015M7

RP

Months

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1982M3 1991M5 2000M7 2009M9

1986M10 1995M12 2005M2 2014M4

2015M7

Table 1: The Result of ADF Test Applied to Level and First-Differenced Variables


and Sahar Bahmani



LnEX ΔLnEX LnRP ΔLnRP

DF -.99081 -16.74 0.7798 -13.27

ADF(1) -.98318 -14.08 0.3936 -10.13

ADF(2) -.97886 -10.11 0.3543 -8.304

ADF(3) -.98864 -9.062 0.2987 -8.032

ADF(4) -.98646 -8.551 0.3291 -8.256

ADF(5) -.97627 -8.085 0.3940 -7.662

ADF(6) -.96496 -7.450 0.4013 -6.632

ADF(7) -.96674 -7.005 0.3608 -6.026

ADF(8) -.98151 -7.061 0.3341 -5.745

ADF(9) -.94171 -6.617 0.3262 -4.942

ADF(10) -.95103 -5.354 0.2445 -4.002

ADF(11) -1.0705 -5.525 0.1091 -3.147

ADF(12) -1.0201 -4.834 -0.0388 -3.101

95% critical value for the augmented Dickey-Fuller statistic = -2.8692


and Sahar Bahmani


Contemporary Economic and Management Studies in Asia and Africa CCJ, V. 1, No. 1 - May 2016

29

REFERENCES

Bahmani-Oskooee, M. (1993), "Black Market

Exchange Rates vs. Official Exchange Rates in

Testing PPP: An Examination of the Iranian

Rial," Applied Economics, Vol. 25, pp. 465-472.

Bahmani-Oskooee, M. (2005), “History of the

Rial and Foreign Exchange Policy in Iran”,

Iranian Economic Review, Vol. 10, pp. 1-20.

Bahmani-Oskooee, Mohsen and Gour G.

Goswami (2005b), “Black Market Exchange

Rates and Purchasing Power Parity in

Emerging Economies,” Emerging Markets

Finance and Trade 41(3), 37-52.

Bahmani-Oskooee, M. and A. Tanku (2008), “The

Black Market Exchange Rate vs. the Official

Rate in Testing PPP: Which Rate Fosters the

Adjustment Process”, Economics Letters, pp. 40-

43.

Bahmani-Oskooee, M. and S. Hegerty, (2010),

“Purchasing Power Parity in Less-Developed

and Transition Economies: A Review Article”,

Journal of Economic Surveys, Vol. 23 (2009),

pp. 617-658.

Chortareas, G and Kapetanios, G., 2004. “The

Yen Real Exchange Rate may be Stationary

after all: Evidence from Non-linear Unit-root

Tests”, Oxford Bulletin of Economics and

Statistics, Vol. 66, Issue 1, pp. 113-131.

Coe, Patrick J. and Apostolos Serletis (2002),

“Bounds Tests of the Theory of Purchasing

Power

Parity,” Journal of Banking and Finance 26(1),

179-99.

Engle, R.F. and C.W.J. Granger (1987), “Co-

integration and Error-Correction:

Representation,

Estimation and Testing,” Econometrica 55, 1251-

1276.

El-Sakka, M. I. T. and R. McNabb (1994),

“Cointegration and Efficiency of the Black

Market for Foreign Exchange: A PPP Test for

Egypt,” Economic Notes 23(3), 473-80.

Kargbo, Joseph M. (2003a), “Cointegration

Tests of Purchasing Power Parity in Africa,”

World Development 31(10), 1673-85.

Pesaran, M. H., Y. Shin, and R. J. Smith. 2001.

“Bound Testing Approaches to the Analysis

of Level Relationship,” Journal of Applied

Econometrics, 16, 289-326.

Phylaktis, Kate and Yiannis Kassimatis (1994),

“Does the Real Exchange Rate Follow a

Random Walk? The Pacific Basin

Perspective,” Journal of International Money

and Finance 13(4), 476-95.

Sanchez-Fung, Jose R. (1999), “Efficiency of

the Black Market for Foreign Exchange and

PPP: The Case of the Dominican Republic,”

Applied Economics Letters 6(3), 173-76.

Globalization and Economic Growth Hsiao-Ping Chu, Tsyangyao Chang and Tagi-Sagafi-nejad



30

Globalization and Economic Growth Revisited: A Bootstrap Panel

Causality Test

Hsiao-Ping Chu10, Tsangyao

Chang,11

Tagi Sagafi-nejad12

10 Department of Business Administration,

Lin-Tung University, Taichung, TAIWAN 11 Department of Finance, Feng Chia

University, Taichung, TAIWAN 12 Corresponding author: Professor

Emeritus, Loyola University Maryland;

2019 Gustavus Street, Laredo, TX 78043;

(956) 206-3351; email:

[email protected]

This article has been revised in light of

comments from reviewers. In particular we

thank Professor Mohsen Bahmani-Oskoee

for his thoughtful comments. All

remaining errors and shortfalls are solely

the responsibility of the authors.

Abstract

This paper revisits the nature and direction of causation between

globalization and economic growth in nine OECD countries and

China by applying the bootstrap panel Granger causality test to

the data over the period of 1981-2008. Empirical results support

evidence on causality from globalization to economic growth for

Netherlands and the UK; causality from economic growth to

globalization in the US, neutrality for Australia, Belgium,

Canada, France, Italy, and Japan. Based on the empirical results

from this paper, we provide important policy implications for the

OECD countries and China.

Keywords: Globalization; Economic Growth; OECD Countries; China;

Bootstrap Panel Causality Test

INTRODUCTION Globalization has accelerated considerably since the mid-1980s.

It is not only one of the most important concepts in economic

development but its impact has been hotly debated and

contested. Dunning (2003) wrote about “making globalization

good”, while Stiglitz, another prominent student of the subject,

wrote about globalization and its discontents in 2002 and about

making it “work” in 2006. These and other scholars would agree

with Intriligator (2003) who describes it as representing one of

the most influential forces in determining the future of the

planet. Furthermore Akinboye (2007) regards it as one of the

most dominant forces in the present day world economy.

Numerous other scholars who have studied the subject, including

Roderik (1997), Scudder (2010), Zhuang and Koo (2007) have

noted that no nation can exist in isolation in the era of

globalization. With unprecedented pace of global

interdependence, increased international trade, foreign direct

investment inflows and the Internet linking all countries and

regions of the world, we literally live in a “global village”.

These, and numerous other studies, confirm that economic

growth is impacted by globalization, and have provided ample

evidence as well as policy recommendations. The importance of

globalization in economic development has triggered scholarly




31

interest in examining this relationship.

Studies of the multidimensional

phenomenon of globalization (and its predecessor,

internationalization) have established that

development can proceed under a variety of

internal and external conditions. There is,

nonetheless, general agreement that development

is much more likely to take place under “open

economy” conditions, which means, inter alia,

exposure to the forces of globalization. Empirical

results differ, depending on the country, time

period, and the methodology employed. In

particular, the lack of consensus on the direction

of causality between globalization and economic

growth provides an opportunity to analyze the

nature of this connection with the help of different

econometric methods.

This study revisits the globalization and

economic growth nexus using the recently

developed econometric techniques - bootstrap

panel Granger causality - proposed by Kónya

(2006) and others to test the causal relationship

between the two. We use the panel data from nine

OECD countries and China over the period 1981-

2008.13 We contribute to the literature by using

this causality analysis to provide new information

regarding the importance of the choice of

statistical techniques in analyzing the direction of

causality. The empirical results show significant

13 The reason that we incorporate China with the nine

OECD countries in our study is that China has made

remarkable economic progress over the past two

decades. China’s average annual economic growth rate

over the past two decades (1990-2010) was about

9.818%. In 2011, per capita GDP in China was US$

8.800 (PPP-adjusted). Second, China has become the

world’s first largest trading countries with the foreign

exchange reserves estimated at US$ 3.18 trillion at the

end of 2011. Third, China does not epitomize the

typical open economy; indeed economic growth has

taken place despite the relative closeness of the

economy.

causal relation only in three countries, (i) one-way

Granger causality from globalization to economic

growth in Netherlands and the UK, and (ii) one-

way Granger causality from economic growth to

globalization in the US. Interestingly, we do not

find significant causal relation between

globalization and economic growth in the case of

China.

The novelty of this study is three-fold.

First, in detecting the existence of causality, we

rely upon the recently developed panel causality

method – the so-called bootstrap panel test. This

test accounts for cross-sectional dependency and

heterogeneity across countries and is not sensitive

to co-integration among and unit root properties

of the variables involved. Panel data methods

produce reliable and statistically powerful method

in contrast to time series analysis because panel

data combines information from cross-section as

well as time dimensions, and is thus both

synchronic and diachronic. Second, we test for

cross-sectional dependency among countries by

drawing upon the most recent advances in panel

data econometrics. In the increasingly

interdependent world, countries are highly

integrated; a shock in one country– such as the

2008 turbulence - is easily transmitted to others

through international economic interrelationships

and enhanced contagion. Finally, we take into

consideration heterogeneity across the countries

rather than testing causality assuming

homogeneity for the entire panel. As stated by

Granger (2003), “investigating causality for the

whole panel is the null hypothesis”. Furthermore,

the homogeneity assumption for estimated

parameters in panel data in the past cannot capture

country-specific characteristics.

The paper is organized as follows. Section

2 explains the hypothesis and reviews the

literature on the globalization and economic

growth relationship. Section 3 describes the data.

Section 4 outlines the econometric methodology.

Section 5 presents our empirical results and

discusses some economic and policy implications

of the empirical findings. Section 6 contains our




32

overall conclusions and suggests areas for further

research.

HYPOTHESES AND LITERATURE To gauge the relation between globalization and

economic growth, we propose four hypotheses.

The first is one-way Granger causality running

from globalization to economic growth, which we

refer to as the “globalization-led growth

hypothesis”. Globalization has entailed an

increase in trade between countries, exporting and

importing have accelerated. Since World War II,

the average annual rate of growth of world trade

has nearly consistently exceeded the rate of

growth of the world economy. The globalization

process has made it possible for countries to sell

goods and services across the globe and purchase

needed goods and commodities from others. One

sign of globalization is integration of markets and

production across countries. By reducing or

eradicating barriers and integrating economies,

globalization stimulates. Numerous scholars have

provided evidence that shows globalization has a

positive effect on economic fundamentals. The

rich literature includes Blomstromet et al. (1992);

Dollar (1992); Borensztein et al. (1998);

Greenaway et al. (1999); Chanda (2001); Dollar

and Kraay (2001);Dunning (2003);Stiglitz (2003);

Dollar (2004); Lumbila (2005); Sylwester (2005).

The second hypothesis is “growth-led

globalization”, i.e., one-way Granger causality

running from economic growth to globalization.

As economic growth accelerates, a country will

attract become more attractive to foreign capital

and foreign workers who seek better

opportunities. (UNCTAD, World Investment

Report, various issues). A country’s absorptive

capacity will enable it to attract and take better

advantages of investments – domestic and foreign.

This also entails acceleration in cross-border

transfer of knowledge, expertise and labor. More

opportunities are made available for the exchange

of various goods and services. This only

accelerates the pace of the country’s globalization.

It is a widely held view, supported by empirical

evidence, that globalization increases foreign

direct investment flows among nations. See

UNCTAD, (2011 and prior issues), Islam, (1999);

and Aninat, (2002).

The third hypothesis is a two-way

Granger causal relationship between globalization

and economic growth, which we call the

“feedback hypothesis”. Economic growth leads a

country to further globalize, which in turn

stimulates economic growth, and vice versa. Thus

globalization and economic growth are mutually

reinforcing.

The fourth hypothesis stipulates that there is no

relationship between globalization and economic

growth, thus the “neutrality hypothesis”. Rodrik

(1998) and Alesina et al. (1994) found no effect of

capital account openness, one of the indicators of

globalization, on economic growth. Similarly,

Carkovic and Levine (2002) found no robust

influence of foreign direct investment on growth.

This indicates that the major competitions of a

country come from its own human, natural and

other unique resources. Economic development

literature has long established these internal and

immutable sources of economic growth and

essential ingredients. See pioneering development

theorists Dennison (1967) and Simon Kuznets

(1968, 1973). Sources of economic growth reside

primarily within each country’s economic,

financial, cultural, political and human resources,

according to these and similarly established

development paradigms.

With respect to the recent empirical

evidence, Dreher (2006) uses panel data for 123

countries in the period 1970-2000 to analyze

whether the overall index of globalization as well

as sub-indexes constructed to measure single

dimensions affect economic growth. Results show

that globalization indeed promotes growth. Until

recently, however, most studies have used a cross-

section approach. These include Blomstromet et

al. (1992), Dollar (1992), Alesina et al. (1994),

Rodrik (1998), Chanda, (2001) and Garrett

(2001). All of these studies present, however, only

cross-sectional estimates. Moreover, they do not

adequately control for endogeneity. Their results

might therefore reflect unobserved characteristics




33

which do not vary over time instead of being the

consequences of globalization; or they might

indicate reverse causality. Aware of the

shortcomings of the cross-section approach, some

recent studies use panel data to examine the

relationship between some dimensions of

globalization and growth (Borensztein et al.,

1998; Greenaway et al., 1999; Dollar and Kraay,

2001; Carkovic and Levine, 2002).

More importantly, most past studies have

either utilized the ordinary least squares (OLS)

method or the traditional panel technique (Alesina

et al., 2000) in investigating the causal

relationship between the two series, but these

procedures do not distinguish between the long-

run equilibrium, as well as the long-run and short-

run causalities between the variables. We believe

that traditional studies regarding the relationship

between growth and globalization require a

revision. Chang and Lee (2010) empirically re-

examine the co-movement and the causal

relationship among economic growth, the overall

globalization index, and its three main

dimensions: economic, social, and political

integrations, using panel data for 23 OECD

countries for 1970 to 2006. They find out that all

variables move together in the long run when the

political variable is taken into account in their

testing model. The results of the panel causality

test indicate that, although the evidence of short-

run causality is very weak, it does show long-run

unidirectional causality running from the overall

index of globalization, economic globalization,

and social globalization to growth.

DATA

The annual data used in this study cover the

period 1981-2008 for nine OECD countries

(Australia, Belgium, Canada, France, Italy, Japan,

Netherland, the UK, and the US) and China.

Variables include overall globalization index and

real GDP (RGDP). We we use Dreher (2006)

globalization (KOF) index. This index divides

globalization in three dimensions: economic,

social, and political integration. We focus on the

overall index, which is made up of economic

globalization (36%), social globalization (38%),

and political globalization (26%). See

http://globalization.kof.ethz.ch/14 Real GDP

measured in constant 2005 U.S. dollars comes

from the World Development Indicators data base

(WDI, 2009). Belgium has the highest mean index

at 87.71, while China has the lowest (43.27). The

US has the highest real GDP at $9,374.85 billion,

and Belgium has the lowest ($306.55 billion)

mean. See tables 1 and 2 for the summary

statistics.

METHODOLOGY

Bootstrap Panel Granger Causality Test

Granger causality, a concept coined by Nobel

Prize winner Clive Granger, is a test for

determining whether one time series can be used

to predict the value of another interrelated series.

Since panel data method provides more

information and reliable statistical results

compared to time series methods, this paper

applies the bootstrap panel causality method

recently proposed by Kónya (2006) to determine

the nature of causal linkages between insurance

activities and economic growth. Kónya argues

that the bootstrap panel causality method is robust

to unit root and cointegration properties of

variables, implying that the testing procedure does

not require any pre-testing for unit root and

14 Kacowicz (1999) claims that globalization means

many different things for different people with an

intensification of economic, political, social, and

cultural relations across borders. Park (2003) also

notices that on the basis of multi-layer perspectives of

globalization, a large body of research is identified that

globalization is constructed out of complex interactions

among social, political, and economic processes

together with materiality. This multi-scalar viewpoint

shows that globalization is not only a process of

economy, but is also constituted by the activities of

society and politics. Therefore, we use the overall

Globalization index in our study to test the causal link

between globalization and economic growth. Details

about how to construct the index see Dreher (2006).

http://globalization.kof.ethz.ch/




34

cointegration. Variables are used in their level

forms irrespective of time series properties. This

feature of the bootstrap panel causality arises from

generating country-specific critical values from

the bootstrapping method and so the variables in

the system do not need to be stationary. This in

turn implies that the variables are used in level

form irrespectively of their unit root and

cointegration properties (Kónya, 2006).15 It is

important to note here that using the level of

variable directly in empirical analysis may play a

crucial role in determining causal linkages, since

differencing variables to make them be stationary

(i.e., using difference form of variables) may lead

to a loss of trend dynamics of series .

The bootstrap panel causality approach of

Kónya entails first estimating the system

described by means seemingly unrelated

regression (SUR) to impose zero restrictions for

causality by the Wald principle, followed by

generating bootstrap critical values. Note that

since country-specific Wald tests with the

country-specific bootstrap critical values are used

in this panel causality method, it does not require

the joint hypothesis for all countries in the panel.

The system for panel causality analysis includes

two sets of equations that can be written as

follows: 1 1

1 1

1 1

1, 1,1 1,1, 1, 1,1, 1, 1,1,

1 1

2, 1,2 1,2, 2, 1,2, 2, 1,2,

1 1

, 1, 1, , , 1, , , 1, ,

1 1

ly lx

t i t i i t i t

i i

ly lx

t i t i i t i t

i i

ly lx

N t N N i N t i N i N t i N t

i i

y y x

y y x

y y x

(1)

and

15 We refer to Kónya (2006) for the details of

bootstrapping method on how to generate country—

specific critical values.

2 2

2 2

2 2

1, 2,1 2,1, 1, 2,1, 1, 2,1,

1 1

2, 2,2 2,2, 2, 2,2, 2, 2,2,

1 1

, 2, 2, , , 2, , , 2, ,

1 1

ly lx

t i t i i t i t

i i

ly lx

t i t i i t i t

i i

ly lx

N t N N i N t i N i N t i N t

i i

x y x

x y x

x y x

(2)

where y denotes the real income, x refers to the

indicator of globalization, N is the number of the

members of panel (j=1,…,N), t is the time period

(t=1,…,T), l is the lag length. In this system

definition, each equation has different

predetermined variables while the error terms

might be cross-sectionally correlated and hence

these sets of equations are the SUR system. To

test for Granger causality in this system,

alternative causal relations for a country are likely

to be found: (i) there is one-way Granger causality

from X to Y if not all 1,i are zero, but all

2,i are

zero; (ii) There is one-way Granger causality from

Y to X if all 1,i are zero, but not all

2,i are zero;

(iii) There is two-way Granger causality between

X and Y if neither1,i nor

2,i are zero; and (iv)

There is no Granger causality between X and Y if

all 1,i and

2,i are zero.

Before proceeding to estimation, the issue

to be considered is to determine optimal lag

lengths.16 Since the results from the causality test

16 As indicated by Kónya (2006), this is a crucial step

because the causality test results may depend critically

on the lag structure. In general, too few or too many

lags may cause problems. Too few lags mean that some

important variables are omitted from the model and

this specification error will usually cause bias in the

retained regression coefficients, leading to incorrect

conclusions. On the other hand, too many lags waste

observations and this specification error will usually

increase the standard errors of the estimated




35

may be sensitive to the lag structure, determining

the optimal lag length(s) is crucial for robustness

of findings. For large panels, varying lag structure

for both equations and variables would cause to

substantial computational burden. Following

Kónya (2006), maximal lags are allowed to differ

across variables, but to be the same across

equations. The system is estimated for each

possible pair of 1ly , 1lx , 2ly , and 2lx respectively

by assuming from 1 to 4 lags and then choose the

combinations which minimize the Schwarz

Bayesian Criterion.17

Cross-Sectional Dependence Tests

One important assumption in the bootstrap panel

causality is the existence of cross-sectional

dependency among the countries in the panel. In

the case of cross-sectionally correlated errors,

estimating the system described with the SUR

estimator is more efficient than the ordinary least

squares estimator (OLS) since the country-by-

country OLS estimator is not able take into

account cross-sectional dependency. Thereby,

testing cross-sectional dependency is crucial for

the estimator selection and hence panel causality

results.

To test for cross-sectional dependency, the

Lagrange multiplier (LM) test of Breusch and

Pagan (1980) is one of the familiar tests. The null

hypothesis of no cross-section dependence-

0 : ( , ) 0it jtH Cov u u for all t and i j - is

tested against the alternative hypothesis of cross-

section dependence1 : ( , ) 0it jtH Cov u u , for at

least one pair of i j . In order to test the null

hypothesis, Breusch and Pagan (1980) developed

the LM test as:

coefficients, making the results less precise. 17 In order to save space, results from the lag selection

procedure are not reported here but available upon

request.

12

1 1

ˆN N

ij

i j i

LM T

(3)

where ij is the sample estimate of the pair-wise

correlation of the residuals from Ordinary Least

Squares (OLS) estimation of equation (1) for each

i. Under the null hypothesis, the LM statistic has

asymptotic chi-square with ( 1) / 2N N degrees

of freedom. It is important to note that the LM test

is valid for N relatively small and T sufficiently

large. For the large panels where T first

and then N , Pesaran (2004) proposed the

scaled version of the LM test as follows:

1/21

2

1 1

1ˆ( 1)

( 1)

N N

lm ij

i j i

CD TN N

(4)

Under the null hypothesis with, the CDlm

test converges to the standard normal distribution.

The CDlm test subjects to substantial size

distortions when N large and T small. Pesaran

developed a more general cross-sectional

dependency tests that is valid for the panels where

T→∞ and N→∞ in any order. The so-called CD

test is as follows:

1

1 1

2ˆ

( 1)

N N

ij

i j i

TCD

N N

(5)

Under the null hypothesis, the CD test has

asymptotic standard normal distribution. Pesaran

indicates that the CD test has exactly mean zero

for fixed T and N and is robust to heterogeneous

dynamic models including multiple breaks in

slope coefficients and/or error variances, so as

long as the unconditional means of ity and itx are

time-invariant and their innovations have

symmetric distributions. However, the CD test

will lack power in certain situations in which the

population average pair-wise correlations are zero,

but the underlying individual population pair-wise

correlations are non-zero (Pesaran et al., 2008,

p.106). Pesaran et al. (2008) proposes a bias-




36

adjusted test which is a modified version of the

LM test by using the exact mean and variance of

the LM statistic. The bias-adjusted LM test is: 21

21 1

( )2ˆ

( 1)

N Nij Tij

adj ij

i j iTij

T kTLM

N N

(6)

where Tij and

2

Tij are respectively the exact

mean and variance of 2( ) ijT k , that are

provided in Pesaran et al. (2008, p.108). Under the

null hypothesis with first T→∞ and then N→∞,

the adjLM test is asymptotically distributed as

standard normal.

Slope homogeneity tests

Another important point in the bootstrap panel

causality approach is cross-country heterogeneity.

Therefore, one needs to determine whether slope

coefficients are homogeneous. In order to test the

null hypothesis of slope homogeneity against the

alternative hypothesis, one familiar approach is to

apply the Wald principle. This principle is valid

for cases where a) the cross-section dimension (N)

is relatively small; b) the time dimension (T) of

the panel is large; c) the explanatory variables are

strictly exogenous; and d) the error variances are

homoscedastic. Swamy (1970) developed the

slope homogeneity test that allows for cross-

section heteroscedasticity (Pesaran and Yamagata,

2008). However, the Wald and Swamy tests are

applicable for panel data models where N is small

relative to T. Pesaran and Yamagata (2008)

proposed a standardized version of Swamy’s test

(the so-called test) for testing slope

homogeneity in large panels. The test is valid

as ( , )N T without any restrictions on the

relative expansion rates of N and T when the error

terms are normally distributed. In the test

approach, the first step is to compute the

following modified version of the Wald-Swamy

test:

21

Ni i

i WFE i WFE

i i

x M xS

(7)

where i is the pooled OLS and WFE is the

weighted fixed effect pooled estimation of the

regression model it i i it ity x ; M is an

identity matrix, the 2

i is the estimator of 2

i .18

The standardized dispersion statistic is then

defined as: 1

2

N S kN

k

(8)

Under the null hypothesis with the

condition of ( , )N T so long as

/N T and the error terms are normally

distributed, the test has asymptotic standard

normal distribution. The small sample properties

of test can be improved under the normally

distributed errors by using the following bias

adjusted version:

1 ( )

var( )

itadj

it

N S E zN

z

(9)

where the mean ( )itE z k and the variance

var( ) 2 ( 1) / 1itz k T k T .

EMPIRICAL RESULTS, ECONOMIC, AND

POLICY IMPLICATIONS

As outlined earlier, testing for the cross-sectional

dependence and slope homogeneity in the

bootstrap panel causality analysis is crucial for

selecting the appropriate estimator and for

imposing restriction for causality. Taking into

account cross-sectional dependency in empirical

analysis is important where countries are

integrated and have a high degree of economic

globalization. Thus, our empirical study starts

18 In order to save space, we refer to Pesaran and

Yamagata (2008) for the details of Swamy’s test and

the estimators describe in equation (7).




37

with examining the existence of cross-sectional

dependency and heterogeneity across the

countries concerned. To investigate the existence

of cross-sectional dependence, we carried out four

different tests ( BPCD , lmCD , CD , andadjLM )

and reported the results in Table 3. It is clear that

the “no cross-sectional dependence” hypothesis is

rejected at the conventional levels of significance,

implying that the SUR method is appropriate,

rather than country-by-country OLS estimation

assumed in the bootstrap panel causality

approach. This finding implies that a shock

occurred in one of these nine OECD countries

and/or China seems to be transmitted to other

countries.19

Table 3 also reports the results of the

Pesaran and Yamagata (2008) slope homogeneity

tests. Both tests reject the null hypothesis of the

slope homogeneity hypothesis, and support the

country-specific heterogeneity. The rejection of

slope homogeneity implies that the panel causality

analysis results in misleading inferences by

imposing homogeneity restriction on the variable

of interest. Hence, direction of causal linkages

between globalization and economic growth may

differ across the selected countries.

The existence of the cross-sectional

dependency and the heterogeneity across OECD

countries and China provides supporting evidence

for the suitability of the bootstrap panel causality

19 The cross-sectional dependency further implies that

examining causal linkages between insurance activity

and economic growth in these nine OECD countries

and China requires taking this information in

estimations of causality regressions into account. In the

presence of cross-sectional dependency, the SUR

approach is more efficient than the country-by-country

ordinary least-squares (OLS) method (Zellner, 1962).

Therefore, the causality results obtained from the SUR

estimator developed by Zellner (1962) will be more

reliable than those obtained from the country-specific

OLS estimations.

approach. The results from the bootstrap panel

Granger causality analysis20 are reported in Tables

4-5. These results show one-way Granger

causality running from globalization to economic

growth for Netherland and the UK. The remaining

eight countries show no relation between

globalization and economic growth. As for the

direction of causality between economic growth

and globalization, we find one-way Granger

causality running from economic growth to

globalization for the US only and independence

between economic growth and globalization for

the rest of the nine countries. Our empirical

evidence suggests that globalization is materially

associated with economic growth only for two

countries, i.e., Netherland and the UK. In sum, our

results show that the globalization-growth nexus

varies across countries with different conditions.

Several interesting things are to be

gleaned from these results. First, we found one-

way Granger causality running from economic

growth to globalization only in the case of the US.

This further explains why the US is still the

dominating country with respect to the

globalization process. Second, regarding the

direction of causality from globalization to

economic growth, we find one-way Granger

causality running from globalization to economic

growth only in the case of the Netherland and the

UK, but not in the rest of the eight countries.

These results indicate a strong mutual relationship

between globalization and economic development

in both Netherland and the UK; the higher the

degree of globalization, the higher the economic

growth. But this does not seem to hold in the other

eight countries. We suspect some other factors

may affect the economic growth of these

countries. These could be akin to the so-called

“Kuznets Curve”.21 Our results are consistent with

20 See Kónya (2006) for the bootstrap procedure and

how the country specific critical values are generated. 21 The so-called Kuznets Curve, named after Simon

Kuznets, an early Nobel Prize-winner, argued that,

income equality worsens before it gets better as a




38

these expectations. Third, we found that the

neutrality hypothesis holds for China. This indeed

comes as a surprise because China has

experienced significant economic growth in the

past few decades. China’s average annual

economic growth rate over the past two decades

(1990-2010) has been over 9%. We would expect

at least a one-way or feedback to exist between

globalization and economic growth in China. In

fact, a study by Chang (2002), using 1987-1999

data, shows that a feedback effect does exist

between the degree of openness and economic

growth in China. Our results are not consistent

with this expectation. One plausible explanation

of the neutrality (no relationship) is that the

overall globalization index is made up of

economic (36%), social (38%), and political

globalization (24%) and China has the lowest

mean overall globalization index of 43.27,

compared to the other nine OECD countries.22 In

fact, Chang and Lee (2010) point out that, if

globalization is viewed only from the economic

aspect, earlier empirical evidence seems

ambiguous. For instance, using cross-country

growth regressions estimated for the period 1920-

1990, Vamvakidis (2002) finds that the positive

correlation between openness and growth is only a

recent phenomenon. Some point to strong positive

impact of trade openness on growth, while others,

such as Rodrik (1997) and Scudder (2010) see

only minor or mixed effects. As noted before,

globalization is a complex process with cultural,

country’s economy develops. He might have also

added “and further globalized”. See Kuznets (1968 and

1973). The association between the two factors changes

in the course of economic development. We leave

further exploration of this curve and its applicability to

the tests presented in this article to a future occasion. 22 We would expect economic globalization will affect

economic growth in China. Future study will be in this

direction to test the causal relation between these three

components and economic growth for the 10 countries.

economic, political, social, and technological

dimensions (Held et al., 2000). Wade (2009)

argues that the political economy of policy

reforms play an important role in global

imbalances and re-organizations. And Harrison

(1996) and Rodrıguez and Rodrik (2001) cast

doubt on the statement that growth only benefits

from openness.

Based on the results from the panel

causality analysis, it is reasonable to conclude that

the nature of the causality between globalization

and economic growth in Australia, Belgium,

Canada, France, Italy, Japan, and China is

generally consistent with the neutrality

hypothesis. Accordingly, one policy implication

for these countries is that policies aimed at

enhancing globalization do not exert an adverse

impact economic growth and that globalization

may not be affected by economic performance.

One can attribute the neutrality between

globalization and economic growth to a relatively

small contribution of globalization to overall

output under certain circumstances. In some cases,

globalization may have little or no impact on

economic growth. Our results seem to contrast

with those found in Chang and Lee (2010), whose

findings support the arguments that globalization

is one of the most powerful weapons for

stimulating economic growth, in particular, in

OECD economies (Saich, 2000; Dreher, 2006;

Mishkin, 2009).

We conclude by arguing that a one-size-

fits-all strategy, with respect to either

globalization or economic development, is not

optimal for all countries, including the OECD

countries we have studied. In the broad scheme of

things, the choice between the market and

government is a false one because neither can ever

be perfect, and thus the Wade (1990) advice, to

wit, “governing the market”, is indeed the

balanced approach. The overall relationship is

neither linear nor homogeneous across time and

space. Indeed history demonstrates cases where

nations have failed, and scholars such as Rostow

(1970) has provided penetrating analyses

concerning the rise and fall of countries. Others,




39

including Acemoglu and Robinson (2012) have

highlighted the pivotal role of institutions. The

state and the market are complements rather than

substitutes. More importantly, the relationship

between the state and the market cannot be

defined once-and-for-all in any dogmatic manner

but evolve over time in an adaptive manner as

circumstances change (Nayyar, 2006). In the end,

although market openness and therefore

globalization matters, good policy matters more.

As Fischer (2001) and Dunning (2003) and

Stiglitz (2003) have noted, if the process is

inevitable, the question then is not whether to

globalize or not but rather how best to take

advantage of the opportunities afforded by

globalization while minimizing its adverse effects.

While the opportunities for growth provided by

global integration could be substantial, they are

not guaranteed

CONCLUSIONS

This study applies bootstrap panel Granger

causality to test the causal relationship between

globalization and economic growth using data

from nine OECD countries and China over the

1981-2008 period. Regarding the globalization-

growth nexus, our empirical results demonstrate

one-way Granger causality running from

globalization to economic growth, but only for

Netherland and the UK. This is not the case for

the remaining seven countries (i.e., Australia,

Belgium, Canada, China, France, Italy, and

Japan). As to the growth- globalization nexus, we

find one-way Granger causality running from

economic growth to globalization, but only for the

US. This further explains that the US is still the

dominating country in the globalization era. Our

bootstrap panel Granger causality analysis

provides support for the growth hypothesis for

only Netherland and the UK. Results support the

neutrality hypothesis for other seven countries

(i.e., Australia, Belgium, Canada, China, France,

Italy, and Japan). Our results have important

policy implication for the ten countries we have

examined (nine OECD countries and China). In

this study, we have used the composite index,

comprised of economic (36%), social (38%), and

political globalization (24%). Further studies

could focus on the causal relation between each of

these three components and economic growth.

ACKNOWLEDGEMENT

We would like to thank László Kónya for

providing us with TSP codes for the bootstrap

panel causality. We are grateful to Takashi

Yamagata for GAUSS codes that modified by

Saban Nazlioglu for Swamy’s slope homogeneity

test on the basis of Yamagata’s procedure. We also

acknowledge helpful comments by William

Gruben and Siddharth Shankar. Any remaining

errors are the authors’ own responsibility.

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42

Table 1. Summary Statistics of Globalization Index

Mean Max. Min. Std. Dev. Skew. Kurt. J.-B.

Australia 83.89 92.26 73.61 6.95 -0.16 1.43 2.98

Belgium 87.71 92.78 77.58 5.03 -0.67 2.11 3.04

Canada 83.71 88.76 79.34 3.46 -0.02 1.33 3.27

China 43.27 61.65 23.87 13.99 -0.09 1.47 2.76

France 80.38 88.03 68.45 6.13 -0.35 1.84 2.17

Italy 70.32 81.48 54.19 10.14 -0.37 1.58 2.98

Japan 56.67 70.81 45.49 8.16 0.12 1.69 2.07

Netherland 87.44 92.04 82.58 3.54 -0.09 1.39 3.05

UK 74.49 83.09 68.89 4.95 -0.46 1.78 2.73

US 75.79 81.21 66.16 4.67 -0.88 2.63 3.80

Note: 1. The sample period is from 1981 to 2008.

Table 2. Summary Statistics of Real GDP

Mean Max. Min. Std. Dev. Skew. Kurt. J.-B.

Australia 604.83 1201.29 384.72 187.45 1.66 5.47 20.01***

Belgium 306.55 550.76 161.01 87.61 0.71 3.72 2.91

Canada 729.29 1328.61 511.62 208.39 1.31 3.96 8.99**

China 1161.75 3130.69 658.61 604.50 1.89 5.91 26.59***

France 1628.00 2831.21 875.43 439.67 0.63 3.60 2.25

Italy 1233.97 2003.72 684.63 301.00 0.29 3.18 0.44

Japan 3576.93 5640.00 1248.00 133.06 -0.53 2.05 2.37

Netherland 588.04 1069.93 371.23 185.00 1.35 3.89 9.48***

UK 1719.39 2908.93 1015.59 517.13 0.86 2.96 3.48

US 9374.85 13206.38 5865.93 2365.88 0.18 1.74 2.01

Note: 1. The sample period is from 1981 to 2008.

2. ** and *** indicate significance at the 0.05 and 0.01 levels, respectively.




43

Table 3. Cross-sectional Dependence and Homogeneous Tests

Test Statistic LM 276.141***

LMCD 28.301***

CD 13.978***

adjLM 55.628***

23.154***

adj 5.239***

Note: 1. *** indicates significance at the 0.01 level.

Table 4. Causality from globalization to economic growth

Wald Statistics

Bootstrap Critical Value

10% 5% 1%

Australia 4.8411 5.7816 8.5843 15.7172

Belgium 3.2820 5.8622 8.4553 16.4531

China 2.0284 5.6418 8.1155 15.0025

Canada 4.1124 6.0625 8.5954 15.4994

France 1.6139 5.3982 8.0412 14.6628

Italy 1.0668 5.6665 8.1984 14.9764

Japan 1.5936 6.3606 9.3566 17.1660

Netherland 12.1679** 5.8666 8.7702 17.5820

United Kingdom 13.4621** 5.3877 7.8499 14.9809

United States 0.4879 5.1813 8.0031 15.2699

Note: 1. ** indicates significance at the 0.05.

2. Bootstrap critical values are obtained from 10,000 replications.




44

Table 5. Causality from economic growth to globalization

Wald Statistics

Bootstrap Critical Value

10% 5% 1%

Australia 0.1104 5.7816 8.5843 15.7172

Belgium 0.1034 5.8622 8.4553 16.4531

China 0.4489 5.3136 8.1155 15.0025

Canada 2.6112 6.0625 8.5854 15.4994

France 3.2117 5.3982 8.0412 14.6628

Italy 2.9891 5.6665 8.1984 14.9764

Japan 4.5209 6.3606 9.3566 17.1650

Netherland 0.1168 5.8666 8.7702 17.5820

United Kingdom 0.4083 5.3877 7.8498 14.9809

United States 6.8206* 5.4995 8.0031 15.2699

Note: 1.* indicates significance at the 0.1 level.

2. Bootstrap critical values are obtained from 10,000 replications.

Natural Resources and Economic Development Hamidullah Farooqi

and Nader H. Asgary



45

Natural Resources and Economic Development: The Case of

Afghanistan

Hamidullah Farooqi

Faculty of Economics,

University of Kabul

Former Minister of Transport

and Civil Aviation

Islamic Republic of Afghanistan

and

Nader H. Asgary

Professor of Management and

Economics

Bentley University, Waltham,

Massachusetts, USA

Abstract

This paper examines the role of natural resources in the

sustainable economic development of Afghanistan. We analyze

Dutch disease theory and its implication for the case of

Afghanistan. Additionally, we apply the Community Based

Natural Resource Management (CBNRM) strategy for effective

resource management and avoidance of Dutch disease.

CBNRM will benefit all stakeholders by engaging them in the

decision-making and implementation process. We describe

historical lessons learned are by other countries with abundant

natural resources to support sustainable development. We

describe various ways in which natural resources can be used to

serve the best interest of Afghanistan in general as well as

distinct Afghan communities.

Keywords: Natural resources, Extractive industries, Dutch Disease, Community

Based Resource Management; Development, Afghanistan.

INTRODUCTION

Afghanistan’s untapped natural resources present an opportunity

for economic development and for the advancement of regional

and international cooperation. However, because of the

country’s inadequate development planning, not enough research

has been conducted to explore its available resources and

potential benefits. Evaluations of natural untapped resources are

usually conducted by a government in collaboration with experts

but because Afghanistan has been engaged in internal and

external wars during the past thirty-five years, very few such

studies have been conducted. Some initial studies on mining

were conducted during the 1970s and80s which indicated that

the country had nearly $1 trillion USD in untapped mineral

deposits. More recent studies indicate that there are more

reserves than were previously known Later assessments have

estimated the amount to be nearly $3 trillion USD (Reuters,

October 25, 2010) an amount which could fundamentally alter

Afghanistan’s economic development path, assuming that

strategies for the appropriate allocation of resources for

development are initiated. These mineral deposits are scattered

throughout the country, with a large segment along the border

with Pakistan; this presents security and geographical challenges

for building mining infrastructure which must be met.


and Nader H. Asgary



46

In 2010, The New York Times reported “with

virtually no mining industry or infrastructure in

place today, it will take decades for Afghanistan to

exploit its mineral wealth fully. The country has no

mining culture.” One of the missed opportunities of

the international community’s involvement in the

country during the last decade, is the discovery of

Afghanistan’s vast mineral wealth, which could

have helped to generate jobs and revenue, and

therefore development.

Afghanistan’s newly discovered oil and

gas reserves (with an estimate of 315 million

barrels of crude oil and 120 billion cubic meters of

gas), creates an opportunity for production and

export, which could generate much needed foreign

exchange. The North Afghan-Tajik Basin and the

South Katawaz and Helmand Basin provide the

potential for the exploration and development of

hydrocarbon. In fact, a number of oil and gas

reserves have already been discovered in the

North. According to the U.S. Geological Survey

and the Afghan Ministry of Mines and Petroleum,

the estimated undiscovered oil and gas reserves

are much larger than thought, especially in the

north and northwest parts of the country. The

economic growth and industrialization of

Afghanistan also requires the expansion of the

electric power generation and distribution system.

There is already a huge demand for electricity, and

the expansion of various manufacturing sectors

will further increase the demand. Afghanistan’s

electric power supplies in 2010 were 470 MW, of

which 100 MW was imported from neighboring

countries (USAID 2010-2013; Da Afghanistan

Breshna Sherkat, 2010). Recently, Afghanistan has

also begun exploring wind and solar technologies.

This paper evaluates Afghanistan’s natural

resources and proposes a strategic approach to

exploring resources for advancing sustainable

development and avoiding Dutch Disease. Many

resource rich countries have been unable to deal

with this important issue appropriately. The

potential for weakening other segments of the

economy is often referred to as “Dutch Disease”

because of the upswing in the extractive industries

revenue to the economy. According to our

literature survey of scholarly research, there are no

studies that have examined this issue for the case

of Afghanistan. This paper will offer methods for

preventing Dutch Disease in Afghanistan, and

provide a roadmap for development using natural

resources.

The Community Based Natural Resource

Management (CBNRM) strategy by engaging

stakeholders actively in the process includes

incorporating national and local interest for

growth. CBNRM provides a way for diverse (and

perhaps competing) parties to work together for

the common good. Scholars (Child, 2003; Sebele,

2010; Walle and Asgary, 2014) have shown that

nurturing and empowering local governments

provides a better outcome and will further help the

peoples of Afghanistan to equitably participate in

the extraction of their nation’s natural resources.

Earlier research in this area has not been adequate,

perhaps because the country’s involvement in

internal and external wars. This paper intends to

fill the gap by providing learning lessons from

countries that that have used their abundant natural

resources for development while avoiding the

Dutch Disease fatigue or the “resource curse”.

We discuss various ways in which natural

resources can be developed with an eye towards

what is in the best interest of Afghanistan as a

whole, while serving distinct Afghan

communities. This approach offers solutions in

which all stakeholders can simultaneously benefit.

Other important issues such as security, political

stability, governance, human resource

development, technology, and regional economic

cooperation are essential and require in-depth

studies but it is not the focus of this study.

EXTRACTIVE INDUSTRIES AND

DEVELOPMENT

An extractive industry is defined as “anything

capable of being extracted from the earth.”

International organizations define extractive

industries to include oil, gas and mineral extracts.

Energy has been defined as oil and petroleum gas.


and Nader H. Asgary



47

The Extractive Industries Transparency Initiative

refers to oil, gas, and minerals as extractive

industries (USEITI, 2015). Potential oil and gas

resources are important parts of Afghanistan’s

extractive industry. This requires collaboration and

partnership of Afghanistan National Oil Company

with regional and international oil companies that

have vast experience in oil and gas development.

The interaction of the energy sector with

the environment should receive serious attention,

to avoid the sort of environmental damage that

other developing economies (i.e., Nigeria) have

encountered in the extraction process. Afghanistan

has never possessed heavy industry before and as a

result it has little, if any, history of environmental

protection. The key question is how this industry

and its tangential organizations and companies can

be developed in a responsible way while

advancing development. It is critical to minimize

corruption in this newly explored industry. This

will require ethics and social responsibility

training for all officials in the government,

especially those with ties to the industry.

Furthermore, studying how and in what ways the

Ministry of Mines and Petroleum can advance

regional collaboration includes the assessment and

approval process for foreign contractors by the

government. Lack of technical capability is a

major impediment to Afghanistan’s economic

development. Development of internal energy

resources will need technological know-how,

financial support, and development of human

resource capabilities. Distribution issues and

fundamental policy issues must also be addressed.

Pricing policy, public private partnership,

contractual agreements with foreign oil companies

are among issues that need to be studied in detail.

In addition to its rich extractive natural

resources, its location can also serve as a

locational comparative advantage, to create a

greater impact in the development. Afghanistan

can reap benefits from trade between Central

Asian countries and the rest of the South Asian

Association for Regional Cooperation (SAARC).

It is seen as a viable gateway for South Asian

countries to access the oil and gas resources of

Central Asian Republics like Tajikistan,

Turkmenistan, and Uzbekistan. The mineral

deposits in Afghanistan have lured economically

and politically powerful neighboring countries like

India and China to offer mining contracts.

Regional economic agreements are

expected to boost the economies of all countries

involved. Economic collaboration is also

potentially good for peace and security in the

region. For example, Afghanistan should consider

participating in the current discussion between

Iran and Pakistan on development of the gas

pipeline between the two countries, with potential

extension to India. It should take into account the

cost-benefit analysis, both economically and

politically.

NATURAL RESOURCES CURSE, ALSO

KNOWN AS DUTCH DISEASE

The term Dutch Disease was first coined by

economist in 1977 when describing the events

associated with natural gas deposits in the

Netherlands, discovered in 1959 and developed

afterwards. Events associated with this economic

bonanza suggest that such rapid development

might have had a dampening effect on other

aspects of the Dutch economy. This resource

curse, discussed among economists and policy-

makers as a concern for countries with large

endowments of natural resources, such as oil and

gas and can result in worse performance in terms

of economic development and good governance

than in countries with fewer natural resources

(Humphreys et al., 2014). The Dutch Disease,

volatility, unequal expertise, corruption, retarded

economic performance, and poor policies, are

forces that work against the success that one

would expect to come from natural resource

wealth. Diamond and Mosbacher (2014) discuss

what causes the resource curse and suggest a

strategy to combat it. They explain how, “…oil

booms have poisoned the prospects for

development in Africa’s oil-rich states”, citing the

case of Uganda. The surge of money from these

extractive industries can cause inflation, distort

exchange rates, and undermine the


and Nader H. Asgary



48

competitiveness of traditional export sectors such

as agriculture.

Scholars (Cullen and Noland, 2014; Durns, 2014;

Diamond and Mosbacher, 2014; Humphreys et al.

2007) have discussed the “paradox of plenty” and

“Dutch disease” suggesting these can create an

economic and cultural atmosphere that does not

advance development and, if not strategically

addressed, could create comparative disadvantages

for the country. Cullen and Noland (2014) state

that, “Dutch Disease suggesting that refers to the

tendency of real exchange rates to appreciate

following the discovery of a valuable commodity

and rendering traditional industries internationally

uncompetitive” (30). Some scholars argue that

having such a wealth of natural resources may not

necessarily be as much of a positive windfall as it

seems. However, others argue, based on economic

theory as well as real-world examples, that

valuable natural resources may actually hinder

long term economic growth due to the negative

consequences that may occur in its overall

economic performance, domestic policy, and

international affairs. By discussing both the

immediate and long-term aspects of these negative

consequences of a country’s development of its

natural resources, better natural resource

management can be achieved.

One of the main problems of countries

afflicted with Dutch Disease is that domestic

prices of goods and services are raised because

incomes have not been adjusted accordingly; and

therefore the population cannot afford to buy

them. This substantial price increase is primarily

driven by the fact that the extra currency entering

the country from the natural resources exports is

converted into local currency considerably

swelling the money supply and therefore pushing

up domestic prices, thereby resulting in a higher

real exchange rate.

After the Netherlands discovered natural

gas in the North Sea in the 1970s, the Dutch found

that their manufacturing sector suddenly began to

perform more poorly than anticipated (Ebrahim-

Zadeh, 2003). When a sudden rise in the value of

its natural resource exports caused an appreciation

in the real exchange rate. This, in turn, made

exporting non-natural resource commodities more

difficult and made competing with a wide range of

imported commodities almost impossible

(Humphreys et al., 2014). The problem is the

volatility of income that comes from three sources:

variation in rates of extraction, variability in the

timing of corporations’ payments to the state, and

fluctuations in the price of the natural resources

produced (Humphreys et al., 6). This sort of

volatility can make it difficult for governments

and companies to predict the impact resources will

have a nation’s economy.

While many countries have failed to

overcome the impact of Dutch Disease, a few such

as Canada, Chile, Norway, and Botswana have

successfully avoided the potential pitfalls of the

resource curse. Canada has an abundance of

natural resources and is a major net exporter of

natural gas and coal and holds the world’s second

largest oil reserves after Saudi Arabia. Durns

(2014) states that Canada also has a major mining

sector and is “the third largest producer of primary

aluminum and diamonds and in the top five for

cadmium, molybdenum, nickel, platinum group

metals, salt, titanium concentrates, elemental

sulfur, and uranium”. In the case of Canadian

extractive industries, there is transparency and

active engagement of key stakeholders. The

country’s provincial bodies are involved in

royalties, taxes, incentives, permits and licensing

for oil and natural gas, and the National Energy

Board oversees regulation, and ultimately reports

to Parliament.

Chile, controls an estimated 20% of the

world’s copper reserves and is the number one

producer, accounting for 11% of total global

production. While the importance of copper to its

economy leaves room for susceptibility to

commodity booms and busts, Chile has largely

managed to overcome concerns that come with

non-renewable resource wealth. There is a great

degree of transparency in the operations, revenues,

royalties, taxes, and other regular reports and the

overall costs and benefits of the industry are

shared with public.


and Nader H. Asgary



49

In the 1960s when it discovered vast

reserves of oil and gas, Norway used a novel

approach in managing this windfall by extending

the benefits of these resources beyond short-term

gains. With the mindset of avoiding the resource

curse and fluctuation in the commodity market, the

government set aside 100% of its oil earnings and

only drew down 4% per year to use for public

services. This creative approach has avoided the

resource curse and encouraged other countries

such as Israel, Chile, and Colombia to adopt a

similar approach, thus averting wealth

concentration, currency appreciation, and

mismanagement.

Since 1970 Botswana has become the

world’s largest producer of diamonds, accounting

for, “…three-quarters of its exports and over 40%

of its GDP…” Jefferis (2009, 72). In contrast to

many other African countries that are resource-

rich and prone to conflict and corruption,

Botswana has managed to avoid the resource

curse. The African Development Bank

characterizes Botswana’s approach as ‘three

pronged.’ First, the country pursued economic

diversification. Second, it divested revenues,

seeking to make the economy less susceptible to

the fluctuations of global markets. Third, it

invested its surplus revenues.

Doraisami (2015) discusses the case of

Malaysia and its resource curse caused by its oil

exploration. In 1974, the Malaysian government

established the Petroleum Development Act

(PDA), aiming to establish an institution that

would manage and control oil revenues once they

became commercially available Six years later in

1980, the National Depletion Policy was enacted

to limit oil production to less than 300,000 barrels

a day. It was initially believed that the amount of

oil was limited. However, more reserves were later

discovered. Another safety measure was the

Investments Promotion Act of 1986 which aimed

to ignite the economy promoting foreign

investment.

The combination of these various policies,

as well as some privatization, led to the growth of

a larger middle class in Malaysia. As focus shifted

away from the electronics industry, the economy

began to stagnate. Although it was becoming a

high-income country, it then moved away from

manufacturing and leaned on foreign capital,

causing its growth to come to a halt. Although

Malaysia avoided the resource curse, it was unable

to compete on prices with other countries in the

region and fell into “the Middle Income Trap”.

Even though the country avoided widespread

poverty, it was no longer able to reach its “2020

Vision” of becoming a high income country. In

many instances unstable and ineffective

institutions cause countries to fall under the

resource curse. Even though the Malaysian

government tried to develop effective institutions

at the time its oil was discovered, it was

nevertheless unsuccessful in reaching its target of

becoming a high-income country.

THE PARADOX OF DUTCH DISEASE:

FOUR CASES

Four countries from different regions with

different levels of development, cultures, and

histories have used various approaches to

successfully address the paradox of plenty and the

avoidance of Dutch Disease. Learning from their

experience may be helpful to Afghanistan.

Transparency and the active participation of

stakeholders such as central and local governments

are key success factors. Providing detailed

explanations to the public about operations,

revenues, royalties, and taxes will build citizens’

trust in the government’s rational management of

natural resources and will likely reduce corruption.

The central government will oversee regulation by

planning for royalties, taxes, incentives, permits

and licensing while allowing regional

governments and local communities input and

representation in the process. When these local

governments and communities are thus directly

involved they have a higher stake in acquiring

benefits such as local training and employment.

Ultimately Parliament will oversee any reports

submitted on these ongoing activities.

This kind of approach is based on a

strategy known as Community Based Natural


and Nader H. Asgary



50

Resource Management (i.e., Child, 2003, Sebele,

2010, Walle and Asgary, 2014). This model

encourages governments to collaborate and

cooperate with local people by sharing decision-

making authority regarding a region’s assets. The

government or outside authority grants local

people a degree of decision making authority over

assets adjacent to their communities, and allows

them to benefit from these assets. This can lead to

a win-win situation in which all stakeholders will

benefit and become more willing to cooperate with

each other. CBRM offers a means to reduce

tensions between local people and powerful forces

like the government and thereby find a more

coordinated, sustainable, and equitable approach

to managing resources and assets.

IMPLICATIONS OF EXTRACTIVE

INDUSTRIES

An examination of the above four countries with

abundant natural resources provides guidelines for

suitable and strategic usage of the resources to

have a sustainable development and avoid the

resource curse.

Graph 1 shows a model which is based on

United Nations Conference on Trade and

Development (UNCTAD, 2007) which shows the

economic, environmental, social and political

impact of the Afghan extractive industries. The

macroeconomic impact of investment in these

industries has direct and indirect economic

implications. While the inflow of capital,

technology, know-how, exports, and government

revenues are the most prominent and direct

economic gains, employment from the extractive

industry is likely to be limited due to its use of

capital intensive or labor saving technologies.

However, indirect economic benefits such as

market linkage and infrastructure development

provide some long-term gains that influence the

macroeconomic footprint. Depending on the type

of minerals extracted, the technology used, the

scale of the extraction activities, and the project

locations, the environmental implications of

investment in this industry may differ. Extractive

projects close to urban settlements, wildlife

habitats, and watersheds tend to create more

negative impact. In addition to the political

corruption that can cripple almost every aspect of

the industry and the overall economy, health and

occupational safety is another important social

issue for extractive industries. For example,

mining-related activities can pose significant

health hazards although technological

improvements are gradually reducing these effects.

The violation of human and labor rights

poses another potential problem. Other difficult

issues that must be grappled with are loss of land

and incomes without negotiation and/or adequate

compensation, forced resettlement, and the

destruction of ritually or culturally significant sites

without consultation or compensation. However,

many of these problems can be avoided by

promoting local community development through

investment in local social infrastructures such as

health and education. Countries such as

Afghanistan should give serious attention to the

environmental impact of extractive industries in

advance of exploration and expansion by

considering the negative environmental effects of

those.

The social and political impact of

extractive industries are also huge and must be

taken into account because good governance and

full transparency in the implementation process

are essential to a good outcome.

These ideas could be applied to the case of

Afghanistan if special attention is given to three

areas, especially after decades of warfare and

instability.


and Nader H. Asgary



51

Graph-1

Firstly, Afghanistan has a decentralized and weak

central government. Secondly, there is generally

a diminished level of human capital. Thirdly,

there exists a dominant culture of corruption and

poor governance. In order to address these issues,

we propose active stakeholder participation in the

process of developing its extractive industries.

The engagement of key stakeholders such

as the central as well as local governments and

communities in decision making and enforcement

is required in order to succeed in the appropriate

use of the output of extractive industries and in

minimizing corruption. In addition to the central

government as the primary stakeholder, active

engagement of local governments is also essential

for sustainable extraction as well as for security.

COMMUNITY-BASED NATURAL

RESOURCES MANAGEMENT

The application of the Community Based Natural

Resource Management model is appropriate for

Afghanistan to increase the potential success of

the extraction process. And the allocation of

significant resources for direct and indirect human

resources development is necessary to ensure

sustainable development.


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52

The concept of “Community Based

Natural Resource Management”, involves a wide

range of governmental strategies that provide

local people with a greater degree of self-

determinism and active engagement in decision

making. CBNRM (i.e., Child, 2003; Sebele,

2010; Walle and Asgary, 2014) includes

governments granting concessions and thus

providing economic benefits to locals in order to

enlist their cooperation and support. It does so by

(1) including locals in the decision-making

process while (2) allowing them to benefit from

the resources of their home territory.

The leaders of national governments seek

centralized authority to effectively implement

strategies that are coherent, consistent, informed,

and intended to achieve the priorities of the state.

Policy makers and investors who collaborate with

them are often members of the elite and not linked

to those directly impacted by such extractive

resources development projects. Therefore, it is

likely that national and corporate priorities may

differ from the desires of local people who are

more directly impacted by decisions of the central

government. Over the years a common problem

recurs in many countries when central

governments make decisions which ignore the

concerns, perspectives, and interests of the local

populations.

To alleviate this inequitable situation,

CBNRM strategies have been developed to more

effectively enlist the cooperation and trust of local

leaders. Therefore, CBNRM advocates

stakeholder engagement rather than “top down”

controls by governmental bureaucracies.

Decisions once made by the government can be

replaced with greater collaboration between the

government and those who live in the vicinity of

the extractive industries - a “co-management”

Process.

While this arrangement can be a positive

step forward, Berkes and Preston (1991) warn that

in order to achieve a better outcome, participants

need to have mutual respect and trust. The aim of

CBNRM is to concurrently serve local people in

addition to a national economic development

strategy by empowering communities to work

with public sector officials for their mutual

benefit. While the government has the ultimate

authority to decide how the environment is used,

its “top down” leadership can be supplemented

with “bottom up” decision-making by those who

live nearby.

CBNRM also permits local people to reap

the benefits of their country while simultaneously

acting in ways that support and reinforce national

policies. This decision-making mechanism

encourages the collaboration of different (and

potentially competing) stakeholders to work

together to achieve a common goal. Although

governments may be the ultimate authorities and

decision makers, they can embrace local

communities as partners thereby empowering

them. Application of this model to the case of

Afghanistan can be beneficial by providing a

more positive outcome while also reducing the

likelihood of Dutch Disease.

EXTRACTIVE INDUSTRIES AND JOBS

CREATION

Job creation in the extractive industries is

achieved through three main channels: direct,

indirect, and induced (World Bank 2012). The

direct channel is related to the activities in the

process of extraction. Based on the records of

several developing counties (Table -1), a small

number of jobs are created in the early phase of

exploration and appraisal as well as in the latter

phase when extraction begins and capital intensive

equipment is used. However, most direct and

local jobs in various activities are created at the

development and construction stages (World Bank

2012; Wise and Shtylla 2007). Necessary

specialists such as geologists, petroleum or

mining engineers, metallurgists, quarry and

mineworkers and heavy truck or tanker drivers

provide direct employment opportunities (World

Bank report, 2012). Distributors and suppliers

within the value chain are indirect channels of job

creation. The degree to which SMEs participate in

the value chain determines the number of jobs

created. The induced channel of job creation is the


and Nader H. Asgary



53

consumer spending of income earned either

directly or indirectly from industries and its

relevant multiplier effects.

Appendix A (Table 1) shows direct

employment during and after construction for

different extractive products natural gas, copper,

gold, and diamonds in several developing

countries. For all cases, the number of direct jobs

created in the long term is fairly small ( 1,000 to

4,500)while the overall number of direct jobs

created during the construction phase is large ( up

to 9,300) but will diminish once construction is

finished and the mines and fields become

operative.

The earned income from direct, indirect

and induced employment can be spent on goods

and services (e.g. consumer goods, education, and

health services), which in turn creates business

opportunities, additional employment, earnings,

and spending multiplied throughout the economy.

The magnitude of the induced effect depends on

earnings from direct and indirect employment and

the consumption habits of the country.

Most long terms employment is created in

other industries and generated by the revenue

from extraction of natural resources. Afghanistan

policymakers should focus on investment in

education, innovation and technology,

infrastructure, small-business development, and

modernization of agriculture, to ensure sustainable

economic growth. As diversification of the

economy is essential to avoid Dutch Disease, it is

reasonable to spend about 50% of the annual

revenue generated from extractive industries for

these development projects; the rest should be

invested as a reserve for unanticipated negative

shocks in the commodity market (extractive

products) and for future generations’ development

plans. As the economy begins to grow, decision

makers should consider reducing the percentage

allocated for current development projects. A

certain percentage should also be allocated to

national defense for a few years to increase

stability in the country. Countries that have

avoided the resource curse spent significantly less

(such as Norway, 4%) on current expenditures. In

Afghanistan strategy plan for development,

diversification of the economy (i.e., agricultural,

extractive industries, and tourism) is essential for

sustainable development and avoidance of Dutch

Disease. Of course, advancement of education and

development of human capital is a necessary

condition for building institutions for sustainable

development (Rodrik, 2008)

The creation of sound institutions in a

country plays a critical role in high-quality growth

and avoidance of the resource curse. Sarmidi,

Hook Law, and Jafari (2014) state that, “It is

found that economies with abundant natural

resources, and at the same time better institutional

quality and governance, such as strong democratic

accountability, high law and order, lower

corruption, or higher integration among

government institutions have better economic

growth and higher welfare,” (195). Countries

with high quality institutions like Canada and

Norway, have low levels of corruption and avoid

civil conflicts, and allocate resources more

equitably. Natural resources contribute to

economic growth only when there is a certain

level of institutional quality (Sarmidi, Hook Law,

and Jafari, 2014; Rodrik, 2008; Stiglitz, 2006).

Countries with low quality institutions are likely

to experience slower economic growth. Therefore

policymakers should strive to support and build

high quality institutions in the early stages of

development. However, economists (i.e.,

Sarmidi, Hook Law, and Jafari, 2014; Rodrik,

2008; Stiglitz, 2006; Sachs, 2006) argue that if the

requisite institutional framework is absent or not

accommodative, no matter the resources, the

intended results will not be achieved. Low quality

institutions can lead to numerous rule changes,

corruption, weak law enforcement, volatility and

lack of efficiency.

When institutional quality is utilized for

the benefit of the economy, the beneficial impact

of resource abundance increases revenues.

Countries such as the United States, Canada,

Norway, and Australia with high quality

institutions can attract more industries to the


and Nader H. Asgary



54

production process and in turn will increase

economic growth.

RECOMMENDATIONS

In this study we discussed principles and offered

solutions for developing natural resources by

actively engaging stakeholders in the process and

allocating funds for projects that leads to a

sustainable development. However,

implementation of public policies requires

stakeholders to develop a deeper understanding of

pertinent issues in order to be able to formulate

prudent policies. Therefore, we suggest that there

be a careful examination of the following issues:

1. Reform laws and regulations in the mining

industry;

2. Trim bureaucracies to increase efficiency;

3. Make all contracts transparent and within the

guidelines of national and international best

practices, including the public announcement

of such contracts.

4. Eliminate corruption at all levels and

implement a zero-tolerance policy with

respect to violators;

5. Identify potential extractive industry jobs that

can be created for citizens in both the short-

term and long-term, in addition to evaluating

the multiplier effects of projects across

industries.

6. Support funding generated from natural

resources for development of human capital;

7. Ensure that any contract signed with foreign

firms has a provision for a high percentage of

employment and training of local citizens.

Employment in the extractive industries is a

good alternative to opium production;

8. Estimate refinery capacity, configuration, and

the cost of its development;

9. Study the feasibility of a transportation

system and a pipeline network within the

country and its neighbors;

10. Consider the financial requirements for

developing oil and gas including financial

sources from multinational agencies and

private ventures.

CONCLUSION The potential for the development of

Afghanistan’s from untapped resources is huge

and can be a game-changer for rapid economic

growth. The country’s current political, security,

and economic development conditions pose

substantial challenges for the development of

extractive industries. In this paper we have

examined the relevant literature and offered a

feasible roadmap for the appropriate use of natural

resources to advance development. Based on

pervious international experiences, we suggested

the engagement of key stakeholders through

CBNRM to reach a positive and sustainable

outcome. Income earned from extractive

industries should support diversification of the

economy, enhance development, and reduce the

likelihood of triggering a downturn in other

sectors of the economy and minimize the

unintended negative consequences of Dutch

Disease.

ACKNOWLEDGEMENT

Contributions of Dr. Bahram Grami, Massood

Samii, Bahram Mahmoudi, Rajat Sharma Subedi,

Alf Walle, and participants in the CIK-AUC

Conference 2016 are greatly appreciated.

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Berkes, F., George, P. J., & Preston, R. J. (1991).

Co-management: the evolution of the theory

and practice of joint administration of living

resources (pp. 12-18). Program for Technology

Assessment in Subarctic Ontario, McMaster

University.

Child, B. (2003). Origins and Efficacy of Modern

Community Based Natural Resources

Management (CBNRM), Practices in the

Southern African Region (pp. 26-28, Rep.).

Da Afghanistan Breshna Sherkat (2010). Energy

Consumption and available Energy Resources

in Afghanistan.

https://www.usea.org/sites/default/files/event-

file/522/Afghan_Power_Sector_Briefing_June

_2011.pdf


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Diamond, L. Mosbacher, J. Boudreaux, K.

Mennen, K. (2014 Feb). Reverse the Curse.

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escaped the resource curse? A closer look at

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Hendrix, Cullen S., and Marcus Noland (2014).

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Humphreys, M., Sachs, J., & Stiglitz, J. E. (2007).

Escaping the resource curse. New York:

Columbia University Press.

Jefferis, Keith (2009) "The Role of TNCs in the

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Transnational Corporations, Transnational

Corporations, Vol. 18, No. 1, 62-91.

Rodrik, D. (2008). One Economics, Many Recipes

Globalization, Institutions, and Economic

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Sachs, J. (2006). The End of Poverty: Economic

Possibilities for Our Time. New York: Penguin

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Stiglitz, J. E. (2007). Making globalization work.

New York: W.W. Norton & Co.

Sarmidi, T., Hook Law S., and Jafari, Y (2014).

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Sebele, L. S. (2010). Community-based tourism

ventures, benefits and challenges: Khama rhino

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56

APPENDIX A China’s state-owned National Petroleum

Corporation (CNPC) signed a $700 million oil

exploration contract with the Afghan government

in January, 2010. Mining Minister Wahidullah

Shahrani (Jan 10, 2012) hailed the deal as

‘historic’, saying it was ‘the first time that

Afghanistan has signed a great contract for the

country’s oil exploration’. The CNPC formed a

joint venture with Afghan partner Watan Group in

the northern provinces of Sar-e Paul and Faryab to

drill three oil blocks in the Amu Darya Basin, 640

kilometers from the border of China’s western

Xinjiang Uyughur Autonomous Region, a staging

base for Chinese companies to build pipelines

through Central Asia.

The project is expected to pay Kabul $5

billion over 10 years, with 70% of profits from oil

and gas sales going to the Afghan government. In

addition, CNPC will pay 15% royalties, 30%

corporate taxes and rent for using Afghan land.

The CNPC’s primary aim is to ensure oil supplies

to China. The three oil blocks are only 640

kilometers from Kabul has also granted rights to

an Indian government-backed steel consortium to

develop the Hajigak iron ore deposit between

Bamyan and Wardak provinces. With a reserve of

1.8 billion metric tons, it is Asia’s largest

untapped iron deposit. The consortium plans to

spend $11 billion to develop the mine, including

the construction of a steel mill, power plant and

transport links. The group also proposes to build a

900-kilometre railway line from Bamyan to

Zahedan, across the border in Iran, at a cost of

$4.3 billion, where ore will be transported to

India.

In November 2007, a 30-year old lease

was granted to the China Metallurgical Group

(MCC) for US $3 billion for copper mining,

making it the biggest foreign investment and

private business venture in Afghanistan’s history.

The Afghan Mining Ministry estimates that the

mine holds some six million tons of copper (5.52

million metric tons) estimated to be worth tens of

billions of dollars and expected to generate jobs

and economic activity for the country. The mining

lease holders propose to build a railway to serve

the copper mine. But since 2014, MCC has been

renegotiating the copper contract with the Afghan

government to reduce its exposure to the war-torn

country in a move that threatens Kabul's plans to

use the revenue generated by its mineral

resources. With copper prices falling, the Chinese

economy slowing, and security in Afghanistan

deteriorating, the company has yet to begin

production and, according to mining industry and

other sources, no longer wants to abide by the

terms of its 2007 contract. The company wanted

to renege on building a railway, power plant and

processing factory, as stipulated in its deal to mine

at Mes Aynak, site of one of the world's biggest

copper deposits. According to a source close to

Kabul's Ministry of Mines, MCC wanted to

renege on paying the remainder of a bonus worth

US$808 million to the Kabul government, having

already paid US$133 million, and also wanted to

cut royalty payments currently set at 19.5 percent,

about double the world average. MCC was

apparently in a position to dictate terms, having

secured a 30-year lease on the mine, which

contains 5.5 million tons of high-grade copper

ore. Copper is currently trading at less than

US$6.60/kg, compared to highs in 2011 of more

than US$9.90. China is estimated to have more

than 700,000 tons of bonded copper stocks. The

huge investments already made by Indian and

Chinese companies reduce the opportunity for

others to be engaged.


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57

IT in the Global Strategy Satya Prakash Saraswat



58

Information Technology in the Global Strategy of a Multinational Bank

from an Emerging Economy Satya Prakash Saraswat

Information and Process Management

Department

Bentley University

Waltham, MA 02452

Abstract

Based on a survey and extended interviews with 78 domestic and

international managers of a leading bank in India, this paper

identifies some problems encountered with the utilization of

Information and Communications Technology (ICT) by this

enterprise in its global marketing strategy. A comparative

analysis of the survey responses reveal recognizable differences

among managers within and outside India concerning the

problems and prospects of ICT as an instrument of global

business strategy. Twenty problems that can diminish the

influence of ICT in this strategy are identified and classified into

four categories: Infrastructure, Regulation and Restrictions,

Training and Culture, and Financial Constraints. The study finds

that ICT has assisted the bank in maintaining its global

competitiveness but the international managers of the bank do

not agree that it has generated any competitive advantage. Using

a qualitative methodological approach, this paper systematically

explores the problems and prospects of ICT as an important

supporting factor in the global strategy of a multinational bank

from India.

Keywords: Global Information Technology, Information Technology Strategy,

Multinational banking

INTRODUCTION

In the contemporary business environment dominated by

multinational corporations (MNCs) and ICT, globalization has

become indispensable for corporate survival and growth. In

recent years, the debate on globalization and the role of India as

an emerging economy has focused primarily on private sector

companies such as Infosys Technologies and Tata Consultancy

Services that provide software development or Business Process

Outsourcing (BPO) services to their clients in North America

and Western Europe. The discussion of multinational companies

originating from India and trying to use ICT in their global

operations for strategic advantage has been absent from the

academic debate on global issues. Some of these companies

have effectively deployed ICT in their business processes to

become successful Indian global corporations in a short period of

two decades. Recent accomplishments of erstwhile notoriously

inefficient and unprofitable Government-of-India (GOI)




59

corporations such Indian Railways,

and semi-autonomous organizations

demonstrated known as Public Sector Undertakings (PSU), have

Demonstrated that PSUs can be made efficient

with information technology without utilizing the

risky management practices of industrialized

economies. ICT that addresses India’s unique

requirements is making it possible for the PSUs to

compete effectively in the global markets while

being sensitive to the public policy requirements

of the country.

This study examines the role of ICT in the

global strategy of a large PSU bank in India,

identified in the paper as the Indian Public Sector

Bank (IPSB). This bank controls a network of

more than 2,000 branches, 1,000 ATMs, 12,000

employees, and 15 million customers in more than

15 countries around the world. Yet, compared to

the large global multinational banks from the

USA and Europe, the multinational operations of

this bank are very small and just emerging. Due

to the competitive pressures created by the

liberalization of India’s economy in the 1990’s,

IPSB recognized the need to differentiate itself in

the marketplace as an international bank and the

importance of ICT in implementing this strategy.

The challenges of executing this strategy in a bank

founded on traditional business values and

culturally unprepared to face the realities of the

global markets are studied in this investigation.

The relatively small size of its global operations

compared to its revenues in India, its strict control

by GOI, and the experimental nature of its ICT

deployment as a strategic asset make the academic

investigation of this organization unique and

interesting.

ICT AND THE GLOBAL BUSINESS

STRATEGY OF THE IPSB IPSB started deploying ICT in 2001 to streamline

its operations in India and expand its presence in

the growing international markets. Despite fierce

opposition from its employee unions, the bank

hired a large international IT consulting firm

operating in India to formulate its ICT strategy.

The consulting firm recommended the

implementation of an Enterprise System (ES)

system known as “Finacle” Core Banking

Solution from Infosys Technologies of Bangalore,

India. This system has Service Oriented

Architecture (SOA) and web-enabled technology

for 24x7 banking operations in multi-country and

multi-currency environments. The key modules of

the system consist of Customer Relationship

Management (CRM), Consumer Banking, Wealth

Management, Corporate Banking, Trade Finance,

and Functional Services. This system provides

specialized services that include Non-resident

External (NRE) accounts, Non-resident Ordinary

(NRO) accounts, fixed deposit certificates, foreign

currency deposits, money transfers, wire transfers,

foreign currency drafts, and Indian currency

drafts. These services are the mainstay of the

bank because most of its customers in the

countries outside India are non-resident Indians

(NRI) who require them. Representatives of GOI

and senior bank executives assessed the banking

industry ICT environment in India and found that

global corporations such as IBM, Accenture, and

the Gartner Group were better prepared to meet

the technology requirements of the bank. This

was due to the superior experience of these

companies with ICT in large banks around the

world and their utilization of global best practices

in their Indian projects. The expectation was that

the bank’s employees, working with outside

consultants, would improve IPSB’s processes and

introduce innovative practices in due course. The

knowledge obtained in the process would be

diffused across the organization making it more

competitive in India and abroad. Senior

executives were expected to play a crucial role in

motivating employees to make greater use of

information technology. Executives were

provided laptop computers and internet

connectivity at their homes and offices with other

required IT resources. Since the management

salaries at PSU banks are lower than the private

sector, non-pecuniary methods such as positive




60

feedback and personal recognition were used as

the tools of motivation.

A REVIEW OF THE GLOBAL ICT

STRATEGY LITERATURE

Topics frequently addressed in academic

publications in international business are cross

cultural studies (Adler, 1989), structural issues of

multinational corporations (Ghoshal, 1993; Gupta,

1991), managerial differences (Broadbeck, 2000;

Keil, 2000), determinants of direct foreign

investment (Chan, 2006), quality of corporate

governance in host countries (Husted, 1999;

Kimbro, 2002), and corporate social responsibility

(Dennis, 2003; Kostova, 2003; Mani, 1998). Some

of these well-known journals are the

Administrative Science Quarterly, the Academy

of Management Review, the Journal of

International Business Studies and the Columbia

Journal of World Business (Chan, 2006, Gupta

1991). Journals exclusively focusing on the

investigation of global issues in information

technology such as the Journal of Global

Information Technology Management, the Journal

of Global Information Management, the Journal

of Cases on Information Technology, and the

Journal of Information Technology Cases and

Applications have also published numerous

studies addressing global issues in information

and communications technology. The broad

issues addressed in these journals include business

process outsourcing, organizational effectiveness

in the software industry, competitive performance

of companies, impact of ICT on organizations,

foreign direct investment in ICT, the digital

divide, and building partnerships with local ICT

businesses in developing countries (Khanna,

2004; Sledge, 2007).

Another frequently addressed topic in

recent years has been the implications of

investment in ICT for the profitability of business

organizations. It has been argued that investments

in information technology and e-business systems

contribute significantly to profitability and

competitive advantage in organizations across

industries (Algalith, 2007; Dewan, 1998; Pavlou,

2006; Villas, 2007). However, others have

completely denied that ICT creates any

competitive advantage in organizations at all

(Carr, 2003). Most studies of global issues in

information technology have investigated the

outsourcing of software development and business

processes to countries such as India from Western

Europe and the United States (Aggarwal, 2008).

A review of 140 articles published since

2001 in MIS Quarterly, Information Systems

Research, the Journal of MIS, Information &

Management, the Journal of Global Information

Management, and the Journal of Global

Information Technology Management reveals the

following taxonomical structure of global IT

research. From the point of view of the

geographical scope, published studies can be

classified as (a) Single country issues, (b) Cross

country issues, (c) Multi-country issues, (d)

Cross-cultural issues, and (e) Multi-cultural

issues. From the point of view of the conceptual

scope or the topics, studies can be classified as (a)

Software and business process offshore-

outsourcing, (b) ICT adoption and diffusion, (c)

ICT management and global virtual teams, (d)

Global IT industry, (e) ICT inter-organizational

issues, and (f) ICT in government sector and other

topics.

As some examples of geographical scope,

a study of 134 Chinese companies in the category

of single country investigations showed that

restricted access to computers, lack of trust in the

Internet, lack of enterprise information sharing,

and inability to deal with rapid change as

characteristics of the Chinese culture are the most

important barriers to the adoption of e-commerce

in China (Tan, 2007). In cross country studies, a

survey of 110 managers of Japan-China off-

shoring projects indicates that trust has an

important influence on project quality and that

information sharing and communication quality

create trust. In another cross-country study

between India and the US, a laboratory

experiment proved that collaborative conflict

management has a positive influence on the

performance of synchronous global virtual teams




61

and group heterogeneity has no impact on

collaboration style. Cross-country comparison of

data from France and Germany shows that the

decision to engage in full or quasi-outsourcing is

based on internal factors such as organizational

size, IT organization and IT assets, and external

factors such as the institutional environment in

which the organization functions (Barthelemy,

2005). In multi-country studies, an analysis of

data from 339 companies in Europe showed

positive correlation between the organization’s

competencies and its e-business success

(Eikebrokk, 2007). In cross cultural studies, a

survey of 722 knowledge workers found that

usage behavior, intention to use computers, and

organizational acceptance of IT are different in

Saudi Arabia and the US. Studies of global

outsourcing in India and other countries have

found that national culture is an important

variable that defines the success of outsourcing

projects in remote countries (Carmal, 2005). A

qualitative case study of a global financial firm

that outsources to its wholly owned subsidiaries

(“captive centers”) in multiple global locations

such as Russia and India found that cultural and

status differences played a significant role in

offshore outsourcing of work (Levina, 2008).

In terms of the conceptual scope, software

and business process outsourcing has been the

most frequently addressed topic in the academic

literature since 2002. The published works range

from journalistic books such as Tom Friedman’s

(2005) book The World is Flat to scholarly

publications such as the special June 2008 issue of

MIS Quarterly addressing the global issues of

information technology. A unique article on

“two-stage outsourcing, ” where companies from

the United States outsource to Ireland and the

Irish companies then outsource to India, proves

that off-shoring tends to progress through a

sequence of stages towards a multistage paradigm

of global outsourcing (Olsson, 2008). Global IT

studies of ICT dissemination have concentrated on

the diffusion of the Internet in various countries.

A study of Kuwaiti ministries indicates that the

technology acceptance model is not universally

applicable in government organizations

(Almutairi, 2007) and another study finds that

national culture is the central issue in the success

of ICT diffusion (Gefen, 2006).

Although implementation of ICT in

municipalities, ministries, and government-

controlled corporations has been addressed in

recent publications, the role of ICT for global

competitive advantage in government controlled

corporations from emerging economies is not

adequately addressed in the literature (Ke, 2006;

Sanford, 2007). One possible reason is that

corporations from developing countries opening

branches and subsidiaries in international markets

is a relatively recent phenomenon. Identifying the

problems and prospects of ICT in these

organizations is an issue that will become

important with the rapid growth of smaller MNCs,

known as micro-multinationals, in the world

economy (Matthews and Zander, 2007; Varian,

2011). This paper represents an exploratory effort

in filling this visible gap in the academic literature

on global information technology.

METHODOLOGY

Extended discussions were held with 7 senior

executives, 9 managers with previous experience

in multinational operations of the bank, 12 branch

managers in India, and 13 ICT-employees at the

headquarters of the bank to identify the

predominant concerns of the organization

regarding the utilization of ICT in its global

operations. With 37 surveys from international

branches and 41 from Indian sources, 78

completed questionnaires were analyzed in the

study. Table 1 lists the branches surveyed in

various countries.

From this joint exploration, twenty areas

of concern were identified. These are listed in

Table 2 and classified into four categories (a) ICT

Technical Infrastructure, (b) Regulatory and

Ethical Environment, (c) ICT human resources

infrastructure, and (d) ICT financial constraints.

After the joint exploration, a five point Likert-

scale questionnaire containing 20 items was




62

administered to managers of all international

branches of the bank outside India and the

managers in India who participated in the joint

exploration through a directive from the bank

headquarters in India. In this questionnaire,

managers were asked to indicate how satisfied

they were with the problems occurring and being

solved in each category. The score of 5 is the

highest level of satisfaction and 1, the lowest.

Two questions at the end asked managers to

indicate whether ICT is generating competitive

advantage or just fulfilling a competitive

necessity. An open-ended question solicited

information about some of the solutions used by

managers.

DATA ANALYSIS AND INTERPRETATION

Table 2 contains the four categories of issues

investigated in this project. These categories are:

(a) ICT Infrastructure, (b) Regulation and

Restrictions, (c) ICT Human Resources, and, (d)

ICT Financial Constraints. The regional averages

for the level of satisfaction with various problems

are summarized in the table followed by an

interpretation of the findings and their

implications. The overall mean score of greater

than 3.0 in the last column of the table indicates

level of moderate level of satisfaction with ICT.

This would imply that no serious problems were

being encountered in this area. However, a closer

look at the averages for individual problems

indicates discernible differences between the

perspectives from various regions and India.

Table 2 summarizes the averages for each region

and provides a framework for comparison.

ICT Infrastructure

The five problems identified in this category are

related to computer equipment, software

malfunction, user (employee) errors, and general

system design. Higher overall scores of 3.68 and

3.33 from Europe and South East Asia as

compared the lower averages of 2.25 and 2.83 for

East Africa and India clearly indicate that

infrastructure problems are more acute in some

regions of the world. The ICT infrastructure

available to managers outside of Europe and

South East Asia requires upgrading to meet the

needs of the bank’s multinational operations.

Averages on individual problems are not being

explained due to the limitations of space in this

paper.

Indian government sector banks have

been lagging behind private sector banks in the

effective deployment of ICT in general.

Electronic mail, Microsoft Office applications,

SWIFT for inter-bank communication, and AS400

for accounting applications are commonly

identified IT applications at IPSB’s international

branches. These systems, however, are

considered no match for what is available to the

bank’s competitors. Managers in all regions

indicated that ICT available to them is

considerably less sophisticated, which often

prevents the dissemination of timely information

on market research and other crucial issues to

global branch managers. Although the old

systems at the bank are now being replaced with

more effective ES, many branches are facing

“teething” problems with ICT deployment at this

stage. Frequently occurring problems in India and

East Africa are computer equipment malfunction,

inadequate support from service providers, and

breakdown of leased telecommunications

channels. These problems seem to be aggravated

during the extended monsoon seasons. In East

Africa, severe problems were encountered in

migrating to the new system and even simple

telephones were down at the branch for two weeks

in 2004 during the tenure of at least one manager.

Regulation and Restrictions The five problems contained in this category are:

(a) Excessive GOI regulation, (b) Excessive host

country regulation, (c) Lack of top management

ICT support, (d) Employee resistance to ICT use,

and (e) Customer resistance to ICT use. Mangers

often indicated that aside from the older and more

senior employees resisting the use of ICT,

established Indian diaspora customers consider




63

technology a hindrance in cultivating personal

relationships with the bank and resist its use. The

lower overall scores of 3.00, 3.04 and 2.91 from

Africa, 2.91, 3.0 and 3.1 respectively for India,

East Africa, and the Middle East indicate that the

organizational culture in these regions appears to

have a lower degree of preparation for the success

of ICT in the global strategy of IPSB. This is in

stark contrast to the fact that so many ICT

outsourcing companies from India have

demonstrated world-class organizational cultures

to adopt these technologies.

ICT Human Resources

It is widely acknowledged in organizations that

without properly prepared human resources,

sophisticated technologies and systems cannot

succeed. The five problems of human resources

preparedness for ICT utilization are (a) Inadequate

employee training, (b) Inadequate ICT staff

training, (c) Inadequately trained managers, (d)

Inadequate number of ICT personnel, and (e)

Lack of ICT Culture. A simple example of

questionable ICT related cultural behavior at IPSB

is that branch managers in East Africa, the Middle

East and India often failed to respond to customer

emails in a timely manner although the volume of

such emails was very low compared to private

sector banks from India.

The overall scores of 3.12 and 3.17 from

East Africa and India compared to 3.47, 3.55, and

3.81 from the other regions of the world

distinguish then on the severity of these problems.

This observation appears to confirm the pattern

emerging from the previous categories. The

human resources at IPSB appear to be less

adequately prepared for effective utilization of

ICT in India and East Africa as compared to

Europe and the Middle East. Part of the reason is

that the bank posts its best educated and highly

trained managers to its branches in Europe and

South East Asia. Also the governments in these

regions have more stringent and strictly enforced

laws against violations of their codes.

ICT Financial Constraints

The problems examined in this category are (a)

Inadequate funding of ICT at branches by IPSB

headquarters, (b) GOI restrictions on ICT funding,

(c) High cost of customer ICT related complaints,

(d) High cost of equipment and Services, and (e)

High Cost of Managing ICT.

This is the only category for which the

averages of scores of 3.04 and 2.95 are lower for

Europe and South East Asia as compared to East

Africa, Middle East, and India. ICT services in

general are more expensive in Europe and South

East Asia due to a chronic shortage of trained IT

personnel in these regions, and the budgets

allocated to the branches of the bank are often

considered insufficient by international managers.

This is because the budget allocations are often

decided at the headquarters of the bank in India

and the special requirements of the more highly

competitive regions such as Europe are not

addressed properly in the allocation process. With

the declining growth of India’s economy and the

profitability of banks, these problems are likely to

be more severe in the future.

The averages reported in the last two rows

of Table 2 lead to an interesting but not-

unexpected conclusion about ICT for

organizational competitiveness. Most managers

agree that ICT is important for maintaining global

competitiveness as indicated by the averages for

every region being above 3.0. The average of

3.65 on the second question indicates that

managers and executives in India generally agree

that ICT plays an important role in generating

competitive advantage for the bank. The

managers of international branches and

subsidiaries, however, appear to be less

enthusiastic about this premise as indicated by a

lower average of 2.15 to 2.83 in the other regions

of the world where the bank operates.

The problems uncovered in this study are

not unique to India but the solutions employed at

the branches can be considered quintessentially

Indian. Table 3, summarizes some typical

solutions employed by global branch managers.

CONCLUSION




64

Four possibilities relevant to global ICT became

evident from this exploratory investigation. First,

in the future many private and PSU companies

from India are likely to expand in international

markets either through conscious organizational

redesign for growth or due to the compulsions of

the global marketing circumstances. Second,

overseas managers of PSU companies such as

IPSB will rely increasingly on ICT to compete

successfully in spite of the disdain some senior

executives or employee-union bosses have for this

technology. Third, ICT by itself will be

insufficient to generate sustainable competitive

advantage in these organizations, and fourth, the

global managers of government sector enterprises

from India will have to develop adequate

infrastructural, regulatory, cultural, human

resources, and financial capabilities to find

optimal solutions to growing ICT problems. An

excessive reliance on antiquated ICT, inadequate

financial resources and constrained decision

making flexibility in a global economic

environment will be a serious hindrance in the

global expansion strategy of these organizations.

Government sector companies from countries like

India can counter these disadvantages more

effectively by improving their organizational

structures and developing methods of motivation

that go beyond higher salaries and self-

actualization possibilities prevalent in many

advanced industrialized countries. This will

require a systemic understanding of the

underlying managerial, technological, and socio-

cultural factors that motivate managers from

traditional cultures to achieve their objectives with

limited resources. Assimilation of best

information technology and systems practices

with innovative techniques of management and

motivation can provide a solution to the pervasive

problems of global ICT.

This exploratory investigation suggests

that deploying sophisticated information and

communications technology in the organization is

not sufficient by itself to generate competitive

advantage. Expatriate managers from India

appear to be recognizing that limitations of ICT

can also be overcome by effective use of

intellectual capital and greater emphasis on

organizational learning. Technology

improvisation is recognized as a classic Indian

solution to all kinds of problems. It is frequently

utilized at the international branches of the bank

to solve the socio-technical problems of ICT. But

this solution may not be optimal when ICT

equipment prices are rapidly declining and

customers are demanding speedy responses to

their problems worldwide.

The limited scope of this study has

generated observations that are relevant only to

the highly regulated government sector banks in

India. However, the methodology employed in

the investigation is sufficiently sound for

undertaking larger studies encompassing multiple

government sector and private sector banks within

a country or across countries. Private sector

banks such as Hong Kong and Shanghai Banking

Corporation (HSBC) and Industrial Credit and

Investment Corporation of India (ICICI) Bank

have the reputation of being some of most

successful global banks in India. These banks

utilize ICT in their trans-national operations with

remarkable efficiency and effectiveness. Studies

can be conducted to compare the ICT strategies of

global private banks with the government-sector

banks to enhance the competitiveness of

government sector banks. A glaring need for a

comprehensive investigation of these issues with

innovative methodologies is established by this

exploratory study.




65

Table 1: International branches surveyed in various countries and regions

Region Examples of Countries

Represented

Branches

Responding

Africa Kenya, South Africa, Tanzania, and Uganda 11

Europe Belgium and United Kingdom 13

East Asia China, Hong Kong, Malaysia, and Singapore 5

Middle East Oman and United Arab Emirates 6

Other Mauritius, Bahamas, etc. 2

INDIA Mumbai and Delhi regions 41

TOTAL 78

TABLE 2: Regional Levels of Satisfaction with ICT Problems

(1= Lowest and 5 = highest level of concern)

PROBLEM CATEGORY REGION

Africa Europ

e

Middle

East

South-

East Asia

India Ove

rall

(a) ICT Infrastructure

Computer equipment malfunction 2.23 3.91 2.84 3.83 2.96 3.15

Telecommunications network down 1.85 3.46 3.62 3.83 2.41 3.03

Software malfunction 1.99 3.84 2.97 2.58 2.87 2.85

User (employee) errors 2.13 3.75 2.96 3.06 2.85 2.95

Improper design of strategic systems 3.07 3.46 3.18 3.34 3.05 3.22

A- Overall 2.25 3.68 3.11 3.33 2.83 3.04

(b) Regulation/Restrictions

Excessive GOI regulation 2.81 2.74 2.73 2.81 2.67 2.75

Excessive host country regulation 3.88 3.25 3.07 3.16 3.14 3.30

Lack of top management support 2.73 2.94 2.82 2.75 2.67 2.78

Employee resistance to ICT use 2.78 4.15 3.67 4.12 3.13 3.57

Customer resistance to ICT Use 2.82 4.24 2.93 3.91 2.95 3.37

B-Overall 3.00 3.46 3.04 3.35 2.91 3.15

(c) ICT Training/Culture

Inadequate employee training 2.33 3.71 2.92 3.54 2.86 3.07

Inadequate ICT staff training 2.92 2.85 3.63 3.75 3.62 3.35

Inadequate training of mangers 3.14 3.36 3.21 3.52 3.64 3.37

Inadequate number of ICT personnel 3.85 3.93 3.96 4.07 2.97 3.76

Lack of ICT Culture at the branch 3.38 3.48 4.05 4.19 2.75 3.57




66

C-Overall 3.12 3.47 3.55 3.81 3.17 3.43

(d) Financial Constraints

Inadequate funding of ICT by IPSB 2.63 2.83 2.52 2.45 2.61 2.61

GOI restrictions on ICT funding 2.85 2.90 2.49 2.61 2.53 2.68

High cost of customer complaints 3.91 3.62 4.11 4.26 3.93 3.97

High cost of equipment and services 4.01 2.76 3.98 2.45 4.02 3.44

High cost of Managing ICT 4.11 3.10 4.13 2.99 4.18 3.70

D-Overall 3.50 3.04 3.45 2.95 3.45 3.28

Is ICT maintaining global

competitiveness?

3.38 3.55 3.63 3.11 3.43

N/A

Is ICT generating competitive

advantage?

2.33 2.15 2.16 2.83 3.65

N/A

Table 3: Solutions applied to global ICT problems

Problem

Category

Problems reported

How the solution is applied

1. ICT

Infrastructure

Antiquated equipment

Unreliable software

Untrained users

Special relationships developed with local

businesses and individuals providing technical

services and assistance

Highly trained specialists from India are deputed

at multinational branches for short duration

Less expensive locally available technology is

purchased

2. Regulation

and restrictions

Host country regulation

Excessive GOI regulation

Local banking regulations are strictly observed by

managers

Inconvenient Indian banking regulations are

observed with flexibility and discretion

3. ICT Training

and culture

Lack of ICT culture among

employees

Lack of discipline

Slow organizational learning

Senior managers exhorting employees to use ICT

more effectively

Citizens of host countries employed to enrich

cultural environment and change work ethics

4. ICT Financial

constraints

Inadequate funds for ICT

Inability to borrow locally

More funds being allocated from the headquarters

and more flexibility given to expatriate managers

to spend locally generated revenues on ICT




67

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Iran and the West Saeb Al. Ganideh



69

Reintegrating Iran with the West: Challenges and Opportunities

Authors

Mohammad N. Elahee,

Farid Sadrieh and Mike Wilman

Editors, (Emerald, June 2015)

Reviewed by

Saeb Al. Ganideh

Associate Professor and Chair, Dept. of Marketing

Al-Zaytoonah University of Jordan

Amman - 11733, Jordan

Published on the eve of the historical nuclear

agreement signed in July between Iran and six

major world powers, this book provides timely

and much needed insights into what may lay

ahead as Iran seeks to recover and rebuild after

years of increasingly punishing economic

sanctions. This somehow eclectic collection of

essays, written by a number of academics from

across the world, reflects the areas of expertise of

its contributors- political scientists, marketing,

management and international business scholars.

Many have also extensive experience in industry,

diplomacy and international trade.

Early indications make clear that despite

what some expected or hoped, and other feared,

there will not be a gold rush to Tehran. The lifting

of sanctions, to be implemented in the coming

months under the Joint Comprehensive Plan of

Action (JCPA), will be a major achievement for

the latter group, likely to influence Iran’s internal

political dynamics, most immediately

parliamentary elections scheduled for February

2016. What Reintegrating Iran with the West does

best is reflecting the political and economic

complexities that characterize Iran whilst

recognizing its immense potential. Perhaps the

subtitle “Challenges and Opportunities”, although

overused and formulaic words in other contexts, is

truly indicative of the balance and nuance

reflected in this book. This approach is clearly

apparent within each essay, as each contributor,

even the most skeptical, like Farid Mirbagheri,

takes great care to examine different possibilities

and the likelihood of potential outcomes. Taken

together, the essays also provide an overall

balance as various perspectives about the future of

Iran are juxtaposed and brought together in a

single document.

Although the depth and quality of the

contributions are necessarily unequal, most

provide a great wealth of information and an

impressive level of detail without becoming

verbose. Monshipouri’s analysis of the potential

for Iranian natural gas exports illustrates how an

exhaustive analysis can also remain parsimonious

and accessible to non-specialist readers. Another

contributor, Massood Samii goes beyond the oil

and gas sector to consider all other export goods

that could lead to a more diversified and less-oil

dependent economy. Since the Iranian revolution

of 1979, and especially over the last few years,

Iran’s trade relations have shifted away from

Western partners toward East Asian as well as

neighboring countries. Will the West be able to

reclaim its former position after the lifting of

sanctions? While in some sectors, like oil

production, Iran needs the technical expertise and

investment that only the West can provide, in

other sectors the new patterns may endure and

European firms may lose market share as a result

of policies implemented by their respective

government. For example, in the auto industry, as

Mike Wilman and Bob Bax demonstrate, Iran has

fallen far behind in terms of manufacturing

technology. Even before the European auto

companies left Iran in 2012 following a tightening

of the sanctions regime, Iran’s car manufacturing

consisted primarily of assembling older models

European automobiles. With a large domestic

market and pent-up demand for more

technologically advanced cars, Iran’s auto

industry is in dire need of foreign expertise and




70

investment. However, as Dino Bozonelos’

macroeconomic analysis demonstrates, Iran’s

“patrimonial political economy”, also known as

crony capitalism, may dissuade many foreign

investors. The need for reform to increase

transparency and efficiency in the economy is

abundantly clear. The author argues that Iran’s has

the potential for such reform. In the event of such

evolution, the large, highly educated and

prosperous Iranian Diaspora is well poised to

assume a critical role in transferring knowledge

and money to their country of origin. As noted

earlier, however, such reform represents a direct

threat to the interests and power of what the

author calls the “patrimonial elements” such as

the Basij militia and other interest groups, and

thus remains hostage to political infighting.

Having addressed some of the economic

challenges and opportunities within specific

industries as well as across industries, the reader

is introduced to the intricacies of diplomacy and

negotiations in an insightful analysis by an expert

in the field, Eugene Kogan. It may be thought that

with the agreement signed, such understanding of

the bargaining process is no longer of great

interest, but such is far from being the case.

Indeed, a process has been triggered by the July

2015 agreement, that will most likely face

challenges as the implementation phase is

potentially ripe with many turbulent episodes as

the parties, Iran and the P5+1, and especially the

West, pursue their strategic goals. Already, the

recent testing of Iranian missiles that could carry

nuclear warheads has raised the tensions a notch,

as the parties evaluate how and when to push for

advantage and how and when to back down. In a

separate chapter, Farid Mirbagheri reviews the

economic and geopolitical implications of the

nuclear negotiations with Iran for the United

States, the European Union, Israel, Russia and

China.

Iran’s bilateral relations with two of the

aforementioned powers- the United States and

China, as well as Indo-Iranian trade relations are

the focus of the last three chapters of this book.

David Cadden offers the reader a vivid, multi-

faceted review and analysis of the complex and

often contentious US-Iranian relationship,

skillfully integrating such diverse and pertinent

elements as economic interests, historical events,

cultural factors and political and geostrategic

considerations. He concludes by emphasizing and

demonstrating that a successful nuclear

negotiation is clearly in the interests of both

countries. Rakesh Mohan Joshi’s chapter on Indo-

Iranian relationship, while insightful, is more

narrowly focused on trade, using trade statistics to

illustrate the evolution of exports and imports

over the last decade. Mohammad Elahee and

Jiayong Gao adopt a more comprehensive

approach in analyzing the Iran-China relationship,

looking beyond the economic to encompass

geostrategic, cultural and historic considerations.

In the first paragraph of this review,

Reintegrating Iran with the West was described as

a somewhat eclectic collection of essays. Having

been introduced to the contents of the book, the

reader of these lines should now have a better

appreciation of the heterogeneous nature of this

collection. Farid Sadrieh’s broad brush overview

of Iranian contributions to the world, in an

introductory chapter, does nothing to lessen the

wide scope or the lack of a strong unifying theme

in this book. Although the wide range and

diversity of themes and perspectives leave many

gaps, they also help trace the contours of an

ambitious project and represent a bold invitation

for others to fill in this fascinating picture with

their own contributions. In particular, insights

from scholars and business analysts and managers

living and working inside Iran, would have

represented a welcome addition to this collection.

This is not, however, a criticism directed at the

editors, who readily acknowledge this weakness

in their concluding chapter, but rather a lament

about sanctions that did- and still do for a short

while longer, limit cooperation and trade between

Iran and the US in many areas, including

academic research. Moreover, as the editors point

out, a host of other issues, like analyses of many

other sectors of the Iranian economy and their

post-sanctions prospects need to be addressed to




71

fill the picture that is emerging from this book.

Iran’s relationship with its neighbors and regional

powers is another area that is not addressed in this

book and merits to be explored.

In sum, this collection of essays

represents a laudable and for the most part

successful attempt to increase the level of

scholarly knowledge about an important but

poorly understood country. While it is far from

being exhaustive, it does shed light on some

critical aspects of Iran’s resurgence.

As such, it is recommended not only for scholars,

but also for graduate students, political and

business leaders and managers and anyone with

an interest in the evolving role for Iran in trade,

business and other policy arenas in its region and

beyond.

Globalization and Inequality Jasmine Morin



72

The Globalization of Inequality

Author

Francois Bourguignon

The Globalization of Inequality

Reviewed by

Jasmine Morin

Bentley University, Waltham MA 02452

This book examines the trends that causes

inequality within and among nations and describes

the policies that should be implemented to help

this inequality from heavily occurring. This book

is broken down into five chapters; these including

Global Inequality, Countries becoming More

Unequal? Forces behind Inequality, Prospects and

Principles, and Policies for a Fairer Globalization.

Defining global inequality as “the level of

inequality between all inhabitants of the world”

(9), he separates global inequality into two areas;

inequality between and within nations,

considering the latter being the worst of the two.

This analytical review will first describe the major

topics discussed and then my review on his book.

Bourguignon believes that globalization has

positive aspects for both emerging and developed

countries. Emerging countries get to open up their

markets, which could potentially mean rapid

growth. Developed countries have positive and

negative outcomes; the negative being that certain

sectors of the economy suffers due to increased

competition but the goods and services that are

capital, skill, or technology intensive have

benefited. When discussing these issues, he does

state that international income inequality is

declining due to the economic rise of certain

developing countries, such as Eastern Europe,

Asia, South America, and Saharan Africa; but

overall there is still a large gap that exists between

the poor and the rich. Although there has been a

drop in global inequality, there has been a rise in

national inequality. Excessive inequality has

negative effects on economic efficiency and

individual welfare, which will be further

discussed in detail in this review.

The inequality of opportunities within countries

was one of his most prominent ideas, explaining

that there are certain opportunities that are letting

individuals in developing countries fall behind.

The monetary opportunities that developed

countries have an advantage over than developing

countries include differences in wage, income,

standard of living, and wealth. There is a high

wealth inequality, the examples he uses including

France and the United States. In France, the

richest 10% account for 60% of all of the total

wealth. In the United States, the richest 10%

receive 40% of the total primary household

income but possess 71% of the total wealth (58).

Then there are access to non-monetary

opportunities that differ between countries; these

which include access to education, credit,

housing, and employment. Many women in

developing countries do not get the chance at a

fair education, thus causing negative outcomes

including increased child bearing. Education is a

huge component to this unequal opportunity, due

to the fact that a talented student may not have the

same higher education as its wealthier

counterpart. There are also market imperfections

where he gives an example of a non-wealthy

entrepreneur who has a brilliant idea but is unable

to get a loan due to his lack of wealth thus

resulting in innovation lacking.

Bourguignon highlights certain trends and

reforms that have been occurring during the

efforts of globalization. There has been a recent

trend of advances in information and

communication in technology that has led to a




73

growing number of office tasks that only require a

certain level of skill. This then has made many

companies outsource these jobs to emerging

economies. There has also been another recent

trend that involves executive remuneration. In

2005, when comparing average earnings, the CEO

made more than 100 times than what the average

employee made (89). There have also been major

attempts at reforms in developed countries

including taxation and privatization/deregulation.

He states that income tax cuts are the most

important of these. Bourguignon points out that

this types of reform in developed countries can be

critical, but also changes the distribution of wealth

in society. Programs need to offer long term

support unemployment due to the growing age

population and unemployment.

Another issue pointed out in the book is

the large difference between inequality within

countries and inequality between nations;

Inequality within nations being the real issue at

hand, although hard to predict. Inequality policies

and institutional reforms could easily cancel each

other out and the countries are so unique which

could result in different outcomes. Within nations

there are poverty traps, where there are

individuals who fall below a certain point and are

unable to get out of poverty. This being said, he

highlights two forces that could affect inequality

in the future. One of these forces has to deal with

the potential in growth of emerging countries as

well as advocating for globalization.

Bourguignon then discusses the many

corrections that can be made to fix inequality. To

first tackle poverty, he suggests the use of policies

toward a global convergence for the reduction of

poverty and standards of living. As of right now,

many of the rich countries allocate .35% of their

Gross National Incomes to developmental aid;

however, the Pearson Commission tried to up this

number to .7% but mainly only the Scandinavian

countries followed through (148). This aid helps

get many countries out of the poverty gap;

however, he does warn that this approach has to

have a successful government behind it. If the

government is corrupt and the money goes to the

leaders, it will not help with the inequality issue.

The money would instead just be redirected back

to the leaders, which would just be funding more

of the corruption. There also needs to be a

redistribution of wealth by the means of

educational policies and taxation. Bourguignon

states that there needs to be a standardized level of

quality of education that has to benefit a large

number of individuals. There must also be a

sustainable amount of growth so that individuals

are able to get jobs after. He stressed the idea that

developed countries need to have a gradual

reduction on taxation of inheritance, either by the

means of taxing at the moment of inheritance or

once a year.

In conclusion, he recommends some

general main issues that we need to start with to

help decrease this inequality. He emphasizes that

this issue needs to come to light and that the

negative consequences of excessive inequality

needs to be stressed to the world. Bourguignon

highlights that policies need to be implemented to

keep inequality from rising even higher; these

including the redistribution of taxation and

educational reforms. Discrimination is a topic of

concern for him, stating that the need for women

to have the same opportunities as their male

counterparts in developing countries is crucial.

This will let women be able to work outside of the

home, get an education, and have a say in their

life more than they have now. He concludes with

stating that as of right now, we need to focus on

poor countries because they need the most

attention at this point in time, with aid having to

be maintained and reformed. For all of these

reforms to work, Bourguignon stresses the need

for countries to make capital movements

transparent.

After analyzing The Globalization of

Inequality, Bourguignon does statistically backup

all of his information and recommendations with

facts concerning what has been happening in

countries, thus making him a reliable source. Not

only is he able to effectively back up his

information, he is a credible and important

individual in the world of economics and policy




74

making. He is currently a professor at the College

de France in Paris and is also a former director at

the prestigious Paris School of Economics.

Bourguignon served as the Chief Economist and

Senior Vice President of the World Bank from

2003 to 2007 and was made a Chevalier of the

National Order of the Legion of Honor in 2010.

He has also written other publications and

contributed with other professionals on books;

these including Handbook of Income Distribution,

The Microeconomics of Income Distribution

Dynamics: In East Asia and Latin America, and

The Impact of Macroeconomic Policies on

Poverty and Income Distribution (NYU). Due to

his high prestige in the economical industry, this

book is considered to be from a very reliable and

credible source.

Although I found the book highly

informative, I thought that he may have talked

about too many different parts on how

globalization impacts inequality. In just the first

chapter alone he describes what methods he used

to come up with his numbers, globalization in the

2000s, the history of globalization, the difference

between inequalities within countries vs.

inequalities between nations, and how the

financial crisis may have affected this

globalization. For every chapter, he has roughly

seven different sub categories, which made it

difficult at times to keep up with what he was

talking about and how they all connected. He did

use many great statistics to back up his arguments

and used many examples of countries that fit each

statement he was making about globalization. It

was laid out in a fashion that was not super

technical, which was nice for an individual like

me who does not know much about inequality and

politics. His writing style was easy to follow but

just overall contained so much information in

each section that it was difficult to stay connected

at times.

Overall, I would suggest this book to

anyone who wanted to know an overview of

inequality in the world and how globalization can

help fix some of these problems. The

Globalization of Inequality was published in April

of 2015, which makes this an extremely recent

book. Bourguignon was able to stick by his main

points that this is something that needs to be on

the top of our priority list, and his arguments were

compelling and realistic. He did not have ideas

that seemed over the top or ridiculous, which in

turn made him more credible.

Business Ethics Ellen McIntire



75

Business Ethics: A Stakeholder & Issues Management Approach, 6th

edition, 2014.

Author

Joseph W. Weiss

Professor of Management, Bentley University,

Waltham, MA

Reviewed by

Ellen McIntire

Office of Ethics and Compliance

Raytheon Company

Professor Weiss provides a straight-forward, easy

to read book with a practical methodology that

combines a stakeholder approach with issues

management methods and ethical analysis to

examine complex organizational, societal and

global issues. The book has been used by

companies, graduate and undergraduate classes,

and professional associations because of its wide

ranging scope, interesting narrative style, and

actionable decision steps.

Other distinguishing features of the book

include 1). A management perspective that relates

ethics to strategy, structure, culture, and human

resources; 2). A global perspective that deals with

current national, multinational, transnational, and

cross-cultural ethical conflicts and issues; and 3).

A pragmatic approach that integrates

contemporary and classical research theory to

individual, organizational, industry, and societal

problems.

The eight chapters and 22 cases comprise

a comprehensive, detailed coverage of micro and

macro-level ethical topics: Ch. 1: Business

Ethics, the Changing Environment, and

Stakeholder

Management, Ch. 2: Ethical Principles, Quick

Tests, and Decision-making Guidelines; Ch. 3

Stakeholder and Issues Management Approaches;

Ch. 4 The Corporation and External Stakeholders,

Corporate Governance, From the Boardroom to

the Marketplace; Ch. 5 Corporate

Responsibilities, Consumer Stakeholders and the

Environment; Ch. 6 The Corporation and Internal

Stakeholders: Values Based Moral Leadership,

Culture, Strategy and Self-Regulation; Ch. 7

Employees and Stakeholder Management; and Ch.

8 Business Ethics and Stakeholder Management in

the Global Environment.

An sample of the diversity of cases

include Bernie Madoff’s Ponzi scandal,

Cyberbullying, Genetic Discrimination, the BP oil

explosion and crisis, Google Books, Google in

China, Conscious Capitalism, Goldman’s Sachs’

Hedging a Bet, Wal-Mart: Challenges with

Gender Discrimination, Fracking, Neuro

marketing, Sweatshops, Pre-employment

Screening and Facebook.

The author’s thoughtful and conscientious

way of explaining complex issues in

understandable terms is noteworthy. I know that

this book is being used by graduate and

undergraduate university classes nationally and

internationally, as well as by practitioner oriented

institutes as noted earlier. The University of

Phoenix adopted it among many leading

competitors as a teaching text. The book is an

educational read, apart from being a “text,”

because of its depth and scope of detailed yet big

picture subject matter. If ethics is a ubiquitous

topic, Professor Weiss has demonstrated that here.

CYRUS CHRONICLE JOURNAL (CCJ): Contemporary Economic and Management Studies in Asia and Africa

Announcements

The CYRUS Institute of Knowledge (CIK)-The American University in Cairo Joint 2016

Conference

Entrepreneurship, Responsible Management, and Economic Development – Cairo, Egypt, March 15-

20th, 2016

CYRUS Institute of Knowledge (CIK), Cambridge, MA, USA and the School of Business, The American

University in Cairo (AUC), Egypt invite you to participate in the joint School of Business-CIK 2016

Conference. We welcome participation of faculty, students, policy makers, business community, civil

society, and regional development leaders. The list of conference co-sponsoring international institutions

is below.

Conference Date: March 15-17th, 2016

Workshops: March, 18-20, 2016

Location: The American University in Cairo, Egypt

Extended Deadline to Submit Abstract: January 15th, 2016

Scholars and practitioners are invited to submit an Abstract for an in-person paper presentation and

workshop related to the conference theme and preferred topics of interest listed below. Abstracts should

be about 500 words and include a specific research question (aims and objectives), methodological

approach, and results. Proposals submitted will undergo a double-blind peer review process. Accepted

proposals will be published in the conference proceedings in electronic format. The best papers will be

double-blind reviewed for possible publication in the CIK Electronic Journal, the CYRUS Chronicle. Full

paper submission is optional for the conference.

We welcome participation from public and private sectors to attend the conference. Participants will find

presentations enlightening and enriching their personal and professional life. Additionally, there will be

significant opportunities for networking. To register for the conference please

check: http://www.cyrusik.org/conference2016/registration.

Preferred Topics are: Entrepreneurship, Family-owned Enterprises, Social Entrepreneurship, Women Entrepreneurship, SMEs,

Innovation, Responsible Management, Corporate Governance, Economic Development, Sustainability,

http://www.cyrusik.org/conference2016/paper-submission/

http://www.cyrusik.org/conference2016/registration



and Leadership. The workshops objectives are to provide practical implications for teaching, research,

and public policies.

For additional inquiry about the conference please contact us

at: [email protected] or [email protected]. For additional information about CIK and AUC-

School of Business please visit:http://www.cyrusik.org/, http://www.aucegypt.edu/business/pages,

respectively.

Conference Co – chairs Dr. Nader Asgary, President of CIK and Professor of Management and Economics, Bentley University,

Waltham MA, USA,

Dr. Tarek Hatem, head of Entrepreneurship and leadership unit and Professor of Entrepreneurship and

Strategy, School of Business, The American University in Cairo, Egypt.

Academic Committee Dr. Samer Atallah, Assistant Professor of Economics, School of Business, The American University in

Cairo;

Dr. Nizar Becheikh, Associate Dean for Graduate Studies and Research and Professor of Strategy and

Innovation Management, School of Business, The American University in Cairo, Egypt;

Dr. Shariar Khaksari – Member of Board of Director of CIK and Professor of Finance, Suffolk

University,

Professor Tagi Sagafi-nejad, Professor Emeritus, Loyola University Maryland and former Radcliffe

Killam Distinguished Professor, Texas A&M International University;

Dr. Massood Samii, Member of Board of Director of CIK and Professor of International Business

department, Southern New Hampshire University, New Hampshire University, USA.

The conference co-sponsoring international institutions are:

The American University of Cairo, Cairo - Egypt

Bentley University – USA

Southern New Hampshire University – USA

Suffolk University – USA

University of Stellenbosch – Bellville Park Campus – South Africa

Uninove University (São Paulo) – Brazil




http://www.aucegypt.edu/business/



Announcements

Call for Papers

The CYRUS Institute of Knowledge invites you to participate in our upcoming conference,

Entrepreneurship and Ethical Leadership for Sustainable Global Development. The conference is

co-sponsored by Bentley University, Southern New Hampshire University, and Suffolk University.

Date: April 20-23rd, 2017

Location: Harvard University Campus, Cambridge MA 02138

Deadline for Submitting Abstract: September 30th, 2016

All scholars and practitioners are invited to submit a proposal, a half page abstract, summarizing the

content of their research. We also encourage participants to submit a proposal with other participants to

run a session together. To submit a proposal or for additional information please consult our website:

http://cyrusik.org.

We welcome participants from both the public and private sectors to attend our conference. Many

participants will find presentations enlightening and enriching to their personal and professional lives.

Additionally, there will be significant opportunities for networking. To register please consult the

aforementioned website.

We welcome submissions that represent various business disciplines, economic development matters, and

cultural issues. We are interested in examining challenges and opportunities related to the issues listed

below.

All submitted proposals will be reviewed by a double blinded Program Committee and referees.

Electronic proceedings will be generated from all accepted proposals. Of these, a select number of

exceptional papers will be published in CIK’s Electronic Journal.

Preferred Topics of Interest

Entrepreneurship; Innovation and Development; Business Development and Governance; Natural

Resources and Sustainable Development; leadership and Cultural Characteristics; Women and Business

Development; Higher Education Institutions; Ethics and social Responsibility; Institution and

Development; Organization and Cultural Issues

Further Topics

Accounting; Economics; Finance; Information and Communication Technology; International Business

and Cultural Issues; International Economics, International Finance; Marketing; Project Management;

Statistics; Strategy; Decision Science

Conference Executive Committee

• Dr. Nader Asgary – President of CIK; Professor of Management and Economics, Bentley University

• Dr. Shariar Khaksari – Member of Board of Directors of CIK; Professor of Finance, Suffolk University

• Dr. Massood Samii – Member of Board of Directors of CIK; Professor and Chairman of International

Business department, Southern New Hampshire University

http://cyrusik.org/



The Cyrus Chronicle Journal Submission Guidelines

Basics of the Journal’s Peer Review Process: Submissions to the Cyrus Chronicle Journal should be no more than 7000 words and are subject to

certain standard tests. By submitting a paper, authors agree:

1. To allow the Journal to test for originality;

2. That the paper has not been submitted for publication elsewhere;

3. That on acceptance, its copyright will be transferred to the Journal.

Title/Abstract page: The manuscript should start with a page that includes the title and an abstract of up to 500 words. This

should not contain any information that identifies the author(s).

Keywords: Include five keywords

Body of the paper: Introduction: state clearly the objective of the paper and its research approach and method.

Literature Review: limit this to the articles, books, and other sources that have a direct relationship to the

paper’s subject.

Theoretical Model: explain the potential usefulness of any theoretical model used.

Empirical Section: provide appropriate citations to the statistical methods and procedure used.

Conclusion: summarize key findings, their importance to the field, and any potential for further research.

Style of presentation:

The text should be double-spaced and fully justified, with 1 inch margins (2½ cm) on all sides.

References, endnotes, and appendices should be single spaced. Font type should be 12-point Times New

Roman. Pagination should start with the Abstract Page. Use endnotes instead of footnotes; they should be

concise. Citations to the literature should be included in the text, not in the endnotes, for example:

“Several studies (AAA and & BBB, 1976; CCC, 2003a, 2003b) concur with this finding”.

For articles with three or more co-authors, cite the first author’s last name followed by “et al.” For a

direct quotation give author’s last name, date and page number, for example, “XYZ, 2000, 50”.Figures

and tables should be placed at the end.

References/Citations: Journal/periodical articles

Asgary, Nader and Li, G. (2014). ”Corporate Social Responsibility: Its Economic Impact and Link to the

Bullwhip Effect” Journal of Business Ethics, 81, 1, 223–234.

Financial Times. (1996). “Survey – Czech Republic: Message from the people. December 6, 3.

Books

Dunning, John H., Ed. (2003). Making Globalization Good: The Moral Challenge of Global

Capitalism. Oxford University Press.

Stiglitz, Joseph E. (2006). Making Globalization Work. W. W. Norton.

Tagi Sagafi-nejad, in collaboration with John H. Dunning (2008). The UN and Transnational

Corporations: From Code of Conduct to Global Compact (Indiana University Press for the UN

Intellectual History Project).

Rainey, Hal G. (2014). Understanding and Managing Public Organizations. Jossey-Bass.

Chapter in Edited Book

Rainey, Hal G. (1993). “Toward a Theory of Goal Ambiguity in Public Organizations”. In J. L. Perry,

ed., Research in Public Administration, Vol. 2, pp. 278–294. Greenwich, CT: JAI Press.



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