Chapter 8Economic Development and Culture

Group 7Sherel BarcenasGarret BrooksJamie DukeKaty King

Amanda Knapp

Sarah OlsonRyan PattersonLuke Ryan

Introduction

Background of Global Economic Development

5 Paradoxes: Trade, Democracy, and Open and Free

Markets Culture and Change

Background

Economic development is critical to globalization

Controversy Split paradoxes into 2 categories:

Trade, democracy, and open and free markets

Culture and change

Theory of Comparative Advantage

David Ricardo 19th century the ability of a person or a country to produce a

particular good or service at a lower marginal and opportunity cost

Economic development from:▪ Land▪ Labor▪ Capital

Theory in question:▪ Multinational corporations moving home countries▪ Doing more business and hiring more people outside their

home country

Theory of Mercantilism

Before Ricardo, was mercantilism Supported by colonialism Strict government regulation of economy Accumulation of wealth from resources Development of manufacturing and

agriculture Establish foreign trading monopolies Wealth went to home country, not

colony▪ Lead to independence movements, wars, and

creation of self-sufficient countries in the New World

Colonialism

From Developing to Developed

Economic model for development: Early stages Explosive growth Maturity Decline (not always)

Rate of development increasing rapidly

Factors Leading to Economic Growth

Natural resources Climate Good geographical position Religious-based culture Strong institutions- banks, police,

courts Clusters of industries

Mix of characteristics for success varies

Issues of Export-Driven Trade

Trading partners at disadvantage Population size vs. rate of economic

development Level playing field? To grow requires more resources,

thus increasing the world price National budget deficits Decrease in skilled labor

Immiseration

Phenomenon stating that “a national economy can suffer dramatically even while growing through accumulating capital or improving productivity”

Producing more could saturate market Decrease demand Decrease price Weaken exporting nation’s profits

The “Shoe Event Horizon”

http://www.csua.berkeley.edu/~dxu/econ/shoe.html

Solution?

Diversification of products produced However, not always the case Competition can lower price as well

Funding for Economic Development

European Union Provides funds to newly admitted nations Taxes lend money for next admitted nation

World Bank and International Monetary Fund (IMF)

Some funds not successful Corruption Mismanagement Rivalries between people

Ranking Nations

Ranking of economic development potential: Degree of corruption as perceived by

international executives Degree of trust between citizens and

public institutions▪ Police, courts, etc

Poverty Reduction

Many organizations state poverty reduction as their mission However, much of world funds go to

nations without will or ability to reduce poverty

George Lodge and Craig Wilson suggest MultiNational Corporations (MNCs) create an organization where they would invest in developing nations and use the profits to invest in other developing nations

Poverty in the World

According to World Bank: Nearly half world population- $2 a day or

less 1/6 world population- less than $1 a day Poverty fallen from 2/3 of developing

nations to ½ of population between 1981 and 2001

World Trade Organization (WTO)

149 of 220 nations in the world are members

Tariffs lowered Many global issues to be addressed Provides framework to dissolve

disputes

Paradox 8.1

Are democracy and free markets antithetical to each other?

Democracy and Free Market

Amy Chua Communism to Capitalism Ethnically similar majority Lack of business and economic

experience Dependence on minority group

Paradox Examples

Indonesia Russia Malaysia

Developing Nations

Open markets with low tariffs Inequalities increase No policy suggestions

Paradox 8.2

Does trust increase trade among nations? Does increased trade lead to conflict and war among nations?

Does Trust Increase Trade Among Nations?

Nations prefer trading with similar cultures

Canada’s largest trading partner is US.

Being Geographically close lowers transaction cost and risk

Luigi Guiso, Paola Sapienza, Luigi Zingales

Researched surveys in the EU focusing on trusting nationalities Germans most trusted Italians rank lower Germans trust British more than French

Variables to predict the amount of trade between EU nations

Cultural Trust Religion History of war Genetic differences

Increase in trust for any variable between two nations associated with a 30% rise in trade

Does Trade Increase Peace?

U.S. trade with China, India and other developing nations

Historical record is mixed United States and Great Britain Great Britain and Germany

Dr. Katherine Barbieri found increased trade is associated with higher incidence of war

Culture and Change

“Change” usually consist of moving from a traditional way of life to modernized way

Individuals accept change if they can see the benefits from it

Paradox 8.3

Are institutions more important than culture for explaining economic development?

Institutions vs. Culture

Institution: an established corporation or corporation (www.merriem-webster.com)

Court of law, police system, government, etc.

Culture: the act of developing the intellectual and moral faculties (

www.merriam-webster.com)

Beliefs, behavior, knowledge, etc.

Institutions

Provide the structure for life at work and outside of work

Need to be trustworthy or people will try to go around the systems Join groups that also avoid systems (legal,

police, tax)▪ Mafia created in Italy▪ Douglas North wins Nobel Prize, shows

trustworthy institutions critical for economic development

Rise and Decline of Nations

Mancer Olson (1982) Work showed that when amounts of

interest groups increase in a country, national prosperity decreases

This occurrence is not only in the United States

Rise and Decline of Nations

Interest groups Helpful because their existence helps

accomplish essential functions (creating diverse views and distribution of their activities, points of view)

Harmful because they can hurt economic growth by drawing the attention of a nation away from good solutions▪ Citizens of the country will see all institutions

as dishonest

The Mystery of Capital

Written by Hernando de Soto (2000)Capital: in Medieval Latin means

“cattle”; symbolizes sources of wealth beyond the meat that can/will become food

It’s difficult, even impossible to create capital without initial capital

Creating change

Powerful interest groups declare property rights on settlers living on public land

Create capital by using little cities or “shantytowns” created by residents San Francisco Solano test Chinese government enforcing

ownership of countryside to create factories, modern cities

Tan and Peng Study (1990s)

Studied three groups of entrepreneurs Native Chinese working in China Chinese Americans White, Anglo-Saxon Americans

Hypothesis: If culture were more important than institutions, the Chinese in mainland China and Chinese Americans would tend to be significantly different in attitudes from their Anglo-Saxon counterparts.

Tan and Peng Study

Findings: similarities were actually between the Anglo-Saxon and Chinese Americans. The native Chinese and Chinese Americans

were not that similar

Conclusion: Institutions are more important than culture, supporting Douglas North’s original idea

Turkey: early 1900s

President Ataturk wanted to separate culture and institutions Changed Turkey from a theocratic,

Muslim nation to secular nation Separated by:

Closed religious schools and lodges Used the Roman alphabet and Western

calendar Used European codes of law instead of

Islamic

Institution vs. Culture

Both are important and relevant, each case depends on which is more important

China’s development leans towards giving culture more importance

Turkey appears to make institutions more relevant

Paradox 8.4

Do economic development and globalization lead to individualism?

Affects of Economic Development

Individualism Considers one self separate from group

Collectivism Decisions are made in GROUPS best

interest

Hofstede’s Cultural Dimensions Power Distance

Level of societal acceptance of equality/inequality

Individualism Degree of interdependence within society

Uncertainty Avoidance Extent to which members of society feel

threatened by unknown/ambiguous situations Masculinity/ Femininity

Masculinity- Importance on “being the best” Femininity-importance on “liking what you do”

Nigeria vs Italy

Hofstede’s 5th Dimension

Long Term Orientation Countries are considered short term

oriented or future oriented Emphasizes▪ Persistence▪ Ordering relationship status▪ Behaving in accordance to order▪ Stressing thrift▪ Having sense of shame

Conclusion from Hofstede

Values of economic growth differ by nation

Different religions have “Confucian” values

Nations are Individualistic and Collectivistic at different time periods

Hofstede’s model proved in the short run Individualism occurs as economies grow

What matters is a society that encourages individualism and emphasizes contributions to society

Paradox 8.5

Why do citizens vote for and accept stationary bandits as political leaders? Stationary bandit-Political leader that

resides in the community he eventually weakens or sometimes destroys.

Mancur Olson

Argued that a "roving bandit" (under anarchy) has an incentive only to steal and destroy, whilst a "stationary bandit" (a tyrant) has an incentive to encourage a degree of economic success, since he will expect to be in power long enough to take a share of it

Genghis Khan

Roving bandit during the 13th century

Founder and emperor of Mongol Empire

Conquered most of Central Asia and China

Mao Tse-tung

Political leader of communist China

Influence lasted 40 years

Guerrilla warfare Long March 50 million Chinese

died due to collectivization and thoughtless government policies

Adolf Hitler

German politician and leader of the Nazi Party

Treaty of Versailles WWII Franklin D.

Roosevelt April 30, 1945

Hitler committed suicide

Joseph Stalin

Leader of Russia Introduced

taxation system The 5 year plan Actions during and

after WWII