Comparative Economic Systems and Development Armenian State University of Economics Spring 2016

Outline Comparative Systems Analysis Markets, Hierarchies, and Economic Performance Some Comparative Data Economic Development Development Strategies

Economic Systems Why do people behave the way they do? In this subject we investigate economic behavior under different economic systems What is an economic system? Framework of social institutions which influence the behavior of economic agents

Social Institution What is a social institution? An arrangement between economic agents that governs the ways the agents relate to one another A governance mechanism

What are institutions? Decision-making arrangements –Firms, Households Coordination and information mechanisms –Money prices, regulations, markets, internet Property Rights –Private, public Goal-setting and incentive mechanisms –Profit, morality Public choice mechanisms –Government

Economic Systems What do we mean by the behavior of economic agents? Every choice people must make due to existence of scarcity –What to produce (and consume) –How to produce –Who consumes it Resource allocation

The simplest economic model Robinson Crusoe Economy RC has –labor –capital (from the ship) –land He needs –Shelter –Food

What kind of economic system is RC’s? Trick Question! In a society, resource allocation requires coordination of activities among 2 or more people Activities are coordinated by means of transactions. Transactions have costs

Transaction Costs Identification Cost –What is the activity and who are the involved parties? Negotiation Cost –What are the terms of the transaction? Enforcement Cost –Are the terms of the transaction carried out? Transactions costs are the resources devoted to answering these questions

Markets and Hierarchies Markets promote voluntary, horizontal, relationships –Buyers and sellers make mutually beneficial exchanges Hierarchies promote compulsory, vertical, relationships –Superiors order subordinates to carry out tasks

Markets and Hierarchies Examples of Markets –Stock Exchange, Farmer’s market, labor market, ebay, flowers, Yerevan taxis, … Examples of Hierarchies –Firm, State administration, Army, Police, Church, …

Markets and Hierarchies Markets define horizontal relations –Voluntary and mutually beneficial exchange –Save on identification costs because buyers and sellers reveal opportunity costs –May have significant negotiation costs Markets have an advantage in governing activities that present identification problems

Markets and Hierarchies Hierarchy defines vertical relations –Superior - Subordinate –Save on negotiating costs because of unequal relationship –May have significant identification costs Hierarchies have an advantage in governing activities that present implementation problems

Markets and Hierarchies Both exist simultaneously in every economic system Why?

Spectrum of Economic Systems Where is Armenia? Centralization Increases anarchy pure market mixed market mixed socialism Planned socialism pure hierarchy California 1849 HongKong 1997 USSR 1980 Germany Sweden Wartime Economies USA China UK France

Performance Dimensions Output Growth –ExtensiveGrowth –Intensive Growth (Dynamic Efficiency) Composition Static Efficiency Stability Income Distribution Quality of Life

Comparative Data 2014 USAGermanyCzech RepublicRussiaChinaArmenia GDP/cap54,90046,70030,30024,70013,4008,200 % Services % Industry % agriculture % GDP growth Investment/GDP %inflation %unemployment (M+X)/GDP %-tile ratio Gini coeff %pop growth life exp infant mortality HDI Econ. Freedom Security Index Sources: CIA World Factbook, UNDP, Fraser Institute, Human Security Index

Development Strategy How to –Increase National Income –Improve Public Health –Industrialize –Urbanize –Reduce Population Growth

Development Strategy Requires –Infrastructure Transportation Communication Public Health Education –Efficient utilization of resources Static efficiency Dynamic efficiency

Development Strategy Extensive Growth –Increase utilization of inputs and existing technology –Achieve full employment and a high rate of capital formation –Negotiation problem – hierarchies have an advantage

Development Strategy Intensive Growth –Increase the productivity of existing inputs –Promote innovation and technological change –Identification problem – markets have an advantage

Role of Government Provision of Public Goods –Law and Order –National Security –Transportation and Communication –Public Health Measures –Public Education Mobilize Resources?

Role of Markets Promote Static Efficiency –Allocate Resources to highest valued use –Capital markets promote investment and savings Promote Dynamic Efficiency –Profit incentive for improvement –Intellectual property rights promote invention

Development Strategies Import Substitution –Prevailing Model after WWII –India, Pakistan, Mexico, Africa, Latin America –Initially successful, later discredited Export Promotion –Japan, Hong Kong, Singapore, South Korea, Taiwan, Thailand, Malaysia –Successful in Asia, domestic consumer bears costs

Asian Development Strategy State-led industrialization High savings/investment rates –Physical and Human Capital Borrowed technology Export promotion Exchange rate policy Relational contracting –Partnership among industry, government, banks