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

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

3. 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

4. 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

5. 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

6. 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

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

9. 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

10. Transaction Costs Identification Cost Negotiation 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

11. 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

12. 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, …

13. 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

14. 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

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

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

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

18. Comparative Data 2014
USA
Germany
Czech Republic
Russia
China
Armenia
GDP/cap
54,900
46,700
30,300
24,700
13,400
8,200
% Services
77.6
69.1
59.2
59.7
48.4
46.7
% Industry
20.8
30.2
38.2
35.8
42.7
30.1
% agriculture
1.6
0.7
2.7
4.4
8.9
23.3
% GDP growth
2.4 2
0.6
7.3
3.4
Investment/GDP
16.3
20.2
25.1
19.1
42.4 20
%inflation
0.8
0.4
7.8 3
%unemployment
6.2 5
7.7
5.2
4.1
17.8
(M+X)/GDP
0.225
0.67
0.15
0.21
0.19
%-tile ratio 15
6.67
19.4
7.44
17.6
6.7
Gini coeff. 45 27
24.9 42
46.9
30.3
%pop growth
0.78
-0.17
0.16
-0.04
0.45
-0.15
life exp
79.7
80.57
78.5
70.47
75.4
74.37
infant mortality
5.87
3.43
2.63
6.97
12.44
13.51
HDI
0.915
0.916
0.87
0.798
0.727
0.733
Econ. Freedom
7.73
7.5
7.33
6.69
6.44
7.67
Security Index
0.594
0.753
0.754
0.645
0.626
0.666
Sources: CIA World Factbook, UNDP, Fraser Institute, Human Security Index

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

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

21. 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

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

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

24. Role of Markets Promote Static Efficiency Promote Dynamic 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

25. 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

26. 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