Chapter 3 National Differences in Economic Development Berlin Wall torn down November 9, 1989
What Determines A Country s Level Of Economic Development? Gross domestic product (GDP) Market value of a country s output attributable to factors of production located in the country (foreign or domestic owned) Gross national income (GNI) per person Measures total annual income received by residents Japan, Sweden, Switzerland, and the U.S. are in the High income group GNI per capita China Upper middle income group GNI per capita India Lower middle income group GNI per capita GNI can be misleading Does not consider differences in the cost of living Purchasing power parity (PPP) Adjusting GNI by purchasing power
Comparison - GNI per capita? Source: https://en.wikipedia.org Atlas Method (US$) PPP Method (US$)
The New Big Mac Index 2016
Largest Economies (PPP) 2015 (Top 20) http://en.wikipedia.org/wiki/list_of_countries_by_gdp_(ppp)
Accurate GDP Reporting? Can we truly trust GDP figures given by countries? http://www.bloomberg.com/news/articles/2016-01-05/is-there-such-thing-as-reliable-gdp-data-
Distribution of Economic Freedom in 2007 Notice only a few countries were considered Free in 2007 ---------------------------- U.S. U.K. Australia New Zealand Japan
Distribution of Economic Freedom in 2010 The U.S. moved from Free in 2007 to Mostly Free in 2010 --------------------------------- Why and how did we move in that direction? - Government spending (bail-outs) - Fiscal freedom (taxes) Let s see for 2016
Distribution of Economic Freedom in 2016 The U.S. stayed Mostly Free in 2016 Free : Switzerland Australia New Zealand Source: http://www.heritage.org/index/heatmap
Let s Talk Taxes World Bank Doing Business Paying Taxes Methodology: Profit or corporate income tax Social & labor taxes paid by the employer Property taxes Property transfer taxes Dividend tax Capital gains tax Financial transactions tax Waste collection taxes Vehicle and road taxes and any other small taxes or fees Which countries do you think are in the Top 20 highest on Paying Taxes for 2016?
World Bank - Highest Taxes 2016 Argentina 170 44.99 9.0 405.0 137.4 0.0 29.3 108.1 Pakistan 171 44.46 47.0 594.0 32.6...... Tajikistan 172 43.53 28.0 276.0 81.8 17.7 28.5 35.6 Congo, Dem. Rep. 173 43.50 52.0 346.0 54.6 27.5 12.6 14.5 Eritrea 174 43.49 30.0 216.0 83.7 9.2 0.0 74.5 Equatorial Guinea 175 43.21 46.0 492.0 47.1 20.7 25.4 1.0 Côte d'ivoire 176 42.73 63.0 270.0 51.9 8.8 23.3 19.8 Gambia, The 177 40.94 50.0 326.0 63.3 6.1 12.7 44.5 Brazil 178 40.85 9.6 2,600.0 69.2...... Which countries do you think are Lowest 20 for 2016? Benin 179 39.91 57.0 270.0 63.3 15.9 26.4 21.0 Cameroon 180 36.34 44.0 630.0 48.8 30.0 18.3 0.5 Nigeria 181 32.17 59.0 907.9 33.3...... Congo, Rep. 182 30.68 50.0 602.0 56.0 0.0 31.3 24.7 Senegal 183 29.83 58.0 620.0 47.3 18.4 23.6 5.3 Guinea 184 28.27 57.0 440.0 68.3 0.0 26.4 41.9 Central African Republic 185 23.47 56.0 483.0 73.3 0.0 19.8 53.5 Chad 186 19.54 54.0 732.0 63.5 31.3 28.4 3.8 Mauritania 187 17.71 49.0 734.0 71.3 0.0 23.2 48.1 Venezuela, RB 188 13.64 70.0 792.0 65.0 9.9 18.0 37.1 Bolivia 189 12.18 42.0 1,025.0 83.7 0.0 18.8 64.9 Source: http://www.doingbusiness.org/data/exploretopics/paying-taxes
World Bank - Lowest Taxes 2016 Qatar 1 99.44 4.0 41.0 11.3 0.0 11.3 0.0 United Arab Emirates 1 99.44 4.0 12.0 15.9 0.0 14.1 1.8 Saudi Arabia 3 99.23 3.0 64.0 15.0 2.2 12.8 0.0 Hong Kong SAR, China 4 98.71 3.0 74.0 22.8 17.5 5.2 0.1 Singapore 5 96.56 6.0 83.5 18.4 2.0 15.3 1.1 Ireland 6 94.97 9.0 82.0 25.9 12.4 12.1 1.4 Macedonia, FYR 7 94.17 7.0 119.0 12.9 10.9 0.0 2.0 Bahrain 8 93.88 13.0 60.0 13.5 0.0 13.5 0.0 Canada 9 93.00 8.0 131.0 21.1 3.9 12.7 4.5 Oman 10 92.91 14.0 68.0 22.9 11.0 11.8 0.1 Kuwait 11 92.48 12.0 98.0 13.0 0.0 13.0 0.0 Denmark 12 91.94 10.0 130.0 24.5 18.7 3.0 2.8 Mauritius 13 91.92 8.0 152.0 22.4 11.7 7.1 3.6 Norway 14 91.36 4.0 83.0 39.5 23.6 15.9 0.0 United Kingdom 15 91.34 8.0 110.0 32.0 19.2 11.2 1.6 Brunei Darussalam 16 89.61 18.0 89.0 8.7 0.8 7.9 0.0 Finland 17 89.38 8.0 93.0 37.9 11.8 24.8 1.3 Kazakhstan 18 89.18 7.0 188.0 29.2 16.2 11.2 1.8 Switzerland 19 89.13 19.0 63.0 28.8 9.3 17.7 1.8 South Africa 20 88.75 7.0 200.0 28.8 21.7 4.0 3.1 Source: http://www.doingbusiness.org/data/exploretopics/paying-taxes
Tax Revenue as % of GDP - 2015 Source: https://en.wikipedia.org
U.S.- State Taxes 2017 Source: taxfoundation.org
Corporate Tax Rates 2015 Which countries have the highest corporate tax rates in the world? (Top 10)
Corporate Tax Rates 2015 Bahamas 0.00% Bahrain 0.00% Bermuda 0.00% Which Bonaire, Saint countries Eustatius and Saba (owned by Netherlands) have 0.00% the Cambodia 0.00% Cayman Islands 0.00% Guernsey 0.00% lowest Indonesia corporate tax 0.00% rates in Isle of Man 0.00% Jersey 0.00% Vanuatu 0.00% Montenegro the world? 9.00% Bosnia and Herzegovina 10.00% Bulgaria 10.00% Gibraltar 10.00% Macedonia (Bottom 10) 10.00% Paraguay 10.00% Qatar 10.00% Macau 12.00% Moldova 12.00% Oman 12.00% Cyprus 12.50% Ireland 12.50% Liechtenstein 12.50% Serbia 15.00%
French vs. U.S. Tax Rates (2016) Taxes Corporate Tax (top rate %) Social Security Employer paid Corporate Total (as %) Personal Income Tax (top rate %) Wealth Tax Social Security Employee paid Personal Total (as %) VAT (France) vs. Sales Tax (LA County) Self Employment Tax (% of revenue) France 34.4 % 50 % 84.4 % 45 % 1.8 % 30 % 76.8 % 20 % 45 % USA 38.9 % 7.7 % 53.9 % 45.5 % 0 7.7 % 53.2 % 9.75 % 15.4 %
French Health Care At What Cost? Video on FRENCH Healthcare (7 min) Great benefits but at what cost? France - new 75% tax on all income over 1 million (2013) FILM FILM Personal Income Tax (top rate %) Wealth Tax Social Security Employee paid FRANCE - Personal Total (as %) 2009 52.1 % 1.8 % 15 % 68.9 % 2012 75.0 % Result is many of the richest are fleeing the country FILM he has since withdrawn his application 1.8 % 15 % 91.8 % On Income > 1 Million In December 2012 French Constitutional Council struck it down. Fixed in 2013 for households (today) vs individuals (2012) What is your opinion regarding Tax the Rich? Will Smith
French Socialism Not Working
2015 Most Miserable Countries of the World (Unemployment, Inflation, Lending, & GDP per Capita) Where do you think are the 20 most Miserable Countries of the World 2015? Source: http://www.cato.org/blog/world-misery-index-108-countries
2015 Most Miserable Countries of the World (Unemployment, Inflation, Lending, & GDP per Capita) Where do you think are the 20 least Miserable Countries of the World 2015? Source: http://www.cato.org/blog/world-misery-index-108-countries
Country Competitiveness Report 2016 Which country do you think is the MOST competitive (2016-17)? Source: http://www.weforum.org/issues/global-competitiveness
Country Competitiveness Report 2016-17
Country Competitiveness Report 2016-17 United States most problematic issues. Taxes & Regulations Source: https://www.weforum.org/reports/the-global-competitiveness-report-2016-2017-1
Global City - Cost of Living Index 2015 Which city do you think is the MOST expensive to live in (2015)? Source: http://www.mercer.com/costofliving
Global Cities - Cost of Living 2015 FILM (1 min)
Cities - 2017 Quality of Life Index Mercer evaluates local living conditions in all the 420 cities it surveys worldwide. Living conditions are analyzed according to 39 factors, grouped in 10 categories: 1. Political and social environment (political stability, crime, law enforcement, etc) 2. Economic environment (currency exchange regulations, banking services, etc) 3. Socio-cultural environment (censorship, limitations on personal freedom, etc) 4. Health and sanitation (medical supplies and services, infectious diseases, sewage, waste disposal, air pollution, etc) 5. Schools and education (standard and availability of international schools, etc) 6. Public services and transportation (electricity, water, public transport, traffic congestion, etc) 7. Recreation (restaurants, theatres, cinemas, sports and leisure, etc) 8. Consumer goods (availability of food/daily consumption items, cars, etc) 9. Housing (housing, household appliances, furniture, maintenance services, etc) 10. Natural environment (climate, record of natural disasters) Source: http://www.mercer.com
Cities - 2017 Quality of Living Rankings Quality of Living Ranking Which cities do you think rank the 10 HIGHEST? Which cities do you think rank the 10 LOWEST? Short FILM
What Determines A Country s Level Of Economic Development? Nobel-prize winner Amartya Sen argues: Economic development should be seen as a process of expanding the real freedoms that people experience Remove impediments to freedom: Poverty, Tyranny, and Neglect of public facilities Provide basic health care and basic education Economic progress requires the democratization Give citizens a voice The United Nations used Sen s ideas to develop the Human Development Index (HDI) next slide
Human Development Index 2016 Human Development Index (HDI) 1. Life Expectancy at birth, 2. Educational Attainment, and 3. Whether average incomes are sufficient to meet the basic needs of life Source: http://en.wikipedia.org/wiki/human_development_index
Global Slavery Index Source: http://www.globalslaveryindex.org
How Does Political Economy Influence Economic Progress? Innovation and entrepreneurship Engines of long-run economic growth Innovation includes new products, new processes, new organizations, new management practices, and new strategies Entrepreneurs commercialize innovative new products and processes Create new markets and products Result in more productive labor and capital
Global Innovation Index 2015 Which countries do you think top the list?
Global Innovation Index 2015 Source: http://www.globalinnovationindex.org
Air Pollution 2016 Source: World Health Organization http://maps.who.int/airpollution/
Air Pollution - Quality of Life?? India China
2015 Source: Yale University http://www.epi.yale.edu/visuals/airmap/
The World is Changing FILM (8 min) Questions: 1. What are some of the issues that are being faced around the world? 2. What might be some potential solutions?
How Is The Political Economy Changing? Since the late 1980s, two trends have emerged 1. Political - Democratic revolution (late 1980s and early 1990s) democratically elected governments replaced totalitarian regimes more committed to free market capitalism 2. Economic - A move away from centrally planned and mixed economies more countries have shifted toward the marketbased model
How Free are Countries? Political Freedom Which country ranked #1 in 2016: -Democracy -Press Freedom -Non-corruption
Democracy Rank 2016 Source: http://www.worldaudit.org
What Is The Nature Of Economic Transformation? The shift toward a market-based system involves deregulation removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate privatization - transfers the ownership of state property into the hands of private investors the creation of a legal system to safeguard property rights
What Does The Changing Economy Mean For Managers? Markets that were formerly off-limits to Western business are now open firms need to explore opportunities in these markets Despite being underdeveloped and poor, some markets have huge potential China -1.3 billion people India 1.2 billion people Latin America 600 million potential consumers
What Does The Changing Economy Mean For Managers? However, the potential risks are large will democracy thrive especially in difficult economic times? will totalitarian regimes return? will a multi-polar world of different civilizations emerge? will China s financial system be stable (debt)?
Benefits of Business The benefits of doing business in a country are a function of Market Size Consumer Purchasing Power Likely Future Wealth
Costs of Business The costs of doing business in a country are a function of its Political System - is it necessary to pay bribes to get market access? Economic Level - are the necessary supporting business and infrastructure in place? Legal System - it can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights
Risks of Business The risks of doing business in a country are a function of Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights
How Can Managers Determine A Market s Overall Attractiveness? More attractive countries have: Political stability Market-based economies Low inflation Low private-sector debt
Balance: Benefits, Costs & Risks Benefits Market Size Consumer Purchase Power Likely Future Wealth Costs Political: Corruption Economic: Infrastructure Legal: Costs Market s Overall Attractiveness Risks Political: Unrest & Anti-business trends Economic: Economic Mismanagement Legal: Protection of Property Rights
Where to call home? If you could relocate to any country in the world, other than the U.S., to where would you move? Why? Is your answer the same as last time? Did our discussion peak your interest to visit a country? Where would you like to go? To make an informed choice (personal and business) we might like to look at: Political Economic Legal