Econ 672/IB 561International Economics and Business

http://www.youtube.com/watch?v=J9qdD48bs_Y

Imagine

Imagine there's no heavenImagine there's no heaven

It's easy if you tryIt's easy if you try

No hell below usNo hell below us

Above us only skyAbove us only sky

Imagine all the people living for todayImagine all the people living for today

Imagine there's no countriesImagine there's no countries

It isn't hard to doIt isn't hard to do

Nothing to kill or die forNothing to kill or die for

And no religion tooAnd no religion too

Imagine all the people living life in peaceImagine all the people living life in peace

You, you may say You, you may say

I'm a dreamer, but I'm not the only oneI'm a dreamer, but I'm not the only one

I hope some day you'll join usI hope some day you'll join us

And the world will be as oneAnd the world will be as one

Imagine no possessionsImagine no possessions

I wonder if you canI wonder if you can

No need for greed or hungerNo need for greed or hunger

A brotherhood of manA brotherhood of man

Imagine all the people sharing all the worldImagine all the people sharing all the world

You, you may say You, you may say

I'm a dreamer, but I'm not the only oneI'm a dreamer, but I'm not the only one

I hope some day you'll join usI hope some day you'll join us

And the world will live as oneAnd the world will live as one

Office Hours: Open door policy Textbook?

The Wall Street Journal

Lecture Notes (available on Blackboard)

Readings (available on Blackboard)

Grading:15% 3 assignments

20% Weekly quizzes (first 3 minutes of every class)20% Weekly quizzes (first 3 minutes of every class)

65% 3 exams, 20-20-25%65% 3 exams, 20-20-25% September 11, TuesdaySeptember 11, Tuesday

September 25, TuesdaySeptember 25, TuesdayOctober 9, TuesdayOctober 9, Tuesday

All grades will be posted on BlackboardAll grades will be posted on Blackboard. .

Grading Criteria for the Assignments  A two-page report on article assigned. A two-page report on article assigned.

Page 1--summarize the article. Page 1--summarize the article.

Page 2--Page 2--criticize the approach, argument or criticize the approach, argument or methodology of the articlemethodology of the article..

Accuracy of the summary (4 points)Accuracy of the summary (4 points)

Coverage of the summary (4 points) Coverage of the summary (4 points)

Critical thinking (8 points) Critical thinking (8 points)

Writing and organization (4 pints) Writing and organization (4 pints)

Total 20Total 20

Why the assignments?

Study: Many college students not learning to think Study: Many college students not learning to think critically critically (Sara Rimer, The Hechinger Report, reported in the Eagle 1-18-2011)(Sara Rimer, The Hechinger Report, reported in the Eagle 1-18-2011)

45% of students made no significant improvement in their 45% of students made no significant improvement in their critical thinking, reasoning or writing skills during the first critical thinking, reasoning or writing skills during the first two years of college. After four years, 36 % showed no two years of college. After four years, 36 % showed no significant gains in these so-called "higher order" thinking significant gains in these so-called "higher order" thinking skills.skills.

Students devoted less than 1/5 of their time each week to Students devoted less than 1/5 of their time each week to academic pursuits. By contrast, students spent 51 percent academic pursuits. By contrast, students spent 51 percent of their time — or 85 hours a week — socializing or in of their time — or 85 hours a week — socializing or in extracurricular activities.extracurricular activities.

Quizzes

5 questions. 2 points each. 5 questions. 2 points each.

Exams

Part 1: short essays/calculations, true and false

Part 2: long essays/calculations

Grades will be curved.

Review Questions and Review Sessions

RSC fireplace or Panera Café on Rock Road

What will we learn this What will we learn this semester ? semester ?

Part One: Globalization and Its Related Issues

Part Two: Foreign Exchange and the Global Financial Markets

Part Three: Trade, Policy and Immigration

Part One: Globalization and Its Related Issues

1. The U.S. in a Global Economy

A. Globalization and examples

What is globalization? Globalization is simultaneous an Globalization is simultaneous an economic,

cultural, and political phenomenon. It includes includes

the integration of world markets through the integration of world markets through increasing trade and capital mobility, increasing trade and capital mobility, the rapid diffusion of ideas and norms the rapid diffusion of ideas and norms transnational, and transnational, and the restructuring of power relationships and the restructuring of power relationships and political interests.political interests.

(i) Local Examples(i) Local Examples Wichita—food, cultural Wichita—food, cultural

activities, immigrantsactivities, immigrants Boeing—Onex—SpiritBoeing—Onex—Spirit Wal-Mart: the single Wal-Mart: the single

largest importer of largest importer of foreign-produced goods foreign-produced goods in the United in the United StatesStates

WSU Foreign Students The Sunflower 8/17/2011The Sunflower 8/17/2011

(ii) National Examples http://www.census.gov/ 8/16/2012

Yao Ming $17.7m 2011

David Beckham $40m 5/2010 to 5/2011

Daisuke Matsuzaka$10m 2011

The Rockets' The Rockets' offer to Lin offer to Lin would pay him would pay him $5 million in $5 million in the first year, the first year, $5.225 million $5.225 million in the second in the second and $14.8 and $14.8 million in the million in the third.third.

(iii) International Examples(iii) International Examples

McDonald’s in Spain and FranceMcDonald’s in Spain and France Number of McDanald’s restaurants 2010: 32,737 Number of McDanald’s restaurants 2010: 32,737

Case 1: Cadbury and Kraft 1/20/2010 USA Today

Cadbury is stronger in Cadbury is stronger in India, Turkey, South Africa, India, Turkey, South Africa, and Mexico.and Mexico.

On the flip side, Kraft could On the flip side, Kraft could promote Cadbury's sales in promote Cadbury's sales in Brazil, Russia and China.Brazil, Russia and China.

KraftKraftRevenue: $40.3 billion Revenue: $40.3 billion Net income: $2.5 billion Net income: $2.5 billion Employees: 98,000Employees: 98,000CadburyCadburyRevenue: $5.7 billion Revenue: $5.7 billion Net income: $564 million Net income: $564 million Employees: 45,000Employees: 45,000

Case 2: Starbucks in China 4/14/2010 WSJ

Starbucks opened its first store on the Chinese mainland in 1999.

It has only 376 stores on the China mainland, compared with 878 in Japan. The retailer has more than 11,000 outlets in the U.S.

Case 3: Wal-Mart Thinks Case 3: Wal-Mart Thinks Locally to Act Globally Locally to Act Globally

8/14/2009 WSJ8/14/2009 WSJ

Wal-Mart has struggled to Wal-Mart has struggled to extend its dominance extend its dominance across the globe. Now the across the globe. Now the retailer is tailoring retailer is tailoring inventories and stores to inventories and stores to local tastes -- and local tastes -- and exporting ideas and exporting ideas and products pioneered products pioneered outside the U.S.outside the U.S.

Case 4: Procter & GambleCase 4: Procter & Gamble

8/19/2010 WSJ P&G’s global thinking

Background: Consumers switched to a cheaper Background: Consumers switched to a cheaper substitutesubstitute

Old strategies: Rolling out new versions of old Old strategies: Rolling out new versions of old productsproducts

New strategies: (1) price cut, (2) New strategies: (1) price cut, (2) new marketsnew markets Main target: Brazil (170 m customers of the 190 m Main target: Brazil (170 m customers of the 190 m

population)population)

Case 5: Europe’s new direction

5-8-2012 USA Today5-8-2012 USA Today

B. Four Challenges to the U.S. (1) Financial Crisis and Euro CrisisFinancial Crisis and Euro Crisis

Congressional Report Congressional Report 4/13/20114/13/2011 Permanent Subcommittee on Investigations (PSI), US Permanent Subcommittee on Investigations (PSI), US

SenateSenate Four causes: Four causes:

(1) High Risk Lending: Washington Mutual Bank(1) High Risk Lending: Washington Mutual Bank

(2) Regulatory Failures: the Office of Thrift Supervision(2) Regulatory Failures: the Office of Thrift Supervision

(3) Inflated Credit Ratings: Moody’s and Standard & (3) Inflated Credit Ratings: Moody’s and Standard & Poor’sPoor’s

(4) Investment Bank Abuses: Goldman Sachs and (4) Investment Bank Abuses: Goldman Sachs and Deutsche BankDeutsche Bank

Root Cause: Housing Prices

How did the storm How did the storm develop?develop?

Step 1: Interest rate fallsStep 1: Interest rate falls

30-Year Conventional Mortgage Rate (1/19/2012)

12/2011: 3.96% 12/2011: 3.96%

Step 2: Securitization and Risky LoansStep 2: Securitization and Risky Loans

Credit scoresExperian, Fair Issac Model: 250-900Equifax, Beacon 5 Model: 300-850Trans Union, New Emperica Model: 300-850.

Subprime mortgageSubprime mortgage: :

A mortgage issued to a A mortgage issued to a borrower with impaired borrower with impaired credit, typically reflected in credit, typically reflected in a credit score below 620.a credit score below 620.

Alt-A mortgageAlt-A mortgage: :

A mortgage with an A- A mortgage with an A- credit rating. credit rating.

Inflated Credit Ratings Report by The Permanent Subcommittee on Investigations (PSI) of the US Senate April 13, 2011

Between 2004 and 2007, Moody’s and Between 2004 and 2007, Moody’s and S&P issued AAA credit ratings for the vast S&P issued AAA credit ratings for the vast majority of tens of thousands of U.S. majority of tens of thousands of U.S. residential mortgage backed securities residential mortgage backed securities (RMBS) and collateralized debt (RMBS) and collateralized debt obligations (CDOs). obligations (CDOs).

Inflated credit ratings contributed to the Inflated credit ratings contributed to the financial crisis by masking the true risk of financial crisis by masking the true risk of many mortgage related securities.many mortgage related securities.

Step 3: Home Prices and Home Ownership

Step 4: House Bubble Bursts, Defaults Increase

Step 5: Credit Crisis and Troubles Spiral

Effects of plunge in the stock markets Effects of plunge in the stock markets on 401(k),mutual funds, and insurance on 401(k),mutual funds, and insurance

Impact 1Impact 1

Impact 2Impact 2 US: 8.3% (July 2012)

Kansas: 6.1% (June 2012)

Bureau of Labor Statistics Bureau of Labor Statistics (BLS) for 2010(BLS) for 2010

UnE rate UnE rate Education attainedEducation attained Median weekly earningsMedian weekly earnings(Percent)(Percent) in 2010 (Dollars)in 2010 (Dollars)

1.9%1.9% Doctoral degreeDoctoral degree $1,550$1,5502.42.4 Professional degreeProfessional degree 1,610 1,6104.04.0 Master's degreeMaster's degree 1,272 1,2725.45.4 Bachelor's degreeBachelor's degree 1,038 1,0387.07.0 Associate degreeAssociate degree 767 7679.29.2 Some college, no degreeSome college, no degree 712 71210.310.3 High-school graduateHigh-school graduate 626 62614.914.9 Less than a high school diplomaLess than a high school diploma 444 444

8.2 8.2 All Workers All Workers 782 782

Policy: (1) Monetary Policy Policy: (1) Monetary Policy 1-30-2012 1-30-2012 WSJ WSJ

9/19/08: the government announced a plan to 9/19/08: the government announced a plan to purchase illiquid, risky mortgage backed purchase illiquid, risky mortgage backed securities, estimated to be $securities, estimated to be $700 billion (TARP).

1/16/09 Obama’s Stimulus Package: The plan The plan includes roughly $550 billion in spending includes roughly $550 billion in spending and $275 billion in tax cuts.and $275 billion in tax cuts.

Policy: (2) Government Bailouts and Fiscal Policy

Cash For ClunkersCash For Clunkers: : vehicles purchased after vehicles purchased after July 1, 2009 are eligible July 1, 2009 are eligible for refund vouchers for refund vouchers worth $3,500 to $4,500 worth $3,500 to $4,500 on traded-in gas on traded-in gas guzzlers. guzzlers. The program The program ended on 8/24/09.ended on 8/24/09.

Chrysler files for Chrysler files for bankruptcy bankruptcy 4/30/20094/30/2009

GM bankruptcy: GM bankruptcy: End of an era End of an era 6/1/20096/1/2009

Policy: (3) Regulations

Senate Passes Finance Bill, Biggest Regulatory Overhaul of Wall Street Since Depression Moves Closer to Law 5/21/2010 WSJ

1.1. Establish a new council of "systemic risk" regulators. Establish a new council of "systemic risk" regulators.

2.2. Create a new consumer protection division within the Create a new consumer protection division within the Federal Reserve. Federal Reserve.

3.3. Empower the Federal Reserve to supervise the largest, Empower the Federal Reserve to supervise the largest, most complex financial companies. most complex financial companies.

4.4. Allow the government in extreme cases to seize and Allow the government in extreme cases to seize and liquidate a failing financial company.liquidate a failing financial company.

5.5. Give regulators new powers to oversee the giant Give regulators new powers to oversee the giant derivatives market.derivatives market.

Whose fault from a global perspective? Whose fault from a global perspective?

Two interesting reportsTwo interesting reports(1) The Global Financial Crisis: Getting Past the (1) The Global Financial Crisis: Getting Past the

Blame Game, Blame Game, Brookings 1-29-2009 Brookings 1-29-2009 Bernanke’s Bernanke’s SSaving Glut Hypothesisaving Glut Hypothesis

(2) (2) Chinese Premier Blames Recession on U.S. Chinese Premier Blames Recession on U.S. Actions, Beijing Rethinks Some of Its Actions, Beijing Rethinks Some of Its American Investments, American Investments, WSJ 1-29-2009 WSJ 1-29-2009

““Unsustainable model of development, Unsustainable model of development, characterized by prolonged low savings and characterized by prolonged low savings and high consumption.”high consumption.”

Euro Crisis

Euro Area Growth Rate, Q2 Euro Area Growth Rate, Q2 20122012

Euro Area Unemployment Rate, Euro Area Unemployment Rate, Q2 2012Q2 2012

Among the Member States, the lowest Among the Member States, the lowest unemployment rates were recorded in Austria unemployment rates were recorded in Austria (4.5%), the Netherlands (5.1%), Germany and (4.5%), the Netherlands (5.1%), Germany and Luxembourg (both 5.4%), and the highest in Luxembourg (both 5.4%), and the highest in Spain (24.8%) and Greece (22.5% in AprilSpain (24.8%) and Greece (22.5% in April2012).2012).

Euro Debt CrisisEuro Debt Crisis

Spanish Banks' Bad Loans Surge 8-17-2012 WSJ8-17-2012 WSJ

Nonperforming loans grew by €8.39 billion Nonperforming loans grew by €8.39 billion ($10.37 billion) in the month of June, to ($10.37 billion) in the month of June, to €164.36 billion, or 9.42% of total outstanding €164.36 billion, or 9.42% of total outstanding loans compared with 8.95% in May.loans compared with 8.95% in May.

http://live.wsj.com/video/eurozone-rot-keeps-spreading-/90677520-FA4E-4E15-8776-88DADB9EDC01.html?KEYWORDS=euro+crisis#!90677520-FA4E-4E15-8776-88DADB9EDC01

PIGS (PIIGS) and the EuroPIGS (PIIGS) and the Euro PIIGS: Portugal, (Italy,) Ireland, Greece PIIGS: Portugal, (Italy,) Ireland, Greece

and Spainand Spain

Debt crisis: Angela Merkel and Debt crisis: Angela Merkel and Francois Hollande pledge to Francois Hollande pledge to back euroback euro 7-27-2012 The Telegraph7-27-2012 The Telegraph

They issued a joint statement following a crisis They issued a joint statement following a crisis telephone call echoing Mario Draghi's promise telephone call echoing Mario Draghi's promise that the European Central Bank would do that the European Central Bank would do whatever it took to save the euro. whatever it took to save the euro.

Four Challenges to the U.S.: (2) Oil Price (8-16-2012 St. Louis Fed)

Top World Oil Producers, 2011 Top World Oil Producers, 2011 www.eia.gov 8-16-2012 8-16-2012

U.S. Crude Oil ImportsU.S. Crude Oil Imports

The top five exporting countries The top five exporting countries accounted for 67 percent of accounted for 67 percent of United States crude oil imports in United States crude oil imports in May while the top ten sources May while the top ten sources accounted for approximately 87 accounted for approximately 87 percent of all U.S. crude oil percent of all U.S. crude oil imports.imports.

http://www.eia.gov/ (8/22/2011) (8/22/2011)

Obama Rejects Canada-Texas Obama Rejects Canada-Texas Oil Pipeline _ for Now Oil Pipeline _ for Now 1/19/2012 ABC1/19/2012 ABC

http://abcnews.go.com/Politics/wireStory/state-department-decision-oil-pipeline-15387299

Impacts on Current AccountImpacts on Current Account U.S. Net Imports of Crude Oil and Petroleum Products U.S. Net Imports of Crude Oil and Petroleum Products

(Thousand Barrels per Day)(Thousand Barrels per Day) Around 50% of the trade deficit is due to Around 50% of the trade deficit is due to energy prices

Impacts on Industries Impacts on Industries 1/22/2009 1/22/2009 WSJWSJ

Rex Tillerson, Chairman Rex Tillerson, Chairman and CEO, ExxonMobiland CEO, ExxonMobil

o 2006: 18.4 m2006: 18.4 mo 2007: 21.7 m2007: 21.7 mo 2008: 23.9 m2008: 23.9 mo 2009: 27.2 m2009: 27.2 mo 2010: 28.9 m2010: 28.9 mo 2011: 34.9 m2011: 34.9 m

What the Top What the Top 1% of 1% of

Earners Earners Majored In Majored In 1-18-2012 NYT1-18-2012 NYT

Reasons for High Oil PriceReasons for High Oil Price

1. Demand

Strong economies worldwide have led to rising demand for oil for Strong economies worldwide have led to rising demand for oil for years. Demand growth is strongest in China, the USA and the Middle years. Demand growth is strongest in China, the USA and the Middle East.East.

   

2. Supply

Supply has lagged: OPEC in 2006 and early 2007 cut production; the Supply has lagged: OPEC in 2006 and early 2007 cut production; the oil cartel increased production at the end of 2007 and gradually boost oil cartel increased production at the end of 2007 and gradually boost production throughout 2008. Production outside of OPEC member production throughout 2008. Production outside of OPEC member countries has not kept pace with demand gains. countries has not kept pace with demand gains.

OPEC was found in 1960. Currently, the organization has a total of 12 member OPEC was found in 1960. Currently, the organization has a total of 12 member countries.countries.

       

3. Geopolitical worries

Much of the world’s oil reserves are in the Middle East, where tensions Much of the world’s oil reserves are in the Middle East, where tensions have led to concerns about the stability of oil supplies. That has led have led to concerns about the stability of oil supplies. That has led investors to add a risk premium into oil prices. (Libya and Iran) investors to add a risk premium into oil prices. (Libya and Iran)

   

EU Bans Imports of Iran's Oil, EU Bans Imports of Iran's Oil, Raising Pressure on Tehran Raising Pressure on Tehran

1-24-2012 WSJ1-24-2012 WSJ

Why? The Iranian leadership has failed to restore Why? The Iranian leadership has failed to restore international confidence in the exclusively peaceful international confidence in the exclusively peaceful nature of its nuclear program. nature of its nuclear program.

The ban is set to take effect on July 1.The ban is set to take effect on July 1.

Oil Climbs 1.3% on EU Oil Climbs 1.3% on EU Embargo Embargo 1-23-2012 WSJ1-23-2012 WSJ

The EU imports about 600,000 barrels of oil a day from The EU imports about 600,000 barrels of oil a day from Iran—close to a quarter of Tehran's exports of 2.6 Iran—close to a quarter of Tehran's exports of 2.6 million barrels a day. million barrels a day.

Light, sweet crude oil for March delivery on the New Light, sweet crude oil for March delivery on the New York Mercantile Exchange settled 1.3%, or $1.25 higher, York Mercantile Exchange settled 1.3%, or $1.25 higher, at $99.58 a barrel.at $99.58 a barrel.

The U.S. has been lobbying Iranian oil buyers in Asia The U.S. has been lobbying Iranian oil buyers in Asia and elsewhere to reduce their purchases or face U.S. and elsewhere to reduce their purchases or face U.S. sanctions for conducting business with Iran's central sanctions for conducting business with Iran's central bank. bank.

China and India did not cooperate.China and India did not cooperate.

Renewed Iran Threat Renewed Iran Threat Rattles Oil Markets Rattles Oil Markets 2-21-2012 WSJ2-21-2012 WSJ

EU ban on Iranian oil starting EU ban on Iranian oil starting July 1. July 1.

The threat: Iran will sell oil to The threat: Iran will sell oil to European countries in terms of European countries in terms of two- to five-year contracts and two- to five-year contracts and without any preconditions, without any preconditions, and…otherwise the exports will and…otherwise the exports will be canceled.be canceled.

4. Dollar

Oil is traded in dollars. For consumers in countries Oil is traded in dollars. For consumers in countries whose currencies have appreciated against the dollar, whose currencies have appreciated against the dollar, the increase in oil prices has had less of a bite and the increase in oil prices has had less of a bite and demand for oil has been strong. For oil-producing demand for oil has been strong. For oil-producing countries, the decline in the dollar may lead them to countries, the decline in the dollar may lead them to keep oil off the market to prop up prices.keep oil off the market to prop up prices.

5. Speculation

Money has flowed into oil and other commodity markets. Money has flowed into oil and other commodity markets. But speculation is really a symptom of the market But speculation is really a symptom of the market fundamentals.fundamentals.

7/29/2011 Reuters Goldman Sach's Turns Warehouses Into Surprising Sources Of Revenue

As Oil Spiked, Many Traded As Oil Spiked, Many Traded 8/18/2011 WSJ8/18/2011 WSJ

The secretive world of oil The secretive world of oil trading: Wall Street, foreign trading: Wall Street, foreign pension funds, corporate pension funds, corporate icons and even an Ivy icons and even an Ivy League endowment. League endowment.

The list could fuel calls for a The list could fuel calls for a crackdown on oil crackdown on oil speculators.speculators.

Banks such as Banks such as Goldman Sachs Group Inc. Inc. and and Morgan Stanley, which , which have long played a central have long played a central role in oil trading, dominate role in oil trading, dominate the list.the list.

Economic Effects – Micro Level Economic Effects – Micro Level (oil market)(oil market)

Economic Effects – Macro Level Economic Effects – Macro Level (country) (country)

(See handout for a review of AD-AS)(See handout for a review of AD-AS)

Four Challenges to the U.S. (3) Offshore Outsourcing (Offshoring)

Outsourcing Outsourcing is the process of contracting a is the process of contracting a third party to manage or operate a non-core third party to manage or operate a non-core business function in order to reduce cost and business function in order to reduce cost and increase efficiency. increase efficiency. 

Outsourcing is typically conducted offsite by Outsourcing is typically conducted offsite by companies who have the infrastructure, companies who have the infrastructure, manpower and know how to run the manpower and know how to run the business function at a profit. business function at a profit.

Factors contributing to outsourcing:

1. Low labor costs

2. Communication/transportation costs

3. Tax

4. Greater access to technical skill sets

5. Regulations

Factors contributing to outsourcing (1) 1/22/2009 WSJ A12

China orders rise in China orders rise in minimum wage rates minimum wage rates 6/17/2010 WSJ6/17/2010 WSJ

Effective 7/1/2010, the minimum Effective 7/1/2010, the minimum wage in Guangdong will increase wage in Guangdong will increase by 10 percent to 1,100 yuan per by 10 percent to 1,100 yuan per month (around $162) from 1,000 month (around $162) from 1,000 yuan ($147). The minimum wage yuan ($147). The minimum wage in Beijing will rise by 20 percent to in Beijing will rise by 20 percent to 960 yuan ($141) a month from 960 yuan ($141) a month from 800 yuan ($118).800 yuan ($118).

Factors contributing to outsourcing (2)

Average Phone cost of call to the USAverage Phone cost of call to the US

Phone card: $20 for 1,400 minutes. 1.4 Phone card: $20 for 1,400 minutes. 1.4 cents per minutes. cents per minutes.

Worldwide Air Revenue per Ton-Worldwide Air Revenue per Ton-KilometerKilometer

Factors contributing to outsourcing (3)

Beyond the Border, Do What You Do Best, Outsource the Rest? Federal Reserve Bank of Dallas, Southwest Economy, Issue 6, November/December 2003

America the Uncompetitive 8/15/08 America the Uncompetitive 8/15/08 WSJWSJ 20102010

Factors contributing to outsourcing (4) NSF

Overall: Students enrolled in science and engineering in fall 2009 (top 10):

1. India 67,8001. India 67,800 2. China 53,7402. China 53,740 3. S. Korea 19,8503. S. Korea 19,850

Example of Outsourcing (1)Cessna November 28, 2007 WSJ

• •  Starter Plane:Starter Plane: Cessna hopes Cessna hopes building the SkyCatcher in building the SkyCatcher in China will help keep prices low China will help keep prices low enough to attract buyers.enough to attract buyers.

• • Fill Cockpits?Fill Cockpits? Cessna hopes it Cessna hopes it will appeal to flight schools and will appeal to flight schools and new fliers amid a tight global new fliers amid a tight global market for pilots.market for pilots.

• •  Shrinking Base:Shrinking Base: It also hopes It also hopes the plane will help counter the the plane will help counter the dwindling number of U.S. pilots, dwindling number of U.S. pilots, who face rising costs to own who face rising costs to own and fly planes.and fly planes.

Example of Outsourcing (2)Apple

AppleAppleTaiwan Makers May Wring Taiwan Makers May Wring Big Profits From iPhone Big Profits From iPhone WSJ, January 11, 2007WSJ, January 11, 2007

Theoretical Model: Bhagwati, Panagariya and Srinivasan.

“The Muddles over Outsourcing.” The Journal of Economic Perspectives, Fall 2004

Two important concepts: (1) Diminishing Return,

(2) Profit Maximization, MPL = (W/P)

marginal product = real wage

Jagdish Bhagwati, Arvind Panagariya, and T.N. Srinivasan

As skills in China and India improve, trade with As skills in China and India improve, trade with them will become more like that with other rich them will become more like that with other rich countries, from which America has historically countries, from which America has historically benefited.benefited.

Forrester Research predicts that 3.4m jobs will Forrester Research predicts that 3.4m jobs will be outsourced by 2015. That may sound be outsourced by 2015. That may sound enormous, but it implies an annual outflow of enormous, but it implies an annual outflow of only only 0.5%0.5% of the jobs in the industries affected. of the jobs in the industries affected.

The other side of the story (1)

The role multinational The role multinational companies play in China's companies play in China's growing pollution. One way growing pollution. One way China's factories have China's factories have historically kept costs down historically kept costs down is by dumping waste water is by dumping waste water directly into rivers. directly into rivers.

Montenegro’s high growth Montenegro’s high growth rate and pollutionrate and pollution

Environmental Kuznets Curve” (EKC) Hypothesis

Simon Smith Kuznets (April 30, 1901 – July 8, Simon Smith Kuznets (April 30, 1901 – July 8, 1985) was a Russian American economist at 1985) was a Russian American economist at the Wharton School of the University of the Wharton School of the University of Pennsylvania who won the 1971 Nobel Pennsylvania who won the 1971 Nobel Memorial Prize in Economic Sciences. Memorial Prize in Economic Sciences.

““Confronting the Environmental Kuznets Confronting the Environmental Kuznets Curve,” Journal of Economic Perspectives Vol. Curve,” Journal of Economic Perspectives Vol. 16, No. 1, 200216, No. 1, 2002

Definition of EKC Definition of EKC Gallagher, Kevin P. “Free Trade and the Environment: Mexico, NAFTA, and Beyond” Americas Gallagher, Kevin P. “Free Trade and the Environment: Mexico, NAFTA, and Beyond” Americas Program, Interhemispheric Resource Center 9/17/2004Program, Interhemispheric Resource Center 9/17/2004

The EKC hypothesizes that the relation between income per capita and emissions has an inverted U-shape.

At relatively low income levels, emissions increase with income, but after some “turning point”, emissions decrease with income.

Economists hypothesized that environmental improvement beyond the “turning point” happened for three reasons.

(1)Scale effects(2)Composition effects(3)Technique effects

Richmond, Amy K. & Kaufmann, Robert K., 2006. "Is there a Richmond, Amy K. & Kaufmann, Robert K., 2006. "Is there a turning point in the relationship between income and energy turning point in the relationship between income and energy use and/or carbon emissions?," Ecological Economics, vol. use and/or carbon emissions?," Ecological Economics, vol. 56(2), pages 176-189, February56(2), pages 176-189, February

Empirical evidenceEmpirical evidence

1. EKC found to hold for some pollutants (sulphur 1. EKC found to hold for some pollutants (sulphur dioxide, particles), but others increase dioxide, particles), but others increase monotonically with income (carbon emissions).monotonically with income (carbon emissions).

2. Differences if study OECD countries or non-2. Differences if study OECD countries or non-OECD countries. No or higher turning point for the OECD countries. No or higher turning point for the latter for CO2 emissions, for example. (Richmond latter for CO2 emissions, for example. (Richmond and Kaufman, 2006)and Kaufman, 2006)

The policy issue?The policy issue?

EKCs have been used as an argument that EKCs have been used as an argument that economic growth and increased environmental economic growth and increased environmental quality go hand in hand. They have also been quality go hand in hand. They have also been used in support of a do-nothing policy.used in support of a do-nothing policy.

This is not very useful since, if there is a turning This is not very useful since, if there is a turning point, we would like to know what factors explain it point, we would like to know what factors explain it before making assessments of whether before making assessments of whether environmental policy is necessary or not.environmental policy is necessary or not.

The other side of the story (2)

JET BLUES, Boeing Scrambles to Repair Problems With New Plane, Layers of Outsourcing Slow 787 Production; 'Hostage to Suppliers‘’12/7/2007 WSJ

To lower the $10 billion or so it would cost to develop the To lower the $10 billion or so it would cost to develop the the Dreamliner, Boeing authorized a team of parts the Dreamliner, Boeing authorized a team of parts suppliers to design and build major sections of the craft, suppliers to design and build major sections of the craft, which it planned to snap together at its Seattle-area which it planned to snap together at its Seattle-area factory. factory.

But outsourcing so much responsibility has turned out to But outsourcing so much responsibility has turned out to be far more difficult than anticipated.be far more difficult than anticipated.

Global Supply Global Supply ChainChain

Boeing Set to Buy Dreamliner Plant  7/8/09 WSJ

Boeing agreed to buy manufacturing operations from Vought, a key Dreamliner supplier, for $580 million.

Boeing Delays New Jet Again 6/24/09 WSJ

Boeing again delayed the first 787 Dreamliner flight due to a structural flaw, which further dents the company's credibility and could hurt the jet's profitability. Boeing Halts Dreamliner

Plant  8/14/2009 WSJ

Boeing has ordered work halted at a fuselage assembly plant in Italy working on its marquee 787 Dreamliner aircraft.

Finally took off on Dec. 15, 2009

Cessna retooling delays Cessna retooling delays deliveries of Skycatchers deliveries of Skycatchers

2/4/2010 Wichita Eagle2/4/2010 Wichita Eagle

Deliveries of its light sport aircraft will be delayed from Deliveries of its light sport aircraft will be delayed from six to 10 months. six to 10 months.

The company decided to build the $112,250 plane at The company decided to build the $112,250 plane at the Shenyang Aircraft Corp. in China so it could be the Shenyang Aircraft Corp. in China so it could be sold at a competitive price.sold at a competitive price.

Last year during flight testing, two test aircraft crashed Last year during flight testing, two test aircraft crashed after they could not recover from planned aggressive after they could not recover from planned aggressive spins.spins.

Where are the best places to Where are the best places to outsource? outsource?

Diana Farrell, “Smarter Offshoring.” Harvard Business Review June 2006

India, eastern Europe, and Russia.India, eastern Europe, and Russia. MGI studied 28 low-wage countries.MGI studied 28 low-wage countries. There were 6.4 million young professionals There were 6.4 million young professionals

suitable for offshore jobs in 2003. suitable for offshore jobs in 2003. ““Suitable” professionals are Suitable” professionals are university university

graduates with up to 7 years of experience graduates with up to 7 years of experience who who have the skills and attributes that multinationals have the skills and attributes that multinationals want. want.

More than 90% of the supply of young professionals suitable for work in More than 90% of the supply of young professionals suitable for work in offshore centers reside outside the current hot spot cities and 72% live outside offshore centers reside outside the current hot spot cities and 72% live outside India.India.

Onshoring or Reshoring8/6/2010 USA Today

Examples: Examples: General Electric, NCR, Caterpillar, and Ford.General Electric, NCR, Caterpillar, and Ford.

Reasons:

1)1)Rising Chinese wages and shipping costs Rising Chinese wages and shipping costs

--Chinese wages have jumped 15% a year--Chinese wages have jumped 15% a year

--Shipping costs are up about 71% the past four --Shipping costs are up about 71% the past four years years

2)2)poor quality of goods made by foreign contractorspoor quality of goods made by foreign contractors

3)3)theft of their intellectual propertytheft of their intellectual property

4)4)long product-delivery cycles that make them less long product-delivery cycles that make them less responsive to customer demandresponsive to customer demand

The end of cheap ChinaWhat do soaring Chinese wages mean for global manufacturing? What do soaring Chinese wages mean for global manufacturing?

2012-3-10 Economist2012-3-10 Economist

Auto Makers Now Import Jobs Labor Deals at Ford, GM to Shed Veterans for New Hires, Returning Some Production From Abroad 10/5/2011 WSJ

ReshoringReshoring New hires are expected to earn half the roughly $28 an New hires are expected to earn half the roughly $28 an

hour wage that veteran auto workers make. The wage hour wage that veteran auto workers make. The wage shift is paving the way for the hiring of up to 12,000 U.S. shift is paving the way for the hiring of up to 12,000 U.S. workers through 2015, including 7,000 previously workers through 2015, including 7,000 previously announced jobs.announced jobs.

Ford: Move Fusion from Mexico to Flat Rock, Mich. Ford: Move Fusion from Mexico to Flat Rock, Mich. Another Ford plant in Kentucky will assemble Another Ford plant in Kentucky will assemble commercial vans that the company now builds in Turkey. commercial vans that the company now builds in Turkey.

Case of Case of Rolls-Royce Rolls-Royce

10-20-2011 WSJ10-20-2011 WSJ

How to Stop Outsourcing? Book Review: Assembled Elsewhere 1-25-2011 WSJ

To manufacture the Kindle, To manufacture the Kindle, Amazon couldn't find enough Amazon couldn't find enough expertise and capacity in the U.S. expertise and capacity in the U.S. It headed to Taiwan.It headed to Taiwan.

Policy suggestions: Policy suggestions:

(1) Cut taxes, (1) Cut taxes,

(2) R&D tax credit permanent,(2) R&D tax credit permanent,

(3) Federal financial incentives, (3) Federal financial incentives,

(4) “Growth bank”, (4) “Growth bank”,

(5) Overhaul K-12 education. (5) Overhaul K-12 education.

Four Challenges to the U.S. (4) The Dollar’s Value and Current Account Deficits 8-17-2012 8-17-2012

Main factor of the dollar Main factor of the dollar depreciationdepreciation

Effects of a declining dollarEffects of a declining dollar Helps exportsHelps exports Increases import costsIncreases import costs Increases pressure on domestic inflationIncreases pressure on domestic inflation Other effectsOther effects

(1) Foreign investment in the U.S.?(1) Foreign investment in the U.S.?

(2) US investment in other countries?(2) US investment in other countries?

(3) Cost of traveling to other countries?(3) Cost of traveling to other countries?

(4) Foreign exchange reserve? (4) Foreign exchange reserve?

Example 1:Example 1: German Auto Makers Rev Up U.S. German Auto Makers Rev Up U.S. Output, BMW and Mercedes Seek Hedge Against Weak Output, BMW and Mercedes Seek Hedge Against Weak Dollar, Giving the South an Economic Boost 8-14-2007 Dollar, Giving the South an Economic Boost 8-14-2007 WSJWSJ

Example 2: Central Banks Boost Holdings in Euros at Expense of DollarJanuary 24, 2005, WSJ

More than two-thirds of the world's central banks have boosted the euro holdings in their currency reserves over the past two years.

The findings cast further doubt on the U.S.'s ability to rely on dollar-buying from central banks, which are among the world's biggest holders of foreign-currency assets.

Example 3: Senate Moves to

Punish China for Yuan's Low Value 10-4-2011 WSJ

The Senate voted yesterday, 79-19, move The Senate voted yesterday, 79-19, move ahead with a bill that would punish China for ahead with a bill that would punish China for keeping the value of its currency low.keeping the value of its currency low.

Why blame on the Chinese yuan? $1 = 6.3137 yuan as of 1-17-2012

The Top Ten Countries by The Top Ten Countries by Foreign Exchange ReservesForeign Exchange Reserves

China’s Treasury Holdings China’s Treasury Holdings Make U.S. Woes Its Own Make U.S. Woes Its Own 7-18-2011 NYT7-18-2011 NYT

A Falling Dollar Will Mean a A Falling Dollar Will Mean a Faster U.S. Recovery Faster U.S. Recovery 8-1-2011 WSJ 8-1-2011 WSJ

Martin Feldstein (Harvard)Martin Feldstein (Harvard) U.S. exports are only 10% of GDP, but U.S. exports are only 10% of GDP, but

account for more than 50% of GDP growth account for more than 50% of GDP growth in the past four quarters. in the past four quarters.

4 strong market forces 4 strong market forces will put downward will put downward pressure on the dollar during coming years. pressure on the dollar during coming years.

Four market forces to Four market forces to depreciate the dollardepreciate the dollar

1.1. Selling by sovereign wealth funds and other Selling by sovereign wealth funds and other international holders of large dollar balances.international holders of large dollar balances.

2.2. Interest rate difference between short-term dollar Interest rate difference between short-term dollar securities and similar euro securities.securities and similar euro securities.

3.3. Enormous U.S. trade deficit, nearly $500 billion Enormous U.S. trade deficit, nearly $500 billion over the past 12 months.over the past 12 months.

4.4. The likely decline in China's current-account The likely decline in China's current-account surplus and therefore in China's demand for U.S. surplus and therefore in China's demand for U.S. bonds. bonds.

The resilient dollar The resilient dollar Why the greenback has so far withstood the Why the greenback has so far withstood the panic in financial markets panic in financial markets 10/2/08 The Economist 10/2/08 The Economist

Kristin Forbes of MIT

1. Against the theory of 1. Against the theory of risk diversification.risk diversification.

2. Lack good options in 2. Lack good options in foreign (developing) foreign (developing) counties.counties.

Common Measures of Globalization1. Exports and imports of goods and services as a percentage of GDP

What Do We Sell To The What Do We Sell To The World in 2011? World in 2011?

Top 5: Industrial supplies and capital Top 5: Industrial supplies and capital goods account for about $1 trillion.goods account for about $1 trillion.

How about Kansas?

Total KANSAS Exports and % Share of U.S. Total 2005: 6,736(m) 0.7 2006: 8,636 0.82007: 10,277 0.92008: 12,5141.02009: 8,917 0.82010: 9,9050.8

The state's largest export markets: Canada, Mexico, and Japan.

The state’s top exports (2010): 1) CIVILIAN AIRCRAFT, ENGINES, EQUIPMENT, AND PARTS 2) MEAT3) ?

2. Foreign Direct Investment 2. Foreign Direct Investment Foreign Direct Investment (FDI) is investment of foreign Foreign Direct Investment (FDI) is investment of foreign

assets into domestic structures, equipment, and assets into domestic structures, equipment, and organizations. organizations.

FDI does not include foreign investment into the stock FDI does not include foreign investment into the stock markets. markets.

FDI is believed to be more useful to a country than FDI is believed to be more useful to a country than investments in the equity of its companies. investments in the equity of its companies. Why? Why?

(1) Equity investments are potentially "hot money.“ (1) Equity investments are potentially "hot money.“

(2) FDI is durable. (2) FDI is durable.

Motives for Direct Foreign Motives for Direct Foreign Investment (1) Investment (1)

Revenue-Related MotivesRevenue-Related Motives

a. Attract New Sources of Demanda. Attract New Sources of Demand

b. Enter Profitable Marketsb. Enter Profitable Markets

c. Exploit Monopolistic Advantagesc. Exploit Monopolistic Advantages

d. React to Trade Restrictionsd. React to Trade Restrictions

e. Diversify Internationallye. Diversify Internationally

Motives for Direct Foreign Motives for Direct Foreign Investment (2) Investment (2)

Cost-Related Motives: Reduce CostsCost-Related Motives: Reduce Costs

a. Fully Benefit From Economies of Scalea. Fully Benefit From Economies of Scale

b. Use Foreign Factors of Productionb. Use Foreign Factors of Production

c. Use Foreign Raw Materialsc. Use Foreign Raw Materials

d. Use Foreign Technologyd. Use Foreign Technology

e. React to Exchange Rate Movementse. React to Exchange Rate Movements

FDI in China FDI in China

FDI in China: FDI in China: Foreign Direct Investment in China Rises 17%Foreign Direct Investment in China Rises 17% 1-19-2011 WSJ1-19-2011 WSJ

Inbound FDI in 2010 rose Inbound FDI in 2010 rose 17% to $105.74 billion.17% to $105.74 billion.

About 23% of FDI last year About 23% of FDI last year flowed into China's real-flowed into China's real-estate market.estate market.

Investment overseas in Investment overseas in nonfinancial sectors by nonfinancial sectors by Chinese companies totaled Chinese companies totaled $59 billion last year, up $59 billion last year, up 36.3% from a year earlier36.3% from a year earlier

China’s Outward Investment: China's Next Buying Spree: Foreign Companies

Charles Wolf Jr. 1-24-2011 WSJ

From 2007 through the first half of 2010, From 2007 through the first half of 2010, Chinese buyers—state, private and in Chinese buyers—state, private and in between—acquired 400 companies located between—acquired 400 companies located outside of the country. outside of the country.

China's share of the total number was 3.2%, China's share of the total number was 3.2%, and its share of total acquisition value was and its share of total acquisition value was 6.6%. 6.6%.

Reasons for the trendReasons for the trend

(1) China has high rate of domestic savings—(1) China has high rate of domestic savings—above 45% of GDP. (Note: US 10.86%) above 45% of GDP. (Note: US 10.86%)

(2) China has shifted its focus away from (2) China has shifted its focus away from investing in U.S. government debt. investing in U.S. government debt.

(3) Beijing's interest in acquiring foreign (3) Beijing's interest in acquiring foreign companies that have rich holdings of natural companies that have rich holdings of natural resources, high-technology or emergent resources, high-technology or emergent technologies, and financial know-how and close technologies, and financial know-how and close connections with other financial institutions. connections with other financial institutions.

Foreign Direct Investment Foreign Direct Investment in the U.S. in the U.S.

Foreign Direct Investment into the U.S. by Country, 2010

How Foreign Direct Investment Benefits the United States

  1. 1. Foreign Direct Investment (FDI) Creates New Jobs: Foreign Direct Investment (FDI) Creates New Jobs: U.S. affiliates of foreign companies (majority owned) U.S. affiliates of foreign companies (majority owned) employ 5.3 million U.S. workers, or employ 5.3 million U.S. workers, or 4.7%4.7% of private of private industry employment. industry employment.

2. Foreign Investment Boosts Wages:2. Foreign Investment Boosts Wages: Some studies have Some studies have found that foreign companies have paid wages in the past found that foreign companies have paid wages in the past that were as much as that were as much as 15%15% higher on average than wages higher on average than wages paid by U.S. companies. paid by U.S. companies.

  3. 3. Foreign Investment Strengthens U.S. Manufacturing: Foreign Investment Strengthens U.S. Manufacturing: 41 %41 % of the jobs related to U.S. affiliates of foreign of the jobs related to U.S. affiliates of foreign companies are in the manufacturing sector. companies are in the manufacturing sector.

4. Foreign Investment Brings in New Research, Technology, and Skills

5. Foreign Investment Contributes to Rising U.S. Productivity

6. Foreign Investment Contributes to U.S. Tax Revenues: In 2002, foreign affiliates paid $17.8 billion in taxes, which represented 12 % of U.S. corporate tax revenues.

7. Foreign Investment Can Help U.S. Companies Penetrate Foreign Markets, and Increase U.S. Exports: Approximately 21 % of all U.S. exports come from U.S. subsidiaries of foreign companies.

8. Foreign Investment Helps Keep U.S. Interest Rates Low

One Interesting Question: One Interesting Question: “Considering the Capital Account.” “Considering the Capital Account.” International Economic TrendInternational Economic Trend FRB FRB St. Louis, Nov. 2004St. Louis, Nov. 2004

Why Does U.S. Investment Abroad Earn Higher Returns Than Foreign Investment in the United

States? CBO Economic and Budget Issue Brief Nov. 2005

3. Immigrants http://www.youtube.com/watch?v=YhEl6HdfqWM&feature=related

Nearly two million immigrants could benefit Nearly two million immigrants could benefit from the from the Deferred Action for Childhood Deferred Action for Childhood ArrivalsArrivals (DACA) program, which began (DACA) program, which began accepting applications 8/15. accepting applications 8/15.

Qualifications: Qualifications:

(1) arrived in the U.S. before turned 16.(1) arrived in the U.S. before turned 16.

(2) 30 or younger and have lived continuously in (2) 30 or younger and have lived continuously in the country for at least five years. the country for at least five years.

(3) Must be enrolled in school in the U.S., have (3) Must be enrolled in school in the U.S., have graduated from high school here or served in graduated from high school here or served in the U.S. military. the U.S. military.

What’s in the news? “Illegal Immigrants Flock to Youth Program” 8-16-2012 WSJ

Policy Debate on immigration law Policy Debate on immigration law (Arizona)(Arizona) 4/23/2010 WSJ4/23/2010 WSJ

Arizona's law orders Arizona's law orders immigrants to carry their immigrants to carry their alien registration alien registration documents at all times documents at all times and requires police to and requires police to question people if there's question people if there's reason to suspect they're reason to suspect they're in the United States in the United States illegally.illegally.

Judge Blocks Arizona’s Judge Blocks Arizona’s Immigration 7/28/2010Immigration 7/28/2010

Policy Debate on Immigration Law (Georgia) 7/3/2011 WSJ

A new law targeting undocumented immigrants has gone into A new law targeting undocumented immigrants has gone into effect in Georgia, with the most controversial two parts put on effect in Georgia, with the most controversial two parts put on hold.hold.

(1) to check the immigration status of suspects without proper (1) to check the immigration status of suspects without proper identification and to detain illegal immigrants. identification and to detain illegal immigrants.

(2) creates a state penalty for people who knowingly and willingly (2) creates a state penalty for people who knowingly and willingly transport or harbor illegal immigrants while committing another transport or harbor illegal immigrants while committing another crime.crime.

Policy Debate on Immigration Law (Alabama) 8-28-2011 NYT

Alabama’s law takes effect 9/1/2011. The Alabama’s law takes effect 9/1/2011. The Nation’s Cruelest Immigration Law Nation’s Cruelest Immigration Law

Added items such as: criminalizes working, Added items such as: criminalizes working, renting a home; nullifies any contracts when renting a home; nullifies any contracts when one party is an undocumented immigrant; one party is an undocumented immigrant; requires public school officials to determine requires public school officials to determine students’ immigration status and report back to students’ immigration status and report back to the state.the state.

Policy Debate on Birthright Policy Debate on Birthright Citizenship Citizenship 2010-8-12 USA Today2010-8-12 USA Today

““Births up for those in USA illegally”Births up for those in USA illegally” The total number of children in the USA born to The total number of children in the USA born to

illegal immigrants on U.S. soil jumped to 5.1 illegal immigrants on U.S. soil jumped to 5.1 million in 2009million in 2009, representing , representing 7% of all children of all children under the age of 18 in the U.S. under the age of 18 in the U.S.

Some senators are calling for a revision of the Some senators are calling for a revision of the 14th Amendment that grants citizenship to 14th Amendment that grants citizenship to anyone born in the United States.anyone born in the United States.

Immigration and the Economy Illegal Immigrants Numbers Steady 2-2-2011 WSJ

2010 Undocumented: 11.2 m (4% of U.S. population, Pew Hispanic Center). 2011: 11.5 m.2010 Undocumented: 11.2 m (4% of U.S. population, Pew Hispanic Center). 2011: 11.5 m. Illegal immigrants in the work force: 8 m (5.2% of labor force)Illegal immigrants in the work force: 8 m (5.2% of labor force)

Reasons for Decline:Reasons for Decline: The economy The economy Intensifying border security, including stiffer penalties for Intensifying border security, including stiffer penalties for

illegal entry, and steep fees charged by "coyotes." illegal entry, and steep fees charged by "coyotes."

Speed of Inflows: Speed of Inflows:

850,000 a year (2000-2005)850,000 a year (2000-2005)

300,000 in 2008300,000 in 2008

Meet the New Immigrants Meet the New Immigrants Pew Center 8/2012Pew Center 8/2012

Another Measure of GlobalizationA.T. Kearney/FOREIGN POLICY Magazine

Globalization Index (http://www.foreignpolicy.com)

Economic Integration: Economic Integration: trade, foreign direct investment, trade, foreign direct investment, portfolio capital flows, and investment income portfolio capital flows, and investment income

Technological Connectivity:Technological Connectivity: Internet users, Internet Internet users, Internet hosts, and secure servers hosts, and secure servers

Personal Contact:Personal Contact: international travel and tourism, international travel and tourism, international telephone traffic, and remittances and international telephone traffic, and remittances and personal transfers (including worker remittances, personal transfers (including worker remittances, compensation to employees, and other person-to-person compensation to employees, and other person-to-person and nongovernmental transfers) and nongovernmental transfers)

Political Engagement:Political Engagement: memberships in international memberships in international organizations, personnel and financial contributions to organizations, personnel and financial contributions to U.N. Security Council missions, international treaties U.N. Security Council missions, international treaties ratified, and governmental transfersratified, and governmental transfers

TOP 20 RANKINGS (2007)TOP 20 RANKINGS (2007)

The Global Cities Index 2010

Foreign Policy, A.T. Kearney, and The Chicago Foreign Policy, A.T. Kearney, and The Chicago Council on Global AffairsCouncil on Global Affairs

Analyzed 65 cities with more than 1 million peopleAnalyzed 65 cities with more than 1 million people FactorsFactors: a city's business activity, human capital, : a city's business activity, human capital,

information exchange, cultural experience, political information exchange, cultural experience, political engagement. engagement.

DataData: the number of Fortune Global 500 company : the number of Fortune Global 500 company headquarters, the size of its capital markets, the flow of headquarters, the size of its capital markets, the flow of goods through its airports and ports, the number of goods through its airports and ports, the number of embassies, think tanks, political organizations, and embassies, think tanks, political organizations, and museums. museums.

Advantages of Globalization

ProductivityProductivity increases faster when countries increases faster when countries produce goods and services in which they produce goods and services in which they have a comparative advantage. have a comparative advantage.

Global competition and cheap imports keep a Global competition and cheap imports keep a constraint on prices.constraint on prices.

Promotes technological development and Promotes technological development and innovation.innovation.

Jobs in export industries tend to pay about 15 Jobs in export industries tend to pay about 15 percent more than jobs in import-competing percent more than jobs in import-competing industries.industries.

Provides the United States access to foreign Provides the United States access to foreign capital. capital.

Disadvantages of Globalization

Americans have lost Americans have lost jobs jobs because of imports or because of imports or shifts in production abroad. shifts in production abroad.

Other Americans fear getting laid off, especially Other Americans fear getting laid off, especially those work in import-competing industries.those work in import-competing industries.

Workers face demands of wage concessions Workers face demands of wage concessions from their employers.from their employers.

Service and white-collar jobs could be sent Service and white-collar jobs could be sent overseas.overseas.

American employees can lose their American employees can lose their competitiveness when companies build state-of-competitiveness when companies build state-of-the-art factories in low wage countries.the-art factories in low wage countries.

The World Is Flat The World Is Flat Thomas L. FriedmanThomas L. Friedman

Globalization and Global Globalization and Global InequalityInequality

““Catching up” Catching up” Aug 21st 2003, From The Economist print editionAug 21st 2003, From The Economist print edition Stanley FisherStanley Fisher

The debate on globalization, poverty and inequality

Optimists Bhagwati, Jagdish. 2004. In Defense of Globalization. New York, NY: Oxford University Press.

Doubters and/or data driven Bardhan, Pranab. 2005. “Globalization, Inequality and Poverty: An Overview” University of California, Berkeley. http://globetrotter.berkeley.edu/macarthur/inequality/papers/BardhanGlobalOverview.pdf

PessimistsStiglitz, Joseph. 2002. Globalization and Its Discontents. New York, NY: Norton & Company, Inc. (2001 Nobel Prize winner)

Bardhan, Pranab. 2005

Lorenz Curve for the American EconomyLorenz Curve for the American Economy

The Lorenz curve is the The Lorenz curve is the dark red curve. The The poorest 20% of the poorest 20% of the population earned only population earned only 3.6% of the income, the 3.6% of the income, the poorest 40% of the poorest 40% of the population earned 12.5 population earned 12.5 percent of income, and so percent of income, and so on. similarly, the least well on. similarly, the least well off 95% of the population off 95% of the population earned 78.8% of the earned 78.8% of the income, leaving 21.2% for income, leaving 21.2% for the richest 5% of income the richest 5% of income for the richest 5%. for the richest 5%.

U.S. Lorenz Curve and Gini CoefficientU.S. Lorenz Curve and Gini Coefficient

The Gini coefficient is The Gini coefficient is the area shaded in pink the area shaded in pink divided by the total of divided by the total of the areas shaded in the areas shaded in pink and light blue-pink and light blue-green.green.

China Narrows Inequity Between the Rich and Poor

2-3-2010 WSJ

The OECD, using what it says are better The OECD, using what it says are better estimates of price changes and the ranks estimates of price changes and the ranks of undocumented rural migrants in cities, of undocumented rural migrants in cities, puts the Gini index for 2005 at .41, and puts the Gini index for 2005 at .41, and says the measure of inequality edged says the measure of inequality edged down to .408 by 2007.down to .408 by 2007.

Nobel Laureates Say Globalization's Winners Should Aid Poor 8/25/08 WSJ

http://www.lindau-nobel.de/LecturesOnline.AxCMS

Robert Solow (Nobel 1987): Much of Robert Solow (Nobel 1987): Much of economics is about the relative economics is about the relative efficiency of market allocation. efficiency of market allocation. Economists also have to study how Economists also have to study how best to reroute income "to those who best to reroute income "to those who are damaged by otherwise useful are damaged by otherwise useful developments in the economy from developments in the economy from those who profit."those who profit."

Robert SolowRobert Solow3 main causes of growing inequality3 main causes of growing inequality

1.1. GlobalizationGlobalization has dramatically increased the world's has dramatically increased the world's supply of low-skilled labor, damping wages for such supply of low-skilled labor, damping wages for such workers in developed countries. workers in developed countries.

2.2. Rapid Rapid technological change technological change also has boosted demand for also has boosted demand for high-skilled workers, whose wages have risen as demand high-skilled workers, whose wages have risen as demand has exceeded supply. has exceeded supply.

3.3. Labor unions Labor unions have lost ground and workers' wages have have lost ground and workers' wages have suffered as wealthy countries have shifted to service suffered as wealthy countries have shifted to service industries from manufacturing.industries from manufacturing.

How to solve global inequality?How to solve global inequality?

Bill Gates at Harvard (2007)“Humanity’s greatest advances are not in its discoveries — but in how

those discoveries are applied to reduce inequity. Whether through democracy, strong public education, quality health care, or broad economic opportunity – reducing inequity is the highest human achievement.” http://www.youtube.com/watch?v=AP5VIhbJwFs

Warren Buffett gives away his fortune (2006)The world's second richest man - who's worth $44 billion in 2006 - The world's second richest man - who's worth $44 billion in 2006 -

started giving away 85% of his wealth - most of it to the Bill & Melinda started giving away 85% of his wealth - most of it to the Bill & Melinda Gates Foundation.Gates Foundation.

Aid to HaitiAid to Haiti2010 Haiti Earthquake The Haitian Government reported that an estimated 230,000

people had died, 300,000 had been injured and 1,000,000 made homeless.

The World Bank:

(1) Haiti has dysfunctional budgetary, financial or procurement systems, making financial and aid management impossible.

(2) The government did not exhibit ownership by taking the initiative for formulating and implementing its assistance program.

(3) A total mismatch between levels of foreign aid and government capacity to absorb it.

James Shikwati, a Kenyan economist: "For God's sake, please a Kenyan economist: "For God's sake, please just stop (giving aid)." just stop (giving aid)."

Summary of Research findings:

(1) (1) Policy matters. Foreign aid works better in countries with good economic policies. (2) Aid is better at reducing poverty if it is spent in very poor countries. (3) Not all foreign aid is equal. Money spent in Money spent in certain ways—such as on campaigns to eradicate certain ways—such as on campaigns to eradicate river blindness and smallpox, or to raise rice river blindness and smallpox, or to raise rice yields—has been more successful. Other yields—has been more successful. Other spending, such as food aid (which helps rich-spending, such as food aid (which helps rich-country farmers) or tied aid (which must be spent country farmers) or tied aid (which must be spent on services from the donor country) is much less on services from the donor country) is much less useful. useful.

Alberto Fujimori (born 1938), President of Peru from 1990 to 2000. Alberto Fujimori (born 1938), President of Peru from 1990 to 2000.

The Five Wars of Globalization (Foreign Policy, January/February 2003, 28-37)

1. Drugs In 1999, the U.N.

calculated the annual trade in illicit drugs at $400 billions (about 8% of world trade).

U.S. spent $35 billion to $40 billion each year on the war on drugs.

Between 1990 and 2000, median price of a gram of cocaine in the U.S. fell from $152 to $112.

Drug war: 12,456 people were killed during the months of January to November 2010 in Mexico.

CNN: 1-26-2006Feds smoke out largest drug tunnel yetTwo tons of marijuana found in U.S.-Mexico passageway

AFP: 9-3-2008 Mexican police discovered an air-conditioned drug-smuggling tunnel less than 60 meters (65 yards) from the US border.

New drug tunnel found at U.S.-New drug tunnel found at U.S.-Mexico border Mexico border 11-26-2010 Reuters11-26-2010 Reuters

Pot-smuggling tunnels in Tijuana Pot-smuggling tunnels in Tijuana grow more elaborate grow more elaborate 2-21-2012 Eagle2-21-2012 Eagle

Some tunnel excavators Some tunnel excavators in Mexico are killed when in Mexico are killed when the job is done to prevent the job is done to prevent them from spreading the them from spreading the word on the location.word on the location.

2. Arms trafficking Drugs and arms often go together. According to the United Nations, only 18 million

(about 3 percent) of the 550 million small arms and light weapons in circulation today are used by government, military, or police forces.

The demand for and supply of nuclear-, biological-, or chemical-weapons are on the rise.

3. Intellectual property What are intellectual property rights? Intellectual

property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time.

Intellectual property rights are customarily divided into two main areas:

(i) Copyright and rights related to copyright. 

(ii) Industrial property. Why safeguarding these property rights? (i) It fosters (i) It fosters

economic growth, (ii) provides incentives for technological economic growth, (ii) provides incentives for technological innovation, and (iii) attracts investment that will create innovation, and (iii) attracts investment that will create new jobs and opportunities for all their citizens. new jobs and opportunities for all their citizens.

“Fakes!” 2-7-05 Business Week (Cover Story)

The Finer Art of Faking It The Finer Art of Faking It Counterfeits Are Better Crafted, Duping Even Counterfeits Are Better Crafted, Duping Even Sophisticated Shoppers Sophisticated Shoppers 6-30-2011 WSJ6-30-2011 WSJ

Chinese Shoppers Lose Chinese Shoppers Lose Taste for Fakes Taste for Fakes 2-14-2012 WSJ2-14-2012 WSJ

A survey in 2011 by China Market Research found that 95% A survey in 2011 by China Market Research found that 95% of Chinese women between 28 and 35 said they would be of Chinese women between 28 and 35 said they would be embarrassed to carry counterfeit handbags. embarrassed to carry counterfeit handbags.

The shift has fueled the expansion plans of foreign The shift has fueled the expansion plans of foreign companies in China. companies in China.

Companies: Nike Inc., Columbia Sportswear Co., cosmetics Companies: Nike Inc., Columbia Sportswear Co., cosmetics maker Shiseido Co. and North Face parent VF Corp.maker Shiseido Co. and North Face parent VF Corp.

Intellectual Property Protection in a Globalizing Era, Economic Letter FRB-Dallas Vol. 3, No. 3, March 2008

My momma always said, My momma always said, "Life was like a box of "Life was like a box of chocolates. You never chocolates. You never know what you're gonna know what you're gonna get." 1994 Oscar.get." 1994 Oscar.

Drug Headache: Drug Headache: As Pfizer Battles Fakes in As Pfizer Battles Fakes in China, Nation's Police Are Uneasy Allies China, Nation's Police Are Uneasy Allies WSJ 1-24-06WSJ 1-24-06

Pfizer is fighting a rising tide of fake drugs that Pfizer is fighting a rising tide of fake drugs that increasingly has China as its source. increasingly has China as its source.

China: Online sales of fake China: Online sales of fake drugs targeted drugs targeted 1-11-2011 China Daily1-11-2011 China Daily

The administration on Dec 20 shut down five production The administration on Dec 20 shut down five production lines and destroyed 60 illegal bases that had sold fake lines and destroyed 60 illegal bases that had sold fake drugs via express delivery companies.drugs via express delivery companies.

W.T.O. Finds China Copyright Law Lacking W.T.O. Finds China Copyright Law Lacking 1/27/2009 NYT B111/27/2009 NYT B11

China was found to have failed to China was found to have failed to protect and enforce copyrights and protect and enforce copyrights and trademarks on a wide range of goods.trademarks on a wide range of goods.

U.S. will engage with China on U.S. will engage with China on appropriate corrective actions to ensure appropriate corrective actions to ensure that U.S. rights holders obtain the that U.S. rights holders obtain the benefits of this decision.benefits of this decision.

4.Alien smuggling About 1 million people entered the

Untied State illegally in 2007—twice as many as the illegal that entered the original 15 EU countries.

$35,000 to smuggle from China to New York City.

$50 to $200 to buy a woman in Romania.

Central and Western Africa enslave 200,000 children a year.

5.Money laundering The Cayman Islands: population 3,600; 2,200 mutual The Cayman Islands: population 3,600; 2,200 mutual

funds, 500 insurance companies, 60,000 businesses, 600 funds, 500 insurance companies, 60,000 businesses, 600 banks and trusting companies.banks and trusting companies.

Russia has 700 legal and financial institutions owned by Russia has 700 legal and financial institutions owned by organized crime groups.organized crime groups.

Estimates of the volume of global money laundering range Estimates of the volume of global money laundering range between 2 and 5 percent of the world’s GNP, or between between 2 and 5 percent of the world’s GNP, or between $800 billion and $2 trillion. $800 billion and $2 trillion.

Cocaine: The New Front Cocaine: The New Front Lines Lines 1-14-2012 WSJ1-14-2012 WSJ

2. Culture and International Business

Success or failure of a company abroad Success or failure of a company abroad depends depends

(1) (1) Job-related expertiseJob-related expertise

(2) Sensitivity and responsiveness to the (2) Sensitivity and responsiveness to the new cultural environment. new cultural environment.

It is just not enough to have a good product It is just not enough to have a good product with a good price. We need both with a good price. We need both interpersonal and intercultural skills.interpersonal and intercultural skills.

Cultures are integrated wholes

In small-town Missouri, a collision of cultures 6-10-2012 KC Star

(1) Education(1) Education

Time 1-31-2011 Time 1-31-2011 http://abcnews.go.com/US/tiger-mom-amy-http://abcnews.go.com/US/tiger-mom-amy-chua-controversial-book-parenting-guide/chua-controversial-book-parenting-guide/story?id=12767305story?id=12767305

The educational expense as a percentage of household income: S. Korea is 3 to 9 times of the U.S., Japan, and Germany.

“Shanghai Test Scores Stun Educators” NYT 12-6-2010

ConfuciuConfuciuss

(2) Technology(2) Technology

"Open your Eyes: The Evidence is There," "Open your Eyes: The Evidence is There," Technology Technology and Learning, and Learning, September 1997.September 1997.

A Vanderbilt University research group's study of at-A Vanderbilt University research group's study of at-risk, inner-city kindergartners. risk, inner-city kindergartners.

The researchers found that students studying language The researchers found that students studying language arts in a multimedia environment gained more auditory, arts in a multimedia environment gained more auditory, language, decoding-in-context, and story-composition language, decoding-in-context, and story-composition skills than did students in a control group who did not skills than did students in a control group who did not use computers. use computers.

Huge crowd forces delay of China's iPhone 4S release

1-13-2012 AP

Apple reacted to the outburst by postponing Apple reacted to the outburst by postponing iPhone 4S sales in its mainland China stores to iPhone 4S sales in its mainland China stores to protect the safety of customers and protect the safety of customers and employees.employees.

The crowd erupted after the store failed to The crowd erupted after the store failed to open on schedule at 7 a.m. Some threw eggs open on schedule at 7 a.m. Some threw eggs and shouted at employees through the and shouted at employees through the windows.windows.

http://www.usatoday.com/tech/news/story/2012-01-13/apple-china-iphone/52529164/1

(3) Marriage(3) Marriage U.S.: 50%, divorce rate of the 1U.S.: 50%, divorce rate of the 1stst marriage and 65% of 2 marriage and 65% of 2ndnd

marriage marriage <http://www.oecd.org/dataoecd/4/19/40321815.pdf><http://www.oecd.org/dataoecd/4/19/40321815.pdf>

Happy Couples Kiss and Tell Happy Couples Kiss and Tell 2-9-2010 WSJ 2-9-2010 WSJ

Find the middle groundFind the middle ground Be funnyBe funny Keep (some) secretsKeep (some) secrets Never, ever give upNever, ever give up Stay aliveStay alive

(4) Medicine(4) Medicine

First Flu Death Provides Clues to Mexico Toll 5-1-2009 NYT

11stst death of swine flu in Mexico: Adela María Gutiérrez. death of swine flu in Mexico: Adela María Gutiérrez.

Chinese herbal medicine: how effective Chinese herbal medicine: how effective is it? is it? 2/16/2008 The Times2/16/2008 The Times

Dr. Stephen Minger, the leading stem cell Dr. Stephen Minger, the leading stem cell scientist of King’s College in London and his scientist of King’s College in London and his experience of using a Chinese herbal medicine to experience of using a Chinese herbal medicine to boost brain cell growth.boost brain cell growth.

Hope for diabetes, Parkinson’s and Alzheimer’s.Hope for diabetes, Parkinson’s and Alzheimer’s. In recent years the Chinese Government has In recent years the Chinese Government has

invested huge sums into investigating whether its invested huge sums into investigating whether its vast library of traditional remedies can be vast library of traditional remedies can be converted into orthodox treatments. converted into orthodox treatments.

(5) Art(5) Art

(6) Government (6) Government

U.S., Europe Are an Ocean Apart U.S., Europe Are an Ocean Apart on Human Toll of Joblessness on Human Toll of Joblessness 5/7/2009 WSJ5/7/2009 WSJ

The differing U.S. and European The differing U.S. and European approaches toward worker approaches toward worker protections can influence recovery protections can influence recovery prospects.prospects.

Europe's high payroll taxes, along Europe's high payroll taxes, along with restrictions on when and how with restrictions on when and how companies can lay off workers, companies can lay off workers, make employers slower to rehire make employers slower to rehire when a recession ends.when a recession ends.

(7) Religion(7) Religion

5-6-07 NYTWhen a Kiss Is More Than a Kiss

2-9-09 NYT2-9-09 NYT Sri Ram Sena attacked Sri Ram Sena attacked several women at a bar in the southern several women at a bar in the southern Indian college town of Mangalore and Indian college town of Mangalore and accused them of being un-Indian for accused them of being un-Indian for being out drinking and dancing with being out drinking and dancing with men.men.

Religion in the U.S. Presidential Election

Few informed, many wary of Mormon Few informed, many wary of Mormon beliefs beliefs 1-25-2012 USA Today Cover Story

3 reasons: 3 reasons:

(1)(1)Mormons are unfamiliar to many. Mormons are unfamiliar to many. There are 6 million, accounting for fewer There are 6 million, accounting for fewer than 2% of the U.S. population. than 2% of the U.S. population.

(2)(2)Outspoken evangelical pastors call Outspoken evangelical pastors call Mormonism a "cult.“Mormonism a "cult.“

(3)(3)Mormonism is not a faith commonly Mormonism is not a faith commonly studied in comparative religion classes.studied in comparative religion classes.

(8) Family(8) Family Joe Jessop: 5 wives, 46 children, and 239 grandchildren(National Joe Jessop: 5 wives, 46 children, and 239 grandchildren(National

Geographic 2/2010)Geographic 2/2010)

Afghan Boys Are Prized, So Afghan Boys Are Prized, So Girls Live the Part Girls Live the Part 9/20/2010 NYT9/20/2010 NYT

Economic need, Economic need, social pressure to social pressure to have sons, and in have sons, and in some cases, a some cases, a superstition that superstition that doing so can lead to doing so can lead to the birth of a real the birth of a real boy. boy.

Implications

Less likely to view foreign cultures ethnocentrically.

Any cultural feature must be understood in terms of Any cultural feature must be understood in terms of that culture.that culture.

No cultures are better or worse than any other, only different.

Offer a lesson for doing international business.

Steel axes -- AustraliaSteel axes -- Australia Marlboro – Taiwan Marlboro – Taiwan Wall clocks – Chicago Lighthouse Wall clocks – Chicago Lighthouse

(2-2-05 WSJ)(2-2-05 WSJ)

Communication across cultures: verbal

factors There are about 5,000-6,000 different languages There are about 5,000-6,000 different languages

spoken in the world today. spoken in the world today.  Source: Ethnologue,Source: Ethnologue, 16th Edition. 16th Edition.

Countries in Which English IsCountries in Which English Isan Official Language (52 countries, red areas)an Official Language (52 countries, red areas)

English is the dominant language in English is the dominant language in electronic communicationelectronic communication. .

It accounts for   It accounts for  

1. 75% of the world's mail, telexes, and 1. 75% of the world's mail, telexes, and cables.  cables. 

2. 60% of the world's radio programs.2. 60% of the world's radio programs.

3. 90% of all Internet traffic.   3. 90% of all Internet traffic.  

The percentage of Internet users who The percentage of Internet users who are not native English speakers is are not native English speakers is increasing rapidly, especially in Asia.increasing rapidly, especially in Asia.

Use Correct EnglishUse Correct English

Use Correct EnglishUse Correct English

Avoid using slang and taboo words in Avoid using slang and taboo words in communicating with foreigners. Example: communicating with foreigners. Example: “cash cow,” “die,” “graves.” “cash cow,” “die,” “graves.”

Understand explicit vs. implicit Understand explicit vs. implicit communication. Example: in Chinese, communication. Example: in Chinese, Positive: “maybe”, Negative: “inconvenient”Positive: “maybe”, Negative: “inconvenient”

Business Example (1)

Pilot Program Aims to Train Spanish-Speaking Doctors 12/18/2007 WSJ

Latino: 14.2 percent of the U.S. population, 6.4 percent of the medical students.

There are roughly 3,000 Latino patients to each Latino physician. In comparison, for non-Latinos, the ratio is 335 patients to 1 doctor.

Business Example (2)

Avoid Translation Mistakes Avoid Translation Mistakes

When a famous pen manufacturer marketed a When a famous pen manufacturer marketed a ballpoint pen in Mexico, its ads were supposed to ballpoint pen in Mexico, its ads were supposed to say "It won't leak in your pocket and embarrass say "It won't leak in your pocket and embarrass you " However, the company mistakenly thought you " However, the company mistakenly thought the Spanish word the Spanish word "embarazo" meant embarrass. meant embarrass. Instead the ads said that "It won’t leak in your Instead the ads said that "It won’t leak in your pocket and make you pregnant.“pocket and make you pregnant.“

Business Example (3)

“How Carlyle Adapts to China, $20 Million Deal Highlights Focus On Smaller Stakes” 9/4/2007 WSJCarlyle plans to invest $20 million in privately Carlyle plans to invest $20 million in privately owned NeWorld Education Group, which runs owned NeWorld Education Group, which runs a chain of 65 schools teaching foreign a chain of 65 schools teaching foreign languages such as English and Japanese.languages such as English and Japanese.

Business Example (4) Number-Crushing: When Figures Number-Crushing: When Figures

Get Personal Get Personal Real-Estate Developers Factor In Real-Estate Developers Factor In

Love of 6 and 8, Fear of Unlucky 4 Love of 6 and 8, Fear of Unlucky 4 and 13; What Happened to Floors and 13; What Happened to Floors 40 Through 59? 40 Through 59? 10/28/2009 WSJ

The nonverbal dimension1)Body posture British professor in CairoBritish professor in Cairo Japanese bowingJapanese bowing

2)Hand gestures President Bush’s visit to Australia in 1992. President Bush’s visit to Australia in 1992. Soviet Premier Nikita Khrushchev visited the Soviet Premier Nikita Khrushchev visited the

US in 1959. US in 1959. ““OK” gesture in the U.S. means “zero” or OK” gesture in the U.S. means “zero” or

“worthless” in France, “money” in Japan, and a “worthless” in France, “money” in Japan, and a general sexual insult in Greece.general sexual insult in Greece.

The nonverbal dimension

3) Facial ExpressionsEyebrow, Wink

4) Eye ContactHighest levels of gaze – Arabs and people

from Latin AmericaLowest – Indians and Northern Europeans

5) Proximity6) Body Contact

Hand-shaking in SpainHand-shaking in SpainKissing in BrazilKissing in BrazilDancing in USDancing in US

Contrasting Culture Values (West vs. East)

1)1) Individualism Individualism 2)2) A precise reckoning of timeA precise reckoning of time3)3) Work and achievementWork and achievement4)4) Control over the natural environmentControl over the natural environment5)5) Youth orientationYouth orientation6)6) InformalityInformality7)7) CompetitionCompetition8)8) Relative status of womenRelative status of women

Cultural Dynamics (1)In Egypt, a New Battle Begins Over the Veil

1/28/07 NYT (and 8/12/09 NYT)

Cultural Dynamics (2) Cultural Dynamics (2) Saudi women campaign for right to Saudi women campaign for right to drive drive

Saudi women campaign for right to drive

Clinton Adds Her Voice in Support of Saudi Women 6-21-2011 NYT

“What these women are doing is brave and what they are seeking is right.”

Saudis Push Young People, Including Women, Into Jobs 1-31-2012 WSJ

Cultural Dynamics (3)India's Surging Economy Lifts Hopes and Ambitions, Socialism and Castes Begin to Give Way WSJ 11/28/07

2007/20082007/2008 India: 94,563India: 94,563 China: 81,127China: 81,127 S. Korea: 69,124S. Korea: 69,124 Japan: 33,974Japan: 33,974 Canada: 29,051Canada: 29,051 Taiwan: 29,001Taiwan: 29,001

Age and wisdom: Older and wiser? 4-7-2012 The Economist

Psychological SciencePsychological Science, Igor Grossmann of the University of , Igor Grossmann of the University of WaterlooWaterloo

5 crucial aspects of wise reasoning: willingness to seek opportunities to 5 crucial aspects of wise reasoning: willingness to seek opportunities to resolve conflict; willingness to search for compromise; recognition of the resolve conflict; willingness to search for compromise; recognition of the limits of personal knowledge; awareness that more than one perspective limits of personal knowledge; awareness that more than one perspective on a problem can exist; and appreciation of the fact that things may get on a problem can exist; and appreciation of the fact that things may get worse before they get better.worse before they get better.

The results suggest Japanese learn wisdom faster than The results suggest Japanese learn wisdom faster than Americans. Americans.

The results also suggest a paradox: Japanese have higher The results also suggest a paradox: Japanese have higher scores than Americans for the sort of interpersonal wisdom scores than Americans for the sort of interpersonal wisdom you might think would be useful in an individualistic society. you might think would be useful in an individualistic society.

Chinese Shoppers Lose Chinese Shoppers Lose Taste for Fakes Taste for Fakes 2-14-2012 WSJ2-14-2012 WSJ

A survey in 2011 by China Market Research found that 95% A survey in 2011 by China Market Research found that 95% of Chinese women between 28 and 35 said they would be of Chinese women between 28 and 35 said they would be embarrassed to carry counterfeit handbags. embarrassed to carry counterfeit handbags.

The shift has fueled the expansion plans of foreign The shift has fueled the expansion plans of foreign companies in China. companies in China.

Companies: Nike Inc., Columbia Sportswear Co., cosmetics Companies: Nike Inc., Columbia Sportswear Co., cosmetics maker Shiseido Co. and North Face parent VF Corp.maker Shiseido Co. and North Face parent VF Corp.

Culture, Economic Success, and Business Strategy (1)

Fareed Zakaria, “Asian Fareed Zakaria, “Asian Values,” Values,” Foreign PolicyForeign Policy, , Nov/Dec 2002, 38-39 Nov/Dec 2002, 38-39

Mikhail V. Gratchev, Mikhail V. Gratchev, “Making the Most of “Making the Most of Cultural Differences,” Cultural Differences,” Harvard Business Harvard Business ReviewReview, 2001, 2001

Secretive Culture Led Toyota Secretive Culture Led Toyota Astray Astray 2-10-2010 WSJ A12-10-2010 WSJ A1

Evidence had been mounting for years that Toyota Evidence had been mounting for years that Toyota cars could speed up suddenly.cars could speed up suddenly.

The heart of Toyota's problem: Its secretive corporate The heart of Toyota's problem: Its secretive corporate culture in Japan clashed with U.S. requirements that culture in Japan clashed with U.S. requirements that auto makers disclose safety threats.auto makers disclose safety threats.

Culture, Economic Success, and Business Strategy (2)

Scholars Link Success of Firms To Lives of CEOs, A Family Death Hurts, as Does Buying a Mansion September 5, 2007 WSJ

Research 1Research 1

Does Culture Affect Economic

Outcomes? Luigi Guiso, Paola Sapienza and Luigi Zingales

Journal of Economic Perspectives—Volume 20, Number 2—Spring 2006—Pages 23–48

Source: European Values Survey and World Values Survey 1981–84, 1990–93, 1995–97 (ICPSR 2790); Guiso, Sapienza and Zingales (2003, tables 2 and 4).Note: The bars represent the effect of religious affiliation on trust in percent of the sample mean of trust relative to “no religious affiliation.” Effects are obtained from a regression where the dependent variable is “trust in others,” which equals 1 if participants report that most people can be trusted. Besides religious affiliation dummies, the regression also includes demographic controls (health, male, age, education, social class, income), a dummy variable equal to 1 if a person does not believe in God, country fixed effects, and survey-year dummies.

Source: General Social SurveyNote: The bars represent the effect of different ethnic background on trust in percent of the sample mean of trust and relative to “people with ancestors from Great Britain,” the excluded group. Effects are obtained from a regression where the dependent variable is “trust in others,” which is a dummy variable equal to one if the respondent answered that most people can be trusted. Besides the ethnic origin dummies, the regression also includes demographic controls (health, gender, age, education, race), and religious affiliations (the omitted category is no religion and atheists). To identify the origin of the ancestors we use the answer to the question “From what countries or part of the world did your ancestors come?” and grouped together several countries of origin, as listed in the figure.

Research 2Research 2

Erzo Luttmer and Monica Singhal of Harvard, “Culture, Erzo Luttmer and Monica Singhal of Harvard, “Culture, Context, and the Taste for Redistribution” May 2009Context, and the Taste for Redistribution” May 2009

“In the blood: Attitudes towards redistribution have a strong cultural component”, Jun 4th 2009, The Economist

This paper hypothesizes that (1) cross-country This paper hypothesizes that (1) cross-country differences in redistributive preferences may have an differences in redistributive preferences may have an important cultural component and (2) examines the important cultural component and (2) examines the determinants of preferences among immigrants across determinants of preferences among immigrants across 32 countries. 32 countries.

Immigrants from pro-redistribution places, and their Immigrants from pro-redistribution places, and their children too, are much more likely to vote for political children too, are much more likely to vote for political parties that champion greater redistribution of wealth. parties that champion greater redistribution of wealth.

Research 3: Research 3: Culture and Culture and UnemploymentUnemployment

““Does Culture Affect Unemployment? Does Culture Affect Unemployment? Evidence from the Evidence from the Röstigraben”Röstigraben”

Brügger, Lalive and Zweimüller July 2009 IZABrügger, Lalive and Zweimüller July 2009 IZA (1) The duration of unemployment is 7 weeks longer in the Latin regions. (1) The duration of unemployment is 7 weeks longer in the Latin regions.

(2) It also find the attitudes toward work are rather shared with those you (2) It also find the attitudes toward work are rather shared with those you live with rather than those you grew up with.live with rather than those you grew up with.

3. Political and Economic systems 'Arab Spring' Gives Way to an Uncertain Autumn

8/23/2011 WSJ

Democracy index 2010Democracy in retreat http://graphics.eiu.com/PDF/Democracy_Index_2010_web.pdf

2010 Democracy Index The Economist 12/19/2010

It was liberalization and democratization that brought the regime to crisis point. (Reform, Coup and Collapse: The End of the Soviet State, by Professor Archie Brown) www.bbc.co.uk/history/war/coldwar/soviet_end_01.shtml

Russian ExportsRussian Exports  Percentage of total exportsPercentage of total exports Fuel products Fuel products 57.8 57.8 Oil and oil products Oil and oil products 40.3 40.3 Natural gas Natural gas 15.3 15.3 Other Other 2.2 2.2

MetalsMetals13.813.8

Machines, equipment and instruments Machines, equipment and instruments 8.68.6

Other Other 19.819.8  TotalTotal100100

SOURCE: International Monetary Fund, SOURCE: International Monetary Fund, Russian Federation: Russian Federation: Statistical AppendixStatistical Appendix, September 2004., September 2004.

Oil's Crash Stirs Unrest in Russia as Slump Oil's Crash Stirs Unrest in Russia as Slump Hits HomeHits Home 12/19/2008 WSJ 12/19/2008 WSJ

Protesters turn up the heat on Protesters turn up the heat on Putin in Moscow Putin in Moscow 2-4-20122-4-2012

http://www.youtube.com/watch?v=WkvxsgFqxlE

Europe Economies Contract 1-16-2012 WSJ1-16-2012 WSJ

RussiaRussia ChinaChina

1978 Deng Xiaoping started privatization and 1978 Deng Xiaoping started privatization and open door policyopen door policy

1989 Massacre in Tiananmen Square 1989 Massacre in Tiananmen Square December 11, 2001 China entered the WTODecember 11, 2001 China entered the WTO July 21, 2005 Yuan revaluationJuly 21, 2005 Yuan revaluation 8-8-2008 Olympic8-8-2008 Olympic

China v US GDP 12/27/2011 Economist

Reasons the Yuan should appreciateReasons the Yuan should appreciate

1. High economic growth rate

2. Large foreign-exchange reserves2. Large foreign-exchange reserves

3. Huge Trade surplus

Effect of revaluationEffect of revaluation: Example of 7/21/2005 : Example of 7/21/2005

How the revaluation of the Chinese yuan could affect trade in various How the revaluation of the Chinese yuan could affect trade in various hypothetical scenarios, assuming the initial 2.1% shift to 8.11 yuan per hypothetical scenarios, assuming the initial 2.1% shift to 8.11 yuan per dollar, from 8.28 yuan. (6.8540 as of 9/16/08)dollar, from 8.28 yuan. (6.8540 as of 9/16/08)

1. U.S. exporters become slightly more competitive: American company sells potato chips in China for the equivalent of $1.80 a bag. Pre-revaluation price: 14.9 yuanPost-revaluation price: 14.6 yuan

 2. Chinese exporters make less (in yuan): Chinese garment-maker sells (in yuan): Chinese garment-maker sells men's corduroy pants for $100 a dozen to U.S. retailer.men's corduroy pants for $100 a dozen to U.S. retailer.  Pre-revaluation revenue: 828 yuanPre-revaluation revenue: 828 yuanPost-revaluation revenue: 811 yuanPost-revaluation revenue: 811 yuan

3.3. Outsourcing to China costs more: U.S. business pays 100 yuan an hour for Chinese labor. Pre-revaluation cost: $12.08 an hourPost-revaluation cost: $12.33 an hour

 4. U.S. importers pay more (in dollars): American toy maker buys a dollfrom a Chinese factory for 36.5 yuan. Pre-revaluation cost: $4.41Post-revaluation cost: $4.50

 5. Would-be Chinese merger partner spends less:: Cnooc offers Cnooc offers $18.5 billion for Unocal, a U.S. oil company.$18.5 billion for Unocal, a U.S. oil company.  Pre-revaluation value: Pre-revaluation value: 153.18 billion yuan153.18 billion yuanPost-revaluation value: Post-revaluation value: 150.04 billion yuan150.04 billion yuan

China’s Three Development-related Issues: (1) Decoupling

China Growth Fantasy Beijing should focus on household incomes, not China Growth Fantasy Beijing should focus on household incomes, not GDP. Yasheng Huang of MIT, WSJ Asia 12/21/2008GDP. Yasheng Huang of MIT, WSJ Asia 12/21/2008

Decoupling? China had become a powerful economic center China had become a powerful economic center of its own, able not only to drive its own growth independent of its own, able not only to drive its own growth independent of the US but also to power the global economy forward.of the US but also to power the global economy forward.

The decoupling theory ignores what's causing China’s The decoupling theory ignores what's causing China’s growth and whether it's self-sustained. growth and whether it's self-sustained.

Chinese development strategy privileges production at the Chinese development strategy privileges production at the expense of consumption (especially the rural households) expense of consumption (especially the rural households) and uses political power to suppress costs rather than and uses political power to suppress costs rather than relying on market mechanisms to boost income.relying on market mechanisms to boost income.

http://http://www.youtube.com/watch?v=L9lKcajBv2E

China Seeks a New Market in Its Own Backyard, As Western Export Markets Languish, Beijing Encourages Consumption by Rural Residents to Help Revive Economic Growth

2-10-2009 WSJ

China's Growth Engine Declines China's Growth Engine Declines 1-17-2012 WSJ1-17-2012 WSJ

(2) China's dubious earnings numbers(2) China's dubious earnings numbers

May 28, 2009 The EconomistMay 28, 2009 The Economist Investors appear to have little faith in company accountsInvestors appear to have little faith in company accounts Long term implications? Long term implications?

(3) The Incredible Shrinking (3) The Incredible Shrinking Surplus Surplus Economist 9/5/2009Economist 9/5/2009

Facts: Surplus with the U.S. in the first 6 months in 2009: $62b vs. Facts: Surplus with the U.S. in the first 6 months in 2009: $62b vs. $103b; Surplus with all trading partners in 2008: $295b vs. $650b $103b; Surplus with all trading partners in 2008: $295b vs. $650b

Factors: (1) HK (2) cif vs. fobFactors: (1) HK (2) cif vs. fob

What’s Next? What’s Next?

Perspiration theory--Krugman’s comment on Asian economies

““WHAT EVER HAPPENED TO THE ASIAN MIRACLE?” WHAT EVER HAPPENED TO THE ASIAN MIRACLE?” FortuneFortune Aug. 18, 1997 Aug. 18, 1997 http://web.mit.edu/krugman/www/perspire.htmAl Young and Larry LauAl Young and Larry Lau1.1.high savings rates high savings rates 2.2.good educationgood education3.3.movement of underemployed peasants into the modern movement of underemployed peasants into the modern sectorsectorThe "perspiration theory" of Asian growth upsets two The "perspiration theory" of Asian growth upsets two cherished beliefs held by both Asian leaders and their admirers. cherished beliefs held by both Asian leaders and their admirers. 1.1.government’s rolegovernment’s role2.2.growth will slow growth will slow

Production functionProduction function

Three Issues Related to Political and Economic System(1) Economic freedomThe 10 Heritage Foundation Economic FreedomsThe 10 Heritage Foundation Economic Freedoms

• • Business FreedomBusiness Freedom

• • Trade FreedomTrade Freedom

• • Fiscal FreedomFiscal Freedom

• • Government SizeGovernment Size

• • Monetary FreedomMonetary Freedom

• • Investment FreedomInvestment Freedom

• • Financial FreedomFinancial Freedom

• • Property RightsProperty Rights

• • Freedom from CorruptionFreedom from Corruption

• • Labor FreedomLabor Freedom

A Related Measure: The Ease of A Related Measure: The Ease of Doing BusinessDoing Business

World Bank, Doing Business 2012World Bank, Doing Business 2012

Is China turning against Is China turning against foreign businesses? foreign businesses?

10-24-2011 USA Today10-24-2011 USA Today

US companies reported as top five business challenges in 2011 and 2010 surveys:

Issue 2011 2010Bureaucracy 31% 23%Mgmt-level human resources constraints 30% 28%Unclear laws, regulations 29% 23%Inconsistent regulatory interpretation 28% 31%Intellectual property rights infringement 24% 19%Corruption 22% 20%Obtaining required licenses 21% 24%Non-mgmt-level human resources constraints 20% 14%National protectionism 20% 23%Local protectionism 18% 17%Difficulty enforcing contract terms 18% 14%

 Source: 2011 Business Climate Survey, American Chamber of Commerce in China.

Research: INSTITUTIONAL DISTORTIONS, ECONOMIC

FREEDOM, AND GROWTH Abdiweli M. Ali and W. Mark Crain, Cato Journal, winter 2002

(1) Y = constant + βi I + βm M + βz Z + u,where Y = real per capita GDP growth, or the share of investment

in GDP; I = a set of core variables always included in the

regressions; M= the variable of interest (i.e., the Economic Freedom

Index, Civil Liberty Index, or the Gastil Political Freedom Indices);

Z = a subset of variables identified by Levine and Renelt (1992) as potentially important explanatory variables of growth; and

u = a random disturbance term.

Core regressionY = constant + βi I + u

GDP = −0.45 + 17.16 INV −0.15 GDP75 + 0.3 SEC −0.88 GPOP (−0.42) (5.69) (−1.75) (0.02) (−3.07)

T-statistics are in parentheses. R-squared = 0.36 F-statistic = 15.4 Obs. = 114

The findings indicate that the Economic Freedom Index is robust and that the Civil Liberty Index and the Political Freedom Index are fragile.

Happiness and Democracy Happiness and Democracy Thanks to Nolan Gibreal Thanks to Nolan Gibreal

Three Issues related to the system(2) Country risk

Country risk relates to the likelihood that Country risk relates to the likelihood that changes in the business environment will occur changes in the business environment will occur that reduce the profitability of doing business in that reduce the profitability of doing business in a country. a country.

Country risk is a broad concept that comprises Country risk is a broad concept that comprises an underlying combination of economics, an underlying combination of economics, finance, geopolitics, sociology, and history finance, geopolitics, sociology, and history issues. issues.

January 22, 2007 January 22, 2007 WSJWSJ In a move that may hint In a move that may hint

at growing economic at growing economic problems in Venezuela, problems in Venezuela, the country's president, the country's president, Hugo Chávez ordered Hugo Chávez ordered his telecommunications his telecommunications minister to seize control minister to seize control of a of a VerizonVerizon-controlled -controlled telecommunications telecommunications company before paying company before paying compensation to its U.S. compensation to its U.S. owners.owners.

Population: 27,635,743 (July Population: 27,635,743 (July 2011 est.)2011 est.)

GDP per capita: $12,400 GDP per capita: $12,400 (2011 est.)(2011 est.)

Inflation: 28.9% (2011 est.)Inflation: 28.9% (2011 est.)

Colgate in VenezuelaColgate in Venezuela On Friday, January 8, 2010 the Venezuelan On Friday, January 8, 2010 the Venezuelan

government announced its intention to devalue its government announced its intention to devalue its currency (Bolivar) and move to a two tier exchange currency (Bolivar) and move to a two tier exchange structure. The official exchange rate is expected to structure. The official exchange rate is expected to move from 2.15 to 2.60 for essential goods and move from 2.15 to 2.60 for essential goods and 4.30 for non-essential goods and services. 4.30 for non-essential goods and services.

Colgate’s products are expected to fall into the Colgate’s products are expected to fall into the non-essential classification. non-essential classification.

Colgate expects charges of 4 cents to 6 cents per Colgate expects charges of 4 cents to 6 cents per share in each quarter of 2010 as money it earns share in each quarter of 2010 as money it earns there will translate back into fewer dollars. there will translate back into fewer dollars.

Path to India's Market Dotted With Path to India's Market Dotted With Potholes Potholes Sept 12, 2006 WSJ

EU Shows Its Cards Behind Intel EU Shows Its Cards Behind Intel Case Case 9/22/2009 WSJ9/22/2009 WSJ

The European Union levied a record €1.06 The European Union levied a record €1.06 billion billion ($1.56 billion($1.56 billion) fine against Intel in May, ) fine against Intel in May, alleging the computer chip giant abused its alleging the computer chip giant abused its dominant position in the microprocessor dominant position in the microprocessor market.market.

The EU outlined the evidence behind its record The EU outlined the evidence behind its record antitrust fine against Intel, including PC antitrust fine against Intel, including PC makers' emails.makers' emails.

Types of country risk

(1) Political change (due to elections, revolution, secession, etc.): expropriation, higher taxes, higher tariffs, elimination of FDI incentives, domestic ownership requirements, local content requirements, currency inconvertibility

Oil Companies Plan Evacuations From Libya 2-21-2011 NYT

Types of country risk (cont.)

Chávez Takes Toll on Multinationals 5/3/2010 WSJ

The U.S. SEC declared Venezuela a The U.S. SEC declared Venezuela a hyperinflationary economy, requiring hyperinflationary economy, requiring companies that do business there to account companies that do business there to account for the change as a charge to earnings. for the change as a charge to earnings.

((2) Macroeconomic mismanagement

inflation, high interest rates

(3) Others

wars, labor unrest (strikes)

Information sources of country risk assessment

International financial organizations International financial organizations Regional development banks Regional development banks National sources and central banks National sources and central banks Risk rating agencies Risk rating agencies Private commercial and investment Private commercial and investment

banksbanks

Measuring country risk

The qualitative approach: the Institute of International Finance

The quantitative approach: econometric models

The rating approach: Moody's, S&Ps, Moody's, S&Ps, Credit Risk International, BERI (Business Credit Risk International, BERI (Business Environment Risk Index), International Environment Risk Index), International Country Risk Guide (ICRG), AM Best, Country Risk Guide (ICRG), AM Best, OECD Country Risk Classification. OECD Country Risk Classification.

ICRG’s rating ICRG’s rating (International Country Risk Guide)(International Country Risk Guide)

Rank in 03/05 Country

Composite Risk

Rating 03/05

Composite Risk

Rating 04/04

03/05 versu

s 04/04

Rank in 04/04

1 Norway 92.0 92.3 -0.3 1

2 Luxembourg 90.0 90.3 -0.3 3

2 Switzerland 90.0 91.0 -1.0 2

4 Sweden 88.5 87.0 1.5 7

5 Singapore 88.3 87.8 0.5 5

6 Finland 87.8 87.3 0.5 6

7 Denmark 87.0 86.5 0.5 9

10 Ireland 86.0 86.5 -0.5 9

BERI's ratingBERI's rating (Business Environment Risk (Business Environment Risk Intelligence) system permits comparisons Intelligence) system permits comparisons between countries for the past, the present, and between countries for the past, the present, and for one- and five-year forecast periods. The for one- and five-year forecast periods. The components are components are

(1) the Operations Risk Index (ORI), (1) the Operations Risk Index (ORI),

(2) the Political Risk Index (PRI), and (2) the Political Risk Index (PRI), and

(3) the Remittance and Repatriation Factor (R-(3) the Remittance and Repatriation Factor (R-Factor). Factor).

A.M. Best’s Rating

A.M. Best uses country risk analysis to determine how the factors A.M. Best uses country risk analysis to determine how the factors outside an insurer's control affect its ability to meet its obligations outside an insurer's control affect its ability to meet its obligations to its policyholders. These analyses include, amongst others, the to its policyholders. These analyses include, amongst others, the assessment of assessment of local accounting rules, government policies and regulation, economic growth and social stability.

Examples:Examples:

Canada Tier I

India Tier IV

Japan Tier II

Russia Tier IIIUnited Kingdom Tier IUnited States of America Tier I

Why is Japan in Tier II?

2010 Standard & Poor’s Rating on 2010 Standard & Poor’s Rating on Credit Risk Credit Risk (2/3/2010 NYT)(2/3/2010 NYT)

August 2011 August 2011 US rating dropped

Responses to country risk

1.1. Project evaluationProject evaluation

2.2. InsuranceInsurance: : The The Overseas Private Overseas Private Insurance Corporation Insurance Corporation (OPIC) (U.S.) and the (OPIC) (U.S.) and the Economic Development Economic Development Corporation (EDC) Corporation (EDC) (Canada) (Canada)

3.3. Maintain alternatives Maintain alternatives

4.4. Maintain control over Maintain control over intangible assets intangible assets

OPIC: insurance, OPIC: insurance, financing, investment financing, investment funds. funds.

Research 1

Erb, Harvey and Viskanta, "Erb, Harvey and Viskanta, "Political Risk, Political Risk, Economic Risk and Financial RiskEconomic Risk and Financial Risk," ," Financial Analysts JournalFinancial Analysts Journal, Nov./Dec. 1996 , Nov./Dec. 1996 (http://faculty.fuqua.duke.edu/~charvey/Rese(http://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/arch/Published_Papers/P38_Political_risk_economic.pdf)P38_Political_risk_economic.pdf)

Rt = c0 + c1At-1 + et

where R represents a vector of six-month equity returns from July 1984 to June 1995 for all of the countries in the sample. A represents the risk attribute which is lagged the risk attribute which is lagged and matched to the country.and matched to the country.

The results suggest that (1)The country risk measures are correlated with

future equity returns. (2)The country risk measures are correlated with

each other. (3)Financial risk measures contain the most

information about future equity returns.

Research 2 Ian Bremmer’s “The J-Curve”Ian Bremmer’s “The J-Curve” Locate nations on the J Curve - left for Locate nations on the J Curve - left for

authoritarian, right for democratic.authoritarian, right for democratic. Western governments should Western governments should

encourage manageable change before encourage manageable change before the country breaks apart.the country breaks apart.

http://www.youtube.com/watch?v=L9lKcajBv2E

Three Issues related to the system (3) Corruption

Corruption is defined by the World Bank and Transparency International (TI) as “the misuse of public office for private gain.”

(1) Petty corruption: practiced by public servants

(2) Grand corruption: high-level public officials and politicians make decisions involving large public contracts or projects financed by external donors.

(3) Episodic corruption: honest behavior is the norm, corruption the exception, and the dishonest public servant is disciplined when detected.

(4) Systemic corruption: channels of malfeasance extend upwards from the bribe collection points, and systems depend on corruption for their survival.

U.S. Opens Probe of Las U.S. Opens Probe of Las Vegas Sands Vegas Sands 3-2-2011 WSJ 3-2-2011 WSJ

US law: the Foreign US law: the Foreign Corrupt Practices Act Corrupt Practices Act

Las Vegas Sands and Las Vegas Sands and its operations in its operations in Macau. Macau. http://http://

www.lasvegassands.com/LasVegasSands/Our_Properties/At_a_Glance.aspx

SEC, the Justice SEC, the Justice Department and The Department and The Nevada Gaming Nevada Gaming Control Board Control Board

U.S. Joins H-P Bribery U.S. Joins H-P Bribery Investigation Investigation 4/16/2010 WSJ4/16/2010 WSJ

The U.S. has joined The U.S. has joined German and Russian German and Russian authorities in investigating authorities in investigating whether HP executives paid whether HP executives paid €8 million in bribes to €8 million in bribes to Russian officials to win a Russian officials to win a €35 million contract in €35 million contract in Russia. Russia. The Foreign The Foreign Corrupt Practices ActCorrupt Practices Act, bars , bars American companies from American companies from bribing foreign-government bribing foreign-government officials anywhere in the officials anywhere in the world.world.

Time Magazine Loses Suit Against Suharto 9/10/07 NYT

Indonesia's highest court ordered Time Indonesia's highest court ordered Time magazine to pay $106 million in damages magazine to pay $106 million in damages for defaming former dictator Suharto in for defaming former dictator Suharto in May 1999 by alleging his family amassed May 1999 by alleging his family amassed 15 billions of dollars. 15 billions of dollars.

Suharto ruled 31 years until May 1998.Suharto ruled 31 years until May 1998. Time filed an appeal in Feb. 2008Time filed an appeal in Feb. 2008 Indonesian Supreme Court (4-16-2009): Indonesian Supreme Court (4-16-2009):

“The story in Time magazine is still within “The story in Time magazine is still within the press code of conduct so it is not the press code of conduct so it is not acting against the law.acting against the law.

In Afghanistan, fighting a legacy of In Afghanistan, fighting a legacy of corruption corruption 11-23-2009 USA Today

A way of doing business A way of doing business Safi, a real estate broker, gave $200 to a clerk at the district office, Safi, a real estate broker, gave $200 to a clerk at the district office,

$3,000 to be shared among three workers at the central municipal $3,000 to be shared among three workers at the central municipal office and $500 to a Finance Ministry official. Then he carried the office and $500 to a Finance Ministry official. Then he carried the paperwork to the municipal court, where a judge demanded $2,500 to paperwork to the municipal court, where a judge demanded $2,500 to file it.file it.

After three weeks, and more than $6,000, he had his title. "This is our After three weeks, and more than $6,000, he had his title. "This is our way of doing business," Safi said. "It's frustrating."way of doing business," Safi said. "It's frustrating."

Chinese Attitudes on Generosity Are Tested 9-24-2010 NYT

Mr. Buffett and Mr. Gates, the Rockefeller and Carnegie Mr. Buffett and Mr. Gates, the Rockefeller and Carnegie of this age, announced plans last month to invite about of this age, announced plans last month to invite about 50 of China’s superrich to discuss their concept of 50 of China’s superrich to discuss their concept of philanthropy. Only two tycoons had accepted the philanthropy. Only two tycoons had accepted the invitation.invitation.

In the last decade, 17 members of an annual list of In the last decade, 17 members of an annual list of China’s 50 richest people had been convicted of China’s 50 richest people had been convicted of economic crimes. economic crimes.

Causes or factors of corruptionCauses or factors of corruption: demand (by the : demand (by the public) and supply (by public officials). public) and supply (by public officials).

GraphGraph Demand side factorsDemand side factors

(1) regulations and authorizations; (1) regulations and authorizations; (2) certain characteristics of the tax systems; (2) certain characteristics of the tax systems; (3) certain spending decisions; (3) certain spending decisions; (4) provision of goods and services at below-(4) provision of goods and services at below-market prices. market prices.

Supply side factors

(1) the bureaucratic tradition; (1) the bureaucratic tradition;

(2) the level of public sector wages; (2) the level of public sector wages;

(3) the penalty systems; (3) the penalty systems;

(4) institutional controls; (4) institutional controls;

(5) the transparency of rules, laws, and (5) the transparency of rules, laws, and processes; processes;

(6) the examples set by the leadership. (6) the examples set by the leadership.

Consequences of corruption1. Paolo Mauro, “Corruption: Causes, Consequences,

and Agenda for Further Research,” Finance & Development

http://www.worldbank.org/fandd/english/0398/articles/010398.htm

(1) lowering incentives to invest (2) reduce growth (by lowering the quality of public infrastructure and services, decreasing tax revenue, causing talented people to engage in rent-seeking rather than productive activities, and distorting the composition of government expenditure.)

2.2. Habib and Zurawicki, "Corruption and Habib and Zurawicki, "Corruption and Foreign Direct Investment," Foreign Direct Investment," Journal of Journal of International Business StudiesInternational Business Studies, Vol. 33, , Vol. 33, No. 2, 2002No. 2, 2002

Sample: Sample: 7 7 x 89 x x 89 x 33

77: Germany, Italy, Japan, Korea, Spain, : Germany, Italy, Japan, Korea, Spain, UK, and USUK, and US

33: 1996-1998: 1996-1998

Conclusion: McDonald’s, 3M in RussiaConclusion: McDonald’s, 3M in Russia

3. N. Charron, “Exploring the Impact of Foreign Aid on Corruption: Has the “Anti-Corruption Movement” Been Effective?”

The Developing Economies 49, no. 1 (March 2011): 66–88The Developing Economies 49, no. 1 (March 2011): 66–88

1.1. From 1997 onward, the impact of multilateral aid is From 1997 onward, the impact of multilateral aid is strongly and robustly associated with lower strongly and robustly associated with lower corruption levels, while bilateral aid is shown to be corruption levels, while bilateral aid is shown to be an insignificant determinant.an insignificant determinant.

2.2. An increase in any official development assistance An increase in any official development assistance (ODA) pre-1997 is associated with higher levels of (ODA) pre-1997 is associated with higher levels of corruption or has no impact at all.corruption or has no impact at all.

2011 Corruption Perception Index

20112011

Part 1

4. Regional Integration

North American Free North American Free Trade Agreement Trade Agreement (NAFTA)(NAFTA)

Successor to 1988 Successor to 1988 Canada-U.S. Free Canada-U.S. Free Trade Agreement Trade Agreement (CUSTA).(CUSTA).

In force since 1994.In force since 1994.

Share of North American Economy & Share of North American Economy & PopulationPopulation

GDP (Gross Domestic Product): Total final output of national economy.

CDA 7.5%

USA 84.8%

MEX 7.7%

CDA 8%

USA 68%

MEX 24%

GDP Population

Relative Standard of LivingRelative Standard of Living

GDP per Capita: Total final output of national economy divided by total population.

CDA

$34,058

USA

$41,789

MEX

$10,627

GDP per Capita

The entire document of NAFTA is available at The entire document of NAFTA is available at http://www-tech.mit.edu/Bulletins/nafta.htmlhttp://www-tech.mit.edu/Bulletins/nafta.html

NAFTA was set to be completely phased in in NAFTA was set to be completely phased in in 2009.

Restrictions on trade and investment were to be Restrictions on trade and investment were to be removed, including those on motor vehicles and removed, including those on motor vehicles and automotive parts, computers, textiles, and automotive parts, computers, textiles, and agriculture. agriculture.

The treaty also protected intellectual property The treaty also protected intellectual property rights (patents, copyrights, and trademarks) rights (patents, copyrights, and trademarks) and outlined the removal of restrictions on and outlined the removal of restrictions on investment among the three countries.investment among the three countries.

ExamplesExamples

Automobile: NAFTA immediately decreased Mexican NAFTA immediately decreased Mexican tariffs on automobiles from 20 to 10 percent in 1994 tariffs on automobiles from 20 to 10 percent in 1994 and was set to drop them to zero by 2004. and was set to drop them to zero by 2004.

Textiles and Apparel: NAFTA immediately eliminated : NAFTA immediately eliminated trade barriers on more than 20 percent of Mexican - trade barriers on more than 20 percent of Mexican - U.S. trade in textiles and apparel. U.S. trade in textiles and apparel.

Agriculture: NAFTA immediately reduced tariffs to zero : NAFTA immediately reduced tariffs to zero for half of U.S. agricultural exports to Mexico. for half of U.S. agricultural exports to Mexico.

Financial Service: Canadian and U.S. financial firms : Canadian and U.S. financial firms are allowed to establish wholly owned subsidiaries in are allowed to establish wholly owned subsidiaries in Mexico and to engage in the same range of activities Mexico and to engage in the same range of activities as similar Mexican firms. as similar Mexican firms.

The NAFTA Debate in the United States

(1) Labor IssuesBlue-collar industrial labor unions were the most vocal opponents of NAFTA. Why? Wage and job concerns. Result: North American Agreement on Labor Cooperation.

(2) Environmental IssuesTwo concerns: (1) firms may relocate to Mexico and (2) pollution along the U.S.-Mexico border.Result: North American Agreement on Environmental Cooperation.

(3) ImmigrationThree factors are involved in the determination of the number of migrants: (1) demand-pull factors, (2) supply-push factors, and (3) social networks.

Supply-push Factors

Better Lives for Mexicans Cut Allure of Going Better Lives for Mexicans Cut Allure of Going North North 2011-7-6 NYT

Economic, demographic and social changes in Mexico Economic, demographic and social changes in Mexico are suppressing illegal immigration as much as the poor are suppressing illegal immigration as much as the poor economy or legal crackdowns in the United Stateseconomy or legal crackdowns in the United States

Supply-push Factors

The birth rate in Mexico has dropped The birth rate in Mexico has dropped from roughly eight children per woman of from roughly eight children per woman of child-bearing age in 1960 to 2.4 in 2009. child-bearing age in 1960 to 2.4 in 2009. Each decline in the birth rate leads to a Each decline in the birth rate leads to a reduction in young adults looking for work reduction in young adults looking for work in subsequent decades, so fewer will in subsequent decades, so fewer will need to cross the border.need to cross the border.

NAFTANAFTA TRUCKING DISPUTE TRUCKING DISPUTE

Under the NAFTA, the US and Mexico agreed to Under the NAFTA, the US and Mexico agreed to phase-out restrictions on cross-border trucking phase-out restrictions on cross-border trucking services. services.

In 1995, the US announced it would not lift In 1995, the US announced it would not lift restrictions on Mexican trucks. restrictions on Mexican trucks.

In 2001, a NAFTA dispute settlement panel found In 2001, a NAFTA dispute settlement panel found the U.S. restrictions to be in breach of its NAFTA the U.S. restrictions to be in breach of its NAFTA obligations.obligations.

In 2007 Mexico agreed to the Trucking Pilot In 2007 Mexico agreed to the Trucking Pilot Program.Program.

March 16, 2009. Mexico announced retaliation, raising March 16, 2009. Mexico announced retaliation, raising tariffs on 99 agricultural products worth more than $2 tariffs on 99 agricultural products worth more than $2 billion annually.billion annually.

Mexico cut the tariffs in half in summer 2011 after Mexico cut the tariffs in half in summer 2011 after Obama and Mexican President Felipe Calderon Obama and Mexican President Felipe Calderon approved an inspection and monitoring program for the approved an inspection and monitoring program for the companies that had been approved in 2009.companies that had been approved in 2009.

1st Mexican truck to will enter Texas on 10/21. 1st Mexican truck to will enter Texas on 10/21. ((10/19/2011 Wichita Eagle10/19/2011 Wichita Eagle))

CAFTA-DRCAFTA-DR The U.S. Congress approved the CAFTA-DR in July 2005 The U.S. Congress approved the CAFTA-DR in July 2005

and the President signed the implementation legislation on and the President signed the implementation legislation on August 2, 2005.August 2, 2005.

Implemented on a Implemented on a rolling basisrolling basis.. El Salvador, March 1, 2006.El Salvador, March 1, 2006. Honduras and Nicaragua, April 1, 2006.Honduras and Nicaragua, April 1, 2006. Guatemala, July 1, 2006. Guatemala, July 1, 2006. Dominican Republic, March 1, 2007. Dominican Republic, March 1, 2007. Costa Rica, January 1, 2009.Costa Rica, January 1, 2009.

80% of U.S. exports of consumer and industrial 80% of U.S. exports of consumer and industrial products to Central America will be duty-free products to Central America will be duty-free "immediately" and over 15 years all tariffs on "immediately" and over 15 years all tariffs on these goods will be eliminated. these goods will be eliminated.

More than half of U.S. farm exports to the More than half of U.S. farm exports to the region will become duty-free immediately and region will become duty-free immediately and tariffs on most U.S. farm products will be tariffs on most U.S. farm products will be phased out within 15 years. phased out within 15 years.

Government procurement contracts will also be Government procurement contracts will also be open for bidding by U.S. contractors. open for bidding by U.S. contractors.

Limitations on sugar and textile industryLimitations on sugar and textile industry

4. Regional IntegrationEU and the Euro

The road to European Union began with three separate The road to European Union began with three separate treaties dating from the 1950s: treaties dating from the 1950s:

(1) the European Coal and Steel Community (ECSC), (1) the European Coal and Steel Community (ECSC),

(2) the European Atomic Energy Community (Euratom), (2) the European Atomic Energy Community (Euratom), (3) (3) the European Economic the European Economic Community (EEC).

Collectively, they became known as the European Community.

The Maastricht Treaty on European Union, which took European Union, which took effect in November effect in November 19931993, was a major overhaul of the , was a major overhaul of the founding treaties. founding treaties.

Copenhagen criteria

To join the Union, they need to fulfill the economic To join the Union, they need to fulfill the economic and political conditions known as the and political conditions known as the Copenhagen criteria::

(1) (1) be a stable democracy, respecting human rights, be a stable democracy, respecting human rights, the rule of law, and the protection of minorities; the rule of law, and the protection of minorities;

(2) (2) have a functioning market economy; have a functioning market economy;

(3) (3) adopt the common rules, standards and policies adopt the common rules, standards and policies that make up the body of EU law. that make up the body of EU law.

Candidate CountriesCandidate Countries Croatia

The former Yugoslav Republic of Macedonia

Turkey

Iceland

How is the EU Run?

European Parliament (elected by the peoples of the Member States); 

Council of the European Union (representing the governments of the Member States); 

European Commission (driving force and (driving force and executive body);  executive body); 

Court of JusticeCourt of Justice (ensuring compliance with the (ensuring compliance with the law);  law); 

Court of Auditors (controlling sound and lawful Court of Auditors (controlling sound and lawful management of the EU budget).management of the EU budget).

European Commission:European Commission:(1) (1) EU's antitrust battles with Microsoft Corp.EU's antitrust battles with Microsoft Corp.

March 24, 2004:March 24, 2004: EU says Microsoft broke antitrust law EU says Microsoft broke antitrust law by denying technical information to competitors and by denying technical information to competitors and bundling its Media Player software with Windows, bundling its Media Player software with Windows, levies €497 million fine.levies €497 million fine.

July 12, 2006:July 12, 2006: Microsoft is fined €280.5 million for non- Microsoft is fined €280.5 million for non-compliance with the ruling.compliance with the ruling.

Sept. 17, 2007:Sept. 17, 2007: EU's Court of First Instance upholds EU's Court of First Instance upholds the 2004 ruling, in a blow to Microsoft.the 2004 ruling, in a blow to Microsoft.

Oct. 22, 2007:Oct. 22, 2007: Microsoft agrees to drop any further Microsoft agrees to drop any further appeal.appeal.

Dec. 13, 2007Dec. 13, 2007: Norwegian browser maker Opera : Norwegian browser maker Opera Software ASA files complaint over the ties between Software ASA files complaint over the ties between Internet Explorer and Windows.Internet Explorer and Windows.

Feb. 27, 2008:Feb. 27, 2008: Microsoft is fined €899 million for non- Microsoft is fined €899 million for non-compliance with the 2004 ruling.compliance with the 2004 ruling.

Jan. 15, 2009:Jan. 15, 2009: EU sends preliminary charges to EU sends preliminary charges to Microsoft, saying it believes the inclusion of Internet Microsoft, saying it believes the inclusion of Internet Explorer in Windows is illegal.Explorer in Windows is illegal.

3/1/2010 Microsoft makes ballot for browser available. .

(2) European Commission against Coke

• • Feb 1987:Feb 1987: European Commission opens investigation into Coke's European Commission opens investigation into Coke's rebate practices.rebate practices.  • • Dec 1989:Dec 1989: European Commission closes investigation after Coke European Commission closes investigation after Coke agrees to end payments for stocking Coke exclusively and to halt other agrees to end payments for stocking Coke exclusively and to halt other sales incentives.sales incentives.  • • May 1999:May 1999: Coke scales back acquisition of Cadbury Schweppes PLC's Coke scales back acquisition of Cadbury Schweppes PLC's soft-drinks business after clashing with EU over jurisdiction.soft-drinks business after clashing with EU over jurisdiction.  • • July 1999:July 1999: EU raids Coke's offices in Austria, Denmark, Germany and EU raids Coke's offices in Austria, Denmark, Germany and U.K. -- investigation continuing.U.K. -- investigation continuing.  • • May 2000:May 2000: EU raids Coke's offices in Belgium and U.K. -- investigation EU raids Coke's offices in Belgium and U.K. -- investigation continuing.continuing.  • • Dec 2003:Dec 2003: European Commission focuses case on Germany and European Commission focuses case on Germany and Belgium.Belgium.June 2005: Coke and EU reached an antitrust settlement forcing Coke to change its practices

  

Reasons for Anti-trust

““What's mine is yours: When should firms be required to share What's mine is yours: When should firms be required to share their intellectual property with rivals?” their intellectual property with rivals?” 5/28/2009 The Economist5/28/2009 The Economist

Professor John Vickers of Oxford University makes the Professor John Vickers of Oxford University makes the case for intervention on three counts: case for intervention on three counts:

(1) A rival is less likely to develop new products if it (1) A rival is less likely to develop new products if it cannot share in the profits from the dominant firm’s cannot share in the profits from the dominant firm’s invention. invention.

(2) The contest to innovate tends to be keenest where (2) The contest to innovate tends to be keenest where there is a neck-and-neck battle to be the dominant firm. there is a neck-and-neck battle to be the dominant firm.

(3) The dominant firm may use “property rights” to stifle (3) The dominant firm may use “property rights” to stifle “follow-on” innovation. “follow-on” innovation.

(3) Banana Trade War (3) Banana Trade War 6/29/2007 6/29/2007 WSJWSJ

The disputes on bananas have lasted for more than 20 The disputes on bananas have lasted for more than 20 years.years.

US Trade Representative requested the WTO panel to US Trade Representative requested the WTO panel to review whether review whether the EU’s banana import regime breaches the EU’s WTO obligations. 

EU failed to implement the WTO rulings in a 1996 EU failed to implement the WTO rulings in a 1996 proceeding initiated by Ecuador, Guatemala, proceeding initiated by Ecuador, Guatemala, Honduras, Mexico and the United States.  That ruling Honduras, Mexico and the United States.  That ruling said the EU’s banana regime discriminates against said the EU’s banana regime discriminates against bananas originating in Latin American countries and bananas originating in Latin American countries and against distributors of such bananas, including several against distributors of such bananas, including several U.S. companies. U.S. companies. 

The EU-Latin America Bananas Agreement

12-15-200912-15-2009 EU will cut its import tariff on bananas in EU will cut its import tariff on bananas in

eight stages, from the current rate ofeight stages, from the current rate of

€€176/tonne to €114/tonne in 2017 at the 176/tonne to €114/tonne in 2017 at the earliest.earliest.

(4) EU Officials Raid Book Publishers 3-3-2011 WSJ3-3-2011 WSJ

Searching for Searching for evidence that evidence that publishers had acted publishers had acted illegally to keep prices illegally to keep prices high in the nascent high in the nascent electronic-book electronic-book market.market.

U.S. companies U.S. companies involved: Apple and involved: Apple and AmazonAmazon

History of the Euro

The Single European Act (1986) and the The Single European Act (1986) and the Treaty on European Union (1992) Treaty on European Union (1992) introduced Economic and Monetary introduced Economic and Monetary Union (Union (EMU) and laying the foundations ) and laying the foundations for the single currency.for the single currency.

On January 1, 1999, the exchange rates of the participating currencies were were irreversibly set.irreversibly set.

EMU Economic Convergence Criteria

(1) Harmonized indices of consumer pricesThe average rate of inflation, observed over a period of one year before examination, should not exceed by more than 1.5 percentage points that of, at most, the three best performing member states.

(2) general government deficitThe government deficit should not exceed 3% of gross domestic product (GDP) unless the ratio has declined substantially and continuously and reached a level that comes close to 3%, or alternatively, if the excess over 3% is only exceptional and is temporary and the ratio remains close to 3%.

(3) General government gross debtThe public debt should not exceed 60% of GDP, unless the ratio is sufficiently diminishing and approaching 60% at a satisfactory pace.

(4) Nominal long-term interest ratesThe average nominal long-term interest rate, observed over a period of one year before the examination, should not exceed by more than 2 percentage points that of, at most, the three best performing member states in terms of price stability.

(5) Participation in the Exchange Rate Mechanism (ERM)The observance of the normal fluctuation margins provided for by the exchange rate mechanism of the European Monetary system (EMS) for at lest two years, without severe tensions.

Estonia (since 1/1/2011)Estonia (since 1/1/2011) The euro is not the currency of all EU Member States. It The euro is not the currency of all EU Member States. It

includes 17 countries. includes 17 countries. Denmark Denmark and and the United Kingdom the United Kingdom opt-out, while the remainder opt-out, while the remainder

(many of the newest EU members plus Sweden) have yet to (many of the newest EU members plus Sweden) have yet to meet the conditions for adopting the single currency.meet the conditions for adopting the single currency.

Asymmetric Economic Structures

The fit and the flabby Sep 16th 2004

The Economist

Germany's economyAngela in Wunderland, What Germany’s got right, and what

it hasn’t 2-3-2011 Economist

Wirtschaftswunder (see next page)Wirtschaftswunder (see next page) 3.6% in 20103.6% in 2010 What’s Germany’s secret? --ExportsWhat’s Germany’s secret? --Exports How? Germany has been a big winner on How? Germany has been a big winner on

both the supply side (wage and exchange both the supply side (wage and exchange rate) and the demand side (China) of rate) and the demand side (China) of globalization. globalization.

Germany's Resiliency Buoys Europe 9/1/2011 WSJ

Two important implications

1.1. Economic structural effectEconomic structural effect: If the economies of : If the economies of America and China slow sharply, Germany's America and China slow sharply, Germany's economy will be much more vulnerable than economy will be much more vulnerable than France's. Germany needs to find more growth France's. Germany needs to find more growth at home.at home.

2.2. Policy asymmetric effectPolicy asymmetric effect: The monetary policy : The monetary policy of the European Central Bank (ECB), which of the European Central Bank (ECB), which sets a single interest rate for the whole euro sets a single interest rate for the whole euro area, is currently probably not ideal for area, is currently probably not ideal for Germany and other Euro nations. Germany and other Euro nations.

Robert Mundell’s Theory of Optimum Currency Areas

To join or not to join? Monetary efficiency gain: the joiner’s

savings from avoiding the uncertainty, confusion, and calculation and transaction costs that arise when exchange rates float.

Economic stability loss: a country a country that joins an exchange rate area that joins an exchange rate area gives up its ability to use the gives up its ability to use the exchange rate and monetary policy exchange rate and monetary policy for the purpose of stabilizing output for the purpose of stabilizing output and employment. and employment.

GG

LL

GG

LL

θ1 θ θ2 Degree of Integration

The Euro CrisisThe Euro Crisis

It’s all connectedIt’s all connected

10-22-2011 NYT10-22-2011 NYT

The Immediate TroubleThe Immediate Trouble

The Risk of ContagionThe Risk of Contagion

A Possible ScenarioA Possible Scenario

Continental ContagionContinental Contagion

Global ReverberationsGlobal Reverberations

Greece and the euroGreece and the euro1-28-2012 Economist1-28-2012 Economist

S&P Declares Greece in Default S&P Declares Greece in Default 2-28-2012 WSJ2-28-2012 WSJ

Greece became the first euro-zone Greece became the first euro-zone member officially to be rated in default member officially to be rated in default yesterday.yesterday.

Europe Tightens Fiscal Ties Europe Tightens Fiscal Ties 1-31-2012 WSJ1-31-2012 WSJ

So, what has happened to the So, what has happened to the exchange rate? exchange rate?