The Political Economy of the Worlds Capitalisms - Book Report/Review Example

 The Political Economy of the World’s Capitalisms Introduction Industrialization is a process by which a social change is brought about that affects all areas of a society such as social, economic and culture spheres. From a broader perspective industrializations is not only an economic phenomenon, in fact relationships of industrialization are more deep rooted with technological change and social awakening. The impacts of industrialization are more on attitudes and cultural norms than anything else, for example old systems of aristocracy were abolished as an aftermath of industrialization. This is marked by the eventual demise of agricultural revolution. The aristocratic system which subjugated people into classes was eventually eliminated. Thus the culture of equality persistent in today’s world is a fruit of the industrial revolution. This was because the whole system of industrial economy functioned on free and independent ideas. The social classes were thus defined not by bloodlines alone but money became a more dominant factor in defining social classes. To understand the economics involved with late industrialized nations, a clear understanding of early industrialization must be developed. This is because late industrialization was in essence a consequence of steps taken by nations involved in early industrialization. The Industrial revolution started from Great Britain. The reforms brought about in agricultural revolution increased output for individual farmers. This however also increased the demand for mechanized machinery required for farming. At that time most of this machinery was being made by local artisans. These were usually family owned business and worked like black smiths. With their limited production capability they could not provide enough goods to satisfy the growing demand of agricultural machinery. The investments in this sector led to modernization of this field of manufacturing. The very early forms of Fordism were witnessed as an assembly line was created and tasks assigned in order to increase efficiency. This started a chain process for other industries. As wealth was being accumulated by businesses they started investing in new business ventures and buying luxury items, thus increasing their demand as well. The initial industrialization in Japan came around as a response to American influence in their trade activities. The opening up of Ports Shimoda and Hakodate forced the Japanese to abolish the feudal system. This allowed a modernization of Japanese army and later through Meiji reforms, industrialization of Japan and convergence to a modern society. The industrialization of Japan can be divided into two main parts i.e. pre and post world war two period. After the Second World War Japanese economy had been completely destroyed. The rebuilding process of Japanese economy after the war was different from pre war periods. This was because Japanese government shifted its focus from developing a military dominated industrial base to a consumer industry base. The affects of Success in world war had dominant affects on US economy as well. The initial strands of industrialization could not reach Germany as quickly as it had reached other European nations. The primary reason was that industrialization of that era was basically focused on or in fact driven by economies of scale. The economies of scale however cannot be achieved until and unless a comprehensive large demand exists in the market. Germany at that point in time was divided up into many small states with trade barriers and embargos on each other. This meant that seeds of industrialization could not be sown as demand was not enough to motivate economies of scale. A significant part of German industrialization is its involvement in World War two. The technological innovations brought about in mechanics are to this day a marvel. The post war era however saw a totally destroyed Germany with international restrictions. This allowed for new era of industrialization focused on industries such as medicine and automobile. Foreign Multinational Enterprises (FMNE) The term foreign multinational enterprise is deemed to be a western concept which describes any corporation or an enterprise which is able to manage its production systems in the global market or which delivers services in more than one country. It can also be referred as an international corporation. Such large companies may have offices, branches or manufacturing plants in different countries and has to integrate their operations and performances at a global level. This trend had left behind the original concept of the production house being at the same premises as the original and main headquarter is located for that company. The very first multinational company was the Dutch East India Company. Its literal name was “United East Indian Company" established in 1602, by the States-General of the Netherlands to carry out colonial activities in Asia. Thus, the world first multinational corporation and the world's first mega-corporation came to the region of Asia from the west with enough powers to manipulate governments, coin money and establish its very own colonies. The nearest competitor was the English (or British) East India Company (est. in the 17th century) which became dominant in the region in the 20th century. It was controlled by the British Empire in the 19th and 20th Centuries in this region. Today, the perception has been built up due to these (dominant) western companies of history and the FMNE’s of today are held to be the developed western corporations. These have numerous business units, who aggressively take part in operating in many developing countries. They have international networks, which translate into an advantage of being able to transfer moveable resources across national borders to be combined with less mobile ones, in response to local opportunities (Bartlett and Ghoshal, 1998). Latecomer Multinational Enterprises (LMNE) The Latecomer Multinational Enterprises stem from the economies that didn’t have the initial access to the technologies and the efficient use of resources to be able to develop themselves on a global front. Nowadays, these are thought to be from the Asian Tigers (Taiwan, South Korea, etc). They are regarded as one of the “engines” in the economic development process in the newly industrializing economies. The basic aim of these LMNE’s is to capitalize on the competitive and comparative advantage in the factors of production that they hold and orient them in a way to compete at the international level. They are fast learning and applying some of the practices of the FMNE’s and building their own competitive advantages rather than simply thrive on the comparative advantage that they may hold due to the large labor pool or the geographic significance they hold in the global front. Nowadays, the eventual threat is perceived from these small, yet powerful emerging companies and the opportunities are also being studied by the western world policy makers as they strive to better understand the degree of competition they pose to the typical FMNE’s of today and tomorrow. Overviews of Different Economic Systems in the World United States The United States has a capitalist mixed economy, which is run by abundant natural resources, a well-developed infrastructure, and high productivity and efficiency. It holds the position of being the largest importer of goods and third largest exporter, though exports per capita are relatively low. Currently, it has the per capita GDP of $46,900. The market decisions are mostly made by private individuals and business and the federal and state governments buy needed goods and services predominantly in the private marketplace. US business firms enjoy greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, to lay off surplus workers, and to develop new products1. The US has been the frontrunner in the all the major technological advances (mainly in the fields of computer technology, medicine as well as cutting edge space age technology and weapons). The excessive reliance on credit structure as well as the troubled real estate had lead to the meltdown of the economy recently and the US Congress had to establish a $700 billion Troubled Asset Relief Program (TARP) in October 2008 to help stabilize financial markets which was causing frenzy the world over due to the interdependence of other economies with that of the U.S. United Kingdom The economy of the United Kingdom is actually comprised of the economies of England, Scotland, Wales and Northern Ireland. It should be noted that The Great Industrial Revolution of the 18th till the 19th century initially started in the UK. This meant that they were the pioneers of the heavy industries such as shipbuilding, coal mining, steel production, and textiles. The expansion of the products of the empire led to its dominance in the trade world of the 19th century. Currently, the manufacturing industry doesn’t account for much in the economy though. It has had the most prosperity in the economy which has put it in front of all the other economies of the Western Europe especially in the 90’s. It has a leading trading power and financial center in Europe. The area has seen a recent growth of social welfare programs as well. Agriculture is intensive and highly mechanized which fulfills the food needs to around 60% using less than 2% of the labor force. The area is dominated by vast coal, natural gas, and oil resources which are at a risk of decline ever since the turn of the millennia. Services, particularly banking, insurance, and business services, account by far for the largest proportion of GDP while industry continues to decline in importance2. The GDP contribution of each sector has been in the form of; agriculture: 1.2%, industry: 23.8% and services: 75% in 2009. Japan The concept of free markets came to Japan in the late 19th century when the period of expansion of the economy started. They learned from the market economies of the British and the American capitalists societies and brought their teachings to their country. This continued growth and determination to learn from the west brought the Japanese miracle of growth in the economy in the 20 the century. Today, the close interlocking structures of manufacturers, suppliers, and distributors, which is also known as keiretsu, and the guarantee of lifetime employment for a substantial portion of the urban labor force have led to the countries strengthening of economy and becoming a power to be dealt with. Japan's industrial sector which drives the economy along with the technology sector is heavily dependent on imported raw materials and fuels. A tiny agricultural sector is highly subsidized and protected. The service sector accounts for three quarters of the gross domestic product. South Korea The country of South Korea is a very well developed nation with one of the world's fastest growing economies from the early 1960s to the late 1990s. Even though the country has been facing wars and political uprisings in the past, it has remained consistent in its mission of rapid transformation into a wealthy and industrialized economy. This phenomenon is also considered to be called “Miracle on the Han River” due to the short time period of time South Korea took in becoming one of the world’s most successful economies. This growth surge was achieved through manufacturing oriented exports and a highly educated workforce. Moreover, the emphasis on the import of raw materials and technology at the expense of consumer goods, and encouraged savings and investment over consumption which has placed South Korea in the trillion dollar club of world economies as of 2004. It has a high-tech infrastructure as it is deemed to be the most wired country in the world. The popular consumer goods are of digital electronics and the most prominent companies are Samsung and LG. The global economic downturn took its toll on this economy in late 2008, when South Korean GDP growth slowed to 2.2% and then declined 0.8% in 2009. The country also has to deal with the fast aging population, rigid labor market, and overdependence on manufacturing exports to drive economic growth which can become a problem in the future. Germany Germany has the largest national economy in Europe, the fourth largest by nominal GDP in the world, and fifth by GDP (PPP) in 20083. Germany has also been the driving force of the age of industrialization like UK and today has a much globalised economy. The contribution to the GDP of the German Economy is in the following form; agriculture: 0.9%, industry; 29.1% and services; 70%. The major products of Germany include specialization in the sectors of engineering, automobiles, machinery, metals, solar power technology and chemical goods. In 2006, it was the world's top exporter with $1.133 trillion. The long term challenges that the country has to face are in the form of creating a balance between its unemployment (which is a major issue for Germany) and the integration of modernization into its economy. The debt of Germany is very elevated with the record-high public debt, which is expected to exceed 5% of GDP in 20104. Observations The observation that can be made in all these current states of economies is that it all leads back to the time when these countries were newly industrializing. It was all a matter of timing. The western nations like the U.K. and the U.S. and Germany developed earlier on than other countries partly because of the industrial revolution for the former and technological breakthroughs for the latter two countries. These capabilities needed a solid foundation on which to build and support the required important physical and intangible investments. Thus they had, in a sense, a first mover’s advantage (developing strong FMNE’s) in the industrialization and breakthrough technology development which entitled them to develop a strong position in the global market and raising entry barriers later on for the developing nation’s economies and companies who were trying to catch up. Due to the lack of well developed industrial structure and technology, the governments of the Late Developing Countries closed off their borders to import or at least discouraged it and encouraged their own industries (to foster the growth of LMNE’s) to grow to be able to compete with the global industries of the west. Late Development theory According to the theory of late development, countries which developed economically late have considerable difference in their management systems. The term ‘management’ being used here defines not only management difference at a firm level but also at a national policy making level. The key institutional differences can be highlighted primarily by investments in less technology oriented industries. The focus of late developed economies was more on the long term rather than the short term. As we have seen in examples mentioned above, Japan was motivated towards industrialization because it feared American economic domination in Japan. The policies set by local governments in late industrialization nations follow the same examples. These nations were more concerned with focusing on developing their own industries by limiting foreign influence on their economic scene. Therefore subsidies and trade barriers are a common phenomenon in late industrialized nations such as China, Germany and Japan. A very interesting example would be of keiretsu a phenomenon common in Japanese industries. This is a structure of informal partnership where different companies form partnerships. This facilitates competition against foreign multinationals having a large resource base. This model encompasses the integration methods adopted by late industrialized nations to safeguard themselves against multinationals from early industrialized economies. These vertical linkages are an important aspect of late development theory. The Chinese system for example uses government as facilitator and protector of local industry by promoting vertical linkages between Chinese firms. The role of banks is also different in late developed countries. The banks unlike early industrialized economies play a role of facilitators usually controlled by governments. They are the main source of funds to businesses. In early developed nations this role is taken up by shareholders. The banks being independently owned play role of a business entity. This primary difference in roles of financer also affects the business environment. The governments use this model to facilities companies which are performing badly against foreign multinationals, thus giving them an unfair competitive advantage. In early developed economies role of state is more oriented towards people rather than business. This can be easily explained the fact that in US and UK there are numerous examples of severe penalties against successful corporations. There approach is more towards people rather than corporations. In late developed nations however corporations hold more power over government decision. Two different set of theories describe allocation and development of R&D in late industrialized nations. The first theory considers R&D as a spate factor along with manufacturing etc (Veloso, 2001). Therefore if this sector does not show gains it will not prosper. The second approach states that human capital is the primary factor when it comes to R&D. Therefore if a nation doesn’t have enough human capital to develop adequate R&D it will engage in other less technology oriented activities. Globalization and outsourcing The affects of globalization started emerging more dominantly in 1990s. This meant that older systems were becoming obsolete. Emerging economies such as China, Brazil and India have captured market place. The reasons behind this exception are different from the ones discussed above. These economies basically rely on out sourcing which is much different from industrial base of nations engaged in early development. The transfer of technology which was a constraint for economies such as Japan and Germany during their period of industrialization is an issue no more. The outsourcing factor has made adequate transfers of technologies to these nations. Building on their low wage rates and raw materials they have been able to develop a cost advantage which cannot be matched by nations like Japan and Germany. 2008 Financial Crisis As mentioned above governments in early industrial economies do not directly interfere in the market. This has led to financial crisis of 2008 where soft investment banking regulations allowed a huge subprime mortgage crisis to destroy American economy. The economies of Japan, Germany and Korea have not been directly affected by this phenomenon because their economies are regulated by their respective governments. An indirect has however been seen as they are engaged in businesses with nations affected by recession. Conclusion The discussion above has revealed the differences in economic and management systems of early and late industrialized nations. The exception of China can be understood through its reliance on outsourcing as a primary industry. This has allowed China to gather technological expertise and compete against western multinationals. The late industrialization states would however have to stop their interference in local markets. If this support is not withdrawn and perfect competition is not supported their industries would never be able to fully compete with western multinationals on all fronts. References Fogel, R. (2010). Chinese GDP in 2040 £123 trillion. Foreign Policy Magazine Hutton, W. (1995). The political economy of the world’s capitalisms: The State we’re In. Hikino, T. Amsden, A. (1994). Convergence of Productivity Abe, E. Fitzgerald, R (1995). Origins of Japanese Economic Power Nolan, P. (2001) China and the Global Economy. Abe, E. Fitzgerald, R. (1995)The Origins of Japanese Industrial Power. Porter, M. The Competitive Advantage of Nations. Veloso, F. (2001). Incentives, Infrastructure and Institutions: Perspectives on Industrialization and Technical Change in Late-developing nations. Amighini, A., Rabelloti, R., Sanfilippo, M., 2007. The rise of multinationals from emerging countries. A review of the literature. [Online Available] http://www.docstoc.com/docs/6339644/The-rise-of-multinationals-from-emerging-countries-A-review-of-the-literature Bartlett, C.A., Ghoshal, S., 1998. Managing across Borders the Transnational Solution, 2nd ed. Harvard Business School Press, Boston, Mass. CIA World Factbook – Germany [Online Available] https://www.cia.gov/library/publications/the-world-factbook/geos/gm.html CIA World Factbook – Japan [Online Available] https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html CIA World Factbook – South Korea [Online Available] https://www.cia.gov/library/publications/the-world-factbook/geos/ks.html CIA World Factbook – U.S.A [Online Available] https://www.cia.gov/library/publications/the-world-factbook/geos/us.html CIA World Factbook – United Kingdom[Online Available] https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html Patricia Hewitt (2004-07-15). "TUC Manufacturing Conference". Department of Trade and Industry. "Seoul Upbeat With Record $41 Bil. Surplus". Koreatimes.co.kr. Retrieved 2010-03-25. Veloso. F., Soto, M.J., 2001. Incentives, Infrastructure and Institutions: Perspectives on Industrialization and Technical Change in Late-Developing Nations. Elsevier Science Inc. New York. Read More