Anglo Saxon Economic Model - Essay Example

The economic performance of the UK compared to Japan since 1990 has clearly demonstrated the superiority of the Anglo Saxon model over Led Capitalism. Introduction An Anglo Saxon economy is generally a capitalist macroeconomics model in which levels of regulation and taxes are low. These economies are more liberal and free market oriented than other capitalist economies as government provides relatively fewer services (Economic Research, 2005). This type of economy is usually associated with United Kingdom, USA, and in some other European countries. On the other hand, State led capitalism is more state controlled, and its economy is more concentrated on wealth redistribution. Anglo Saxon economy is traditionally highlights the free market tendency, and has led to less regulated financial and labour markets. Where as in state led capitalism, the productive forces are directed and controlled by the government in a capitalist manner. It is a social system combining capitalism with state ownership. Merits and Demerits Anglo Saxon economic model encourages innovation, competitiveness, and promote overall prosperity, and produces less inequality and poverty at the lowest margins of a society. It creates more jobs and delivers better working conditions as seen in UK where working condition is better than Japan. When people invest their own money, they have a chance to make profit by best efforts. Here production utilises at optimum level as the individual interest is involved. Competition pushes the producer to take up productive steps such as new technology, cost cutting, and use of best supply chain for making good profit (Schmidt, Vivien A., 2002). Other than these advantages, this economy also proves some disadvantages. This model of economy is responsible for a life of low wages and long hours for its employees. It creates inequality in society as the more talented and innovative people build strong financial position compared to less skilled individuals. Adding, poverty rates which were substantially higher in recent years in UK, where the economy is basically followed by Anglo Saxon economy model (Schmidt, Vivien A, 2002). State led capitalism economy advocates for the principle of individual rights. Consistent and rapid economic growth is the proven outcome of this economy. Human welfare is common in this economy. Its decentralised system of coordination is the greatest strength of its economy. But it has also some negative factors in its model. Because of more government intervention, social evils like nepotism, corruption, poor management may hurt the growth rate. In United Kingdom, Anglo Saxon model has allowed higher incomes for low paid workers, and at the same time it enhanced better work incentives. Where as in Japan, state led capitalism led to a shrinking population problem. For the past 10 years, Japan has witnessed a shrinking population problem as it is evident that there is a decline in Japanese birth rate which is a direct result of their overworking, and consumer culture lifestyle. Most of them are in their 30s or older with a few young children which are becoming a serious social issue. Whereas in United Kingdom there are many young parents and decline in population may not be an issue for many years to come ( Ray Barrell , Dawn Holland & Iana Liadze, 2010). Workers in UK are enjoying average higher salaries than Japan. Average working hours in a week in United Kingdom is higher than Japans average. At the same time its economy helps many women to achieve a better work life balance. According to statistics available in Eurostat, average working hours in a week in United Kingdom is 40 hours which are less compared to Japan. In Japan average working hours in a week is 46 hours. Moreover, many workers in Japan still work for long hours. In Japan, in 1995, the average employee worked for 1,884 hours in a year which was reduced to 1,615 hours in 2009. But in UK, the average employee worked for 1,714 hours in a year in 1995, which was reduced to 1,460 hours in 2009. Adding, Japan also has a far higher proportion of part time workers compared to Britain. Influence of governments policies The economic performance of UK compared to Japan since 1990 has clearly demonstrated the superiority of the Anglo Saxon model over State Led Capitalism. It is evident when we go through the history of the economic performance of both the countries.  The way of economic development achieved by UK over the past decade has really surprised as its present economy is one of the most dynamic of the developed world which was once dubbed as "sick man of Europe." This was mainly contributed by the reforms introduced from 1979 onwards by its political leaders, first by Margaret Thatcher (1979-1990), and later by Sir Jhon Major (1990-1997) and Tony Blair(since 1997). In 1995, countrys income per capita was just below the EU15 average, but by 2005, it was more than 10% higher than EU15 average level. The successive governments took steps to improve the functioning of the economy through privatisation by lowering taxes and strict budgetary discipline. The booming housing market in the period 1997-2004 was one of the major indications of growth stimulating factors. Between 1985 and 2004, potential output growth increased nearly to 2.75 per cent from 2 per cent. Because of policies under taken by the Thatcher government, trade union membership had dramatically declined to 28.2 % in 2004 which was 50% in 1980. It was resulted in the changing structure of the British economy which saw a decline of manufacturing sector and the rapid increase of service sector. As a result, UK economy had outperformed all the major industrial countries over the period 1995-2005 in terms of GDP growth per capita, and had lowered the unemployment rate (McKinsey Global Institute, 2000). In contrast to UKs improved economy, Japans economy had faced problems after 1990s recession, which was mainly because of the methods it used to run its economy since 1950 as it sticked to state controlled capitalism. It was evident that Japans economic problems were on governments intervention in the private economy which had suppressed market forces to boost industrial output.  To overcome this economic crisis, Japan government took some steps, and changed its economic policies. In the early 2000s, Japans prime minister, Junichiro Koizumi had initiated steps to change the LPDs traditional pork barrel politics, and privatise state monopolies. His economics advisor in chief, Heizo Takenaka, has been largely credited as being the architect of Japans recovery. As a result, economy had improved, and showed improvements from February 2002.  But, nearly 58 months of sustained growth lasted in November 2006, which was the longest period growth in the post war period. The main reason for this change is said to be the pressures of globalisation. Japans unemployment rate has reached a record high of 4.9% as of August 2010, with more than 3.42 million people are desperately looking for job. Unemployment rate for people over 45 years is more than 10% which is much higher than the national rate. Number of suicide, family violence cases are increasing as the personnel budgets are slashed drastically. Stress related problems are also reported to be increasing ( Jeffrey Hays, 2009). Success story behind UKs economy Over the last 25 years, many state owned businesses in UK have been privatised, and transferred them from the public sector into private sector. If we take the example of British Gas, British Airways, British Telecom, Railways, Regional water companies, British Aerospace, British Steel, Electricity generators and distributors, all have been completely or partially privatised(Tutor2u, 2011). The main aim of privatisation is to break up state monopolies and create more competition, and is one aspect of Anglo Saxon economic model. The government also created utility regulators to impose price controls on many of these industries. De regulation or liberalisation means opening the market for competition, and the main aim is to increase market supply while widening the range of choices available for customers. At the same time this competition lead to a greater cost efficiency from producers those who are eager to hold onto their existing market share. For example, urban bus transport, gas and electricity supply, mortgage lending, parcel delivery services, telecommunications. The remarkable structural improvement in the British economy began under Margaret Thatcher and was largely maintained under Tony Blair rule. Privatisation, deregulation, reductions in the trade union power, and reform of unemployment benefits have transformed the business environment in United Kingdom. For example, UK wants its agricultural policy as a stepping stone to global trade agreements between Europe, United States and with other developing countries. Importance of supply side performance in economy Since 1990 UK economy was dominated by market economy in which the national and the state governments play a minor role, where as consumers and their buying decisions drive the economy. In this type of economic system, instead of government, market play a major role in deciding the right path for the countrys economic development, and the market decisions are mainly dominated by supply and demand. Absence of central planning is one major feature of this system, and the role of the government here is to make sure that the market is stable enough to carry out its economic activities properly. Almost all governments now accept that an improved supply side performance plays an important role in achieving sustained economic growth without a rise in inflation. Up course, supply side reform on its own is not enough to achieve economical growth. There must be a high enough level of aggregate demand so that productive capacity could actually bring into play. Clearly we can see two approaches. First one is the policies focused on product markets in which goods and services are produced and sold to consumers, and the second approach is labour market where labour is bought and sold (Tutor2u, 2011). Generally, trade between nations create competition, and lowers the cost and price of goods which in turn benefited consumers. In the way, UK government is committed to expand free trade within the European single market, and also being a member of the World Trade Organisation, it negotiates a liberalisation of trade in the global economy (Alexander Dolgin, 2010). The supply side of the British economy has improved over the last 20 years thanks to the efforts undertaken by the government. Countrys product and labour markets are more flexible than they were a decade ago. During 1990-92, UK experienced an economic recession, and over three million people became unemployed. But from 1993, country has enjoyed a sustained growth in its economy. In the year 1997, GDP witnessed 3.3 per cent growth and in the year 2000, it expanded by nearly 4%. As a result, the UK economy has now enjoyed its longest period of sustained growth of over forty years whereas other countries including United States, Germany, France and Japan have experienced recessions or slow growth in economy in the last few years (Tutor2u, 2011). Being a sixth largest economy in the world, United Kingdom is emerging as a major player at international trade, and its highly developed, diversified, market based economy ensure the nationals with a high standard of living. Its GDP per capita is the 20th highest in the world, and the countrys public sector net debt is nearly £875.8 billion or 58% of the national GDP. The national dept has increased in recent days just because of global economic recession (U.S. Department of State, 2011). In UK, economic performance improved between 1997 and 2007 when compared to other OECD countries, and the GDP in the thirty years from 1978-2007 increased at an average annual rate of nearly 2.4 %. In the same way, until the onset of global recession, output growth exceeded than other European countries (McKinsey Global Institute, 2000). Role of bureaucracy in Japan Japan has largely state led capitalistic market economy, and the state plays a major developmental role on industrial groups and to some extent its bureaucracy controls the businesses. Natural resources in Japan are few, so, foreign exchange helps it to purchase raw materials for its economy. Economic growth in Japan was slower in 1990s than other major industrial nations, but from 2003, it began to grow strongly (Yahoo Inc, 2011). Inward direct investment in Japan from foreign companies are subjected to some restrictions, and investments in the field of petroleum, agriculture, gas, forestry, electricity, telecommunications, water, aerospace, and leather manufacturing needed governments approval. Adding, over regulation and a slow court system are inhibited the foreign acquisition of Japanese firms, and the capital markets are relatively well developed. Even though the intellectual property rights are generally secure, obtaining and protecting trademarks and patents are time consuming and costly. Japan ranked at 18th in the 2010 international property rights index. Japans economy is efficient, competitive in areas linked to international trade, but productivity is lower in areas such as distribution, agriculture, and services. Factors such as industrial leadership, high skilled technicians, well educated and industrious work force, high rate of savings and investment, intensive promotion of industrial development and foreign trade contributed a lot for its matured industrial economy (Applet-magic.com, 2011). During Second World War Japans economy was virtually destroyed when the United States conducted two atomic bombings against the cities of Hiroshima and Nagasaki. Aftermath of these two bombings country had restructured. Many industries were established and the people were guaranteed jobs. But, throughout the history of Japan, its economy has struggled as it has faced many political regimes and has been subjected to a number of natural disasters. A recent earthquake and aftermath tsunami is one such an example. The strong growth witnessed during 1980s disappeared, and in 1990s the economy had no trend which saw volatility in nature. But in 2003, countrys economy began to grow again which apparently back on track after the collapse of the bubble economy. Having a state led capitalism, equality of income is important, everyone is same in Japan, and no one is viewed as being better than the rest. Generally, Japan had been relying heavily on exports for its successful economic growth. As many experts argued its management system has greatly contributed the countrys successful economic performance. Up course, Japanese culture has also had an impact on the management system (McKinsey Global Institute, 2000). Firms in Japan were more market orientated having long term goals. Their goal was increasing market share and growth in the global economy which is the forefront of their success (U.S. Department of State, 2011). Economic freedom UKs economic freedom score is 74.5, and the country has maintained 16th position in 2011 index. Inflation rate is moderate and was 2.5 per cent between 2007 and 2009. Corruption rate is low as the country ranks at 20th position in the transparency internationals corruption perceptions index for 2009. Accepting and offering bribe is a criminal offence in the country, and corrupt payments are not tax deductible (The Wall Street Journal, 2011). Compared to UK, Japans economic freedom index is low, and the score is 72.8, and maintained 20th position in 2011 index. Even though Japans economic freedom including business freedom, property rights, and freedom from corruption are well, it is now facing challenges while trying to revitalise its stagnant economy. Its growing public debt has taken a toll on private sector economic activity and is becoming a main hindrance for its dynamic growth. Disparities in productivity between different segments of the economy and the growing political interference is the major concerned in the financial sector. Nations corporate tax rate is increasingly uncompetitive, and the taxation system of the country is fairly burdensome. Moreover, its non tariff barriers are hurting the overall trade freedom, and the country has lagged behind in pursuing bilateral trade agreements. Nation urgently needed market reform to create domestic sources of growth (The Wall Street Journal, 2011). Japan has the high rate of income and corporate taxes. Its top income tax rate rises to almost 50% when local taxes are included, where as its corporate tax rate rises to almost 41% when local and enterprise taxes are included. Inflation and corruption rates are minimal as Japan maintained at 17th position in the transparency internationals corruption perceptions index for 2009 (The Wall Street Journal, 2011). Japan towards reform Japan is on the way towards more economic reforms as the countrys business and banking sectors needed reforms. The government has stepped up efforts to attract foreign direct investments which were not needed in the past. Ignoring protest by farmers, government gave in to demand to allow foreign rice imports into the court which makes the foreign markets remained open to Japanese exports.  In 2009, government has enacted a new law that aims to ease financing opportunities for distressed small and medium sized enterprises. To tackle the impact of the recent global recession, the government, for the first time in six years in Japan has intervened in the currency market to stop the soaring yen from crippling its fragile economy. Deregulation of the financial sector, which is popularly called as Big Bang, began in 1998 which is the direct result of the Asian financial crisis prevailed in 1997. Regulations on currency exchange were ended in 1998 where as fixed commissions charged by brokerages were ended in 1999. Informal guidance regulatory system for banks imposed by the ministry of finance was replaced. Laws have been changed in 2007 which making it easier for companies to merge and launch takeover bids. As a result, in recent years the Japanese way of management has been replaced by more international styles, and companies are looking more and more at UK companies for ways to improve their productivity and competitiveness ( Jeffrey Hays, 2009). Conclusion Japan is on the way towards opening its economy as its economy has been facing problems since 1990s recession, which was mainly because of its governments policies which sticked to state led capitalism. Following the success of Anglo Saxon economic model in UK, which promotes innovation competitiveness, and over prosperity, it seems that Japan should follow the same. In the way, government has stepped up efforts to attract foreign direct investments which were not needed in the past. Beginning with former Prime Minister Junichiro Koizumi, political leaders have taken step towards improving its economy which leading towards Anglo Saxon model. Its market economy is becoming more and more competitive, efficient, and responsive as the cozy relations between countrys large companies and the government no longer seems to be work. Its troublesome licencing procedures have been discarded slowly to make its economy more efficient. As a result of all these efforts, Japan is on the way towards more economic reforms which seem to be end of state led capitalism. Comparison between UK and Japan UK Japan FDI Inflow $45.7 billion $11.9 billion Unemployment 7.6% 5.1% Population 61.8 million. 127.6 million Annual population growth rate 0.56%. -0.29% GDP (PPP) $2.184 trillion. $4.2 trillion Annual GDP growth rate -4.9%. -5.2% Per capita GDP $34,619 $32,608 Total population: 59,054,800 127,333,002 Population density per sq.km 245 340 Life expectancy - men- women 75-80 77-84 Household savings 3% 13% Human Development Index 26th Rank 11th Rank Life expectancy at birth 79.8 years 83.2 Years Inflation (CPI) 2.2% -1.4% GDP per capita in Purchasing Power Standards (PPS) (EU-27 = 100) Source: Euro stat Human Development Index: Trends 1990 -present Source: Human development index site Reference Alan Hutton & David Donald. (2010) The political economy of economic performance, [Online], Available: blogs.spokenword.ac.uk/ecoe431/files/2007/07/courseworkpaper.doc [30 March 2011]. Alexander Dolgin. (2010) Manifesto of the New Economy. 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