BOOK REVIEW: “How Countries Compete: Strategy, Structure, and Government in the Global Economy” by Richard Vietor (2007)

How Countries Compete: Strategy, Structure, and Government in the Global EconomyHow Countries Compete is a political and economic strategic analysis of 11 different countries around the world.  The book is divided into 12 new chapters, which deal with one country per chapter.  Japan is dealt with twice, looking at it from a historical perspective at the beginning of the book, and then looking more towards the future and there after the pre 1990 crisis.  Richard Vietor uses the word “compete” in the sense that countries try to compete for market share in the world economy and gain foreign investment and export their sales in business.  Governments can help in this policy, either by macroeconomic policies that encourage investment and greater economic activity, or by things like increasing human resource competencies through education.  Some countries have very active and direct policies.  In China, for example, technology transfer and know-how has been encouraged through the use of FDI.  In Singapore, workers are required to save as much as 50% of their gross income for their retirement plan.

Key words

Economics, finance, international trade, microeconomics, macroeconomics, fiscal policy, monetary policy, strategy, competitive advantage.

japan

Chapter: Japan’s Economic Miracle

Time magazine: Japan's Business Invasion

The cover of the Time magazine from 1971 is self-explanatory.

This chapter sets out the spectacular rise of the Japanese economy after the Second World War.  Between 1954 and 1971, its real economy grew at an average rate of over 10% per year.  This is unprecedented in world history.  As the author points out, this rise was based around the power of two ministries within the government- the Ministry of Finance (MOF) and the Ministry of International Trade and Industry (MITI).  The MITI had the power to control imports and allocate foreign exchange and also, after 1950, to control a whole transaction, including foreign currency, to ensure the best technologies were available to Japanese firms.  Business was concentrated almost exclusively within Tokyo, creating perhaps one of the world’s first post-modern clusters.  As Vietor points out, there were probably no more than 10,000 people running the great firms and ministries, and they all went to school together, worked together, and socialized together.  Japan was helped during this period to the extent that its currency, the Yen, was greatly undervalued.  This was accepted by the United States, until the collapse of the Bretton Woods System in 1971, which had a huge impact on the growth of Japan, and on the crisis that arrived two decades later.

Singapore

Singapore Inc.

Harvard AMP Books

Click to access more AMP books.

Singapore has the history of a small country that has managed to reinvent itself economically several times, mainly through very highly interventionist policies.  Between 1960 and 2004, it had achieved income growth of 9.7% annually.  When the Suez Canal was opened in 1869, it became a port for refueling and refitting ships, travelling between East Asia and India.  In three decades, its trade expanded six fold.  After the Second World War, and its independence, the country sought to define itself as a first world oasis in a third world region.  Trade barriers and investment barriers were eliminated, and large areas were reclaimed to give room in which Western companies could build factories.  Pioneer investors got special tax exemptions, and in 1968, Texas Instruments and Hewlett-Packard relocated their operations to Singapore.  This led to a rush by other companies.  The author points out that a productive and passive labour force was the key and rest was uncommon, and antagonistic unions were banned, with some leaders even being arrested.  The government controlled many aspects of life, including 20% of GDP, and corruption amongst bureaucrats was almost unheard of.  When China began to open up in the 1990s, Singapore realized the need to reinvent itself again.  Its low wages strategy would no longer work.  Thus, it tried to become a trading powerhouse.  In 1989, it launched TradeNet, the first e-trade processing system, which improved efficiency and turned around the timeframe for investing in businesses.  By 2001, Singapore’s total trade was 270% of GDP.  Similarly, the country took steps in areas of biomedical research, trying to become a hub within Asia, and within education, encouraging institutions such as INSEAD, John Hopkins, and MIT to set up satellite campuses.  As Vietor points out, Singapore is probably the best example of a government that actually works.

     

Interesting Quotes

 Development Strategy and Structure

I believe that the role of government is crucial to economic development.

japan

Japan’s Economic Miracle

The bureaucracy, reformulated as twelve cabinet ministries reporting to a weak prime minister, quickly came to be dominated by two ministries – the Ministry of Finance (MOF) and the Ministry of International Trade and Industry (MITI, previously the Ministry of Munitions).

Cars pilled in Yokohama

Cars piled in the Yokohama port. Japanese economy became very efficient in 1960s and 70s.

MITI used this power to guarantee that the best technologies were made available to Japanese firms.

And the Japanese were perhaps the first to discover the power of the learning curve. Costs could be reduced by as much as 20 percent each time output was doubled – through learning.

In the 1950s and 1960s, there were probably no more than ten thousand important people running great firms and populating the ministries, almost exclusively in Tokyo. They went to school together, worked within a twenty-block area, socialized together, and commuted together.

singapore-flag

Singapore Inc.

Singapore’s per capita income had risen from US $427 in 1960 to US $24.793 by 2004. Income growth of 9.7 percent annually had been achieved by active government direction and control.

After 1869, when the Suez Canal was opened, Singapore became the principal port for refuelling and refitting ships between East Asia and India. Only two routes could accommodate east-west trade – the Sunda Straits, between Sumatra and Java, and the far more convenient Malaccan Straits, in which Singapore was situated.

A productive and passive labor force was key. In postindependence Singapore, labor unrest was common.

Transparency international corruption index

Singaporean persisting corruptionless business environment is exceptional in the region.

There was no corruption among Singaporean bureaucrats. The authoritarian government was renowned for its honesty and transparency. It consistently ranked high in Transparency International’s Corruption Perceptions Index. In 2004, for example, Singapore ranked fifth best, of 145 countries – the only Asian country in the top fifteen.

By 2004, Singapore’s trade balance in goods was a surplus of US $32 billion, in services it was US $8.5 billion, and in income it was $8.9 billion. Together, these produced a current account surplus of US $28.8 billion. This was 30 percent of GDP … the highest in the world!

Singapore is almost certainly the best example of government that works – more than a quarter of Singapore’s GDP and virtually all of its policy endowment is government controlled.

china

China: The Pragmatic State

Education in China under Mao

Check the post on Chinese cultural revolution.

Although about the size of the continental United States, China has perhaps one-fifth of America’s arable land, with four times the population.

Farmers in southern China grow two or three crops annually – this is the rice bowl. In the north, one crop is grown each year, usually maize, soybeans, or wheat.

With 11 percent of the world’s coal, and relatively little oil or gas, China’s electricity has been either coal-fired (84 percent) or hydroelectric (14 percent). Added to this, some 300 million tons of coal per year were used for cooking, mostly in open stoves.

indian flag

India on the Move

In 1973, Indira Gandhi got Parliament to enact the Foreign Exchange Regulation Act, placing a 40 percent limit on foreign equity ownership.

The IT industry is not impeded by government policy issues,” explained Nandan Nilekani, Infosys’s CEO. “Ninety-eight percent of our revenue comes from the global markets. Our business does not exist in the physical world so we don’t worry about such factors as ports, roads, airports, etc. We do not have labor problems. We are a unique set of businesspeople.”

ge bangalore

GE had gone so far as to outsource some of its research in Indian Bangalore.

Perhaps the best-known foreign employer is General Electric, with more than twelve thousand employees in India. GE employed thousands processing credit cards, placing internal orders, and performing insurance functions and a host of other back-office operations. GE had gone so far as to outsource some of its research, with a huge $80 million research campus in Bangalore that works on plastics, jet engines, wind turbines, and refrigerators.

Truck travel from Delhi to Mumbai, a mere fourteen hundred kilometres, took eight days. When trucks arrived at the Port of Mumbai, entry required another wait in line of up to forty-eight hours.

“Our tax base has gone up, but so has tax avoidance,” observed a deputy governor of the central bank. “In many cases, it is the rich who are not paying.”

mexico-flag

Mexico: Incomplete Transition

NAFTA – Tariffs on approximately 50 percent of the nine thousand traded items covered by the treaty would disappear immediately, tariffs on another 15 percent within five years, and tariffs on all remaining goods over the following ten years.

In June 1994, I asked President Salinas whether he intended to devalue. No, he responded; they would squeeze inflation so hard that the value of the peso would rise up to meet the value of the dollar. Groan!

Mexican Education

In 2000, the average Mexican child received only 7.7 years of schooling.

While Zedillo abhorred corruption, he found it almost impossible to reform. It was endemic and institutional. In 2005 Mexico was ranked sixty-fifth by Transparency International – worse even than Brazil and Colombia.

In 2000, the average Mexican child received only 7.7 years of schooling. And this varied sharply by region – it was much higher in the north and lower in the south, far worse in rural communities than in major cities.

Ten years of NAFTA had made Mexico an economic appendage of the United States, which absorbed 88 percent of its exports.

Mexico has great promise, but it is time to realize that promise – now.

South Africa

South Africa: Getting in Gear

“The time to build is upon us,” commented Thabo Mbeki just before Christmas 2004. Although he was speaking about racial harmony, he could as easily have meant the economy.

The start of the school year in 1996 made history in South Africa. For the first time in decades, school began for all children, regardless of race.

South African housing problem

Housing was probably the most pressing shortage in South Africa.

Only 54 percent of South African homes had running water, and even in cities some 15 percent lacked plumbing. Electricity was a similar story – only 73 percent of urban dwellings and 15 percent of rural ones had power. Housing was perhaps the most pressing shortage. With an estimated 8.3 million households, South Africa apparently contained little more than 3.4 million homes, of which only 1.5 million were “formal housing units,” that is, other than shacks.

Thabo Mbeki estimated that 2 million to 3 million illegal immigrants were in South Africa in 1996, but the police suggested a number as high as 5 million.

South Africa must stimulate savings and investment. Household savings, at less than 2 percent, are totally inadequate to provide resources for the investments that the nation needs.

russia

Institutional Collapse and Recovery in Russia

Tax collection was a major issue. The government created an armed tax police to cope with the tax authority’s lack of data and with massive tax evasion problems. Tax collectors were often beaten, kidnapped, or even killed, and more than forty had their homes burned down.

Homicides tripled from 1987 to 1995, leaving Russia the most dangerous state next to South Africa.

Russian institutional collapse

Alcohol consumption, already significant, jumped to 6.5 liters of pure alcohol per capita (compared to the EU, for example, at 1.64) by 2000.

By the end of 1998, more Russians were poor than ever before – perhaps 40 million, using the World Bank’s definition. Unemployment (or unpaid employment) had reached 11.9 percent, with an additional 10 percent of the workforce on a shortened workweek. Income distribution, at least measured by the Gini index, had worsened; it fell from 0.28 to 0.45 by 2004 – worse than any OECD country except Mexico and the United States.

“The stronger the state,” concluded Putin, “the freer the individual.”

As one BP executive commented, you can’t be a global oil company if you’re not in Russia!

euitaly-flag

European Integration and Italian Competitiveness

Higher education lags severely behind the United States, as does the innovation process in general. The population is aging, yet pension systems remain growly underfunded.

Uncompetitive public procurement was another target of the Single Europe Act. Because of Europe’s socialist legacy, public procurement (from government-owned companies) amounted to some 12 percent of the EC’s GDP.

Even for branded consumer goods – like Levi’s jeans, Pampers, or a 1.5-liter bottle of Coke-price gaps of 50 percent to 70 percent prevailed.

In 2002, the average annual hours worked in the Netherlands was near 1,300. In Germany, it was 1,450, and in France 1,560. This compared to 1,810 in the United States and 1,820 in Japan.

Economic figures Italy

In 2003-04 Italy already lagged in competitiveness.

Italy’s other problem, besides slow growth, had to do with its competitiveness. With inflation averaging 2.5 percent, wages rose 3.3 percent annually in 2003-2004. But productivity (with stagnant output and increased employment) slowed, growing just 0.3 percent per year. This, Italy’s unit labor costs were rising quickly – 3.6 percent in 2003 and 2.4 percent in 2004.

japan

Japan: Beyond the Bubble

On August 15, 1971, when President Richard Nixon took the United States off the gold exchange standard and imposed a 10 percent import surcharge, Japan’s miracle ended abruptly. Its currency, previously pegged to the dollar at ¥360, jumped to ¥308 per dollar, producing a sharp drop in net exports.

There was no simple explanation for Japan’s continuing stagnation. Since the Japanese had long been motivated to catch up with the United States, the parity they had achieved in 1989 perhaps left the country without a strategic goal.

This debt-financing system permitted Japanese business to focus on long-term issues, as opposed to the shorter-term concerns of western-style shareholders. Taking the long view allowed Japanese businesses to acquire market share, which could eventually be mined for profit. Tax incentives encouraged borrowing over equity funding.

The fertility rate began dropping just after the baby boom, from 3.7 in 1950 to a surprisingly low 1.28 by 2004.

japanese economic crisis

Japanese crisis at the end of 20th century was not deflected by extensive governmental spending.

Despite massive spending on infrastructure, and significant tax cuts, these policies provided little stimulus. It seemed that Japanese, worried about the need for government to reduce deficits in the future, simply spent less and saved more. Paul Krugman has called this peculiar effect “Ricardian equivalence.”

usa

Managing the American Dream

This second industrial revolution, as Alfred Chandler has explained, was based on “three-pronged investments” in production, distribution, and management.

jJFK tax cuts

Kennedy’s tax cuts in 1964 boosted economic growth and decreased unemployment.

In January 1963, Kennedy advocated tax cuts both to spur consumption and business investment, but only when needed for economic stimulus. The cut actually came three months after Kennedy’s death – in the Revenue Act of 1964. Real GDP growth jumped to 6.4 percent annually in 1965-1966. And while the inflation rate accelerated from 1.6 percent in 1964 to 2.8 percent annually by 1966, unemployment fell from 5.2 percent to 3.8 percent. Keynes, I think, would be satisfied.

Indeed, 1966 was probably the United States’ economic high point since the Korean War.

Second, Reagan would cut taxes – a 30 percent across-the-board cut of the income tax rate, and an accelerated depletion and investment tax credit for business.

The Laffer curve, meanwhile, was slow to take hold. The U.S. deficit worsened abruptly – hitting $184 billion by 1984. Government expenditures went up, not down, form 22 percent to 25 percent of GDP during Reagan’s first three years. Social entitlements and defense spending accounted for all of the increase. Yet revenues, not surprisingly, dropped from 20 percent to 17,5 percent during the same period. By 1992, the deficit had reached $290 billion.

Likewise, we see that the Gini index had risen from 0.39 in 1981 to 0.46. (Latin American and African countries rank at about 0.50 or so, Europeans at about 0.30 or so, and Japan at about 0.25).

Of course, the United States still had plenty of assets to sell – Yellowstone, GE, Harvard, and so on. But at some point, Americans might want to think about reducing consumption and saving more while they still have some assets left.

Conclusion: Trajectories of Globalization

The place to start is basic property rights. These are essential. If a country cannot guarantee private property, its protection, and the right to exchange it, development of a working market economy will at best be slow. Consider China before 1983 or Russia during the 1990s.

Sound microeconomic policies are also important. For all of these countries, we see that liberalization sometimes is necessary to facilitate growth.

income inequality

Lousy income distribution undermines the potential for growth.

Lousy income distribution not only causes social frictions but, by leaving a large segment of the population without purchasing power, undermines the potential for growth.

It is our responsibility to manage the globalization process – and to make our countries compete.

     

See also:

Other Book Reviews

How Countries Compete: Strategy, Structure, and Government in the Global Economy

Economic History Association: “The book builds from Vietor’s extensive research and consulting experience, providing in essence a thesis of why government can serve a crucial role in the economic development of nations. He argues that government can do this in a variety of ways in order to advance the performance of business, namely by inducing savings and offering low interest rates, guaranteeing property rights and other necessary institutions, providing an educated workforce, and maintaining low inflation.”

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3 Comments

Filed under Asia, China, Economics, Finance, India, Japan, Politics, Strategy, USA

3 responses to “BOOK REVIEW: “How Countries Compete: Strategy, Structure, and Government in the Global Economy” by Richard Vietor (2007)

  1. Very interesting read! 🙂 Thanks! x

  2. Pingback: BOOK REVIEW: “When China Rules the World, the end of the western world and the birth of a new global order (second edition)” by Martin Jacques (2012) | GlobalEd

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