Developing and Developed

The United Nations divides countries of the world into two major categories - developed and developing - based on economic status. Developed countries are developed in terms of economy and industrialization, whereas developing countries are in the beginning stages of industrial development and have low per capita incomes. Developed countries generate revenue from the industrial sector and have more advanced technology and infrastructure, whereas developing countries tend to rely more on the service and agriculture sectors. Most African countries are developing. Canada and the Netherlands are both examples of developed countries.  As globalization expands, developing countries are playing an increasingly important role in world trade. Current GDP projections estimate that developing countries will be involved in nearly 70% of all world trade by the year 2050 (Carnegie Endowment for International Peace, 2009).

 

The International Trade Environment

Different factors affect the ability of a country to engage effectively in international trade, and the risk level for companies considering investing in the country. These factors can be summarized into three main categories: geographic, economic and political.

Geography

There are a number of geographic factors that affect a country’s level of development, and thus influence a country’s ability to engage effectively in international trade. So how does the geography affect a country’s economic growth?

Watch this video, which summarizes the impact that geography has on international trade:

Economic Systems

Three basic forms of national economic systems exist today: free market (capitalist), centrally planned/command (socialist), and mixed.

National economic systems are often classified in terms of whether it is a) government or b) private individuals and private firms that are responsible for providing answers to the following four questions:

1. Which goods and services should be produced within the nation and in which quantities?
2. How should goods and services be distributed throughout the nation and in which quantities?
3. How should prices of goods and services be determined within the nation?
4. How should scarce resources (human resources, natural resources, capital resources) be allocated throughout the nation?

In free market (or capitalist) economies, it is private individuals and firms that are responsible for providing answers to the above four questions.

In centrally planned/command (or socialist) economies, it is government that is responsible for providing answers to the above four questions.

In mixed economies, it is both private individuals and firms and government that are responsible for providing answers to the above four questions.

Alternatively, in order to define national economic systems, we may simply ask the degree to which government permits the following four factors:

1. unrestricted accumulation of income and property by private individuals;
2. unrestricted accumulation of profit and scarce resources by private firms;
3. unrestricted competition in various areas of private and public commercial activity;
4. the ability of private individuals/private firms (and market forces of supply and demand) to determine which goods and services should be produced (including so-called public goods and services such as healthcare, education, infrastructure, utilities, waste management, security, etc.) and how these goods and services should be priced and distributed.

Free market (or capitalist) economies tend to permit greater degrees of the above four factors with little or no intervention on the part of government.

Centrally planned/command (or socialist) economies tend to permit lesser degrees of the above four factors with significant intervention on the part of the government.

Mixed economies tend to permit moderate degrees of the above four factors with limited intervention on the part of government.

Wealth distribution via government taxation of private individuals and corporations (income taxes, payroll taxes, property taxes, sales taxes, excise taxes, probate fees, etc.) should not be considered a factor in the classification of economic systems because taxation clearly occurs subsequent to the resolution of the above four questions and the above four factors.

Political Systems

A political system is the type of government by which a country is run. The government controls and sets the political direction for the country.

Monarchy - Power is passed down through generations. Most monarchies today are constitutional monarchies (as opposed to absolute monarchies), and work with the government in power.

Oligarchy - Power rests in a group of people, often for military, wealth, or religious reasons. Countries are often tyrannical and rely on political oppression so that power remains with this small group.  An oligarchy can even coexist with a democracy or monarch.  This is the most common type of government in history and in the world today.

Autocracy - Power rests with an individual, and the country is characterized by absolute or blind obedience to authority. There is no real freedom, and the system relies on fear mongering. It is sometimes called a dictatorship.

Democracy - power with the people, with the belief that people have the right to govern themselves. Businesses and people have economic freedom. In a Direct Democracy, there are no elected leaders and each citizen has an equal level of power. In a Representative Democracy, people vote for leaders, who listen to the ideas and concerns of the people and create laws to solve them. A Representative Democracy is sometimes called a Republic.

Anarchy - the condition of no government. This type of system is typically characterized by violence and disorder.

Political Economies

Economic Systems and Political Systems are not the same thing. Political Systems determine how the country is run, and Economic Systems determine how resources will be allocated and goods and services produced. The two do work closely together, however, and an understanding of both is essential to success in international business. Here is a summary of some of the main types of political economies, which describe the combination of the two.

Communism = Command Economy + Autocracy (e.g., Cuba, North Korea)

Socialism = Command Economy + Democracy (e.g., Sweden, Venezuela)

Capitalism = Free Market + Democracy (e.g., Hong Kong, United States)

Fascism = Free Market + Autocracy (e.g., Cambodia, Myanmar)

What’s the Risk?

Companies look at the host country's current or future political system to assess the political risk. However international business always faces some political risk. For example, if you operate a Canadian company, foreign customers may be unable to pay in full on time because of instability from currency controls imposed by the government.

Emerging Markets

The importance of emerging markets to world trade cannot be understated. In 2006, they accounted for 30% of world exports, up from 19.5% in 1996 (Carnegie). The BRIC economies’ (Brazil, Russia, India and China) share of world exports has more than doubled, rising from 6% to 12.5%. Developing countries also represent a growing source of import demand, with growing middle classes and an increase in the availability of foreign exchange. Most developing countries have trade deficits and have no choice but to welcome international business into their countries. Encouraging foreign direct investment is a preferable option to financing deficits by borrowing money at high rates.

As wages and education levels in developing countries rise, it is predicted that patterns of comparative advantage (the ability to produce something at a lower opportunity cost than someone else) will begin to shift. Low developed countries will be able to benefit by offering lower wages, developing countries will increase their success in the manufacturing of products, and developed countries will be forced to innovate and differentiate even further in order to sustain their market positions in high value-added products. However, these benefits will only be realized if protectionist sentiments are stifled and governments support and promote international trade.

 

200 Countries, 200 Years in 4 Minutes

International trade has contributed to the economic growth of countries worldwide.  Watch Hans Rosling’s visual depiction of human development over the past 200 years.

What’s Stronger than BRICS?

The acronym referring to the four largest emerging market economies - Brazil, Russia, India, and China - was coined in 2001 by Jim O’Neil, Chief Economist of Goldman Sachs.  He predicted that these economies would grow faster than the developed countries and play an increasingly important role in world trade.  All four are giants today, and were joined by South Africa in 2010 to add the “S” to the acronym.  Each of these economies has grown significantly since 2001; as predicted, China is poised to become the largest economy in the world. Watch this video which discusses China’s growth, competitive advantages and challenges as a world economic power:

Now, in the wake of a global economic slowdown, the world is changing again.  China’s rapid growth has slowed. Brazil has been plagued by scandals and is deep in a recession and falling oil prices and political problems have forced a downturn in Russia’s economy.  For many developing countries, the missing piece has been a strong corruption-free government. Now, new emerging markets are being identified as having promise. In this video Political Scientiest Ian Bremmer explains the shift from BRICS to the new “stars” of global trade.