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Its a flat world, after all

By Thomas L. Friedman
Globalization 1.0 (1492-1800) shrank the world from size large to med.
Dynamic force was countries globalizing 4 resources & imperial conquest
Globalization 2.0 (1800-2000) shrank the world frm size med-small
spearheaded by coy globalisaing for mkt and labour
Glob 3.0 (2000- ) shrinking the world from small to tiny & leveling the
playing field.
Countries globalizing coy globindi/small coy glob
Europ/amediverse group
Anyone can reap the benefits of globalization now with internet,
technologies that enable meetings to be held without needing to be physically
How did world become flat? Through 10 events frm 1990s to 2000.
11/9berlin wall came down which allowed us to think of the world as a single
space. 8/9 ; 9 Aug 1995 when Netscape went public, allowed browser to display
images &data stored on websites & stock offering trig dot-com boom which
became a bubble and resulted in assive overinvestment in fiber-optic telecom
cablemin cost of trans voices, data and images to 0affected india a lot
workflow revoutsourcing, offshoring, insourcing, open-sourcing, supplychaining, informingwireless access and VoIP (turbocharge these new forms of
collab so you can do any one of them anywhere with any device. 1990s, ppl of
china, india, Russia, eastern Europe, latin ame and central asia all incr free to
join free market didnt even have to leave home to partake.
10 forces enable connectivity & collaboration at a distance are flattening
the Earth & leveling the field of competitiveness.
No guarantee that ame/western eurp will cont to lead the way.
Flattening of the world means the world is changing in ways that req ame
to step back and re-evaluate how they can make the best use of this situation.
Using tactics which were successful prev might not be successful now.
Building strong statebuilding strong individuals
Solution must be found themselves as ame have basic econ and edu tools
to do that.
Crisis due to 3 gaps: (1)Ambition gap-young energetic Indians&chinese vs
lazy ame (2)Numbers Gap insufficient engineers &scientists (3)Education gapoutsourcing to get better-skilled&more productive ppl than ame workers.
Why the world isnt flat
By Pankaj Ghemawat
Close look at data reveals 90% of all phone calls, web traffic, investment
is local.
Few cities tht dominate inter financial activity Frankfurt, Hong Kong,
London, New York are at the height of modern global interaction, all well
connected to each other.
10% Presumption ave of 9 categories of data in chart about activity level
barriers at borders have declined but not disappeared entirely.
Internet: ppl across the world getting more connected but not with each
other but rather with people within the same country. Even googles operation in
Russia reaches only 28% of pop, 64% for the Russian market leader in search

services Yandex. What is hindering google from expanding into Russian mkts?
Linguistic complexities.
Possible to turn back the clock of globalization esp so since deep
international economic integration may be inherently incompatible with national
sovereignty esp given tendency of voters in many countries to support more
protectionism rather than less
The Myth Of Asias Miracle
By Paul Krugman
Soviet/communist growth depended on ability to amass large inputs
expansion of employment, increases in education levels, investment in physical
capital to produce rapid output growth(1) Baseless to say that western
economies could replicate this system and that communist system was superior
(2) econ analysis of communists countries growth implied future limits to their
industrial expansion.
Econ growth based on increase in inputs, by mobilizing resources rather
than productivity subj to diminishing returns.
Paper argues that Singapore/ Asians growth similar to that of the Soviet
Union and that growth rates are not sustainableevidenced by growth accting
that calculates explicit measures of inputs increases as well as increases in
output per unit of input, which are elements of econ expansion. Growth accting
combines all measurable inputs & to measure rate of growth of national income
relative to tht index-total factor productivity
Japan 2nd industrial power growth in the 1950s and 60s showed both
high rates of input growths and high rates of efficiency growth but slowed down
in 1991 after then econ recession
Chinese growing fast but doubts on numbers presented-corrupt society.
Disagreements of which year to use as a baseline. If 1978 used, theres
improvement in efficiency aft Mao Zedongs reign. If 1964 used, picture
resembles East Asian Tigers
Krugman rebuts the view that (1) major diffusion of world tech in progress
& tht western nations are losing their trad adv there are still tech gaps and
actual capital flows to developing countries in the 1990s have been small having
gone to latin ame instead. (2) worlds econ centre of gravity will shift to the Asian
nations of the western pacific (3) Asian successes demonstrate the superiority of
economies with fewer civil liberties & more planning than the west is willing to
Econ growth is the reward for extraordinary mobilization of resources,
deferred gratification, willingness to sacrifice current satisfaction for future gain.
Systemic Vulnerability & The Origins Of Developmental States: Northeast And
Southeast Asia In Comparative Perspectives
By Richard f.doner, bryan k.ritchie, and dan slater

Rodriks conclusion that quality of institutions is key to econ growth

Developmental states : organizational complexes in which expert and
coherent bureaucratic agencies collaborate with org pte sectors to spur national
econ trans. Article aims to und political origins.
Political elites will build institutional arrangements dev states only when
(1) credible threat of deterioration in the living standards of popular sectors
could trigger mass unrest [BROAD COALITIONAL- a temp alliance 4 combined

action COMMITMENTS] (2) heightened need for foreign exchange and war
material induced by national security [SEVERE SECURITY THREATS] (3) hard
budget constraints imposed by scarcity of easy rev sources [SCARCE RESOURCE
(1) + (2) + (3) = systemic vulnerability
Developmental states emerge when political leaders confront constrained
political environment and are not highly autonomous entities
NIC- Singapore, Taiwan, South korea enhanced info flows within & btwn
pte and public sector. Bureaucrats given the political clout to make credible but
conditional commitments & withdraw to support firms that underperf despite w
the help from the state and to give help to firms to compete w global rivals in
more challenging econ activitiesincr info flow and the resolution of
commitment prob help states coordinate multiple actors and pursue LT
objupgrading growth in local innovation capacities, lower-value to higher
value econ activities within the global commodity chainscombination of export
promo&industrial deepening VS ASEAN-4 (Malaysia, Thai, Philippines, Indo)
where intermediate state institutions have been assoc w impressive growth
and econ diversification but little upgrading
Institutional capacity dept variable
Developmental states must have dev because of political reasons
securing power instead of providing collective goods. They do this by setting up
institutions to channel large amounts of money/goods/adv to key constituencies
(econ elites int in easy profits)
Difficult for politicians to preserve power which is why they have to create
such institutions to pacify their clientelist connections to the pte sector alone
Any subset of (1),(2),(3) make it diff 4 politicians to stay in power w/o
improving insti perf.
The more tightly bound political leaders are, the more pressed they would
be to dev developmental states
Treat leadership and agency as out of discussion
Ruling elites political survival = recon of coalitional, geopolitical & fiscal
constraints pursue higher-skilled export trajectory so as not to leave the
coalition members out and to benefit them instead of pursing low-wage based
export growth strategy
Institutional features: recruitment, promotion is based on merit alone with
sanctions for corruption and pay rates are competitive. Links to the private
actors esp biz & ideally labour. They operate on fxnal/industry-wide criteria,
participants tend to be encompassing in the form of official, sectoral/peak
associations & operations tend to be trans tp govt and biz and to proceed
accordin to explicit & consistent rules and norms.
Institutional variation: ASEAN4 VS NIC NIC had meritocratic promotion
and competitive selection, w low corruption levels, powerful lead dev agencies,
high linkage w org pte actors while ASEAN4 public-pte linkages exhibit significant
degrees of clientelism & pte-sector factionalism, serving non-economic ends
Initial conditions-colonisation period, ethic homogeneity, confucian
values, heavy reliance on foreign capital all deemed not to be reasons for the
variations in institutions
Deemed reasons: (1) Broad Coalitions: Waldner argues that narrow rather
than broad coalitions were necessary for formation of institutions. Rebutted by
Campos & Roots who said that broad coalitions were needed instead. But why do
some ruling elites sustain broad coalitions w side pmt tht req so much money

and some increase cost-competitiveness? (2) External Threat: how war makes
states generate revenue (3) Resource Competition: Rasiah argued that naturalresource exports reduced fiscal pressure on the ASEAN-4 to promote
complementary institutional & linkage development but this cant account for inst
diff between countries w similar resource endowments. Have to look at whether
states are rev-maximisers/satisfisers which depend on coalitional & geopolicitcal
context they are forced to operate
Systemic vul: broad coalitions & ext security claims on natural resources
press ruling elites to be rev-maximisersthey have to promote growth, inc living
standards & upgrade local resources. Ruling elites have to set up strong
institutions to deal with these skills upgradation, education, ensure ppty rights,
est macro stability, socializing risks of new investments and these new policies
need to be bought in by numerous parties. Institutions in this case need to come
up with broad dev obj, facil info flows within state agencies & betwn officials and
pte actors regarding mkt req, monitor firm perf and be credible in terms of
commitment to econ policies & willingness to exact reciprocityWeberian
bureaucracies led by pilot agencies embedded in org sets of private interests
Skorea & Taiwan: rural dev & import sub (early to mid 1950s)labourintensive export promotion (late 1950s to early 1960s) industrial deepening &
upgrading (early 1970s). Side pmt took the form of wealth-sharing mechanisms
in rural dev & education I.e. land reforms to get support from peasants.
Productivity improved. Import subs had to happen to finance security. Export
promo happened as import sub became unsustainable esp with rising military
costs & cut in US aidsdeclining BOP of Taiwanstronger institutionalization of
govt-biz cooperationlate 1960s both countries faced more threatening ext
conditions and both responded with efforts at military self-sufficiency at
firstheavy industrailisation proj in stell, metal, chemicals, machine-building,
plastics, shipbuilding, electrongics. Labour intensive X had competitors
(cheaper rivals in the region) and low skilled labour cant compete w more
efficient ones like in Japaninstead of lowering wages, both countries raised the
domestic value added of inc sophisticated exports (incr productivity)promoted
education and human capital investmentrising wages and cheap education
(1)forstall mass op pot large-scale biz subsidies (2)expand HR needed for manu
efficiency and innovation.
Singapore: PAP had to sustain broad coalition w side pmt tht wld not raise
X costs (1)HDB subsidise land, building prices & home financing (2) Prioritise
Education w emphasis on technical training (3) Restored perks & intro aggressive
pay scale 4 civil svc (4) Increase cont to CPF which could be accessed to pay for
housing, education & health needs + workers cld buy discounted shares in govtlinked corp (GLCs) (1) reduce upward pressure on wages (2) High productivity
resulted which helped bureaucracy attract city-states brightest and best. All
these req institutions to facil ongoing laour and biz part w public officials in
policy formulation & implementationEDB coord foreign capital, National Wage
Council peg wages to productivity, Skills Dev Fundmake local & foreignowned firms resp to upgrade workers by giving such firms incentives to do so.
For Thailand: the 3 conditions came at diff times, not all at once and not
of sufficient intensity to create institutional development.
Philippines, Indonesia and Malaysia kept factor costs low and yet
satisfied broad coalitions. Malaysia transferred corp assets from chinese &
foreign corp to govt trusts managed on behalf of malays. Postboom (OPEC oil
boom) in these countries have casued institutions to floundered.

Democracy can help to increase public prov and improve inst perf only if
it is in interests of politicians. Otherwise , politicians can preserve power without
delivering side pmt Philippines.

The Primacy Of Institutions ( And What This Does And Does Not Mean)
By Dani Rodrik & Arvind Subramanian
Paper attempts to explain huge diff in ave income between worlds richest
&poorest nations
3 strands of thought: (1)Geography; det climate & nat resource
endowments, disease burden, trans costs, extent of diffusion of tech from more
adv areasagricutlural productivity and human resources quality (2)
International trade to increase productivity and income integration view (3)
Institutions; role of property rights & rule OF law
Results indicate institutions quality override everything else. Geog has
weak direct effects on incomes altho strong indirect effects through institutions
by influencing their quality. Trade has sig effect on institutional quality but no
direct effect on income.
Geog only 1 treated as exogenous/nt influenced by income. Geog can
affect income directly by det agricultural productivity and indirectly by impacting
mkt integration/quality of institutions but INCOME CANT AFFECT GEOG Trade
integration & income run both waysintegration can raise income but trade can
be result of increased productivity in economy. While better institutions better
protection of ppty rights increase investment & foster tech progress and raise
incomes, better institutions can also be outcome of econ development as
demand for better institutions rise as countries become richer.

Work borrowed from 2001 Acemoglu, Johnson & Robinson, 1999 Jeffrey
Frankel & David Romer to capture variation in the determinant that is exogenous
international trade & institutional quality
Regression analysis showed that insti quality always had +ve & sig effect
on integration ( trade) while integration also has a positive impact on inst
qualitytrade can have indirect effect on income by improving insti quality
Types of instituitons: (1)Market-creating protect ppty rights and contract
enforcements. Without them markets cease to exist/perf poorly (2) Mkt
regulating deal w externalities, EOS, imperfect info e.g.telecom, transport, fin
svcs (3)Mkt stabilizing ensure low inflation, min macroecon volatility, avert fin
crisis e.g. central banks, exchange rate regimes, fiscal/budgetary rules (4)Mkt
legitimizing provide social protection, insurance, redistribution and manage
conflict e.g.pension systems, social funds. (2),(3) &(4) needed to sustain the
growth momentum, build resilience to shocks and facilitate socially acceptable
burden sharing in response to such shocks.
Make institutional choices by id incentive effects of alt arrangements &
relevant tradeoffslarge role for public deliberation and collective choice within
societies. Political democracymetainstitution that help societies make choices
about institutions they want
Sustaining spurts of growth and trans them into consistently higher SOL
seems to be facil by democracy.
Institutions can change albeit slowly and can have lasting effect on dev
Imf and world bank conditional loans should be over a longer time
period as structural adj programmes are slow otherwise expectations would be
unmet. Also, if institutional quality is the main source of dev, must change
underlying instituions in apt way or policies would be ineffective. Should find the
right institutional preconditions rather than micromanage outcomes which is
what US Millennium Challenge account is doing and IMFs poverty reduction
strategy paper (PRSP)

Institutions Matter, But Not For Everything. The Role Of Geography & Resource
Endowments In Development Shouldnt Be Underestimated
BY Jeffrey D.Sachs
Using institutions as a single reason to explain for income levels is alluring
because (1) Attributes high income levels in USA, Europe, Japan to superior
social institutions (2) Rich has little financial resp for poor because dev failures
are the result of insti failures, not lack of resources.
Institutions matter but not everything. What the poor needs now are
direct interventions, donations, address of disease and geographical isolation
and low tech productivity and resource limitations that trap them in poverty.
Worlds most troubled dev hot spots: sub-saharan Africa and central asia.
according to Adam Smith: these countries cant partake in international trade
because transport costs were too high. w/o international trade, regions
condemned to small internal markets, inefficient labour division, cont poverty.
Africa cut off from global trade & investment by Malaria. Africas climate
aided malaria spreadlowers returns on foreign investments, raises trans costs
of international trade, migration and tourism in malaria regions.
When countries are remote/have few skilled workers, these workers more
likely to emigrate than attract physical capital into country. True even within
Globalisation have caused countries to be classified into 3 categories:
(1)Countries within countries in which insti, policies and geog are all reasonably

fav coastal regions of east Asia have all become closely integrated w global
production system and benefitted frm large inflows of foreign capital (2)Regions
relatively well endowed geog but have ppor institutions central European
states; institutional reforms impt (3)Impoverished regions w unfav geog subSaharan Africa , central Asia, large parts of Andean region and highlands of
Central America; globalisaion has not succeeded in raising living standards and
may have caused brain drain + capital outflows. Initial low levels of income and
small populations (int mkts), living far frm coasts, burdened by diseasetrapped
in poverty because of inability to attract pte capital
Wrong to say that nth can be done to geog. Special investments needed
to fight malaria, roads, communications, transportation facilities. Need help from
outside world to initiate self-sustaining growth.
3 alternatives : (1)Cont poverty for region (2)Migrtion from interior to
coast (2)Sufficient foreign assistance to build infrastructure needed to link region
to world mkts (4)Regional integration: break down artificial political barriers tht
limit mkt size and comdemn isolated countries to relative poverty but slow to
good test to see if policies are successful : are they successful in
attracting new capital inflows
international community can set actual dev goals for such regions instead
of make do w wtv econ results tht emerge. Best stnd millennium dev goals
free thinking frm 1-factor explanations.
Institutions and investors: The Politics of the Economic Crisis in Southeast Asia
By: Andrew MacIntyre
Politics an important factor as to why investment reversal was greater in
some countries than in others. Specifically, veto authority (rigidity & volatility
extreme ends that are suboptimal during times of crisis) caused govt to
responses to be diff
Govt responses in times of crisis impt for investors
Countries chosen for analysis : Thai, Msia, Indonesia,
Philippinescomparable in structure & dev level, broad orientation of econ
policies & coalitions underlying govt similar at the time, located in same region,
hit by 1st currency collapse in Asia. Initial cond & econ vulnerability not identical
but diff dont correlate w econ outcomes.
Strong differentiation in relation to dept var (investment) & indept var
(institutional framework of politics). Philippines suffered least severe, Malaysia
and thai hit hard and indo suffered most.
3 indicators used : gross domestic investment, capital inflows and rate of
GDP growth
institutional framework policy postureinvestment
The economic consequences of political institutions: (1)Douglass Norths
work on the imptance of stable & secure ppty rights regimes for investment &
growth in econ dev of Europe. Introduction of new political insti was impt to
constrain power of political executive, which prov a more stable and secure
environ where investors less discouraged by risk of capricious policy
actiongreater confidence that political execs would adhere to their proclaimed
policies as there were other poltical insti to check on themcan be seen in
modern day as well whr industrial democracies politicians delegate mgt of a
special area of policy to a credible nonpartisan 3rd party i.e. central bank that

prov additional check on exec actionhelps expl rapid rise of investment &
growth globally. When govt is inst contrained, a more stable & predictable policy
environ exists for investors VS (2)Flexibility in policymaking & economic reform
crucial to make unattractive invesmt environment more attractive & prevent an
attractive one from losing appeal.
Using George Tsebelis veto player framework allows us to compare,
calibrate diverse systems of fovt. It diff political systems by e no.of actors who
can bloc/veto a policy change. A veto player: ind/collective actor whose
agreement is req 4 policy change/legislative change. The higher e no.of veto
players, the further apart their policy preferences, the more diff for policy
changemore stable & predictable policy environ

R/s between no.of veto players & policy risk for investors is a U-shaped
curve tht passes through a min. more than 1 veto player helps reduce policy
volatility but at some pt of inflexion, no additional veto players are welcome as
they serve to increase policy rigidity. Fewer veto playergreater risk to ORs of
policy volatility.
Veto players id by both constitutional structure & party system where
players who are rendered mute/redundant are discounted if their aggregate pref
are subsumed by agg pref of others.
Thailand: 2houses of parliament. Upper house had powers of delay rather
than actual veto, w no scope 4 judicial review. Only house of rep carried veto
power. Thai also had multiple weak parties (10-12) being rep in parliament,
making coalition in govt inevitable (6/more parties)@least 6 veto players as
prime minister (pm)risked coalitional collapse if he attempted to override serious
oppositionfragmented control over policy as each parties wanted to fight for
their own interest/side pmt.
Property mkt boom failing by late 1996 which threatens banks & financial
insti, export growth fell in 1996 (total exports decreased) + much lending funded
through ST foreign borrowing
Dec1996 to nov1997, govt Chavalit Yonchaiyudh: looked impressive &
competent in the beg but was beset by paralysis, corruption. Institutional config
made it diff for any govt to intro major policy change due to dispersed veto
power. Amnuay was installed as finance minister and he aimed to cut govt
spending. However, this created opposition.
Feb 1997: 1st default on foreign loan w announcement tht countrys
largest fin coy merging to avoid collapse. Many went to withdraw their money. 3rd

march, Amnuay & central bank gov Rerngchai Marakanond suspended trading of
fin shares and announced emergency measures to reassure nervous mkts req
tht all banks & fin coys make stronger prov 4 bad debt and 10 of e weakest fin
coys have to raise their capital base within 60days. Did little to reassure mkts.
When trading resumed, fin shares fell. Some members of govt had interests in e
10 insitutions &vetoed actual implementation of tough measurescentral bank
had to pump in new capital to keep these coy afloat in e face of panicked ORS.
Chavalit delayed measures to prevent risking collapse of his govt. central bank
was also spending down reserves to prop up exchange rate. Many people started
to exchange their currency to the dollars (increasing supply of thai baht and
causing it to fall further). Amnuay resigned, taken over by Thanong Bidaya; he
annouched suspension of 16 fin coy while central bank was trying hard to prop
up baht.
Reserves of Central bank exhaustedFall of baht on 2nd july 1997 due to
failure of 1st rnd of crisis mgt tactics
Thanongs policies blocked and resigned 19th oct
ORs confidence fell exchange rate fell, capital flew out of country and
lending dried out due to govts inability to deliver necessary policy adj
Philippines: presidential system of govt w a legislature having 2 chambers
(bicameral) house of reps & the senate have full veto power over legislation.
Multiparty system w about 6 incohesive parties gaining rep in the Congress.
Need for a multiparty coalition in each chamber for president to pass legislation.
Unlike thai, the president is SEPARATELY elected and not beholden (owing a duty
to some1 in return) to the parties for tenure & doesnt req consent of a majority
of each chamber 4 legislation to pass but as long as majority is achieve, precise
size & Party composition dont mater. No stable majority of disciplined
partieseach legislative chamber as a single collective veto player. No. of veto
players3 : president, senate, house of rep w judiciary occasionally serving as a
veto player to overturn actions approved by president & congress. Philippine
presidency has a range of formal & informal discretionary powers and many
legislators migrate to party of new president aft elections.
Intermediate case whr thr were institutional checks against policy
volatility but sufficient scope for flexible executive action on pressing issues
Crisis struck Philippines during final 12 months of Fidel Ramos term as
president. Policy adj (exchange rate & monetary) involved executive
agencies/central banks and not the legislaturepresidentialism meant that exec
decision-making authority conc in president vs in thai where exec authority was
fraught as the executive- the cabinet was made of all the veto players
Economy was experiencing growth
Peso was allowed to dep sharply on 11july aft costly effort to defend
currency and adj Mp, enhanced bank reg, tightened FP (inc tax, decr G spending
to decr AD) and a tolerably timely & coherent outcome was achieved. Central
bank worked w govt to reduce liquidity. Philippines focused on oversight
arrangements for the banking sectors (limit bank exposure to ppty sector & incr
cover against forex volatility), fiscal mgt
2 serious prob for Ramos: (1)income tax laws: central to IMF extended
fund facility (EFF) agreement in 1994; scheduled to expire in june; with upcoming
elections, some legislators champion higher tax-free thresholds. Agreement met
8dec by house, senate finally. Late but not too late oucome for help by IMF. (2)oil
deregulation: feb1997 prev heavily subsidized and reg oil industry but public
opposition arose due to rising oil prices + depre of peso. Several members of
congress challenged the dereg and supreme court overturn law on 5novoil

industry pricing&admin was confused+incr fiscal burden on gov + could

jeopardise fin support to battle econ instability by IMF as it was also a
component of EFF agreement
constraints on exec action frm legislature & judiciary sufficient to preclude
possiblility of radical policy volatility
Malaysia: more centralized. Multiparty system, only lower house of
parliament has vetio power. It has a longstanding & oversized coalition madeup
of diff political parties barisan nasional that is made up of parties tht divide
electoral map among themselves b4 each election 2 prevent competition
amongst the group. The absence of competition among partieis in barisan tog w
history of stablilitybarisan is a unitary actor/single party. United malays
national org overshadows much smaller ethnic & regional parties in barisan &
controls all key cabinet posts. Crucial battles in msia not among parties in
coaltion but within UMNO. One collective veto player- Barisan, dominated by
Central bank intervened 2push up i/r to bolster exchange rate. In july
ringgit came under pressure following devaluation of baht and manilas decision
to devalue peso.
PM Mahathir championed the dev of local corp sector and unwilling to see
this reversed by higher interest rates due to fall of ringgit as those who had
access to extensive bank lending were closely allied with UMNO party leadership
& him. He started to blame foreign ORS& hedge fund operators for messing SEA
mkt. He carried out moves to favour the large umno-connected firms which cont
to rapid growth in money supplyfall in ringgit. Mahathirs own supporters in
party was anxious as their money were affected and Anwar + Daim urged adj to
his policy stances. Mahathir, afraid of losing support retraced most policies. He
then renewed such policies again in late sept. His policies were expansionary &
sought to restrict ST foreign ORS but It was failing to stop the decr in biz
confidence. He then let Anwar make some policy changes w formation of a new
national econ action council under leadership of Daim so as to prevent Anwar
from gaining econ centre stage. Anwar unveiled dec in govt spending, increase
in lending requirements (contractionary policies)a stark contrast as opposed to
what was implemented b4. Mahathir & Daim working to ensure these policies
didnt undermine key party supporters. Anwars position weakened as msias
econ cond were worsening, causing Mahathir to yet again urge for expansion.
No insti checks on exec action
Indonesia: even more centralized than msia. Both president & house of
reps have veto power over legislation but presidents party so dominated the
legislature (Suharto) and his own party that the legislature is discounted as a
veto player w pref diff from president. Only one veto player- president, a single
- 11july, CB widened daily trading bank of rupiah. mid aug, govt intro sharp
liquidity squeeze to eoncourage ORS to hold rupiah depts, CB pushed up i/r and
state enterprises trans depts. From commercial to central bank. Govt spending
froze for 2weeksdrained liquidity frm the interbank mkti/r rose sharply. Lifting
of restrictions on foreign ownership of shares for coys listed on Jakarta stock
exchange announced. Rupiah stabilized in sept but fell in early oct. govt called
for IMF assistance and signed an agreement for fin support where it committed
itself to an intensification strategy it had alr begunclose banks down, reduce
import tariffs, cut g spending, removal of entry barriers for foreigners 2
wholesale&dist activities but Suharto also signed a decree to authorize initiation

of some buidings projects and instead of closing banks down, he bailed them
outvolatile policy signals
Initial conditions were similar and Philippines actually fared worst w its
high public debt and rapid credit growth

From most centralized ( volatile) to least (rigid): Indonesia, Malaysia,

Philippines, Thailand.
Institutional framework alone not enough to explain the diverse outcomes
but it is a needed factor. Institutions do not drive policy but they impose
parameters on whats possible
Most adv industrial democracies located centre of spectrum, less
susceptible to stark differentiation based solely on dist of veto authority while
developing countries more likely near extremes of spectrum either bcus
democracy is weak/nonexistent/ in democratic party systems are more likely to
be fluid, fragmented in policy terms (dispersed veto authority)
Assume roughly equal shock & vulnerability to crisis across countries and
thus diff outcomes are the result of diff policy responses to crisis. Policy
responses flow from institutional set-ups
Logic of veto points: (1) Decisivenessappropriate flexible & responsive
policy in dynamic environments req institutions to respond in an efficient &
timely manner. Too many veto points leads to policy rigidity that wont respond
when needed. (2) Credible commitmentstable, dependable policy environment
req ability to make binding promises. Too few veto points leads to policy

Thailand: pre-1997 health policy focused more on infrastructure than on

services like insurance. Infrastructure was at times made redundant as shown by
the low bed occupancy rates. This is due to electoral system incentivizing
personal over party votes. Then came the 30baht solution health care scheme
which decreased the uninsured from 54.5% to 5% (1996-2002)effective income
in rural area increased 5-10%
Thaksin & yingluck: centralization of power, redistribution of resources
caused backlash among elites in rural south. Accused of suppressing media
critics and of vote buying, using policies to enrich himself (sold off shin corp and
no taxes).
Introduction- From Market Failure to Government Failure
By Rahul Mukherji
Pte coys played a sig role in the Indian econ since 1991. How india
transformed its regulatory structure & promoted the indian enterprise in the
global econ

Institutions facilitate certain modes of econ behavior & inhibit others.

Econ institutions discouraged entrepreneurship in India. Airlines, iron & steel,
mining, banks, telecommunications, power generation,etc, were almost entirely
state-controlled before 1990. Those pte coys that succeeded Hindustan Motors,
Premier Automobiles, Bajaj Auto depended on permissions, monopolistic
privileges and govt protection. Foreign investment was little. Annual trade over
GDP was 16% vs 25-29% for China. Indias econ institutions & policies placed sig
constraints on countrys entrepreneurial talent.
Aft 1991, framework of Indias econ insti changed dramatically building on
the gradual deregulation of pte coys tht begain in 1975. State actively promoted
this transformation. Competition driven down px; mobile phones penetrated rural
areas, being more accessible to the poor. Telecom,automobiles & airline industry
in india was revolutionized since 1991
State withdrew frm investment decisions, india exp rapid EG aft 1991
which accelerated aft 2003. Indias econ cont to grow at annual rate of more
than 5% even w global fin crisis.
Transition to a mkt-based econ had not cured the infrastructure deficit.
Econ reforms challenging in power sector where indias politically
powerful farmers refuse to pay electricity bills.
Tipping point model of econ change where new econ ideas & politics
are equally impt for und e slow-moving processes of change. India was at a
tipping point in 1991 when a BOP crisis started a shift in countrys econ policies.
In 1966, similar crisis but econ ideas and govt policies not evolved in the
direction of change at that time. TTM: importance of endogenous & slow-moving
processes tht can bring a system to e brink of change.
1991 bop crisis: indian technocrats negotiated a deal with IMF;
implemented some of their home-grown ideas abt cond lending. The agreement
shifted domestic bOP in favour of those who believed the indian econ has been
excessively reg & self-contained.
Prime Ministers Office help promote pte sector parti in telecom tht led to
rapid expansion but faced fierce opposition from the Dept Of
Market failure: econ pt to possibility tht mkts dont allocate resources
efficiently. They work on the assumption of low trans costs, perfect info, respect
for contracts. Trans costs for specifying, monitoring/ enforcing a contract. If high
trans costs + poor mkt knowledge + unenforceable contracts = govt
intervention needed. Foreign exch reg act 1973 unpredictable raised ORs costs
of doing biz in India by reducing the max permissible foreign equity in india from
51 40 %. Countries did not possess adv industrial base. Competitive adv in
unprocessed pri commodities was a handicap as demand for these didnt
respond to either a rise in income/decline in price. Before 1980s, import sub w
state intervention was the developing words pref econ path. Assumed that
country w poor manu base wld face mkt failure in open global econ as it could
not modernize the manu base when faced w competition w more adv countries.
Import sub industrialization (ISI) relied on high tariffs, import quotas, overvalued
exch rate & guided industrialization. Overvalued exch rate lower the price of M
req 4 manu gds &essential items. Govt conc ind prod in the hands of a few
licenced pte coys and publicly owned ind to coord ind & achieve eos. View that
mkts fail heighted in 1960/70
The rise of govt failure as a policy idea: ind rev largely served pte rather
than public int. These reg perpetuated monopolies, circumvent competition and

prod profits for certain privilege parties. George Stigler demon tht us coys
benefitted frm the systematic capture of ind policy by pte coy. Stigler lamented
tht a small & conc group of ind in the US could obtain substantial rents by prov
resources to politicians which enabled these politicians to remain in power and
allowed party workers to gain access to govt jobs. Richard Posner: regulatory
agencies werent mismanaged. They intentionally operated in ways to max
inefficient goals of executive branch. Tech adv in 1980s created new biz
opportunities tht increase econ cost of protecting govt and pte monopolices.
Transformations to be more pro-competition started in UK, US and other
countries incl india. Econ argued against state control in context of a developing
country. ISI has evolved as a regime of controls were govt interfered a lot and
industrialists couldnt make decisions based on profitability. Incentives offered by
insti forced ind to spend resources lobbying 4 production licences to protect their
monopolies, but no incentives to invest in innovation, productivityDWL to econ.
Rent-seeking industrialization emphasized govts failure to allocate resources
efficiently. Import subnot easy to locate ind fit for protection and to define
duration of protection, might spoil these ind. Owners of secure monopolies
became rich due to rs with ruling party rather than ability to compete. Govt
intervention stifled competition in india. Ind give black money to govt officials
in exc 4 rents accuring 2 pte monopolies created by govt control. Investments to
procure licences DWL to econ. ISI dealt a major blow when some East and
Southeast Asian countries grew rapidly in 1980s by promoting their X.
Politics of globalization and deregulation in India: 1980India political
econ locked in a state-driven, import substituting eqm tht resisted
transformation. State- balancer of class interests. India was comfy w rentseeking industrializationlarge dom mkt and monopoly production privileges in
return 4 rents. Pro-biz reforms of the 1980s inc privileges 4 big indian w/o subj
them to competition. Farming community-largest voting block wanted more
subsidies, free power, no taxation. Middle class took privileges frm the state in
the form of subsidized higher education and guaranteed govt jobs. State- actor
tht could bal interests of the classes but not transform them to favour
globalization & dereg. Classes dept reg & comfort of closed econ to secure
privileges. How did transformation occur? States can make a transition bcuz
donors have coercive power 2 direct dev when foreign exch is scarce. Econ
change favouring dereg and globalization w/o support of powerful politicians and
technocrats would not succeed in india. Argues that its not biz associations like
CII-confederation of indian industry tht capture the state & guide it toward econ
reform. Indian state was the pri author of reform stategy. Govt didnt rec support
frm indias other leading industrial lobby. State directed indias ind towards
reform at a time when they indirectly dept on IMF for foreign exch tht wld fin M.
Econ change in india did not occur by stealth.
Stolper-samuelson theorem suggests democracy such as india should
promote free trade. According to theorem, a sector of econ whr production
factors are abundant should demand free trade bcuz px paid to factors would be
low. Labour as an input is priced competitively, countries where labour is
abundant should be globally competitve in labour-intensive forms of production
and should thus demand free trade. Yet no evidence of labour demanding freer
trade regime in india. Imperative for democratic rulers to produce public goods &
legal framework essential for EG. EG and dereg since the 1980s has coincided w
a period of greater political competition and party fragmentation. Charles
R.Hankla: over-reg of econ occurred during period whens ruling congress party
was losing mass bass & resorting to patronage politics. Irfan Nooruddin: coalition

govt bese at making credible comm bcus of checks and bal in place due to
numerous veto players in the governing coalition.
Indias response to BOP shock in 1991 diff frm crisis in 1966 as policy elite
well prep in 1991 to harness the countrys dependence on IMF to initiate
transition to dereg and globalization. Countrys dept on IMF helped indian
industry to accept a more competitive econ order.
Indias fact sheet
Gained independence in 1947 aft 2cent of British colonial rule. Democracy
since independence.
Prime minister is e leader of the govt, req support of a majority in
parliament. President is the head of state, limited in executive power but can
influence formation of govt at both state & national levels when no party gained
outright majority. Judiciary is formally indept & incr assertive
Fairly insulated frm 09 global recession, but a bout of populist spending
beg 08 wasted public spending
Top rate of both personal & corp tax for indian = 30%. Exemptions reduce
effective tax rate for indian firms to less than 20%. All coy pay 10% tax on dist
profits. Corp tax rate for foreign firms 40%.
Trade deficit narrowed from 12-13 due to declining M due to stringent
controls on gold M, expanding X with weaker rupee
Major X-engin goods, petroleum. Major M-petroleum pdt, gold&silver
Leading mkts 13: US, UAE. Leading Supplier 13: China, Saudi Arabia
A Guide To The Constitutional Structures & Electoral Systems Of East, South And
By Allen Hicken, Yuko Kasuya
Describes the consti structures and electoral system of the 17 asian-pac
countries since 1945
Recognition that e consti structure & electoral system a country adopts
can have impt implications for democratic stability, econ growth & social welfare
Following convention used by Jones (95) , powell (82) and others, only
systems tht were indpt & had elected govt 4 a min of 5 yrs are included. Include
any regime tht had held reg elections 4 at least 5yrs, in which opposition parties
were allowed to participate. Exclude regimes tht held elections for a minority of
legislative seats. Years 1945-2000. Countries are divided into multiple time
periods to reflect sig changes in the variables listed.
3 Different ways to classify constitutional structures across Asia.
1st way: Presidential systems: an executive (1) is elected by a popular
vote (b) holds office 4a fixed term; not dept on parliamentary confidence (c)
selects & directs the cabinet (d) has some legislative authority. Parliamentary
systems: executive is (a) selected by e legislature (b) dept on legislatures
Of 17 countries, 15 had a parliamentary system at one time/another w
majority of these being former British colonies Bangladesh, Burma, India,
Malaysia, Pakistan, Papua New Guinea, Singapore, Srik Lanka. Bangladesh,
Burma, india, indo1, Pakistan, Singapore 1, SK3, Sri Lanka 2 each have
presidents as head of state but not classified as presidential systems since these
presidents are not pop elected/do not have a cabinet/legislative authority. 5
countries blangadesh (1), Philippines (1,3) and SK (1,3), Taiwan (1), South

Vietnam(1) have had a presidential regime which meets 4 criteria listed above. 7
countries used the hybrid systems tht dont fit well into either category.
Singapore (2) directly elected President has some legislative autho & can
appt/remove the PM. However, the PM & cabinet are also subject to
parliamentary confidence.
Prime Minister: Head of an elected govt. President: Head of a republican.
2nd way: legislative structureunicameral/bicameralupper house can be
3rd way: structure of central-local govt relationsextent e national govt
formally shares power w sub-national govt. Federal systems: formal division of
power between central/national govt and sub-national govt; formal div of
legislative authority. Such a formal division dont exist in unitary states.
Election of president & presidential vetoes: voters can elect president
directly/choose rep who then elect the president. Plurality voting (relative
majority) VS pref voting rank candidates in order of preference(Sri Lanka)
Presidential term limit non-existent in Bangladesh, indo (1), Philippines
(2), Singapore and South Korea (2,3), ban on re-election in SK (45) while
Philippines (3), SL, Taiwan, SK(1), Indo (2) and Philippines (1) places a 2-term
limit on presidents.
SK (3) and Indonesian presidents are the most powerful in terms of veto
powers. Their vetoes cant be overridden. Taiwans president has no veto power
indpt of the exec yuan. SL president lacks veto power over legislation but
approval is req before results of a referendum becomes law. SK (1,2,4,5) and
Philippines presidents have package vetoes tht take a supermajority to overturn.
Bangladeshi & Pakistani presidents can veto non-money bills but veto can be
overturned by simple majority. Singapore president cant veto most legislation.
Created in 1991 via a consti amendment. Can veto certain govt apptmt as well
as bills tht affect the CPF. President must approve budgets of certain govt
agencies & can veto bills relating to foreign borrowing. His veto can be
overridden by a 2/3rd vote of legislature
Parliamentary system & heads of state: duties of the head of govt ( PM)
separated frm tht of the head of state (President/monarch). Normally, head of
states powers are ceremonial but some enjoy additional powers refuse to sign
bills passed by the legislature/veto power. Veto power normally limited to nonmonetary bills & vetoes can be overridden by majority vote of 1/both legislative
chambers Bangladesh, India, Malaysia & Nepal. Thai king enjoys greater power
than most ceremonial heads of state. He can withhold his consent on any bill &
send the bill back to parliament for redeliberation. Override of kings veto req a
2/3rd vote of both houses.
Selection of the legislature: Electoral formulas for the legislature: plurality
formula& proportional representative to allocate legislative seats. Mixed-member
system employ a combi of these formulas. Plurality formula: member with the
highest no of votes in a given district is elected; usually in single-seat districts
but sometimes in multi-seat districts like Thais lower chamber, the Philippine
senate, provincial seats in indos electoral collegevoters have as many votes
as there are seats to be filled & the highest polling candidates fill the avail seats.
Singapores system aft 1987 combines a handful of single-seat districts with
group representative constituencies (GRC), each w 3-6 seats. GRC can be
contested only by teams of candidates frm the same party (allied indpt) &
@least one member from each team must be frm the malay, indian/ minority
community. Voters cast a single vote for a team and team with a plurality of the

votes win all the seats in that GRC. A few countries give voters a single non-trans
vote (SNTV) rather than multiple votes. Under SNTV there are multiple seats in
each district and each voter has one vote. Seats awarded based on plurality
basis election of SKS Nat Assembly frm 1972-1980 & Japanese lower chamber
elections until 1994. PR: seats are allocated to parties in proportion to votes
obtainedclosed list PR, Flexible list PR & SNTV. Closed listpresent a list of
candidates to e electorate w voters selecting a party rather than candidate.
Parties rec seats in proportion to their overall share of votes. Candidates
awarded seats based on their position on the list, voters cant det position on list.
Flexible list voters cast one vote for a party list but can also vote for an indi
candidate on the list. Parties awarded seats on a PR basis & candidate vote totals
used to det candidates place on the party list. Candidates in Indo (1) had to rec
@least 300k votes to win a seat. Nepal, Pakistan, SL use STV systems to elect
their lower chambervoters can rank as many candidates as they wish both
within and across diff parties in order of pref. any candidaes who reach a certain
quota of 1st choice votes are deemed elected. The surplus votes of the justelected candidate trans to the 2nd choice candidates as marked out by the
ballots. Once vote trans are complete, individuals who reached the quota are
declared winners. Process cont until all seats are filled. In indo, certain threshold
must be reached for parties to win any seats.
Mixed member/two-tiered systems: 1 tier is allocated nominally while the
other tier is allocated on the basis of party lists. Nominal tier: candidates
allocated based on votes cast 4 candidates by name; plurality formula. In south
korea and Taiwan, voters cast a single fused vote for a candidate in a nominal
tier district which also counts as a vote for that candidates party 4 purposes of
the list tier. Others cast votes separately for both nominal and list tiers. Votes are
linked when there is a trans of votes from one tier to another. Seat allocation can
be indpt or linked to the nominal and list tiers as well. SL use a mod form of PR w
preferential voting in its 1st tier. Each voter chooses a specific party list and up tp
3 of that lists candidates. The party w highest votres in district rec one bonus
seat awarded to candidate w highest vote total. Remaining seats in the district
awarded to parties/groups in proportion to votes received. Seats in 2nd tier
allocated in a proportional manner based on national party vote shares


Douglas J. Amy

We in the United States are very used to our single-member district, winner-take-all style of
elections. We've all grown up with a system where we elect members of our legislatures
one at a time in small districts, with the winner being the candidate with the most votes.
This system seems so "natural" that proportional representation (PR) elections may at first
appear a bit strange to us. Adding to the potential confusion is the fact that there are
several different kinds of PR systems in use around the world. But in reality, the principles
underlying proportional representation systems are very straightforward and all of the
systems are easy to use.
The Basic Principles of PR

The basic principles underlying proportional representation elections are that all voters deserve
representation and that all political groups in society deserve to be represented in our
legislatures in proportion to their strength in the electorate. In other words, everyone should
have the right to fair representation.
In order to achieve this fair representation, all PR systems have certain basic
characteristics -- characteristics that set them apart from our current election system. First,
they all use multi-member districts. Instead of electing one person in each district, as we do
here in the U.S., several people are elected. These multi-member districts may be relatively
small, with only three or four members, or they may be larger, with ten or more members.
(The figures below illustrate districting maps for a hypothetical 50-person state senate.
Figure 1 shows 50 single-seat districts, as is common with plurality-majority systems.
Figure 2 depicts 10 five-seat PR districts, and Figure 3 shows 5 ten-seat PR districts.)
Figure 1

Figure 2

Figure 3

The second characteristic of all PR systems is that they divide up the seats in these multimember districts according to the proportion of votes received by the various parties or
groups running candidates. Thus if the candidates of a party win 40% of the vote in a 10
member district, they receive four of the ten seats -- or 40% of the seats. If another party
wins 20% of the vote, they get two seats, and so on.
That, in a nutshell, is how proportional representation works. But while all PR systems have
the same goals of ensuring that all voters receive some representation and that all groups
are represented fairly, various systems do have different ways of achieving these goals. So
it is helpful to see how different kinds of PR systems work in practice.
Types of PR Systems
Party List Voting
Party list voting systems are by far the most common form of proportional representation.
Over 80% of the PR systems used worldwide are some form of party list voting. It remains
the system used in most European democracies and in many newly democratized
countries, including South Africa.

How It Works. Legislators are elected in large, multi-member districts. Each party puts up
a list or slate of candidates equal to the number of seats in the district. Independent
candidates may also run, and they are listed separately on the ballot as if they were their
own party (see below). On the ballot, voters indicate their preference for a particular party
and the parties then receive seats in proportion to their share of the vote. So in a fivemember district, if the Democrats win 40% of the vote, they would win two of the five seats.
The two winning Democratic candidates would be chosen according to their position on the
There are two broad types of list systems: closed list and open list. In a closed list system-the original form of party list voting--the party fixes the order in which the candidates are
listed and elected, and the voter simply casts a vote for the party as a whole. This is shown
in the first ballot below, which illustrates an election for the House of Representatives in a
five-seat district. Voters are not able to indicate their preference for any candidates on the
list, but must accept the list in the order presented by the party. Winning candidates are
selected in the exact order they appear on the original list. So in the example here, if the
Democrats won two seats, the first two candidates on the pre-ordered list--Foster and
Rosen-Amy--would be elected.
Closed Party List Ballot

Most European democracies now use the open list form of party list voting. This approach
allows voters to express a preference for particular candidates, not just parties. It is
designed to give voters some say over the order of the list and thus which candidates get
elected. One version of this is illustrated in the ballot below. Voters are presented with
unordered or random lists of candidates chosen in party primaries. Voters cannot vote for a
party directly, but must cast a vote for an individual candidate. This vote counts for the
specific candidate as well as for the party. So the order of the final list completely depends
on the number of votes won by each candidate on the list. The most popular candidates
rise to the top of the list and have a better chance of being elected. In our example, if the
Democrats won 2 seats, and Volz and Gentzler received the highest and next highest
number of individual votes, they would rise to the top of the list and be elected. This
example is similar to the system used in Finland and widely considered to be the most open
version of list voting.

Open Party List Ballot

A variety of different formulas exist for accomplishing the actual allocation of seats to the
parties. One of the simplest seat allocation formulas is the called the "largest remainder
formula." In this approach, the first step is to calculate a quota, which is determined by
taking the total number of valid votes in the district and dividing this by the number of seats.
In the example in the table below, 100,000 votes were cast and ten seats are to be filled.
100,000/10 = 10,000 which is the quota. The quota is then divided into the vote that each
party receives and the party wins one seat for each whole number produced. So the
Republican party received 38,000 votes, which is divided by 10,000 to produce three seats
with a remainder of 8,000. After this first allocation of seats is complete than the
remainder numbers for the parties are compared and the parties with the largest
remainders are allocated the remaining seats. In our example, two seats remain to be
allocated and the Republicans and Moll, the independent candidate, have the largest
remainders, so they get the seats. Ultimately all the parties end up with the number of seats
that as closely as possible approximates their percentage of the vote.
Largest Remainder Approach to Seat Allocation

Mixed-Member Proportional Voting

Mixed-member proportional representation goes by a variety of other names, including "the
additional member system," "compensatory PR," the "two vote system," and "the German
system." It is an attempt to combine a single-member district system with a proportional
voting system. Half of the members of the legislature are elected in single-member district
plurality contests. The other half are elected by a party list vote and added on to the district

members so that each party has its appropriate share of seats in the legislature.
Proponents claim that mixed-member proportional voting (MMP) is the best of both worlds:
providing the geographical representation and close constituency ties of single-member
plurality voting along with the fairness and diversity of representation that comes with PR
This system was originally invented in West Germany right after World War Two, though
since then it has also been adopted in several other countries, including Bolivia and
Venezuela. It is still one of the least used PR systems, but in recent years it has begun to
garner a great deal of attention. In fact, it is now one of the "hottest" systems being
considered by those involved in electoral design. In part this growing attention is a result of
MMPs unique claim to be a "compromise" between the two main rival systems. In the
1990s New Zealand abandoned its traditional single-member plurality system for MMP.
Hungary also adopted this approach. Most recently, the newly formed parliaments of
Scotland and Wales used this system for their first elections.
How It Works. People cast votes on a double ballot--see the ballot below. First, on the left
part of the ballot, they vote for a district representative. This part of the ballot is a singlemember district plurality contest to see which person will represent the district in the
legislature. The person with the most votes wins. Typically half of the seats in the legislature
are filled in this way. So in a hypothetical 100-member state legislature, the winners of
these district contests would occupy 50 of the seats.

On the right part of the ballot--the party list portion--voters indicate their choice among the
parties, and the other half of the seats in the legislature are filled from regional lists of
candidates chosen by these parties. The party lists are closed in the German version.
These party list votes are counted on a national basis to determine the total portion of the
100-seat legislature that each party deserves. Candidates from each partys lists are then

added to its district winners until that party achieves its appropriate share of seats. The
following table illustrates how this process works for our hypothetical election. The
Democrats won 40% of the party list votes in the 100-member state legislature, so they
would be entitled to a total of 40 of the 100 seats. Since they already elected 28 of their
candidates in district elections, they would then add 12 more from their regional party lists
to come up to their quota of 40 seats.
Allocation of Seats in MMP

In the German version two electoral thresholds are used, either of which a party must
overcome to be allotted seats in the legislature. A party must either get 5% of the
nationwide party list vote or win at least three district races in order for it to gain any seats
in the legislature. In our hypothetical case, the New Party did not win any district seats, but
they did win over 5% of the nationwide vote, so they deserve their share of legislative
seats--which in this case would be six seats, all of which would be filled from the regional
party lists.
Single Transferable Vote Or Choice Voting
This system of proportional representation is known by several names. Political scientists
call it "the single transferable vote." It is called the "Hare-Clark system" in Australia. In the
United States, electoral reform activists have taken to calling it "choice voting." Currently
this system is used to elect parliaments in Ireland and Malta. In Australia it is used to elect
the federal Senate, as well as the legislatures in several states there. It is also the PR
system that was used in a number of cities in the United States during the twentieth
century, including New York, Cincinnati, Cleveland, Toledo, and Boulder. It continues to be
used today in Cambridge, Massachusetts for elections to their city council and school
How It Works. The voting process is illustrated by ballot below. All candidates are listed in
the same place on the ballot. Instead of voting for one person, voters rank each candidate
in their order of choice. So if you like Campbell best, you would mark the "1" after his name.
If you liked Gomez second best, you would mark "2" by his name, and so on. You can rank
as few or as many as you want. This ballot illustrates the use of the AccuVote system used
in Cambridge, Massachusetts to elect its city council and school board. Voters fill in the

ranking numbers as they would for standardized tests taken in school, which allows for
computerized vote counting and ballot transfers.
Choice Voting Ballot

As the name "single transferable vote" implies, this systems involves a process of
transferring votes. To understand how the transfer process works, it may be best to start out
with a simple analogy. Imagine a school where a class is trying to elect a committee. Any
student who wishes to run stands at the front of the class and the other students vote for
their favorite candidates by standing beside them. Students standing almost alone next to
their candidate will soon discover that this person has no chance of being elected and
move to another candidate of their choice to help him or her get elected. Some of the
students standing next to a very popular candidate may realize that this person has more
than enough support to win, and decide to go stand next to another student that they would
also like to see on the committee. In the end, after all of this shuffling around, most students
would be standing next to candidates that will be elected, which is the ultimate point of this
In the single transferable vote, votes are transferred around just as the students moved
from candidate to candidate in the analogy. The exact order of the transfer process is
illustrated in figure below. An example of how the votes are actually transferred is shown in
the table that follows. For the sake of simplicity, assume that there is a three-seat district in
which six people are running for office. The first step in the process is to establish the
threshold: the minimum number of votes necessary to win a seat. The threshold usually
consists of the total number of valid votes divided by one plus the number of seats to be
filled, plus one vote. The formula looks like this: Threshold = (valid votes/1+seats) +1 vote.

So in our three-seat districts with 10,000 voters, a candidate would need 10,000/1+3 (which
is 2,500) plus one more vote, for 2,501.
Diagram of Ballot Transfer Process

The second step is to count all the number one choices to see if any candidates have
reached the threshold of 2,501. As shown on the table below, the Democrat Gomez has
2,900 voters and he is declared elected. But Gomez actually has 399 more votes than he
needs to win. These votes are considered wasted if they stay with Gomez, so they are
transferred to the second choices on the ballot. (There are several ways to do this, but we
neednt get into those details here.) In the second count, we see the effect of this transfer.
The other Democratic candidate, Campbell, gets 300 of those second choice votes, and the
independent candidate, Daniels, gets the other 99. The vote totals are now recalculated to
see if anyone is now over the threshold. No one is, so the next transfer takes place. The
candidate with the least chance to win is eliminated and his or her votes are transferred to
their second choices. This candidate is Higgins, the Republican, and 500 of his votes are
transferred to the other Republican candidate, Dains; and the other 100 votes are given to
Daniels. Again the votes are recounted to see if anyone has reached the threshold. Dains
has reached it with 2,800 votes and so she is declared elected. Once again her excess
votes are redistributed to their second choices--200 to Graybeal, and 99 to Daniels. But still
no one has reached the threshold, so again the lowest candidate is eliminated and those
votes transferred. That candidate is Campbell, the Democrat, and 100 of his votes go to
Graybeal, and 600 go to Daniels. This puts Daniels, the independent candidate, over the
threshold with 2,698 votes, and she is the last one elected.

Ballot Count and Transfer Process

This transfer process is a bit complicated, so why does it exist? The transfer process was
invented primarily to reduce the problem of wasted votes -- votes that are cast but do not
actually elect anyone. Plurality-majority systems routinely waste large numbers of votes
and this is why they are prone to such problems as party misrepresentation, and the
underrepresentation of political minorities, racial minorities, and women. The transfer
process in STV is designed to ensure that the fewest votes are wasted and that the
maximum number of people gets to elect a representative to office. It acknowledges that
there are two kinds of wasted votes: votes for candidates that stand little chance of winning,
and votes in excess of what a winning candidate needs. Transferring these votes to their
next ranked choice makes it more likely that they will actually contribute to the election of a
Party Fabrication: Constitutional Reform And The Rise Of Thai Rak Thai
By Allen Hicken

Describe, analyse success of Thaksin Shinawatra & his Thai Rak Thai party,
arguing tt neither personal assets/effects of the crisis enough to explain the rise
and success. It was instead the 1997 constitutional reforms tht altered thais
political-institutional landscape that created new opportunites, incentives 4
political actors tht thanksin and his party took adv of. The reforms helped reduce
no of political parties and increased the power of PM relative to coalition partners
and intraparty fraction

2001 electoral victory of TRT party brought an end to a short-lived

multiparty coalition govt that had been the norm

Some consequences of bold policy initiatives: rise in rural indebtedness,

2000-plus extrajudicial killings during war on drugs. Critics claim that thaksin is
trying to centralize political power and create a dominant party for thai

Sale of Shin Corp (founded by Thaksin and owned by his famiy) to a sg firm
for a subs, tax free profit in jan06seen as thaksin using his authority for his own
personal adv. Protests of the sale led thaksin to call new elections and step down
as PM.
A draft constitution was produced in aug1997: reforms aimed to reduce
influence of provincial politicians, increase accountability of both elected officials
and government bureaucrats, promote stronger, more nationally oriented political
Elections & parties: previously, Thai House of rep used the bloc vote (BV)
electoral system tht combines multiseat constituencies w multiple votes & the
plurality rule. 76 provinces divided into 142-156 electoral constituencies, each
containing 2/3 seats. Voters in each constituency could cast as many sep votes as
there were seats. Voters cast their votes for ind candidates and allowed to split
their votes/partially abstain. Prohibited frm cumulating multiple votes on a single
candidiate. Political parties wishing to contest were req 2 field a full team of
candidates and law req parties to run a min no of candidates nationwide.
Candidates req to belong to a political party to stand 4 election. 1997
constitutionBV system replaced by a mixed-member/2tier system. House has
400 seats elected frm single-seat cons via the plurality rule & 100 seats from a
single nationwide consti via PR. 4 nation list tier, each party must submit a list of
candidates 4 voters to consider. Voters then cast 2 sep votes 1 for candidate for
single-seat const and 1 for party for the national list tier. Not linked. Candidates
must choose between running on the party list/in the constituency-cant do both.
Parties with <5% of the party list voters rec no list tier seats. New restrictions of
party switchingcandidates must be members of parties for @least 90 days prior
election to be eligible to runto reduce last-min party switching. Members of
parliament who wisht o serve in the cabinet must surrender their seats in the
House. Introduction of a FULLY elected senate. Prev, senators appted by PM and
came from ranks of bureaucracy, armed forces, biz. Now, elected body depts. On
SNTV electoral system to fill the Senates 200 seats Japan, SK, Taiwan. Each
province is an electoral constituency w 1-18 seats, based on population. Each
voter casts a single vote 4 candidate and seats awarded accord to plurality rule.
Senate candidates are however prohinited frm belonging to political parties
campaigning 4 office. Lesser individuals having too much power by having more
than one authoritarian position.
New constitution allowed voters to directly place laws on the legislative
agenda. 50k voters can petition the Nat Assem to consider a piece of
legislation/req senate to pass a resolution removing office snr officials suspected
of wrongdoing. Several superintendent institutions semiautonomous bodies
were also create to monitor govt and hold officials actable.
Local govt be filled via electionsdecentralisation
The draft was met with opposition from parties whose interests are
threatened but the july1997 asian fin crisis tht hit thai started to show some of
thais shortcomings in its political system. The constitutional draft then became a
symbol of govts commitment to difficult but needed political & econ reforms.
Consti reform and broader reform became linked. 11oct, king affixed his signature
on the doc for reform.
Critics fo the old thai party system: (1) Too many parties reduced
effective governance, cont to unstable, short-lived govt (2) Not cohesive shortlived alliances of convenience (3) Political parties tended to focus interest of a

relatively narrow grps of supporters and directed govt resources to them (vote
1 argument is that large no of parties in pre-reform due to different parties
that ran for elections frm constituency to consti, from province to province, region
to region. Parties able to dominate elections in their particular regions but very
little coordination across regions. Pre-1997 parties tended to be based in a
particular region and drew much of their support from that region. But coord
within regions is v poorcleavages based on regional diff cnnot explain
comparative lack of cross constituency coord in thai. Another argument: greater
the concen of power the stronger the incentives 4 candidates to coorp in order to
capture the prize. In prereform thai, power was in the Senate that rep powerful
military /bureaucrats + other Thai parties.
New constitution incr power of the PM relative to factions within his own
party. (1)Cabinet members are req 2 give up seats in parliament if they want to
join the cabinetstakes w breaking w PM higher. Restrictions on party switching
PM can credibly threaten to call new elections if party factions try to bolt, keep
factions loyal to the PMincr cross consti coord incentiveslower effective no of
nat parties (2) Fully elected Senateelimination of appted check on politicians
power, the coord incentives stronger. (3) New constitution awards electoral bonus
to parties tht mge to coord & run a competitive national campaign in the form of
100 party list tier seats.
No of parties proportional to size of constituency. Better coord was a bigger
factor in reducing no of parties nationally than decline in no of parties at the
consti level.
Fewer parties in govt + PM greater leverage over members of coalition =
more stable govt
Pre-reform: BV allowed intraparty competitioncandidates/voters cannot
rely on party label to help differentiate between candidates frm the same party.
Instead, they worked to dev a personal reputation & personal network of support
Move to single-seat const brought an end to intraparty competition. New
restrictions on party-switching encourage party-building. National list tier
encourage voters & candidates to place party before person. To win the national
party listsupplement local public gds w national ones- 30 baht healthcare
TRT promised protection & political power to domestic biz interests which
were in dire straits aft the crisis, with a populist campaign that promised tht the
govt would now take an active role in eliminating poverty and increasing social
welfare. Govt implemented policies like the million-baht village fund, 30 baht
health care schame, debt moratorium for farmersTRT took adv of new insti
environ and chose a national programmatic appeal.
Democratization And Electoral Reform In The Asia-Pacific Region. Is There An
Asian Model Of Democracy?
By Benjamin Reilly
Trend toward democracy being accepted means for choosing & changing
a countrys political leadership. E.g. uprising against the Marcos regime in the
Philippines in 1986, negotiated transitions frm military-backed, single party govts
in Korea & Taiwan in 1987, resumption of civilian govt in thai in 1992, uN
intervention in Cambodia in 1993, fall of indos Suharto regime in 1998,
international rehab of East Timor ended 2001.

Identifiable Asian model of demo characterized by aggregative electoral

politics, centrist political competition, nascent two-party systems. Institutional
reforms has impact on elections, parties and parties via political engineering
conscious design of political institutions 2 achieve certain specified objectives
Trend in Asia reversedless proportional elections, towards plurality
Systematic convergence in electoral & party systems across the APAC
region and regions systematic divergence frm developing democracies in other
parts of the world
Trade off between efficiency (majoritarian elections) and representation
(PR). PR facil direct trans of popular pref & cleavages into e political sphere w as
little interference as possible via political parties rep distinct social groups,
proportional elections & low barriers to minority enfranchisement. Asia tries to
engineer political stability through the design of democratic institutions. Mixed
member majoritarian (MMM) rule is highly disproportional with mosr seats
elected frm local districts and a much smaller proportion frm a party listtend to
fxn more like plurality systems. Japan: intended to reorient polltics away from
special interests, promote dev of a 2-party system responsive to median voter
interestschange from SNTV w an overtly majoritarian form of mixed system,
3/5 of all seats chosen frm single-member districts. SNTV leads to personalized
and factionalised party politics.
In msia & sg electoral playing field tilted in favour of incumbent parties:
msia uses e stnd Westminster system w pluarility elections but consti boundaries
favors malay communitygovt won every election since indp and maintained
2/3 majority needed to amend constitution. Singapore: most MPs are elected
from multimember GRC, voters choosing between competing party lists rather
than candidates. And highest-polling party wins all seats in the district. This
party block system has benefitted PAP, which reg wins >90% seats in
parliament. Many Asian MM system runs the list component of elctions in parallel
w district contest, w no linkage between the 2, unable to compensate any
disprop in either lists. Party list also lesser than single-seat consti vs other
coutries where the seats are split almost equallyAPAC govt try to min threat of
political fragmentation by restricting electoral prospects of minor parties &
promote incumbents interests. Lack of compensatory mechanism + relatively
small no of list seats offered overall levels of prop are like of a plurality
Nascent parties try to engineer dev of their systems via new rules gov
formation, reg & campaigning of political parties. 3 types : (1) Promote
development of a national party system and hamper growth of regional/local
parties (2) Control/influence/ restrict no of political parties (3) Strengthen party
org by building stable party systems from top-down. This can be done like in
indos case: all parties had to have a national support base as a precond to
contest the transitional 1999 elections. New rules req each party to est branches
in at least 1/3 of indos then 27 provinces and in more than half the
districts/municipalities within these provinces. No of parties limited on the basis
of insufficient geo coverage & depth of penetration of their parties. Thai: must
have @ least 5k member within 6 months of party reg / face threat of
deregistration aft 1997 reforms.
Strengthen parties int control over members to maintain greater org
cohesiveness & stability & restrict capacity of parliamentarians to change parties
as in thai.

Use vote thresholds to limit no of parties which prevent election of

smaller parties into parliament. In thai & Taiwan: parties competing for party-list
must attain at least 5%of vote.
Asian model of democracy moving closer to anglo-ame model of 2-party
democracy. Exceptions: indo & Philippines, both saw increase in party
fragmentation following party openings tht accompanied fall of the Suharto &
Marcos regime. High levels of social diversity + both recently out from extended
authoritarian rule in which composition & no of parties were controlled from
above explains this pattern.
Reasons for the convergence on MMM electoral models & agg parties
across the region : (1) Asian values hypothesis- search for a stable, bal &
harmonious political order (2) Self-int politicians seeking to ensure electoral
prospects by rejigging political rules in their favour but why & how asias
leaders have been able to push through this kinds of incumbent-benefitting
reforms but not their counterparts in Latin Ame & Eurp (3) Asias distinctive
democratic development in recent years heralds a new form of political
architecture historic compromise between mass constituents ( need for more
prog & effective parties & elite politicians who favour restrictions on political frag
& suppression of ethnic/regional movements)but why only in asia not

5 Most Common Types Of Political Systems:

1. Democracy: (a) Direct democracy: every citizen has an equal say in the
workings of the govt. (b) Representative demo: citizens elect rep who actually
make the law e.g.legislators. (c) Deliberative demo: citizens make decisions by
considering diff viewpts & options. (d) Demo Socialism: citizens help make
deicisions/ vote for policies tht are socialistic in nature.
2. Republic: govt remains subj to those governed. Citizens legtitimise
governance and can recall the govt. Oligarchy: rule by a few citizens/grp of
3. Monarchy: head of state till abidication/death. Often, manarch has final word
in govt. (a) Abs monarchy: monarch truly has the final say. (b) Elective
monarchy: monarch is elected
4. Communism: Marx/ Lenin. Planned economy often part of the governing class.
Resources taken and redist to others, at the top of the system. An authoritarian
form of political system. Citizens req to do certain jobs.

5. Dictatorship: authoritarian form of govt. Norm main ind ruling the country. Not
restricted by constitutions/ parliaments. Military dictatorship: military exerts a
great deal of pressure on the govt, running the country de facto. Authoritarian
forms of govt has the adv of quick decisions being made.

Why Isnt The Whole World Developed? Lessons From The Cotton Mills
By Gregory Clark
1910, New England cotton textile workers performed better than others.
Local culture seems to det workers perf. Such differences can help explain inter
variation in wages. They also help in making us und labor migration, choice of
technique & sources of EG.
Examine underdev thrugh detailed study of the cotton textiles industry in
the early 20th cent as factory prod of textiles was a 1st step on the path to
industrailisation. Failure of poor countries to dominate textile prod in the way their
labour cost adv wld sugest is the result of inefficient labout rather than failure of
import tech/mgt skills/failure of local capital/imput mkt/scale scon within textile
factories. Thus, reasons 4 inefficiency of low-wage labour must be focus of
explanation of underdev of these countries.
Britain launched the modern factory system in textile prod in late 18th
cent and technologies soon spread to North Ame & Europ. Other countries soon
follow suit. Britain est 1st spinning factory in 1771. US, French, Ruhr, Prussia
Despite great labour cost adv of the continental (Mainland Europe) &
Asian countries, few could compete w the british ouside their domestic mkt before
WW2. British still actted 4 81% of net X of cotton yarn & cloth in international
trade, faced little competition in unprotected mkt since besides low labour costs in
Asian countries, manu costs in all the low-wage countries were still higher in
Briain, making tariff protection necessary.
Decline of british textile ind from 1920s onwards attributed to managerial
failures but this seems misguided to Clark. (1) Given low labour cost of other
countries, how did Britain managed to thrive in the ind for so long. (2) Specific
failures attributed to mgrs. Has lil impact on total costs & shld be completely
swamped by labour cost effects. How could an industry burdened by high costs for
its major input remain so long successful, when competing with others with lower
True that other costs offset labour cost adv in low-wage countries ( had to
M machinery/personnel from Britain, had to pay transport fees+import duties)
England had better working hours, wages and lower dollars per
If according to the profit rate/rate of return, the adv of low wages in china
and india would allow production to expand rapidly. However, this did not happen.
Why then did Lancashire (country in UK) experience such an expansion?
Also, given the same production rate and taking costs of nonlabour input
into acct, the Chinese could have paid higher wages. Cost disadv of low-wage
countries in other inputs explain little of their low wages.
The British = England remained competitive despite high labour costs as
worker efficiency corresponded closely w real wages. Worker efficiency can be
shown by looking at how many machines each worker tended. Index of the no of
spindles & looms per worker. Loom given a wgt of 1, ring spindles wgt of 0.011
and mule spindles wgt of 0.008. Index adj to a per shift basis. The higher the
index the better.

Aggregate measure contaminated by : (1) Diff types of machinery used

(2) Diff proportions of women & children (3) Yarn & Cloth differed in fitness and
quality but workers efficiency still most impt factor.
Better-paid workers were more efficient.
Taking into acct diff in labour efficiency, the only countries able to
compete w British would have been China, India, Japan.
Counter to (1) Diff machinery usedby 1910 only NA adopted auto loom
which inflate no.of loom-equivalents per worker in Ame but closer examination
shows the same index being concluded-low-wage countries employed many more
workers per machine. Could anything other than efficiency of workers explain
these differences?
One explanation: Capital-Labour Sub: but low-wage countries not getting
greater utilisation of their capital except thru running longer hours. Seem to have
gotten sig lower o/p per hr arnd 1910. Efficiency of spindles/looms = % of a
machines theoretical production det by speed machine was set to run at, which
was actually achieved. By 1920s, some evidence tht Japanese & chinese mills
were using their capital more intensively than British mills as o/p per spindle for
Brit: 100, Japan 115, China 117. (Insert formula here/write) 1910-20, India shows
no greater machine util than Brit so K-L sub cannot exp e extra 3.08 workers per
British workers.
K-L sub irrelevant in explaining excess manning of low-wage countries.
Substitute L for K to reduce total manu costs.
Another explanation: Raw Materials-Labour sub: possible to some extent
to save cotton costs by using more labour. Weaker yarns broke easily, req more
labour to repair broken threads, can save on total costs if labour cheap but this is
not a good reason 2 explain extra labour in low-wage countries. Why? (1) Only a
few countries w high manning lvls used inferior cotton (2) Workers did not spend
much time repairing (3) Value of o/p appear to be reduced sig when inferior cotton
used (4) Overmanning was just as great as machines making finer yarns (5) Even
processes unaffected by cotton quality were overstaffed. China, India had supplies
of good quality yarns. Strength of yarn doesnt seem to have much to do w diff
manning levels.
Another: Tech gaps: No, low-wage countries were not employing inferior
tech. Tech were similar & mgrs./skilled workmen supplied by Britain to op e
machinery & train workforce in many countries. Absence of secondhand
machinery as well as setup cost for machinery in a mill was 20% of final cost.
India, china, japan had high capital stock growth rates in the late 19th and early
20th cent.
Antoher: Labour experience: Clark argues that this should NOT be a real
reason. Basic constraint on ave exp of workers was growth rate of industry. Ind
which grew quickly had relatively inexp workers. Basic det of ave workers exp
was how rapidly employment was growing. Difficult to pose exp as explanation:
(1) No simple association betwn labour productivity & growth rate of local ind (2)
Effect of exp on competence of machines tender Is slight measured by earnings,
once initial training period has passed. Ave exp of workers in countries whr ind
was growing quickly wld not be much shorter than in mature centres of ind. The
fact that young girls cld be recruited as temp workers evidence that exp didnt
matter much. Also, newer machines in low-wage countries: (1) Less repair to keep
it running (2) Higher machine-worker ratio need less workers actually.
Another: Inherent Labour Quality: poor nutrition/general training/no formal
ed BUT nature of operatives taskfew task demanded literacy; only need2 perf

few simple ops repeatedly, strength didnt mattersmall size didnt matter. If
small size did matter, factories cld simply feed the workers and gain enormous o/p
gains. Whatever created the inefficiency didnt seem to be inherent since eg New
Eng employed most efficient op but these workers came from countries whose
own textile ind had v inefficient EEs
Another: Local: Clark thinks that the efficiency of workers is limited due to
the local environmentaffect ind choices, which correlated to local real
wage.Mexico conservative, didnt want to accept automatic looms.
Major cause of underdev in poor countries was inefficiency of labour
rather than inability to absorb modern ind tech.
Labour constrained by local environment. Productivity increase with
labour intensification.

Cultural Constraints In Management Theories

By Geert Hofstede

Management is an Ame invention. Practices and entire concept of mgt

may differ in other parts of the world and theories needed to und it may deviate
considerably from what is thought of in USA.

Worldwide diff in nat cultures categorized according 2 5 dimensions tht

help explain diff in mgt found. Helps demon relative position of US vs other parts
of the world.

No such things as universal mgt theories. Mgt theories are human; their
ideas cannot help but reflect constraints of their environ.

Origin: manege: training of horses. Menage: art of running a household.

Mgt:process. Managers: a class of ppl (1) does not own a biz but sells
skills 2 act on behalf of owners (2) does not prod personally but is indispensable 4
making others prod thru motivation. In the US, manager is a cultural hero

Germany: mgr not a cultural hero. Engineer fills the hero role. Effective
apprenticeship system exists both on the shop floor & in the office, which
alternates prac work & classroom courses. Worker rec cert at end of
apprenticeship the Facharbeiterbrief. Highly skilled & responsible German
workers do not need a manager, Ame-style to motivate them. They expect their
boss/Meister to assign their tasks and be the expert in resolving technical
problems. Highest rate of personnel in productive roles and lowest in leadership &
staff roles. Biz schs unknown in Germany. German economy has performed in a
superior fashion to the US in virtually all respects so a strong concept of mgt
might have been a liability rather than an asset

Japan: Ame type of mgr missing in Japan. In us, core of enterprise is the
managerial class while in Japan, core is the perm worker grp: workers who are
tenured & aspire life-long employment. Japan grads join perm worker grp & fill
various positions, moving frm line to staff as need occurs and paid according to
seniority rather than position. They partake in Japanese-style grp consultation
sessions 4 impt decisions which extend decision-making period but guarantee fast
implementation aftwards. Japanese are to a large extent controlled by their peer
grp rather than by manager. Own PM theory of leadership. P = perf M =
maintenance. Workers > mgr in Japan.

France: manager, us style absent. USA: fair contract btwn EEs and ORs
which give mgr certain prerogatives but within limits. But in france, honor of each
class in society in which superiors behave as superior beings & subordinates
accept & expect this, conscious of their own lower lvl in the national hierarchy but

also honor of their own class. They think not in terms of mgr vs non-mgr but
cadres vs non-cadres. One becomes a cadre by attending proper schs and
remains in it forever, regardless of actual task. Cadres have privileges of a higher
social class & rare for a non-cade to cross the ranks. Matrix org never not tht
Holland: need 4 consensus among all parties, neither predet by
contractual r/s/class distinctions but based on open-ended exch of views &
balancing of interests. Leadership presupposes modesty as opposed to
assertiveness as in US. Time-consuming ritual consultations to maintain
apparence of modesty and consensus.
The overseas chinese: Taiwan, hong kong, sg. Enterprises tend to be small
org through networks based on personal relations. They are family-owned w/p
separation btwn ownership & mgmt. Focus on 1 prdt/mkt w growth by
opportunistic diversification. Decision-making centralized in hands of one
dominant family member, low profile, extremely cost-conscious, apply Confucian
values of thrift and persistence. Size kept small by assumed lack of loyalty of nonfam EEs. Prefer econ activities in which great gains can be gained w lil manpower.
Employ few prof mgrs. These system has its roots in history, where there were no
formal laws, only formal networks of powerful ppl guided by general principles of
Confucian virtue. Works for chinese well.
General lack of success in econ dev of other countries sufficient argument
to doubt validity of western
mgt theories in non-western environ

Regions of the world w history of large-scale political integration & civil

generally done better than regions in which no large-scale political & cultural
infrastructure existed. Development cannot be rushed. It requires time to grow
cultural infrastructure local mgt. It cant be M in packaged form.
Russia & China: the ind Western world & World Bank seem committed to
help ex-Eastern bloc countries dev but w the same technocratic neglect 4 local
cultural factors tht proved unsuccessful in dev ass to other poor countries. Free
mkt capitalism intro by west supposed to be the answer. Mgt theories cant
neglect the great literature of the coutnries they want their ideas to apply to.
Cultural diff btwn nations can be described using 5 bipolar dimentions.
And the position of countries on these dimensions allow us to predict the way
their society operates, incl mgt processes, & the kind of theories applicable to
their mgt. Culture: collective prog of e mind which dist 1 grp/category of ppl frm
another. Category=nation in the paper. These dimensions are constructs tht
shldnt be reified (made concrete). First 4 dimension exp 49% of var in data; other
51% remain specific to ind countries. First 4 dimen detected through comparison
of values of similar ppl (EEs and Mgrs) in 64 national sub in IBM corp. Ppl working
in same coy but in diff countries rep v well-matched samples frm pop of their
countries similar in all respects excpt nationality.
1. Power Dist: deg of inequality among ppl which pop of a country considers
normal; relatively = (small power dist); extremely unequal (large PD)
2. Individualism: deg to which ppl in a country pref to act as ind rather than
members of grp. Opp: collectivism child learns to respect e grp and diff out/in
grp members; loyalty to grp.
3. Masculinity vs Feminity: deg to which tough values i.e assertiveness, perf,
success & competition prevail over tender ones like quality of life, maintaining
warm personal rs, svc, care4weak, solidarity
4. Uncertainty Avoidance: de got which ppl in a country pref structured clear
rules as to how to behave over unstructured situations. High UA: more nervous,
rigid. Low: more easy gg, more open to changes.
5. LT VS ST Orientation, study of values of students in 23 countries by Michael
Harris Bond- wondered 2 what extent cld common findings in studies be e effect
of a Western bias intro by common Western background of researchers. 50males
& 50females in each 23 countries In all 5continents. Chinese Value Survey (CVS)
5th dimension rooted in teachings of Confucian. LT: thrift, persistence. ST: respect
for tradition & fulfilling social obligations.
US culture profile below ave on PD &UA, highly indi, fairly masculine and
ST oriented. Germains show stronger UA, less extreme indi. Japanese least on PD
& UA but less ind & feminine. Dutch same as US on first 3 dimens but score
extremely feminine & relatively LT oriented. HK has large PD, weak UA,
collectivism and LT orientation.
3 elements present in US : (1) Stress On Mkt Processes: Org explained
from mkt failure and thus prefer org tht internally resembles mkt to org tht
internally resemble more structured models. Ideal principle of control in org in mkt
philosophy is competition betwn indi. This fits w society tht has a not too large PD
w not too strong UA and indi, fit all Anglo countries. (2) Stress On Indi: culture at
national and org lvl v diff. Nat culures differ in fundamental, invisible values held
by majority acq in early childhood vs corp cultures acq by socialization of new
members who join as young adults and are more superficial visibile prac in org.
Nat culutres change slowly while corp ones can be consciously changed. EEs w v

diff nat values have corp culture tht keeps thaem tog. (3) Stress On Mgrs Rather
Than Worker: Mgrs more involved in maintaining networks. If anyth, it is the rank
& file worker who can really make decisions on his/her own altho on a simple lvl.
All great ideas have travelled frm one country to another, enriched by
foreign influences.

World Value Survey (WVS) worldwide network of social scientists studying changing
values & their impact on social & political life. Rep surveys in 97 societies containing
almost 90% of worlds population. Surveys show changes in what ppl want out of
their life and what they believe. Provide valuable info abt social change: values,
beliefs & motivations of ord citizens. Anlalyse impact of global cultural change on
econ dev, creativity, quality of life & democracy.

Many basic values are closely correlated & can be depicted in 2 major
dimensions of cross-cultural variation: (1) Traditional/secular-rational helps
contrast btwn societies in which religion is impt & those whr its not. Nearer to
trad pole emphasise e imptance of parent-child ties, deference (polite submission)
to authority, trad fam values, rejction of divoirce, abortion, euthanasia, suicide,
have high levels of nat pride & a nationalistic outlook. (2) Survival/self-expression
valuetrans frm industrial to knowledge society linked w shift frm survival values
toward self-expression values. In knowledge societies, many grow up taking
survival 4 granted. Priorities shift ffrm emphasis on econ & physical security to
subj well-being, self-exp & quality of life. Self-exp: high priority 2 environ
protection, tolerance of foreigners, gays, les & gender equality & rising demands
4 participation in deicison-making in econ & political life. Shift in child-rearing
values from emphasis on hard-work to on imagination & tolerance as impt values
to inculcate in a child. Ppl place high value on ind freedom &self-exp, have
activitst political orientationssame attributes defined as crucial 4 democracy.

Und of democracy: correlation btwn mass self-exp values& democratic

institutions in society is strong & consistent. In the LR, process of intergen pop
replacement tends to make self-exp values more widespread. Countries w autho
regimes likely to become more liberalized in the next 15-20 yrs.
Empowerment: democracys essence is the empowerment of ord citizens.
Each of these 3 elements action resources, self-exp values & democratic
institutions empowers ppl on a diff lvl. Action resourcesmaterial/cognitive
resources like education & skills tht help ppl govern their lives. Modernization incr
ppls econ resources, brings rising educational lvls tht help move ppl into

occupations tht req indpt thinking, making them more articulate & better
equipped to partake in politics. Human development: Econ devinc
resourcesself-exp valueseffective democratic institutions.

Globalisation, gender & converging values?: Globalisation shld lead to a

convergence of values but data frm 20 countries show tht from 1981 to 2007
almost NO evidence of a convergence of values. Support 4 gender equality not
just a consequence of democratization but part of a broader cultural change tht is
trans indus societies & fuelling mass demands 4 incr demo insti.
Culture, diversity & religion: secularization theory modernization &
rising lvls of human security are said to cause declining lvls of religious
involvement tog w a more skeptical view of religion impacting politics.
Modernization brings about cultural diversity as well that leads to more religious
involvement & more positive views of religions impacting politics. 2 schs of

Rising insecurity & values: est stable demo under severe exisitential
insecurity extremely difficult. Stable, effective demo generally emerges through a
process of human dev tht starts w econ dev & leads to a culture of tolerance, trust
& emphasis on human autonomy. Socioeconomic dev brings shift frm xenophobic
& authoritarian outlook linked w survival values towards inc tolerant& democratic
outlook linked w self-exp.

Facilitating Development: The Role Of Business Groups

By Raymond Fisman & Tarun Khanna

Developing countries unable to support org econ activity due to

inadequacy of basic svcs. Pte sector facil dev through investments by

agglomerations of firms biz grps. Grp-affiliates more likely to profitably locate in

less-dev states than unaffiliated firms. Scale & scope of grps + de facto ppty
rights enforcement within grps in environ where legal enforcement i=s lacking
permit them to overcome some difficulties tht impair production in underdev
Pte enterprise ade lil headway hs govt bureaucracy & reg often make
entry exp + time consuming _ weak ppty rights, contract enforcement prevent
firms frm capturing ecno rents frm g&s they prov. Govt reputations also play a
role. Regimes are unstable in dev countries&nationalization of infrastructure
assets may discourage invesments in such proj.
Firms can either (1) make do w shortages, use what is publicly prov,
accept low productivity & prdt quality as cost of doing biz in underdeveloped area
or (2) supply inputs for their own use.
Biz grps better suited to dealing w poor avail of basic inputs/svcs. Such
grps comprise of a diverse set of biz often initiated by a single fam, bound tog by
equity cross ownership/common board membership. Grp-affiliates often share a
common brand id Salim Grp in Indo, Tata Grp in India, Samsung in Korea, have a
common labor pool, rely on one another for financing. Family bonds reduce
likelihood that contracts will be renegedput grps in better position to deal w
failures in fin, labor, prdt mkt. Grps may be able to take adv of EOS in
infrastructure provision by co-locating a no of grp affiliated plants & sharing costs
of infrastructure svc. Unrelated biz in a grp prob ensure smoother overall internal
CF than a firm (diversification).
Found tht grp-affiliated plants more likely to locate in less-dev regions
1975-1995 and stronger for younger plants where location decision less likely the
result of political economy considerations driven by Indias ind licensing regime.
India well-suited for study because: large prop of Indian grp affiliates are
publicly traded, firms affiliated w 1 grp only. Large no of grps facil stat analysis.
Much variation in dev level across regions of the country which enable us to look
at firm decisions as a fxn of dev.
Data: taken from CMIE Centre for monitoring the indian economy. Plants
located in union territories dropped ( no data), removed govt-run & foreign firms
as they were sufficiently diff frm other indian firms tht can distort results. Firms tht
lacked observations on variables used in basic regression sales, age, plant
location removed as well. Prior to 1975, plant location decisions made by govt
bureaucrats rather than biz leaders bcus a govt licence was req 4 any new
enterprise & licence given conditional on the firm locating in home state of govt
official who made the decision. Aft 1975, reforms, destabilization of govt tht came
w Congress Partys fall frm power in 1978 led to more profit-based plant location
decisions. 1991 particularly impt. Ind prod grew steady pace of 6%/more
throughout the 1980s while thr was a marked decline in no of licences issued,
simply bcus fewer & fewer biz req licenses to undertake new ventures. Also, no of
licences issued decr more rapidly in less-dev regions while indian gov may hve
been forcing firms to locate in underdev regions early on, this effect decreased
overtime. Sample restricted to firm location decisions made aft 1975 proxied by
firm incorporation date. This gave final sample of 957 firms and 1193 plant-level
observations. Measure dev using 4 basic categories: (1) Power generation (2)
Telecomm (3) Transportation (4) Social Svc. Try to obtain proxies tht reflected
quality rather than qty. Use per capita instead of unit area measures due to vast
underdev expanses. Use 3 basic measures of energy infrastructuredeficit in prod
(extent to which demand exceeds supply), % loss in transmission, generating

capacity per capitaaffect likelihood & freq of brownouts/blackouts. Direct phone

lines/telephone exch per capita used to assess accessibility of comm. Transuse
% of roads tht are surfaced. Social svcslook at public prov of education - & of
teachers w formal training, total expen on education/capita and healthcare
hospital beds/healthcare workers per capita. Score for each type of svc is a simple
ave of its component. Overall measure of dev is the sum of these 4 scores scaled
to make lowest score=0 and highest=1.
Why locate in low-infra region?: Labour must be less exp in low-infra
region to compensate coy locating thr 4 higher costs of production resulting frm
low-infra[ pf(La, Ia) WaLa = pf(Lb, Ib) WbLb]. Firms best able to deal w
infrastructure shortages more likely to locate in low-infrastructure regions as it
allows them to take adv of cheap FOP tht arise in equilibrium in order for mkts to
clear. Firm w DEV<0.5 benefit frm lower wage rates; 30% lower, lower tax rates
and higher govt fiscal benefits.
Results: controls in regressions incl log(sales) = firm size, AGE. Negative
corr betwn Age & Dev. Industry has been later in coming to less-dev regions so
firms in such regions can be expected to be younger on average. Exp sign of
coeeficient on log(Sales) less clear-exp larger firms to be more likely to locate in
less-dev regions 4 same reasons as larger grps. Larger firms, however are
generally more capital intensive, so complementaries betwn public and pte capital
may result in a higher prop of large firms in more dev regions. MEMB dummy
variable representing grp membership. MEMB coeffi ranges frm -0.05 to -0.04. Exp
MEMB coeff to be larger for younger firms. Coeff of MEMB far higher, more
negative when term changed to MEMB*AGEconclude tht younger grp-affiliates
are more likely to locate in less-dev regions. Using perf as dept variable: look @
purer econ outcome as dept variable-if grp-affiliates better able to min costs of
locating in less-dev regions, they shld be weakly more profitable in these regions
vs non-grp affiliatesUse ROA & Tobins Q. Mean ROA higher 4 grp firms in undev
regions and mean Q differ slightly. For non-grp firms both ROA & Q are higher in
dev than non-dev states.
Alternative explanations:
1. Responding to regulatory distortions & Govt bureaucracy: Can be tht grps
restricted frm plant expansions bcus of a societal bias aganinst large org,
enshrined in the monopoly & restrictvie trade prac MRTP. If MRTP relaxed for grps
only 4 plants in underdev regions and if non-grps faced no constraints. If this was
true, shld see effect become weaker as age of firms decrease but results showed
opposite. Could be tht grps are prone to do biz in underdev regions due to better
political connections there. Bureaucratic corruption doesnt seem to explain
observed pattern in locational choice as well as shown in statistical analysis.
2. Intrastate heterogeneity: use of state as lvl of analysis seems justified by
district-lvl data.
3. Firm diffusion: 1st few plants locted in dev region due to closeness of pdt
mkts&input suppliers. Construction of future plants diffuse outward 2 take adv of
new opportunities but coefficient close to 0. So no evidence to support this
Role of grps in less-dev regions:
1. Direct infrastructure substitution: for joint use of co-located coys. Infra
investments have high FC, more efficient to spread expenses over a large vol of

2. HR Consideration: due to (1), grps able to make life in backward areas more
palatable for skilled EEs & can rotate skilled workers thru facilities in less-dev
areason ST assignments.
3. Supply of inputs: insufficient demand to have ancilliary svcs. Grp firms alr hve
well-est supplier networks, able to coord delivery of materials thru a corp headq
4. Financing: indpt firms in less dev regions diff to obtain financing as most of
Indias fin institutions are in e major urban centres. A grp likely to hvr a head
office in a major city tht handle financing on behalf of its rural sub. Many grps use
internal capital mkts.
5. Risk & Diversification: grps have greater size and diversificatn to bear risk.
6. Land Intensive Projects grps& govt bureaucracy: large grps able to expedite
rezoning process due to superior political contacts. Usu pref to locate proj w sig
land req in less dev regions, where ppty costs are cheaper.
7. Accting Profits: 5yr tax holiday.
Using accting profits, govt firms not doing v well, not as efficient to bring
industry to underdev compared to grp firms. Foreign firms have diff enforcing
contracts and pref to locate firms in dev regions. Being the 1st to locate in less dev
region diff due to absence of infra & ancilliary svcs but a firm of sufficient scale
will spur dev of these svcs which make the area more attractive as a site 4 other

Estimating The Value Of Political Connections

By Raymond Fisman

Claim tht in SEA, political connectedness rather thn fundamentals i.e

productivity was the pri det of investment decisions.

Problems in trying to value political connectedness: (1) Where decisionmaking is decen, analyzing firms political associations req info on its rs w
numerious govt decision-making bodies & hve to come up w a way to aggregate
these connections (2) How to est VALUE of these connections (3) Unobservables
like biz acumen can be correlated w ability to est political connections. In
Indonesia, these prob overcome. Indo is highly centralized and have a stable
political structure till end of Suhartos regime & thus can construct a credible
index of political connectedness. To infer a measure of value of connections, id a
no of episodes when there were adverse rumours abt state of Suhartos health
during his final yrs in office and compare returns of firms w differing deg of
political exposure.

In every case, returns of shares of politically dept firms were lower than
tht of less-dept firms. Magnitude of differential effect iis highly correlated w net
return on Jakarta Stock Exchange Composite Index bcus return on index is a
measure of severity of rumours perc by ORs. Regression run 4 interaction btwn
political dept & event severity. Coeff on this interaction term is positive &
statistically sig, implying tht well-connected firms suffer more in rxn to a more
serious rumor, suggesting tht a large % of well-connected firms value derived frm
political connections.

How MUCH do connections matter

Data: (1) Stock mkt & accting data 4 coys traded on JSX (2) Grp Affiliation:
inferred by looking at firms major SHR & examine composition of board + mgt (3)
Political Connectedness: Suharto dependency index based on subj assessments of
a no of top consultants @ Castle Group. Consists of a numerical rating of deg to
which each of the 25 largest ind grps is dept on political connections 4
profitability. Ratings range frm 1 (least dept) to 5. All coys affiliated w Suhartos

children & those owned by LT Suharto allies rec a 5. (4) Info on Suhartos death:
ascertain date rumors 1st hit JSX. Each episode assumed to come to an end when
it was put to rest by revelation of new info or it was reported tht analysts had
factored new info about Suhartos health into pxing of securities.
Results: politically dept firms on ave lost more value during these
episodes than less dept firms.
Insert formula
Events described above cant be used to infer full value of connections
bcuz assoc rumours only increased the prob tht Suharto wld leave office. To est
full value of connections req event involving Suhartos sudden & unexp removal
from office.
Robustness of study:
1. Thiny traded firms: if coy not traded on tht day, reg no px change even if It
suffered decline in underlying value. If unconnected firms more likely to have 0
trading value, what is interpreted as effect of connectedness may be
manifestation of general mkt decline. A smaller decline in unconnected firms bcus
they arent being traded.
Perceived corruption is a reasonable proxy 4 prevalence of political rents,
political connections may play an impt role in many of the worlds largest and
most impt econ.

Japan Fact Sheet Based On 2013 Data

Post-war econ miracle ended in late 1980s when a huge asset-px bubble
burst, leading to countrys lost decade of fin distress and econ stagnation in the
1990s. EG resumed in e 2000s but hit hard by 08/09 global fin crisis & 11
earthquake + tsunami.

Population shrinking + large fiscal deficit as a proportion of nominal GDP

Legislative & executive powers vested in the Diet (Parliament) which

consists of e House of Councillors (upper house) and House of Rep (Lowee house).
Ruling Liberal Democratic Party.

Gross public debt in 14 = 240% of nominal GDP. Effectiveness of LDPs

econ revival strategy Abenomics remain in doubt while Bank Of Japan (Central
bank) tries to achieve 2% inflation target.

Stnd nat corp tax rate = 34.6%. Top effective personal Y tax rate, incl
local taxes is 50%. Consumption tax rate 8% planned to incr to 10%.

Japans merchandise trade deficit @ USS$89.7 Bn in 13 while current acct

recorded surplus.

Main X: transport equip, non-electrical machinery to US, China. Main M:

Mineral fuels, electrical machinery from China, EU.
The System That Soured: Toward A New Paradigm To Guide Japan Policy
By Richard Katz

Ames policy towards Japan is special because for the past 2 decades it
has 2 opposite paradigms Revisionism & Traditionalism BUT neither could
predict/explain in hindsight how e greatest econ miracle of post-war era stopped
dead in its tracks suddenly. Neither offers reliable guidance on how to respond to
Japans current payalysis.

Revisionists argued Japans econ system was so diff, so superior, so

threatening tht extraord remedies needed while traditionalists argued tht no

special measures needed bcuz japan followed same free mkt & free trade patterns
like in US.
Japans past econ success based on high savings, tech, hard work and
fierce competition as individuals & enterprises responded to tht opportunities
provided in quite free mkts for commodities & labour.
Neither revisionists/trad can suggest good way for US to get Japan to stop
wasting time/reliably indicate what is (not) achievable.
Need a new paradigm to guide policy and in katz opinion, such a
paradigm wld include these elements:
1. A system that soured economic model: Japanese econ model was a good
mechanism for turning a poor country into an industrial powerhouse in record
time, but became counterproductive once japan achieved econ maturity.
2. Governance by negotiation political model: japans political system allow all
the special interest Lilliputians to secure the nat int in millions of tiny threads;
helped to ensure tht rapidly growing econ pie shared by all. But it has left govt
unable to shift gears even when vital nat int demand tht it overrides all special int.
Unable to end its obsolete industrial policy regime in the 1970s, has trouble
introducing mkt economics & competitive politics today.
3. A Road Map To The Political Dynamics Of The Future: powerful int forces seeking
major renovations in both economics & politics, incl more mkt-opening to e
outside world.
4. A Guide To Policy
The govt help create a fav supportive biz climate tht did not exist in most
countries and this was taken for granted (1) banking credit backed by govt made
heavy capital investment possible (2) govt was deeply involved in planning tht
they targeted growth industries, set production goals and est foreign mkts.
Growth rewarded w high dep, cheap loans, subsidies, light taxes (3) Infant
industries protected.
In the high growth era, major decisions regarding what industries existed,
what coys entered those industries, whr investment lvls & pxs shld be and how to
save jobs in declining sectors shaped by negotiations + lobbying rather than
mkt/bureaucratic effect.
Both schools of thought assumed tht the political process in Japan auto
allows the country to shift gears in accordance w changes in the national
interests. Revisionist: bureaucracy und nat int imposes itself on a Confucian
society which willingly submits to rule by the madarins. Trad: survival of the fittest
scene. In reality, japan politics is complex; governed by negotiation, which
combines heavy govt intrusion w powerful societal pressures on the govt and
consensus politics tht virtually force Tokyo to accommodate all special int.
Currency rationing: to produce industrial o/p, need to have foreign tech &
thus need foreign currency for royalty pmt. Until system ended in 1964, power to
allocate/deny foreign exchange was the power to det which industries/coys got off
the ground. MITI usually tries to limit entry to a new ind but political lobbying
made such fine-tuning impossible. Once MITI designated an industry as strategic,
major firms had a virtual guarantee against bankruptcy and thus such industries
attracted far too many entrants to maintain EOS. MITI oft unable to resist when
each powerful keiretsu lobbied for its own contender. If growth & inc in efficiency
fast enough, as s the case in the catch-up era, policy worked out. In other cases, it
led to costly white elephants. Govt authorized firms to form cartels to avoid
bankruptcy during periodic downturns/bouts of excess capacity. Rationale was to
reduce risk, inducing firms to invest in higher rates. Cartels fixed pxs and imposed

limits on capacity and o/p. however, during slumps, production quotas assigned
pro rata based on mkt share and everytime industry recovered, firms raced to
build new capacity so as to enlarge their shareanother cycle of overcapacity and
need for another cartel industries such as shipbuilding, cement, chemicals,
steel, textiles, machinery, electronics. Cartels limited px competition & helped
incumbents keep out newcomers. Overtime economy became incr cartelized, esp
among least competitive sectors mkt det px didnt prevail.
Ability to finance a proj decided by politics, not CF proj.
Governance by negotiation: Strategy vs Competition: small biz were one
of the losers to be compensated. LDP dist billions of $ disguised as no-collateral
govt loans to > hald of the nations small biz. Fin Ministry overlooked large-scale
tax evasion by small biz as much as 40% of income. Large-scale retail store law
enacted, allowing small retailers to obstruct expansion of department stores,
enabling them to raise px. LDP bought votes w subsidies by e 1980s, more than
75% of all farm income come frm subsidies & px support prog. Tokyos pro-growth
policies gave aid to key X industries while its anti-growth policies handed out
heavy subsidies and abundant govt loans to preserve employment in flagging
sectors. Balanced shifted frm former to latter overtime.
Need compromisecomplianceconsensus
Why the system soured: as long as strat & compensation remained in
balance, system worked but in the 1970s, demands for compensation rose beyond
ability of econ to meet them. As japan econ matured, no more infant industries.
Japan refused to let go of the ind policy model. Tactics of protection were now
used to shield losers frm competition at home & abroad. Japan became a
deformed dual econ: fxnal hybrid of super-strong Xing ind & super-weak domestic
sectors. Many of japans efficient exporters fled offshore.
Coys still rake in cash and pile up biz savings but they have fewer outlets
for profitable investments within japn.
Rise of Tanaka: Compensation Seizes The Throne: workers cried out for
relief and it was given as in the 1970s, LDP was also facing a political crisis. LDP
found a way to appeal to rising new demographic grps fromed by urban whitecollar salary men + bue-collar workers hit hard by the 1970s downturn but at a
huge econ costs- solution was the corrupt money politics of Kakuei Tanaka. In
1972, over big biz obj, LDP made Tanaka PM. By elevating e Tanaka faction,
japans leaders greatly exacerbated ability of small int grps to hold entre nation in
thrall. Up until e 1994 electoral reform, LDP cld remain in power bcuz of japans
unique electoral system. Each district in Japan elected 3-5 members of the Diet, w
every voter getting one vote. A diet member can win election w only 15-20 % of
votes vs 51% in most countries. This system the opposition. However, this system
promotes parochial thinking and vested int. the key to winning is by assembling
org of personal support grps Koenkai instead of focusing on national issues. Ind
diet members secure re-electio by mediating w the ministries to secure goodies
for their koenkai. With arrival of Tanaka, Koenkai moved up. Political compensation
became the focus trad govt loans to small biz, farm px supports, construction
proj, expensive prog intro to satisfy demands of urban middle class like health
insurance, social security, education, parks, anti-pollution measures. Tanaka
pressured BOJ to print more money 30% inflation1st bubblebudget became a
deficit. Another method to support the koenkai was to charge high px in the pte
mkt, allowing Japans inefficient sectors to charge monopolistic px& maintain
Following elements are part of the rd map the new paradigm gives us:

(1) Japan cannot rec econ w/p major structural overhaul tht goes far beyond dereg
(2) Political obstacles to reform are so great tht thorough reform will take years:
obstacles crowd of special interests
(3) Japans present political leadership is incapable of instituting needed reform
and instead tries to muddle through.
(4) Muddling through is untenable (Unable to be maintained), it just sends Japan
lurching from crisis to crisis
(5) Cracks in the web of mutual support are widening
(6) Ultimately to solve the prob, thorough political & econ reform will need to
(7) Most likely supporters of reform are those forces rep efficient part of dual
economy, like Xers, urban middle class, enlightened bureaucrats, academics.
(8) None of this implies tht Japan is abt to embrace the Ame model
What can US do? They hve to recog that Japan will be adrift 4 yrs to come
but tasks of helping Asia should not be avoided/delayed just bcuz japan is
paralysed. Recog Japan is gridlocked doesnt mean accepting itseek enggment
by Japan. LT reforms in financial sector and retail sector. Money show flow on the
basis of real return rather than outdated keiretsu ties. Us can help shorten yrs of
reform. Us needs to find & focus on items whr its own desire 4 mkt access
coincides w reform agenda of powerful forces within japan & whr such changes
create powerful systematic ripple effect.

Democracy, Inclusion & Prosperity

By Reserve Bank of India Governor Rajan

Fukuyama argues tht liberal democracies which seem best to foster

polical freedom &econ success, tend 2 have 3 pillars: a strong govt, rule of law &
democratic accountability. Author adds in a 4th pillar: free market which are impt
to make the liberal demo prosperous. But pillars are weakening in ind countries
bcuz of rising inequality of opportunities.

Strong govt: prov effective & fair admin through clean, motivated &
competent administrators who can deliver good govt

Rule of law: govts actions are constrained by a historical & widely

understood code of moral & righteous behavior, enforced by religious,
culture/judicial authority

Democratic accountability: govt has to be popularly accepted, w ppl

having right to throw unpop, corrupt/incompetent rulers out.

All 3 aspects: executive, judiciary, legislature needed to bal one another.

Strong govt emphasized even in a dev country.

Strong govt need to be peopled by those who can prov public goods- req
expertise, motivation + integrity. BUT gd govt need to run in the RIGHT direction
(e.g. hitler didnt run in the right direction). Thus, need both rule of law & demo
acct to keep strong govt on e right path. Rule of law needed 2 prevent tyranny
(cruel + oppressive govt/rule) of majority tht can arise in a democracy + ensure
basic rules of the game preserved over time so tht environ is prectitable no
matter which govt vomes to power. Ensure all citizens have inalienable (not subj
to being taken away) rights and protections constrain e majoritys behavior
towards minorities. Ensuring predictable environ ensures biz can invest securely
today 4 e future. Rule of law alone would not be enough to accommodate e
aspirations of new emerging grps/ consequences of new idea or tech. Demo
actability ensures govt responds to wishes of the mass citizen, allowing emerging
grps 2 gain influence thru political nego & competition w others.

Dev of each pillar in diff societiesnature of states we see today is largely

exp by history. China: long periods of chaos, competition meant grps had to org
themselves as hierarchical military units w rulers hvng unlimited powers. When a
grp eventually was victorious, natural for it to impose cent autocratic rule to
ensure chaos didnt reemerge. To rule over large geog area of country, china
needed a well-dev elite bureaucracy and chose them based on exams. China did
not have strong alt sources of power founded in religion/culture to impose rule of
law. In western europ, the Christian church imposed constraints on wht the ruler
cld do. So military competition, tog w constraints on ruler imposed by canon law
led to emergence of both strong gov + rule of law. In india: caste system led to
div of labour which ensured tht entire pop cld nvr be totally devoted to e war
effortno pressure to dev strong govt as their war/milirary comp were never as
harsh. Codes of just behavior for rulers originating frm ancient indian scriptures
constrain any arbitrary exer of power by indian rulers. India has weaker govt,
constrained further by rule of law.
Free enterprise & political freedom frm demo actability and rule of law
can be mutually reinforcing. Also, there has to be a fair dist of econ capabilities
among the citizenry for the 4 pillars to work but this is not seen strongly in india.
Median voter agrees to protect richs ppty & to tax them mod may be tht
he sees the rich as more efficient managers of tht property and thus creators of
jobs and prosperity tht everyone will benefit frm. To the extent tht the rich are
self-made & have emerged as winners in a competitive, fair & transparent mkt,
society may be better off allowing them to own & mge their own wealth, settling
in return for a reasonable share of their produce as taxes. But if the rich are seen
to obtain weath through dubious means mged the system and not their biz well,
there wld be protests. Rich might go to the authorities to protect their wealth
strong check on official arbitrariness disappears. Govt free to become more
autocratic. BUT if its a free enterprise system (competitive one), w a lvl playing
field, it generally permits e most efficient to acq wealth. Fairness of the
competition improves legitimacy perceptions. Under fair comp, process of creative
destruction pulls down badly mged inherited wealth, replacing it w dynamic & new
wealth. The rich can use indept tht acc wealth to limit arbitrary govt, support rule
of law & protect democratic rights. Free enterprise & democracy sustain each
Free enterprise system works well when participants enter the comp
arena w fundamentally = chances of success. Given the subsequent lvl playing
field, the winners road to riches depend on greater effort, innovation &
occasionally luck. Such a scene is seen in Western democracies prosperity
seems incr unreachable for many bcuz a gd education which seems to be todays
passport to riches is unaffordable for many in the middle class. Middle class dont
see e system as fair and support 4 e free enterprise system is eroding. Mutual
support giving way to antagonism. Govt can choose either the most capable
applicants 4 positions but risk becoming unrep of e classes or choose rep over
ability and risk eroding effectivenessthreatens govt capacity.
Strongest pillar in india is democratic acctbility. India needs better govt
,more specialists w domain knowledge & experience. In india, it is opp frm other
countries where strong govt emerged 1st followed by constraints frm rule of law &
democratic actability. Need a balance of checks.
Modulate liberalization pace to pace at which econ capabilities broadened
can gain public support for reforms. To embed e 4 pillars supporting prosperity &

political freedom, need to cont to nurture the broadly equitable dist of econ
capabilities among ppl quality education, nutrition, healthcare, fin, mkts.
China Fact Sheet, 2013 data

Peoples Republic Of China founded in 1949 by e Chinese Communist

Party (CCP). Ccps chairman, Mao Zedong led country for nearly 3 decades. In
1978, Deng Xiaoping (then ccps chairman) intro econ reformsJiang Zemin w a
more collective leadershipHu JintaoXi Jinping chairman of central military
commission which controls armed forces & general secretary of the CCP. Ccp is
chinas main decision-making body & dominates e govt.

Seek to cont econ liberalization + EG + keep political control. Past

emphasis on EG shift towards social priorities like corruption, widening inequality
of wealth. Govt has to rebaln the econ which is dept on high lvls of investment
spending. Govt wants to pursue fin liberalization, to improve productivity of stateowned enterprises (SOE) reform of local govt fin, cent of control over judicial
system, reform of hh reg (Hukou) system.

Stnd tax rate+25%, prog Y tax system. Rife tax evasion. Trade surplus

Major X: electrical machinery, telemcomms equip to HK, US

Major M: electrical machinery, petroleum & petroleum products frm SK,

The Life Of The Party: The Post-Democratic Future Begins In China
By Eric Li

Beijing will be able to meet countrys ills w dynamism & resilience due to
ccps adaptability, system of meritocracy, legitimacy w the chinese ppl.

On the job learning: since found in 1949, peoples republic has pursued a
broad range of econ policies. Early 1950s, ccp intro radical land
collectivizationlate 1950s, great leap forward (econ & social campaign by the
ccp led by mao Zedong, aimed to rapidly transform country frm agrarian economy
into a socialist society through rapid industrialization & collectivization.
Introduction of agricultural collectivization whr pte farming was prohibited & those
engaged in it were labeled counter-revoluntionaries and persecuted. Years of the
great leap forward saw econ regression w many ppl killed. Mao insisted tht
communes must prod more grain 4 the cities & earn foreign exch frm exports.
Land was redist frm rich to poor and agricultural sectors w crops like opium was
destroyed & replaced w crops like rice)late 1960s to mid 1970s, cultural
revolution (led by Ma, meant to preserve true communist ideology in the country
by purging remnants of capitalist/trad elements frm chinese society & reimpose
maoist thought as the dom ideology within party. The revolution marked return of
Mao to a position of power aft great leap forward but movement paralysed china
politically & sig affected country econ & socially)quasi-pte farmland in early
1960s1970s, mkt reforms by deng Xiaoping (de-collectivisation of agriculture,
opening up of country to foreign investment, permission for entre to start biz +
privatization and contracting out of much STO, lift price controls & protectionist
policiespte sector grew)1990s, jiang zemins opening up of the ccps
membership to pte biz ppl. Goal has always been econ health and when great
leap forward & cultural rev didnt work, ccp found sth else tht did, Dengs reforms,
which helped chinas econ grew to be the 2nd largest globally. CCP didnt shield
away frm insti reforms. Intro term limits 4 most political positions & age limits.
Before, leaders cld use positions 2 accumlate power & cont their rules Mao.

Upward mobility within party incr. ccp has been 1 of the most self-reforming
polticial orgxis ccp will be able to adapt to & meet whatever new challenges
Making the grade: the party itself weeds out corruption according to the
author. Of 25 members of the pre-18th congress politburo, only 5 came frm
privileged backgrnds. Majority worked & competed their way through e ranks to
the top. China ensures meritocracy by the org dept of ccp. This org has an elab
process of beauratic selection, evaluation & promotion. Govt & affiliated org
recruit uni grads into entry-lvl positions annually into 1 of e 3 state-controlled
systems (civil svc, SOE, govt-affiliated social org-uni/community prog). Org dept
review perf ( quantitative perf records review + peer interview+vet personal
conduct) & promote through 4 incr elite mgerial ranks starting ke yuan. Fu
kekefu chuchu. EEs paths diverge aft chu and can be rotated through and
out of all 3 tracks/ be sent abroad to learn best prac arnd the world). Most
successful are promo again to fu ju and ju lvls assignment wld be to mge
districts w huge pop/coy. Aft ju, v talented few move up and make it to partys
central comm.
Innovate/stagnate: conduct top-down experience in select locales &
expand successful ones nationwide. Dengs creation of special econ zones in
1980s Shenzhen was to operate under mkt principles rather than dictates and
the success of this encouraged same implementation in other districts. Policy exp
also rise up frm local level qiu he carried out risky experiments: 1997 mandatory
municipal bond purchase prog to fund infrastructure w quotas to govt officials to
attract commercial investments, offered fav tax rates & cheap land concessions to
biz. Biz emerged which transformed cent planned rural comm into a vibrant mkt
econ. Qiu also made selection of officials more open & competitive by posting
upcoming official apptment in adv of final decisions 2 allow a public comment
period + two-tier voting system to vote candidates 4 certain positions.
By popular demand: chinese nationalism + moral legitimacy (Monument
to the Peoples Heroes at Tiananmen sq) + perf legitimacy. Ccps role in saving +
modernizing china>econ perf legitimacy. Repression not sustainable but seek to
employ small containment (of ppl w political agenda)
Enter the dragon: urbanization + entrepreneurship. Entrepreneurship will
help overcome threats to Chinas X-fuelled econ model. Adaptablethey move
inland as labor costs have risen in coastal manu regions which prod incr highervalue gds. Measures to encourage econ liberalization likely to be picked up +
social policy to make party more inclusive and outsource certain social welfare
fxns. 3-pronged approach to corruption: ccps central comm 4 discipline
inspection can detain & interrogate party members suspected of corruption w/o
legal limits + relying on media outlets to expose official corruption but ensuring
tht stories are not fabricated and are credible + incr competition within own ranks
tht will air dirty laundry and discourage unseemly behaviors.
Historys restart: chinas political model cant be exported. Success shows
tht systems of political govt ( not only electoral democracy) can work as long as
they are congruent w countrys culture and history. China doesnt prov world w alt
but show tht alt do exist.

Why Democracy Still Wins: A Critique Of Eric X. Lis A Tale Of Two Political Systems
By Yasheng Huang

Based on data, countries transition to democracy as they get rich.

Of 25 countries w higher gdp per capita than china tht are not
free/partially free, 21 are sustained by natural resources proves the 1st pt.

Li cites transparency international index (TI) to support his view tht demo
are more corrupt. Huang however, thinks tht IT is a product of demo, which
underscores tht we know more abt corruption in demo than in authoritarian
countries bcuz demo are by definition, more transparent & they have
transparency data. Li pts out tht Argentina & Philippines are both demo & corrupt
but he failed to pt out ttht in 2013 they were democracies but they have been
ruled by ruthless military dictators 4 decades b4 the transition. The autocracy of
these countries bred corruption. Legit to criticize new demo 4 not rooting out
corruption timely but not legit to confuse it w demo being e cause of corruption.
World league of e more egregious corruption offenders belong to autocrats
Suharto, Marcos, Mobutu.
Li states tht chinese system enjoys support among pop by citing high %
of ppl optimistic for future. But in a country w/o free speech, survey answers are
biased. There are political pressures tht tend 2 channel ans in a particular
Li states tht ccp self-corrects itself but almost every single policy change
Li id in his talk was made by the successor 2 e person who initiated e policy tht
got corrected. Self-correction implies a deg of voluntariness on part of the person
making the correction, not lackof alt other than making the correction, as in
E only authoritarian regimes tht go w/o suffering an explicit fin crisis are
centrally planned econ i.e Romania & East Germany bcus they failed 2 meet a min
cond for a fin crisis have a fin system.
2 academics david lake & matthew baum show tht democracies are
superior in prov public svcs.
Li blames low growth in Eur and US on demo but demo countries are
richer, much harder to grow at the same rate as the poor.
Chinese have accepted many foreign concepts/prac alr.
There is nth fundamentally incompatible betwn chinese culture
&democracy. HK, has press freedom & rule of law tho w/o electoral demo system,
no evidence place has fallen into chaos.
Li objects to many mechanics of demo. He objectst to voting when it is a
way to implement the prac of democracy but he endorses in-tra party democracy
BUT how to w/o voting?
Democracy can tame violence as well. Democracy has many probs but
the insurance fuxn makes it superior.

Law, Finance And Economic Growth In China

By Frankin Allen, Jun Qian & Meijun Qian

China impt counterexample to findings: neither legal/fin system well dev

yet it has one of e fastest growing economies. The law-finance-growth nexus
applies to the state & listed sector. Arguably, pooer applicable legal & financial
mechanisms pte sector much faster & prov most of the econs growth. Imbalance
among 3 sectors suggest alt financing channels & governing mechanisms such as
those based on reputation & r/s, support e growth of the pte sector.

La porta, lopez-de-silanes, sheifer, vishny (LLSV) & others prod empirical

evidence tht links origin of a countrys legal system to countrys institutions &
financial & economic outcomes. One result of study is tht countries w Eng
common-law origin prov strongest legal protection to both SH & creditors, have
better institutions, less corrupt govt, more efficient courts, more informative
accting stnd. Better legal protection & better institutions lead to better outcomes

4 the financial system. 2nd strand of literature is of the view tht dev of a fin system
tht incl a stock mkt & intermediation contributes to a countrys overall econ
growth. 3rd strand: prov evidence for the link & causality among law, finance & EG
at country, industry & firm level.
Examine 3 sectors of chinese econ: state all coy tht govt has ultimate
control (SOE), listed listed on an exch & publicly traded, pte sector other firms
w various types of pte & local govt ownership.
Chinas law & institutions, incl OR protection systems, corp govt, accting
stnds & quality of govt sig less dev than most countries in the LLSV. Chinas fin
system dominated by large but underdev banking system mainly controlled by 4
largest state-owned banks.
State sector shrinking due to ongoing privatisation process, which incl
firms gg public. Results: equity ownership is conc within the state for firms
converted frm the state sector & founders familites for the nonstate firms. Corp
govt are weak in listed sector. Dividend ratio & firm value of Chinese are low
compared to similar firms operating in countries w stronger OR protection,
consistent w LLSV predictions.
Results: on a survey of 17 entrepreneurs & exec, 2 most impt financing
channels for pte firms during their start-up and subsequent periods are financing
intermediaries, incl state-owned banks & pte credit agencies,, founders friends +
families. Most loans frm fin intermediaries secure by fixed assets/ 3rd party
guarantees. During firms growth period, funds frm ethnic chinese and trade
credits impt. Going public has benefits of incr reputation and access to large scale
funding but risk disclosing info to competitors/outsiders and incur large amt of
fees. Alternative mechanisms, due to absence of formal govt mechanisms have
been effective in pte sector. Role of reputation & r/s. most impt force shaping
chinas social values and insti related to Confucius define family, social order &
trust. Another mechanism tht drives good mgt & corp gov is competition. Firms
have strong incentive to gain comparative adv given low surivival rates during
early stages of dev. 3rd impt mechanism: role of local govt support & partake in
growth of pte sector firms.
Differences among 3 sectors challenge law-and-fin view tht it is the legal
origin tht cause the diff in fin systems and the fin-and-growth view tht it is the dev
of stock mkts/banking system tht cause diff in growth of firms/econ and challenge
the view tht ppty rights and lack of govt corruption are crucial in det fin & econ
Evidence on chinas legal & financial systems and growth in the 3 sectors:
majority of LLSV countries have better sh & creditor protection than in china but a
more impt measure 4 china wld be law enforcement rule of law & govt
corruption chinas measures sig below LLSV countriessuggest that scores of
creditor and SH protection of china unreliable. Chinas legal system isnt ahead of
any other major emergin econ & is dominated by those tht have eng common-law
origin. China ranks poorly in terms of polticial freedom + ppty protection rights
and thrs a positive correlation betwn political freedom & measures of econ
freedom. Judicial indpt acct 4 positive effect of common-law legal origin on econ
freedom. But fact tht china scores poorly but still grow fast cast doubt on impt of
political freedom + econ freedom in LLPS. China lack indpt, prof auditors
embezzlement of coy assets/fraud may occur more freq under IAS-based stnd
compared to alt system w much simpler set of accting stnd. Size of countrys
equity mkt & banks relative to gdp: china has smaller compared to other countries
but its total bank credit to gdp was higher. When consider bank credit to pte

sector only, ratio drop, suggesting most bank credit is issued to coy in state/listed
sectors. China has dominance by banks over mkts stronger than llsv countries.
Chinas stock mkt are relatively more efficient thank banks as well due to high
overhead costs of chinas banking system. Chinas fin system is smaller and less
efficient. Scale and relative impt of chinas ext mkt not sig. Underdev legal
systemsmall ext mkt. LLS result on the negative relation btwn govt ownership of
banks & growth of a countrys econ seem to apply to chinas state sector; this has
not slowed down growth of pte sector. Prob for state-owned banks are NPL made
to SOE, due to political/nonecon reasons. Chinese govt take active measures to
rectify issue: 4 state-owned AMcoy formed to assume NPLs and liquidate them,
improved loan structure by incr loans made to indi lenders while being more
active in risk mgt and monitoring of loans made to SOE, growth of non-state finan
Pte sector dominate the state/listed in terms of size & o/p & growth
trendpte sector more productive. Pte sector impt source of employment oppor
Chinas 4 most impt financing sources for all firms in China, in terms of
fixed asset investments: bank loans, firms self-fundraising, state budget, FDI. Pte
sector relies more on self-fundraising less strict legal & financial mechanisms.
Dev of chinas ext mkts relative to its overall EG is not dramatically diff frm other
emerging countries. Common pattern is tht dev of ext mkts trails growth of overall
economy, given tht deve of these mkts req a min efficiency for a countrys
institutions inclu legal system, accting stnds, dev of associated professionals.
Early stages of growth in contrast, need only alt insti and mechanisms to support
growth of firms and and overall econ.
Corp gov is extremely weak for listed sector. 2-tier board structure: bod
and board of supervisors ranking above directors, usually officials chosen frm govt
branches/exec frm the parent coys while bod controlled by firms parent coys.
Incentive pay rarely explicitly specified. Cross-holdings of shares among listed
insti make hostile takeover impossible. Ineffective bankruptcy implementation.
Govt plays dual roles of regulator + blockholder of many listed firms. Doubtful tht
top officials elected by govt pursue their fiduciary role as sh.
Firms w poorer protection of outside sh/agency prob like in china have
lower div ratio and lower tobins q ( mkt-to-bk asset ratios) for listed sectorLLSV
predictions work well for listed sector.
Pte sector: (1) Wenzhoustart as fam-run biz in townships w a similar pdt
emphasis to have easy access to needed tech, human capital and potential
cliemts/partnersspecialisation by regioncompetitive. Certain developed areas
shifted pdt emphasis frm labor-intensive to high-tech pdt. Failure rate for start-ups
high. New pdt strat oft start w mimicking successful/pop pdts. Patent laws diff to
implement and disputes settled among themselves. Some entrepreneurs
overcome this prob by spending more effort money to ensure key parts of their
new pdts diff to disassemble and copy. Another prdt strat is to export their pdts to
other regions. (2) Kunshanattract FDI w special dev zones and fav land and tax
policies. Centre in a special zone est by local govt for liaison bwn local govt, entre,
foreign ORs, regulators, svc providers. During early stage of special zones, ORs
frm Taiwan willing to commit their capital & refin them when needed due to many
Kunshan citizens having relatives in Taiwan. Taiwanese und tht altho there are
almost no formal OR protections, local govt officials have incentive to coop w dev
of special zone & 2 try to create an econ boom in local econ as it will enhance
chances for promotion, and increases profits in profits-sharing. In the start-up
stage, funds frm founders and friends re an impt source of financing. Funds frm

friends in the form of pte loans& equity are also impt in subsequent growth
period. In some cases, there are no formal written contracts between friends/ORS
and entre reputation & r/s based implicit contractual agreements worked
effectively. Internal financing (Retained earnings) also impt. Financial
intermediaries also impt source of funds but not clear tht state-owned banks bt
not clear if state-owned banks prov cheapest start-up financing channel since all
surveyed firms tht rec start-up fin frm state-owned banks alr est close r/s w those
banks b4 inception. Financing frm pte credit agencies (PCAs) most imt channel
during growth period. Fixed assets most pop form of collateral followed by 3rd
party guarantees.
Success of pte sector dept on support from the govt as govt widely
regarded as corrupt/disrespectful of ppty rights.
If coorp among diff supplier of inputs needed and all suppliers benefit frm
the firm doing well, a gd equilibrium w no ext govt is possible as internal, mutual
monitoring can ensure optimal outcome. Family-run firms emerge as dominant
form of ownership structure in countries w weak minority SH protection. While
professionally managed firms must be optimal form in countries w strong OR
protection. Common goal of sharing high prospective profits align interests of local
& foreign ORsimplicit contractual agreements + reputation act as enforcement
mechanisms to ensure all parties fufil their roles to make firm more successful. In
china, belief tht change shld be gradual and implemented when proven to be
correct. China adopts a gradual dual track path whr cont enforcement of existing
planning system goes with fast-paced dev of financial markets. Govt supportive in
china to promote growth of pte sector, diff from grabbing hands in other
countries due to : mandatory retirement age for all bureaucrats which made
officials younger and more familiar w capitalist ideas, TVEs township village
enterprises where local govt are partial owners prov most impt source of growth in
pte sector, profit-sharing w firms in multiperiod setting makes it incentive
compatible for officials to support growth of firms.

Changes To The Ownership & Control Of East Asian Corporations Between 1996 Ans
2008: The Primacy Of Politics
By Richard W. Carney And Travers Barclay Child

1386 publicy traded coys end of 08 supplemented w existing data on

1606 publicly traded coys end of 1996. 2 main findings: (1) Where status quo
political arrangements persist, preexisting ownership arrangements go
unchanged/ become more entrenched. Whr major political changes occurred, corp
ownership wld undergo substantial changes (2) State has become incr impt as an
owner of domestic firms as well as foreign firms.

Major changes along period: SK implemented substantial corp gov

reforms, HK became special administrative region of china, Indonesia initiated
impt demo reforms, thai lurched frm one regimet to another.

Collect data on 9 countries largest publicly traded coy HK, indo, japan,
SK, msia, Philippines, sg, Taiwan, Thailand. Study proves tht major political
transformations best acct 4 changes.

Data in 08 mirrors data set of claessens, djankov & lang w respect 2

variables & sources used so as 2 ensure consistency.

East asia useful region to study changes to corp ownership across time
bcus large data set tht exists b4 asian fin crisis + insti changes tht subsequently
happened. 08 is a useful pt to examine whether changes has occurred bcus

sufficient time has elapsed since crisis 4 new arrangements to consol their
Find tht family control remains most dominant form of ownership across
east asia, though widely held ownership dom in japan, Taiwan & substantial in
korea, thai. Philippines largest inc in family-controlled firms while Taiwan largest
decline. State control become part impt to sea countries in 08, incl hk, sg, msia,
indo, exhibiting largest incr. Foreign state ownership become evident for firms in
nearly every country. Separation of ownership & control undergone lil change 4
region & remain highest among family-contr firms.
Control thru pyramid structures fallen while among firms w a dominant
owner,increase in no controlled by a single SH. Separation of mgt frm ownership
contr remains rare. Top mgt of abt 71% of firms not widely held in 08 is related to
fam of controlling SH, abt the same in 1996. Among firms w a dominant fam
owner, ave no of firms belonging to a single family/ top families remained
relatively stable overtime. Political links of firms declined in general while the no
of firms aged 25 & above (proportion of all fam-owned firms w heirs @ helm)
increased generally. Firm age corresponds to a greater likelihood tht an heir likely
to take over frm the founder.
Construction of data: take largest 200 publicly traded firms ( in terms of
mkt cap) frm each countries respective stock exch end 08. Include data for 200
largest firms 4 each country listed in CDL set. Gather ownership data.
Intermediate non-publicly traded firms present are either state-owned, familyowned, EE-owned/ subsi of public/ other non public corp. to resolve ownership
structreannual reports of downstream publicly traded firm whose ownership
trying to reveal, website, stock exch filings indicating transfer of share ownership
to id ultimate owners, biz reports/ newspaper articles. Data for 1386 firms
collected using 20% share threshold to define coy ownership. 10% threshold
reduced firms to 1296. All sh can be traced abt a given ownership threshold (5%).
Include some firms tht are exceptions: (1)If owner whose id cant be traced but
detailed info on a larger owner who claims more than 50% of coys stock. (2)If
there exists share blocks whose owners cannot be traced due to their share being
held via a nominee/trust acct but whose total sum < proportion of shares held by
a revealed owner whose id we are able to trace all these cases we are still able
to id largest SH. Eg of exception (1): mandom Indonesia tbk pt; coy owned by
mandom corp japan; able to trace stake of 11.31% held by pt asia jaya paramita.
(2): sg technologies engineering ltd; sg govt holds 49.32% of outstanding shares
in coy. 3 other share blocks tog acct 4 32.66% held by nominee acct. Eg of coy
excl frm sample due to them not being exception 1: of the
Philippines (2) Thai chemical public company ltd. Bias likely intro by excl firms
whose largest owners hold shares thru nominee acccts/ holding coys whose
ownership structure not being discerned. Aggregate measure offers most useful
comparison of sh transparency across countries as it captures use of both holding
coys & nominee/trust accts as opaque ownership vehicles. Sg and Philippines rank
lowest 4 transparency measured this way. In 1996 also, bias is against uncovering
family ownership. Same conclusion for 08 as most the time AR/ Stock exch filings
show tht most nominee acct holders have been found to be an ind/family. Families
& ind have largest incentive to hide control of coy through use of trusts/nominee
accts/shell holding coys. Another bias: reported incidence of widely held corp
likely overstated w incidence of fam-owned coy understated. Gather info on top
exec of firms in data set to check if they are affiliated w firms ultimate owner and
build fam trees 4 major bi grps. To examine changes of crony capitalism: gather
data on political ties of firms tht are predom family-owned, supplement data w

names of bod of fam-owned firms and politicians in both exec and legislative
branches of govt. investigate m&a, take historical data to track emergence of corp
in data set. Variables: focus is on ownership type based on control rights. To
enable comparison w 96 data, grp ultimate owners into- ind, fam/domestic govt,
widely held fin insti, widely held govt, foreign govt. one of the above grp deem to
own a firm if prop of outstanding shares exceed working threshold of 10/20%. If 2
such ultimate owners, report subj firms to be half owned by each. Control rights
=prop of outstanding shares through which voting power can be exer
directly/indirectly by ult owners. Report level of control exer through a given
ownership channel to be lowest shareholding denomination across tht chain of
ownership. Cal largest owners cf rights which differ frm control rights in tht they
reflect level of fin stake in corp. CF rights of owners are considerably diluted due
to multiple intermediate SH firms along the line of ownership. Study of pyramidsvalue of 1 if there exists @least 1 publicly traded corp within chain of ownership &
0 otherwise. If largest sh hold any portion of it share through an intermediate
publicly traded firm=pyramid. Cross-holdings also captured-firm holds a stake in
one of its shdecreased frm 96 to 08. Last measure: if top member of corps exec
board is affiliated w ult owner perf 4 firms tht are held by fam, widely held fin ins&
corp .affiliation value = 1 if top exec related by blood/marriage & 0 otherwise. If
top exec has been in his immed preceding employment been employed by
controlling firm = 1. Changes stem within many prev listed corp incl in 96 and frm
emergence of new corp over this time period. Reasons given 4 firms tht were in
96 data set but not in 08 data set: not top 200, firms gone bankrupt/delisted 4 fin
reasons/govt or fam buyout/firms bought out & delisted by a publicly traded corp.
Firms are considered to be politically connected if one of the coys large sh is a
govt agency/ministry/@least one of coys directors is a member of
parliament/minister/head of state/close relation spouse, child, sibling, parent,
close friend. Include foreign politicians & ppl assoc w a political party/govt official.
Changes to control of largest publicly traded coy in east asia: @10&
curoff, fam ownership dom type for both yrs but in 1996 widely held ownership
dom in japan, sig in korea, state ownership impt in sg, msia, indo. In 08, widely
held ownership cont dom in japan, sub in jorea but become most impt for Taiwan,
incr markedly in thai. State ownership inc in msia, hk. Foreign ownership: thai &
indo had highest level. 20%: fam ownership dom across both time periods,
moreso in sea than nea. Prop of widely held firms higher in nea 4 btoh time period
and higher modestly in sea. Hk largest inc for state onwed. Family ownership decr
modestly aggregate while state ownership increased. Widely held ownership incr
while whide held financial & corp ownership declined. Ownership changes cld be
due to : (1)Ownership characteristics of firms in 96 changed or (2)New firms in 08
sample displaced some firms in 96 sample. Incr imptance of state is due to
relatively large no of fam dom firms tht become statw owned and large no of
newly listed state owned firms. Data 4 indo reveals relatively large no of fam
dominated firms came under control of foreign state/delisted due to fin. (former
complsed of major indo banks taken over by govt following fin crisis in 1997
where 6 banks underwent merger). Ownership structure in japan stable. Korea:
large no of widely held firms become dom by fam ownership and large no of fam
dom firms in 96 underwent m&a. msia: change of ownership of 10 firms frm fam
to state owned in 08. Philippines: none of fam-dom firms delisted, many widely
held firms become fam dom as of 08. Sg: large no of m&a of state dom firms, fam
& state dom constituted largest share of newly listed firms. Taiwan: move away
frm fam dom, towards widely held ownership. Thai, many firms delisted, move to
widely hekd ownership, sg govt held sub ownership stke in 10 firms while msia

govt retained sig ownership in 2 firms. sg invested 26 firms in indo, 1 in korea,

4msia, 5 philippines, 10 thai, china 11.
Changing characteristic of fam owned firms & their political ties: examine
3 sets of indicator regarding firms w dom fam owner: (1)Conc of corp ownership in
hands of fam (2)Prevalence of founders vs heirs (3)Incidence of political ties
among fam-owned firms. Korea has largest inc in ave no of nations largest firms
in hands of single fam while most countries seen a decline, consistent w
expectations govt a growing exon w inc no of publicly listed firms. Conc of control
in hand of largest 10 fam seen decline for most countries except korea again.
Decline for connections involving directors and state ownership, w most dramatic
reductions in sg,, indo, korea, thai. Korea is due to backlash of the chaebols while
sg due to reduction in no of publicly traded fam owned firms in which state has an
ownership stake. Indo due to fall of suhartos regime. Thai due to political
changes. Incidence of crony capitalism to have fallen but it could simply have
changed frm more overt to opaque mechanisms.
Menas of enhancing control: pyramids declined in sg, indo, Taiwan while
incr in korea, thai. Correspondence betwn control & mgt high for both times, w
largest inc in hk, japan, Philippines and dec in indo, msia.
Changes to sep of ownership and control: overall inc in conc of cf rights in
indo, japan, Philippines, hk, sg, thai (small change). Changes in conc of control
rights show similar pattern. Ratio of cf to control rights nearly same at both times,
w thai largest inc followed by korea and decre in japan. Sep of ownership&control
4 fam-controlled firms remained nearly the same, biggest changes happened for
other ownership types whr it incr for state-owned firms followed by firms where
dom owner is a widely held corp. greatest level in 08 are firms w foreign owner as
a dom owner.
Political trans &ownership changes: sig changes to structure happened
only when dramatic changes in political system happened. In hk, handover to
chinaincr in state ownership. Indo, Suharto regime endnew
constitutiondemocratising directiondecline in fam ownership. Taiwanend of
Kuomintangdemocracy. Thai 1997 constitutiondemocracyfall in fam
ownership, inc in widely help ownership. In japanno major political changes.
Koreapressure to reform corp govt policies but did not exp major dom political
changes in terms of new institutions/shift of power away frm long dom partyfam
ownership dom in both periods followed by widely held. Msia: mahathis Mohamed
ride out crisiscent and authoritarianhigh state ownership in both times.
Philippines: prob not as severe. Not much change. Sg: relatively unscated by
Fam control most impt. State hk. Indo firms- fam. Japan-widely held.
Korea-fam dom, widely held. Msia-state intervention. Philippines- fam control. Sgmix of family & state ownership. Thai-widely held ownership. Thai-away frm fam
dom, to state.

From Control To Market: Time For Real Soe Reform In Vietnam?

By Markus Taussig, Hieu Nguyen, Linh Nguyen

To strengthen econ perf, Vietnam govt encouraging mixed ownerships in

diff sectors of the economy. Lack of clarity abt role, responsibility of SOEs stunted
its progress in restructuring SOEs but cont to favour them as it can help est
macroecon stability.

Regulating econ & limiting no and reach of soes + to clearer definition of

role of soes in relation to state sector might be needed to help the situation.

SOE- vehicle to carry out control of market processes.

For Vietnam, state faces challenge of moving control of econ through
direct ownership of SOEs to govt of non-state firms through reliable, transparent
rules & institutions. Taiwan-style process is not suitable for Vietnam, whr state
could avoid political challenges of SOE reform but focus instead on mkt
institutions tht applied equally to all, allowing pte sector to flourish & make soes
fate less central to overall economy. BUT powerful SOES, state agencies dept on
soes impeded building of transparent mkt institutions & their consumption of
resources crowded out pte sector dev.
Why state-led economy? By right in post-cold war era, shown that private
sectors make economic decisions and allocate scarce resources more efficiently
that state bureaucrats. Even outliets- Singapore help prove this rule. Sg prov
bureaucrats w huge incentives tht help min diff betwn state & pte sectors. This is
not seen in Vietnam, where instead it is troubled w poor resource allocation,
substantial rent seeking by firms, mgrs. & EEs. Why do we still see sub state
ownership shares in Vietnam? SOEs enjoys privileged access to capital, land &
foreign joint-venture partners, monopoly, oligopoly in a variety of ind. Vietnam
communist party maintains monopoly on political power & see its leadership
threatened (political risks) to an unambiguous rejection of its founding ideology.
Existing SOEs keeps subs resoures & are rep in govt by interest grps tht fear any
major structural change may leave them worse off. Eg: soe EEs who enjoy more
protections & suffer less pressure, soe managers who wont be replaced by more
experienced workers unlike in pte sectors. These grps directly involved in current
ops of soes have power to slow e pteisation process. 4 broader justifications for
SOE: (1) State is a more benevolent, socially resp owner than any pte sector OR,
less stringent profitability expectations; have a union&thus unable to avoid
regulators BUT in vietnams weak reg environ, SOE caught in plenty of socially
irresp actions. (2)SOE effective tool 2 address mkt inefficiencies state contrl over
macroecon challenges BUT this argument assumes a weak state unable to reg
mkt effectively. (3)Weakness of state (4)Unfav Russian transition: subs benefits
borne @ pyramid bottom& real opportunities provided for upward mobility. Broad
based growth increased legitimacy of VCP, govt, econ reform process itself. Vcp
concerned potential4 centres of pte wealth to start shaping internal politics/serve
alt to party.
Realities of SOEs today:
1. State sector: states share of economy&eomployment began a slow but steady
decline in 05 due to new round of restructuring of soes launched, intro of a 3rd
enterprise law, and start of period of increased enthusiasm for Vietnam amg
foreign ORs. In terms of employment, state shifted into core set of ind deemed
impt by govt 4 proper fxing of reforming econ utilities, info&comms, finance,
education & training, health & social work, public admin&related. State sectors
share of employment decre in other areas: construction, manu, trans&storage,
trade. State sectors overall share of ind o/p declined in 05-13. State sector
claimed highest share in investment in Vietnam. Cont of soes to gdp growth
underperf those of other sectors. State sector had highest incremental capital
output ratio (icor) of all ownership forms due to: (1)Overall incentive structure not
efficient (2)SOEs more active in much more capital-intensive ind & preferential
access 2 resrouces led to far more investment into these ind than wld occur if
resource allocation det by mkts. Vietnams limited actin of SOE reform led to
trapping too many scarce resources in hands of less able managers, less in
productive econ activities.

2. SOEs: soes categorized either as (1)Firms w state ownership of 100% charter

capital in the form of a limited liability 1 member coy (2)Firms w state ownership
>50% charter capital in the form of joint stock coy & limited liability coy w 2/more
members. Classification of SOEs valid till july 15. SOE cont to gdp, employment
also decreased. Strong growth in dom pte sector & FDI sector reduced role of
soes. No of 100% state capital soes dropped dramatically in 1990-2010 but states
share in partially privatized soes still substantial. State maintained a dom share in
more than a third of partially privatized soes, w its share on ave being 57% across
all these firms while outsiders acted 4 only 29%.
3. Present Reform Agenda: hopes tht soes will operate in line w mkt principles.
updated enterprise law, coming into effect in july15 redefines SOE to include only
enterprises tht are wholly owned by state instead of current 51%rule. Decree
71/ND-CP aim to help soes struggling to meet req 2 divest out of their non-core
areas by facil sale of non-core components to state capital investment
corpassets are still in state hands but scic will be better equipped to take action
on next steps. Decree 61/ NP-CP provides regulations 4 monitoring & evaluating
SOE fin perf & public disclosure. Decree 206/ND-CP includes guidelines 4 debt mgt
of fully state-held soes. Tog w these reg measures on SOE reform, actual
privaitisation shown an increase. Most impt impediments remaining in ptetisation
process relate to countrys biggest privatization targets. While no of firms assoc w
general corp & state econ grps sig smaller than no of remaining soes at
local/provincial level, scale of state resources tied up in these big grps & impace
of these firms on rest of economy makes them impt in evaluating the reform
process. Attention on how govt will move forward w plans of IPO of equity in high
profile firms like MobiFone and 3 electricity dist under EVN.
State capital investment corporation (SCIC): mandate is to oversee
ownership shares shares in soes assigned to it by govt, accel restructuring of soes
& professionalization of their mgt, to mobilise revenues 4 e state through issuance
of shares & other fin instruments. Scic must provide transparent reports abt its
perf & activities to e ministry of finance & PM. However, currently no req for it/any
other state-owned general corp to prov financial statemetns/annual biz report to
public. SCIC manage equity stakes in 335 firms & classifies these firms into 3
groups: A, B, C. A include firms believed to be op effectively. SCIC has good corp
gov ceo & chairman sep person while corp mgt and BOD separate as well.
Debate abt state sector: (1)Broad govt oversight & internal mgt of firms in
which state is full/partial owner. (2)Cont process of privatizing SOEs esp process of
IPO. SOEs still granted special privileges tht give them an edge over non-state
competitors. They have backing frm the govt- they & resource mkt that supply
them discount the risk of bankruptcy. Soe able to become state monopoly whr
they dom the mkt & control px. Soe enjoy extra state support when they report
the difficulties and pref access 2 countrys scarcest biz resources, esp credit &
land. Soe can borrow v easily as they are guaranteed by the govt. borrow frm
SCIC, Vietnam dev bank, other state-owned commercial banks instead of frm mktoriented sources like the stock mkt, strategic ORs/investment funds. Soe can
borrow on easy terms v lil disclosure/supervision by prudential authorities due to
backing by govt. Pref support frm govt (supplementary capital, debt rescheduling,
debt forgiveness) leads to burden on state budget + moral hazard. Effect of
special privileges to soes 2-fold- (1)crowd out pte sector access 2 key resources &
growth opportunities. Negative correlation observed betwn soe growth & pte
sector growthexplain pte entrepreneurs perceptions towards soes-consider
access 2 land & credit an area of special privilege for SOEs. (2)managers less
motivate to increase productivity & engage in difficult ind upgrading activities,

pting them instead towards opportunistic & unrelated expansions of op scope into
non-core, low-handing fruit biz activitiesleads soes into activities that lack
competitive adv & govt capabilities & which are mostly speculative & rent-seeking
in nature (banking, insurance, stock exc activities, real estate)biz activities of
state corp & econ grps in Vietnam more diversified than other countries. Corp
govt of firms in which state owns a stake greatly complicated by large no of govt
institutions involved & limited transparency in relation to the public and betwn
institutions. Many ministries maintain dual resp for managing & regulating
SOEsconflict of interest where ministries hope to maintain control through
ownership due to greater access to rev & greater use of regulating tht both result
fr direct ownershipno one govt agency resp for cleaning up mess of inefficient
operations & NPLimpt for Vietnam to streamline corp gov approach to manage
remaining soes. Another area tht needs improvement is the transparency of SOEs.
Not even the ministry of planning & investment has full access to fin reports of
soes. Scic can play a role in both areas. 2 rec to improve trans: (1)Simplify &
invigorate disclosure req on soes, incl req 4 disclosure to public (2)Punish noncompliance, reward compliance. Increasing trans will increase efficiency in these
Failure to attract strat ORs in recent IPOs as they are still not comfortable
w current soe reform context. Soes have huge debt prob, transparency prob, how
much control they will be able to exer w minor shares, unclear future prospects for
incr shares once they get their foot inbroader reforms like raising upper limit on
foreign holdings in Vietnamese coy will help resolve this. Vietnams govt also
suffers frm credibility gap on the soe reform issue.
Change is needed. Need willingness by state to more fully transition frm a
system of control through direct ownership to one of governing mkt through trans
rules & institutions. Soe shld be made to fit within vietnams key policy obj rather
than countrys policies being contorted to needs of soesneed to explicitly state
cond under which state sees a net adv for society to maintain state ownership. If
such an adv not seen soes should be privatized quickly, orderly & transparently.
Scic can facil this process. Have to change the idea tht soes deserve special
treatment, to be served as a govt tool for social policy & mgt of econ. No of soes
needs to be reduced to those govt has det a clear & socially beneficial rationale
for state ownership. Needs to encourage state competition w a fair playing field
while trans & corp govt enforced to ensure Vietnamese coys, stateowned/otherwise can better integrate w global mkt.

The Mirage Of Marketing To The Bottom Of The Pyramid: How The Private Sector Can
Help Alleviate Poverty
By Aneel Karnani

Fortune at the bottom of the pyramid: eradicating poverty through

profits book by C.K. Prahalad propositions:
- untapped purchasing power @ bottom of pyramid (BOP)pte coys can make
profits by selling to poor
- By selling to the poor, can bring prosperity to e poor, help eradicate poverty
- Large multinational companies (MNCs) shld play leading role in process of selling
to the poor.

Prahalad argues tht selling 2e por is both profitable & eradicates poverty.

This paper argues against prahalad proposition: lil fortune @ bop &
argues bop proposition is logically flawed, inconsistent w evidence. Study propses
alt perspective on how pte sector can help alleviate povertyview poor as

primarily producers rather than consumers. Real way to eradicate poverty is to

increase REAL income of the poor.
Target mkt: both prahalad & paper uses definition for poverty as $2/day at
purchasing power parity (PPP) rates in 1990 prices. At this lvl of poverty, basic
needs are met but barely. Prahalad overest bop potential mkt at $13trillion ppp
while ave consumption of poor is only $1.25/day. Assuming 2.7bn poor ppl, this
means a bop mkt size of $1.2trn @ ppp in 02. If look at it whr profits repatriated
back at fin mkt exchange rate, not PPP rates, global mkt is < $0.3 trn making bop
a diff place to look for fortune.
No fortune: costs of serving bop high due to increased dist & marketing
costs because poor are oft geo dispersed & cultural heterogenous. Also, diff to get
EOS. Weak infra & small size of transactions further adds on to costs. Poor ppl are
px sensitive spend abt 80% of Y on basic needs, leaving little left for luxuries.
Coys following bop proposition oft fail because they overest pp of the poor & set
px too high.
Cases claimed to support the BOP proposition:

1. Casas Bahia:
- Large retailer in brazil selling top-quality brands like Sony, Toshiba
- Argued tht poor ppl do desire quality pdts BUT cant afford them
- Ave income of consumers abt x2 min wage, so NOT really BOP consumers as it is
well above $2/day poverty line.
- Thus, highly profitable coy has lil to do w bop proposition.
2. Iodized Salt:
- Effective/inexp way to prevent iodine deficiency. Some iodine in salt lost in
storage, transportation & cooking processes. HLL (Hindustan Level Ltd), indian

sub of Unilever dev a proprietary mirco-encapsulation tech to stabilize salt

content in saltAnnapurna salt. Fact is penetration among poor still lil due to
275% px premium of salt, many ppl dont see it as a bargaindont support bop
3. Ice Cream:
- Amul, a large indian coorperative ofund instant mkt in 01 when it intro ice-cream
@ affordable px.
- Before Amul, HLL was largest firm in mkt due to radical innovation which allow
ice cream to be transported cheaply w/o need for refrigeration which allows it to
reach BOP mkttruth however is tht on top of cheaper ice cream, HLL decided to
compete on diff in 02 in 6 cities onlyfirst profit.
Single serve revolution: A Dud ( a thing tht doesnt work properly/ is
unsatisfactory or worthless): pioneer CavinKare who intro shampoo sachets.
Approach to encourage consumption & choice at bop by making unit packages tht
are small & thus affordable BUT claim of affordability is falsecoy may prefer to
sell smaller packages w lower profit margin 2 encourage sampling, poor might
prefer small packages due to convenience & mging CF; Poor may not have
enough to buy a whole bottle of shampoo & can thus buy sachets for occasional
use; this does create value for poor and can lead to increased consumption. Small
packets facil impulse buying also & consumers may be fooled into thinking tht
smaller px 4 smaller packages are truly cheaper BUT these DOESNT increase
affordability. Only way to increase affordability is to reduce px per use but since
pdts sold @ exactly same px per kg as bigger packages, affordability is nt
increasedexplains annapura low mkt penetration & success in niche mkts like
college students. Single serve packages has environmental consequences due to
plastic packaging which is exacerbated in poor villages whr trash collection facil
are inadequate. Prahalad dismisses this prob by arguing tht coys have incentives,
resources to tackle the prob but 20 yrs have gone by without much improvement.
Financing schemes: Casas Bahia prov credit for consumers even when
their income streams may be unpredictable & low. This prov consumers with
access to high-quality pdts who could otherwise not afford them BUT prov credit
doesnt change affordability of pft even tho it prov other value to poor- instant
gratification with int rate of over 4% per month. True tht consumers lack access to
efficient credit mkt and int rate charged lower than moneylenders but doesnt
change the fact tt affordability (Fxn of price of pdt) is not addressed.
Role of MNCS: bop proposition tht mncs shld take the lead to sell to poor
but mkts for poor dont have sig EOS as they are oft geog, culturally fragmented.
Pdts sold to poor are oft less complex, reducing scale econ in tech & operations.
Interesting (Sarcastic) tht despite BOP emphasis on MNCs, eg cited in Parhalads
books are fairly small/local org, not MNCS. Maybe through experience, MNCs have
realized tht there is no fortune at BOP/ they have no competitive adv thr & thus
avoided major investments. May be a gd thing since MNCs may inhibit emergence
of local pte enterpreneurs who proc econ + non-econ benefits to society.
Harmless illusion OR Dangerous Delusiom: there are rare success cases of
selling to the poor. Another interesting thing (sarcastic) is the proposition
emphasise opportunities for sig profits & yet cite many supporting eg of not-forprofit org & prahalad rejects corp social resp as basis for bop initiatives.
Exploitation of the poor: true tht increased variety can increase welfare of
the poor. However, increasing expenditure on luxurious pdts means less to spend
for other pdts tht meets basic needs. Truth is, poor is more constrained by lack of
income than by lack of variety of g&s offered. If poor is deceived by mkting/poorly

informed, bop initiative might even lower welfare of poor. Poor might end up
purchasing lower priority pdtsprahalad dismisses such argument as patronizing
and arrogant: how can anyone else but the poor decide whats best for them?
(poor have rights to judge for themselves how they, as value-conscious
consumers want to spend their money to maximize their utility). HOWEVER, poor
are vulnerable due to lack of education, info & econ, cultural, social deprivations.
A persons pref is malleable & shaped by backgrnd + experience. Need to look
beyond expressed pref & focus on ppls capabilities to choose the lives they have
reason to value. Banerjee & duflo show, in a survey, ppl cld save more w/o getting
less nutrition by spending less on alcohol, tobacco, food items like sugar, spcie &
teadata suggest poor, just like the rest lack self control, yield to tempt & spend
to keep up w neighbours just tht the consequence for them are more severe. More
often than not, poor make choices which are not in their own best int.
Poverty & alcohol: poorer ppl spend a greater fraction of income on
alcohol than less poor. Alcohol has high direct fin costs, econ & social costs (dim
work productivity, health, accidents, dom violence, child neglect). Alcohol
exacerbates poverty. Poor cant make decisions to for their best interests.
Whitening cream: racist & sexist prejudices lead women to use skinlightening pdts tht sometimes have negative health side effects. Hammond &
prahalad argues tht poor women have a choice & feel empowered bcus of an
affordable consumer pdt formulated for her needs but THIS is an illusion. It serves
to entrench disempowerment. The way to empower a woman is to make her fin
indpt & better educated need social + cultural changes tht eliminate prejudices.
Shld impose some constraints in terms of truth in advert + full disclosure of
ingredients used in pdts + negative side effectsmore so 4 ppor who lack info &
education needed to make well-informed choices.
Lower prices/ Raise income: only way to help eradicate poverty is to raise
real income by either lowering prices of gds consumers buy or raise their income
earned. Px reductions must be over 90% to have sig impact on purchasing
behavior of the poor. 3 ways to reduce px reductions- reduce profits, reduce costs
w/o reducing quality, reducing costs w reducing quality. Bop does not consider e
3rd alt. Biz process redesign will not reduce cost by over 50% w/o reducing quality.
A sig improvements in tech could reduce costs bt this is found only in areas of
computers, telecomm, electronic prdts, which are a small proportion of the poors
income. Bop exaggerates px reductions achieved by inapt comparisions: aravind
eye care system with usa. But this exclude the fact tht aravinds costs shld be
converted at ppp not fin exch rate and tht usa healthcare costs high due to high
labour costs, admin costs and malpractice insurance. Shld compare aravind to a
hospital in india. Prices charged in pte hospitals and aravind abt the same.
Aravind sub patients due to highly dedicated staff willing to work long hours for
pay same as govt hospitals. Retention is a prob.
Cost-quality trade-offs: contrary to bop prop, oft needed to reduce quality
to reduce costs but need to do oit in a way cost-quality trade-off acceptable to the
poor. Good eg: Nirma in india which prod cheap but low quality detergent tht
could even cause blisters. Contrary to bop prop, poor like inexp, low quality pdts
not bcus they do not want good quality but bcus they cant afford same quality
pdts so they have a diff price-quality trade-off frm the rich. Dont need extensive
technology. Nirma gd eg of win-win situation whr coy created a large mkt w sig
profits while poor are better off as they get affordable detergent. Imposing out pxquality trade-off on the poor is disrespectful of their pref. Quality is a relative

Poor as producers: free mkt advocate EG to alleviate poverty due to

trickle down effect but effect is too slow and little. Need to target prog specifically
at poverty reduction.
Microcredit: ideally, microentreprenuers use credit to set up biz, make it
thrive and cont to gdp. Microcredit also have non-econ benefits for clients like selfesteem, social cohesion, empowering women, smooth consumption over periods
of cyclical criss. However, this is not enough. Key issue is still if microcredit helps
eradicate poverty. Additional burden on debt might prove non-beneficial but
overall, still beneficial to a limited extent. Why is microcredit not effective? Not
everyone has the skills needed to be an entrepreneur vision, creativity,
persistence. Most clients engage in subsistence activities w no prospects of
competitive adv. Self-employed poor oft have no spec skills & prac multiple
occupation. Biz operate at too small a scale and no paid stuff. Low BTEtoo much
competition. Low productivity leads to lil earnings tht cant lift themselves out of
Employment: best way to take ppl out of poverty is to create decent
employment opportunities. Indias jobless growth due to emphasis on capitalintensive & skill-intensive dev path. Need to emphasis on labour-intensive, low
skill sector.
Productivity: productivity needs to be increased so tht wages are high
enough to allow EEs to rise above poverty. One obstacle is the inadequate scale
econ made worse by microcredit. Banerjee & Duflo: microentreprenuers do lil to
create jobs for others.
Role of govt: govt needs to facil creation & growth of pte enterprises in
labour-intensive sectors through apt policies, infra, institutions. Lack of gd
infrastructure results in geog fragmented mkt & small firms tht are unable to
exploit eos. Financing options have to be made avail through an efficient capital
mkt. Dev shuld not be seen only in econ terms but in non-econ terms as wellsocial, cultural & political freedom ppl enjoy as they are enablers of indi income
growth. Providing public gds help increase productivity.
Create efficient mkts: poor oft sell pdt to inefficient mkt & dont capture
full value of their output middlemen. E.g Anul,e-Choupal.
Downside of bop prop: de-emphasis on role of state in prov infra & basic
svcs and tht self-reg by pte sector might be solution. To solve prob of poverty,
must go beyond incr income. Must improve capabilities & freedom. Bop prop
detracts frm imperative to correct govt failure to fulfill trad & accepted fxn like
public safety, education, public health, infra, all of which incr productivity &
employability of poor and their income and well-being.
Conclusion: Best opportunities exist when firm reduce px sig by
innovatively changing px-quality trade-off in a manner acceptable to poor. Focus
on poor as producersmake mkt more efficient such tht poor capture more value
of o/p. Pte firms can invest in upgrading skills & productivity of poor & create
more employmentwin-win.

Bottom Of The Pyramid As A Source Of Breakthrough Innovations

By C.K. Prahlad

Managers can create an exciting environ for innovation by focusing on

4As awareness, access, affordability & availability while external constraints can
be used to build an innovation sandbox within which new pdts & biz models can
be created. Biomass stove for rural poor in india used as an example. Global firms

are also increasingly recognizing implications of innovations at bop for developed

Paper focus on how & why bop markets are becoming drivers of
fundamental innovation, not just the pdt but the biz system. Must focus on total
delivery of value and not just tech & pdt perspectives to earn profits.
Bop markets: 4bn ppl who live on less than $2/day, multiple cultures,
ethnicity, literacy, capabilities and needs. Can be segmented in multiple ways.
Large untapped mkt served by unorg sector oft inefficient and controlled by local
monopolies. Challenge is to convert unorg & fragmented mkts to an org, pte
sector mkts. Proliferation of cell phones and rate of adoption is start of process of
bop-led growth and innovation. Poor live in both rural & urban settigns. India:
70% of bop live in rural areas & access to tht mkt is a major prob while in brazil,
most poor live in urban slums (Favelas)undiff approach to mkts will not work.
Need to convert bop into microconsumers, microproducers, microinvestors, and
innovators which req focus on 4As. Innovation at bop must start w commitment to
4as. Each of these prereq has unique challenges. Is is the response to these
challenges tht become basis for breakthrough innovations. To succeed, need to
accept constraints as real & work within them.
Innovation sandbox: starting point of process for biomass stove is a
detailed, in-depth und of consumer& her varying req using video ethnography to
id what ppl need and to video down entire process of cookingStarting pt for dev
broad specs 4 design & dev of proj. Form criterias based on consumer immersion
& insight (in eg: modern, smokeless, easy to use stove which needs to be
aspirational such tht consumers want to own one, adhere to global safety stnd,
scalable-build a biz not just a pdt, affordable while generating profit). The
critierias became the boundaries of innovation sandbox tht couldnt be violated.
Pdt thus has to be fxnal, aspirational, beautiful. Scalability means tht pdt has to
be transportable across countries. All these led to the logic of PX PROFIT = COST
instead of COST + PROFIT = PRICE. Start w px and recog profit req 4 biz to sustain
itselfonly thing designers can focus & work on is the cost which challenged the
design team. Mr. Roberto Bocca of BP signed up to lead the proj called Emerging
Consumer Markets Group.
Innovation as a learning process: the evolution of business systems: initial
conception was stove w biomass & lpg component to give consumers choice but
bp is a foreign firm and dont have access to lpg in india @ subsidized rates thus
abandon lpg choice. Initially req consumers to use biomass broken into small bits
then worked w Indian institute of science to form uniform pellets made out of
biomass to be offered as fuel. Relieved consumer frm searching biomass on her
own and ensured convenience, ease of use as well as consistent quality. Design of
stove include batt operated fan tht allow flame to be controlled, behaving like lpg
stove. Stainless steel sleeve for easy cleaning and withstand heat intensity. Each
version incorp many easy to-use capabilities in addition to sig changes to
Building on ecosystem: must incorp cost effective process methods to
access rural poor into innovation. To have cost-effective, scalable and provision of
much needed skills and knowledge, Bp had an ecosystem consisting of some
elements Indian institute of science, NGOs like village lvl entrepreneurs
JyotiAmmas women in village who were trained to advise potential buyers +
stock stoves & fuel; they were an indispensable part in logistics system 4 making
stoves accessible & fuel avail at all times; key was to create awareness of how
new stoves worked, BP also needed to build a manu capacity for stove &

contracted 3rd party w experience in manu stoves, bp prov a ready mkt and tech
assistance while investment in plant to manu stove made by partner.
BOP Innovations: generalizable lessons: systems from the west wont
work in bop mkts. Firms have to learn to bal global stnd & local responsiveness.
1. BOP mkts diff frm developed country mkts. BOP not monolith. Wide variations
exist without universal bop solution. Solutions are specific to an industry & to a
particular target within bop.
2. BOP challenges our thinking by focusing on 4AS
3. Innovation must start w deep immersion on consumers lives to get insights
which allows us to dev system of constraints within which we have to innovate,
resulting in the innovation sandbox.
4. Innovation is not just a pdt. It is dev an appropriate ecosystem tht allows a new
biz system to fxn.
Ecosystem allows specialization working tog, where affordable pxing focused on
volume & scale. Focus is on reducing capital intensity to a pt where capital req
fixed assets +working cap needs are spread over ecosystem and not borne by any
one firm. Workflow is e baiss for picking partners to coop & building ecosystems.
Dev bop mkt to serve existing mkt more efficienty & create a new mkt, sub an
existing approach to fulfill well-recog fxnality. Create awareness + build
ecosystems for acq new customers.
The innovation flow: shift in emphasis to move from pdt-centric innovation
to focus on biz-model innovation of which pdt is a subset. Systems thinking is a
prereq 4 success in bop mkts. Bop mkt req renewed emphasis on building
ecosystem as an integral part of innovation. Bop can be a source of new
developments. Potential for bop mkt is huge: (1) Recog bop, 4bn unserved
customers as a legit mkt consisting of microconsumer/producer/investors,
innovators (2) Accept constraints & work within it, building innovation sandbox.
bOP forces a value eqn and supports new applications which put pressure of trad
definitions of mkts of the rich and poor as well as trad cost structures of global
firms. Major move towards middle class.
Conclusion: bop mkt impt for sustained & profitable growth. Can leverage
on breakthrough innovations tht allow global firms to participate in bop markets to
sell in developed markers as well. Qualities learnt in bop mkt change in value
eqn, use of hybrid tech, coop w ngo & public sector, deskilling of work, lean mgt,
mkt dev, dist & logistics in hostile conditions would serve them well in becoming
globally competitive.

The Political Economy Of Transnational Corporations: A Study Of The

Regionalization Of Singaporean Firms
By Henry Wai-Chung Yeung

Paper concerned with role of state in promoting cross-border operations of

biz firms frm sg. Argues tht regionalization of sg firms is a state-led phenomenon
because of : (1)Heavy involvement of state in the domestic economy (2)Relative
lack of pte entrepreneurship in sg. A collusion-and-rivalry framework est to
analyse case of sg. 3 key issues: (1) Historical underdev of indigenous
entrepreneurship (2) Role of state as entrepreneur (3) Role of state in changing
comparative adv of regionalization through various incentive schemes.

Need to situate globalization within context of state-TNC r/s & explain r/s
of globalizing processes to specific places @ diff geog scales & how these scales

The political economy of transnational corporation: towards a synthesis

- Mainstream neoclassical econ concerned with explaining mkt failure and
subsequent emergence of firms. Mkt failure occurs when mkt mechanism fails to
perf role of allocating resources to best uses. This increases trans costs of
production. Producers may respond by internalizing production within firm. When
this internalization occurs across countries, firm trans to a trans corp. Existence
of state is potential source of mkt failure tht compels national firms to enter
international prodtn. 2 ways state can create mkt failure: (1)Regulation
(2)Participating directly in economic activities through public enterprises/other

means which are seen as counter-productive as these activities dont coincide

with profit-max objectives of pte capital insti.
- Radical political economy perspective conceptualise nation state as a
capitalized institution whose existence ensure reproduction of capitalist mode of
production. State seen as relatively autonomous, helping capital to achieve its
aims. On the one hand, capital, rep by tncs needs a system of nation states to
defend its global int. On the other, growing internationalization of capital tend to
increase relative power of tncs in relation to nation states. Internationalisation of
capital reproduces uneven dev within and across countries. Hymer labeled this
as law of uneven development. Inherent contradiction in internationalization of
capital process works against objectives of nation states and results in continued
instabilitycollapse of capitalism.
- Collusion-and-rivalry framework useful in anal changing r/s btwn states & TNCs.
Nation states relatively autonomous. State-TNC r/s depend on domestic strength
& geographical scales.
Insert table here. Weak nation state needs capital TNCs to sustain national
growth & dev through cont investment & reproduction of capital and may collude
w dom/foreign capital to sustain national competitive adv. If it fails to attract
investment frm capitalists weak state face a legitimacy crisis which ends in loss
of power/leadership/dominance. TNCs need system of nation states to exploit
comparative diff in national labour and play off nation states against each other.
Small states tend to be more coorperative & able to control ind policies, econ
initiatives. Smaller states, esp Asian developmental states more able to collude
w capital to further econ de & nat compt strat, facilitating their political
legitmisation. Smaller scale allows containment of diff demands of society &
exercise of stronger political will in adv their strat. Ind/insti in these states also
concede more political power to e state as a guardian in protecting collective
interest as they recog their constraints due to size. Large states may find it diff
to collude due to complex bargaining processes&power relations. A strong state
not obliged to collude esp when trans capital threaten
autonomy/hegemonypotential for rivalry to political power and may limit
participation of foreign firms in state-sponsored collab ventures. (e.g.US,Europe,
state excl foreign firms frm partaking in high-tech collab proj). strong state may
impose strict req on local op of foreign tncs. BUT LR, strong state may face
legitimation crisis when existing economic dev strat begin to wear off in comp
environment and much search for an alternative. This search reflects political
struggle btn labour int & biz demands.
Singapore economy & regionalization of Singaporean firms (Overview):
Singapore now is a dual econ specializing in high value-added manu activities &
international financial and business services.