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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 together.
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, supply-chaining, 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 gap-outsourcing 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 accept
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 ENDOWMENTS] .
(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 natural-resource
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)labour-intensive 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 govt-linked 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 & foreign-
owned 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 countries.
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 sub-Saharan 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 happen
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 3 rd 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
UMNO.
- 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 person.
- 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 volatility.

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 Telecommunications.
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 rent-seeking 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 SEA
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
confidence.
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 elected/appted
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 non-monetary 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 1 st choice votes
are deemed elected. The surplus votes of the just-elected 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 1 st 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

HOW PROPORTIONAL REPRESENTATION ELECTIONS WORK


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 multi-
member 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 five-
member 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
list.

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
voting.

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 single-
member 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
board.

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 process.

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
candidate.

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 parties.
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 short-lived alliances of convenience (3) Political parties
tended to focus interest of a relatively narrow grps of supporters and directed govt resources to
them (vote buying)
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 scheme
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 systems.
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 elsewhere?

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 citizens
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 20 th 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 18 th cent and technologies soon
spread to North Ame & Europ. Other countries soon follow suit. Britain est 1 st spinning factory in
1771. US, French, Ruhr, Prussia followed.
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 wages?
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 plant/machinery
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 popular
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 non-fam 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 thought.

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 regions.
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 explanation.
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 assets.
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 industries.

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 decision-making 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 1 st 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 white-collar 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 employment.
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 happen.
(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 other.
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 1 st
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
state-owned 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, Japan.

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 higher-value 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 direction.
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 China.
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. 2 nd 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 outcomes.
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 intermediaries.
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 3 rd 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
positions.
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,
family-owned, 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: Citiseconline.com 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 pyramids- value 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 crisis.
Fam control most impt. State hk. Indo firms- fam. Japan-widely held. Korea-fam dom, widely held.
Msia-state intervention. Philippines- fam control. Sg- mix 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
mkt-oriented 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 non-compliance, reward compliance. Increasing trans will increase efficiency in these
firms.
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, state-owned/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 prop
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-for-profit 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 skin-lightening 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 px-quality trade-off on the poor is disrespectful of their pref.
Quality is a relative concept.
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 self-esteem, 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 poverty.
Employment: best way to take ppl out of poverty is to create decent employment opportunities.
Indias jobless growth due to emphasis on capital-intensive & 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 well- social, 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 markets.
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 fxnality.
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. Generalisations:
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 interrelate.
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.