Corruption & Development

I.B. ECONOMICS.

An educational podcast that looks at the  Section 4 topic of Development, in particular at the question of ‘the balance between markets and government intervention’  (Section 4.8).

Should governments intervene a lot in markets and in that way boost or accelerate development? Or is it better for them to leave markets alone and take a ‘stand off approach’?

What happens if the government in question is corrupt? Does a corrupt government, when it intervenes in markets, hinder, or help the situation?

The following video discusses corruption, its causes, its effects, possible solutions to the problem, and the government’s role in the development process.

There Is No Such Thing as A ‘Free Market’.

I.B. Economics.

Anyone studying economics, no matter how briefly, will soon come across the phrase, the ‘ free market’. We also talk about ‘ free marketeers’, who are economists who believe that the less the government ‘ interferes’  in markets the better. They tend to argue that when the government steps into markets and introduces, for example, a minimum wage or a price ceiling, then this results in a restriction on the ‘freedom of choice’ of the players in the market, and also causes a loss of efficiency in the market. One of the main themes of the IB Economics  course is the debate about the extent to which governments should intervene in markets and should attempt to control them, and the extent to which should they should leave them alone and let them just get on to ‘do their job’.

For Ha-Joon Chang in his excellent book ‘ 23 Things They Don’t Tell You About Capitalism’ the argument put forward by the free marketeers is superfluous. Governments and politicians have always interfered in markets and have always attempted to control them. In his Chapter entitled ” There Is No Such Thing as A Free Market”, he says that markets have always been subject to rules, regulations and laws, some of which are ‘explicit’ but many others are ‘implicit’ and are not therefore obvious to us. For this reason, there is no such thing as a ‘free’ market.

Chang points out that in 1819 when in Britain Parliament introduced laws to protect children from being exploited in coal mines, the ‘ free marketeers’ of the day protested that this was an unwarranted interference in the market for labour (P2). Now we take it for granted that children should not be forced to work in coal mines. Similar protests occurred in the 1960’s and 70’s when legislation was enacted to stop factories from polluting the environment, or from producing products that damaged the environment. Again, the free marketeers of the era protested, saying that the legislation restricted the free choice of the economic agents involved in those industries.  Now we take it for granted that firms should not pollute the environment or produce environmentally unfriendly products (P3).

Chang also points out how there are many rules and regulations emanating from governments determining what can or cannot be sold. For example, in most countries it is illegal to sell votes, university places and government jobs (P4).

Rio Carnival
Participants processing, Rio Carnival, 2014.

How else do governments ‘ control’  or ‘interfere in’ free markets?

One role of government in an economy is to create and enforce laws and two areas of law which are vital for the efficient functioning of free markets are laws of contract and laws about property rights. Take laws of contract. Whenever an economic transaction takes place a ‘contract’ is entered into. A buyer of a house, for example, signs a contract with the seller, usually a physical document, which specifies things like the agreed price that will be paid, how the payments will take place and who the true owner of the property is. If the buyer finds out at a later date that the seller was not the true owner of the property, then that contract becomes null and void, and the buyer can sue the owner for breach of contract.

What a lot of people don’t realize is that even when buying cheaper, more mundane things, like food in a restaurant, or a cup of coffee in a cafe, you are still entering into a contract with the seller. However, the contract is implicit in the transaction, and is something that most people just take for granted. Take buying a coffee in a cafe. When you buy it you are assuming that it is in fact coffee and not another type of product, and you are making the assumption that it is safe to drink. If you bought something that made you violently ill, and turned out not in fact to be coffee, you could sue the sellers of the coffee for breach of contract. Unlike the example above of buying a high value item like a house, you did not  sign a contract with the coffee vendors ( i.e. a physical piece of paper), but you did enter into an implicit contract with the seller when you paid for the product. And if this contract is broken then you have the right to redress in the eyes of the law.

So, is there such a thing as a completely ‘free’ market in the sense of being free from government intervention or government interference? No. Laws and regulations govern how efficiently a market operates, and laws and regulations are created by, and enforced by, the state. These laws and regulations can be explicit, but some are implicit and are just taken for granted. To quote Chang:-

” How free a market is cannot be objectively defined. It is a political definition. The usual claim by free market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved, and those free marketeers are as politically motivated as anyone” (P1).

Brexit – A Revolt Against Globalisation.

IB Economics & IB Business.

On Thursday June 23rd the British people voted in a referendum to leave the European Union ( EU). The value of the Pound promptly dropped 10% and stock markets around the word fell. As a British citizen myself who is on holiday in the UK, I thought that it would be apposite to make Brexit the topic of my next blog post.  Brexit is short for a ‘ British exit’ of the EU.

So what has Brexit got to do with the IB Economics and IB Business courses? A lot. The topics of ‘ globalization’, ‘ trading blocs’ and ‘ common markets’ appears in the IB Economics syllabus ( Section 4, International Economics) and ‘globalization’ is one of the key concepts that runs throughout the IB Business course. The impact on a UK business of Brexit would also come under ‘the external environment’ in the IB Business course ( Section 1, Businesses and their External Environment).

Why did Brexit caused such a shock in markets around the world and how can we link it to the courses that we study?

Up until last Thursday the orthodox economic, business and political view was that globalization ‘is a good thing’. Globalization means the ” increasing inter-connectedness of the world, in all areas – economic, political, technological, social and cultural”. ( See blog post entitled ‘The Course Key Concepts‘ for some definitions of globalization). For businesses globalization opens up both opportunities and challenges. Opportunities include the ability to expand market share by selling in markets abroad, the ability to take advantage of economies of scale, the ability to cut costs by buying cheaper raw materials and by hiring cheaper foreign workers. There are potential challenges for businesses too – more competition from foreign competitors, the lowering of prices in markets and consequently lower profit margins, increasing threats to patents and copyright etc.

The EU, a trading bloc, is also an example globalization. In fact, it could be argued that it is an example of an attempt to accelerate the globalization process between and within a group of countries. The EU is a particular type of trading bloc, where not only goods and services are traded freely, but also the factors of production such as ‘labour ‘ and ‘capital’. Certain countries in the EU also share a single currency, the Euro, a situation known as ‘ economic and monetary union’. Those countries that belong to the Euro are highly integrated, both economically and politically. In order for countries to have the same currency, for example, they necessarily need to have the same monetary policies.

Britain never adopted the single currency, but it did adopt all the other obligations associated with being a member of the EU. So why did British voters vote for a Brexit?

Thousands of words can be written answering this question, but I will attempt to briefly outline what I think are the main reasons:-

1) One of the main obligations of being a member of the EU is adhering to the ‘free movement’ of labour rule. This means that anyone in any EU country has the right to find work in any other member country. One result for the UK of this has been a big increase in immigration from other EU member countries. For example, net EU migration into the UK in 2015 reached an all time high of 183,000, 53,000 higher than the previous year. This huge increase in the number of foreigners living in the UK has exacerbated social tensions, which, unfortunately, some right-wing and racist groups have actively attempted to exacerbate.

2) Disaffection with the current political system and current political elites, especially since the 2008 economic crisis. Many people in the UK were badly affected by the 2008 economic crisis and have suffered due to the policies the government has pursued since. Unemployment rose, people lost their properties because they were unable to pay off mortgages and others have seen the value of their properties fall. Moreover, due to ‘austerity’ measures taken by the government since, they have less access to high quality public services such as healthcare, housing and education. ( Austerity measures occur when governments reduce public spending to correct a budget deficit). In short, living standards have fallen for quite a lot of people in the UK.

3) An inability to see what the benefits of being part of the EU are. Membership of the EU benefits some people in the UK, but not all. Farmers, for example, receive a lot of subsidy money from the EU and have benefitted a lot, as have certain deprived inner-city areas, but many groups in society have not benefitted. Furthermore, any form of financial aid from Brussels is also accompanied by time consuming rules, regulations and bureaucracy, which seem to negate any benefits associated with it’s receipt.

4) Disillusion and dissatisfaction with globalization itself. Increasing competition from Chinese, Indian and US companies in the UK over the last few decades has resulted in the closure of many domestic companies. Workers have lost their jobs due to outsourcing. Those lucky enough to find another job are often forced to accept part-time contracts, or very short term contracts, with lower wages and worse terms and conditions. In short, their lives have become more precarious and unstable.

The vote by the UK to leave the EU was certainly a surprise, a surprise to the financial markets, to the established political elites in both the UK and in Europe, and to the writer of this blog. It was also a ‘ thumbs down’ to globalization by UK citizens,  a phenomenon whose benefits have passed many by.

For more information on Brexit, listen to this excellent podcast on the subject by the USA’s National Public Radio.

Business Internal Assessment (HL) – The Main Body

Students often don’t know how to begin writing the main body of their business I.A. In order to help them, I give them questions whose objectives are to guide them in the right direction, and to help them to create a ‘scaffold’ around which they can base their research.

Only after the students have followed these 5 stages, have collected their data and have written up their findings, do I ask them to format their IA according to the recommended format i.e. Introduction, Methodology, Main Results & Findings, Analysis & Discussion, Conclusion & Recommendations.

Stage 1.

Graphical portrayal of the problem / issue / decision being investigated and its effects (bar charts / line graphs / ratio analysis / break even etc.)

BUSINESS ANALYTICAL TOOLS can be used here.

Stage 2.

What does the IB BUSINESS & MANAGEMENT THEORY / THE TEXTBOOK tell us how the problem / issue should be solved?

In your opinion, what strategies should be used?

Stage 3.

Is the company using these strategies? Yes or no?

If no, could it pursue your strategies?

Stage 4.

Evaluation of the above strategies, using BUSINESS ANALYTICAL TOOLS.

Which strategy / strategies would be the most successful and why?

Stage 5.

Conclusion and Recommendations for the company on how to improve their current strategies / implement new ones.

Weaknesses of study.

If you were to do the study again, how would you improve it?

With regard to Stage 5, the conclusions and recommendations section,  it is important that students don’t write any new or previously unmentioned content here. Any recommendations that the student makes should have already been discussed extensively in the main body.

 

Business Internal Assessment – The Introduction

Business & Management.

The introduction of your business internal assessment (IA) is very important because it is the first thing that your teacher, and any coursework moderators, will read. Is important, therefore, to make a good impression from the beginning.

Here is a template that I use to help students write their introduction. The advice that I give is start straight away with the business issue, problem or decision that you are investigating. A common mistake is to start your introduction giving a brief description of the company, it´s history etc. Avoid doing this. Only describe or explain your chosen company towards the end of the introduction if you have to. Remember, to keep your introduction brief – about 300 words for a Standard Level IA, and 400 for a Higher Level IA.

Introduction.
Description of problem / issue or decision the business has to make.

What effects are there on the company because of the problem?

Context (background situation).

Why is the problem / issue / decision important for the company?

What may happen to the company if they cannot resolve the problem / cannot make the decision?

Brief description / history of the company.

Carnival Float, Sao Paulo, 2015.
Carnival Float, Sao Paulo, 2015.

Limited Liability – Good or Bad for Society? (Part 2)

Business & Management.

I.B. Business syllabus links – 1.2 – Types of organisation (plc´s), 1.2 – Limited Liability, 1.4 – Stakeholders, 1.3 – Profit maximization, 1.3 – Business ethics, 1.3 – Business strategy, 1.6 – Growth & evolution

He-Joon Chang in his popular book “23 Things They Don´t Tell You About Capitalism” (see my previous post) argues that limited liability, combined with how plc´s have been managed recently, particularly in the Anglo-Saxon world of the USA and the U.K., has been bad for society.

He traces the origins of the problem back to 1981 when Jack Welsh, the then CEO of General Electric, coined the term ´maximizing shareholder value´. According to Welsh, this is what companies should do; aim to raise company share prices by increasing profits as much as possible and give as much dividend back as possible to shareholders. Managers were encouraged to do this by having part of their pay in share options. This created what Chang calls ‘an unholy alliance’ (P17) between shareholders and senior executives, both of whom benefit if the share price of their companies rise and rise.

What were the consequences of these policies?  According to Chang ” Jobs were ruthlessly cut, many workers were fired and re-hired as non-unionized labour with lower wages and fewer benefits and wage increases were surpressed …. The suppliers and their workers, were also squeezed by continued cuts in procurement prices” (P18). In other words, the other stakeholders in the business lost out.

Another strategy, moreover,  aimed at maximizing shareholder value became more and more popular – share buybacks. This is when a company uses it’s own profits to buy back it’s shares in order to artificially increase their value. According to Chang, prior to 1980 share buybacks made up just 5% of US company profit spending, by 2007 this figure had reached 90% and in 2008 just as the economic crisis was taking hold, reached 280% (P20)

These policies, moreover,  don’t even make good business sense. Less investment by companies (most of the money is being used to buy back shares or is being given to the shareholders) leads to lower long term productivity. Workers who are forced to accept wage cuts and more temporary or short term contracts, become demoralized and demotivated and consequently productivity falls.

Chang backs up his arguments with some astonishing statistics. Quoting the research of Willam Lazonik, a business economist, he says “…Had GM not spent the $20.4 billion that it did in share buybacks between 1986 and 2002 and put it in the bank (with a 2.5% after tax annual return), it would have had no problem finding the $35 billion that it needed to stave off bankruptcy in 2009” (P20). (GM, the large US automobile manufacturer, went bankrupt in 2009 and had to be bailed out at great expense using taxpayers money by the US government).

Below is a video outlining the story of GM´s bankruptcy:-

Limited Liability – Good or Bad for Society? (Part 1)

IB Business & Management.

I.B. Business syllabus links – 1.2 – Types of organisation (plc´s), 1.2 – Limited Liability, 1.4 – Stakeholders, 1.3 – Profit maximization, 1.3 – Business ethics, 1.3 – business strategy, 1.6 – Growth & evolution

On the IB Business course we learn that businesses maximizing their profits is generally a good thing, that the concepts of limited liability and company legal structures such as the public limited company (plc)  are positive, useful things for society, and that a good business manager should consider the long term interests of all the stakeholders in the business. However, is the concept of limited liability really good for society, are plc’s and the way they are run nowadays positive for society, and do business managers really take into consideration the long term interests of all the stakeholders in the business?

Some business analysts think not. Ha-Joon Chang, in his popular book ” 23 Things They Don’t Tell You About Capitalism*”, argues that these things have in many ways been bad for society, that the way plc’s have been run over the last few decades has generated more social harm than good and that, in reality, the interests of just two groups of stakeholders – company shareholders and senior executives – have taken precedence above all others.

When capitalism and business as we know it now was in it’s infancy, owning and running a business was much more risky than it is today. If your business went bankrupt and you ended up owing lots of money to creditors you could have lost all of your personal possessions and have been thrown into a debtors prison. Nowadays we have this concept of limited liability whereby you only lose the original amount of money you invested in the business and your personal possessions are protected.

What a lot of people don’t realize, however, is just how controversial the joint stock company (the limited liability company as we now know it) was when it was first invented. Adam Smith, one of the founding fathers of economics and modern capitalism disapproved saying ” The directors of [joint stock companies] … being the managers rather of other people’s money than their own, it cannot well be expected that they would watch over it with the same anxious vigilance with which the partners in a private copartnery [ i.e. partnership with unlimited liability] frequently watch over their own. “ (P 13, Chang book). His disapproval of limited liability reflected the current wisdom of the time; people felt that managers of limited liability companies would take greater risks because they were managing companies funded in most part by other people’s money rather than their own. Indeed, when the joint stock company was first invented, only very speculative, risky ventures in the national interest took the form of joint stock companies, such as the Dutch East India Company set up by Holland in 1602.

As countries industrialized, however, and there was more and more of a need for investments in large, expensive investment projects such as railways, steel and chemical plants, limited liability companies became more and more popular.  Indeed, this is the main argument for the social usefulness of plc´s as institutional structures – they enable finance to be raised for big, risky investment projects which otherwise would probably not be funded.  Nowadays, they are taken for granted as being essential to the modern business world.

* = This is an excellent book which all IB Business and IB Economics students should read. See image below. I will be using it quite a lot in the next few posts I make. You can buy it on Amazon by clicking the link above.

Ha-Joon Chang´s book cover.
Ha-Joon Chang´s book cover.

Part 2 of this post will follow soon.

IB Business Coursework – The Research Question

IB Business & Management.

The Coursework Research Question – The Importance of ‘Focus’.

One of the first things that you will have to do when starting your business coursework is to choose a good, well focused research question (r.q.) . If you choose an inappropriate or unfocused r.q., you will be handicapped from the beginning. The word count for the HL coursework is only 2000 words (excluding the Research Question and Research Proposal) and for SL it is only 1500 ( for more general  information on the business coursework see this page of my blog). These word counts are short, and for this reason your r.q. must not be too broad. You need to focus on one specific business (or industry) in one country, and analyse one (or possibly two) of it’s problems,  strategies or decisions. See the diagram below:-

Increasingly Focused Research Question.
Increasingly Focused Research Question.

The above diagram illustrates some possible research questions, and their levels of focus, from unfocused at the top to much more focused on the bottom.

As you can see from the r.q. at the bottom, it looks at just one company, in one country, focusing on just one strategy. Indeed, rather than looking at just the ‘marketing strategy ( which potentially is a very broad strategy that includes a number of things such as ‘pricing’, ‘promotion’, ‘product’ and ‘place’, see the r.q. second from bottom ) it just focuses on just one of these – promotion.

Keep following this blog for more posts  on the IB Business coursework.

 

The Course Key Concepts – IB Business & Management

IB Business & Management.

The Key Concepts – The New Syllabus for Examinations Starting In May 2016.

 The teaching of the new syllabus should be based around three elements; the course content (the syllabus), contexts (the companies that you study throughout the course, whether they be related to your Internal Assessment, an Extended Essay, case studies that you have done in class, a company that you are familiar with) and the key concepts. See the following diagram: –

The Three Elements of the Course.
The Three Elements of the Course.

Course Key Concepts *

 Change

 A famous adage in business is that if a business does not adapt to the changing external environment, then it will die.

 Change is constantly happening, whether it be in consumer tastes, fashion, technology, culture, globalization, the external economic and social environments and the competition. Businesses are therefore having to adapt their organization, structures, aims and strategies accordingly.

One feature of the modern world is that change is accelerating.

 Culture

 The attitudes and values held by people in an organization which determine the norms, ways of thinking, courses of action and behavior of individuals in that organization.

 Businesses are located in certain countries and geographical regions, which possess their own unique cultures, attitudes and ways of doing things. However, due to globalization, these cultures are becoming increasingly interconnected and mixed up.

 Globalization

The increasing inter-connectedness of the world, economically, politically, socially, culturally and technologically.

 How businesses are increasingly selling their products, locating, conducting marketing campaigns, sourcing their finances, recruiting staff, worldwide, rather than just in their home countries.

Ethics

Relates to the decisions individuals, stakeholders and organizations make and whether they are morally right or wrong.

Innovation

In order for a business to survive, they need to innovate. This involves coming up with new ways of doing things, whether it be producing a new good or service, creating a a new production method, a new technology, a new distribution system, or a new marketing strategy. Businesses that don’t innovate cannot compete and eventually go bankrupt.

Strategy

A plan of action, usually formulated by the senior managers of a company, aimed at reaching certain goals or objectives in the future.

Your teacher should include all of these elements throughout the teaching program. These concepts are tested on Paper 2, Section C, of the final exam. More information will be provided about how  to approach this question.

*= these are my definitions / explanations of the key concepts. You may find others that are different.

Development Economics – South Africa Verses Brazil

IB Economics.

The Similarities and Differences Between South Africa and Brazil.

(Syllabus Section 4.1 – Similarities and Differences Between Developing Countries).

I am spending the holiday in South Africa at the moment so thought that I would do a post on South Africa and Brazil.

When I started studying economics all those years ago we used the terms ‘ the First World’, the ‘ Second World’ and the ‘ Third World’ – meaning the rich countries, the Soviet Bloc countries and the poor countries of the world. However, the phrase ‘ Third World’ implies that all the poor countries are lumped into one block and are the same. Not true.

One of the most difficult things about development economics ( and for the politicians and government bureaucrats that try and ‘manage’ the development of a country) is that every county is different – they have different histories, different resource endowments, different cultures, different political systems, different climates, different languages and different social institutions.

Each country therefore faces it’s own unique problems that require their own unique solutions.

Here are the similarities between Brazil and South Africa ( SA) :-

  • Both are middle income countries – $ 6617 GDP per capita for SA in 2013, and $ 11208 for Brazil.
  • They are regarded as the industrial power hubs of their two continents
  • Both have been classified as BRICS
  • Both rely on the extraction and export of raw materials
  • Both have been suffering from falling economic growth recently because of the slowdown in the growth of China and the fall in raw material prices
  • Both countries currencies have depreciated a lot recently
  • Colonization – Brazil by the Portuguese, South Africa by the Dutch and the British, are common to both countries.
  • Both are located in the Southern Hemisphere
  • Both countries became truly democratic relatively recently ( see below)
  • A strong African culture exists in both countries – in the case of Brazil due to slavery
  • Extreme inequality of income and wealth, as shown by the shanty towns of SA and the favela’s of Brazil, are features of both countries.
  • Both suffer from very high crime rates
  • Both suffer from corruption

Here are some of the differences:-

  • South Africa’s experience of colonialism was longer and much more traumatic for the country, due to the racist system of ‘ Apartheid ‘ – the forcible separation of races and cultures in the country. Apartheid only ended in 1994.
  • South Africa’s peoples and cultures are more diverse than Brazil’s – SA has  eleven official languages!
  • Brazil’s population is much bigger than SA’s – 250 million verses 53 million
  • Brazil is a much bigger country than SA
  • SA, arguably, has a better infrastructure than Brazil.

This thirteen minute video is about the life of Nelson Mandela, one of the greatest leaders of the 20th Century,  and the man largely responsible for  ending Apartheid  in South Africa.