Akash Kumar MBA (IB)

The global economic environment plays a large role in the development of new markets for organizations

REALITIES
Capital movements have replaced trade as the

driving force of the world economy Production has become uncoupled from employment The world economy, not individual countries, is the dominating factor 75-year struggle between capitalism and socialism has almost ended E-Commerce diminishes the importance of national barriers and forces companies to reevaluate business models

ECONOMIC SYSTEMS
4

main types of economic systems

Market Capitalism Centrally Planned Socialism Centrally Planned Capitalism Market Socialism

ECONOMIC SYSTEMS
Resource Allocation Market Private Resource Ownership
Market Socialism

Command

Market Capitalism

Centrally Planned Capitalism

State

Centrally Planned Socialism

MARKET CAPITALISM
Individuals and firms allocate resources Production resources are privately owned Driven by consumers Government should promote competition among firms and ensure consumer protection

CENTRALLY PLANNED SOCIALISM

Opposite of market capitalism State holds broad powers to serve the public interest; decides what goods and services are produced and in what quantities Consumers can spend on what is available Government owns entire industries Demand typically exceeds supply Little reliance on product differentiation, advertising, pricing strategy

CENTRALLY PLANNED CAPITALISM

Economic system in which command resource allocation is used extensively in an environment of private resource ownership Examples:

Sweden Japan

MARKET SOCIALISM
Economic system in which market allocation policies are permitted within an overall environment of state ownership Examples:

China India

COMPONENTS
GOODS & SERVICES (Inflation rate)

INVESTMENT (Rate of return)

LABOUR (Wage rate)

Global Economy

CURRENCY (Exchange rate)

MONEY SUPPLY (Interest rate)

GLOBAL ECONOMIC POLICY

Globalization
The increasing interconnectedness of peoples

and societies and the interdependence of economies, governments, and environments.

What is Globalization ?

World wide integration and deepening of economic activities. Integrated production and consumption systems. Facilitated by IT revolution, liberalization and deregulation. Unprecedented mobility of goods, services, capital and people. Events all over the world strongly interdependent.

GLOBALIZATION ENCOMPASSES
Internationalization (trade & investment) Liberalization (freeing markets) Universalization (cultural interchange)or Westernization (Western cultural dominance) Deterritorialization (compression of time and space)

Interdependence of Economies

Globalization is binding different economies of the world together. Due to which different economies are now interconnected and effect of one economy can be felt by other.

International macroeconomic Interdependence among Economies

Macroeconomics is international given the increasing

economic interdependence among countries and the increased globalization of trade and finance.

Made possible by:

Technology Communication networks Internet access Growth of economic cooperation trading blocs (EU,

NAFTA, etc.) Collapse of communism Movement to free trade

Financial Channels of Interdependence

Assets/Liabilities traded internationally Stocks Bonds Derivative instruments

International financial Markets/intermediaries: Banks Capital markets (stock/bond/money markets) Foreign exchange markets Commodities markets

Interdependence channels via common shocks and FDI/MNC

Common sectoral/external shocks Common oil and commodity shocks Tech sector technology shock in the mid 1990s and bust in 2000-2001 Housing bubbles in the US and other countries; and their bust in 2007-09 Global credit crunch
Foreign Direct Investment (FDI)/ Multinational

Corporations (MNCs):
Real investment (FDI, M&A) Output/production location decisions

Interdependence via policy links

Domestic effects of macro policies
International effects of domestic policies if a country is large

(US, Europe, Japan) Global financial contagion of 2008-2009

International effects of domestic policies even if a country is

small (international contagion): Mexico Tequila effect The Asian fever/flu The Russian virus (contagion to emerging markets Brazil, LatAm - and advanced markets LTCM & US capital markets) The Turkish influenza in 2001 The modest contagion from Argentina in 2001-2002

Threats to Global Economy

Energy Costs
Rising oil prices affect many businesses worldwide Change the nature of demand (e.g. off-road vehicles) Potential to generate inflationary pressures Possibility of triggering global economic slowdown

Famine
Succession of poor harvests can lead to famine conditions Attempts to grow food to meet increasing shortages can lead to environmental degradation Impact on global economy of dealing with aid problems and the social issues that come with it refugees, for example Lack of access to world markets by developing countries

Share Prices
Share Prices reflect the expectation of future financial performance A belief that prices may fall in any area of the world is sufficient to trigger global market changes The share market is now 24-7

Economic policies
Interest rate changes anticipated across the world The global capital market means such changes can have significant impacts Expansionary/contractionary policies in major economies can influence smaller economies around the world

Domestic Policies
Trade Protectionism for example, the US tariff on steel Regulation impacts on trade patterns Trade Blocs NAFTA, EU

Uncertainty
One of the most significant of the factors affecting the global economy Business does not like uncertainty! Affects future planning and investment

Uncertainty

Can include:
Corruption/fraud Parmalat, Enron causes loss of

faith in markets Political change Iraq, Zimbabwe, South Africa, China Rumour Payment default Russian Bond Crisis Collapse of major industries shipbuilding, coal, manufacturing, etc.

WAR
War increases uncertainty and leads to potential economic dislocation The Middle East and conflict in Africa and the Iraq war being such cases

Natural Disasters
Natural disasters can affect resource allocation and availability and also create massive economic dislocation Temperature extremes can destroy crops and lead to global shortage

Global Economic Crisis?

Crisis long period of negative/low economic growth, negative/low prices and high unemployment Correction short period of negative/low economic growth, negative/low prices and moderate/high unemployment

Recession negative economic growth for two consecutive quarters (i.e. 6 months) Depression economic downturn that lasts several years (Great Depression 1929 10 years)

Global Crisis

The global financial crisis has spread like wildfire across the world because one single model of globalization, i.e. liberalizing market economy without regard to diversity, different stages of development, needs etc. was pursued.

Consequences

Developing countries, the most defenseless and often times innocent bystanders - face a perfect storm (WB) and for them the crisis may translate into
lower government budget allocations to social AND

productive sectors; rising poverty levels More demand for official development assistance (ODA) and foreign direct investment (FDI) flows More demand for multilateral and NGO/foundation funds More recourse to South-South cooperation

For industrialised countries, this may translate into

Lower ODA (Official Development assistance)

earmarking and allocations, abandoning commitments made only recently (e.g. 2005 G-8 Gleneagles commitment to double aid to Africa by 2010) - at present, US$ 30 billion short; Less ODA for select sectors, especially those not protected by specific international pledges or agreements Less availability of discretionary funds and hence lower/stagnant levels of extra budgetary contributions to multilateral organisations Lack of readiness to subscribe to new multilateral initiatives

Consequences
Lower economic growth Less trade with developing countries irrespective of

trade barriers and custom levels Lower levels of FDI flows Less loans for investment and trade in developing countries Lack of interest in new public-private partnerships requiring private sector funding Overall, reduced confidence in market forces Lower volume of donations to NGOs and charities

Crisis in Emerging markets

Currency/Financial Crises in Emerging Markets: 1980s debt crisis in Latin America Mexico, East Asia, Russia, Brazil in the 1990s; Turkey and Argentina in 2001; Uruguay in 2002; Brazil mini-crisis in 2002; Dominican Republic in 2003 Market turmoil (mini-crisis) in Emerging markets in May-June 2006 Massive contagion of US financial crisis of 2008-2009 to emerging markets economies markets and economic growth

In Developed Countries

Savings & loan crisis in US in early 1990s Corporate/Banking crisis in Japan in 1990s after bursting of the 1980s asset price bubble European Monetary System (EMS) currency crisis in Europe in 1992-93 (Italy, UK, France, Sweden) Banking crisis in Finland and Sweden in early 1990s Bond market crash in the US in 1994 as the Fed unexpectedly tightened monetary policy. Sharp fall of the value of the US dollar in 1994-1995 Long term capital management (LTCM) crisis in 1998 and seizure of U.S. capital markets

Bursting of the US asset price bubble in equity markets in 2000-2002; IT and [Link] crash. US corporate and accounting scandals in 2002-2003 (Enron, Sarbox legislation, etc.) GM-Ford downgrade in 2005 and turmoil in credit derivatives markets Equity market turmoil in the spring of 2006 during the inflation scare Housing bust and sub-prime crisis in the US (20062008) US and global financial markets turmoil and volatility starting in the summer of 2007 Global financial crisis and recession of 2008-2009 European debt crisis

THANK YOU