Two Different Institutional Environments

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From the course by IE Business School

Business Opportunities and Risks in a Globalized Economy

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IE Business School

Business Opportunities and Risks in a Globalized Economy

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Course 3 of 3 in the Specialization Globalization, Economic Growth and Stability

This is the last of the three courses part of the Globalization, Economic Growth and Stability Specialization.¨Business Opportunities and Risks in a Globalized World¨ is the the 3rd and final course of the ¨Globalization, Economic Growth and Stability¨ Specialization taught by IE Business School's Professor Gayle Allard. This course is designed to help an investor, businessperson or economist approach macroeconomic, institutional and international data and derive information from the indicators that point to the types of opportunities and risks that they present. Students will gain practice by handling the data of some of the largest economies in the world –the United States, Japan, the European Union, China and India—and “reading the story” of their economies from their data, yielding surprisingly profound conclusions about their present and future. The course is the third in a series for the specialization but it is also a stand-alone course for anyone who wants practice in practical macroeconomics. This course includes 4 modules, each one deep-diving into the macroeconomic circumstances that have been brought up in the recent history of four key regions: the USA, Japan, Europe, and China and India. Students will analyze the ways in which international economies relate with one another, the benefits of trade and migration and economic development and how it occurs, among other themes. Professor Allard takes overarching macroeconomic theory and turns it into a practical tool for those interested in the opportunities and risks of investment and doing business in each of the four regions covered.

From the lesson

India and China: Economic Development, How it Occurs, and the World's Upcoming Giants

The final segment of the course turns toward the two emerging giants, India and China, and contemplates their past and future development strategies and thee risks and opportunities that they entail. Development itself is discussed, and how it occurs, and the strategies that nations may choose. The different components of GDP (C, I, G and X-M) are compared between India and China over a long period, to see what have been the different drivers for growth in the two countries over time. Special attention is paid in this section to institutional indicators, which are very different from developed countries, and the divergent demographic trends in the two countries; and the implications of those differences for the future.

Two Different Growth Models: Internal vs External Drivers11:15

Two Different Currencies4:43

Two Different Demographies5:51

Two Different Institutional Environments9:41

Meet the Instructors

Gayle Allard
Professor
Economics

Finally we turn to,

two institutional stories which show us another contrast between India and China.

Now, you may say, "How can we talk about

institutions if we're only going to look at macro data? "

But fortunately, institutional economics has given us a lot of data where economists and

experts go in and they code countries institutions for more free less free,

more rigorous less rigorous,

more corrupt less corrupt,

based on surveys, based on a look at the laws.

So, this is a really valuable resource that you can

put into your toolkit as you want to approach countries and analyze them.

The first of these indicators is one that we have been looking at so

far in all of the developed countries that we've been exploring.

It's the ease of doing business index that comes out of the World Bank.

And if we look at this one remember

that lower numbers mean you're ranked higher in the world.

So, number one in the world has the lowest number.

The best country, the easiest country to do business in the world has the lowest number.

The worst country to do business in the world has a highest number.

So we've ranked here the countries that we've been

looking at and we've had a look at this slide before.

I want you to notice this time that India is

the worst country in which to do business of all of the ones that we've been exploring.

Even though Prime Minister Modi,

has set as an explicit objective to become

one of the top 100 countries in the world and ideally 70,

75th in the world in ease of doing business.

The latest data show that it's still behind that,

it's the 100th easiest country in the world to do business,

whereas China is in the 70's,

and the developed countries that we've been looking at,

we noticed that the United States and the UK were number six and seven in the world.

So this is a contrast.

India has not made the kind of reforms that China has in order

for its economy to work efficiently in order for investors to want to come and invest.

If we drill down a little bit and we want to see

what this actually looks like in those two countries,

the ease of doing business,

you can break it down into a number of

subcategories and I'm not going to name these one by one.

But on this slide, you can see different contrasts between India and China for example,

registering property, where is it easier?

Where is it very, very difficult?

Or getting credit, or starting a business,

where is it easiest?

And here, depending on the rankings,

you can see the particular bureaucratic obstacles that

each country poses to the potential investor.

Another aspect of institutions and this one gets a little more

complicated is how well do governments function in these countries?

If a government is operating well there are a number of things we might see,

we might see that the country is stable,

that there's not a lot of violence,

that the government is accountable to its people,

that the rule of law is strong so that you

go before the courts and it doesn't matter who you are,

law prevails over the person.

Well, we also have indicators that show these things,

these are the world governance indicators that you can find on the World Bank website.

Here in the ones we're going to be looking at first,

the numbers go from -1.5 to +1.5,

+1.5 would be the best,

-1.5 is the worst.

So in this first slide,

political stability, an absence of violence or terrorism,

both India and China come up as unstable countries with India being the worst.

They both have negative numbers meaning that if I'm going invest in this country,

one of the things I have to keep in mind is that it may be unstable.

There could be political violence,

whereas all of the developed countries we've looked at have positive numbers,

notice how large that positive is in the case of Japan.

How good are regulations?

How efficient are laws?

How well do they control what you want them to control?

How well do they hold up under pressure?

That's another question we might want to ask.

And here the answer is an indicator called regulatory quality.

It belongs to that same set of indicators that the World Bank that I was mentioning.

And again, you see India and China with worse regulations.

India, again the worst.

Whereas we see the developed countries that we've been looking at

as countries with good regulations that seem to work,

that seem to be impartial and particularly,

the United Kingdom stands out in this regard.

Here's one that's really interesting and that kind of goes to the heart of

what a political system might be about depending on what we're looking for.

This is called voice and accountability.

Here the indicator is trying to show,

do the people in the country actually have a voice in what's happening to them?

And is the government accountable to them?

If the government does something wrong,

can people move against them and hold them accountable for what they've done?

Here suddenly, we find China as the outlier,

with a very negative voice and accountability score.

In fact, India is the country where people do have voice and the government

is held accountable even though the score is

lower than the developed countries we've been looking at.

But China is not.

It has one of the worst scores possible on this indicator.

And you see that the United Kingdom once again stands out as a country where

people particularly have a voice and are held accountable to their governments,

as well as Japan and Spain being similar and

the United States being a little bit better a little bit worse than the United Kingdom.

Here's a further indicator which is the rule of law.

Now the rule of law as I've said is,

am I in this country in a situation where the law is above the person?

Where the law is going to hold no matter who I am,

no matter what party I belong to,

or what race I am?

So, it scored in the same way, however,

this is a percentile rank where 100 would be the best score.

And we find once again that the United Kingdom looks really good,

Japan looks really good,

so does the United States,

Spain a little bit less,

but India and China are way behind.

However, India is ahead of China.

In other words, the rule of law is stronger in India than in China.

The average citizen has more of a chance of being

defended by the law in India than in China.

Finally, there is a contrast in terms of corruption.

Now, this may be a tricky indicator to work with,

but the corruption perception's index asks people around the world,

year after year, every year asks them how

often they've had to bribe people to get things done.

And so, again this is a ranking.

So, if you are a low number,

you are very uncorrupt because you're ranked high in the world.

If you're a high number, you're quite corrupt.

The higher the number the worse.

And again we will see this division between developed and developing countries,

where the developed countries tend to not be very

corrupt on this indicator which is relatively impartial,

you're just asking people if they bribed,

and India and China are both corrupt.

Depending on whom you talk to some people will say,

one is more corrupt than the other,

some people say that the Chinese model is

a centralized corruption while the Indian model is

a decentralized corruption which is less efficient.

Whatever the case, both of them are corrupt compared to the developed countries.

This all takes us to a final question which is democracy.

Now, I'm not going to show you an indicator for democracy,

but we know that India has the world's largest democracy and it's

an old democracy and China does not have one.

It has the rule of a single party, does that matter?

Does that condition economic development,

does that present risks or opportunities for investors?

Does that have anything to say about the future of a country?

It's hard to say here, many,

many studies have been done trying to prove that

democracy is better or worse for economic growth.

There are lots of different results,

sometimes they conflict one another usually they show that

democracy is associated with higher per-capita incomes.

In fact, if we look at the world,

we see that all of the developed countries actually are functioning democracies.

So, if we were to look at this aspect of the institutions of India and China,

we might say, that as people become economically freer,

there's a chance they will demand more political freedom.

If that's the case,

India may be more stable going forward and China

may face some sort of an institutional crisis as people say,

"I want political freedom to match my economic empowerment."

Will that happen? Who knows?

The Chinese model is different,

the government has very successfully managed

any dissent up until now and has listened to the people in different ways,

not through the ballot box.

But always this would be a question mark on the future of China as compared to India.

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