. 25
( 33)



to capitalism.


ndrei Mladentsev, the Russian entrepreneur
Cover Stor y featured in the cover story, now runs one of
the largest and most modern pharmaceutical
companies in Russia. At age 26 he used the funds he
Rubles From the Ruins: accumulated trading stocks to engineer a takeover of
A Russian Success the 75-year-old pharmaceutical factory in Nizhny
Novgorod. He is, however, the exception rather than
Russia”In general, the
N the norm”as the problems of transition are truly
Industrial production is
ian economy is a mess:
Russ t
e transition to a marke daunting.
what it was in 1991, th
ruble has collapsed, and
omy has gone badly, the
econ -
desperate straits, unem
y giant enterprises are in
Problems of Transition
e ubiquitous.
ployment and poverty ar
And yet, some Russian Historically, communism and capitalism
ey, some
are actually making mon have been viewed as two opposing political
are thriving. . . .
and economic structures. The collapse of commu-
Although criminals an
nism, however, does not mean that the transition
corrupt government offic
all to capitalism will be smooth, or that it will be
frustrate entrepreneurs
over the country, some made at all. An examination of the problems of
age to evade or ignore th transition will show why.
e few
The experiences of th
who are succeeding pr
in why
some powerful lessons Russian currency
ains so remote.
that hope rem A key feature of capitalism is private property”
Consider the adventur especially capital, which is sometimes referred to
of Andrei Mladentsev. . as the means of production. Because communist
Tribune, July 20, 1999
”International Herald

governments owned the means of production, pay other bills or make other purchases. These
privatization, or the conversion of state-owned transactions bypassed the citizens and transferred
factories and property to private ownership, has to ownership to foreign investors.
be accomplished. Privatization is important
because people tend to take better care of the
Loss of Political Power
property they actually own. Private property is
Under communism, the Communist party was
also important for entrepreneurial activity, espe-
the ruling class. The transition to capitalism
cially if the entrepreneurs are allowed to keep the
stripped the Communist party of its political
fruits of their labor.
power and transferred it to the new class of entre-
In Poland, Hungary, and the Czech Republic,
preneurs and capitalists.
this transition was accomplished using vouchers.
In countries where the Communists were literally
Vouchers were certificates either given to people or
thrown out”as in Poland, Czechoslovakia, and
sold at very low prices, depending on the country.
Hungary”the Communist leaders lost their power
As the vouchers were distributed, the government
before industry was privatized. In these countries,
drew up a list of companies to be privatized and
the voucher system worked reasonably well.
then organized the companies as corporations. The
In other countries, former Communist leaders
corporate shares were auctioned, and people would
grabbed a large share of vouchers, and thus a large
bid for the shares using their vouchers for payment.
portion of ownership in many privatized compa-
As people exchanged their vouchers for shares,
nies. In the most blatant cases, some of which
ownership of the previously state-owned enter-
occurred in Russia following the collapse of the
prises transferred to private hands.
Soviet Union, the ownership of companies was
In other cases, the transition governments sim-
simply transferred to politicians who were influen-
ply sold state-owned companies to foreign corpo-
tial during the transition period. Former political
rations. The government then used the funds to

Projected Population
Rank City, Country (in millions)
Most of the world™s population lives in urban
1 Tokyo, Japan 28.88
areas. Projections show that this trend will con-
2 Bombay (Mumbai), India 26.22
tinue. Today™s five largest cities are more populous
3 Lagos, Nigeria 24.64
than most countries. Cities are rapidly becoming the
4 São Paulo, Brazil 20.32
Mexico City,C18-09C key economic units of global market analysis.
5 Mexico 19.18
6 Shanghai, China 17.97
7 New York, New York USA 17.60
Critical Thinking
8 Calcutta, India 17.31
9 Delhi, India 16.86 1. Categorizing Information How many cities
10 Beijing, China 15.57 are projected to surpass 20 million in popu-
lation by the year 2015?
Source: The Shape of Things to Come,
by Richard W. Oliver, McGraw-Hill, 1999 2. Understanding Cause and Effect What do
you think are the economic reasons that
the largest cities continue to grow?

leaders traded their political power for economic
Figure 18.2
power in the form of resource ownership”so that
the old ruling group simply became the new
New and Emerging
ruling group.

Stock Markets
The Discipline of Capitalism
Many countries that desire a capitalist structure COMPANIES COMPANIES
have focused on the benefits to be obtained, not
Country Country
the costs. However, the costs can hinder or even
discourage a country from making the transition. Argentina 138 Morocco 48
The disadvantages of capitalism made apparent Brazil 543 Nigeria 180
during the Great Depression included instability, Chile 296 Pakistan 778
unemployment, and social unrest. At that time, the
China 763 Peru 247
United States did not have the fiscal policies, the
Colombia 163 Philippines 222
automatic stabilizers, and the social welfare nets
needed to lessen the devastation of the Depression. Egypt 668 Poland 159
Now that such assistance exists, most economists Greece 231 Portugal 143
agree that another Great Depression will not occur Honduras 111 Russia 222
in the United States.
Hungary 50 South Korea 776
The same cannot be said for the nations in tran-
India 5,853 Sri Lanka 240
sition. They have not yet developed the automatic
stabilizers and the social welfare nets that cushion Indonesia 287 Taiwan 408
the instabilities of capitalism. During the transition Israel 648 Thailand 431
phase, nations will most likely experience the insta- Jamaica 46 Turkey 262
bilities of early capitalism”the unemployment, the
Malaysia 722 Venezuela 91
inflation, and the lost production”long before they
Mexico 198 Zimbabwe 64
experience the benefits.
Source: Emerging Stock Markets Factbook, 1998

Responding to New Incentives Using Charts New and emerging stock
Finally, countries that make the transition to markets are now found all over the world, and
capitalism have to learn to live with a whole new more are still to come. Why is the cor-
set of incentives. For generations, the government porate form of
in the former Soviet Union told its people what to o r gani z a t i o n
do. Under capitalism, people must learn how to a necessary
make decisions on their own. They must learn how component of Visit epp.glencoe.com and click on
to take the initiative, how to interpret prices, and Textbook Updates”Chapter 18 for
an update of the data.
how to fend for themselves because the govern-
ment no longer guarantees their jobs, nor does it
keep prices artificially low.
These adjustments will be enormous, perhaps
Countries and Regions in Transition
even prohibitive, for some people. Many will
even long for the past when life was simpler. Despite the transitional problems, the rise
These people may not want to go through the of capitalism is one of the most remarkable
adjustments and submit to the discipline of capi- phenomena of the late twentieth century. Today,
talism. Impatience for the end result may be a nations and regions all over the globe are making
major obstacle to the transition. the transition.

Russia by individuals is now a reality in a country that
once preached the evils of private ownership.
Privatization in Russia is well underway, despite
the continued resistance of hard-liners. Some pri-
Eastern Europe
vatization took place under Gorbachev, and
The nations of eastern Europe, especially those
President Boris Yeltsin accelerated the process
that were unwilling members of the Soviet bloc, are
when he signed a 1992 decree requiring that state-
the newest nations to embrace capitalism. The strug-
owned enterprises be converted to privately
gle for freedom began in Poland with Solidarity, the
owned ones.
independent and sometimes illegal union that Lech
Many conversions took place when the govern-
Walesa established in 1980. Solidarity was influential
ment printed and distributed vouchers to its peo-
in securing a number of political freedoms in
ple. The people then used the vouchers to purchase
Poland. Eventually, the Communist party lost
shares of stock in the newly converted companies.
power, and interest in capitalism grew. Political
Smaller businesses were also being privatized
reform slowed privatization plans at first, but capi-
at a rapid rate. Soon more than half of the restau-
talism finally appeared to be under way again in the
rants and shops in the major cities were in private
face of progress by Poland™s neighbors.
hands. Eventually Russia opened a stock market so
Hungary is another country well on the way to
that individuals could buy and sell shares. The
capitalism. Hungary was often regarded as the most
widespread ownership of the means of production

An Emerging Latin
American Market
Historically, the economies of most Latin American
countries depended on agriculture. Beginning in the mid-
nineteenth century, these Latin American economies began
to change. Countries exported raw materials, such as oil,
so that they could import machinery to build factories for
manufacturing goods. As a result of the growth of the man-
ufacturing sector, service industries such as banking and Changes in Latin America™s business
insurance took on new importance. An educated middle class shopping are becoming more popular with consumers.
emerged, consisting of lawyers, doctors, entrepreneurs, gov- Technology is being developed in Brazil to develop an
ernment employees, and skilled office and factory workers. online-only grocery store, where consumers will be able
As Latin America moves into the twenty-first century, to purchase products such as soap and oatmeal using a
economies in the region are changing once again. Tech- catalog and a bar-code scanner. Businesses use the
Internet to link their factories with suppliers to cut
nology is affecting how business is done. Many groups in
costs. They can track product shipments and check on
Latin America see e-commerce as a means to becoming
the status of an invoice. The government is also begin-
more economically efficient and competitive.
ning to post government contracts online so that pub-
Internet Users in Latin America Consumers, busi- lic and private companies can bid on them. Companies
can get information about competing bids and contest
nesses, and governments are beginning to see the value
decisions using the Internet.
of Internet commerce. Online supermarkets and retail

“western” of the Eastern bloc countries. It also had much progress that it”along with the Czech
a flourishing black market”a market in which Republic, Hungary, and Poland”will be considered
entrepreneurs and merchants sold goods illegally. for membership in the European Union between
Hungary™s experience with these markets helped 2002 and 2006.
ease the transition to capitalism.
The Czech Republic is another country in transi-
Latin America
tion. By early 1998, more than 60 percent of the
economy was in private hands. Progress accelerated In the past, many Latin American countries fol-
after the separation of the Czech and Slovak lowed a path of economic development that com-
Republics, a separation based in part on the bined socialism and isolationism based on the infant
Slovakian concern about adopting the capitalist industries argument. Mexico accelerated the move to
ways of the West. The Czechs, who were strongly capitalism and open markets in 1989 as it made plans
influenced by the economic success of the former to restructure its economy for the North American
West Germany, are now more able to pursue Free Trade Agreement (NAFTA). Under President
reforms. Salinas de Gortari, the government sold thousands of
The Baltic states of Estonia, Latvia, and Lithuania state-owned companies
are also making great strides toward capitalism. and cut back on
Latvia and Lithuania have their own stock markets the government
to help facilitate the transition. Estonia has made so bureaucracy.
Did You Know?
On The Net Even though fewer
people in Latin America have access to
the Internet than in the United States,
those who use it spend more time online.
Latin American Internet users spend
Getting Online Several problems are hindering the
about 8.2 hours online a week,
growth of e-commerce in Latin America. Only one in ten
compared with 7.1 hours in
people have a phone line. Because the average gross
the United States.
domestic product per capita is less than $4,000, the
ability to buy a personal computer and get online is out
of reach for many people. Few people in Latin America
use credit cards; many are reluctant to give out credit
card numbers online. Custom regulations and import
duties can delay the arrival of goods or make them too
expensive to buy.
E-commerce grows
Industry experts agree that these problems will
be less troublesome in the future. It is
expected that within a period of five to seven
years the number of phone lines will double, to
two per 10 people. Personal computer prices
are expected to fall as the number of sales
increases. Smart cards are becoming more pop-
ular, giving consumers a better sense of secu-
rity for buying online. Internet companies are
beginning to inform shoppers at the time of
purchase how much they will owe for duties
and other taxes, and it is expected that tariffs
will be removed as more countries form
regional trading blocs.

institute a system of pure communism along with
Economic Change
an industrial and agricultural revolution almost
overnight. Industrialization was pushed and, at
the same time, collectivization of agriculture was
intensified. Farmers were forced off their land and
made to live and work on large, state-owned
The Great Leap Forward was a disaster. The agri-
cultural experiment failed, and the economy never
came close to achieving the planned degree of
industrialization. Even the gains made during the
first Five-Year Plan were lost.
Other plans followed but, by the late 1970s, the
government decided that the country no longer
could follow the models of either the Soviet Union
or other command-type economies. China and its
population were too big for large-scale centralized
planning. Industrializing the cities enough to pro-
vide jobs for nearly one-fourth of the world™s pop-
Retreat From Socialism Once state-owned,
many companies in Mexico are now under pri- ulation would be nearly impossible.
vate ownership. How is Argentina reducing By the early 1980s, the influence of other suc-
the role of government in the economy?
cessful market economies in Asia”Taiwan, South
Korea, Hong Kong, and Singapore”was too much
for China to ignore. One of China™s provinces,
Chile has also taken major steps to foster the
growth of capitalism. It has privatized airlines, tele-
phone services, and utilities. Chile even used the
billions deposited in its pension funds to supply
capital to new entrepreneurs. As a result, the coun-
try exports copper, lumber, fruit, and even software
to the rest of the world. Chile™s markets include the
United States, which imports millions of popsicle
sticks, and Japan, which imports chopsticks.
Argentina has similarly embarked on a crash
program to remove government from the everyday
business of running the economy. The country has
sold oil fields, petrochemical plants, and a number
of other formerly state-owned businesses.

The People™s Republic of China became a com-
munist economy in 1949. That year, the Chinese
Communists, under the leadership of Mao Zedong,
gained control of the country. Over the years,
China modeled itself after the Soviet Union, adopt-
Changes in Chile Chile has privatized tele-
ing a series of Five-Year Plans to manage its growth.
phone services and airlines. What is Chile hop-
In 1958 the Great Leap Forward was instituted. ing to accomplish through privatization?
This was the second Five-Year Plan that tried to

the Guangdong Province just north of Reform and Expansion
Hong Kong, copied many of the free
market practices of the region and was
even allowed to officially experiment
with capitalism. At one time
Guangdong was an embarrassment to
the official communist dogma, but it
was later touted as an economic role
model for the rest of the nation.
China was also influenced by the
eventual reunification with Hong Kong,
which took place in 1997. The city of
Shanghai, in particular, embarked on a
program of reforms and expansion in an
attempt to become China™s “first city”
after the reunification.
Today China is no longer experi-
menting with capitalism. It is instead
privatizing industries, introducing mar-
ket reforms, and otherwise acting in a
decidedly capitalistic manner. China
still has a long way to go, and the gov-
ernment still directs most major eco-
nomic activity. Its economy has
evolved, however, into what former
President Jiang Zemin once called
Shanghai Reform has resulted in strong economic
“socialism with Chinese characteris-
growth for China. Why did China stray from centralized
tics””loosely translated as free market planning?

Checking for Understanding Applying Economic Concepts
1. Main Idea What is privatization? Describe 6. Privatization Explain why capital stock and
two ways in which transition economies han- other property is expected to last longer
dled privatization. when it is privatized rather than collectively
2. Key Terms Define privatization, Solidarity,
black market, Great Leap Forward.
3. List the problems a country is likely to
7. Finding the Main Idea Suppose you are visit-
encounter when converting to capitalism.
ing one nation in eastern Europe adopting a
4. Identify two major countries that are making
market economy. What questions would you
the transition to capitalism.
ask local officials to determine whether they
5. Trace the economic policy changes in China. are successfully moving toward capitalism?
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

AUGUST 2, 1999
In 1949, communist forces won the civil war
in China. The communists then established
absolute control over the government and
the economy. Today, however, technology is
reshaping the communist state.

Web Masters of Net companies. And although Beijing guards its
monopoly on traditional media, it lets entrepre-
neurs publish on the Web. . . .
Anyone who assumes the Internet is still a
. . . The government limits what Chinese Net
novelty in China has been asleep at the mouse.
users can see by telling them to block portals run
The communist giant™s state-owned factories and
by dissident and human-rights groups.
political system may seem frozen in another era.
Determined surfers can go through offshore ser-
But when it comes to cyberindustry, China is
vices. But because Beijing prohibits imported
moving at net speed. Driven by soaring com-
encryption technology, state snoops can easily
puter sales, rapid expansion of China™s telecom
eavesdrop on traffic. . . .
networks, and the encouragement of reformist
The Net™s success could breed its own prob-
leaders, Internet use is growing explosively. . . .
lems. As it grows more lucrative, bureaucrats may
The impact will be revolutionary, both on
not be able to keep their hands off. Beijing is usu-
China™s economy and society. A new class of
ally happy to accept foreigners™ investment dollars
entrepreneur is emerging because the government
at first. Then it often changes the rules to the
is allowing the private sector wide latitude
advantage of state-run rivals once a sector gets hot.
to develop Web business”remarkable for an indus-
The same could happen with the Internet.
try Beijing regards as strategic. The rapid
spread of e-commerce could transform ”Reprinted from August 2, 1999 issue of Business Week, by special
permission, copyright © 1999 by The McGraw-Hill Companies, Inc.
China™s stodgy retail and banking sec-
tors. It may also boost efficiency
of Chinese industry by allowing
old-line factories to streamline sup-
ply chains. . . .
Examining the Newsclip
To encourage development of
Chinese content, Beijing makes it 1. Analyzing Information How is technology
surprisingly easy for foreign com- changing China™s economy and society?
panies. While they cannot own 2. Making Predictions What problems could
equity in mainland telecom opera- arise as Internet use increases?
tors, they can own majority control

The Various Faces of Capitalism
Main Idea Key Terms
Many countries have moved toward capitalism, capital-intensive, keiretsu, infrastructure, collateral,
although its exact form varies from country to transparency
After studying this section, you will be able to:
Reading Strategy 1. Explain the factors that encouraged economic
Graphic Organizer As you read the section, complete growth in Japan.
a graphic organizer similar to the one below by 2. Rank the “Asian Tigers” according to per
selecting one of the nations discussed in the section capita GNP.
and describing what role the government plays in 3. Describe Sweden™s retreat from socialism.
its economy.
Applying Economic Concepts
Economic Growth Have you ever looked at the labels
inside your clothes? If so, you may have noticed that
Government and
Country many of them were made in Korea, Hong Kong, or
the economy
Taiwan. Read to find out how different economies
experienced economic growth.

Cover Stor y
apitalism is a force sweeping the world. It is
also a force that has many different faces. The
common element of capitalism is that the fac-
Pressing Need for a Secon tors of production are privately owned and controlled;
there are, however, many variations on this theme.
˜Restoration™ The sharp financial crisis that swept Asia in the
stands an elegant, wood
In the center of Tokyo fall of 1997 also demonstrates another feature of
eiji who ruled Japan in
rine to the Emperor M capitalism”that the welfare of most capitalist
sh it-
ent that now poses a cr
th century. It is a monum economies is increasingly entwined. The interde-
19 rs.
n-day political successo
l challenge to his moder
ica pendence we often see at the local and national
Slightly over a century level is beginning to become a feature of the global
s name
Emperor Meiji gave hi economy. These are some of the forces that are
to one of the most dr
causing capitalism in Japan, as you read in the cover
n has
reformations that Japa
story, to continue to evolve.
s he
seen: in a few decade
transformed the country
id soci-
a closed, feudal, and rig
trepre- Meiji shrine in Tokyo Japan
ety into a dynamic, en
r. The
neurial industrial powe critics
r Japan can surprise its Japan, like the United States, has a capital-
question now is whethe ain”
e “modernizing” trick ag
by performing the sam ist economy based on markets, prices, and
major “restoration” to re
and implement a second the private ownership of capital. Unlike the
the country™s flagging fo United States, however, Japan™s government is
July 13, 1999
”The Financial Times, very involved in the day-to-day activities of the
private sector.

At the end of World War II, Japan was a devas- a company™s entire workforce to arrive early to
tated country. Today, it is the second largest indus- take part in group calisthenics and meditation
trial nation in the world, with a GNP about 79 exercises.
percent of that of the United States. In the 1970s Japan™s recent economic crisis has severely
and 1980s, the Japanese economy was one of the tested the historically close employee-employer
fastest growing in the world. However, it stalled in relationship. Some firms have actually laid off
the 1990s. Slower growth, a currency crisis in 1995, workers, and some no longer guarantee lifetime
and a recession in 1998“99 added to the economy™s employment. Whether or not these changes will
woes”factors that convinced the Japanese that fur- become widespread depends in large part on the
ther restructuring was necessary. speed and strength of the Japanese recovery.
Another reason for Japan™s success is the ability
and willingness of the Japanese to develop new
Reasons for Success technology. Because of their relatively small popu-
lation, they have worked to boost productivity by
One of the reasons for Japan™s early success was
developing methods that are capital-intensive”
the workers™ intense loyalty to their employers.
techniques that use a large amount of capital for
Many workers joined large companies for life. In
every person employed. Today, the Japanese are
return, the company supplied benefits such as
recognized as the world leader in the area of indus-
wedding halls, private schools, and even vacation
trial robots. As a result, most factories require only
a fraction of the workers that similar factories in
Japanese workers traditionally take great pride
other countries need.
in the quality of their work. It is not unusual for
Most large Japanese firms also
belong to a keiretsu (ky • reht • soo).
This is a tightly knit group of firms
Japan governed by an external board of
directors from potential competi-
tors. The role of the governing
board is to ensure that competi-
tion does not get so fierce that
individual firms are threatened. A
similar agreement in the United
States among competing firms
would be illegal under our antitrust

The Role of Government
Historically, Japan™s public sec-
tor was relatively small. Spending
on infrastructure”the highways,
mass transit, communications,
power, water, sewerage and other
public goods needed to support a
large population”was low. The
government also had a modest mil-
Worker Attitudes Japan™s economic success is due in part to its itary capability and was not bur-
workers™ loyalty and pride in their products. What other factors
dened with welfare spending. As
have contributed to Japan™s success?
a result, taxes were low, which

allowed people to save their money or spend it on
consumer goods.
The Japanese government also worked closely
with businesses to limit foreign competition in the
domestic market. Even today the Japanese govern- Student Web Activity Visit the Economics: Principles
ment is more closely allied with businesses than and Practices Web site at epp.glencoe.com and click
on Chapter 18”Student Web Activities for an activ-
consumers, often aiding efforts to keep foreign
ity on the governments and economies of nations.
goods out of the country in order to protect
domestic producers.
Some of this has changed with the recent eco-
nomic downturn. In order to stimulate economic equipment are among the most popular items
growth, the government introduced a number of Japanese visitors bring back from trips abroad.
Keynesian-type spending packages in 1998 and
1999 to stimulate the economy. As a result, the
Reliance on Manufacturing and Trade
government sector now spends more than ever.
Japan must actively engage in international trade
because it is an island nation with few natural
A Closed Economy resources. Consequently, it must import most of its
Despite Japan™s success in international trade, oil as well as a number of other critical materials.
their economy is partially closed to the products For the most part, the Japanese paid for their
of foreign producers. When foreign companies try imports with revenues from the sale of cars, cam-
to sell their goods in Japan, many encounter eras, and other consumer products.
numerous obstacles ranging from delayed govern- Much of Japan™s trade success has been attrib-
ment permission to huge amounts of paperwork. uted to the direction that provides its Ministry of
Until recently, Japan was even reluctant to International Trade and Industry (MITI). This is a
import rice, a food staple, in order to protect government ministry that identifies promising
domestic rice producers. As a result, the cost of rice export markets, and then subsidizes industries so
to the Japanese consumer is several times higher that they can be competitive in this area.
than it would be if Japan imported rice from the
world markets.
Stagnation and Recession
Despite Japan™s economic successes, it experi-
The High Cost of Living enced stagnation and recession for most of the
Protectionism in Japan may help certain seg- 1990s. Industrial production peaked in 1991 and
ments of the economy such as the rice farmers, but then declined until 1994. It recovered to its 1991
it does not help the consumer. Because foreign level in 1997, but then went into its worst recession
competitors supply so few goods, products are gen- since World War II.
erally expensive. Citrus fruits cost four to six times Part of the reason for the poor economic per-
more in Japan than they do in the United States. formance was the banking crisis in the 1990s.
Clothing costs two to three times as much, and When Japan was growing exceptionally fast sev-
even cameras and electronics cost more in Japan eral years earlier, land values soared. Many bor-
than elsewhere. rowers pledged their land as collateral”property
For years, the Japanese have been making elec- or other security used to guarantee repayment of
tronic consumer goods and selling them abroad. a loan”against loans that ultimately went bad.
Recently, Japanese citizens discovered they could Banks had so many bad loans”estimates ranged as
purchase their own goods cheaper in Hawaii than high as one in four”that banks simply stopped
they can in their own country. As a result, lending in 1996 and 1997. To make matters worse,
Japanese cameras, radios, and other electronic banks had been so secretive about their loans that

role in the economy and restructure the way firms
INFOBYTE produce and compete with one another. This is an
ironic turn of events because the world looked to
Japan as the very model of growth in the 1980s.
International Bonds An international bond is a Today, Japan looks to the United States for guidance
bond that is issued in one country on behalf of bor- on restructuring so that it can resume its previous
rowers that live in another country. An example
would be a Japanese-issued corporate bond being
offered for sale on the New York bond market.

The Asian Tigers
Three other Asian countries”Singapore,
Taiwan, and South Korea”have made strik-
banking regulators did not even know who ing economic progress during the last 50 years.
received the loans, making default by the borrowers The British colony of Hong Kong also experi-
relatively easy. enced explosive growth before it was reunified
The banking situation made it difficult for with China. Despite setbacks during the Asian
qualified borrowers to get loans, and many indus- financial crisis of 1997, the four are called the
tries, including construction, came to a halt. “Asian Tigers.” Each has based its growth on cap-
Unemployment rose; the government tried to stim- italism, but each has taken a slightly different
ulate the economy with a number of programs, path.
including “employee adjustment grants” designed
to subsidize employee wages. In 1999 alone, the
Hong Kong
government used Y 61.1 billion ($532 million) to
When Hong Kong was still a British colony, it
pay two-thirds of the salaries of nearly 2.5 million
was recognized as the most free market economy
workers in 300 industries. Despite these subsidies,
in the world, one with virtually no government
Japan™s unemployment reached record-high levels
interference. Entrepreneurs in Hong Kong devel-
in late 1999.
oped a manufacturing-based economy that used
technology other countries had already devel-
Restructuring and Reform oped. Their major industrial products included
Another problem facing Japan is that it can no textiles, clothing, electronic games, radios, tele-
longer rely exclusively on basic manufacturing phones, watches, electronic components, and
because many of its neighbors can now produce the toys.
same products at a lower cost. Also, the cozy rela- At the time of unification in 1997, Hong
tionship between government and industry makes it Kong™s per capita GNP was nearly 90 percent of
difficult for incremental change to take place”one the United States™s, and nearly 40 times that of
of the features of capitalism. This inflexibility is China. Other factors, however, were beginning to
made more difficult by the keiretsu, whose purpose change. Financial services and tourism had caught
is to maintain relationships and to ensure that com- up with manufacturing, and the Asian crisis had
petition does not become detrimental to its mem- thrust the economy into a deep recession.
bers. Finally, there is the issue of transparency, or Furthermore, China™s promise not to interfere
the need to make business dealings more visible to with Hong Kong markets for a period of 50 years
everyone, especially government regulators. seemed to be in jeopardy. In mid-1999, Hong
Without more transparency, it will be difficult to Kong™s chief executive Tung Chee-hwa announced
prevent another crippling banking crisis. plans to pour billions of dollars into high-tech
According to its Ministry of International Trade computer industries, marking a sharp departure
and Industry, Japan needs to institute supply-side from the laissez-faire capitalism that once charac-
reforms. These reforms would redefine government™s terized Hong Kong.

Singapore South Korea
The second Asian Tiger is Singapore, an island South Korea, a country slightly larger than
nation about 3.5 times larger than Washington, D.C., Indiana, has the smallest per capita GNP of the
with a per capita GNP about 80 percent of that of the Asian Tigers, at about 45 percent of the United
United States. More than 1,000 multinational firms States™s. In the past, a group of technocrats gov-
have been attracted to Singapore with the lure of gen- erned Korea with the help of the military. The fac-
erous tax breaks, government subsidies, and tors of production were privately owned, but a
government-sponsored training of employees. small number of powerful business families domi-
Unlike Hong Kong, Singapore made a determined nated the private economy through conglomerates.
effort to develop its own technologies through exten- South Korea was hit hard by the 1997 Asian
sive spending on research and development. financial crisis, but it was also one of the first
The government of Singapore is trying to develop nations to recover. Many reforms have been under-
a few select industries, including telecommunica- taken since, but South Korea™s future economic
tions services, software, and biotechnology. The gov- growth still depends on whether the private econ-
ernment has spent millions on laboratories, omy can adapt to competition and rely less on its
attracting top scientists from all over the world. The relationship with the political sector.
biotechnology industry has scored some original
successes, one of which is the transfer of firefly genes
to orchids to make them glow in the dark.
Sweden is a mature industrial nation, once
Taiwan regarded as the “socialist state that works.”
The reputation was apt because Sweden provided a
The Republic of China, also known as Taiwan, is
broader range of social welfare programs for its citi-
an island about the size of West Virginia located off
zens than did any other free-world country. Some
the coast of the People™s Republic of China.
Taiwan™s population is about 22 mil-
lion, and the per capita GNP is almost
half that of the United States. Changes in Sweden
Planning was always a feature of
the Taiwanese economy. The most
recent plan identified 10 industries
to receive government assistance”
these include telecommunications,
consumer electronics, semiconduc-
tors, precision machinery, aerospace,
pharmaceuticals, and others.
Taiwan was one of the early eco-
nomic powers in Asia, but some peo-
ple wonder if the centralized planning
process will hamper future economic
growth. Another concern is the loom-
ing presence of the People™s Republic
of China, which regards Taiwan as a
“renegade province” and vows even-
tual unification. Despite its early start,
Restructuring Many government-owned businesses in
the per capita GNP in Taiwan has
Sweden were privatized in the early 1990s. What led to the
fallen far behind those of Hong Kong ouster of Sweden™s Socialist party?
and Singapore.

of the basic industries were nationalized, but who built some cabinets for an auto mechanic, for
Sweden also had a considerable amount of private example, might be paid with repair work on the
enterprise. The country, therefore, was not a model family car.
of pure socialism in the traditional sense.
The Welfare State Eventually, the heavy tax burden and the addi-
Many worker benefits were instituted during the tional costs of the welfare state began to cut into
44-year rule of the Socialist party. During this time, Sweden™s economic growth. Growing inflation
wages were high, jobs were easy to find, and unem- added to the problems, as did a massive govern-
ployment was in the 1- to 3-percent range. The ment deficit. Growing discontent with conditions
Swedish economy”with its generous maternity, finally led to the defeat of the Socialist party
education, disability, and old-age benefits”was in 1976.
thought to be the model of European socialism. A free-market government was elected in 1991,
Because government owned some basic indus- and by 1993 the role of the public sector had been
tries, and because many of these industries were not reduced, although current revenues by all levels of
profitable, the government relied on steep taxes to government exceed 60 percent of GNP. Taxes on
pay for the welfare state benefits. In the mid-1980s, individuals and corporations are also lower,
tax receipts were about 50 percent of GNP. In some although they are still high by U.S. standards. Many
cases, additional income that Swedish citizens government-owned businesses have been priva-
earned was taxed at an 80 percent rate, meaning tized, and more are scheduled to be converted.
that a person who earned an additional $100 would European nations such as Sweden were rela-
keep only $20. Some individuals even left the tively unaffected by the Asian crisis, so economic
country to avoid high taxes. When tennis star Bjorn growth was positive in the decade of the 1990s.
Borg was at the peak of his career, he resided out- Real GNP growth rates have been lower than those
side of Sweden to avoid paying high taxes. of the Asian tigers, however, leaving Sweden with
Many others devised ways to avoid paying taxes. a real GNP per capita about two-thirds of that in
Some craft workers resorted to barter. A carpenter the United States.

Checking for Understanding Applying Economic Concepts
1. Main Idea Discuss how the approaches to 6. Economic Growth How has Sweden™s transi-
economic growth differ in Taiwan and South tion from socialism to capitalism helped pro-
Korea. mote economic growth?
2. Key Terms Define capital-intensive, keiretsu,
infrastructure, collateral, transparency.
7. Making Predictions How might continued
3. Describe significant factors that contribute
economic growth in Asia affect industries in
to economic growth and development in
the United States?
8. Making Comparisons What type of help is
4. Rank the “Asian Tigers” according to per
provided to Japanese businesses by their
capita GNP.
government that the American government
5. Explain how Sweden™s retreat from socialism
does not give to its businesses?
affected the nation™s tax rates.
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

Section 1 Section 3

The Spectrum of Economic The Transition to Capitalism
Systems (pages 491“494) (pages 501“507)
• •
The world™s three main types of economic systems The former communist systems face several
are capitalism, socialism, and communism. challenges”including the privatization of capital
resources”as they try to move toward capitalism.
• Under capitalism, productive resources are privately

owned and operated; capital is obtained through These challenges include privatization, the shift
profits in the market; supply and demand determine in political power from Communists to elected
prices; and the role of government is limited to pro- officials, and the new incentives of a capitalist
moting competition and providing public goods. economy.
• •
Under socialism, many of the basic resources are Russia and Eastern Europe have had varying
government owned and operated, with prices play- amounts of success in this transition to capitalism.
ing a major role in the allocation of resources.
• Many countries in Latin America and even China
• Under communism, all productive resources are are also moving toward a capitalist economy.
government owned and operated; centralized plan-
ning directs all resources; and labor is organized for
the common advantage of the community.
Section 4

The Various Faces
Section 2
of Capitalism
The Rise and Fall of Communism (pages 509“514)
(pages 496“499)
• Japan achieved phe-
• In 1917 revolutionists overthrew the government of nomenal economic
Russia and instituted a communist system. growth with a combi-
nation of worker and
• Utilizing a series of Five-Year Plans, Stalin wanted to
corporate loyalty,
achieve rapid industrialization. The plans included
technology, and low
the collectivization of agriculture and the transfor-
taxes until the early
mation of industry.
• When Stalin™s brutal regime ended in 1953, the
• Despite Japan™s economic success, it experienced
Soviet Union had successfully completed its transi-
stagnation and recession during the 1990s.
tion to a major industrial power.
• The economies of the “Asian Tigers””Singapore,
• The command economy ultimately proved to be
Taiwan, Hong Kong (before reunification with
a miserable failure. Low productivity and the lack
China), and South Korea”also owe much of their
of incentives led Mikhail Gorbachev to attempt
remarkable success to capitalism.
perestroika, the fundamental restructuring of the

economy and the government. The restructuring was Sweden, once regarded as the “socialist state that
not completed, however, and in the early 1990s, the works,” has restructured in an attempt to move away
Soviet economic system collapsed. from socialism.

9. In _______ industries, a large amount of capital is
used for every person employed in manufacturing.
10. Piecework quotas often led to _______ , where
workers worked slowly until the last week of the
Self-Check Quiz Visit the Economics: Principles
month and then sped up to meet the unrealisti-
and Practices Web site at epp.glencoe.com and
cally high quota.
click on Chapter 18”Self-Check Quizzes to pre-
pare for the chapter test.

Reviewing the Facts
Section 1 (pages 491“494)
Identifying Key Terms
1. Explain the role of the government in a capitalist
Write the key term that best completes the following economic system.
2. Describe how the people in a socialist economy
a. state farm f. Five-Year Plan help allocate the use of resources.
b. socialism g. collective farm
3. Describe who answers the basic economic ques-
c. black market h. communism
tions in a communist system.
d. capital-intensive i. perestroika
e. privatization j. storming
Section 2 (pages 496“499)
1. In most former communist countries, state-owned
4. Describe Stalin™s efforts to implement centralized
enterprises are being converted to private owner-
ship, a process known as _______ .
5. Describe the problems that central planning
2. To direct production, Soviet planners adopted a
caused in the Soviet economy.
_______ .
6. Explain the impact that perestroika had on the
3. Under _______ , the government owns all the
Soviet economy.
means of production.
4. In the Soviet agricultural system, the state owned
Section 3 (pages 501“507)
and operated each _______ .
7. List the problems that nations may face as they
5. Soviet leader Mikhail Gorbachev introduced a pol-
try to make the transition from communism to
icy of _______ , the fundamental restructuring of
the economy and government.
8. Name the nations that are currently trying to
6. In the Soviet Union, groups of peasant families,
adapt to a market economy and describe the spe-
each of which was allowed to keep their home and
cific problems they are facing in their transition.
household goods, a few cattle, and a small plot of
land, worked each _______ .
Section 4 (pages 509“514)
7. Most nations of Eastern Europe had a flourishing
9. Explain the role that the government plays in
_______ , where entrepreneurs and merchants sold
Japan™s economy.
goods illegally.
10. Describe how the approaches to economic growth
8. Under _______ , the government owns many, but
differ in South Korea and Singapore.
not all, of the basic productive resources.

Thinking Critically Math Practice
1. Evaluating Information Do you think five-year Assume that your salary is 500 rubles per month. The
plans could work in the United States? Why or government-controlled price of bread is 10 rubles,
why not? and you buy five loaves each month. What percentage
of your income do you spend on bread? After the
2. Drawing Conclusions What safeguards are in
government deregulates prices, bread costs 25 rubles.
place to ensure that the United States will not
What percentage of your income goes to buy bread?
face an economic downturn as severe as the
How does the inflation affect your standard of living?
Great Depression? List the safeguards on a graphic
organizer like the one below.
Thinking Like an Economist
Explain why firms in the former Soviet Union could
make low-quality products and continue to exist year
after year. What would happen to such a firm in the
United States economy?
3. Sequencing Information Trace Sweden™s transi-
Technology Skill
tion from socialism to capitalism.
4. Drawing Conclusions The Communists prom-
Using a Computerized Card Catalog For one week,
ised people that their system would lead to work-
summarize in your journal news articles you read
ers™ paradises throughout the world. By the early
about events in eastern Europe and other former
1990s, however, communist systems and their
Soviet bloc nations. Focus on articles that relate to
command economies in most countries had col-
those regions working to convert from a command
lapsed. Why do you think communism was such
economy to a market economy.
a failure?
Using a computerized card catalog, find other sources
describing economic events in these areas. Compose
Applying Economic Concepts a journal article analyzing current developments in
either of those regions of the world. Include quotes
1. Capitalism Many nations are attempting to
from the sources you found using the computerized
switch from communism or socialism to capital-
card catalog.
ism. Often, the transition has been quite difficult.
What suggestions would you make to the leaders
of these nations to help ease the transition to
capitalism? Building a Database Review recent issues
of newsmagazines and current newspapers.
2. Economic Growth The “Asian Tigers” have experi-
Using the steps described on page 495, build
enced rapid economic growth and development.
a database of information about current
Do you think they can sustain this growth rate? world developments concerning capitalism
Why or why not? and socialism that the newspapers or the
news magazines mention. Explain to a part-
3. Economic Change Why have many countries ner why the database is organized the way
chosen to change the mix of socialism and capital- it is and how it might be used in class.
ism in their economies in recent years?
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

Setting Up the Workshop
Your teacher will separate you into groups
and provide you with your products. Your group
will represent a command, market, traditional,
or mixed economic system. Read the instructions
for your economic system. Then, read the steps
of the procedures and begin the activity.

Your group has all the “goods” your country
produces (for example, the command economy
Simulating Trade has all the sugar packets). Later, you will use
your goods to trade for the staples you need

in Various that are produced in the other countries.

Economies STEP 2
When your group trades, keep in mind that
From the classroom of . . . the trade value of the products are: 100 lbs
of sugar 100 lbs of tea 50 lbs of cotton
Danielle Dressler
25 lbs of meat.
Mifflinburg High School
Mifflinburg, Pennsylvania
The world contains various types of eco- Begin trading with the other “countries,” paying
nomic systems. Some countries have mar- careful attention to your restrictions on imports
and exports. To satisfy the needs of its popula-
ket economies, some command economies,
tion, the goal of each country is to trade its
some traditional, and still others have product in such a way that it comes as close as
mixed economies. Each type of economy possible to achieving the following mix of
poses its own challenges when it comes to goods:
international trade. In this workshop, you • 75 lbs of meat
will organize into groups and attempt to • 250 lbs of cotton
trade your products for goods produced in • 500 lbs of sugar
another country.
• 300 lbs of tea

Command Economy Market Economy
You are citizens of a country under a com- You are a member of a country that has a
mand economy. Your country has 1,500 pounds market economic system. Your main export is
of sugar to trade. Your government has placed meat”300 pounds in total. (Every member has
many regulations on both imports and exports. an equal share.) You are free to compete in
Three regulations are required during sugar trade against one another. Your task is to
production in order for sugar to be exported. export the meat from your country by compet-
Also, three regulations protecting your citizens ing with the other members of your group.
need to be met in order for products to come Before you begin, describe the characteristics
into the country. Before you begin, organize of your society and decide if you want to
your society (government officials, farmers, implement regulations on imports and exports.
etc.) and list your regulations on imports and
Summary Activity
When the trading has been completed, discuss
Traditional Economy the following questions.
You are members of a society that has a
1. Which “country” came closest to the opti-
traditional economic system. Your country has
mal mix of products? What factors of the
800 pounds of tea to trade. You must decide in
economic system made this possible?
what quantities and with what countries you
2. Which types of economies were least able
want to trade your tea, which is in very low
to achieve a good mix of products? Why do
supply. Before you begin, describe the charac-
you think this is so?
teristics of your society (climate, organization,
leaders, etc.) and organize your group so that
each member has a part in the economy.

Mixed Economy
You are members of a country that has a
mixed economic system. You have 400 pounds
of cotton to trade. Your government does
not have complete control over the
economy, but it places two regulations
on the export of the cotton pro-
duced in your country and two
regulations on imported prod-
ucts. Before you begin,
organize your society
(government officials,
producers, etc.) and
list your country™s
regulations on
imports and

Read to find out how
developing countries
are working to increase their
production and raise the
standard of living of their
people. To learn more about the
economic challenges facing
many nations, view the Chapter
26 video lesson:
Developing Countries

Chapter Overview Visit the Economics: Principles and
Practices Web site at epp.glencoe.com and click on
Chapter 19”Chapter Overviews to preview chap-
ter information.

Buyers and sellers meet at a produce market
in the Vietnamese river town of Hoi An.
Economic Development
Main Idea Key Terms
Developing countries face a number of obstacles that developing country, crude birthrate, life expectancy,
make economic growth extremely difficult. zero population growth (ZPG), external debt, default,
capital flight, International Monetary Fund, World Bank
Reading Strategy
Graphic Organizer As you read the section, complete
After studying this section, you will be able to:
a graphic organizer similar to the one below by pro-
1. State the concern for the plight of the developing
viding at least two reasons why it would probably be
more difficult to bring about change in a traditional
2. Identify the obstacles to economic development.
economic system than in a developed country.
3. Compare per capita GNP among various countries
and regions.
The difficulty of
Applying Economic Concepts
change in a
Life Expectancy Are there any downsides to longer
traditional economy
life expectancies? Read to find out how a longer life
expectancy affects the quality of life in developing

ost of the people in the world today live in
Cover Stor y developing countries”countries whose
average per capita GNP is a fraction of that
he Casualties Don™t Stop W in more industrialized countries. Most developing
T countries are located in Africa, Asia, and Latin
the War Does America.
d mines In many ways, developing economies are similar
Anti-personnel (AP) lan
™s largest
have become the world to other economies of the world. The major differ-
source of war-related ence is that their problems are much greater. Some
According to the In problems faced by developing countries, such as the
d Cross,
Committee of the Re residual effects of war highlighted in the cover story,
ery month
mines kill 800 people ev are so serious that some developing nations may
and another 1,200 are m Mine detecting in never reach their potential.
s a month”one Cambodia
total of 2,000 victim
person every 20 minutes
ability have made anti-
w cost and easy avail
apons of choice in the Interest in Economic
nel land mines the we
d Nations estimates that
loping world. The Unite
deve l
millions of anti-personne
e are currently tens of
than 70 countries . . .
mines buried in more Economists know that all nations are bet-
r every 50 people on
oximately one mine fo
appr ter off when they produce and trade the
earth. . . .
as $3 (U.S.) to produce products in which they have a comparative
nd mines cost as little
La es
e. For every 5,000 min advantage. Even so, the international commu-
up to $1,000 to remov
lled and two are injured. nity™s concern for the developing countries is
ared, one de-miner is ki
humanitarian as well as economic and political.
ainst Land Mines, Augu
”PALM Physicians Ag

Concern for Developing Countries
Industrialized countries of the world often
believe it is their moral responsibility to help those
who have less than they do. Assistance to develop- Greenland
ing countries helps assure the industrial nations of a
stable supply of critical raw materials. In turn, devel-
oping countries also provide markets for the prod- Canada
ucts of industrial nations.
Politics are also important. Despite the dramatic
failure of communism in some countries, various
political ideologies wage a continuing struggle for
the allegiance of developing countries.
United States
Per Capita Income
Today more than 1.2 billion people exist on
an income of less than $1 a day. According to
Figure 19.1, the majority of these people are in
Africa and Asia. The map contrasts the income of Bermuda
the industrialized nations and the developing Barbados
nations, scaling each country to show the size of its Mexico Aruba

total GNP. Recall that GNP is a measure of income, Virgin Islands (US)
while GDP is a measure of output relative to other Cuba Republic Puerto Rico (US)
Trinidad and
countries. Thus, the United States, which has the Honduras Tobago
largest total income in the world, is the largest area Costa Rica Antilles
El Salvador
on the map. Countries with smaller GNPs are Grenada
Venezuela Suriname
scaled accordingly. Colombia
St. Vincent
The map is also color coded to show countries Brazil
St. Lucia
with similar per capita GNPs. When viewed this Martinique (Fr)
Uruguay Dominica
way, the contrast is clearly shown between the Bolivia Paraguay Guadeloupe
industrialized economies of North America, Antigua and Barbuda
St. Kitts and Nevis
Western Europe, and Japan, and the developing
countries of South America, the Caribbean, Africa,
and Asia. The gap between industrialized and GNP Per Capita
developing countries is enormous. If anything, the $27,000 + $1,500 to $3,500
gap is getting larger, rather than smaller.
$23,000 to $27,000 $500 to $1,500

$15,000 to $23,000 under $500

Obstacles to Development $6,000 to $15,000 no data

$3,500 to $6,000
Before examining some of the possible solu-
Source: The World Bank Atlas
tions to the plight of developing countries,
we need to take a closer look at some common
problems and challenges.

Population Growth
One obstacle to economic development is popu-
lation growth. The populations of most developing

Figure 19.1

Gross National Product and Gross National Product Per Capita
Islands (Den)

Isle of
United Denmark Latvia
Man (UK)
Kingdom Lithuania

Channel Islands (UK)
Poland Federation
Germany Slovakia Kazakhstan
France Republic
Belgium Hungary


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