716 Economic and Political Connections The world’s people function in a variety of economic systems. Understanding the relationship between economic decisions and political freedom will enable you to make better choices as a citizen. To learn more about world economic systems and how they affect citizens, view the Democracy In Action Chapter 26 video lesson: Comparing Economic Systems Chapter Overview Visit the United States Government: Democracy in Action Web site at gov.glencoe.com and click on Chapter 26–Overview to preview chapter information. GOVERNMENT ★ ★ ★ ★ ★ ★ ★ ★ ★ ★
Transcript
716
Economic and Political ConnectionsThe world’s people function in a variety of economic systems. Understanding the relationship between economic decisions and political freedom will enable you to make better choices as a citizen.
To learn more about world economic systems and how they
affect citizens, view the Democracy In ActionChapter 26 video lesson:
Comparing Economic Systems
Chapter Overview Visit the United StatesGovernment: Democracy in Action Web siteat gov.glencoe.com and click on Chapter26–Overview to preview chapter information.
Americans benefit from an economic sys-tem that provides great opportunities.However, like all other nations, we mustdeal with the problem of limited re-
sources. Economic systems have developed in theworld to deal with this fundamental economicproblem—scarcity. Scarcity is a condition that ex-ists because society does not have all the resourcesto produce all the goods and services that everyonewants. In dealing with this problem, economic sys-tems address the questions “What should be pro-duced?” “How should it be produced?” and “Forwhom should it be produced?”
All economic systems can be classified intothree major types—traditional, market, and com-mand. In a traditional economy habit and customdictate the rules for all economic activity, deter-mining what, how, and for whom goods and ser-vices are produced. A command economy has acentral authority—usually the government—thatmakes most of these economic decisions. Stateplanning commissions or other agencies deter-mine the needs of the people and direct resourcesto meet those needs. A market economy allowsbuyers and sellers acting in their individual inter-ests to determine what, how, and for whom goodsand services are produced. In a market economythe individual’s decisions are like votes. Con-sumers “vote” for a product when they purchaseit, thus helping producers determine what to pro-duce. Producers determine the best method forproducing goods and services.
Factors of ProductionThe resources of an economic system arecalled factors of production because
economies must have them in order to producegoods and services. They may be grouped intofour categories: land, capital, labor, and entre-preneurs.
Land includes all natural resources such assoil, water, and air. Minerals such as copper or
Capitalist and Mixed SystemsS e c t i o n 1S e c t i o n 1
More MillionairesWASHINGTON, D.C., AUGUST 4, 1997
In 1979 fewer than
14,000 Americans
earned $1 million or
more a year. Today
the number tops
70,000. The newly
rich defy the tradi-
tional stereotypes of
affluence. Many are
average folks who
spend their days toil-
ing for wages. The secret of their wealth is that they
work for a growing number of businesses that re-
ward employees with company stock in addition to
paychecks. “We told them, ‘If we make it, you’re
going to get the rewards,’” says Home Depot co-
founder Bernie Marcus of his workers. Marcus esti-
mates that his company’s success has made about
1,000 of its employees millionaires. “We should be a
model for the free enterprise system,” he says.
Reader’s Guide
Key Termsscarcity, traditional economy, command economy,market economy, factors of production, entrepre-neur, monopoly, profit, mixed economy
Find Out■ What are the characteristics of capitalism that
differentiate it from socialism and communism?■ Why can the economy of the United States be
called a mixed economy?
Understanding ConceptsFree Enterprise What kinds of economic choicesdo individuals make in a free enterprise system?
▲ CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 717Worker surveys industries in Beijing, China.
Home Depot employees
716-721 CH26S1-860053 12/2/04 10:35 AM Page 717
iron ore are land resources. Rich soil for farming isa land resource, as are forests that yield timber.Capital is the means of production—money, fac-tories, heavy machinery—used to produce otherproducts and goods. The furnaces in a steel millthat convert iron ore to steel are capital. Labor ishuman resources—people who produce goodsand services. Factory workers, farmers, doctors,plumbers, teachers, and everyone else who is em-ployed are part of an economy’s labor force. Final-ly, entrepreneurs,—risk takers who organize anddirect the other factors of production to producegoods and services in search of profit—are thefourth factor of production.
Forms of Economic Organization
Three major forms of economic organiza-tion—communism, socialism, and capital-
ism—represent the range of economic systemsthat determine how the factors of production areallocated. Communism is a command system in
which the central government directs allmajor economic decisions. Socialism is apartial command system in which the gov-ernment influences economic decisions.Under capitalism, consumers and privateowners make the economic decisions infree markets.
People have strong opinions about thestrengths and weaknesses of the three prin-cipal economic systems. The authors ofComparative Economic Systems said:
“In evaluating the strengths andweaknesses of capitalism, one is con-fronted with the possibility that thecapitalist system may best sustain thefundamental human values of libertyand freedom of the individual. In-deed, it may even be the only contextwithin which Western democraticpolitical institutions can flourish.”—William Loucks and William
Whitney, 1969
Although people refer to nationaleconomies as communist, socialist, or
capitalist, most countries in the world today havemixed economic systems. Moreover, at any giventime a nation may be moving in the direction of acommand economy or a market economy.
Characteristics of Capitalism In the United States and several industrialcountries, capitalism is the economic sys-
tem. Capitalism is based on private ownership ofthe means of production—the capital—and on in-dividual economic freedom. A capitalist economicsystem is often called a free enterprise system.
In the free enterprise system, people who ownthe means of production are called capitalists. Theowner of a small corner grocery store, the personwho owns a few shares of stock in a huge corpora-tion, industrialists who own large factories or coalmines, and those who own financial institutionsare all capitalists.
Most capitalist economies today have fivemain characteristics. These include private owner-ship, individual initiative, competition, freedom ofchoice, and profit (or loss).
718 CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS
Factors of Production A researcher at Fujitsu—aTokyo-based company—checks data on the control boardof a machine used to grow crystals. Fujitsu specializes in creating communications and electronic devices.Using a product that is familiar to you, explain how each of the factors of production was used inits production.
716-721 CH26S1-860053 12/2/04 10:36 AM Page 718
Private Ownership Capitalist economies de-pend on the right of private ownership of propertyand control of economic resources. Governmentprovides some public services such as road build-ing, water and sewers, parks, and libraries. In addition, the government may own land, as in thecase of national parks.
Capitalism also emphasizes respect for per-sonal property not used in production. The FifthAmendment to the United States Constitutionstates that the government shall not deprive peopleof their property “without due process of law; norshall private property be taken for public use,without just compensation.” The right to inheritproperty is another feature of private ownership ina capitalist system. In a pure capitalist system therewould be no limit on this right. In the UnitedStates, inheritance taxes limit this feature.
Individual Initiative In a capitalist system, thelaw does not prevent anyone from trying to be anentrepreneur. Each year thousands of Americansgo into business for themselves. In 1998–1999, for
example, Americans started over 500,000 newbusinesses. Many of these start-ups were in suchfast-growing fields as microcomputers, bioen-gineering, robotics, electronic communication,and energy.
Competition Another essential aspect of capi-talism is competition. Competition exists whenthere are a number of sellers of a product or serviceand no one seller can exercise control over themarket price. For example, competition existswhen a city has a large number of gas stations that compete with one another for business. Thegas station that offers the best combination ofprice, quality, and service is likely to get the largestshare of the business. Competition helps assurethat the consumer will get products of goodquality at low prices.
A monopoly is the opposite of competition.Monopoly exists when an industry includes onlyone seller, resulting in no competition at all.Oligopoly, a situation where there are only a fewlarge firms in an industry, is more common.
CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 719
Critical Thinking The table shows economic systems in theory. In practice there are no pure capitalist or communist systems, and socialist systems vary from nation to nation. Who or what authority allocates the factors of production in each of the three systems?
Communism Socialism Capitalism
Ownership ofResources
Allocation ofResources
Role ofGovernment
All productive resources are government owned
and operated.
Government makes all major economic
decisions.
Centralized planning directs all resources.
Productive resources are privately owned and
operated.
Government may promote competition and provide
public goods.
Capital for production is obtained through the lure of profits in the
market.
Basic productive resources are government owned and
operated; the rest are privately owned and
operated.
Basic productive resources are government owned and
operated; the rest are privately owned and
operated.
Government directs the completion of its
economic plans in key industries.
Government plans ways to allocate resources in key
industries.
Economic SystemsEconomic Systems
716-721 CH26S1-860053 12/2/04 10:36 AM Page 719
Businesses in such an industry often competefiercely with each other, but there are also timeswhen they are tempted to limit competition by di-viding the market or agreeing to raise prices. Toensure competition in free enterprise economies,governments pass laws against monopolies that tryto control their markets.
Freedom of Choice Buyers, sellers, and work-ers all have freedom of choice in a capitalist system.Consumers can buy the products they can affordfrom whatever companies they choose. At thesame time, businesses are free to provide whateverlegal goods and services they think people want.Workers can decide where they will work and whatthey will do. When new jobs open up at better pay,workers may move from one job to another.
Profit or Loss The capitalist system is based onthe profit motive. Profit is the difference betweenthe amount of money used to operate a businessand the amount of money the business takes in.Profits are the fuel that keeps a free enterpriseeconomy running.
Profits are part of the reward to the entrepre-neur for assuming the risk. They also pay for futureexpansion and provide for unexpected events.Business owners use some profits for their own in-come. In addition, they may reinvest some of theseprofits in their business or in some other company.
In a capitalist economy, the risk of loss accom-panies the potential for profits. Entrepreneursmust be willing to take chances and risk losses tobe successful in a capitalist system.
Changing Face of CapitalismThe economic system of the United States isbased on capitalism, but it includes ele-
ments of a command economy. In the UnitedStates, government has played a growing role inthe economy as a protector, provider of goods andservices, consumer, and regulator.
Regulation and Social Policies For its first100 years, the United States government played alimited role in the national economy, and businesswas largely unregulated. By the late 1800s powerful
720 CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS
Food From the ’Hood
Making a DifferenceMaking a Difference When biology students atCrenshaw High Schoolplanted a small garden
next to their football field, theyhad no idea they were also plant-ing the seeds for a successfulbusiness. The first year’s harvestof herbs and vegetables, sold atlocal farmers’ markets, generat-ed $600 for college scholarships.The rest of the produce went tothe neighborhood’s homelesspeople.
After a successful first year,students at the Los Angeles highschool decided to create theirown business. They called it FoodFrom the ’Hood. Using herbs andproduce from their garden, theyconcocted their own all-naturalsalad dressing called Straight Out’the Garden. The dressing was ahit and is now found on the
shelves of more than 2,000 nat-ural-food stores throughout thenation.
The company is run just likeany other successful company.Students who want to work forthe company must apply for jobsjust as with any other job. Thescreening process is rigorous. Ap-plicants must write essays andparticipate in an internship pro-gram to obtain a position.
Profits from the salad dress-ing are used to run the businessand establish scholarships. One-fourth of the vegetables growneach year are donated to thehomeless. The student-run com-pany has earned an achievementaward from Newsweek magazine,and has been visited by suchwell-known dignitaries as Britain’sPrince Charles.
Food Fromthe ’Hoodsalad dress-ing label
716-721 CH26S1-860053 12/2/04 10:36 AM Page 720
industrialists began to dominate the economy,squeezing out competitors. Because immigrationbrought an abundance of laborers, wages fell.Families with low incomes were forced to allow theirchildren to work long hours in terrible conditions.
As a result of these conditions, public attitudestoward business changed. Both the states and thenational government began to adopt regulatory leg-islation to ensure competition and promote publicsafety. Today the government plays an importantrole in regulating business, labor, and agriculture.
In the 1930s the federal government began totake responsibility for the well-being of individu-als and for the financial condition of the nationthrough fiscal and monetary policy. Since then thegovernment has assumed increasing responsibilityfor social policies in housing, transportation,health, education, and welfare. As a result, theUnited States today has what economists call amixed economy, or modified capitalism.
Capitalism Around the World In Japangovernment works closely with business to limitforeign competition in the domestic market. Thegovernment of Japan spends relatively little onwelfare, and taxes are low.
Singapore, Taiwan, and South Korea are threeother Asian capitalist countries that have made re-markable progress in the last 20 years. The govern-ments of Singapore and Taiwan also have a close
relationship with private business. Governmentplanning redirects resources into target industries.
Generally Western European economies aremore controlled and regulated than that of theUnited States. However, many Western Europeangovernments have moved away from central plan-ning toward more free markets in recent years.Eastern European countries have privatized a largepercentage of their industries.
Sect ion 1 Re v iewSect ion 1 Re v iewSect ion 1 AssessmentSect ion 1 Assessment
Free Enterprise One of the issues debated by advocates of a planned economy and thosewho support a free market economy is whetherthere can be democratic freedoms such asfreedom of speech without having economicfreedom. Write an essay explaining the connection between economic freedom andcivil liberties.
Checking for Understanding1. Main Idea Use a graphic
organizer like the one on the right to identify five characteristics of capitalist economies.
2. Define scarcity, traditional economy, commandeconomy, market economy, factors of production,entrepreneur, monopoly, profit, mixed economy.
4. What are the three forms of economic organiza-tion that have emerged in the world?
5. How has the U.S. government played a growingrole in the nation’s economy since the late 1800s?
Critical Thinking6. Making Inferences How does the free market
system promote freedom of choice for con-sumers in the United States?
CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 721
Capitalism
Old Money Money can be accidentallytorn or damaged, or it can simply wear out frombeing handled too much. With normal use, $1and $10 bills last on average about 18months, $5 bills last about 15 months, and$20 bills wear out after about 2 years. Higherdenominations don’t circulate as frequently aslower denominations, so they tend to lastlonger. For example, a $50 bill lasts about 5years, and a $100 bill wears out in about 8years. On average, coins last 25 years.
716-721 CH26S1-860053 12/2/04 10:36 AM Page 721
By the late twentieth century many develop-ing countries were moving toward indus-trialization. As these nations developedindustry and trade, they faced similar
problems but dealt with them in a variety of ways.Turkey, for example, increased its defense spendinginstead of its spending for education. In 2000Turkey allotted $90 per student, far below the levelspent by developed countries such as Greece ($240per student) and Germany ($817 per student). Suchgaps between rich and poor nations continued to bea concern to world leaders.
Developing and Newly Developed Nations
Developing nations are states with little orno industry. The majority of these countries
are largely agricultural. A few, such as Saudi Arabiaand Kuwait, are rich, usually because of oil. Manydeveloping nations are former colonies of WesternEuropean nations that gained independence afterWorld War II. Much of the world’s population is indeveloping nations.
Newly developed nations are states that havehad significant or rapid industrial growth in re-cent years. These countries, mostly in Eastern Eu-rope, the Middle East, Asia, and South America,have begun to influence the world economy. Theyalso face economic choices that will determinetheir rate of growth and the shape of their eco-nomic systems.
The Economic ChoicesSome developing and newly developednations have chosen to rely on free mar-
kets, trade, and contacts with the West to devel-op their economies. Their economic systemslean toward capitalism. The free market deter-mines what goods and services are producedand at what prices. They are open to investmentfrom capitalist countries.
Emerging EconomiesS e c t i o n 2S e c t i o n 2
Turkish Schools Fall Short YENIDOGAN, TURKEY, SEPTEMBER 12, 2000
This week 14 million chil-
dren started the school
year in Turkey. But 1 million
more went to work or stayed
home instead. Why? The
World Bank reports that
schools in most Turkish vil-
lages only go to the fifth
grade. Poor village families
cannot afford to bus their
children to urban schools.
Even in urban areas such as Istanbul or Ankara,
school expenses are daunting. Mandatory school uni-
forms cost up to $80 each, and parents must pay for
textbooks and supplies as well. Those who can pay get
overcrowded classrooms and underpaid teachers. Ed-
ucation union president Alaatin Dincer says, “Turkey
needs 190,000 more teachers and 106,000 more class-
rooms and only then can we have 30 kids to a class.”
Turkish childrenwork in the fields.
722 CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS
Reader’s Guide
Key Termsdeveloping nations, newly developed nations, welfare state, nationalization
Find Out■ What are the important economic choices that
developing and newly developed nations mustmake?
■ How have economic choices affected the devel-opment of nations in Latin America and Africa?
Understanding ConceptsComparative Government What are the differ-ences and similarities of socialist governmentsand communist governments?
722-727 CH26S2-860053 12/2/04 10:37 AM Page 722
Other developing and newly developed na-tions have chosen socialism as a model for theireconomies. Under socialism, government ownssome factors of production. As a result, the gov-ernment controls the production and distributionof some products. Under communism, the govern-ment owns all factors of production and takes a much more direct role in deciding what,how, and for whom to produce. Other importantdifferences distinguish the command elements indemocratic socialist economies and communisteconomies.
One difference is that under democratic so-cialism the voters can replace those in command of the economy and the government. In a commu-nist country there is only one party, and the peoplehave no control over those who lead the economy.
Another difference is that most socialist coun-tries use the command system to control only partsof their economy. The governments in these coun-tries operate such important industries as miningand transportation. They may not operate industriesthat produce food, clothing, or household items. In
contrast, in communist economies, governmentplanners control every part of the economy.
Socialists believe that wealth should be distrib-uted as equally as possible. In practice, they havetried to achieve this goal by making basic goodsand social services equally available to everyone.Modern socialist governments also provide a widearray of so-called “cradle-to-grave” benefits fortheir citizens. Usually these benefits include freehospital, medical, and dental care; tuition-free education through college; generous retirementbenefits; and low-rent public housing. Other government-provided services may include mater-nity allowances, free treatment for alcohol anddrug abuse, and generous unemployment pay-ments.
Critics of socialism claim it creates a welfarestate that discourages people from producing goodsand services and makes them overly dependent ongovernment. Socialists answer that every personshould be able to receive such basic necessities asfood, shelter, clothing, and medical care. Cradle-to-grave services do not come free, however.
CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 723
Critical Thinking Changes in development indicators are apparent as countries work toward developing industrial economies. Which measures of development increase as countries become more industrialized?
Sources: CIA, The World Fact Book 2003 (Washington: 2003); The World Almanac and Book of Facts 2003 (New York, NY: 2003).
Bangladesh
Bulgaria
Chile
Ethiopia
Ghana
Honduras
Malaysia
Turkey
24
69
85
17
38
52
57
74
$1,700
$6,600
$10,000
$750
$2,100
$2,600
$9,300
$7,000
$16.5
$10.3
$40.4
$5.3
$7.2
$5.4
$47.6
$118.3
43.1%
98.6%
96.2%
42.7%
74.8%
76.2%
88.9%
86.5%
2.06%
�1.09%
1.05%
1.96%
1.45%
2.32%
1.86%
1.16%
CountryPercentUrban
AdultLiteracy Rate
PopulationGrowth Rate
External Debt(billions of U.S. $)
GDP per Capita(U.S. $)
Developing Countries
COMPARING GovernmentsCOMPARING Governments
722-727 CH26S2-860053 12/2/04 10:37 AM Page 723
of land or establishment of agricultural com-munes, and a welfare system.
Socialist governments often take control ofindustry—usually selecting the country’s most important industries—through a process callednationalization. When nationalization occurs indemocratic countries, the government pays privateowners of the businesses that it takes over. In lessdemocratic countries, socialist governments havetaken over private property with little or no com-pensation to the owners.
Nationalization in Latin America Becauseof their colonial history or their reliance on foreigninvestment, many developing nations have had in-dustries that are foreign-owned. This is especiallytrue in Latin America. Nationalization of these in-dustries by the government has been both an eco-nomic policy and a gesture of anticolonialism. Inaddition to foreign ownership of business, manydeveloping countries have been ruled by wealthyelites. In these states, the poverty of masses of peo-ple could ignite revolution and civil war at almostany time.
724 CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS
Socialist governments require citizens to pay veryhigh taxes to pay for social services. Businesses insocialist economies are also heavily taxed.
Searching for Economic Answers
Many developing and newly developed na-tions have sought economic progress by
adopting socialist economic policies. These poli-cies, often with little success, aim to raise the stan-dard of living of the large masses of poor people.Socialist governments in these countries often usecentralized planning, or government control ofthe economy, to an even greater extent than devel-oped socialist nations do. They believe only cen-tralized planning can achieve rapid industrialgrowth. In many of these nations, authoritariangovernments take over economic planning. Manyof these governments focus on welfare and educa-tion programs for the poor.
These socialist governments often turn to na-tionalization of existing industries, redistribution
Attracting Investors Chilean salmon farmers, such as this one, raise a high qualityproduct. U.S. salmon farmers complain thatthey are losing market share to the Chileanfarmers. The Chilean government promotesease of accessibility and pro-business economic policies to enhance internationaltrade. Why might investors consider a government’s stability before doing business with a country?
Open for Business!
This ad, sponsored by the Chilean TradeCommission, encour-ages internationalbusiness investmentin Chile.
722-727 CH26S2-860053 12/2/04 10:37 AM Page 724
The nation of Chile reflectsthe difficulties of a developingnation attempting to build a so-cialist democracy. In 1970Chileans elected Salvador Al-lende as president. Allende, aMarxist socialist, took quicksteps to nationalize businesses,including American coppermining companies. WealthyChileans, frightened by Al-lende’s ties to Castro’s Cuba andthe government’s efforts to na-tionalize industries, withdrewtheir money from Chile and in-vested it in other countries. As aresult, the Chilean economyspiraled downward. In 1973Chilean military leaders work-ing with the CIA led a coupagainst Allende.
After Allende was founddead, a new government, led by General AugustoPinochet, took over. Pinochet dissolved the con-gress, canceled civil liberties, and issued a new con-stitution. He also encouraged foreign investment.Inflation fell, consumer goods became availableagain, and the economy prospered. Mounting pop-ular pressure against Pinochet, however, forced himto hold elections in 1988. The new leaders sincethen have increased government spending on edu-cation, health, and housing. The economy of Chilehas improved, and the nation is interested in join-ing the North American Free Trade Agreement (seeSection 4).
Agricultural Communes Until recent gov-ernment moves toward free enterprise, Israel had amoderately socialist economy. In the early 1900s,Jewish immigrants brought many European so-cialist ideas to the area that is now Israel. They builtcollective agricultural communes, or kibbutzim.In these communes, wealth was held in commonand profits were reinvested in the settlement aftermembers had been provided with food, clothing,shelter, and medical services. Since Israel’s found-ing in 1948, the communes have allowed some pri-vate property. Today, the kibbutzim still contributeto Israel’s economy, although their members makeup a small share of the country’s population.
Economic Development in Africa Afterindependence, many African nations tried to de-velop economies based on one cash crop or one re-source for trade. Promoting the export of cashcrops and raw materials while trying to industrial-ize did not produce sufficient capital. Seekingmore funds for development, African nationsturned to foreign governments and banks forloans. Some governments in Africa followed a cap-italist model and developed close ties to the West.Others organized socialist economies.
Beginning in the 1970s, droughts, growingpopulations, lack of capital, and falling worldprices for their exports weakened most Africaneconomies. African nations south of the Sahararelied heavily on foreign help, accumulating $130 billion worth of debt by the 1980s. Risinginterest rates and economic stagnation com-pounded the region’s debt, which reached $227billion in 1996.
The World Bank identification of 33 Africancountries as Heavily Indebted Poor Countries(HIPC) provides them with some aid, but it is notenough. In 1996, sub-Saharan nations were paying$1.30 toward debt for every $1.00 received in aid.A movement to cancel Africa’s staggering debt has gained momentum around the world. Sup-porters argue that most African nations’ current
CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 725
Restructuring and Profiting
Modernization A liberalization of many African economies hasopened up those countries to private foreign capital investment.Foreign investors press those African countries, like Nigeria, to establish more efficient financial institutions. How does modern-ization of economic infrastructure, such as banks, helpAfrican countries to develop?
722-727 CH26S2-860053 12/2/04 10:37 AM Page 725
Socialism’s Practical ProblemsSocialist ideology is losing ground in thedeveloping world because several practical
problems have caused socialism to fail to live up toits promises. First, a primary need for developingeconomies is capital investments. The quickestroute to capital is through foreign investors. Yetbanks and private investors have been cautiouswhen investing in developing nations. A majorconcern is whether the emerging economy willhonor its obligations. Free market economieswithout a threat of nationalization of businessesattract capital. Economies based on a Marxistmodel do not.
Second, the failure of large-scale state planningto meet the needs of the consumers in Eastern Eu-ropean nations raises concern about socialism’sability to do so in other regions. Developing nationshave large populations with basic consumer needs.Failure to meet these needs would risk revolt.
Finally, Western governments, particularly theUnited States, have exercised influence and pres-sure in favor of a combination of free markets anddemocracy in developing nations. The growing in-terdependence of nations in a global economy anda global communications network have made re-sistance to the West’s economic leadership diffi-cult, if not futile. Meanwhile, governments inindustrialized nations have been willing to acceptsome government planning.
debt is so large that they will continue to pay moretoward debt service than for health care and devel-opment unless their debt is canceled. Opponentsargue that unless these nations end corruption,debt cancellation will only restart the debt cycle.
Seeking Investment Moscow’s homeless citizens erected tattered tents on the lawn of theRossia Hotel near Red Square in 1990. Govern-ment leaders appealed to the West to save thesinking Russian economy. Western investors hesitated, not knowing how far the Russian officials would move toward free markets. Why do investors prefer free market economies?
An Ailing Economy
Sect ion 2 AssessmentSect ion 2 Assessment
Comparative Government Review the charac-teristics of economies under socialist govern-ments and under communist governments.Create an organizational chart that illustratesdecision making under each of these types ofgovernment.
Checking for Understanding1. Main Idea Create a graphic organizer like the
one below. In the left box, identify the economicissues facing developing countries. In the rightbox, list policies some have adopted to promoteeconomic progress.
2. Define developing nations, newly developed nations, welfare state, nationalization.
3. Identify centralized planning, kibbutzim.4. Why have many Latin American industries been
foreign-owned?5. What factor contributes to socialism in Africa?
Critical Thinking6. Making Comparisons Analyze the economic
choices that developing and newly developed nations must make in an increasingly interde-pendent global economy.
726 CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS
PoliciesIssues DevelopingCountries
722-727 CH26S2-860053 12/2/04 10:37 AM Page 726
CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 727
toto
SHOULD THE UNITED STATESINCREASE FOREIGN AID?
Foreign aid is a very small percentage of the federal budget. However, most Americansbelieve that we spend too much on foreign aid. When the nation is in an economic
recession, foreign aid comes under strong criticism.
FOREIGN AID POLICIES
United States foreign aid policies expanded in 1948 with the Marshall Plan, designed to helpWestern Europe recover from World War II and tobuild strong U.S. trading partners that supporteddemocracy.
Most recently the newly free nations of EasternEurope began to receive American aid. When Rus-sia struggled after the collapse of communism,many believed that the United States had an oppor-tunity to influence the growth of democracy by eco-nomic support of that country. Others believed thataid should be given according to Russia’s commit-ment to establishing a free enterprise economy.
Today most people believe that foreign aid is asignificant portion of the federal budget, yet it repre-sents less than 1 percent of total federal spending.
RECENT AID ARGUMENTS
Some opponents of foreign aid say that it oftengoes to foreign governments that provide little relief
for the poor. Other critics point out that aid may actually hinder foreign economic development. Forexample, food aid may depress the prices of agricul-tural products, thus ruining the developing nation’sfarmers. Finally, some critics argue that the UnitedStates is no longer an economic giant that can afford foreign aid.
Defenders of foreign aid believe that there is amisconception that foreign aid “represents a massiveoutflow of dollars from the United States.” Actually,most of the money appropriated for foreign aid returns to the United States as foreign nations buy Americanproducts. Another argument for foreignaid is that it con-tributes to the sta-bility of developing nations, therebyprotecting the security of the United States.
How much should Americans be willing to investin the development of foreign economies? Is foreignaid a necessary investment for world stability?
KEY ISSUES✔ Should foreign aid be an important part of na-tional security policy?✔ How should the nation determine when and forwhom foreign aid should be spent?
Debate Divide the class into three to five teams.Have the first team research a recent U.S. foreignaid budget and serve as a panel to decide aid to begiven. Each of the other teams should represent a na-tion seeking aid and present their cases to the panel.
Vote The first team should consider each requestindividually. After deciding the amount of aid on acase-by-case basis, add up the total assistance.
Debating the IssueDebating the Issue
WHAT PERCENTAGE OF THE FEDERAL BUDGET SHOULD BE FOREIGN AID?
722-727 CH26S2-860053 12/2/04 10:38 AM Page 727
Many nations today are attempting to make the transition from com-mand economies to a market econ-omy. The two most significant
nations doing so are are Russia and China.
Transforming the RussianEconomy
The Soviet Union collapsed in 1991 becauseits Communist leaders could not keep the
economy going. Since then Russian leaders havebeen attempting to build a free enterprise systemthat can compete effectively in the global economy.
Collapse of Soviet Communism Begin-ning in 1917 the Soviet Union built the world'sleading communist economic system. AlthoughSoviet leaders called their system a socialist econo-my, the Soviet system was different from the sys-tems of democratic socialist countries. In theSoviet Union, the Communist Party closely con-trolled the government and made almost all theeconomic decisions. With few exceptions, enter-prises were state-owned and state-operated. TheSoviet government also controlled labor unions,wages, and prices.
Under this system, about 98 percent of all Soviet farmland was also under government control. About two-thirds of this farmland con-sisted of state farms. State farms are farmsowned by the government and run like factories,with the farmworkers being paid wages. The remaining one-third of Soviet farmland consist-ed of collective farms. On a collective farm,the government owns the land but rents it tofamilies. Farmworkers had little incentive towork hard, and inefficiency was widespread.
The huge, oppressive state bureaucracy that managed every detail of Soviet productionbred economic stagnation. When the last Communist leader of the Soviet Union,
Major Economies in TransitionS e c t i o n 3S e c t i o n 3
Russian Economy Stumbles MOSCOW, RUSSIA, JULY 14, 2001
Adjustment from
a government-
controlled economy
to a combination of
socialism and capi-
talism has left many
Russians in various
stages of economic
desperation. Over 80
percent of the population makes less than $70 a month.
In buying power, the Russian ruble has lost about 18
percent since 1999. Even when they have the money,
the average Russian often finds consumer products,
including daily necessities, unavailable.
Signs of progress, however, are beginning to show.
Industrial output has grown almost 8 percent in the last
two years, unemployment has fallen by 11 percent, and
inflation is down by almost 57 percent.
Workers face hardships
728 CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS
Reader’s Guide
Key Termsstate farm, collective farm, gross national product
Find Out■ How did economic problems lead to the
collapse of the Soviet Union? ■ What are some of the obstacles to change
faced by Russia?
Understanding ConceptsComparative Government How did the Commu-nist Party control the government and economy ofthe Soviet Union?
728-731 CH26S3-860053 12/2/04 10:46 AM Page 728
Mikhail Gorbachev, came to power in 1985,he tried to implement economic reforms whilekeeping the Communist form of authoritarian government. The Soviet economy, however, contin-ued to decline. Beginning in the mid-1980s,the Soviet Union’s gross national product (GNP),the annual sum of all the nation’s goods and services, was growing by only 2 or 3 percent a year.In 1991, amidst antigovernment demonstrations,Gorbachev resigned as Communist Party leader.Several Soviet republics seized the opportunity todeclare their independence, effectively ending theSoviet Union.
Incomplete Reforms Since the collapse ofcommunism in Russia, the country has tried tomove toward capitalism and democracy. Russianleaders have ordered reforms aimed at breakingup the huge, inefficient industries that wereowned by the state under the communist system.Stock markets have been created to give people achance to invest in new companies. The govern-ment has also sought to simplify the tax laws andend corruption in banking and finance.
Progress has been slow, however, and evenafter some reforms the country is being runmuch as it was during the communist years—and by many of the same people. For example,Russian president Vladimir Putin, whom theRussian people elected in 2000, is a former lieu-tenant colonel of the KGB, the Soviet secret po-lice. After taking office, Putin prescribed the“strengthening of the state” as the cure for manyof Russia’s economic ills.
In the last few years, efforts at democratizationin Russia have slowed. Recently, for example, thegovernment shut down the country’s only majorindependent television station. In December 2003,international observers questioned the results ofRussia’s parliamentary elections. The Organizationfor Security and Cooperation in Europe stated thatprior to the election, the Russian media grantedunequal, favorable treatment to the pro-state Unit-ed Russia Party. The United Russia Party went onto win more than 37 percent of the parliamentaryvote, and therefore it now controls 37 percent ofthe seats in the Duma, the Russian parliament.This number of seats is approximately twice aslarge as that held by the United Russia Party priorto the election.
Obstacles to Change Several factors explainthe slow pace of change in Russia. One has beenresistance to reform by a group of former Com-munist bureaucrats. As the Soviet Union collapsed,these officials used inside knowledge of policychanges to buy state properties, such as newspa-pers, banks, and oil and gas companies, at bargainrates. As a result, they became very wealthy andnow control many of Russia’s resources. Throughbribes, mutual favors, and other strategies, theyhave found ways to slow reform to protect theirnewly acquired wealth and power.
Another factor may be a lack of commitmentto democracy among Russian citizens. Through-out their history, Russians have generally experi-enced order imposed from above. Public opinionpolls have shown that the vast majority of Rus-sians—79 percent in one poll—express regret forthe breakup of the Soviet Union and respect forformer Communist leaders such as VladimirLenin. One member of the Russian Parliament explains that it will not be easy to overcome 70years of Communist Party authority and centuriesof czarist autocracy before that: “The totalitarianmind-set is still an organic part of public con-sciousness.”
Russia’s attempt to transform its economyillustrates the close relationship between capital-ism, democracy, and the rule of law. As NobelPrize-winning economist Milton Friedman states:
“Economic freedom is an essential requisitefor political freedom. By enabling people tocooperate with one another without coer-cion or central direction, it reduces the areaover which political power is exercised. . . .I know of no example . . . of a society thathas been marked by a large measure ofpolitical freedom, and has not also usedsomething comparable to a free market toorganize the bulk of economic activity.”—Milton Friedman, 1982
Changing the Chinese EconomyAfter World War II, the Chinese Commu-nist government followed the Soviet model
and created a planned economy. Over time, how-ever, China found itself unable to compete eco-nomically with the market-based economies of its
CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 729
728-731 CH26S3-860053 12/2/04 10:41 AM Page 729
Hosting a Foreign Exchange Student
D oes your school participate in a student ex-change program? Has your family or anyonewhom you know ever hosted a high school
student from another country?Families who support or participate in intercul-
tural exchange programs believe that the experi-ence promotes understanding and respect amongthe world’s people. Hosting an exchange studentprovides your family with a chance to learn first-hand about another country, its government, andits culture. It also allows you to share your way oflife with the visiting student.
Intercultural programs vary; families may host astudent for a summer, a semester, or a year. Visit-ing students generally are members of the junior or senior class in high school. Some communities,however, participate in exchange programs for
college students, teachers, orelementary school students.Host families may have members who are the sameage as the visiting student. Families with young children, couples with no children, andsingle people, however, alsohost exchange students.
Organizations that sponsor exchange programsprovide orientation meetings and staff to helpmake the experience valuable for everyone.
Conduct an Interview Ask a foreign exchangestudent about his or her experiences in theUnited States and at home. Also discuss differ-ences in forms of government the students haveexperienced.
A C T I V I T YA C T I V I T Yarticipating
I N G O V E R N M E N T articipating
I N G O V E R N M E N T
neighbors like Taiwan, South Korea, Japan, HongKong, and Singapore.
In the late 1970s, China’s Communist leadersbegan dismantling the centrally controlledeconomy and encouraging private enterprise. Inrecent years the Chinese economy has started togrow between 5 and 8 percent per year, and in2002 China was estimated to be the world’s fifthlargest exporter. According to Nicholas Lardy ofthe Brookings Institute, “The pace of China’s industrial development and trade expansion isunparalleled in modern economic history.”
Reasons for Rapid Development China’spopulation of 1.3 billion provides a large laborpool. The average factory wage is about 40 centsper hour. As a result, China has become the centerfor low-cost production for companies all over theworld. Eighty percent of the shoes sold in theUnited States, for example, are made in China.
The Chinese government has promotedmanufacturing by giving foreign companies taxbreaks and cheap land. The government has alsospent billions on highways, ports, and fiber-optic
communications to assist manufacturers. ThePearl River Delta area of China, for example, hasbeen turned into huge manufacturing zones. Oneof these zones alone has 22,000 factories with morethan 4 million workers.
Economic, Not Political, Change TheChinese government is attempting to move from acommand to a market economy while maintainingan authoritarian political system controlled by theCommunist Party. China’s former president, JiangZemin, recently stated, “Should China apply theparliamentary democracy of the Western world . . .the result will be great chaos.”
Experts disagree about whether the currentpolitical system can keep up with the dramaticchanges in society being created by the economicboom. The nation’s middle class is already at 130million people and is expected to grow to 400 mil-lion within a decade. In the old days of commu-nism, such people would be punished by theCommunist Party as a “counterrevolutionary”threat. In 2000, the Party’s General Secretarystunned party old-timers by officially inviting
730
A foreign exchangestudent with hishost family
728-731 CH26S3-860053 12/2/04 10:41 AM Page 730
Sect ion 3 AssessmentSect ion 3 Assessment
representatives of the new middle class to join theParty. More recently, the Party invited private en-trepreneurs to join its ranks.
One danger to the Communist Party is thatthe growing middle class will want to have moresay in how China is governed. Experts note thatfor the moment there appears to be an unspokendeal. As long as the Party can keep the economybooming, then the Communists can keep tight con-trol over politics. If economic prosperity begins tofalter, however, the Party’s authority might weaken.
Another danger is that China remains a poorcountry. Two-thirds of Chinese still must live onless than one dollar a day. In addition, more than26 million workers have lost jobs as old state-owned industries have closed down. Unemployedworkers, as well as farmers who are no longerneeded due to new agricultural methods, arepouring into the cities. This is creating a new classof urban poor angry with the government.
Finally, government corruption has become abigger problem than ever. Without political re-form, Communist Party members are able to use their positions to gain unfair advantages in thebooming market economy while remaining unac-countable to the people. For instance, officialsmight buy natural resources at fixed governmentprices and then sell them at a huge profit on theprivate market. They might also close a state fac-tory, fire the workers without pay, and then sell theassets. Anyone who objects could be arrested.
Impact on the United States Economicchanges in China are having a huge effect onAmericans. Trade with China is opening newmarkets for American goods and new places forAmerican corporations to expand. In 2002 theUnited States invested over $3.5 billion in U.S.parent companies and their foreign affiliates thatare operating within China’s industrial economy.These changes are also creating new sources of in-come for American lawyers, shippers, truckers,and many others. At the same time, however,many American manufacturers in areas like tex-tiles, furniture, and electronics have gone out ofbusiness or moved abroad because they cannotcompete with low Chinese labor costs. One studyestimates that at least 760,000 U.S. manufacturingjobs have gone to China in the last decade.
Finally, some experts worry that an economi-cally strong China might become a dangerouspolitical and military rival if the United Statesdoes not maintain favorable relations with theChinese government. China’s attraction as alucrative area of economic investment and theUnited States’ goal to promote democratic politi-cal practices to a repressive government createstension between the United States and China.Other political observers argue that the economicdevelopment of China will create new opportu-nities for American business and could encouragethe Chinese government to extend greater rightsto its people.
CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 731
Comparative Government Before the 1980s,the Soviet economy was under the control ofgovernment planners from the CommunistParty. Create a political cartoon that illustratesone of the problems that centralized planningcreated for the Soviet economy. Share yourcartoon with your classmates.
Checking for Understanding1. Main Idea Use a graphic
organizer like the one here to identify four reasons for China’s rapid economic growth.
2. Define state farm, collective farm, gross nationalproduct.
3. Identify Mikhail Gorbachev, Vladimir Putin.4. What was the main source of agricultural
problems in the Soviet Union?5. What events in 1991 led to the collapse of the
Soviet Union?
Critical Thinking6. Analyzing Information How does the growing
Chinese middle class threaten the currentgovernment in China?
China’sgrowingeconomy
728-731 CH26S3-860053 12/2/04 10:41 AM Page 731
In today’s interdependent world, there are many forms of international economicactivity. Participants in the global economyrange from individuals who may invest
directly in foreign companies or real estate togiant multinational corporations that employ tensof millions of workers. Global economic activitiesinclude investments, banking and financial services, and currency exchange. The major activ-ity in the global economy is trade among nations.
International Trade Since the end of World War II, the UnitedStates has been a dominant actor in inter-
national trade. Congress and the president areconstantly under pressure to manage trade policyin ways that will promote the American economy.
Purpose of Trade Nations engage in interna-tional trade for several reasons. One is to obtaingoods and services they cannot produce them-selves. For example, the United States buys, or im-ports, industrial diamonds from other countriesbecause we do not have deposits of such minerals.The United States sells, or exports, computers andcomplex weapons like jet fighters to countriesthat do not have the technology to make theirown.
Another reason nations trade is compara-tive advantage. This economic principle saysthat each country should produce those goods it can make more efficiently and purchase thosethat other nations produce more efficiently.When nations specialize in goods they canproduce most efficiently, the total world pro-duction is greater. This means that the total cost of all products is less, and therefore, theaverage cost of any product is less, benefiting all consumers.
Finally, nations trade to create jobs. Forinstance, the global market for automobiles is much larger than the market in the United
The Global EconomyS e c t i o n 4S e c t i o n 4
Stock Exchanges Merge LONDON, ENGLAND, MAY 4, 2001
The stock ex-
changes of Eng-
land and Germany
merged yesterday,
creating Europe’s
largest market. Head-
quartered in London,
the exchange will
allow equal access to
investors from Great
Britain and Germany.
The new market will be known as the International
Exchange. The merger appears to be the first step in
creating a single European stock market. The stock
markets of Italy and Spain also have signed prelimi-
Find Out■ Why do nations develop trading blocs and
regional trade agreements?■ What are the four types of trade policy?
Understanding ConceptsGlobal Perspectives How is the global economymaking nations interdependent?
732-739 CH26S4-860053 12/2/04 10:42 AM Page 732
States alone. There will be more jobs for Americanautoworkers if American automakers can sell theirproducts abroad.
Barriers to International Trade Unre-stricted international trade promotes efficientproduction. At the same time, it can threatendomestic industries and the jobs of workers inthose industries. As a result, policymakers in everynation are often under pressure to limit or controlinternational trade. National governments useseveral methods to restrict international trade.
One trade barrier is tariffs, or taxes placed onimports to increase their price in the domesticmarket. The United States recently threatened toimpose stiff tariffs on some Chinese goods ifChina did not end the illegal copying and distrib-ution of U.S. intellectual property like music andvideo compact discs by Chinese bootleggers.
Another barrier is quotas. These are limits onthe quantities of a foreign product that may beimported. The United States placed quotas on theimportation of Japanese cars in the 1970s in an
effort to protect the jobs of American autoworkers.The United States also has import quotas on suchproducts as peanuts, dairy products, sugar, andtextiles.
Countries may also use non-tariff barriers(NTBs) to limit or control unwanted imports.These are very strict health, safety, or other regu-lations that must be met before a foreign productcan be offered for sale in a country. The Japanese,for example, have protected their automakers byrequiring higher fuel efficiency standards andexhaust emission regulations on imported auto-mobiles. This makes it harder for a U.S.-based carmanufacturer to sell a car produced in the UnitedStates in Japan. New assembly requirements cut into profits and make Japan a less attractivemarket for U.S. automobiles.
Finally, countries may use embargoes to totallybar trade with a specific country. An embargo is acomplete prohibition of trade by law, and the useof one is considered an extreme measure. Embar-goes are often employed for political rather thaneconomic reasons.
CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 733
Critical Thinking The global economy is expanding as more middle- and low-income countries participate in international trade. What generalizations can you make about the main trading partners of the countries shown here?
United States
Japan
South Korea
China
Russia
Brazil
Jamaica
Cote d’Ivoire
Canada, Mexico,Japan (2001)
United States, China,South Korea (2002 est.)
Japan, United States,China (2002)
Japan, Taiwan,South Korea (2002)
Germany, Belarus,Ukraine (2000)
United States, Argentina,Germany (2001)
United States, Caricom*,European Union (1999)
Nigeria, France, China (2001)
Canada, Mexico,Japan (2001)
United States, China,South Korea (2002)
United States, China,Japan (2002)
United States, HongKong, Japan (2002)
Germany, UnitedStates, Italy (2000 est.)
United States, Argentina,Germany (2001)
United States, EuropeanUnion, UK (1999)
France, Netherlands,United States (2001)
$1,165
$292.1
$148.4
$295.3
$60.7
$46.2
$3.1
$2.5
$687
$383.8
$162.6
$325.6
$104.6
$59.4
$1.4
$4.4
Country Imports
Trading Partners(3 largest import and export trading partners)
Exports
Source: CIA Factbook, 2003. *Caribbean Community and Common Market Countries
Value of Imports,2002
(billions of U.S. dollars)
Estimated
Value of Exports,2002
(billions of U.S. dollars)
Trade in the Global Economy
COMPARING GovernmentsCOMPARING Governments
732-739 CH26S4-860053 12/2/04 10:42 AM Page 733
In addition to using such barriers, countriesmay sometimes engage in unfair trade practices.The most common is dumping, the practice ofselling products in another country below theirmanufacturing cost or below their domestic costin order to drive other producers out of a market.Once the competition is gone, the price of thegoods being dumped is then raised.
Financing Trade Economists and policymak-ers look at a nation’s balance of trade—also calledthe balance of payments—as an important measureof a nation’s overall performance in the globaleconomy. The balance of trade is the difference be-tween the value of a country’s imports and exports.Thus, it is a measure of the entire flow of money inand out of a country. A nation has a trade deficitwhen the value of products it imports exceeds thevalue of products it exports. A nation has a tradesurplus when the value of its exports is greater thanthe value of its imports.
Trade AgreementsHigh tariffs and trade wars between nationscontributed directly to the Great Depres-
sion of the 1930s and also to World War II. Sincethe end of World War II, the major nations of theworld have created a number of organizations andagreements aimed at limiting unfair trade prac-tices. These agreements have created tradingblocs, or groups of nations that trade with eachother without barriers such as tariffs.
GATT and WTO In 1947, 90 countries sub-scribed to a treaty, the General Agreement onTariffs and Trade (GATT), in an effort to reducetrade barriers. Under this agreement and a revisedseries of trade regulations negotiated between1986 and 1994, member nations meet in trade“rounds” to reduce or remove trade barriers, suchas tariffs. In 1994 GATT was replaced by a regula-tory body known as the World TradeOrganization (WTO) to enforce the provisions of the treaty.
Over 100 nations signed the GATT between1947 and 1994. Today 147 nations are members ofthe WTO, which is becoming an important actorin the global economic community. The organiza-tion has headquarters in Geneva, Switzerland, with
a staff of over 500 to oversee the various tradeagreements signed by its member countries. TheWTO calls these agreements “the legal groundrules for international commerce.”
The WTO hears complaints brought to it bymember countries and has the authority to assesspenalties against nations that violate the terms ofthe GATT treaty. Since the creation of the WTO,the United States has brought many complaintsagainst other nations and has had to answer hundreds of complaints from other countries on a wide range of trade issues.
Tariffs, import quotas, and subsidies for agri-cultural products have recently become a majorissue within the WTO. A group of less developednations claim that the United States and Europeare seriously damaging their economies by sub-sidizing their own farmers and thereby making itimpossible for farmers in poorer countries tocompete against them.
The European Union The EU has becomethe world’s most important regional economicgroup. Twenty-five European nations currentlymake up the EU. Four additional countries—Bul-garia, Croatia, Romania, and Turkey—have ap-plied for membership and will probably join theEU over the next few years. The gross nationalproduct (GNP) of the EU is almost as large as thatof the United States. The EU imports and exportsalmost the same value of goods and services eachyear as the United States.
The European Union has been the means forthe various countries of Europe to achieve fulleconomic integration. There are no trade barriersamong the EU nations. Goods, services, andworkers can move freely between member coun-tries. The EU achieved monetary integration inJanuary 2002, when the euro became the officialcurrency of most of the EU nations. The euro re-placed many of the national currencies of Europe,
734 CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS
Student Web Activity Visit the United StatesGovernment: Democracy in Action Web site atgov.glencoe.com and click on Chapter 26–Student Web Activities for an activity aboutdevelopment of economic systems.
including the German mark, the French franc,and the Italian lira.
North American Free Trade AgreementThe nations of North America constitute anotherlarge trading bloc. In December 1992 the United States, Canada, and Mexico concluded negotiations for the North American Free TradeAgreement (NAFTA). This agreement will eventually remove all trade barriers among thethree countries. Further, it ends restrictions onforeign investments among the NAFTA countriesand gives shipping companies nearly free accessacross borders. The agreement established astanding commission with representatives fromthe member nations to resolve any trade disputesthat may arise.
NAFTA created a large regional economicunit with over 400 million people and a combinedgross national product in 2002 of over $12 trillion.Since the start of NAFTA, trade among the UnitedStates, Canada, and Mexico has expanded rapidly.At the same time, NAFTA has been controversialin all three countries. In Canada and Mexico,many people are worried about being over-whelmed by American culture and currency. Inthe United States, opponents of NAFTA fear thatAmerican workers will lose jobs as businessesmove from the United States to Mexico to take ad-vantage of lower labor costs and less strict envi-ronmental and workers’ rights laws. Supporters ofNAFTA have argued that the agreement providesan increase in lower-cost goods for Americans tobuy and thereby decreases their cost of living.They also note that many Americans can take ad-vantage of a growing Mexican market for goodsand services.
Trade Alternatives for theUnited States
As global interdependence has increased,foreign trade has become ever more impor-
tant to the American economy. Since World War II,the United States has generally wanted increasedtrade and fewer trade barriers. Yet lower trade bar-riers do not always benefit everyone. Sometimesworkers in a particular industry may be economi-cally hurt by the freer flow of trade. As a result,
CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS 735
International Business Students in Beijingenjoy an American soft drink while relaxing. Tradepolicies affect how American products are soldoverseas. Which trade policy is designed tobenefit American industry?
there are sometimes disagreements about the bestapproach to trade policy. The four major approachesinclude free trade, fair trade, managed trade, and protectionism.
Free Trade A pure free-trade policy wouldmean businesses in different nations could buyand sell goods with no tariffs or other limitationsof any kind. In theory, free trade would allow theprinciple of comparative advantage to work with-out interference. This would mean that all tradingnations gain as each uses its scarce resources toproduce those things, whether color televisions orbananas, that they produce more efficiently thanother countries. The United States has never fol-lowed a pure free trade policy because the govern-ment is always under pressure to protect domesticworkers and industries from foreign competition.
Fair Trade The United States has often advo-cated fair trade. This is trade regulated by interna-tional agreements that outlaw unfair businesspractices or limit tariffs. American participationin GATT, the WTO, and NAFTA are examples ofthe United States following a fair-trade policy.The key goal of a fair-trade policy is to create an
732-739 CH26S4-860053 12/2/04 10:42 AM Page 735
orderly world market that does not give an unfair advantage to countries willing to use unfair businesspractices such as dumping.
Advocates of fair trade claim that open econom-ic exchange promotes economic prosperity by open-ing up the largest number of possible markets forAmerican goods and therefore creating new jobs forAmerican workers. Supporters of fair trade also claimthat foreign competition spurs American manufac-turers to modernize their production techniques,which then allows them to offer consumers betterproducts at lower costs. Some also argue that moreopen trade policies promote economic interdepen-dence around the world, which in turn reduces thechances of military disputes or war.
Managed Trade Another approach to tradepolicy is managed trade. In this policy strategy, thegovernment intervenes in a trade arrangement inorder to achieve a specific result. For example, in re-cent decades Japan has often used non-tariff barri-ers such as very strict health, safety, and otherregulations to limit or prevent American imports.As a result, the United States has had huge tradedeficits with Japan. In order to reduce thosedeficits, the United States government negotiatedtrade agreements with Japan that required theJapanese government to allow American businessesto have a larger share of the Japanese market forcertain products, such as auto parts.
Protectionism A fourth trade policy is protec-tionism, the policy of using trade barriers to protectdomestic industries from foreign competition and toprevent free trade. Former U.S. trade representativeand secretary of commerce Mickey Kantor said thegovernment’s goal should be “to nurture Americanworkers and industry. . . . not to adhere to some strict[free trade] ideology.” Some protectionists worrythat foreign investors and companies will gainundue influence in the American economy if mea-sures are not taken to prevent their entrance. Protec-tionists also argue that participation in internationaltrade agreements is eroding American sovereigntyby requiring the United States to accept rules madeby organizations like the WTO.
Some advocates of managed trade and protec-tionism see international trade as a powerful for-eign policy tool that should be used to promoteAmerican interests. The U.S. embargo on mosttrade with and travel to Cuba, in place since 1961,is an example of using trade to punish a hostilecommunist regime.
The globalization of the economy has broughtmany benefits to the American consumer, includ-ing new and more varied products and lower pricesfor goods. Globalization has also brought its shareof challenges. The American worker must nowcompete with a much wider labor pool for somejobs, and economic and political decisions are nowmore complicated for the U.S. government.
Sect ion 4 AssessmentSect ion 4 Assessment
Global Perspectives Trade is becoming moreand more international, and countries arelinking their economic fortunes with tradeagreements. However, there are barriers tointernational trade. Review these barriers, andthen prepare a plan for helping nations to overcome these barriers and build theirinternational trade opportunities.
Checking for Understanding1. Main Idea Using a graphic organizer like the one
below, identify factors that affect the stability ofthe global economy.
3. Identify embargo, General Agreement on Tariffs and Trade (GATT), World TradeOrganization (WTO).
4. Why do nations trade with one another?
Critical Thinking5. Drawing Conclusions Which type of trade policy
do you believe is the most appropriate for theUnited States to follow? Why?
736 CHAPTER 26: DEVELOPMENT OF ECONOMIC SYSTEMS
GlobalEconomy
Free TradeEconomic Development
732-739 CH26S4-860053 12/2/04 10:43 AM Page 736
Making Decisions
Adecision is a choice from among two ormore alternatives. Decision making is a keypart of citizenship. When choosing which
candidate to vote for or whether to attend a pub-lic hearing, thoughtful decision makers take intoaccount the impact of their choices on them-selves and others. Following the steps below willhelp you make more thoughtful decisions.
Learning the Skill
1. State the situation or define the problem.Gather all the facts. Ask: Why do I have tomake a decision on this matter? Whom willmy decision affect?
2. List the options. Ask: What are the alterna-tives? How can I deal with this situation in a different way?
3. Weigh the possible outcomes. What are thepositive or negative effects of each?
4. Consider your values. Values are the beliefsand ideas that are important to you. Your values should serve as your guidelines in making all decisions.
5. Make a decision and act. Use all the informa-tion gathered to make a decision. Then act onyour decision.
6. Evaluate the decision. Ask: How did the out-come affect you and others? Would you makethe same decision again? Why or why not?
Practicing the Skill
Answer the following questions about decision making.1. Why should you consider more than one
option when making a decision?
2. How will using the six steps help lessen the possible risks involved in acting on a decision?
3. What might be the result of making a decision that conflicts with your values and beliefs?
737
International economic decisions were made ata 1997 Denver, Colorado, summit.
Application ActivityApplication Activity
The Glencoe SkillbuilderInteractive Workbook, Level 2provides instruction and practicein key social studies skills.
Read newspapers for articles about anevent that affects your community, such as adecision whether to tear down a historiclandmark to build a new shopping mall.Make an educated decision about the event.Explain your reasoning.
732-739 CH26S4-860053 12/2/04 10:43 AM Page 737
Reviewing Key TermsMatch the following terms with each of the descriptions given below.
factors of production developing nationsnewly developed nations trading bloccommand economy tariffsgross national product market economycomparative advantage quotas
1. an economy in which the government makesmost of the economic decisions
2. an economy in which consumers make mostof the economic decisions
3. the resources that an economic system needsto produce goods and services
4. nations with little or no industry 5. nations recently having significant or rapid
industrial growth6. the sum of a nation’s goods and services7. principle that each country should produce the
goods it can make efficiently and trade for othergoods
8. taxes placed on imports to increase their pricein the domestic market
9. limits on the quantities of a product that maybe imported
10. a group of nations that trade without economicbarriers
Recalling Facts1. What are the four factors of production?2. What is the role of competition in the free
enterprise system?3. Where are most newly developed nations
located?4. How has China’s growing economy impacted
the United States?5. What are the causes of a lack of national unity
in some developing nations?
Assessment and ActivitiesChapter 26Chapter 26
Self-Check Quiz Visit the United States Government:Democracy in Action Web site at gov.glencoe.com andclick on Chapter 26–Self-Check Quizzes to preparefor the chapter test.
GOVERNMENT
• Three major types of economic systems are traditional, market,and command.
• Capitalist economies have private ownership, individual initiative,competition, freedom of choice, and profit (or loss).
• Mixed economies blend capitalism with some government regulation.
Capitalist and Mixed Economies
• Since 1991, Russia has been working toward capitalism anddemocracy, but change has been slow.
• China’s Communist government is trying to develop a marketeconomy but maintain an authoritarian political system.
Major Economic Transitions • The main approaches to trade policy include free trade, fair trade,managed trade, and protectionism.
• Tariffs, quotas, strict health or safety regulations, embargoes, andunfair trade practices are some of the barriers to international trade.
• The World Trade Organization (WTO), European Union (EU), andNorth American Free Trade Agreement (NAFTA) have formed toencourage free trade.
Global Economy
• Some developing and newly developed nations build theireconomies by relying on free markets, trade, and investment.
• Others have chosen a socialist system, but socialism is losing popularity due to the challenges of attracting foreign investors and the influence of Western governments.
1. Free Enterprise How did So-viet agricultural policy differfrom the policy practiced inthe United States?
2. Global Perspectives Whatare the differences be-tween the traditional andthe new economic goals topromote development indeveloping nations?
Critical Thinking1. Making Comparisons Use a
graphic organizer like theone below to compare land ownership in a capitalist system with thatin a planned economy.
2. Drawing Conclusions Why might industrializednations such as the United States exercise in-fluence on developing nations to develop freemarket economies and democracy?
Analyzing Primary SourcesCommunist theory, which arose in Europe in thelate 1800s, advocated the abolition of privateproperty and government ownership of major indus-tries. Read the excerpt below from Karl Marx andFrederick Engels’ 1848 Communist Manifesto andanswer the questions that follow.“Nevertheless, in most advanced countries, the followingwill be pretty generally applicable. 1. Abolition of property in land and application of all
rents of land to public purposes. 2. A heavy progressive or graduated income tax. . . .5. Centralization of credit in the banks of the state, by
means of a national bank with state capital and an ex-clusive monopoly.
6. Centralization of the means of communication andtransport in the hands of the state.
Interpreting Political Cartoons Activity
7. Extension of factories and instruments of productionowned by the state; the bringing into cultivation ofwaste lands, and the improvement of the soil generallyin accordance with a common plan.
8. Equal obligation of all to work.”
1. What type of economy does communism advo-cate?
2. What elements of this type of economy do youthink the United States’s capitalist economyhas adopted, if any?
Participating in Local GovernmentNations of the world are increasingly interdependent.Find out what opportunities yourcommunity offers for individual involvement in world issues. For example, are there any organizations or programsthat work to end world hunger? Find out how youmight contribute to such efforts.
Chapter 26Chapter 26
1. What comparison is the cartoonist making?2. Do you think the comparison is a valid one? Why or why not?3. This cartoon was published in 1993. Are the issues it raises
still applicable today? Explain.4. How do you think the economic situation in a country affects
