First "scientific" paper

Good afternoon fellas,

Today I finished my first "scientific" paper. The quotation marks belong there for sure, since the research effort was not that high. It is basically a comparison of the economical growth pattern of Argentine and Japan over the last 20 years and was written for my "Multidisciplinary approach to economic growth" course at Utrecht School of Economics. Maybe some of you spend some time reading it, if so i would be happy to read some critics. 

i.                    Introduction

Economies can just function effectively with a steady growth. That growth can be acquired in different ways and by a number of concepts. How those concepts are applied most effectively is one crucial task of politics. In a further and further globalized world we would expect similar growth patterns but actually we can detect the biggest similarities in the global crisis of ´08.

Why do economies have different growth patterns? That is one basic question of economic research which I will partly answer in this short paper. We will do this by comparing two economies with very different economical climates. On the one hand side we have agricultural focused Argentine, and on the other hand we have high-tech focused Japan who´s Gross Domestic Product is between the three biggest of the world. At the same time it is 16 times as big as Argentines GDP.

Therefore the central question of this paper is: How did different values and concepts affect the economic growth performance of Argentine and Japan in the past twenty years? Japan is focused on high-quality innovative goods such as cars or chemicals, whereas Argentineans are proud of their high-quality agricultural goods such as beef or soya as well as their wine and their transport business.

We are going to analyze the problem by looking at four distinctive economical concepts. We will be taking a look at the culture, economic freedom, innovation and comparative advantage in the two countries of Japan and Argentine. The text is structured into six main parts. We will start with some general information about the growth performance of our two countries over the last 20 years. Afterwards we monitor the mentioned economic concepts. Each of those concepts are defined in the beginning and their influence on economic growth in the two countries is explained afterwards. Finally we will summarize the main findings of this paper draw some conclusions and give some suggestions for possible further investigations.

ii.                  Differences in economic growth over the last 20 years between Japan and Argentine

Whereas Argentine´s growth performance goes up and down like a Jo-Jo, the Japan one stays at least pretty over zero with one exception in ´01. For such a big economy even just growing further can be a very difficult task.

However, let us take a more detailed look at Argentina´s growth performance there is one figure which takes our attention immediately, the severe downturn in 2002 (Table 1). It is pretty easy to explain this figure since there was the so called “Tango-Crisis” in 2002 which lead to a big lack of trust in all public institutions as well as in banks. In the previous years the government set a fixed exchange rate between Argentinean Peso and US Dollars. Since the Peso´s inflation was much higher than the American one, and the exchange rate was hold at 1 to 1, there was a big discrepancy between the fictional and the real exchange rate. In reality the Peso was worth one fourth of his initial value, therefore all Argentinean savers wanted to get their money out of the country or changed to dollar savings to the real exchange rate, but the government freezed all savings at banks and nobody was allowed to access their assets. This let to plundering and scenes on TV looking like civil war. Another attention drawing pattern might be the steady growth between ´90 and ´94 this is based in privatizations heavily performed by the former president Carlos Menem. Those sales of state property led to a “government-surplus” and accordingly to a higher investment ratio

Table 1: Growth Performance

Source: World Bank Group, 2009

Japan formerly reported high growth figures from the 50´s onwards but also had its exploding bubble in the late 80´s. In that decade the value of the Yen increased rapidly. Thus a lot of investors bought mostly estate in Japan. The prices rose and finally the monetary bubble exploded. The decade afterwards can be seen in Table 1. It is called the “lost decade” since it was not happening a lot in Japans economy but stagnation. In recent times Japan is struggling to maintain a growth especially after the financial crisis in 2008 which could affect Japan keenly as a result of the high degree of globalization of Japans industries. After all Japan has had a pretty steady growth over the last two decades. It´s growth is not overwhelmingly high but still recognizable.

Comparing both performances you might detect some similarities when looking at the time periods from ´99 to ´01 and from ´03 to ´08. Especially when looking at older figures you see the big discrepancy between the pair of countries. It might be an extent of the ongoing globalization that the countries have a more and more similar growth performance even though they have two totally different economies. However there is a big difference between the steady pattern of Japan and the volatile one of Argentine.

iii.                How did culture affect economic growth?

“Culture has been defined in different ways in sociology, but is typically seen as some kind of mixture of values and meaning structures” (Swedberg, 2003, p.240). This mixture differs from continent to continent, from country to country and from city to city. Meaning structures could be seen as norms, common agreements which resulate how a person should behave or act in a society. Values on the other hand are beliefs a person or society represents and believes in. Those beliefs are adapted in daily life. Norms and Values are built over generations and are constantly changing. Therefore it is very important to look at the history of one country to understand its actual economic culture and its specialties.

Japanese Business culture is characterized by Keiretsus and by the strong discipline dating back to the times when Japan was an empire and the Samurai culture was prevailing. Keiretsus are groups of companies which are very well connected by holding big stakes among each other. They could be seen as Japanese Joint Ventures, comparable to the entrepreneur families reining the industrialization of America. Those Keiretsus are often typified by owning one bank which supplies the companies with physical capital. Additionally there is the discipline and accuracy dating back to times of the Samurai, when life was well-structured and everybody lived in the way the imperator wanted them to.

 Argentinean culture was stamped by aristocratic families from Europe, who established big farms and cultivated the vast lowlands. Afterwards, around 1900, a big wave of Spanish and Italian people populated the cities. Nowadays it is the difference between the metropolis Buenos Aires and the immense size of the Pampa which characterizes Argentinean economic Culture. On the one hand there are still big farms making Argentine e.g. to one of the world´s biggest soya producers. On the other hand there is the 12 million-inhabitant capital Buenos Aires with lots of industries such as international car producers. Its harbor should be mentioned as well, since it is one of the biggest in South America. These differences and uncertainties are also found in the Argentinean mentality. There is also a severe distrust in governmental institutions, that distrust may very well be one scarce of the “Tango-Crisis” in 2002 and was further strengthened by the most recent acting of the Argentinean government concerning pension politics.

Both cultures are very different, on the one hand side the disciplined Japanese, and on the other hand the mix of cultures and rich as well as poor ancestors which led to the Argentinean culture as it is today. Japanese discipline is the base for the steady growth with almost no big jumps neither upwards nor downwards. The uncertainty of the Argentineans can also be seen in the unstable pattern of economic growth. “We are not afraid of a Global Crisis, since we always have crisis in Argentine”, told us a taxi driver. We asked him what he would think concerning the financial crisis in ´08 previously. We consider this a very plastic example on Argentinean culture, since it describes how Argentineans are thinking as well as why their growth patterns look a bit like the Andes.

iv.                 How did economic freedom affect economic growth?

Economic freedom can also be defined as the degree of latitude allowed by the government, in other words, how easy it is to do business. That ease is not defined by any number and cannot be calculated with formulas. It is a sum of different surroundings such as for example employment or property rights. Those rights differ from region to region and determine for example what the people are allowed to use or not. They need to be adjusted with technological changes. If a good which is owned communally gets more valuable due to changes in society, than the goods property right need to be adjusted (Alchian & Demsetz, 1973). Without those changes an economy would stuck behind due to the comparatively worse surroundings to do business. We should focus on different tasks which need to be performed while doing business. How easy or hard is it to perform those? If doing business is easy the country would have a lot economic freedom, since the government is doing everything to make business processes as easy as possible and the markets can self-determine their premises.

A way to measure economic freedom is the Ranking “Doing Business” introduced by the World Bank, in this Ranking is shown how economies perform on different aspects which are important to do business (Table 2). Please note that the numbers displayed in the Graph are just positions of the regarding country in the Ranking. Therefore a high number is not an indicator for a high ease of doing business, but for a bad position compared to other countries.

Table 2: Ease of Doing Business

Source: World Bank Group, 2009

We can see a very big discrepancy in “Trading across Borders” and in “Dealing with Construction Permits” among others. Apparently Japan is over performing Argentine also in the overall ranking. A high ease in “Trading across Borders” is crucial to enable entrepreneurs to access other markets than the domestic one. That broadening of the markets would lead to a possibly higher growth rate. A high ease in “Dealing with Construction Permits” is vital to encourage entrepreneurs to keep investing, since they would not invest, if, for example, just getting the permits for the construction of a new office would be a long, stressful process. As we well know, investing is decisive for economic growth and needs to be supported by national decision makers.

Argentine is underperforming Japan in every aspect; we can relate this to the very unstable performance in economic growth by Argentine, since there is no trustworthy environment for an entrepreneur to invest. Furthermore it is one indicator why Argentine is struggling to motivate foreign investors to place their funds in Argentine.  Japan on the other hand set good surroundings for a continuous economic growth. Especially the good position in the overall ranking is notable and one possible explanation for its huge GDP.

v.                   How did innovation/technological progress affect economic growth?

Innovation is defined as the introduction and dissemination of a new idea, product, or technological process throughout society and the economy. Accordingly inventions are a big part of innovation. Anyhow “Technological progress emerges when society becomes less a protector of ancient ways and more a patron of a new ways of doing things” (Heilbroner & Milberg, 2008, p.96). Or in other words: Society has to sacrifice old habits in order to profit from new ideas as old habits often include barriers for progress.

Japans economy is based on innovative technologies which require a lot of research such as ICT and Chemicals. This severe focus on research is the reason for Japans leading role in a lot of new markets. Japanese society was not afraid to leave old technologies and beliefs behind in order to adopt the new ideas and inventions their researchers came up with. Nevertheless it must be allowed to ask for what cost they did that. Sacrificing old habits, values etc. can lead to a devaluation of your own culture which was built up through centuries (see section iii). The difficult task is to find a good equilibrium.

Argentineans basically just improved the technologies which were already there; they applied new forms of enriching their crop and improved their mechanisms of processing their produced goods. Unlike Japanese society the Argentinean one seemed to be satisfied with the life they were living. Their motivation to adapt new ideas was low, since they were not willing to sacrifice old habits. In Buenos Aires the public transport sector is still mainly based on “colectivos”, old buses which are not just consuming lots of fuel, but are harming the environment extremely also.  The Government refused to invest in new technologies of public transportation over a long period until they finally started to build up a subway-system.

The focus on next generations’ technology enables Japan to a higher potential and it also regulates the growth to get a steady growth pattern over generations. Argentines strategy of not investing in the future but focusing on short term goals without worrying about future harms can be seen in their growth pattern. Some good years are always followed by one drastic downturn. Now those are two different ways to approach innovation. Obviously the Japanese one would be performing better in the future, or at least is the one who is better prepared for the future.

vi.                 How did comparative advantages affect economic growth?

A comparative advantage is a situation in which one country or region can produce a good more efficiently than others. This greater efficiency is the so called comparative advantage. Economic efficiency is warranted, if the goods are used to fulfill the most necessary demands (Hessel, 1998). Even a good can have a comparative advantage over another one if producing is more effective and opportunity costs are less. A number of countries set special barriers to prevent, more conveniently produced, foreign goods to enter the domestic market in order to protect local production.

In Argentine the most obvious effect can be seen in the agricultural sector. Argentine was and is still known for its high-quality beef all over the world. Some years ago more and more farmers switched their production and started to cultivate soya on the meadows previously used for cattle. The change was performed since prices for soya rose and the export of beef was getting more and more difficult due to import-restrictions set by e.g. the European Union. The farmers realized that it would be more efficient to produce soya instead of beef. There was a comparative advantage to produce soya.

Japan was able to sell their relatively better cars in big amounts to the US when import restrictions were released. Nowadays American roads are full of foreign cars and especially lots of Toyotas´. The change which can be noticed is a result of the release of all import restrictions and the belief in totally free markets. It is not just that Japanese cars are cheaper than American ones, they are produced more efficiently and are more innovative (see section v.). All that contributes to the comparative advantage Japanese cars have over American ones and this is what enabled them to capture the American market.

Car Production was one big factor for the steady growth of Japans economy since the markets in modern times are much bigger than before. Japanese producers could export freely and explore new markets with a demand for cheap high-quality cars. Whereas Argentines economy was barely affected, their food production was. Due to the focus on the export good soya instead of beef, which is one of the most important aliments in Argentine, the prizes for beef rose. This led to some difficulties in domestic politics since the people were vehemently criticizing the increase in beef prizes.

vii.               Conclusion

At first we took a look at the general growth patterns of Japan and Argentine, we evaluated that Argentinean pattern is characterized by severe downturns on the one hand side and on high growth performances, mostly in the 90´s, on the other hand. Whereas the Japanese pattern shows a steady growth over the last two decades. Its worst downturn was in last year’s crisis (Table 1).

Afterwards we evaluated some reasons explaining those patterns. We started by analyzing the different cultural backgrounds. We concluded that the Japanese discipline is also shown in its growth pattern and that Argentinean uncertainties are shown by their one as well.

In section iv we examined the economic freedom and how easy it is for entrepreneurs to do business in the studied countries. We deduced that it is a lot easier to do business in Japan than in Argentine due to the worse ranking in World Bank´s study on the ease of doing business. This can be interpreted as the degree of economic freedom as well.

The next concept we narrowed was innovation and technological progress. This is one of the most important motors of economic growth according to Heilbroner & Milberg (2008). Japan is focusing on innovative technologies, doing a lot of research and adopts those new ideas while Argentine was falling behind and struggled to include the new ideas and inventions into their daily life.

The last economic concept we narrowed is also a very important one, comparative advantage. Comparative advantages can favor a countries economy severely as it was in the case of Japan. It´s car manufacturers could play out its advantages compared to American ones when restrictions were cut off and the free trade was taking over.

All of the four analyzed concepts contributed to the growth performances of the two countries. The question which is still to be answered is how it is possible for Argentine to maintain a steady and high growth rate of over five percent for the last five years, if they are underperforming Japan in almost every aspect. A possible answer is balance-fraud by the Argentinean government and unfortunately this is a very likely possibility, but why? Looking back at the culture, Latin American people and especially Argentineans are known for taking everything a bit too relaxed. Corruption is an everyday business. Even if you are acting contra the laws you can be very well respected or even deified, as long as you beware a positive image. The best example therefore is Diego Maradonna; he had all kind of affairs but will be admired by all Argentineans longer than a life-time. Argentine would have to face the truth in order to reach a steady growth as Japan does.

Japan is already the second biggest economy of the world after the United States and has set very appealing surroundings for future growth. Their joint-ventures in the form of Keiretsus seem stable, it is easy to do business, the economy is future-orientated and in a number of sectors Japan appears to have a comparative advantage to other nations. The question would be how hard they are affected by the global crisis and its impacts on globalization.

That would also be one of the suggestions for further investigations we would like to make: How dealt the Japanese economy with the financial crisis? Since the country is heavily globalized there is a lot room for speculation on this theme. We guess that a profound research would not be possible before 2012 at least. Another interesting subject would be how the severe drought Argentina was facing in the summer of 2009 affected the country’s economy and especially how the government dealt with it since there have been some disputes with the farmers formerly.

 
I could not upload the graphs, they show the GDP per capita growth over the last 20 years( table 1)  and the ranks in the "ease of doing business" ranking of the World Bank.
Now I will start to prepare for my math exam as well as for my economics exam.
Other news may be that the pre-planned party for the 7th of november is know layed on ice. i have to figure out how many persons plan to come, since the girls are out for vacation and coming back the 8th.

Have a nice day,
Tim