Country analysis involves the examination and interpretation of a nations economic, social and political environment.

The analysis offers a comprehensive overview of a country Objectives identify the common factors used by MNCs to measure a countrys political risk and financial risk;

country risk when making financial decisions Country analysis is useful for: Investors in the financial market Companies intending to set up a subsidiary Companies wishing to enter a new market People wishing to reside in the country

Factors Considered in a Country Analysis A country analysis is often conducted through country reports researched by professional government or independent firms, such as the Economist Intelligence Unit, World Bank and Organization for Economic Cooperation and Development (OECD). Some of the data points considered in a country analysis are: Economic Indicators: Indicators such as gross domestic product (GDP), consumer price index (CPI), inflation rate and producer price index (PPI) help in gauging a countrys economic health. High GDP growth, low inflation and high CPI are favorable for companies and investors. These indicators also reflect job availability and standard of living in the country. Government Policy: Governments often introduce policies and programs to promote the growth of certain industries. Favorable government policies (such as subsidies and tax rebates) attract multinational and domestic companies. Industry Association Support: An industry association not only works towards enhancing opportunities, but also lobbies the government for easing regulations. Financial Markets: The extent of regulations, liquidity and volatility determine how reliable the financial markets in a country are. The efficiency of the financial market is a critical determinant of the risks faced by companies and investors.

Trading Conditions: Poor trading conditions adversely impact the profit generating capabilities of businesses. Human Capital: The availability of skilled human resource and the salaries drawn by them reflects the heath of a country. Infrastructure: This includes data points such as condition of roads, number of ports, educational institutions, penetration of the Internet and availability of support services. Political Scenario: Political stability offers a favorable backdrop for businesses to thrive. The political climate and risks and the future developments form critical data points for decision making. Country analysis reports are usually made for a specific industry. Understanding the current environment and predicting trends further the prospects of a business or an individual investor. To clarify the meaning of international competitiveness at the country level within in the context of Porters (1990a) thesis that countries, compete in international markets for their fair share of the world markets. The first section of this article gives a short synoptic overview of trade theory in order to provide some background on how economists differ from management specialists on the issue of international competitiveness at a country level. Trade theories and the international competitiveness of countries According to this theory, a country can enhance its prosperity if it specializes in producing goods and services in which it has an absolute cost advantage over other countries and imports those goods and services in which it has an absolute cost disadvantage. This theory explains why countries, through imports, can increase their welfare by simultaneously selling goods and services in international markets. Adam Smith thus viewed trade as a positive sum game. This was in direct contrast to the viewpoint of the mercantilists of the 16th century that trade is a zero sum game .They believed that if countries wanted to become rich and powerful, they must export more and restrict imports to the minimum. Such a policy would result in an inflow of gold and silver that would make the country wealthy. Because they viewed trade as a zero sum game, they advocated strict government control and preached economic nationalism. The Competitive Advantage of Nations, presents a new theory of how nations and regions compete and their sources of economic prosperity. Motivated by his appointment by President Ronald Reagan to the President's Commission on Industrial Competitiveness. Porters Five Forces Assessing the Balance of Power in a Business Situation .Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are:

1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. 2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you. 3. Competitive Rivalry: What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one else can do what you do, then you can often have tremendous strength. 4. Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. 5. Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. These forces can be neatly brought together in a diagram like the one in figure 1 below: Comparative advantage According to the law of comparative advantage, a country must specialize in those products that it can produce relatively more efficiently than other countries. This implies that despite absolute cost disadvantages in the production of goods and services, a country can still export those goods and services in which its absolute disadvantages are the smallest and import products with the largest absolute disadvantage. It also implies that a country with absolute cost advantages in all its products will specialize and export those products where the absolute advantage is the largest, and will import products with the smallest absolute advantages. Management theory and the international competitiveness of countries Disillusioned by the economic theories of trade, Porter (1990a) advanced a new theory to explain national competitive advantage. The main question he attempts to answer is why some countries are more successful in particular industries than others. He identifies four classes of country attributes (which he calls the National Diamond) that provide the underlying conditions or platform for the determination the national competitive advantage of a nation. These are factor conditions, demand conditions, related and support industries, and company strategy, structure and rivalry. He also proposes two other factors, namely government policy and chance

(exogenous shocks), that support and complement the system of national competitiveness but do not create lasting competitive advantages. Factor conditions factor conditions as land, labour and capital (including human capital), Porter (1990a) distinguishes between the following categories: human resources, physical resources, knowledge resources, capital resources and infrastructure. Factor conditions are further subdivided into basic and advanced factors that can be either general or specialised. Basic factors such as unskilled labour, raw materials, climatic conditions and water resources are inherited and require little or no new investment to be utilised in the production process. Advanced factors are created and upgraded through reinvestment and innovation to specialised factors, which according to Porter form the basis for the sustainable competitive advantage of a country. Demand conditions According to the Linder hypothesis, countries with similar per capita incomes will have similar spending patterns. In terms of the Linder hypothesis, these comparable demand conditions in countries lead to analogous demand structures, which enhance intra-industry trade. Porter, however, focuses more on demand differences than on similarities to explain the international competitiveness of countries. According to him, it is not only the size of the home demand that matters, but also the sophistication of home country buyers. It is the composition of home demand that shapes how firms perceive, interpret and respond to buyers needs. This forces home country firms to continually innovate and upgrade their competitive positions to meet the high standards in terms of product quality, features and service demands. More specifically, Porter (1990a, 1998a) regards the essential conditions of demand as: a home demand that anticipates and leads international demand, industry segments with a significant share of home demand, and sophisticated and demanding buyers. However, different demand conditions in countries, leading to different demand structures, can determine location economies of increasing returns, as explained by the new trade theories. Location economies of increasing returns that keep an industry in a specific location, due to a specific set of demand conditions, will be difficult to be competed away by industries in another country . In such cases, comparative advantage is determined by demand conditions rather than differences in factor conditions. According to the United Nations framework, less developed countries may "graduate" from the less developed countries list when they meet or exceed the thresholds for two of the three criteria in two consecutive reviews by the Committee for Development Policy. The less developed countries list is very fluid and dynamic. For example, in 2003, Senegal was added to the less developed countries list and Cape Verde and Maldives qualified for graduation from the less developed countries category. The United Nations, as of 2006, classifies the following countries and regions as less developed regions, least developed countries, and more developed regions:

Less developed regions: All regions of Africa, Asia (excluding Japan), Latin America and the Caribbean plus Melanesia, Micronesia, and Polynesia.

Least developed countries: 50 countries including Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Cape Verde, Central African Republic, Chad, Comoros, Democratic Republic of the Congo, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Lao People's Democratic Republic, Lesotho, Liberia, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Samoa, So Tom and Prncipe, Senegal, Sierra Leone, Solomon Islands, Somalia, Sudan, Timor-Leste, Togo, Tuvalu, Uganda, United Republic of Tanzania, Vanuatu, Yemen, and Zambia. More developed regions: All regions of Europe plus Northern America, Australia/New Zealand, and Japan.

The least developed regions and countries of the world experience economic problems caused and exacerbated by shared characteristics, structures, histories, climates, and practices. For example, developing countries tend to have high-income inequality, low life expectancy, small or limited industrial sectors, outward migration from rural to urban areas, market imperfections (or market absence), and a colonial past. This list of shared characteristics, while not present in all developing countries, illustrates the complexity of economic problems in developing countries. Economic problems do not occur in isolation. Economic problems, which are products of particular historical events, patterns, and structures, are related to social and cultural problems, practices, and beliefs. The following sections describe economic problems in their respective cultural, social, political, and historical contexts. The economic problems of child labor, creditworthiness, corruption, and poverty will be described and analyzed. In addition, the issue of colonization's continued influence on business climates in developing countries will be introduced. The country analysis report provides a wide array of analytical inputs to analyze the countrys performance, and the objective is to help the reader to make business decisions and prepare for the future. The report on country analyzes the political, economic, social, technological, legal and environmental (PESTLE) structure of country. The report provides a holistic view of Country from historical, current and future perspective. Insightful analysis on critical current and future issues is presented through detailed SCPT (strengths, challenges, prospects and threats /risks) analysis for each of the PESTLE segments. In addition, the PESTLE segments are supplemented with relevant quantitative data to support trend analysis. The PESTLE country analysis report series provides an in-depth analysis of 50 major countries. Features and Benefits Understanding gained from the country analysis report can be used to plan business investments or market entry apart from a holistic view of the country. Political section provides inputs about the political system, key figures in the country, and

governance indicators. Economic section outlines the economic story of the country to provide a balanced assessment on core macro-economic issues. Social section enables understanding of customer demographics through the income distribution, rural-urban segmentation and centres of affluence, healthcare and educational scenario in the country. Technological section provides strategic inputs on information communications and technology, technological laws and policies, technological gaps, patents data and relevant laws. Legal section provides information about the legal structure, corporate laws, business set-up procedures and the tax regime. Environmental section provides information on environmental policies and the performance in terms of important environmental indicators. Highlights PESTLE analysis of a country identifies issues that affect the countrys performance through the prism of current strengths (strengths), current challenges (weaknesses), future prospects (opportunities) and future risks (threats).

The political landscape discusses the evolution of the political scenario in different periods. The economic, social, foreign and defence policies are considered in the political landscape section. It also discusses the performance of the country as per World Bank Governance Indicators. The economic landscape describes the evolution of the economy in different periods. It also examines the countrys performance in terms of GDP growth, composition by sector (agriculture, industry and services), fiscal situation, international investment position, monetary situation, credit disbursement, banking sector and employment. The economic landscape also explains the financial system in the country, especially with regard to financial authorities/regulators. The social landscape covers the demographics, education and healthcare scenario. The social welfare policies of the government along with the countrys performance in terms of healthcare, income distribution and education are also provided. The technological landscape discusses the structure and policies in terms of Intellectual property, research & development, technology agreements/pacts; and policies related to the promotion of technology . The legal landscape examines the structure of the judicial system, legislation affecting businesses, tax regulations, labor laws, trade regulations and corporate governance . The environmental landscape in China discusses the environmental regulations and policies of the country. The performance of the country in terms of in terms of environmental indicators and impact of environmental policies is also examined. Economists predict that the scales of emerging economies will surpass those of developed countries for the first time this year with China their key driver.

Emerging countries like China, Brazil, India, Russia and Indonesia have been growing strongly while Mexico, Pakistan and Turkey are also developing fast and following them closely. The GDPs of these countries are likely to amount more than half of the world's economic output this year, meaning Western developed economies will contribute less than half of the world's economy, an unprecedented phenomenon in the past 100 years, according to the state-run China News Service, citing French newspaper Le Monde. These emerging countries' economic growth has been boosted by faster population growth than in developed countries. Economic experts predict that their average economic growth is likely to reach 4.5%, compared to a meager 0.3% in eurozone countries. China's economy, which has become the world's second largest, is likely to lead the emerging nations with GDP growth of 8%, while Brazil may replace Britain as the world's sixth largest economy. The developing countries have also benefited from their relatively lower debt burden. The average debt ratio of 77 emerging markets studied by credit rating agencies was 39% of GDP while that of 30 developed economies stood at 76%. These economies also hold about two thirds, or US$10.8 trillion, of the world's total international currency reserves. China, Brazil and Russia hold the highest proportion. Emerging markets have often been criticized for their poor social welfare systems, but this has also been a factor in their higher economic growth rates, according to China News Service. Economists also said the financial markets in these emerging economies have also been undervalued, since they make up around US$13.6 trillion or one quarter of global stock market. Hedge funds and major investors have already spotted their opportunities and shifted their focus to these areas, though private investors have been slower to follow suit. German private investors have only invested 4% of their total investments, or less than 10 billion (US$13 billion), on funds in emerging economies. Each country profile is designed to give a summary of that country, its economy and economic profile. It provides economic indicators, data and statistics, as well as analyses of its history, GDP, GDP growth, GDP per capita, prospects, sectors and international trading relations, imports & exports. Gross Domestic Product (GDP) :The Gross Domestic Product measures the value of economic activity within a country. Strictly defined, GDP is the sum of the market values, or prices, of all final goods and services produced in an economy during a period of time. There are, however, three important distinctions within this seemingly simple definition: 1. GDP is a number that expresses the worth of the output of a country in local currency. 2. GDP tries to capture all final goods and services as long as they are produced within the country, thereby assuring that the final monetary value of everything that is created in a country is represented in the GDP. 3. GDP is calculated for a specific period of time, usually a year or a quarter of a year. Taken together, these three aspects of GNP calculation provide a standard basis for the comparison of GDP across both time and distinct national economies.

GDP vs. GNP GDP is just one way of measuring the total output of an economy. Gross National Product, or GNP, is another method. GDP, as said earlier, is the sum value of all goods and services produced within a country. GNP narrows this definition a bit: it is the sum value of all goods and services produced by permanent residents of a country regardless of their location. The important distinction between GDP and GNP rests on differences in counting production by foreigners in a country and by nationals outside of a country. For the GDP of a particular country, production by foreigners within that country is counted and production by nationals outside of that country is not counted. For GNP, production by foreigners within a particular country is not counted and production by nationals outside of that country is counted. Thus, while GDP is the value of goods and services produced within a country, GNP is the value of goods and services produced by citizens of a country. For example, in Country B, represented in , bananas are produced by nationals and backrubs are produced by foreigners. Using figure 1, GDP for Country B in year 1 is (5 X $1) + (5 X $6) = $35. GNP for country B is (5 X $1) = $5, since the $30 from backrubs is added to the GNP of the foreigners' country of origin. The distinction between GDP and GNP is theoretically important, but not often practically consequential. Since the majority of production within a country is by nationals within that country, GDP and GNP are usually very close together. In general, macroeconomists rely on GDP as the measure of a country's total output. Growth Rate of GDP GDP is an excellent index with which to compare the economy at two points in time. That comparison can then be used formulate the growth rate of total output within a nation. In order to calculate the GDP growth rate, subtract 1 from the value received by dividing the GDP for the first year by the GDP for the second year. GDP growth rate = [(GDP1)/(GDP2] - 1 For example, using , in year 1 Country B produced 5 bananas worth $1 each and 5 backrubs worth $6 each. In year 2 Country B produced 10 bananas worth $1 each and 7 backrubs worth $6 each. In this case the GDP growth rate from year 1 to year 2 would be: [(10 X $1) + (7 X $6)] / [(5 X $1) + (5 X $6)] - 1 = 49%

Real GDP vs. Nominal GDP In order to deal with the ambiguity inherent in the growth rate of GDP, macroeconomists have created two different types of GDP, nominal GDP and real GDP.

Nominal GDP is the sum value of all produced goods and services at current prices. This is the GDP that is explained in the sections above. Nominal GDP is more useful than real GDP when comparing sheer output, rather than the value of output, over time. Real GDP is the sum value of all produced goods and services at constant prices. The prices used in the computation of real GDP are gleaned from a specified base year. By keeping the prices constant in the computation of real GDP, it is possible to compare the economic growth from one year to the next in terms of production of goods and services rather than the market value of these goods and services. In this way, real GDP frees yearto-year comparisons of output from the effects of changes in the price level.

GDP Deflator When comparing GDP between years, nominal GDP and real GDP capture different elements of the change. Nominal GDP captures both changes in quantity and changes in prices. Real GDP, on the other hand, captures only changes in quantity and is insensitive to the price level. Because of this difference, after computing nominal GDP and real GDP a third useful statistic can be computed. The GDP deflator is the ratio of nominal GDP to real GDP for a given year minus 1. In effect, the GDP deflator illustrates how much of the change in the GDP from a base year is reliant on changes in the price level. For example, let's calculate, using , the GDP deflator for Country B in year 3, using year 1 as the base year. In order to find the GDP deflator, we first must determine both nominal GDP and real GDP in year 3. Nominal GDP in year 3 = (10 X $2) + (9 X $6) = $74 Real GDP in year 3 (with year 1 as base year) = (10 X $1) + (9 X $6) = $64 The ratio of nominal GDP to real GDP is ( $74 / $64 ) - 1 = 16%. This means that the price level rose 16% from year 1, the base year, to year 3, the comparison year. Global Economic Analysis - Effect of Monetary Policy Unanticipated changes in monetary policy will produce both price (substitution) and income effects. For example, suppose monetary authorities begin a program of expansionary (easy) monetary policy.

We would then expect the following sequence of events to occur with regard to the price effect: Real interest rates will be reduced. As real interest rates are reduced, domestic financial and capital assets become less attractive as a result of their lower real rates of return. Foreigners will reduce their positions in domestic bonds, real estate, stocks and other assets. The financial account (or balance on capital account) will deteriorate as a result of foreigners holding fewer domestic assets. Domestic investors will be more likely to invest overseas in the pursuit of higher rates of return. The reduction in domestic investment by foreigners and the country's citizens will decrease the demand for the nation's currency and increase the demand for the currency of foreign countries. The exchange rate of the nation's currency will tend to decline. With no government intervention, the financial account and the current account must sum to zero. As the financial account declines, the current account will be expected to improve by an equal amount. In other words, the balance of trade should improve. The country's export will have become relatively cheaper and imports will be relatively more expensive. The effect of an expansionary monetary policy is to lower the exchange rate, weaken the financial account and strengthen the current account. A restrictive monetary policy would be expected to result in the opposite: a higher exchange rate, a stronger financial account and a weaker current account (a more negative, or a less positive balance of trade). In summary, the income effect of expansionary monetary policy tends to lower the domestic currency exchange rate, weaken the current account and work to improve the financial account. A restrictive monetary policy tends to cause the opposite due to the income effect. The domestic currency exchange rate increases, the current account improves and the financial account weakens. As both price and the income effects of monetary policy move in the same direction regarding their impact on the exchange rate, it is clear that expansionary (restrictive) monetary policy will lower (raise) the country's exchange rate. The effect of monetary policy on the current and financial accounts is not so clear because the price and income effects move in opposite directions. For example, the price effect of easy money on the current account tends to strengthen it, while the income effect tends to weaken the current account. Since the effects move in opposite directions, it is not immediately clear what the ultimate impact will be. We should note that investors can buy and sell financial assets such as stocks and bonds more quickly than producers and consumers can sell and buy physical goods. So initially, interest rate (substitution) effects would be expected to dominate. An unanticipated increase in the money supply will cause the exchange rate to go down, the financial account to weaken and current account to gain strength. Over time, the income effect will come into play. A rising GDP will cause both the trade balance and financial account to weaken. Some argue that for an economy with a foreign sector, monetary policy can create cyclical movements that tend to destabilize an economy. Unanticipated expansionary monetary policy

initially causes the trade balance to improve, but as time progresses, it causes the trade balance to become more negative. It initially causes the capital account to weaken due to lower interest rates, but then later tends to improve it. In the long run, the main effect of the expansionary monetary policy is a lowering of the nation's currency exchange rate, which is the international equivalent to the long-run effect of expansionary monetary policy, inflation. Empirical evidence indicates that countries with high rates of monetary supply growth experience both inflation and declining currency exchange rates. An important point to consider is the exchange rates of two countries - their relative rates of money supply growth will help determine how the exchange rate changes. Fiscal policy changes will produce both price (substitution) and income effects for exchange rates and balance of payments. Suppose government policymakers enact a program of unanticipated fiscal stimulus. This would be expected to cause the following sequence of events to occur with regard to the price effect: Greater government budget deficits caused by tax cuts and/or increased spending will increase the demand for investable funds, which will cause interest rates to rise. The increase in interest rates will cause capital inflows (foreigners will purchase more domestic financial assets). As a result, the capital account will strengthen (become more positive or less negative). Foreign investors will need to exchange their currency for the domestic currency. The increased demand for the domestic currency will cause its exchange rate to increase. If there is no government intervention with the balance-of-payments, the current account will need to become more negative (or less positive). The trade balance will weaken as imports increase and/or exports decrease. This makes sense because the strengthening of the nation's currency will make its exports relatively less attractive to foreigners and imports will be less expensive relative to the country's consumers and domestic businesses. To summarize, the price effect of a stimulative fiscal policy is to raise the value of the domestic currency, strengthen the capital account and weaken the current account. A restrictive fiscal policy would have the opposite effects: a weaker domestic currency, a weaker capital account (there would be net capital outflows) and a stronger current account. With a program of fiscal stimulus, the following sequence of events would be expected to occur with regard to the income effect: The tax cuts and/or increase in government spending associated with the fiscal policy, and the associated multiplier effect, will increase GDP. The rise in GDP will cause the demand for imports to increase and the current account will be weakened (become more negative or less positive). More domestic currency will need to be converted into foreign currencies to purchase the increased quantity of imports. The increased supply of domestic currency on the international markets will cause the exchange rate to decline. With no government intervention, the financial account will need to become more positive (or

less negative) in order to compensate for the weakening of the current account. Foreigners will be holding more of the domestic currency and are therefore in a position to purchase more of the nation's financial assets. Also, as the domestic economy is improving, they may find it more attractive as a place to invest. To summarize, the income effect associated with fiscal stimulus will tend to lower the exchange rate of the country's currency, weaken the current account (trade balance) and strengthen the financial account. Fiscal policy price and income effects move in the same direction with regard to their impact on the financial and current accounts. Stimulating fiscal policy will clearly weaken the current account (balance of trade) and strengthen the capital account. Restrictive fiscal policy will strengthen the current account (balance of trade) and weaken the capital account. The impact of fiscal policy on exchange rates is not so clear because the price and income effects work in opposite directions. The income effect tends to weaken the currency exchange rate,while the price effect will tend to strengthen the currency exchange rate. Because foreign investors can trade financial assets (such as stocks and bonds) more quickly and easily than consumers and producers can alter the purchase and sale of physical assets, the price effect would be expected to have the larger initial effect. Over time, the income effect will increasingly come into play. So initially, the fiscal stimulus should cause the domestic currency to appreciate. Over time, as the demand for imports is stimulated, the domestic currency will weaken. If the fiscal stimulus is associated with inflation, there will be a further weakening of the domestic currency. Note that the fiscal stimulus will also have the effect of worsening the balance of trade and increasing the financial account in both the short and long run. A stimulative fiscal policy is good for the economy when it is operating below full employment levels. There are a couple of factors that will mitigate the positive effects. One factor is that government deficits will work to increase interest rates, which can crowd out private investment. Another factor is that after foreign capital comes in (due to higher interest rates), the domestic currency exchange rate rises. This leads to a rise in imports, which reduces GDP. These two factors lessen the positive effects of fiscal policy stimulus. GDP per capita There is a scientific way of measuring prosperity that, while not fully descriptive, is useful in comparing the standard of living across countries. This is called the GDP per capita measure. This is simply calculated by dividing the nominal GDP in a common currency, say US dollars, by the total number of people in the country. This gives the average amount of income that each member of the population potentially has access to. In other words, the more money each individual is able to access the higher the potential standard of living.

This is a useful means of comparing economic wellbeing--that is, prosperity-- across countries. For instance, the GDP per capita in the US is around $25,000 while in Mexico it is around $7000. It stands to reason that by and large, the standard of living in the US is higher than the standard of living in Mexico. This same logic can be used to compare the standard of living between any countries. As mentioned earlier, the GDP per capita measure is the nominal GDP divided by the population. Thus, for a give amount of output, a country with a smaller population will have a higher standard of living than a country with a larger population. This is a problem often encountered in countries with very low GDP per capita measures of the standard of living. When GDP grows slowly and the population increases rapidly, the GDP per capita and thus the standard of living tends to decline over time. Thus, a major way of increasing the standard of living in a country is to control the population growth rate and thus increase the GDP per capita. Country analysis on Monetary Policy: The conduct of monetary policy in emerging market (and transition) countries confronts different challenges from that in industrialized countries. In contrast to the experience in industrialized countries, the past monetary policy experience of many emerging market countries has been dismal, with extreme episodes of monetary instability, swinging from very high inflations, to massive capital flight, to collapses in their financial systems. However, in recent years the prospects for successful monetary policy in emerging market countries have increased, as exemplified by the far lower rates of inflation in the Latin American region, which have fallen from an average of over 400% in 1989 to below 10% at the beginning of the millennium. The small open economy is populated by households, rms, entrepreneurs and a consolidated government. There are three consumption goods: exportables (x, sold both domestically and in the rest of the world), non-tradeables (n) and imported goods (f). The rst two are produced domestically, while the latter is produced abroad and sold domestically trough import agents. The production of x and n uses labor, capital, and other consumption goods as inputs, taking their prices as given. While exportable rms sell at a price determined in the rest of the world, both non-traded rms and import agents have market power and face price adjustment costs. Capital goods are produced in three steps. First, competitive rms combine entrepreneurs labor with both non-traded and foreign goods to produce nal investment goods. In a second stage, a group of competitive rms produce unnished capital goods for each sector combining nal investment goods and used capital, which they buy from entrepreneurs. Finally, entrepreneurs transform these into nished capital goods using a linear technology. This production process is subject to an idiosyncratic productivity shock, revealed privately to entrepreneurs ex-post. Because they have to borrow to produce, this informational asymmetry introduces an endogenous nance premium. In addition, they are subject to balance-sheet eects originated by movements in the nominal exchange rate, for they borrow in foreign currency but their income is denominated in local currency.

The Macroeconomics of Fiscal Policy effect of government expenditures, taxation, and debt on the aggregate economy is of immense importance, and therefore great controversy, in economics. A broad range of essential services is provided by governments, requiring the collection of taxes and fees.

Fiscal policy plays an increasingly important role in many developing countries. Decisions on fiscal policy, especially if properly synchronised with monetary policy, can help smoothen business cycles, ensure adequate public investment and redistribute incomes.The four main components of fiscal policy are (i) expenditure, budget reform (ii) revenue (particularly tax revenue) mobilization, (iii) deficit containment/ financing and (iv) determining fiscal transfers from higher to lower levels of government. Fiscal policy works through both aggregate demand and aggregate supply channels. Changes in total taxes and public expenditure affect the level of aggregate demand in the economy, whereas, the structure of taxation and public expenditure affect, among others, the incentives to save and invest (at home and abroad), take risks, and export and import goods and services.This paper presents a broad overview of fiscal issues confronting developing countries. Three of these are (i) developing countries have low tax/GDP and expenditure/GDP ratios compared to developed countries, even though developing countries need more public expenditure; (ii) developing country fiscal stance is often pro-cyclical; (iii) developing country tax resources are more volatile than those of developed countries. These issues are considered in section II of this paper. Section III considers the issue of budgetary deficits and problems arising therefrom in developing countries. Section IV considers some widely accepted norms for tax and expenditure. ECONOMIC GROWTH Standard of living Relationship between productivity and unemployment In the previous section we learned that increases in productivity allow a given amount of labor to produce a greater amount of output than was possible before the productivity increase. Popular wisdom dictates that increases in productivity thus reduce the number of jobs available, because less labor is required to produce the same amount of output. Fortunately, this is not the case suggested by the historical economic data. Rather, increased productivity seems to help the economy overall to a much greater extent than it hurts workers, especially in the long run. A historical example will serve to demonstrate this. Since the early 20th century, there has been an over 1000% increase in output per hour in the US. This means that, on average, workers today can produce more than 10 times more than what workers, on average, could produce around the turn of the century. With productivity increases this high, it seems that unemployment should be very high, too, as all of the goods and services used in the early 1900's can be produced now by a much smaller workforce. But, as productivity increases, so do the number of products and

markets available. Similarly, as products become less expensive, due to more efficient production methods, the quantity demanded for some of those products also increases. Overall, in the long run, increases in productivity are offset by increases in demand, so those jobs are not lost. Costs of lagging productivity We just demonstrated how increases in productivity do not necessarily result in a rise in unemployment. But what is the other side of this coin? That is, what are the effects of lagging productivity? In general, a country that lags in productivity will have both lower wages and lower living standards than a country with higher productivity. This assumption is based on the idea that all economies trade on the open market. If a country that lags in productivity produces a good to sell on the international market, it must price the good at the same level that more productive countries. In this case, the only way for the lagging country to produce the good at a low price is to pay labor a low wage. Thus, if labor receives a low wage, the workers are unable to provide or enjoy a high standard of living. Let's work this out through an example. Say that there is an international market for widgets. The going price is $5 per widget. Most productive countries are able to produce widgets and sell them for this price. One country, which is lagging in productivity, can only produce widgets at half the speed of the other countries. But, because the lagging country is only able to sell widgets at $5 each, it must reduce its costs of production. Since labor is the only cost that can be changed, as the machines are paid for and their maintenance cannot be put off, workers are paid less to make the country that lags in productivity competitive in the international marketplace. Prosperity What does a high standard of living entail? This judgment is relatively subjective, but there are a number of factors that seems to be common to most economists' ideals. These include physical possessions, nutrition, health care, and life expectancy. The more prosperous an economy, the better off the citizens of that economy are in terms of material possessions and health. Thus, prosperity is attainable when wages are high and countries are highly productive. This is not to say that prosperity is static. Instead, over time different countries becomes more and less prosperous. An economic boom in one country may bring temporary prosperity to that country. Similarly, a depression may wipe out some hard won gains in prosperity.

DEFINING AND MEASURING PRODUCTIVITY Productivity isnt everything, but in the long run it is almost everything. A countrys ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker. Productivity is commonly defined as a ratio between the output volume and the volume of inputs. In other words, it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. Productivity is considered a key source of economic growth and competitiveness and, as such, is basic statistical information for many international comparisons and country performance assessments. For example, productivity data are used to investigate the impact of product and labour market regulations on economic performance. Productivity growth constitutes an important element for modelling the productive capacity of economies. It also allows analysts to determine capacity utilisation, which in turn allows one to gauge the position of economies in the business cycle and to forecast economic growth. In addition, production capacity is used to assess demand and inflationary pressures. Factors that determine productivity levels The level of productivity in a country, industry, or enterprise is determined by a number of factors. These include the available supplies of labour, land, raw materials, capital facilities, and mechanical aids of various kinds. Included also are the education and skills of the labour force; the level of technology; methods of organizing production; the energy and enterprise of managers and workers; and a range of social, psychological, and cultural factors that underlie and condition economic attitudes and behaviour. Real Wage: The term real wages refers to wages that have been adjusted for inflation. This term is used in contrast to nominal wages or unadjusted wages. Real wages provide a clearer representation of an individual's wages, but suffer the disadvantage of not being well defined, since the amount of inflation, based on different goods and services, is itself not well defined. The use of adjusted figures is used in undertaking some forms of economic analysis. For example, to report on the relative economic successes of two nations, real wage figures are more useful than nominal figures. The importance of considering real wages also appears when looking at the history of a single country. If only nominal wages are considered, the conclusion has to be that people used to be significantly poorer than today. However, the cost of living was also much lower. To have an accurate view of a nation's wealth in any given year, inflation has to be taken into account and real wages must be used as the measuring stick.

Distribution of Wealth and Income The distribution of wealth and income reveals inequalities among and within countries and the ways in which wealth is redistributed.

1. fig. 1 Global Distribution of Wealth by Country (2000) This pie chart shows the global distribution of wealth among countries, illustrating the point that a small number of countries hold the majority of global assets. KEY POINTS

The distribution of wealth compares the assetsincluding income, land, stocks, and other investmentsheld by the richest and poorest members of society, while the distribution of income compares only how much money each group earns per year. Since the 1970s, the gap in wealth between the highest and lowest brackets of earners has grown, with 2 percent of the population owning a majority of global wealth and the bottom half of the population owning less than 1 percent of global wealth in the year 2000. Policies aimed at redistributing wealth may attempt to either increase the wealth of the upper class or decrease inequality. These policies may include the adoption of national economic systems or the operation of small scale charitable organizations. Purchasing power parity Purchasing power parity (PPP) is an economic theory and a technique used to determine the relative value of currencies, estimating the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to (or on par with) each currency's purchasing power. It asks how much money would be needed to purchase the same goods and services in two countries, and uses that to calculate an implicit foreign exchange rate. Using that PPP rate, an amount of money thus has the same purchasing power in different countries. This process continues until the goods have again the same price. There are three caveats with this law of one price. (1) As mentioned above, transportation costs, barriers to trade, and other transaction costs, can be significant. (2) There must be competitive markets for the goods and services in both countries. (3) The law of one price only applies to tradable goods; immobile

goods such as houses, and many services that are local, are of course not traded between countries. Economic Problems of Child Labor, Creditworthiness, Corruption, & Poverty Economic problems refer to factors that hinder the functioning and growth of an economy. Economic problems of all kind, including structural, fiscal, and cultural, impact economic development efforts by national governments, corporations, and international development organizations. Economic development encompasses a wide range of programs and strategies aimed at promoting growth in a part or whole of an economy. Developing countries with limited economies or economies in transition are particularly sensitive to economic problems of child labor, creditworthiness, corruption, and poverty and its related conditions. Child Labor Exploitative child labor, which refers to any economic activity performed by a person under the age of fifteen, is a major economic and social problem in developing countries. The International Labor Organization (ILO) estimates that there are about 250 million children, between the ages of five and fourteen, involved in at least part time labor. The International Labor Organization (ILO) estimates that there are 120 million involved in hazardous and exploitative full-time work. Child labor by region suggests that child labor is a global problem: Asia has 152.5 million child laborers, Africa has 80 million child laborers, and Latin America has 17.5 million child laborers (Palley, 2002). The International Labor Organization reports that child labor is used in multiple industries and sectors including agriculture, fishing, forestry, hunting, manufacturing, retail, trade, community and personal services, transport, storage, communications, construction, mining, and quarrying (Tierney, 2000). Child labor is deeply connected to the economic life and prosperity of many developing countries. Child labor in developing countries cannot be eradicated without solving the problems that afflict developing country labor markets. Labor market dysfunction and under-development are believed to be the fundamental causes of exploitative child labor in developing regions of the world. The eradication of exploitative child labor practices requires the development and implementation of economic development programs that strengthen the economies of developing countries. International development organizations, national governments, and corporations debate whether voluntary practices or required labor rules should be used to solve the problem of child labor in developing countries. Corporations are increasingly adopting voluntary practices, such as private labeling schemes, as part of corporate social responsibility (CSR) efforts, which certify to global consumers that a product has been produced without child labor. While voluntary efforts by corporations to use adult labor rather than child labor is a positive step, voluntary practices alone are not believed to be sufficient to eradicate child labor in developing countries. International labor standards, which address the root causes of child labor such as labor market dysfunction and under-development, have a better chance for success than voluntary practices alone. The International Labor Organization (ILO), as described in the 1998 Declaration of Fundamental Principles and Rights at Work, promotes five main international labor standards which, if adopted by developed and developing countries alike, would likely significantly impact the problem of child labor (Palley, 2002):

Freedom of Association: The ILO Freedom of Association and Protection of the Right to Organize Convention (No. 87) establishes the right of workers to form and join organizations, including unions, of their own choosing. Effective Recognition of the Right to Collective Bargaining: The Right to Organize and Collective Bargaining Convention (No. 98) protects unions from outside interference. The Elimination of All Forms of Forced or Compulsory Labor: The Forced Labor Convention (No. 29) and the Abolition of Forced Labor Convention (No. 105) require governments to suppress all forms of forced and compulsory labor in their territories. The Effective Abolition of Child Labor: The Minimum Age Convention (No. 138) sets a baseline minimum working age of fifteen. The Elimination of Discrimination in Respect of Employment and Occupation: The Discrimination Convention (No. 111) requires governments to establish national policies that eliminate discrimination on the basis of race, color, sex, religion, political opinion, and national origin (Palley, 2002, p.605). Creditworthiness Developing countries depend on international loans and grants from both the public sector and private sector to fund economic development programs and initiatives. International institutions use creditworthiness scores to determine developing country loan eligibility. Numerous national governments, international aid and development organizations, and for-profit reporting agencies compile and distribute sets of economic indicators, in part, to meet the demand for quantifiable data about economic development and activity. International organizations that depend on and produce economic indicators include the United Nations and World Bank. Common economic indicators include national income per capita, age-dependency rates, fertility rates, migration, marriage and divorce, employment, unemployment, mothers in paid employment, childcare costs, tax on labor, unemployment benefits, students' performance, material deprivation, earnings inequality, gender wage gaps, intergenerational mobility, public social spending, poverty persistence, housing costs, and pension replacement rates. Development agencies, which refer to organizations, either public or private, that lead the economic development and regeneration efforts in developing countries or regions of the world, use multiple economic tools, vehicles, and products to promote economic growth and its related social, cultural, and political gains. One of the most important economic tools that developments agencies use to promote economic growth in developing countries are loans for small and largescale businesses and initiatives. Development agencies use the criteria of creditworthiness to determine the type and amount of development loan that a developing country business or local government may receive. Ultimately, creditworthiness is directly tied to increasingly important and competitive development funds. The World Bank produces a set of statistics on developing countries based solely on income. These income-based country classifications are used to determine creditworthiness and development loan eligibility. The World Bank's main criterion for classifying developing country economies is gross national income (GNI) per capita. Gross national income per capita classifies economies and countries as low income, lower middle income, upper middle income, or high income. The gross national income categories correspond to the following income levels: Low income: $875 or less Lower middle income: $876 $3,465 Upper middle income: $3,466 $10,725 High income: $10,726 or more

While classification by income does not always correctly represent development status, lowincome and middle-income economies are usually known as developing economies. Developing countries are eligible for different types of loans based on their gross national income per capita and perceived creditworthiness. The most common economic development loans made to developing countries are made by the International Development Association (IDA) and the International Bank of Reconstruction and Development (IBRD). The International Development Association lends money to low-income countries that have difficulty borrowing on international markets. IDA loans and grants, which carry a zero interest rate, are intended to promote economic growth and improve living conditions. IDA loans are concessional loans offering interest rates below those available on the market and long grace periods. Sixty-six countries, with a per capita income in 2005 of less than $1,025, currently qualify for IDA loans and grants. The International Bank of Reconstruction and Development currently provides loans to sixty-four developing countries. IBRD loans are non-concessional, meaning they do not offer exceptionally low interest rates or long grace periods. IBRD loans are only offered to developing countries considered, based on economic indicators, to be financially creditworthy. In addition to private sector development use, as described above, developing country creditworthiness indicators, also called risk indicators, are developed and used by commercial lending institutions. Commercial creditworthiness ratings (country specific risks) refer to the likelihood that a certain country will fail to repay its debt. Default risk is evaluated using specific information about a countrys political and economic development levels thought to affect its ability and willingness to repay its loan. Commercial creditworthiness indicators determine both the volume and the rates of commercial bank loans to developing countries. Commercial creditworthiness indicators are influenced by variables such as economic fundamentals, regional location, and structure and content of its exports. Economic fundamentals refer to the ratio of non-gold foreign exchange reserves to imports, the ratio of the current account balance GDP, growth, and inflation. Three main rating agencies, including Institutional Investor, Euromoney, and Economist Intelligence Unit, produce and publish commercial creditworthiness indicators for developing countries for use by commercial lending institutions (Haque, 1996). Corruption Corruption is a social pathology that affects both developing and developed countries. Corruption refers to abuse of the agent-client relationship, misuse of public office, law violations, opposition with public opinion, and not acting in ways that promote the public interest, trust, or duty. Three main factors influence the economic impact of corruption in developing countries. These factors include: The amount of resources wasted through each corrupt action The periodicity of corrupt activities The amount of people involved in the corrupt action Corruption can be separated into two categories including small and large scale. Small-scale corruption extracts public resources to supplement the income of one or a few individuals. Large-scale corruption produces resources that promote growth and protection. Scholars and societies cite the following variables as the root causes of large-scale corruption: protection of self interest, unfair laws, pathology of the market structure, ineffective control systems, bureaucracy, lack of knowledge, economic need, job dissatisfaction, and lack of power.

Ultimately, large-scale corruption results from power networks (social networks that function through horizontal and vertical exchanges) that profit and grow through exploitation of opportunity. Power networks depend on economic, political, technical, historical, and ideological support. Large-scale corruption affects programs, law, and organizations and has a major impact on economic development. Corrupt networks grow quickly. Police and legal systems are major targets and places for large-scale corruption as these arenas offer the elements that corruption needs in order to grow. Large-scale corruption is an obstacle to economic development. Corruption impacts the resources available for development and limits the development of new institutions and ways of operating (Carvajal, 1999). Corruption and political instability threaten trade in developing countries. For example, breadbulk shippers, which refer to shippers handling cargo that cannot be stored in liquid containers or steel container boxes, transporting goods to developing countries, face corruption problems and related conditions. Corruption is often part of a wide range of economic related problems including: piracy, regime change, thieves, difficult terrain, lack of transportation infrastructure and ports, political instability, and unstable or disputed succession (Leach, 2006). Poverty Poverty, which encompasses a lack of basic necessities as well as a denial of basic opportunities and choices that permit human development, is a persistent, widespread, and intractable economic problem in developing regions. The United Nations provides two separate metrics for measuring poverty including the Human Development Index (HDI) and the Human Poverty Index (HPI) (Norton, 1998): The Human Development Index measures human capabilities through healthy life, knowledge, and a healthy standard of living metrics. The Human Poverty Index provides a metric to compare the well-being of the most deprived people in a community for the purposes of economic planning and advocacy. According to the World Bank, extreme poverty, and its related conditions such as hunger, currently affect more than one billion people in the world. The measure of extreme poverty is based on individual income or consumption levels of below $1 a day. Economic development efforts in developing countries are based on the argument that poverty reduction is tied to economic growth. Economic development, as it is practiced today, involves numerous public sector and private sector stakeholders (such as development agencies, national governments, corporations from industrialized countries, businesses from developing countries, community agencies, and populations in need) committed to ending poverty, and related conditions, in developing countries. Combating global poverty is an economic development goal that unites international development organizations, national governments, and corporations around the world. For example, in 2000, the United Nations Millennium Summit was held to create time-bound and measurable goals for combating poverty and related conditions. The millennium development goals (MDGs) have become a blueprint of sorts for national governments, development agencies, and corporations committed to aiding the worlds poorest people. The millennium development goals include the following objectives: eradicate extreme poverty and hunger; achieve universal primary education; promote gender equality and the empowerment of women; reduce child mortality; improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure environmental sustainability; and develop a global partnership for development (Millennium Development Goals, 2005).

While contemporary forms of economic development are focused primarily on eradicating extreme poverty and related conditions, economic development has been in existence, in some form, since the end of WWII. The modern era of aid to developing countries began in the 1940s as World War II ended. After WWII, world leaders and governing bodies put structures into place, such as the World Bank, United Nations, World Trade Organization, and International Monetary Fund, to prevent the economic depressions and instability that characterized the years following World War I. The modern trend of globalization, and resulting shifts from centralized to market economies in much of the world, has created both a need and opportunity for economic development in developing countries and regions of the world. International development organizations, national governments, and corporations are coming together to focus on building frameworks for economic development as the basis for achieving sustainable economic growth.