Topics in Managerial Economics

BULM 758K – Spring, 2005

Professor Charles E. Olson

3419 Van Munching Hall
Phone: (301) 405-8666
Email: [email protected]

Office Hours: College Park Tuesdays, 1– 3 pm and by appointment.

Shady Grove, before class.

Course Objectives

To obtain an understanding of the relationship between institutions and the economic

environment of business. Topics include fiscal policy, monetary policy, exchange rates,
political regimes, trade policy, country strategies for development, and investment and
policy challenges facing the advanced industrial nations.

Class Structure

The student is expected to read assignments prior to class and be prepared to

participate in a discussion of them with the instructor. This means there will be cold
calling.

Formal meetings will consist of case discussions. Most of the learning in this course
occurs through independent analysis and discussion of course materials. Students will
volunteer and/or be called on to contribute to the discussions of each case on the dates
indicated in the syllabus. (Any variation from these dates will be announced in class.)

One of the cases must be submitted in writing by a group. Groups must have a
minimum of four and a maximum of six students. Requests for case choices should be
made by e-mail, with the second and third choices indicated along with the proposed
team. Requests should be dated no later than February 7, 2005. Each team is
expected to do its own work on each case and not confer with others.

The following cases are eligible for a write-up (no more than two groups per case); Blair
Wealth, Netherlands, Brazil 2003, Sweden for Sale. Choices go to those with the
earliest e-mail date. Opening date for submissions is December 28, 2004.

Course Requirments

Class Particpation: 50%

Mid-Term Exam: 25%

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Case Write-up: 25%

It is important that your schedules permit you to be free on the exam date. Absence
from the exam will result in a grade of F, unless cleared in advance with the instructor.

Course Grievance Procedures

If YOU feel you have been graded unfairly in this course, you may use the following
procedure to voice your complaint:

1. Within eight days of receiving the grade, give me a written appeal. After eight
days, I will assume that you agree with my assessment and consider the grade
final. In other words, you should NOT wait until the end of the term to contest
grades earned at an earlier date.

2. To file an appeal, prepare a written statement detailing why you think the grade is
unfair. Be sure to document your reasons by referring to inconsistency in grading
standards, misinterpreted meaning, etc. Stating simply that you feel you “deserve”
a higher grade because you worked hard is not sufficient grounds for an appeal.
Performance is a combination of hard work AND ability.

3. Submit the written statement together with the graded material in both original and
printed form. I will consider your complaint and make a decision. You will be
notified in writing of my decision.

Like many work organizations, I have no provisions for a second layer of appeals. If
you are not satisfied with my decision, you may use university grievance procedures as
your “appeal.” Please note that I will document, to the fullest extent possible, my
rationale for all grades.

Course Material

The course material is available from Harvard Business School Publishing in either
printed or electronic form. Go to www.hbsp.com/relay.jhtml?name=cp&c=c43128. Do
not wait until right before the class to order this material. I expect to hear of any
problems you might have with HBSP by January 18, 2005.

Additional Class Policies

1. All known student disabilities and religious holidays will be accommodated. If you
have a documented condition (e.g., learning disability, physical disability, pregnancy,
etc.) or a religious holiday that requires accommodation, please see me early in the
semester so that we can determine appropriate steps.

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2. Academic dishonesty, as defined by university policy, will not be tolerated in any
form. The course is structured to provide many opportunities for you to excel, so I
will NOT be understanding in matters of academic dishonesty. If you observe
instances of dishonesty that I miss, please report them to me immediately. Academic
dishonesty cheapens the value of your degree and undermines the quality of your
education. University procedures (involving an impartial committee composed mostly
of other students) will be use to investigate reported instances of dishonesty.

3. I will not mediate disputes between team members relative to the case studies. If
a team member does not do the assigned work for a case study, it is up to the other
team members to drop that person from the team. Likewise, if a major dispute
develops in the preparation of the case, consider diving into two groups.

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 TOPICS IN MANAGERIAL ECONOMICS
Assignments

Week #1

Case: John Maynard Keynes: His Life, Times and Wrtings 702-092

John Maynard Keynes is one of the most famous and influential economists of all time and among the
most important figures of the twentieth century.
Keynes’ contributions spanned an enormous range. He developed a novel set of theories that created the
new discipline of macroeconomics. Yet, at the same time, Keynes was closely involved in the practical
world of economic policy making. He proposed a variety of responses to the Great Depression of the
1930’s and was one of the chief architects of the Bretton Woods system of international finance and trade
that grew up after the Second World War.
In between all these activities, Keynes managed an investment fund and made large amounts of money
for himself and his Cambridge College on the financial markets of the City of London. Keynes was also
actively involved in the arts, marrying a Russian ballerina and creating and financing the Arts Theatre in
Cambridge, England.
Keynes was fascinated with how businesses and individuals took decisions in the face of uncertainty.
Many of his policy proposals revolved around this issue.

Questions:
1.Keynesian economics is often viewed as justifying increases in deficit spending by the government to
stimulate real economic activity. How does this proposal related to Keynes own writing
reproduced the case?
2.What role do confidence and psychology play in Keynes understanding of the economy and the role
of government?
3. Why is Keynes so concerned with uncertainty?

Case: The Birth of Macroeconomics Policy: Sweden 704-029

The central theme running through this case is the choice faced by central banks between stabilizing the
price of foreign exchange and stabilizing some index of domestic prices. Over one hundred years ago,
Wicksell said the latter was superior. Recently, many central banks have explicitly adopted the goal of
stabilizing domestic prices. New Zealand provides one notable example of this. Whenever either the
Finance Minister or the Central Bank President changes in New Zealand, they jointly sign a letter setting
forth a domestic inflation objective for the central bank. This letter commits the central bank to explain
any discrepancy of actual inflation from this objective.

Questions:
1. Why do so many countries want to get back on gold after World War I?

2. Why did Sweden give it up in September 1931?

3. Why does the Riksbank focus on exchange rate stability starting in 1933?
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 4. Why was Sweden a pioneer in monetary and fiscal policies?

Week #2

Case: Alan Greenspan 702-072

This case describes the life and times of Alan Greenspan.

Questions:
1. Why does Greenspan instill confidence?
2. What impact has Greenspan had on the international economy?

Case: Mexico – The Tequila Crisis 1994-95 702-093

Mexico – The Tequila Crisis explains “Washington consensus” policies. The case discusses the weakness
of Mexico’s financial infrastructure and the inability of its banking system to intermediate the vast capital
inflows efficiently. Moreover, the case places these institutional weaknesses in the context of the broader
political and social shortcomings of the Mexican state in the early 1990’s.

Questions:
1. What caused Mexico’s peso crisis of December 1994?
2. Have capital inflows helped or hindered Mexico’s development strategy?
3. How should the Mexican authorities respond to this case?
4. Can crises of this type be avoided? Are new international rules or institutions needed? Are
controls on capital a desirable response?

Week #3:

Case: Uganda and the Washington Consensus 798-047

In the late 1990’s, the Western world heaped praise on Uganda for its apparent economic transformation
from devastation to growth. Moreover, Uganda was applauded for improved management of the ethnic
and racial strife that divided the country (often violently) in the past. At the time the case is set and
following a decade of reforms, Uganda is finally reaping some of the benefits brought by economic
austerity.

These apparent successes are set against the historical and geographical context from which the Uganda
of the late 1990’s emerged. Foremost in the this discussion is the chaos and violence which soon
followed independence from Britain in the early 1960’s.

Nonetheless, by the late 1990’s, Uganda presents a textbook case of IMF structural adjustment and has
been held up by the IMF and the U.S. Treasury as a model for other African countries. In this context,
President Museveni must now decide the best way in which to govern his country into the next century.
Foremost among the challenges he faces are: how to diversify the export base and attract foreign
investment; how to manage the burden imposed by external debt; and how to distribute scarce resources

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(balancing competing demands for investment in human capital, spending on social and economic
infrastructure and health services, along with a whole host of other demands).

Questions:
1. Viewed from the perspective of the late 1990’s, has Uganda been a success story since 1967 (as
an article in the New York Times at that time suggested?) On what criteria should success be
measured?
2. To the extent that Uganda has been successful, is this because of - or in spite of – the role played
by the International Monetary Fund in its development strategy? How important are the policies
introduced independently of the IMF program by President Museveni?
3. Do you agree with President Museveni’s assessment that economic growth must come before
Western-style democracy?

Case: The Argentine Paradox: Economic Growth and the Populist Tradition 702-001

The case covers Argentina’s general context, including Peron’s rise to power. It then focuses on
Argentina’s numerous attempts at stabilizing its economy.

Questions:
1. Why did Argentina fall from being one on the world’s richest nations to an “also ran”?
2. What is populism? Does it just mean left wing? Was Peron a populist? In what ways? Why was
populism more influential in Argentina than in other countries, such as the United States?
3. Why was stabilization delayed for so long?
4. What have been the positive legacies of Argentina’s populist tradition?

Week #4

Case: Argentina’s Convertibility Plan 702-002

The case covers Menem’s background and his convertibility plan. It then discusses the initial results of
this plan and the problem of potential collapses.

Questions:
1. Why is a populist president introducing such an orthodox and rigid policy as the Argentine
currency board? Why is the Peronist president in league with such a technocratic, market-
oriented economist as Finance Minister Cavallo?
2. Did the Convertibility Plan work well for Argentina in the period discussed in the case?
3. In the context of the impact of the tequila crisis on Argentina in early 1995, what is the dilemma
faced by President Carlos Menem? What tradeoffs does he face? Should he respond by
abandoning the currency board?

Case: Argentina’s Financial System: The Case of Banco de Galicia 702-033

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The case is divided into three sections. It first covers macroeconomic problems up through the mid-
1990’s. Then the relationship between capital markets, legal institutions and corporate governance is
covered. Finally, the case focuses on Banco de Galicia and its proposed share offer.

Questions:
1. As a minority shareholder in Banco de Galicia, would you accept the tender offer described in the
case? Why or why not?

2. Should the Argentine authorities encourage or discourage the sale of Argentine banks to
foreigners? What are the pros and cons of foreign ownership of the domestic banking sector?

3. As an advisor to the Argentine government, what legal framework for governing share trading
would you recommend in light of the case of Banco de Galicia? Is you recommendation feasible
in Argentina?
Week #5

Case: The 2001 Crisis in Argentina: An IMF Sponsored Default 704-004

“The 2001 Crisis in Argentina” is used to:

*Study theories of banking, financial and exchange rate crises and, in particular, the connections between
them.

*Discuss problems of development, and in particular, the difficulty of escaping a “development trap”
where the institutional environment is weak and the public’s faith in policy-makers (and even in market-
based economic principles) is also weak or non-existent.

*Analyze the political difficulties associated with the management of economic crises.

Questions:
1. What caused the breakdown of Argentina’s economy and society?
2. Why didn’t Cavallo’s rescue plan work?
3. What should Duhalde do in response to Argentina’s crisis?

Case: Bolivia: Globalization, Sovereignty, or Democracy? 702-086

In the mid-1980s, Bolivia endured hyperinflation as the institutional, economic and social fabric of the
country collapsed under the increasing burden of the 1980s international debt crisis. Finance Minister
Gonzalo Sanchez de Lozada, in association with Harvard Professor Jeffrey Sachs, designed and
implemented an “orthodox” stabilization plan in early 1986, which reduced inflation dramatically.

In the years following macroeconomic stabilization, Bolivia’s growth resumed. But by the mid-1990s,
problems were beginning to surface. In particular, the largely disenfranchised, rural indigenous
population clamored for greater influence and economic status. In February 2003, their protests escalated
into full-scale riots, marking Bolivia’s worst period of civil unrest for 50 years.

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The situation left many observers debating whether market-oriented policies could ever produce real
improvements in living conditions for the country’s poorer citizens. More generally, they questioned
whether a stable, internationally integrated economy could ever coexist with democracy.

Questions:
1. How did the Lozada/Sachs plan work? Why was it successful while previous attempts to
eliminate inflation had not been?

2. What role did political factors play in the stabilization? Were these unique to the time and place?

3. Can Bolivia be a participant in the global economy (and, in particular, the global financial
market) and remain a full democracy? Do the political rights of the poor, rural, indigenous
population have to be suppressed if Bolivia is to be able to access these international markets?

Week #6:

Case: Fresh Start? Peru’s Legacy of Debt and Default (A) 703-001

The main purpose of this case is to teach about the determinants of the extent to which countries pay back
their sovereign debt. In addition, the case allows the exploration of a “heterodox stabilization plan” in
which Garcia initially lowers inflation while also reducing unemployment. Since conditions in Peru
worsen considerably after this plan is instituted, both the strengths and weaknesses of this plan can be
explored.

Questions:
1. Did Garcia’s debt plan make sense?
2. Should he have paid even less?
3. Were buybacks of debt in the secondary market a good idea?
4. How about Garcia’s other policies. Were they successful initially? Why?
5. Why did he choose to have several different exchange rates?
6. Did his experiment have to end in hyperinflation?
7. What should Fujimori do?

Case: Botswana: A Diamond in the Rough 703-027

Questions:
1. Is Botswana a success story.
2. What accounts for the country’s performance?
3. Is this performance sustainable?

Week #7:

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Case: India on the Move 703-050

The decision point for this case is February 2003. India’s Finance Minister, Jaswant Singh, is reviewing
the latest draft of the national budget for 2003-04, with another year of huge fiscal deficits. The Plan
extends, for another year, the gradual process of structural adjustment underway since 1992. The country
needs desperately to grow faster than it has for the past few years, but geographic and religious frictions
have recently disrupted national political process. Singh knows that these large deficits undermine the
goals of the 10th Five Year Plan, but he also understands the political realities facing his party, the BJP, in
national elections one year hence.

Questions:
1. Why did India experience relatively slow economic growth (3.5%, the “Hindu rate of growth”)
from independence until 1991?
2. Why did Rao adopt the post-crisis, “Washington Consensus” strategy? How is it working?
3. How big a deal are Hindu-Muslim frictions? Demographic fragmentation? Deficits?
4. Is India an attractive site for foreign direct investment?

Cases: Saudi Arabia: Getting the House in Order 702-031

World Oil Markets 702-030

This case focuses on Crown Prince Abdullah's effort to liberalize Saudi Arabia, whose economy has long
been dependent on oil exports. His efforts to liberalize, however, come at a politically and socially
sensitive time - just after September 11th and amidst violent conflict in the Middle East. In a desperate
effort to maintain oil prices, OPEC has recently reduced output by 1.5 million barrels daily - with Saudi
Arabia bearing the largest cut.

Questions:
1. Why has Saudi Arabia's economy grown so slowly over the past two decades? What role did oil
play?
2. What should Crown Prince Abdullah do to "get his house in order?" What should be his oil
policy?
3. Why does there appear to be so much anti-American sentiment in Saudi Arabia? Will this
sentiment have important consequences for the country's future political and economic
development?

Week #8:

Midterm Exam

Week #9:

Case: Singapore 793-096

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For more than 25 years, Singapore has achieved virtually unprecedented levels of real economic growth.
Governed closely by Lee Kuan Yew, Singapore benefited from an unusual mix of macroeconomic and
microeconomic policies. In the early 1990s, however, the island nation is faced with apparent
diminishing returns to its previous strategy, new competitive pressures, changing social issues, and new
leadership.

Questions:

1. How do you explain Singapore's performance since 1965? Why has it outperformed most
other developing countries?
2. What is the role of savings and investment in Singapore's development? How has
productivity growth been attained, and how has it contributed to economic performance?
3. How has Singapore avoided the problems that plagued the USSR in the 1970s and 1980s?

Should Singapore change its strategy in August 1992? If so, why and how? If not, why not?

Cases: Malaysia: Capital and Control 702-040

Capital Controls 702-082

On September 1, 1998, the government of Malaysia imposed currency and capital controls in response to
the financial crisis that had swept Asia. The controls sparked an enormous controversy in the
world of international finance. Some celebrated the controls for insulating the Malaysian
economy from the unstable international financial system. Others criticized the controls for
trapping investors and allowing the government to protect the interests of “cronies.” This
debate also raised the central question about the future of the international financial
architecture: What is the appropriate balance between financial market freedom and
government discretion in the management of the global economy?
Questions:
What caused the financial crisis in Malaysia?
Why did the Malaysian government impose currency and capital controls? Were the controls necessary?
Were they effective? What were the benefits and costs? What are the lessons of Malaysia’s
experiment with currency and capital controls?
1. Why did the international financial community react so negatively to the Malaysian currency and
capital controls?
What have been the effects of the Malaysian government’s attempts to achieve “national unity” between
1971 and 2001?

Week #10:

Case: The Blair Wealth Project: Antecedents and Prospects 702-008

Britain’s economy after the Second World War is often seen as having evolved according to a “stop – go”
pattern, with spurts of economic growth alternating with contractions required to dampen inflation and
correct balance of payment imbalances.

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Prime Minister Margaret Thatcher (1979 – 90) attributed this pattern to the weakness of the supply-side
of Britain’s economy and lack of discipline among macroeconomic policy makers. She set out to address
the former problem with a series of structural reforms, notably of the trade unions and labour market.
Rule-based macroeconomic policies (staring with monetarism) dealt with the latter issues.

Britain boomed briefly in the mid-1980s following Mrs. Thatcher’s revolution, but the boom culminated
in a recession in the early 1990s. This ultimately led to Tony Blair’s New Labour government achieving
power in 1997, charged with a mandate to address what were seen as shortcomings in the Thatcherite
reforms.

Questions:
1. What were the causes of Britain’s “stop – go” economy?
2. Did Prime Minister Margaret Thatcher address these problems successfully?
3. What is the difference – if any – between “stop – go “ in the 1950s and ‘60s and what Gordon
Brown, New Labour’s Chancellor of the Exchequer (i.e., Finance Minister) has called “twenty
years of Tory boom and bust” under Mrs. Thatcher and her conservative successor?
4. Do you believe that the policies implemented by Blair’s New Labour government will finally
abolish the macroeconomic instability that has plagued the U.K. through the second half
of the twentieth century?
Case: Renewing Germany: Kohl’s Legacy and Schroeder’s Dilemma 702-087

From the 1950s through the 1980s, the German economy has been seen as the locomotive of European
(and, on occasion, global) growth. Germany appeared to weather the stagflation of the 1970s more
successfully than many other industrial economies. Reunification of East and West in 1990 at the end of
the Cold War appeared to present further opportunities for growth and economic dynamism.

Yet by the time Gerhard Schroeder was elected Chancellor of Germany in 1998, many saw Germany as
the new “sick man of Europe” – a title assigned to Britain during the 1970s. Burdened by the
unanticipated high costs of integrating the former East Germany into the Federal Republic and choked by
labour market regulations and dormant financial markets, German Business was no longer seen as a
world-beater. Unemployment mounted to levels not seen since the 1930s and economic growth
stagnated.

In this context, many argued for fundamental reform of German institutions, although many of these
institutions seemed to have served Germany well during most of the post-Second World War period.

Questions:
1. Why did Germany manage the stagflation of the 1970s better than the United Kingdom? What
role does institutional structure play in this comparison?

2. Are German labour markets flexible? If so, in what respects? If not (and this is seen as a
problem), how was Germany so (relatively) successful in economic terms prior to unification?

3. Does Germany need to change? In what respects? What advice would you offer to incoming
Chancellor Schroeder in 1998?

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Week #11:

Case: The Netherlands: Is the Polder Model Sinking? 702-051

The Netherlands suffered economic crisis in the late 1970s and 1980s, despite (or perhaps because of) its
access to North Sea gas. In response to mounting inflation and unemployment, a tripartite agreement
between employers, unions and government was reached at Wassenaar in 1982.

This agreement laid the basis for macroeconomic stabilization in the 1980s. At the same time, a variety
of structural reforms were introduced – centered on improving the flexibility of the labour market by
increasing part-time work. The results appeared impressive: by the mid 1990s, the Netherlands was
enjoying strong economic growth and unemployment rates of below 3%, much lower than its large
continental European neighbors and even better than the U.S. at the height of the New Economy boom.
President Clinton saw much to admire and even to emulate in the Netherlands.

However, many observers doubted the sustainability of this so-called “polder model”. Low
unemployment had been achieved in part by reducing participation rates. Some doubted whether a
declining working population could sustain the Dutch standard of living. At the same time, the
Netherlands was not a leader in technological development and others were concerned whether it could
compete effectively in the new global information economy.

Questions:
1. What is the “Dutch disease”? Is it the cause of the Netherlands’ economic problems in the 1970s?

2. Why did employers sign the Wassenaar agreement when market conditions (i.e., high unemployment)
appeared to offer scope to reduce wages through the market mechanism?

3. Why did trade unions agree to increased labour market flexibility through greater part time work? Are
labour unions an aid or a hindrance to economic stability and growth in the Netherlands?

4. Is the polder model sustainable? How, if at all, should it be amended in 2002?

Case: The EU’s 13th Directive on Takeover Bids: Unlucky for Some? 703-014
In the late 1990s, the United States boomed in the context of the so-called New Economy. The countries of the
European Union – despite their progress with integration in the form of the Single Market 1992 program and the
adoption of a single currency in January 1999 – appeared to languish behind the U.S. and looked for ways to
stimulate faster growth.

Many observers pointed to the need for structural reform and, in particular, the creation of American-style
deep and liquid continent-wide capital markets that would act as the catalyst for managerial change. By
subjecting incumbent managers to the pressure of hostile takeovers, greater discipline and improved
efficiency would result.

However, hostile takeovers were anathema to the bank-centered systems of corporate governance typical
of continental Europe in general, and Germany in particular. The EU Commission introduced a draft
takeover directive in 1989. After a tortuous process through the labyrinthine corridors of many European
institutions, the directive was ultimately rejected on the basis of a tied vote in the European Parliament.
This rejection had been engineered by the German Christian Democrats – a supposedly right-of-center
party supported by German business
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Questions:
1. Does Europe need a EU takeover directive? Why or why not?

2. How does the EU work? Does the institutional structure of the EU make sense?

3. After the failure of the European Parliament to approve the directive, should EU Commissioner
Bolkenstein introduce a new Takeover directive? Of what type?

4. Will the creation of American-style capital markets allow Europe to emulate American economic
performance? In light of the collapse of the internet bubble in 2000-01 and the subsequent Enron
scandal, is attempting such emulation sensible?

Week #12:

Case: Spain: Straddling the Atlantic 705-006

This case provides a broad overview of economic and political developments in Spain from the 1940s to
the present day. The case examines the emergence of Spain from the Franco dictatorship and its
convergence into a vibrant democracy, as reflected in the surprising election results of 2004. Also
discussed is the economic transformation of Spain and the interrelationships between the economic and
political dynamics. Additionally the case highlights the role the European Union (EU) played an
inspirational goal and institutional constraint on how Spain developed both economically and politically.
The case discusses in greater detail the Spanish labor market and the evolution of unemployment levels in
Spain. It also looks at the role of terrorism in a society such as Spain’s with reference to both the Basque
separatist terrorism of ETA and the international terrorism associated with the Atocha station bombings in
2004.

Questions:
1. How had the EU shaped economic and political development in Spain over the last three decades?
2. What are the implications of high levels of unemployment in many continental European
economies?
3. What are the possible solutions to high unemployment?

Case: Italy: A New Commitment to Growth 703-007

In 1992, Italy committed itself to the Maastricht criteria for eventual currency union with Europe. At the
time, its macroeconomic performance criteria were a shambles. In the subsequent seven years, Italy made
dramatic adjustments to fiscal and monetary policy, successfully meeting the criteria by 1998.

More difficult, however, were fundamental microeconomic and political adjustments that Italy needed in
order to become competitive. This, the case depicts a country now a part of the European Union, but
lagging in investment, employment and the prospects for growth. The first part of the analysis assesses
Italy’s macroeconomic strengths as well as its microeconomic, political and cultural weaknesses. The
second part considers the workability and feasibility of Silvio Berlusconi’s reforms – in light of Italy’s
non-compliance with the Stability and Growth Act.

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Questions:
1. What effect has the Maastricht Treaty had on Italy? Why is Italy’s unemployment so high? Can
Italy expect to become a state in the United States of Europe?

2. In 2001, Italy’s GDP/capita (adjusted for purchasing power parity) was $24,340 and the USA’s,
$34,820. Why was Italy so far behind?

3. Are clusters a part of the problem or part of the solution?

4. What is the implication of Italy’s demographic profile, vis a vis future growth, unemployment,
savings and pensions?

5. What is your evaluation of Berlusconi’s reforms? Are they feasible? Will they work?

6. Is Italy a good place for foreign direct investment? Why? Why not?

Week #13

Case: Brazil 2003: Inflation Targeting and Debt Dynamics 704-028

“Brazil 2003: Inflation Targeting and Debt Dynamics” consists of three distinct sections. The first
section includes a brief history of the Brazilian economy from the import substitution strategy of the
1950s to the economic crisis in 1999 that forced Brazil to float its currency.

The second section goes into detail surrounding inflation targeting. It introduces the mechanics of
inflation targeting, alternative monetary policy management regimes, challenges of inflation targeting in
emerging market economies and Brazil’s specific framework.

The third section focuses on Luis Inacio “Lula” da Silva. It describes his background, the presidential
election and his first few months in office. Inheriting a weakly performing economy, President Lula is
forced to consider what actions to take. Complicating matters is the large public debt. The reader is asked
to contemplate what he and the Central Bank of Brazil should do in the face of a looming recession and
Brazil’s complicated debt dynamics.

Questions:

1. What is inflation targeting? What are the alternatives?

2. Would you buy a Brazilian Bond July 2002? How would you make your decision? What other
information would you like to have?

3. How about August 2003. Would you buy a Brazilian Bond? What has changed?

4. Is inflation targeting a good strategy for emerging markets such as Brazil?

Case: Korea: On the Back of a Tiger 700-097

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Under President Park Chun Hee (1961-1979), Korea achieved extremely fast economic growth. This
record of economic success was attributed to Park’s deft management of the economy and to his
development strategy. Park’s successors have tried to move away from that strategy but their reform
efforts have been complicated by the economic and political changes in Korea in the 1980s and 1990s.
Questions:

1. How did Korea achieve its miracle?

2. How did Park Chung Hee ensure that his strategy would promote economic growth?

3. If Park’s strategy was so successful, why did his successors want to change it?

4. Was the financial crisis in 1997 inevitable?

Week #14

Case: The Welfare State and its Impact on Business Competitiveness: 703-019
Sweden Inc for Sale?

The “Swedish model” – sometimes presented as a “third way” between savage capitalism and unrealistic
socialism – was much lauded in the 1960s. It was viewed as a strategy that addressed social concerns
while supporting economic growth. However, the financial and currency crisis of the early 1990s threw
the model into doubt and prompted much soul searching and reform among Sweden’s establishment.

The welfare state introduced in Sweden imposed a high tax burden on individuals and business. By the
late 1990s some concerns were emerging that these costs were acting as a deterrent to doing business in
Sweden. In an international market for labour and capital, Sweden was a less attractive home for high-
flying MBAs or multinational companies than other countries.

Questions:
1. Is the Swedish welfare state successful? On what criteria?
2. Does the welfare state prompt or hinder innovation and business dynamism?
3. If Sweden is concerned with the instabilities and risks of capitalism which arise from the capital
market, why does it address these indirectly through the welfare state and labour market
regulation rather than directly by intervening more extensively in capital markets?
4. Can the “Swedish model” survive in the context of globalization and European integration?

Case: Inequality and the “American Model” 703-025

The official data suggest inequality has been rising in the United States on various dimensions since 1973.
Many causes of such inequality have been postulated: technologic change; globalization; demographic
factors; and changes in public policy (notably changes in taxation during the Reagan presidency).

Whether rising inequality matters is an open question, particularly in economic systems that give priority
to individual effort and responsibility. Some dimensions of inequality may be of concern, whereas other

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dimensions may be viewed as less problematic. To the extent that rising inequality is seen as a social
problem that needs to be addressed, various policy proposals have been advocated. An understanding of
the role of inequality in the American model is important also because of its link to the set of beliefs on
which American institutions are based.
Questions:
1. Which is of greater concern: poverty or inequality? Should we be concerned with rising
inequality in the United States?
2. How should business respond to inequality? Does it create business opportunities?
3. What are the causes of inequality in the United States?
4. What policy responses are appropriate? Can the United States learn from the experiences of other
countries discussed in this course? If so, what lessons should it draw?

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