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Chapter 2: The Economic Environment

Chapter Objectives
Structure Of The Chapter
The global economy
Chapter Summary
Key Terms
Review Questions
Review Question Answers

Much was said in the first chapter about the necessity to take into account the global "environmental" factors. These factors are those so called "uncontrollables", unlike the "controllable" factors of price, promotion, place and product. They include market tastes, economic, socio cultural, legal, technological, competitive and political factors to name but a few. Failure to account for these factors can lead to dire consequences. As can be seen later, the failure by Tanzania to take account of the market changes and demand shift to polypopylenes from sisal, led to a demise in that country's sisal industry.

Chapter Objectives

The objectives of this chapter are:

· To describe and demonstrate the importance of the "economic" environment factor in planning and carrying out global marketing

· To show the importance of the "economic" factor in global marketing

· To describe and give an understanding of the major world regional economic blocs with particular emphasis on developing countries

Structure Of The Chapter

The chapter starts off with a review of the global economy, the composition of world trade and the World Trade Institutions. Regionalism is a major phenomenon of the late 80s and early 90s and so the chapter describes in detail a number of major regional economic blocs. Very important in any discussion on economic factors is the size of market, and more specifically, the market ability to purchase, which depends on levels of income. The chapter finishes by looking at the nature of economic activity including the stages of market development, urbanisation and infrastructure as important precursors to the degree of economic activity.

Note that a comprehensive case study covering the "environmental" aspects of global marketing occurs at the end of chapter four.


In the past fifty years the global economy has changed rapidly. Particularly marked has been the development of world economic integration and standardised products. Coca Cola, Nissan and Marlboro cigarettes are examples of products which serve nearly every market. Generally there have been four major changes:

· capital movements rather than trade have become the driving force of the global economy

· production has become "uncoupled" from employment

· primary products have become "uncoupled" from the industrial economy and,

· the world economy is in control - individual nations are not, despite the large world economic share of the USA and Japan.

Taking each of these changes in turn, world trade is about some US$ 3 trillion, however, capital movements are much higher. The London Eurodollar market is worth about US$ 75 trillion per annum and foreign exchange transactions are US$ 35 trillion per annum.

Another change is the decoupling of employment from production. Employment is in decline whilst manufacturing output is growing or remaining static at 20-25% of GNP. Sectors such as agriculture, are achieving higher productivity through mechanisation but this is at the expense of employment.

Still another change is the decoupling of the primary product market from the industrial economy. Many commodity prices have collapsed, for example tea, yet industrial economies have been relatively affected. Unfortunately the prime producers have been dramatically affected.

Finally, the most significant change is the change of focus from domestic to the world economy as the chief economic unit. This has been grasped by Japan and Germany, but not really by the USA, or Africa. These factors have repercussions on exporting by developing countries. Firstly with developing countries' emphasis on the export of primary products, they are at the mercy of world supply and demand movements, with the resultant fluctuations in prices. Depressed world market prices can have a deleterious effect on developing economies. Secondly the rapid globalisation and focus away from domestic economies has created global competition and in turn, this has pushed up quality. Generally speaking, unless developing countries can break into non-comittally based products they are being further left behind in the global economic stakes. However positively, whilst developed worlds concentrate on industrial and service products it leaves opportunities for developing countries to export more food based products.

The global economy

The development of the global economy can be traced back many hundreds of years when traders from the east and west came together to exchange goods. However, the growth of the modern global economy is marked by a number of features as follows:

The legacy of mercantilism 1500-1750

The prevalent wisdom was one of nationalism, that is, that one nation prospered at the expense of another. Nations like the UK, Netherlands and later France and Germany, with powerful navies which ruled the waves in the West, and the traders of the East, dominated that area. Over time, nationalism gave way to bullionism, where gold and silver, rather than other raw materials, became the basis of wealth. Still later, domination took another form, where countries were believed to be powerful if they had a favourable balance of trade - an excess of exports over imports. Mercantilism died with the development of the United Nations (UN) and the General Agreement on Tariffs and Trade (GATT), along with Adam Smith's tome on the "Wealth of Nations" which advocated market forces as the principal driving force to development and wealth.

World trade

Economic progress is linked to world trade and those who preach trade restrictions are denying this fact. Countries like the old communist bloc (Russia, East Germany, etc.) have not developed as fast as those with more outward orientation. The same can be said of African nations, where the inability to industrialise and export in volume has locked them into, generally, primary product producers. Economic Structural Adjustment Programmes (ESAP) are supposed to remedy this situation by giveng "command economies" a market oriented focus.

Another argument concerns whether marketing has relevance to the process of economic development. Less developed countries (LDCs) have traditionally focused on production and domestic income generation. Also, marketing addresses itself to needs and wants and it could be argued that where LDCs' productive capabilities are far less than unsatisfied needs and wants, then marketing is superfluous. However, adopting "marketing" could lead to the more efficient and effective use of productive and marketing resources and it may be able to focus on current needs and find better solutions. For example, techniques developed in the West for optimising transport resources could well be transferred to effect. Similarly, adopting new methods of marketing may give better results. A good example is the Cold Storage Company of Zimbabwe (CSC). By changing from the current system of marketing cattle (the CSC takes in cattle, at fixed prices and slaughters) to an auction system by description, all actors in the system could benefit.

Decisions in product, price, communications and merchandising can stimulate economic development. Changing from fixed price systems to market based pricing could lead to the faster achievement of development objectives (for example "higher incomes"). In current drought conditions in Africa, governments could well benefit from advertising other forms of nutritious food, for example, fish, rather than let the populace be left uninformed and disgruntled about the lack of maize.

Composition of world trade

Agriculture, minerals, fuels and manufactured goods figure most in world trade. However shifts are occurring (see table 2.1)6.

Table 2.1 Shift in commodity trade - % of world trade





















Interestingly enough, those economies which have divested themselves of agriculture (or made it more efficient) and invested in manufacturing are those which have shown spectacular growth. Table 2.2 compares Zimbabwe with Thailand6.

Patterns of trade

Most industrialised nations trade with each other. This had led to their continued domination. particularly the USA, Western Europe and Japan which between them have 66% of world GNP and trade. In 1985 industrialised trade to other industrialised countries accounted for 47% of trade, next came developing countries to industrialised (15%), and finally industrialised to developing countries (13%). Political influences can also be seen between trading partners, for example Zimbabwe's trade with China. Marketers need to identify trading patterns between nations and product trading patterns. East-West trade and West to the former communist bloc is likely to grow at the expense of North-South trade.

Table 2.2 Structure of production

Distribution of GDP %


GDP $ m





































This pattern is repeated throughout Africa and Asia in general.

Comparative costs - comparative advantage

As discussed in chapter one, price has been called the immediate basis for international trade - cheaper prices based on different cost structures, especially labour. Countries trade because they produce and export goods in which they enjoy a greater comparative advantage and import goods in which they have a least comparative advantage. A further refinement of this is the international product cycle discussed fully in chapter one.

Balance of payments

This is the measure of all economic transactions between one nation and another. The balance of payments is made up of the current account, showing trade in goods and services; and the capital account, which shows financial transactions. In 1989, after official transfers, the USA had a US$ 109,242 million deficit on its current account, Japan had a $ 131,400 million surplus, Tanzania a $ 778,5 million deficit and Zimbabwe a $ 2,783 million deficit.

The balance of payments account helps marketers select the location of supply for foreign markets and the selection of markets. The capital account may show the nations which have control restrictions and hence be difficult to deal with. In this regard, African nations are generally disadvantaged.

Government policy

This refers to the government measures and regulations which have a bearing on trade - tariffs, quotas, exchange controls and invisible tariffs. These can cause formidable barriers to marketers and will be dealt with at length later.

World Institutions

Institutions like GATT and the United Nations Conference on Trade and Development (UNCTAD) have been of help to countries in their development. GATT had over 120 members and associated and accounted for 80% of world trade. Its intention was to create a general system of preferences and negotiate tariffs for members' products on a nondiscriminant basis and provide a forum for consultation. The Kennedy Round of the 1960s was superseded by the Tokyo round of the 1970s and that by the current Uruguay round signed in 1994.

UNCTAD furthers the development of emerging nations. It seeks to improve the prices of primary goods exports through commodity agreements. It also established a tariff preference system favouring developing nations.


Regionalism is a major and important trade development. Some regional groupings have either market (EU) or command (China) or mixed economies (former communist countries and The Preferential Trade Area (PTA) and The Southern African Development Community (SADC). With these developments, free trade zones have occurred (all internal barriers abolished) economic unions (the EU), export pricing zones (Mauritius) and other schemes. The major regional economic organisations are: Acuerdo de Cartegna (Andean Group), Association of South East Nations (ASEAN), Asian Pacific Rim countries (APC), Caribbean Community and Common Market (CARICOM), Central American Common Market (Mercado Comùn Centro Americano), Council of Arab Economic Unity, Economic Community of West African States (ECOWAS), the European Union (EU), Latin American Integration Association, Organisation Commune Africane et Mauricienne, Preferential Trade Area (PTA) and the Southern African Development Conference (SADC). A principal collapse has been the Council for Economic Assistance (COMECON) with the disappearance of the communist bloc in Eastern Europe. Of these blocs, the EU (reporting 33% of world trade) and EFTA are very important. To counteract the growing power of the EU, the USA and Canada have entered into an agreement with Mexico as a willing partner and created the North American Free Trade Agreement (NAFTA).

These blocs are of various form, power, influence and success. ASEAN is a collaboration of industry and agriculture, PTA in tariffs. SADC and PTA have had historically little impact but are now beginning to grow in importance in view of the normalisation of South Africa. The EU, North American Union and the Pacific Rim Union will pose the greatest power blocs in future years. Many developing countries have entered into trading blocks as a reaction against loss of developed country markets or as a base to build economic integration and markets.

The development of trading blocs can bring headaches and advantages to trade. It is worth comparing the European Union, a relatively well developed bloc, with SADC and the PTA which are well developed. SADC and PTA are described in a little detail in appendix one and two of this chapter.

The international financial system

Global financing operations based on the gold standard gave rise to instability, so Bretton Woods, post World War II, saw the nascence of the International Monetary Fund (IMF) and World Bank.

The IMF deals with the International Monetary System. Involved countries joined IMF to establish a par value for other countries in terms of the US dollar and maintain it with +/- one percent of that value. The system fell down because large corporations were holding more funds than banks and so a "float" set in. IMF began to fade somewhat. However it still lends, on a short term basis, to countries with payment problems to help them continue trading.

The World Bank, or International Bank for Reconstruction and Development (IBRD) deals with international capital. It provides long term capital to aid economic development. Currently it has about US$ 22 billion annually for this operation. The role of the World Bank has often been criticised especially on its conditionalities for loans to Africa in funding structural adjustment and trade liberalisation programmes. However many developing countries require institutional funding to help them with trade and balance payment problems.

Other major lenders include the EU and bilateral donors and agencies who have provided money for developmental projects. A principal donor is the United States Agency for International Development (USAID).

The United States of America

Since the Gulf War of 1991, the USA has played an increasingly important role in the economic affairs of the world. Since that time, itself, and its agency USAID, have increasingly flexed their muscles. However, the balance of economic power in recent years, has shifted towards the Pacific rim, especially Japan and the Asian Tigers.

Individual economies

Whilst the global factors listed above have aided the development of a world economy, marketers must consider carefully individual economies. A study of these helps answer the questions - how big is the market and what is it like? Currently there are over 200 individual countries in the world.

Size of market

General indications of market size include population (growth rates and distribution) and income (distribution, per capita, GNP).

a) Population: In general, the larger the population, the bigger the market. However there is no correlation between income level and population. China has 2 billion plus people, India 1 billion, Zimbabwe 8 million. However, they do not have the same income per capita as the USA or UK. In 1993 the USA population of 252.2 million, the UK 57.4 million and Africa 400 million, were respectively 6%, 1.5% and 9% of the world's population. However the USA and UK had an infinitely higher GNP per capita income than Africa, US$ 22,520, UK $17,300 and Africa $ 270 respectively (1989).

Different countries experience different population growth rates. In the early 90s, the UK had an annual growth rate of 0.1%, the Ivory Coast 6%, and Africa in general, 3% per annum. Low income countries and oil rich countries have the largest growth rates. Growth rates have a dual edge - they are good for sales but bad for world resources. The world population, currently standing at 5 billion is experiencing a rapid growth rate. It is expected to reach 7 billion by the end of the century. The strain on world resources is likely to be very large. The distribution of the population is also important. Different age groups have different needs and population density should mean good market potential, the higher the better. The Netherlands have 1000 persons per square mile, Bangladesh 1,791 but the USA only 65 persons per square mile. However, the USA spends more per capita than Bangladesh

b) Income: No one has yet been able to assess accurately the impact of the AIDS pandemic on world population and economic activity. South Africa estimates AIDS will cost South African industry R16.7 billion by the year 2000 (Business Herald - Nov. 24.1994). Suffice to say, unless a cure or prevention is found, it could be serious, especially in Africa and South East Asia, the world's "hot spots"

Income is the most important variable affecting market potential. Markets are not markets without money to spend. Interestingly, there is an inverse correlation between GNP per capita and income elasticity of demand for food. Asia has a 0.9 income elasticity of demand and the USA 0.16.

The distribution of income is very uneven. In Kenya the lowest 20% of the population receive less then 3% of national resource. This bimodal distribution of income means marketers must analyse two economies in a country. Per capita measures have therefore, many limitations. Per capita judges a country's level of economic development and its degree of modernisation and progress in health, education and welfare. Half of the world's population lives with an average per capita income of only US$ 270. Per capita is usually reflected in US dollars and is only valid for comparison if exchange rates are equal. Exchange rates reflect international goods and services in a country but not domestic consumption.

Another limitation of per capita measures is the lack of comparability with the figures themselves. The US budget contains food, clothing and shelter. In many of the less developed nations these items may be largely self provided and therefore not reflected in national income tables. Also in the UK, snow equipment is included, and this is not, obviously, in Africa and parts of Asia. Other limitations are that sales of goods are not well correlated with per capita income and if there is great unevenness in income distribution, per capita figures are less meaningful. Product saturation can be equally troublesome in affecting market potential. A vacuum cleaner in the Netherlands has a 95% household penetration rate, but only 7% in Italy.

Gross National Product is a better indicator of potential than Gross Domestic Product as GDP includes more than "product". World GNP figures reveal the concentration of wealth in the three nations, the USA, Japan and Western Europe. Africa trails far behind (see table 2.3)3.

However, when evaluating markets it is wise to consider individual product areas. For example, Belgium's GNP is better than India's but India's, consumption of steel is 3 times that of Belgium's.

Table 2.3 GDP and GNP of selected countries

US$ bn

of World

US$ bn

of World
















The United Nations International Comparison Project (ICP) developed a sophisticated method for measuring total expenditure, which has been used to derive more reliable and directly comparable estimates of per capita income. The World Bank has published a comparison of ICP findings with its own Atlas figures based on the exchange rate conversion. The use of exchange rates tends to distort real income or standard of living measures.

The nature of economy

More than money makes up an economy's economic environment. Natural resources -raw materials now and in the future are important. If synthetic gold or tobacco were developed or, in the case of the latter, became unfashionable, Zimbabwe's economy would be ruined.

Topography may produce two, three or more submarkets in a country. Zambia, for example, has "rural" and "urban" areas with different needs and wants.

Extremes of climate - like the Southern African drought in 1992 can devastate economies and derail any economic development plans and exports. Simply, products are not available to export, because they are being consumed by the domestic economy.

The nature of economic activity

Economic activity is often correlated to the type of economic activity. Various methods have been derived to classify economies. These are:

Stages of market development

Global markets are at different stages of development which can be divided into five categories based on the criterion of gross national product per capita.

i) Preindustrial countries - incomes less than US$ 400 GNP per capita. Limited industrialisation, low literacy rates, high birth rates, heavy reliance on foreign aid, political instability. Parts of Sub-Saharan Africa. Little market potential.

ii) Less developed countries - per capita between US$ 401 and US$ 1,635. Early stages of industrialisation, growing domestic market, mature product markets, increasing competitive threat.

iii) Developing countries - per capita income between US$ 1,636 and US $ 5,500. Decrease in percentage of agricultural workers, industrialisation, rising wages, high literacy rates, lower wage rates than developed countries, formidable competitors.

iv) Industrialised countries - per capita income between US$ 5,501 and US$ 10,000. Moving towards post industrialisation, high standard of living.

v) Advanced countries - per capita income in excess of US$ 10,000. Post industrialisation, information processors, knowledge based, less machine based. Product opportunities are in new products, innovations and raw materials plus fresh foods.

The World Bank classification

The World Bank has drawn up a classification of economies based on GNP per capita.

i) Low income economies, China and India, other low-income-GNP per capita income of between US$ 675 or less, 41 nations including Tanzania, Kenya, Zambia and Malawi.

ii) Middle income economies, lower middle income, GNP per capita of between US$ 676 and US$ 2,695, 40 nations including Zimbabwe, Mexico and Thailand.

iii) Upper middle income, GNP per capita of between US$ 2,676 and US$ 8,355, 17 nations including Brazil, Portugal and Greece.

iv) High income economies, OECD members and others, GNP per capita of between US$ 8,356 or more, 24 nations including UK and the USA.

v) Other economies - communist bloc.

Mozambique and Switzerland are the two extreme ends of the spectrum with US$ 80 per capita and US$ 29,880 per capita respectively.

Rostow: Whilst economic in nature, Rostow (1971) produced a five stage model of economic takeoff:

· Stage 1 traditional society, little increase in productivity, no modern science application systematically, low level of literacy

· Stage 2 the preconditions of takeoff, modern techniques in agriculture and production, developments in infrastructure and social institutions

· Stage 3 the takeoff, normal growth patterns, rapid agricultural and industrial modernisation, good social environment.

· Stage 4 the drive to maturity, modern technology applied to all fronts, international involvement, can produce anything

· Stage 5 the age of high mass consumption, production of durable goods and services, large amounts of

These classifications enable marketers to assess where and how to operate in countries which may display the stage characteristics. For example African exporters would look to stage 4 and 5 economies to obtain the greatest revenue opportunities for other produce.

Another way to assess the market alternatives to a potential global marketer is to look at the origin of its national product - is it farm or factory generated? Farm workers tend to have low incomes. Input-output tables provide other insights into a country's potential, that is, what inputs go into a particular industry's output? What combination of labour, materials and equipment?


Infrastructure is a very important element in considering whether to market in a country or not.

Transportation, for example, is vital. Zambia and Zimbabwe are landlocked and have relatively poor transport facilities. Tanzania, whilst having direct access to the coast, has also a relatively poor internal rural infrastructure. Chaos can therefore ensue, especially during the rainy season. Without being able to get produce to the point of exportation, countries will suffer poor export performance accordingly.

Energy consumption shows the overall industrialisation of a society as does its infrastructure. The less energy is consumed, the less likely the development of the market resulting in a not too attractive market proposition.

Communications are essential. India has only some 10 million telephones to a population of 1 billion people. Media availability is important. Zambia has 680 radios per 1000 population, France 2,059 per 1000. Malawi has no domestic television service but access to satellite television.

Commercial infrastructure is also vital - banks, accountants, advertising agencies and other services. Without these " transaction " facilities, exporting cannot take place.


Differences exist between "urban" and "country" dwellers. City dwellers may have more income, more developed communications and access to new products. Developing countries tend to suffer from rural drift, but without the accompanying incomes characteristic of developed countries. So when assessing market opportunities widespread urbanisation is no guarantee of a good market potential.


Inflation causes havoc with economies and foreign exchange. For example Zambia has an unofficial inflation rate of over 100%, which makes it difficult and expensive to access capital for investment and obtain pre-export finance.

The role of Government is essential. Some encourage joint ventures and investment, others do not. The number of international companies operating in an economy can be both good and bad. Japan's investment in the USA and UK is high, creating jobs, but gives rise to negative feelings because access to Japan is not so easy. This has led to calls for protectionism. Similarly, flows from developed countries to less developed ones are generally one way. This leads to instability in the underdeveloped country because it has no "hostage" leverage.

Repatriation or transfer of dividends can be an issue which can detract from investment if negative facilities exist. This can seriously undermine economic development and trade.

Many African countries are undergoing structural adjustment and trade liberalisation programmes. In some cases, these have met with limited success. They can create market opportunities, but they also can cause internal economic upheavals for long periods of time, detracting from investment by outsiders and limiting the export opportunities, especially if interest rates rise, as is often the case.

The economic environment is one of the major determinants of market potential and opportunity. Careful analysis of this, particularly income and the stage of economic development is essential. Failure to do so will lead, at best, to sub optimal opportunity and, at worst, to disaster. Less developed countries like Africa, are at a disadvantage, due to their primary material export dependence. It behoves these nations in the continent to derive policies and strategies for rapid industrialisation, or forever to be at the mercy of world demand and prices.

Chapter Summary

Economic factors are just some of the "environmental uncontrollables" which marketers must consider when deciding to market globally. The global economy can be traced back hundreds of years when traders from the east and west came together to exchange goods. Through the legacy of mercantilism up to the current GATT Round, marketers have had to contend with changes and developments in the economic environment, including the growth of regional economic blocs, all aimed at increasing cooperation between the grouped nations.

Markets differ widely in their size and state of development world wide. It would be too easy to classify these markets as "rich" or "poor", "developed" or "less developed", although this is often done for ease of analysis. Countries show great within country differences also and marketers have to be aware in assessing market potential that they do not use general descriptions of nations as criteria of whether to, or whether not to, open trade negotiations.

Key Terms

Balance of payments

Gross National Product

National income

General Agreement on Tariffs and Trade

International Monetary Fund

World Bank

Gross Domestic Product


World Trade Organisation

Review Questions

1. In what way has the global economy changed in the last 50 years? Why?

2. Discuss the various measures for assessing the size of market potential. What are the problems in the assessment? Give examples.

Review Question Answers

1. The Global economy has experienced the following changes

a) Capital movements rather than trade have become the driving force of the global economy.
b) production has become "uncoupled" from employment.
c) primary products have become uncoupled from the industrial economy.
d) The world economy is in control.


a) World trade is some US$ 3 trillion, whereas the London Eurodollar market - alone is some US$ 75 billion per annum and foreign exchange transactions were US$35 billion per annum. Interest and exchange rate - gains are often more lucrative than investment in goods and services manufacturing.

b) Employment is in decline while manufacturing either grows or remains static. Sectors are becoming more productive, with injections of capital equipment and new technologies.

c) Commodity prices may collapse but industrial economies can be unaffected.

d) World trade is recognised as vital to economies as domestic growth slows down and opportunities overseas grow. Growth achievable in international trade is often at a greater rate than domestically and the returns higher. (Ask students to find the figures which can be gained for rates of growth and returns on capital employed in International trade.)

2. Measures for assessing market potential are

a) Size of market - population, income (GNP/capita)
b) Nature of the economy - urban and rural
c) Nature of economic activity-preindustrial, less developed, developing, industrial, advanced.

· World Bank classification
· Rostow's five state economic tale off model.

d) Infrastructure
e) Inflation
f) Role of Government - laws, rules, regulations, stability
g) Economic environment - confidence, history, stability.

Problems in assessment

a) Data too general and non specific
b) Data may be out of date
c) There may be lucrative segments hidden by the general data
d) Data may be invalidated or false
e) Data may be incorrectly gathered and reported
f) Units of reporting may differ from country to country
g) Data gaps or nonavailability.


1. Dixie. G.R. "European Union Case Study". Network and Centre for Agricultural Marketing Training in Eastern and Southern Africa, Zimbabwe 1994

2. "Guiness World Data Book", 1993

3. Keegan, W.J. "Global Marketing Management", 4th ed. Prentice Hall International Edition, 1989.

4. Masanzu, F. "SADC and PTA". FAO consultant, Network and Centre for Agricultural Marketing Training in Eastern and Southern Africa, Zimbabwe 1994

5. Terpstra, V. "International Marketing", 4th ed. The Dryden Press, 1987

6. World Bank. "World Development Report 1991", The Challenge of Development. Oxford University Press, 1991.

7. Rostow. W. W. "The Strategies of Economic Growth" 2nd Edition, London: Cambridge University Press, 1971

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