2000 chp 3 political economy and development

7/27/2019 2000 Chp 3 Political Economy and Development

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Chapter 3

Political Economy and

Economic Development


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What Determines A Countrys Level

Of Economic Development?

Gross national income (GNI) per personmeasures the total annual incomereceived by residents of a nation

Japan, Sweden, Switzerland, and the U.S.have high GNI

China and India have low GNI

GNI can be misleading because it does

not consider differences in the cost ofliving need to adjust GNI figures using purchasing

power parity (PPP)


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How Do Countries

Compare On GNI?Economic Data for Select Countries


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Official figures can also be misleadingbecause they do not account for black-market economy transactions

In addition, GNI and PPP data are staticand do not consider economic growthrates So, while China and India are currently

categorized as being poor they are growingmore rapidly than many developed nationsand are expected to become among thelargest economies in the world


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How Do Countries

Compare On Growth Rates?Economic Data for Select Countries


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Nobel-prize winner Amartya Sen argueseconomic development should be seen as aprocess of expanding the real freedoms thatpeople experience

the removal of major impediments to freedom likepoverty, tyranny, and neglect of public facilities

the presence of basic health care and basiceducation

Amartya Sen also claims that economicprogress requires the democratization ofpolitical communities to give citizens a voice


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The United Nations used Sens ideas to

develop the Human Development Index

(HDI) which is based on

life expectancy at birth

educational attainment

whether average incomes are sufficient to

meet the basic needs of life in a country


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How Do Countries Compare on

Economic Development?Economic Data for Select Countries


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How Does Political Economy

Influence Economic Progress? Innovation and entrepreneurship are the engines

of long-run economic growth innovation includes new products, new processes,

new organizations, new management practices, and

new strategiesentrepreneurs commercialize innovative new products

and processes

Innovation and entrepreneurship help increaseeconomic activity by creating new markets and

products that did not previously exist innovation in production and business processes

result in more productive labor and capital furtherboosting economic growth rates


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Influence Economic Progress?

Innovation and entrepreneurship require amarket economy there is little incentive to develop new innovations in

planned economies because the state owns all

means production and therefore, the gains

There is a strong relationship between economicfreedom and economic growth the six countries with the highest ratings of economic

freedom from 1975 to 1995 were also among thehighest for economic growthHong Kong, Switzerland, Singapore, the United States,

Canada, and Germany


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Innovation and entrepreneurship require

strong property rights

without strong property rights, individuals and

businesses risk having their innovations and

potential profits stolen

Economist Hernando de Soto claims that

inadequate property protection in manydeveloping nations limits economic growth


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Democratic regimes are probably more

conducive to long-term economic growth than

dictatorships, even the benevolent kind

property rights are only secure in well-functioning,mature democracies

Subsequent economic growth leads to the

establishment of democratic regimes

South Korea

Taiwan


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How Does Geography Influence

Economic Development?Countries with favorable geography are more

likely to engage in trade, and so, be more opento market-based economic systems, and theeconomic growth they promote

Jeffrey Sachs studied economic growth ratesbetween 1965 and 1990 and found that landlocked countries grew more slowly than coastal

economies

being totally landlocked reduced a countrys growthrate by 0.7% per year

tropical countries grew more slowly than countries intemperate zones

d fl


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How Does Education Influence

Economic Development?

Countries that invest in education have

higher growth rates because the workforce

is more productive

countries in Southeast Asia have offset their

geographical disadvantages by investing in

education

Indonesia, Malaysia, and Singapore

H I Th P li i l


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How Is The Political

Economy Changing?

Since the late 1980s, two trends haveemerged

1. Democratic revolution (late 1980s and early

1990s) democratically elected governments replacedtotalitarian regimes

more committed to free market capitalism

2. A move away from centrally planned andmixed economies more countries have shifted toward the market-

based model

H I Th P li i l


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Economy Changing?

Trend 1: Democracy has spread over the last

two decades

many totalitarian regimes failed to deliver economic

progress to the vast bulk of their populations new information and communication technologies

have broken down the ability of the state to control

access to uncensored information

economic advances of the last 25 years have led toincreasingly prosperous middle and working classes

who have pushed for democratic reforms

H I Th P li i l


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Economy Changing?

Author Francis Fukuyama argues that the new

world order will be characterized by democratic

regimes and free market capitalism

But, political scientist Samuel Huntingtonargues that while many societies are

modernizing they are not becoming more

Western

predicts a world split into different civilizations

these civilizations will be in conflict with each

other

H I Th P li i l


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Economy Changing?

Trend 2: The spread of market-based

systems

more countries have moved away from

centrally planned and mixed economiestoward the market-based model

Command and mixed economies failed

to deliver the sustained economic growthachieved in market-based countries

Wh I Th N Of


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What Is The Nature Of

Economic Transformation?The shift toward a market-based system

involves

deregulation removing legal restrictions to

the free play of markets, the establishment ofprivate enterprises, and the manner in whichprivate enterprises operate

privatization -transfers the ownership of state

property into the hands of private investorsthe creation of a legal system to safeguard

property rights

Wh D Th Ch i


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What Does The Changing

Economy Mean For Managers?Markets that were formerly off-limits to Western

business are now open firms need to explore opportunities in these markets

Despite being underdeveloped and poor, somemarkets have huge potentialChina -1.2 billion people

India 1.1 billion people

Latin America 400 million potential consumers


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What Are The Implications Of Political

Economy Differences For Managers?

Countries with democratic regimes, market

based economic policies, and strong property

rights protection are more likely to have higher

sustained rates of economic growth these markets are more attractive to international

businesses

the benefits, costs, and risks of doing business in a

country are a function of the countrys political,economic, and legal systems


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The benefits of doing business in a country are afunction of the markets size

the purchasing power of its consumers

their likely future wealthBy identifying and investing early in potential

future economic stars, firms may be able to gainfirst mover advantages (advantages that accrue

to early entrants into a market) and establishloyalty and experience in a countryChina


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The costs of doing business in a countryare a function of itspolitical systemis it necessary to pay bribes to get market access?

economic levelare the necessary supporting business and

infrastructure in place?

legal system

it can be more costly to do business in countrieswith dramatically different product, workplace, andpollution standards, or where there is poor legalprotection for property rights


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The risks of doing business in a country are afunction of Political risk - the likelihood that political forces will

cause drastic changes in a country's business

environment that adversely affects the profit andother goals of a business enterprise

Economic risk - the likelihood that economicmismanagement will cause drastic changes in acountry's business environment that adverselyaffects the profit and other goals of a businessenterprise

Legal risk - the likelihood that a trading partner willopportunisticallybreak a contract or expropriateproperty rights

H C M D t i A


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How Can Managers Determine A

Markets Overall Attractiveness?Country Attractiveness

2000 chp 3 political economy and development

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