CHAPTER 3: POLITICAL ECONOMY

AND ECONOMIC DEVELOPMENT

 1. Explain what determines the
level of economic development of a
nation.
  2. Identify the macro-political and
economic changes occurring worldwide.

LEARNING OBJECTIVES
 3. Describe how transition
economies are moving towards market-
based systems.
4. Explain the implications for
management practice of national
differences in political economy. 

LEARNING OBJECTIVES
 3.1 Differences in Economic
Development
3.2 Political Economy and
Economic Progress
3.3 Implications of Changing Political
Economy
3.4 Implications for Managers

OUTLINE
 3.1 What Determines A Country’s
Level Of Economic Development?
 Gross national income (GNI) per person
measures the total annual income received 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 of living
 need to adjust GNI figures using purchasing power
parity (PPP)
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Development
 How Do Countries
Compare On GNI?

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 What Determines A Country’s Level
Of Economic Development?
 Official figures can also be misleading because
they do not account for black economy
transactions
 In addition, GNI and PPP data are static and
do not consider economic growth rates
 So, while China and India are currently
categorized as being poor they are growing more
rapidly than many developed nations and are
expected to become among the largest
economies in706036
the- Chapter
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Development
 How Do Countries
Compare On Growth Rates?

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 What Determines A Country’s Level
Of Economic Development?
 Nobel-prize winner Amartya Sen argues economic
development should be seen as a process of
expanding the real freedoms that people experience
 the removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities
 the presence of basic health care and basic education
 Amartya Sen also claims that economic progress
requires the democratization of political
communities to give citizens a voice

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Development
 What Determines A Country’s Level
Of Economic Development?

 The United Nations used Sen’s 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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Development
 How Do Countries Compare on
Economic Development?

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 3.2 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
strategies
 entrepreneurs commercialize innovative new products
and processes
 Innovation and entrepreneurship help increase
economic activity by creating new markets and
products that did not previously exist
 innovation in production and business processes result in
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more productive labor and capital further boosting
706036 - Chapter 3: Political Economy and Economic
economic growth ratesDevelopment 8
 3.2 How Does Political Economy
Influence Economic Progress?

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Development
 How Does Political Economy
Influence Economic Progress?

 Innovation and entrepreneurship require a

market economy
 there is little incentive to develop new
innovations in planned economies because
the state owns all means of production and
therefore, the gains

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Development
 How Does Political Economy
Influence Economic Progress?

 There is a strong relationship between

economic freedom and economic growth
 the six countries with the highest ratings of
economic freedom from 1975 to 1995 were
also among the highest for economic growth
 Hong Kong, Switzerland, Singapore, the United
States, Canada, and Germany

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Development
 How Does Political Economy
Influence Economic Progress?
 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 many
developing nations limits economic growth
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Development
 How Does Political Economy
Influence Economic Progress?
 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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Development
 How Does Geography Influence
Economic Development?
 Countries with favorable geography are more likely
to engage in trade, and so, be more open to
market-based economic systems, and the
economic growth they promote
 Jeffrey Sachs studied economic growth rates
between 1965 and 1990 and found that
 landlocked countries grew more slowly than coastal
economies
 being totally landlocked reduced a country’s growth rate
by 0.7% per year
 tropical countries grew more slowly than countries in
01/11/2023temperate zones
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Development
 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

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Development
 3.3 How Is The Political
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 to
increasingly prosperous middle and working classes
who have pushed
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democratic reforms
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15
 How Free Are
Countries Politically?
Political Freedom in 2012

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Development
 How Is The Political
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 Huntington argues
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
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Development
 How Is The Political
Economy Changing?
 Trend 2: The spread of market-based systems
 more countries have moved away from centrally
planned and mixed economies toward the market-
based model
 Command and mixed economies failed to deliver
the sustained economic growth achieved in
market-based countries

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 How Free Are
Countries Economically?

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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 of private
enterprises, and the manner in which private
enterprises operate
 privatization - transfers the ownership of state property
into the hands of private investors
 the creation of a legal system to safeguard property
rights

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Development
 3.4 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, some
markets have huge potential
 China -1.3 billion people
 India – 1.2 billion people
 Latin America – 600 million potential consumers

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Development
 What Does The Changing
Economy Mean For Managers?
 However, the potential risks are large
 will democracy thrive especially in difficult
economic times?
 will totalitarian regimes return?
 will a multi-polar world of different civilizations
emerge?
 will China’s financial system be stable?

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Development
 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 country’s political,
economic, and legal systems
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Development
 What Are The Implications Of Political
Economy Differences For Managers?
 The benefits of doing business in a country are a
function of
 the market’s size
 the purchasing power of its consumers
 their likely future wealth
 By identifying and investing early in potential future
economic stars, firms may be able to gain first mover
advantages (advantages that accrue to early entrants
into a market) and establish loyalty and experience in
a country
 China
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Development
 What Are The Implications Of Political
Economy Differences For Managers?
 The costs of doing business in a country are a
function of its
 political system
 is it necessary to pay bribes to get market access?
 economic level
 are the necessary supporting business and
infrastructure in place?

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Development
 What Are The Implications Of Political
Economy Differences For Managers?

 legal system
 it can be more costly to do business in countries with
dramatically different product, workplace, and
pollution standards, or where there is poor legal
protection for property rights

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Development
 What Are The Implications Of Political
Economy Differences For Managers?
 The risks of doing business in a country are a function
of
 Political risk - the likelihood that political forces will cause
drastic changes in a country's business environment that
adversely affects the profit and other goals of a business
enterprise
 Economic risk - the likelihood that economic mismanagement
will cause drastic changes in a country's business
environment that adversely affects the profit and other goals
of a business enterprise
 Legal risk - the likelihood that a trading partner will
opportunistically break a contract or expropriate property
rights
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Development
 How Can Managers Determine A
Market’s Overall Attractiveness?
 The overall attractiveness of a country as a potential
market and/or investment site for an international
business depends on balancing the benefits, costs, and
risks associated with doing business in that country
 Other things being equal, the benefit-cost-risk trade-off
is likely to be most favorable in politically stable
developed and developing nations that have free market
systems and no dramatic upsurge in either inflation
rates or private sector debt

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Development
 How Can Managers Determine A
Market’s Overall Attractiveness?
Country Attractiveness

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