Political Economy and Economic Development

1. Political Economy and Economic Development 1

2. Economic Issues for International Businesses • What type of economic system does the country have? • What is the size, growth potential, and stability of the market? • Is the company’s industry in that country’s public or private sector? • If public, does the government allow private competition? • If private, is it moving towards public ownership? 4-3

3. Importance of Economic Environments • Company managers study economic environments to estimate how trends affect their performance • A country’s economic policies are a leading indicator of government’s goals and its planned use of economic tools and market reforms. • Economic development directly impacts citizens, managers, policymakers, and institutions. 4-5

4. 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) • PPP asks how much money would be needed to purchase the same goods and services in two countries.

5. What Determines A Country’s Level Of Economic Development? • Economic development differs from economic growth. It is a broader concept than economic growth. Development reflects social and economic progress and requires economic growth. • Growth is a vital and necessary condition for development and it includes policy intervention endeavor with aims of economic and social well-being of people, economic growth is a phenomenon of market productivity and rise in GDP., but it is not a sufficient condition as it cannot guarantee development.

6. What Determines A Country’s Level Of Economic Development? • One of the most compelling definitions of development is that proposed by Amartya Sen. • 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

7. 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

8. 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 more productive labor and capital further boosting economic growth rates

9. 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 production and therefore, the gains • 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

10. 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

11. How Does Political Economy Influence Economic Progress? • Democratic regimes are probably more favorable 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

12. 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 temperate zones

13. 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

14. States In Transition Since the late 1980s, two trends have emerged in the political economy: • A wave of democratic revolutions swept the world in the late 1980s and early 1990s • There has been a move away from centrally planned and mixed economies and toward a more free market economic model

15. Trend 1- The Spread Of Democracy There are three main reasons for the spread of democracy: • Many totalitarian regimes failed to deliver economic progress • New information and communication technologies, have broken down the ability of the state to control access to uncensored information • Emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms

16. How Free Are Countries Politically? Political Freedom in 2010

17. 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 • 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

18. How Free Are Countries Economically? Economic Freedom in 2010

19. Implications of a Changing Political Economy • 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

20. Implications 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

21. Implications 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 Example: In 1960, South Korea was an unremarkable Third World nation. Today, it is the eleventh largest economy in the world as measured by GDP. Firms that recognized the country’s potential have benefited from its stunning growth. • 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

22. 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? • 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

23. 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