3. 3-3
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)
5. 3-5
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 in the world
7. 3-7
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
8. 3-8
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
9. 3-9
How Do Countries Compare on
Economic Development?
Economic Data for Select Countries
10. 3-10
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
11. 3-11
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
12. 3-12
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
13. 3-13
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
14. 3-14
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
15. 3-15
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
16. 3-16
How Is The Political
Economy Changing?
Since the late 1980s, two trends have emerged
1. Democratic revolution (late 1980s and early
1990s)
democratically elected governments replaced
totalitarian regimes
more committed to free market capitalism
2. A move away from centrally planned and mixed
economies
more countries have shifted toward the market-
based model
17. 3-17
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 for democratic reforms
19. 3-19
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
20. 3-20
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
22. 3-22
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
23. 3-23
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
24. 3-24
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?
25. 3-25
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
26. 3-26
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
27. 3-27
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
28. 3-28
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
29. 3-29
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
30. 3-30
How Can Managers Determine A
Market’s Overall Attractiveness?
Country Attractiveness
Hinweis der Redaktion
LO1: Explain what determines the level of economic development of a nation.
Japan, Sweden, Switzerland, and the United States rank among the highest on GNI.
Source: World Development Indicators Online, 2013.
It is estimated that black market transactions in India could account for as much as 50 percent of GDP.
LO2: Identify the macro-political and economic changes occurring worldwide. Source for table: World Development Indicators Online, 2013.
The Nobel prize-winning economist Amartya Sen has argued in his theory of social development that development should be assessed less by material output measures such as GNI per capita/GDP per capita and more by the capabilities and opportunities that people enjoy.
According to Sen, development should be seen as a process of expanding the real freedoms that people experience. Hence, development requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as the intolerance of repressive states. In Sen’s view, development is not just an economic process, but it is a political one too, and to succeed requires the “democratization” of political communities to give citizens a voice in the important decisions made for the community. This perspective leads Sen to emphasize basic health care, especially for children, and basic education, especially for women.
Sen’s influential thesis has been picked up by the United Nations, which has developed the Human Development Index (HDI) to measure the quality of human life in different nations.
The HDI is based on three measures: life expectancy at birth (which is a function of health care), educational attainment (which is measured by a combination of the adult literacy rate and enrollment in primary, secondary, and tertiary education), and whether average incomes, based on PPP estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care).
Source: World Development Indicators Online, 2013.
A country’s economic development is a function of its economic and political systems. Economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy.
The Opening Case: Political and Economic Reform in Myanmar (Burma) explores the recent political and economical changes that have increased the chances for economic progress in this country.
LO3: Describe how transition economies are moving towards market-based systems.
Innovation and entrepreneurship require strong property rights. Without strong property rights protection, businesses and individuals run the risk that the profits from their innovative efforts will be expropriated, either by criminal elements or by the state.
There is debate on the kind of political system that best achieves a functioning market economy with strong protection for property rights. People in the West tend to associate a representative democracy with a market economic system, strong property rights protection, and economic progress. Building on this, we tend to argue that democracy is good for growth.
However, some totalitarian regimes have fostered a market economy and strong property rights protection and have experienced rapid economic growth. Four of the fastest-growing economies of the past 30 years—South Korea, Taiwan, Singapore, and Hong Kong—had one thing in common at the start of their economic growth: undemocratic governments!
While it is possible to argue that democracy is not a necessary precondition for a free market economy in which property rights are protected, subsequent economic growth often leads to establishment of a democratic regime.
Country Focus: Emerging Property Rights in China explores the implications of a new property law that took effect in China in 2007. In China, all land technically belongs to the state. Land is leased to urban users for 40-70 years, and to rural users for 30 years. Under the law, urban and rural land lease holders now have the right to automatically renew their leases, or be fairly compensated if the land needs to be used for other purposes. Consequently, lease holders now have some protection against large scale appropriation by the state.
Two trends are evident: first, during the late 1980s and early 1990s, a wave of democratic revolutions swept the world; second, totalitarian governments collapsed and were replaced by democratically elected governments that were typically more committed to free market capitalism than their predecessors had been.
These changes were most dramatic in Eastern Europe, where the collapse of communism bought an end to the Cold War and led to the breakup of the Soviet Union, but similar changes were occurring throughout the world during the same period. Across much of Asia, Latin America, and Africa there was a marked shift toward greater democracy.
Source: The Freedom House Survey Team, “Freedom in the World: 2013,” www.freedomhouse.org.
Country Focus: India’s Economic Transformation explores India’s ambitious economic reform program. The reforms, which began in 1991, were designed to help the country achieve greater economic growth through privatization, new investment opportunities, changes in import and export controls, and other policies. So far, the reforms seem to be working.
The underlying rationale for economic transformation has been the same the world over. In general, command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems, such as the United States, Switzerland, Hong Kong, and Taiwan.
Source: 2013 Index of Economic Freedom (Washington, DC: Heritage Foundation, 2013). Reprinted with permission of The Heritage Foundation, www.heritage.org.
Without a legal system that protects property rights, and without the machinery to enforce that system, the incentive to engage in economic activity can be reduced substantially.
LO4: Explain the implications for management practice of national difference in political economy.
Example: In 1960, South Korea was an impoverished Third World nation. Today, it is the fifteenth largest economy in the world as measured by GDP. Firms that recognized the country’s potential have benefited from its stunning growth.
McDonald’s found that it needed to make numerous investments in Russia in order to ensure the quality of its supplies.