Chapter 3

Political Economy and Economic Development

3-2

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)

3-3

How Do Countries Compare On GNI?

Economic Data for Select Countries

3-4

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

3-5

How Do Countries Compare On Growth Rates?

Economic Data for Select Countries

3-6

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

3-7

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

3-8

How Do Countries Compare on Economic Development?

Economic Data for Select Countries

3-9

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

3-10

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

3-11

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

3-12

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

3-13

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

3-14

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

3-15

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

3-16

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

3-17

How Free Are Countries Politically?

Political Freedom in 2012

3-18

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

3-19

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

3-20

How Free Are Countries Economically?

Economic Freedom in 2013

3-21

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

3-22

How Can Managers Determine A Market’s Overall Attractiveness?

Country Attractiveness