Chapter 3

Political Economy and Economic Development 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  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)

3-2 How Do Countries Compare On GNI?

Economic Data for Select Countries

3-3 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 and are expected to become among the largest economies in the world

3-4 How Do Countries Compare On Growth Rates?

Economic Data for Select Countries

3-5 What Determines A Country’s Level Of Economic Development?  Nobel-prize winner 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 of political communities to give citizens a voice

3-6 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

3-7 How Do Countries Compare on Economic Development?

Economic Data for Select Countries

3-8 How Does 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

3-9 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

3-10 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

3-11 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

3-12 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

3-13 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

3-14 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 2. A move away from centrally planned and mixed economies  more countries have shifted toward the market- based model

3-15 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 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

3-16 How Free Are Countries Politically? Political Freedom in 2012

3-17 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

3-18 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

3-19 How Free Are Countries Economically?

Economic Freedom in 2013

3-20 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

3-21 How Can Managers Determine A Market’s Overall Attractiveness?

Country Attractiveness

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