SEU National Differences in Economic Development Presentation

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National
Differences in
Economic
Development
Chapter 3
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Learning Objectives
3-1
Explain what determines the level of economic
development of a nation.
3-2
Identify the macropolitical and macroeconomic
changes occurring worldwide.
3-3
Describe how transition economies are moving toward
market-based systems.
3-4
Explain the implications for management practice of
national difference in political economy.
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Introduction
Economic Development
• Differences among nations affects how attractive it is for
doing business.
• Trends that foster greater economic development:
• Democratic forms of government.
• Market-based economic reforms.
• Legal systems that better enforce property rights.
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Differences in Economic Development
1
Gross National Income (GNI)
• Measures the total annual income received by residents of
a nation.
• Japan, Sweden, Switzerland, and U.S. have high GNI.
• China and India have low GNI.
• GNI does not consider differences in the cost of living.
• Purchasing power parity (PPP) is an adjustment in gross domestic
product per capita to reflect differences in cost of living.
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Table 3.1 Economic data for select countries
Country
GNI per
Capita, 2018
($)
GNI PPP per
Capita, 2018
($)
Annual GDP
Growth Rate,
2009 to 2018
(percent)
Size of Economy
GDP, 2018
($ billions)
Brazil
$9,140
$15,820
1.2
$1,868
China
9,470
18,140
8.0
13,608
47,450
55,800
1.3
3,998
India
2,020
7,680
7.1
2,726
Japan
41,340
45,000
0.7
4,970
Nigeria
1,960
5,700
4.2
397
Poland
14,150
31,110
3.5
586
Russia
10,230
26,470
0.9
1,658
Switzerland
83,580
69,220
1.5
706
United Kingdom
41,330
45,660
1.3
2,825
United States
62,850
63,390
1.8
20,494
Germany
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Source: World Development Indicators Online, 2018
Differences in Economic Development
2
The “official” figures can be misleading.
• Do not account for black economy transactions that
include unrecorded cash transactions or barter
agreements.
• GNI and PPP data are static and do not consider
economic growth rates.
• China and India are currently relatively poor, but their economies are
growing more rapidly than many advanced nations.
•
China may become the world’s largest economy during the next decade.
•
India will be among the largest economies in the world.
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Differences in Economic Development
3
Broader Conceptions of Development: Amartya Sen
• Economic development should be assessed by the
capabilities and opportunities people enjoy.
• Development requires the removal of major impediments to freedom:
poverty, tyranny, poor economic opportunities.
• Economic progress requires the democratization of
political communities to give citizens a voice.
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Differences in Economic Development
4
Broader Conceptions of Development: Amartya Sen
continued
• The United Nations used Sen’s ideas to develop the
Human Development Index (HDI) to measure quality of
human life in different nations.
• 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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Map 3.4 Human development index, 2017
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Political Economy and Economic Progress
Innovation and Entrepreneurship Are the Engines of
Growth
• Innovation.
• Includes new products, new processes, new organizations, new
management practices, and new strategies.
• Entrepreneurs.
• First to commercialize innovative products and processes.
• Provides much of the dynamism in an economy.
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1
Political Economy and Economic Progress
Innovation and Entrepreneurship Require a Market
Economy
• Little incentive to develop new innovations in planned
economies because the state owns all means of
production and therefore, captures the gains.
• Strong relationship between economic freedom and
economic growth.
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2
Political Economy and Economic Progress
Innovation and Entrepreneurship Require Strong
Property Rights
• Without strong property rights, individuals and businesses
risk having innovations and potential profits stolen.
• This reduces the incentive for innovation and entrepreneurism.
• Economist Hernando de Soto claims that inadequate
property protection in many developing nations limits
economic growth.
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3
Political Economy and Economic Progress
The Required Political System
• Democratic regimes are probably more conducive to longterm economic growth.
• China, South Korea, Taiwan, Singapore, Hong Kong all had
undemocratic governments but experienced economic growth.
• Property rights are only secure in well-functioning, mature
democracies.
• Totalitarian states are detrimental to progress.
• They limit freedom.
• They suppress human development.
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4
Political Economy and Economic Progress
Economic Progress Begets Democracy
• Economic growth often leads to establishment of
democratic regimes.
• South Korea and Taiwan.
• If China adopts a free market system, belief is that the
country will have greater individual freedoms followed by
democracy.
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5
Political Economy and Economic Progress
Geography, Education, Demographics and
Economic Development
• Economist Jeffrey Sachs argues that countries with
favorable geography are:
• More likely to engage in trade.
• More open to market-based systems.
• Countries that invest in education have higher growth
rates because the workforce is more productive
• Countries in Southeast Asia have offset their geographical
disadvantage by investing in education.
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6
Political Economy and Economic Progress
Geography, Education, Demographics and
Economic Development
continued
• In terms of demographics, countries with a young and
growing population have greater growth potential.
• Growing population increases supply of labor.
• Younger workers tend to consumer more than older workers.
• Aging population implies a stress on government finances.
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7
States in Transition
1
Political economy of nation-states is marked by
three trends:
1. Democratic revolutions during late 1980s; early 1990s
led to greater commitment to free market capitalism.
2. A move away from centrally planned and mixed
economies toward a more free market approach.
3. Since 2005, there has been a shift back toward
greater authoritarianism in some nations resulting in a
retreat from the free market model.
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States in Transition
2
The Spread of Democracy
• In 2019, Freedom House ranked countries into three
broad categories:
• 86 countries classified as free: 44 percent of nations.
• 59 countries classified as partly free: 30 percent of nations.
• 51 countries classified as not free: 26 percent of nations.
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States in Transition
The Spread of Democracy
3
continued
• Three reasons for the spread of democracy:
1. Many totalitarian regimes failed to deliver economic progress to
the bulk of their populations.
2. New information and communication technologies.
•
Reduced state’s ability to control access to uncensored information.
•
Created new conduits for the spread of democratic ideals.
3. Economic advances have led to a prosperous middle class that
has pushed for democratic reforms.
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States in Transition
The Spread of Democracy
4
continued
• Since 2005, there has been a drift back toward more
authoritarian modes of government in many nations.
• Elections have been compromised; civil liberties restricted;
independent press has been attacked; opposition parties have been
restricted.
• Examples: Turkey, Russia, Ukraine, Indonesia, Ecuador, Venezuela.
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Map 3.5 Freedom in the world, 2019
Access the text alternative for slide images
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States in Transition
5
The New World Order and Global Terrorism
• Author Francis Fukuyama argues the new world order will
be characterized by democratic regimes and free market
capitalism.
• Political scientist Samuel Huntington argues that while
many societies are modernizing, they are not becoming
more Western.
• Predicts a world split into different civilizations that will be in conflict
making business difficult.
• Political position is more likely to be somewhere between
Fukuyama and Huntington.
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States in Transition
6
The New World Order and Global Terrorism
continued
• Huntington: global terrorism is a product of tensions
between civilizations and a clash of value systems and
ideology.
• Al-Qaeda and ISIS.
• Former U.S. Secretary of State Colin Powell maintains
that terrorism is one of the major threats to world peace
and economic progress.
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States in Transition
7
The Spread of Market-Based Systems
• A shift from centrally planned economies to market-based
economies.
• More than 30 countries in the former Soviet Union and eastern
European communist bloc have changed economic system.
• Change also occurring in Asian and African states.
• Command and mixed economies failed to deliver the
sustained economic growth achieved in market-based
countries.
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Map 3.6 Index of economic freedom, 2019
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Source: “Interactive Heat Map.” The Heritage Foundation, 2019. www.heritage.org/index/heatmap
The Nature of Economic Transformation
The shift toward a market-based system involves:
• Deregulation.
• Privatization.
• A legal system to safeguard property rights.
© McGraw Hill
1
The Nature of Economic Transformation
2
Deregulation
• Removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in
which private enterprises operate.
• Deregulation in mixed economies involved the same
initiatives as in command economies.
• Transition was easier due to a vibrant private sector.
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The Nature of Economic Transformation
3
Privatization
• Transfers ownership of state property into the hands of
private individuals.
• Movement started in Great Britain in early 1980s.
• In many nations economic activity is still in the hands of
state-owned enterprises.
• Selling state-owned enterprises not enough to guarantee
economic growth.
• For privatization to work it must be paired with a general
deregulation and opening of the economy.
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The Nature of Economic Transformation
4
Legal Systems
• A well-functioning market economy requires laws.
• Need to protect property rights.
• Mechanisms for contract enforcement.
• Adoption of a legal system requires time to function well.
• Institutional weaknesses undermine contract enforcement
in most countries.
• Progress being made regarding laws on property rights.
© McGraw Hill
Implications of Changing Political
Economy
Ideological conflict between collectivism and
individualism less prevalent today
• Western ideology more widespread.
• Markets formerly off-limits to Western business are now
open presenting a huge potential for business.
• Potential risks are large:
• Will democracy thrive during difficult times?
• Will totalitarian regimes return?
• Is the risk associated with investment worth it?
• Is China’s financial system stable?
© McGraw Hill
Focus on Managerial Implications
1
Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
• Countries are more likely to have higher sustained rates of
economic growth when they have:
• Democratic regimes.
• Market based economic policies.
• Strong property rights protection.
• These markets are more attractive to international
businesses.
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Focus on Managerial Implications
2
Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
continued
• Benefits:
• Based on the size of the market, as well as current and future
purchasing power of its consumers.
• First-mover advantages enjoyed by early entrants.
• Late-mover disadvantages suffered by late entrants.
• A country’s economic system and property rights regime good
predictors of economic prospects.
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Focus on Managerial Implications
3
Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
continued
• Costs:
• 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: how do local laws and regulations affect business
decisions? Are there well-established contract laws?
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Focus on Managerial Implications
4
Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
continued
• Risks:
• Political risk: the likelihood that political forces will cause drastic
changes in a country’s business environment that will adversely
affect the profit and other goals of a business.
• Economic risk: the likelihood that economic mismanagement will
cause drastic changes in a country’s business environment that
adversely affect 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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Focus on Managerial Implications
5
Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
continued
• Overall Attractiveness:
• Based 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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Figure 3.1 Country attractiveness
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