Political

Economy and
Economic
Development

1
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
Economic Issues for International
Businesses
► Does the government view foreign capital as
competition with or in partnership with public or
local private enterprises?
► How does the government control the nature and
extent of private enterprise?

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
 Economic System; Economic Growth;
Economic Development
► Structure and Processes that a country uses to allocate its
resources and conduct commercial activities.

► Economic growth means an increase in the capacity of an economy

to produce goods and services, compared from one period of time
to another. Economic growth can be measured in nominal terms,
which include inflation, or in real terms, which are adjusted for
inflation.
► Economists and statisticians use several different methods to track
economic growth. The most well-known and frequently tracked metric
is gross domestic product, or GDP.
Economic Development

Economic well-being of one

nation’s people relative to
another nation’s people

Economic output (agricultural,

industrial, service)

Infrastructure (communications,
transportation, power)

People (physical health,

education level)
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.
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.
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
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
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
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
How Does Political Economy
Influence Economic Progress?
► 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!
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
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
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
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
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
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
How Free Are Countries Politically?

Political Freedom in 2010

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
How Free Are Countries Economically?

Economic Freedom in 2010

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
What Is The Nature Of Economic
Transformation: Bangladesh
► Privatization programs got its virtual start in Bangladesh in the
mid-seventies. The first round of privatization was put to work
following the post independence thrust on economic growth.
The second phase of privatization (or denationalization) took
place in the first half of the 1980s and covered jute and textile
mills owned originally by Bangladeshi citizens prior to
independence.
► Since the establishment of the Privatization Board in 1993 and
thereafter the Privatization Commission in 2000, 74 state
owned enterprises (SOEs) have been privatized in Bangladesh.
► Mymensingh Jute Mills Ltd., Madaripur Textile Mills, Kohinoor
Spinning Mills, Dhaka Vegetable Oil, Berger Paints Bangladesh
Ltd.,Paper Mills, Ujala Match Factory Ltd., etc.
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 -1.2 billion people
► India – 1.1 billion people
► Latin America – 400 million potential
consumers
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
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
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
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
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
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
How Can Managers Determine A Market’s
Overall Attractiveness?

Country Attractiveness