CHAPTER 3:

POLITICAL ECONOMY &

ECONOMIC DEVELOPMENT

INB 372 Lecture

By: Ms. Adina Malik (ALK)
 ECONOMIC GROWTH &
ECONOMIC DEVELOPMENT
 Economic growth is the increase in the market value of the goods
and services produced by an economy over time. It is conventionally
measured as the percent rate of increase in real
gross domestic product, or real GDP

 Economic development is the sustained, concerted actions of policy

makers and communities that promote the standard of living and
economic health of a specific area. Economic development can also
be referred to as the quantitative and qualitative changes in the
economy. Such actions can involve multiple areas including
development of human capital, critical infrastructure, regional
competitiveness, environmental sustainability, social inclusion,
health, safety, literacy, and other initiatives.
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 THE DETERMINANTS OF ECONOMIC
DEVELOPMENT
 Different countries have dramatically different levels of economic
development.
 GNI (Gross National Income) is regarded as the yardstick for measuring the
economic development of a country as it measures the total annual income
received by the residents of a nation.
 However, living cost needs to be considered along with GNI. E.g. GNI per
capita of USA is $46,040 and Switzerland is $59,880 (for e.g.) but the living
cost of USA is low. So the residents of USA can afford better living standard
than Switzerland.
 GNI per capita does not measure whether the economy is growing. To
measure that, we need to consider PPP (Purchasing Power Parity) and its
growth rate.
 PPP asks how much money would be needed to purchase the same goods
and services in two countries. 3
AMARTYA SEN

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 BROADER CONCEPTIONS OF
DEVELOPMENT: AMARTYA SEN
Human Development Index (HDI) was developed to measure the quality
of life in different nations. It calculates three factors:
1. Life expectancy at birth (function of health care)

2. Educational attainment (combination of adult literacy rate and

enrollment in primary, secondary and tertiary education)
3. Whether average incomes enable people to afford basic needs of life
(adequate food, shelter, health care)

 High HDI: 0.8 and above (up to 1)

 Medium HDI: 0.5 to 0.8
 Low HDI: less than 0.5 (the quality of life is poor)

In 2015, HDI of Bangladesh was 0.579 (Ref: UNDP). It was 0.433 in 2000. 5
 LIFE EXPECTANCY RATES
List By World Health Organization 2015

Rank Country Overall Rate

1 Japan 83.7
3 Singapore 83.1
31 United States 79.3
34 Maldives 78.5
102 Bangladesh 71.8
125 India 68.3
129 Myanmar 66.6
177 Nigeria 54.5
183 Sierra Leone 50.1

As of 2014, the country with the highest life expectancy is Monaco at 89.52
years; the country with the lowest life expectancy is Chad at just 49.81 years. 6
 LITERACY RATES (CIA EST.
2015)
Countries Total Population (%)
Bangladesh 61.5%
India 71.2%
Ghana 76.6%
UAE 93.8%
South Sudan 27%
South Korea 100%

 Germany, France, USA, UK and Japan is 99% (2013 data).

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HUMAN DEVELOPMENT INDEX
RANK (2015) COUNTRY HDI
1 Norway 0.949
2 Australia 0.939
10 United States 0.920
111 Egypt 0.691
4 Germany 0.926
158 Madagascar 0.512
16 United Kingdom 0.909
147 Pakistan 0.550
45 Argentina 0.827
79 Brazil 0.754

179 Sierra Leone 0.420

Source: UNDP
 INFANT MORTALITY RATE &
MATERNAL MORTALITY RATE
 HDI is a powerful predictor of both infant and maternal
mortality rates.

 Infant Mortality Rate (IMR) is the number of deaths of infants

under one year old per 1,000 live births.

 Maternal Mortality Rate (MMR) is the annual number of

female deaths per 100,000 live births from any cause related to
or aggravated by pregnancy or its management (excluding
accidental or incidental causes).
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 GEOGRAPHY, EDUCATION &
ECONOMIC DEVELOPMENT
Geography and education are also important determinants of
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
Countries that invest in education have higher growth rates
because the workforce is more productive

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 POLITICAL ECONOMY AND
ECONOMIC PROGRESS
i) Innovation and entrepreneurship are the engines of growth:
Innovation and entrepreneurship activity ensure long term
economic growth. The economic growth of USA is the reflection
of innovative firms like Microsoft, Dell Computers.

ii) Innovation and entrepreneurship require a market economy

 To ensure innovation and entrepreneurship, economic freedom is
necessary which can only be ensured through market economy.
 In a market economy, any individual who has an innovative idea are
free to try to make money out of that idea through business.
 In planned or mixed economy all or most sectors are state-owned.
So entrepreneurship spirit is often not appreciated. 11
 POLITICAL ECONOMY AND
ECONOMIC PROGRESS
iii) Innovation and entrepreneurship require strong property rights:
To promote innovation and entrepreneurship providing property right
is necessary. Otherwise, business will be in risk that the profit may be
taken by criminal activity or by the state. State can take the money
through excessive tax or through corruption.

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 THE REQUIRED POLITICAL SYSTEM
 Free market economy with strict protection for property rights is
required first. However, democracy is not always the key to
economic growth.
 Totalitarian regimes that ensured strong property rights and free
market economy have observed economic growth.
 Example: four fastest growing economies of past 30 years – South
Korea, Taiwan, Singapore and Hong Kong were under totalitarian
regime.
 A dictator government committed towards free market and
development can also ensure economic growth.

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 THE NATURE OF ECONOMIC
TRANSFORMATION
To form a market-based economy number of steps needs to be
entailed:
Deregulation:
Deregulation involves removing legal restrictions to
1. Free play of markets (removing price controls and price set by
the demand and supply of markets)
2. Establishment of private enterprises
3. The manner in which private enterprises operate
4. Relaxing or removing restrictions on FDI by foreign enterprises
and international trade. 
 Example: India is a mixed economy and now going through gradual
deregulation.
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 THE NATURE OF ECONOMIC
TRANSFORMATION
Privatization:
 It goes hand in hand with deregulation.

 Privatization means transferring the ownership of state property into

hands of private individuals, frequently by sale of state assets through
auction.
 Example: 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.
 SOEs privatized till date: Mymensingh Jute Mills Ltd., Madaripur Textile
Mills, Kohinoor Spinning Mills, Dhaka Vegetable Oil, Berger Paints
Bangladesh Ltd., Siemens Bangladesh Ltd., Sylhet Pulp and Paper Mills,
Ujala Match Factory Ltd., etc.
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 MANAGERIAL IMPLICATIONS
The attractiveness of a country as a market depends on long-term:
1. Benefits:
 This include;

- The size of the market

- Present and future wealth of the consumers 
 E.g. in 1960 South Korea was viewed as just another improvised
Third World nation. By 2000 it was world’s 12th largest economy
measured in terms of GDP.
 Country’s economic system and property rights regime are
reasonably good predictors of economic prospects.
For example, countries with market economy in which property
rights are protected tend to achieve greater economic growth rates
than command economies and economies where property rights
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are not well protected.
 MANAGERIAL IMPLICATIONS
2. Costs:
Cost of doing business depends on a number of political, economic
and legal factors.
 Political: Cost increases if
- Only politically powerful people are allowed to do business.
- Need to pay bribe
 Economic: if the country is economically under developed, then
it lacks proper infrastructure and support for doing business.
 Example: McDonalds in Moscow had to build up vertically
integrated backward supply chain as the quality of poultry and
vegetables produced in Russia was poor.
 Legal: If the legal system of a country is strong, then cost of
doing business will be more. 17
 MANAGERIAL IMPLICATIONS
3. Risks
 Political risk: political risk tends to be higher in countries experiencing social
unrest and disorder. Social unrest is usually expressed through strikes,
demonstrations, terrorism and violent conflict. All these hamper business
activities.

 Economic risk: Economic mismanagement can adversely affect profit and

other goals of business (Inflation, Bankruptcy or business and government
debt). Example: South East Asian crisis ( Indonesia, Thailand, South Korea in
1997-1998)

 Legal risk: Legal risk means the likelihood that a trading partner will
opportunistically break a contract or expropriate property rights. Investors
may hesitate to invest in joint ventures if legal risk is high. Example: Coca- 18
Cola, IBM in India
 Benefits Costs
Size of Economy Corruption
Likely Economic Lack of Infrastructure
Growth Legal Costs

Overall
Attractiveness

Risks
Political Risks: Social unrest/Anti-business trends
Economic Risks: Economic mismanagement
Legal Risks: Failure to safeguard property rights 19