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