Chapter 3

National Differences in
Economic Development
 Learning Objectives
LO 3-1 Explain what determines the level of economic
development of a nation.
LO 3-2 Identify the macropolitical and macroeconomic
changes occurring worldwide.
LO 3-3 Describe how transition economies are moving
toward market-based systems.
LO 3-4 Explain the implications for management practice
of national difference in political economy.
 Introduction
Economic Development
• Differences among nations
• Attractiveness for doing business
• Trends that foster greater economic development
• Democratic forms of government
• Market-based economic reforms
• Legal systems to better enforce property rights
Differences in Economic Development 1 of 4
Learning Objective 3-1 Explain what determines the level of economic
development of a nation.

Gross national income (GNI)

• 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
• Need to adjust GNI figures using purchasing power
parity (PPP)
Table 3.1 Economic Data for Select Countries
GNI per GNI PPP per Annual GDP Size of Economy
Capita, 2016 Capita, 2016 Growth Rate, GDP, 2016
Country ($) ($) 2007-2016 (%) ($ billions)
Brazil $8,840 $14,810 2.1 $1,796
China 8,260 15,500 9.0 11,199
Germany 43,660 49,530 1.3 3,467
India 1,680 6,490 7.4 2,263
Japan 38,000 42,870 0.5 4,939
Nigeria 2,450 5,740 5.0 405
Poland 12,680 26,770 3.6 470
Russia 9,720 22,540 1.7 1,283
Switzerland 81,240 63,660 1.6 660
United Kingdom 42,390 42,100 1.1 2,618
United States 56,180 58,030 1.3 18,569

Source: World Development Indicators Online, 2017.

Differences in Economic Development 2 of 4
The “official” figures can be misleading
• Do not account for black economy transactions
• 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 become among the largest economies in the world
Differences in Economic Development 3 of 4
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
Differences in Economic Development 4 of 4
Broader Conceptions of Development: Amartya Sen
continued

• 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
Political Economy and Economic Progress 1 of 6
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
Political Economy and Economic Progress 2 of 6
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, the gains
• Strong relationship between economic freedom and
economic growth
Political Economy and Economic Progress 3 of 6
Innovation and Entrepreneurship Require Strong
Property Rights
• Without strong property rights, individuals and
businesses risk having innovations and potential
profits stolen
• Economist Hernando de Soto claims that inadequate
property protection in many developing nations limits
economic growth
Political Economy and Economic Progress 4 of 6
The Required Political System
• Democratic regimes are probably more conducive to
long-term 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
Political Economy and Economic Progress 5 of 6
Economic Progress Begets Democracy
• Economic growth leads to establishment of
democratic regimes
• South Korea
• Taiwan
• If China adopts a free market system, belief is that the
country will have
• Greater individual freedoms
• Democracy
Political Economy and Economic Progress 6 of 6
Geography, Education, 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
 States in Transition 1 of 6
Learning Objective 3-2 Identify the macropolitical and macroeconomic changes
occurring worldwide.

Political economy of nation-states is marked by

two trends
1. Democratic revolutions of the late 1980s and early
1990s
• Totalitarian governments fell
• Replaced by democratically elected governments
• Greater commitment to free market capitalism
2. A move away from centrally planned and mixed
economies toward a more free market approach
 States in Transition 2 of 6
The Spread of Democracy
• Many totalitarian regimes failed to deliver economic
progress to the bulk of their populations
• New information and communication technologies
• Reduced state’s ability to control access to uncensored
information
• Created new conduits for the spread of democratic
ideals
• Economic advances have led to a prosperous middle
class that has pushed for democratic reforms
 States in Transition 3 of 6
The Spread of Democracy continued
• It is naïve to conclude that the spread of democracy
will continue unchallenged
• Democracy is still rare in parts of the world
• Sub-Saharan Africa
• Former communist Eastern and central Europe and
former USSR
• Middle East and North Africa
• Signs that authoritarianism is gaining ground
• Russia, Ukraine, Indonesia, Ecuador, and Venezuela
• Egypt
Map 3.5 Freedom in the World, 2017

Source: The Freedom House Survey Team, “Freedom in the World 2017,” www.freedomhouse.org
 States in Transition 4 of 6
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
 States in Transition 5 of 6
The New World Order and Global Terrorism continued

• Global terrorism is a product of tensions between

civilizations and a clash of value systems and
ideology
• Al-Qaeda and ISIS
• Struggle between radicalized Sunni and Shia factions
within Islam
• Former U.S. Secretary of State Colin Powell
maintains that terrorism is one of the major threats to
world peace and economic progress
 States in Transition 6 of 6
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
• Change also occurring in Asian and African states
• Command and mixed economies failed to deliver the
sustained economic growth achieved in market-based
countries
Map 3.6 Index of Economic Freedom, 2017

Jump to long description in appendix

Source: The Freedom House Survey Team, “Freedom in the World 2016.” www.freedomhouse.org
The Nature of Economic Transformation 1 of 4
Learning Objective 3-3 Describe how transition economies are moving toward
market-based systems.

The shift toward a market-based system involves

• Deregulation
• Privatization
• A legal system to safeguard property rights
The Nature of Economic Transformation 2 of 4
Deregulation
• Deregulation in command economies
• Removing price controls
• Abolishing laws regulating the establishment and operation of
private enterprise
• Relaxing or removing restrictions on direct investment by
foreign enterprises

• Deregulation in mixed economies involved the same

initiatives as in command economies
• Transition was easier due to a vibrant private sector
The Nature of Economic Transformation 3 of 4
Privatization
• A way to stimulate economic efficiency
• 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
The Nature of Economic Transformation 4 of 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
Implications of Changing Political Economy
Ideological conflict between collectivism and
individualism is 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?
 Focus on Managerial Implications 1 of 5
Learning Objective 3-4 Explain the implications for management practice of
national difference in political economy.

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
 Focus on Managerial Implications 2 of 5
Benefits, Costs, Risks, and Overall Attractiveness
of Doing Business Internationally continued
• Benefits of doing business in a country based on
• The size of the market
• The current and future purchasing power of its consumers

• First-mover advantages
• Late-mover disadvantages
• A country’s economic system and property rights
regime good predictors of economic prospects
 Focus on Managerial Implications 3 of 5
Benefits, Costs, Risks, and Overall Attractiveness
of Doing Business Internationally continued
• The costs of doing business in a country based on
• 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?
 Focus on Managerial Implications 4 of 5
Benefits, Costs, Risks, and Overall Attractiveness
of Doing Business Internationally continued
• The risks of doing business in a country based on
• Political risk
• Economic risk
• Legal risk
 Focus on Managerial Implications 5 of 5
Benefits, Costs, Risks, and Overall Attractiveness
of Doing Business Internationally continued
• Overall attractiveness of a potential market to
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
Figure 3.1 Country Attractiveness

Jump to long description in appendix