POLITICAL ECONOMY AND
ECONOMIC DEVELOPMENT
Differences in
Economic
Development
• Gross National Income: Total Annual income
received by the residents of a nation
• Purchasing Power Parity Adjustment: Adjusting
GNI per capita by purchasing power
• Provides a direct comparison of living standards,
keeping the United States the base
• Only gives a static picture of development
• Innovation and entrepreneurship
Political Economy and
Economic development
1.
Innovation: Creation of new products,
processes, organizations and strategies.
2.
Increased economic activity through creation
of new products and services
3.
Increase in productivity of labor and capital
4.
Drivers of long run economic growth
5.
Requires strong property rights
Democracy and Economic Growth
• It is generally believed that Democratic countries have better economic growth
• However, China, Hong Kong, Singapore, etc. had totalitarian regimes between 1960 to 1990
• Totalitarian leaders believe that a country needs to develop discipline
To promote economic growth
• However, Latin American, African countries were under totalitarian regimes from 1960 to 1990
• A country committed to a free-market system and strong protection of property rights is capable of
having a long run economy.
Geography, Education
and Economic
Development
• With favorable geography, certain societies were
more likely to engage in trade than others and
were thus more likely to be open to and develop
market-based economic systems.
• The high rate of disease, poor soils, and hostile
climate that afflict many tropical countries, can
have a negative impact on the development
• Countries that invest in education have higher
growth rates as children are more productive
• For instance- South Korea and Pakistan
States in Transition
• The Spread of Democracy
• The New World Order and Global Terrorism
• The Spread of Market Based Systems
The Spread of
Democracy
• Free countries- Citizens enjoy a high degree of political
and civil freedoms.
• Partly free- Countries are characterized by some
restrictions on political rights and civil liberties, often in
the context of corruption, weak rule of law, ethnic strife,
or civil war.
• Not Free- The political process is tightly controlled and
basic freedoms are denied.
Reasons for spread
of Democracy
• Many totalitarian regimes failed to deliver economic
progress to their populations. For instance-The collapse of
communism in Eastern Europe
• New information and communication technologies,
including shortwave radio, satellite television, fax
machines, desktop publishing, and, most important, the
Internet, have reduced the state's ability to control access
to uncensored information.
• Economic advances of the have led to the emergence of
increasingly prosperous middle and working classes who
have pushed for democratic reforms
The New World
Order and Global
Terrorism
• Some countries may be difficult to do business
in, either because they are shot of violent
conflicts or because they are part of a civilization
in conflict with an enterprise's home country.
• Global terrorism- Product of the tension between
civilizations and the clash of value systems and
ideology
The Spread of Market Based Systems
• Shift towards mixed economy
• Sold State-owned businesses to private investors (privatization) and deregulated their economies to
promote greater competition.
• Command and mixed economies failed to deliver the kind of sustained economic performance in
countries adopting market-based systems, such as the United States, Switzerland, Hong Kong, and
Taiwan.
The Nature of Economic Transformation
• Deregulation- Removing legal restrictions to the free play of markets, the establishment of private
enterprises, and the manner in which private enterprises operate
• Deregulation involves removing price controls, allowing prices to be set by the interplay between
demand and supply; abolishing laws regulating the establishment and operation of private
enterprises; and relaxing or removing restrictions on direct investment by foreign enterprises and
international trade.
Privatization
• Transfers the ownership of state property into the hands of private individuals, by the sale of state
assets through an auction
• Stimulate gains in economic efficiency by giving new private owners a powerful incentive—the
reward of greater profits
• Not useful if the newly privatized firms continue to receive subsidies from the state and are protected
from foreign competition by barriers to international trade and foreign direct investment
• Managers of small firms having a greater ownership stake can often gain control over the newly
privatized entity and run it for their own
• Benefits- Function of the size of the market, the
present wealth (purchasing power) of consumers
in that market and the future wealth of customers
• For instance- China and India
Implications for
Managers
• Identifying and investing early in a potential
future economic star, international firms may
build brand loyalty and gain experience in that
country's business practices. These will pay back
substantial dividends if that country achieves
sustained high economic growth rates.
• A country's economic system, property rights
regime, and market size (in terms of population)
are good indicators of the potential long-run
benefits of doing business in a country.
• Exceptions- India and China
Costs of doing
Business
• Political : Pay off political entities in a country before the
government allows it to do business there. Bribes are
higher in totalitarian regime than democratic regime
• Economic- Costlier to do business in undeveloped
economies because of the lack of infrastructure and
supporting businesses. For instance- McDonald's in
Moscow
• Legal – Costlier to do business where regulations are strict
towards product safety, safety in the workplace,
environment. In the United States, the absence of a cap on
damage awards has meant spiraling liability insurance
rates. Thirdly, costlier to do business in countries having
lenient rules as international firms may find no satisfactory
way to resolve contract
RISKS
• Political risk: Greater in countries experiencing social unrest and disorder
• In countries where the nature of a society increases the likelihood of social unrest.
• Strikes, demonstrations, terrorism, and violent conflict.
• Likely found in countries having more than one ethnic nationality, where competing ideologies are
battling for political control, where economic mismanagement has created high inflation and falling
living standards
• Social unrest can result in abrupt changes in government and government policy. New policies
might hurt international business
Economic risks
• Caused by economic mismanagement of the country
• Increase in country's inflation rate
• Increase in business and government debt
• Asian states of Indonesia, Thailand, and South Korea,
businesses increased their debt rapidly during the 1990s,
often at the bequest of the government, resulting in
overinvestment, with more industrial (factories) and
commercial capacity (office space) being built than could
be justified by demand conditions.
Legal Risks
• Country's legal system fails to provide adequate safeguards in the case of contract violations or to
protect property rights.
• Firms more likely to break contracts or steal intellectual property if they perceive it as being in their
interests to do so.
• IBM and Coca-Cola closed their investments in India in 1970s considering that Indian legal system did
not provide for adequate protection of intellectual property rights.
References
• Hill, C. W. L., International Business: Competing in the Global
Marketplace, McGraw-Hill Irwin. 12th Edition Connect (eBook) ISBN:
9781260390056