Transcript Chapter 2: National Differences in Political Economy

CHAPTER 3:
POLITICAL ECONOMY &
ECONOMIC DEVELOPMENT
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MGT 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 (2007) 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.
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AMARTYA SEN
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BROADER CONCEPTIONS OF
DEVELOPMENT: AMARTYA SEN

Development should be assessed less by material output measures
such as GNI per capita and more by the capabilities and opportunities
that people enjoy.

Development means ensuring real freedom of people through:
 Removing impediments to freedom
 Removing poverty, as well as, tyranny
 Removing social deprivation
 Ensuring public facilities for all
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Development is not only economic freedom but also political
freedom. To succeed in this countries need ‘democratization’.
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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)


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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 2013, HDI Rank for Bangladesh is 142 and HDI of Bangladesh was
0.558. It was 0.433 in 2000.
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LIFE EXPECTANCY RATES
List By World Health Organization 2012
Rank
Country
Overall Rate
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Japan
84.6
3
Singapore
84
36
United States
79.8
50
Maldives
77.2
127
Bangladesh
70
137
Myanmar
68
150
India
65
182
Nigeria
53
193
Sierra Leone
38
As of 2014, the country with the highest life expectancy is Monaco at 89.57
years; the country with the lowest life expectancy is Chad at just 49.44 years.
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FACTS ABOUT LITERACY RATES

According to the CIA World Factbook, almost 75% of the world's 775
million illiterate adults are concentrated in ten countries (in descending
order: India, China, Pakistan, Bangladesh, Nigeria, Ethiopia, Egypt,
Brazil, Indonesia, and the Democratic Republic of Congo).

Women represent two-thirds of all illiterate adults globally. Extremely
low literacy rates are focused in three regions: South Asia, West Asia
and Sub-Saharan Africa.

Literacy rate of Bangladesh is 57.7%; India is 74.4%; Germany, France,
USA, UK and Japan is 99%; Ghana is 71.5%; UAE is 77.9%; South Sudan
is 27%; Haiti is 52.9%, etc. (2013 data).
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HUMAN DEVELOPMENT INDEX
RANK
(2013)
COUNTRY
HDI
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Norway
0.944
2
Australia
0.933
5
United States
0.914
110
Egypt
0.682
6
Germany
0.911
155
Madagascar
0.498
14
United Kingdom
0.892
146
Pakistan
0.537
49
Argentina
0.808
79
Brazil
0.744
183
Sierra Leone
0.374
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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. The infant mortality
rate of the world is 49.4 according to the United Nations and
42.09 according to the CIA World Factbook.

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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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.
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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



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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 are
not well protected.
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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.
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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-Cola, IBM in India
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Benefits
Costs
Size of Economy
Likely Economic
Growth
Corruption
Lack of Infrastructure
Legal Costs
Overall
Attractiveness
Risks
Political Risks: Social unrest/Anti-business trends
Economic Risks: Economic mismanagement
Legal Risks: Failure to safeguard property rights
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