1. Chapter 3: National Differences in Economic Development
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Chapter 3: National Differences in Economic Development

2. 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 differences in political economy.

3. Introduction
Differences in political, economic, and legal systems influence the level of economic development and its attractiveness for doing business
There has been a general move toward more democratic forms of government, market-based economic reforms and adoption of legal systems that better enforce property rights

4. Differences in Economic Development 1 of 3
A country’s level of economic development affects its attractiveness as a possible market or production location for firms
A common measure is gross national income (GNI) – value of all final goods and services produced in the country in a year.
A purchasing power parity (PPP) adjustment provides a more direct comparison of living standards in different countries
LO 3-1 Explain what determines the level of economic development of a nation.

5. Jump to Appendix 1 long image description
Map 3.1 GNI per Capita 2014
Jump to Appendix 1 long image description

6. Table 3.1 Economic Data for Select Countries
Country
GNI per Capita 2014 $
GNI PPP per Capita 2014 $
Annual Average GDP Growth Rate %
Size of Economy GDP 2014 $ billions
Brazil
$11,530
$15,590
3.41%
$2,346
China
7,400
13,170
9.99
10,355
Germany
47,640
46,480
1.32
3,868
India
1,570
5,630
7.69
2,049
Japan
42,000
37,920
0.61
4,601
Nigeria
2,970
5,710
6.04
569
Poland
13,690
23,930
3.84
545
Russia
13,220
24,710
3.46
1,861
Switzerland
90,680
59,610
2.09
701
United Kingdom
43,430
39,040
1.34
2,989
United States
55,200
55,860
1.58
17,419
Source: World Development Indicators Online, 2016.

7. Map 3.2 GNI PPP per Capita 2014

8. Gardner: Ratio of GNI at PPP to GNI at market exchange rate, related to GNI at market exchange rate, 2015

9. Differences in Economic Development 2 of 3
Official figures can be misleading
Unrecorded cash transactions can be significant
India’s black or shadow economy may be around 50% of GDP
The EU estimates that the shadow economy accounted for 10% of GDP in the UK and France in 2012, 24% in Greece, and 32% in Bulgaria

10. Map 3.3 Average Annual Growth Rate in GDP % 2005-2014

11. Differences in Economic Development 3 of 3
Broader Conceptions of Development
Amartya Sen - development should be assessed less by material output and more by the capabilities and opportunities that people enjoy
The UN created the Human Development Index based on life expectancy, education attainment, and whether average incomes are sufficient to meet the basic needs of life in a country
Reflects Sen’s ideas and gauges a country’s economic development and likely future growth rate

12. Map 3.4 Human Development Index 2014

13. Human Development Index Related To GNI per capita at PPP

16. Political Economy and Economic Progress 1 of 6
Innovation and Entrepreneurship are the Engines of Growth
For a country to sustain long term economic growth, the business environment needs to be conducive to innovation and entrepreneurial activity
Innovation - new products, new processes, new organizations, new management practices, and new strategies
Entrepreneurs first commercialize innovative new products and processes

17. Political Economy and Economic Progress 2 of 6
Innovation and Entrepreneurship require a Market Economy
Countries with high economic freedom have high economic growth and richer citizens
Hong Kong, Switzerland, Singapore, the U.S., Canada, and Germany
Countries that lack economic freedom also fail to achieve respectable economic growth

18. Political Economy and Economic Progress 3 of 6
Innovation and Entrepreneurship require Strong Property Rights
Individuals and businesses must have the opportunity to profit from innovative ideas
Hernando de Soto – developing world will not benefit from capitalism until property rights are better defined and protected

19. Political Economy and Economic Progress 3 of 6
Gardner: The Washington Consensus
10 economic policy prescriptions in a "standard" reform package promoted by institutions such as the IMF, World Bank, and US Treasury Department. The term was coined in by the English economist, John Williamson
Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
Redirection of public spending from subsidies toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;

20. Political Economy and Economic Progress 3 of 6
Gardner: The Washington Consensus (continued)
Tax reform, broadening the tax base and adopting moderate marginal tax rates;
Interest rates that are market determined and positive (but moderate) in real terms;
Competitive exchange rates;
Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
Liberalization of inward foreign direct investment;
Privatization of state enterprises;

21. Political Economy and Economic Progress 3 of 6
Gardner: The Washington Consensus (continued)
Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
Legal security for property rights.
Gardner – Expanding on point 6 - Trade Policy – Import Substitution versus Export Promotion

22. Political Economy and Economic Progress 4 of 6
The Required Political System
Democratic regimes tend to be more conducive to long- term economic growth than dictatorships – even the benevolent kind
Limiting human freedom also suppresses human development and therefore limits progress

23. Political Economy and Economic Progress 5 of 6
Economic Progress Begets Democracy
Democracy is often a consequence of economic growth
South Korea and Taiwan
This has contributed to the attitude of many Western governments towards human rights violations in China
If China establishes a free market system, it is hoped that greater individual freedom and democracy will follow

24. Political Economy and Economic Progress 6 of 6
Geography, Education, and Economic Development
Geography - influences economic policy, and thus economic development
Favorable geography facilitates trade which can promote economic growth
Gardner – Geography and colonialism (Acemoglu, Johnson, Robinson)
Education levels
Investment in education promotes faster economic development
The belief that geography can influence economic policy, and hence economic growth rates, goes back to Adam Smith.
Education emerges as another important determinant of economic development (a point that Amartya Sen emphasizes).

25. States in Transition 1 of 4
Since the late 1980s, a wave of democratic revolutions has swept the world, and many of the previous totalitarian regimes collapsed
There has been a move away from centrally planned and mixed economies towards free markets
LO 3-2 Identify the macropolitical and macroeconomic changes occurring worldwide.

26. Map 3.5 Freedom in the World 2016
The Freedom House Survey Team, “Freedom in the World 2016,”
Jump to Appendix 2 long image description

27. States in Transition 2 of 4
The Spread of Democracy
Many totalitarian regimes failed to deliver economic progress to the majority of their population
New information and communication technologies have broken down the ability of the state to control access to uncensored information
Economic advances of the last quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms

28. States in Transition 3 of 4
The New World Order and Global Terrorism
The end of the Cold War and the “new world order” that followed the collapse of communism, taken together with the collapse of many authoritarian regimes in Latin America, have given rise to intense speculation about the future shape of global geopolitics
Fukuyama: war of ideas may be at an end and liberal democracy has triumphed
Huntington saw the world split into different civilizations each with its own value systems and ideology
Two decades ago, author Francis Fukuyama argued, “We may be witnessing the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.”22 Fukuyama goes on to say that the war of ideas may be at an end and that liberal democracy has triumphed.
In contrast to Fukuyama, Huntington envisioned a world split into different civilizations, each of which has its own value systems and ideology. Huntington predicted conflict between the West and Islam and between the West and China. As for terrorism, in Huntington’s thesis, global terrorism is a product of the tension between civilizations and the clash of value systems and ideology.

29. States in Transition 4 of 4
The Spread of Market-Based Systems
Since the late 1980s there has been a transformation from centrally planned command economies to market-based economies
Command and mixed economies failed to deliver the sustained economic performance achieved by countries that had adopted market-based systems
Many countries shifted to a market-based system

30. Map 3.6 Distribution of Economic Freedom 2016
Source: The Freedom House Survey Team, “Freedom in the World 2016.”
Jump to Appendix 3 long image description

31. The Nature of Economic Transformation
Deregulation
Removing legal restrictions to the free play of markets
Establishment of private enterprises
Removing price controls
Privatization
Transfers ownership of state property into the hands of private individuals
Legal Systems
Laws protecting private property rights and providing mechanisms for contract enforcement
Without a legal system in place, little incentive to engage in economic activity
LO 3-3 Describe how transition economies are moving toward market-based systems.

32. The Nature of Economic Transformation
Gardner – Privatization Methods
restitution
equal-access voucher privatizations
management-employee takeover
auction
strategic investors in a closed-bid tender offers.
loans for shares auctions
LO 3-3 Describe how transition economies are moving toward market-based systems.

33. Implications of Changing Political Economy
Markets that were formerly off-limits to Western business are now open
China (population of 1.3 billion) could be a bigger market than the U.S., the EU, and Japan combined. Gardner – Graham Allison on the risk of Thucydides Trap – that wars often happen, even when unwanted, when a rising power challenges an established one
India (population 1.2 billion) is also a potentially huge market
Latin America has 600 million potential consumers
No guarantee that democracy will thrive in newer democratic states
Although the bipolar world of the Cold War era has vanished, it may be replaced by a multipolar world dominated by a number of civilizations. In such a world, much of the economic promise inherent in the global shift toward market-based economic systems may stall in the face of conflicts between civilizations.

34. Focus on Managerial Implications 1 of 4
The overall attractiveness of a country depends upon the balance between the likely benefits of doing business in that country against the likely costs and risks
Benefits
Function of market size, and current and future consumer purchasing power
May be able to gain first mover advantages
Late entrants face late-mover disadvantages
LO 3-4 Explain the implications for management practice of national difference in political economy.

35. Focus on Managerial Implications 2 of 4
Costs
Political costs - include the cost of paying bribes or lobbying for favorable or fair treatment
Economic costs - relate primarily to the sophistication of the economic system, including the infrastructure and supporting businesses
Legal costs - can be higher in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights

36. Focus on Managerial Implications 3 of 4
Risks
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

37. Focus on Managerial Implications 4 of 4
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
Generally, the costs and risks are lower in economically developed and politically stable markets
However, the potential for growth may be higher in less developed nations
Gardner – Willingness to take risk may vary between large and small companies, and between state-controlled and private companies.
Internet Extra: The U.S. State Department produces a series of annual "Country Reports“. The site is {
1. Click on Doing Business in International Markets. Discuss the ways the State Department helps American companies doing business in other countries.
2. Next, click on More Business Information and then on Investment Climate Statements. Compare the investment climate in several countries. Where would you invest? Which countries would you avoid?

38. Figure 3.1 Country Attractiveness
Jump to Appendix 4 long image description

39. Summary In this chapter we have
Explained what determines the level of economic development of a nation.
Identified the macropolitical and macroeconomic changes occurring worldwide.
Described how transition economies are moving toward market-based systems.
Explained the implications for management practice of national differences in political economy.

40. Videos
Jim Yong Kim - Doesn't everyone deserve a chance at a good life? Graham Allison - Thucydides’ Trap