1. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-1 Political Economy and Economic Development Innovation and Entrepreneurship are Engines of Growth Economic Progress Begets Democracy

2. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-2 Political Economy and Economic Development Innovation and Entrepreneurship are Engines of Growth Innovation and Entrepreneurship Require a Market Economy Economic Progress Begets Democracy What kind of political system?

3. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-3 Political Economy and Economic Development Innovation and Entrepreneurship are Engines of Growth Innovation and Entrepreneurship Require a Market Economy Innovation and Entrepreneurship Require Strong Property Rights Economic Progress Begets Democracy What kind of political system?

4. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-4 Geography, Education and Economic Development “..that throughout history, coastal states, with their long engagements in international trade, have been more supportive of market institutions than landlocked states, which have tended to organize themselves as hierarchical (and often military) societies. Mountainous states, as a result of physical isolation, have often neglected market- based trade. Temperate climes have generally supported higher densities of population and thus more extensive division of labor than tropical regions.” Jeffrey Sachs Harvard University The general assertion is that nations that invest more in education will have higher growth rates because an educated population is a more productive population.

5. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-5 States in Transition Two Trends Two Trends Democratic Revolutions Decline in Centrally Planned and Mixed Economies Decline in Centrally Planned and Mixed Economies

6. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-6 Spread of Democracy: Why? 1. Totalitarian regimes failed to deliver economic progress to the vast bulk of their populations.

7. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-7 Spread of Democracy: Why? 1. Totalitarian regimes failed to deliver economic progress to the vast bulk of their populations. 2. New information and communications technologies, Internet, have broken down the ability of the state to control access to uncensored information.

8. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-8 Spread of Democracy: Why? 1. Totalitarian regimes failed to deliver economic progress to the vast bulk of their populations. 2. New information and communications technologies, Internet, have broken down the ability of the state to control access to uncensored information. 3. 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.

9. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-9 Fukuyama

10. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-10 There is no “universal” civilization based on widespread acceptance of Western liberal democratic ideals. Clash of Civilizations

11. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-11 The spread of Market-Based Systems Shift Centrally Planned Economies Mixed Economies Market – Based Economies

12. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-12 The Nature of Economic Transformation The shift to market-based economies entails: Deregulation Removal of legal restrictions to free markets.

13. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-13 The Nature of Economic Transformation The shift to market-based economies entails: Deregulation Removal of legal restrictions to free markets. Privatization Transfer of state ownership of property into private hands.

14. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-14 The Nature of Economic Transformation The shift to market-based economies entails: Deregulation Removal of legal restrictions to free markets. Privatization Transfer of state ownership of property into private hands. Legal Systems Creation of systems to protect property rights.

15. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-15 Implications for Business Attractiveness

16. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-16 Implications for Business Attractiveness Benefits First-mover advantages

17. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-17 Implications for Business Attractiveness Benefits First-mover advantages Late-mover disadvantages

18. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-18 Implications for Business Attractiveness Benefits First-mover advantages Late-mover disadvantages Costs

19. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-19 Implications for Business Risks Political Economic Legal

20. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-20 Implications for Business Risks Political Economic Legal Ethics Human rights Regulations Corruption Foreign Corrupt Practices Act Attractiveness Benefits First-mover advantages Late-mover disadvantages Costs