International Business 9e By Charles W L Hill McGraw Hill Irwin Copyright 2013 by The McGraw Hill Companies Inc All rights reserved Chapter 3 Political Economy and Economic Development What Determines A Country s Level Of Economic Development Gross national income GNI per person measures the total annual income received by residents of a nation Japan Sweden Switzerland and the U S have high GNI China and India have low GNI GNI can be misleading because it does not consider differences in the cost of living need to adjust GNI figures using purchasing power parity PPP 3 3 How Do Countries Compare On GNI Economic Data for Select Countries 3 4 What Determines A Country s Level Of Economic Development Official figures can also be misleading because they do not account for black economy transactions In addition GNI and PPP data are static and do not consider economic growth rates So while China and India are currently categorized as being poor they are growing more rapidly than many developed nations and are expected to become among the largest economies in the world 3 5 How Do Countries Compare On Growth Rates Economic Data for Select Countries 3 6 What Determines A Country s Level Of Economic Development Nobel prize winner Amartya Sen argues economic development should be seen as a process of expanding the real freedoms that people experience the removal of major impediments to freedom like poverty tyranny and neglect of public facilities the presence of basic health care and basic education Amartya Sen also claims that economic progress requires the democratization of political communities to give citizens a voice 3 7 What Determines A Country s Level Of Economic Development 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 3 8 How Do Countries Compare on Economic Development Economic Data for Select Countries 3 9 How Does Political Economy Influence Economic Progress Innovation and entrepreneurship are the engines of long run economic growth innovation includes new products new processes new organizations new management practices and new strategies entrepreneurs commercialize innovative new products and processes Innovation and entrepreneurship help increase economic activity by creating new markets and products that did not previously exist innovation in production and business processes result in more productive labor and capital further boosting economic growth rates 3 10 How Does Political Economy Influence Economic Progress Innovation and entrepreneurship require a market economy there is little incentive to develop new innovations in planned economies because the state owns all means production and therefore the gains There is a strong relationship between economic freedom and economic growth the six countries with the highest ratings of economic freedom from 1975 to 1995 were also among the highest for economic growth Hong Kong Switzerland Singapore the United States Canada and Germany 3 11 How Does Political Economy Influence Economic Progress Innovation and entrepreneurship require strong property rights without strong property rights individuals and businesses risk having their innovations and potential profits stolen Economist Hernando de Soto claims that inadequate property protection in many developing nations limits economic growth 3 12 How Does Political Economy Influence Economic Progress Democratic regimes are probably more conducive to long term economic growth than dictatorships even the benevolent kind property rights are only secure in well functioning mature democracies Subsequent economic growth leads to the establishment of democratic regimes South Korea Taiwan 3 13 How Does Geography Influence Economic Development Countries with favorable geography are more likely to engage in trade and so be more open to market based economic systems and the economic growth they promote Jeffrey Sachs studied economic growth rates between 1965 and 1990 and found that landlocked countries grew more slowly than coastal economies being totally landlocked reduced a country s growth rate by 0 7 per year tropical countries grew more slowly than countries in temperate zones 3 14 How Does Education Influence Economic Development Countries that invest in education have higher growth rates because the workforce is more productive countries in Southeast Asia have offset their geographical disadvantages by investing in education Indonesia Malaysia and Singapore 3 15 How Is The Political Economy Changing Since the late 1980s two trends have emerged 1 Democratic revolution late 1980s and early 1990s democratically elected governments replaced totalitarian regimes more committed to free market capitalism 2 A move away from centrally planned and mixed economies more countries have shifted toward the marketbased model 3 16 How Is The Political Economy Changing Trend 1 Democracy has spread over the last two decades many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations new information and communication technologies have broken down the ability of the state to control access to uncensored information economic advances of the last 25 years have led to increasingly prosperous middle and working classes who have pushed for democratic reforms 3 17 How Free Are Countries Politically Political Freedom in 2010 3 18 How Is The Political Economy Changing Author Francis Fukuyama argues that the new world order will be characterized by democratic regimes and free market capitalism But political scientist Samuel Huntington argues that while many societies are modernizing they are not becoming more Western predicts a world split into different civilizations these civilizations will be in conflict with each other 3 19 How Is The Political Economy Changing Trend 2 The spread of market based systems more countries have moved away from centrally planned and mixed economies toward the market based model Command and mixed economies failed to deliver the sustained economic growth achieved in market based countries 3 20 How Free Are Countries Economically Economic Freedom in 2010 3 21 What Is The Nature Of Economic Transformation The shift toward a market based system involves deregulation removing legal restrictions to the free play of markets the establishment of private enterprises and