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Chapter 3
National Differences in
Economic Development
naqiewei/DigitalVision Vectors/Getty Images
Learning Objectives
3-1 Explain what determines the level of economic
development of a nation.
3-2 Identify the macropolitical and macroeconomic
changes occurring worldwide.
3-3 Describe how transition economies are moving
toward market-based systems.
3-4 Explain the implications for management
practice of national difference in political
economy.
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Opening Case
What Ails Argentina?
A hundred years ago, Argentina was one of the world’s
wealthiest countries.
It now ranks about 60th in GDP per capita.
Issues:
• High government spending along with budget deficits.
• Persistently high inflation rates have hurt business investment.
• Legacy of Peronist rule.
Reformist government tried to liberalize economy in 2015,
but efforts failed and caused severe economic contraction.
Peronist Alberto Fernandez elected in 2019.
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Introduction
Differences in Political, Economic, and Legal Systems
All influence level of economic development and its
attractiveness for doing business.
General movement toward:
• Democratic forms of government.
• Market-based economic reforms.
• Adoption of legal systems that better enforce property rights.
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Differences in Economic
Development 1
Level of Economic Development
• Affects a country’s attractiveness as a possible market or
production location for firms.
• Common measure is gross national income (GNI).
• Purchasing power parity (PPP) adjustment provides a
more direct comparison of living standards in different
countries.
• GNI and PPP data give a static picture of development.
• Economic growth rates provide a dynamic picture of
development.
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Map 3.1 GNI per Capita, 2019
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Table 3.1 Economic Data for Select
Countries
Annual GDP Size of Economy
GNI per GNI PPP per
Country Growth Rate, GDP, 2019 ($
Capita, 2019 $ Capita, 2019 $
2010 to 2019 % billions)
Brazil $9,130 $14,850 1.39 percent $1,840
China 10,410 16,740 7.69 14,343
Germany 48,520 57,690 1.97 3,998
India 2,130 6,960 6.74 2,875
Japan 41,690 44,780 1.28 5,0812
Nigeria 2,030 5,170 3.65 448
Poland 15,200 32,710 3.63 592
Russia 11,260 28,270 1.92 1,700
Switzerland 85,500 72,390 1.85 703
United Kingdom 42,370 48,040 1.86 2,827
United States 65,760 65,880 2.28 21,428
© McGraw Hill Source: World Development Indicators Online, 2020. 7
Map 3.2 GNI PPP per Capita, 2019
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Differences in Economic
Development 2
Differences in Standards of Living
Official figures can be misleading.
Unrecorded cash transactions can be significant.
• India’s black or shadow economy may be around 50 percent of GDP.
• EU estimates shadow economy accounted for 10 to 12 percent of GDP
in the U.K. and France, 21 percent in Italy, and 23 percent in Greece.
GNI and PPP data don’t indicate growth rates.
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Map 3.3 Average Annual Growth Rate in
GDP (%) 2010 to 2019
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Differences in Economic
Development 3
Broader Conceptions of Development: Amartya Sen
Economist Amartya Sen argues development should be
assessed less by material output and more by the
capabilities and opportunities people enjoy.
UN created the Human Development Index (HDI) based on
life expectancy, education attainment, and whether average
incomes are sufficient to meet basic needs of life in a
country.
• Reflects Sen’s ideas and gauges a country’s economic development
and likely future growth rate.
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Map 3.4 Human Development Index,
2018
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Political Economy and Economic
Progress 1
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 to commercialize innovative new
products and processes.
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Political Economy and Economic
Progress 2
Innovation and Entrepreneurship Require a Market
Economy
Countries with high economic freedom have high economic
growth and richer citizens.
• Hong Kong, Switzerland, Singapore, U.S., Canada, and Germany.
Countries that lack economic freedom fail to achieve
respectable economic growth.
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Political Economy and Economic
Progress 3
Innovation and Entrepreneurship Require Strong
Property Rights
• Individuals and businesses must have opportunity to profit
from innovative ideas.
• Economist Hernando de Soto argues developing world will
not benefit from capitalism until property rights are better
defined and protected.
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Political Economy and Economic
Progress 4
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.
Some of the fastest growing economies of past 40 years
began as undemocratic governments:
• China, South Korea, Taiwan, Singapore, and Hong Kong.
• But only in a well-functioning, mature democracy are property rights truly
secure.
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Political Economy and Economic
Progress 5
Economic Progress Begets Democracy
Democracy is often a consequence of economic growth.
• South Korea and Taiwan.
Contributed to 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.
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Political Economy and Economic
Progress 6
Geography, Education, Demographics, and Economic
Development
Belief that geography influences economic policy, and thus
economic development, goes back to Adam Smith.
Economist Jeffrey Sachs argues that by virtue of favorable
economy, certain societies are more likely to engage in trade, which
promotes economic growth.
Investment in education promotes faster economic development.
Demographic forces are also important determinants of economic
growth rate.
• Young and growing population.
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States in Transition 1
Three Trends in Political Economy Since Late 1980s
1. A wave of democratic revolutions swept the world and
many previous totalitarian regimes collapsed.
2. A move away from centrally planned and mixed economies
towards free markets.
3. A shift back toward greater authoritarianism in some
nations and signs of a retreat from the free market model.
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States in Transition 2
The Spread of Democracy
• Many totalitarian regimes failed to deliver economic
progress to majority of population.
• New information and communication technologies have
broken down ability of state to control access to uncensored
information.
• Economic advances of last quarter century led to
increasingly prosperous middle and working classes who
pushed for democratic reforms.
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Map 3.5 Freedom in the World, 2020
© McGraw Hill Source: Freedom House, 2020. [Link] 21
Transfer of Power in Nigeria
Voters wait in a queue
in front of the election
center in the city of
Lagos, Nigeria.
© McGraw Hill Anadolu Agency/Getty Images 22
States in Transition 3
The New World Order and Global Terrorism
• End of Cold War and “new world order” that followed the
collapse of communism, along with collapse of many
authoritarian regimes in Latin America, have given rise to
intense speculation about the future of global geopolitics.
• Fukuyama argues 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.
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Rising Global Terrorism
ISIS fighters are a
visible symbol of the
rise of global terrorism
in the post Cold War
world.
© McGraw Hill Medyan Dairieh/ZUMA Press, Inc./Alamy Stock Photo 24
States in Transition 4
The Spread of Market-Based Systems
Since the late 1980s, 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.
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Map 3.6 Index of Economic
Freedom, 2020
Access the text alternative for slide images.
© McGraw Hill Source: “Interactive Heat Map.” The Heritage Foundation, 2020. [Link] 26
The Nature of Economic
Transformation 1
Deregulation
• Removing legal restrictions to the free play of markets.
• Establishment of private enterprises.
• Removing price controls.
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The Nature of Economic
Transformation 2
Privatization Legal Systems
• Transfers ownership of • Laws protect private
state property to private property rights and
individuals. provide mechanisms for
• First seen in Great Britain contract enforcement.
under PM Thatcher; now a • Without a legal system in
worldwide phenomenon. place, there is little
• Does not guarantee incentive to engage in
economic growth. economic activity.
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Implications of Changing Political
Economy
Global Changes in Political and Economic Systems
Markets formerly off-limits to Western business are now open.
• China (population of 1.3 billion) could be a bigger market than U.S., EU,
and Japan combined.
• 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.
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360° View: Managerial Implications 1
Benefits, Costs, Risks, and Overall
Attractiveness of Doing Business
Internationally
Overall attractiveness of a country
depends upon balance between 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.
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360° View: Managerial Implications 2
Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally (continued)
Costs:
• Political costs include paying bribes or lobbying for favorable or fair
treatment.
• Economic costs relate primarily to sophistication of economic system,
including 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.
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360° View: Managerial Implications 3
Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally (continued)
Risks:
• Political risk: likelihood that political forces will cause drastic changes in
a country's business environment that adversely affects profit and other
goals of a business enterprise.
• Economic risk: likelihood that economic mismanagement will cause
drastic changes in a country's business environment that adversely
affects profit and other goals of a business enterprise.
• Legal risk: likelihood that a trading partner will opportunistically break a
contract or expropriate property rights.
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360° View: Managerial Implications 4
Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally (continued)
Overall Attractiveness:
• Depends on balancing benefits, costs, and risks associated with doing
business in that country.
• Generally, costs and risks are lower in economically developed and
politically stable markets.
• However, potential for growth may be higher in less developed nations.
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Figure 3.1 Country Attractiveness
Access the text alternative for slide images.
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Summary
In this chapter, we have
• Explained what determines the level of economic
development of a nation.
• Identified macropolitical and macroeconomic changes
occurring worldwide.
• Described how transition economies are moving toward
market-based systems.
• Explained implications for management practice of national
differences in political economy.
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