Chapter 3
National Differences in
Economic
Development
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WHAT WE
KNOW
- Globalization (of markets and products)
- Global Institutions (WTO, UN, World Bank…)
- Drivers of Globalization (Less barriers, trade agreements,
technology, internet..)
- Pros and Cons of globalization
- Political systems (collectivism vs individualism AND democratic vs
totalitarian)
- Economic systems (market economy, command economy, mixed)
- Legal System (Common law, civil law, theocratic law)
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Learning Objectives
Explain what determines the level of economic development of a nation.
LO 3-1
Identify the macropolitical and macroeconomic changes occurring worldwide.
LO 3-2
LO 3-3 Describe how transition economies are moving toward market-based
systems.
LO 3-4 Explain the implications for management practice of national difference in
political economy.
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Poland: Eastern Europe’s Economic Miracle
• As the great financial crisis of 2008 and 2009 unfolded, countries across Europe were hit hard. A
notable exception was Poland, whose economy grew by 1.5 percent during 2009. Between 2010 and
2018, Poland’s growth rate averaged 3.5 percent per annum, the best in Europe.
• This country of 38 million now has the largest economy among the post-Communist states of
Eastern Europe. In 1989, Poland elected its first democratic government after more than four decades
of Communist rule. The Government moved quickly to shift the economy away from the centrally
planned Soviet model it had been operating under since 1945. Poland embraced market-based
economic policies and quickly implemented them through a “shock therapy” program.
• In 2004, the country joined the European Union and subsequently adopted the euro.
• All this helped transform Poland into an export powerhouse. Exports now account for 54 percent of
GDP, compared to 34 percent in 2004 and way better than UK and USA.
• Polands exports include machinery and transportation equipment, intermediate manufactured goods,
furniture, hardwood products, food, and casual clothing.
• Living standards, measured by GDP per capita at purchasing power parity increased 2.7 times,
compared to 1.7 times in the neighboring Czech Republic.
Poland: Eastern Europe’s Economic Miracle
• Poland's government has also been fiscally conservative, keeping public debt in check, not allowing it
to expand during the recession as many other countries did. This stands in stark contrast to what happened
in the Baltic states (Estonia, Latvia, and Lithuania), where investors pulled money out of those economies
during 2008 and 2009, driving their currencies down, raising the cost of government debt, and
precipitating a full-blown economic crisis that required the IMF and EU to step in with financial
assistance.
• Post 2009, the Government has continued to adhere to a fairly conservative management of the
economy. In 2018, the Government deficit as a percentage of GDP was 1.6 percent, safely below the 3
percent European Union requirement for members of the euro zone. As of 2018, economic growth
remains strong, inflation is low at under 2 percent, and the unemployment rate of 3.7 percent is the
lowest since 1989.
• The country faces several significant economic challenges. First, the work force is aging. Despite some
anti-immigration sentiment, government has been issuing substantially more work permits to immigrants,
the majority of whom have come from the Ukraine. Second, the Government recently lowered the
retirement age (which exacerbates the labor shortage) and raised social security payments. Third, despite
substantial privatization after 1990, Poland still has a mixed economy with several major state-owned
enterprises. The government controls the two largest banks, the biggest insurer, and two defense groups,
as well as important energy, mining, and petrochemical companies.
Differences in Economic Development 1 of 4
A measure of economic development is a country’s gross national income (GNI).
(total amount of money earned by people in a country.
– Richest Countries: Japan, Sweden,
Switzerland, and U.S. have high
GNI
– China and India have low GNI
– GNI does not consider differences
in the cost of living, e.g. Switzerland
vs USA
• Need to adjust GNI figures using
purchasing power parity
(PPP)
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Table 3.1 Economic Data for Select
Countries
©McGraw-Hill Education. Source: World Development Indicators Online, 2017.
Differences in Economic Development 2 of 4
• Table 3.1 suggests the average Indian citizen can afford to consume only about 12
percent of the goods and services consumed by the average U.S. citizen on a PPP
basis. Given this, we might conclude that despite having a population of 1.2 billion,
However, this would be incorrect because India has a fairly wealthy middle class of
close to 250 million people, despite its large number of poor citizens. In absolute
terms, the Indian economy now rivals that of Russia.
• Large amounts of economic activity may be in the form of unrecorded cash
transactions or barter agreements. Known as the black economy or shadow
economy, estimates suggest that in India it has been as high as 50 percent of GDP,
which implies that the Indian economy may be half as big again as the figures
reported in Table 3.1.
Differences in Economic Development 2 of 4
• The “official” figures can be misleading
– GNI and PPP data are static and do not
consider economic growth rates
– China and India are currently relatively
poor, but their economies are growing
more rapidly than many advanced
nations. In 2010, China overtook Japan
to become the second-largest economy
in the world after the United States.
– China may become the world’s largest
economy during the next decade.
– India will become among the largest
economies in the world.
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Differences in Economic Development 3 of 4
• Broader Conceptions of Development:
Amartya Sen (economist)
– Economic development should be
assessed by the capabilities and
opportunities people enjoy
• Development requires the
removal of major impediments
to freedom: poverty, tyranny,
poor economic opportunities
– Economic progress requires the
democratization of political
communities to give citizens a voice
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Differences in Economic Development 4 of
4
Broader Conceptions of Development: Amartya Sen continued
• The United Nations used Sen’s ideas to develop the Human Development
Index (HDI) which is based on
• Life expectancy at birth
• Educational achievement
• Whether average incomes are sufficient to meet the basic needs of life in a
Country; Sen’s thesis suggests that political freedoms should also be included in the
index, and they are not.
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Human development Index 2017
Political Economy and Economic Progress 1 of 6
• Innovation and Entrepreneurship Are the Engines of
Growth
Innovation
• Includes new products, new processes, new
organizations, new management practices, and
new strategies, e.g., Uber, [Link]
Entrepreneurs
• First to commercialize innovative products and
processes
• Provides much of the dynamism in an economy
• Firms such as Apple, Google, Facebook, Amazon,
Dell, Microsoft, and Oracle were all founded by
entrepreneurial individuals to exploit new
technology.
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Political Economy and Economic Progress 2 of 6
Innovation and Entrepreneurship Require a Market Economy (PP/SD)
• What is required for the business environment of a country to be conducive to innovation and
entrepreneurial activity? It has been argued that the economic freedom associated with a market
economy creates greater incentives for innovation and entrepreneurship than either a planned or a
mixed economy.
• In a planned economy, the state owns all means of production. Little incentive to develop new
innovations in command economies because the state owns all means of production and therefore, the
gains
• Strong relationship between economic freedom and economic growth
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Political Economy and Economic Progress 3 of 6
• Innovation and Entrepreneurship Require Strong
Property Rights
– Without strong property rights, individuals and
businesses risk having innovations and potential
profits stolen either by criminal elements or by the
state
– Nobel Prize–winning economist Douglass North,
throughout history many governments have
displayed a tendency to engage in such behavior
(e.g., license, Excessive tax)
– Economist Hernando de Soto claims that
inadequate property protection in many developing
nations limits economic growth
– Haiti, for example, where individuals must take 176
steps over 19 years to own land legally.
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Political Economy and Economic Progress 4 of 6
• The Required Political System
– Democratic regimes are probably more conducive to long-term economic growth
• Property rights are only secure in well-functioning, mature democracies
• Five of the fastest-growing economies of the past 40 years— China, South Korea,
Taiwan, Singapore, and Hong Kong—had one thing in common at the start of their
economic growth: undemocratic governments.
• Singapore’s leader for many years, told an audience, “I do not believe that democracy
necessarily leads to development. I believe that a country needs to develop discipline
more than democracy. The exuberance of democracy leads to undisciplined and
disorderly conduct which is inimical to development.
• Only a totalitarian regime that is committed to a market system and strong protection of
property rights is capable of promoting economic growth.
– Totalitarian states are detrimental to progress
• They limit freedom
• They suppress human development
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Political Economy and Economic Progress 5 of 6
• Economic Progress Begets Democracy
– Economic growth leads to establishment of
democratic regimes
• South Korea
• Taiwan
– If China adopts a free market system, belief is
that the country will have
• Greater individual freedoms
• Democracy
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Political Economy and Economic Progress 6 of 6
• Geography, Education, and Economic Development
– Economist Jeffrey Sachs argues that countries with favorable geography are
• More likely to engage in trade and More open to market-based
systems
– He also argues that, irrespective of the economic and political institutions a country adopts,
adverse geographic conditions—such as the high rate of disease, poor soils, and hostile
climate that afflict many tropical countries—can have a negative impact on development.
– Countries that invest in education have higher growth rates because the workforce is more
productive. However, just 30 percent of Pakistani children were enrolled in primary schools,
while 94 percent of South Koreans were. By the mid-1980s, South Korea’s GNP per person
was three times that of Pakistan
• Countries in Southeast Asia have offset their geographical disadvantage by investing
in education
• Economists also argue that demographic forces are an important determinant of a
©McGraw-Hill Education. country’s economic growth rate.
States in Transition 1 of
6
Political economy of nation-states is marked by two trends
1. Democratic revolutions of the late 1980s and early 1990s
• Totalitarian governments fell
• Replaced by democratically elected governments
• Greater commitment to free market capitalism
2. A move away from centrally planned and mixed
economies toward a more free-market approach
In political freedom 2025, grouping countries into three broad groupings: free, partly
free, and not free. In “free” countries, citizens enjoy a high degree of political and civil
freedoms. “Partly free” countries are characterized by some restrictions on political
rights and civil liberties, often in the context of corruption, weak rule of law, ethnic strife,
or civil war. In “not free” countries, the political process is tightly controlled and basic
freedoms are denied.
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States in Transition 2 of 6
• The Spread of Democracy: Three main reasons account for the spread of democracy
❑ Many totalitarian regimes failed to deliver economic progress to the bulk of their
populations.
Today, the economic success of many of the newer democracies—such as Poland and the
Czech Republic in the former communist bloc, the Philippines and Taiwan in Asia, and
Chile in Latin America—has strengthened the case for democracy as a key component of
successful economic advancement.
❑ New information and communication technologies
• Reduced state’s ability to control access to uncensored information
• Created new conduits for the spread of democratic ideals
❑ Economic advances have led to a prosperous middle class that has pushed
for democratic reforms
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States in Transition 3 of 6
• The Spread of Democracy continued
– It is naïve to conclude that the spread
of democracy will continue
unchallenged
• Democracy is still rare in parts of
the world
– Sub-Saharan Africa
– Former communist Eastern and
central Europe and former
USSR
– Middle East and North Africa
• Signs that authoritarianism is
gaining ground
– Russia, Ukraine, Indonesia,
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Ecuador, and Venezuela
©McGraw-Hill Education. Source: The Freedom House Survey Team, “Freedom in the World 2017,” [Link]
States in Transition 4 of
6
The New World Order and Global Terrorism
• Author Francis Fukuyama argues the new world order will be characterized by
democratic regimes and free market capitalism
• Political scientist Samuel Huntington argues that while many societies are
modernizing, they are not becoming more Western
✔ Huntington predicted conflict between the West and Islam and between the
West and China.
✔ Predicts a world split into different civilizations that will be in conflict making
business difficult
• Political position is more likely to be somewhere between Fukuyama and
Huntington
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States in Transition 5 of 6
• The New World Order and Global
Terrorism continued
– Global terrorism is a product of
tensions between civilizations and a
clash of value systems and
ideology
• Al-Qaeda and ISIS (Syria and
neighboring Iraq)
• Struggle between radicalized
Sunni and Shia factions within
Islam
– Former U.S. Secretary of State
Colin Powell maintains that
terrorism is one of the major threats
to world peace and economic
©McGraw-Hill Education.
progress
States in Transition 6 of 6
• The Spread of Market-Based Systems –
• A shift from centrally planned
economies to market-based
economies
• More than 30 countries in the former Soviet
Union and eastern European communist bloc
changed economic system
• Change also occurring in Asian and African
states (China and Vietnam)
• African countries such as Angola, Ethiopia,
and Mozambique
– Command and mixed economies failed to
deliver the sustained economic growth
achieved in market-based countries
©McGraw-Hill Education.
Index of Economic Freedom, 2025
Jump to long description in appendix
©McGraw-Hill Education. Source: The Freedom House Survey Team, “Freedom in the World 2016.” [Link]
The Nature of Economic Transformation 1 of 4
• The shift toward a market-based
system involves
– Deregulation
– Privatization
– A legal system to
safeguard property rights
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The Nature of Economic Transformation 2 of 4
• Deregulation: Deregulation involves removing legal restrictions to the free play of
markets, the establishment of private enterprises, and the manner in which private
enterprises operate.
– Deregulation in command economies
– Removing price controls and thereby set by the interplay between demand
and supply
– Abolishing laws regulating the establishment and operation of private
enterprise
– Relaxing or removing restrictions on direct investment by foreign enterprises
– Deregulation in mixed economies involved the same initiatives as in command
economies
– Transition was easier due to a vibrant private sector
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The Nature of Economic Transformation 3 of 4
Privatization: Privatization transfers the ownership of state property into the hands of
private individuals, frequently by the sale of state assets through an auction.
• A way to stimulate economic efficiency
– Started in Great Britain in early 1980s when then–Prime Minister Margaret
Thatcher started to sell state-owned assets such as the British telephone
company, British Telecom (BT).
– In many nations economic activity is still in the hands of state-owned enterprises,
such as Czech Republic, for example, three-quarters of all state-owned enterprises
were privatized between 1989 and 1996
– Selling state-owned enterprises not enough to guarantee economic growth; Studies
of privatization have shown that the process often fails to deliver predicted benefits if
the newly privatized firms continue to receive subsidies from the state and if they are
protected from foreign competition by barriers to international trade and foreign direct
investment.
– For privatization to work it must be paired with a general deregulation and opening
©McGraw-Hill Education.
The Nature of Economic Transformation 4 of 4
• Legal Systems
– A well-functioning market
economy requires laws
• Need to protect property rights
• Mechanisms for contract
enforcement
– Adoption of a legal system requires
time to function well
– Institutional weaknesses undermine
contract enforcement in most
countries
– Progress being made regarding
laws on property rights
©McGraw-Hill Education.
Implications of Changing Political Economy
• Ideological conflict between
collectivism and individualism is less
prevalent today
– Western ideology more widespread
– Markets formerly off-limits to
Western business are now open
presenting a huge potential for
business
– Potential risks are large
• Will democracy thrive during
difficult times?
• Will totalitarian regimes return?
• Is the risk associated with
investment worth it?
• Is China’s financial system
stable?
©McGraw-Hill Education.
Implications of Changing Political Economy
For nearly 50 years, half of the world was off-limits to Western businesses. Since the late 1980s,
much of that has changed. Many of the national markets of eastern Europe, Latin America,
Africa, and Asia may still be underdeveloped, but they are potentially enormous. With a
population of more than 1.3 billion, the Chinese market alone is potentially bigger than that of the
United States, the European Union, and Japan combined. Similarly, India, with about 1.2 billion
people, is a potentially huge market. Latin America has another 600 million potential consumers.
It is unlikely that China, India, Vietnam, or any of the other states now moving toward a market
system will attain the living standards of the West soon. Nevertheless, the upside potential is so
large that companies need to consider investing there. For example, if China and the United
States continue to grow at the rates they did from 1996 through 2018, China will surpass the
United States to become the world’s largest national economy within the next two decades.
©McGraw-Hill Education.
Focus on Managerial Implications 1 of 5
Learning Objective 3-4 Explain the implications for management practice of
national difference in political economy.
Benefits, Costs, Risks, and Overall
Attractiveness
of Doing Business Internationally
• Countries are more likely to have higher
sustained rates of economic growth when
they have
• Democratic regimes
• Market based economic policies
• Strong property rights protection
• These markets are more attractive to
international businesses
©McGraw-Hill Education.
Focus on Managerial Implications 2 of 5
• Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally
continued
– Benefits of doing business in a
country based on
• The size of the market
• The current and future purchasing power of its consumers
– First-mover advantages are the advantages that accrue to early entrants into a
market
– Late-mover disadvantages are the handicaps that late entrants might suffer
– A country’s economic system and property rights regime good predictors of
economic prospects
©McGraw-Hill Education.
Focus on Managerial Implications 3 of 5
Benefits, Costs, Risks, and Overall Attractiveness of Doing
Business Internationally continued
• The costs of doing business in a country based on
• Political system: is it necessary to pay bribes to get
market access?
• Economic level: are the necessary supporting business
and infrastructure in place?
• Legal system: how do local laws and regulations affect
business decisions? Are there well-established
contract laws?
©McGraw-Hill Education.
Focus on Managerial Implications 4 of 5
Benefits, Costs, Risks, and Overall Attractiveness of Doing
Business Internationally continued
• The risks of doing business in a country based on
• Political risk has been defined as the likelihood that political forces
will cause drastic changes in a country’s business environment that
adversely affect the profit and other goals of a business enterprise
• Economic risk can be defined as the likelihood that economic
mismanagement will cause drastic changes in a country’s business
environment that hurt the profit and other goals of a particular
business enterprise.
• Legal risk can be defined as the likelihood that a trading partner will
opportunistically break a contract or expropriate property rights.
©McGraw-Hill Education.
Focus on Managerial Implications 5 of 5
• Benefits, Costs, Risks, and
Overall Attractiveness of Doing
Business Internationally
continued
• Overall attractiveness of a potential
market to international business
– Depends on balancing the benefits,
costs, and risks associated with
doing business in that country
• Other things being equal, the benefit-
cost-risk trade-off is likely to be most
favorable in politically stable
developed and developing nations
that have free market systems and no
dramatic upsurge in either inflation
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rates or private sector debt
Figure 3.1 Country Attractiveness
Jump to long description in appendix
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