CHAPTER 3
POLITICAL ECONOMY & ECONOMIC DEVELOPMENT
Economic System; Economic Growth
Economic System: Structure and Processes that a country uses to
allocate its resources and conduct commercial activities.
Economic growth means an increase in the capacity of an economy to
produce goods and services, compared from one period of time to another.
Economists and statisticians use several different methods to track
economic growth. The most well-known and frequently tracked metric is
gross domestic product, or GDP.
Nominal GDP is the market value of goods and services produced in an
economy, unadjusted for inflation. Real GDP is nominal GDP, adjusted
for inflation to reflect changes in real output.
Economic Development
Economic well-being of one nation’s people relative to another
nation’s people
Economic output (agricultural, industrial, service)
Infrastructure (communications, transportation, power)
People (physical health, education level)
What Determines A Country’s Level
Of Economic Development?
Economic development differs from economic growth. It is a
broader concept than economic growth. Development reflects social
and economic progress and requires economic growth.
Growth is a vital and necessary condition for development and it
includes policy intervention endeavour with aims of economic and
social well-being of people, economic growth is a phenomenon of
market productivity and rise in GDP., but it is not a sufficient
condition as it cannot guarantee development.
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What Determines A Country’s Level
Of Economic Development?
Gross National Income (GNI): measures the total income received by resident of
a nation.
The GNI can be misleading because it does not take the cost of living into
consideration.
Purchasing power parity (PPP) allows for a more direct comparison of living
standards in different countries.
The GNI and PPP data give a static picture development but does not give a
measurement of whether the difference between the countries is being
shortened or not (Interest rates, exchange rates, inflation rates)
PPP asks how much money would be needed to purchase the same goods and
services in two countries.
GNI and GDP
GDP is the total market value of all finished goods and
services produced within a country in a set time period. GNI
is the total income received by the country from its residents
and businesses regardless of whether they are located in the
country or abroad
GDP & GNI
GDP=C+I+G+(X−M)
Where:
• C = Consumption: Spending by households on goods and services (e.g., food, clothing, healthcare,
etc.).
• I = Investment: Spending on capital goods by businesses (e.g., factories, machinery) and
households (e.g., housing).
• G = Government Spending: Total government expenditure on goods and services (e.g., education,
defense).
• X = Exports: Goods and services produced domestically and sold abroad.
• M = Imports: Goods and services produced abroad and consumed domestically.
GNI = GDP + Net Income from Abroad
What Determines A Country’s Level
Of Economic Development?
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Broader conceptions of
Development: Amartya Sen
Development should be assessed
less by material output measures
such as GNI per capita and more
by what people enjoy.
Sen emphasizes basic health care
and basic education
The United Nations used Sen’s
ideas to develop the Human
Development Index (HDI):
Life expectancy at birth
Educational achievement
Average incomes sufficient to
meet the basic needs of life
Political Economy And Economic
Development
What is the relationship between political economy and economic progress?
Experts agree that:
Innovation and entrepreneurship are the engines of long-run economic
growth
Innovation and entrepreneurship require a market economy
Innovation and entrepreneurship require strong property rights
Democratic regimes are more conducive to long-term economic growth than
a dictatorship, even one of the benevolent kind
Subsequent economic growth leads to establishment of democratic regimes
How Does Political Economy Influence
Economic Progress?
Some totalitarian regimes have fostered a market economy and strong
property rights protection and have experienced rapid economic
growth. Four of the fastest-growing economies of the past 30 years—
South Korea, Taiwan, Singapore, and Hong Kong—had one thing in
common at the start of their economic growth: undemocratic
governments!
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
Geography, Education, And
Economic Development
Geography and education are also important determinants of 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
• Bolivia in South America has no coast line
• Maldives dependent on fishing and tourism
• Rwanda in Africa is dependent on agriculture
Countries that invest in education have higher growth rates because the
workforce is more productive. (Aakash tablet failure in India)
Geography and Education
States In Transition
Since the late 1980s, two trends have
emerged in the political economy:
A wave of democratic revolutions swept the
world in the late 1980s and early 1990s
There has been a move away from centrally
planned and mixed economies and toward a
more free market economic model
The Spread Of Democracy
There are three main reasons for the
spread of democracy:
Many totalitarian regimes failed to
deliver economic progress
New information and communication
technologies, have broken down the ability
of the state to control access to
uncensored information
Emergence of increasingly prosperous
middle and working classes who have
pushed for democratic reforms
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 the manner in which private enterprises
operate
Privatization- transfers the ownership of state property
into the hands of private investors
The creation of a legal system to safeguard property
rights
What Is The Nature Of Economic
Transformation: Bangladesh
Privatization programs got its virtual start in Bangladesh in the mid-seventies. The
first round of privatization was put to work following the post independence thrust on
economic growth. The second phase of privatization (or denationalization) took place
in the first half of the 1980s and covered jute and textile mills owned originally by
Bangladeshi citizens prior to independence.
Since the establishment of the Privatization Board in 1993 and thereafter the
Privatization Commission in 2000, 74 state owned enterprises (SOEs) have been
privatized in Bangladesh.
Mymensingh Jute Mills Ltd., Madaripur Textile Mills, Kohinoor Spinning Mills, Dhaka
Vegetable Oil, Berger Paints Bangladesh Ltd.,Paper Mills, Ujala Match Factory Ltd., etc.
Implications For Managers
There are two broad implications for managers:
the political, economic, and legal systems of a
country raise important ethical issues that have
implications for the practice of international
business
the political, economic, and legal environment
of a country clearly influences the attractiveness
of that country as a market and/or investment
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