Because learning changes everything.

National
Differences in
Economic
Development
Chapter 3

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 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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 Introduction
Economic Development
Differences among nations affect how attractive it is
for doing business.
Trends that foster greater economic development:
• Democratic forms of government.
• Market-based economic reforms.
• Legal systems that better enforce property rights.

In general, the past three decades have seen a general move toward more democratic
forms of government, market-based economic reforms, and adoption of legal systems
that better enforce property rights. Taken altogether, these trends have helped foster
greater economic development around the world and have created a more favorable
environment for international business.

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 Differences in Economic Development 1

Gross Domestic Product (GDP)

Measures the total monetary or market value of all the
finished goods and services produced within a country's
borders in a specific time period.
Japan, Sweden, Switzerland, Australia and the United States
have high GDP.
• China and India are significantly poorer.
GDP does not consider differences in the cost of living.
• To account for differences in the cost of living, one can adjust GDP per capita
by purchasing power. Referred to as a purchasing power parity (PPP)
adjustment, it gives us a more direct comparison of living standards in
different countries. The base for the adjustment is the cost of living in the
United States. The PPP for different countries is then adjusted (up or down)
depending on whether the cost of living is lower or higher than in the United
States.
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 Map 3.1 GDP per capita, 2020

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 Table 3.1 Economic Data for Select Countries

GDP per GDP P P P Annual GDP Growth Size of Economy

Capita, per Capita, Rate, 2011 to 2020 GDP, 2020
Country 2020 ($) 2020 ($) (%) ($ billions)
Brazil $6,797 $14,836 0.3 $1,445
China 10,500 17,312 6.84 14,723
Germany 45,724 53,694 1.02 3,806
India 1,901 6,454 5.02 2,875
Japan 40,113 42,197 0.83 5,065
Nigeria 2,097 5,187 2.67 432
Poland 15,656 32,710 3.00 594
Russia 10,127 28,213 1.28 1,484
Switzerland 86,602 71,352 1.39 748
United Kingdom 40,285 44,916 0.64 2,708
United States 63,544 63,543 1.70 20,937

There are striking differences in the standards of living among countries.

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 Differences in Economic Development 2

The “official” figures can be misleading.

Do not account for black economy transactions, such as
unrecorded cash transactions or barter agreements.
GDP 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.
• China may become the world’s largest economy within the
next decade.
• India will be among the largest economies in the world.

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Map 3.2 GDP PPP per Capita, 2020 Map 3.2 summarizes the GDP PPP per capita in 2020 for the
nations of the world. It should be noted that due to the impact of
the COVID-19 pandemic, most of the world’s nations
experienced significant negative economic growth during 2020
and their economies shrank. For example, the U.S. economy
contracted by 3.49% in 2020.
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 Countries By GDP Per Capita
(PPP) 2024

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Map 3.3 Average annual growth rate in G D P (%), 2010 to 2019

Map 3.3 summarizes the annual average percentage growth rate in GDP
from 2011 to 2020. Note that the COVID-19 pandemic had a significant
short term impact upon the growth rate on many nations and depressed
the 10 year average.

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 Source: IMF

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 Differences in Economic Development 3

Broader Conceptions of Development:

According to Nobel Prize–winning economist Amartya Sen, development should

be seen as a process of expanding the real freedoms that people experience.
This perspective leads Sen to emphasize basic health care, especially for
children, and basic education, especially for women. Not only are these factors
desirable for their instrumental value in helping achieve higher income levels, but
they are also beneficial in their own right. People cannot develop their capabilities
if they are chronically ill or woefully ignorant.

Economic development should be assessed by the capabilities and opportunities

people enjoy.
• Development requires removing major impediments to freedom: poverty,
tyranny, poor economic opportunities, systematic social deprivation, neglect of
public facilities.
Economic progress requires the democratization of political communities to give
citizens a voice.

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 Differences in Economic Development 4

Broader Conceptions of Development: Amartya Sen

The United Nations used Sen’s ideas to develop the Human Development Index
(HDI) to measure quality of human life in different nations.

The Human Development Index (HDI) is based on three measures: life

expectancy at birth (a function of health care); educational attainment (measured
by a combination of the adult literacy rate and enrollment in primary, secondary,
and tertiary education); and whether average incomes, based on PPP estimates,
are sufficient to meet the basic needs of life in a country (adequate food, shelter,
and health care).

The HDI comes much closer to Sen’s conception of how development should be
measured than narrow economic measures such as GDP per capita—although
Sen’s thesis suggests that political freedoms should also be included in the index,
and they are not.

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Map 3.4 Human Development Index, 2020

The HDI is scaled from 0 to 1. Countries scoring less than 0.55 are classified as
having low human development (the quality of life is poor), those scoring from
0.55 to 0.8 are classified as having medium human development, and those that
score above 0.8 are classified as having high human development.

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 Human Development Index Growth
2024
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 Political Economy and Economic Progress 1

Innovation and Entrepreneurship Are the Engines of

Growth
Innovation.
• New products along with new processes, new
organizations, new management practices, and new
strategies.
Entrepreneurs.
• First to commercialize innovative products and processes.
• Provides much of the dynamism in an economy.

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 Political Economy and Economic Progress 2

Innovation and Entrepreneurship Require a Market

Economy
• In market economies, any individual is free to try
out an innovative idea by starting a business, and
existing businesses are free to improve their
operations through innovation.
• In planned economies, there is little incentive to
develop new innovations because the state owns
all means of production and captures the gains.
• Strong relationship between economic freedom
and economic growth.
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 Political Economy and Economic Progress 3

Innovation and Entrepreneurship Require Strong

Property Rights
Without strong property rights, individuals and
businesses risk having innovations and potential
profits stolen.
• This reduces the incentive for innovation and
entrepreneurism.

Economist Hernando de Soto claims that

inadequate property protection in many developing
nations limits economic growth.
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 Political Economy and Economic Progress 4

The Required Political System

Democratic regimes are probably more conducive to
long-term economic growth.
• China, South Korea, Taiwan, Singapore, and Hong Kong
all had undemocratic governments but experienced rapid
economic growth.
• Property rights are only secure in well-functioning, mature
democracies.

Totalitarian states are detrimental to progress.

• They limit freedom and suppress human development.

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 Political Economy and Economic Progress 5

Economic Progress Begets Democracy

Economic growth often leads to establishment of
democratic regimes.
• South Korea and Taiwan.

Problem of human rights violations in China.

• Once China has a free market system, belief is that the
country will have greater individual freedoms and
democracy.

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 Political Economy and Economic Progress 6

Geography, Education, Demographics and Economic

Development
Economist Jeffrey Sachs argues that countries with
favorable geography are more likely to engage in trade
and are open to market-based systems.
• Promotes faster economic growth.

Countries that invest in education have higher growth

rates because the workforce is more productive.
• Countries in Southeast Asia have offset their geographical
disadvantage by investing in education.

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 Political Economy and Economic Progress 7

Geography, Education, Demographics and

Economic Development
In terms of demographics, countries with a young
and growing population have greater growth
potential.
• Growing population increases supply of labor.
• Younger workers tend to consumer more than older
workers.
• Aging population implies a stress on government finances.

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 States in Transition 1

Political economy of nation-states is marked by

three trends:
1. Democratic revolutions during late 19 80s and
early 1990s led to greater commitment to free
market capitalism.
2. Moving away from centrally planned and mixed
economies toward a more free market approach.
3. Since 2005, a shift back to greater
authoritarianism in some nations has resulted in a
retreat from the free market model.

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 States in Transition 3

The Spread of Democracy

Three reasons for the spread of democracy:
1. Many totalitarian regimes failed to deliver economic
progress to the bulk of their populations.
2. New information and communication technologies.

• Reduced state’s ability to control access to uncensored

information.
• Created new conduits for the spread of democratic ideals.

3. Economic advances have led to a prosperous middle

class that has pushed for democratic reforms.
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 States in Transition 4

The Spread of Democracy

Since 2005, there has been a drift back toward
more authoritarian modes of government in many
nations.
• Elections have been compromised; civil liberties restricted;
independent press has been attacked; opposition parties
have been restricted.
• Examples: Turkey, Russia, Ukraine, Indonesia, Ecuador,
Venezuela.

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 States in Transition 5

The New World Order and Global Terrorism: The end of the Cold War
and collapse of communism in Eastern Europe and the former Soviet
Union resulted in “New World Order.”

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.
• 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 6

The New World Order and Global Terrorism

Huntington: global terrorism is a product of tensions
between civilizations and a clash of value systems
and ideology.

Former U.S. Secretary of State Colin Powell

maintained that terrorism is one of the major threats
to world peace and economic progress.

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 States in Transition 7

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 have changed
economic systems.
• Change also occurring in Asian and African states.

Command and mixed economies failed to deliver

the sustained economic growth achieved in
market-based countries.
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 The Heritage Foundation’s index of
economic freedom is based on 10
indicators, including the extent to which
the government intervenes in the
economy, trade policy, the degree to
which property rights are protected,
foreign investment regulations, taxation
rules, freedom from corruption, and labor
freedom. A country can score between
100 (freest) and 0 (least free) on each of
these indicators. The higher a country’s
average score across all 10 indicators,
the more closely its economy represents
the pure market model.

According to the 2021 index, which is

summarized in Map 3.6, the world’s
freest economies are (in order of rank)
Singapore, New Zealand, Australia,
Switzerland, Ireland, Taiwan, United
Kingdom, Estonia, Canada and
Denmark. The United States was ranked
20, Germany came in at 29, Japan at 23,
France at 64, Mexico at 65, Russia at 92,
China at 107, India at 121, and Brazil at
143. The economies of Zimbabwe,
Venezuela, Cuba, and North Korea are
at the bottom of the rankings.

Map 3.6 Index of economic freedom, 2021

Source: “Interactive Heat Map,” The Heritage Foundation, 2021,

[Link]

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 3.6 Index of economic freedom, 2023

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 The Nature of Economic Transformation 1

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

Deregulation
• Removing legal restrictions to the free play of
markets, the establishment of private enterprises,
and the manner in which private enterprises
operate.
• In command economies and mixed economies,
the state sets prices, owns businesses, limits
private enterprise, restricts investment by
foreigners, and restricts international trade.

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 The Nature of Economic Transformation 3

Privatization
Transfers ownership of state property to private
individuals.
• Movement started in Great Britain in early 1980s.

In many nations, economic activity is still dominated

by state-owned enterprises.
Selling state-owned enterprises not enough to
guarantee economic growth.
For privatization to work, it must be paired with a
general deregulation and opening of the economy.
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 The Nature of Economic Transformation 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.
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 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?
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 360° View: Managerial Implications 1

Benefits, Costs, Risks, and Overall Attractiveness of

Doing Business Internationally
Countries are more likely to have higher sustained
rates of economic growth with:
• Democratic regimes.
• Market-based economic policies.
• Strong property rights protection.

These markets are more attractive to international

businesses.

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 360° View: Managerial Implications 2

Benefits, Costs, Risks, and Overall Attractiveness

of Doing Business Internationally
Benefits:
• Based on size of the market, as well as current and future
purchasing power of its consumers.
• First-mover advantages enjoyed by early entrants.
• Late-mover disadvantages suffered by late entrants.
• A country’s economic system, property rights regime, and
education systems are good predictors of economic
prospects.

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 360° View: Managerial Implications 3

Benefits, Costs, Risks, and Overall Attractiveness of

Doing Business Internationally
Costs:
• Political system: is it necessary to pay bribes to get market
access?
• Economic level: are the necessary supporting businesses
and infrastructures in place?
• Legal system: how do local laws and regulations affect
business decisions? Are there well-established contract
laws?

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 360° View: Managerial Implications 4

Benefits, Costs, Risks, and Overall Attractiveness of

Doing Business Internationally
Risks:
• Political risk: likelihood that political forces will cause drastic
changes in a country’s business environment that will
adversely affect a business’s profit and other goals.
• Economic risk: likelihood that economic mismanagement will
cause drastic changes in a country’s business environment
that adversely affect a business’s profit and other goals.
• Legal risk: likelihood that a trading partner will
opportunistically break a contract or expropriate property
rights.
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 360° View: Managerial Implications 5

Benefits, Costs, Risks, and Overall Attractiveness of

Doing Business Internationally
Overall Attractiveness:
• Based 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 rates or private
sector debt.

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 Figure 3.1 Country attractiveness

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