Political Economy and Economic DevelopmentHow Does Political Economy Influence Economic Progress?...
Transcript of Political Economy and Economic DevelopmentHow Does Political Economy Influence Economic Progress?...
Chapter 3
Political Economy and Economic Development
3-2
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 market-
based 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 2012
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 2013
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 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
3-22
How Can Managers Determine A Market’s Overall Attractiveness?
Country Attractiveness