Week 2 on Economic Development and Political Economy

Economic Development: How to Measure it?

Concept Alerts

  • Gross Domestic Product (GDP):

    • Total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

  • Gross National Income (GNI):

    • Total income earned by a nation's residents and businesses, both domestically and from abroad, over a specific period, typically a year.

  • Purchasing Power Parity (PPP):

    • Adjustment in GDP per capita to reflect differences in the cost of living.

  • Economic Growth:

    • An increase in the amount of goods and services produced per head of the population over a period of time.

Measures of Economic Development

  • Consideration of which measure provides a better indication of economic development:

    • Which measure is most precise?

    • Should we look at trends over time or points in time?

    • Which is a more static, and which is a more dynamic indicator?

    • Encouraged to analyze data for determining the best countries for investment.

GDP per Capita in U.S. Dollars (2022)

Classification of Income Levels

  • Low Income: $775 or less

  • Lower Middle Income: $776-$2,190

  • Upper Middle Income: $2,191-$9,238

  • Lower High Income: $9,239-$43,260

  • Upper High Income: $43,260 or more

Data Table of GDP per Capita and Growth Rates (2022)

Country

GDP per Capita ($)

GDP PPP per Capita ($)

Annual GDP Growth Rate (2013-2022, %)

Size of Economy GDP ($ billions)

Brazil

$8,918

$17,822

0.56

$1,920

China

$12,720

$21,476

6.24

$17,963

Germany

$48,432

$63,150

1.18

$4,072

India

$2,389

$8,379

5.74

$3,385

Japan

$33,815

$45,572

0.54

$4,231

Nigeria

$2,184

$5,860

2.41

$477

Poland

$18,321

$43,269

3.73

$688

Russia

$15,345

$36,485

0.84

$2,240

Switzerland

$92,101

$83,598

1.71

$808

United Kingdom

$45,850

$54,602

1.60

$3,071

United States

$76,399

$76,399

2.12

$25,463

Purchasing Power Parity in U.S. Dollars

Classification of Income Levels

  • Low Income: $2,546 or less

  • Lower Middle Income: $2,547-$6,974

  • Upper Middle Income: $6,975-$18,075

  • Lower High Income: $18,076-$50,070

  • Upper High Income: $50,071 or more

Limitations of Official Figures

  • Unrecorded cash transactions can be significant:

    • Shadow economy estimates by the European Union:

    • 12% of GDP in the U.K. and France

    • 21% of GDP in Italy

    • 23% of GDP in Greece

    • 50% of GDP in India

  • Important to note that cash transactions need not involve illegal activities; often reflect the coverage of banking services.

Alternative Conceptions of Development: Amartya Sen

  • Economist Amartya Sen's view on development suggests:

    • Development should be evaluated based less on material output and more on capabilities and opportunities enjoyed by people.

  • The UN Human Development Index (HDI) include metrics such as:

    • Life expectancy

    • Educational attainment

    • Average incomes sufficient to meet basic needs.

Gross National Happiness (GNH) Concept

  • Coined by Bhutan's 4th King, GNH includes various dimensions of well-being:

    • Living Standards:

    • Assets, housing, household per capita income.

    • Psychological Well-Being:

    • Life satisfaction, positive emotions, negative emotions, spirituality.

    • Health:

    • Mental health, self-reported health status, healthy days, disability.

    • Ecological Diversity and Resilience:

    • Ecological issues, responsibility towards environment, rural wildlife damage, urbanization.

    • Community Vitality:

    • Donations (time & money), community relationships, family safety.

    • Time Use:

    • Work, sleep.

    • Good Governance:

    • Government performance, fundamental rights, political participation.

    • Cultural Diversity and Resilience:

    • Language skills, cultural participation, artistic skills.

    • Education:

    • Literacy, school enrollment, overall knowledge.

Pause for Thought: Life Satisfaction Examples

  • Fulfilling relationships with loved ones and friends.

  • Good physical and mental health.

  • Accomplishing personal and professional goals.

  • Financial stability and responsibility.

  • Finding joy and purpose in work.

  • Continuous learning and personal growth.

  • Community involvement and support.

  • Practicing gratitude and mindfulness.

  • Autonomy and freedom in decision-making.

  • Positive outlook and resilience.

  • Leisure and relaxation for stress relief.

Main Dilemma: Democracy and Economic Development

Relationship Analysis

  • Version 1: Democracy Fosters Economic Growth

    • Inclusive Economic Institutions:

    • Provide private property rights, unbiased judicial systems, public services, and equal chances.

    • These institutions encourage investment, innovation, and education, allowing individuals to retain the rewards of their labor.

    • Inclusive Political Institutions:

    • Aim to distribute power broadly (e.g., universal suffrage).

    • Policies to enhance representation of underrepresented groups, invest in disadvantaged areas.

  • Version 2: Economic Progress Leads to Emergence of Democracy

    • Economic growth leads to:

    • A larger middle class demanding political representation.

    • A stronger civil society that can challenge state power.

    • Increased education, making citizens more politically savvy.

Probability of Regime Transition Graph (1950-90)

  • Graph displaying probability of regime transitions by income intervals:

    • Economic growth correlates with a higher likelihood of transitioning to democracy.

Engines of Growth

Concept Alert

  • Innovation as a driving force, which refers to:

    • New products, processes, organizations, management practices, and strategies.

  • Entrepreneurs:

    • Individuals who commercialize innovative products and processes.

    • Questions arise about the degree of democracy needed to foster innovation.

Innovation and Entrepreneurship Requires Strong Property Rights

  • Individuals and businesses need assurance of profiting from their innovations.

  • Economist Hernando de Soto's position:

    • Developing nations will not benefit from capitalism until property rights are adequately defined and protected.

Geography and Economic Development

  • Historical belief dating back to Adam Smith, emphasizing the influence of geography on economic policy and development.

  • Jeffrey Sachs argues:

    • Favorable geography can encourage trade and economic growth.

  • Importance of demographic factors:

    • Young and growing population contributes to growth rates.

The New World Order and Global Terrorism

  • Post-Cold War geopolitics have led to speculation about the global landscape:

    • Fukuyama: War of ideas has concluded with the triumph of liberal democracy.

    • Huntington: Predicts conflicts stemming from civilizational differences, particularly between the West and Islamic/Chinese ideologies.

The Nature of Economic Transformation

Deregulation

  • Process of removing legal restrictions to market operations, enabling the establishment of private enterprises and the removal of price controls.

Privatization

  • Transference of state property ownership to private entities, first exemplified in Great Britain under PM Thatcher.

  • Recognized as a global trend that may not guarantee economic growth.

Legal Systems

  • Essential for protecting private property rights and contract enforcement mechanisms.

  • An absence of a legal system diminishes the incentive for economic activity and growth.

Implications of a Changing Political Economy

Global Changes in Political and Economic Systems

  • Markets once restricted to Western businesses now open:

    • China: potential larger market than the U.S., EU, and Japan combined (1.3 billion).

    • India: a large market opportunity (1.2 billion).

    • Latin America holds 600 million potential consumers.

360° View: Managerial Implications

Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally

  1. Benefits:

    • Determined by market size and future consumer purchasing power.

  2. Costs:

    • Political Costs: related to bribery or lobbying practices necessary in certain markets.

    • Economic Costs: related to the sophistication of the economic system, existing infrastructure, and support.

    • Legal Costs: emerge in countries with unusual product, workplace, and pollution standards, affecting property rights enforcement.

  3. Risks:

    • Political Risk: likelihood of adverse changes due to political actions affecting businesses.

    • Economic Risk: probability of detrimental economic mismanagement affecting businesses.

    • Legal Risk: danger that trading partners break contracts or expropriate property rights.

  4. Overall Attractiveness:

    • Balance between expected benefits against potential costs and risks designed to evaluate investment opportunities.

    • Generally lower costs and risks in economically developed and politically stable markets, but less developed markets may present higher growth potential.

Summary

  • Key points from the chapter:

    • Determinants of national economic development were explained.

    • Macropolitical and macroeconomic transformations worldwide were identified.

    • Transition economies' movement towards market systems was described.

    • Implications for management practice due to political economy differences were explained.

Essential Concepts

  • Economic growth

  • Gross Domestic Product (GDP)

  • Purchasing Power Parity (PPP)

  • Human Development Index (HDI)

  • Innovation

  • Entrepreneurs

  • Political Risk

  • Legal Risk

  • Economic Risk