WEEK 2.

2 and 3 / INTRO TO BUSINESS

NATIONAL DIFFERENCES IN ECONOMIC DEVELOPMENT

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

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 US have high GDP

- China and India are significantly poorer

- GDP does not consider differences in the cost of living. (can be misleading)

- Purchasing power parity (PPP) is an adjustment in gross domestic product

per capita to reflect differences in cost of living

in order to make adjustments for the higher prices of goods and services, adjust GDP per
capita by purchasing power. PPP, gives more direct comparison of living standards in
different countries,

Differences in economic development

- The official figures can be misleading

 - do not account for black economy transactions, such as unrecorded cash
transactions on 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 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.

Differences in Economic Development

Broader conceptions of development: Amartya Sen

Theory :- social development should be assessed less by material outfit measures

such as GNI per capita/GDP per capita and more by capabilities and opportunities
that people enjoy.

Economic development should be assessed by the capabilities and opportunities

people enjoy.

- development should be seen as a process of expanding the real freedoms that

people experience.

Hence, Development requires removing major impediments to freedom: poverty,

tyranny, poor economic opportunities, systematic social deprivation, neglect of public
facilities.

- Development is not just an economic process but a political one too, and to succeed
requires the “democratization” of political communities to give citizens a voice in the
important decisions made for the community. → leads to sen emphasizing basic
health care, especially for children and basic education, especially for women,

→ The United Nations used Sen's ideas to develop the human development index
(HDI) to measure quality of human life in different nations.

● life expectancy (a function of health care)

● Educational attainment (measured by a combination of the adult literacy rate of
enrollment in primacy, secondary and tertiary education)
 ● whether average incomes are sufficient to meet the basic needs of life (based
on PPP estimates, sufficient to meet the basic needs of life)

Sen’s thesis suggests political freedom should also be included in the index, HDI is scaled
from 0 to 1 and countries scoring less than 0.55 are classified as having low human
development.

POLITICAL ECONOMY AND ECONOMIC PROGRESS

Innovation and Entrepreneurship are the engines of growth

Innovation: New products along with new processes, new organizations, new
management practices, and new strategies

Eg: Uber, Amazon

→ innovation in production and business processes lead to an increase in the productivity of

labor and capital which further boosts economic growth rates.

Entrepreneurs:

- First to commercialize innovative products and processes

- provides much of the dynamism in an economy

eg: The US economy has benefited greatly from a high level of entrepreneurial activity,
which has resulted in rapid innovation in products and processes. Apple, google, facebook
etc swerve all founded by entrepreneurial individuals.

Innovation and Entrepreneurship requires 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.

- Both individual entrepreneurs and established businesses can reap awards in the
form of high profits.

Advantages of a market economy: economic freedom is associated with a market economy

that creates greater incentives for innovation and entrepreneurship than either a planned or
a mixed economy.
→ In planned economies, there is little incentive to develop new innovations because
the state owns all means of production and captures the gains.

State owns all means of production. The lack of economic freedom and incentives for
innovation was the main factor in the economic stagnation of many former communist states
which ultimately led to their collapse.

→ strong relationship between economic freedom and economic growth

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

Without strong property rights protection, businesses and individuals run the risk that the
profits from their innovative efforts will be expropriated, either by the criminal elements or by
the state.

eg: through taxation, illegal means such as demands from state bureaucrats for kickbacks in
return for granting an individual or firm a license to do business in a certain area.

Hernando de soto → inadequate property protection in many developing nation limits

economic growth

The required political system

Democratic regimes are probably more conducive to long term 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.

→ Only a totalitarian government that is committed to a market system and strong protection
of property rights is capable of promoting economic growth.

+ there is no guarantee that a dictatorship will continue to pursue such progressive

policies.

That’s why, democratic regimes are more conducive to long term economic growth than
dictatorships.

WELL FUNCTIONING , MATURE DEMOCRACY ARE PROPERTY RIGHTS FULLY

SECURE. totalitarian regimes, by limiting human freedom, also suppress human
development and therefore are detrimental to progress.

Economic progress begets democracy

Economic growth often leads to establishment of democratic regimes.

eg: South Korea and Taiwan

A strong belief that economic progress leads to adoption of democratic regime underlies the
fairly permissive attitude that many western govts have adopted towards human rights
violation in China. Western countries are hesitant in criticizing china in a fear it might hamper
the country’;s march towards a free market system. Free market system < greater individual
freedoms < democracy will follow.

Geography, education, demographics and economic development

Economist Jeffery 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

Irrespective of the economic and political institutions a country adopts, adverse geographic
conditions like hostile climate, poor soil can have a negative impact on development.

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.
Investment in education → higher growth rates → educated population is more productive
population. (pakistan and south korea example)

- In terms of demographic, countries with a young and growing population have

a greater growth potential

1) growing population increases supply of labor

2) younger workers tend to consume more than older workers → boosts demand
for goods and services
3) Aging population implies stress on government finances → more retirees,

eg: Japan, china, Germany, US.

One way around countries with an aging population is to permit higher immigration.

→ Poland allowed for increased immigration from Ukraine in order to cope with labor
shortages; however Japan continues to have tight restrictions on immigration.

QUESTIONS:

consider china’s growth over past 3 years, slowdown in china for the global economy

phase 1 of a new trade deal. concerned with the viability of the agreement,
 WEEK 3/ INTRO TO BUIZ

States in Transition

Political economy of nation-states is marked by three trends:

1. Democratic revolutions during late 1980s and early 1990s led to greater
commitment to free market capitalism

Totalitarian governments fell and were replaced by democratically elected governments that
were mostly committed to free market capitalism than their predecessors had been

2. Moving away from centrally planned and mixed economies towards 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

The spread of democracy

In 2021, freedom house ranked countries into three broad categories:

- 82 countries classified as free: 42% of nations

- 59 countries → partly free → 30% of nations
- 54 countries → not free → 28%

Free countries : citizens enjoy higher degree of political and civil freedoms.
Partly free : some restrictions on political rights and civil liberties → due to corruption, civil,
weak rule of law etc
Not Free : Political process is tightly controlled and basic freedoms are denied

Newer democracies → eastern europe and latin america,africa incl South Africa and Nigeria
The reasons for the spread of democracy

1. Many totalitarian regimes failed to deliver economic progress to the vast bulk
of their populations.

- ( The collapse of communism in eastern europe → growing gulf between vibrant and
wealthy economies of the west and stagnant economies of the communist east)

- Czech republic and poland, philippines and taiwan in asia and chile in latin america.

2. New info and communication technologies

- reduced state’s ability to control access to uncensored information

- created new conduits for the spread of democratic ideals and information from
free societies.

3. In many countries, economic advances have led to a prosperous middle class

that has pushed for democratic advances.

- eg: south korea

The new world order and global terrorism

Author Francis Fukuyama → ‘new world order’ will be characterized by democratic

regimes and free market capitalism.

- end point of mankind’s ideological evolution and the universalization of western

liberal democracy as the final form of human government.
- the war of ideas may be at an end and the liberal democracy has triumphed.

Political scientist Samuel Huntington argues that while many societies are
modernizing, they are not becoming more western.

- Predicts a world split into different civilisations that will be in conflict, making
business difficult

1) Many societies may be modernizing- they are adopting the material paraphernalia of
the modern world, from automobiles and facebooks to coca cola and smartphones –
they are not becoming more western.
2) He theorized that modernization in non western societies can result in a retreat
towards the traditional → resurgence of islam.
3) Thus the rise of Islamic fundamentalism is portrayed as a response to the alienation
produced by modernization.
 4) Huntington envisioned a world split into different civilizations, each of which has it’s
own value systems and ideology. Predicted conflict between west and islam and
between west and china.
5) The Dramatic rise of the Islamic state in war torn syria and neighboring Iraq during
2014-2015 → in alliance with his views. growing penchant for ISIS to engage in
terrorist acts outside the Middle east.

Political position is more likely to be somewhere between fukuyama and huntington

Hungtington: Global terrorism is a product of tensions between civilisations and a

clash of value systems and ideology.

- The terror attacks undertaken by Al qaeda and ISIS = consistent with this view.

- Others point out to terrorism’s roots in long standing conflicts that seem to defy
political resolution - Palestinian, Kashmir and Northern ireland.

- al qaeda affiliates in iraq during the 200s and more recently ISIS in iraq and syria can
be understood between radicalized Sunni and shia factions with islam,

Former US secretary of state colin powell maintained that terrorism is one of the
major threats to world peace and economic progress

The spread of market based systems

A shift of 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 economies.

The nature of economic transformation

1) Deregulation
2) 2) privatization
3) 3) creation of a legal system to safeguard property rights
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
business, limits private enterprises, and the manner in which private enterprises
operate.

deregulation → removing price controls, prices are set through supply and demand,
abolishing laws regulating the establishment and operation of private enterprises, relaxing/
removing restrictions on direct investment

eg: India

Privatization:

Transfer ownership of state property to private individuals, frequently by the sale of

state assets through an auction.

- Seen as a way to stimulate gains in economic efficiency by giving new private owners
a powerful incentive - the reward of greater profits - to search for increase in
productivity, to enter new markets and to exit losing ones.

→ movement started in Great Britain in early 1980s

- brazil - state owned electric country, airports, highways, ports etc

- south arabia - state owned oil company -Soudi Aramco

In many nations, economic activity is still dominated by state owned enterprises

Selling state owned enterprises is not enough to guarantee economic growth.

→ For privatization to work, it must be paired with a general deregulation and

opening of the country.

if the newly privatized firms continue to receive subsidies from the state and if they are
protected from foreign competition by barriers → they act as monopolies and are left with
little incentive to restructure their operations to become more effective.

Brazil → telephone monopoly → split the company into four independent firms → compete
with each other.
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.

Benefit, 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 business.

COUNTRY ATTRACTIVENESS
Benefits

- Based on the size of market, as well as current and future purchasing power
of its customers
- first mover advantages enjoyed by early entrants
- Late mover disadvantages suffered by late entrants
- A country’s economic system, property right regime, and education system
are good predictors of economic prospects.

By identifying and investing early in a potential future economic star, international firms may
build brand loyalty and gain experience in that country’s business practices,

Costs

- Political system: is it necessary to pay bribes to get market access?

Need to pay bribes is greater in closed totalitarian states than in open democratic societies
where politicians are held accountable by the electorate.

- Economic level: are the necessary supporting businesses and infrastructures

in place?

Sophistication of a country’s economy.

- Legal system: how do local laws and regulations affect business decisions?
Are there well-established contract laws

Local laws and regulations set strict standards with regard to product safety, safely in the
workplace, environmental pollution. Well established laws → adhering to laws and
regulations can be costly. Lack of laws → firms find no satisfactory way to resolve contract
disputes and consequently, routinely face large losses from contract violations.
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.

Political risk tends to be greater in countries experiencing social unrest and disorder or in
countries where the underlying nature of a society increases the likelihood of social unrest

More than one ethnic nationality, countries where competing ideologies are battling for
political control, where economic mismanagement has created high inflation and falling living
standards.

eg: protracted civil strife, aftermath of 1979 Islamic revolution in Iran the iranian assets of
numerous US companies were seized by the new iranian govt, without compensation

- 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.

Intervend with political risk. may give rise to significant social unrest.
High inflation rate, level of business and government debt in the country.

- Legal risk: likelihood that a trading partner will opportunistically break a

contract or expropriate property rights.

Legal risks are high, firms might hesitate.

Legal safeguards are weak → firms more likely to break contracts or steal intellectual
property.

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 countries that have free market
systems and no dramatic upsurge in either inflation rates or private sector debt.
__________________________________________

CLOSING CASE:

1. What are root causes of argentina;s relatively poor economic performances?

these impacted the economic
- spent more than they have made in taxes
- to finance high public spending and persistent budget, → printing more
money→ high inflation →lower investment by the companies abroad →
lower economic growth
- Fascism → nationalized utilities, gave low cost housing etc

→ public companies →public employees → more salary

→ tariff barriers
→ export tariffs → export taxes → companies aren't growing and these taxes raine
money for agricultural

→ export taxes

2. Persisting appeal of peronism in Argentina, even though the economic track

record of the Peronist govt, has not been good?

3. what