Economic Development Differences

Question 1

Economic Development​ - topic

Answer 1

Differences among nations​

Attractiveness for doing business​

Trends that foster greater economic development​

Democratic forms of government​

Market-based economic reforms​

Legal systems to better enforce property rights​

Question 2

GNI

Answer 2

Gross National Income (GNI) is the total amount of money earned by a nation’s people and businesses. It is used to measure and track a nation’s wealth from year to year. The number includes the nation’s gross domestic product (GDP) plus the income it receives from overseas sources.

Japan, Sweden, Switzerland, and U.S. have high GNI​

China and India have low GNI​

GNI does not consider differences in the cost of living​

Need to adjust GNI figures using purchasing power parity (PPP)​

These are per capita Gross National Income (GNI) and Net National Income (NNI). Whereas GDP refers to the income generated by production activities on the economic territory of the country, GNI measures the income generated by the residents of a country, whether earned in the domestic territory or abroad.

Question 3

The “official” figures can be misleading​

Answer 3

Do not account for black economy transactions​

GNI 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 during the next decade​

India will become among the largest economies in the world

To complicate matters, in many countries the “official” figures do not tell the entire story. Large amounts of economic activity may be in the form of unrecorded cash transactions or barter agreements. People engage in such transactions to avoid paying taxes, and although the share of total economic activity accounted for by such transactions may be small in developed economies such as the United States, in some countries (India being an example), they are reportedly very significant.

Black economy/shadow economy (e.g. in India around 50%)

Question 4

Broader Conceptions of Development: Amartya Sen​

Answer 4

Economic development should be assessed by the capabilities and opportunities people enjoy​

Development requires the removal of major impediments to freedom: poverty, tyranny, poor economic opportunities​

Economic progress requires the democratization of political communities to give citizens a voice ​

Broader Conceptions of Development: Amartya Sen continued​

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 ​

Question 5

Innovation and Entrepreneurship Are the Engines of Growth

Answer 5

Innovation​

Includes new products, 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​

Question 6

Innovation and Entrepreneurship Require a Market Economy

Answer 6

Little incentive to develop new innovations in planned economies because the state owns all means of production and therefore, the gains​

Strong relationship between economic freedom and economic growth​

Question 7

Innovation and Entrepreneurship Require Strong Property Rights

Answer 7

Without strong property rights, individuals and businesses risk having innovations and potential profits stolen​

Economist Hernando de Soto claims that inadequate property protection in many developing nations limits economic growth

Question 8

The Required Political System

Answer 8

Democratic regimes are probably more conducive to long-term economic growth​

Property rights are only secure in well-functioning, mature democracies​

Totalitarian states are detrimental to progress​

They limit freedom​

They suppress human development

Question 9

Economic Progress Begets Democracy

Answer 9

Economic growth leads to establishment of democratic regimes​

South Korea​

Taiwan​

If China adopts a free market system, belief is that the country will have​

Greater individual freedoms​

Democracy

Question 10

Geography, Education, and Economic Development​

Answer 10

Economist Jeffrey Sachs argues that countries with favorable geography are​

More likely to engage in trade​

More open to market-based systems​

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​

Question 11

Political economy of nation-states is marked by two trends

Answer 11

1.Democratic revolutions of the late 1980s and early 1990s​

Totalitarian governments fell​

Replaced by democratically elected governments​

Greater commitment to free market capitalism​

2.A move away from centrally planned and mixed economies toward a more free market approach​

Question 12

The Spread of Democracy

Answer 12

Many totalitarian regimes failed to deliver economic progress to the bulk of their populations​

New information and communication technologies​

1.Reduced state’s ability to control access to uncensored information​

2.Created new conduits for the spread of democratic ideals​

Economic advances have led to a prosperous middle class that has pushed for democratic reforms

HOWEVER It is naïve to conclude that the spread of democracy will continue unchallenged​

Democracy is still rare in parts of the world ​

Sub-Saharan Africa​

Former communist Eastern and central Europe and former USSR​

Middle East and North Africa​

Signs that authoritarianism is gaining ground​

Russia, Ukraine, Indonesia, Ecuador, and Venezuela​

Egypt

Question 13

The New World Order and Global Terrorism​

Answer 13

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​

Global terrorism is a product of tensions between civilizations and a clash of value systems and ideology​

Al-Qaeda and ISIS​

Struggle between radicalized Sunni and Shia factions within Islam​

Former U.S. Secretary of State Colin Powell maintains that terrorism is one of the major threats to world peace and economic progress​

Question 14

The Spread of Market-Based Systems​

Answer 14

A shift from centrally planned economies to market-based economies​

More than 30 countries in the former Soviet Union and eastern European communist bloc​

Change also occurring in Asian and African states​

Command and mixed economies failed to deliver the sustained economic growth achieved in market-based countries​

Question 15

The shift toward a market-based system involves​

Answer 15

Deregulation​

Privatization​

A legal system to safeguard property rights​

Question 16

Deregulation

Answer 16

Deregulation in command economies​

Removing price controls​

Abolishing laws regulating the establishment and operation of private enterprise​

Relaxing or removing restrictions on direct investment by foreign enterprises​

Deregulation in mixed economies involved the same initiatives as in command economies​

Transition was easier due to a vibrant private sector​

Question 17

Privatization

Answer 17

A way to stimulate economic efficiency​

Started in Great Britain in early 1980s​

In many nations economic activity is still in the hands of 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​

Question 18

Legal Systems​

Answer 18

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

Question 19

Ideological conflict between collectivism and individualism is less prevalent today

Answer 19

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?​

Question 20

Countries are more likely to have higher sustained rates of economic growth when they have​

Answer 20

Democratic regimes​

Market based economic policies​

Strong property rights protection​

These markets are more attractive to international businesses

Question 21

benefits and costs picture

Answer 21

slide 33

Question 22

questions in each category about doing business in a foreign country

Answer 22

The costs of doing business in a country based on​

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

Economic level: are the necessary supporting business and infrastructure in place?​

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

Question 23

benefits & costs overall

Answer 23

Overall attractiveness of a potential market to international business​

Depends 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 ​

Question 24

risks

Answer 24

Legal risks - Thus, a legal risk can be defined as the likelihood that a trading partner will opportunistically break a contract or expropriate property rights. When legal risks in a country are high, an international business might hesitate entering into a long-term contract or joint-venture agreement with a firm in that country.

Economic risks - An economic risk can be defined as the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a particular business enterprise. Economic risks are not independent of political risk. Economic mismanagement may give rise to significant social unrest and, hence, political risk. Nevertheless, economic risks are worth emphasizing as a separate category because there is not always a one-to-one relationship between economic mismanagement and social unrest

Political risks - Political risk has been defined as the likelihood that political forces will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a business enterprise.38 So defined, 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. Social unrest typically finds expression in strikes, demonstrations, terrorism, and violent conflict. Such unrest is more likely to be found in countries that contain more than one ethnic nationality, in countries where competing ideologies are battling for political control, in countries where economic mismanagement has created high inflation and falling living standards, or in countries that straddle the “fault lines” between civilizations

Question 25

The past three decades have seen a general move toward

Answer 25

more democratic forms of government, market-based economic reforms, and adoption of legal systems that better enforce property rights. Taken together, these trends have helped foster greater economic development around the world and have created a more favorable environment for international business.

Question 26

GNI can be misleading1

Answer 26

GNI per person figures can be misleading because they don’t consider differences in the cost of living. For example, although the 2016 GNI per capita of Switzerland at $81,240 exceeded that of the United States by a wide margin, the higher cost of living in Switzerland meant that U.S. citizens could actually afford almost as many goods and services as the average Swiss citizen. To account for differences in the cost of living, one can adjust GNI per capita by purchasing power. Referred to as a purchasing power parity (PPP) adjustment, it allows a more direct comparison of living standards in different countries.

As can be seen, there are striking differences in the standards of living among countries. Table 3.1 suggests the average Indian citizen can afford to consume only about 11 percent of the goods and services consumed by the average U.S. citizen on a PPP basis. Given this, we might conclude that despite having a population of 1.2 billion, India is unlikely to be a very lucrative market for the consumer products produced by many Western international businesses

GDP per capita –> how many big macs (same things/basket of goods) can I buy for this amount –> how many baskets of goods could I consume in the other country

Shows can much can a currency buy in a state

Question 27

Amartya Sen has argued that development should be assessed less by material output measures such as GNI per capita and more by

Answer 27

the capabilities and opportunities that people enjoy

Hence, development requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, and neglect of public facilities as well as the intolerance of repressive states

Sen’s influential thesis has been picked up by the United Nations, which has developed the Human Development Index (HDI) to measure the quality of human life in different nations.

The 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).

Question 28

What is required for the business environment of a country to be conducive to innovation and entrepreneurial activity?

Answer 28

In a market economy, any individual who has an innovative idea is free to try to make money out of that idea by starting a business (by engaging in entrepreneurial activity).

Strong legal protection of property rights is another requirement for a business environment to be conducive to innovation, entrepreneurial activity, and hence economic growth.8 Both individuals and businesses must be given the opportunity to profit from innovative ideas. Without strong property rights protection, businesses and individuals run the risk that the profits from their innovative efforts will be expropriated, either by criminal activity or the state.

Question 29

global stats: poverty

Answer 29

Poverty is the world’s biggest challenge and the inequality of global wealth distribution is
frightening. 80% of the 7 billion people in this world live less than $10 dollar a day and only 5% of
global income was generated by the poorest 40% of the world population while 75% of the global
income was generated by the wealthiest 20% of the world’s population.

Question 30

globalization –>bad effects on poverty - “J curve”

Answer 30

Many mechanisms are straightforward applications of mainstream economic theory: specialization, scale economies, competition, incentives for macro-economic stability, and innovation are all likely to be important mechanisms. Higher integration in the global economy may also increase the returns to higher education in poor countries, as described by Stark (2004), negatively affecting poverty in the long run. Agénor (2004) notes also that there are several reasons why the short-run effect of globalization may well be an increase in absolute poverty, suggesting that globalization has an inverted J-curve effect on absolute poverty. Such reasons include:
*
Transition costs: As an economy opens, more and cheaper capital becomes available. When firms replace labor with capital in production, poverty may increase before laid-off workers find new employment. Increasing competition following economic openness may also affect unemployment by forcing some domestic firms out of business.

*
Shortage of human capital: If openness leads to the introduction of more advanced technologies, or more capital intense production, the full benefits may require more skilled labor than is initially available.

*
As discussed by Bhagwati and Srinivasan (2002), higher economic openness likely comes with a greater commitment to low inflation, which should foster growth in the long run and particularly assist the poor if they are vulnerable to inflation. The transition from high to low inflation may, however, be associated with higher unemployment in the short run.

*
Globalization may affect government size and, for example, social spending, in turn affecting poverty. As suggested by the race to the bottom hypothesis (Sinn, 1997) open economies may have to compete by lowering taxes in turn followed by less social spending. An opposite mechanism—termed the compensation hypothesis—has however also been proposed in the literature (Rodrik, 1998 and Lindbeck, 1975) where open economies rather develop larger welfare states as an insurance institution.6

Question 31

Three main reasons account for the spread of democracy:

Answer 31

First, many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations. The collapse of communism in eastern Europe, for example, was precipitated by the growing gulf between the vibrant and wealthy economies of the West and the stagnant economies of the communist East. In looking for alternatives to the socialist model, the populations of these countries could not have failed to notice that most of the world’s strongest economies were governed by representative democracies.

Second, new information and communication technologies—including satellite television, desktop publishing, and, most important, the Internet and associated social media— have reduced a state’s ability to control access to uncensored information. These technologies have created new conduits for the spread of democratic ideals and information from free societies.

Third, in many countries, economic advances have led to the emergence of increasingly prosperous middle and working classes that have pushed for democratic reforms

Moreover, there are disturbing signs that authoritarianism is gaining ground in several countries where political and civil liberties have been progressively limited in recent years, including Russia, Ukraine, Indonesia, Ecuador, and Venezuela. An increasingly autocratic Russia annexed the Crimea region from the Ukraine in 2014 and has actively supported pro-Russian rebels in eastern Ukraine.

Question 32

economic freedom

Answer 32

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.

Question 33

Deregulation

Answer 33

Deregulation involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate.

. Deregulation in these cases involved removing price controls, thereby allowing prices to be set by the interplay between demand and supply; abolishing laws regulating the establishment and operation of private enterprises; and relaxing or removing restrictions on direct investment by foreign enterprises and international trade.

Question 34

Privatization

Answer 34

Hand in hand with deregulation has come a sharp increase in privatization. Privatization, as discussed in Chapter 2, transfers the ownership of state property into the hands of private individuals, frequently by the sale of state assets through an auction.29 Privatization is 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 increases in productivity, to enter new markets, and to exit losing ones.30

Studies of privatization in central Europe have shown that the process often fails to deliver predicted benefits if the newly privatized firms continue to receive subsidies from the state and if they are protected from foreign competition by barriers to international trade and foreign direct investment.

Question 35

costs of doing business internationally

Answer 35

A number of political, economic, and legal factors determine the costs of doing business in a country. With regard to political factors, a company may be pushed to pay off politically powerful entities in a country before the government allows it to do business there. The need to pay what are essentially bribes is greater in closed totalitarian states than in open democratic societies where politicians are held accountable by the electorate (although this is not a hard-and-fast distinction). Whether a company should actually pay bribes in return for market access should be determined on the basis of the legal and ethical implications of such action. We discuss this consideration in Chapter 5, when we look closely at the issue of business ethics.

Question 36

late vs early entrsnts to international business

Answer 36

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. These will pay back substantial dividends if that country achieves sustained high economic growth rates. In contrast, late entrants may find that they lack the brand loyalty and experience necessary to achieve a significant presence in the market. In the language of business strategy, early entrants into potential future economic stars may be able to reap substantial firstmover advantages, while late entrants may fall victim to late-mover disadvantages.

Question 37

Benefits of doing business in a country based on​

Answer 37

The size of the market​

The current and future purchasing power of its consumers​

First-mover advantages​

Late-mover disadvantages​

A country’s economic system and property rights regime good predictors of economic prospects​