Course Note 3: National Differences in Economic Development

Opening Case: Economic Development in Bangladesh

The principle reason for the economic stagnation of Bangladesh after the war were the lack of natural resources,
coupled with poor infrastructure, political instability and high level of corruptions. Besides, they are prone of
natural disaster with the land is less than 12 meters above sea level. The low-sea level is vulnerable to tropical
cyclones, floods and tidal bores.
Differences in Economic Development
Gross National Income (GNI)
• Measures the total annual income received by residents of a nation.
• 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.
• Purchasing power parity (PPP) is an adjustment in gross domestic product per capita to reflect
differences in cost of living.
The “official” figures can be misleading.
• Do not account for black economy transactions that include unrecorded cash transactions or barter
agreements.
• 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 be among the largest economies in the world.

Broader Conceptions of Development: Amartya Sen

- Following Amartya Sen, development should be assessed not only on the GNI per capita but also on the
capabilities and opportunities that people enjoy.
- The development requires the removals of impediments to freedom: poverty, tyranny, poor economic
opportunities, and systematic social deprivation, as well as neglect of public facilities and intolerance of
repressive states
- Development is not just and economic process but political one too, to succeed requires the “democratization”
of political communities to give citizens a voice.
- This perspective leads Sen to emphasize 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 at birth.

- Educational attainment.

- Whether average incomes are sufficient to meet the basic needs of life in a country.
Political Economy and Economic Progress
Innovation and Entrepreneurship Are the Engines of Growth
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.

Innovation and Entrepreneurship Require a Market Economy
- Little incentive to develop new innovations in planned economies because the state owns all means of
production and therefore, captures the gains.
- 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.

- Economist Hernando de Soto claims that inadequate property protection in many developing nations
limits economic growth.
The Nature of Economic Transformation
Deregulation
- Removing legal restrictions to the free play of markets, the establishment of private enterprises, and the
manner in which private enterprises operate.
- Deregulation in mixed economies involved the same initiatives as in command economies.

- Transition was easier due to a vibrant private sector.

Privatization
- Transfers ownership of state property into the hands of private individuals.
o Movement 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.
Legal Systems
- A well-functioning market economy requires laws.
o Need to protect property rights.
o 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.

Focus on Managerial Implications
Benefits
- Based on the 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 and property rights regime good predictors of economic prospects.

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 Costs
- 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?
Risks
- Political risk: the likelihood that political forces will cause drastic changes in a country’s business
environment that will adversely affect the profit and other goals of a business.
- Economic risk: the likelihood that economic mismanagement will cause drastic changes in a country’s
business environment that adversely affect the profit and other goals of a business enterprise.
- Legal risk: the likelihood that a trading partner will opportunistically break a contract or expropriate
property rights.
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.

CRITICAL THINKING AND DISCUSSION QUESTIONS

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QUESTION 1: Is privatization by itself enough to guarantee economic growth? Why? Explain using an
example.
The privatization by itself is not enough to guarantee economic growth. Based on privatization studies, the
process of privatization often fails if the newly privatized firms continue to receive the supports from the state
and if they are protected from foreign competition by barriers to international trade and foreign direct
investment. When these circumstances prevail, these companies have a little incentive to restructure their
operations to become more efficient.
Example: The failure of privatization in Iran (Iran Air)
Some of the most important factors for privatization of economy in countries such as Iran are: The size of the
public sector, and the type of government controls.
The size of public sector is an element of privatization in advanced countries of the third world. Even the
government controls is usually quite extensive, this leads to the appearance and the development of the quasi -
private sector. Privatization policy in these countries needs to have one of the core elements that liberalization
and deregulation of this system. Iran is placed in this category. Although in Iran, the political problems are the
obstacles for liberalization and deregulation. The tendency of sovereignty and control over the financial
resources in Iran’s government makes it tough in liberalization. In Iran, a large government with huge control
over the economy has been a reason for budget deficits, inflation, unfair allocations, and unrealistic prices; so,
the government has made Iran unable to compete in international markets. Thus, these difficulties more than
ever necessitate the process of privatization and development of the private sector in Iran. (Seyed Fatemeh Alaei
& Anette Andersson (2014), Privatization: What we learn from failure-A case study of Iran Air)
QUESTION 2: What are the factors that determine the long-run monetary benefits of doing business in a
country?
The factors that determine the long-run monetary benefits of doing business in a country are: a function of the
size of the market, the present wealth (purchasing power) of consumers in that market, and the likely future
wealth of consumers.
QUESTION 3: What are the factors that determine the costs of doing business in a country?
The factors that determine the costs of doing business in a country:
- 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?