Political Economy and Economic Development Chapter 3 Political Economy and Economic Development Md. Afnan Hossain Lecturer, School of Business & Economics

Economic Growth & Economic Development Economic growth is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real GDP. Economic development is the sustained, concentrated actions of policy makers and communities that promote the standard of living and economic health of a specific area. Such actions can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, health, safety, literacy and other initiatives. GDP: It is the total dollar value of goods and services produced over a specific time period. It indicates about the health and size of the country’s economy. Real: Real values are adjusted for inflation. Critical infrastructure is a term used by governments to describe assets that are essential for the functioning of a society and economy. For e.g. electricity generation, gas, oil, telecommunication, water supply, transportation, security services, agriculture, heating, public services, financial services, etc. The World Bank defines social inclusion as the process of improving the terms for individuals and groups to take part in society. 2 2

The Determinants of Economic Development Different countries have dramatically different levels of economic development. GNI (Gross National Income) measures the total income received by resident of a nation. Japan, Sweden, Switzerland, and the U.S. have high GNI China and India have low GNI However, GNI can be misleading because it does not take the cost of living into consideration. Living cost needs to be considered along with GNI. E.g. GNI per capita of USA is $46,040 and Switzerland is $59,880 (2007) but the living cost of USA is low. So the residents of USA can afford better living standard than Switzerland. GNI per capita does not measure whether the economy is growing. To measure that, we need to consider PPP (Purchasing Power Parity) and its growth rate. PPP asks how much money would be needed to purchase the same goods and services in two countries. 3

Broader Conceptions of Development: Amartya Sen Development should be assessed less by material output measures such as GNI per capita and more by the capabilities and opportunities that people enjoy. Development means ensuring real freedom of people through: Removing impediments to freedom Removing poverty, as well as, tyranny Removing social deprivation Ensuring public facilities for all Development is not only economic freedom but also political freedom. To succeed in this countries need ‘democratization’. Citizens should be able to voice out their opinion in important decision making process. There should be basic education for women, basic healthcare for children. If people are chronically ill or ignorant, than they will not be able to expand their capabilities and opportunities. 4 4

Broader Conceptions of Development: Amartya Sen The United Nations used Sen’s ideas to develop the Human Development Index (HDI) to measure the quality of life in different nations. It calculates three factors: Life expectancy at birth (function of health care) Educational attainment (combination of adult literacy rate and enrollment in primary, secondary and tertiary education) Whether average incomes enable people to afford basic needs of life (adequate food, shelter, health care) High HDI: 0.8 and above (up to 1) Medium HDI: 0.5 to 0.8 Low HDI: less than 0.5 (the quality of life is poor) In 2013, HDI Rank for Bangladesh is 142 and HDI of Bangladesh was 0.558. It was 0.433 in 2000. Life expectancy is a statistical measure of how long a person may live, based on the year of their birth, their current age and other demographic factors including gender. 5 5

Life Expectancy Rates List By World Health Organization 2012 Rank Country Overall Rate 1 Japan 84.6 3 Singapore 84 36 United States 79.8 50 Maldives 77.2 127 Bangladesh 70 137 Myanmar 68 150 India 65 182 Nigeria 53 193 Sierra Leone 38 As of 2014, the country with the highest life expectancy is Monaco at 89.57 years; the country with the lowest life expectancy is Chad at just 49.44 years. 6

Facts About Literacy Rates According to the CIA World Factbook, almost 75% of the world's 775 million illiterate adults are concentrated in ten countries (in descending order: India, China, Pakistan, Bangladesh, Nigeria, Ethiopia, Egypt, Brazil, Indonesia, and the Democratic Republic of Congo). Women represent two-thirds of all illiterate adults globally. Extremely low literacy rates are focused in three regions: South Asia, West Asia and Sub-Saharan Africa. Literacy rate of Bangladesh is 57.7%; India is 74.4%; Germany, France, USA, UK and Japan is 99%; Ghana is 71.5%; UAE is 77.9%; South Sudan is 27%; Haiti is 52.9%, etc. (2013 data). 7

Human Development Index RANK (2013) COUNTRY HDI 1 Norway 0.944 2 Australia 0.933 5 United States 0.914 110 Egypt 0.682 6 Germany 0.911 155 Madagascar 0.498 14 United Kingdom 0.892 146 Pakistan 0.537 49 Argentina 0.808 79 Brazil 0.744 183 Sierra Leone 0.374 8 Source: UNDP 8

Political Economy and Economic Progress i) Innovation and entrepreneurship are the engines of growth Innovation and entrepreneurship activity ensure long term economic growth. The economic growth of USA is the reflection of innovative firms like Microsoft, Dell Computers. ii) Innovation and entrepreneurship require a market economy To ensure innovation and entrepreneurship, economic freedom is necessary which can only be ensured through market economy. In a market economy, any individual who has an innovative idea are free to try to make money out of that idea through business. In planned or mixed economy all or most sectors are state-owned. So entrepreneurship spirit is often not appreciated. 9 9

Political Economy and Economic Progress iii) Innovation and entrepreneurship require strong property rights: To promote innovation and entrepreneurship providing property right is necessary. Otherwise, business will be in risk that the profit may be taken by criminal activity or by the state. State can take the money through excessive tax or through corruption. 10

The Required Political System Free market economy with strict protection for property rights is required first. However, democracy is not always the key to economic growth. Totalitarian regimes that ensured strong property rights and free market economy have observed economic growth. Example: four fastest growing economies of past 30 years – South Korea, Taiwan, Singapore and Hong Kong were under totalitarian regime. A dictator government committed towards free market and development can also ensure economic growth. 11

The Nature of Economic Transformation To form a market-based economy number of steps needs to be entailed: Deregulation: Deregulation involves removing legal restrictions to Free play of markets (removing price controls and price set by the demand and supply of markets) Establishment of private enterprises The manner in which private enterprises operate Relaxing or removing restrictions on FDI by foreign enterprises and international trade.  Example: India is a mixed economy and now going through gradual deregulation. 12

The Nature of Economic of Economic Transformation Privatization: It goes hand in hand with deregulation. Privatization means transferring the ownership of state property into hands of private individuals, frequently by sale of state assets through auction. Example: Since the establishment of the Privatization Board in 1993 and thereafter the Privatization Commission in 2000, 74 state owned enterprises (SOEs) have been privatized in Bangladesh. Legal system: The creation of a legal system to safeguard property rights. 13 13

Managerial Implications The attractiveness of a country as a market depends on long-term: 1. Benefits This include; The size of the market Present and future wealth of the consumers  E.g. in 1960 South Korea was viewed as just another improvised Third World nation. By 2000 it was world’s 12th largest economy measured in terms of GDP. Country’s economic system and property rights regime are reasonably good predictors of economic prospects. For example, countries with market economy in which property rights are protected tend to achieve greater economic growth rates than command economies and economies where property rights are not well protected. 14

Managerial Implications 2. Costs Cost of doing business depends on a number of political, economic and legal factors. Political: Cost increases if Only politically powerful people are allowed to do business. Need to pay bribe Economic: if the country is economically under developed, then it lacks proper infrastructure and support for doing business. Example: McDonalds in Moscow had to build up vertically integrated backward supply chain as the quality of poultry and vegetables produced in Russia was poor. Legal: If the legal system of a country is strong, then cost of doing business will be more. McDonalds needed to built their own poultry farm, cattle ranches, vegetable plot, food processing plant, etc. 15 15

Managerial Implications 3. Risks Political risk: political risk tends to be higher in countries experiencing social unrest and disorder. Social unrest is usually expressed through strikes, demonstrations, terrorism and violent conflict. All these hamper business activities. Economic risk: Economic mismanagement can adversely affect profit and other goals of business (Inflation, Bankruptcy or business and government debt). Example: South East Asian crisis ( Indonesia, Thailand, South Korea in 1997-1998) Legal risk: Legal risk means the likelihood that a trading partner will opportunistically break a contract. Investors may hesitate to invest in joint ventures if legal risk is high. Example: Coca-Cola, IBM in India Financial crisis-South East Asian Crisis: Many businesses were increasing their debt rapidly. Even government was encouraging the businesses to invest in industries of ‘strategic importance’. It led to over investment with respect to more factories and offices being built that could not justify the demand condition. The businesses were not being able to make profit with over capacity and such investments became uneconomic. Banks realized that the businesses will not be able to meet their debt payment obligations. Many foreign investors pulled their money out of the country realizing that the local companies and the banks will go bankrupt. In 1970s, Indian Government passed a law requiring all foreign investors to enter into joint ventures with Indian companies. Coca-Cola and IBM closed their investment as they felt that the Indian legal system did not provide adequate protection of their IPRs and Indian companies might seize their IP. IPR-core of competitive advantage for the American companies. 16 16