Political

Economy and
Economic
Development

1
Lecture Topics
Economic Endowments
Macroeconomic Stability
Economic Development
Economic Systems
Economies in Transition
Managerial Implications

2
Economic Endowments
Size
Natural and created resource
endowments associated with its
geography
People
Infrastructure
Competitiveness

3
Size - Gross National Income (GNI)
GNI is the value of a nations income, ie the
income earned by the residents of the nation
GNI doesnt matter where the income is
earned, in the domestic market or a foreign
market
GNI equals GDP plus net income from
abroad.
GNI per capita is a common measure of
economic development

4
Geography

The natural resources and features of a
country affect the level and patterns of
market demand and production.
Geographic features such as the
endowments of accessible mineral
deposits, climatic patterns, the
distribution of soil types and the
topography of a region provide or limit
business opportunities
5
People

The population characteristics of a country help
define its market potential or its potential as a
location for production
Market analyses of population size and growth and
population distributions can provide general
indicators of the potential market size for a firms
product
One thing that is happening globally is the so-called
demographic divide which shows major shifts
across countries and within countries and the second
is an aging population profile





6
Net Overseas Migration (000s)
1-7
0
50
100
150
200
250
457 Visa Applications Granted Since
August 1996, 000s.
1-8
0
10
20
30
40
50
60
70
80
90
Permanent Visa Outcomes by Migration
Program, 1997-2006, (000s).
1-9
0
20
40
60
80
100
Skill stream Family stream Humanitarian Program
Population debate
The worlds population expect to increase by 50% by 2070
which is an extra 3 billion people
Can Australia simply shut its borders down
How many people can Australia accommodate and at what
rate can we grow
What are the opportunities that come with population
growth and what are the sacrifices
http://www.youtube.com/watch?v=8KgqDzBCAnU




1-10
Infrastructure
Infrastructure refers to the created assets of
an economy that facilitate business.

It includes the physical structures such as
transport, energy, communications,
financial and legal systems

11
Competitiveness and Productivity
External sources: Quality infrastructure,
country of origin effects, and external
economies arising from the firms operation
in a large and successful industry or cluster
of successful industries in a country or
region
firms competitiveness depends on three key
elements: price of inputs, productivity and
the foreign exchange rate.

12
Major Productivity Determinants


13
Macroeconomic Stability
occurs when an economy grows without
persistent and major fluctuations in the levels
of economic activity, inflation rates,
unemployment and balance of payments
This measure focuses more on the state of the
current economic conditions of an economy.
Current economic conditions reflect the stage
of the business cycle.

14
Business Cycle
refers to the tendency of economies to
move in sequence through phases of
expansion and contraction of economic
activity in a somewhat regular pattern.
In pursuit of social, political and
economic goals, national governments
attempt to stabilise the economy.

15
16
1-17
-3
-2
-1
0
1
2
3
4
5
6
Recession
Recession
Gross Domestic Output, 1981 2009
Unemployment Rate, per cent
0
2
4
6
8
10
12
1960 1970 1980 1990 2000 2010
Costs to the economy as a whole.
Loss of Gross Domestic Product.
Loss of human capital.
Re-training costs.
Unemployment benefit payments are a net drain on
federal budget.
The opportunity cost of funds directed towards
unemployment benefits.
Loss of tax revenue personal income tax,
company tax, GST and excise taxes.

The costs of unemployment
Costs to the unemployed people.
Loss of income.
Loss of skills.
Re-training costs.
Loss of self esteem.
Unemployment may contribute to family break-
ups, health problems, mental illness, crime and
political unrest.
The costs of unemployment
Inflation
Inflation is a process in which the price level is
rising and money is losing value.
Inflation is not the increase in the price of one
item.
Inflation is the increase in the price of all items by
similar percentages.
A one-time jump in the price level is not inflation.
Inflation is an ongoing process.

The CPI Market Basket
Inflation Rate, per cent
0
5
10
15
20
1970 1980 1990 2000 2010
Costs of Inflation
Individuals
- Borrowers or lenders of money may lose
- Real wages may fall
- Reduces purchasing power of those on fixed incomes
The economy
- Export and import effects
- Investment effects
- Tax bracket creep effect may reduce real incomes
- Uses resources, e.g. shops changing prices or wages


Inflation
Interest rates are likely to rise with inflation.
High inflation can lead to the depreciation
of the value of a currency, which implies
consequences for international business
High rates of inflation can hinder the long-
term development performance of an
economy.

25
External Viability & Debt

The external viability of a country is an
important variable for business to monitor
when assessing the economic conditions of a
country.
Whether or not a country is able to pay its
way internationally can affect the market or
investment potential of the country.

26
Balance of Payments
The Current Account records the
current expenditures on transactions.
The Capital Account records
international capital transfers.
The Financial Account records the
financial flows and balances arising
from capital transactions.

27
Economic Growth
Refers to an increase in the productive
capacity and national output of a country,
measured by the rate of increase of GDP
Sources of economic growth include:
the availability of more resources;
the factors that lead to the more productive
use of those resources such as increased
labour skills, new technologies, innovative
products and expanding markets and scale
economies

28
Policy objectives
Full employment
Stable price level
External balance
Economic growth
-trade offs and constraints

29
Instruments
Monetary policy
involves the manipulation of interest rates and the
money supply by the nations central bank for similar
purposes
Fiscal policy
involves making adjustments to government
expenditures and taxes to stimulate or slow down
economic activity
Exchange rate
Interdependence of Policies and Lags


30
Economic Development
Multi-dimensional concept
Refers to the increasing capacity of an
economy to improve and sustain the
standards of living of the entire
population.
It includes notions of process, change,
inherent dynamism, independence,
sustainability and the long term.

31
Differences in Economic
Development
Different countries have dramatically
different levels of economic
development.
One common measure of economic
development is a countrys gross national
income per head of population.
Although there are a variety of measures
of economic development

32
GNI per Capita in US Dollars
33
Purchasing Power Parity
GNI per capita figures can be misleading
do not consider how the income is distributed
or differences in the cost of living.
Purchasing Power Parity (PPP) is an
adjustment in gross national income per capita
to reflect differences in the cost of living
PPP allows for a more direct comparison of
living standards in different countries

34
Purchasing Power Parity GNI

35
Human Development Index
different perspective on development
(Amartya Sen)
development should be more by the
capabilities and opportunities that
people enjoy
HDI measures the quality of human life
in different nations

36
Human Development Index
based on three measures:
i. Life expectancy at birth
ii. Educational attainment (adult literacy rate and
enrolment in primary, secondary and tertiary
education)
iii. Whether average incomes, based on PPP
estimates, are sufficient to meet the basic needs
of life in a country
Less than 0.5 low human development
0.5 to 0.8 medium human development
Above 0.8 high human development
37
Human Development Index
38
Economic Systems
Market economy
Command economy
Mixed economy
Economies in transition
39
40
0 5 10 15 20 25
Sweden
France
EU 15
UK
Australia
Japan
OECD
US
Government Expenditure on Goods &
Services (per cent of GDP)
Australia
Totally
planned
economy
Totally
free-market
economy
N. Korea
N. Korea
Cuba
China
Poland
Poland
France
France
UK
UK
US
U
S
Early 1980s
Early 2000s
Classifying Economic Systems
China Hong
Kong
Cuba
Hong
Kong
Australia
41
Nature of Economic
Transformation

The shift towards a market-based
economic system typically involves at
least three distinct activities:
1. Deregulation
2. Privatisation
3. Development of institutions

42
Managerial Implications
Political changes of last 20 years has opened
markets to business
Many national markets of may still be
undeveloped and impoverished, but they are
potentially enormous
The Chinese market alone is potentially bigger
than that of the United States, the European
Union and Japan combined.
What managerial, social and political skills are
required in this new environment
43
Managerial Implications
Benefits
countrys resource endowments, both
created and natural
its location, either by proximity to its
markets or essential resources.
By identifying and investing early in
potential future economic stars, firms may
be able to gain first mover advantages and
establish loyalty and experience in a country.
44
Managerial Implications
Costs
Macroeconomic instability
International competitiveness
Redistribution of Income
Policy Initiatives
Risks

45
Overall Attractiveness
overall attractiveness of a country as a potential
market and/or investment site depends on
balancing the benefits, costs and risks associated
with doing business in that country.
Generally, the costs and risks associated with
doing business in a foreign country are typically
lower in economically advanced and politically
stable democratic nations and greater in less
developed and politically unstable nations.

46
1-47
1. Your firm is sourcing its products from a country that for the
foreseeable future is likely to experience relatively high rates of
inflation and increasing current account deficit balances. Identify
the risks to which your firm is exposed and suggest strategies to
minimise these exposures.

2. The Nobel Prize-winning economist Amartya Sen argues that
the concept of development should be broadened to include more
than just economic development. What other factors does Sen
think should be included in an assessment of development? How
might the adoption of Sins views influence government policy?
Do you think Sen is correct that development is about more than
just economic development? Explain.
Critical Thinking