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IBG - political economy and economic development s2 2014
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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 nation’s income, ie the income earned by the residents of the nation
GNI doesn’t 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 firm’s 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 (000’s)
1-7
2006
–07
2005
–06
2004
–05
2003
–04
2002
–03
2001
–02
2000
–01
1999
–200
0
1998
–99
1997
–98
1996
–97
1995
–96
1994
–95
1993
–94
1992
–93
1991
–92
1990
–91
0
50
100
150
200
250
457 Visa Applications Granted Since August 1996, 000s.
1-8
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
Permanent Visa Outcomes by Migration Program, 1997-2006, (000’s).
1-9
0
20000
40000
60000
80000
100000
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 ProductivityExternal sources: Quality infrastructure,
country of origin effects, and external economies arising from the firm’s operation in a large and successful industry or cluster of successful industries in a country or region
– firm’s 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 nation’s 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 country’s 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 birthii. 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 developmentAbove 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)
AustraliaTotallyplannedeconomy
Totallyfree-market
economy
N. Korea
N. Korea
Cuba
China
Poland
Poland France
FranceUK
UKUS
US
Early 1980s
Early 2000s
Classifying Economic Systems
China HongKong
CubaHongKongAustralia
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 ImplicationsBenefits–country’s 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 ImplicationsCosts• 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 Sin’s views influence government policy? Do you think Sen is correct that development is about more than just economic development? Explain.
Critical Thinking