IB311: Political Economy and

Economic Development

Arunee Tanvisuth, Ph.D.

BBA, Thammasat Business School
Agenda for Today
Factors that determine the level of
economic development of a nation
Macro-political and economic changes
occurring worldwide
How transition economies are moving
toward market-based systems
Implications for management practice

2
How to measure economic
development of a country?
GNP
GDP
GNI

3
Gross National Product (GNP)
It includes the earnings from all assets
owned by residents, it even includes those
that doesn't flow back into the country
It then omits the earnings of all foreigners
living in the country, even if they spend it
within the country
GNP only reports how much is earned by
the country's citizens and businesses, no
matter where it is spent in the world

4
Gross Domestic Product (GDP)
It measures the income of anyone
within a country's boundaries,
regardless of who produces it
It includes anything earned by
foreigners, including foreign
businesses, while they are in the
country

5
Gross National Income (GNI)
It measures the total annual income of a
country's residents and businesses,
regardless of where it's produced
GDP measures production while GNI
measures income
GNI equals GDP plus wages, salaries, and
property income of the country's residents
earned abroad. It also includes net taxes
and subsidies receivable from abroad

6
Income GDP GNI GNP
earned by:
Residents in C+I+G+X C+I+G+X C+I+G+X
Country

Foreigners Includes Includes if Excludes All

in Country Spent in
Country
Residents Excludes Includes if Includes All
out of Remitted
Country Back

Foreigners Excludes Excludes Excludes

out of
Country 7
Why are these Differences
Important?
In many emerging markets, residents move
to other countries where they can earn a
better living
They send lots of money back to their
families in their home country
This income is large enough to drive
economic growth
It is counted in GNI and GNP, but not in GDP
As a result, comparisons of countries by GDP
will underestimate the size of these
8
 of
to measure size economy

middle income Trap

✓
stage
①
Factor Driven
d
② investment Driven ( Thai )
d
③ innovation Driven ( Italy

d
④ wealth Driven CUS , Germany ,
Austria)

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 Stage
①
Factor Driven
low labour skill , cheap labour, foriengner invest in the
country
to use labour
d
② investment Driven ( Thai ) more machine
,
use less labour
,
more skill labour
, rely technology of other countries

d
③ innovation Driven ( Italy have own
technology

d
④ wealth Driven (US
, Germany ,
Austria)
Nominal GDP per capita
(IMF, 2018 in US$)

These # didn't include cost of

living

show what you think

& support 10
Measures of Economic Development
GDP per capita
Gross National Income (GNI) per capita
The total annual income received by the
residents of a nation
Why these figures can be misleading?
palm oil →
exported from Malaysia

11
GDP per capita (PPP), 2018
(IMF)

12
GDP Growth
(2008-2017, % and average, IMF)
2008 2009 2010 2011 2014 2017 Avg.
Ethiopia 11.2 10.0 10.6 11.4 10.3 7.5 9.8
Qatar 17.7 12.0 18.1 13.4 4.0 3.4 8.2
China 9.6 9.2 10.6 9.5 7.3 6.6 8.2
India 3.9 8.5 10.3 6.6 7.2 7.2 7.0
Brazil 5.1 -0.1 7.5 4.0 0.5 0.2 1.4
USA -0.3 -2.8 2.5 1.6 2.4 2.3 1.4
UK -0.6 -4.3 1.9 1.5 3.1 2.0 1.1
France 0.2 -2.9 2.0 2.1 0.6 1.4 0.6
Australia 2.6 1.7 2.3 2.7 2.8 3.1 2.6
Japan -1.1 -5.4 4.2 -0.1 0.3 1.2 0.5
Singapore 1.8 -0.6 15.2 6.2 3.6 2.2 4.0
Thailand 1.7 -0.7 7.5 0.8 0.9 3.0 2.9
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Broader Conception of Development
The Nobel Prize-winning economist Amartya Sen has
argued that development should be assessed less by
material output measures such as GDP per capita and
more by capabilities and opportunities that people
enjoy
The core focus of the capability approach is on what
individuals are able to do
The importance of real freedoms in the assessment of a
person's advantage
Individual differences in the ability to transform resources
into valuable activities
The multi-variate nature of activities giving rise to happiness
A balance of materialistic and nonmaterialistic factors in
evaluating human welfare
Concern for the distribution of opportunities within society
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Human Development Index (HDI)
A composite index of life
expectancy, education, and per capita
income indicators
The HDI was developed by Pakistani
economist, Mahbub ul Haq, for the UNDP
A country scores higher HDI when
the lifespan is higher, the education level is
higher, and the GDP per capita is higher
HDI is scaled from 0 to 1
Countries scoring less than 0.5 low
Countries scoring 0.5-0.8 medium
Countries scoring above 0.8 high
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HDI does the country support your potential

The index is often framed in terms of whether

people are able to "be" and "do" desirable things
in life
HDI combines three dimensions
A long and healthy life
Life expectancy at birth (a function of health care)
Life Expectancy Index
Knowledge Thai - a years

Expected years of schooling and Mean years of schooling

Education Index
Public Univ Private better than

A decent standard of living

GNI per capita (PPP US$)
GNI Index

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India

18
19
HDI 2017 (UNDP)

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Gross National Happiness Index

first coined by the 4th King of Bhutan, King

Jigme Singye Wangchuck, in 1972 when he

important than Gross Domestic

The concept implies that sustainable
development should take a holistic approach
towards notions of progress and give equal
importance to non-economic aspects of
wellbeing
It identifies four groups of people unhappy,
narrowly happy, extensively happy, and deeply
happy 21
22
Dimensions of GNH
Living Standards
Level of material comfort as measured by income,
financial security, housing and asset ownership
Education
Knowledge, values, skills and formal and informal
education across age levels
Health
A holistic healthy lifestyle both at the mental and
physical states
Community Vitality
Gather information on social cohesion among
family members and neighbors, and on practices
like volunteering 23
Dimensions of GNH (2)
Cultural Diversity and Resilience
Strength and diversity of cultural norms, ethos
and festivals across the country and age groups
Time Use
Harmonious work life balance
Psychological well-being
These living standards include spirituality,
reflective cognitive evaluations such as life
satisfaction, and affective reactions to life
events such as positive and negative emotions

24
Dimensions of GNH (3)
Ecological Diversity
perceptions and evaluations of
the environmental conditions of their
neighborhood and assess ecofriendly behavior
pattern
Good Governance
Evaluate the level of participation in government
decisions at the local level and the presence of
various rights and freedom, the level of efficacy,
honesty and quality within government

25
GNH Index (2)
In 2011, The UN General Assembly
passed Resolution "Happiness: towards
a holistic approach to development"
urging member nations to follow the
example of Bhutan and measure
happiness and well-being and calling

In 2012, the first World Happiness

Report was issued

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The World Happiness Report
Sustainable Development Solutions Network
(SDSN) ranks countries by how happy their citizens
perceive themselves to be.
SDSN stresses that its findings draw heavily on
data from population samples in each country, using
a life evaluation survey to produce subjective
wellbeing data.
a ladder, with steps numbered from 0
at the bottom to 10 at the top. The top of the
ladder represents the best possible life for you
and the bottom of the ladder represents the
worst possible life for you. On which step of
the ladder would you say you personally feel you
stand at this time 27
Happiest Countries in the World
2019 (SDSN)

28
Easterlin Paradox
In the mid-70s, Richard Easterlin showed that
despite a steadily growing American economy
over the previous decades, the average
happiness had remained almost unaltered.
The 'Easterlin Paradox' states that at a point in
time happiness varies directly with income both
among and within nations, but over time
happiness does not trend upward as income
continues to grow.
If economic growth does little to improve social
welfare, should it be a primary goal of
government policy or should 'gross national
happiness' be the main target? 29
30
 1st
Switzerland
2nd
3rd Japan
Canada
4th

5Th
Germany
u k

Sweden

31
Best Countries to Live 2019
(US News and World Report)
The study, developed by BAV Group and The
Wharton School at the University of
Pennsylvania, asked participants to score
each country out of 10 based on 65
attributes that contribute to its success on
the global stage.
These attributes were grouped into nine
sub-rankings: Adventure, Citizenship,
Cultural Influence, Entrepreneurship,
Heritage, Movers, Open for Business, Power
and Quality of Life.
32
Best Countries to Live 2019

33
 4
Jap a
Tigers

in corn state
p
Political Economy and Economic
Progress
Innovation and entrepreneurial activities
are the engines of long-run economic growth
Innovation and entrepreneurial activities
help increase economic activities by
creating new products and market that did
not previously exist
Innovation in production and business
processes lead to an increase in the
productivity of labor and capital which
further boosts economic growth rates

34
Innovation and Entrepreneurship
Innovation
New products, new processes, new organizations,
new management practices, and new strategies
-
style toy stores and then engaging in heavy advertising
and price discounting
strategy of developing a mass-market
online retailing
-term
economic growth rate, the business
environment must be conducive to the
consistent production of product and process
innovation and to entrepreneurial activity

35
Innovation & Entrepreneurship

Market Economy
Strong Property Rights
Required Political System

36
Market Economy
It has been argued that the economic freedom
associated with a market economy creates greater
incentives for innovation and entrepreneurship than
either a planned or mixed economy
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
In a planned economy, the state owns all means of

incentives to develop valuable new innovations because it is

the state that captures most of the gains
Studies over a 20-year period provided evidence of a
strong relationship b/w economic freedom (as provided by
market economy) and economic growth

37
Strong Property Rights
Both individuals and businesses must
be given the opportunity to profit
from innovative ideas, without strong
property right protection, businesses
and individuals run the risk that their
profits will be expropriated, either by
criminal elements or by the state
Excessive taxation, demand for kickbacks

38
The Required Political System
People in the West tend to associate a
representative democracy with a market
economy system, strong property rights
protection, and economic progress

China, South Korea, Taiwan, Singapore and Hong

Kong
Some totalitarian regimes have fostered
market economy and strong property rights
protection and have experienced rapid
economic growth
How about India? 39
40
41
42
Lee Kuan Yew (1923-2015)
The first Prime Minister of Singapore,
governing for 3 decades (1959-1990)
Lee is recognized as the nation's founding
father, with the country described as
transitioning from the "third world to first
world in a single generation" under his
leadership

leads to development. I believe that a country

needs to develop discipline more than
democracy. The exuberance of democracy
leads to undisciplined and disorderly conduct
43
44
Geography and Economic
Development
An influential economist, Jeffrey Sachs
argues that by virtue of favorable
geography, certain societies are more likely
to engage in trade than others and are thus
more likely to be open to and develop market
based economic system, which in turn
promotes faster economic growth
Sachs tested for the impact of geography on a

1990 and found that landlocked countries grew

more slowly than coastal economies and that being

roughly 0.7% per year 45

Education and Economic
Development
The general assertion is that nations that invest
more in education will have higher growth rates
because an educated population is a more
productive population
In 1960, Pakistanis and South Koreans were on
equal footing economically
However, just 30% of Pakistani children were
enrolled in primary schools, compared to 94% of
South Koreans
By the mid-
was 3 times that of Pakistan
14 studies showed a positive and significant

education and its economic growth rates 46

The Spread of Democracy
During the late 1980s and early 1990s, a
wave of democratic revolutions swept the
world
Main Reasons for the spread of democracy
Many totalitarian regimes failed to deliver
economic progress to their populations the
collapse of communism in eastern Europe
New information and communication technologies,

ability to control access to uncensored information

In many countries, economic advances have led to
the emergence of prosperous middle and working
classes that have pushed for democratic reform
South Korea 47
The New World Order?
The end of the cold war and the collapse of
communism in eastern Europe and the former
Soviet Union
Francis Fukuyama argues that at the end we will
have
A more harmonious world dominated by a universal
civilization characterized by democratic regimes
and free market capitalism
Samuel Huntington envisioned the world split
into different civilizations, each of which has its
own value systems and ideology
He predicted conflict between the West and
Islam and between the West and China
48
The New World Order? (2)
Huntington theorized that modernization in
non-Western societies can result in a
retreat toward the traditional, such as the
resurgence of Islam in many traditionally
Muslim societies

product of the tension between civilizations

and the clash of value systems and ideology
Some commentators originally dismissed

attention
49
The Spread of Market-Based
Systems
Since the 1980s, there has been the
transformation from centrally planned
command economies to market-based
economies
In mixed Economies, many states have
sold state-owned businesses to
private investors (privatization) and
deregulated their economies to
promote greater competition

50
Implications for Managers
Benefits
Size of the market (populations), its present
wealth (purchasing power), and its future growth
prospects
Costs
Corruption, lack of infrastructure and supporting
businesses, legal costs
Risks
Political risks, economic risks, legal risks
The overall attractiveness of a country as a
potential market or investment site depends on
balancing the benefits, costs, and risks
associated in doing business in that country 51