International Business - MGT520 VU
© Copyright Virtual University of Pakistan 35
Lesson 13
NATIONAL DIFFERENCES IN POLITICAL ECONOMY
The Determinants of Economic Development:
1. Different countries have dramatically different levels of development, as shown in Map 2.1.
GDP/capita is a good yardstick of economic activity, as it measures average value of the goods and
services produced by an individual.
2. But GDP/capita does not consider the differences in costs of living. The UN's PPP index as
shown in Table 2.1 shows the differences in the standards of living of people in different countries.
3. A problem with both GDP/capita and PPP is that they are static in nature. From an international
business perspective it is good to look at the rate of growth in the economy as well as the status of
its people. Map 2.3 shows that some of the fastest growing countries economically are those have
been slower to develop.
4. A broader approach to assessing the overall quality of life in different countries is the Human
Development Index. This is based on life expectancy, literacy rates, and whether (based on PPP
indices) incomes are sufficient to meet the basic needs of individuals. Map 2.4 shows the Human
Development Index. Notice that some of the worse off countries are heavily populated and have
rapidly expanding populations.
5. What is the relationship between political economy and economic progress? This is a difficult
issue. One thing that is generally accepted is that innovation is the engine of long-run economic
growth. Another thing that we have come to generally accept in recent years is that a market
economy is better at stimulating innovation than a command economy that does not have the same
types of incentives for individual initiative.
6. Innovation also depends on a strong protection of property rights, as innovators and entrepreneurs
need some level of assurance that they will be able to reap the benefits of their initiative.
7. While it is possible to have innovation and economic growth in a totalitarian state, many believe
that economic growth and a free market system will eventually lead a country to becoming more
democratic.
8. Geography can also affect economic development. A landlocked country with an inhospitable
climate, poor soil, few natural resources, and terrible diseases is unlikely to develop economically as
fast as country with the opposite characteristics on each of these attributes.
9. While it can be hard to do much about unfavorable geography, education is something that
governments can affect. Numerous studies suggest that countries that invest more in the education
of their young people develop faster economically. Examples include, Japan, South Korea and
many Asian countries.
Other regulatory issues:
1. Countries often impose protectionist policies, such as tariffs, quotas, and other trade restrictions, to
give preference to their own products and industries.
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