Economic Development Differences Flashcards

Question

The past three decades have seen a general move toward

Answer 1

more democratic forms of government, market-based economic reforms, and adoption of legal systems that better enforce property rights. Taken together, these trends have helped foster greater economic development around the world and have created a more favorable environment for international business.

Answer 2

GNI per person figures can be misleading because they don’t consider differences in the cost of living. For example, although the 2016 GNI per capita of Switzerland at $81,240 exceeded that of the United States by a wide margin, the higher cost of living in Switzerland meant that U.S. citizens could actually afford almost as many goods and services as the average Swiss citizen. To account for differences in the cost of living, one can adjust GNI per capita by purchasing power. Referred to as a purchasing power parity (PPP) adjustment, it allows a more direct comparison of living standards in different countries. As can be seen, there are striking differences in the standards of living among countries. Table 3.1 suggests the average Indian citizen can afford to consume only about 11 percent of the goods and services consumed by the average U.S. citizen on a PPP basis. Given this, we might conclude that despite having a population of 1.2 billion, India is unlikely to be a very lucrative market for the consumer products produced by many Western international businesses GDP per capita --> how many big macs (same things/basket of goods) can I buy for this amount --> how many baskets of goods could I consume in the other country Shows can much can a currency buy in a state

Answer 3

the capabilities and opportunities that people enjoy Hence, development requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, and neglect of public facilities as well as the intolerance of repressive states Sen’s influential thesis has been picked up by the United Nations, which has developed the Human Development Index (HDI) to measure the quality of human life in different nations. The HDI is based on three measures: life expectancy at birth (a function of health care); educational attainment (measured by a combination of the adult literacy rate and enrollment in primary, secondary, and tertiary education); and whether average incomes, based on PPP estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care).

Answer 4

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 (by engaging in entrepreneurial activity). Strong legal protection of property rights is another requirement for a business environment to be conducive to innovation, entrepreneurial activity, and hence economic growth.8 Both individuals and businesses must be given the opportunity to profit from innovative ideas. Without strong property rights protection, businesses and individuals run the risk that the profits from their innovative efforts will be expropriated, either by criminal activity or the state.

Answer 5

Poverty is the world’s biggest challenge and the inequality of global wealth distribution is frightening. 80% of the 7 billion people in this world live less than $10 dollar a day and only 5% of global income was generated by the poorest 40% of the world population while 75% of the global income was generated by the wealthiest 20% of the world’s population.

Answer 6

Many mechanisms are straightforward applications of mainstream economic theory: specialization, scale economies, competition, incentives for macro-economic stability, and innovation are all likely to be important mechanisms. Higher integration in the global economy may also increase the returns to higher education in poor countries, as described by Stark (2004), negatively affecting poverty in the long run. Agénor (2004) notes also that there are several reasons why the short-run effect of globalization may well be an increase in absolute poverty, suggesting that globalization has an inverted J-curve effect on absolute poverty. Such reasons include: * Transition costs: As an economy opens, more and cheaper capital becomes available. When firms replace labor with capital in production, poverty may increase before laid-off workers find new employment. Increasing competition following economic openness may also affect unemployment by forcing some domestic firms out of business. * Shortage of human capital: If openness leads to the introduction of more advanced technologies, or more capital intense production, the full benefits may require more skilled labor than is initially available. * As discussed by Bhagwati and Srinivasan (2002), higher economic openness likely comes with a greater commitment to low inflation, which should foster growth in the long run and particularly assist the poor if they are vulnerable to inflation. The transition from high to low inflation may, however, be associated with higher unemployment in the short run. * Globalization may affect government size and, for example, social spending, in turn affecting poverty. As suggested by the race to the bottom hypothesis (Sinn, 1997) open economies may have to compete by lowering taxes in turn followed by less social spending. An opposite mechanism—termed the compensation hypothesis—has however also been proposed in the literature (Rodrik, 1998 and Lindbeck, 1975) where open economies rather develop larger welfare states as an insurance institution.6

Answer 7

First, many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations. The collapse of communism in eastern Europe, for example, was precipitated by the growing gulf between the vibrant and wealthy economies of the West and the stagnant economies of the communist East. In looking for alternatives to the socialist model, the populations of these countries could not have failed to notice that most of the world’s strongest economies were governed by representative democracies. Second, new information and communication technologies—including satellite television, desktop publishing, and, most important, the Internet and associated social media— have reduced a state’s ability to control access to uncensored information. These technologies have created new conduits for the spread of democratic ideals and information from free societies. Third, in many countries, economic advances have led to the emergence of increasingly prosperous middle and working classes that have pushed for democratic reforms Moreover, there are disturbing signs that authoritarianism is gaining ground in several countries where political and civil liberties have been progressively limited in recent years, including Russia, Ukraine, Indonesia, Ecuador, and Venezuela. An increasingly autocratic Russia annexed the Crimea region from the Ukraine in 2014 and has actively supported pro-Russian rebels in eastern Ukraine.

Answer 8

The Heritage Foundation’s index of economic freedom is based on 10 indicators, including the extent to which the government intervenes in the economy, trade policy, the degree to which property rights are protected, foreign investment regulations, taxation rules, freedom from corruption, and labor freedom. A country can score between 100 (freest) and 0 (least free) on each of these indicators.

Answer 9

Deregulation involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate. . Deregulation in these cases involved removing price controls, thereby allowing prices to be set by the interplay between demand and supply; abolishing laws regulating the establishment and operation of private enterprises; and relaxing or removing restrictions on direct investment by foreign enterprises and international trade.

Answer 10

Hand in hand with deregulation has come a sharp increase in privatization. Privatization, as discussed in Chapter 2, transfers the ownership of state property into the hands of private individuals, frequently by the sale of state assets through an auction.29 Privatization is seen as a way to stimulate gains in economic efficiency by giving new private owners a powerful incentive—the reward of greater profits—to search for increases in productivity, to enter new markets, and to exit losing ones.30 Studies of privatization in central Europe have shown that the process often fails to deliver predicted benefits if the newly privatized firms continue to receive subsidies from the state and if they are protected from foreign competition by barriers to international trade and foreign direct investment.

Answer 11

A number of political, economic, and legal factors determine the costs of doing business in a country. With regard to political factors, a company may be pushed to pay off politically powerful entities in a country before the government allows it to do business there. The need to pay what are essentially bribes is greater in closed totalitarian states than in open democratic societies where politicians are held accountable by the electorate (although this is not a hard-and-fast distinction). Whether a company should actually pay bribes in return for market access should be determined on the basis of the legal and ethical implications of such action. We discuss this consideration in Chapter 5, when we look closely at the issue of business ethics.

Answer 12

By identifying and investing early in a potential future economic star, international firms may build brand loyalty and gain experience in that country’s business practices. These will pay back substantial dividends if that country achieves sustained high economic growth rates. In contrast, late entrants may find that they lack the brand loyalty and experience necessary to achieve a significant presence in the market. In the language of business strategy, early entrants into potential future economic stars may be able to reap substantial firstmover advantages, while late entrants may fall victim to late-mover disadvantages.

Answer 13

The size of the market The current and future purchasing power of its consumers First-mover advantages Late-mover disadvantages A country’s economic system and property rights regime good predictors of economic prospects