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CHAPTER FOUR
ECONOMIC
DEVELOPMENT OF
NATIONS

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Learning Objectives

1. Explain economic development and how it is measured.

2. Describe economic transition and its main obstacles.
3. Outline the various sources of political risk.
4. Explain how companies can manage political risk.
5. Describe China’s and Russia’s experiences with economic
transition.

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India’s Tech King

Infosys is a global provider of IT

services.
 India has organic-led path to
development.
 Brainpower is driving development.

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Economic Development
Classifying Countries

Developed Country

Newly Industrialized Country

Emerging Markets

Developing Country

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Economic Development
National Production

Popular Indicators of
Economic Development

Gross Domestic Product Gross National Product

(GDP) (GNP)

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Economic Development
National Production (Cont.)

Uncounted Transactions

Question OF Growth
GDP and GNP
Drawbacks
Problem of Averages

Pitfalls of Comparison

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Purchasing Power Parity

Purchasing • Value of goods and services that can

be purchased with one unit of a
Power country’s currency

Purchasing • Relative ability of two countries’

Power currencies to buy the same “basket”
of goods in those two countries
Parity (PPP)
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Economic Development
Human Development

United Nations’ Human

Development Index (HDI)

Long and Healthy Decent Standard

Education
Life of Living

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Table 4.1 HDI Rank Country HDIValue GNI per Capita Life Expectancy at
Human Very High Human Development
Rank Birth (Years)

Development 1
3
Norway
United States
0.955
0.937
5
9
81.3
78.7
Index (HDI) 5
9
Germany
Switzerland
0.920
0.913
15
11
80.6
82.5
11 Canada 0.911 16 81.1
20 France 0.893 24 81.7
23 Spain 0.885 31 81.6
26 United Kingdom 0.875 21 80.3

45 Argentina 0.811 52 76.1

High Human Development
55 Russia 0.788 55 69.1
61 Mexico 0.775 65 77.1
85 Brazil 0.730 77 73.8
Medium Human Development
101 China 0.699 90 73.7
112 Egypt 0.662 106 73.5
121 South Africa 0.629 79 53.4
Low Human Development
153 Nigeria 0.471 147 52.3
185 Mozambique 0.327 176 50.7

Source: Based on data obtained from Human Development Report 2013 (New York: United Nations Development Programme, 2013), Table 1, pp.
144–146, available at www.undp.org.

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Quick Study 1

1. An increase in the economic well-being, quality of life, and

general welfare of a nation’s people is called what?
2. What are the drawbacks of using national production to measure
economic development?
3. The human development index measures what aspects of a
nation’s development?

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Economic Transition

Reforms Obstacles
Stabilizing the economy, reducing Managerial expertise
budget deficits, and expanding credit
availability
Shortage of capital
Allowing prices to reflect supply and
demand Cultural differences
Legalizing private business, selling
state-owned companies, and Sustainability
supporting property rights
Reducing barriers to trade and
investment and allowing currency
convertibility

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Quick Study 2

1. What does the economic transition process involve?

2. What are the key obstacles for countries in transition?
3. Transition replaces dependence on the government with greater
emphasis on what?

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Political Risk

Political Risk: Likelihood that a society will undergo political

change that negatively affects local business activity
Main sources of political risk include:
Conflict and violence
Terrorism and kidnapping
Property seizure: confiscation, expropriation, or nationalization
Policy changes
Local content requirements

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Quick Study 3

1. How does political risk abroad affect companies?

2. Companies fear open violence and conflict abroad because it can
threaten the ability to do what?
3. What is the name given to the forced transfer of assets from a
company to the government with compensation?

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Managing Political Risk
Methods

Managing
Political Risk

Information Political
Adaptation
Gathering Influence

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Managing Political Risk
Relations Between Countries
International Relations
Favorable and strong political
relationships
Foster stable business
environments
Expand business opportunities
Lower risk
Promote economic
development
Multilateral agreements
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The United Nations
Six main bodies
The General Assembly
The Security Council
The Economic and Social
Council
The Trusteeship Council
The International Court of
Justice
UN Economic and Social Council
Chapter 4-16
Quick Study 4

1. How can a company incorporate political risk into its business

strategies?
2. What is a good source of information to help conduct accurate
political risk forecasting?
3. What might result from unfavorable political relations among
countries?

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Emerging Markets and Economic Transition
China

Profile
Communist after civil war ended in 1949
Agricultural reforms began in 1979
 Township and Village Enterprises legal in 1984
“Socialism with Chinese characteristics”
Challenges
Political and social problems
Unemployment and migrant labor
Reunification of “greater China”

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Emerging Markets and Economic Transition
Russia

Profile
Operated under a staunchly communist system for about 75 years
In the 1980s, the former Soviet Union entered a new era of freedom
of thought, freedom of expression, and economic restructuring
Transition away from government ownership and central planning
was challenging
Opaque legal system, rampant corruption, and shifting business laws
Challenges
Developing managerial talent
Political instability
Unstable investment climate

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Quick Study 5

1. During what time period did China undergo its most rigorous
experience with central planning?
2. What challenges might pose a threat to China’s future economic
performance?
3. Over what aspects of Russia’s centrally planned economy did
planners exercise control?
4. What might challenge Russia’s future economic prospects?

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MAMOUN BENMAMOUN
ASSISTANT PROF OF INTERNATIONAL BUSINESS
BOEING INSTITUTE OF INTERNATIONAL BUSINESS
JOHN COOK SCHOOL OF BUSINESS
SAINT LOUIS UNIVERSITY

Copyright © 2016 Pearson Education Limited

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