1. Summary of Krugman's Book
Through the book, Paul Krugman (1996) as the author that emphasizes the difference between running a business and formulating economic policy for a country. The article highlights the differences between the two entities and highlights the importance of understanding the unique challenges and complexities of governing a country. His paper claims that the principles and strategies for running companies cannot be directly applied to the management of a nation. The habits of mind that make a great business leader are not the same as those that make a great economic analyst.
There are some differences between operating a company and managing a country's economy:
- Complexity: a country's economy is much more complex and diverse than a companies. A company usually operates in a specific industry or market segment, while a country's economy includes many different sectors and activities. The country's economy contains many more actors and interactions, making managing it much more challenging.
- Concepts and Metrics: different concepts and metrics are used to measure and manage a country's economy than companies. For example, national income accounts use various indicators and concepts than corporate financial statements. A corporate leader must acquire new vocabulary and concepts to understand and effectively manage the country's economy.
- Goals and Responsibilities: a company's manager primarily has the company's interests and profitability in mind. On the other hand, the leader of a country must keep in mind the interests of the national economy as a whole, which is much more complex and diverse. The responsibility of the country's leader is to achieve economic stability, job creation, reduction of social inequalities and other public interest goals.
- Economic Policy Principles: general principles are needed to manage the country's economy, not specific strategies. For example, a good tax system follows general principles developed by tax experts, such as investment neutrality, low marginal tax rates, and minimal discrimination between current and future consumption. This differs from corporate governance, which operates based on specific strategies and decisions.
2. Development Economic Stages
Before explaining the development economic stages, the economic development itself should be explained first. There are many definitions of development economic, one definition of economic development is by Joseph Schumpeter. Feldman et al. (2016) described economic development according to Joseph Schumpeter that involves transferring capital from established production methods to new, innovative, productivity-enhancing ways. In Schumpeter's view, economic development is a fundamental transformation of an economy. This includes altering the industrial structure, the educational and occupational characteristics of the population, and indeed the entire social and institutional fabric. Thus, economic development is the means to achieve sustained increases in prosperity and quality of life realized through innovation, lower transaction costs, and the utilization of capabilities toward the responsible production and diffusion of goods and services. In summary, economic development is a qualitative concept that refers to the overall development of the quality of life in a nation, which includes economic growth and typically refers to a structural transformation, mainly of the economy (Perplexity, 2023).
Regarding economic development stages, Gunter (n.d.) stated that economic development stages refer to the different transitions that a country goes through in its economic development process. Even though there is no one universally accepted model of economic development stages, most economists agree that there are a few key stages that all countries go through (Bard, 2023). One common model of economic development stages is the Rostow theory which divides economic growth into the five phases (Jacobs, 2015):
- Traditional Society: this stage is characterized by a subsistent, agricultural-based economy, with intensive labor and low levels of trading, and a population that does not have a scientific perspective on the world and technology.
- Preconditions to Take-off: here, a society begins to develop manufacturing, and a more national/international, as opposed to regional, outlook.
- Take-off: this stage is a short period of intensive growth, in which industrialization begins to occur, and workers and institutions become concentrated around a new industry.
- Drive to Maturity: this phase takes place over a long period of time, as standards of living rise, the use of technology incereases, and the national economy grows and diversifies.
- Age of High Mass Consumption: at the time, Rostow believed that western countries, most notably the United States, occupied this last "developed" stage. Here, a country's economy flourishes in a capitalist system, characterized by mass production and consumerism.
3. Analysis
Krugman's book is relevant to the perspective of different stages of economic development in that it highlights the importance of understanding the complexities of the economy and the differences between running a business and managing a country's economy. Different stages of economic development require other economic policies and strategies. This understanding is crucial for policymakers to develop effective economic policies and strategies that are tailored to the unique needs and challenges of their country's economy at each stage of development.
During the Traditional Society phase until Take-off, the government must understand their country's unique needs, circumstances, and challenges. That country should not be managed like a profit-seeking company. The country's leader must provide basic infrastructure for all citizens due to the lack of the institutional and technological capacity to function like profit-driven companies. Applying business principles to such countries can lead to policies that exacerbate these problems. Governments can play a crucial role in promoting economic growth by investing in public goods such as education, healthcare and agriculture. This is because public goods are often underprovided by the private sector. Meanwhile, these goods can provide a significant boost to economic growth. At the time, the countries needed to prioritize long-term development goals.
In these stages, the government should gradually promote industrialization. This aligns with the transition phase, where countries accumulate more capital and technology for the development of new industries and invest in industries with long-term potential. The result of human capital investment from traditional and preconditions to take-off stages can be seen at least in the take-off period. When industrialization begins and the export-import opens widely, the country's population has enough skills and expertise to enter the world of industry and global competition. From the traditional society to the take-off period, we can see this occurring in developing countries.
After the leave take-off phase, the country will enter the drive to maturity and age of high mass consumption stages. In this stage, the government focuses on improving productivity and competitiveness by investing in research, innovation and technology development. The government may face challenges from advanced economies, including globalization and their roles in the global economy. In this period, it also must address issues like inequality, technological disruption and economic stability. Leaders must ensure that economic advancement can create sufficient jobs for the population. These stages usually occur in developed countries.
