Lecture 2: National Differences in Political Economy

Chapter 2 & 3Differences in National Political

Economy

Charles Hill 10e

What Is A Political Economy?Political economy of a nation - how the

political, economic, and legal systems of a country are interdependentthey interact and influence each

otherthey affect the level of economic

well-being in the nation

What Is A Political Economy?Political system - the system of

government in a nationAssessed according to

the degree to which the country emphasizes collectivism as opposed to individualism

the degree to which the country is democratic or totalitarian

Collectivism and individualism

• Collectivism– Collective goals are more

important than individual goals.

– Individual rights are sacrificed for the good of the majority.

– In the modern world collectivism is expressed

through socialism.

• Individualism– Is the direct opposite

of collectivism.– Central tenet is that

individual economic and political freedoms are the ground rules on which society is based.

How Does Modern-Day Socialism Look? In the early 20th century, socialism split into1. Communism – socialism can only be achieved

through violent revolution and totalitarian dictatorship in retreat worldwide by mid-1990s

2. Social democrats – socialism is achieved through democratic means retreating as many countries move toward free

market economies state-owned enterprises have been

privatized

What Is Democracy?

Democracy - a political system in which government is by the people, exercised either directly or through elected representativesusually associated with individualism pure democracy is based on the belief that citizens

should be directly involved in decision makingmost modern democratic states practice

representative democracy where citizens periodically elect individuals to represent them

Safeguards of Representative Democracy• Individual’s right to freedom of expression, opinion and

organisation.• Free media. • Regular elections.• Limited terms for elected representatives.• A fair court system that is independent from the political

system.• A non-political state bureaucracy.• Non-political force and armed service.• Relatively free access to state information.

What Is The Link Between Political Ideology and Economic Systems?

Political ideology and economic systems are connected

countries that stress individual goals are likely to have market based economies

in countries where state-ownership is common, collective goals are dominant

Case: Indonesia: The Stumbling Giant

• Indonesia is a vast country. Its 221 million people are spread out over some 17 000 islands that span an arc approximately 5150 km long from Sumatra in the west to Irian Jaya in the east.

• Suharto ruled the country for more than 30 years and was famous for ‘crony capitalism’, using his command of the political system to favour the business enterprises of his supporters and family.

• After Suharto, Indonesia quickly moved towards democracy. • However, economic conditions did not show any significant

improvement.• Poor infrastructure, natural calamities and declining private

investment together with bureaucratic red tape and alleged corrupt practices have made the situation even worse.

• What, according to you, are the major problems in Indonesia that are hindering its economic and social progress?

• What are the possible remedies to these problems?

What Is An Economic System? There are three types of economic systems1. Market economies - all productive

activities are privately owned and production is determined by the interaction of supply and demand government encourages free and fair

competition between private producers(Laissez faire)

What Is An Economic System?2. Command economies - government

plans the goods and services that a country produces, the quantity that is produced, and the prices as which they are sold

all businesses are state-owned, and governments allocate resources for “the good of society”

because there is little incentive to control costs and be efficient, command economies tend to stagnate

What Is An Economic System?3. Mixed economies - certain sectors of

the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning

governments tend to own firms that are considered important to national security

What Is A Legal System? Legal system - the rules that regulate

behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained the system in a country is influenced by the

prevailing political system Legal systems are important for business

because they define how business transactions are executed identify the rights and obligations of parties involved

in business transactions

What Are The Different Legal Systems? There are three types of legal systems1.Common law - based on tradition, precedent, and

customUK, -Flexible & Judges have power to interpret law.2.Civic law - based on detailed set of laws organized

into codes80 countries Germany, France, Japan Judges only apply

law based on detailed codes –less flexible3.Theocratic law - law is based on religious

teachingsIslamic law ‘Moral’ but cover commercial law i.e., interest

payment

How Are Contracts Enforced In Different Legal Systems?

Contract - document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved

Contract law is the body of law that governs contract enforcementunder a common law system, contracts tend to be

very detailed with all contingencies spelled outunder a civil law system, contracts tend to be much

shorter and less specific because many issues are already covered in the civil code

How Are Contracts Enforced In Different Legal Systems?

Contract - document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved

Contract law is the body of law that governs contract enforcementunder a common law system, contracts tend to be

very detailed with all contingencies spelled outunder a civil law system, contracts tend to be much

shorter and less specific because many issues are already covered in the civil code

How Are Property Rights And Corruption Related?

Property rights can be violated through1. Private action – theft, piracy, blackmail (Countries

with weak legal system allows higher level of criminal action Russia in 1990s- Protection money –Russian Mafia

2. Public action - legally - excessive taxation or illegally - bribes or blackmailing EFFECT or OUTCOME:high levels of corruption

reduce foreign direct investment, the level of international trade, and the economic growth rate in a country

How Are Property Rights And Corruption Related?

The Foreign Corrupt Practices Act (1970) makes it illegal for U.S. companies to bribe foreign government officials to obtain or maintain business over which that foreign official has authority

facilitating or expediting payments to secure or expedite routine government action are permitted

Which Countries Are Most Corrupt?(Transparency International)

How Can Intellectual Property Be Protected? Intellectual property - property that is the product of

intellectual activity Can be protected using1. Patents – exclusive rights for a defined period to the

manufacture, use, or sale of that invention(chemical formula- for drugs)

2. Copyrights – the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit

3. Trademarks – design and names by which merchants or manufacturers designate and differentiate their products

How Can Intellectual Property Be Protected? Protection of intellectual property rights differs

from country to country World Intellectual Property Organization Paris Convention for the Protection of Industrial Property

(1995- Trade Related Aspects of Intellectual Property Rights TRIPS)

To avoid piracy, firms can stay away from countries where intellectual property

laws are laxfile lawsuitslobby governments for international property rights

agreements and enforcement

What Is Product Safety And Liability?Product safety laws set certain standards to

which a product must adhereProduct liability involves holding a firm and its

officers responsible when a product causes

injury, death, or damage liability laws tend to be less extensive in less

developed nations

How Can Managers Determine A Market’s Overall Attractiveness?

The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that countryOther things being equal, more attractive countries

have democratic political institutions, market based economies, and strong legal systems that protect property rights and limit corruption

What Determines A Country’s Level Of Economic Development

Gross national income (GNI) per person measures the total annual income received by residents of a nation

Japan, Sweden, Switzerland, and the U.S. have high GNI

China and India have low GNI GNI can be misleading because it does not

consider differences in the cost of living

need to adjust GNI figures using purchasing power parity (PPP)

What Determines A Country’s Level Of Economic Development?

Official figures can also be misleading because they do not account for black economy transactions

In addition, GNI and PPP data are static and do not consider economic growth rates

So, while China and India are currently categorized as being poor they are growing more rapidly than many developed nations and are expected to become among the largest economies in the world

How Do Countries Compare On GNI? Economic Data for Select Countries

Country GNI per Capita

2011 ($)

GNI PPP per Capita

2011 ($)

Annual Average GDP Growth Rate,

2002-2011 (%)

Size of the Economy GDP,

2011 ($billions)

Brazil 11,420 10,720 3.78 2,477

China 4,940 8,390 10.59 7,319

Germany 44,230 40,190 1.16 3,601

India 1,420 3,620 7.73 1,873

Japan 44,900 34,670 0.67 5,867

Nigeria 1,280 2,290 6.88 244

Poland 12,380 20,260 4.23 514

Russia 10,650 21,210 4.84 1,858

Switzerland 76,340 52,530 1.81 659

United Kingdom 37,780 35,590 1.58 2,445

United States 48,620 48,620 1.63 14,991

What Determines A Country’s Level Of Economic Development?

The United Nations used Amartya Sen’s ideas to develop the Human Development Index (HDI) which is based on

life expectancy at birth educational attainment whether average incomes are sufficient to meet

the basic needs of life in a country The Human Development Index (HDI) is a comparative measure of

life expectancy, literacy, education, standards of living, and quality of life for countries worldwide

Source: http://hdr.undp.org/en/content/human-development-index-hdi

What Does The Changing Economy Mean For Managers?

Markets that were formerly off-limits to Western business are now openfirms need to explore opportunities in these

markets Despite being underdeveloped and poor, some markets

have huge potential China -1.2 billion people India – 1.1 billion peopleLatin America – 400 million potential consumers

What Does The Changing Economy Mean For Managers?

However, the potential risks are largewill democracy thrive especially in

difficult economic times?will totalitarian regimes return?will a multi-polar world of different

civilizations emerge?will China’s financial system be stable?

What Are The Implications Of Political Economy Differences For Managers?

Countries with democratic regimes, market based economic policies, and strong property rights protection are more likely to have higher sustained rates of economic growth these markets are more attractive to

international businesses the benefits, costs, and risks of doing business

in a country are a function of the country’s political, economic, and legal systems

What Are The Implications Of Political Economy Differences For Managers?

The benefits of doing business in a country are a function of the market’s sizethe purchasing power of its consumerstheir likely future wealth

By identifying and investing early in potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market) and establish loyalty and experience in a country

What Are The Implications Of Political Economy Differences For Managers?

The costs of doing business in a country are a function of itspolitical system

is it necessary to pay bribes to get market access?economic level

are the necessary supporting business and infrastructure in place?

legal systemit can be more costly to do business in countries with

dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights

What Are The Implications Of Political Economy Differences For Managers?

The risks of doing business in a country are a function of Political risk - the likelihood that political forces will

cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise

Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise

Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights

What Are The Implications Of Political Economy Differences For Managers?

The benefits of doing business in a country are a function of the market’s sizethe purchasing power of its consumerstheir likely future wealth

By identifying and investing early in potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market) and establish loyalty and experience in a countryChina

What Are The Implications Of Political Economy Differences For Managers?

The costs of doing business in a country are a function of itspolitical system

is it necessary to pay bribes to get market access?economic level

are the necessary supporting business and infrastructure in place?

legal systemit can be more costly to do business in countries with

dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights

What Are The Implications Of Political Economy Differences For Managers?

The risks of doing business in a country are a function of Political risk - the likelihood that political forces will

cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise

Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise

Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights