Mod 2 -Political Economy

Fourth Edition

InternationalBusiness

National Difference

s in Political Economy

India

• The economic, legal& political systems are interdependent

• Politicians write the laws that help to shape economic activity in a nation state, and politicians like everybody are influenced by the prevailing culture or cultures of their nation.

Focus

The term Political Economy is used to stressthat the political, economic, and legal systems of a country are not independent of each other.

Review these systems and explore how differences in political economy influence the benefits, costs, and risks associated with doing business in different countries.

Political Systems“The system of government in a nation.”

Collectivism: A political system that stresses the primacy of

collective goals over individual goals.Advocated by Plato in the “Republic”.In modern times, the Socialists advocate

Collectivism.Socialism:

Trace intellectual roots to Karl Marx.Argued that the pay of workers does not reflect

the full value of their labor.Advocated state ownership of production,

distribution, and exchange (businesses), thereby ensuring that workers were fully compensated for their labor.

Communists:Socialism is achieved through violent revolution.

Social Democrats:Socialism is achieved through

democratic means.

Two Approaches

Political Systems

Individualism: Opposite of Collectivism. Individual should have freedom in political and economic

pursuits. Advocated by Aristotle.

Private property is more highly productive than communal property and will thus stimulate progress.

Revived during the 16th century in England and the Netherlands.

Hume (1711-1776) Adam Smith (1723-1790) John Stuart Mill (1806-1873)

Embodied in the U.S. Declaration of Independence.

“The system of government in a nation.”

Two tenets: An emphasis on the importance of guaranteeing individual freedom and self-expression. The welfare of society is best served by letting people pursue their own economic self-interest, as opposed to some collective body (government) dictating what is in society’s best interest.

Individualism advocates: Democratic political systems. Free market economics.

Democracy and Totalitarianism• Democracy

– Government by the people, exercised either directly or through elected representatives.

• Totalitarianism– Government in

which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited.

Democracy• Safeguards to protect a democracy:

– Right to freedom of expression, opinion, and organization.

– A free media.– Regular elections in which all eligible citizens

are allowed to vote.– Universal adult suffrage.– Limited terms for elected representatives.– A fair court system independent of the

political system.– A nonpolitical state bureaucracy.– A nonpolitical police force and armed service.– Relatively free access to state information.

Totalitarianism• 4 major forms:

– Communism• Collectivism is achieved through total

dictatorship• eg., China, Cuba, Vietnam,Laos,North Korea

– Theocratic• Political power is influenced by religious

principles. Islamic countries

– Tribal• A political party representing the interests of

a particular tribe monopolizes power.• Zimbabwe, Tanzania, Uganda and Kenya

– Right-wing• Generally permits individual economic

freedom, but restricts political freedom to prevent the rise of communism.

• Sometimes backed by military • Military officers government• The fascism in Germany & Italy

Economic Systems• Market Economy:

– All productive activities are privately owned.

• Command Economy:– Goods and services produced, their

quantity, and prices are determined by the government.

– Consistent with the collectivist ideology– Govt can always direct the companies

investing in the best interest of the nation– Historically, this command economy is found

in communist countries– Some elements of command economy are

also evident in socialist economies

• Mixed Economy:– Parts of the economy are left to

private ownership and free market mechanisms while other sectors are state-owned and have government planning.

– India has a mixed economy, Great Britain ,France, Sweden

Legal Systems

• Immense importance to international business

• A country’s laws regulate business practice, define the manner in which it can be conducted

• Difference in legal system can always affect the attractiveness of a country for investment

Rules, or laws, that regulate behavior and the processes by which laws are enforced

and grievances redressed.

• Legal system is also influenced by the prevailing political system

• Collectivist oriented government would restrict the private owned enterprises.

• Individualistic government would favor the private enterprise and consumerism

• There are different types of legal systems;• Common Law, Civil Law, Theocratic Law

Common Law

• Evolved in England over 100 year ago• Based on Tradition, precedent & custom• Tradition refers to country’s legal history• Precedent to cases that have come before

the court in the past• Custom to the ways in which laws are

applied in specific situations • Each new interpretations set a precedent

that can be followed in the future

Civil Law

• Based on very detailed set of laws organized into codes

• More than 80 countries operate with civil law• A civil law is less adversarial than the

common law because judges rely upon detailed legal codes

• Judges here have les flexibility than the common law because they only have power to apply the law not to interpret the law

Theocratic Law

• Law is based on religious teachings

• Islamic law is the widely practiced theocratic laws

• Kuran & Sunnah are the foundation of theocratic laws

• Primarily concerned with the moral behavior

• Has been extended to cover certain commercial activities

• Acceptance of interest is seen as a great sin

Contract Law

• Body of law that governs the contract enforcement

• Very detailed , all contingencies mentioned and spelled out

• International dispute handled by United Nations Convention on Contracts for the International Sale of Goods (CISG)

• International Court of arbitration of the International Chambers of Commerce in Paris

• Property Rights: the legal rights over the use of a resource and the income derived from it.

• Property refers to a resource over which an individual or business holds a legal title, i.e., a resource is owned

• Countries differ significantly in the extent to which their legal system protect the property rights

• Property rights can be violated in two ways:– Private Action:

• Theft, piracy, blackmail and the like by private individuals and groups.

• Russian Mafia

– Public Action and Corruption:• Violation of property rights by public officials, such as

politicians and government officials, by extorting income or resources from property holders.

• By levying excessive taxation, expensive licenses from the property holders, taking asset into state ownership without compensating the property holders

Country Corruption Rankings 2000

0

2

4

6

8

10Fin

land

Sin

gapo

re

Sw

itze

rlan

d

U.S

.A.

Jap

an

Chi

na

Indo

nesi

a

Ranking

Canada

U.K

.

Aust

ralia

France

Gre

ece

Russ

ia

Nig

eri

a

10=Highly clean 0=Totally corrupt

Figure 2.1

Protection of Intellectual Property

• Property that is the product of intellectual activity.– Patent: through exclusive use rights, it

protects the inventor of a product for a certain period of time.

– Copyright: Gives exclusive rights to authors, composers, playwrights and artists to publish and dispense their work.

– Trademark: Officially registered designs and names that protect owners product designations.

• Piracy remains a significant problem in international business.

Software Piracy by Region

0

10

20

30

40

50

60

70

N.A

mer

.

W.E

urop

e

Asi

a/Pa

cifi

c

L.A

mer

.

Mid

Eas

t/A

fric

a

E.E

urop

e

1999

2000

2000 Avg.

Figure 2.2

Software Piracy Losses by Region 2000

3% 7%

37%

27%

26% Mid East Af rica

Latin Amer.

Asia/ Pacifi c

W. Europe

N. Amer.

Figure 2.3

Product Safety and Product Liability

• Product Safety:– Safety standards to which a product

must adhere.

• Product Liability:– Civil and criminal penalties if

standards are not met.– Civil law results in fine– Criminal law results in imprisonments

Product Standards and Ethical Dilemmas

StrongProduct

Standards

WeakProduct

Standards

Contracts

• Common Law– Evolved in England– Based on:

• Tradition• Precedent• Custom

– United States

• Contracts tend to be long

• Civil Law– ‘Code Napoleon’– Detailed set of laws

organized into ‘Codes’.

– Europe– Russia– Japan– 80 countries

• Short contracts

Differences in Economic Development

• Gross National Product (GNP)– Common yardstick for measuring

economic activity.• Measures total value of goods and services

produced annually.

– Doesn’t consider the differences in costs of living.

• Purchasing Power Parity.– Uses U.S. cost of living for basis of

adjustment among countries.

Both givea static picture ofdevelopment

PPP Index and GNP Data for Selected Countries 2000

Country GNP/ Capita PPP/ Capita GNP Growth Rate (%) 90-99

Brazil $3,570 $7,320 3.0

China 840 3,940 10.7 Germany 25,050 25,101 1.3

I ndia 460 2,390 6.0 J apan 34,210 26,460 1.3 Nigeria 260 790 2.4

Poland 4,200 9,030 4.5 Russia 1,660 8,030 - 6.1

Switzerland 38,120 24,970 0.6 United Kingdom 24,500 23,550 2.5 United States 34,260 34,260 3.3

Table 2.1

Amartya Sen• Measure development by

capabilities and opportunities people enjoy.– Requires removal of:

• Poverty• Tyranny• Poor economic opportunities• Systemic social deprivation• Neglect of public facilities• Intolerance of repressive states

• U.N.’s Human Development Index– Based on:

• Life expectancy at birth• Educational attainment• Whether average income is

sufficient

Political Economy and Economic Development

Innovation and Entrepreneurship are Engines of Growth

Innovation and Entrepreneurship Require a Market Economy

Innovation and Entrepreneurship Require Strong Property Rights

Economic Progress Begets Democracy

What kind of political system?

Geography, Education and Economic Development

“..that throughout history, coastal states, with their longengagements in international trade, have been more supportive of market institutions than landlocked states,which have tended to organize themselves as hierarchical(and often military) societies. Mountainous states, as a result of physical isolation, have often neglected market-based trade. Temperate climes have generally supported higher densities of population and thus more extensivedivision of labor than tropical regions.”

Jeffrey SachsHarvard University

The general assertion is thatnations that invest more ineducation will have highergrowth rates because an educated population is a moreproductive population.

States in Transition

Two Trends

Democratic Revolutions

Decline in Centrally Plannedand Mixed Economies

Spread of DemocracyWhy?

1. Totalitarian regimes failed to deliver economic progress to the vast bulk of their populations.2. New information and communications technologies, Internet, have broken down the ability of the state to control access to uncensored information. 3. Economic advances of the last quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms.

Fukuyama

There is no “universal” civilization based on widespread acceptance of Western liberal democratic ideals.

Clash of Civilizations

The spread of Market-Based Systems

Shift

Centrally Planned

Economies

Mixed Economies

Market – Based

Economies

The Nature of Economic Transformation

The shift to market-based economies entails:

Deregulation Removal of legal restrictions to free

markets.Privatization

Transfer of state ownership of property into private hands.

Legal Systems Creation of systems to protect property

rights.

Implications for Business

• Attractiveness• Benefits

– First-mover advantages

– Late-mover disadvantages

• Costs

• Risks– Political

– Economic

– Legal

• Ethics– Human rights

– Regulations

– Corruption• Foreign Corrupt

Practices Act