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Chapter 2

National Differencesin Political Economy

Copyri ght 2011 by the McGraw-H il l Companies, Inc. All ri ghts reserved.McGraw-Hill/Irwin

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What Is A Political Economy?

The political economyof a nation refers to

how the political, economic, and legal

systems of a country are interdependent

they interact and influence each other

they affect the level of economic well-being in

the nation

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What Is A Political System?

Political systemrefers to the system of

government in a nation

Assessed according to

the degree to which the country emphasizes

collectivism as opposed to individualism

the degree to which the country is democratic

or totalitarian

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SOCIALISM

Socialism

Modern socialists trace their roots to KarlMarx

advocated state ownership of the basic meansof production, distribution, and exchange

the state then manages the enterprises for thebenefit of society as whole

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How Does Modern-Day

Socialism Look? In the early 20thcentury, socialism split into

1. Communismsocialism can only be achievedthrough violent revolution and totalitarian

dictatorship in retreat worldwide by mid-1990s

2. Social democratssocialism is achieved throughdemocratic means

retreating as many countries move toward free marketeconomies

state-owned enterprises have been privatized

Many state-owned enterprises failed to succeed, and today,many nations are implementing privatizationprogramswhereby state-owned enterprises to private investors

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What Is Individualism?

Individualism refers to philosophy that an

individual should have freedom in his own

economic and political pursuits

can be traced to Greek philosopher, Aristotle (384-322BC), who argued that individual diversity and private

ownership are desirable

individual economic and political freedoms are the

ground rules on which a society should be based implies democratic political systems and free market

economies

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What Is Democracy?

Democracyrefers to a political system in which

government is by the people, exercised either

directly or through elected representatives

usually associated with individualismpure democracy is based on the belief that citizens

should be directly involved in decision making

most modern democratic states practice

representative democracywhere citizens periodicallyelect individuals to represent them

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What Is Totalitarianism?

Totalitarianismis a form of government in which oneperson or political party exercises absolute control overall spheres of human life and prohibits opposing politicalparties

1. Communist totalitarianismfound in states where thecommunist party monopolizes power

2. Theocratic totalitarianism- found in states where politicalpower is monopolized by a party, group, or individual thatgoverns according to religious principles

3. Tribaltotalitarianism- found in states where a political partythat represents the interests of a particular tribe monopolizespower

4. Right-wing totalitarianism- permits some individual economicfreedom, but restricts individual political freedom

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Economic Systems

Political ideology and economic systems are

connected

There are three types of economic systems: the

market economy, the command economy, and themixed economy

A free market system is likely in countries where

individual goals are given primacy over collective

goals

State-owned enterprises and restricted markets

are common in countries where collective goals

are dominant

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Economic System

There are three types of economic systems:1. Market economies

In a pure market economy all productiveactivities are privately owned and productionis determined by the interaction of supply anddemand

Consumers, through their purchases,determine what is produced and in whatquantity

The role of government is to encourage freeand fair competition between privateproducers

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Economic System3. Mixed economies

A mixed economyincludes some elements ofa market economy and some elements of acommand economy

certain sectors of the economy are left toprivate ownership and free marketmechanisms while other sectors havesignificant state ownership and government

planning governments tend to own firms that are

considered important to national security

- eg: French government took over Renault (automobilecompany) during financial problem to save company from

bankruptcy and unemployment problem.2-13

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What Is A Legal System?

The legal systemof a country refers to the rulesthat regulate behavior along with the processesby which the laws are enforced and throughwhich redress for grievances is obtained

There are three types of legal systems

1. Common law

2. Civic law

3. Theocratic law

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Different Legal Systems

There are three main types of legal systems:

1. Common law- based on tradition, precedent, and

custom

found in most of Great Britains former colonies,

including the United States

2. Civil law- based on a very detailed set of laws organized

into codes

found in over 80 countries, including Germany, France,

Japan, and Russia

3. Theocratic law- based on religious teachings

Islamic law is the most widely practiced

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How Are Contracts Enforced In

Different Legal Systems? A contractis a document that specifies the conditions under which an

exchange is to occur and details the rights and obligations of theparties involved

Contract lawis the body of law that governs contract enforcement

Under a common law system, contracts tend to be very detailed withall contingencies spelled out

Under a civil law system, contracts tend to be much shorter and lessspecific because many issues are already covered in the civil code

Many countries have ratified the United Nations Convention onContracts for the International Sale of Goods (CIGS)whichestablishes a uniform set of rules governing certain aspects of themaking and performance of everyday commercial contracts betweenbuyers and sellers who have their places of business in differentnations

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How Are Property Rights

And Corruption Related? Property rights refer to the legal rights over the use to

which a resource is put and over the use made of anyincome that may be derived from that resource

Can be violated through

1. Private actiontheft, piracy, blackmail2. Public action - legally - ex. excessive taxation or illegally - ex.

bribes or blackmailing

high levels of corruption reduce foreign direct investment, the levelof international trade, and the economic growth rate in a country

The Foreign Corrupt Practices Actmakes it illegal forU.S. companies to bribe foreign government officials toobtain or maintain business over which that foreignofficial has authority

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Which Countries Are

Most Corrupt?Rankings of Corruption by Country 2008

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How Can Intellectual

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

intellectual activity

Can be protected using

1. Patentsexclusive rights for a defined period to the

manufacture, use, or sale of that invention2. Copyrightsthe exclusive legal rights of authors,

composers, playwrights, artists, and publishers to publishand disperse their work as they see fit

3. Trademarksdesign and names by which merchants ormanufacturers designate and differentiate their products

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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-

agreement signed by 170 countries to protect intellectualproperty rights

Trade Related Aspects of Intellectual Property Rights(TRIPS) - requires WTO members to grant and enforce patentslasting at least 20 years and copyrights lasting 50 years

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

lax

file lawsuits

lobby governments for international property rights

agreements and enforcement

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What Is Product Safety

And Liability?

Product safety lawsset certain standards towhich a product must adhere

Product liabilityinvolves holding a firm and its

officers responsible when a product causes injury,death, or damage

When product safety laws are stricter in a firmshome country than in a foreign country, or when

liability laws are more lax, the firm has to decidewhether to adhere to home country or hostcountry standards

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What Determines A Countrys Level

Of Economic Development?

Two ways to measure levels of economic developmentare

1. Gross national income (GNI)per person of population

2. Purchasing power parity (PPP)involves adjusting GNI

by purchasing power GNI and PPP data provide a static picture of

development & also important to consider growth rates.

Nobel-prize winner Amartya Sen argues economicdevelopment should be seen as a process of expanding

the real freedoms that people experience the removal of major impediments to freedom like

poverty, tyranny, and neglect of public facilities

the presence of basic health care and basic education

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What Determines A Countrys Level

Of Economic Development?

The United Nations used Sens 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

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How Do Countries Compare on

Economic Development?Economic Data for Select Countries

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How Does Political Economy

Influence Economic Progress?

Innovation and entrepreneurship are the engines

of long-run economic growth

Innovation and entrepreneurship require a

market economy and strong property rightsDemocratic regimes are probably more conducive

to long-term economic growth than dictatorships,

even the benevolent kind

Subsequent economic growth leads to the

establishment of democratic regimes

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How Do Geography And Education

Influence Economic Development?

Countries with favorable geography are

more likely to engage in trade, and so, be

more open to market-based economic

systems, and the economic growth theypromote

Countries that invest in education have

higher growth rates because the workforceis more productive

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How Is The Political

Economy Changing? Since the late 1980s, two trends have emerged

1. Democratic revolution (late 1980s and early 1990s) many totalitarian regimes failed to deliver economic progress to

the vast bulk of their populations

new information and communication technologies have brokendown the ability of the state to control access to uncensoredinformation

economic advances of the last 25 years have led to increasinglyprosperous middle and working classes who have pushed fordemocratic reforms

2. A move away from centrally planned and mixedeconomies more countries have shifted toward the market-based model

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How Free Are

Countries Politically?Political Freedom in 2008

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How Free Are

Countries Economically?Distribution of Economic Freedom in 2008

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What Is The Nature Of

Economic Transformation?

The shift toward a market-based systeminvolves

deregulationremoving legal restrictions to

the free play of markets, the establishment ofprivate enterprises, and the manner in whichprivate enterprises operate

privatization-transfers the ownership of state

property into the hands of private investorsthe creation of a legal systemto safeguard

property rights