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Political Environment and Economic Systems

C hapter One. Political Environment and Economic Systems. ECONOMIC SYSTEMS. Capitalism: Adam Smith & The Wealth of Nations (1776) Communism: Karl Marx & Das Kapital (1886) Mixed Economy. The Free Market of Adam Smith.

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Political Environment and Economic Systems

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  1. Justin Paul : Business Environment Chapter One Political Environment and Economic Systems

  2. Justin Paul : Business Environment ECONOMIC SYSTEMS • Capitalism: Adam Smith & The Wealth of Nations (1776) • Communism: Karl Marx & Das Kapital (1886) • Mixed Economy

  3. Justin Paul : Business Environment The Free Market of Adam Smith “The uniform, constant and uninterrupted effort of every man, to better his own condition, the principle from which national and public as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.” - Adam Smith

  4. Justin Paul : Business Environment How Does This Happen? Buyers and sellers negotiate prices in a free market and carry out transactions of buying and selling that leave all parties mutually better off.

  5. Justin Paul : Business Environment Capitalism • System based on Free market • Capital: owned by a minority of individuals • Private Property rights: legal right to use this capital for private gain • Market system (Supply & Demand factors) • To determine distribution of goods & services • To allocate resources • To establish income levels, wages, rents & profits • Govt. Role is limited • Ex: USA, UK etc.

  6. Justin Paul : Business Environment A Startling Idea Economic order can emerge as the unintended consequence of the actions of many people, each seeking his own interest. -Milton Friedman

  7. Justin Paul : Business Environment CommunismAccording to Marx • The natural evolution of communism after capitalism • State owns all factors of production and distribution. Ex: Cuba • The workers reap the profits from their labor rather than subsistence wages

  8. Justin Paul : Business Environment Question? • Why did the people of the United States choose markets as the means to organize economic activity?

  9. Justin Paul : Business Environment MIXED ECONOMY • India’s experience since the First Five Year Plan • Equal importance to private and public sector. However, major factors of production and distribution are owned and managed by the state. • Success or Failure?…Debatable issue Ex: India, France and Holland

  10. Justin Paul : Business Environment Absolute Poverty: Measured as total number living below a specified min level of real income/poverty line(people who are unable to satisfy basic needs) POVERTY

  11. Justin Paul : Business Environment Human Poverty Index (HPI) • UNDP HPI measures poverty in terms of 3 deprivations-of life(percentage of people unlikely to live beyond 40 years),of basic education(as measured by % of adults who are illiterate), & of overall economic provisioning(% of people without access to health services & safe water+% of under-weight children under 5) [Source:HD report 2001, UNDP]

  12. Justin Paul : Business Environment Poverty characteristics • Rural Poverty, Women & Poverty, Ethnic Poverty • Rural Poor as % of population is 79%(India), 80%(Malaysia), 37% (Mexico), 96%(Kenya). • Women make up majority of world’s poor. • Minority ethnic groups are poor (Latin America etc.

  13. Justin Paul : Business Environment INCOME DISTRIBUTION AND PLANNING - POLICY OPTIONS 1. Altering the distribution of income to change factor prices (eg: relative price of labor, ensuring min.wages) 2. Progressive Distribution of Asset Ownership (Classic case: Land reforms): Purpose is to transform tenant cultivators into small holders who will then have incentive to raise production and improve their income.

  14. Justin Paul : Business Environment INCOME DISTRIBUTION AND PLANNING - POLICY OPTIONS 3. Reducing income distribution at the Upper levels through progressive income and wealth taxes (Rich required to pay larger % of their income in taxes than poor and high indirect taxes on cigarettes and beer) 4. Direct Transfer Payments & Public Provision of Goods and services (Ex: Public Distribution system in India). Subsidies for farmers, Pension and policies to keep price of essential foodstuffs low.

  15. Justin Paul : Business Environment INDIAN SCENARIO The impact of planning strategy of the last 2 decades on social sector indicate significant improvements - yet, there is need to improve the quality of life. Govt expenditure for social services has more than doubled from Rs.11,631 crore in 95-96 to Rs.35,478 in 03-04. As per the Planning commission estimates, there was a significant decline in proportion of people living below poverty line, from 51.3% (77-78) to 26.1% (99-00).

  16. Justin Paul : Business Environment COUNTRY CASES Cases: US & CANADA INDIA & POLAND CUBA & VIETNAM

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