Chapter 2: National Differences in Political Economy

1. Chapter 2:National Differences in Political Economy MGT 372 Lecture By: Ms. Adina Malik (ALK)

2. Political System • Political system refers to the system of government in a nation. The political system of a country shapes its economic and legal system. • The political economy of 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 • It differs in 2 degrees: 1. degree to which they emphasize collectivism as oppose to individualism 2. degree to which a nation is democratic as oppose to totalitarian

3. Political System: Collectivism • Collectivism: refers to an ideology that stresses the importance of collective goals over individual goals. The system values ‘the needs of the society’as a whole rather than ‘individual freedoms’. • Emphasize on ‘the good of the society’ or to ‘the common good’. • Individual rights should be sacrificed for the good of the majority and property should be owned in common. • Examples: Japan, China.

4. Political System: Individualism • Individualism:refers to an ideology that stresses the interest of the individual more than the interest of the state or the society. • It emphasizes that an individual should have freedom in his or her economic and political pursuit. • Private property is more highly productive than communal property and will thus stimulate progress. Individualism has two central principles: • Guaranteeing individual freedom and self-expression • Letting individual pursue their own economic self-interest Examples: Great Britain and Sweden formerly believed in collectivism but now they are valuing individualism in their political system.

5. Political System: Democracy • Democracy: refers to a political system in which government is by the people, exercised either directly or through elected representatives • usually associated with individualism. This system allows both economic and political freedom. • pure democracy is based on the belief that citizens should be directly involved in decision making • most modern democratic states practice representative democracywhere citizens periodically elect individuals to represent them. These representatives function on behalf of the people

6. Political System: Democracy • Some characteristics of a democratic nation are: • Freedom of rights to express • Freedom of media • Regular elections in which all eligible citizens are allowed to vote • Universal adult suffrage (right to vote) • Limited terms for elected representatives • A fair court system that is independent from the political system • A non political state bureaucracy (administrative policy-making group) • Relatively free access to information • Non political police and armed force • Example:USA, Germany, Japan, Australia, Finland, France, India.

7. Political System: Totalitarianism • Totalitarianism: This is a form of government in which one person or political party exercises absolute control over all spheres of human life and opposition party is prohibited. This system is inspired by the philosophy of collectivism.The characteristics of democracy are absent. There are 4 forms of Totalitarianism • Theocratic Totalitarianism:when a group or individual governs as per religious principles monopolizes power. • Example: Saudi Arabia, Iran. • These states limit freedom of political and religious expression with laws based on Islamic principles.

8. Political System: Totalitarianism • Communist Totalitarianism: This system believes that totalitarianism can be achieved through dictatorship. • Communist parties monopolizes power. • Totalitarian states deny many basic civil liberties to their population. • Communism is in decline worldwide. • Example: North Korea, Cuba, China, Laos, Vietnam; Venezuela under the government of Hugo Chavez

9. Political System: Totalitarianism • Tribal Totalitarianism: when a political party represents the interests of a particular tribe monopolizes powered. • Example: This has arisen from time to time in African countries such as Zimbabwe, Tanzania, Uganda & Kenya. • Right-wing Totalitarianism:it permits some individual economic freedoms but restricts individual political freedom. They are against communism and is mainly backed by militaries. • Example:Before 80s South Korea, Taiwan, Singapore, Indonesia and the Philippines were right-wing totalitarianism. These are mostly military governments. Recent example could be Pakistan.

10. Economic System There are 3 types of Economic System: • Market Economy:all productions are privately owned, the goods/services are not planned by anybody but by the supply-demand theory. Monopoly must not exists in this economic system. Government encourages free and fair competition between private producers. (Anti trust laws in the USA) • Example: Japan, USA, Sweden, Colombia, Mexico

11. Economic System • Command Economy:Govt plans the quantity and price of good/services to produce within. All business are state owned. The objective is to mobilize economic recourses for public good. But the scope of efficiency is very low under this system. • Example: Cuba, Venezuela, People's Republic of China, Vietnam. • Mixed Economy:when some sectors of economy are privately owned and some are publicly depending on the nature of the sector and govt takes over companies when they run into severe financial problems to save them from being bankrupt. (Renault in France & AIG of America) • Example: Australia, USA, Great Britain, France, Spain, Italy, etc.

12. Legal System • TheLegal system of a country refers to the rules or laws that regulate behavior along with the processes by which the laws are enforced and through which remedy for injustices are obtained. • The legal system of a country is of immense importance to international business. Legal system determines the business practice and also the method of transaction. • It should also be consistent with the political system. Like, collectivist states will develop laws that will restrict private ownership of property and business. Contrarily, individualist states will encourage private business through their laws.

13. Legal System • Common Law:TheCommon Law system evolved in England over hundreds of years ago. It is based on traditions(a country’s legal history), precedents(cases in the past) and customs(how laws are applied in specific situations). • Judges in a common law system have the power to interpret the law so that it applies to the unique circumstance of a case (flexibility). As new precedent arises, law might be altered, clarified or amended to deal with new situations. • Example:USA, UK, Australia, etc.

14. Legal System • Civil Law:Law is based on detailed set of rules organized into codes. The judges under this law system don't have the right to interpret but to apply only (less flexibility compared to Common Law). Example: Germany, France, Russia, Japan, etc. • Theocratic Law:here law is based on religious teachings. Example: Saudi Arabia, Pakistan (Islamic Law). Islamic Financial Institutions are found in Pakistan, Bangladesh, Egypt, Malaysia, etc.

15. Differences In Contract Law • A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved • Contract lawis the body of law that governs contract enforcement. • Under a common law system, contracts tend to be very detailed with all contingencies spelled out • Under a civil law system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code • Many countries have ratified the United Nations Convention on Contracts for the International Sale of Goods (CIGS) which establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between buyers and sellers who have their places of business in different nations

16. Economic Growth & Economic Development • Economic growth is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP • Economic development is the sustained, concerted actions of policy makers and communities that promote the standard of living and economic health of a specific area. Economic development can also be referred to as the quantitative and qualitative changes in the economy. Such actions can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and other initiatives.

17. Economic Growth & Economic Development • Economic growth is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP • Economic development is the sustained, concerted actions of policy makers and communities that promote the standard of living and economic health of a specific area. Economic development can also be referred to as the quantitative and qualitative changes in the economy. Such actions can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and other initiatives.

18. The Determinants of Economic Development • Different countries have dramatically different levels of economic development. • GNI (Gross National Income) is regarded as the yardstick for measuring the economic development of a country as it measures the total annual income received by the residents of a nation. • However, living cost needs to be considered along with GNI. E.g. GNI per capita of USA is $46,040 and Switzerland is $59,880 (2007) but the living cost of USA is low. So the residents of USA can afford better living standard than Switzerland. • GNI per capita does not measure whether the economy is growing. To measure that, we need to consider PPP (Purchasing Power Parity) and its growth rate. • PPP asks how much money would be needed to purchase the same goods and services in two countries.

19. AmartyaSen

20. Broader conceptions of development: AmartyaSen • Development should be assessed less by material output measures such as GNI per capita and more by the capabilities and opportunitiesthat people enjoy. • Development means ensuring real freedom of people through: • Removing impediments to freedom • Removing poverty, as well as, tyranny • Removing social deprivation • Ensuring public facilities for all • Development is not only economic freedom but also political freedom. To succeed in this countries need ‘democratization’.

21. Broader conceptions of development: AmartyaSen • From his thesis Human Development Index (HDI) was derived. HDI calculates three factors: • Life expectancy at birth (function of health care) • Educational attainment (combination of adult literacy rate and enrollment in primary, secondary and tertiary education) • Whether average incomes enable people to afford basic needs of life (adequate food, shelter, health care) • High HDI: 0.8 and above (up to 1) • Medium HDI: 0.5 to 0.8 • Low HDI: less than 0.5 In 2012, HDI Rank for Bangladesh is 146 and HDI of Bangladesh was 0.515. It was 0.433 in 2000.

22. Human Development Index

23. Political Economy and Economic Progress i) Innovation and entrepreneurship are the engines of growth: Innovation and entrepreneurship activity ensure long term economic growth. The economic growth of USA is the reflection of innovative firms like Microsoft, Dell Computers. ii) Innovation and entrepreneurship require a market economy • To ensure innovation and entrepreneurship economic freedom is necessary which can only be ensured through market economy. • In a market economy, any individual who has an innovative idea are free to try to make money out of that idea through business. • In planned or mixed economy all or most sectors are state-owned. So entrepreneurship spirit is often not appreciated.

24. Political Economy and Economic Progress iii)Innovation and entrepreneurship require strong property rights: To promote innovation and entrepreneurship providing property right is necessary. Otherwise, business will be in risk that the profit may be taken by criminal activity or by the state. State can take the money through excessive tax or through corruption.

25. The Required Political System • Free market economy with strict protection for property rights is required first. However, democracy is not always the key to economic growth. • Totalitarian regimes that ensured strong property rights and free market economy have observed economic growth. • Example: four fastest growing economies of past 30 years – South Korea, Taiwan, Singapore and Hong Kong were under totalitarian regime. • A dictator government committed towards free market and development can also ensure economic growth.

26. The nature of Economic Transformation To form a market-based economy number of steps needs to be entailed: Deregulation: Deregulation involves removing legal restrictions to • Free play of markets (removing price controls and price set by the demand and supply of markets) • Establishment of private enterprises • The manner in which private enterprises operate • Relaxing or removing restrictions on FDI by foreign enterprises and international trade.  • Example: India is a mixed economy and now going through gradual deregulation.

27. The nature of Economic Transformation Privatization: • It goes hand in hand with deregulation. • Privatization means transferring the ownership of state property into hands of private individuals, frequently by sale of state assets through auction. • Example:Since the establishment of the Privatization Board in 1993 and thereafter the Privatization Commission in 2000, 74 state owned enterprises (SOEs) have been privatized in Bangladesh. • SOEs privatized till date:Mymensingh Jute Mills Ltd., Madaripur Textile Mills, Kohinoor Spinning Mills, Dhaka Vegetable Oil, Berger Paints Bangladesh Ltd., Siemens Bangladesh Ltd., Sylhet Pulp and Paper Mills, Ujala Match Factory Ltd., etc.

28. Managerial Implications The attractiveness of a country as a market depends on long-term: 1. Benefits: • This include; • The size of the market • Present and future wealth of the consumers  • E.g. in 1960 South Korea was viewed as just another improvised Third World nation. By 2000 it was world’s 12th largest economy measured in terms of GDP. • Country’s economic system and property rights regime are reasonably good predictors of economic prospects. For example, countries with market economy in which property rights are protected tend to achieve greater economic growth rates than command economies and economies where property rights are not well protected.

29. Managerial Implications 2. Costs: Cost of doing business depends on a number of political, economic and legal factors. • Political:Cost increases if • Only politically powerful people are allowed to do business. • Need to pay bribe • Economic:if the country is economically under developed, then it lacks proper infrastructure and support for doing business. • Example:McDonalds in Moscow had to build up vertically integrated backward supply chain as the quality of poultry and vegetables produced in Russia was poor. • Legal:If the legal system of a country is strong, then cost of doing business will be more.

30. Managerial Implications 3. Risks • Political risk:political risk tends to be higher in countries experiencing social unrest and disorder. Social unrest is usually expressed through strikes, demonstrations, terrorism and violent conflict. All these hamper business activities. • Economic risk:Economic mismanagement can adversely affect profit and other goals of business (Inflation, Bankruptcy). Example:South East Asian crisis ( Indonesia, Thailand, South Korea in 1997-1998) • Legal risk:Legal risk means the likelihood that a trading partner will opportunistically break a contract or expropriate property rights. Investors may hesitate to invest in joint ventures if legal risk is high. Example: Coca-Cola, IBM in India

31. Benefits Size of Economy Likely Economic Growth Costs Corruption Lack of Infrastructure Legal Costs Overall Attractiveness Risks Political Risks: Social unrest/Anti-business trends Economic Risks: Economic mismanagement Legal Risks: Failure to safeguard property rights