2 Our political economy topics… Political-economic systems of the developed worldWays of classifying, analyzing political systemsWays of classifying, analyzing economic systemsLegal systemsThe corruption problemLevels of economic developmentThe spread of freedom, democracy, and marketsManaging your relationship with governmentPortions (c) McGraw-Hill Companies Inc.
3 We complain about government and politics… But the U.S. and other developed countries have important safeguards in their constitutionsPortions (c) McGraw-Hill Companies Inc.
4 Safeguards of Successful Representative Democracy Individual’s right to freedom of expression, opinion and organizationFree mediaRegular electionsAdult suffrageLimited terms for elected representativesA fair court system that is independent from the political systemA non-political state bureaucracyNon-political force and armed serviceRelatively free access to state informationLast slide presented, sept Start class talking about OECD.Portions (c) McGraw-Hill Companies Inc.
5 The rich countries almost all belong to a group called the Organization for Economic Cooperation and Development (OECD)To join, a country must be guaranteeing these rights to its peoplePortions (c) McGraw-Hill Companies Inc.
6 Business benefits in mature democracy Constitutions limit what government can takeand what other changes governments can makeLegal systems enforce contractsbetween businesspeoplebetween businesspeople and customersPortions (c) McGraw-Hill Companies Inc.
7 Political systems…provide the written “rules of the game” (institutions) in a nation that allow people togovern themselves andwork togetherTo do business, you have to know the rulesSometimes …the written rules aren’t followedthere are no agreed rules to say whether what you want is OKPortions (c) McGraw-Hill Companies Inc.
8 2 key dimensions of difference Political systems as they are designed can be assessed according to two dimensionsDegree to which they are democratic or totalitarianDegree to which they emphasize individualism as opposed to collectivismThese dimensions are interrelated; systems that emphasize collectivism tend toward totalitarian, while systems that place a high value on individualism tend to be democratic. However, a large gray area exists in the middle. It is possible to have democratic societies that emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian societies that are not collectivist.Portions (c) McGraw-Hill Companies Inc.
9 Democracy versus totalitarianism Government is by the people, exercised either directly or through elected representatives (representative democracy)Elected representatives are held accountable through safeguardsTotalitarianismOne person/party exercises absolute control over all spheres of human life (competing political parties are banned)Communist totalitarianismTheocratic totalitarianismTribal totalitarianismRight wing totalitarianismDemocracy and totalitarianism are at different ends of a continuum with many shades in between.Portions (c) McGraw-Hill Companies Inc.
10 Collectivism and Individualism Central tenet is that individual economic and political freedoms are the ground rules on which society is basedIs the direct opposite of collectivismCollectivismCollective goals are more important than individual goalsIndividual rights are sacrificed for the good of the majorityIn the modern world collectivism is expressed through socialismThe term collectivism refers to a political system that stresses the primacy of collective goals over individual goals. When collectivism is emphasized, the needs of society as a whole are generally viewed as being more important than individual freedoms. In such circumstances, an individual’s right to do something may be restricted on the grounds that it runs counter to “the good of society” or to “the common good.” Advocacy of collectivism can be traced to the ancient Greek philosopher Plato (427–347 BC), who in The Republic argued that individual rights should be sacrificed for the good of the majority and that property should be owned in common.Individualism is built on two central tenets. The first is an emphasis on the importance of guaranteeing individual freedom and self-expression. As John Stuart Mill put it,The sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number is self-protection The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.... The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.The second tenet of individualism is that the welfare of society is best served by letting people pursue their own economic self-interest, as opposed to some collective body (such as government) dictating what is in society’s best interest [i] J. S. Mill, On Liberty (London: Longman’s, 1865), p. 6.Portions (c) McGraw-Hill Companies Inc.
11 But government’s official principles don’t tell everything Perhaps we should have an additional classification of political systemsMore mature (e.g., the rich countries’ systems – usually)Less mature (many systems in poorer countries)Are some of the rich countries turning their systems into less mature ones?Portions (c) McGraw-Hill Companies Inc.
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13 Classifying Economic Systems Market economy: what is produced & in what quantity is determined by supply/demand and signaled to producers through a price systemHong Kong is closestCommand economy: planned by governmentrare today – North Korea, CubaMixed economy: a balance of both of the abovemost countries, but degree of mixture variesPortions (c) McGraw-Hill Companies Inc.
14 Individualism vs. Collectivism in Economic Systems There is a connection between political ideology and economic systemsIn countries where individual goals are given primacy free market economic systems are fosteredCountries where collective goals are given primacy there is marked state control of marketsPortions (c) McGraw-Hill Companies Inc.
15 In any new country, consider whether rules are real Many poor countries have what used to be called a “soft state”Powerful people can break or change the rules when they wantPeople don’t follow the rules (take bribes, etc.)Even in many rich countries (Japan), the rules may tilt in favor of local peoplePortions (c) McGraw-Hill Companies Inc.
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17 Legal SystemsRules, laws, and processes that enforce them regulate behaviorProcesses through which grievances are addressedAll countries have legal systems, but they may work very differentlyThe legal system of a country is of immense importance to international business. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. Like the economic system of a country, the legal system is influenced by the prevailing political system (although it is also strongly influenced by historical tradition). The government of a country defines the legal framework within which firms do business—and often the laws that regulate business reflect the rulers’ dominant political ideology.
18 Property RightsA bundle of legal rights over the use to which a resource is put and over the use made of any income from that resourceCan be violated throughPrivate action (e.g., theft)Public (government) actionCorruptionPrivate action refers to theft, piracy, blackmail, and the like by private individuals or groups. While theft occurs in all countries, a weak legal system allows for a much higher level of criminal action in some than in others.Public action to violate property rights occurs when public officials, such as politicians and government bureaucrats, extort income, resources, or the property itself from property holders. This can be done through legal mechanisms such as levying excessive taxation, requiring expensive licenses or permits from property holders, taking assets into state ownership without compensating the owners, or redistributing assets without compensating the prior owners. It can also be done through illegal means, or corruption, by demanding bribes from businesses in return for the rights to operate in a country, industry, or location.Portions (c) McGraw-Hill Companies Inc.
19 Contract LawContracts specify conditions under which an exchange is to occurDetail rights and obligations of partiesContract law is the body of law that enforces a contractDispute resolution is often complexWhere to sue, where to arbitrate - whose laws apply?Validity of contracts and decisionsThe United Nations has a Convention on Contracts for the International Sale of Goods (CIGS)Because common law tends to be relatively ill specified, contracts drafted under a common law framework tend to be very detailed with all contingencies spelled out. In civil law systems, however, contracts tend to be much shorter and less specific because many of the issues typically covered in a common law contract are already covered in a civil code. Thus, it is more expensive to draw up contracts in a common law jurisdiction, and resolving contract disputes can be a very adversarial process in common law systems. But, common law systems have the advantage of greater flexibility and allow for judges to interpret a contract dispute in light of the prevailing situation. International businesses need to be sensitive to these differences; approaching a contract dispute in a state with a civil law system as if it had a common law system may backfire (and vice versa).Portions (c) McGraw-Hill Companies Inc.
20 Intellectual Property Rights Intellectual property refers to property that is the product of intellectual activityIntellectual property laws are believed very important stimulus to innovation and creative workProtection of intellectual property rights varies greatly from country to countryThere are international rules, and the U.S. is struggling to get them enforcedOwnership rights over intellectual property are established through patents, copyrights, and trademarks. A patent grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarks are designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their productsPortions (c) McGraw-Hill Companies Inc.
21 Piracy of Intellectual Property Portions (c) McGraw-Hill Companies Inc.
22 Product Safety and Liability Product safety laws set safety standards for products and manufacturing processesProduct liability laws hold the firm and its officers responsible for product safety standardsEnvironmental standards limit pollution etc.Laws differ radically from country to countryPortions (c) McGraw-Hill Companies Inc.
23 Portions (c) 2007-2013 McGraw-Hill Companies Inc.
24 The ‘corruption’ problem Many (most?) traditional codes of behavior require people to do things that in developed countries are called ‘corruption’For example, in most traditional societies, a key obligation is taking care of your extended familyBut doing this often contradicts laws of both capitalist and socialist societiesTransparency International produces good measures of corruption for nationsPortions (c) McGraw-Hill Companies Inc.
25 Which Countries Are Most Corrupt? Rankings of Corruption by Country 2010Country Focus on Corruption in Nigeria describes the corruption that has characterized Nigeria’s economy over the last 40 years. When the country initially gained its independence from Britain in 1960, expectations were high that Nigeria would become an economic heavyweight in Africa. With abundant natural resources and a large population, it seemed the stage was set for success. However, despite earnings of more than $300 billion from oil sales during the period 1970 to 2000, the country still suffered from extreme poverty, illiteracy, and high debt. Several factors have been blamed for Nigeria’s troubles including political instability and corruption.
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27 Differences in Economic Development Different countries have dramatically different levels of economic development
28 Two common measurements of economic development Gross National Income (GNI)superseded Gross National Product or GNPthe sum of all income received by residents of a nationGross National Income at Purchasing Power Parity (PPP), which accounts for differences in the cost of living
29 To estimate how big a market a country is, look at GNI U.S. GNI for 2011 was $15.2 trillion.China’s GNI was $7.3 trillion.India’s was $1.9 trillion.Portions (c) McGraw-Hill Companies Inc.
30 To gauge how rich the country is, look at GNI per capita Large GNI does not prove a country is richChina has the second highest GNI in the world, but many of its people are very poorGNI per capita is GNI per head: Total GNI divided by populationThis is called “nominal” GNI per capita because it is not adjusted for price differencesU.S. “nominal” GNI per capita in 2011 was $48,328China’s nominal GNI per capita was $5,417India’s nominal GNI per capita was $1,514Portions (c) McGraw-Hill Companies Inc.
31 Differences in Economic Development GNI per Capita, 2006
32 The single best measure of the wealth of the people of a country is GNI per capita at purchasing power parity (GNI PPP)Agencies calculating GNI at purchasing power parity take GNI and population calculated by governmentsThen they make an adjustment based on price indexes for different countriesPortions (c) McGraw-Hill Companies Inc.
33 Differences in Economic Development GNI PPP per Capita, 2006
34 Differences in Economic Development Growth Rate in GDP per Capita,
35 Broader Conceptions of Development: Amartya Sen Sen says development should be measured less by material output measures, such as GNP per capita, and more by the capabilities and opportunities that people enjoy.His Human Development Index (HDI) measures quality of life in different nationsBased on life expectancy, educational attainment, and GNI at PPP average incomesThe Nobel Prize-winning economist Amartya Sen has argued that development should be assessed less by material output measures such as GNI per capita and more by the capabilities and opportunities that people enjoy. According to Sen, development should be seen as a process of expanding the real freedoms that people experience. Hence, development requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as the intolerance of repressive states. In Sen’s view, development is not just an economic process, but it is a political one too, and to succeed requires the “democratization” of political communities to give citizens a voice in the important decisions made for the community.
36 Broader Conceptions of Development: Amartya Sen Map 2.4 – The Human Development Index, p. 65
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38 States in TransitionThe political economy of the world has changed radically since the late 1980’sTwo trendsA wave of democratic revolutions swept the worldThere has been a strong move away from centrally planned and mixed economies toward a free market model
39 The Spread of Democracy Map 2.5 – Political Freedom, 2004, p. 69
40 The Spread of Democracy Three main reasons account for the spread of democracyTotalitarian regimes failed to deliver economic progressNew information and communication technologies, including shortwave radio, satellite television, fax machines, desktop publishing, and most importantly, the Internet, have broken down the ability of the state to control access to informationThe economic advances of the past quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reformsEven though democracy is advancing it is important to remind students that democracy is still rare in large parts of the world. In sub-Saharan Africa in 2004, only 11 countries are considered free, 21 are partly free, and 16 are not free. Among the 27 post-Communist countries in Eastern and Central Europe, 8 are still not electoral democracies and Freedom House classifies only 12 of these states as free (primarily in Eastern Europe). And there is only one partial democracy among the 16 Arabic states of the Middle East and North Africa, Iraq, where foreign occupiers are imposing a democratic system.
41 The Spread of Market-Based Systems Paralleling the spread of democracy since the 1980s has been the transformation from centrally planned command economies to market-based economies. The rationale for economic transformation has been the same the world over. In general, command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems. Economic freedom does not necessarily equate with political freedom, as detailed in Map 2.6. For example, 3 of the top 16 states in the Heritage Foundation index, Hong Kong, Singapore, and Bahrain, cannot be classified as politically free. Hong Kong was reabsorbed into Communist China in 1997, and the first thing Beijing did was shut down Hong Kong’s freely elected legislature. (Map 2.6 – Distribution of Economic Freedom, 2005, p. 73)
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43 What does this mean for businesspeople? Political economy often tells you how attractive a country is for businessWhen operating in a country, understand the political economic situation to knowwhat you can do in the countryhow to address political problemsYou have to plan how you’ll address the differences between your home system and the ones you enterYou will face major ethical issuesPortions (c) McGraw-Hill Companies Inc.
44 Political risksPolitical risk is the danger that political forces will cause drastic changes or unexpected behaviors in a country that adversely affect profit or other business goals.Many kinds of change can alter a business’ position in a country.Portions (c) McGraw-Hill Companies Inc.
46 The homework task Pick one company that operates internationally Many people will be able to do this easilyIf you need help, flip through issues of Fortune or Economist magazine, look at or check out the Wall St. Journal or NY Times (or their web pages)List at least 3 countries where the firm operatesIt’s OK to guess
47 Describe at least five political risks the firm faces in these countries Plan on writing at least one sentence about each risk to describe itIt’s OK if the risks all come from 1 countryBut include a diverse group of risks
48 You don’t have to write a lot to get a good grade But you do have to describe 5 risks clearly and accuratelyStudents who get less than C- will be required to re-write