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National Differences in Political Economy

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Title: National Differences in Political Economy


1
Chapter Two
  • National Differences in Political Economy

2
Political Economy
  • Political Economy is the study of the political,
    economic, and legal systems of countries and
    their consequences
  • These systems are interdependent they interact
    and influence each other, and
  • in doing so they affect the level of economic
    well-being

3
Political, economic, and legal systems today are
built on
  • the culture on each individual nation and
  • economic political theories of Adam Smith, David
    Ricardo, and other northern Europeans of the 18th
    and 19th centuries
  • Even when leaders dont believe in those
    theories, they are pressured to follow rules of
    organizations like the World Trade Organization
    that are based on them.

4
Political Systems
  • System of government in a nation
  • It provides the written rules of the game that
    should allow the people of the nation to
  • govern themselves
  • work together
  • the political and legal institutions

5
To do business, you must understand the rules
  • Political, economic, and legal rules
  • differ significantly among developed Western
    democracies
  • differ more between West and Japan
  • differ much more between the West and developing
    countries

6
  • Sometimes there are no agreed rules to say
    whether what you want is OK

7
2 dimensions of difference
  • In principle, political systems as they are
    designed can be assessed according to two
    dimensions
  • Degree to which they emphasize collectivism as
    opposed to individualism
  • Degree to which they are democratic or
    totalitarian

8
Collectivism and Individualism
  • Collectivism
  • Collective goals are more important than
    individual goals
  • Individual rights are sacrificed for the good of
    the majority
  • In the modern world collectivism is expressed
    through socialism
  • Individualism
  • Is the direct opposite of collectivism
  • Central tenet is that individual economic and
    political freedoms are the ground rules on which
    society is based

9
The driving principles of the international
system
  • come from individualist thinkers like Smith,
    Ricardo, and John Stuart Mill
  • But that does not mean that collectivism cannot
    be successful in international business
  • Japanese and Chinese firms have had important
    successes with collectivist approaches
  • Toyota
  • Matsushita Electric

10
  • But today collectivists do not have well
    developed theory like individualists

11
Democracy versus totalitarianism
  • Democracy
  • Government is by the people, exercised either
    directly or through elected representatives
    (representative democracy)
  • Elected representatives are held accountable
    through safeguards
  • Totalitarianism
  • One person/party exercises absolute control over
    all spheres of human life (competing political
    parties are banned)
  • Communist totalitarianism
  • Theocratic totalitarianism
  • Tribal totalitarianism
  • Right wing totalitarianism

12
Safeguards of Successful Representative Democracy
  • Individuals right to freedom of expression,
    opinion and organization
  • Free media
  • Regular elections
  • Adult suffrage
  • Limited terms for elected representatives
  • A fair court system that is independent from the
    political system
  • A non-political state bureaucracy
  • Non-political force and armed service
  • Relatively free access to state information

Return
13
In all of todays rich countries, these
safeguards exist
  • They are part of the national culture

14
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 want
  • People dont follow the rules (take bribes, etc.)
  • Even in some rich countries (Japan), the rules
    may tilt in favor of local people

15
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16
Economic Systems
  • Market economy what is produced in what
    quantity is determined by supply/demand and
    signaled to producers through a price system
  • Hong Kong is closest
  • Command economy planned by government
  • rare today North Korea, Cuba
  • Mixed economy a balance of both of the above
  • most countries, but degree of mixture varies

17
Economic Systems
  • Connection between political ideology and
    economic systems
  • In countries where individual goals are given
    primacy free market economic systems are
    fostered
  • Countries where collective goals are given
    primacy there is marked state control of markets

18
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19
Legal Systems
  • Rules - laws and processes that enforce them -
    regulating behavior
  • Processes through which laws are enforced
    grievances are redressed

20
Property Rights
  • A bundle of legal rights over the use to which a
    resource is put and over the use made of any
    income from that resource
  • Can be violated through
  • Private action (e.g., theft)
  • Public (government) action
  • Corruption

21
Property Rights and Corruption
  • Rankings of Corruption by Country 2007

22
Contract Law
  • Contracts specify conditions under which an
    exchange is to occur
  • Detail rights and obligations of parties
  • Contract law is the body of law that enforces a
    contract
  • Dispute resolution is often complex
  • Where to arbitrate and whose laws apply?
  • Validity of contracts and decisions
  • Role of United Nations Convention on Contracts
    for the International Sale of Goods (CIGS)

23
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24
Manage your relationship with people in power
  • Work with political decision-makers, if possible
  • Lobbying is often inevitable
  • directly
  • through multi-firm organizations (e.g., the
    U.S.-China Business Council)
  • Show decision-makers it is in their interests to
    work with you
  • IMPORTANT Avoid appearance of improper
    influence

25
Some institutional challenges
26
Foreign Corrupt Practices Act
  • An act passed by U.S. Congress in the 1970s after
    revelations that U.S. companies had bribed
    foreign government officials to win lucrative
    contracts (Lockheed selling airplanes)
  • This law makes it illegal to bribe a foreign
    official in order to obtain or maintain business
  • The act allows facilitating or expediting
    payments to secure the performance of a routine
    governmental action

27
Intellectual Property Rights
  • Intellectual property refers to property that is
    the product of intellectual activity
  • Intellectual property laws are believed very
    important stimulus to innovation and creative
    work
  • Protection of intellectual property rights varies
    greatly from country to country

28
Piracy of Intellectual Property
29
Product Safety and Liability
  • Product safety laws set safety standards for
    products and manufacturing processes
  • Product liability laws hold the firm and its
    officers responsible for product safety standards
  • Criminal laws/ civil liability laws
  • Civil laws call for payment and monetary damages
  • Criminal liability laws result in fines or
    imprisonment
  • Laws differ radically from country to country

30
Managerial Implications
  • The political, economic, and legal environment of
    a country (and its culture) clearly influences
    the attractiveness of that country as a market
    and/or investment site
  • You have to plan how you will address the
    differences between your system and the ones you
    go into.
  • Political, economic, and legal systems of a
    country raise important ethical issues for
    international business

31
Attractiveness
Return
32
Political risks
  • The danger that political forces will cause
    changes in a countrys environment that will
    directly and adversely affect the profit and
    other goals of a business
  • Refers to changes that alter the firms position
    in the economy
  • Also includes risks of any political surprises
  • i.e., bribery was common, but you didnt know
    that when you went in.

33
Economic risks
  • The likelihood that macroeconomic events,
    including economic mismanagement, will cause
    drastic changesin a countrys economic
    environment such as
  • a decline in per capita GNI or
  • an increase in inflation
  • that adversely affect all businesses ability
    to achieve profits and other goals.

34
Homework assignment 1
35
The homework task
  • Pick one company that operates internationally
  • Many people will be able to do this easily
  • If you need help, flip through issues of Fortune
    or Economist magazine
  • List at least 3 countries where the firm operates
  • Its OK to guess

36
  • Describe at least five political or economic
    risks the firm faces in these countries
  • tell which are political and which are economic
  • Include at least
  • 2 political risks
  • 1 economic risk
  • Plan on writing at least one sentence about each
    risk to describe it
  • Its OK if the risks all come from 1 country

37
  • You dont have to write a lot to get a good
    grade
  • But you do have to describe 5 risks clearly and
    accurately
  • Students who get less than C- will be required to
    re-write

38
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39
Differences in Economic Development
  • Different countries have dramatically different
    levels of economic development

40
  • Two common measurements of economic development
  • Gross National Income (GNI)
  • superseded Gross National Product or GNP
  • the sum of all income received by residents of a
    nation
  • Gross National Income at Purchasing Power Parity
    (PPP) which accounts for differences in the cost
    of living

41
Differences in Economic Development
  • GNI per Capita, 2006

42
Differences in Economic Development
  • GNI PPP per Capita, 2006

43
Differences in Economic Development
  • Growth Rate in GDP per Capita, 1997 - 2006

44
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 nations
  • Based on life expectancy, educational attainment,
    and GNI at PPP average incomes

45
Broader Conceptions of Development Amartya Sen
46
Political Economy and Economic Progress
  • It has been argued that a nations economic
    development is a function of its economic and
    political systems
  • Innovation and Entrepreneurship are the engines
    of growth
  • Innovation and Entrepreneurship require amarket
    economy
  • Innovation and Entrepreneurship require strong
    property rights
  • Economic progress begets democracy

47
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48
States in Transition
  • The political economy of the world has changed
    radically since the late 1980s
  • Two trends
  • A wave of democratic revolutions swept the world
  • There has been a strong move away from centrally
    planned and mixed economies toward a free market
    model

49
The Spread of Democracy
50
The Spread of Democracy
  • Three main reasons account for the spread of
    democracy
  • Totalitarian regimes failed to deliver economic
    progress
  • New 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
    information
  • The economic advances of the past quarter century
    have led to the emergence of increasingly
    prosperous middle and working classes who have
    pushed for democratic reforms

51
The Spread of Market-Based Systems
52
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53
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54
The Nature of Economic Transformation
  • Deregulation
  • Removal of legal restriction to the free play of
    market systems
  • Allowing establishment and operations of private
    enterprises
  • Privatization
  • Transfer of ownership of state owned enterprise
    to private individuals
  • Legal systems
  • Laws that support a market economy

55
Economic risk
  • The likelihood that events, including economic
    mismanagement, will cause drastic changesin a
    countrys business environment that adversely
    affect the profit and other goals of a business

56
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57
  • Material in slides below here is not required

58
The New World Order and Global Terrorism
  • We may be witnessing . . . the end of history as
    such that is, the end point of mankinds
    ideological evolution and the universalization of
    Western liberal democracy as the final form of
    human government.
  • Francis Fukuyama. The End of History. The
    National Interest
  • 16 (Summer 1989) 18.

59
The New World Order and Global Terrorism
  • The Islamic resurgence is both a product of and
    an effort to come to grips with modernization.
    Its underlying causes are those generally
    responsible for indigenization trends in
    non-Western societies urbanization, social
    mobilization, higher levels of literacy and
    education, intensified communication and media
    consumption, and expanded interaction with
    Western and other cultures. These developments
    undermine traditional village and clan ties and
    create alienation and an identity crisis.
    Islamist symbols, commitments, and beliefs meet
    these psychological needs, and Islamist welfare
    organizations, the social, cultural, and economic
    needs of Muslims caught in the process of
    modernization. Muslims feel a need to return to
    Islamic ideas, practices, and institutions to
    provide the compass and the motor of
    modernization.
  • Huntington. The Clash of Civilizations and the
    Remaking of World Order.
  • New York Simon Schuster, 1996.

60
The New World Order and Global Terrorism
61
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62
Socialism
Socialist ideology is split into 2 broad camps
  • Communism
  • Communists believe that socialism can only be
    achieved through violent revolution and
    totalitarian dictatorship
  • Social Democracy
  • Marxist roots. State owned enterprises run for
    public good rather than private profit

Return
63
Communist Totalitarianism
  • Advocates that socialism can be achieved only
    through totalitarian dictatorship
  • Has been in decline worldwide since 1989
  • Communist Totalitarian states deny many basic
    civil liberties to their populations
  • Exceptions to this trend are China, Vietnam,
    Laos, North Korea, and Cuba

Return
64
Theocratic Totalitarianism
  • Found in states where political power is
    monopolized by a party, group, or individual that
    governs according to religious principles
  • Most common form of theocratic totalitarianism is
    based on Islam
  • State limits freedom of political and religious
    expression while the laws of the state are based
    on Islamic principles

Return
65
Tribal Totalitarianism
  • Tribal totalitarianism occurs when a political
    party that represents the interests of a
    particular tribe (and not always the majority
    tribe) monopolizes power
  • Tribal totalitarianism has arisen from time to
    time in African countries such as Zimbabwe,
    Tanzania, Uganda, and Kenya

Return
66
Right Wing Totalitarianism
  • Generally permits some individual economic
    freedom but restricts individual political
    freedom, frequently on the grounds that it would
    lead to the rise of communism
  • Many right-wing totalitarian governments are
    backed by the military, and in some cases the
    government may be made up of military officers
  • Since the early 1980s this form of government has
    been in retreat

Return
67
Differences in types of legal systems
  • Common law systems (based on tradition/precedent)
  • United States
  • United Kingdom
  • Civil law (rules of business are part of the
    countries written code)
  • Germany
  • France
  • Japan
  • Theocratic law (based on religious precepts)
  • Sudan
  • Much law in Pakistan

3-14
68
Common Law
  • Evolved in England over hundreds of years
  • Based upon tradition, precedent, and custom
  • Judges have the power to interpret the law so
    that it applies to the unique circumstances of an
    individual case

69
Civil Law
  • Based upon a very detailed set of laws organized
    into codes
  • Courts interpret civil law with regard to codes
  • More than 80 countries operate with a civil law
    system these include Germany, France, Japan, and
    Russia
  • Judges have less flexibility than those in a
    common law system

70
Theocratic Law
  • Based upon religious teachings
  • Islamic law is the most widely practiced
    theocratic legal system in the modern world,
    although both Hindu and Jewish law are still
    practiced
  • Based upon moral behavior
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