CHAPTER-2 NATIONAL DIFFERENCES IN POLITICAL ECONOMY Political system:

Political system refers to the system of government in a nation. Political systems can be assessed according to two related dimensions. The first is the degree to which they emphasize collectivism as opposed to individualism The second dimension is the degree to which they are democratic or totalitarian. Two extreme philosophies: Collectivism $Totalita%ia!& I!"ivi"#alism $Democ%atic&

Collectivism: refers to a political system that emphasizes the primary of collective goals over individual goals. The system values the good of the society rather than individual welfare. Individual rights should be sacrificed and property should be owned in common. I!"ivi"#alism: refers to an ideology that stresses the interest of the individual more than the interest of the state or the society. The ideology is free market economy. Everybody will take care of his private property and thus be most productive rather than being inefficient. o! as a whole! state will progress. Individualism has two basic beliefs:

". #reedom of e$pression! personal freedom and self% e$pression guarantees &. Individuals pursue their own economic interest. 'reat (ritain! weden! oviet )nion formerly believed in collectivism but now they are valuing individualism in their political system. There are two extreme political systems: '( Democ%acy: This refers to a political system in which government is by the people. In *ncient 'reece! citizens were directly involved in decision% making. +ow! most modern democratic states practice representative democracy. ,ere citizens periodically elect individuals to represent them. These elected representatives combined form government and work on behalf of the people. People elect the representatives! who combined forms the government. These representatives function on behalf of people. This system is inspired by the philosophy of individualism. This allows both economic and political freedom. The characteristics of democracy include". Individuals right to freedom of e$pression! opinion and organization. &. * free media .. /egular elections in which all eligible citizens are allowed to vote. 0. )niversal adult suffrage 1. 2imited terms for elected representatives 3. * fair court system that is independent from the political system 4. * non%political state bureaucracy 5. * non%political police force and armed service 6. /elatively free access to state information. E.g. ) * and recently India.

2( Totalita%ia!ism: This is a form of government in which one person or political party e$ercises 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 four ma7or types of totalitarianism'( Comm#!ist totalita%ia!ism: This system believes that totalitarianism can be achieved through dictatorship. 8orldwide communism collapsed since "656. ome countries like 9hina! :ietnam! 2aos! +orth ;orea and 9uba are still run by 9ommunist partys monopoly. 2( T)eoc%atic totalita%ia!ism: )nder this system political power is monopolized by a party! group or individual that governs according to religious principles. E.g. Iran and audi *rabia. *( T%i+al totalita%ia!ism: This occurs when a political party represents the interest of a particular tribe. E.g. *frica ,( Ri-)t-.i!- totalita%ia!ism: This system allows individuals economic freedom but restricts individuals political freedom.

E.g. before 5<s outh ;orea! Taiwan! ingapore! Indonesia and the Philippines were right%wing totalitarianism. These are mostly military governments. /ecent e$ample could be Pakistan.

Eco!omic System
Mi""le Poi!t

Collectivism I!"ivi"#alism

$Comma!" eco!omy& $Ma%0et eco!omy&

$Mi/e" eco!omy&

'( Ma%0et eco!omy: *ll productive activities are private owned rather than state%owned. =uantity of production is not planned. It is determined by the interaction of demand and supply of goods and signaled to producer through the price system. There should not be any restriction on supply because it will create monopoly. 8hen demand of products increase monopolists! instead of increasing the supply! they may restrict output to raise price. This is bad for the consumers. o in market economy governments should encourage competition and should have anti%trust laws that prevent monopoly. ) *! which is one of the largest market economies! has strong anti%trust laws.

2( Comma!" eco!omy: 'overnment plans for the >uantity of goods and services to be produced and also determines the prices. This is inspired by the collectivist philosophy and so values the good of the society. *s a result! all the businesses are state% owned ensuring proper distribution of wealth. E.g. India e$perimented with command economy through e$tensive government planning and state ownership. ,owever! as we know that state ownership can create inefficiency. *s a result economies become stagnant. o the trend of command economy collapsed in the late "65<s.

*( Mi/e" eco!omy: In a mi$ed economy! certain sectors are left to private ownership and free market mechanism while others have significant state ownership. E.g. India! after deregulation! is now e$periencing mi$ed economy. )ntil recently! #rance! (ritain and weden were mi$ed economies. +ow privatization increased significantly and so state ownership reduced. In mi$ed economy! government takes state ownership of troublesome firms to save employment. #or e$ample! /enault! the #rench automobile company! was state owned until recently. 'ovt. took over it to protect the company from serious financial crisis and thereby! prevent unemployment.

Le-al system

2egal system refers to the rules or laws that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained. 2egal system determines the business practice and also the method of transaction. It should also be consistent with the political system. 2ike! collectivist states will develop laws that will restrict private ownership of property and business. 9ontrarily! individualist states will encourage private business through their laws.

Different legal systems: '( Commo! la.s: The common law system is based on tradition! precedent and custom. Tradition countrys legal history

Precedent in the past

reference to cases that appeared on court

9ustom the ways in which laws are applied in specific situation This law is fle$ible. 2aw is interpreted considering the situation. The interpretation of a particular case will be reference point for other similar cases. E.g. 'reat (ritains former colonies follow this law. 2ike! India! (angladesh. 2( Civil la.s: This law is based on a very detailed set of laws organized into codes. This law is not fle$ible and there is no scope for interpretation. ?udges do not have the power to interpret law rather they are given power to apply the law. E.g. @ore than 5< countries! including 'ermany! #rance! ?apan and /ussia operate under civil law. *( T)eoc%atic la.: This law system is based on religious teaching. E.g. Islamic countries like! audi *rabia follow Islamic law.

The impact of the legal system on business

Di11e%e!ces i! co!t%act la. 9ontract law is the body of law that governs contract enforcement. 9ommon law and civil law have different approaches to contract law. 9ommon law is ill specified. o contract under common law system needs to be detailed as the common law does not cover specific situations. o designing contract in common law system can be difficult.

9ontracts under civil law may not need details as laws cover most of the specifications of different situation. 9ontrarily! common law is fle$ible and thus allows 7udges to interpret a contract in light of the prevailing situation. Problem arises when two parties! one follow common law and another civil law. In such cases! most countries settle through negotiation. There is a specialized court for such settlement! the International 9ourt of *rbitration of the International 9hamber of 9ommerce. P%o2e%ty %i-)ts 2egal rights over the use to which resource is put and over the use made of any income that may be derived from that resource. *lmost all countries have laws to protect properties. ,owever! the enforcement of law varies. Property rights can be violated in two ways P%ivate actio!: This could be theft! blackmail! piracy by individual or groups. P#+lic actio!: uch violation occurs when public officials! such as politicians and government bureaucrats! pressurize for income or resources from private properties. 2ike! - E$cessive ta$ - E$pensive license or permits from property holders - Taking assets under state ownership without compensating. These are all legal means but there are illegal ways to violate property rights through corruption. #or e$ample! uharto! the e$%president of Indonesia! was famous for asking bribes from foreign business wishing to set up operations in Indonesia. ,igh level of corruption discourages #AI.

#oreign 9orrupt Practices *ct was passed in ) * which prevents all ) @+9s to bribe local government to win lucrative contracts. ,owever! the law allows facilitating or e$patiating payments to secure the performance of routine governmental action. o bribes used to obtain or maintain the business is prohibited but that to facilitate or speed up the routine tasks of govt. officials is allowed. T)e 2%otectio! o1 i!tellect#al 2%o2e%ty Intellectual property is established through patents! copyrights and trademarks. In todays high%tech knowledge economy! intellectual property has become one of the key sources of competitive advantage. o both domestic and foreign firms should be given appropriate protection to their IP. IP protection rewards peopleBbusiness for their creativity. E.g. Pharmaceuticals. P%o"#ct sa1ety a!" 2%o"#ct lia+ility Product safety laws set certain safety standards to which a product must adhere. Product liability involves holding a firm and its officers responsible when a product causes death! in7ury or damage. These liability laws are stronger and more e$pensive in western countries than in 2A9s. #or e$ample! in ) *! business is e$pensive due to high e$pense of liability insurance. The ethical dilemma for @+9s is whether to follow home country liability rules and standards or to e$ploit the rela$ed laws of 2A9s.

T)e "ete%mi!a!t o1 eco!omic "evelo2me!t

 Di11e%e!ces i! eco!omic "evelo2me!t Aifferent countries have economic development. dramatically different levels of

'+I C'ross +ational IncomeD 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. 2iving cost needs to be considered along with '+I. E.g. '+I per capita of ) * is E.054< and witzerland is E.364< but the living cost of ) * in low. o the residents of ) * can afford better living standard than witzerland. '+I per capita does not measure whether the economy is growing. To measure that! we need to consider 'AP C'ross Aomestic ProductD and its growth rate. 3%oa"e% co!ce2tio!s o1 "evelo2me!t: Ama%tya Se! The view of Ama%tya Se!: - Aevelopment should be assessed less by material output measures such as '+I per capita and more by the capabilities and opportunities that people en7oy. - Aevelopment means ensuring real freedom of people through ". &. .. 0. /emoving impediments to freedom /emoving poverty /emoving social deprivation Ensuring public facilities for all

- Aevelopment is not only economic freedom but also political freedom. To succeed in this countries need democratization. - #rom his thesis ,uman Aevelopment Inde$ C,AID was derived. ,AI calculates three factors ". 2ife e$pectancy at birth Cfunction of health careD

&. Educational attainment Ccombination of adult literacy rate and enrollment in primary! secondary and tertiary educationD .. 8hether average incomes enable people to afford basic needs of life. Political eco!omy a!" eco!omic 2%o-%ess The relationship of political economy and economic progress is defined using three factors I!!ovatio! a!" e!t%e2%e!e#%s)i2 a%e t)e e!-i!es o1 -%o.t)

Innovation and entrepreneurship activity ensure long term economic growth. The economic growth of ) * is the reflection of innovative firms like @icrosoft! Aell 9omputers. I!!ovatio! a!" e!t%e2%e!e#%s)i2 %e4#i%e a ma%0et eco!omy

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 mi$ed economy all or most sectors are state% owned. o entrepreneurship spirit is often not appreciated.

I!!ovatio! a!" 2%o2e%ty %i-)ts

e!t%e2%e!e#%s)i2

%e4#i%e

st%o!-

To promote innovation and entrepreneurship providing property right is necessary. Ftherwise! business will in risk that the profit may be taken by criminal activity or by the state.

tate can take the money through e$cessive ta$ or through corruption. T)e %e4#i%e" 2olitical system

#ree market economy with strict protection for property rights. ,owever! democracy is not always the key to economic growth. Totalitarian regimes that ensured strong property rights and free market economy have observed economic growth. E.g. four fastest growing economies of past .< years G outh ;orea! Taiwan! ingapore and ,ong ;ong were under totalitarian regime. * dictator government committed towards free market and development can also ensure economic growth.

T)e !at#%e o1 eco!omic t%a!s1o%matio! To form a market%based economy number of steps needs to be entailed De%e-#latio!: Aeregulation involves removing legal restrictions to

- #ree play of markets Cremoving price controls and price set by the demand and supply of marketsD - Establishment of private enterprises and - The manner in which private enterprises operate - /ela$ing or removing restrictions on #AI by foreign enterprises and international trade. E.g. India is a mi$ed economy and now going through gradual deregulation. P%ivati5atio!:

It goes hand in hand with deregulation. Privatization means transferring the ownership of state property into hands of private individuals! fre>uently by sale of state assets through auction. E.g. (angladesh Cneed to findD 'overnment has to ensure that privatization does not lead to another monopoly.

Ma!a-e%ial Im2licatio!

The attractiveness of a country as a market depends on long% term '( 3e!e1its: This includeH - The size of the market - Present and future wealth of the consumers E.g. in "63< outh ;orea was viewed as 7ust another improvised Third 8orld nation. (y &<<< it was worlds "& th largest economy measured in terms of 'AP. 9ountrys economic system and property rights regime are reasonably good predictors of economic prospects. #or e$ample! 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. 2( Costs: 9ost of doing business depends on a number of political! economic and legal factors. Political: 9ost increases if - Fnly politically powerful people are allowed to do business. - +eed to pay bribes Eco!omic: if the country is economically under developed! then it lacks proper infrastructure and support for doing business. E.g. @cAonalds in @oscow had to build up vertically integrated supply chain as the poultry and vegetables produced in /ussia are of poor >uality. Le-al: If the legal system of a country is strong! then cost of doing business will be more. #or e$ample! due to different product safety standards and other legal obligations cost of doing business is high in ) *. *( Ris0s Political %is0: political risk tends to be higher in countries e$periencing social unrest and disorder. ocial unrest is usually e$pressed through strikes! demonstrations! terrorism and violent conflict. *ll these hamper business activities. Eco!omic %is0: Economic mismanagement can adversely affect profit and other goals of business. E.g. *sian crisis. Le-al %is0: 2egal risk means the likelihood that a trading partner will opportunistically break a contract or e$propriate

property rights. Investors may hesitate to invest in 7oint ventures if legal risk is high.

T)e e!"