Lecture 2: National Differences in

Political Economy

Chapter 2 & 3
Differences in National Political
Economy
Charles Hill 10e

What Is A Political Economy?

Political economy of a nation - 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

What Is A Political Economy?

Political system - the system of
government in a nation
Assessed according to
the degree to which the country
emphasizes collectivism as opposed to

individualism
the degree to which the country is

democratic or totalitarian

Collectivism and individualism

Collectivism

Individualism
Collective goals are more
Is the direct opposite
important than individual
goals.
Individual rights are

sacrificed for the good

of the majority.
In the modern world
collectivism is expressed
through

socialism.

of collectivism.
Central tenet is that

individual economic
and political
freedoms are the
ground rules on which
society is based.

How Does Modern-Day Socialism Look?

In the early 20th century, socialism split into

1. Communism socialism can only be achieved
through violent revolution and totalitarian
dictatorship
in retreat worldwide by mid-1990s
2. Social democrats socialism is achieved

through democratic means

retreating as many countries move toward free

market economies
state-owned enterprises have been

privatized

What Is Democracy?

Democracy - a political system in which

government is by the people, exercised either
directly or through elected representatives
usually associated with individualism
pure democracy is based on the belief that citizens
should be directly involved in decision making
most modern democratic states practice
representative democracy where citizens
periodically elect individuals to represent them

Safeguards of Representative Democracy

Individuals right to freedom of expression, opinion and
organisation.

Free media.
Regular elections.
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.

What Is The Link Between Political Ideology

and Economic Systems?
Political ideology and economic systems
are connected
countries that stress individual
are likely to have market based

goals

economies
in countries where state-ownership is
common, collective goals are
dominant

Case: Indonesia:
The Stumbling
Giant
Indonesia is a vast country. Its 221 million people are spread out over
some 17 000 islands that span an arc approximately 5150 km long from
Sumatra in the west to Irian Jaya in the east.

Suharto ruled the country for more than 30 years and was famous for
crony capitalism, using his command of the political system to favour
the business enterprises of his supporters and family.
After Suharto, Indonesia quickly moved
However, economic conditions did
improvement.

towards democracy.
not

show

any

significant

Poor infrastructure, natural calamities and declining private

investment together with bureaucratic red tape and alleged corrupt
practices have made the situation even worse.

 What, according to you, are the major problems in

Indonesia that are hindering its economic and social progress?
What are the possible

remedies to these problems?

What Is An Economic System?

There are three types of economic systems

1. Market economies - all productive

activities are privately owned and
production is determined by the
interaction of supply and demand
government encourages free and fair
competition between private
producers(Laissez faire)

What Is An Economic System?

2. Command economies - government
plans the goods and services that a country
produces, the quantity that is produced, and

the prices as which they are sold

all businesses are state-owned, and
governments allocate resources for the

good of society

because there is little incentive to control

costs and be efficient, command
economies tend to stagnate

What Is An Economic System?

3. Mixed economies - certain sectors of
the economy are left to private

ownership and free market

mechanisms while other sectors have
significant state ownership and
government planning
governments tend to own firms that are
considered important to national

security

What Is A Legal System?

Legal system - the rules that regulate

behavior along with the processes by which the laws

are enforced and through which redress for
grievances is obtained
the system in a country is influenced by the

prevailing political system

Legal systems are important for business

because they
define how business transactions are executed
identify the rights and obligations of parties involved
in business transactions

What Are The Different Legal Systems?

There are three types of legal systems
1.Common law - based on tradition, precedent, and

custom
UK, -Flexible & Judges have power to interpret law.
2.Civic law - based on detailed set of laws organized
into codes
80 countries Germany, France, Japan Judges only apply
law based on detailed codes less flexible
3.Theocratic law - law is based on religious
teachings
Islamic law Moral but cover commercial law i.e., interest
payment

How Are Contracts Enforced In Different

Legal Systems?
Contract - document that specifies the conditions
under which an exchange is to occur and details
the rights and obligations of the parties involved
Contract law is 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

How Are Contracts Enforced In Different

Legal Systems?
Contract - document that specifies the conditions
under which an exchange is to occur and details
the rights and obligations of the parties involved
Contract law is 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

How Are Property Rights And Corruption

Related?
Property rights can be violated through
1. Private action theft, piracy, blackmail (Countries
with weak legal system allows higher level of criminal
action Russia in 1990s- Protection money Russian
Mafia

2. Public action - legally - excessive taxation or

illegally - bribes or blackmailing
EFFECT or OUTCOME:high levels of corruption
reduce foreign direct investment, the level of
international trade, and the economic growth rate in
a country

How Are Property Rights And Corruption

Related?

The Foreign Corrupt Practices Act (1970)

makes it illegal for U.S. companies to

bribe foreign government officials to

obtain or maintain business over which
that foreign official has authority
facilitating or expediting payments to
secure or expedite routine government action
are permitted

Which Countries Are Most Corrupt?(Transparency

International)

How Can Intellectual Property Be Protected?

Intellectual property - property that is the product of
intellectual activity
Can be protected using
1. Patents exclusive rights for a defined period to the
manufacture, use, or sale of that invention(chemical
formula- for drugs)
2. Copyrights the exclusive legal rights of authors,
composers, playwrights, artists, and publishers to
publish and disperse their work as they see fit
3. Trademarks design and names by which merchants or
manufacturers designate and differentiate their products

How Can Intellectual Property Be Protected?

Protection of intellectual property rights

from country to country

differs

World Intellectual Property Organization

Paris Convention for the Protection of Industrial Property

(1995- Trade Related Aspects of Intellectual

Property Rights TRIPS)

To avoid piracy, firms can

stay away from countries where intellectual

laws are lax

property

file lawsuits
lobby governments for international property rights
agreements and enforcement

What Is Product Safety And Liability?

Product safety laws set certain standards to
which a

product must adhere

Product liability involves holding a firm and its

officers responsible when a product causes

injury, death, or damage

liability laws tend to be less extensive in less
developed nations

How Can Managers Determine A Markets

Overall Attractiveness?
The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doing
business in that country
Other things being equal, more attractive countries
have democratic political institutions, market
based economies, and strong legal systems that
protect property rights and limit corruption

What Determines A Countrys Level Of

Economic Development
Gross national income (GNI) per person
measures the total annual income received
by residents of a nation
Japan, Sweden, Switzerland, and the U.S. have
high GNI

China and India have low GNI

GNI can be misleading because it does not

consider differences in the cost of

living

need to adjust GNI figures using purchasing

power parity (PPP)

What Determines A Countrys Level Of

Economic Development?
Official figures can also be misleading
because they do not account for black

economy transactions

In addition, GNI and PPP data are static and

do not consider economic growth rates
So, while China and India are currently
categorized as being poor they are
growing more rapidly than many developed
nations and are expected to become among the
largest economies in the world

How Do Countries Compare On

GNI?
Economic Data for Select Countries
Country

GNI per
Capita

GNI PPP
per Capita

Annual
Average GDP
Growth Rate,

Size of the
Economy GDP,

2011 ($)

2011 ($)

2002-2011 (%)

2011
($billions)

Brazil

11,420

10,720

3.78

2,477

China

4,940

8,390

10.59

7,319

44,230

40,190

1.16

3,601

India

1,420

3,620

7.73

1,873

Japan

44,900

34,670

0.67

5,867

Nigeria

1,280

2,290

6.88

244

Poland

12,380

20,260

4.23

514

Russia

10,650

21,210

4.84

1,858

Germany

What Determines A Countrys Level Of

Economic Development?
The United Nations used Amartya Sens
ideas to develop the Human
Development Index (HDI) which is
based on
life expectancy at birth
educational attainment
whether average incomes are
sufficient to meet the basic needs of
life in a country

What Does The Changing Economy Mean For

Managers?
Markets that were formerly off-limits to Western
business are now open
firms need to
in these markets

explore opportunities

Despite being underdeveloped and poor, some

markets have huge potential

China -1.2 billion people

India 1.1 billion people
Latin America 400 million potential
consumers

What Does The Changing Economy

Mean For Managers?
However, the potential risks
are large
will democracy thrive especially
in difficult economic times?

will totalitarian regimes

return?
will a multi-polar world of
different civilizations emerge?
will Chinas financial system be

What Are The Implications Of Political

Economy Differences For Managers?
Countries with democratic
regimes, market based economic
policies, and strong property rights
protection are more likely to have higher
sustained rates of economic growth
these markets are more attractive to
international businesses
the benefits, costs, and risks of doing
business in a country are a function of the
countrys political, economic, and legal
systems

What Are The Implications Of Political Economy

Differences For Managers?
The benefits of doing business in a country are a function of

the markets size

the purchasing power of its
consumers
their likely future wealth
By identifying and investing early in potential future
economic stars, firms may be able to gain first
mover advantages (advantages that accrue to
early entrants into a market) and establish

loyalty and experience in a country

What Are The Implications Of Political

Economy Differences For Managers?
The costs of doing business in a
country are a function of its
political system

is it necessary to pay bribes to get market access?

economic level

are the necessary supporting business and

infrastructure in place?

legal system

it can be more costly to do business in countries

with dramatically different product, workplace,
and pollution standards, or where there is poor
legal protection for property rights

What Are The Implications Of Political

Economy Differences For Managers?
The risks of doing business in a country are
a function of
Political risk - the likelihood that political
forces will cause drastic changes in a
country's business environment that
adversely affects the profit and other goals
of a business enterprise
Economic risk - the likelihood that
economic mismanagement will cause
drastic changes in a country's business
environment that adversely affects the
profit and other goals of a business
enterprise

What Are The Implications Of Political Economy

Differences For Managers?
The benefits of doing business in a country are
a function of
the markets size
the purchasing power of its consumers
their likely future wealth
By identifying and investing early in
potential future economic stars, firms may
be able to gain first mover advantages
(advantages that accrue to early entrants into a
market) and establish loyalty and
experience in a country

China

What Are The Implications Of Political

Economy Differences For Managers?
The costs of doing business in a
country are a function of its
political system

is it necessary to pay bribes to get market access?

economic level

are the necessary supporting business and

infrastructure in place?

legal system

it can be more costly to do business in countries

with dramatically different product, workplace,
and pollution standards, or where there is poor
legal protection for property rights

What Are The Implications Of Political

Economy Differences For Managers?
The risks of doing business in a country are
a function of
Political risk - the likelihood that political
forces will cause drastic changes in a
country's business environment that
adversely affects the profit and other goals
of a business enterprise
Economic risk - the likelihood that
economic mismanagement will cause
drastic changes in a country's business
environment that adversely affects the
profit and other goals of a business