Int Business Chap2. Du

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Chapter 2:

National Differences inPolitical Economy


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a. Political System

1. Collectivism and Individualism:Collectivism as was argued by Plato is thatindividual rights should be sacrificed for thegood of majority and that property should beowned in common. In modern days it is pickedup by socialists. Despite the failure of communism, still there are countries likeChina, Cuba, North Korea that experience

communist power. There are socialist partiesin many countries like Austria, UK, France,Germany, and India who believe in theeffectiveness of public sector ownership of certain sectors.


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a. Political System (Contd..)

Individualism as Aristotle argued is basedon individual ownership and freedom. Heargued that private property is moreproductive than the productivity of joint or state ownership as communal propertyreceives little care. Modern dayeconomists, like Milton Friedman, believein a free market economy that essentiallyfollows the principle of individualism.


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2. Democracy and Totalitarianism: In democracy government would be

regularly elected by the population. Some of the features of democracy are: (a)individuals right to freedom of expression,(b) free media, (c) regular election, (d) limitedterms for elected representatives, (e)independence of judiciary, (f) a nonpoliticalstate bureaucracy, (g) a nonpolitical policeforce and armed service, and (g) free accessto state information.


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In totalitarianism individuals right to freedomof expression and organization, free media, andregular elections are denied to citizens. Thereare four kinds of Totalitarianism. Communist totalitarianism believes that

socialism would be achieved only by Totalitariandictatorship by communist party.

Theocratic totalitarianism is found in stateswhere political power is monopolized by a party,group, or individual that governs according toreligious principles. (Like in Saudi Arabia, Iran).


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a. Political System: totalitarianism (Contd..)

Tribal Totalitarianism is found in Africa (Uganda, Kenya,Tanzania, and Zimbabwe) where there are many tribes withconsiderable differences among them. When any partycomes into the power it serves the interest of the tribe hebelongs to and monopolizes the power.

Right wing Totalitarianism generally permits individualeconomic freedom but restricts individual political freedomon the ground that it would lead to the rise of communism. Itcan be in the form of military dictatorship like in Latin

America in 1980s; or It can be in democratic forms like inSouth Korea, Taiwan, Singapore, Indonesia, and thePhilippines.


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b. Economic System

1. Market Economy:

In a pure market economy all productive activitiesare privately owned, as opposed to being owned

by the state. The goods and services that shouldbe produced, the quantity at which they should beproduced, and the prices at which those will besold are determined by market mechanism.However, government makes policies to restrictmarket imperfections (like monopolistic or oligopolistic exploitations).


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b. Economic System (Contd..)2. Command Economy:

In a pure command economy all productiveactivities are owned by the state. The goods andservices that should be produced, the quantity at

which they should be produced, and the prices atwhich those will be sold are determined by thegovernment. Consistent with the collectiveideology, the government is assigned to allocate

resources for the goods of the society. Commandeconomies are found in former communist states.Quite often this results in inefficiency due to lack of competition and of motivation to product

improvement.


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b. Economic System (Contd..)

3. Mixed Economy: Mixed economy refers to the country where certainsectors are under private ownership dictated by themarket mechanism and certain sectors are under government ownership dictated by national interests.

Externality and non-divisibility nature of certain goodsconstraint the use of market mechanism as the methodof allocation. Pure market mechanism also suffers frommonopolistic and other exploitation that createsinequality. Similarly, government ownership in all sectors

encourages inefficiency. Keeping the limitations in mindsmost of the countries follow the mixed economy wheresome sectors having national interests are kept under government ownership and the rest of the sectors areallocated to private ownership.


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c. Legal System (Contd..)3. Property Rights:

In a legal sense, the term property refers to a resource over which an individual or business holds a legal title that he ownsthe resource. It is protected by domestic laws of every country,but violation is quite common. Violation may be throughprivate action or Public action. Private action refers to theft,

piracy, extortions, blackmail, and the like by private individualsor groups. Role of police and judicial system is also important.(Example: Mafia in Russia). Public action to violate propertyrights occurs when public officials, such as politicians andgovernment bureaucrats, extort income or resources from

property holders. It can also be in the form of excessivetaxation, license fees, or sudden nationalization without duecompensation. The status of property rights is affected by theprevalence of corruption in the society. Economic evidencesuggests that high levels of corruption significantly reduce the

foreign direct investment, level of international trade.


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c. Legal System (Contd..)4. Protection of intellectual Property Intellectual property rights are protected by patent, trademark

and copyright. Patent grants the inventor a new product or process exclusive rights for a defined period to themanufacture, use, or sale of that invention. Trademarks aredeigns and names, often officially registered, by whichmerchants or manufacturers designate and differentiate their

products (e.g., Christian Dior cloths). Copyrights are exclusivelegal rights to authors, composers, playwrights, artists, andpublishers to publish and disperse their work as they see fit.Technological development is a real threat to the protection of property rights. To give incentives to the companies spending

huge amounts for R&D, property rights need to be protected.Violation is noticeable in China and Thailand. Software piracyis common worldwide. Piracy in music is also common. WTOtakes care of this violation through the formal enactment of TRIPS (Trade Related Aspects of Intellectual Property Rights).

It gives the member countries to enforce patent lasting at least20 years, and copyrights lasting 50 years.


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c. Legal System (Contd..)

5. Product safety and product liability: Product safety laws set certain standards

to which a product must adhere. Productliability involves holding a firmresponsible when a product causesinjury, death, or damage. There are both

civil product liability laws (in the form of payment of money) and criminal liabilitylaws (fines and imprisonment).


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d. Determinants of Economic Development1. Traditional measures of differences in Economic

Development National Income: GDP, GNP, NNP, and NDP Growth rate in GNP is also used to provide some idea

about the nature of economic development and marketpotentials of a country (Reference: China).

Per capita GNP is an indicator of the stage of economicdevelopment of a country. However, there are someproblems of per capita GNP as cost of living varies fromcountry to country.

Purchasing Power Parity is used to show the relativestandard of living of each of the countries. Under thesystem per capita income is converted intocommodities, and then, prices are taken from USA. (PPPper capita GDP of Bangladesh was US$2,040 against thetraditional per capita income of $523 in 2007).

The rich and poor gap is another indicator to indicate thecomposition of consumer of a country.


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d. Determinants of Economic Development (Contd..)

2. Broader Conceptions of Development (Sens view): Amarta Sen argued that development should not be

material output measure such GNP per capita but by thecapabilities and opportunities that people enjoy. Freedomof deprival, poverty and suppression are keys todevelopment. Sen introduced some more variables in theconcept of development. Freedom is an essential elementof development and to have a say in the crucial decisionsof the government makes someone more developed. Alsoimportant for development is the education, basic health

care, and reduced child mortality. Sen argued thatpeople can not develop their capabilities if they arechronically ill or woefully ignorant. Sens qualitativeaspects have been picked up by United Nations, whichhas developed Human Development Index (HDI).


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d. Determinants of Economic Development (Contd..)3. Human Development Index (HDI) HDI is based on three measures: living standard, education and

health care. It gives equal weight on income, life expectancy atbirth and adult literacy. It assumes a diminishing marginal utilityof income by taking the log number of income. Income ismeasured by the Purchasing Power Parity (PPP) Index of per capita income. The HDI Index is scaled from 0 to 1; countriesscoring less than 0.5 are classified as having low humandevelopment, from 0.5 to 0.8 medium and above 0.8 as havinghuman development.

HDI=1/3(Income Index) + 1/3(Education Index) + 1/3(HealthIndex)

Income Index={(Log of PPP Income)-Log(100)}/{(Log of 40,000)-Log(100)} Education Index= 2/3(adult Literacy)+1/3(gross enrollment) Health Index=Life expectancy Index= (life expectancy-

25)/(85-25)

HDI of Bangladesh: .547 (2007) rank: 140 out of 177


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4. Political economy and Human Progress A countrys economic progress is a function of its economicand political system because of following reasons:

- Innovation and entrepreneurship are the engines of economic growth. Innovation involves not only the productbut also the process, organization, management practicesand strategies.

- Innovation and Entrepreneurship requires marketeconomy. Market economy creates greater incentives for innovation and entrepreneurship than either a plannedeconomy or a mixed economy.

- Innovation and entrepreneurship require strong propertyrights. Strong legal protection of property rights is another requirement for business environment conducive toinnovation and entrepreneurial activity. The state must notexpropriate the profit of business.


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Political economy and Human Progress(Contd.)

- Political system: The representative democracy of the West hasbecome successful for creating the required political systemconducive for innovation and entrepreneurship development.However, the experience of Asian emerging tigers (Singapore,South Korea, Hong Kong and Taiwan) suggests ensuringdiscipline before democracy, which is a lesson for manydeveloping countries where democracy fails to ensure discipline.Experience of some dictator government of Africa, Latin Americaand Asia committed to market mechanism failed to ensuregrowth of entrepreneurship and innovation.

- Economic Progress ensures democracy. Although democracy incertain cases failed to protect the legal property rights buteconomic progress may ensure democracy, which is the lessonof Emerging Asian Tigers.


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5. Geography, Education and Economic Development Harvard economists Sachs pointed that by virtue of favorable geography, certain societies were morelikely to engage in trade than others and were thusmore likely to be open to and thus, to develop marketbased economic system, which in turn wouldpromote faster economic growth. Sen emphasizedon education as a source of economic development,which appears to be true in reference to the cases of

Pakistan and South Korea. Both the countries hadsame economic footing in 1960s with an educationrate of Pakistan one third of that of South Korea atthat time; now per capita income of South Korea is 3times that of Pakistan.


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States in Transition

1. Spread of Democracy: A study in 2001, on the nature of freedom in differentcountries, reveals that 86 countries in the world with41% population of the world are classified as free.

Another 59 countries with 24% population are partly

free, while 47 countries with 35.5% population are notfree. The number of democratic countries has increasedfrom 69 nations in 1987 to 120 in 2001. The two reasonsattributed to the failure of communism and transition todemocracy are that: (1) on the one hand the totalitariangovernment failed to deliver the economic progress

whereas the developed countries were practicingrepresentative democracy, and (2) closing the countryfrom the information of the rest of the world is almostabsurd due to new information and communicationtechnology like satellite TV, internet, fax etc.


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States in Transition (Contd..)

2. The New World Order: There are two views of the new world order. One

group, led by Francis Fukuyama, views a triumph

of western liberalization all over the world. Itasserts that we may be witnessing the end pointof the mankinds ideological evolution in theuniversalization of western liberal democracy asthe final form of human government. The other

group including Samuel Huntington opines thatdespite the global popularity for coca cola andMTV, the world is going to retreat towardstraditionalism as is demonstrated by theresurgences of Islam.


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States in Transition (Contd..)

3. The Spread of Market Based Economy: Along with the spread of democracy in 1980s

there was a transformation from centrally planned

economy or command economies to market-based economies. More than 30 countries thatwere in the former Soviet Union and EastEuropean communist block are now changingtheir economic system. Asian countries likeChina and Vietnam and African countries Angola,Ethiopia, and Mozambique followed the sameprocess.


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States in Transition (Contd..)4. The Nature of Economic Transformation:

It follows the 3 steps:- Deregulation : Most of the economies experiencing

the transformation had certain sectors protected

under government control where private enterpriseswere not allowed. Deregulation involves removinglegal restrictions to the free play of the markets andthe establishment of private enterprises.

- Privatization : Privatization implies the transfer of ownership from government holdings to privatesectors.

- Legal System: Enactment and application of manylaws to ensure property rights and discipline is thenext step required to facilitate the transformationtowards market economy.

Int Business Chap2. Du

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