Chapter 2: Country Differences in Political Economy

Country Differences:
- Russian invasion in Ukraine = 35% economy recession in 2022
- Local, regional, international economic and social consequences
- Global shortage of grain and good security/ Economic slowdown EU
- Hungary less free b/c from dictatorships to democracy to less free
“Political economy”: political, economic, and legal system of a county are interdependent as they
interreact and influence each other, leading to changes in level of economic well-being

Political System:
Collectivism: stresses that primary goal is collective goals over individuals
- Needs of society as a whole > individual freedom “for the good of society/common
good”
- Plato = sacrificing individual rights for goods of society. “The Republic” = society should
be arranged into classes with best suited (natural philosophers and soldiers) leading for
the benefit of all. Traces of socialism
- Influenced socialists
Modern socialism (ownership of means of production):
- Mark Max: state ownership of production, distribution, and exchange to ensure that
workers were well compensated to benefit society as a whole
1. Communism: through violent revolution and totalitarian dictatorship
 highest point 1970s: Soviet Union, China, Vietnam, Cambodia, Laos, Cuba, Nicaragua
 Old-style communism = North Korea
2. Social Democrats: achieving socialism by democratic means; turning backs on violent
revolution and dictatorship
Australia, Denmark, Finland, France, Germany, GB, Norway, Spain, Sweden, India, Brazil
 After WW2: private  state-owned enterprises for “public good rather private profit”
 Demonstrated to be counter to public interest b/c inefficient = monopoly position + subsidies

Individualism: focuses on interest of individual interest of state’s  free market

- Private property: more productive than communal = stimulate progress
- Aristotle = individual diversity + privatization = good b/c more likely to be productivity
and will be stimulus to progress + more care
- Reborn in Protestant trading union – refine in work of Hume, Smith, Mill
- Influence on American colonies wanting independence from GB
- Concept underlies the ideas expressed in Declaration of Independence
1. Individual freedom and self- expression = John Stuart
2. Let people pursue own economic self-interest is best way to serve welfare of society
- Smith = invisible hand
- Central message: individual economic and political freedom =ground rules on which
society should be based
 Venezuela, Bolivia, Russia, Paraguay = swing back to socialist ideas +
 2009 Financial crisis: re-evaluation of individualism
Democracy:
- Government is by the people, excised either directly or through elected representatives
- Freedom of expression, free media, regular elections, limited terms for representatives,
fair court system, non-political police and army
- Hand to hand with individualism
- Pure form: Ancient Greece base on believe that citizens should be directly involve in
decision making  representative democracy
Safeguards:
1. Individual’s right to freedom of expression, opinion, and organization
2. Free Media
3. Regular elections in which eligible citizens can vote
4. Universal adult suffrage
5. Limited terms for elected representative
6. Fair court system that is independent from political system
7. Nonpolitical state bureaucracy
8. Nonpolitical police force and armed service
9. Relatively free access to state info
Totalitarianism: Repression + imprisonment (maybe worse) of those who questions
- denies all democratic demands to citizens
- Hand to hand with collectivism
1. Communist totalitarianism: North Korea, Cuba, Laos, China, Vietnam (still present but
eroding)
2. Theocratic totalitarianism (based on religions usually Islam) : Iran, Afghanistan
3. Tribal totalitarianism (parts of Africa)
4. Right-wing totalitarianism: individual economic freedom but restriction on individual
political freedom Nazi Germany, Juntas in South America. (has retreated + army in
government

 Can have democratic state with collective values predominating totalitarian with some degree
of individualism + economic sphere = good!
Ex: China

Pseudo democracies: imperfect democracies

- Where authoritarian elements have captured some or much of the machinery of state and
use this as an attempt to deny basic and civil liberties (Putin + hungary)

Economic Systems:
Market economy: All productive activities are private
- Supply/demand determines price and production
- Cannot have a monopolist or supply will be restricted (bad for welfare b/c pay more since
no competition so no incentives to find more efficient cheap production so customers
have to pay a lot)
Command Economy:
- gov determines allocation of resources + prices and production for public good = doesn’t
do good b/c don’t have incentive to controls cost to be efficient
- Absent dynamism and innovation
 - Found in communist : Collectivist goals > individuals goals
Mixed economy: some private + free market VS some public (government owned)
- Tend to take into state ownership troubled firms who operations is thought to be vital to
nations interested
- Promoting development of public and private sectors

Legal Systems: systems of rules that regulates behavior and processes by which the law of
country is enforced
Common Law: based on tradition, precedent, and customs.
- Judges/law courts interpret the law by regarding tradition etc…
Civil Law: based on detailed set of written law and codes
Theocratic Law: based on religious teaching
- Islamic baking and interest

Contract Law: body of law that governs contract creation and enforcement
- Use when violation of agreement
International Trade and Contract Disputes:
United Nations Convention of Contract (CISG)
- For international sales of goods
- Nation accept to treat the convention as part of its law
- Applies automatically to all contracts for sale of goods between diff firms in CISG
countries
Property: resource over which an individual/business holds legal title
- Lands, real estate, equipment, capital, mineral rights, businesses, intellectual property
(patents, copyrights, and trademarks)
Property rights: Bundle of legal rights regarding property

Actions Against Property Rights:

Private Action: private individuals/group against property holders
- Theft, piracy, blackmail, any criminal activity against property rights
Public Action: Public officials extort income from property holders (against property rights)
- Bribes, More tax, expensive licenses/permits, taking assets without compensation

Most corrupt in 2022: Denmark, New Zealand, Finland, Canada, U.S.A

Canada’s Bill S-21: Corruption of Foreign Public Officials Act

- 1999
- Loophole provisions to cover when bribe is due to perception due to cultural
consideration (gift giving)
- Lawful exception that accused can use as defense
- Illegal to bribe + Cad officials illegal to bribe in other country

Protection of intellectual property

- Property of product of intellective activity (music, formulas, software)
- Patents, Copyright, Trademarks
- Protection of industrial property: 96 nations
 - Trade Related Aspects of Intellectual Property rights (TRIPS) agreement - 1995
- Among WTO members = oversee enforcement of stricter intellectual property regulation
- China, Russia, US, India = worst

Product Safety and Product Liability:

Product Safety Laws: sets of standards for safety if want to be commercialized
Product Liability: holding firms/officers responsible for product causing injury, damage, death

Determinant of Economic Development:

- Gross National Income (GNI): total income of all citizens
- Purchasing Power Parity (PPP): adjustment in GDP per capita for comparing living
standards

Broader Conceptions of Development:

Amartya Sen: argued that development should be assessed less by material output measure but
rather capabilities and opportunities enjoyed by people
- Development: process of expanding real freedoms that people experience + need
“democratization” of political communities (economic + political dev)

HDI human development index: measures quality of human life

- Education attainment (combination of adult literacy rate and enrolment in 1,2,3 education
- Life expectancy at birth
- Average income based on PPP estimates: whether sufficient to meet basic needs
(adequate healthcare, food, shelter)

Political economy and economic progress:

1. Innovation and entrepreneurship:
- Engines of long-run economic growth, includes new processes, organization,
management practices, and strategies
- Market economy  economic freedom = greater incentives for innovation and
entrepreneurship > planned/mixed economy
- Strong property rights: individuals/businesses = profit from innovative ideas (without =
expropriated profit by criminal or state)
2. The required Political System:
- South Korea, Taiwan, Singapore, and Hong King Undemocratic governments = start of
economic but then democratic
3. Economic Progress Begets Democracy:
Fastest growing Asian economies = adopted democratic government ex: South Korea and Taiwan

Geography, Education, and Economic Development

Geography: also, important to rate of economic development (+political and economic aspect)
- Jeffrey Sachs: favorable geography more likely to engage in trade = open and develop
market-based economic systems
Education: investing more in education = higher growth rates b/c more productive pop
 Evident trend in 1980s/1990s
- wave of democratic revolution + collapse of totalitarian gov
 - Strong move of from command/mixed economies to free-market economic

The New World Order:

- Collapse of communism + authoritarian regimes in LA = End of Cold War + NOW =
given rise to intense speculation about future shape of global geopolitics
- Francis Fukuyama: End of history b/c end point of mankind’s ideological evolution and
universalization of Western liberal democracy = final form of human government
- Samuel Huntington: modernization in non-western countries = retreat toward the
traditional + “fault lines” conflict
 Islamic resurgence = product/effort to address modernization

The spread of market-based systems:

- Command/mixed econ. = failed to deliver kind of sustained economic performance
achieved by market-based (US. Switzerland. Hong Kong, Taiwan)
- Most free market = Singapore, Switzerland, Ireland, Taiwan. Canada #16 US #25

Nature of Economic Transformation:

Deregulation: involves removing legal restrictions to free play of markets
Privatization: transfer ownership of state property into hands of individuals. Through auction
Legal Systems: protects property rights
- If not that + machinery to enforce = incentive to engage in economy activity = reduced a
lot by private and public entities that expropriate profits generated by efforts of private-
sector entrepreneurs

Implications of the changing political economy:

Post communist era = move toward greater political and economic freedom accompanied by
economic and political chaos
Implication for business:
- Used to be limited to western businesses only
- Chinese market > United states, European union and Japan combined
- Long-run Monetary benefits of doing business in a country = Attractiveness: size of
market, present wealth of customer in that market (PPP), likely future wealth of
consumers
First mover: advantages that accrue to being early entrants into a market
VS late-mover disadvantages: handicap that late entrants might suffer
Costs:
- Political+economic+legal factors = costs of doing business in a country
- Political factor: increase need to pay off the politically powerful to be allowed by gov to
do business
- Sophistication of a country’s economy
- Lack of infrastructure + supporting businesses in primitive/underdeveloped econ= more
costly

Risks:
- Political: defined as likelihood that political forces will cause drastic changes in country’s
business environment and affect profitability/other goals
 - Economic: defined as likelihood that economic mismanagement will cause drastic
changes
- Legal: defined as likelihood that trading partner will opportunistically break a contract or
expropriate property rights

Overall attractiveness: potential market/investment site for IB depend on balancing benefits, cost
and risks

Ethical issues:

Ethics and Human Rights:

- Whether they should do business in totalitarian countries that violate rights of their
citizens
- Whether International firms should adhere to same standards of product safety, work
safety, environmental protection required in home country

Ethics and corruption:

Canada’s corruption of foreign public official acts
- Should IB pay bribes to corrupt gov official to gain market access in foreign country
Reduces the returns on business investment but pragmatic standpoint a reality

Summary:
Political systems = assessed according to 2 dimensions
- Degree to which emphasize collectivism vs individualism
- Degree to which they are democratic vs totalitarian
Implication for IB: degree to which property rights are protected, product safety and liability
laws, and nature of contract law
Moving towards democracy and free market economic system = need for deregulation,
privatization, creation of legal system protecting property rights

Implication for IB
1. Political, economic, and legal systems of a country raise important ethical issues that
have implication for IB
Ex: ethical dilemmas with doing business with countries denying basic human rights
2. Political, economic, and legal systems environment influence attractivenemess which
depends on likely long-term benefits of doing business against all costs and risks
Ex: risks associated with doing business

China lacks democratic institutions, corruption is widespread, property rights not always
respected, too much command government
- But large recipient of FDI b/c moving towards market-based economy and legal
protection is improving