Chapter 2: National Differences in Political Economy INB 372 Lecture By: Ms. Adina Malik (ALK)

Political System The political economy of a nation refers to 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 Political system refers to the system of government in a nation. The political system of a country shapes its economic and legal system. It differs in 2 degrees: 1. degree to which they emphasize collectivism as oppose to individualism 2. degree to which a nation is totalitarian as oppose to democratic Countries have different political, legal and economic system. Collectively the three systems are referred to as the political economy.

Political Ideology: Collectivism Collectivism: refers to an ideology that stresses the importance of collective goals over individual goals. The system values ‘the needs of the society’ as a whole rather than ‘individual freedoms’. Emphasize on ‘the good of the society’ or to ‘the common good’. Individual rights should be sacrificed for the good of the majority and property should be owned in common. Examples: Japan, China.

Political Ideology : Individualism Individualism: refers to an ideology that stresses the interest of the individual more than the interest of the state or the society. It emphasizes that an individual should have freedom in his or her economic and political pursuit. Private property is more highly productive than communal property and will thus stimulate progress. Individualism has two central principles: Guaranteeing individual freedom and self-expression Letting individual pursue their own economic self-interest Examples: Great Britain and Sweden formerly believed in collectivism but now they are valuing individualism in their political system.

Political System: Democracy Democracy: refers to a political system in which government is by the people, exercised either directly or through elected representatives usually associated with individualism. This system allows both economic and political freedom. pure democracy is based on the belief that citizens should be directly involved in decision making (ancient Greece) most modern democratic states practice representative democracy where citizens periodically elect individuals to represent them. These representatives function on behalf of the people

Political System: Democracy Some characteristics of a democratic nation are: Freedom of rights to express Freedom of media Regular elections in which all eligible citizens are allowed to vote Universal adult suffrage (right to vote) Limited terms for elected representatives A fair court system that is independent from the political system A non political state bureaucracy (administrative policy-making group) Relatively free access to information Non political police and armed force Example: USA, Germany, Japan, Australia, Finland, France, India.

Political System: Totalitarianism Totalitarianism: This is a form of government in which one person or political party exercises 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 4 forms of Totalitarianism Theocratic Totalitarianism: when a group or individual governs as per religious principles monopolizes power. Example: Saudi Arabia, Iran. These states limit freedom of political and religious expression with laws based on Islamic principles. Totalitarian: Controlling the people of a country strictly, authoritative, dictatorship, exercising autocratic power. Communist Totalitarianism: Worldwide communism collapsed since 1989. Some countries like China, Vietnam, Laos, North Korea and Cuba are still run by Communist party’s monopoly.

Political System: Totalitarianism Communist Totalitarianism: This system believes that totalitarianism can be achieved through dictatorship. Communist parties monopolizes power. Totalitarian states deny many basic civil liberties to their population. Communism is in decline worldwide. Example: North Korea, Cuba, China, Laos, Vietnam; Venezuela under the government of Hugo Chavez

Political System: Totalitarianism Tribal Totalitarianism: when a political party represents the interests of a particular tribe monopolizes powered. Example: This has arisen from time to time in African countries such as Zimbabwe, Tanzania, Uganda & Kenya. Right-wing Totalitarianism: it permits some individual economic freedoms but restricts individual political freedom. They are against communism and is mainly backed by militaries. Example: Before 80s South Korea, Taiwan, Singapore, Indonesia and the Philippines were right-wing totalitarianism. These are mostly military governments. Recent example could be Pakistan.

Economic System There are 3 types of Economic System: Market Economy: all productions are privately owned, the goods/services are not planned by anybody but by the supply- demand theory. Monopoly must not exists in this economic system. Government encourages free and fair competition between private producers. (Anti trust laws in the USA) Example: Japan, USA, Sweden, Colombia, Mexico Market Economy: Supply must not be restricted. A supply restriction occurs when a single firm monopolizes a market. With an increase in demand, rather than increasing output, monopolists restricts supply and increase prices. This is good for the monopolist, but bad for the competitors. Government help the society by outlawing monopolies and restrictive business practices. Private ownership encourages vigorous competition and economic efficiency. Command Economy: Scope of efficiency is very low under this system as the state-owned enterprises have little incentive to control costs and be efficient as they cannot go out of business. Dynamism and innovation are absent. So, rather than growing, such economies tend to be stagnant. Mixed Company: For example, the French automobile Renault was nationalized as the French government reasoned that the social costs of unemployment that might result if Renault collapsed were unacceptable. Another example is AIG of USA (80% stake by US Government).

Economic System Command Economy: Govt plans the quantity and price of good/services to produce within. All business are state owned. The objective is to mobilize economic recourses for public good. But the scope of efficiency is very low under this system. Example: Cuba, Venezuela, People's Republic of China, Vietnam. Mixed Economy: when some sectors of economy are privately owned and some are publicly depending on the nature of the sector and govt takes over companies when they run into severe financial problems to save them from being bankrupt. (Renault in France & AIG of America) Example: Australia, USA, Great Britain, France, Spain, Italy, etc. The French Government reasoned that the social cost of unemployment if Renault dissolves will be unacceptable. Renault’s competitors, however, were not thrilled as they have to compete with a company whose costs are subsidized by the state. If AIG collapsed, then it would have a serious consequence for the entire financial system.

Legal System The Legal system of a country refers to the rules or laws that regulate behavior along with the processes by which the laws are enforced and through which remedy for injustices are obtained. The legal system of a country is of immense importance to international business. Legal system determines the business practice and also the method of transaction. It should also be consistent with the political system. Like, collectivist states will develop laws that will restrict private ownership of property and business. Contrarily, individualist states will encourage private business through their laws.

Legal System Common Law: The Common Law system evolved in England over hundreds of years ago. It is based on traditions (a country’s legal history), precedents (cases in the past) and customs (how laws are applied in specific situations). Judges in a common law system have the power to interpret the law so that it applies to the unique circumstance of a case (flexibility). As new precedent arises, law might be altered, clarified or amended to deal with new situations. Example: USA, UK, Australia, etc.

Legal System Civil Law: Law is based on detailed set of rules organized into codes. The judges under this law system don't have the right to interpret but to apply only (less flexibility compared to Common Law). Example: Germany, France, Russia, Japan, etc. Theocratic Law: here law is based on religious teachings. Example: Saudi Arabia, Pakistan (Islamic Law). Islamic Financial Institutions are found in Pakistan, Bangladesh, Egypt, Malaysia, etc.

Contract Law A contract is a 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 Many countries have ratified the United Nations Convention on Contracts for the International Sale of Goods (CIGS) which establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between buyers and sellers who have their places of business in different nations To ensure compliance, binding and implementation. Contingency: future occurences, possibilities, circumstances, etc.

Property Rights & Corruption Property rights refer to the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource Can be violated through Private action-theft, piracy, blackmail Public action- public officials pressurize for income or resources from private such as excessive taxes, expensive license, bribes, blackmailing, etc. High levels of corruption reduce foreign direct investment, the level of international trade, and the economic growth rate in a country The Foreign Corrupt Practices Act was passed in USA which prevents all US MNCs to bribe local government to win lucrative contracts. However, the law allows facilitating or expatiating payments to secure the performance of routine governmental action. Foreign Corrupt Practices Act: So 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.

Corruption Perception Index Transparency International (TI) has published the Corruption Perceptions Index (CPI) since 1995, annually ranking countries "by their perceived levels of corruption, as determined by expert assessments and opinion surveys." The CPI generally defines corruption as "the misuse of public power for private benefit." The CPI currently ranks 178 countries "on a scale from 100 (very clean) to 0 (highly corrupt)."

Corruption Perception Index (2016) Countries CPI Denmark 90 Hong Kong 77 Bangladesh 26 Sweden 88 France 69 South Africa 45 New Zealand UAE 66 Sudan 14 Singapore 84 Bhutan 65 Iran 29 Canada 82 Spain 58 Brazil 40 Australia 79 South Korea 53 India UK 81 Thailand Nepal Germany Saudi Arabia 46 China USA 74 Malaysia 49 Argentina 36 Japan 72 Indonesia 37 Vietnam 33 Russia Italy 47 Pakistan 32 Syria 13 Myanmar 28 Zimbabwe 22 http://www.transparency.org/news/feature/corruption_perceptions_index_2016#table