CHAPTER 2 & 3

National Differences in
Political Economy &
Economic Development
 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
• A country’s political economy plays a HUGE role in international
business, for several reasons: Political and economic systems differ
widely across countries, making it difficult to make generalizations or
have a uniform strategy.
• Countries, represented by their governments, are sovereign entities.
 WHAT IS A POLITICAL SYSTEM?
• 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
 WHAT IS A POLITICAL SYSTEM?
• Collectivism stresses the primacy of collective goals over
individual goals. The needs of society as a whole are
generally viewed as being more important than
individual freedoms.
✓ Supports Socialism, which had two wings – communists & social democrats
▪ Communist believed socialism could be achieved only through violent revolution and
totalitarian dictatorship. E.g. former Soviet Union, Poland, Czechoslovakia, Hungary,
China, Cambodia, Laos, Vietnam, Angola, Mozambique, Cuba, and Nicaragua.
▪ Social democrats

• Individualism – an individual should have freedom in his

own economic and political pursuits.
✓ It
supports free market system.
✓ Based on two tenets – guaranteeing individual freedom and self
expression, and social welfare through letting individuals pursue their own
economic self interest
 WHAT IS A POLITICAL SYSTEM?
• Democracy - government is by the people, exercised
either directly or through elected representatives
✓Ideal democracy has a number of safeguards –
1. An individual’s right to freedom of expression, opinion, and
organization
2. A free media
3. Regular elections in which all eligible citizens are allowed to vote
4. Universal adult suffrage
5. Limited terms for elected representatives
6. An independent and fair court system
7. A nonpolitical state bureaucracy
8. A nonpolitical police force and armed services
9. Relatively free access to state information
 WHAT IS A POLITICAL SYSTEM?
• Totalitarianism - one person or political party exercises
absolute control over all spheres of human life and
prohibits opposing political parties.
• Four major totalitarianism exist in the world today.
1. Communist Totalitarianism
2. Theocratic Totalitarianism
3. Tribal Totalitarianism
4. Right-wing Totalitarianism
 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
✓ Supply must not be restricted, otherwise there would be a monopoly
✓ Private ownership is encouraged
✓ New products development, efficient production process, better marketing and after
sales service – ensure greater competition, positive impact on economic growth

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
✓ Businesses are state owned, so that government can ensure best interest of a nation

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
 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 IS A LEGAL SYSTEM?
Legal Systems refer to
Rules or laws that regulate behavior,
Process through which laws are enforced, and
Process through which redress for grievances is
obtained.
There are three types of legal systems
1. Common law - based on tradition, precedent, and custom
• E.g. United States
2. Civil law - based on detailed set of laws organized into codes
• E.g. Japan, Germany, France
3. Theocratic law - law is based on religious teachings
• Saudi Arabia, Pakistan
 WHAT IS A LEGAL SYSTEM?
Differences in Contract Law
Contract: specifies conditions under which an exchange is to
occur, and details rights of parties involved.
Contract law: body of law that governs contract
enforcement.
Under common law -
• Contracts are very detailed with all contingencies spelled out.
• More expensive and can be adversarial.
• Under civil law:
• Contracts tend to be much shorter and less specific.
 HOW ARE PROPERTY RIGHTS AND
CORRUPTION RELATED?
• Property rights - 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

• Property rights can be violated through

1. Private action – theft, piracy, blackmail
2. Public action - legally - e.g. excessive taxation or
illegally - e.g. bribes or blackmailing
WHICH COUNTRIES ARE MOST CORRUPT?
Rankings of Corruption by Country 2020

Source: Transparency International, 2020

 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
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
 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

Both civil and criminal product laws exist. Civil laws call
for payment and monetary damage. Criminal laws
result in fines and imprisonment.
WHAT DETERMINES A COUNTRY’S 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)
HOW DO COUNTRIES COMPARE ON GNI?
Economic Data for Selected Countries
GDP per G DP P P P Annual GDP Growth Size of Economy
Capita, per Capita, Rate, 2011 to 2020 GDP, 2020
Country 2020 ($) 2020 ($) (%) ($ billions)
Brazil $6,797 $14,836 0.3 $1,445
China 10,500 17,312 6.84 14,723
Germany 45,724 53,694 1.02 3,806
India 1,901 6,454 5.02 2,875
Japan 40,113 42,197 0.83 5,065
Nigeria 2,097 5,187 2.67 432
Poland 15,656 32,710 3.00 594
Russia 10,127 28,213 1.28 1,484
Switzerland 86,602 71,352 1.39 748
United 40,285 44,916 0.64 2,708
Kingdom
United States 63,544 63,543 1.70 20,937
 WHAT DETERMINES A COUNTRY’S 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 DOES POLITICAL ECONOMY
INFLUENCE ECONOMIC PROGRESS?
• Innovation and entrepreneurship are the engines of
long-run economic growth
• innovation includes new products, new processes, new organizations,
new management practices, and new strategies
• entrepreneurs commercialize innovative new products and processes
• Innovation and entrepreneurship help increase
economic activity by creating new markets and
products that did not previously exist
• innovation in production and business processes result in more
productive labor and capital further boosting economic growth rates
HOW DOES POLITICAL ECONOMY INFLUENCE
ECONOMIC PROGRESS?
• Innovation and entrepreneurship require a market
economy
• In market economies, any individual is free to try out an innovative
idea by starting a business, and existing businesses are free to improve
their operations through innovation.
• there is little incentive to develop new innovations in planned
economies because the state owns all means production and
therefore, the gains
• There is a strong relationship between economic
freedom and economic growth
• the six countries with the highest ratings of economic freedom from
1975 to 1995 were also among the highest for economic growth
• Hong Kong, Switzerland, Singapore, the United States, Canada, and Germany
 HOW DOES POLITICAL ECONOMY INFLUENCE
ECONOMIC PROGRESS?
• Innovation and entrepreneurship require strong property rights
• without strong property rights, individuals and businesses risk having their innovations
and potential profits stolen

• Economist Hernando de Soto claims that inadequate property protection

in many developing nations limits economic growth
• Democratic regimes are probably more conducive to long-term
economic growth than dictatorships, even the benevolent kind
• property rights are only secure in well-functioning, mature democracies

• Subsequent economic growth leads to the establishment of democratic

regimes
• South Korea
• Taiwan
 HOW DOES GEOGRAPHY INFLUENCE ECONOMIC
DEVELOPMENT?
• Countries with favorable geography are more likely to
engage in trade, and so, be more open to market-
based economic systems, and the economic growth
they promote
• Jeffrey Sachs studied economic growth rates
between 1965 and 1990 and found that
• landlocked countries grew more slowly than coastal economies
• being totally landlocked reduced a country’s growth rate by 0.7% per
year
• tropical countries grew more slowly than countries in temperate zones
 WHAT IS THE NATURE OF ECONOMIC
TRANSFORMATION?
• The shift toward a market-based system involves
• deregulation – removing legal restrictions to the free play
of markets, the establishment of private enterprises, and
the manner in which private enterprises operate
• privatization - transfers the ownership of state property into
the hands of private investors
• the creation of a legal system to safeguard property rights