Download The Political Economy

The Political Economy
“The Economy”


It is not a monolithic institution – it is a
collection of billions of individual choices
based on people’s incentives
The Political Economy – how politics and
economics interact, and how they balance
freedom and equality (conflicting values)
Components of Political Economy

Every regime’s ideology determines the relationship
the state will play in regulating the economy
 Markets – interaction between supply and
demand that functions to allocate resources
 Freely allow individuals to buy, sell, and trade
what they produce for what they will consume
 Sets values, or “prices” for these goods and

services
Markets arise spontaneously, and are difficult for the
state to control
Components of Political Economy

Property – ownership of goods and services
 State can choose to play a role in protecting
property rights – the right to sell property freely,
or to not have it taken away
 In LDCs, frequently property exists without a
fundamental protection of property rights, due
to the state’s inability to monitor instances of
fraud
Components of Political Economy

Public Goods – goods provided and/or secured by
the state
 Examples (universal): Roads, lighthouses, the
military
 Examples (in some cases)
 Health care in Britain, Canada
 Oil in Nigeria and Saudi Arabia
 Most businesses in Cuba
Components of Political Economy

Social Expenditures



Commonly called “The Welfare State” –
redistribution of wealth through government
taxing some, and paying others
Typically provided to the elderly, the
unemployed, the poor, and the disabled
Often a subject of political battle, due to the
question of who benefits from expenditures
Components of Political Economy

Taxation


Means to provide for public goods and social
expenditures
Subject of political battles, determined partially
by ideology toward the role of the state
Tax Rates as % of GDP (2008)











Sweden: 54.2 %
Denmark: 48.8 %
Finland: 46.9 %
Belgium: 45.6 %
France: 45.3 %
Austria: 43.7 %
Italy: 42 %
Netherlands: 41.4 %
Norway: 40.3 %
Germany: 37.9 %
United Kingdom: 37.4 %












Russia: 36.9 %
Canada: 35.8 %
Switzerland: 35.7 %
New Zealand: 35.1 %
Australia: 31.5 %
Ireland: 31.1 %
United States: 29.6 %
Japan: 27.1 %
China: 17%
Mexico: 9.7%
Iran: 7.3%
Nigeria: 6.1%
Components of Political Economy

Money, Inflation, and Unemployment


States create and manage the money supply through a
central bank
Money is created by the rate at which banks make loans




Low interest rates encourage more creation
High interest rates discourage creation
Creation of too much money in effort to stimulate the
economy and reduce unemployment can cause inflation
Slowing the growth of money to control inflation can
slow economic growth and cause unemployment to rise
Components of Political Economy

Regulation – rules or orders to set the
boundaries of given procedures


States can ban production or sale of goods, set
safety requirements, outlaw monopoly control,
etc.
Trade – access to goods and services from
foreign states

States can allow open trade, or restrict it through
tariffs, quotas, and other non-tariff barriers
Arguments for and Against Trade

Why Regulate Trade?




Generate state revenue
Foster local industry
Protect local jobs
Keep wealth within the
country

Why Not?



Promote competition
Keep the cost of goods
and services low
Stimulate domestic
innovation in areas of
comparative advantage
Political-Economic Systems

Liberalism – rooted in capitalist ideology of
private ownership, minimal state regulation
and intervention beyond protection of
property rights



Emphasizes individual freedom
Examples: U.S., Great Britain
Laissez-Faire – philosophy claiming the economy
should be left to do what it wishes
Political-Economic Systems

Social Democracy – eliminate extremes of too
much freedom, too much equality


Accepts a role for both private property and
public ownership, freedom and regulation
Examples: Most European countries
Political-Economic Systems

Communism – believes freedom only comes
from total economic equality, uses the state to
achieve that goal



Rejects private ownership of property
Nationalization – bringing private industries
under state control
Examples: China (though there is a massive
transition ongoing), former Soviet Union
Political-Economic Systems

Mercantilism – emphasizes needs of the state
to grow wealthy and powerful above the
needs of society



Emphasizes neither freedom nor equality
Parastatals – industries nationalized based on
some perceived need for international
competitiveness
Examples: Japan, India, South Korea
Measurements of Economic
Performance

GDP – Gross Domestic Product



Total dollar value of all goods and services
GDP per capita shows standard of living of the
average person
PPP – Purchasing Power Parity

Adjusts GDP for relative buying power in each
country, since cost of living differs from place to
place
Measurements of Economic
Performance

Gini Index



Formula to measure economic inequality in
society
High Gini coefficient = more inequality, lower
Gini coefficient = less inequality
HDI – Human Development Index

Attempts to measure well-being, in addition to
wealth
GDP for the 6 Countries







U.S. - $14.26 Trillion
China - $4.4 Trillion
United Kingdom - $2.67 Trillion
Russia - $1.68 Trillion
Mexico - $1.09 Trillion
Iran - $0.34 Trillion
Nigeria - $0.21 Trillion
GDP per capita (PPP) for the 6
Countries







U.S. - $46,859
China - $5,693
United Kingdom - $36,523
Russia - $15,922
Mexico - $14,560
Iran - $11,250
Nigeria - $2,134
Gini Coefficient for the 6 Countries







U.S. – 40.8
China – 44.7
United Kingdom – 36.0
Russia – 31.0
Mexico – 54.6
Iran – 43.0
Nigeria – 50.6
HDI Ranking for the 6 Countries







U.S. – #8
China – #94
United Kingdom – #12
Russia – #57
Mexico – #53
Iran – #101
Nigeria – #151
Global Trends in Political Economy

2 MAJOR movements


Globalization – world is increasingly
interconnected due to technology and trade
Liberalization – free markets are more prevalent
than ever before in history, and developing
nations often see liberalization as the key to
growing wealth