Download Political, Economic, and Legal Systems

Political Economy and
Global Business
Our political economy
topics…
1. Political-economic systems of the developed world
2. Ways of classifying, analyzing political systems
3. Ways of classifying, analyzing economic systems
4. Legal systems
5. The corruption problem
6. Levels of economic development
7. The spread of freedom, democracy, and markets
8. Managing your relationship with government
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We complain about
government and politics…
 But the U.S. and other developed countries have
important safeguards in their constitutions
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Safeguards of Successful Representative
Democracy
 Individual’s right to freedom of expression, opinion and organization
 Free media
 Regular elections
 Adult suffrage
 Limited terms for elected representatives
 A fair court system that is independent from the political system
 A non-political state bureaucracy
 Non-political force and armed service
 Relatively free access to state information
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 The rich countries almost all belong to a group called
the Organization for Economic Cooperation and
Development (OECD)
 To join, a country must be guaranteeing these rights to
its people
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Business benefits in
mature democracy
 Constitutions limit what government can take
 and what other changes governments can make
 Legal systems enforce contracts
 between businesspeople
 between businesspeople and customers
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Political systems…
 provide the written “rules of the game” (institutions) in a
nation that allow people to
 govern themselves and
 work together
 To do business, you have to know the rules
 Sometimes …
 the written rules aren’t followed
 there are no agreed rules to say whether what you want
is OK
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2 key dimensions of difference
 Political systems as they are designed can be
assessed according to two dimensions
 Degree to which they are democratic or
totalitarian
 Degree to which they emphasize individualism
as opposed to collectivism
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Democracy versus totalitarianism
 Democracy
 Totalitarianism
 Government is by the
 One person/party
people, exercised either
directly or through elected
representatives
(representative
democracy)
 Elected representatives
are held accountable
through safeguards
exercises absolute control
over all spheres of human
life (competing political
parties are banned)
 Communist totalitarianism
 Theocratic totalitarianism
 Tribal totalitarianism
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 Right wing totalitarianism
Collectivism and Individualism
 Individualism
 Collectivism
 Central tenet is that
 Collective goals are
individual economic
and political
freedoms are the
ground rules on which
society is based
 Is the direct opposite of
collectivism
more important than
individual goals
 Individual rights are
sacrificed for the good
of the majority
 In the modern world
collectivism is
expressed through
socialism
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But government’s official
principles don’t tell everything
 Perhaps we should have an additional classification of
political systems
 More mature (e.g., the rich countries’ systems – usually)
 Less mature (many systems in poorer countries)
 Are some of the rich countries turning their systems into less
mature ones?
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Classifying Economic Systems
 Market economy: what is produced & in what
quantity is determined by supply/demand and
signaled to producers through a price system
 Hong Kong is closest
 Command economy: planned by government
 rare today – North Korea, Cuba
 Mixed economy: a balance of both of the above
 most countries, but degree of mixture varies
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Individualism vs. Collectivism
in Economic Systems
 There is a connection between political ideology and
economic systems
 In countries where individual goals are given primacy
free market economic systems are fostered
 Countries where collective goals are given primacy there
is marked state control of markets
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In any new country, consider whether
rules are real
 Many poor countries have what used to be called a
“soft state”
 Powerful people can break or change the rules
when they want
 People don’t follow the rules (take bribes, etc.)
 Even in many rich countries (Japan), the rules may
tilt in favor of local people
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Legal Systems
 Rules, laws, and
processes that enforce
them regulate behavior
 Processes through which
grievances are addressed
 All countries have legal
systems, but they may work
very differently
Property Rights
 A bundle of legal rights over the use to which a
resource is put and over the use made of any
income from that resource
 Can be violated through
 Private action (e.g., theft)
 Public (government) action
 Corruption
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Contract Law
 Contracts specify conditions under which an exchange is to
occur
 Detail rights and obligations of parties
 Contract law is the body of law that enforces a contract
 Dispute resolution is often complex
 Where to sue, where to arbitrate - whose laws apply?
 Validity of contracts and decisions
 The United Nations has a Convention on Contracts for the
International Sale of Goods (CIGS)
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Intellectual Property Rights
 Intellectual property refers to property that is the
product of intellectual activity
 Intellectual property laws are believed very
important stimulus to innovation and creative work
 Protection of intellectual property rights varies
greatly from country to country
 There are international rules, and the U.S. is
struggling to get them enforced
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Piracy of Intellectual Property
Figure 2.2: Regional Piracy Rates for Software
Eastern Europe
Asia Pacific
Latin America
Middle East and Africa
Western Europe
North America
0
20
40
60
Percentage of Software that is Pirated
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80
Product Safety and Liability
 Product safety laws set safety standards for products
and manufacturing processes
 Product liability laws hold the firm and its officers
responsible for product safety standards
 Environmental standards limit pollution etc.
 Laws differ radically from country to country
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The ‘corruption’ problem
 Many (most?) traditional codes of behavior require
people to do things that in developed countries are
called ‘corruption’
 For example, in most traditional societies, a key obligation
is taking care of your extended family
 But doing this often contradicts laws of both capitalist and
socialist societies
 Transparency International produces good measures
of corruption for nations
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Which Countries Are
Most Corrupt?
Rankings of Corruption by Country 2010
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Differences in Economic Development
 Different countries have dramatically different
levels of economic development
 Two common measurements of economic
development
 Gross National Income (GNI)
 superseded Gross National Product or GNP
 the sum of all income received by residents of a nation
 Gross National Income at Purchasing Power Parity
(PPP), which accounts for differences in the cost of living
 To estimate how big a market a country is, look at GNI
 U.S. GNI for 2011 was $15.2 trillion.
 China’s GNI was $7.3 trillion.
 India’s was $1.9 trillion.
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To gauge how rich the country is,
look at GNI per capita
 Large GNI does not prove a country is rich
 China has the second highest GNI in the world, but many
of its people are very poor
 GNI per capita is GNI per head: Total GNI divided by
population
 This is called “nominal” GNI per capita because it is not
adjusted for price differences
 U.S. “nominal” GNI per capita in 2011 was $48,328
 China’s nominal GNI per capita was $5,417
 India’s nominal GNI per capita was $1,514
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Differences in
Economic Development
GNI per Capita, 2006
 The single best measure of the wealth of the people of a country
is GNI per capita at purchasing power parity (GNI PPP)
 Agencies calculating GNI at purchasing power parity take
GNI and population calculated by governments
 Then they make an adjustment based on price indexes for
different countries
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Differences in
Economic Development
GNI PPP per Capita, 2006
Differences in
Economic Development
Growth Rate in GDP per Capita, 1997 - 2006
Broader Conceptions of Development:
Amartya Sen
 Sen says development should be measured less by
material output measures, such as GNP per capita,
and more by the capabilities and opportunities
that people enjoy.
 His Human Development Index (HDI) measures
quality of life in different nations
 Based on life expectancy, educational attainment,
and GNI at PPP average incomes
Broader Conceptions of Development:
Amartya Sen
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States in Transition
 The political economy of the world has changed
radically since the late 1980’s
 Two trends
 A wave of democratic revolutions swept the world
 There has been a strong move away from centrally
planned and mixed economies toward a free market
model
The Spread of Democracy
The Spread of Democracy
 Three main reasons account for the spread of
democracy
 Totalitarian regimes failed to deliver economic progress
 New information and communication technologies, including
shortwave radio, satellite television, fax machines, desktop
publishing, and most importantly, the Internet, have broken
down the ability of the state to control access to information
 The economic advances of the past quarter century have led to
the emergence of increasingly prosperous middle and
working classes who have pushed for democratic reforms
The Spread of Market-Based Systems
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What does this mean for
businesspeople?
 Political economy often tells you how attractive a
country is for business
 When operating in a country, understand the political
economic situation to know
 what you can do in the country
 how to address political problems
 You have to plan how you’ll address the differences
between your home system and the ones you enter
 You will face major ethical issues
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Political risks
 Political risk is the danger that political forces will
cause drastic changes or unexpected behaviors in a
country that adversely affect profit or other business
goals.
 Many kinds of change can alter a business’ position in
a country.
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Homework assignment 1
The homework task
 Pick one company that operates internationally
 Many people will be able to do this easily
 If you need help, flip through issues of Fortune or Economist
magazine, look at www.Fortune.com, or check out the Wall St.
Journal or NY Times (or their web pages)
 List at least 3 countries where the firm operates
 It’s OK to guess
 Describe at least five political risks the firm faces in these
countries
 Plan on writing at least one sentence about each risk to
describe it
 It’s OK if the risks all come from 1 country
 But include a diverse group of risks
 You don’t have to write a lot to get
a good grade
 But you do have to describe 5 risks clearly and accurately
 Students who get less than C- will be required to re-write