Int Business Chap2. Du
Content
Chapter 2: National Differences in Political Economy
A1 - 1
a. Political System
1. Collectivism and Individualism:
Collectivism as was argued by Plato is that individual rights should be sacrificed for the good of majority and that property should be owned in common. In modern days it is picked up by socialists. Despite the failure of communism, still there are countries like China, Cuba, North Korea that experience communist power. There are socialist parties in many countries like Austria, UK, France, Germany, and India who believe in the effectiveness of public sector ownership of certain sectors.
A1 - 2
a. Political System (Contd..)
• Individualism as Aristotle argued is based
on individual ownership and freedom. He argued that private property is more productive than the productivity of joint or state ownership as communal property receives little care. Modern day economists, like Milton Friedman, believe in a free market economy that essentially follows the principle of individualism.
A1 - 3
a. Political System (Contd..)
2. Democracy and Totalitarianism: • In democracy government would be regularly elected by the population. Some of the features of democracy are: (a) individual’s right to freedom of expression, (b) free media, (c) regular election, (d) limited terms for elected representatives, (e) independence of judiciary, (f) a nonpolitical state bureaucracy, (g) a nonpolitical police force and armed service, and (g) free access to state information.
A1 - 4
a. Political System (Contd..)
• In totalitarianism individual’s right to freedom
of expression and organization, free media, and regular elections are denied to citizens. There are four kinds of Totalitarianism. ¤ Communist totalitarianism believes that socialism would be achieved only by Totalitarian dictatorship by communist party. ¤ Theocratic totalitarianism is found in states where political power is monopolized by a party, group, or individual that governs according to religious principles. (Like in Saudi Arabia, Iran).
A1 - 5
a. Political System: totalitarianism (Contd..)
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¤
Tribal Totalitarianism is found in Africa (Uganda, Kenya, Tanzania, and Zimbabwe) where there are many tribes with considerable differences among them. When any party comes into the power it serves the interest of the tribe he belongs to and monopolizes the power. Right wing Totalitarianism generally permits individual economic freedom but restricts individual political freedom on the ground that it would lead to the rise of communism. It can be in the form of military dictatorship like in Latin America in 1980s; or It can be in democratic forms like in South Korea, Taiwan, Singapore, Indonesia, and the Philippines.
A1 - 6
b. Economic System
1. Market Economy:
• In a pure market economy all productive activities
are privately owned, as opposed to being owned by the state. The goods and services that should be produced, the quantity at which they should be produced, and the prices at which those will be sold are determined by market mechanism. However, government makes policies to restrict market imperfections (like monopolistic or oligopolistic exploitations).
A1 - 7
b. Economic System (Contd..)
2. Command Economy:
• In a pure command economy all productive
activities are owned by the state. The goods and services that should be produced, the quantity at which they should be produced, and the prices at which those will be sold are determined by the government. Consistent with the collective ideology, the government is assigned to allocate resources for the goods of the society. Command economies are found in former communist states. Quite often this results in inefficiency due to lack of competition and of motivation to product improvement.
A1 - 8
b. Economic System (Contd..)
3. Mixed Economy: • Mixed economy refers to the country where certain sectors are under private ownership dictated by the market mechanism and certain sectors are under government ownership dictated by national interests. Externality and non-divisibility nature of certain goods constraint the use of market mechanism as the method of allocation. Pure market mechanism also suffers from monopolistic and other exploitation that creates inequality. Similarly, government ownership in all sectors encourages inefficiency. Keeping the limitations in minds most of the countries follow the mixed economy where some sectors having national interests are kept under government ownership and the rest of the sectors are allocated to private ownership.
A1 - 9
c. Legal System:
1. Different legal system: • The sources of law defines different legal system in the form of the common law, civil law and theocratic law. The common law system is not exclusively written as it is based on tradition, precedent, and custom. The civil law is based on a very detailed set of laws organized in codes. Theocratic law is based on religious teachings.
2. Contract Law: • Contract law is the body of law that governs contract enforcement. The parties to an agreement normally resort to contract law when one party feels the other has violated either the spirit of an agreement. Not only enactment of laws is enough but also important is the implementation of laws.
A1 - 10
c. Legal System (Contd..)
3. Property Rights: In a legal sense, the term property refers to a resource over which an individual or business holds a legal title that he owns the resource. It is protected by domestic laws of every country, but violation is quite common. Violation may be through private action or Public action. Private action refers to theft, piracy, extortions, blackmail, and the like by private individuals or groups. Role of police and judicial system is also important. (Example: Mafia in Russia). Public action to violate property rights occurs when public officials, such as politicians and government bureaucrats, extort income or resources from property holders. It can also be in the form of excessive taxation, license fees, or sudden nationalization without due compensation. The status of property rights is affected by the prevalence of corruption in the society. Economic evidence suggests that high levels of corruption significantly reduce the foreign direct investment, level of international trade.
A1 - 11
•
c. Legal System (Contd..)
4. Protection of intellectual Property
Intellectual property rights are protected by patent, trademark and copyright. Patent grants the inventor a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Trademarks are deigns and names, often officially registered, by which merchants or manufacturers designate and differentiate their products (e.g., Christian Dior cloths). Copyrights are exclusive legal rights to authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Technological development is a real threat to the protection of property rights. To give incentives to the companies spending huge amounts for R&D, property rights need to be protected. Violation is noticeable in China and Thailand. Software piracy is common worldwide. Piracy in music is also common. WTO takes care of this violation through the formal enactment of TRIPS (Trade Related Aspects of Intellectual Property Rights). It gives the member countries to enforce patent lasting at least 20 years, and copyrights lasting 50 years. A1 - 12
•
c. Legal System (Contd..)
5. Product safety and product liability:
• Product safety laws set certain standards
to which a product must adhere. Product liability involves holding a firm responsible when a product causes injury, death, or damage. There are both civil product liability laws (in the form of payment of money) and criminal liability laws (fines and imprisonment).
A1 - 13
d. Determinants of Economic Development
1.
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¤
¤
Traditional measures of differences in Economic Development National Income: GDP, GNP, NNP, and NDP Growth rate in GNP is also used to provide some idea about the nature of economic development and market potentials of a country (Reference: China). Per capita GNP is an indicator of the stage of economic development of a country. However, there are some problems of per capita GNP as cost of living varies from country to country. Purchasing Power Parity is used to show the relative standard of living of each of the countries. Under the system per capita income is converted into commodities, and then, prices are taken from USA. (PPP per capita GDP of Bangladesh was US$2,040 against the traditional per capita income of $523 in 2007). The rich and poor gap is another indicator to indicate the composition of consumer of a country.
A1 - 14
d. Determinants of Economic Development (Contd..)
2. Broader Conceptions of Development (Sen’s view): • Amarta Sen argued that development should not be material output measure such GNP per capita but by the capabilities and opportunities that people enjoy. Freedom of deprival, poverty and suppression are keys to development. Sen introduced some more variables in the concept of development. Freedom is an essential element of development and to have a say in the crucial decisions of the government makes someone more developed. Also important for development is the education, basic health care, and reduced child mortality. Sen argued that people can not develop their capabilities if they are chronically ill or woefully ignorant. Sen’s qualitative aspects have been picked up by United Nations, which has developed Human Development Index (HDI).
A1 - 15
d. Determinants of Economic Development (Contd..)
3. Human Development Index (HDI) • HDI is based on three measures: living standard, education and health care. It gives equal weight on income, life expectancy at birth and adult literacy. It assumes a diminishing marginal utility of income by taking the log number of income. Income is measured by the Purchasing Power Parity (PPP) Index of per capita income. The HDI Index is scaled from 0 to 1; countries scoring less than 0.5 are classified as having low human development, from 0.5 to 0.8 medium and above 0.8 as having human development. ¤ HDI=1/3(Income Index) + 1/3(Education Index) + 1/3(Health Index) ¤ Income Index={(Log of PPP Income)-Log(100)}/{(Log of 40,000)-Log(100)} ¤ Education Index= 2/3(adult Literacy)+1/3(gross enrollment) ¤ Health Index=Life expectancy Index= (life expectancy25)/(85-25) • HDI of Bangladesh: .547 (2007) rank: 140 out of 177 A1 - 16
d. Determinants of Economic Development (Contd..)
4. Political economy and Human Progress A country’s economic progress is a function of its economic and political system because of following reasons: - Innovation and entrepreneurship are the engines of economic growth. Innovation involves not only the product but also the process, organization, management practices and strategies. - Innovation and Entrepreneurship requires market economy. Market economy creates greater incentives for innovation and entrepreneurship than either a planned economy or a mixed economy. - Innovation and entrepreneurship require strong property rights. Strong legal protection of property rights is another requirement for business environment conducive to innovation and entrepreneurial activity. The state must not expropriate the profit of business.
A1 - 17
Political economy and Human Progress (Contd.)
- Political system: The representative democracy of the West has
become successful for creating the required political system conducive for innovation and entrepreneurship development. However, the experience of Asian emerging tigers (Singapore, South Korea, Hong Kong and Taiwan) suggests ensuring discipline before democracy, which is a lesson for many developing countries where democracy fails to ensure discipline. Experience of some dictator government of Africa, Latin America and Asia committed to market mechanism failed to ensure growth of entrepreneurship and innovation. - Economic Progress ensures democracy. Although democracy in certain cases failed to protect the legal property rights but economic progress may ensure democracy, which is the lesson of Emerging Asian Tigers.
A1 - 18
d. Determinants of Economic Development (Contd..)
5. Geography, Education and Economic Development • Harvard economists Sachs pointed that by virtue of favorable geography, certain societies were more likely to engage in trade than others and were thus more likely to be open to and thus, to develop market based economic system, which in turn would promote faster economic growth. Sen emphasized on education as a source of economic development, which appears to be true in reference to the cases of Pakistan and South Korea. Both the countries had same economic footing in 1960s with an education rate of Pakistan one third of that of South Korea at that time; now per capita income of South Korea is 3 times that of Pakistan.
A1 - 19
States in Transition
1. Spread of Democracy:
•
A study in 2001, on the nature of freedom in different countries, reveals that 86 countries in the world with 41% population of the world are classified as “free”. Another 59 countries with 24% population are “partly free,” while 47 countries with 35.5% population are “not free.” The number of democratic countries has increased from 69 nations in 1987 to 120 in 2001. The two reasons attributed to the failure of communism and transition to democracy are that: (1) on the one hand the totalitarian government failed to deliver the economic progress whereas the developed countries were practicing representative democracy, and (2) closing the country from the information of the rest of the world is almost absurd due to new information and communication technology like satellite TV, internet, fax etc.
A1 - 20
States in Transition (Contd..)
2. The New World Order: • There are two views of the new world order. One group, led by Francis Fukuyama, views a triumph of western liberalization all over the world. It asserts that we may be witnessing the end point of the mankind’s ideological evolution in the universalization of western liberal democracy as the final form of human government. The other group including Samuel Huntington opines that despite the global popularity for coca cola and MTV, the world is going to retreat towards traditionalism as is demonstrated by the resurgences of Islam.
A1 - 21
States in Transition (Contd..)
3. The Spread of Market Based Economy:
• Along with the spread of democracy in 1980s
there was a transformation from centrally planned economy or command economies to marketbased economies. More than 30 countries that were in the former Soviet Union and East European communist block are now changing their economic system. Asian countries like China and Vietnam and African countries Angola, Ethiopia, and Mozambique followed the same process.
A1 - 22
States in Transition (Contd..)
4. The Nature of Economic Transformation:
It follows the 3 steps:
-
-
-
Deregulation: Most of the economies experiencing the transformation had certain sectors protected under government control where private enterprises were not allowed. Deregulation involves removing legal restrictions to the free play of the markets and the establishment of private enterprises. Privatization: Privatization implies the transfer of ownership from government holdings to private sectors. Legal System: Enactment and application of many laws to ensure property rights and discipline is the next step required to facilitate the transformation towards market economy.
A1 - 23
A1 - 1
a. Political System
1. Collectivism and Individualism:
Collectivism as was argued by Plato is that individual rights should be sacrificed for the good of majority and that property should be owned in common. In modern days it is picked up by socialists. Despite the failure of communism, still there are countries like China, Cuba, North Korea that experience communist power. There are socialist parties in many countries like Austria, UK, France, Germany, and India who believe in the effectiveness of public sector ownership of certain sectors.
A1 - 2
a. Political System (Contd..)
• Individualism as Aristotle argued is based
on individual ownership and freedom. He argued that private property is more productive than the productivity of joint or state ownership as communal property receives little care. Modern day economists, like Milton Friedman, believe in a free market economy that essentially follows the principle of individualism.
A1 - 3
a. Political System (Contd..)
2. Democracy and Totalitarianism: • In democracy government would be regularly elected by the population. Some of the features of democracy are: (a) individual’s right to freedom of expression, (b) free media, (c) regular election, (d) limited terms for elected representatives, (e) independence of judiciary, (f) a nonpolitical state bureaucracy, (g) a nonpolitical police force and armed service, and (g) free access to state information.
A1 - 4
a. Political System (Contd..)
• In totalitarianism individual’s right to freedom
of expression and organization, free media, and regular elections are denied to citizens. There are four kinds of Totalitarianism. ¤ Communist totalitarianism believes that socialism would be achieved only by Totalitarian dictatorship by communist party. ¤ Theocratic totalitarianism is found in states where political power is monopolized by a party, group, or individual that governs according to religious principles. (Like in Saudi Arabia, Iran).
A1 - 5
a. Political System: totalitarianism (Contd..)
¤
¤
Tribal Totalitarianism is found in Africa (Uganda, Kenya, Tanzania, and Zimbabwe) where there are many tribes with considerable differences among them. When any party comes into the power it serves the interest of the tribe he belongs to and monopolizes the power. Right wing Totalitarianism generally permits individual economic freedom but restricts individual political freedom on the ground that it would lead to the rise of communism. It can be in the form of military dictatorship like in Latin America in 1980s; or It can be in democratic forms like in South Korea, Taiwan, Singapore, Indonesia, and the Philippines.
A1 - 6
b. Economic System
1. Market Economy:
• In a pure market economy all productive activities
are privately owned, as opposed to being owned by the state. The goods and services that should be produced, the quantity at which they should be produced, and the prices at which those will be sold are determined by market mechanism. However, government makes policies to restrict market imperfections (like monopolistic or oligopolistic exploitations).
A1 - 7
b. Economic System (Contd..)
2. Command Economy:
• In a pure command economy all productive
activities are owned by the state. The goods and services that should be produced, the quantity at which they should be produced, and the prices at which those will be sold are determined by the government. Consistent with the collective ideology, the government is assigned to allocate resources for the goods of the society. Command economies are found in former communist states. Quite often this results in inefficiency due to lack of competition and of motivation to product improvement.
A1 - 8
b. Economic System (Contd..)
3. Mixed Economy: • Mixed economy refers to the country where certain sectors are under private ownership dictated by the market mechanism and certain sectors are under government ownership dictated by national interests. Externality and non-divisibility nature of certain goods constraint the use of market mechanism as the method of allocation. Pure market mechanism also suffers from monopolistic and other exploitation that creates inequality. Similarly, government ownership in all sectors encourages inefficiency. Keeping the limitations in minds most of the countries follow the mixed economy where some sectors having national interests are kept under government ownership and the rest of the sectors are allocated to private ownership.
A1 - 9
c. Legal System:
1. Different legal system: • The sources of law defines different legal system in the form of the common law, civil law and theocratic law. The common law system is not exclusively written as it is based on tradition, precedent, and custom. The civil law is based on a very detailed set of laws organized in codes. Theocratic law is based on religious teachings.
2. Contract Law: • Contract law is the body of law that governs contract enforcement. The parties to an agreement normally resort to contract law when one party feels the other has violated either the spirit of an agreement. Not only enactment of laws is enough but also important is the implementation of laws.
A1 - 10
c. Legal System (Contd..)
3. Property Rights: In a legal sense, the term property refers to a resource over which an individual or business holds a legal title that he owns the resource. It is protected by domestic laws of every country, but violation is quite common. Violation may be through private action or Public action. Private action refers to theft, piracy, extortions, blackmail, and the like by private individuals or groups. Role of police and judicial system is also important. (Example: Mafia in Russia). Public action to violate property rights occurs when public officials, such as politicians and government bureaucrats, extort income or resources from property holders. It can also be in the form of excessive taxation, license fees, or sudden nationalization without due compensation. The status of property rights is affected by the prevalence of corruption in the society. Economic evidence suggests that high levels of corruption significantly reduce the foreign direct investment, level of international trade.
A1 - 11
•
c. Legal System (Contd..)
4. Protection of intellectual Property
Intellectual property rights are protected by patent, trademark and copyright. Patent grants the inventor a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Trademarks are deigns and names, often officially registered, by which merchants or manufacturers designate and differentiate their products (e.g., Christian Dior cloths). Copyrights are exclusive legal rights to authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Technological development is a real threat to the protection of property rights. To give incentives to the companies spending huge amounts for R&D, property rights need to be protected. Violation is noticeable in China and Thailand. Software piracy is common worldwide. Piracy in music is also common. WTO takes care of this violation through the formal enactment of TRIPS (Trade Related Aspects of Intellectual Property Rights). It gives the member countries to enforce patent lasting at least 20 years, and copyrights lasting 50 years. A1 - 12
•
c. Legal System (Contd..)
5. Product safety and product liability:
• Product safety laws set certain standards
to which a product must adhere. Product liability involves holding a firm responsible when a product causes injury, death, or damage. There are both civil product liability laws (in the form of payment of money) and criminal liability laws (fines and imprisonment).
A1 - 13
d. Determinants of Economic Development
1.
¤ ¤
¤
¤
¤
Traditional measures of differences in Economic Development National Income: GDP, GNP, NNP, and NDP Growth rate in GNP is also used to provide some idea about the nature of economic development and market potentials of a country (Reference: China). Per capita GNP is an indicator of the stage of economic development of a country. However, there are some problems of per capita GNP as cost of living varies from country to country. Purchasing Power Parity is used to show the relative standard of living of each of the countries. Under the system per capita income is converted into commodities, and then, prices are taken from USA. (PPP per capita GDP of Bangladesh was US$2,040 against the traditional per capita income of $523 in 2007). The rich and poor gap is another indicator to indicate the composition of consumer of a country.
A1 - 14
d. Determinants of Economic Development (Contd..)
2. Broader Conceptions of Development (Sen’s view): • Amarta Sen argued that development should not be material output measure such GNP per capita but by the capabilities and opportunities that people enjoy. Freedom of deprival, poverty and suppression are keys to development. Sen introduced some more variables in the concept of development. Freedom is an essential element of development and to have a say in the crucial decisions of the government makes someone more developed. Also important for development is the education, basic health care, and reduced child mortality. Sen argued that people can not develop their capabilities if they are chronically ill or woefully ignorant. Sen’s qualitative aspects have been picked up by United Nations, which has developed Human Development Index (HDI).
A1 - 15
d. Determinants of Economic Development (Contd..)
3. Human Development Index (HDI) • HDI is based on three measures: living standard, education and health care. It gives equal weight on income, life expectancy at birth and adult literacy. It assumes a diminishing marginal utility of income by taking the log number of income. Income is measured by the Purchasing Power Parity (PPP) Index of per capita income. The HDI Index is scaled from 0 to 1; countries scoring less than 0.5 are classified as having low human development, from 0.5 to 0.8 medium and above 0.8 as having human development. ¤ HDI=1/3(Income Index) + 1/3(Education Index) + 1/3(Health Index) ¤ Income Index={(Log of PPP Income)-Log(100)}/{(Log of 40,000)-Log(100)} ¤ Education Index= 2/3(adult Literacy)+1/3(gross enrollment) ¤ Health Index=Life expectancy Index= (life expectancy25)/(85-25) • HDI of Bangladesh: .547 (2007) rank: 140 out of 177 A1 - 16
d. Determinants of Economic Development (Contd..)
4. Political economy and Human Progress A country’s economic progress is a function of its economic and political system because of following reasons: - Innovation and entrepreneurship are the engines of economic growth. Innovation involves not only the product but also the process, organization, management practices and strategies. - Innovation and Entrepreneurship requires market economy. Market economy creates greater incentives for innovation and entrepreneurship than either a planned economy or a mixed economy. - Innovation and entrepreneurship require strong property rights. Strong legal protection of property rights is another requirement for business environment conducive to innovation and entrepreneurial activity. The state must not expropriate the profit of business.
A1 - 17
Political economy and Human Progress (Contd.)
- Political system: The representative democracy of the West has
become successful for creating the required political system conducive for innovation and entrepreneurship development. However, the experience of Asian emerging tigers (Singapore, South Korea, Hong Kong and Taiwan) suggests ensuring discipline before democracy, which is a lesson for many developing countries where democracy fails to ensure discipline. Experience of some dictator government of Africa, Latin America and Asia committed to market mechanism failed to ensure growth of entrepreneurship and innovation. - Economic Progress ensures democracy. Although democracy in certain cases failed to protect the legal property rights but economic progress may ensure democracy, which is the lesson of Emerging Asian Tigers.
A1 - 18
d. Determinants of Economic Development (Contd..)
5. Geography, Education and Economic Development • Harvard economists Sachs pointed that by virtue of favorable geography, certain societies were more likely to engage in trade than others and were thus more likely to be open to and thus, to develop market based economic system, which in turn would promote faster economic growth. Sen emphasized on education as a source of economic development, which appears to be true in reference to the cases of Pakistan and South Korea. Both the countries had same economic footing in 1960s with an education rate of Pakistan one third of that of South Korea at that time; now per capita income of South Korea is 3 times that of Pakistan.
A1 - 19
States in Transition
1. Spread of Democracy:
•
A study in 2001, on the nature of freedom in different countries, reveals that 86 countries in the world with 41% population of the world are classified as “free”. Another 59 countries with 24% population are “partly free,” while 47 countries with 35.5% population are “not free.” The number of democratic countries has increased from 69 nations in 1987 to 120 in 2001. The two reasons attributed to the failure of communism and transition to democracy are that: (1) on the one hand the totalitarian government failed to deliver the economic progress whereas the developed countries were practicing representative democracy, and (2) closing the country from the information of the rest of the world is almost absurd due to new information and communication technology like satellite TV, internet, fax etc.
A1 - 20
States in Transition (Contd..)
2. The New World Order: • There are two views of the new world order. One group, led by Francis Fukuyama, views a triumph of western liberalization all over the world. It asserts that we may be witnessing the end point of the mankind’s ideological evolution in the universalization of western liberal democracy as the final form of human government. The other group including Samuel Huntington opines that despite the global popularity for coca cola and MTV, the world is going to retreat towards traditionalism as is demonstrated by the resurgences of Islam.
A1 - 21
States in Transition (Contd..)
3. The Spread of Market Based Economy:
• Along with the spread of democracy in 1980s
there was a transformation from centrally planned economy or command economies to marketbased economies. More than 30 countries that were in the former Soviet Union and East European communist block are now changing their economic system. Asian countries like China and Vietnam and African countries Angola, Ethiopia, and Mozambique followed the same process.
A1 - 22
States in Transition (Contd..)
4. The Nature of Economic Transformation:
It follows the 3 steps:
-
-
-
Deregulation: Most of the economies experiencing the transformation had certain sectors protected under government control where private enterprises were not allowed. Deregulation involves removing legal restrictions to the free play of the markets and the establishment of private enterprises. Privatization: Privatization implies the transfer of ownership from government holdings to private sectors. Legal System: Enactment and application of many laws to ensure property rights and discipline is the next step required to facilitate the transformation towards market economy.
A1 - 23
