Transcript Chapter 2: National Differences in Political Economy

CHAPTER 2:
NATIONAL DIFFERENCES IN
POLITICAL ECONOMY
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MGT 372 Lecture
By: Ms. Adina Malik (ALK)
POLITICAL SYSTEM
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Political system refers to the system of government in a nation. The
political system of a country shapes its economic and legal 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
It differs in 2 degrees:
1. degree to which they emphasize collectivism as oppose to
individualism
2. degree to which a nation is democratic as oppose to totalitarian
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POLITICAL SYSTEM: 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.
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POLITICAL SYSTEM: 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:
1. Guaranteeing individual freedom and self-expression
2. 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.
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POLITICAL SYSTEM: DEMOCRACY
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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
 most modern democratic states practice representative
democracy where citizens periodically elect individuals to
represent them. These representatives function on behalf of the
people
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POLITICAL SYSTEM: DEMOCRACY
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Some characteristics of a democratic nation are:
1. Freedom of rights to express
2. Freedom of media
3. Regular elections in which all eligible citizens are allowed
to vote
4. Universal adult suffrage (right to vote)
5. Limited terms for elected representatives
6. A fair court system that is independent from the political
system
7. A non political state bureaucracy (administrative policymaking group)
8. Relatively free access to information
9. Non political police and armed force
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Example:
USA, Germany, Japan, Australia, Finland,
France, India.
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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
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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.
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POLITICAL SYSTEM: TOTALITARIANISM
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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
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POLITICAL SYSTEM: TOTALITARIANISM
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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.
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ECONOMIC SYSTEM
There are 3 types of Economic System:
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Market Economy: all productions are privately owned, the
goods/services are not planned by anybody but by the supplydemand 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
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ECONOMIC SYSTEM
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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.
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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.
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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.
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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.
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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.
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LEGAL SYSTEM
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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).
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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.
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Example: USA, UK, Australia, etc.
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LEGAL SYSTEM
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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.
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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.
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DIFFERENCES IN CONTRACT LAW
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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
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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
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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
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PROPERTY RIGHTS & CORRUPTION
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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
1.
Private action-theft, piracy, blackmail
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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.
THE PROTECTION OF INTELLECTUAL PROPERTY
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Intellectual property refers to property that is the product of
intellectual activity, such as a computer software, a chemical
formula for a new drug, etc. It is established through
patents, copyrights and trademarks.
In today’s high-tech ‘knowledge’ economy, intellectual
property has become one of the key sources of competitive
advantage. So both domestic and foreign firms should be
given appropriate protection to their IP.
IP protection rewards people or business for their creativity.
World Intellectual Property Organization (183 member
countries)
Paris Convention for the Protection of Industrial Property
(170 nations as of 2007)
PRODUCT SAFETY & PRODUCT LIABILITY
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Product safety laws set certain safety standards to which a
product must follow.
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Product liability involves holding a firm and its officers
responsible when a product causes death, injury or damage.
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These liability laws are stronger and more expensive in
western countries than in LDCs. For example, in USA, business
is expensive due to high expense of liability insurance.
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The ethical dilemma for MNCs is whether to follow home
country liability rules and standards or to exploit the relaxed
laws of LDCs.