CHAPTER 2: COUNTRY DIFFERENCE IN POLITICAL ECONOMY

Political Economy: The political, economic, and legal economy of a country interdependent of
each other, so they affect the level of economic well-being in a country
Political Systems
System of government in a nation shapes the economic and legal systems
Assessed according to
1. Degree to which the country emphasizes collectivism as opposed to individualism
2. Degree to which the country is democratic (individualism) or totalitarian (collectivism)
Collectivism and Individualism
Collectivism: System that stresses the primacy of collective goals over individual goals
individual rights should be sacrificed for the good of the majority and that property should
be owned in common, traced to Plato
Today, collectivism is equated with socialists (Karl Marx 1818-1883)
- advocate state ownership of the basic means of production, distribution, and
exchange; if state owned the means of production, must ensure the workers
were fully compensated for their labour
- manage to benefit society as a whole, rather than individual capitalists
Socialism
In the early 20th century, socialism split into
1. Communism socialism can only be achieved through violent revolution and totalitarian
dictatorship
- in retreat worldwide by mid-1990s; North Korea
2. Social democrats socialism is achieved through democratic means
- retreating as many countries move toward free market economies realize the
state-ownership of the means of production doesnt always benefit the public
- state-owned enterprises have been privatized: New parties have been voted into
power with the goal of selling state-owned enterprises to private investors who
will run them more efficiency through higher prices and higher taxes
Individualism
Philosophy that an individual should have freedom in his own economic and political
pursuits
1. Individual freedom and self-expression are guaranteed
2. People are allowed to pursue their own self-interest in order to achieve the best
overall good for society.
traced to Aristotle (384-322 BC), argued that individual diversity and private ownership
are desirable
individual economic and political freedoms are the ground rules on which a society
should be based - implies democratic political systems and free market economies
Democracy and Totalitarianism
Democracy: Political system in which government is by the people, exercised either
directly or through elected representatives usually associated with individualism
- 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
- elected representatives form a government, whose function is to make decisions
Totalitarianism: Form of government in which one person or political party exrcises
absolute control over all spheres of human life and prohibits opposing political parties

Communist totalitarianism found in states where the communist party

monopolizes power totalitarian dictatorship; China, Vietnam, Laos, North Korea
and Cube
- Theocratic totalitarianism - found in states where political power is monopolized
by a party, group, or individual that governs according to religious principles;
Islam Iran and Saudi Arabia
- Tribal totalitarianism - found in states where a political party that represents the
interests of a particular tribe monopolizes power; Africas tribes
- Right-wing totalitarianism - permits some individual economic freedom, but
restricts individual political freedom; south Korea, Taiwan, Singapore, Indonesia
and Philippines
Economic Systems
In countries where individual goals are given primacy over collective goals, free market
systems are likely to exist, but in countries where collective goals are dominant, markets
are likely to be restricted and state-owned enterprises are common.
1. Market economies all productive activities are privately owned and production is
determined by the interaction of supply and demand
- government encourages free and fair competition between private producers
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
- all businesses are state-owned, and governments allocate resources for the
good of society
- because there is little incentive to control costs and be efficient, command
economies tend to stagnate
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
- governments tend to own firms that are considered important to national security
Legal Systems
Rules that regulate behaviour along with the processes by which the laws are enforced
and through which the law are enforced and through which redress for grievances is
obtained
Its important because a countrys laws regulate business practice, define the manner in
which business transactions are to be executed, and set down the rights and obligations
of those involved in business transactions. So, the legal system impacts the
attractiveness of a country as an investment or a potential target market.
So, countries that are collectivistic totalitarian states restrict private enterprise, while
individualistic market economies are pro private enterprise and pro consumer.
1. Common law - based on tradition (legal history), precedent (previous cases), and custom
(ways laws are applied). When interpreting common law, they do so with regard to these
characteristics gives system degree of flexibility
Each new interpretation sets a precedent that may be followed in future cases.
As new precedent arise, law can be amended if necessary
2. Civic law - based on detailed set of laws organized into codes
Have the power to apply the existing law, not interpret the law
3. Theocratic law - law is based on religious teachings
Islamic law is the most widely practiced theocratic law system in the world. In
practice, Islamic jurors and scholars are struggling to apply the foundations of
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Islamic law to the modern world, and many Muslim countries today are actually
practicing Islamic law combined with common law or civil law.
Differences in Contract Law
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
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 - more flexibility in how a dispute is handled
Under a civil law system, contracts tend to be much shorter and less specific because
many issues are already covered in the civil code - more expensive to draw up, and
contract disputes will be very adversarial
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
Property Rights
Legal rights over the use to which a resource is put and over the use made of any
income that may be derived from the resource
Can be violated through
1. Private action: theft, piracy, blackmail are done by individuals
2. Public action: legally - excessive taxation or illegally bribes or blackmailing
- 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 makes it illegal for U.S. companies to bribe foreign
government officials to obtain or maintain business over which that foreign official has
authority
Corruption Perceptions Index - most companies will be significantly more cautious when
doing business in countries with high levels of corruption. This can be quite detrimental
to a country because when foreign direct investment and trade are reduced, economic
growth slows.
The Protection of Intellectual Property
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
Protection of intellectual property rights differs from country to country
- World Intellectual Property Organization
- Paris Convention for the Protection of Industrial Property
To avoid piracy, firms can
- stay away from countries where intellectual property laws are lax
- file lawsuits
- lobby governments for international property rights agreements and enforcement
Product Safety and Product 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
When product safety laws are stricter in a firms home country than in a foreign country,
or when liability laws are more lax, the firm has to decide whether to adhere to home
country or host country standards
The Determinants of Economic Development
Differences In Economic Development
- Two ways to measure levels of economic development are
1. Gross national income (GNI) per person
2. Purchasing power parity (PPP) involves adjusting GNI by purchasing power
Nobel-prize winner Amartya Sen argues economic development should be seen as
a process of expanding the real freedoms that people experience
- the removal of major impediments to freedom like poverty, tyranny, and neglect of
public facilities
- the presence of basic health care and basic education
Boarder Conceptions of Development: Amartya Sen
The United Nations used Sens ideas to develop the Human Development Index (HDI)
which is based on
- life expectancy at birth
- educational attainment
- whether average incomes are sufficient to meet the basic needs of life in a
country
Political Economy and Economic Progress
Innovation and entrepreneurship are the engines of long-run economic growth - that
furthermore innovation and entrepreneurship require a market economy. In other words,
new products and business processes can increase the productivity of labor and capital.
Innovation and entrepreneurship require a market economy and strong property rights
market economy that creates incentives for entrepreneurs
Democratic regimes are probably more conducive to long-term economic growth than
dictatorships, even the benevolent kind
Subsequent economic growth leads to the establishment of democratic regimes
Similarly, innovation and entrepreneurship require strong property rights. If the
innovations by Microsoft were not given protection, there would have been little incentive
for the company to continue to develop new software and other products.
What type of political system is best for economic development? Most experts agree
that sustained economic growth requires a free market system and strong protection of
property rights, and that while a totalitarian regime may initially experience growth, it is
unlikely that even a benevolent dictatorship is best in the long run.
Finally, remember that economic progress often leads to the establishment of
democracy. When a free market system is in place, individual freedoms and democracy
will follow. Think about countries, like South Korea and Taiwan that have adopted more
democratic governments in the last twenty years, and of China which appears to be on
the road to a free market system. You can learn more about some of the changes taking
place in China in the Country Focus exploring the implications of the property law that
was passed in 2007.
Geography, Education and 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

Countries that invest in education have higher growth rates because the workforce is
more productive
States in Transition
Since the late 1980s, two trends have emerged
1. Democratic revolution (late 1980s and early 1990s)
o many totalitarian regimes failed to deliver economic progress to the vast bulk of
their populations
o new information and communication technologies have broken down the ability of
the state to control access to uncensored information
o economic advances of the last 25 years have led to increasingly prosperous
middle and working classes who have pushed for democratic reforms
2. A move away from centrally planned and mixed economies
o more countries have shifted toward the market-based model
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
Implication of Country Difference: Market Attractiveness
Because the political, economic and legal (and culture) systems of a country have an impact on
nations level of economic impact on the market attractiveness of particular country, therefore
has an impact on choice of national market as market and or/ product site for a business
Benefits
function of size of market, present wealth (purchasing power) of consumers in the
market and likely future of consumers
by identifying and investing early in a potential future economic stars, international firms
may build brand loyalty and gain experience in the countrys business practice
language of business strategy, early entrants into potential future economic stars may be
able to reap substantial first- mover advantage
a countrys economic system and property rights regime are reasonably good predictors
of economic prospects
Countries free market economies which property rights are well protected achieve higher
economic growth rates
Costs
Political factors cost of business increase by a need to pay off the politically powerful
to be allowed by government
Pay off bribes is greater in closed totalitarians states than in open democratic
societies politicians hold accountable by electorate
Economic factors sophistication of a countrys economy
Costly to do business in a developing nation lack of infrastructure and
supporting business
Legal factors local laws and regulations set strict standards with regard to product
safety, safety in workplace and environmental pollution
As consequence when laws and legal are followed leads to large losses from
contract violation, theft of an international business intellectual property and
lose income

Risks
Political risk: likelihood political forces will causes drastic changes in a countrys
business environment that will adversely affect the profit and other goal of enterprise
Risk greater in countries experiencing social unrest and disorder or in countries
where the underlying nature of a society increases likelihood of social unrest
(strikes, demonstration of terrorism and violent conflict)
Found in countries with more than one ethnic nationality, in countries competing
ideologies are battling for political control in countries where economic
mismanagement has create high inflation and galling living standards or in
countries that straddle the fault lines between civilization
Changes in government and government policy or in some cases, in protracted
civil strife: negative economic implications for the profit goal of business
enterprises
Economic risk: likelihood events, including economic mismanagement will cause drastic
change in countries
May give rise to significant social unrest and hence political risk
Indicator tends to be a countrys inflation rate and level of business and
government debt in country
Legal risk: likelihood that a trading partner will opportunistically break a contract or
expropriate intellectual property right
High legal risk, business hesitate to enter long-term contract