Chapter 2
National Differences in Political Economy
Political Economy
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
Political System
Assessed according to
the degree to which the country emphasizes collectivism as opposed to
individualism
the degree to which the country is democratic or totalitarian
Collectivism
Collectivism refers to a political system that stresses the primacy of collective goals over
individual goals. When collectivism is emphasized, the needs of society as a whole are generally
viewed as being more important than individual freedoms. In such circumstances, an individual’s
right to do something may be restricted on the grounds that it runs counter to “the good of society” or
to “the common good.” Advocacy of collectivism can be traced to the ancient Greek philosopher
Plato (427–347 BC), who argued in The Republic that individual rights should be sacrificed for the
good of the majority and that property should be owned in common. Plato did not equate collectivism
with equality; he believed that society should be stratified into classes, with those best suited to rule
(who for Plato, naturally, were philosophers and soldiers) administering society for the benefit of all.
In modern times, the collectivist mantle has been picked up by socialists.
Socialism
Today, collectivism is equated with socialists (Karl Marx 1818-1883)
advocate state ownership of the basic means of production, distribution, and
exchange
manage to benefit society as a whole, rather than individual capitalists
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
China; the Southeast Asian nations of Cambodia, Laos, and Vietnam; various African
nations (e.g., Angola and Mozambique); and the Latin American nations of Cuba and
Nicaragua
2. Social democrats – socialism is achieved through democratic means
retreating as many countries move toward free market economies
state-owned enterprises have been privatized
Social democracy has had perhaps its greatest influence in a number of democratic Western
nations, including Australia, France, Germany, Great Britain, Norway, Spain, and Sweden,
where Social Democratic parties have often held political power. Other countries where social
democracy has had an important influence include India and Brazil.
Individualism
Individualism refers to philosophy that an individual should have freedom in his
own economic and political pursuits
can be traced to Greek philosopher, Aristotle (384-322 BC), who argued that
individual diversity and private ownership are desirable
Individualism is built on two central tenets
individual economic and political freedoms are the ground rules on which a
society should be based
implies democratic political systems and free market economies
Individualism is defined as the distinctive qualities that make you who you are, or self-reliance,
or a political system that focuses on each person having freedom to act. Your distinctive
personality quirks and unique sense of humor are an example of your individualism.
Examples of Countries with Generally Individualistic Cultures Edit
United States.
Australia.
United Kingdom.
Canada.
Netherlands.
Hungary (post-communist generation)
New Zealand.
Italy.
Individualism was reborn as an influential political philosophy in the Protestant trading nations
of England and the Netherlands during the sixteenth century. The philosophy was refined in the
work of a number of British philosophers, including David Hume (1711–76), Adam Smith
(1723–90), and John Stuart Mill (1806–73). Individualism exercised a profound influence on
those in the American colonies who sought independence from Great Britain. Indeed, the
concept underlies the ideas expressed in the Declaration of Independence. In the twentieth
century, several Nobel Prize–winning economists, including Milton Friedman, Friedrich von
Hayek, and James Buchanan, have championed the philosophy.
Democracy
Democracy refers to a 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
To guarantee that the electorate can hold elected representatives accountable for their actions, an
ideal representative democracy typically enshrines a number of safeguards in constitutional law.
These include
(1) an individual’s right to freedom of expression, opinion, and organization;
(2) a free media;
(3) regular elections in which all eligible citizens are allowed to vote;
(4) universal adult suffrage;
(5) limited terms for elected representatives;
(6) a fair court system that is independent from the political system;
(7) a nonpolitical state bureaucracy;
(8) a nonpolitical police force and armed service; and
(9) relatively free access to state information.
Totalitarianism
Totalitarianism is a form of government in which one person or political party exercises absolute
control over all spheres of human life and prohibits opposing political parties.
Four major forms of totalitarianism exist in the world today
1. Communist totalitarianism – found in states where the communist party
monopolizes power.
Communism, however, is in decline worldwide, and most of the Communist Party dictatorships
have collapsed since 1989. Exceptions to this trend (so far) are China, Vietnam, Laos, North
Korea, and Cuba, although all these states exhibit clear signs that the Communist Party’s
monopoly on political power is retreating. In many respects, the governments of China, Vietnam,
and Laos are communist in name only since those nations now adhere to market-based economic
reforms. They remain, however, totalitarian states that deny many basic civil liberties to their
populations. On the other hand, there are signs of a swing back towards communist totalitarian
ideas in some states, such as Venezuela where the government of Hugo Chavez is starting to
display totalitarian tendencies
2. Theocratic totalitarianism - found in states where political power is
monopolized by a party, group, or individual that governs according to religious
principles.
The most common form of theocratic totalitarianism is based on Islam and is exemplified by
states such as Iran and Saudi Arabia. These states limit freedom of political and religious
expression with laws based on Islamic principles
3. Tribal totalitarianism - found in states where a political party that represents the
interests of a particular tribe monopolizes power.
Tribal totalitarianism has arisen from time to time in African countries such as Zimbabwe,
Tanzania, Uganda, and Kenya. The borders of most African states reflect the administrative
boundaries drawn by the old European colonial powers rather than tribal realities. Consequently,
the typical African country contains a number of tribes. Tribal totalitarianism occurs when a
political party that represents the interests of a particular tribe (and not always the majority tribe)
monopolizes power. Such one-party states still exist in Africa.
4. Right-wing totalitarianism - permits some individual economic freedom, but
restricts individual political freedom
A common feature of many right-wing dictatorships is an overt hostility to socialist or
communist ideas. Many right-wing totalitarian governments are backed by the military, and
in some cases the government may be made up of military officers. The fascist regimes that
ruled Germany and Italy in the 1930s and 1940s were right-wing totalitarian states. Until the
early 1980s, right-wing dictatorships, many of which were military dictatorships, were
common throughout Latin America. They were also found in several Asian countries,
particularly South Korea, Taiwan, Singapore, Indonesia, and the Philippines. Since the early
1980s, however, this form of government has been in retreat. Most Latin American countries
are now genuine multiparty democracies. Similarly, South Korea, Taiwan, and the
Philippines have all become functioning democracies, as has Indonesia.
Economic Systems
1. Market economies - all productive activities are privately owned as opposed to being
owned by the state 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
Cuba, North Korea, China, Russia and Iran are current examples of economies that
are closest to perfect command economies.. An economy that is planned and
controlled by a central administration, as in the former Soviet Union is a perfect
example of command economy: Economy in which government planning dominates
the direction of economic activity, and market forces are not allowed to do so to any
considerable degree. Socialist and, especially, communist economies are planned
economies, whereas capitalist economies are much less so. Command economy is a
type of communist economic system, sometimes called a centrally planned economy,
where the state controls macro-economic policy and entrepreneurial activity, but
allows some freedom for economic decisions about employment and consumption at
the household level. In other words, there is state control of the factors of production
and centralized, state planning—what to produce, how to produce it, and who to
produce it for—but with some freedom for individual decisions, like which job to
take. Command economies have been criticized because they tend to be badly
organized, lack quality control or worker incentives, and have been responsible for
severe environmental degradation.
Now that Russia, China and countries like India have allowed market economies to
function in varying degrees and allows capitalist to own and expand their businesses
to a large extent than before, they are not perfect command economies but more
oriented to command economic management that countries like the US, UK and
France or Germany that depend more on capitalism and free markets in most areas of
economic activities.
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
A mixed economy combines more than one economic system, like capitalism and socialism or
market economy and planned economy.
Mixed economies were once common throughout much of the world, although they are
becoming much less so. Not long ago, Great Britain, France, and Sweden were mixed
economies, but extensive privatization has reduced state ownership of businesses in all three
nations. A similar trend occurred in many other countries where there was once a large state
sector, such as Brazil, Italy, and India (in India, however, the state sector remains large, still
accounting for 38 percent of nonfarm output).
In mixed economies, governments also tend to take into state ownership troubled firms whose
continued operation is thought to be vital to national interests. Consider, for example, the French
automobile company Renault. The government took over the company when it ran into serious
financial problems. The French government reasoned that the social costs of the unemployment
that might result if Renault collapsed were unacceptable, so it nationalized the company to save
it from bankruptcy. Renault’s competitors weren’t thrilled by this move because they had to
compete with a company whose costs were subsidized by the state. Similarly, in 2008 and early
2009 the U.S. government took an 80 percent stake in AIG to stop that financial institution from
collapsing, the theory being that if AIG did collapse, it would have very serious consequences
for the entire financial system. The government of the United States usually prefers market-
oriented solutions to economic problems, and in the AIG case the intention is to sell the
institution back to private investors as soon as possible.
Legal System
The legal system of a country refers to the rules that regulate behavior along with the processes
by which the laws are enforced and through which redress for grievances is obtained
There are three types of legal systems
1. Common law - based on tradition, precedent, and custom
The common law system evolved in England over hundreds of years. It is now found in most of
Great Britain’s former colonies, including the United States.
Tradition refers to a country’s legal history, precedent to cases that have come before the courts
in the past, and custom to the ways in which laws are applied in specific situations.
When law courts interpret common law, they do so with regard to these characteristics. This
gives a common law system a degree of flexibility that other systems lack. Judges in a common
law system have the power to interpret the law so that it applies to the unique circumstances of
an individual case. In turn, each new interpretation sets a precedent that may be followed in
future cases. As new precedents arise, laws may be altered, clarified, or amended to deal with
new situations.
2. Civic law - based on detailed set of laws organized into codes
When law courts interpret civil law, they do so with regard to these codes. More than 80
countries, including Germany, France, Japan, and Russia, operate with a civil law system. A civil
law system tends to be less adversarial than a common law system, since the judges rely upon
detailed legal codes rather than interpreting tradition, precedent, and custom. Judges under a civil
law system have less flexibility than those under a common law system. Judges in a common law
system have the power to interpret the law, whereas judges in a civil law system have the power
only to apply the law.
[Link] law - law is based on religious teachings
Islamic law is the most widely practiced theocratic legal system in the modern world, although
usage of both Hindu and Jewish law persisted into the twentieth century. Islamic law is primarily
a moral rather than a commercial law and is intended to govern all aspects of life. The foundation
for Islamic law is the holy book of Islam, the Koran, along with the Sunnah, or decisions and
sayings of the Prophet Muhammad, and the writings of Islamic scholars who have derived rules
by analogy from the principles established in the Koran and the Sunnah. Because the Koran and
Sunnah are holy documents, the basic foundations of Islamic law cannot be changed.
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
Under a civil law system, contracts tend to be much shorter and less specific because
many issues are already covered in the civil code
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 AND CORRUPTION
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
Property rights can be violated through
[Link] action – theft, piracy, blackmail , and the like by private individuals or groups.
Although theft occurs in all countries, a weak legal system allows for a much higher
level of criminal action in some than in others. For example, in Russia in the chaotic period
following the collapse of communism, an outdated legal system, coupled with a weak police
force and judicial system, offered both domestic and foreign businesses scant protection from
blackmail by the “Russian Mafia.” Successful business owners in Russia often had to pay
“protection money” to the Mafia or face violent retribution, including bombings and
assassinations (about 500 contract killings of businessmen occurred in 1995 and again in 1996)
[Link] action - legally - ex. excessive taxation or illegally - ex. bribes or blackmailing high
levels of corruption reduce foreign direct investment, the level of international trade, and the
economic growth rate in a country.
Corruption has been well documented in every society, from the banks of the Congo River to the
palace of the Dutch royal family, from Japanese politicians to Brazilian bankers, and from
Indonesian government officials to the New York City Police Department. The government of
the late Ferdinand Marcos in the Philippines was famous for demanding bribes from foreign
businesses wishing to set up operations in that country.
Foreign Corrupt Practices Act
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.
The Top 10 most Corrupt Countries 2016
Nigeria.
North Korea.
Somalia.
Iraq.
Afghanistan.
Sudan.
Venezuela.
Libya
THE PROTECTION OF INTELLECTUAL PROPERTY
Intellectual property - property that is the product of intellectual activity such as computer
software, a screenplay, a music score, or the chemical formula for a new drug
Intellectual property 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
How Can Intellectual Property Be Protected
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 firm’s 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
Civil laws call for payment and monetary damages. Criminal liability laws result in fines
or imprisonment. Both civil and criminal liability laws are probably more extensive in the
United States than in any other country, although many other Western nations also have
comprehensive liability laws. Liability laws are typically least extensive in less developed
nations.