Chapter 2
National Differences in Political Economy
What Is A 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
What Is A Political System?
• Political system refers to the system of
government in a nation
• 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
What Is Collectivism?
• Collectivism stresses the primacy of collective
goals over individual goals
 can be traced to the Greek philosopher,
Plato (427-347 BC)
• 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
• When collectivism is emphasized, the needs of
the society as whole are generally viewed as
being more important than individual
freedoms
SOCIALISM
• Modern socialists trace their roots to Karl
Marx
 advocated state ownership of the basic
means of production, distribution, and
exchange
 the state then manages the enterprises
for the benefit of society as whole
How Does Modern-Day Socialism Look?
• 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
2. Social democrats – socialism is achieved
through democratic means
– retreating as many countries move
toward free market economies
– state-owned enterprises have been
privatized
 Many state-owned enterprises failed to
succeed, and today, many nations are
implementing privatization programs whereby
state-owned enterprises to private investors
What Is 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
 individual economic and political
freedoms are the ground rules on
which a society should be based
 implies democratic political systems
and free market economies
What Is 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
What Is 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
 Communist totalitarianism – found
in states where the communist party
monopolizes power
 Theocratic totalitarianism - found in
states where political power is
monopolized by a party, group, or
individual that governs according to
religious principles
 Tribal totalitarianism - found in
states where a political party that
represents the interests of a particular
tribe monopolizes power
 Right-wing totalitarianism - permits
some individual economic freedom,
but restricts individual political
freedom
Economic Systems
• Political ideology and economic systems are
connected
• There are three types of economic systems: the
market economy, the command economy, and
the mixed economy
• A free market system is likely in countries
where individual goals are given primacy over
collective goals
• State-owned enterprises and restricted markets
are common in countries where collective
goals are dominant
Three Types of Economic Systems
1. Market economies
– In a pure market economy all
productive activities are privately
owned and production is determined
by the interaction of supply and
demand
– Consumers, through their purchases,
determine what is produced and in
what quantity
– The role of government is to
encourage free and fair competition
between private producers
2. Command economies
– In a pure command economy
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
– Because there is no private ownership,
there is little incentive to better serve
consumer needs
– Dynamism and innovation are absent
– Economic System
3. Mixed economies
– A mixed economy includes some
elements of a market economy and
some elements of a command
economy
– 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
- eg: French government took over Renault
(automobile company) during financial problem to
save company from bankruptcy and unemployment
problem.
What Is A Legal System? How Are Property Rights And Corruption Related?

• 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
2. Civic law
3. Theocratic law
Different Legal Systems
• 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
2. Public action - legally - ex.
excessive taxation or illegally - ex.
bribes or blackmailing

There are three main types of legal systems:
1. Common law - based on tradition, precedent,
and custom
– found in most of Great Britain’s
former colonies, including the United
States
2. Civil law - based on a very detailed set of laws
organized into codes
– found in over 80 countries, including
Germany, France, Japan, and Russia
• 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

3. Theocratic law - based on religious teachings

– Islamic law is the most widely

practiced

How Are Contracts Enforced In Different Legal

Systems?

• 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
How Can Intellectual Property Be Protected? What Determines A Country’s Level of Economic
Development?
• Intellectual property - property that is the
product of intellectual activity Two ways to measure levels of economic
development are
• Can be protected using
1. Gross national income (GNI) per person of
1. Patents – exclusive rights for a defined period population
to the manufacture, use, or sale of that
invention 2. Purchasing power parity (PPP) involves
adjusting GNI by purchasing power
2. Copyrights – the exclusive legal rights of
authors, composers, playwrights, artists, and • GNI and PPP data provide a static picture of
publishers to publish and disperse their work development & also important to consider
as they see fit growth rates.

3. Trademarks – design and names by which • Nobel-prize winner Amartya Sen argues
merchants or manufacturers designate and economic development should be seen as a
differentiate their products process of expanding the real freedoms that
people experience

 the removal of major impediments to

• Protection of intellectual property rights
differs from country to country
 World Intellectual Property
Organization
 Paris Convention for the Protection
of Industrial Property - agreement
signed by 170 countries to protect
intellectual property rights
 Trade Related Aspects of
Intellectual Property Rights (TRIPS)
- requires WTO members to grant and
enforce patents lasting at least 20
years and copyrights lasting 50 years
freedom like poverty, tyranny, and
neglect of public facilities
 the presence of basic health care and
basic education
What Determines A Country’s Level of Economic
Development?
• The United Nations used Sen’s ideas to
develop the Human Development Index
(HDI) which is based on
 life expectancy at birth
 educational attainment

• To avoid piracy, firms can  whether average incomes are

sufficient to meet the basic needs of
 stay away from countries where life in a country
intellectual property laws are lax

 file lawsuits

 lobby governments for international

property rights agreements and
enforcement

What Is Product Safety and 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
How Does Political Economy Influence Economic
Progress?
• Innovation and entrepreneurship are the
engines of long-run economic growth
• Innovation and entrepreneurship require a
market economy and strong property rights
• 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
How Do Geography And Education Influence
Economic Development?
What Is The Nature Of Economic Transformation?
• 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

• 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

How Is The Political Economy Changing?

• Since the late 1980s, two trends have emerged

1. Democratic revolution (late 1980s and early

1990s)

 many totalitarian regimes failed to

deliver economic progress to the vast
bulk of their populations

 new information and communication

technologies have broken down the
ability of the state to control access to
uncensored information

 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

 more countries have shifted toward the

market-based model