Lectures 3 - Economics and Politics.pptx

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1. Economics, Strategy and Management Topic 2: Economics and Politics M.S. Oowise MBA (ECU Australia) FCIM (UK), FIMS (UK), MSLIM, MIM(S/L), CeMA, CPM (Asia/Pacific)

2. Your gains… After the sessions you will be able to: Explain what is “State” and “political system Profile trends and characteristics of different political and economic systems and understand their significance for international business Demonstrate how businesses attempt to influence the State Identify sources and nature of political risk Discuss the idea of economic freedom Explain the main indicators of economic development, performance, and potential and explain their significance for international business Define key measures of economic performance

3. Outline of the session Overview of political environment Political systems (democracy, totalitarianism) Characteristics? Shortcomings? Role of the Nation-State Business / State interactions Political risk Economic freedom Economic systems Assessing economic development and potential

4. International Business Environment

5. Political and Legal Environment The political and legal environments comprise institutions that pass laws and establish regulations implement and enforce laws and regulations interpret, execute and protect the law shape the political environment through their policies

6. Political Systems The system of Government in any nation (Hill 2009, p.43) A set of formal institutions that constitute a government ( Cavusgil et al. 2017, p. 212) Political institutions: political parties legislative bodies trade unions lobby groups ( Cavusgil et al. 2017, p.212)

7. National Decision-Making Unitary systems decision-making power is centralized in hands of central government – regions (local authorities) have little or no autonomy Federal systems power is shared between the centre and the regions (localities)

8. Political Systems (Liberal) democracy (less than half of 193 UN members) Totalitarian Authoritarian / absolutist (e.g. Burma, Saudi Arabia) Communist (China, Cuba, Vietnam, N. Korea) Theocratic (Iran, Vatican)

9. The Political Spectrum

10. Map of ‘freedom’

11. Democracy "A political system in which government is by the people, exercised directly or indirectly through elected representatives.“ (Hill 2009, p.46) Right of citizens to elect governments to represent their interests Governmental institutions based on majority rule members drawn from a variety of political parties Free elections

12. Democracy The consent of the governed Free, fair & regular elections Constitutional limits on government Majority rule/minority rights Accountability & Transparency The multiparty system Freedom of speech, press, religion

13. Democracy In liberal democracies, conflicts occur between different branches of the state , e.g.: Politicians and judiciary Politicians and bureaucrats "There is a permanent power struggle between commissioners and high ranking bureaucrats.”; “In my opinion, too much is decided by civil servants." ( G.Verheugen , EU Industry Commissioner, quoted in EU Observer 5 & 10 Oct 2006) “Every time I want to do something, the department argues with it….if they don’t want you to do something, they produce the lengthiest, most obscurantist document… (with)…the pluses and minuses (but) with the minuses… highlighted….(They inflate) the costings (making it) impossible…to (argue) with the Treasury.” ( D.Blunkett diaries, The Guardian 11 Oct 2006)

14. Churchill on Democracy "Democracy is the worst form of government, except for all those other forms that have been tried from time to time.“ (Winston Churchill on 11 th November 1947)

15. Totalitarianism "A political system in which one person or political party exercises absolute control over ALL spheres of human life and prohibits opposing political parties. “ (Hill 2009: 46) Forms of totalitarianism Communism (aimed at attaining socialism; e.g. North Korea) Theocratic systems (control through religious principles, e.g. Iran) Fascism / Nazism (radical, authoritarian nationalism) Historical Examples: Nazi Germany, Soviet Union, China under Mao Zedong

16. Totalitarianism Restrictions on operations of political parties Power in hands of one or a few people No checks or balances on those holding power Power retained through patronage The abolition of property right (For example: Confiscation of private property)

17. Totalitarianism Government ownership of communication and transport factories and agriculture Government control of labour Education Heavy progressive income tax Corporate farms and centralised spatial/regional planning

18. Communism Means of production owned by the State Domination by one political party The party controls the legislative, executive and judicial branches of the State as well as trade unions and the media

19. Theocratic Systems Religion/faith plays dominant role Religious leaders and political rulers are the same people Political decisions derived from principles of the dominant religion

20. Factors Limiting the Spread of Democracy The link between democracy and economic development is getting questioned economic success of totalitarian states (e.g. China, oil-rich Islamic States) Inconsistencies in democratic state operations Western countries’ involvement in Iraq, Libya, Afghanistan & biased foreign policies Saudi vs. Venezuela The difficulties in implementing a functioning democracy The Arab Spring (e.g. Egypt) Standards of democracy Who defines democracy? Washington (traditional “Western” view of democracy) vs. Beijing consensus (Non-Western View of Democracy).

21. Roles of the STATE The State performs some very important functions with major implications for international business: establishes the legal framework regulator and deregulator public expenditure and taxation international negotiator internal and external security arbitrator / judge

22. Roles of the STATE States are also important market players: Subsidiser Competitor Customer and supplier

23. Four Roles of the State Dicken (2015) outlines four key roles played by the nation-state within the contemporary global economy: 1) States as containers of cultures, of varied economic systems 2) States as regulators of trade, industry and FDI, and agents of economic development 3) States as competitors : for talent, capital, resources, global political influence (Do states compete with each other, just as firms do? In what sense? In what ways?) 4) States as collaborators : e.g. in regional trade agreements (RTA), Bilateral Investment Treaties (BIT)

24. Business Influences on the Political Environment How do business attempt to influence politics (i.e. politicians)? Pressure group – lobbying Promises or threats State consultation with business Representation on government bodies Giving money or gifts Employment and exchange of personnel

25. Business / State Influences In 2011 The Guardian reported that: 50 energy company employees had been working in UK government on energy issues Energy companies had met ministers from the Department of Energy 195 times after the 2010 election The Treasury had received over 200 secondees from business in previous 4 years (The Guardian 6th December 2011)

26. Political Risk Government interference with private investment Sudden or gradual change in the local political environment that is disadvantageous or counter-productive to the interests of foreign firms Risk of loss of assets, earning power and managerial control due to events or actions that are politically biased or politically motivated “potential loss arising from a change in government policy” (Daniels et al 2019: 118)

27. Classes and Characteristics of Political Risk

28. Classes and Characteristics of Political Risk

29. Systemic System change / political change: shift in public policy can have either a positive or negative effect. Exemplified by: expropriation or nationalisation (Bolivarian socialism) restrictions on repatriation of profit discriminatory tax regimes unilateral breach of contract Systemic Political Risk also presents opportunities

30. Procedural Associated with political actions that interfere with the movement of people, products and funds (Daniels et al. 2019). Corruption / 'extra costs' e.g. additional costs of business transactions for 'special assistance', corrupt bureaucratic procedures. Difficult to change, depends on how long-lasting the corrupt procedures have been how in-depth (level of public administration)

31. Distributive Political stand and regulations related to wealth distribution. Linked to questions around distributive justice . Balancing between gaining more from the MNEs but not provoking them to leave Exemplified by: Formal changes in investment rules (shared ownership) (Lou, 2008)

32. Catastrophic Random ( unforeseen? ) events international military conflicts, civil / ethnic unrest Critical impact on business environment and firms' operations Suppliers, markets Physical destruction of company's assets (Daniels et al. 2019)

33. Political Risk

34. International Business Environment

35. The context Managers assess a country ’ s economic environment knowing… Countries differ in different ways Economic and political changes alter market circumstances It is important to understand connections, change, and consequences Choices of citizens, policymakers, and institutions

36. International Economic Analysis A universal assessment of economic environments is difficult because System Complexity Identifying proper indicators is difficult Market Dynamism New economic circumstances Market Interdependence Markets influence each other Data Overload Complicates decision-making

37. Economic Freedom Economic freedom: people have the right to work, produce, consume, save, and invest the way they prefer Measured across : business freedom, trade freedom, fiscal freedom, government size (spending), monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, and labor freedom

38. Global Distribution of Economic Freedom

39. Economic Freedom (by region and population)

40. The Value of Economic Freedom Economic freedom is related to a range of business and development-focused issues: Growth rates Productivity Income levels Inflation Employment Life expectancy Literacy Political openness Environmental sustainability

41. Economic Freedom & Standard of Living

42. Trends in Economic Freedom The trend toward increased economic freedom is no longer certain Questions about the legitimacy of free markets Particularly relevant after the recent global financial crisis The benefits of more state control Performance of China State intervention during Covid-19 pandemic

43. Types in Economic Systems Economic system: T he mechanism that deals with the production, distribution, and consumption of goods and services Types Market economy Command economy Mixed economy

44. Types in Economic Systems Source: Daniels et al. (2019: 156).

45. Market Economy In a market economy individuals rather than governments make most economic decisions (i.e. decide on allocation of resource) Capitalism private ownership of capital Laissez-faire governmental noninterference in economic affairs

46. Command Economy In a command economy the “ visible hand of the state ” supersedes the “ invisible hand of the market ” (the individuals) Socialism Government (as a ‘representative’ of society) owns and controls resources and determines prices control over supply of resources and, through central planning, also of demand

47. Mixed Economy Most economies are mixed economies fall between market and command economies Social market economy Influence/regulate economic activity with a focus on social equality and a fair(er) distribution of wealth

48. State Capitalism: Detour or Destination? State capitalism : a system in which the government explicitly manipulates market outcomes for political purposes promote certain industries to encourage economic development develop national companies into global leaders foreign companies restricted from strategic industries

49. Economic Development, Performance, and Potential D eveloping countries largest number of countries low per capita income E merging economies fast growing, relatively prosperous BRIC – Brazil, Russia, India, China MIST – Mexico, Indonesia, South Korea, Turkey MINT – Malaysia, Indonesia, Nigeria, Turkey D eveloped countries high per capita income and standard of living (e.g. U.S., Japan, France, Australia)

50. Emerging Economies of the World Source: Daniels et al. (2019: 144).

51. Size of the Economy (national income and product) Gross National Income (GNI) the broadest measure of economic activity for a country the sum of value added by all resident producers + taxes (but excluding subsidies) not included in the valuation of output + net receipts of primary income (compensation of employees and property income) from abroad . Gross Domestic product (GDP) the total market value of goods and services produced by workers and capital within a nation ’ s borders

52. Improving Analysis and Meaning GNI (and/or GDP) data should be adjusted for growth rate of the economy (i.e. %) number of people in a country ( i.e per capita) local cost of living ( i.e purchasing power parity)

53. GDP contribution by country (2018) Source: WorldMapper Project (2019; available at: https://worldmapper.org/maps/gdp-2018/ )

54. Problems with interpretation of GDP data Source: The Economist (2020)

55. GNI Growth Rates of 10 Largest Economies (2011, NB as measured by GNI )

56. GNI Per Capita (2011)

57. GNI Per Capita (2011) Adjusted with Purchasing Power Parity (PPP)

58. Economic Analysis Managers should also consider other key macroeconomic indicators : Inflation Unemployment Debt Income distribution Poverty Balance of payments

59. Inflation & Unemployment Inflation: a measure of the increase in the cost of living Deflation: when prices for products go down not up Reflation: increase the money supply and reduce taxes to accelerate economic activity Unemployment rate: share of unemployed workers seeking employment for pay relative to the total civilian labor force Misery index: the sum of a country ’ s inflation and unemployment rates

60. Debt and Income Distribution Debt: the total of a government s (external/internal) financial obligations Growing public debt signals include reduced growth, rising inflation, increasing austerity (public spending cuts), tax increases Income distribution : estimates the proportion of the population that earns various levels of income Gini coefficient: measures the extent to which the distribution of resources deviates from a perfectly equal distribution ( value of 0 represents absolute equality, a value of 100 absolute inequality; Germany: 28, UK: 36 , USA: 40, Chile: 52, South Africa 63 )

61. Poverty Poverty: the state of having little or no money and few or no material possessions extreme poverty less than $1.25 per day moderate poverty less than $2.00 per day Today the world population is approx. 80% poor, 10% middle income, and 10% rich Base of the Pyramid Frugal engineering

62. Preparation READ Case : China: Big Opportunities Complicated Risks Case : The BRICs: Vanguard of the Revolution