The Political Economy

1. The Political Economy

2. “The Economy” • It is not a monolithic institution – it is a collection of billions of individual choices based on people’s incentives • The Political Economy – how politics and economics interact, and how they balance freedom and equality (conflicting values)

3. Components of Political Economy • Every regime’s ideology determines the relationship the state will play in regulating the economy • Markets – interaction between supply and demand that functions to allocate resources • Freely allow individuals to buy, sell, and trade what they produce for what they will consume • Sets values, or “prices” for these goods and services • Markets arise spontaneously, and are difficult for the state to control

4. Components of Political Economy • Property – ownership of goods and services • State can choose to play a role in protecting property rights – the right to sell property freely, or to not have it taken away • In LDCs, frequently property exists without a fundamental protection of property rights, due to the state’s inability to monitor instances of fraud

5. Components of Political Economy • Public Goods – goods provided and/or secured by the state • Examples (universal): Roads, lighthouses, the military • Examples (in some cases) • Health care in Britain, Canada • Oil in Nigeria and Saudi Arabia • Most businesses in Cuba

6. Components of Political Economy • Social Expenditures • Commonly called “The Welfare State” – redistribution of wealth through government taxing some, and paying others • Typically provided to the elderly, the unemployed, the poor, and the disabled • Often a subject of political battle, due to the question of who benefits from expenditures

7. Components of Political Economy • Taxation • Means to provide for public goods and social expenditures • Subject of political battles, determined partially by ideology toward the role of the state

8. Sweden: 54.2 % Denmark: 48.8 %  Finland: 46.9 %   Belgium: 45.6 % France: 45.3 %   Austria: 43.7 %   Italy: 42 %   Netherlands: 41.4 % Norway: 40.3 %   Germany: 37.9 % United Kingdom: 37.4 % Russia: 36.9 % Canada: 35.8 % Switzerland: 35.7 % New Zealand: 35.1 % Australia: 31.5 % Ireland: 31.1 %   United States: 29.6 % Japan: 27.1 %   China: 17% Mexico: 9.7% Iran: 7.3% Nigeria: 6.1% Tax Rates as % of GDP (2008)

9. Components of Political Economy • Money, Inflation, and Unemployment • States create and manage the money supply through a central bank • Money is created by the rate at which banks make loans • Low interest rates encourage more creation • High interest rates discourage creation • Creation of too much money in effort to stimulate the economy and reduce unemployment can cause inflation • Slowing the growth of money to control inflation can slow economic growth and cause unemployment to rise

10. Components of Political Economy • Regulation – rules or orders to set the boundaries of given procedures • States can ban production or sale of goods, set safety requirements, outlaw monopoly control, etc. • Trade – access to goods and services from foreign states • States can allow open trade, or restrict it through tariffs, quotas, and other non-tariff barriers

11. Why Regulate Trade? Generate state revenue Foster local industry Protect local jobs Keep wealth within the country Why Not? Promote competition Keep the cost of goods and services low Stimulate domestic innovation in areas of comparative advantage Arguments for and Against Trade

12. Political-Economic Systems • Liberalism – rooted in capitalist ideology of private ownership, minimal state regulation and intervention beyond protection of property rights • Emphasizes individual freedom • Examples: U.S., Great Britain • Laissez-Faire – philosophy claiming the economy should be left to do what it wishes

13. Political-Economic Systems • Social Democracy – eliminate extremes of too much freedom, too much equality • Accepts a role for both private property and public ownership, freedom and regulation • Examples: Most European countries

14. Political-Economic Systems • Communism – believes freedom only comes from total economic equality, uses the state to achieve that goal • Rejects private ownership of property • Nationalization – bringing private industries under state control • Examples: China (though there is a massive transition ongoing), former Soviet Union

15. Political-Economic Systems • Mercantilism – emphasizes needs of the state to grow wealthy and powerful above the needs of society • Emphasizes neither freedom nor equality • Parastatals – industries nationalized based on some perceived need for international competitiveness • Examples: Japan, India, South Korea

16. Measurements of Economic Performance • GDP – Gross Domestic Product • Total dollar value of all goods and services • GDP per capita shows standard of living of the average person • PPP – Purchasing Power Parity • Adjusts GDP for relative buying power in each country, since cost of living differs from place to place

17. Measurements of Economic Performance • Gini Index • Formula to measure economic inequality in society • High Gini coefficient = more inequality, lower Gini coefficient = less inequality • HDI – Human Development Index • Attempts to measure well-being, in addition to wealth

18. GDP for the 6 Countries • U.S. - $14.26 Trillion • China - $4.4 Trillion • United Kingdom - $2.67 Trillion • Russia - $1.68 Trillion • Mexico - $1.09 Trillion • Iran - $0.34 Trillion • Nigeria - $0.21 Trillion

19. GDP per capita (PPP) for the 6 Countries • U.S. - $46,859 • China - $5,693 • United Kingdom - $36,523 • Russia - $15,922 • Mexico - $14,560 • Iran - $11,250 • Nigeria - $2,134

20. Gini Coefficient for the 6 Countries • U.S. – 40.8 • China – 44.7 • United Kingdom – 36.0 • Russia – 31.0 • Mexico – 54.6 • Iran – 43.0 • Nigeria – 50.6

21. HDI Ranking for the 6 Countries • U.S. – #8 • China – #94 • United Kingdom – #12 • Russia – #57 • Mexico – #53 • Iran – #101 • Nigeria – #151

22. Global Trends in Political Economy • 2 MAJOR movements • Globalization – world is increasingly interconnected due to technology and trade • Liberalization – free markets are more prevalent than ever before in history, and developing nations often see liberalization as the key to growing wealth