The Political Economy

“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)

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

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

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

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

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

Tax Rates as % of GDP (2008) 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%

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

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

Arguments for and Against Trade 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

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

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

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

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

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

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

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

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

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

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

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