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Chapter 4 Notes

by: Elise Herenton

Chapter 4 Notes PLSC 2013

Elise Herenton
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About this Document

Political Economy
Intro to Comparative Politics
William Sullivan
Class Notes




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This 5 page Class Notes was uploaded by Elise Herenton on Thursday July 28, 2016. The Class Notes belongs to PLSC 2013 at University of Arkansas taught by William Sullivan in Fall 2016. Since its upload, it has received 67 views. For similar materials see Intro to Comparative Politics in Political Science at University of Arkansas.


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Date Created: 07/28/16
Chapter  4:  Political  Economy   v What  is  Political  Economy?   Ø Political  Economy  refers  to:  the  relationship  between  politics  and  economics,  as  well  as  their  effects  on  political   life  in  a  state.   § The  main  components  of  political  economy  are   markets  and  property.   Ø Markets  refer  to  the  interaction  of  supply  and  demand,  which  allocate  resources  through  the  intera ctions.   § Sellers  attempt  to  develop  products  that  individuals  will  purchase,  while   consumers  attempt  to  find  the   highest  quality  product  at  the  lowest  price .   § Because  multiple  sellers,  or  producers,  sell  the  same  goods,  these  individuals  naturally   compete  with  each   other  to  sell  more.   Ø States  may  regulate  markets  as  a  way  to   protect  consumers  or  to  prevent  a  market  from  emerging .   § Ex.  Minimum  Wage  or  the  FDA  (Drug  Laws-­‐  illegal  to  protect  individuals  and  society  as  a  whole)   v Property   Ø Property  refers  to  the  ownership  of  goods  and  services  that  are  exchanged  in  markets .   • There  is  no  marketplace  without  property.   § Some  protections  are  also  associated  with  property  owners hip,  primarily  from  having  property  taken   without  compensation.   Ø Intellectual  Property,  or  a  personal  creation  which  lacks  a  physical  presence ,  is  protected  by  the  state.   • Ex.  music/writings   Ø States  construct  and  enforce  property  rights.     • The  state  protects  owners  from  losing  property  without  compensation.   • Why?  Taxation.  What  money  you  make  off  your  trade  the  government  can  take  a  portion  through  taxes.   v Public  Goods   Ø States  also  provide  goods  and  services  that   facilitate  economic  growth.     § (Ex.  Highways)   Ø These  are  referred  to  as  public  goods,  or  resources  that  are  guaranteed  and  provided  by  the  state  and  are   available  for  use  by  society.   § Such  goods  are  usually  considered   indivisible,  meaning  ownership  of  these  resources  cannot  be  transferred   from  the  state  and  cannot  be  fragmented.   • One  cannot  sell  or  transfer  public  good  to  private.   § These  resources  also  reduce  business  costs  by  providing  some  basic  utilities  free  of  cost  for  businesses.   Ø The  level  of  public  goods  a  state  provides  varies  according  to  the  state.   § All  states  consider  infrastructure  a  public  good.  Resource  rich  states  may  consider  their  natural  resources  to   be  a  public  good.   • Ex.  states  with  oil:  US-­‐  If  you  have  oil  on  your  property,  it’s  your  oil  and  you  can  sell  it;  Russia -­‐  If  you  find   oil  on  your  property,  it  belongs  to  the  state.   v Social  Expenditures   Ø Public  goods  can  be  considered  a  type  of   social  expenditure,  or  a  state’s  provision  of  public  benefits  that   provide  economic  and  social  resources  for  use  by  its  citizens.   § Such  expenditures  are  commonly   referred  to  as  being  part  of  the  “welfare  state.”   Ø Some  argue  that  social  expenditures  may  create  a  drag  on  economic  growth.   § Such  claims  are  typically  unfounded,  yet  social  expenditures  may  be  very  expensive.  Specifically  in  states   that  provide  a  high  level  of  benefits  and  feature  an  aging  population.   Ø Who,  specifically,  benefits  from  social  expenditures  varies  according  to  the  service.   § Some  benefits  are  designed  to  target  and  assist   at-­‐risk  members  of  society.  (Ex.  Unemployment)     § However,  expenditures  such  a s  education,  or  maternity  leave  equally  benefit  all  levels  of  society.   v Taxation   Ø As  states  provide  increasing  levels  of  benefits,  the  public  must  be  willing  to  support  them  with  higher  levels  of   taxation.   § Taxation  represents  the  main  source  of   revenue  for  funding  social  expenditures.   • Social  expenditures-­‐  money  spent  in  an  economy   Ø The  level  of  taxation  that  a  state  imposes  is  usually  in   line  with  the  level  of  public  benefits  that  a  state  wishes  to   provide.   § In  states  with  high  levels  of  benefits,  taxation  acc ounts  for  a  significant  percentage  of  the  national   gross   domestic  product  (GDP),  or  the  total  market  value  of  all  good  and  services  produced  by  on  country  in  a   year.   § Ex.  In  the  US  with  (lower  levels  of  benefits),  taxation  accounts  for   about  30%  of  the  GDP.  In  Sweden,  (with   expansive  services)  it  accounts  for  closer  to  45%  of  the  GDP.       v Economic  Growth   Ø Broadly  speaking,  governments  are  responsible  for  esta blishing  a  relationship  between  property  and  markets .   § Specifically,  how  regulated  should  marketplaces  be ?  Which  goods  should  be  classified  as   public  property,   and  what  should  be  considered   private  property  (and  how  one  can  develop  it)?   Ø States  must  also  establish  a  level  of  public  services  that  meets  with   public  expectations.   § In  turn,  this  requires  creating  a  tax  policy  that  allows  a  state  to  meet  these  needs.   • Taxes  are  the  paycheck  that  countries  use  to  pay  for  public  services.   Ø However,  in  order  for  a  tax  policy  to  be  effective,  a  state  must   achieve  a  basic  level  of  economic  growth .   § Thus,  states  must  establish  regulations  that   encourage  economic  development  while  also  maintaining   a  level   of  taxation  that  funds  services  that  meet  public  expectations.     v Money   Ø Economic  growth  can  be  achieved  through  the  creation  and  management  of  the  national  currency,  or  money.   § The  amount  of  currency  in  supply,  and  how  interest  rates  are  managed,  helps  a  state  trigger  economic   growth  or  slow  an  economy  down  as  is  necessary.   Ø Money  has  no  intri nsic  value.  Its  main  function  is  as  a  medium  for  property  exchange.   • Money  is  just  a  piece  of  paper,  however  everyone  agrees  that  the  paper  has  value.   § Without  money,  sales  are  difficult  to  negotiate  and   commerce  deceases.  Thus  money  plays  a  role  in  helping   to  promote  economic  growth.   • Ex.  tracker  trading  with  no  money:  Trading  2  chickens  for  a  tracker  is  not  an  even  trade.  Even  trading   half  the  chickens  could  be  problematic.   § States  interactions  with  money  are  crucial  because  these  allow  a  state  to  ensure  that  transactions  take  place   and  future  transactions  are  possible.   Ø Today,  the  value  of  a  currency  is  determined  by  the  faith  that  investors  have  in  a  national  government.   § A  currency  is  only  as  valuable  as  the   stability  of  the  national  government .   • Euro  vs  Pound:  The  euro  isn’t  popular  throughout  Europe.     v Interest  Rates   Ø Coordination  of  a  national  monetary  supply  is  usually  handled  by  a  Central  Bank.   § A  Central  Bank  is  an  institution  that  controls  how  much  money  is  circulating  in  society  and  borrowing  rates   of  a  national  currency.     Ø Managed  borrowing  rates  are  referred  to   as  interest  rates.     § Interest  rates  refer  to  the  rate  of  return  that  is  changed  to  private  banks  when  they  borrow  from  a  Central   Bank,  or  borrow  from  one  another .   § As  a  Central  bank  raises  or  lowers  interest  rates,  private  banks  usually  make  similar  adjustments  to  the  rates   they  charge  individuals  to  borrow  from   their  bank.   Ø As  interest  rates  are  lowered,  access  to  a  loan  becomes   less  expensive  and  individuals  (and  businesses)  are   more   likely  take  out  a  loan  to  finance  economic  activity.   § This  increases  the  amount  of  money  in  an  economy  and   helps  stimulate  economic  growth .   v Interest  Rates,  Cont’d.   Ø If  a  country  raises  interest  rates,  borrowing  and  lending  become  costlier ,  and  less  likely  to  occur.   § This  may  also  lead  individuals  to  put  money  in  savings ,  partially  to  take  advantage  of  high  interest  rates.   Ø As  interest  rates  rise,  the   amount  of  money  in  an  economy ,  and  the  economy  is  cooled  off.   • reduces  the  chance  of  inflation  or  the  chance  that  your  money  will   get  lost   § Sometimes  this  done  as  a  way  to  prevent  a  recession.   v Inflation   Ø A  Central  Bank  may  also  take  steps  to  address  concerns  of  inflation  and  deflation.   Ø Inflation  refers  to  an  increase  in  price  within  an  economy  when  supplies  do  not  meet  levels  of  demand .   § Scarcity  of  supplies  will   automatically  lead  to  higher  prices  within  a  specific  market  or  the  economy  overall.     When  inflation  is  too  high,  the  value  of   wages  and  savings  are  decreased .   • The  value  of  $20  now  has  changed  since  the  80s  and  90s.   Ø Government  policy  may  also  cause  inflation,  if  a  state   borrows  money  at  high  interest  rates .   §  This  can  lead  to  hyperinflation,  or  inflation  that  is  higher  than  50  percent  a  month,  for  more  than  two   months  in  a  row.     • It  most  likely  occurs  to  pay  for  debt.  A  country  can  print  money  to  relieve  debt,  but  the  money  has  less   value  because  there’s  nothing  to  back  it  up.  (Ex.  Zimbabwe)   § Hyperinflation  is  more  likely  to  occur  when   states  print  money  without  discretion  to  cover  debts ,  which   leads  to  a  loss  of  confidence  in  that  state’s  government.  This  usually  causes  a  currency  to  collapse.   v Trade   Ø In  order  to  create  a  healthy  economy,  states  must  ensure  that   competitive  markets  exist  and  that  domestic   business  are  themselves  competitive .   • Free  trade-­‐  few  politic  restraints,  politics  out  of  commerce,  sell  goods  between  international  fines   § These  goals  form  the  basis  of   trade  policies.   Ø States  may  use  several  types  of  policies  to  influence  trade.  These  will  also  affect  the   strength  of  the  economy  as   a  whole.   • The  government  doesn’t  want   domestic  businesses  to  suffer.  (Ex.  Japanese  cars  made  more  expensive  in   the  US  so  American  car  companies  don’t  suffer  financially.)     • If  the  tariffs  are  too  high,  less  people  will  want  the  product  less.  If  they  go  too  far,  the  economy  will   become  damaged.   § States  may  impose  tariffs,  or  the  taxation  of  imports  (usually  set  at  a  certain  percentage  of  their  value) .   § States  may  also  limit  trade  through   import  quotas,  which  place  an  upper  limit  on  the  amount  of  certain   types  of  goods  that  can  be  imported.     § States  may  also  use  nontariff  regulatory  barriers ,  or  policies  and  regulations  that  limit  imports  without   taxation.  (Ex.  American  Airline  Companies -­‐  domestic  flights  owned  by  a  majority  of  American  airlines )   Ø Such  policies  involve  a  tradeoff  between   protecting  domestic  business  and  promoting  growth  through  trade.   v Political  Economic  Systems:  Liberalism   Ø A  political  economic  system   refers  to  efforts  by  state  leaders  to  manage  an  economy  according  to  specific   ideological  principles.     • What  do  you  want  to  accomplish?   § Political  economic  systems  therefore  describe   the  relationship  between  political  and  economic  institutions   in  a  state.   § Because  political  economic  syst ems  are  designed  to  achieve  specific  goals,  they  usually  form  the  basis  of  an   ideology.       § Main  economic  ideologies  are  liberalism,  communism,  and  social  democracies.     Ø Economic  liberalism  shares  the  same  principles  as  classical  liberalism .   § Economic  liberalism  places  a   high  emphasis  on  freedom .  Thus,  they  favor  strong  property  rights  and  prefer   that  marketplaces  be  self -­‐regulated.   • Markets  are  a  little  more  efficient  with  providing  needs  than  the  government.   § This  means  that  economic  liberals  prefer  that   taxation  be  kept  minimal  levels  and  public  goods  are  limited  to   those  that  provide  common  benefits.  (Ex.  Education  or  Security)   • Lower  taxes  =  more  money  for  providing  individuals   Ø In  general,  economic  liberalism  is  characterized  by  an  emphasis  on   individual  liberties  over  the  need  for   collective  equality  and  by  market  self-­‐regulation,  rather  than  state  regulation.     • It  looks  at  employment  as  a  necessary  evil  in  some  instances  and  sometimes  a  good  thing.   • Self  regulation  =  more  wealth  than  if  the  government  regulated  it   § This  is  the  ideology  most  closely  associated  with   capitalism.   v Communism   Ø Recall:  Communism  practically  eliminates  individual  freedoms  in  favor  of  equality.   § Communists  believe  that  capitalism  will  eventually  lead  to  a   concentration  of  wealth  through  exploitation  of   laborers  by  property  owners.  Laborers  will  eventually  revolt  and  establish  a  c ommunist  society  that   guarantees  equitable  distribution.   Ø Since  private  ownership  leads  to   exploitation,  the  state  controls  ALL  resources  and  property  and  makes  ALL   economic  decisions.   § Prices  and  wages  are  established  by  the  state  and   revenue  an  industry  generates  is  collected  for  public   expenditures.  Labor  is  managed  by  the  state,  and  workers  are   told  when  and  where  they  will  work.   § Communist  states  provide  extensive  social  benefits  that  are  designed  to  meet  all  basic  needs  of  citizens.   Ø In  such  a  system,  there  is  no  separation  between  public  and  private  decision -­‐making  and  the  state  essentially   controls  the  lives  of  its  citizens ,  without  tolerating  dissent.   § However,  communist  states  claim  they  can   guarantee  a  level  of  equality  that  no  other  system  can.   v Social  Democracy   Ø Social  democracy  attempts  to  combine  the  benefits  of  liberalism  and  communism.   § Social  democrats  accept  the  need  for   the  need  for  property  rights  and  a  competitive  market,  but  also   believe  that  the  state  should   guarantee  some  equal  provision  for  citizens .  (takes  that  from  communism)   Ø Thus,  states  should  make  numerous   public  goods  available  to  citizens.   § Social  democracies  all  provide  universal  (or  near)   healthcare,  education,  and  retirement  funds.  Some  states   also  provide  greater  benefits  than  this.  Thus,  taxes  are  noticeably  higher.     • Cradle  to  grave  coverage   • 45%-­‐50%  of  income  goes  towards  taxes.   Ø Competition,  though  essential,  is  viewed  as  less  important  than   state  regulation  of  markets.   § Some  advocate  state  ownership  of  certain  resources  or  sectors  if  they  provide  benefits  deemed   essential  to   citizens.   • Ex.  France-­‐  28  days  paid  vacation,  4  day  work  week   v Measuring  Outcomes   Ø Recall:  the  simplest  measurement  of  wealth  is  Gross  Domestic  Product,  or  GDP.   • GDP-­‐  final  marketplace  value   § GDP  is  measured  on  a   per  capita  basis  by  dividing  a  state’s  GDP  by  its  population .     § However,  income  poorly  explains  wealth,  as   costs  of  living  vary  (wildly)  around  the  world.  Therefore,  other   measurements  must  be  used  to  evaluate  wealth.   Ø One  measurement  of  is   Purchasing  Power  Parity  (PPP)  or  estimates  of  the  buying  power  of  a  currency  by   comparing  the  cost  of  a  product  in  multiple  countries .   § The  strength  of  a  currency  is  determined  by  comparing   the  price  of  a  product  in  one  country   to  the  price  of   the  same  product  in  the  US.  (Ex.  The  Big  Mac  Index-­‐  compare  the  cost  of  a  Big  Mac  in  the  US  to  the  rest  of   the  world)   • Why  the  US?  The  value  of  the  dollar  is  pretty  stable   § PPP  allows  for  a  more  accurate  comparison  of  national  economies  by  using  a   common  standard  to  compare   different  countries.     v Measuring  Outcomes,  cont’d.   Ø GDP  also  fails  to  measure  how  wealth  is   distributed  within  a  country.   § To  track  income  inequality,  economists  developed  the   Gini  Index,  or  a  mathematical  equation  that   quantifies  how  evenly  income  is  dispersed  among  citizens .   § On  the  Gini  Index  income  equality  is  scored  as  a  zero,  while   total  inequality  is  scored  as  100.   • 0  =  total  equality,  100  =  total  inequality;  both  extremes  are  bad   Ø The  Gini  Index  can  also  illustrate  the  effectiveness  of  economic  ideologies  at  promoting  equality.   § Economic  liberalism  tends  to  generate  more  inequality  than  do  other  systems.  However,  this  is  also   influenced  by  the  commitment  a  state  has  social  expenditures .   § Ex.  The  US  scored  a  45  on  the  Gini  Index,  China  scored  a  42,  Germany  scored  a  27.   v Human  Development  Index  (HDI)   Ø The  Human  Development  Index  tracks  how   a  state  reinvests  its  revenues  on  behalf  of  its  population .   § The  Human  Development  Index  refers  to  a  statistical  tool  that  tracks  and  evaluates  social  development  by   examining  the  overall  wealth,  health,  and  knowledge  of  a  state.   Ø HDI  is  measured  using  three  variables:   § Average  life  expectancy ,  access  to  education,  and  income  (GNI  per  capita  PPP).   Ø HDI  is  measured  on  a  scale  of  0  to  1  and  indicates  the  quality  of  life  for  a  state’s  population.   • The  closer  you  are  to  1  the  better.     § Ex.  Norway:  0.944,  Chad,  0.392   Ø There  is  typically  a  correlation  between  high   HDI  and  high  GDP  per  capita  values .   § However,  because  the  value  is  derived  from  three  different  sources,  positive  scores  in  some  areas  can  mask   deficiencies  in  others.  (Ex.  Japan-­‐  average  person  lives  to  88  years  old,  which  pulls  up  the  HDI  score )   v Conclusions   Ø Political  economy  reflects  the  ways  that  states  provide   access  to  markets  and  protect  the  rights  of   property   owners.   § Policies  regarding  trade,  interest  rates,  and  currency  are  essentially  designed  to  allow  citizens  to   utilize  their   property  to  enter  the  market .   § Within  this  system,  states  must  also  decide  what  types  of   public  goods  to  provide  for  citizens.   Ø How  states  prioritize   property  rights  and  social  equality  forms  the  basis  of  political  economic  systems .   § Each  economic  system  places  emphasis  on  either  equality  or  individual  freedom,  and  produces  a  distinct   system  with  significant  consequences.   Ø How  states  perform  economically  is   quantifiable.   § Measurements  such  as  GDP  can  be  used  to  evaluate   economic  production.     § Measurements  like  HDI  can  be  used  to  measure   what  (and  how)  a  state  reinvests  in  itself.        


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