We live in a world of intensifying global relationships, one in which international business has become the key determinant of economic development and prosperity. This course, Global Business Environment, Part I, introduces students to a fundamental understanding of the socioeconomic political, cultural, and linguistic environment in which international businesses operate. This course utilizes an inquiry-based approach to understanding country level relationships in the Global Business Environment. It surveys the global business environment by asking and answering key questions about society, the global economy, cultures, institutions and languages. The questions we will ask are: 1. What is Globalization?, 2. Is Globalization New?, 3. How do Political and Social Institutions impact National Economic Development?, 4. What is the role of Culture?, 5. What are the Gains from Trade?6. Free Trade, Free-r Trade or Managed Trade?, 7. What are Foreign Currencies and how are Exchange Rates Determined?, 8. What does the Current Global Business Environment look like? This inquiry-based approach creates reflective opportunities for students to better understand the environment in which businesses operate. Lectures are delivered in an engaging manner, which encourages reflection and inquiry.
Module 3, Part 4
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Do curso por University of New Mexico
International Business I
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Week 3
How do Political and Social Institutions impact National Economic Development?
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Doug E Thomas, Ph.D.Professor
International Management, Anderson School of Management
This is going to be the fourth lecture in our discussion,
in module three, of the economic wealth of nations.
I'm D.T. Glad to be back with you, hope you're having a great day.
This discussion is very complex, as I mentioned last time.
And we're giving only the briefest justice to each of these topics.
Today we're going to look at another very important, but
perhaps less commonly answered, answers to our questions.
I don't think that many students would necessarily raise their hands and
offer this answer.
The answer that,
that I'll give you is something called Property Rights Protection.
Now that, again, that may not jump to your mind as the first, answer to our question,
why are some countries richer than others?
So let's talk about it for a minute.
First of all some, some people would say this is the most powerful explanation,
that it does seem to be the, most likely factor, or
the most important factor that an economy could
adopt in order to try to achieve new levels of economic growth.
What do we mean by property rights protection?
Well if you think about it, in any economy,
there exists diversity of types of properties.
For example, you can think of real estate, physical property.
You can think of physical capital, goods.
You can think of intangible property, ideas discoveries, innovations.
The idea that we're going to discuss here today is that
each of these types of properties need to have a very clear
definition of ownership and protection of that ownership or
the rights of ownership in order for an economy to succeed.
If there is confusion or a mystery or
an easily manipulated system of property rights shifting from one person or
one entity to the other you won't see economic growth happen.
Let's talk about that for just a few minutes.
What we need to see in, in terms of property rights,
is a working system of a judicial system, a legal system,
a regulatory system that exists, that people have faith in that actually
protects the rights of individuals and entities to own and develop property.
Think about that for a minute.
If, if it weren't the case that I, Doug Thomas, was the author of these videos and
that you could, equa, easily tomorrow claim that these videos were yours.
What incentive would I have to create them?
What incentive does anyone have to create anything,
whether it's a new pharmaceutical product, a new book, a song,
to develop a company if they don't think, or
if there isn't a system backing up that thinking, that protects those rights?
Who would, who would invest in anything?
Now that may sound like a very market oriented or capitalistic argument, but
I think you'll find across many economies with lots of different types of
political systems and even economic systems,
that property rights development is highly correlated with economic wealth.
Let me give you a brief example.
And we're going to talk about another aspect of a society or its economy,
we're going to talk about institutions.
Which are simply the entities in a society which
exist to protect what we call the rules of the game.
And in order for a functioning property rights system to work, we have to have
a functioning set of institutions to protect those property rights.
We have to know the rules of the game, we have to have these rules set up and
to be well known in order for anyone to invest and to try to advance the economy.
Here's the example,
who of you have ever received an invitation to sign up for a credit card?
Probably all of you.
Many of you have probably accepted those invitations,
some of you perhaps wish that you hadn't done that.
Maybe your parents wish you hadn't done that.
But nevertheless, many of you've signed up for credit cards.
Think about that for a minute.
In the United States and
many other places in the world, those invitations comes quite easily.
You go to the mailbox, and there it is,
a letter offering you several thousand dollars worth of credit.
What does that even mean?
Well as you know, you get a credit card, you have a limit, you can spend on it.
There's a monthly payment expected.
And the company does expect you to pay it back over time.
And if you do, you pay for it in the form of interest.
What happens if you don't pay it back?
Well, they're institutions in most or many societies called credit agencies.
You've probably seen funny commercials like CreditReports.com that talk about
your ability to get information about your own credit rating, your credit report.
Think about how those institutions even develop.
Did the government say one day, hm, we need to have a way for
people to get credit.
Actually, it's not the case that that's what
happened in the United States, at least.
What has happened here is that private entities Equifax is one,
have developed that allow entities like governments and companies,
private companies to report information on individuals
abilities to pay back debts and then share that information with others.
In some places if you do not return a library book on time
you can be reported to the credit agency.
Do you have an incentive as an individual as you get older
to develop a good credit score.
Of course you do because later on you are going to want to buy a a car perhaps,
or a house, and you probably used some type of debt financing in order to
get that house or that car.
So, you know growing up that you need to have a good credit score.
Someone usually tells you that, whether it's a family member, a professor,
a teacher, or just TV.
You learn that.
And so, what we're talking about is an unwritten rule of the game.
And institution, the system of credit that exists in the United States and
many other societies, to allow people to get ahead.
So if that system didn't exist to protect
other property right holders, people who issue credit.
Or to protect me if I were the individual who
owned a piece of property and owed money on it.
Who would ever build a house,
who would ever be able to buy a house, who would ever be able to get ahead?
Who would be able to start a small business?
These systems of protection of property rights are very, very important.
Do we find some countries in the world that are less
successful at protecting property rights?
I think if you find if you've spent any time across the world,
you will see that, in some places, you will find music, software and,
other luxury goods that are pirated or that are, not,
the original, version of the item, sold freely for a much lower cost.
This is an example of property rights not being protected.
Those economies which allow that that to flourish or to succeed,
that lack of property rights protection where you can go and buy a Rolex for
$10 or, you can buy you know, the latest version of a movie on DVD,
or on a Flash drive for a dollar before it even hits the theaters.
Those societies tend to not have good institutions set up to protect property
rights, and therefore we don't see, a strong development
of investment in private, in the private sector in many of these economies.
So, when we look at this list, that I've got up here of countries and
their ability to protect or their willingness to protect, property.
We see some of the same,
countries that we saw at the top of our wealthiest nations in the world.
We see some of our Scandinavian countries like Norway and Sweden.
We see Singapore, which is on the top list, Luxembourg, there's,
Great Britain and Japan, the United States, and
so it does seem to be the case that there's this high correlation between
property rights protection and, and economic wealth development.
And if we go to the bottom of the list, list we see many countries once again in
parts of the world that are much less protective of property rights.
We see some of our African nations that unfortunately, are struggling with that.
Now, paradoxically, there we see South Korea low on the list,
which we know is a wealthy country.
So, this is not a perfect explanation but, it does seem to be the case that economies
have to develop this ability to protect, the ability of,
property right holders to, to earn wealth or
earn rents or earn profits off of their own private holdings.
A couple more examples of that, in some places in the world you find that,
real estate property is not well-protected.
Someone will start to build a small home on a piece of land.
And, within a few months, someone else will come along and claim that,
that's their piece of property that they have a title to it.
And, will force the individual off of that land.
In other societies,
we find that the judicial system does not protect property rights holders.
For example, if, a company is thinking of investing in an economy or
country where the judicial system will not protect, companies and
their ability to make investments and then, if there's a disagreement, have,
a fair and just solution to that disagreement, companies won't make those
investments, and therefore you'll see economic, development growth stunted.
You won't see as much investment, you won't see as much wealth creation.
Countries have to create that system of investment protection or
the protection of property rights in order for investors, whether local, individual
entrepreneurs or, companies coming in from the outside to make those investments.
So this, this latest factor seems to be somewhat more important,
in the economic development of nations.
Perhaps even more important than political system or natural resources or
even education.
This is something tangible that coun, countries could and can and
should work on in order to improve their economic wealth.
Thank you very much and next time we'll look at another factor
that is very important in understanding of the development of economic wealth.
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