Lecture 3

The mixed economy (= interventionism)

 the quasipresent economic systems around the word today

 a combination of private property and state property
 the state limits the free exercise of private property in certain activities or sectors in
order to reach political objectives

Market versus the public sector

 the market = a social and economic system based on private property in which the
social transactions are voluntarily concluded among participants
 the public sector = a monopoly of legal enterprise (rule making and enforcement) =
the core issue in the public sector is the compulsory character of the social transactions
with the state (such as taxation) or of observing the rules of the exchange among the
member of the society

Franz Oppenheimer (a German sociologue)

= there are two possibilities of acquiring economic goods by an individual:

 the economic means = involvement in market transactions → satisfying the
customers
 the political means = the use of the state as a mechanisms for acquiring resources

The problem of „economic freedom”

 several innitiatives to assess the economic freedom: Heritage Foundation and others
 different criteria such as: Business Freedom, Trade Freedom, Fiscal Freedom,
Government Spending, Monetary Freedom, Investment Freedom, Financial Freedom,
Property Rights, Freedom from Corruption, Labor Freedom;
 Economic freedom around the world, 2018, Heritage Foundation

The freest economies The least free economies

1. Hong Kong, 180. North Korea
2. Singapore, 179. Venezuela,
3.New Zeeland, 178. Cuba,
4. Switzerland 177. Rep. Of Congo
5. Australia, 176. Eritrea,
6. Ireland, 175. Equatorial Guinea,
33. Macedonia
35. Botswana Not rated: Iraq, Lybia,
37. Romania Liechtenstein, Somalia, Syria,
Yemen

Economic freedom in 2018 in the world:

• 93 countries = free or mostly free
• 84 countries = unfree or mostly unfree.

Americas: 15 economies improved, 17 declined;

Asia-Pacific: 31 economies improved, 12 declined;
Europe: 32 economies improved, 11 declined, 1 unchanged, 1 ungraded;
Middle East/North Africa: 6 economies improved, 8 declined, 4 ungraded;
Sub-Saharan Africa: 18 economies improved, 27 declined, 2 unchanged.
 The impact of economic freedom:

 freer an economy, more prosperous the society → the firms have the liberty to engage
in those activities of production which are focused on maximizing their profits, that is,
satisfying consumers
 more interventionist an economy:
• more resources are allocated by government for “government consumption”,
observing public regulations, etc.
• satisfying consumers is not a priority any more;
• the arbitrariness of public servants (corruption, taxation, etc.) and additional
costs
 World Bank – 2017 - how burdensome are public regulations?

The least burdens on private companies The most burdensome

1. Singapore Mexico
2. United Arab Emirates El Salvador
3. Rwanda Serbia
4. Hong Kong Columbia
5. Malaysia Romania
6. Switzerland Costa Rica
7. Germany Honduras
8. Finland ....
9. Georgia Venezuela
10. Gambia

Economic freedom versus political freedom

 are the countries with political freedom the countries with also economic freedom?
→ fundamentally, both liberties start from the basic rights of individuals = property
rights are among the basic right of individuals → these two dimension are usually in
direct relation

However:
 countries with significant political freedom but with a reduced economic
freedom = while democratic, government intervention is massive (such as
Brazil în anii 60,70, Argentine in the 2000’)
 countries with a low political freedom but with significant economic freedom
= examples from Middle East (United Arab Emirates, Qatar, Bahrain,so on)
 sometimes, countries differentiate between local companies and foreign
companies
 Time preference of governments

Besides the attitude towards private property rights, there are also differences in the time
horizon of governments:
 shorter the time horizon, higher intervention and arbitrariness (e.g. the electoral cycles
in democracies)
 longer the time horizon on which a government operates, stronger the incentive to
increase prosperity (Singapore, Taiwan, South Korea, etc.)

Why the state intervenes in the economy?

= a tradition debate in political economy

 supplying public goods (security, defense, justice, infrastructure)

 correcting the market failure (monopolies, cartels, etc.)
 redistribution (in favor of certain social groups which are disadvantaged)
 rent-seeking (special interests, private benefits)
 Etc.

The size of the government budget

Largest such an indicator in GDP, more resources in such an economy are allocated by the
state):
 economic inefficiency (= central allocation = lack of the test of profit and loss)
 the decrease of the market for consumer goods (through higher taxation, they have less
resources to spend on consumer goods on the market)
 an increase in the possibility of bribery
 The political environment

 Politics: „a set of discourses, institutions and practices that target the establishment
of an order; of the organization of human society, in a context that is always
conflicting (McAuley, 2003).
 Political ideology: „a coherent system of beliefs” (Hoffman, 2007) → right versus left

The impact of politics on business

 How should a society be organized from the perspective of laws, institutions,

relations between the citizens and the state, business-government relations, so on = the
legal environment;
 There are competing visions in this respect: a political competition between
individuals and groups that compete in order to implement their vision of the society;

Political competition
 Ethical, transparent = political actors accept a common basic set of rules (the rule of
law)
 Unethical, untransparent = some actors may want to win the competition by violent /
illegal means (civil war, state coup, terrorism, insurgency)
 Fragile states Index 2018 (Fund for Peace)

1. South Sudan 133. Bulgaria

2. Somalia 134. Hungary
3. Yemen 137. Romania
4. Syria 174. Iceland
5. Central African Republic 175. Denmark
6. Congo Democratic Republic 176. Switzerland
7. Sudan 177. Norway
8. Chad 178. Finland
9. Afganistan
10. Zimbabwe

 In order to observe the legislation, business undergo compliance costs;

 inside the limits of the law, businesses can influence public decision-making through
Public Relations, advocacy or lobby (Baumgartner and Leech, 1998);
 economic entities controlled by the government (ex. „state owned enterprises” -
SOE) can operate in certain industries;
 the way in which the government of a country spends the resources levied through
taxation has a major impact on budget balance, on the macro-economic indicators in
that country;
 companies can also change the regulatory framework through promotion of special
interests (getting favors or privileges);
 Business-Government relations = how businesses interact with governments (from
PR, lobby, so on to corruption, subsidies )
 etc.