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Lecture 5

The Political
Environment

Lecture Five: Overview

Politics is a universal activity which affects the business world in a variety of

ways. Understanding political systems, institutions and processes provides a
greater insight into business decisions and into the complexities of the business
environment.
Given the increasing globalisation of markets, this environment has an
international as well as a domestic element and the two are closely interrelated.
Appreciating some of the key aspects of this environment and its impact on
business organisations is vital for students of business and managers alike.

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Lecture Four: Overview

By the end of this lecture, you should be able to:

vexplain the political context within which business operates

vdemonstrate the relevance of political values to the organisation of
business activity
videntify and discuss key political institutions and processes at a
variety of spatial levels
villustrate how business organisations can influence, as well as be
influenced by, the political environment

Introduction: Political Systems

The Nature of Political Activity
• The members of the board of directors of a company may have different views
about future investment or diversification or the location of a new factory. In all
these cases, some solution needs to be found, even if the eventual decision is to
do nothing. It is the processes involved in arriving at a solution to a problem,
where a conflict of opinion occurs, that are the very essence of political activity.

• Politics, in short, is concerned with those processes that help to determine how
conflicts are contained, modified, postponed or settled, and as such can be seen
as a universal social activity. Hence, individuals often talk of ‘office politics’, the
‘politics of the board- room’ e.t.c.
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Introduction: Political Systems

The Nature of Political Activity
• Politics, for most individuals, however, the term ‘politics’ tends to be associated
with activities at state level, where the resolution of conflict often involves large
numbers of people and may even involve individuals in other states.

• Political activity at this level is clearly qualitatively different from the other social
situations mentioned, and given the scale and complexity of the modern state,
the problems requiring solutions can often be acute and chronic. Solving those
problems tends to be seen, at least in part, as the function of government.

Introduction: Political Systems

The Nature of Political Activity
• Government as a process is concerned with the pursuit and exercise of power –
the power to make decisions which affect the lives of substantial numbers of
people, be it at local, regional, national or even international level.
• Government may also refer to the institutions through which power tends to be
formally and legitimately exercised, whether they be cabinets, parliaments,
councils, committees or congresses.
• Governments are normally transitory, comprising those individuals and/or
groups who, at a particular time, have the responsibility for controlling the state,
including making laws for ‘the good of society’. Governments exercise their
power based on the ideological foundations and the nature of the political
system.
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Political Systems
Authoritarian Systems
In an authoritarian political system the disposition is to settle conflicts through
the enforcement of rules, regulations and orders by an established authority.
This authority may be an individual (e.g. a monarch or other powerful individual)
or a group of individuals (military junta) which may have assumed political
power in a variety of ways (e.g. by coup).
• Once in power, the individual or group will tend to act so as to limit the degree of
participation by others in the process of decision-making, even to the extent of
monopolising the process altogether and permitting no opposition to occur.
Where this is the case, a society is often described as being totalitarian.

Political Systems
Democratic Political Systems
In contrast, in a democratic political system, the assumption is that as far as
possible conflicts should be resolved by rational discussions between the various
parties concerned, with the final solution being accepted voluntarily by all
participants, even if they disagree. At one extreme, such consultation may involve
all individuals, who have equal influence over the final outcome (e.g. as in
referendums).
• Given the scale and complexity of modern states, however, such examples of
direct (or pure) democracy tend to be rare and it is invariably the case that the
democratic solution to conflict resolution is achieved ‘indirectly’ through a
system of political representation and responsibility.
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Political Systems
Democratic Political Systems

Representative democracy
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Government and Democratic States

Democratic Institutions and Processes
• Democracy means far more than just popular government or a system of regular
elections; the democratic approach to government implies the existence of a
complex array of institutions and processes through which the wishes of the
people are articulated and carried out.
• While the specific institutional arrangements tend to vary between states,
countries that are held to be democratic invariably have a political system which
comprises four common and interlocking elements: an electoral system; a party
system; a representative assembly; and a system for the articulation of sectional
interests.

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Government and Democratic States

The electoral system
• In a representative democracy the electoral system links the people (the
electorate) with government; it is through elections that a country’s
citizens periodically get to choose who will exercise the power to make
decisions which will ultimately shape the lives of individuals.
• Elections, in short, are a vital ingredient of a representative system of
government. That said, the fact that elections exist in a particular
country is not a sufficient guarantee that it is democratic in the
accepted sense of the word.

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Government and Democratic States

The electoral system
In order to operate in a way that is normally regarded as democratic, a country’s
electoral system would need to exhibit a number of features which suggest that the
wishes of individual citizens – as expressed through the ballot box – are reasonably
reflected in the choice of government. Such features would include:
va system of regular elections (every five years) based on universal adult
suffrage (all adults have equal rights to vote);
vbasic freedoms of speech, movement, assembly, etc.;
vfreedom from coercion and the absence of illegal electoral practices;
va secret ballot;
vfree media.
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Government and Democratic States

The Party system
• While it is possible to have democratic government in a one-party state,
democracy is normally taken to imply that citizens get to choose between
alternative candidates when casting their vote at an election.
• Invariably such candidates tend to represent different political parties and to
this extent a vote for a specific candidate can be said to equate to a vote for the
party that he or she represents and which is ultimately hoping to form the
government.

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The Branches of Government

• In a broad sense the process of governing involves three major activities: making
decisions; putting them into effect; and adjudicating over them in the event of
dispute or non-compliance.
• Each of these functions or branches of government, as they operate at a national
level, is discussed in turn below. A similar form of analysis could, if necessary, be
applied at other spatial levels.
vThe Legislative Branch
vThe Executive Branch
vThe Judicial Branch

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The Branches of Government

The Legislative Function
• Governing, as we have seen, is about making decisions which affect the lives of
large numbers of people. Some of these decisions require new laws or changes
to existing laws to bring them into effect so that the individuals and/or groups to
whom they apply become aware of the government’s wishes and requirements.
• In a democratic system of government this formal power to make the law (i.e. to
legislate) is vested in a legislative body (the legislature) which is elected either
wholly or partly by the people. As indicated above, this process of choosing a
representative decision-making body by popular election is a central feature of
the democratic approach to government.

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The Branches of Government

The Executive function
• Governing is not only about making decisions, it is also about ensuring that these
decisions are put into effect in order to achieve the government’s objectives.
Implementing governmental decisions is the responsibility of the executive
branch of government.
• In modern states the term ‘the executive’ refers to that relatively small group of
individuals chosen to decide on policy and to oversee its implementation; some
of these individuals include politicians, career administrators, advisers, and
political appointees. Together they are part of a complex political and
administrative structure designed to carry out the essential work of government
and to ensure that those responsible for policy-making and implementation are
ultimately accountable for their actions.
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The Branches of Government

The Executive function
• Governing is not only about making decisions, it is also about ensuring that these
decisions are put into effect in order to achieve the government’s objectives.
Implementing governmental decisions is the responsibility of the executive
branch of government.
• In modern states the term ‘the executive’ refers to that relatively small group of
individuals chosen to decide on policy and to oversee its implementation; some
of these individuals include politicians, career administrators, advisers, and
political appointees. Together they are part of a complex political and
administrative structure designed to carry out the essential work of government
and to ensure that those responsible for policy-making and implementation are
ultimately accountable for their actions.
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The Branches of Government

The Executive function
• The head of government (President) will appoint the head of government
business (prime Minister) as well as other individuals to head the different
government departments/ministries and to be part of a collective decision-
making body (e.g. a Cabinet) which meets to sanction policy proposals put
forward through a system of executive committees and subcommittees (e.g.
Cabinet committees).
• These individuals, along with the President, are not only part of the executive
machinery of the state but also usually members of the legislative assembly and
both ‘individually’ and ‘collectively’ responsible to the legislature for the work of
government.
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The Branches of Government

The Judicial function
• Governing is not just about making and implementing laws, it is also about
ensuring that they are applied and enforced. The latter is essentially the role of
the third arm of government, namely the judiciary and the system of courts.
• Some states have a relatively unified legal system, others organised on a federal
basis usually have a system of parallel courts adjudicating on federal and
state/provincial law, with a Supreme Court arbitrating in the event of a dispute.
In some countries a proportion of the judges may be directly or indirectly elected
by the public, in others they may be appointed by government and/or co-opted
by fellow judges.

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The State

• The fact that it is often politics that determines economic and business policies
highlights the critical importance of the political environment to business.
• Dimock observes: “The two most powerful institutions in society today are
business and government; where they meet on common ground – amicably or
otherwise – together they determine public policy, both foreign and domestic,
for a nation”.
• Major economic policy decisions often have political underpinnings.

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The State
Functions of the State
• There are very divergent perceptions of the functions of the state. On the one
extreme is the view that “the government that governs is the best” and on the
other extreme is the demand for government ownership or control of almost
everything. Further, the philosophy regarding the state’s role in the society has
undergone significant changes over time in many countries over time. A number
of countries are, in fact, transitioning from Marx to the market.
• The economic role of the state has been recognised for several centuries now.
“States have come in all shapes and sizes, depending on a mix of factors
including culture, natural endowments, opportunities for trade and distribution
of power.”
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The State
Functions of the State
• Adam Smith’s popularised the view that economic growth and welfare are best
achieved by the free market mechanism and the state should confine itself to
certain core functions such as law and order defence etc. and enforcement of
contracts, essential for the proper functioning of the market economy. “But even
then, state intervention went on to play a vital, catalytic role in the development
and growth of markets.
• In most modern economies, the state’s regulatory role is now broader and more
complex than ever before, covering such areas as the environment and the
financial sector, as well as more traditional areas such as monopolies. The design
of regulation needs to fit the capability of state regulatory agencies and the
sophistication of markets, and give greater emphasis to personal responsibility.
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The State
Functions of the State
Functions of the state varies from basic minimum requirements to active
participation in several other sectors.
• The basic functions include the pure public goods such as the provision of
property rights, macroeconomic stability, control of infectious diseases, safe
water, roads, and protection of the destitute. In many countries, the state is not
even providing these. Recent reforms have emphasised economic fundamentals.
But social and institutional (including legal) fundamentals are equally important
to avoid social disruption and ensure sustained development.

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The State
Functions of the State
• Going beyond these basic services are the intermediate functions, such as
management of externalities (pollution, for example), regulation of monopolies,
and the provision of social insurance (pensions, unemployment benefits). Here,
too, the government cannot choose whether, but only how best to intervene,
and government can work in partnership with markets and civil society to ensure
that these public goods are provided.

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The State
Functions of the State
• Going beyond these basic services are the intermediate functions, such as
management of externalities (pollution, for example), regulation of monopolies,
and the provision of social insurance (pensions, unemployment benefits). Here,
too, the government cannot choose whether, but only how best to intervene,
and government can work in partnership with markets and civil society to ensure
that these public goods are provided.
• States with strong capability can take on more activist functions, dealing with
the problem of missing markets by helping coordination. Africa’s experience has
renewed interest in the state’s role in promoting markets through active
industrial and financial policy.
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The State

Functions of the State

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The State
Reinvigorating the capacity of the State
Reinvigorating the state’s capability can be achieved through the following:
1. Rules and Restraints: Mechanisms for enforcing the rule of law, such as an
independent judiciary, are critical foundations for sustainable development.
Along with appropriate separation of powers and the presence of watchdog
bodies, they also restrain arbitrary behaviour.
2. Competitive Pressure: Competitive pressure can come from within the state
bureaucracy, through recruitment of civil servants on the basis of merit. It can
come from the domestic private sector, through contracting out for services
and allowing private providers to compete directly with public agencies. Or it
can come from the international marketplace, through trade and through the
influence of global bond markets on fiscal decisions.
.
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The State
Reinvigorating the capacity of the State
Reinvigorating the state’s capability can be achieved through the following:7
3. Voice and Partnership: The means to achieve transparency and openness in
modern society are many and varied—business councils, interaction groups,
and consumer groups, to name a few. Institutional working arrangements
with community groups can contribute to greater state effectiveness by
giving citizens a greater voice in the formulation of government’s policies
and partnerships between levels of government and with international
bodies can help in the provision of local and global public goods.

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The State and Economic Outcomes

The State sets the formal rules—laws and regulations—that are part and parcel of a
country’s institutional environment. These formal rules, along with the informal rules
of the broader society, are the institutions that mediate human behaviour.
Every day, state agencies invest resources, direct credit, procure goods and services,
and negotiate contracts; these actions have profound effects on transactions costs and
on economic activity and economic outcomes, especially in developing economies.
Played well, the state’s activities can accelerate development. Played badly, they will
produce stagnation or, in the extreme, economic and social disintegration. The state,
then, is in a unique position: not only must it establish, through a social and political
process, the formal rules by which all other organisations must abide; as an
organisation itself, it, too, must abide by those rules.

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The State and Economic Outcomes

Economic Roles of Government
The Government plays an important role in almost every national economy of the
world.
Even in the countries described as capitalist economies or market economies, “a
substantial share of the nation’s product goes to satisfy public wants, a substantial
part of the private income originates in the public budget and public tax and
transfer payments significantly influence the state of private income distribution.
Moreover, the budget policy affects the level of employment and prices in the
private sector.”

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The State and Economic Outcomes

Economic Roles of Government
In the predominantly private enterprise economies, government interference is
necessitated by the fact that the market mechanism alone cannot perform all
economic functions.
Public policy is needed to guide, correct and supplement it in certain respects. It is
important to realise this fact since it implies that the proper size of the public sector
is, to a significant degree, a technical rather than ideological issue

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The State and Economic Outcomes

Economic Roles of Government
Governments normally play four important roles in an economy, viz.,
vregulation,
vpromotion,
ventrepreneurship, and
vplanning.
As stated above, the extent and nature of these roles in a given situation depend on
a number of factors. Some salient features of these roles are outlined in the coming
slides:
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The State and Economic Outcomes

Economic Roles of Government
1. Regulatory Role: Government regulation of the business may cover a broad
spectrum extending from entry into business to the final results of a business. The
reservation of industries to small-scale, public and cooperative sectors, licensing
system etc. regulate the entry. Regulations of product mix, promotional activities
etc. amount to regulation of the conduct of business.
• Results of business operations may be regulated by such measures as ceilings on
profit margins, dividend etc. The State may also regulate the relationship
between enterprises. Examples of this include monopoly restrictions, restrictions
on intra-corporate investments and appointment of sole selling agents.

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The State and Economic Outcomes

1. Regulatory Role:....
Government regulation of the economy may be broadly divided into direct controls
and indirect controls.
• Indirect controls are usually exercised through various fiscal and monetary
incentives and disincentives or penalties. Certain activities may be encouraged or
discouraged through monetary and fiscal incentives and disincentives. For instance,
a high import duty may discourage imports and fiscal and monetary incentives may
encourage the development of export-oriented industries.
• The direct administrative or physical controls are more drastic in their effect. The
distinguishing characteristic of direct controls is their discretionary nature. They can
be applied selectively from firm to firm and industry to industry, at the discretion of
the State. 34

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The State and Economic Outcomes

2. Promotional Role: The promotional role played by the Government is very
important in both developed countries and developing countries. In developing
countries, where the infrastructural facilities for development are inadequate and
entrepreneurial activities are scarce, the promotional role of the Government
assumes special significance.
The State will have to assume direct responsibility to build up and strengthen the
necessary development infrastructures, such as power, transport, finance,
marketing, institutions for training and guidance and other promotional activities.
• The promotional role of the State also encompasses the provision of various
fiscal, monetary and other incentives, including measures to cover certain risks,
for the development of certain priority sectors and activities.
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The State and Economic Outcomes

3. Entrepreneurial Role: In many economies, the State also plays the role of an
entrepreneur – establishing and operating business enterprises and bearing the
risks.
Private entrepreneurship neglect of certain unprofitable sectors, as well as absence
of or inadequate competition in certain segments and the resultant exploitation of
consumers have contributed to the growth of State owned enterprises (SOEs) in
many countries.
In many developing countries, public sector dominance is usually established in
capital-intensive projects like steel, capital goods, petrochemicals and fertilisers for
which investment requirements were very large and the expected private returns,
at least in the short-run were too low to provide an incentive for private
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The State and Economic Outcomes

4. Planning Role: Especially in the developing countries, the State plays a very
important role as a planner.
• The importance of planning to a less developed economies is often underrated.
In underdeveloped countries, which have to develop fairly rapidly, the time
element is important and the question is how to use our resources to the best
advantage.
• If our resources are abundant, it will not matter how they are used. They will go
into a common pool of development. But where one’s resources are limited, one
has to see that they are directed to the right purpose so as to help to build up
whatever one is aiming at”.

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Government and Legal Environment

• In many countries, with a view to protecting consumer interests, regulations
have become stronger. Regulations to protect the purity of the environment and
preserve the ecological balance have assumed great importance in many
countries.
• Some governments specify certain standards for the products (including
packaging) to be marketed in the country: some even prohibit the marketing of
certain products.
• In most nations, promotional activities are subject to various types of controls.
Uganda restricts the use of children in commercial advertisements involving
sports betting and alcohol.

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Government and Legal Environment

• In a number of countries, including Uganda, the advertisement of alcoholic
liquor is highly regulated (responsible drinking message as well as 18 years legal
age). Advertisements, including packaging, of cigarettes must carry the statutory
warning that “cigarette smoking is injurious to health”. Similarly, baby foods must
not be promoted as a substitute for breast feeding.
• Uganda, Uganda National Bureau of Standards (UNBS) is empowered to require a
company to provide sufficient evidence to substantiate the claim concerning the
quality and performance and specification and pricing structure of its products.
• There are a host of statutory controls on business in Uganda. Although the
controls have been substantially brought down as a result of the liberalisation, a
number of controls still prevail.
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Government and Legal Environment

• Many countries, today, have laws to regulate competition in the public interest.
Elimination of unfair competition and dilution of monopoly power are the
important objectives of these regulations.
• Certain changes in government policies such as the industrial policy, fiscal policy,
tariff policy etc. may have profound impact on business. Some policy
developments create opportunities as well as threats.
• The industrial policy liberalisations in Uganda have opened up new opportunities
and threats. They have provided a lot of opportunities to a large number of
enterprises to diversify and to make their product mix better. But they have also
given rise to serious threat to many existing products by way of increased
competition; many seller’s markets have given way to buyer’s markets.
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