Politico-economic synthesis - Business Environment

The economic problem of resource allocation, described above, clearly has a political dimension, given its focus on the ownership, control and use of wealth-producing assets within society. This allows links to be made between a country’s chosen economic system and its political regime. A useful way of representing possible relationships is illustrated. As suggested in Chapter, political systems can be characterised as ranging from democratic to authoritarian, depending on the degree of public involvement in decision-making processes.
Similarly, economic systems can be seen to range from free market to planned, according to the level of state intervention in the process of resource allocation.This two-dimensional model thus provides for four major combinations of politicoeconomic systems, ranging from democratic–free-market on the one hand (quadrant 1) to authoritarian–planned on the other (quadrant 3).


In applying this model to specific cases, it is clear that free-market approaches to resource allocation are predominantly associated with democratic states. Such a link is not surprising. Democracy, after all, includes the notion of individuals being able to express their preferences through the ballot box and having the opportunity to replace one government with another at periodic intervals. In free markets similar processes are at work, with individuals effectively ‘voting’ for goods and services through the price system and their expressed preferences being reflected in the pattern of resource allocation.

A link between authoritarian regimes and planned economic systems can equally be rationalised, in that government control over the political system is considerably facilitated if it also directs the economy through the ownership and/or control of the means of production, distribution and exchange. In effect, the relative absence of democratic mechanisms, such as free elections and choice between alternative forms of government, is echoed in the economic sphere by the inability of individuals to exercise any real influence over resource allocation. At the extreme, this could involve a government ban on any forms of free enterprise and total government control of the pattern of output and consumption in an economy which is devoid of effective consumer sovereignty.

In practice, of course, the picture is much more complicated than suggested by this simple dichotomy. Some authoritarian states, for instance, have predominantly capitalist economic systems (quadrant 4), while some democratic countries have a substantial degree of government intervention (i.e. moving them towards quadrant 2), either by choice or from necessity (e.g. wartime). Added to this, even in states where the political or economic system appears to be the same, considerable differences can occur at an operational and/or institutional level and this gives each country a degree of uniqueness not adequately portrayed by the model. That said, it is still the case that the basic congruity between democracy and free-market systems represents a powerful and pervasive influence in the business environment of the world’s principal democratic states. The process of economic reform as in eastern Europe accordingly tends to be accompanied by corresponding pressures for political change and these are often resisted by regimes not prepared to give up their political and economic powers and their élite status.

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