Business Environment-UNIT IV-CHAPTER 1

8/2/2019 Business Environment-UNIT IV-CHAPTER 1

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UNIT IVUNIT IV CHAPTER 1CHAPTER 1

POLITICAL ENVIRONMENTPOLITICAL ENVIRONMENT

MEANING & FUNCTIONS OFMEANING & FUNCTIONS OFSTATESTATE


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IntroductionIntroduction

Very often it is the political environment thatVery often it is the political environment thatdecides economic and business policies.decides economic and business policies.

The political environment includes factors such asThe political environment includes factors such ascharacteristics and policies of political parties,characteristics and policies of political parties,the nature of the constitution and governmentthe nature of the constitution and governmentsystem and the government environmentsystem and the government environmentconsisting of economic and business policiesconsisting of economic and business policiesand regulations.and regulations.

The adoption of socialist pattern of society by theThe adoption of socialist pattern of society by thecongress party in 1950s, was responsible for thecongress party in 1950s, was responsible for thepublic sector dominated strategy followed inpublic sector dominated strategy followed inIndia till the early 1990s.India till the early 1990s.


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Introduction contd..Introduction contd..

It has been observed that even within transnationalIt has been observed that even within transnational

economic units, national politics overruleeconomic units, national politics overrule

economic rationality.economic rationality.

Important economic policies such as industrialImportant economic policies such as industrial

policy, policy towards foreign capital andpolicy, policy towards foreign capital and

technology, fiscal policy and exporttechnology, fiscal policy and export--import policyimport policy

are often political decisions.are often political decisions.

Many political decisions have serious economicMany political decisions have serious economic

and business implications.and business implications.


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Functions of StateFunctions of State

On the one extreme there is the view that theOn the one extreme there is the view that thegovernment that governs is the best and on thegovernment that governs is the best and on theother extreme, is the demand for governmentother extreme, is the demand for governmentownership or control of almost everything.ownership or control of almost everything.

The economic role of the state has beenThe economic role of the state has beenrecognised for several centuries and therecognised for several centuries and themercantilists wanted the state to play a majormercantilists wanted the state to play a majorrole in guiding trade.role in guiding trade.

However, Adam Smith believed that economicHowever, Adam Smith believed that economicgrowth and welfare are best achieved by freegrowth and welfare are best achieved by freemarket mechanism and the state should confinemarket mechanism and the state should confineitself to certain core functions such as law anditself to certain core functions such as law andorder, defence, etc.order, defence, etc.


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Functions of State contd..Functions of State contd..

Concepts:Concepts:

State: Refers to a set of institutions that possessState: Refers to a set of institutions that possess

the means of legitimate coercion, exercised overthe means of legitimate coercion, exercised over

a defined territory and its population referred toa defined territory and its population referred toas society.as society.

Government: the term is often used differently inGovernment: the term is often used differently in

different countries. It may refer to existence of adifferent countries. It may refer to existence of a

process of governing or exercise of power. Itprocess of governing or exercise of power. Itmay refer to people who fill the positions ofmay refer to people who fill the positions of

authority in the state. It may refer to the mannerauthority in the state. It may refer to the manner

or system of governing in a society.or system of governing in a society.


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In most modern economies the states regulatoryIn most modern economies the states regulatoryrole is very broad, covering the environment,role is very broad, covering the environment,financial sector and traditional areas likefinancial sector and traditional areas like

monopolies.monopolies.The first half of the twentieth century saw anThe first half of the twentieth century saw an

increased state intervention in the economy. Theincreased state intervention in the economy. TheGreat depression in the USA in 1929 brought toGreat depression in the USA in 1929 brought to

the fore, the role of the State. Shortage ofthe fore, the role of the State. Shortage ofentrepreneurship and other developmententrepreneurship and other developmentresources encouraged countries to assign anresources encouraged countries to assign animportant role to the State in socioimportant role to the State in socio--economiceconomicsystem.system.


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After the first oil price shock of 1973, there was feltAfter the first oil price shock of 1973, there was felt

a need to provide welfare benefits to thosea need to provide welfare benefits to those

suffering from transitory loss of income.suffering from transitory loss of income.

Then, there was a desirability of mixed publicThen, there was a desirability of mixed public--

private economy, which meant nationalising aprivate economy, which meant nationalising a

range of strategic industries.range of strategic industries.

Next, there was need for coordinated macroNext, there was need for coordinated macro--economic policy which had as its maineconomic policy which had as its main

objectives; full employment, price stability, andobjectives; full employment, price stability, and

balance of payments equilibrium.balance of payments equilibrium.


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Thus, states began to assume new roles. TheThus, states began to assume new roles. The

tasks performed by public institutions includedtasks performed by public institutions included

not only provision of utilities and infrastructure,not only provision of utilities and infrastructure,

but also support for health care and education.but also support for health care and education.

This trend reversed in 1980s, when the economyThis trend reversed in 1980s, when the economy

was opened for foreign investment. Privatisationwas opened for foreign investment. Privatisation

caught on at an amazing speed in bothcaught on at an amazing speed in both

developed and developing economies.developed and developing economies.

However, the government expenditure as aHowever, the government expenditure as a

percentage of GDP substantially increased.percentage of GDP substantially increased.


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The functions of the state vary from basicThe functions of the state vary from basicminimum requirements to active participation inminimum requirements to active participation incoordinating activities.coordinating activities.

Classification:Classification:

1. The basic functions include, pure public goods1. The basic functions include, pure public goodssuch as provision of macroeconomic stability,such as provision of macroeconomic stability,control of infectious diseases, safe water, roads,control of infectious diseases, safe water, roads,and protection of the destitutes. In severaland protection of the destitutes. In several

countries, the State is not even providing these.countries, the State is not even providing these.But they are important to ensure sustainedBut they are important to ensure sustaineddevelopment.development.


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2. Going beyond basic services are intermediate2. Going beyond basic services are intermediate

functions such as management of externalitiesfunctions such as management of externalities

like pollution, regulation of monopolies, andlike pollution, regulation of monopolies, and

provision of social insurance like pension,provision of social insurance like pension,unemployment benefits, etc.unemployment benefits, etc.

3. States with strong capability can take on more3. States with strong capability can take on more

activist functions, dealing with the problem ofactivist functions, dealing with the problem of

missing markets by helping coordination.missing markets by helping coordination.

Refer to Figure 4.1 for a better understanding ofRefer to Figure 4.1 for a better understanding of

the Classification of Functions of State.the Classification of Functions of State.


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Reinvigorating the States capability:Reinvigorating the States capability:

Rules and constraints: mechanisms for enforcingRules and constraints: mechanisms for enforcinglaw, such as independent judiciary, are criticallaw, such as independent judiciary, are critical

foundations for sustainable development. Thefoundations for sustainable development. Thepresence of watchdog bodies can restrainpresence of watchdog bodies can restrainarbitrary behaviour.arbitrary behaviour.

Competitive pressure: it can come from within theCompetitive pressure: it can come from within the

state bureaucracy through recruitment of civilstate bureaucracy through recruitment of civilservants on merit basis. It can come from theservants on merit basis. It can come from theprivate sector through contracting out services,private sector through contracting out services,or it can come from the internationalor it can come from the internationalmarketplace through influence of global markets.marketplace through influence of global markets.


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Voice and partnership: the means to achieveVoice and partnership: the means to achieve

transparency and openness are variedtransparency and openness are varied

business councils, interaction groups, etc.business councils, interaction groups, etc.

Working arrangements with community groupsWorking arrangements with community groupscan ensure greater state effectiveness by givingcan ensure greater state effectiveness by giving

citizens greater voice in the formulation ofcitizens greater voice in the formulation of

government policies. Further, partnershipgovernment policies. Further, partnership

between levels of government and withbetween levels of government and withinternational bodies can help in the provision ofinternational bodies can help in the provision of

local and global public goods.local and global public goods.

Business Environment-UNIT IV-CHAPTER 1

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