Hello, students of history and political science! I’m Mr. Tesch, and welcome to Global Chat, where we explore the ins and outs of the field of study known as “Comparative Politics.”

In this video, we’re going to learn about political economy, which is defined as the interaction between markets and political systems. Let’s first talk about exactly what that means. 

Markets are defined as the interactions between the forces of supply and demand. They are communities of buyers and sellers who are constantly interacting. To explain this a little better, let’s use an example. Let’s say I want a new bicycle. If I go out and look for someone who can sell me a bicycle, I say that I am “in the market” for a bicycle. As a buyer, I have a want, or to put it in economic terms, a “demand” for a new bicycle. If I find a business that sells bicycles that I like and for a price that I am willing to pay, then that business has the “supply” for me the thing that I want. 

Having bought a bicycle that I like, I can call that bicycle my “property.” In economic terms, property is defined as the ownership of goods and services. Property refers to much more than just bicycles, too. It can refer to land, buildings, business, personal items, and even ideas — pretty much anything someone can claim as their own. And this is where states get involved. In order for something to belong to someone, a state has to guarantee their right to that property. I couldn’t just ride off on my new bike without paying it, for example. If I did that, I would get in big trouble with the law.

Most of the things that we want and need — like my bicycle — are purchased on the free market in this way. Private businesses produce goods or services that people want, and people make choices to purchase what they want and can afford. But there are also limits to what markets and property can achieve. For example, imagine for a moment that all schools in the United States were private schools. First of all, that would mean not everyone could afford to have their children educated. In democratic societies where theoretically everyone has the right to vote, that would obviously be a pretty big problem. Also, more schools would be built in areas where more people live and can afford schooling, meaning that there would be rural areas where there aren’t many schools nearby. What that means for our purposes is that sometimes, the interactions between property and markets do not produce the benefits that we as a society desire. This is why we also rely on states to provide certain essential things as public goods.

Public goods are all around us. They are any goods that are provided by the state for society, including roads, bridges, police, fire departments, national defense, schools, and even health care. States often also provide public benefits. These are called social expenditures or welfare. They include things like unemployment assistance, job training, and even housing. Most often, these kinds of benefits go to the poor, unemployed, elderly, and disabled. 

States differ in the extent of public goods and social expenditures that they provide. In the United Kingdom, for example, healthcare is funded and provided by the state through a system called the National Health Service or NHS. In fact, all of the countries that we study provide healthcare to their citizens to at least some degree. The trouble is that social expenditures can be very costly, especially where the population is aging and paying less taxes than it is drawing benefits. This has been a problem in the United Kingdom, where an aging population is putting a strain on the National Health Service. Like all other states, the UK will have to fund its National Health Service In order to raise revenue to pay for military defense and welfare, states have to collect taxes.

There are many different types of taxes that governments can impose. Governments can tax personal income, business profits, property, imports or exports, sales, and more. How much and what kinds of taxes are collected varies from country to country, and can sometimes be a rather large portion of a country’s gross domestic product. A middle income country like Mexico might have a total tax rate of around 13 percent of GDP, but other countries have rates that are even higher. The United Kingdom collects about 26 percent of GDP in taxes, and Denmark tops the list by collecting as much as 46% of GDP in taxes alone. Most developed democracies reinvest these taxes to try to reduce poverty, increase literacy, and improve public health while bolstering the political legitimacy of the state.

Because of this, taxes are necessary. Without taxes, states cannot maintain a military, provide healthcare, or any of the other public goods and social expenditures that most of us rely on. But taxes can also be a burden for citizens and businesses. Raise tax rates too much, and a government can really put a damper on economic activity. The challenge is finding the right level of taxation, raising the necessary revenue to provide vital public goods and social expenditures, but also reinvesting those funds in a way that generates economic development and prosperity.

Besides providing public goods and services, governments can shape economic activity in other ways as well. If employment and productivity are low, governments often pursue what is called economic liberalization to try and promote economic growth. The term means exactly what it says: provide more economic freedom or reduce the government’s role in the economy. In our last video, we talked briefly about Margaret Thatcher and her role in promoting economic liberalization in the United Kingdom during the 1980s. Now we should discuss what economic liberalization looks like in the real world.

Perhaps the most obvious policy a government can pursue to promote more economic freedom is to reduce taxes. This can certainly make businesses more profitable, providing more incentive for productivity. On the flip side, this reduces the state’s capacity to provide infrastructure or public goods and services. As before, it is a question of finding the right balance. 

States can also choose to privatize state controlled resources or industries. Most of the countries that we study more or less control some of their natural resources, their extraction, and the revenues from their sale. This is especially true with oil and natural gas. By selling these industries and resources to private owners, though, governments hope to promote competition. The idea is that private companies compete for profits, and in so doing find more efficient ways to extract and sell resources like oil and gas. During his time in office, Mexican President Enrique Pena Nieto began the process of opening the national oil company Pemex to foreign investment for exactly this reason. The company’s productivity had been declining, and Pena Nieto had made it a campaign promise to institute changes to draw in foreign investment, make Pemex more profitable, and promote growth. We will be discussing Pena Nieto’s policies in more detail later in our course. 

Economic liberalization can also be achieved through changes in trade policy. If a government reduces taxes on imports and exports, businesses and individuals can more cheaply exchange goods and services across borders. This was the point of the North American Free Trade Agreement, more commonly known as NAFTA. The idea for NAFTA was first part of Ronald Reagan’s presidential campaign in 1980, and became a reality when it was signed in 1988. NAFTA was an agreement between Canada, Mexico, and the United States to reduce barriers to trade and investment. The hope was that such an agreement would stimulate trade between the three countries, increasing productivity and national income. And it worked. Since the agreement went into effect in 1994, cross border investment and trade have grown sharply for the three member states, as have their economies overall. 

The United Kingdom and Nigeria are also members of free trade agreements with neighboring countries, both because they are member states of supranational organizations. In basic terms, a supranational organization is a political union of multiple member states who each give up some sovereignty and governing authority. The famous example is the European Union, of which the United Kingdom is at least as of yet still a member. Nigeria is a member state of ECOWAS, or Economic Community of West African States, a lesser known but also very important supranational organization. Supranational organizations like these facilitate free trade between member states, and all member states largely benefit economically from such arrangements. In the European Union, many countries have even agreed to share a common currency, known as the Euro. Currently, ECOWAS is working to adopt its own common currency that it calls the “Eco” for similar reasons.

So far, we can say that pursuing economic liberalization has had some positive benefits for the states where they have been attempted. But these types of policies also come with some problems of their own. 

In the first place, economic liberalization often leads to growing inequality. There are a few reasons for this. If a state cuts taxes, this means that it must also reduce its social expenditures and the public goods it provides. For the poor, this can create challenging situations where some of their basic needs that used to be provided by the state are now harder to afford. Earlier, I mentioned that Pena Nieto had begun a process to reform Pemex, bring in foreign investment, and to try and make the national oil company more competitive and productive. In addition, he also began a process of eliminating price controls that fixed the price of gasoline, and allowed fuel prices to rise by 20% in January, 2017. Sure, this meant the Mexican government no longer had to pay large subsidies for fuel, but many Mexican citizens were outraged and took to the streets in protest. 

Pursuing economic liberalization can also be bad for the environment. This is often true when governments deregulate business and industry, or when they choose not to regulate industries at all. In Nigeria, for example, the State Department of Forestry has not implemented any forest management policies since the 1970s. As a result, between 1990 and 2010, Nigeria lost over half of its forest cover. This has led to problems like loss of wildlife and soil erosion. A lot of what is driving this deforestation is the expansion of agriculture, the construction of infrastructure such as roads, and the unsustainable use of wood for fuel. Because of this, the government has been reluctant to regulate forestry in Nigeria. 

Economic liberalization can also lead to uneven development in countries, which has led to mass migrations in Mexico and China. In Mexico, maquiladoras are factories that import raw materials and export finished goods with relatively small duties or taxes. Since the 1980s, many of these factories have sprung up in Northern Mexico along the United States border. American companies often have their products manufactured or assembled in maquiladoras, where they take advantage of less expensive Mexican labor. Between 1990 and 2000, the number of employees in Maquiladoras quintupled, meaning that millions of Mexicans have since also moved North. Meanwhile, Southern Mexico has remained largely rural and poor, with the benefits of economic development going largely to Northern states.

China has experienced a similar situation to Mexico. In the 1980s, Deng Xiaoping began to move China away from its centrally planned, communist economy, and the Chinese government established “Special Economic Zones,” mostly along the Pacific Coast. These Special Economic Zones implemented economic policies more attractive to foreign businesses than the rest of China, and led to a boom in manufacturing. As a result, millions of people have migrated to these cities over time, despite the Chinese government’s attempts to limit and control this movement of people. As in Mexico, the benefits of economic development have disproportionately benefited the Special Economic Zones. 

In this video, we’ve talked about the relationship between politics and economics. Along the way, we’ve introduced some basic economic concepts, like the idea of property, markets, supply and demand, public goods, and social expenditures. We’ve also discussed the benefits and costs of policies that promote increased economic freedom, along with the terms economic liberalization and neoliberalism. For more information and additional resources, please check in the description below this video. And remember to subscribe to catch more of our videos. Thank you for watching, and see you next time!