Comparative Political Economy Analysis of Angola and Iran - Research Paper Example

Comparative Political Economy Analysis: Angola and Iran I. Political Economy, Comparative Political Economy, and Innovation Walter and Sen define political economy as the interaction between economic and political factors (1). On the other hand, Boettke, Coyne Leeson, and Sautet defines comparative political economy as a study that focuses scholarly attention on the political/legal, economic/financial, and social/cultural institutions that govern economic life (37). Describing the disciplinal orientations from 1978 to 2008, Schmidt says that the last 30 years saw political economy returning to a focus on the state, an emphasis on the role of business, and de-emphasis on the role of labor (1-2, 9, and 11) in shaping society political economy. Nevertheless, the result is a scholarship on political economy that is "now back to a more balanced emphasis on all three" (Schmidt, 15) ---notwithstanding the differences between American and British traditions in political economy (Maliniak and Tierney, 1). According to Maliniak and Tierney, the American school of political economy is positivist and empiricist while the British school is more explicitly normative and interpretative. A comparative political economy approach allows us to derive lessons useful for advancing knowledge and informing policy. We have this in mind as we study and compare the cases of Angola and the Islamic Republic of Iran. We choose the two countries because relatively little is known on the two countries. We apply our comparative political economy approach to Angola and the Islamic Republic, focusing on the role of political economy on national innovative capacity. Porter and Stern define national innovative capacity as the countries potential "to produce a stream of commercially relevant innovation" (5).1 They emphasize that national innovative capacity is a product of the countrys technological sophistication, number of scientific and technical labor force, investments, and policy choice.2 Viewed in this perspective, national innovative capacity is definitely an outcome of a political economy environment that promotes technological sophistication, size of scientific and technical labor force, investments, and competition. Further, the Porter-Stern notion of national innovative capacity also emphasizes on the political and economic entities of countries (5) and, therefore, this constitutes another stress on a political economy perspective. In contrast, the political economy perspective on innovation of Cowhey and Aronson stresses on how a combination of technological innovation, market strategies, and political entrepreneurship shapes the global economy, particularly the global information and communication markets (1-2). For Cowhey and Aronson, policy is imperfect and politics alone can lead to absurdities (2). Thus, policy is not the sole determinant of innovation. Porter and Stern developed an index to measure national innovative capacity based on the values of sub-indices on the proportion of scientists and engineers in the population, potentials of policy to produce innovation, and clustering/linkages variables. Using a national innovative index, they were able to measure national innovative capacity of several countries. Table 1 of this work captures the Porter and Stern country rankings of 75 nations with regard to innovative capacity. Table 1 confirms a relationship between national innovative capacity and political economy. Countries that rank highest on national innovative capacity are also those that significantly affect world economy and politics: the United States, Finland, Germany, United Kingdom, Switzerland, Australia, Sweden, France, Canada, Israel, and Japan. At the same time, those with the highest innovative capacity are also those that provide a good political economy environment for innovation: countries that scored high on the national innovative capacity index are also among those with good policies for innovation. As good political economy environment provides a good environment for innovation, we expect that national innovative capacity will be correlated with country affluence. The study of Ying, Eng, and Robinson confirms that a good political economy environment favors economic growth (31-34). Porter and Stern found a high and significant correlation between competitiveness and between competitiveness and prosperity (12-14). In the latter and in the former, Porter and Stern supported their assertion of the strong link with regression statistics and graphs of regression. Regarding the strong and significant correlation between national innovative capacity and prosperity, Porter and Stern were able to show that national innovative capacity is strongly correlated with per capita gross domestic product. At the same time, countries with more than usual focus on innovation (United States, Israel, and Taiwan) also scored very high on national innovative capacity. Again, this confirms the important role of the political economy environment on national innovative capacity. Stern, Furman, and Porter elaborate that differences in national innovative capacity "reflect variation in both economic geography (e.g. levels of spillovers between local firms) as well as cross-country differences in innovation policy (e.g. the level of public support for basic research or legal protection for intellectual property (IP))" (900). Some of the more important foundations for national innovative capacity in the Stern, Furman, and Porter framework are an innovation infrastructure that includes a technology policy environment, competition and an environment that encourage investments, and institutions that encourage the commercialization of technologies (900). Table1. Leading Innovative Countries Source: Global Competitive Report 2001 (as cited by Porter and Stern p. 4) On the other hand, Nee, Jeong-Han, and Opper emphasize the important role of transition to a market economy in shifting to higher levels of innovation (1). A market economy will increase the power of economic actors relative to economic actors, promote competition, creates opportunities for entrepreneurship, and subsequently support innovative activity (Nee, Jeong-Han, and Opper 1). Boldrin and Levine also emphasized on the role of competitive markets and businesses rather than intellectual property rights in producing innovation (45-46). Table2. Innovation Figures, 2004-2008 Country Innovation Performance Innovation enablers Patents per m Innovation performance index Rank Direct inputs index Rank Innovation environment index Rank Aggregate innovation enablers index Rank Japan 1,274.333 10.00 1 9.81 9 7.11 23 9.14 11 Iran 0.033 3.65 75 4.19 66 3.46 79 4.00 72 Angola 0.001 1.44 81 1.25 82 3.03 82 1.70 82 Libya 0.000 1.44 81 2.44 78 3.4 81 2.68 80 World Average Not computed 6.28 n.a. 6.31 n.a. 6.3 n.a. 6.31 n.a. Source: Economic Intelligence Unit, The Economist, 2009, p. 12 and 14 Table 2 below shows that Japan is the leading country in terms of innovative performance while Libya and Angola rank both 81 in 82 countries where innovative performance statistics were obtained. In other words, Libya and Angola are the most "backward" countries in terms of "innovative performance." Innovative performance is seen in terms of the number of patents per million people in 2004 to 2008. Table 2 shows that the leading country in terms of innovative performance has about 1,274 patents per million people while the "laggard" countries, Angola and Libya, has close to zero patent for every million people in 2004 to 2008. Iran is also one of the "laggard" countries having a rank of 75 out of 82 countries. Iran has also practically zero patent for every million people during the period. In terms of innovative performance, both Angola and the Islamic Republic of Iran performance are far below the world average of 6.28. Not surprisingly, Angola and Iran are the laggards in innovative performance precisely because they are also laggards in terms of innovation enablers, which are political economy policies, according to the Economic Intelligence Unit of The Economist. Iran and Angola belong to the same league as Libya in terms of innovative performance precisely because they have poor innovation enablers that are political economy variables. The average score of 82 countries on innovation enablers is 6.31 but Angola and Iran performed very poorly at 1.740 and 4.00, respectively. At the bottom of the list is Libya, which has an "innovation enablers" score of 2.68. A cursory inspection of Table 2 suggests that innovation performance is highly correlated with the political economy variable of innovation enablers. Table 3. Rank in Innovation Index 2002-2008 and Expected Rank 2009-13 Country Rank in Innovation 2002-06 (actual) 2004-08 (actual) 2009-13 (expected) Japan 1 1 1 Iran 77 75 75 Angola 81 81 81 Libya 82 81 81 Source: Economic Intelligence Unit, The Economist, 2009, p. 15 and 18 Table 3 above compared with Table 2 suggests that for 2009 to 2013, the country rankings of Iran and Angola will persist at the low-end of the country rankings in terms of innovation. This suggests that innovative performance tend to perpetuate itself given the low scores on innovation enablers. Those with good "innovation enablers" tend to remain at high rankings while those with poor "innovation enablers" tend to remain at low rankings in terms of innovation performance. Table 4. Expected Innovation Indices and Rank, 2009-2013 Country Innovation Performance Expected Innovation Performance Index Expected growth next 5 years Expected Change in Rank Japan 10.00 0.0 0 Iran 3.94 8.0 0 Angola 1.56 8.9 0 Libya 1.51 5.3 -1 World Average 6.41 2.1 n.a. Source: Economic Intelligence Unit, The Economist, 2009, p. 13 and 15 Nevertheless, Table 4 indicates that even if Iran and Angola are poor innovation performers, the two countries will continue to grow above the world average growth rate. Aggregate growth for the world economy is expected to be only 2.1% but Iran and Angola will grow by 8.0% and 8.9%, respectively. This is the short-term scenario, of course. At the same time, Table 4 suggests that that innovation performance does not pose an obstacle to economic growth in the immediate period. Most likely, the effect of innovation performance on economic growth happens in the longer term. II. Political Economy, Institutions, and Ease of Doing Business Figure 1 shows the World Bank criteria on ease of doing business. The figure shows that 25% of the criteria pertain to time involved in preregistration, 25% pertains to costs, 25% pertains to procedures, and the last 25% pertains to capitalization. Figure 1. Criteria on Ease of Dong Business Source: World Bank, Doing Business 2009, p. 9 Table 5 shows that that Angola ranks 168th in terms of the overall ease of doing business while Iran ranks higher at 142 out of 181 countries. Specifically, starting a business in Angola ranked 156 in 181 countries assessed for the rankings. Starting a business in Angola requires at least 68 days, taking up at least 8 procedures, costs at least 196.8% of income per capita, and a minimum capitalization of 39.1% of income per capita. Firing costs 58 weeks of salary. Registering property costs 11.6% of property values. Total tax rate as a percentage of profit is 53.2%. Exporting requires 68 days. It takes US$2,250 per container to exports. Importing requires 62 days. Importing costs US$3,325 per container. Enforcing contracts requires 1,011 days. Closing a business requires 6.2 years, costs 22% of the estate, and recovery is only 10 cents per dollar. Table 5. Ease of Doing Business in Angola Source: World Bank, Doing Business 2009, p. 87 Table 6. Ease of Doing Business in Iran Source: World Bank, Doing Business 2009, p. 110 In contrast, based on Table 6, the ease of doing business in Iran ranks higher than Angolas rank of 168 based on 181 countries ranked. Starting a business in Iran requires a shorter number of days than Angola or 47 days, taking up a greater number or at least 8 procedures, costs significantly lower at only 4.6% compared to Angolas 196.8% of income per capita, and a capitalization much lower than Angolas minimum capitalization of 1% of income per capita versus Angolas 39.1%. Firing however is more difficult than Angola at the cost of 91 weeks of salary. Registering a property in Iran costs lower at 10.6% of property values compared to Angolas 11.6% of property values. Compared to Angola, total tax rate as a percentage of profit is lower in Iran at 44.2%. Exporting requires only 26 days compared to Angolas 68 days. Exporting in Iran takes only US$1,011 compared to Angolas US$2,250 per container. Importing requires only 42 compared to Angolas 62 days. Importing costs only US$1,656 compared to Angolas US$3,325 per container. Enforcing contracts requires 520 days compared to Angolas 1,011 days. Closing a business requires only 4.5 days compared to Angolas 6.2 years, costs 9% compared to Angolas 22% of the estate, and recovery is higher at 23.1 cents compared to Angolas 10 cents per dollar. Table 7. International Rank in Ease of Doing Business in Angola and Iran in the last 3 Years Country Year 2008 2009 2010 Angola 169 168 169 Iran 142 138 137 Sources: World Bank, Doing Business 2010 (p. 2) and Doing Business 2009 (p. 6) While Angola improved the speed of starting a business, reformed procedures in construction permits, and simplified paying taxes in 2007-2008, Iran did not undertake much reform during the same period (Doing Business, 2009, p. 81 & 82). These highlight the role of national or government institutions in promoting business activity and innovation. Nevertheless, Table 7 indicates that Iran improved its ranking by 5 steps while Angola basically did not improve her ranking. Meanwhile, according to Holmes, Feulner, and Anastasia, Angola has a rank of 143 while Iran has a rank of 151 in 2008 index of economic freedom (81-82 and 215-216). According to the material, Angola in 2008: Is only 47.1% economically free Increased its overall economic freedom score by 1.9 % relative to 2007 despite of having emerged out of a civil war only recently Is far below the worlds average in seven out of ten indicators of economic freedom Strangles businesses Is unfriendly to foreign investments Has a high degree of government corruption Has a biased judiciary Has commercial regulations that are inconsistent/confusing and that restrict business mobility At the same time, according to the three authors, Iran in 2008: Is only 44% economically free Decreased its overall economic freedom score by 0.1% relative to 2007 and the decrease mainly mirrors a deterioration in government corruption in the country Does not have "strong economic institutions" Employs economic protectionism, price controls, and double-digit tariffs Suffers from double-digit inflation Has an economy that is unfree in many aspects: "trade freedom, monetary freedom, investment freedom, financial freedom, property rights, and freedom from corruption are all weak" Has high tariff rates and non-tariff trade barriers that cripple trade and investments Has a business sector that is not fully mobile to go in and out of business Again, the above highlights the role of institutions. Without reforming institutions, innovative economic activity that provide impetus for innovation will be at a snails pace and will ultimately affect innovation. Holmes, Feulner, and Anastasia attribute the deteriorating state of Iranian economy to the presidency of Mahmoud Ahmadinejad that started in 2005. In the authors view, the Iranian president held back "tentative" efforts to change or reform the dominance of the state in Iranian economy. Ahmadinejad promoted populist policies and "promised the poor a greater share of Irans oil wealth, greater subsidies, and greater state control" (215). According to the three authors, the public sector is both bloated and inefficient. Holmes, Feulner, and Anastasia (39-55) measured economic freedom in terms of indices developed for 10 economic freedom areas: 1. Business freedom refers to the ease of starting, operating, and closing an enterprise. 2. Trade freedom refers to extent international trade is free from barriers. 3. Fiscal freedom is the extent of governments freedom from financial burden. 4. Government size pertains to government ability or freedom to undertake expenditure. 5. Monetary freedom is indicated by price stability and absence of price controls. 6. Investment freedom is indicated by extent the capital is free to flow in or out, especially foreign capital. 7. Financial freedom refers to banking security indicated by banks ability to operate free from state ownership of banks and financial institutions. 8. Property rights refer to the freedom of citizens to accumulate private property. 9. Freedom from corruption refers to the assessment how businesses are free to operate free from bribing public officials. 10. Labor freedom is the freedom of labor and business to interact. Based on the Holmes, Feulner, and Anastasia indices, Angolas 2008 business freedom is 36.5%; trade freedom, 73%; fiscal freedom, 85.2%; government size, 72.8%; monetary freedom, 57.8%; investment freedom, 20%; financial freedom, 40%; property rights, 20%; freedom from corruption, 22%; and labor freedom, 44.1%. Meanwhile, again based on the Holmes, Feulner, and Anastasia measures, Irans 2008 business freedom is rated at 55%; trade freedom at 57.4%; fiscal freedom, 81.1%; government size, 84.5%; monetary freedom, 61.3%; investment freedom, 10%; financial freedom, 10%; property rights, 10%; freedom from corruption, 27%; and labor freedom, 43.8% (216). Economic freedom and the indices used to measure the extent to which there is economic freedom are basically politico-economic institutional factors. For the 10 freedoms to take place, a legal and political environment that respects, recognizes, and upholds the freedoms must be available. At the same times, institutions must be available to serve as agencies in upholding, respecting and advancing the freedoms. Table 8 of the next page indicates that ease of doing business is associated with affluence. Many of the top 10 countries where doing business are easier have a reputation for affluence: United States, Canada, Australia, United States, United Kingdom, and Singapore. In contrast, all of those in the bottom 10 countries where doing business is difficult belong to a category of countries whose majority of its citizens do not have a reputation for affluence. Thus, it appears logical that ease of doing business leads to affluence. Table 8. Easiest and Most Difficult Countries for business Source: World Bank, Doing Business 2009, p. 9 Table 9 suggests that the ease of doing business is associated with investments. As of 2007, both Angola and Iran are at the bottom of the rankings for the destination of foreign direct investments or FDIs. Table 9 also indicates that Angola used to be a favorite destination for foreign investments in 2005 but quickly jumped to one of the bottom rankings in 2006. The Islamic Republic of Iran, however, is consistently low in FDI performance ranking. Table 9. Country Ranking by FDI Performance Indices, 2005-2007 Country Inward FDI Performance Index Outward FDI Potential Index Outward FDI Performance Index 2005 2006 2007 2005 2006 2007 2005 2006 2007 Angola 35 136 139 80 76 n.a. 58 59 65 Iran 133 133 133 59 61 n.a. 93 78 85 Source: UNCTAD World Investment Report 2008, p. 214 In 2004, Table 10 shows that Angola used to ranked fourth in terms of FDI performance. However, even at the time, Iran has been at the bottom rank or 130th in terms of FDI performance. Table 10 indicates that FDI performance does not indicate affluence because many in the top 10 in 2004 do not have a reputation for affluence. Table 10. Country Ranking, FDI Performance Index 2004 Source: UNCTAD World Development Report 2005, p. 23 III. POLITICAL ECONOMY & OTHER INSTITUTIONAL/CULTURAL FACTORS Angola and Irans poor international ranking in terms of innovation and ease of doing business has likely basis in its political economy. Tables 11 to 15 shows the percentile rankings of Angola and Iran based on assessments of the World Bank. The assessments use percentile rankings as the basis for assessing country performance. The country percentile rank is indicated by the dark blue line. A percentile rank of 10 indicates that the country rank is only greater than 10% of the countries assessed while a percentile rank of 30 indicates the country rank is greater than 30% of the countries assessed. Thus, the higher the numeral of percentile rank indicates a higher rank because the country has a higher rank than a higher number of countries. Table 11 suggests that Angola and Iran have dropped to a percentile rank lower than 10 while Iran has dropped to a percentile rank lower than 30 in terms of controlling corruption. The figures indicated by the graph from 1996 to 2008 indicate that the two countries are either deteriorating in terms of controlling corruption or have not improved much in controlling corruption. Table 11. Angola and Iran on Control of Corruption Source: The World Bank, Country Data Report for Angola 1992-2008 p. 7 and Country Report for Iran 1992-2008 p. 7 Table 12. Angola and Iran on Regulatory Quality of Government Policy Source: The World Bank, Country Data Report for Angola 1992-2008 p. 5 and Country Report for Iran 1992-2008 p. 5 Table 12 confirms that both Angola and Iran rank poorly on the regulatory quality of their government policy, as viewed from the market perspective of the World Bank. Based on Table 12 we can say that Angolas regulatory quality of government policy is below percentile rank 20 while Iran is below percentile rank 10. Table 13 shows that, overall between 1996 to 2000, Angola has ranks below percentile rank 30 in terms of government effectiveness while Irans rank below percentile ranks 40. Percentile rank 40 is nothing to brag about because it only means that Iran is only ahead of 40% of the countries ranked. Further, even if government is effective but regulatory quality is not good then government effectiveness will not attract investment and will not encourage innovation. Table 13. Angola and Iran on Government Effectiveness Source: The World Bank, Country Data Report for Angola 1992-2008 p. 4 and Country Report for Iran 1992-2008 p. 4 Table 14 suggests that Angola ranks poorly in terms of percentile rank in terms of the rule of law. Iran, however, has a better ranking but Iran implements Islamic law that does not appear to be encouraging for foreign investments and innovation as indicated by our tables on innovation, foreign direct investment or FDI performance, and data on ease of doing business. This matter is a cultural dimension of innovation and innovative capacity. Table 14. Angola and Iran and Rule of Law Source: The World Bank, Country Data Report for Angola 1992-2008 p. 6 and Country Report for Iran 1992-2008 p. 6 Table 15. Angola and Iran on Political Stability and Absence of Violence Source: The World Bank, Country Data Report for Angola 1992-2008 p. 3 and Country Report for Iran 1992-2008 p. 3 Table 15 indicates that while Iran has been consistently deteriorating in terms of political stability and absence of violence since 2003, Angola has been consistently progressing on the parameter since 2000. This alone can serve as an important encouragement for foreign investments, economic activity, and innovation in Angola. In contrast, political instability and possibility of violence will do much to drive away investments, economic activity, and innovation in Iran. Table 16. Country Ranking, Logistic Performance Index 2007 Source: Arvis & others, 2007, p. 2 Table 16 indicates that the Islamic Republic of Iran ranks 78 while Angola ranks 86 in the World Banks logistic performance index in 2007. The World Banks 2007 logistic performance index measures seven areas of performance: efficiency of the customs clearance process, quality of transport and information infrastructure, ease and affordability of international shipping, competence of the logistic industry, costs, and timeliness of shipments (8). Again, this is an institutional dimension of innovation or innovative capacity. Meanwhile, one important cultural element that deserves close attention in Iranian culture is avoidance of uncertainty that serves as one of the cultural obstacles to innovation (Sarkissian, p. 10). In Angola one concern raised by Lance is that corruption may be so accepted that it becomes cultural but, at the same time, culture explains only a part of the corruption (15). IV. Concluding Remarks We have analyzed the political economy foundation of the innovative capacity status of Angola and Iran using the method of comparative political economy. Our analysis covered national policy frameworks, role of institutions, and culture. Summarizing our discussion, we point out the following: 1. A comparative political economy approach allowed us to derive useful insights on the political economy foundation of innovative capacity in a way that is useful to policy. In particular, we have pointed out the policy areas where reforms are needed that can boost innovative capacity in both Angola and Iran. 2. We have confirmed that innovative capacity of Angola and Iran are rooted in their political economy environment or situation. The political economy environment appears to be affecting culture and, in turn, culture or cultural response reinforces the innovative capacity situation of the two countries. However, more research is still needed in the study area, as the data that we have gathered are not yet adequate to make a very good description of the interface among political economy, culture, and innovative capacity. The inadequacy of data in the study area reflects the state of research on Angola and Iran. 3. The political economy reforms needed in Angola and Iran are in the area of eliminating corruption, facilitating ways of doing business faster and easier, creating institutional support for business and innovation, creating a good political economy environment for investments, and in building or consolidating economic freedom. The reforms are needed for their intrinsic value but they contribute as well towards advancing innovative capacity in the two countries. The build-up of the innovative capacity of the two countries will go a long way in making their economic growth sustainable or more sustainable. Works Cited Arvis, Jean-Francois, Monica Alina Mustra, John Pranzer, Lauri Ojala, and Tapio Naula. Connecting to Compete: Trade Logistics in the Global Economy. Washington: The World Bank, 2007. Boldrin, Michele, and David K. Levine. "Intellectual Property and the Efficient Allocation of Social Surplus from Creation." Review of Economic Research on Copyright Issues 2.1: 45-66. 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Cornell University: Center for the Study of Economics & Society, April 2009. 26 November 2009 < http://www.economyandsociety.org/publications/wp46.pdf> Porter, Michael E., and Scott Stern. National Innovative Capacity. Prepared for the World Economic Forum: The Global Competitive Report 2001-2002. New York: Oxford University Press, 2001. 26 November 2009 Sarkissian, Alfred. "Industrial Policy in Iran: A Politico-Institutional Analysis of the Policy Process." 26 November 2009 Schmidt, Vivien A. "Changes in Comparative Political Economy: Taking Labor Out, Bringing the State Back In, Putting the Firm Front and Center." Paper prepared for the European Studies Association Meeting in Montreal, Canada (May 17 to 20, 2007): 1-21. Seitz, Jay A. "The Political Economy of Creativity." Creativity Research Journal 15.4 (2003), 385-392. Stern, Scott, Jeffrey L. Furman, and Michael E. Porter. "The Determinants of National Innovative Capacity." Abstract. Research Policy 31.6 (August 2002): 899-933. 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