Question one
Proper management of institutions is vital for the success of any country. The management of political and economic institutions is the main difference between successful and poor nations. The consistency and dynamism of economic and political institutions in America have ensured that the country remains successful. The stability of her institutions has ensured that the private sector prospers. It has also established a conducive environment where individuals can succeed based on their efforts, talents and gifts. On the contrary, poor nations have weak, easy to manipulate economic and political institutions. This has led to reliance on patronage, corruption and other unethical business practices that have crippled economic growth and concentrated wealth around a few individuals.
The recent financial crisis, however, exposed the weakness of American institutions. It showed that regulatory institutions could be manipulated, either knowingly or otherwise by the private sector. The regulatory institutions reacted long after the crisis had happened. Previously, American institutions were proactive in the detection and execution of business malpractices and hence effectively protected the population from exploitation.
Events leading to the crisis also showed the susceptibility of the housing sector, one of the most important sectors sector. The decision to sell unsecured mortgage policies exposed inefficiency in the governance of financial institutions. The preset conditions were not sufficient to determine whether the borrowers were capable of servicing their mortgages. The decision by financial institutions to invest in this sector showed that they were poorly managed, and this explains why many of them collapsed.
In the past, America has had a balance between the economic, political and social institutions. However, the crisis showed dominance of the economic institutions over the others. This explains why there was little regulation. The political and other social institutions could neither detect nor mitigate the situation fast enough to protect Americans.
Question two
External rent has substantial influence on the business behavior in a country. External economic rent is the inflow of economic resources from foreign nations and institutions. The constant inflow of the external rent results into a ‘rentier state’. The ‘rentier state’ concept was developed by Hussein Mahdavy in 1970 describing the nature of economies of oil producing nations. Wealth generation in such states is carried out by a few individuals while the majority is involved in distribution and consumption. This leads to concentration of wealth among a few individuals. This hampers the development of businesses and leads to overreliance on the external rent.
Governments are also the main recipients of external rent. Other economies rely on taxes to run governments and also development their countries. As such, they generate policies that are favorable for business and that encourage entrepreneurship. Nations that rely on external rent are not reliant on taxes. They, therefore, lack policies to facilitate entrepreneurship. Governments also fail to invest in projects that can lead to future generation of taxes and instead spend the rent to meet the needs of the population. This explains why many oil-producing countries, despite all the resources at their disposal, are not among the fastest growing economies.
The availability of external rent further means that there is increased foreign currency. This facilitates importation of foreign goods and services. Foreign products have the capacity to replace locally produced goods. This hampers the growth of domestic industries due to their inability to compete with imported goods produced under economies of scale.
Overreliance on external rent predisposes states to external price shocks. This eliminates government’s control over the economy. This negatively affects the economic stability of the economy which negatively affects businesses.
Question three
The impact of legal systems and regulations on businesses depends on their enforcement. Businesses can exploit lapses in regulations to maximize their profits. This has the potential to benefit the business positively. However, strict legal systems eliminate the possibility of benefitting from unethical or illegal activities. There is a blurred line between the positive and negative impacts of legal systems on businesses. A business can engage in an illegal or unethical practice and obtain immense profits. When discovered, the businesses are charged and fined. The fines are the negative aspects of the legal system to the businesses. However, the fines are usually lower than the profits made from the unethical behavior.
Effective legal systems are beneficial to businesses. They not only guide business processes, they protect businesses from unfair competition and damaging market practices. However, increased regulation has the potential to limit business growth.
Question four
Managing personal and group interests is an important aspect in corporate governance. Clear guidelines are necessary to prevent conflict of interest. Daniel was wrong in all the three cases. It would have been prudent for Daniel to provide full disclosure about the warehouse. In this case, he lied about its ownership and its value. This shows that he betrayed the trust accorded to him by the other directors. His failure to examine the insurance policies can be classified as neglect, and he ought to be held personally liable. Offering a lower price to the client for personal gain is fraud (Pacces 2013). As such, Daniel breached his duties as a director.
Reference
Pacces, A., 2013. Rethinking Corporate Governance: The Law and Economics of Control Powers. 1st ed. New York: Routledge.
