Chapter Three

International Political Economy

(IPE)
 3.1. Meaning and Nature of International Political
Economy (IPE)
• IPE is a field of study that deals with the interaction of
politics and economics among the world’s nations
• It examines the interdependence of politics and economics
in the international system.
• It views political and economic reality as the two sides of
the same coin.
 3.2. Theoretical perspectives of International Political Economy

• There are three major theoretical perspectives regarding the

nature and functioning of the International Political economy
A. Mercantilism/nationalism:
• Is State-centric approaches to political economy.
• Defends a strong and pervasive role of the state in the economy –
both in domestic and international trade, investment and finance.
• Mercantilist states are highly interventionist.
• National power and wealth were tightly connected
• National/state power in the international system derived in
large part from wealth
• Wealth in turn is required to accumulate power.
• Economic strength is a critical component of national power.
• For mercantilists, the world is a tough, unforgiving place, where
only the strong survive.
• Focuses on state efforts to accumulate wealth and power to
protect society from physical harm or the influence of other
states.
• Their primary goal is the maximization of power and they see
economic activity as a vehicle for achieving this end.
• Intends to build up a state’s wealth, power and prestige by
developing a favourable trading balance through producing
goods for export while keeping imports low.
• Trade provided one way for countries to acquire wealth from
abroad
• Wealth could be acquired through trade, however, only if
the country ran a positive balance of trade, that is, if the
country sold more goods to foreigners than it purchased
from foreigners.
• The chief device for doing this was protectionism.
• Import restrictions such as quotas and tariffs, designed to
protect domestic producers
• To protect ‘infant’ industries and weaker economies from
‘unfair’ competition from stronger economies (defensive
mercantilism).
• To strengthen the national economy in order to provide
the basis for expansionism and war (offensive
mercantilism).
• Strongly concerned with developing a country’s domestic
manufacturing capacity by grant subsidies to domestic
industries.
• Emphasizes the importance of balance-of-payment
surpluses in trade with other countries
• And, to this end it often promotes an extreme policy of
autarky to promote national economic self-sufficiency.
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• States should also play a disciplinary role in the economy to

ensure adequate levels of competition.
• Found in the recent experience of the Japanese, South
Korean, Taiwanese and Chinese national political economies
• Instead of the term mercantilism, these states the East Asian
economies (especially Japan, South Korea, and Taiwan) used
the term ‘developmental state approach’.
 B) Liberalism:

• Emerged in Britain during the 18th C to challenge the dominance of

mercantilism.
• Adam Smith’s set out explicitly to demonstrate that mercantilism was flawed.
• Among other criticisms of mercantilism, Smith suggested that it was
inefficient for a state to produce a product that could be produced more
cheaply elsewhere.
• Defends the idea of free market system.
• A market is any place where the sellers of a particular good or service can
meet with the buyers of that good or service to conduct an exchange or
transaction.
• Free-market is therefore a market conditioned on voluntary and unrestricted
exchanges.
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• Liberalism favors free trade/trade liberalization and free financial

and Foreign Direct Investment (FDI) flows.
• Has a policy of laissez-faire, in which the state leaves the
economy alone and the market is left to manage itself.
• Economic exchange via the market is therefore a positive-sum
game, in that greater efficiency produces economic growth and
benefits everyone.
• Removing impediments (barriers) to the free flow of goods and
services among countries is the foundational value and principle
of liberalism.
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• The foundational value and principle of liberalism is removing

barriers to the free flow of goods and services among countries
• Removing barriers: reduces prices, raises the standard of living
for more people, makes a wider variety of products available,
and contributes to improvements in the quality of goods and
services.
• Removal of barriers would also encourage countries to specialize
in producing certain goods, contribute to the optimum
utilization of resources such as land, labor, capital, and
entrepreneurial ability worldwide.
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• Limited role of state/government:

• Establishing clear rights of ownership of properties
and resources
• Enforcing (the judicial system) these rights and the
contracts that transfer ownership from one
individual to another.
• Resolving market failures
 C) Marxism:

• Originated in the work of Karl Marx as a critique of capitalism.

• According to him capitalism is characterized by two central conditions:
the private ownership of the means of production, or capital, and
wage labor.
• He believed that capitalist society was increasingly divided into ‘two great
classes’, the bourgeoisie and the proletariat.
• The relationship between these classes is one of irreconcilable
antagonism:
the proletariat being necessarily and systematically exploited by the
bourgeoisie
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• capitalism is a system of class exploitation and treats social classes

• Marxists argue that capitalists:
decide about how society’s resources are used
control resource allocation
Decisions about what to produce are made by few firms that
control the necessary investment capital.
State plays no autonomous role in the capitalist system
The state operates as an agent of the capitalist class
The state enacts policies
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• Generally, the mercantilists who focus on the state and the

liberals who focus on the market, Marxists focus on large
corporations as the key actor that determines how
resources are to be used.
• Three contemporary theories of IPE
A. Hegemonic Stability Theory (HST):
B. Structuralism
C. Developmental State Approach
 A. Hegemonic Stability Theory (HST):

• Focused on the reasons for the Great Depression.

• A hybrid theory containing elements of mercantilism, liberalism,
and even Marxism.
• The basic argument of HST is:
the root cause of the economic troubles that bedeviled
Europe and much of the world in the Great Depression of
the 1920s and 1930s was the absence of a benevolent
hegemon.
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• A dominant state willing and able to take responsibility (in the sense of
acting as an international lender of last resort as well as a consumer of
last resort)for the smooth operation of the International (economic)
system as a whole.
• More specifically, as a lender of last resort, the hegemon provides access
to loans (especially long-term loans) when the normal flow of international
lending has dried up.
• International trade is also negatively impacted if there is no consumer of
last resort.
• The existence of a hegemon does not prevent economic shocks and
downturns from taking place.
• Instead, it plays a central role in ensuring that such events do not devolve
into full-blown economic crises or depressions
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• HST has thus influenced the establishment of the Bretton Woods
institutions (IMF and WB)-both being the products of American
power and influence.
 B) Structuralism

• It is a variant of the Marxist perspective.

• Starts analysis from a practical diagnosis of the specific structural
problems of the international liberal capitalist economic system whose
main feature is centre-periphery (dependency) relationship between the
Global North and the Global South which permanently resulted in an
“unequal (trade and investment) exchange.”
• The centre refers to the industrialised countries and the periphery to the
developing countries.
• The centre produces sophisticated manufactured goods while the
periphery specialises in the production of primary products.
•.
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• The products produced face differing elasticities of demand.
• Primary products are price and income inelastic, while manufactures have a
high income elasticity of demand.
• The gains from trade will continue to be distributed unequally (and,
some would add, unfairly) between nations exporting mainly primary
products and those exporting mainly manufacturer
• It advocates for a new pattern of development based on
industrialization via import substitution based on protectionist
policies.
• Prescribe import substitution industrialization through suspension
of free play of international market forces.
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C) Developmental State Approach

• Realizing the failure of neo-liberal development paradigm/model in solving
economic problems in developing countries, writers suggested the
developmental state development paradigm as an alternative development
paradigm.
• it advocates for the robust role of the state in the process of structural
transformation.
• refers to a state that intervenes and guides the direction and pace of
economic development.
• Advocates a state-directed lead to achieve remarkable economic growth.
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• Some of the core features of developmental state include:

Strong interventionism
Existence of bureaucratic apparatus
Existence of active participation and response of the private
sector
Regime legitimacy built on development results
East Asian economies
Japan, Singapore, China, South Korea, and Taiwan
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• Survey of the Most Influential National Political Economy systems in

the world
1. The American System of Market-Oriented Capitalism
2. The Japanese System of Developmental Capitalism
3. The German System of Social Market Capitalism
 Differences among National Political Economy Systems

• International Trade and the WTO

What is trade?
• Exchange of a good or service for another: Barter trade
• Exchange of money for goods and services: Currently, dominant mode
• Might be domestic or international trade.
What is International Trade?
• In cross-border trade the exchange of goods and services is mediated by at
least two different national governments,
• Each of which has its own set of interests and concerns,
• Each of which exercises (sovereign) authority and control over its national
borders.
 • Why International Trade?
• The five basic reasons why trade may take place between countries
are:
• Differences in Technology
• Differences in Resource Endowments
• Differences in Demand
• Existence of Economies of Scale in Production
• Existence of Government Policies
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• International/global trade governed by

Global/Regional Free Trade Agreements govern it.
• How does this work? Through:
A. WTO:
• It is the successor of GATT, which was established in 1947, to mitigate the
major international problems.
• The GATT established to avoid the kind of competitive protectionism
• GATT transformed into WTO in 1995
• The WTO has not only continued the work of the GATT, but has also created a
much stronger basis for trust building and cooperation.
• The GATT was expressly intended to bring about a “substantial reduction of
tariffs and other trade barriers and the elimination of preferences, on a
reciprocal and mutually advantageous basis”
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Generally:
• Serves as a rule-making organization,
• Monitors trade agreements,
• Adjudicates trade disputes between member states, and
• Facilitates trade talks.
• Has more than 150 members.
• Voting in WTO is equally counted unlike IMF, WB
• But, the major economic powers such as the US, EU and Japan have
managed to use the WTO to frame rules of trade to advance their own
interests.
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•The GATT succeeded in liberalizing international trade, primarily

through tariff concessions.

B. North American Free Trade Agreement (NAFTA): U.S., Canada, and

Mexico
• “free trade” was initially meant a lesser degree of governmental
constraints in cross-border trade
• The tariffs were eliminated by mutual agreement in 2008
 International Investment and the WB
• What is investment?
• World Bank defines FDI as follows: “the net inflows of investment to
acquire a lasting management interest (10 percent or more of voting
stock) in an enterprise operating in an economy other than that of the
investor’’
• The transfer of capital, personnel, know-how, and technology from
one country to another for the purpose of establishing or acquiring
income-generating assets.
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• According to Thomas Oatley (???), firms have engaged in FDI to achieve one of
the three basic objectives:
• Firms have invested across national borders to gain secure access to natural
resources.
• For example oil companies have invested heavily in Middle Eastern countries because
they hold such a large proportion of the world’s petroleum reserves.
• Firms also invest across borders to gain secure access to foreign markets.
• Because of tariff and nontariff barriers to export to important foreign markets.
• To produce and sell in the local market.
• MNCs make cross-border investments to improve the efficiency of their
operations.
• Parent firms allocate different elements of the production process to different parts of
the world.
• The capital-intensive part to developed countries and the labour-intensive part to
developing countries
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• There is a debate in the literature whether FDI is, in fact, a conduit for
wealth extraction rather than for domestic development.
• Advocators of FDI
• Creates jobs
• Increases the revenue and tax bases of the host
government
• Facilitates the transfer of technology and human capital
• Ultimately promotes development, economic growth, and
prosperity
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• Opponents of FDI
• FDI serves to extract more national wealth than it contributes to the host
country.
• They claim that FDI maintains the host country in a dependent situation.
• it creates a skewed or uneven pattern of economic development. When the
investment period comes to an end, for example, it can leave the local
workforce in a precarious economic position.
• host countries increasingly compete with one another and can end up
offering such favourable deals and incentives that they ultimately lose more
revenue than they generate.
• Finally, there are environmental and health issues as well. For example,
multinational corporations (MNCs) sometimes export heavy polluting
technologies or ‘dirty industries’ that are highly regulated in the home
country.
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World Bank:
• Created immediately after the Second World War in 1944.
• Based in Washington, D.C.
• It provides loans and grants to the member-countries.
• Was primarily designed as a vehicle for the disbursement of Marshall
Plan money set up to aid the (immediate) reconstruction of Europe.
• Accordingly, it succeeded in achieving a financially, economically, and
politically more stable and stronger Europe.
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• Later on, the bank expanded its influence to all developing countries
in Asia, Africa, and Latin America.
• Its activities are focused on the developing countries.
• It works for human development, agriculture and rural development,
infrastructure, and governance.
• However, unlike in the case of Europe, the impact of the WB on the
development of developing countries has been at best controversial
and at worst negative.
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• It is often criticized for:
• Setting the economic agenda of the poorer
nations,
• Attaching stringent /tough conditions to its
aids/loans and
• Forcing free market reforms/excessive and hard to
implement policy prescriptions
 International Finance and the IMF

• Based in Washington, D.C.

• The IMF was set up to oversee the management of fixed exchange
rates between member states.
• Oversees those financial institutions and regulations that act at the
international level.
• The IMF was designed to promote international monetary
cooperation.
• The IMF also engages in lending, but on a short-term basis only.
• IMF loans (and loan guarantees) are meant to solve temporary
balance-of-payment problems faced by member countries that
cannot otherwise obtain sufficient financing.
• In this sense, the IMF is an international lender of last resort.
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• The IMF has been subject to intense criticism.
• Critics are mainly concerned with the CONDITIONALITIES imposed on
borrower countries.
• borrowers are required to liberalize their economies and cut government
spending.
• The IMF has 184 member countries, but they do not enjoy an equal say.
• The top ten countries have 55 per cent of the votes.
• The US alone has 17.4 per cent voting rights.
• There is unequal voting system.
• Voting power is determined by what the IMF calls a quota.
• Accordingly, the more a country pays, the more say it has in IMF decision
makings.
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• The global financial system is divided into two separate, but tightly
inter-related systems: a monetary system and a credit system.
• The international monetary system can be defined as the relationship
between and among national currencies.
• More concretely, it revolves around the question of how the
exchange rate among different national currencies is determined.
• The credit system, on the other hand, refers to the framework of
rules, agreements, institutions, and practices that facilitate the
transnational flow of financial capital for the purposes of investment
and trade financing.
 Exchange Rates and the Exchange-Rate System

• An exchange rate is the price of one national currency in terms of

another.
• Example: one U.S. dollar ($1) was worth 98.1 Japanese yen (¥)
• There are two main exchange rate systems in the world namely: fixed
exchange rate and floating exchange rate.
• A pure floating-rate system:
• Determined solely by money supply and money demand.
• Absolutely no intervention by governments.
• A pure fixed-rate system
• The value of a particular currency is fixed against the value of another
single currency.