Wolkite University

College of Social Science and Humanities

Department of Governance and Development Studies

 Course title: International Political Economy

Instructor: Gifawosen M. (MA in GPE)
Academic Year: 2021(3nd year –First Semester )
Content

 Introduction
 What Is Political Economy?
 Scope and Nature of IPE
 Embeddedness of the Economy and the Political Consequences of the Market
 International Economics and International Politics
 The Issues of International Political Economy
 Unit One:
The Subject Matter and Essence of IPE

Unit Introduction
 IPE

 A discipline that analyses economics and international relations- emerged in the

mid-1970s
 Political economy- lying at the crossroads of the study of politics and economics,
defined as the mutual interaction of states and markets (at the international
level)
 Some define it like: the study of the interplay of economics and politics in the world
arena”
 where economics is understood as “the laws of the marketplace” and politics as the
processes that generate government policy
 “A marriage of two disciplines, integrating market studies and political analysis into
a single field of inquiry
 By this “states and markets” approach, IPE seeks to explain how political power

shapes economic outcomes and how economic forces influence political action
 Cont…
 Interdisciplinary field
 Parallel existence and mutual interaction of the state and the market created

political economy
 It crosses the boundary between the study of politics and economics
 Without both the state and the market there will be no political economy
 In the absence of the state : price mechanisms and market force determine

outcomes of economic activities …pure world of economists

 In the absence of the market mechanism: the state would allocate economic

resources…pure world of political scientists

 Neither world can ever exist in a pure form, but
 The relative influence of the state or the market changes overtime
 Thus, the worlds of politics and economics, once thought to be separate (at least as
 What Is Political Economy? Historical
development
 The very term “political economy” does not have an agreed
universal definition
 Different definitions of the term “political economy” have been set
forth
 For Adam Smith in The Wealth of Nations (1776)
“branch of the science of a statesman or legislator” and a
guide to the prudent (wise) management of the national
economy
 For John Stuart Mill 1848, Principles of Political Economy
the science that teaches a nation how to become rich
 These thinkers emphasized the wealth of nations, and the term
“political” was as significant as the term “economy”
 Adam Smith and classical economists used it to mean what today is called the “science of
economics”
 In the late nineteenth century, this broad definition of what economists study was narrowed
considerably*
 In the late nineteenth century Alfred Marshall (Principles of Economics -1890), substituted the
present-day term “economics” for “political economy”
 He turned his back on the earlier emphasis on the nation as a whole and on the “political” as
important
 Marshal restricted the domain of economic science
 economics was an empirical and value-free science
 Economics was seen as a science which studies human behavior as a relationship between
ends and scares means which has alternative use
 For decades afterward, only those working from a Marxist lineage continued to use the label-
political economy.
 In the late 20th century, the term PE came into the fore again
 However, there was controversies over the meaning of the term
 For many neoliberal economists, political economy means a significant broadening of the scope
or subject matter that economists’ study
 They greatly extended the social domain to which the methods or formal models of
traditional economics are applicable
 Three different school of economists emerged during this period which employ an economic
approach to human behavior

1. The Neoclassical Institutionalism: attempts to explain the origin, evolution, and functioning
of all types of institutions (social, political, economic) as the result of the maximizing behavior of
rational individuals.
 According to neoinstitutionalist economists, economic institutions (and other institutions,
including the state) and their characteristics can be explained by the methods of neoclassical
economics.
 2. The public-choice school: is interested in applying the methods of formal economics to
analysis of political behavior and institutions, especially to the political organization of free men.
Distinguished by its explicitly normative commitment to unfettered markets and strong
opposition to government intervention in the economy.
3. The new political economy: is interested primarily in the political determinants of economic policy.

They mention the self-serving behavior of individuals and groups in the determination of public policy. Eg.

trade protection is rent-seeking behavior by particular interest groups.

 But, a very different concept of political economy is used by Marxists
 Marxists:
 believe that the discipline of economics has become too formal, mathematical, and abstract
 the mathematical models has become largely irrelevant to the understanding and solving of real
social and economic problems
 economics neglects the historical, political, and social settings in which economic behavior takes
place
 economics, they contend, cannot be value-free, and economists should not pretend that it is
 conventional economics reflects the values and interests of the dominant groups of a capitalist
society
 it essentially neglects social problems as inequality of income and chronic unemployment
 Scope and Nature of IPE
 Market, State and Political Economy
 The study of political economy focuses on the market and its relationship to the state
 The state: you are more familiar with it from the courses you have had as a student of GaDS
 Market is an abstract concept
 a market economy can be defined as one in which goods and services are exchanged and prices are

determined

 Its specific characteristics are dependent upon its degree of openness and the intensity of the

competition among producers and sellers

 Its essence, a Market is “the making of a price by bargaining between buyers and sellers’
 Markets differ with respect to the freedom of participants to enter the market and also the extent to which

individual buyers or sellers can influence the terms of the exchange

 Ideally, a perfect or self-regulating market is one that is open to all potential buyers or sellers and one in

which no buyer or seller can determine the terms of the exchange

 Only exists theoretically
 Cont…
 Three characteristics of a market economy are vital to the conception of market:
A. the critical role of relative prices in the exchange of goods and services
B. the centrality of competition as a determinant of individual and institutional
behavior
C. the importance of efficiency in determining the survivability of economic
actors
 Economists regard an economy as a market composed of objective or impersonal economic
forces (composed of rational actors)
 Whereas, specialists in political economy interpret it as a sociopolitical system populated
by powerful actors having their own interest
 Such conceptual differences distinguish the study of economics from that of IPE
 Cont…
The neoclassical economic interpretation of market The political economy interpretation of market
economy economy

• a market is composed of impersonal economic forces over • economy as a sociopolitical system composed of powerful
which individual actors have little or no control economic actors or institutions that are competing with one
• economy is nothing more than a collection of flexible wages, another to formulate government policies e.g national
prices, interest rates, and similar forces that move up and down governments, firms, Labor Unions etc
allocating resources • there are many social, political, or economic actors whose
• economic universe is a self-regulating and self-contained behavior has a powerful impact on the nature and
system composed solely of changing prices and quantities to
functioning of markets
which individual economic actors respond
• The role of institutions in determining economic behavior
and outcomes is of particular interest
Cont…
 The study of political economy requires integration of these two fundamentally different
meanings of “economy”
 The study of political economy requires
 an understanding of how markets work and how market forces affect economic
outcomes
 an understanding of how powerful actors, of which the nation-state is by far the most
important, attempt to manipulate market forces to advance their private interests
 Embeddedness of the Economy and the Political Consequences of the Market
 The idea that markets are embedded in larger socio-political systems underlies the basic
interpretation of both political economy and international political economy
 Essentially, the government, powerful domestic interests, and historical experiences determine the
purpose of the economy and establish the parameters within which the market (price mechanism)
functions
 Contrary to economists’ belief that economic activities are universal in character and essentially the
same everywhere,
 the specific goals of economic activities are in actuality socially determined and differ
widely over the face of the earth
 the socio-political system and a society’s values determine the role that the market or price
mechanism plays and the socially approved ways in which economic objectives may be
pursued
 societies establish rules and set boundaries that govern the range of activities in which the
price mechanism is considered legitimate; what is considered to be “fair” economic
 There are some flaws in the market that triggers or give rise to the domestic and
international political response
I. markets are subject to cyclical fluctuations and disturbances over which the society may
have little control (no state, however liberal its preferences, permits the full and unregulated
development of market forces)
II. the introduction of market forces causes uneven distribution of wealth and power within and
among societies
III. economic interdependence establishes a power relationship among groups and societies, in
response to this situation, states attempt to enhance their own independence and to
increase the dependence of other states
 International Economics and International Politics
 It is hard to imagine a world without International Political Economy
 The political actions of nation-states clearly affect international trade (e.g U.S policy towards
international trade during the Presidency of D. J. Trump) and monetary flows
 which in turn affect the environment in which nation-states make political choices and
 entrepreneurs, make economic choices
 the two have mutual influences and effects on one another
 yet, experts on both sides were ignoring this reality for so long
 Cont…
 This was cleared up a bit in the 1970s as a number of dramatic international events made
plain how tightly the two fields were intertwined
 the oil embargoes of the 1970s and
 the breakdown of the Bretton Woods monetary system
 These two events are frequently cited as key events in IPE's development as a field of study
 Other events such as:
 the Third World debt crisis,
 the fall of communist regimes,
 the rise of the East Asian Newly Industrialized Countries (NICS),
 the expansion of the European Union, and
 the financial crises in Mexico, Russia, and East Asia all provided impetus for the
growth and development of IPE studies
 The Issues of International Political Economy
 The market and the state has fundamentally opposing logics

Market (in the form of State

trade, money and FDI)
Vs

• Tends to restrict and channel

• Tends to jump national boundaries
economic activities and serve
and escape political control
the best interests of the states
• Locate economic activities where
• Attempts to control the
they are most productive
process of economic growth
• Associated with the pursuits of
and capital accumulation
wealth
• Associated with the pursuits
of power
 Thus, IPE is concerned with the way in which political and economic factors interact at the
global level.
 More specifically, political economists usually undertake two related kinds of
investigations.
 The first concerns how politics constrains economic choices, whether policy choices by
governments or choices by actors or social groups.
 The second concerns how economic forces motivate and constrain political choices, such
as individuals’ voting behavior, unions’ or firms’ political lobbying, or governments’
internal or external policies.
Cont…

Thank you for your attention!!!