Chapter Three: International Political Economy (IPE)

3.1. Meaning and Nature of International Political Economy

(IPE)
Political economy is the study of the intersection between politics
and economics within a given country
 International Political economy (IPE) is a field of inquiry that
studies the ever-changing relationships between governments,
businesses, and social forces across history and in different
geographical areas.
IPE is concerned with the way in which political and economic factors
interact at the global level
The field consists of two central dimensions namely: the political
and economic dimension.
•A political dimension accounts for the use of power by a variety of
actors, including individuals, domestic groups, states (acting as
single units), International organizations, (NGOs), and Transnational
corporations (TNCs).
• All these actors make decisions about the distribution of
tangible things such as money and products or intangible
things such as security and innovation.
• In almost all cases, politics involves the making of rules
pertaining to how states and societies achieve their goals.
• Another aspect of politics is the kind of public and private
institutions that have the authority to pursue different goals.
• The economic dimension, on the other hand, deals with how
scarce resources are distributed among individuals, groups,
and nation-states.
3.2. Theoretical perspectives of International Political
Economy
• There are three major theoretical (often ideological)
perspectives regarding the nature and functioning of the
International Political economy:
1. Mercantilism/nationalism:
 is a theoretical and ideological perspective which
defends a strong and pervasive role of the state
in the economy – both in domestic and
international trade, investment and finance.
 In field of international trade, for instance,
mercantilism emphasizes the importance of
balance-of-payment surpluses in trade with other
countries.
 According to mercantilists, states should also
play a disciplinary role in the economy to ensure
adequate levels of competition. Eg.
Japanese,South Korean, Taiwanese and Chinese
 Mercantilism
 The 16th and 17th centuries economic policies of the great powers
and the overall economic systems are often referred to by the term
mercantilism
 international economic relations were carried out within the context of
imperialism.
 Mercantilists advocated self-serving states of favouring exports so
that wealth could be accumulated
 Basic tenets include:
 The government should involve in international trade
 International economics is competitive not cooperative
 Self-sufficiency
 Protectionism
 classical mercantilism is based on three central propositions. These
are
• National power and wealth are tightly connected
 Cont…

• Trade provides countries one way for countries to acquire wealth from
abroad
• Manufacturing activity should be promoted, whereas agriculture and
other non-manufacturing activities should be discouraged
 Modern mercantilism applies these three propositions to
contemporary international economic policy in the following
propositions.
• Economic strength is a critical component of national power
• Trade is to be valued for exports, but government should discourage
imports whenever possible
• Some forms of economic activities are more valuable than others
 Mercantilism, in general, argued that state should play a large role in
determining how society’s resources are allocated.
 2. Liberalism:
• Emerged in the 18th century
• Challenged all the three propositions of mercantilism
It defends the idea of free market system (i.e free trade/trade
liberalization and free financial and Foreign Direct Investment
(FDI) flows).
• The purpose of economic activity is to enrich individuals, not to
enhance state power
• Countries do not enrich themselves by running trade surpluses
• Efficiency and effectiveness – not just by producing
manufacturing products rather than primary goods
• It is based on people’s natural inclination to cooperation
• Accordingly, removing impediments (barriers) to the
free flow of goods and services among countries is
the foundational value and principle of liberalism.
• Liberal political economists believe that by removing
barriers to the free movement of goods and services
among countries, as well as within them;
• countries would be encouraged to specialize in
producing certain goods, thereby contributing to the
optimum utilization of resources such as land, labor,
capital, and entrepreneurial ability worldwide.
• If countries focused on what they do best and freely
trade their goods with each other, all of them would
benefit.
• The concept that captures this idea is also known
as comparative advantage.
• However, the theory of comparative advantage has
been undermined by the current wave of economic
globalization.
• The production of goods and services is strongly
influenced by costs, arbitrary specialization, and
government and corporate policies.
• These developments thus mark a shift from the
conventional theory of comparative advantage to
what is known as competitive advantage.
3. Marxism: Following the collapse of the Soviet
Union in the 1990’s and the apparent embrace of
the free market economy by a significant
number of developing countries, there was a
widely held belief that such phenomenon marks
a clear failure and hence death of Marxism.
In fact, according to advocates of Marxism just
the opposite is the case.
Global and national income inequality, for
example, remains extreme: the richest 20% of
the world’s population controlled 83% of the
world’s income,
 Cont.…

 while the poorest 20% controlled just 1.0%;

Exploitation of labor shows no sign of
lessening/decrease/; the problem of child labor and
even child slave labor has become endemic and so
on and so forth.
they all reflect the inherent instability and
volatility of a global capitalist system that has
become increasingly reliant on financial
speculation for profit making.
Give all the above realities about contemporary
International political economy, therefore, the
report of Marxism’s death is greatly exaggerated
NB: each perspective have different response to the questions:
• How politics shape the allocation of resources?
 Mercantilist: state guides resource allocations
 Liberalist: politics play little role
 Marxist: decision are made by large capitalist class
• What are the consequences of resource allocation?
 Mercantilist: to enhance state power
 Liberalist: to improve the welfare of the people
 Marxist: to concentrate wealth in the hands of capitalists.
 The following three contemporary theories of International
political economy are also worth considering.
• Hegemonic Stability Theory (HST) is a hybrid theory
containing elements of mercantilism, liberalism, and even
Marxism.
• The basic argument of HST is simple: 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 /generous/ hegemon-that is,
• 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.
• In this regard, what then happened during the Great
depression period was the old hegemon, Great Britain, had
lost the capacity to stabilize the international system,
while the new (latent) hegemon, the United States, did not
yet understand the need to take on that role—or the
benefits of doing so-hence global economic instability.
• Structuralism: is a variant of the Marxist perspective
and 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 perspective is also known as the ‘Prebisch-Singer
thesis’ (named after its Latin American proponents
Presbish and Singer) and
• it advocates for a new pattern of development based
on industrialization via import substitution based on
protectionist policies.
• Developmental State Approach: Realizing
the failure of neo-liberal development
paradigm in solving economic problems in
developing countries.
• The concept of the developmental state is a
variant of mercantilism and it advocates for
the strong role of the state in the process of
structural transformation.
• The term developmental state thus refers to a
state that intervenes and guides the direction
and pace of economic development.
 Some of the core features of developmental state include;
• Strong interventionism: Intervention here does not imply
heavy use of public ownership enterprise or resources but
state’s willingness and ability to use a set of instruments.
• Existence of bureaucratic apparatus to efficiently and
effectively implement the planned process of
development.
• Existence of active participation and response of the
private sector to state intervention.
• Regime legitimacy built on development results that
ensured the benefits of development are equitably shared
and consequently the population is actively engaged in
the process of formulating and executing common
national project of development....etc.
3.3. Survey of the Most Influential National Political
Economy systems in the world
3.3.1. The American System of Market-Oriented
Capitalism
• The American system of political economy is founded
on the premise that the primary purpose of economic
activity is to benefit consumers while maximizing
wealth creation; the distribution of that wealth is of
secondary importance.
• The American economy does approach the neo-
classical model of a competitive market economy in
which individuals are assumed to maximize their own
private interests (utility), and business corporations are
expected to maximize profits.
 3.3.2. The Japanese System of Developmental
Capitalism
 Many terms have been used to characterize the
distinctive nature of the Japanese system of political
economy: developmental state capitalism, collective
capitalism, welfare corporatism, competitive
communism, network capitalism and strategic
capitalism.
 Japanese economic system, such as its overwhelming
emphasis on economic development, the key role of
large corporations in the organization of the economy
and society, subordination of the individual to the group,
primacy/dominance/ of the producer over the consumer,
and the close cooperation among government, business,
and labor.
• Yet, the term “developmental state capitalism” best
captures the essence of the system, because this
characterization conveys the idea that the state must
play a central role in national economic development
and in the competition with the West.
• Despite the imperative of competition, the Japanese
frequently subordinate pursuit of economic efficiency to
social equity and domestic harmony.
• Industrial policy has been the most remarkable aspect of
the Japanese system of political economy.
3.3.3. The German System of Social Market
Capitalism
• Germany, like Japan, emphasizes exports and national
savings and investment more than consumption.
• However, Germany permits the market to function with
considerable freedom; indeed, most states in Western
Europe are significantly less interventionist than Japan.
• Furthermore, except for the medium-sized business
sector, the nongovernmental sector of the German
economy is highly oligopolistic and is dominated by
alliances between major corporations and large private
banks.
• The German national system of political economy is
representative of the “corporatist” or “welfare state
capitalism” of continental Europe in which capital,
organized labor, and government cooperate in
management of the economy.
• At the core of the German system of political economy is
their central bank, or Bundesbank.
 3.3.4. Differences among National Political Economy
Systems
• Differences in the following areas are worthy of particular
attention:
(1) The primary purposes of the economic activity of
the nation,
(2) The role of the state in the economy, and
(3) The structure of the corporate sector and private
business practices.
3.4. Core Issues, Governing institutions and Governance
of (IPE)
3.4.1. International Trade and the WTO
The World Trade Organization is an international
organization which sets the rules for global trade.
 This organization was set up in 1995 as the successor to
the General Agreement on Trade and Tariffs (GATT)
created after the WWII. It has about 150 members.
 All decisions are taken collectively but the major
economic powers such as the US, EU and Japan has
managed to use the WTO to frame rules of trade to
advance their own interests.
 The developing countries often complain of non-
transparent procedures and being pushed around by big
powers.
3.4.2. International Investment and the WB
 The World Bank was created immediately after the
WWII in 1945.
 Its activities are focused on the developing countries.
 It works for human development (education, health),
agriculture and rural development (irrigation, rural
services), environmental protection , infrastructure (roads,
urban regeneration, and electricity) and governance (anti-
corruption, development of legal institutions).
• It provides loans and grants to the member-countries.
• In this way, it exercises enormous influence on the
economic policies of developing countries.
• It is often criticized for setting the economic agenda of the
poorer nations, attaching rigid conditions to its loans and
forcing free market reforms.
• The WB which was primarily designed as a vehicle for the
expense of Marshall Plan money set up to aid the
(immediate) reconstruction of Europe.
• And, the end result was exactly what the U.S. had hoped to
achieve: a financially, economically, politically more
stable and stronger Europe.
• Later on, the bank expanded its influence to all developing
countries in Asia, Africa, and Latin America.
3.4.3. International Finance and the IMF
IMF-Govern global financial system both the monitory and
credit system
• The IMF has 184 member countries, but they do not enjoy
an equal say.
• The top ten countries have 55% of the votes.
They are the G-8 members (the US, Japan, Germany, France,
the UK, Italy, Canada and Russia, Saudi Arabia and China.
• The US alone has 17.4 voting rights.
3.5. Exchange Rates and the Exchange-Rate System
• An exchange rate is the price of one national
currency in terms of another.
• There are two main exchange rate systems in the
world namely: fixed exchange rate and floating
exchange rate.
• In a pure floating-rate system, the value of a
currency is determined solely by money supply and
money demand.
• In other words, this system exists only when there is
absolutely no intervention by governments or other
actors capable of influencing exchange-rate values
through nonmarket means.
• A pure fixed-rate system, on the other hand, is
one in which the value of a particular currency
is fixed against the value of another single
currency or against a holder of currencies.
• The IMF, which was set up as supposedly
neutral international financial institution,
• was designed to clearly represent U.S.
interests and power first and foremost, and the
interests of the other major capitalist countries
(the developed economies) secondarily while
governing the global finical system.