Chapter Three
International Political Economy (IPE)
3.1. Meaning and Nature of International Political
Economy (IPE)
Central points in political economy are:
Debates on national or/and international level over the
responsibilities of the state in economy.
The relation between state and market in economy.
how international trade, investment, foreign loan and debt and
foreign aid should be governed.
The role of international institutions in the governance of
international finance, investment and trade.
IPE “is the study of the tension between the market, where
individuals engage in self-interested activities, and the state, where
those same individuals undertake collective action”.
The assumptions for this definition are:
There are only two significant subjects of IPE: The markets and
the State.
The most important aspect of the relationship between markets and
states is based on tension.
Cont’d
However, this definition misses that:
political society represented by non-state actors.
state-market relation based on reciprocal/cooperative interest.
This problems have thus developed two contending definitions of
IPE.
state-centered definition of IPE
Marxist definition of IPE-focuses on social class based definition
of IPE
Cont’d
IPE’s definition is also getting ever widened and deepened in
content -IPE is changing to GPE (Global Political Economy).
However, market economy cannot exist and operate without some
kind of political order (the state),i.e. IPE.
With disagreement on the kind of political order:
Minimalist view (neoclassical economists): the state only
provides the legal-institutional framework for enforcing contracts
and protecting private property.
Others convince an active and direct role of state in a much
wider range of economic activity.
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.
Cont’d
Thus, it consists of two central dimensions namely:
A political dimension implies to the use of power and making of
rules by a variety of actors.
The economic dimension deals with how scarce resources are
distributed among individuals, groups, and nation-states.
IPE studies the political battle between the winners and losers of the
global economy exchange.
• Aspects of the global economic exchange include:
competition conflict
Cooperation Exploitation
3.2. Theoretical perspectives of IPE
Regarding the nature and functioning of the IPE, there are three
major theoretical/ideological perspectives. These are:
1. Mercantilism/Economic Nationalism
The oldest of the three, dating back as early as the 16th century.
Developed in the 21st century.
Is a response to classical economics, specifically, to liberal
perspective.
It based on three ideas:
A. Not market rather state should compete economically
B. Free trade only benefits the wealthiest or rich nation
C. Protecting infant industries from competition with rich
countries
Cont’d
It defends:
a strong and pervasive role of the state in the economy
the importance of balance-of-payment surpluses in trade.
an extreme policy of autarky to promote national economic self-
sufficiency.
more sophisticated and interventionist role of the state in the
economy in terms of:
Tax policy, Subsidization, banking regulation, labour control, interest-
rate management and a disciplinary role to ensure adequate levels of
competition.
The main theorists are Alexander Hamilton and Friedrich List.
Contemporarily relevant in Japanese, South Korean, Taiwanese and
Chinese national PE.
2. Liberalism
The root of liberalism is related to Adam Smith’s ‘‘the wealth of
Nations”-1776’
Defends the idea of free market system, such as:
free trade/trade liberalization
free financial and FDI flows.
It is based on the following ideas:
the key to national wealth is economic growth : the key to
economic growth is free trade.
Free market operation without any barrier.
Minimal state role in economy.
Cont’d
It believe that free trade would encourage countries to specialize
in producing certain goods- (comparative advantage).
Comparative advantage has been undermined by the current wave
of economic globalization.
The growth of TNC and MNCs complicates global trading.
The production of g/s is strongly influenced by costs, arbitrary
specialization, and government and corporate policies.
This mark a shift from the comparative advantage to competitive
advantage.
As a result, governments continue to engage in protectionism,
despite global acceptance of free trade.
3. Marxism
Is the youngest of the three and is advanced by Karl Marx
Emerged as a critique of classical economics.
There is a belief on clear failure and death of Marxism due to:
collapse of the USSR in the 1990’s
the apparent embrace of the free market economy.
However, all or most of the Marxist critiques of capitalism has
not been negated by any historical and contemporary realities.
According to advocates of Marxism:
Global and national income inequality remains extreme.
Thus, inherent instability and volatility of a global capitalist
system.
Cont’d
Some of the central arguments are:
historical changes are the reflection of economic development
Capitalism is the main driving force of the global economic
relations
Class conflict is pervasive and the world system is exploitative
The world should be analyzed in totality
Contemporary theories of IPE
1. Hegemonic Stability Theory (HST):
Is a hybrid theory containing elements of mercantilism, liberalism,
and even Marxism.
Started in the 1970s with the work of Charles Kindleberger (1973).
His basic argument: the root cause of the economic troubles
(Great Depression) in the 1920s and 1930s was the absence of a
benevolent hegemon.
Benevolent hegemon is a dominant state willing and able to take
responsibility for the smooth operation of the International
(economic) system as a whole.
During the Great depression period, the old hegemon, Great
Britain, had lost the capacity to stabilize the IS, and
The new hegemon, the United States, did not yet understand the
need to take on that role—hence global economic instability.
Cont’d
The Hegemonic power ease currency exchange between
countries.
HST has thus influenced the establishment of the Bretton Woods
institutions (IMF and WB) by American power and influence
with the adoption of the U.S. blueprint for the IMF.
Cont’d
2. Structuralism: is a variant of the Marxist perspective .
Is Latin American model .
starts analysis from a practical diagnosis of the specific structural
problems of the international liberal capitalist economic system.
The main feature of capitalist system is centre-periphery
(dependency) relationship between the Global North and the
Global South -resulted in an “unequal exchange.”
it advocates for a new pattern of development- industrialization
via import substitution based on protectionist policies.
Since 1950s, this model spread to other countries in Asia and
Africa, and became a central objective in many development
plans.
Cont’d
3. Developmental State Approach: suggested as an alternative
development paradigm to the failure of neo-liberal development
paradigm (in the 1980s) in solving economic problems in developing
countries.
Is a variant of mercantilism
advocates for the robust role of the state in the process of
structural transformation.
Some of the core features include;
Strong interventionism to direct the pace of economic
development.
Bureaucratic apparatus to efficiently and effectively implement
the planned process of development.
Active participation and response of the private sector to state
intervention.
Regime legitimacy built on development results and active
public engagement in the issues of development.
3.3.4. Differences among National Political Economic
Systems (The case of USA, Japan and German)
National systems of political economy differ from one another in:
The primary purposes of the economic activity of the nation.
The role of the state in the economy
The structure of the corporate sector and private business
practices.
Different societies vary in the emphasis given to particular
objectives, ranging from promoting consumer welfare to pursuit
of national power.
In terms of state role, market economies include:
the generally laissez-faire
noninterventionist stance of the United States up to
State’s central role in economic management stance of the
Japanese
Cont’d
The purpose of economic activity in a particular country largely
determines the role of the state in that economy.
In liberal societies, the emphasis is on:
welfare of the consumer
the autonomy of the market - minimal state role.
The role of the state is limited to correct market failures and
provide public goods.
In terms of the system of corporate governance and private
business practices in a national political economy:
In the American business- shareholders (stockholders) have an
important role .
In both Japan and Germany-banks have played a more
important role .
Cont’d
In business practices:
The largest American firms frequently invest and produce
abroad while,
Japanese firms prefer to invest and produce at home.
3.4. Core Issues, Governing institutions and Governance
of IPE
3.4.1. International Trade and the WTO:
WTO sets the rules for global trade.
was set up in 1995 as the successor to the General Agreement on
Trade and Tariffs (GATT) after the WW II.
has about 150 members.
All decisions are taken unanimously
but the major economic powers have managed to use the WTO to
frame rules of trade to advance their own interests.
International Trade: involves the exchange of money for goods and
services.
Is critical distinctions between domestic and cross-border trade;
In cross-border trade,
the exchange of goods and services is mediated by at least two
different national governments
each national government has its own set of interests and concerns
Cont’d
each national government exercises authority and control over
its national borders.
Today, the scope and scale of cross-border trade is immensely
greater than at any other time, due to:
The important nature of cross border trade is beneficial-for
liberal economists
autarky is essentially impossible.
However, there is world disputes and frequently serious tensions
over trade due to ideological and political disagreements.
So, the international/global trade governed by the idea of
Global/Regional Free Trade Agreements.
3.4.2. International Investment and the WB
WB- was created immediately after the WW II in 1945
primarily designed as a vehicle for the disbursement of
Marshall Plan money set up to aid the reconstruction of
Europe.
Later on, it expanded to influence all developing countries
in Asia, Africa, and Latin America.
focused on the developing countries for;
human development
agriculture and rural development
environmental protection
infrastructure and
governance
provides loans and grants to the member-countries
Cont’d
International/Transnational/global production is a type of
production in which different parts of the overall production
process for a particular product take place across different national
territories.
The transnational production networks are immensely more
complex and larger in scale and scope than in the past.
Some of the most important factors are:
the drastic decrease in transport and communications costs.
improvements in global finance for easier and more profitable
integrated production systems across borders.
Investment and development process in the developing countries
are directly or indirectly governed by the WB.
But, its impact has been at best controversial and at worst negative
with the ‘one size fits all’ types
Cont’d
3.4.3. International Finance and the IMF
IMF-is an international organization that oversees those financial
institutions and regulations that act at the international level.
has 184 member countries, but they do not enjoy an equal say.
The top ten countries (G-8 members + Saudi Arabia and China)
have 55% of the votes.
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.
Related with how the exchange rate among different national
currencies is determined.
The credit system -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.
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:
Pure fixed exchange rate: the value of a particular currency is
fixed against the value of another single currency or against a
basket of currencies.
Pure floating exchange rate : the value of a currency is
determined solely by money supply and money demand in the
absence of intervention by governments or other actors.
The IMF provided governance for the global financial system.
while governing the global finical system, voting power is
determined by quota.
A quota (capital subscription) is the amount of money that a
member country pays to the IMF.
The more a country pays, the more say it has in IMF decision
makings
The End !!!
