Chapter Three

International Political
Economy (IPE)
2024 GC
 Introduction
 The study of political economy is dominated by the national or/and international level debate over
the responsibilities of the state with regard to the economy.
 Should the state be responsible for determining how the economy of a given country is to be organized and
run?
 Should such responsibility be left to the market which is populated by self-serving individuals acting as private
agents?
 Should, for example, housing, medical care, education, welfare be provided by private citizens using the
resources they have available to them? Or should they be provided by the state?
 At the international level of analysis, the debate also poses such pressing questions as:
 How should international trade be governed?
 How should international investment be governed?
 How should international finance be governed?
 What should/not be the role of international institutions like the IMF, WB and WTO in the governance of
international finance, investment and trade?
 Meaning and Nature of International
Political Economy (IPE)
 Political Economy the study of the interaction between the state and the economy, that is, how the
state and political processes affect the economy and how the organization of the economy affects
political processes.
 There is no universal agreement on how IPE should be defined. Let’s see this definition for our
discussion: International Political Economy ―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.
 From the above definition we can understand the following;
 First, it suggests that there are only two significant subjects of International Political Economy:
 markets, which are composed of self-interested individuals (and the firms that they operate), and
 states, which are the primary political institutions of the modern international system.
 Second, the most important aspect of the relationship between markets and states is based on
tension, which is ―a strained state or condition resulting from forces acting in opposition to each
other‖.
 In other words, the definition assumes that states and markets relate to one another in fundamentally
 Cont. …

 The above definition misses the role of non-state actors in the contemporary world politics (in the
age of globalization; e.g. MNCs)
 Another limitation of the definition is steams from the usage of the word international; it means
relation among or between two sovereign states; which implies a clear distinction between the
national and the international- with in and outside of a state.
 Thus, it is clear that a great deal of economic activity that occurs in the world today is conducted—
and sometimes controlled—by non-state actors in ways that transcend national boundaries.
 Large corporations engage in all sorts of economic transactions and activities that cut across
borders: from buying, selling, and trading products and services, to building and investing in global
chains of production, to forging strategic alliances with other corporations based in a range of
different countries.
 Due to this trend in today‘s political economy, IPE‘s definition is getting ever widened and
deepened in content and even the name of the field is changing from IPE to GPE (Global Political
Economy).
 Cont. …. Definition

 International Political Economy studies the reciprocal relationship between politics and economics
in the global system.
 IPE- is the study of how politics shapes the global economy and how the global economy shapes
politics (examine the reciprocal relationship between politics and economics in the global system)
 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. There are two
dimensions; political and economic dimensions.
 Political dimension accounts for the use of power by variety of actors; individuals, domestic
groups, states, International organizations, nongovernmental organizations (NGOs), and
Transnational corporations (TNCs).
 economic dimension, on the other hand, deals with how scarce resources are distributed among
individuals, groups, and nation-states.
 Theoretical perspectives of IPE
 There are three major theoretical (often ideological) perspectives
regarding the nature and functioning of the International Political
economy: liberalism, Marxism, and nationalism (mercantilism).
 Mercantilism is the oldest, dating back as early as the 16th century (even
earlier)
 Friedirich List is the father of mercantilism as Adam Smith is for Liberalism
and Karl Marx for Marxism
 Since the mid-1980s, the relevance of the three perspectives has
changed dramatically. With the end of both communism and the ―import-
substitution‖ strategies of many less developed countries (LDCs), the
relevance of Marxism greatly declined, and liberalism has experienced a
relatively considerable growth in influence.
 Mercantilism/nationalism

 Mercantilism defends a strong and pervasive role of the state in the economy – both in
domestic and international trade, investment and finance.
 At the international level, it 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 (Autarkic- policy of a country to be a self-sufficient, closed economy without any
external trade).
 Mercantilism epitomized economic nationalism with a focus on trade policies aimed at
bolstering (support and strengthen) the state’s power and prosperity.
 Central to this approach was the endeavor to maintain trade balance, amass precious
metals, and shield domestic sectors using barriers and control measures. These efforts
were, therefore, guided by a quest to advance national riches and influence, aligning
with a belief that the accumulation of global wealth was a competitive enterprise.
 Cont. …

 Mercantilists see the international economy as an arena of conflict between opposing national
interests, rather than an area of cooperation and mutual gain i.e. Economic competition
between states is a ‘zero-sum game’ where one state’s gain is another state’s loss.
 States have to be worried about relative economic gain, because the material wealth
accumulated by one state can serve as a basis for military–political power which can be used
against other states.
 Economic rivalry between states can take two different forms (Gilpin 1987: 32).
 The first is called defensive or ‘benign’ mercantilism: states look after their national economic
interest as an ingredient of their national security; such policies need not have overly negative effects
on other states.
 The other form, is aggressive or ‘malevolent’ mercantilism; attempt to exploit the international
economy through expansionary policies; for example, the imperialism of European colonial powers in
Asia and Africa.
 Mercantilists thus see economic strength and military–political power as complementary,
not competing goals, in a positive feedback loop.
 Key points of Mercantilism

 Mercantilism was the dominant economic system from

the 16th century to the 18th century.
 Mercantilism was based on the idea that a nation's wealth and power
were best served by increasing exports and reducing imports.
 It's characterized by the belief that global wealth was static and that a
nation's economic health relied heavily on its supply of capital.
 Due to the nationalistic nature of mercantilism, nations frequently
used military might to protect local markets and supply sources.
 Mercantilism was replaced by free-trade economic theory in the mid-
18th century.
 Basic Principles of Mercantilism

I. Nation’s strength depends on its wealth measured in silver and gold

II. Fixed amount of wealth in world, and nations' compete for it
III. Balance of trade is important to gaining wealth
IV. Countries should seek to limit imports and maximize (promote)
exports
V. Countries should have its own sources for raw materials and precious
metals to avoid dependence on others
VI.Colonies exist only as a way for the mother country to make profit
VII.A country’s colonies should not trade with any other countries.
 Favorable trade

 Under Mercantilism, nations can gain wealth in two ways:

 Extract gold and silver from mines
 It could sell more goods than it bought(Exports > Imports)
 Balance of Trade- the difference in value between what a nation imports and exports over
a period of time.
 How do you discourage people from buying other countries goods? (discouraging imports)
 Taking the following measures for Favorable balance of trade
 Place tariffs (tax) on imported goods = makes imported goods more expensive
 People are discouraged from buying

 Finished goods (exports) sell for more than raw materials.

 Cloth is more expensive than raw wool.

 Control overseas sources of raw materials (colonies)

 CRITICS

 They gave too much importance to gold and silver by ignoring other commodities
 Government regulation and monopoly often lead to inefficiency and corruption
 High tariffs on import leads to retaliation
 Mother Country gets all the benefits, but the colonies have no say in economic policy.
 Leads to trouble!
 Limited trade!
 Colonies dislike!
 If mercantilism was an ad on Facebook, the colonies would click the dislike button or they would
un-friend it!
 Liberalism

 Economic liberalism emerged as a critique of the comprehensive political control and regulation of
the economic affairs that dominated European state-building in the 16 th and 17th centuries;
 It defends the idea of free market system (i.e. free trade/trade liberalization and free financial and
Foreign Direct Investment (FDI) flows).
 Removing impediments (barriers) to the free flow of goods and services among countries is the
foundational value and principle of liberalism.
 Liberalism advocate free trade; it reduces price, 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.
 In other words, 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.
 Cont. …
 Comparative advantage became the major principle advocated by the liberalist
(specifically David Ricardo), which free trade will bring benefits to all participants
because free trade makes specialization possible and specialization increases efficiency
and thus productivity.
 However, comparative advantage is undermined by the growth of transnational or
multinational corporations(MNCs) complicates global trading.
 At the age of globalization the production of goods and services is strongly influenced
 by costs,
 arbitrary specialization, and
 government and corporate policies, which leads to competitive advantage

 Competitive advantage refers to an advantage availed by a company that has

remained successful in outdoing its competitors belonging to the same industry by
using different and innovative strategies.
 Cont. …

 Economic liberals thus reject the mercantilist view that the state is the
central actor and focus when it comes to economic affairs. The central
actor is the individual as a consumer and a producer.
 Individuals are rational in pursuing their own economic interests, and
when they apply that rationality in the marketplace, all participants
gain. Economic exchange via the market is thus a positive-sum game:
everybody gains more than they put in because of increased
efficiency
 Liberals thus reject the mercantilist zero-sum view where one state’s
economic gain is necessarily another state’s economic loss.
 Marxism/ Structuralism
 The political economy of the nineteenth-century German philosopher and economist Karl Marx
represents in many ways a fundamental critique of economic liberalism.
 Marxist reject the view of liberalist, the economy as a positive-sum game with benefits for all,
rather, they saw the economy as a site of human exploitation and class inequality. Thus, Marx
takes the zero-sum argument of mercantilism but applies it to relations of classes instead of
relations of states.
 Both Marxist and Mercantilist, agree on following points;
 politics and economics are closely intertwined;
 They both reject the liberal view of an economic sphere operating under its own laws.
 Difference;
 Mercantilists see economics as a tool of politics,
 Marxists put economics first and politics second.
 For Marxists, the capitalist economy is based on two antagonistic social classes: one class, the bourgeoisie,
owns the means of production; the other class, the proletariat, owns only its labor power which it must sell
to the bourgeoisie.
 Cont. …
 For Marx, capitalism is not a negative or retrogressive event; though capitalist economy
controlled by the bourgeoisie is exploitative of labor. Rather, capitalism means progress for Marx
in two ways:
 first, capitalism destroys previous relations of production, such as feudalism (more exploitative)
 Second, and most important for Marx, capitalism paves the way for a socialist revolution where the
means of production will be placed under social control for the benefit of the proletariat who are the vast
majority.
 The Marxist view is materialist:
 Economic production is the basis for all other human activities, including politics.
 On the other hand, it consists of the relations of production; i.e., the system of social ownership which
determines actual control over the productive forces
 Taken together, the forces of production and relations of production form a specific mode of production,
for example capitalism.
 The one who control of the means of production (bourgeoisie), will also tend to control
political sphere, because for Marxist, economics is the basis for politics.
 Cont. …

 Marx didn’t say much about the IPE, but his writings include a few
scattered remarks about the importance of access to raw materials
abroad and the possibility that advanced countries can export for profit.
 A theory of IPE has been built on the basis of these remarks and the
Marxist theory of domestic politics;
 First, states are not autonomous; they are driven by ruling-class interests, and
capitalist states are primarily driven by the interests of their respective
bourgeoisies. Struggle between states (war), is viewed in the economic context of
competition between capitalist classes of different states.
 Second, capitalism is expansive: there is a never-ending search for new markets
and more profit. Because classes cut across state borders, class conflict is not
confined to states; it expands around the world
 In addition to the above mentioned foundational
theories of International Political economy, following
three contemporary theories of International political
economy are also worth considering.
Hegemonic Stability Theory
Structuralism
Developmental State Approach
 Hegemonic Stability Theory (HST)

 It 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 hegemon—that is, a dominant state willing and able to
take responsibility for the smooth operation of the International (economic) system as a
whole.
 According to this theory, the great depression of 19320/30’s in Europe specifically, was
because the old hegemon i.e. Britain 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.
 Thus, the great depression influenced the establishment of Bretton Woods institutions
(WB and IMF) after the end of WWII, as being the product American power and influence.
 Structuralism (Prebisch-Singer
thesis)
 It 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
center-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.
 Dependency theory holds that underdevelopment and poverty in the LDCs is the result of
exploitation by EDCs.
 EDCs exploitation of the LDCs is driven by the EDCs need for:-
 Cheap primary products (like oil) and
 Large external markets for the EDCs
 Expensive manufactured goods
 profitable investment opportunities and
 low wage labors.
 Cont. …
 This is because the economic structure enriches the EDCs and impoverishes the LDCs.
 Dependency theory argued that the EDCs follow policies designed to keep LDCs dependent.
 For this reason economic structuralism call the system that has been created Neocolonialism
because it operates without colonies but is nevertheless imperialism.
 Dependency of LDCs is maintained in numbers of ways.
 Giving rich countries much greater voting in IMF and others IGOs, thereby allowing the EDCs to
manipulate the world economy to their advantage.
 The other techniques includes ;-
 corrupting and co-opting the local elite in LDCs by allowing them personal wealth in return for governing
their countries to benefits the North
 Using military forces to overthrown defiant local elites and replace it with a friendly regime
 Developing countries are subjected to unequal exchange in the global market.
 In order to participate in the global capitalist economy they must sell their raw material at the
cheap price and have to buy finished good in the higher price.
 Developmental State Approach

 The concept of the developmental state is a variant of mercantilism and it advocates for the
robust 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: imply heavy use of public ownership enterprise or resources and state‘s
willingness and ability to use a set of instruments such as:
 tax credits, subsidies, import controls, export promotion, and targeted and direct financial and credit policies
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.
 Survey of the Most Influential
National Political Economy
systems in the world
American system of market-oriented capitalism
Japanese System of Developmental Capitalism
German System of Social Market Capitalism
 The American System of Market-Oriented
Capitalism

 The American system 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 model like the neoclassical model rests on the assumption that markets
are competitive and that, where they are not competitive, competition should be
promoted through antitrust and other policies; any economic activity is permitted
unless explicitly forbidden, and the economy is assumed to be open to the outside
world unless specifically closed.
 American economy is as a system of managerial capitalism; the economy was
profoundly transformed by the late 19th century emergence of huge corporations and
the accompanying shift from a proprietary capitalism to one dominated by large,
oligopolistic corporations.
The Japanese System of Developmental
Capitalism

 In the Japanese scheme of things, the economy is subordinate to the social and political
objectives of society. Ever since the Meiji Restoration (1868), Japan‘s overriding goals have been
making the economy self-sufficient and catching up with the West.
 In the pre–World War II years this ambition meant building a strong army and becoming an
industrial power. Since its disastrous defeat in World War II, however, Japan has abandoned
militarism and has focused on becoming a powerful industrial and technological nation, while
also promoting internal social harmony among the Japanese people.
 The political goals resulted in a National economic policy for Japan best characterized as neo-
mercantilism;
 it involves state assistance, regulation, and protection of specific industrial sectors in order to increase their
international competitiveness and attain the ―commanding heights of the global economy.
 It was because of;
 Japan‘s experience as a late developer and also from its strong sense of economic and political
vulnerability.
 Japanese people‘s overwhelming belief in their uniqueness, in the superiority of their culture, and in their
manifest destiny to become a great power.
 Cont. …Japan

 Japan's system of political economy was described words like;

 developmental state capitalism,
 collective capitalism,
 welfare corporatism,
 competitive communism,
 network capitalism and
 strategic capitalism
 After the defeat of WWII, different bodies requested for the catching up with west. Thus,
state assumed central role in the economy and specifically the elite pursued rapid
industrialization through a strategy employing trade protection, export-led growth, and
other policies.
 Cont. … Japan

 Japan used the following policies to promote its infant industries:

 Taxation, financial, and other policies that encouraged extraordinarily high savings
and investment rates.
 Fiscal and other policies that kept consumer prices high, corporate earnings up, and
discouraged consumption, especially of foreign goods.
 Strategic trade policies and import restrictions that protected infant Japanese
industries against both imported goods and establishment of subsidiaries of foreign
firms.
 Government support for basic industries, such as steel, and for generic technology,
like materials research.
 Competition (antitrust) and other policies favorable to the keiretsu and to inter-firm
cooperation.
 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;
 Except for the medium-sized business sector (Mittelstand), the nongovernmental sector of the
German economy is highly oligopolistic and is dominated by alliances between major
corporations and large private banks.
 The German system of political economy attempts to balance social concerns and market
efficiency.
 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, characterized by greater representation
of labor and the larger society in the governance of corporate affairs than in Anglo-Saxon
shareholder capitalism.
 Cont. … Germany

 At the core of the German system of political economy is their central bank, or Bundesbank.
 During the postwar era, the German federal government and the governments of the individual
Lander (states) have created a stable and favorable environment for private enterprise. Their
laws and regulations have successfully encouraged a high savings rate, rapid capital
accumulation, and economic growth.
 The Germans, have not had an activist industrial policy although, like other advanced industrial
countries, the government has spent heavily on research and development.
 The German government has not intervened significantly in the economy to shape its structure
except in the support it has given through subsidies and protection to such dying industries as
coal and shipbuilding and the state-owned businesses such as Lufthansa and the Bundespost
(mail and telecommunications). However, since the early 1990s, these sectors have increasingly
been privatized.
 On the whole, the German political economy system is thus closer to the American market-
oriented system than to the Japanese system of collective capitalism.
 Differences among National Political
Economy Systems

 National systems of political economy differ from one another in many important respects, this
are some of them;
 the primary purposes of the economic activity of the nation,
 the role of the state in the economy, and
 the structure of the corporate sector and private business practices.
 The purpose of economic activity in a particular country largely determines the role of the state in
that economy.
 liberal societies, the role of the state tends to be minimal. Although liberal societies obviously differ in the
extent to which they do pursue social welfare goals, the predominant responsibility of the state in these
societies is to correct market failures and provide public goods.
 In communal or collective society, the role of the state is much more intrusive and interventionist in the
economy. It can range from providing what the Japanese call “administrative guidance” to maintaining a
command economy like that of the former Soviet Union
 Cont. …

 The system of corporate governance and private business practices constitutes another
important component of a national political economy.
 American, German, and Japanese corporations have differing systems of corporate
governance, and they organize their economic activities (production, marketing, etc.) in
varying ways.
 For example, whereas shareholders (stockholders) have an important role in the governance of
American business, banks have played a more important role in both Japan and Germany.
 The largest American firms frequently invest and produce abroad, Japanese firms prefer to
invest and produce at home.
 Core Issues, Governing
institutions and Governance
of International Political
Economy
 International Trade and the WTO

 World Trade Organization (WTO) is an international organization which sets the rules for global
trade.
 It is successor to the General Agreement on Trade and Tariffs (GATT) established after the end
of WWII.
 All decisions are taken unanimously 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.
The developing countries often complain of non-transparent procedures and being pushed
around by big powers.
 International Investment and the
WB

 WB was created immediately after the Second World War 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 (pollution reduction, establishing and enforcing regulations),
 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 stringent conditions
to its loans and forcing free market reforms.
 Cont. …

 The WB which was primarily designed as a vehicle for the disbursement

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.
 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.
 International Finance and the IMF

 The International Monetary Fund (IMF) is an organization of 191 countries, working

to foster global monetary cooperation, secure financial stability, facilitate international
trade, promote high employment and sustainable economic growth, and reduce poverty
around the world.
 The International Monetary Fund (IMF) is an international organization that oversees
those financial institutions and regulations that act at the international level.
 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.
 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 per cent voting rights.
 Cont. …

The global financial system is divided into two;

monetary system and a credit system.
The international monetary system can be defined as the
relationship between and among national currencies (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.
 Exchange Rates and the Exchange-Rate
System

 Exchange rate is the price of one national currency in terms of another. For instance the
current value of Birr to Dollar is, 1$- 120/130 birr in the market.
 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.
 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 basket of
currencies.
 In addition to the above classification, there is also Managed floating exchange
rate, which combine the features of the floating and fixed rate (determine value of a
currency by market and with some intervention from the government and central
bank.
 Cont. ….

 Fixed exchange rate systems, also know as currency pegs, determine

a currency’s value by linking it to another currency, a basket of
currencies, or a precious metal. The goal is to maintain exchange rates
within a narrow range.
 How it works: Governments and central banks actively manage currency values
using various monetary policy tools. These tools include buying or selling domestic
currency, currency reserve management, interest rate adjustments, and quantitative
easing (injecting new money into the economy).
 Benefits: Fixed exchange rate systems can offer stability and predictability.
Developing economies may use them to curb inflation and attract foreign investment.
 Who fixes their exchange rates: The Hong Kong dollar and Saudi Arabian riyal are
both pegged to the US dollar (USD).
 Cont. …
 Floating exchange rates (flexible exchange rates), determine currency
values by supply and demand in foreign exchange markets.
 How it works: Currency values fluctuate freely without direct
intervention from the government or central bank. Beyond supply and
demand (currency), other key factors can influence exchange rates;
like, economic conditions, trade balances, investor sentiment, interest
rates, inflation, and economic performance.
 Benefits: it provide flexibility and promote international trade and
investment.
 Who floats their exchange rates: Major economies that float their
currencies include the United States, the European Union, and the
United Kingdom.
 Cont. …

 ‘How is the global financial system governed?’

 The answer is linked with the creation of IMF; though its establishment is presumed to
be neutral international financial institution; but in practice, it was designed to;
 clearly represent U.S. interests and power and
 the interests of the other major capitalist countries (the developed economies)
 This can be seen from the decision making power, i.e. voting power is determined by
what the IMF calls a quota-> (capital subscription) is the amount of money that a
member country pays to the IMF.
 Accordingly, the more a country pays, the more say it has in IMF decision makings.
And, it is the US that tops up in this regard.
THANK YOU