INTERNATIONAL POLITICAL ECONOMY

What is international Political Economy?

Relationship between states: black box
IPE also studies the relationship between the States.
But most often we open up the box and we look at the State.
o Negotiators: how they do negotiations.
o Elites
Economic organizations: WTO, IMF, World Bank.
After WWII the term embedded liberalism (Ruggie)
Free trade promises two things: peace and prosperity. This is economic liberalism.
CLASS I: What is International Political Economy.
The inter-relationship between the state, market and society in different nations.
A synthesis of methods, insights from economics, political sciences, sociology,
(history and philosophy). It is a broad field.
an attempt to synthesize analytical elements of separate academic disciplines to
better explain complex, real-world problems that span physical and intellectual
boundaries (Balaam and Dillman 2014). This definition is too broad.
What kinds of questions are we asking in the field of international political
economy?
The complexity of IPE. International relations: how much has the financial crisis
detracted from the ability of states to pay for defense. International Economics:
how has the crisis impacted foreign investment, trade, and the values of different
currencies? Comparative Politics: what is the capability of domestic institutions to
respond to the needs of those adversely affected?. Sociology: what is the impact of
the crisis on consumption trends for different groups, such as the wealthy, middle
class and labor.
Debates on methodology
Note that your source outline perspectives
This reflects the diversity, as well as major methodological debates in the field.
Some argue that specialization promotes a scholarly blindness that comes from
relying on one method, one perspective.
Others aim for parsimony (specialization).
Key dimensions of IPE
The political dimensions: the use and distribution of power
The economic dimensions: deals with how scarce economic resources are
distributed among central actors.
Who are the central actors in IPE?: States. IO.
Domestic level: governments, Transnational corporations. MNCs
We rely on various perspectives to study IPE
mercantilism/nationalism, economic liberalism, Strcuturalism/Marxism
Why perspectives? Theoretical perspectives allow:

Focusing on the relationships between a variety of political, economic, and social

actors, as well as institutions.
Emphasizing different values, actors and solutions.
Basically, perspectives are lenses that allow us to analyze and understand
events.
IPE perspectives
Central question: Why do we operate with different perspectives
Four levels of analysis
The global level of analysis: focuses factors such as changes in technology,
commodity prices, the climate.
The interstate level of analysis: emphasizes the relative balance of political,
military and economic power between states.
The State/Societal level of analysis: domestic configurations: interests groups,
electoral pressures, and culture.
The individual level of analysis: state leaders: emphasizes psychology,
preferences, political interests, and aspirations.
Globalization
The term globalization began appearing in IPE literature in the mid-1980s
Used to describe growing inter-dependence
Global inter-dependence has been facilitates by information and communication
technology.
Some trace globalization to the economic policies advocated by Ronald Reagan
and Margaret Thatcher in the 1980s. They are responding to the economic
problems. In the 1970s there is oil shocks. In 1979 there is the Iranian Revolution.
o Associated with the promotion of neo-liberal economic ideas and policies.
o Exported-led growth strategies resulted in larger global networks of trade.
The Complexity of Globalization
o Analytically, we can see globalization as:
o An economic process: increase in the mobility of goods and capital. A
process that involves integrating national and regional markets: single global
market?
o A political process: implications for sovereignty? There is autonomous policy?
o A cultural process: a threat to national/local practices?
Is Globalization a Positive Force?
o Globalization is not always seen as a positive force
o Ex: Multinational corporations:
Factory conditions /exploitation
Environmental concerns/ problems
Critical questions: are country equally affected by globalization? Can globalization
be managed? If so how?
CLASS II- 18 August 2015
Perspective in International Political Economy

The

As alredy mentioned, we operate with different perspectives in IPE. We will focus

on:
o The mercantilist perspective
o The economic liberal perspective
o The structural/Marxist perspective.
o
Mercantilist Perspective
Mercantilist economic policies are associated with state-building in the 16 th
century, particularly in Europe. Security and money is very important. You need
resources that can be converted to military power.
Europe was characterized by warfare: consequently, states sought to sustain
wealth and power in order to protect their borders.
Historically, classical mercantilist connoted efforts by states to maximize power.
Hence, it is closely related to the Realist perspective in IR.
The English mercantilist literature generally encouraged state regulation of trade.
However, as Irwin (1998) explains, the goals of state regulation varies:
o The accumulation of resources
o The promotion of national wealth and economic growth
o The achievement of a favorable balance of trade
o The maximization of employment
o The protection of home industry
o The increase of state power
From our perspective, its is important to study mercantilism because:
o Mercantilist doctrines constitute a major epoch in economic thought
o Mercantilism provides the immediate backdrop for the emergence of free
trade arguments
o Mercantilist or protectionist policies are still pursued by states.
The first notable mercantilist publication appeared in 1581.
o The discourse of Commonwealth of this realm of England By Sir
Thomas Smith.
o On one hand, T. Smith recognized that trade was indispensable. He also
acknowledged that domestic prices would increase as a result of trade
barriers.
o On the other hand, T. Smith belonged to a school who associated imports
with superfluous consumption. Hence, he advocated heavy taxes on luxury
goods. It limits the imports because it disuades the foreigner to export to
that country. Second, prices increase and you will decide to go for the
national product. You divert consumption patterns.
o As most mercantilist after him, T. Smith advocated the promotion of exports
to get specie. However, he objected to exporting goods that would have to
be processed abroad and imported once again.
o 2 conclusions emerged from Smiths 1581 publication:
States should maintain a favorable balance of trade. That is, states
should export more than they import. This creates accumulation of
wealth.

Raw materials should be processed at home. The value-added would

stay in the home market
Note: the emergence of the nation-state as the primary actor in international
relations set clear boundaries to trade policy. That is, rivalries between states gave
rise to the view that an increase in a countrys trade gave rise to the view that an
increase in a countrys trade must come at the expense of other countries. Trade
was seen as a zero sum gam.
Britains merchant class did not always support mercantilist policies. However,
many mercantilists argue that there was an inherent tension between the interests
of the merchants. (FALTA)
To resolve the tensions between private and national interest, many mercantilist
advocated the state assuming an active role in trade policy. From their perspective,
national leaders were better situated to see the larger picture.
Mercantilist argued that the principal benefit of trade from exports, not imports.
Hence, the policy regarding exports was clear: remove al possible impediments.
Grains and raw materials were exceptions. As such, many argue that the tax
burden should be shifted from domestically produced goods to imports.
Toward the end of 1500s mercantilist started to move away from advocating a
favorable balance of trade policy. Instead, we see arguments emerging around the
use of protective policies to promote economic development.
At the same time, mercantilists started to argue that protectionist policies were
effective in terms of creating employment. Especially in the manufacturing sector.
The focus thus shifted to the use of protectionist policies to promote domestic
manufacturing.
The argument was essentially that economic activities that generated (a) high
value-added productions and involved (b) extensive processing should be
produced at home.
In 1967, John Stuart Mill published an inquiry into the principles of
political economy: often described as mercantilism at its most extreme.
o Essential to his work is the promotion of economic development through the
use of trade intervention
o To achieve development, he proposed creating and protecting infant
industries.
o Hence, a development policy centered on protecting infant industries is
often accredited to Mills. These were defines as industries that were not
initially capable of surviving in the faced import competition.
o The argument was that with time, infants would be able to compete on the
world market.
According to mercantilists, infant protection would
o Create new wealth and capital
o Stimulate domestic producers to acquire new technology
o Generate long-term economic development.
Economic liberals saw no justification for infant protections, disagreed. Adam Smith
published the Wealth of Nations in 1776. In the U.S., Alexander Hamilton argued
that subsidies were the most effective policy to spur industrialized development.

Hamilton was the Secretary of treasury (1788-1791). U.S Declaration of

Independence was written in 1776.
Hamilton stated that
o Subsidies have the most immediate effect
o Unlike tariffs, subsidies are less likely to produce scarcity
o Subsidies promote exports.
Neo-Mercantilism
Today, we use to term neo-mercantilism to account for a variety of instruments to
protect wealth and power.
The term protectionism is generally used to describe the existence of trade
barriers.

The Economic Liberal Perspective

The core ideas of liberalism derive from Adam Smiths the wealth of
nation (1776).
o Laissez faire: let the market be
We will also look at the ideas of
o David Ricardo
o Friedrich Hayek
o Keynes
o Friedman
The economic liberal perspective
o Liberalism is the most influential perspective in IPE
o Most international economic institutions are founded upon liberal principles.
Embedded liberalism (Ruggie).
o The economic policies of most states are also heavily influenced by
liberalism
Neoliberalism
As we will learn, 2 strands of economic liberalism have emerged.
o The orthodox school: Hayek
o The heterodox school: Keynes
At the international level, liberals tend to support the establishment of
strong institutions
o Liberal institutionalism
o The WTO. The GATT was established in 1947
o The IMF: was established for financial stability
o The World Bank: reconstruction
Adam Smiths The Wealth of Nation (1776) is seen as a direct response to
mercantilism
o Smiths main argument was simply that the nation is best served if power is
used to create wealth
o Smith reflected on the reliance of protective trade instruments and argued
that these policies were inefficient. He is looking at the competitiveness of
the State against other state.
A minimal role for Government

o Smith envisioned a different role for the government than mercantilist had
advocated.
o Laissez fair: let the market be: the invisible hand
o However, orthodox liberals outline important functions for the government:
Providing internal and external security.
Establishing essential public goods such as infrastructure.
Preventing the spread of disease (public health)
Establishing property rights and enforce contracts: John Locke (16321704).
o This essentially means that the individual and individual rights is at the
center of orthodox liberalism. Example: private property rights.
o 1815: Corn Laws: dont let the corn be exported, it increases prices.
Rationality
o Human beings are assumed to be rational
o Definition of rationality:
Our behavior is purposeful and goal-oriented
We rank order our preferences
We pursue these preferences systematically
That is, human beings are utility maximizers.
o Rational Choice Theory assumes that
We have perfect information (to know every available option)
We purposely calculate the cost of our alternatives.
Specialization and the Division of Labor
o Efficiency is the core principle of economic liberalism:
Economic theory assumes that resources are scarce
Therefore
o Smith assumed that the manufacturing capitalist seeks to better his position
by saving and accumulating revenue:
The manufacturer uses profit to buy additional machinery in order to
expand output.
The addition of equipment will improve the division of labor.
o To illustrate this argument, Smith described a factory in which 10 people
were employed in making pins
o Smith wrote that by dividing the task into its constituent parts and assisting
the process with machinery, the factory was able to produce 48,000 pins a
day. This stood in contrast to one pin per worker a day if they work alone.
The logic of free trade
o The proposition of free trade is a positive sum game is based on the
concept of absolute advantages in production.
o Stated simply, if one country can produce a product at a lower cost than
other country, then it would make sense to trade. This is the concept of
absolute advantage.
o The comparative advantage: is taking into account the opportunity cost.
o The idea of comparative advantage was formulated by David Ricardo
o Ricardos formulation of comparative advantage refined the orthodox
economic argument for opening the international trade system.

o In his famous example, Ricardo discussed trade between Portugal and

England. His model encompassed the following assumptions:
Both countries produced 2 types of good: cloth and wine
Labor is the sole input of production
Labor productivity vary between industries and countries.
o Ricardo differed from Smith in that he assumed about one country (Portugal)
had more productivity.
o The lesson is that to identify a countrys comparative advantage, a
comparison of production costs across countries is necessary.
Essay: You have tos say something about the framework: las 3 teoras son validad,
depende de la situacin. In this paper I argue that/ this paper argues that

TIMELINE

John Mayard Keynes

o John Maynard Keynes (1883-1946) was a British economist
Often considered the father of the heterodox school
o Keynes was later important in terms of establishing the Bretton Woods
instituions.
o He proposed banking insurance, work insurance.
o For Keynes, the question revolved around how to restart the domestic
economy.
o Keynes proposed that the state take the lead
Constructive state intervention. The problem is when the rent-seekers
search for the help of the government.
o This line of thinking has become known as the heterodox school, which
dominated the domestic economies after WWII.
o The Keynesian Compromise
A the international level, we talk about the Keynesian Compromise: A
Compromise that reconciles state and international interests
Keynes played a key role in establishing a new international economic
order
The Bretton Woods System.
The International Level
o In 1944, The Bretton Woods Institutions were established in order to manage
the International economic system
The IMF: stable international system to create more trade
The World Bank
o In 1947, the General Agreement on Tariffs and Trade (GATT) was established.
The purpose was to liberalize trade. It lasted until 1995: it was a legal
framework.
The End of a Era

o The period 1945-late- 1960s is often described as the Golden Age.

o The Golden Age comes to an end in early 1970. The European Countries are
constructed.
Inflation was on the rise on the U.S, but the dollar was tied to the gold
standard.
The oil shocks of 1973 and 1979 sent the Western economies into a
recession. 1973 was the first oil shock.
U.S. had a gold standard. They could not deal with inflation at home. A
floating exchange rate is imposed. The value of the dollar was
determined by the offer and demand.
The Return to Economic Liberalism (Neoliberalism)
o After WWII, many governments were inspired by Keynes (Marshall Plan, fear
for communism)
Hence, the economic problems of the 1970s were attributed to
excessive government intervention
With Reagan and Thatcher, the government intervention was seen as
the problem. The enterprises were rent-seekers.
o The neoliberal movement was heavily influenced by the ideas of Frederich
Hayek (1899-1993). From the Austrian School of Economics. Ludwig von
Mises (1881-1973). The neoliberal movement has the influenced of Hayek.
Hayeks Road to Serfdom (1944)
o The Road to Serfdom is written in response to Nazi Germany. At the time of
writing, he observed totalitarianism in the Soviet Union.
o Hence, the book dealt with broader political consequences of government
intervention in the market.
o Hayeks basic point is that government intervention is :
A fundamental threat to liberty
A slippery slope toward socialism or fascism
o For Hayek, economic freedom is political freedom, political freedom is
economic freedom: that is , the two cannot be separated.
o Chapter 2: the great utopia
While progressives were still deluding themselves that communism
and fascism represented opposite poles, more and more people began
to ask themselves whether these new tyrannies were no the outcome
of the same tendencies. The tendencies is state intervention
o Chapter 1: The Abandon Road
We have progressively abandoned freedom in the economy without
which personal and political freedom has never existed in the past.
And now that we have seen a new form of slavery arise before our
eyes, we have so completely forgotten the warning, that is scarcely
occurs to us that the two things might be connected.
o Chapter 3: Individualism and Collectivism
Deals of the tension in socialism regarding its means vs. ends
Socialism is often used to describe the ideas of social justice, greater
equality and security which are the ultimate ends.

The is the ends of socialism are justice, greater equality and

security.
But it means also the particular method by which most socialist hope
to attain these ends.
socialism means the abolition of private enterprise, of private
ownership of the means of production, and the creation of a system of
planned economy in which the entrepreneur working for profit is
replaced by a central planning body.
This leads hayek to conclude that political freedom cannot exist
without economic freedom.
Liberalism regard competition as superior because it is the only
metod by which our activities can be adjusted to each other without
coercive or arbitrary intervention of authority (1944,38).
Ronald Reagan, Margaret Tatcher and the Neoliberals
o Neoliberalism/ Neoliberal Economic Theory: emphasized economic growth
over stability.
o Lower taxes: instead of hugh spending
o Deregulation
o Privatization: job losses.
o According to the neo-liberalism, sluggish growth could be attributed, to rentseeking pressures on the government
o Neoliberals argued that growth would trickle-down and lead to a leveled
playing field. The other part of the argument: accumulation of wealth.

The Structure Perspective

What is the structure? The structure shapes economic and social institutions.
The idea is that the structure shapes economic, political and social institutions.
o The structure imposes constraints on states. (especially on developing
countries).
The structuralism perspective is harder to pin down than mercantilism and
liberalism: no single method. No unified policy prescriptions. Often described as an
active debate: yet it tends to lack a unified voice.
The structuralist perspective has roots in the writings of Karl Marx (1818-1883)
o The definition of class and class conflict:
o The exploitation of workers
o Capitalist control over the state
o Ideological manipulation
The is a great variations among so-called structuralists scholars
However they generally share the view that the global capitalist system is unfair
and exploitative. In short it is a more critique of the inequality and exploitation that
capitalism produces.
Karl Marx and Structural Theory
o Marxs theory of historical development hinges on his concept of historical
materialism.

o Saw the course of history as steadily evolving from one system of political
economy-or mode of production- to another.
o Hence Marx understood history to be a dynamic, evolving creature
determined by economic and technological forces.
o Postulated that through historical materialism these forces can be
objectively studied.
o Historical materialism posits that the force of production set the parameters
fo the whole political- economic system.
o In each mode of production, there is a dialectical process. That is, opposing
economic forces and counterforces lead to a crisis (revolution) and then to
the next stage of history. For Marx, human beings are agent of change
organized into social classes.
o Marx postulated that a set of objective laws would destroy capitalism from
within:
1. The law of falling rates of profits: As investment causes machines to
replace workers, profits will decline. There are more offer of workers,
the wage declines.
2. The law of under-consumption: the workers cannot afford to buy
what they produce.
3. Labor theory of value: the value of a commodity is related to the
amount of labor required for production. Assumed that workers were
abundant, making it possible to pay them less: growing social conflicts
resulting in collapse.
Whats left of Marx in Structuralism
o Exploitation and skewed power relations
Inequality: within countries. How FDI affect the society.
Class conflict. Class is determined by ownership.
o Problems of collective action: or false consciousness?. It said that it will pass
a problem of collective action.
Structuralism in the international level
o Structuralism argue that relative influences of states-power- structures the
international system
o Hence, interests of the most powerful states will be channeled through the
system. The system defined by the most powerful states set the term of
trade.
Lenin and the International Capitalism
o In 1917, V.I. Lenin published the Theory of Imperialism the Highest State of
Capitalism
States are treated as classes in the international system
Through imperialism, advanced capitalist.
According to Lenin, Imperialism is capitalism in that stage of
development in which the dominance of monopolies and finance
capital has established itself; in which the export of capital has
acquired pronounced importance.
o Lenin on Imperialism

From these perspectives, colonies were established in order to provide:

cheap labor, cheap raw materials and outlet for finance capital.
Imperialism
o Note that so-called structuralisms deferred in their view of imperialism
o Lenin followed Marx in that he saw imperialism as the highest level of
economic development
o Karl Kautsky (1854-1938), however, saw imperialism as a policy pursued by
states.
Dependency Theory
o Dependency theory is perhaps the most influential of structuralist theories:
An analysis of relations between the core and the periphery
Promoted Import Substitution industrialization as an alternative to
participation in the in the international market. A widely adopted
growth strategy in developing countries after WWII.
o The developing countries could not growth in the framework of the
international economy.
o Raw materials (no value added) were sold cheaply in to the developed
markets. The prices of raw materials are changing all the time. They import
very expensive value added goods. The balance of trade was negative.
o In order to develop, the countries need to go out of the international
economic
system
and
developed
nationally.
They
need
rapid
industrialization. This leads to the Import Substitution Industrialization. It
seeks to build up the industrialization to substitute the import by national
goods.
Central Dependency Scholars
o Angre Gunder Frank
Development of under-development
Underdevelopment as a result of colonization
o Theotonio de Santos
Colonial dependence
Financial-industrial dependence. Developing countries need technology
an capital so they need that from the developed countries.
A structure of dependence
o Raul Prebisch
United Nations Committee on Trade and Development (UNCTAD).
Modern World System Theory
o Immanuel Wallerstein: focused on the way in which the global system has
developed since the middle of the 15th century. According to this perspective,
the capitalist world system determines political an social relations (within
nations and between nations).
o Example: Extractive institutions: Congo has a lot of minerals. You make
investments in the institutions that will help you extract the resources from
the country.
o The modern world system exhibits the following characteristics
A single division of labor whereby nation-states are mutually
dependent on economic exchange

The sale of products and goods for profit

The division of the world into 3 functional areas that correspond to the
riles that nations within these regions play in the international
economy.
o The world is conceptualized in terms of:
The core: ex: industrialized states; Western Europe
The periphery: ex: agricultural producers; eastern Europe
The semi-periphery: ex: labor-intensive industries; southern Europe.
o Wallerstein argues that the core states dominate the peripheral state
through unequal exchange. The goal is often to extract raw materials.
o The functioning then of capitalis world economy requires that groups pursue
their economic interests within a single world economy while seeking to
distort this market for their benefit (Quoted in Baalam and Dillman 2014,
92).
Polanyis the great transformation (1944)
o Polanyi central ideas:
Government intervention is necessary because:
The self-regulation mechanism doesnt work
The adverse distributional consequences of free markets create
social conflict.
Free-market ideology is used selectively by industrial interests.
o Free marker ideology is used selectively by industrial interests.
o Polanyis concept of embeddedness is the starting point for his work.
o Expresses the idea that the economy is not autonomous: Rather it is
subordinate to politics, religion and social relations.
o The background for Polanyis work are the events that led to WWI, the Great
Depression, and the rise of fascism. Polanyis puzzle: why did the prolong
period of relative peace and prosperity in Europe (1815-1914) suddenly end?
o According to Polanyi, the answer to the puzzle goes back to the Industrial
Revolution
Gave rise to a number of English thinkers who developed the theory of
market liberalism
o Market liberalisms core belief: (according to Polanyi): Human society should
be subordinated to self-regulating markets.
o Polanyi argues that Englands leading role as the workshop of the world
resulted in the idea od a self-regulating market becoming the organizing
principle of the world economy.
o The social response, he said, was the concerted effort to protect society from
the market.
In turn, efforts to protect society produced conflicts at the domestic
and international levels.
Note to self: I need to know Polanyi for my midterm. Why according to
Polanyi will the market mechanism will never work.
o Polanyis concept of embeddedness is a starting point for his work. He
expresses the idea that the economy is not autonomous. Rather it is
subordinate to politics, religion and social relations. According to common

o
o

o
o
o
o
o

interpretations, Polanyi used this concept to suggest that marker

transactions depend on trust and mutual understanding. If they are absent,
the self-regulating market will never work.
Polanyi pointed out that market liberalism assumes that the economy is an
interlocking system of markets adjusted by the price mechanism: supply and
demand.
Polanyi sought to show how sharply this assumption differs from the reality
of human society. This leads to a couple of conclusions.
He argues that creating a fully self-regulating marker economy is impossible:
Because it requires that human beings and the natural environment be
turned into pure commodities.
This will ensure that destruction of both society and the natural environment:
consequently, conflict and resistance develop.
Polanyis argument rest on his distinction between real and fictious
commodities.
For him, the definition of a commodity is something that has been produced
for sale on a market.
By this definition, land, labor and money are not real commodities: because
they were not originally produced on a market
In particular, he saw labor has an activity of human beings rather than a
commodity.

School of IPE

As discussed, the modern field of International Political Economy was formed in

the early 1970s. The goal of the field was to teach us to think about the
connections between economics and politics beyond the confines of a single state.
That means that a very broad field was developed.
The Magnificent 7: Cox, Gilpin, Katzenstein, Keohane, Kindleberger, Keohane,
Kindleberger, Krasner, (Concepts of the state) Stranger.
Benjamin Cohen Suggests organizing the field into 2 schools:
o The American School: scientific approach. They are a reductionist theory.
They use statistics or game theory.
o The British School
In the U.S., the birth of the field is associated with: Keohane and Nyes Power and
Interdependence. Laid out a vision for the field revolving around the concept
complex of interdependence
o Multiple channels of cooperation
o An absence of hierarchy among issues.
o A diminished role for military force
The American School is considered the dominate approach to studying OPE.
International Organization reflects the fields methodological approach. Statistics or
game theory.
o 1980-1984: 10%
o 1985-1994: 7.4%

o 1995-1999: 26%
o 2000-2004: 47.5%
In Great Britain, the birth of IPE as a field has been accredited to Susan Strange.
The field adapted a very different approach to studying.

Managing the Global Economy

International Cooperation after WWII
The Bretton woods Conference resulted in a global economic instiution.
The main objectives at Bretton Woods:
o To manage the international economy
o To rebuild war-torn economies.
o To avoid the disastrous events of the interwar period.
International institutions provide a forum for dialogue for countries. The
assumption is that we can cooperate (Wilson after WWI).
The Post WII architecture consisted in:
o The International Monetary Fund (IMF): promote short terms loans and
monitor the gold standard (The IMF coordinated).
o The World Bank: bank of reconstruction aiming at the time to Europe.
o The general Agreement on Tariffs and Trade (GATT), 1947. Its not part of the
BW institutions.
The World Trade Organization 1995.
The international institutional framework was based on liberal economic principles:
Hence, one of the primary functions of the framework was o reduce uncertainty
and unpredictability of international trade relations. Goal: Stability.
o The coordinating ability of the IMF with the gold-standard helped to reduce
uncertainty.
o The GATT: states can basically negotiate and there is a framework.
Today the global trade regime is based on components:
o Trade
o National regulations
o International agreements.
As discussed, many economists attribute economic growth in the post-WWII period
to this architecture. However, that doesnt imply harmonious relations.
This leads to an essential question
o What were the motivations behind the establishment of an international
architecture post-WII?
Peace and stability under free trade.
The promise of leadership and international institutions.
As we know the mercantilist policies pursued by G.B. and others until the 1860s
resulted in a relatively closed trading system.
We also learned that GB changed its economic model somewhere between 1840s
and 1860s.
The industrial revolution and British Hegemony
We attribute the change in GB policy to:
o 1. An emerging merchant class sought access to foreign markets.
o 2. Landowners (corn producers) no longer dominated the legislative branch

o Hence these are major factor explaining Britains rise a hegemony power
in t e 19th century.
That is to say, Brintains need for larger markets resulted in a change in domestic
trade polivy.
o This lead to the removal of most industrial trade restrictions by the 1830s
o The Corn Laws (which reflected the power of the landowners were removed
in 1816.
Internationally this resulted in a extended period of free trade under British
regime.
How do we Understand Changes in British Trade Policy?
Britains rise as a hegemonic power is a study case on the relationship between
changes in domestic on the relationship between changes in domestic policy and
international trade patters.
Recall that Britains import market offered opportunities for other exporters:
o In turn, this led other states reorienting their production in line with British
preferences.
o The result was the negotiations of as series of trade between major powers.
The hegemon is afraid because of 2 things. It opens its market, and the other risk
was tying its currency which impeded Britain from using national monetary policies
in order to battle inflation or recession..
For example, in 1860, Britain and France concluded the Cobden-Chevalier treaty.
This treaty marks the opening of free trade Europe
The Decline of British Hegemony
Britains power declined just before WWI (1914-1918). Example: Britains share of
the world fell from 24% in 1870 to 14% in 1913.
Simultaneously, we observed rapid growth in the U.S. and Germnay. Remember
that Germany was unified in 1871 under Bismarck. The industrial Revolution had
spread; countries were catching up while Britain experienced relative decline.
Consequently, by 1913, the US had become the largest industrial power.
Hegemonic stability Theory: The interwar Period 1919-1939
The weakening of British hegemony resulted in a decline in world trade. Ex: we
observe that other European states abandoned their free trade policies around
WWI. This resulted in an international trading system characterized by high
barriers. We observed a relatively close global economy.
What about the U.S.? We recall that after WWI, the US emerged as the largest
industrial power and creditor nation. This meant that power had shifted from
Britain to the US. Remember that Germany was devastated as a result of WWI. The
Versailles Treaty and the War Guilt Clause.
After WWI, however, the US did not assume an active role in international relations.
Hegemonic stability scholars have attributed the collapse of trade in the inter-war
period to the absence of leadership.
Instead of assuming leadership, the U.S. imposed substantial trade barriers after
WWI.
At the same time, the US used high barriers to accomplish 2 domestic goals:
o To protect infant industries.

o To generate revenue for the federal government.

In 1913, the US attempted to liberalize trade with the Underwood-Simmons
Tariffs under the leadership of the Democratic Party. This resulted in lower tariffs.
However, when the republicans gained control of the Congress during WWI, trade
liberalization was reversed.
As a result, the Republican Congress passed the Fordney-McCumber Act in
1922. This created customs duties. It also gave discretionary powers to the
president allowing him to raise or lower a given tariff by 50%.
In 1929, the U.S. stock market crashed. As a result, we see the U.S. intensifying
efforts to protect domestic producers.
o Example: The Smooth-Hawley Act (1930): increased tariffs to their highest
levels in the 20th century. Europe retaliated with imports restrictions.
o The Smooth Hawley Act was used to protect American farmers. The
expansion of non European agriculture had lead to overproduction. In turn,
farmers faced lower prices and started lobbying the government for
protection from foreign competition. As a result Herbert Hoovers 1928
presidential campaign seized the opportunity to harvest farm votes.
o However, once the industrialists learned that the farmers were protected by
tariffs, they started lobbying the government. In turn politicians were
captured by interest groups and tariffs rose across the border. Recognize the
rent-seeking government? You give money, in order to get political support.
Nevertheless, there were some efforts to open the U.S. economy in 1934. Example:
The US Congress passed the Reciprocal Trade Agreements Act in 1934
(RTAA). American policymakers expressed that domestic recovery depended in
part upon revived international trade.
o With the RTAA, Roosevelt asked Congress for authority to negotiate
reciprocal tariff reduction agreements with other countries.
o Hence the RTAA delegated tariff-setting policy to the president.
o The RTAA resulted in 19 bilateral agreements , yet tariff levels remained
relatively high. International trade liberalization did not follow.

Hegemonic Stability Theory: U.S Leadership after WWII

We observe specific changes in U.S. policy changes after WWII with the
establishment of the existing international architecture.
o According to hegemonic stability theory, the U.S. leadership was central for
world trade to recover after WWII.
A hegemon is the preponderant power: it has large share of the power in the
international system. After WWII, The US gave 2 factors:
o Organize the international financial system
o Supply security to the international system.
The logical progression of the argument, is that in absence of a hegemon,
cooperation will be difficult.

The General Agreement on Tariffs and Trade, 1947

The initial objective of the trade negotaitions that took place after WWII was to
establish an actual organization.
o The Congress of the United States thought it was too tight.
o They have to expose their markets to international competition.
In fact, the International Trade Organization (ITO) was concluded and signed in
1948.
The ITO would have completed the triad of functional organizations to promote
international economic relations.
So, what happened to the ITO?
o The U.S Congress failed to ratify it and without U.S involvemenet the ITO
would have been irrelevant.
o Recall that: by the 1950, the U.S. account for nearlt 17% of world trade. It
shares was about one and a half times that share of the U.K.
o By 1960, U.S trade was 20% of overall world trade. Over twice as large as
UK.
In place of the ITO, countries relied on the GATT which had been established in
1947.
The GATT was a contract embodying trade rules that were negotiated during the
multilateral tariff negotiations in 1947. States were contracting parties.
Some describe that GATT rules as temporary mechanisms put in place to ensure
that countries lowered tariffs as agreed.
Articles
The GATT contains 35 articles.
The most important rule is that of non-discrimination.
o Articles i and iii
Article i is known as the most favored nation principle. (exam).
The MFN principles require that any advantage-such as lower tariff- granted to a
countracting will be accorded to all other contracting parties. During negotiations,
this principle attacked prevailing practices of bilateral tariff preferences
o It was a major issue for the U.S.
o In essence, Article I ensured that a country could not discriminate externally
between countries.
Non discrimination. Article iii which deals with national treatment obliged
contracting parties to treat foreign products no less favorably than domestic
products. Taxes and other requirements.
Hence, Article iii ensured that a country could not discriminate against imported
products once it had cleared custom.
The second important GATT rule was the prohibition in Article xi against
quantitive and other non-tariff restrictions to trade.
o The GATT rules sought to delegitimize the use of protectionist measures
other than tariffs.
Consequently, Article xi is often regarded as a key constraint on governments.

A third GATT rule deals with the methodology adopted by the GATT for reducing
trade restrictions. The reciprocity concept is the most interesting aspect of this
methodology. In simple terms this means that every country is treated equally.
The reciprocity principle was the guiding beacon of the GATT in its early days.
However, it came under scrutiny when developing countries started to join.
o From their perspective, it is questionable whether the equal treatment of
unequal partners could be considered reciprocal.
o Hence, industrialized countries granted numerous concessions to developing
countries once they entered into the GATT.

The

main functions of the GATT are:

Facilitating negotations
Setting transparent rules and standards
Establishing norms
Administrating trade agreements
Providing dispute settlement mechanism
o The GATT was substantially weaker as an organization than the WTO today it
lacked a dispute resolution mechanism.
The GATT/WTO organizes their negotiations in bargaining rounds.
o Each round has aimed to reduce specific barriers to trade.
To date, 8 rounds have been concluded and the 9th round is still ongoing (the Doha
Round).

The first 7 trade rounds

1. 1947: Geneva
2. 1949: Annecy (France)
3. 1951: Torquay (England)
4. 1956: Geneva
5. 1960-6: Dillon Round
6. 1964- 1967: Kennedy Round
7. 1973-79: Tokyo Round.
Trade Rounds
Developing issues
o 1986-1993: Uruguay Round
o 2001: Doha Round (the first WTO round)
The first 7 rounds were mainly about the legal framework of the GATT and tariffs.
However, we observe changes in the Uruguay Round (1986-93): reflects the
increasing involvement of developing countries.
The Uruguay Round is also significant because it established the World Trade
Organization.
Trade liberalization for economic growth.
Kennedy Round (1963-1967)
The Kennedy Round was the first negotiation after the GATTs establishment in
1947.
It led to an average tariff reduction among the participants of about 35%
The negotiations also resulted in the GATT0s anti-dumpling code

It also represented the first in which the European Community participated as a

single unit:

Dumping and Anti-Dumping duties

Understood as selling a product to another country for less than its sale price in the
exporting country.
The GATT (WTO) defines dumping as exporting below the normal value of a
product.
o Determined through a comparison of the price of the product in both the
exporters and the importers markets.
o Or through the analysis of the exporters costs of producing the product vs.
the sales price.
Tokyo Round 1973-79: Non-tariff barriers
We observe more complex negotiations leading up to the Tokyo Round
o Efforts to convince countries to extend liberalization into the area of nontariff barriers started after Kennedy Round
These efforts were intensified in the early 1970s because of the increasing use of
non-tariff barriers: the surge in exports from Japan and the newly industrializing
economies (NIE) resurrected fears of trade protectionism.
NTB refer trade restriction that make importation and/or exportation of a products
difficult and or costly
Can take various forms such as:
o 1.Specific prohibitions: import bands
o 2. Specific conditions: complex regulatory environment, lengthy customs
procedures, and inadequate infrastructure.
o 3. Specific market requirements: law employment, various product
specifications (ex. Cars).
Tokyo Round (1973-1979)
The agreements reached at the Tokyo Round were the most comprehensive
achieved since the creation of the GATT.
Introduce: new legal codes that dealt with NTBs: goals: improved openness,
certainty and the rule of law.
o Achieved several revisions of GATT articles involving developing countries:
safeguard actions for developing countries purposes: infant industry
promotion.
The Uruguay Round (1986-1993)
Main 2 points:
o Creation of the WTO.
o Incorporation of developing countries.
Tariffs, NTB
Trading rules
Services
Intellectual property rights
Textile and clothing
Agriculture
Dispute settlement

Establishment of the WTO

Doha Round (2001-)

The Doha Round is not yet concluded
Also called the development round
Focuses on lowering tariffs on products from developing countries.
Deals with trade in services
Liberalization in the trade agricultural products.
Future challenges:
A move from consensus-based to rule-based WTO
The increase in size and thus diversity complicates negotiations
The reduction of non-tariff barriers is more complicated than reducing tariffs.
Furthermore, the global trade has expanded considerably: intellectual property
issues, trade in services, trade related investment measures.
INTERNATIONAL MONETARY RELATIONS
Overview
Currencies facilitate trade and exchange at the global level
Actors in one country can make payments to actors in another country
Currency exchange rates affect the value of everything a nation buys/sells on the
international market.
Hard currency
Money issued by large countries with reliable and stable political economies.
A hard currency can be directly exchanged with other hard currencies. That is, hard
currencies are easily accepted for international payments.
Soft Currency
The term is used to denote currencies that are not widely accepted on the
international market. That is, its value may be too uncertain.
Important terms
When currency becomes more valuable relative to other currencies (appreciate).
The decisions of national government to float or to fix currencies interact to create
and international monetary order
International monetary regimes: facilitate international exchange and cooperation.
Reduce volatility in the trading system.
Can there be world without world government?
o An international monetary order provides predictability in currency values
across borders. In basic terms it is an arrangement that is widely accepted to
govern relations. (NO SE QUE PEDO)
There are 2 principles features of an international monetary system:
o To clarify wether currency values are expected to be fixed or floating (or
mixed)
o To establish a common base of benchmark to which currencies can be
compared.
Hence, a successful international monetary regime depends on interactions among
the governments of the worlds major economies.
Three benchmarks against which values are measured
o Commodity standard: the classical gold standard
o Commodity-backed paper standard: the modified gold standard /IMF

standard
o National paper currency standard: floating exchange rates. Currency is
backed only by the commitments of its issuing governments to support it.
o
Historically, the international monetary order has taken 3 forms:
o 1870s-1914: the classical gold standard tied currencies together.
o Post WWII 1973: the Bretton woods monetary system: the modified gold
standard
o 1973-today: floating exchange
The Classical gold standard
o A fixed exchange rate system, which linked the values of currencies to the
price of gold. This system was put in place in order to create and maintain
stability in international commerce.
o The problem was that the gold standard was relatively inflexible. Also.
National governments gave up some autonomy at home. That is,
governments were not able to freely use monetary policy to adjust the
economy.
Timeline
1870-1914: the classical gold standard: the main actor is GB. Same currency for
trade: stability
o What is critical here is that it creates stability. All states can increase their
trade, you dont have to take into account currency fluctuations.
o Workers suffer because to stabilize the currency they lower the salaries.
You loose the interest rate power. In order to reduce inflation you cannot
use interest rate, so they increase prices and reduce wages. Workers get
upset.
o the government committed is to maintain their peg. Since the
commitment was credible, there were few
1914-1944: GB is the hegemon.
o The one country that backed the commitment is GB and is running out of
money. In this period you see attempts. There is the lack of trading
relations to the lack of a unified monetary system, because traders get
scare.
1944-1973: the modified gold standard
o Gold and Dollars
o There was inflation, so policy maker try to find a solution.
o Its difficult to increase to capital flows, and increasing economic
integration.
o The goal number 1 is stability, but with a little felixibility. Each
government has a little bit ability to modified the exchange rate.
o In 1971, the one that has the commitment, USA, has inflation, it is a
democracy, increasing prices and decreasing wages would be suicide.
Nixon decides to go off the gold-standard.
o By 1973, it is clear that no one can have the pegged. Therefore, they have
floating exchange rate.
1973-present: floating exchange rates and regional arrangements.
o It is based on supply and demand. You dont have stability.
o You get the European Union get together. It is around this time when they
form a a group internationally. They create the same coin. They try to

increase instability by creating the same currency.

Neoliberal revolution
o Margaret Thatcher and Ronald Reagan.
THE GLOBAL VALUE CHNAGE
The Globalization of production
Global production floor (ikenson): providing you with the economic argument
for creating global supply change. According, to Ikenson, it makes not sense to
have political barriers, no capital control.
Ikenson leaves out the distributional consequences. They leave out the people
that loose from it. The losers from globalization.
1. Perspective from the home country
2. From the perspective of the host country.
When they open up NAFTA, a lot of investment flow to Mexico, The
manufacturer sector in USA has been affected. The home country can loose
enterprises
From the perspective of the host country: wages go up, greater employment,
learning the know-how (training and technology). Cons: many local businesses
loose, The investment are nor reinvested in the country, they take out their
profit, host countries may become dependent of the investmenet, MNCs
economic power can be transform into political power.

ti

Paper goals:
-argument
-create and IPE paper, not looking for a security paper.
-

Trade hegemony story wu

What flexibility and rigidity means
Outline the hypothesis to address the
Outline the hypothesis of hegemonic stability theory to assess the monetary system.

Hegemonic exam: and provide an alternative (its a domestic politic stuf