Chapter Three

International Political Economy

(IPE)
Introduction
 Both at national or/and international level there are

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?
 Or 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?
 Or more specifically what should/not be the role of
international institutions like the IMF, WB and WTO in the
governance of international finance, investment and trade?
 With these debates in mind, this chapter thus briefly but
comprehensively:
 presents the most influential theoretical perspectives of
International Political economy,
 surveys the most common national political economy
systems/models
 examines the core issues, governing institutions
 3.1. Meaning and Nature of International Political
Economy (IPE)
 International Political Economy (IPE), also known as global
political economy
 is an interdisciplinary academic discipline that analyzes
economics, politics and international relations.
 is a field of study that deals with the interaction between
political and economic forces.
 It is concerned with the way in which political and
economic factors interact at the global level.
 Thus, the field undertake two related kinds of
investigations.
 The first concerns how politics constrains economic
choices.
 The second concerns how economic forces motivate
and constrain political choices.
 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 field thus consists of two central dimensions namely:
 the politics/state and
 Economy/market dimension
 A political dimension accounts for the use of power by a
variety of actors-policy choices by governments.
 politics involves the making of rules pertaining to
how states and societies achieve their goals.
 political society involve states and non-state actors in global
politics such as Transnational Corporations/Multinational
Corporations.
 The economic dimension deals with how scarce resources
are distributed among individuals, groups, and nation-
states.
 A market is not just a place where people go to
buy or exchange.
 It is a driving force that shapes human behavior.
 Thus, IPE focuses on the politics of economic
phenomena that transcend state border, whether be they
 trade transactions,
 exports and imports,
 protectionism, tariffs,
 non-type barriers, production,
 the way multinational corporations operates across
state boarders and finance.
 In the field of IPE there are two significant subjects:
a) markets, which are composed of self-interested
individuals (and the firms that they operate), and
b) states, which are the primary political institutions of
the modern international system.
 Yet, the definition excludes important actors in IPE such as
Transnational Corporations/Multinational Corporations.
 This limitation of the definition stems from the use of
the term International in the concept.
 Strictly speaking, International applies only to relations
between and among sovereign states.
 But, the definition of IPE is adopted because a market
economy cannot exist and operate without some kind of
political order (the state).
 3.2. Theoretical perspectives of International
Political Economy
 There are three major theoretical (often ideological)

perspectives regarding the nature and functioning of the

International Political economy: liberalism, Marxism, and
nationalism (mercantilism).
 Mercantilism is the oldest of the three, dating back as

early as the 16th century.

 Marxism, by contrast, is the youngest of the three.

 Each focuses on the relationships between a variety of

actors and institutions.

1. Mercantilism/nationalism
 Mercantilism is labeled with economic nationalism.
 It is most closely relate with the political philosophy
of realism/pragmatism.
 Mercantilism is an economic theory that advocates gov’ts
regulation of international trade to generate wealth and strength
national power.
 It focuses on state efforts to accumulate wealth and power to protect
society from physical harm.
 It supports a strong and pervasive role of the state in the economy
both in
 domestic and international trade,
 investment and finance.
 It defended even a much more sophisticated and interventionist
role of the state in the economy-for example, the role of
identifying and developing strategic and targeted industries through:
 tax policy,
 subsidization,
 banking regulation,
 labor control, and
 interest-rate management.
 According to mercantilists, states should also play a disciplinary
role in the economy to ensure adequate levels of competition.
 It is intended to promote national economic self-
sufficiency.
 It is found in the recent experience of the Japanese, South
Korean, Taiwanese and Chinese national political
economies.
 Instead of the term mercantilism, however, these states
used the term ‘developmental state approach’ (a less
politically laden term).
 Mercantilism is economic nationalism for the purpose of
building a wealth and powerful state.
 Adam smith coined the term “mercantile system” to describe the
system of political economy that sought to enrich the country by
restraining imports and encouraging exports.
2. Liberalism
 It is a mainstream perspective in International

political economy.
 It defends the idea of free market system i.e.;

 free trade/trade liberalization and

 free financial and Foreign Direct Investment
(FDI) flows
 Accordingly, removing impediments (barriers) is the

foundational value and principle of liberalism. What

liberals wants is this:
 all economic decision should be made by the
marketplace- the free market.
 get the government out of foreign trade.
 The consensus among advocates of free trade is that:
 it reduces prices,
 it raises the standard of living for more people,
 it makes a wider variety of products available,
 it contributes to improvements in the quality of goods
and services.
 it encouraged to specialize in producing certain goods
 it contribute to the optimum utilization of resources such
as land, labor, capital,…
 The concept that captures this idea is also known as
comparative advantage.
 However, the conventional theory of comparative advantage
shifted into what is known as competitive advantage.
 As a result, governments continue to engage in
protectionism.
3. Marxism
 Marxism has emerged as a response to the liberal thought.
 It focus on the struggle between capitalists and the
working class.
 The former is primarily characterized by ownership of
the means of production,
 while the latter compromises free wage laborers.
 See the economy as an instrument of exploitation of
lower social classes (worker).
 It predicted that private ownership of the means of
production would be replaced by collective ownership,
first under socialism and then under communism.
 Advocate controlled and command economies.
 The economy should shaped by the lower social classes.
4. Structuralism
 is a variant of the Marxist perspective
 is rooted in Marxist analysis but not limited to it.
 It starts analysis from a practical diagnosis of the
specific structural problems of the liberal capitalist
economic system whose main feature is
 centre-periphery (dependency) relationship between
the Global North and the Global South
 which permanently resulted in an “unequal (trade
and investment) exchange.”
 While neo-liberalist seen the state as the source of most of
development problems in the Least Developed Countries.
 Structuralism argued that the unequal terms of trade were
the cause of the periphery’s poverty.
 Structuralisms argued that markets have never existed in a
social vacuum.
 Some combination of social, economic, and political forces
establishes, regulates, and preserves them including state.
 Further argued that industrialization was impaired by
governmental delays in carrying out structural and
institutional reforms, such as land and tax reforms.
 It therefore came to realize that industrialization could not
remain enclosed within the national boundaries if the
continuing shortage of foreign exchange was to be
resolved.
 View the state as rational, progressive and acting in the
national interest with a more realistic view.
 Favor state intervention to get the balance right between
state and market.
5. Hegemonic Stability Theory (HST)
 It is a hybrid theory containing elements of
mercantilism, liberalism, and even Marxism.
 Its closest association, however, is with mercantilism.
 The connection with mercantilism may not be
immediately apparent, but it is not difficult to discern.
6. Developmental State Approach
 It developed as a response to economic problems in
developing countries in 1980s.
 It is a variant of mercantilism and it advocates for the
robust/healthy role of the state in:
 the process of structural transformation.
 guiding the direction and pace of economic
development.
Some of the core features of developmental state
include;
 Strong interventionism:

 not imply heavy use of public ownership

enterprise or resources.
 but state use a set of instruments such as tax
credits, subsidies, import controls…
 Existence of bureaucratic apparatus

 planned process of development.

 Active participation private sector

 response of the private sector to state intervention.

 Regime legitimacy built on development results

 consequently the population is actively engaged

3.3. Survey of the Most Influential National Political
Economy systems in the world
3.3.1. The American System of Market-Oriented
Capitalism
 The American system of political economy is founded on

 the premise to benefit consumers while maximizing

wealth creation;
 the distribution of that wealth is of secondary
importance.
 Despite numerous exceptions, it is a competitive market

economy in which
 individuals are assumed to maximize their own
private interests (utility), and
 business corporations are expected to maximize
profits.
 It rests on the assumption that
 Markets are competitive and that competition
should be promoted through antitrust and other
policies,
 Almost any economic activity is permitted
unless explicitly forbidden,
 the economy is assumed to be open to the
outside world unless specifically closed.
 Emphasis on consumerism and wealth creation

results in a powerful pro-consumption bias.

 The system is characterized as a system of

managerial capitalism.
 The American economy is based upon the abstract theory
of economics.
 Pragmatically, a self-regulating economy was further
undermined by
 passage of the Full Employment Act of and
 the subsequent acceptance of the Keynesian idea
 that the federal government has a responsibility to maintain
full employment through use of macroeconomic (fiscal and
monetary) policies.
 Individual consumers and the corporate power have resulted
in an unresolved tension in American economic life.
 Whereas consumer advocates want a strong role for the
government in the economy to protect the consumer,
 American economists and many others belief that
competition is the best protection for consumers.
 The role of the American government in the economy is
determined
 not only by the influence of the neoclassical model on
American economic thinking
 but also by fundamental features of the American
political system.
 Authority over the economy is divided among
 the executive, legislative, and judicial branches of the
federal government and
 between the federal government and the fifty states.
 Whereas the Japanese Ministry of Finance has virtual monopoly
power over the Japanese financial system, in the United States
this responsibility is shared by
 the Treasury,
 the Federal Reserve, and
 several other powerful and independent federal agencies
 3.3.2. The Japanese System of Developmental
Capitalism
 In Japan, the economy is subordinate to the social and
political objectives of society.
 The goals have been making the economy self-sufficient
and catching up with the West. This ambition meant
 In the pre–World War II it was to build a strong army
and becoming an industrial power.
 But after WW-II, Japan has abandoned militarism
and has focused on becoming a powerful industrial
and technological nation.
 Thus, the objective is making vanquished Japan into the
economic and technological equal, and perhaps even the
superior, of the West.
 These political goals have resulted in a national economic
policy characterized as neo-mercantilism; it involves
 state assistance,
 regulation, and
 protection of specific industrial sectors.
 Many terms have been used to characterize the distinctive
nature of the Japanese system of political economy:
 developmental state capitalism,
 collective capitalism,
 welfare corporatism,
 competitive communism,
 network capitalism and
 strategic capitalism.
 Each of these labels connotes particularly important
elements of the Japanese economic system, such as
 its overwhelming emphasis on economic
development,
 the key role of large corporations in the economy
and society,
 subordination of the individual to the group,
 primacy of the producer over the consumer, and
 the close cooperation among government,
business, and labor.
 Yet, the term “developmental state capitalism” best
captures the essence of the system, because this
characterization conveys the idea that the state must
play a central role in national economic development.
 Generally, despite the imperative of competition,
economic activity is subordinate to
 social equity and domestic harmony.
 over-regulation & extensive intervention
 The commitments to political independence and

social harmony are major factors in the Japanese

state’s determination over the economy.
 This is originated from the Japanese people’s belief:

 in their uniqueness,
 in the superiority of their culture, and
 in their manifest destiny to become a great
power.
 Industrial policy has been the most remarkable aspect
of the Japanese system of political economy.
 Government support for favored industries,
especially for high-tech industries, through
 trade protection,
 generous subsidies, and
 their means.
 Among the policies Japan has used to promote its

infant industries include the followings:

 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.
 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.
3.3.3. The German System of Social Market Capitalism
 The German economy has
 some characteristics similar to the American and
 some to the Japanese systems of political economy.
 But it is quite different from both in other ways.
 Germany, like Japan, emphasizes exports and national
savings and investment more than consumption.
 However, Germany permits the market to function with
considerable freedom
 Furthermore, 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.
 It is called “corporatist” or “welfare state capitalism” in which
capital, organized labor, and government cooperate in
management of the economy.
 This corporatist version of capitalism is characterized by greater
representation of labor and the larger society
 the state plays a strategic role in the economy.
 labor has a particularly important role in corporate
governance.
 The role of the German state in the microeconomic aspects has
been modest.
 government has not also intervened significantly in the
economy to shape its structure.
 For example, the government has spent heavily on
research and development.
 3.3.4. Differences among National
Political Economy Systems
 National political economy of world nations varies in the
following areas:
1. the primary purposes of the economic activity of
the nation,
2. the role of the state in the economy, and
3. the structure of the corporate sector and private
business practices.
 The role of the state in the economy range from laissez-
faire, noninterventionist stance to controlled economy.
 The purpose of economic activity in a particular
country largely determines the role of the state in that
economy.
 In liberal societies
 the welfare of the consumer and the autonomy of the
market are emphasized.
 the role of the state tends to be minimal.
 the state is responsible to correct market failures and
provide public goods.
 In communal societies
 the role of the state is much more intrusive and
interventionist
 the role of such states can range from providing
administrative guidance” to maintaining a command
economy.
 The system of corporate governance and private
business practices constitutes another important
component of a national political economy.
 3.4. Core Issues, Governing institutions and
Governance of IPE
3.4.1. International Trade and the WTO
WTO
◦ It is an international organization which sets the rules for
global trade.
◦ It has been established in 1995 after General Agreement on
Trade and Tariffs (GATT) created after the Second World
War.
◦ It has about 150 members.
◦ All decisions are taken unanimously but it is in favor of the
US, EU and Japan.
◦ It blamed as non-transparent procedures and being pushed
around by big powers.
 WTO is one of institutions that govern international/global
trade.
International/global trade is cross-border trade.
 It is trade based on elimination of tariff and barriers.
 NAFTA and other similar global and regional

institutions are govern how the trade will be held.

 NAFTA has significant element of protectionist

/mercantilist policies such as:

 a tax on specific imported goods (tariff),
 prohibiting their importation (import ban), or
 Imposing a quantitative restriction (import
quota).
 A “free trade” was initially meant a lesser degree of

governmental constraints in cross-border trade, but

not an elimination of government action.
 Cont’d……..
 The latter two policies are examples of nontariff
barriers, or NTBs.
 NTBs include:

 domestic health, safety, and

environmental regulations;
 technical standards (i.e., a set of
specifications for the production or
operation of a good);
 inspection requirements; and the like.
3.4.2. International Investment and the WB
 The World Bank was created immediately after the Second
World War in 1945.
 It offers development assistance to middle-income and low-
income countries.
 It has 189mmember nations and aims to reduce poverty in the
developing world.
 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).
 Cont’d………
 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.

 It attach conditions to its loans and forcing free

market reforms.
 The WB was

 Primarily designed as a vehicle for the

disbursement of Marshall Plan money set up to
aid the (immediate) reconstruction of Europe.
 Later on, the bank expanded its influence to all
developing countries.
3.4.3. International Finance and the IMF
 The International Monetary Fund (IMF) is an
international financial institutions and regulations.
 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.
 IMF was designed to clearly represent

 First and foremost the U.S. interests, and

 the interests of the other major capitalist
countries (the developed economies)
 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 r/ship between and among national currencies.

 it revolves around the question of how the
exchange rate among different national currencies
is determined.
 The credit system, on the other hand, refers to the

framework of rules, agreements, institutions, and

practices that facilitate the transnational flow of
financial capital.
3.5. Exchange Rates and the Exchange-Rate System
 An exchange rate is the price of one national currency in
terms of another.
 There are two main exchange rate systems in the world
namely:
 fixed exchange rate and
 floating exchange rate.
 In a pure floating-rate system, the value of a currency is
determined by money supply and money demand.
 In other words, this system exists only when there is
absolutely no intervention by governments or other actors.
 In a pure fixed-rate system, the value of a particular
currency is fixed against the value of another single
currency or against a basket of currencies.
Thank you so much!!