Chapter Three

International Political Economy (IPE)

 Critical questions?

 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?
 cont,d

 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?
 3.1 Introduction

 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”.
 This definition is based on several important, but un-clear
assumptions.
 First, it suggests that there are only two significant subjects of
International Political Economy:
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.
 Also, it suggests that a clear-cut distinction exists b/n economic or
market-based activities and political or state-centered ones.
 Second, this definition tells us that 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 adversarial/oppositional ways.
 Indeed, such definition has big truth in it because states and markets
are obviously the two key actors in the discussion of IPE and also
the relationship between the two is often antagonistic.
 Cont,d

 Yet, the definition misses other important side of the story. For
instance, political society is not solely represented by the state in
(especially today‘s) global/world politics.
 We have also equally or even more powerful (than states) non-state
actors in global politics such as Transnational
Corporations/Multinational Corporations (TNCs/MNCs).
 The definition that excludes these important actors in IPE thus
becomes misleading.
 Similarly, unlike what the definition suggests, state-market relation
in IPE could be (and is often the case) reciprocal/cooperative or even
mutually constitutive one making the definition useless.
 Cont,d
 There is also other significant limitation in defining the concept of
IPE. This limitation stems from the use of the term International in the
concept. Strictly speaking, International applies only to relations
between and among sovereign states.

 It also implies a clear distinction b/n the national and the international
b/n what goes on inside states and what goes on outside states.

 It is clear though 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.
 Cont,d
 Most of us know, for example, that large corporations engage in all
sorts of economic transactions and activities that cut across borders
whereby a single product is designed, manufactured, assembled,
distributed, and marketed in various locations throughout the world,
to forging strategic alliances with other corporations based in a
range of different countries.
 These types of firms are named as Transnational Corporations.
 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,d

 For the purpose of discussion in this chapter, therefore, a broader

definition of IPE is adopted because a market economy cannot exist
and operate without some kind of political order (the state).
 Some take a minimalist view: the best political order is one in which
the state only provides the legal-institutional framework for
enforcing contracts and protecting private property
 Others are convinced that the most appropriate political order is one
in which the state plays an active and direct role in a much wider
range of economic activity.
 What then can this broader definition be?
 Cont,d

 International Political economy (IPE) is a field of inquiry that

studies the ever-changing relationships between governments,
businesses, and social forces across history and in different
geographical areas.
 Defined this way, the field thus consists of two central dimensions
namely: the political and economic dimension.
 A political dimension accounts for the use of power by a variety of
actors, including individuals, domestic groups, states (acting as
single units), International organizations, nongovernmental
organizations (NGOs), and Transnational corporations (TNCs).
 Cont,d

 All these actors make decisions about the distribution of tangible

things such as money and products or intangible things such as
security and innovation.
 In almost all cases, politics involves the making of rules pertaining
to how states and societies achieve their goals.
 Another aspect of politics is the kind of public and private
institutions that have the authority to pursue different goals.
 Cont,d

 The economic dimension, on the other hand, deals with how scarce
resources are distributed among individuals, groups, and nation-
states.
 Today, a market is not just a place where people go to buy or
exchange something face to face with the product‘s maker.
 The market can also be thought of as a driving force that shapes
human behavior.
 Activities

 Define International/Global Political Economy, Mercantilism,

Liberalism and Marxism your own words.
 Why do you think some countries/societies in the world are poor
and others rich?
 Which of these actors do you think are and should be drivers of
development? Market, 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).
 Each of these perspectives has been around for a long time.

 Mercantilism is the oldest of the three, dating back as early as the 16th century.

 Many scholars point to Friedrich List (1789–1846) as the intellectual father of the
mercantilist thought and it is a thought in response to classical economics and,
more specifically, to Adam Smith‘s (1723–1790) liberal perspective.
 Marxism, by contrast, is the youngest of the three and is advanced by Karl Marx
who also emerged as a critique of classical economics.
 Cont,d
 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.
 Around the world, more and more countries are accepting liberal principles as they
open their economies to imports and foreign investment, scale down the role of the
state in the economy, and shift to export-led growth strategies.
 Marxism as a doctrine of how to manage an economy has been discredited/fallen
but as an analytic tool and ideological critique of capitalism it survives and will
continue to survive as long as those flaws of the capitalist system remain-e.g.
widespread poverty side by side with great wealth, and the intense rivalries of
capitalist economies over market share.
 Mercantilism/nationalism
 Mercantilism/nationalism: is a theoretical and ideological perspective which
defends a strong and pervasive role of the state in the economy – both in domestic
and international trade, investment and finance.
 mercantilism 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 to promote national economic self-sufficiency.
 As it developed in the 21st century, mercantilism (or neo-mercantilism) 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 (i.e. industries considered vital to long-term economic growth)
through a variety of means, including tax policy, subsidization, banking
regulation, labor control, and interest-rate management.
 Cont,d

 According to mercantilists, states should also play a disciplinary role

in the economy to ensure adequate levels of competition.
 The proof of the relevance of mercantilist thought in the contemporary
international political economy is found in the recent experience of the
Japanese, South Korean, Taiwanese and Chinese national political
economies whose states fulfilled the above stated roles almost
perfectly.
 Instead of the term mercantilism, however, these states the East Asian
economies (especially Japan, South Korea, and Taiwan) used the term
developmental state approach‘ (a less politically laden term) to
describe the nature of their national political economy system.
 Liberalism

 Liberalism: is a mainstream perspective in International political

economy and 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) to the free flow of
goods and services among countries is the foundational value and
principle of liberalism.
 The consensus among advocates of free trade is that it reduces
prices, 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.
 Cont,d

 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.
 If countries focused on what they do best and freely trade their goods
with each other, all of them would benefit.
 The concept that captures this idea is also known as comparative
advantage.
 Cont,d
 However, the theory of comparative advantage has been undermined
by the current wave of economic globalization.
 The growth of transnational or multinational corporations(MNCs)
complicates global trading.
 The production of goods and services is strongly influenced by
costs, arbitrary specialization, and government and corporate
policies.
 These developments thus mark a shift from the conventional theory
of comparative advantage to what is known as competitive
advantage.
 As a result, despite global acceptance of the concept of free trade,
governments continue to engage in protectionism.
 For example, the European Union (EU) and the United States each
support their own commercial aircraft industries so that those
industries can compete more effectively in a market dominated by a
 Marxism
 Following the collapse of the Soviet Union in the 1990‘s and the apparent embrace of the
free market economy by a significant number of developing countries, there was a widely
held belief that such phenomenon marks a clear failure and hence death of Marxism.
 However, while it is certainly true that central planning in command economies (which
was what existed in Soviet Union and other so called socialist/communist states- they
were not true communists though!) has proven to be a failure, it is not necessarily true
that all or even most of the Marxist critique of capitalism has been negated by any
historical and contemporary realities.
 In fact, according to advocates of Marxism just the opposite is the case.

 Global and national income inequality, for example, remains extreme: the richest 20
percent of the world‘s population controlled 83 percent of the world‘s income, while the
poorest 20 percent controlled just 1.0 percent; Exploitation of labor shows no sign of
lessening; the problem of child labor and even child slave labor has become endemic and
so on and so forth.
 Cont,d
 Marxists then tell us that all of these crises are cut from the same cloth.

 They all reflect the inherent instability and volatility of a global capitalist system
that has become increasingly reliant on financial speculation for profit making.
 Some actors are always making huge sums of money from the speculative bubbles
that finance capitalism produces, and this is creating the illusion that everything is
working well.
 Give all the above realities about contemporary International political economy,
therefore, the report of Marxism‘s death is greatly exaggerated.
 In addition, to the above mentioned foundational theories of International Political
economy, the following three contemporary theories of International political
economy are also worth considering.
 Hegemonic Stability Theory (HST)

 Hegemonic Stability Theory (HST): 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.
 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
(in the sense of acting as an international lender of last resort/alternative as well as a
consumer of last resort) for the smooth operation of the International (economic)
system as a whole.
 Cont,d

 In this regard, what then happened during the Great depression period was the old

hegemon, Great Britain, had lost the capacity to stabilize the international system,

while the new (latent) hegemon, the United States, did not yet understand the need

to take on that role or the benefits of doing so-hence global economic instability.

 During its explanatory power to the Great Depression, HST has thus influenced

the establishment of the Bretton Woods institutions (IMF and WB)- both being the

products of American power and influence.

 On this point, it is specifically worth noting that Great Britain was given an

important role to play but British interests and desires were clearly secondary. U.S.

dominance was manifested, in particular, by the adoption of the U.S. blueprint for

the IMF.
 Structuralism

 Structuralism: is a variant of the Marxist perspective and starts analysis from a

practical diagnosis of the specific structural problems of the international liberal
capitalist economic system whose main feature is centre-periphery (dependency)
relationship between the Global North and the Global South which permanently
resulted in an unequal (trade and investment) exchange.
 The perspective is also known as the Prebisch-Singer thesis‘ (named after its Latin
American proponents Presbish and Singer) and it advocates for a new pattern of
development based on industrialization via import substitution based on
protectionist policies.
 During the 1950s, this Latin American model spread to other countries in Asia and
Africa and then the domestic promotion of manufacturing over agricultural and
other types of primary production became a central objective in many development
plans.
 Developmental State Approach

 Developmental State Approach: Realizing the failure of neo-liberal

development paradigm (in the 1980‘s) in solving economic
problems in developing countries, various writers suggested the
developmental state development paradigm as an alternative
development paradigm.
 The concept of the developmental state is a variant of mercantilism
and it advocates for the robust/healthy role of the state in the
process of structural transformation.
 The term developmental state thus refers to a state that intervenes
and guides the direction and pace of economic development.
 Some of the core features of developmental state include:

 Strong interventionism: Intervention here does not imply heavy use

of public ownership enterprise or resources but state‘s willingness
and ability to use a set of instruments such as tax credits, subsidies,
import controls, export promotion, and targeted and direct financial
and credit policies instruments that belong to the realm of industrial,
trade, and financial policy.
 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.
 Activity
 Compare and contrast the following theories of International
Political Economy based on their assumptions, core propositions
and policy prescriptions:
 Mercantilism
 Liberalism
 Marxism
 Hegemonic Stability Theory (HST)
 Structuralism
 Developmentalism
 3.3. Survey of the Most Influential National Political Economy
systems in the world

3.3.1. The American System of Market-Oriented Capitalism

 The American system of political economy is founded on the
premise that the primary purpose of economic activity is to benefit
consumers while maximizing wealth creation; the distribution of
that wealth is of secondary importance.
 Despite numerous exceptions, the American economy does
approach the neoclassical model of a competitive market economy
in which individuals are assumed to maximize their own private
interests (utility), and business corporations are expected to
maximize profits.
 Cont,d

 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.
 Almost any economic activity is permitted unless explicitly
forbidden, and 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 and insensitivity, at least when
compared with the Japanese and German models, to the social
welfare impact of economic activities.
 Cont,d
 Although Americans pride themselves on their pragmatism, the
American economy is based upon the abstract theory of economic
science to a greater degree than is any other economy.
 At the same time, however, the American economy is appropriately
characterized as a system of managerial capitalism.
 Management was separated from ownership, and the corporate elite
virtually became a law unto itself.
 by the late nineteenth-century emergence of huge corporations and
the accompanying shift from a proprietary capitalism to one
dominated by large, oligopolistic corporations.
 .

 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 gov’t and b/n the
federal gov’t and the fifty states.
 Whereas the Japanese Ministry of Finance has virtual monopoly
power over the Japanese financial system
 Cont,d

 In addition, the fifty states frequently contest the authority of the

federal government over economic policy and implement important
policies of their own.
 Industrial policy represents another great difference between the
United States and other economies.
 Industrial policy refers to deliberate efforts by a government to
determine the structure of the economy through such devices as
financial subsidies, trade protection, or government procurement.
 3.3.2. The Japanese System of Developmental Capitalism

 In the Japanese scheme of things, the economy is subordinate to the

social and political objectives of society.
 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.
 Cont,d
 These political goals have 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.
 Another very important source of this powerful economic drive is
the 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,d
 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.
 However, the term ―developmental state capitalism best captures
the essence of the system, because this characterization conveys the
idea that the state must play a central role in national economic
development and in the competition with the West.
 Despite the imperative/authoritative of competition, the Japanese
frequently subordinate pursuit of economic efficiency to social
equity and domestic harmony.
 Cont,d

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 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 interfirm cooperation.
 Cont,d

 Japanese industrial policy was most successful in the early postwar

years when Japan was rebuilding its war-torn economy.
 However, as Japan closed the technology gap with the West and its
firms became more powerful in their own right, Japan‘s industrial
policy became considerably less significant in the development of
the economy.
 Yet the population and the government continued to believe that the
state should play a central or at least an important supportive role in
the continuing industrial evolution of the economy.
 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.
 On the one hand, Germany, like Japan, emphasizes exports and national
savings and investment more than consumption.
 However, Germany permits the market to function with considerable
freedom; indeed, most states in Western Europe are significantly less
interventionist than Japan.
 Except for the medium-sized business sector (Mittelstand) nongovernmental
sector of the German economy is highly oligopolistic and is dominated by
alliances between major corporations and large private banks.
 Cont,d
 The German system of political economy attempts to balance social
concerns and market efficiency.
 The German state and the private sector provide a highly developed
system of social welfare.
 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.
 This corporatist version of capitalism is characterized by greater
representation of labor and the larger society in the governance of
corporate affairs than in Anglo-Saxon share holder capitalism.
 Cont,d

 At the core of the German system of political economy is their

central bank, or Bundesbank.
 The Bundesbank‘s crucial role in the postwar German economy has
been compared to that of the German General Staff in an earlier
German domination of the Continent.
 On the other hand, the role of the German state in the
microeconomic aspects of the economy has been modest.
 The Germans, for example, have not had an activist industrial policy
although, like other advanced industrial countries, the government
has spent heavily on research and development.
 Cont,d

 The German government has not also 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.
 3.3.4. Differences among National Political Economy Systems

While national systems of political economy differ from one

another in the following areas are worthy of particular attention:
 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.
 In those liberal societies where the welfare of the consumer and the
autonomy of the market are emphasized, the role of the state tends
to be minimal.
 Cont,d

 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.
 On the other hand, in those societies where more communal or
collective purposes prevail, the role of the state is much more
intrusive and interventionist in the economy.
 Thus, the role of such states can range from providing what the
Japanese call administrative guidance to maintaining a command
economy like that of the former Soviet Union.
 Cont,d

 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.
 3.4. Core Issues, Governing institutions and Governance of
International Political Economy

 3.4.1. International Trade and the WTO

 The World Trade Organization (WTO) is an international organization

which sets the rules for global trade.
 This organization was set up in 1995 as the successor to the General
Agreement on Trade and Tariffs created after the Second World War.
 It has about 150 members. 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.
 3.4.2. International Investment and the WB

 The World Bank 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.
 3.4.3. International Finance and the IMF

• 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.

Chapter Four: Globalization and Regionalism