Chapter THREE

International Political Economy (IPE).

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Meaning and Nature of International Political Economy (IPE)
 There is no universal agreement on how IPE should be defined. The
definition which tells us that 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”.
 It suggests that there are only two significant subjects of International
Political Economy:
 Markets, which are composed of self-interested individuals (and the firms that they
operate),
 States, which are the primary political institutions of the modern international
system.

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 CON’T…
 International applies only to relations between and among sovereign
states.
 For example, that large corporations engage in all sorts of economic
transactions and activities that cut across borders: from buying, selling, and
trading products and services, to building and investing in global chains of
production.
 These types of firms are named as Transnational Corporations
(TNCs).
 Due to it, 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).

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 CON’T…
 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.
 It 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).
 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.

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 Theoretical perspectives of International Political Economy
 There are three major theoretical 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.

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 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.
 It is found in the recent experience of the Japanese, South Korean,
Taiwanese and Chinese national political economies.
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 Liberalism
 Is a mainstream perspective in International political economy and it defends the
idea of free market system.
 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.
 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 at 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.
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 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.
 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.
 They all reflect the inherent instability and volatility of a global capitalist system for
profit making.
 They argued that some actors are always making huge sums of money from the
speculative bubbles that finance capitalism produces.
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Contemporary Theories of International Political Economy
 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 for the smooth operation of the International
(economic) system as a whole.
 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.
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 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.
 This permanently resulted in an “ unequal (trade and investment)
exchange .”
 This perspective is also known as the ‘Prebisch-Singer thesis’ 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.
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 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 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.
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 Survey of the Most Influential National Political
Economy systems in the world
I. The American System of Market-Oriented Capitalism
 the primary purpose of economic activity is to benefit consumers while
maximizing wealth creation;
 the distribution of that wealth is of secondary importance.
 markets are competitive - competition should be promoted
 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,

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 II. The Japanese System of Developmental Capitalism
 Ever since the Meiji Restoration (1868), Japan’s goals have been
making the economy self-sufficient and catching up with the West.
 pre–World War II years ambition meant building a strong army
and becoming an industrial power.
 in post World War II, Japan abandoned militarism and focused on
becoming a powerful industrial and technological nation.
 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.

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 II. The German System of Social Market Capitalism
 It has some characteristics similar to the American and some
to the Japanese systems of political economy,
 like Japan, emphasizes exports and national savings and
investment more than consumption. However, Germany
permits the market to function with considerable freedom.
 The German system of political economy attempts to balance
social concerns and market efficiency.

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 BOSS MAN
 Differences among National Political Economy Systems
 National political economy differ from one another 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.
 As for the role of the state in the economy,;
 market economies include the generally laissez-faire, noninterventionist
stance of the United States as well as the Japanese state’s central role in
the overall management of the economy.
 And the mechanisms of corporate governance and private business
practices also differ; the relatively fragmented American business
structure and the Japanese system of tightly integrated industrial
groupings (the keiretsu).

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  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.
 The predominant responsibility of the state in liberal 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.

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  The system of corporate governance and private business
practices constitutes another important component of a
national political economy.
 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
 Regarding business practices, the largest American firms
frequently invest and produce abroad,
 Japanese firms prefer to invest and produce at home.

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 Core Issues, Governing institutions and Governance of International
Political Economy

INTERNATIONAL TRADE ORGANIZATION

 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 (GATT) created after the Second
WWII. 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.
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 CONT’D…
 The exchange of a good or service for another illustrates a particular type of trade, referred
to as barter trade.
 In the contemporary period, however, the great preponderance of trade involves the
exchange of money for goods and services.
 This type of trade can take place entirely within a domestic economy or internationally.
 But there are a number of critical distinctions between domestic and cross-border trade.
 While in cross-border trade the exchange of goods and services is mediated by at least two
different national governments, each of which has its own set of interests and concerns, and
each of which exercises sovereign authority and control over its national borders.
 This brings the question: “how is international/global trade governed?”
One most common answer is the idea that Global/Regional Free Trade
Agreements govern it-i.e institutions like World Trade Organization (WTO) and
North American Free Trade Agreement (NAFTA) or similar other organizations.

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 WORLD BANK
 It was created immediately after the WWII 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/pre-conditions to its loans
20 and forcing free market reforms.
 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.

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 International Investment and the WB
 International/Transnational/global production (in short global FDI)
is a type of production in which different parts of the overall
production process for a particular product take place across different
national territories and it is one major element of the international or
global political economy.
 To appreciate how many countries participate today in the production
of a single product, consider the following case for example.
 One would observe that in a production of one particular model of
Swedish automobile, at least 38 major and minor components were
manufactured in factories spread throughout the world.
 This is due to the drastic decrease in transport and communications
costs which made transnational production much more economically
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efficient.
 CONT’D…
 This is also reflected in the rise of efficiency-seeking FDIs world wide.
 Besides, the developments of new and better technologies and improvements in
global finance have also made it easier and more profitable to build
integrated production systems across borders.
 While investment and the development process in general in the developed
countries is predominantly governed by the interactions of multinational
companies and investment.
 Development process in the developing countries, on the other hand, are
directly or indirectly governed by the WB (some times more powerfully than
the governments of sovereign states).
 This depicts that the WB influences the domestic affairs of developing
countries via loans and aids.
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International Finance and the IMF
 The global financial system is divided into two separate, but tightly
inter-related systems: a monetary system and a credit system.
 The international monetary system can be defined as the
relationship between and among national currencies.
 More concretely, 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 for the purposes of investment and trade
financing.
 From these two very general definitions, one can understood that the
monetary and credit systems are inextricably related to one another.
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 Exchange Rates and the Exchange-Rate System
 An exchange rate is the price of one national currency in
terms of another. For example, according to July 2013 rate,
one U.S. dollar ($1) was worth 98.1 Japanese yen (¥), while
one British pound (£) was worth 1.54 U.S. dollars. Yet, in
August 1998, one U.S. dollar was worth 145.8 yen.
 Compared to the rate in July 2013, the difference is then
almost 50 percent. This implies that in August 1998, the yen
was substantially “weaker” (the quotation marks are used
because a weak currency is not necessarily a disadvantage).

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 CON’T…
 There are two main exchange rate systems in the world namely: fixed
exchange rate and floating exchange rate.
 In a pure floating-rate system, the value of a currency is determined solely
by money supply and money demand.
 In other words, this system exists only when there is absolutely no
intervention by governments or other actors capable of influencing
exchange-rate values through non-market means.
 A pure fixed-rate system, on the other hand, is one in which the value of a
particular currency is fixed against the value of another single currency or
against a basket of currencies.
 The question thus remains: How is the global financial system governed?
The creation of the International Monetary Fund (IMF) provided the
answer for this question.

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