Chapter Three:

International Political
Economy

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 3.1. Meaning and Nature of IPE
• There is no universal agreement on how IPE should be defined.
• Defining it s not as simple or straightforward as one might expect
• The term ‘international’ being used in IPE is one source of limitation in
defining the concept.
• In strict sense , the term “international” applies to relations
between and among sovereign states only .
• But that is not the case in IPE as the involvement of non-state
actors in the economic activity in the world is a practical reality.
• In fact, this is making the definition of IPE even wider and
changing the name of the field from IPE to GPE
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A broader definition is adopted in this chapter for IPE because a
market economy cannot exist and operate without
political order.
A Minimalist view: claims that the best political order is the
question one in which the state only provides the legal institutional
arises as framework for enforcing contracts and protecting
to what private property(Neoclassical economists).
kind of
political Hands-on view: calls It claims the best
order is for a hands on political order is one in
approach by the which the state plays
needed. an active and direct
state on the
economic activity. role in a much wider
range of economic
activity
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Hence a broader definition is needed to capture these essences.

IPE is a field of
Political dimension: (these actors include:
study that Define accounts for the use of individuals, domestic groups,
studies the states (acting as single
ever changing d this power by a variety of Units), international
actors; and these actors Organizations, NGOs and
relationships way, make decisions about TNCs).
between the the distribution of
governments, tangible things like
Politics involves the
businesses field making of rules
money and products; or
regarding to how states
intangible things like
and social consists and societies achieve
security and innovation
forces across their goals.
of two
history and in
different central
geographical dimens Economic dimension: deals with how
areas. ions: scarce resources are distributed among
individuals, groups and nation states.
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 3.2. Theoretical Perspectives of IPE
• There are three major theoretical perspectives in IPE
• Mercantilism(Nationalism), Liberalism, and Marxism
• Mercantilism , is an economic system with a belief that a government can make a nation
more prosperous by regulating trade and using tariffs and other protective measures to
achieve a balance of exports over imports.
• It is the oldest- dates back to 16th c or even back. Fiedrich List: intellectual father of
mercantilist thought . It is a response to the classical economics of Adam Smith’s liberal
perspective.
• Marxism is the youngest of the three. Advanced by Karl Marx. Started as a critique to
classical economics.
• Even though Marxism as a doctrine has been discredited by many, it is still
considered as an analytic tool and ideological critique of capitalism
• Among the three, currently, liberalism has experienced a relatively considerable
growth in influence.
• States are accepting liberal principles more
• EG: opening up economies to imports ad foreign investment, minimize the role of the state in
the economy; shifting to export led growth strategies. 5
 A. Mercantilism (Nationalism)
• Defends a strong and pervasive role of the state in the economy
• (the state should play a strong role in both domestic and international trade,
investment and finance).
• Emphasizes the importance of balance of payment surpluses in trade with other countries
• (export must always be more than import);
• to this end, it promotes extreme policy of autarky
• (Autarky is an economic policy to have a closed economy and not allow any
external trade/ minimal trade)
• Neo-mercantilism (21st C): is developed form of the old mercantilism; promotes a more
sophisticated and interventionist role of the state in the economy.
• EG: identifying and developing strategic and targeted industries through variety of means like tax
policy, subsidization, banking regulation, labor control, interest rate management
• Encourages the state to play a disciplinary role in the economy to ensure adequate
levels of competition
• A true mercantilist reflection in the contemporary world: Japan, South Korean, Taiwanese and
Chinese national political economies.
• Their governments applied the ‘developmental state approach’ (a less politically land term) to
describe the nature of their mercantilist national political economic system.
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B. Liberalism
• Defends the idea of free market/trade system.
– Free trade: trade liberalization and free financial and Foreign Direct Investment(FDI) flows

• Basic principle: Removing barriers to the free flow of goods and services among
countries
– Assumes that free trade:
• 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.

• Free trade encourages states to specialize in producing certain goods; this will in turn
contribute to the optimum utilization of resources (like land, labor, capital and
entrepreneurial ability) worldwide

• Free trade helps countries to focus on what they do best: Comparative Advantage
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• Economic globalization is making comparative advantage less
attractive.
– Thus the conventional theory of comparative advantage has shifted to
Competitive Advantage.

• Even though liberalism is gaining a world wide acceptance compared

to Marxism and Mercantilism, governments across the world have
continued to engage in protectionism despite going for the concept
of free trade

C. Marxism
• Starts with the assumption that problems like global and national
inequality; exploitation of labor and the like are reelections of the
global capitalist system that has become highly reliant on financial
speculation for profit making (capitalism/liberalism).
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In addition to the three foundational Basic argument: the root cause
theories in IPE, we also have I. Hegemonic Stability of economic troubles that
additional theories: Theory (HST) trouble Europe and the rest of the
• Hegemonic Stability Theory This is a hybrid theory with world in the time of the Great
elements of liberalism, Marxism Depression (1920s and 30s) was
• Structuralism Theory
and Mercantilism the absence of a „Benevolent
• Developmental State Theory Hegemon‟

Benevolent hegemon: a During the Great Depression; there

dominant state willing and was no benevolent hegemon because
able to take responsibility for Great Britain had lost the capacity to Hence, a global
stabilize the international system; and the economic instability
the smooth operation of the then new hegemon, US, did not occurred.
international economic understand the need to take on the
system as a whole role.

HST has influenced the

establishment of the Both institutions are the
products of American power
Bretton Woods institutions and influence.
(IMF and WB).
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 II. Structuralism
• A variant of the Marxist perspective
• Starts by claiming the current world problems are structural
problems of the international capitalism economic system.
• The system has a „Center- Periphery‟ (dependency)
relationship between the Global South and the Global
North and this has resulted in a permanently unequal trade
and investment exchange.
• Also known as Prebisch-Singer thesis. Originated in Latin America
• Advocates for a new pattern of development based on
industrialization via import substitution based on
protectionist policies
• Was famous in the 1950s.
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 • Started out after observing the failure of the
neo-liberal development paradigm to solve
the economic problems of the developing
world.

III. • Is a variant of Mercantilism; advocates for the

Developmental robust role of the state in the process of
State Approach structural transformation

• Refers to a state that intervenes and guides the

direction and pace of economic development

• What are the core features of DSA?

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3.3. Survey of the Most Influential IPE Systems in the World
American PE is founded based on the Individuals are assumed to
premise: the primary purpose of economic maximize their own private
activity is to benefit consumers while interests (utility); business
3.3.1. corporations are expected to
maximizing wealth creation; the distribution maximize profits
The of that wealth is of a secondary importance.
American
Similar to the Almost any economic the economy is
System of assumed to be open
Market neoclassical activity is permitted
model: markets unless explicitly for the outside
Oriented are competitive; forbidden; world, unless
Capitalism specifically closed.

Compared with the German and Japanese model that focus on the social
welfare impact of economic activities, the American system: emphasis is
given to consumerism and wealth creation
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Another prominent feature distinguishing the American PE from
that of the German and the Japanese: Industrial policy
• Industrial policy: deliberate efforts by a government to determine the structure
of the economy through financial subsidies, trade protection, or government
procurement.

US used these kinds of industrial policies in just few areas:

• agriculture
• national defense.
• Research & Development.

But in 1980s US took a major step towards establishing a

national industrial policy.
• The only justification for an industrial policy considered legitimate in the
US is to overcome a market failure. 13
3.3.2. The After the end of WWII, Japan’s this remained the
Japanese Ministry of International Trade and driving force of
System of Industry, and other agencies of the Japanese society in
Japanese economic high command set the beginning of the
Developme their sight on making Japan in to the 21st C.
ntal economic and technological equal
Capitalism and perhaps even the superior of
the west.
For the Japanese, the economy is subordinate to the
social and political objectives of society.

The goal of the Pre WWII, this After the defeat in WWII,
economic system amounted to
since the Meji
Japan abandoned militarism
restoration was to building a and has focused on:
make the strong army • becoming a powerful industrial and
economy self and becoming technological nation,
sufficient and
catching up with
an industrial • promoting internal social harmony
power. among the Japanese people
the west. 14
After the WWII defeat, Japan’s Liberal Democratic Party (LPD) had the goal
of catching up with the west.
• Thus, the state assumed central role in the economy and specifically the elite pursued rapid
industrialization (through a strategy employing trade protection, export led growth, and other
policies)
• The people also supported this extensive interventionist role of the state.

Japanese National economic policy: is based on neo-mercantilism

• Meaning: 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.
This economic objective arose from the experience of japan as a late
developer and its strong sense of economic and political vulnerability.
• Also 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.
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Many terms are used to describe the Japanese economic system:
• developmental state capitalism, collective capitalism, welfare corporatism,
competitive communism, network capitalism and strategic capitalism.
Developmental state capitalism is the widely used one:
• the state must play a central role in national economic
development and in the competition with the west
• Represents:
• overwhelming emphasis on economic development,
• the key role of large corporations in the organization of 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.
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 Japan also uses over
regulation in the economy.
• This is motivated by the desire
to protect the weak and
defenseless.
Japan usually subordinates • EG:
pursuit of economic • you can find large
efficiency to social equity redundant staffs in
and domestic harmony. Japanese retail stores; this
is so as to employ many
unemployed individuals;
• life time employment;
reluctance to downsize and
lay off thousands of
employees.

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 • government support for favored industries (especially for
high-tech industries)
• Methods used: trade protection, generous subsidies and
other means
Japanese Industrial policy: • government supported the declining industries
• Methods used: creation of cartels to help and eliminating
excessive competition;
• government followed infant industry protection through
different means

After Japan closed the

technology gap with the
west, the Industrial policy • But the government and the people continued to
became considerably less believe that the state should play a central role at
significant in the least an important supportive role in the
development of the continuing industrial evolution of the economy.
economy.
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•3.3.3. The German System
of Social Market
Capitalism

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3.3.3. The German System of Social Market Capitalism
• Shares some characteristics similar to the American and some to the
Japanese systems of PE
• Like Japan: emphasizes exports and national savings and investment more than
consumption.
• Unlike Japan: allows the market to function with considerable freedom
• German tries to balance social concerns and market efficiency.
• The state and the private sector provide highly developed system of social welfare.
• The German PE is representative of the “corporatist”/ “welfare state capitalism”
of continental Europe:
• This is a type of capitalism where capital, organized labor and government
cooperate in management of the economy
• Corporatist capitalism is characterized by greater representation of labor and
the larger society in the governance of the corporate governance.
• In Germany, labor has an important role in corporate governance.
• German has “a law of co-determination” which orders for the equal
representation of employees and management on supervisory boards 20
Most important contribution of the German state to the
economic success of their economy has been indirect
• After WWII, the federal and state governments created a stable and
favorable environment for private enterprise.
• The laws and regulations have successfully encouraged a high savings
rate, rapid capital accumulation and economic growth.

Bundesbank (central bank) plays a key role in the

German PE.
• It created a stable macro-economic environment and low interest
rates which provided support for the German industries post WWII
to make them competitive in the world.
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Role of the state in the micro economic
aspects of the economy has been modest.
German did not have an active industrial policy
• Government invested heavily on R&D.
• Government only gave subsidies and protection to dying
industries like the Coal and Shipbuilding Industries and
government owned businesslike Lufthansa and Bundespost;

• other than this it did not interfere in the economy

significantly

Generally, the German PE system is more closer to the

American market-oriented system than to the Japanese.
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 • The differences of national political economies seen in
Differen terms of:
• the primary purpose of the economic activity of the nation
ces • the role of the state in the economy
among • the structure of the corporate sector and private business practices
National • Objectives of National PEs might range from:
Political • promoting consumer welfare to pursuit of national power
Economy Role of the state in the economy:
System Market economies follow Laissez-faire= USA, Japanese state
follows central role in the overall management of the economy
Mechanisms of corporate governance and private
business:
USA: relatively fragmented business structure
Japanese: highly integrated industrial groupings
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The purpose • Liberal societies:
• role of the state tends to be minimal as the
of economic welfare of the consumer and the autonomy of
activity in a the market are emphasized.
particular • The main responsibility of the state is to correct
country market failures and provide public goods
largely • Societies where communal/collective purposes
determines prevail:
the role of • role of the state is more intrusive and
interventionist in the economy.
the state in
• The states‟ role can vary from providing
that administrative guidance (like Japan) to a
economy: command economy (like former USSR)
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Different state systems have different ways of organizing their
economic activities of production marketing etc.
• USA:
• shareholders/stockholders have an important role in the governance of America.
• The largest firms usually invest and produce abroad
• Japan:
• firms prefer to invest and produce at home.
• Japan and Germany:
• Business, banks have played a more important role

Additional factors that bring difference in the NPEs of states: policies

of each government
• These can be regulatory, industrial and other policies;

national differences in corporate structure and business practices have also

been shaped by the economic and technological forces of the state.
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 3.4. Core Issues, Governing Institutions and
Governance of International Political Economy
3.4.1. International Trade and the WTO

International Trade
• Trade is the exchange of money for goods and services;
• this could happen domestically or internationally

• Distinction between domestic and cross-border trade:

• Cross border trade: at least two different national governments
with their own sets of interests and concerns, exercising sovereign
authority and control over their national borders engage in the
trading activity
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 • Why is this?
• To Liberal economists this is because cross border
trade is beneficial for the national economies of
the individual states and for the world as a
Scope and scale of cross whole.
border trade is now
greater than any other • liberals believe that autarky is impossible and self
time in human history defeating in the industrial and post industrial eras

• Via Global/Regional Free Trade Agreements

(FTAs) like WTO, NaFTA etc.
• However, even these FTAs are not 100% going for a
free trade; some times they follow
How is protectionist/mercantilist policies like tariffs, and
international/global
trade governed?
nontariff barriers (import ban, import quota) to
protect ‘import sensitive sectors’
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The world trade organization (WTO):

Sets the rules for global trade;

Set up in 1995 succeeding GATT which was created at the end of WWII;

Has around 150 members;

All decisions are taken unanimously; but major economic powers use WTO to
frame rules of trade to advance their own interests;

Developing states complain of non-transparent procedures and being pushed

around by big powers
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3.4.2. International Investment and the WB
• Created in 1945 after WWII;
• primarily designed for the disbursement of Marshall Plan money to
reconstruct war thorn Europe.
• It achieved a financially, economically, politically more stable and stronger Europe
• Later the bank focused its influence on Asia, Africa and Latin America.
• It activities are now focused on the developing countries
• Works for achieving: human development, agriculture and rural development,
environmental protection, infrastructure and governance.
• Provides loans and grants to member states.
• as a result it has a high degree of influence on the economic policies of
developing states.
• criticized for setting the economic agenda of the poor nations, attaching
stringent conditions to its loans and forcing free market reforms
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 FDI is the major element of the
international or global political economy.
This is because:
Investments and
development processes in
developed states are 1. There is a drastic increase in transport and
primarily governed by the communications costs, and this makes
interactions of multinational
companies; transnational production much more
economically efficient.
however, investments and
development process in
developing countries are 2. Rise of efficiency seeking aids worldwide.
directly or indirectly
governed by the WB.
3. Developments of new and better
technologies and improvements in global
finance
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Impact of the WB on the development of developing states is
mostly controversial (sometimes even negative) because the
WB uses „one size fits all‟ kind of policy prescription for
development.

WB uses tough aid/loan conditionality in order to influence

the policies of the developing states.

hence, the relationship b/n WB and developing states‟

governments who want to defend their policy freedom is not
smooth.
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3.4.3. International Finance and the IMF
• IMF is an International Organization that oversees those financial
institutions and regulations that act at the international level
• IMF has 184members; but not all members have equal say in it.
• top 10 countries (the G8) have 55% of the votes. USA alone has 17.4% of the
vote.
• The global system is divided into two separate, but highly inter-
related systems:
• The International Monetary System:
• Concerned with the relationship between and among national currencies;
deals with how the exchange rate among different national currencies is
determined
• The Credit System:
• is the framework of rules, agreements, institutions, and practices that facilitate
the transnational flow of financial capital for the purpose of investment and
trade financing 32
 3.5. Exchange Rates and the Exchange-Rate System
• Exchange rate: the price of one national currency in terms of another.
• There are two main exchange rate systems in the world:
• Fixed Exchange Rate: in a pure fixed rate, the value of a particular currency is
fixed against the value of another single currency or a basket of currencies
• Floating Exchange Rate: in pure floating rate, the value of a currency is
determined solely by money supply and money demand. This system exist only
when there is absolutely no intervention by governments or other actors
• How is the global financial system governed? Creation IMF provides answer for this
question.
• IMF was set up as an ostensibly neutral international financial institution. It was
designed to clearly represent US interest and power primarily and the interest of
other major capitalist countries secondarily while governing the global financial
system.
• Decision making power in IMF: voting power is determined by quota (the amount
of money that member country pays to IMF). The more a country pays, the more
say it has in IMF decision making. US is at the top of the quota list. 33
34