Chapter Three: International Political Economy (IPE) Introduction

The study of Political economy has always been dominated by a national or/and international
level debate over the responsibilities of the state with regard to the economy.
3.1. Meaning and Nature of International Political Economy (IPE)
Before defining the concept of International Political Economy, one has to take note of few
words of warning. First, there is no universal agreement on how IPE should be defined. This in
turn implies that defining the concept is not as simple or straightforward as one might expect (or
want). Second, definitions are important because it is the definitions that tell us what to include
in our analysis and what to leave out.
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
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). to relations between and among sovereign states.
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),
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.
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 (perhaps even earlier). 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.
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 but

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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
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.
In arena of international trade, for instance, 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 21 st
century, mercantilism (or neo-mercantilism) defended even a much more sophisticated and
interventionist role of the state in the economy-
According to mercantilists, states should also play a disciplinary role in the economy to ensure
adequate levels of competition.
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).
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.
. 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.
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.
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,
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.
the following three contemporary theories of International political economy are
also worth considering.

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Hegemonic Stability Theory (HST):is a hybrid theory containing elements of mercantilism,
liberalism, and even Marxism..
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 as well as a
consumer of last resort) for the smooth operation of the International (economic) system as a
whole.
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.
Developmental State Approach: Realizing the failure of neo-liberal development paradigm (in
the 1980’s) in solving economic problems in developing countries,
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. 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,
 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

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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 (GATT) created after the Second World War.
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.
scope and scale of cross-border trade is, today, immensely greater than at any other time in
human history.
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),
In other words, the notion of free trade in NAFTA had and still have 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). The latter
two policies are examples of nontariff barriers, or NTBs. Other types of 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;

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).
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.
it is likely that each of these manufacturers had their own transnational system of production.
This thus tells us that today transnational production networks are immensely more complex and
larger in scale and scope than at any other time in history.

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The WB which was primarily designed as a vehicle for the disbursement of Marshall Plan money
set up to aid the (immediate) reconstruction of Europe. And, the end result was exactly what the
U.S. had hoped to achieve: a financially, economically, politically more stable and stronger
Europe
the impact of the WB on the development of developing countries has been at
best controversial and at worst negative. This has largely to do with the ‘one size
fits all’ types of excessive and hard to implement policy prescriptions (mostly of
the neo-liberal versions) of the bank to developing countries and the tough
aid/loan
conditionality it often puts for policy conformance. That is also why the bank’s
relationship with the governments of the developing countries who seriously
want to defend their policy freedom has often been not smooth.

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.
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.
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.
3.5. 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.
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.
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 IMF, which was set up as an ostensibly neutral international financial institution, was
designed to clearly represent U.S. interests and power first and foremost, and the interests of the
other major capitalist countries (the developed economies) secondarily while governing the
global finical system.

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