CHAPTER TWO

THEORIES OF INTERNATIONAL POLITICAL ECONOMY

There are several competing explanations for the nature of the institutions and the system in
deciding and managing key economic questions. A slightly old-fashioned way to describe the
competing approaches to IPE is to divide the subject into liberal, mercantilist, and Marxist
traditions. These labels still usefully describe different economic traditions each of which has a
particular moral and analytical slant on global economic relations. 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.

2.1. Realist theory of International Political Economy

There are several schools of thought those bring together analysts who focus on the role of the
state and the importance of power in shaping outcomes in the international political economy.
These theories stress the importance of the interest of the nation or the state in understanding
activity in international relations (IR). This grouping is variously termed ‘mercantilist’, ‘neo-
mercantilist’, ‘statist’, ‘state-based theory’, ‘power politics’ or ‘economic nationalist’. The
equivalent in IR theory is realism. We use the term ‘mercantilism’ to refer to this perspective
because at the center of such analyses is the protection of the national unit.

Mercantilism was a doctrine of political economy that governed the actions of many states until
the liberal revolution in Britain in the mid-19th century. Mercantilists believed that there was
only a limited amount of wealth in the world and that each state must secure its interests by
blocking the economic interests of other states. This is known as a ‘zero-sum game’. One state’s
gain is another state’s loss.

Mercantilist sometimes called as economic nationalist. This theory views the state as the main
actor in the global political economy. Economic nationalist thought begins from two major

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assumptions. The first is that the inter-state system is anarchical and it is therefore the duty of
each state to protect its own interests. At the core of the various historical versions of economic
nationalism is the belief that an economic community persists and acts for the good of all its
members. The second assumption concerns the primacy of the state in political life--the primacy
of the political life over other aspects of social life. As the state is the central instrument through
which people can fulfill their goals, it follows that the state remains the preeminent actor in the
domestic and international domains. Economic policy should be used to build a more powerful
state. From this perspective, the state is prior to the market and market relations are shaped by
political power.

Economic nationalist thought is both descriptive and predictive. Descriptive economic

nationalists maintain that production, consumption, exchange and investment are all governed by
political power. Markets are not ‘natural’; they can only exist within a social context. For
mercantilists, political needs and purposes are seen largely as being achieved through the form of
the state. It remains at the core of social life. But economic nationalists move beyond description
and also provide policy advice. Given their analysis of the dynamics of political economy, such
advice is geared towards supporting and maintaining state power.

Economic nationalists recognize the importance of market-based actors such as firms, but
subordinate their importance to that of the state. Within this perspective, the economic power of
transnational corporations (TNCs) is acknowledged, but the overall power of such firms remains
limited. In the end, firms are subject to the dictates of states. Insofar as firms have become
important economic actors, this is only because states have abandoned regulation or lessened
controls on the movement of capital. When firms encounter economic or political trouble, they
quickly turn to their home states for protection.

Mercantilists do not focus on individual policy-makers and their policy choices but rather
assume that the world economy is an arena of competition among states seeking to maximize
relative strength and power. Simply put, the international system is like a jungle in which each
state has to do what it can to survive. For this reason, the aim of every state must be to maximize
its wealth and independence. States will seek to do this by ensuring their self-sufficiency in key

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strategic industries and commodities, and by using trade protectionism (tariffs and other limits on
imports), subsidies and selective investments in the domestic economy.

Mercantilism or economic nationalism 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. It defend 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.

The theory was practically applied in countries like Great Britain, France, the Netherlands,
Portugal and Spain during the 1500s to the late 1700s. 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.

To summarize, mercantilism proposed that a country should try to export more than its imports
in order to receive gold. To advance the benefit of one state, the theory advocated strict controls
on trade in the form of tariffs and quotas. It argues countries must practice the zero-sum game
approach where world wealth was limited and that countries could increase their share only at
the expense of other countries. This protectionist policy decelerated the long term growth of
countries. Mercantilism argued for closed national market and aggressive overseas business as a
means to national growth and prosperity. However, it was later challenged by modern liberal
scholars as its effect was largely manifested in aggravated inter-state conflicts, bloody
competitions and colonialism. Its contribution for mutual international economic relations and
regional integration was totally adverse. The first economist who discredited mercantilism was,

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Adam Smith, who lived at the very time when capitalism was expanding in Western Europe.
Therefore, mercantilism had a very constraining effect on international economic relations and
regional cooperation as well.

Major attributes of Mercantilism economic theory

 Restrictive trade aiming at the acceleration of exports and reduction of imports

 Strict focus on wealth accumulation than welfare promotion

 Advocates the principle of self-sufficiency

 No simultaneous gains or sharing of gains among countries. One country can benefit
only at the cost of other countries

 Adoption of trade protectionism

Cognizant of the aforementioned negative assumptions for international trade for mutual benefit,
the theory faded and replaced by liberalism. The book written by Adam Smith “Wealth of
Nations” strongly degraded the irrelevancy of mercantilist economic theory. Very recently, the
theory is reemerged with slight variations in the notion of Neo-mercantilist practices through the
formation of local trading blocs and promotion of trade with imposition of tariffs and quotas.

2.2. Liberal theory of International Political Economy

The liberal view of international economic relations stands in marked contrast to that of the
mercantilists. In contrast to the mercantilists/economic nationalist theories, liberals focus either
on the individual or on a wide range of actors from the state to the corporation to interest groups.
They do not see the state as a unitary actor, but as influenced by numerous factors. Rather than
stress the inevitability of conflict, liberals search out the conditions for cooperation. They tend to
play down the role of force and coercion in human affairs and emphasize the ability of
individuals to choose between attractive courses of action or negotiate their differences. Liberals
see the world system as one of interdependence rather than anarchy. They argue that states and
peoples can cooperate for mutual benefit. Rather than a zero-sum game where one’s gains are the
other’s losses, liberals see a positive-sum game where the pie grows bigger and everyone gains.
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Liberal theories of political economy emerged in 18 th and 19th century in Britain alongside the
Industrial Revolution. They offered a critique of economic nationalist thought by arguing that
protectionism and restriction of economic activity were actually impoverishing states. Scottish
moral philosopher, Adam Smith ([1776]1983), advocated freeing up commerce and creating
larger national and international markets as a method of generating wealth for everyone. After
Smith, Englishman David Ricardo ([1817]1992) introduced the revolutionary theory of
comparative advantage, which demonstrated that all nations can benefit from free trade even if
they are not as competitive as other states.

Today’s global economy is governed largely according to liberal principles. The trade regimes is
based upon the goal of free trade, money flows into and out of most countries without great
difficulty and all forms of economic activity are increasingly liberalized. However, there is a
wide variety of liberal thought. It ranges from those who see the state fading away in an
emerging borderless world dominated by corporations (Ohmae, 1990) to liberal institutionalists
(Keohane and Nye, 1977), who stress the continuing importance of the state, but see it enmeshed
in webs of interdependence and international organization. The historical evolution of liberal
economic theory of international trade started from mercantilism to classical liberalism and then
neo-liberalism.

 Classical liberalism underpinned the move towards a free market capitalist economic
system by denying the mercantilist system. The proponents of the free trade economy
believe that the international economy and exchange of trade is a positive sum game in
which prosperity is available to all. The road to human prosperity then goes through the
unfettered expansion of free market economy, capitalism. The state is a night watchman
state responsible to maintain peace and security alone. It acknowledges laissez-faire
economic policies at the global level that discourages government intervention in the
economy. This assumption of classical liberalism directly or indirectly portrays the
possibility of global and regional economic relations.

 Concomitantly, liberal institutionalism/neo-liberalism recognizes the growing

interdependence of the world and the growing role and importance of international
regimes in setting norms and rules. It realizes that the problems of the world can only be

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 solved through cooperation. According to neo-liberalism, international regimes not only
set norms and rules but also enforce them by imposing sanctions on states found in
violation of those norms and rules. Moreover, international regimes incentivizing those
states operating in accordance with the principles of international regimes. Generally, the
liberal ideology of inter-state economic relations has significantly affected the agenda of
regional cooperation and integration in many ways. It stipulates about comparative
advantages of inter-state trade, the importance of peace, the rule of international
competition and regional integrated market.

For liberal theorists the market lies at the center of economic life. Economic progress results
from the interaction of diverse individuals pursuing their own ends. While liberals acknowledge
that market relations are not always optimal, they tend to argue that intervention in the market is
most likely to produce suboptimal outcomes. They offer an optimistic vision of a benign system
in which unimpeded free-trade will secure productive efficiency and the global maximization of
human satisfactions. The liberal tradition is the `free market’ one in which the role of voluntary
exchange and markets are emphasized both as efficient and as morally desirable. The assumption
is that free trade and the free movement of capital will ensure that investment flows to where it is
most profitable to invest (hence, for example, flowing into under-developed areas where
maximal gains might be made). Free trade is crucial for it permits countries to benefit from their
comparative advantages. In other words, each country can exploit its own natural advantages,
resources and endowments and gain from specialization. The economy is oiled by freely
exchangeable currencies and open markets which create a global system of prices which, like an
invisible hand, ensures an efficient and equitable distribution of goods and services across the
world economy. Order in the global economy is a fairly minimal one. The optimal role of
governments and institutions is to ensure the smooth and relatively unfettered operation of
markets.

Liberalism is thus 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

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more people, makes a wider variety of products available, and contributes to improvements in
the quality of goods and services. 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.

Major assumptions of Classical Liberalism and Neo-Liberalism

 Free trade deepens international economic interdependence

 Economic interdependence brings international peace

 Inter-state coordination and regional integration may lead to peaceful international orders

 International organizations may provide an institutional platform to maintain existing and

create new international orders

 Emphasizing coordination among states and the importance of international institutions

Adam Smith: the theory of absolute advantage

He developed the trade theory of absolute advantage in 1776 under the book “An Enquiry into
the Nature and Causes of Wealth of Nations”. This theory was developed as an attack against the
then prevailing mercantilist view of restrictive trade with the slogan ‘free trade’. He pointed out
that the wealth of nations depends upon the goods and services available to their citizens rather
than the gold reserves held by the nation. Maximizing this availability depends primarily on
fuller utilization of resources and the ability to obtain goods and services from where they are
produced most cheaply because of natural or acquired advantages. It strongly advocates that
states should pay more attention on the production of goods and services produced most cheaply
in the country. The presence of upgraded human skill, division of labor, specialization and
economies of scale are the sources of acquired advantage for cheaper production. States can have

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both natural and manmade advantages to maximize production. It further speculates that a
country should engage in the production and exchange of commodities where it has an absolute
advantage. Such a country produces greater output of a good or service than other countries
using the same amount of resources. Absolute advantage is defined as the ability to produce
more of a good or service than competitors using the same amount of resources. Smith stated that
tariffs and quotas should not restrict international trade; it should be allowed to flow according to
market forces. Contrary to mercantilism, Smith argued that a country should concentrate on
production of goods in which it holds an absolute advantage. No country would then need to
produce all the goods it consumed. The theory of absolute advantage destroys the mercantilist
idea that international trade is a zero-sum game rather economic relations are a non-zero sum
where all parties are benefited. According to the absolute advantage theory, international trade is
a positive-sum game, because there are gains for both countries involving in trade.

Major assumptions of the theory of absolute advantage

 There are two countries and two commodities

 One country has absolute advantage in one commodity and the second country has
advantage in another commodity
 Technology is assumed to be constant
 Labor is the only factor of production
 Labor is homogeneous, that means each unit of labor produces the same level of output
 Value of a commodity is measured in terms of its labor content
 There is no technological improvement
 Labor is perfectly mobile within the country but perfectly immobile between the
countries. It means that workers are free to move between industries within the nation
but migration to other countries is impossible.
 A system of barter prevails
 Zero transportation cost
In accordance with the aforementioned assumptions, the theory of absolute advantage can be
explained as follows with an example. Suppose there are two countries- India and Cuba
producing tea and sugar. By employing a worker for one hour; India can produce either 10

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kilograms of tea or 5 kilograms of sugar. On the same token, Cuba produced 10 kilograms of
Sugar or 5 kilogram of Tea by the same labor.

Country Sugar Tea

India 5 Kilograms 10 Kilograms

Cuba 10 Kilograms 5 Kilograms

As deducted from the above table, by spending an hour’s labor in India can produce twofold of
tea than Cuba. On similar token, Cuba can produce twofold of sugar than India by spending
identical labor force. This indicates that Cuba has an absolute advantage in production of sugar
than India. Inversely, India has an absolute advantage in tea production than Cuba. The theory
acknowledges concentration of production on commodities having absolute advantage than
involving in production of the two commodities. Since there is perfect factor mobility within a
country, India can channelize laborers into tea sector and Cuba into sugar industry. If India
transfer one labor from sugar to tea sector, sugar production may fall by 5 kilograms but can
produce 10 more kilograms of tea. By exchanging this one unit effort India is capable of
purchasing 10 kilograms of sugar from Cuba. So it is beneficial for India. If India goes for
domestic exchange, due to the increased cost it will not benefit India. The same is true for Cuba
in the case of sugar. There is a potential problem with absolute advantage. If there is one country
that does not have an absolute advantage in the production of any product, will there still be
benefit to trade, and will trade even occur? The answer may be found in the extension of absolute
advantage, the theory of comparative advantage.

David Ricardo: Comparative advantage

The theory of comparative advantage of international trade was first introduced by David
Ricardo in 1817. It remains a major influence on much international trade policy and is,
therefore, important in understanding the modern global economy. Comparative advantage is the
ability of a firm or individual to produce goods and/or services at a lower opportunity cost than
other firms or individuals. A comparative advantage gives a company the ability to sell goods
and services at a lower price than its competitors and realize stronger sales margins. David
Ricardo stated in his theory of comparative advantage that a country should specialize in

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producing and exporting products in which it has a comparative advantage and it should import
goods in which it has a comparative disadvantage. Out of such specialization, it will accrue
greater benefit for all.

Major assumptions of the theory of comparative advantage

 There are two countries and two commodities

 One country has absolute advantage in both commodities and the second country is
disadvantageous in both commodities
 Technology is assumed to be constant
 Labor is the only factor of production
 labor is homogeneous, that means each unit of labor produces same level of output
 value of a commodity is measured in terms of its labor content
 There is no technological improvement
 Labor is perfectly mobile within the country but perfectly immobile between the
countries. It means that workers are free to move between industries within the nation
but migration to other countries is impossible.
 A system of barter prevails
 Zero transportation cost
To show the nature of comparative advantage in typical examples, see the following examples

Country Wheat Tea

Qatar 10 10

Eritrea 4 5

As shown in the above table, Qatar laborers are capable of producing both wheat and tea in
absolute advantage. Eritrea is disadvantageous in both cases. But still there is a possibility for
trade between the two countries. Eritrea has lesser disadvantages in tea than wheat; thus, it is
Eritrea’s comparative advantage. If Qatar concentrates in wheat it is capable of producing more

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than Eritrea; so it is Qatar’s comparative advantage. However, Qatar can produce only two fold
of Tea production than Eritrea. Although Qatar has an absolute advantage in the production of
both tea and wheat, Qatar has a comparative advantage only in the production of wheat. This is
because its advantage in wheat is comparatively greater than its advantage in tea. In this
situation, Qatar can concentrate on production of wheat and Eritrea on tea. Generally, the two
countries can benefit from engagement in trade.

2.3. Marxist theory of International Political Economy

Marxist theory emerged in the 19th century in reaction to liberal thought. Marxism’s critical
approach to liberalism can be seen in a number of other bodies of thought that move away from
the individual and states to consider other units of analysis. They are sometimes called ‘critical
theories’ because they question the way the world is organized and seek to change the world.
They are sometimes labeled as ‘radical’ because they challenge established forms of
organization. Marxist theories focus on class and the interests of workers rather than state
interests. Writing during the English Industrial Revolution, Karl Marx took issue with the idea of
a harmony of interests that the liberals advocated. Marx and his co-author, Engels, discerned an
ongoing conflict between workers and capitalists that would only be resolved when the workers
seized power (Marx and Engels, [1848]1977).

Marxist writers begin with a focus on class as the main ‘actor’ in the global political economy.
They reject the individualism of liberal theory and embrace the collectivist approach of
economic nationalist perspectives. However, Marxist theory rejects Statism and focuses instead
on the significance of class. This focus arises from the Marxist account of capitalist relations,
which are predicated on exploitation. The Marxist concept of class has been open to various
interpretations and critiques. We define class simply as arising from one’s position in the
structure of production. Marx defined class in relation to the structure of production, which
creates owners of the means of production (the bourgeoisie) and the laborers who sell their labor
power to the bourgeoisie (the workers). Within Marxist writing the firm is an instrument of
exploitation. TNCs contribute to the exploitation and oppression of the working class. The
centralization and concentration of capital visible in the form of TNCs is a key feature of
imperialism, whereby dominance is expressed in the global political economy. In this

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perspective, the state is the representative of class interests rather than the expression of the
harmony of communal interests posited by economic nationalists.

Dominance and exploitation among and within societies provide the main dynamic for Marxist
theories of IPE. Unlike liberals, Marxists view market relations as inherently exploitative. Under
capitalism, workers are denied a fair remuneration because capitalists pay workers less than their
labor is worth. Marxists view international economic relations as inherently unstable and
conflictual because of three tendencies of capitalism:

1. The tendency for the rate of profit to fall sees capitalists engaged in fierce competition
with each other, which tends to drive down workers’ wages.

2. Capitalism leads to uneven development as some centers increase their wealth and
growth at the expense of others. Uneven development sows the seeds of conflict between
countries.

3. Marxists argue that capitalism leads to overproduction or under consumption, giving rise
to fluctuations in the business cycle and undermining social stability.

The theory rejected the liberal's view of the economy as a positive-sum game with benefits for
all. It is a false narration to assume that exchange between two countries under free market
economic system necessarily maximizes the welfare of the whole society. Marx takes a zero-sum
argument of mercantilists and applies it to relations of classes instead of states. He saw the
capitalist economy as a site of human exploitation and class inequality. Marx saw capitalism and
the market as creating extremes of wealth for capitalists and poverty for workers. Contrary to
liberal economists’ assumption of free market as natural and necessary system, Marx began the
belief that free market system was an aberration that has to be destroyed by revolution.

The radical Marxist perspectives offer yet another contrasting view of global economic relations.
The structural inequality that is held to be characteristic of the system is seen to be the inevitable
product of capitalism. The Advanced Capitalist States have, through imperialism, neocolonialism
and free-trade dominance, come to control the international economic system. The changes in
international economic relations that are deemed necessary for the substantial advance of the
LDCs can come, therefore, only if the domination of the Advanced Industrialized Countries can

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be overthrown and/or their systems thoroughly transformed. This rests upon recognition of the
fundamental structural disadvantage of the LDCs in relation to the AICs and identifies a number
of conditions that maintain this disadvantage.

Trade between North and South is an unequal exchange where unilateral advantage earned by the
north. This means that the terms of trade in the international market are biased against the South.
The language of comparative advantage used by liberal free-traders makes their desire to
maintain an international division of labor that is unfavorable to the South. Foreign investment
further hinders and distorts Southern development by controlling the most dynamic local
industries and expropriating the economic surplus of these sectors through the repatriation of
profits, royalty fees, and licenses. According to many Marxists, there is a net outflow of capital
from the South to the North. Trade and investment remove capital from the South and makes the
south poorer and poorer. The international market under capitalism perpetuates dependence,
uneven, distorted and partial development. For Marxists, the only appropriate strategy for
development is revolution: total destruction of the international capitalist system and its
replacement with an international socialist system. They differ on whether it is possible to
achieve this revolutionary ideal on a national basis or whether it is necessary for the revolution to
be global, but they agree that revolutionary change is the only way to achieve true development
in the South.

Marxism develops the following set of principles in international economic relations. These are:

 It views that classes are the main socio-economic manifestations of relations at personal
and state level in the age of capitalism. Society everywhere is nothing but a social grouping
along economic positions and advantages in which societies are divided between those who
control the means of production and those who do not. Those who do not economic means
of production are exploited by those who control the means of production. The capitalist
class in developed states of Europe and America controls these economic means of
production to extend the territory of its exploitations and oppression in the greater world of
states. In the perspective of Marxism, any inter-state economic relations and cooperation
under the rules of capitalism is an act of exploitation of the poor states by developed
nations. Therefore, Marxist scholars argued that the coming together of the capitalist

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 classes of different states is an agreement to exploit the properties of poor nations under the
cover of international trade and regional cooperation for mutual benefit.

 It argued that imperialism is the highest stage of capitalism in which capitalists in Europe
and America are forced to search for much wider global markets for their surplus products
and raw materials for their industries in the underdeveloped states. These capitalists have
the direct political support of their capitalist governments to find such market opportunities
through different mechanisms including inter-state trade and investment. It further noted
that international trade and investment under capitalism is an attempt to open up other
countries boundaries in the guise of inter-state trade and economic relations. Thus, inter-
state trade and investment under free market economic system should be rejected by the
working class of cooperating states everywhere.

According to Marx, capitalism is characterized by two major divisions within a society: the
‘bourgeoisie’ who own the means of production and the ‘proletariat’ who sell labor to the
bourgeoisie. Cognizant of such a fact, Marx considered capitalism as exploitative which destroys
previous relations of production such as feudalism, which were even more exploitative, with
peasant subsisting under slave like conditions. Capitalism would eventually impoverish the
working class and thereby create the social conditions for a revolution. Ultimately, capitalism
leads to a fierce class struggle between the proletariat and the bourgeoisies. Marx agrees with
mercantilists in that politics and economics are closely intertwined; both reject the liberal view of
an economic sphere operating under its own law. But where mercantilists see economics a tool of
politics, Marxists put economics first and politics second.

Marxists see the political economy as necessarily conflictual because the relationship between
capitalists and workers is essentially antagonistic. The means of production are controlled by a
minority of capitalists, who exploits the masses. As noted by Marx, conflict between classes is
inevitably caused by capitalistic exploitation. Marxists also believe that capitalism is inherently
prone to periodic economic crises which ultimately lead to the overthrow of capitalism by labor
and the erection of a socialist society in which the means of production will be owned jointly by
all members of society and exploitation will cease.

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The Marxian tradition also sees the world economy as an arena of competition, not among states
but among classes. Using Marx’s language, this means that world economic relations are best
conceived as a class struggle between the `oppressor and the oppressed’. The oppressors or
capitalists are those who own the `means of production’ (trade and industry). The oppressed are
the working class. The struggle between the two arises because capitalists seek to increase their
profits and this requires them to exploit ever more harshly the working class. In international
relations, `class relations’ within a capitalist system has been applied to describe relations
between the `core’ (industrialized countries) and `periphery’ (developing countries) whereby
unequal exchange trade occurs between the two. International cooperation among the working
class/proletariat will eventually bring about a just and fair international system where everyone
equally benefits. Generally, the theory of Marxism views that proletarian internationalism is the
best and scientific growth of international solidarity and inter-state trade and investment among
the working class of the world in the absence of the capitalist class. This is the true and genuine
inter-community trade and investment rather than satisfying imperialist demands and interests
under capitalism.

Marxism versus Political Realism

 The three perspectives such as realism, liberalism and Marxism have different purposes and
to some extent exist at different levels of analysis. Both nationalists and Marxists, for
example, can accept most of liberal economics as a tool of analysis while rejecting many of
its assumptions and normative foundations. Thus Marx used classical economics with great
skill, but his purpose was to embody it in a grand theory of the origins, dynamics, and end of
capitalism. The fundamental difference, in fact, between liberalism and Marxism involves the
questions asked and their sociological assumptions rather than the economic methodology
that they employ (Blaug, 1978, pp. 276-77).

 As reformulated by Lenin, Marxism has become nearly indistinguishable from the doctrine
of political realism (Keohane, 1984a, pp. 41-46). Political realism, like economic
nationalism, stresses the primacy of the state and national security. Although the two are very
close, realism is essentially a political position whereas economic nationalism is an economic

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 one. Or, put another way, economic nationalism is based on the realist doctrine of
international relations.

 Both in Lenin's theory and in political realism, states struggle for wealth and power, and the
differential growth of power is the key to international conflict and political change (Gilpin, I
98 I). However, the assumptions of the two theories regarding the basis of human motivation,
the theory of the state, and the nature of the international system are fundamentally different.
Marxists regard human nature as malleable and as easily corrupted by capitalism and
correctable by socialism; realists believe that political conflict results from an unchanging
human nature.

 Whereas Marxists believe that the state is ultimately the servant of the dominant economic
class, realists see the state as a relatively autonomous entity pursuing national interests that
cannot be reduced to the particularistic interests of any class. For Marxists, the international
system and foreign policy are determined by the structure of the domestic economy; for
realists, the nature of the international system is the fundamental determinant of foreign
policy. In short, Marxists regard war, imperialism, and the state as evil manifestations of a
capitalism that will disappear with the communist revolution; realists hold them to be
inevitable features of an anarchical international political system.

The difference between the two perspectives, therefore, is considerable. For the Marxist, though
the state and the struggles among states are a consequence of the capitalist mode of production,
the future will bring a realm of true harmony and peace following the inevitable revolution that
the evil capitalist mode of production will spawn. The realist, on the other hand, believes there
will be no such nirvana because of the inherently self-centered nature of human beings and the
anarchy of the international system itself. The struggle among groups and states is virtually
ceaseless, although there is occasionally a temporary respite. It seems unlikely that either
prediction will ever receive scientific verification.

2.4. Dependency theory of International Political Economy

Dependency theory starts analysis from a practical diagnosis of the specific structural problems
of the international liberal capitalist economic system whose main feature is center-periphery

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(dependency) relationship between the Global North and the Global South which permanently
resulted in an “unequal (trade and investment) exchange.” The perspective is also advocates for a
new pattern of development based on industrialization via import substitution based on
protectionist policies.

Dependency theory is a revision of Marxist thought that explains the persisting poverty of many
states. Dependency theory suggests that poor countries faced immense obstacles to development
because they were vulnerable to economic exploitation from developed states (Dos Santos,
1970). The links between the rich and the poor were thought to make the poor poorer and the
rich richer. Underdevelopment of some parts of the world was caused by development in other
parts of the world. This school of thought informed developing countries’ attempts to create a
New International Economic Order (NIEO) in the 1970s (Cox, 1979). This approach was
undermined in the 1980s as many developing states adopted liberal economic policies in the
wake of the debt crisis.

Dependency theory is developed by Latin American scholars (Cardoso and Faletto) that put
forward the argument that the accumulation of capital in a third world country cannot sustain
itself internally. Third world nations own capital is not adequate enough for their overall
economic development. The colonial legacy made third world state dependent of advanced
countries. A dependent state, even if it accumulates capital, must borrow foreign currency to
produce goods, repay debt and build infrastructure to achieve development which in turn creates
vicious circle of debt. Thus, according to dependency theory foreign capital is invested in
periphery country to extract raw materials and minerals, but the sale of capital goods take place
in core states. As a result, the local people do not get benefit except few job opportunities despite
increasing resource depletion.

 Dependency theory postulates that underdevelopment is externally imposed due to the

excessive intervention of core countries. The dependency perspective assumes that the
development of a national or regional unit can only be understood in connection with its
historical insertion into the worldwide political-economic system which emerged with the
wave of European colonization of the world. This global system is thought to be
characterized by the unequal but combined development of its different components.

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  Dependency theory argues that underdeveloped countries existed in an economy
dominated by Western and developed countries. It also puts emphasis and accountability
for underdevelopment on external factors.

 The theory views that the annexation of the developing world by colonial powers,
extreme polarization of capitalism and the widespread of MNC’s were causes of
underdevelopment in third world countries.

In this way, the resources of poor countries are extracted by the core to sustain their economic
growth and wealth. Therefore, Poverty and underdevelopment are not the result of tradition or
backwardness instead the coercive and exploitative process by which the peripheral states
integrated into the world economy. Generally, due to long colonial past, third world states
become perennially dependent on the advanced nations. Three main characteristics of
dependency theory are salient. First, the international system is seen as the sum of two sets of
states: dominant and dependent. Second, dependency theory holds that external forces are critical
in terms of economic activity of dependent states. Third, relationships, based on strongly
historical patterns between dominant and dependent states are vibrant process with exchanges
taking place between the states playing a considerable role in the reinforcement of patterns of
inequality. The dependency theory attempts to explain the present underdeveloped state of many
nations in the world by examining the patterns of interactions among nations and by arguing that
inequality among nations is an intrinsic part of those interactions.

Dependency theory and its close relative, world system theory, emphasized the role of external
relationships in the developmental process. Relationships with developed countries and
particularly with multinational corporations were viewed as barriers. World system theory took a
larger perspective, examining the wider network of relationships between the industrialized
‘core’ countries, impoverished ‘peripheral’ countries, and a group of ‘semi-peripheral’ countries
in order to show how some are disadvantaged by their position in the global system. Because of
their overspecialization in a small number of commodities for export, the unchecked economic
influence of external organizations, and political power wielded by local agents of capital,
countries on the periphery of the global capitalist system continue to be characterized by high
levels of economic inequality, low levels of democracy, and stunted economic growth.

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Dependency also argues that the rich nations exploit the poor nations. But this is not because
capitalism is evil. It is because capitalism needs to be more regulated so it will be more just.
Dependency theorists call for a number of solutions:

 International rules that raise the price of commodities (oil, coffee, bananas, timber,
copper) regardless of market forces. Economically Developed Countries (ECDs) refused
to do this.

 Massive amount of aid to poor nations. Most EDCs refused to do this.

 Debt forgiveness. EDCs have agreed, but it doesn’t fix the problem because as soon as
the old debt is forgiven, new debt accumulates.

 Nationalization. Government seizure of the MNCs of the EDCs that operate in the
LDCs. The profit of the home-controlled MNCs is used to enrich the nation. But the
EDCs don’t like this and often retaliate with trade embargoes and even attempts to
overthrow the government that does this. During the Cold War the US would label such
governments as communist (some of them were) and tried to overthrow the government.

 Import Substitution: Banning the import of foreign manufactured goods from EDCs (like
computers and cars) and forcing the nation to make its own. EDCs might retaliate with
trade sanctions.

To summarize, the satellite-metropolitan relationship is considered dependent rather than

interdependent, because the satellite nations lack the resources to create or choose alternative
ways of responding to the constraints impinging upon them from the international environment.
Dependent countries, in other words, are unable to exert substantial influence over the basic
decisions affecting their national economies; the issues of what to produce, how to produce, and
for whom are all shaped directly or indirectly by international structures and process.

The effects of dependency are treated on two rather different levels in the literature. On one
level, dependency is viewed as a perversion of the LDCs developmental process, because by
definition LDCs, as presently constituted, lack control over the forces which shape their destiny.
From this perspective, there is nothing to "prove" or "disprove" empirically about dependency

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theory, except perhaps the fact of dependency itself. In other words, whatever other
consequences may or may not flow from a dependent relationship, efforts to end LDCs’
subordinate status can be justified on prima facie grounds as essential to the establishment of
some legitimate form of "national sovereignty."

At another level, however, a great deal more is claimed for dependency theory. It is offered, as
an alternative to more "conventional" developmental theories, as a framework or paradigm for
diagnosing the general problems of LDCs’ social, economic, and political underdevelopment.
"Conventional" theories, so the argument goes, make a mistaken analogy between change in
contemporary LDCs and the earlier developmental experiences of EDCs, locating the key
variables, actors, and cleavages essentially within the framework of each national third world
system.

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