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CHAPTER 3
International Political Economy (IPE)
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3.1. Meaning and Nature of International Political Economy (IPE)

• There is no universal agreement on how IPE should be defined.

• 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
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• This definition is based on several important, but un-clear assumptions:

• It suggests that there are only two significant subjects of International

Political Economy:
a) Markets:

b) States:

• Further, it suggests that a clear-cut distinction exists between:

• economic or market-based activities and.

• political or state-centered.

• Assumes states and markets relate to one another in fundamentally adversarial

ways.

• What are the limitations of the above definition?

• In globalized world political society is no solely represented by the state.

• non-state actors such as TNCs/MNCs are equally important.

• state-market relation in IPE could be reciprocal or even mutually constitutive.

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• Limitation that stems from the use of the term International:

• Strictly speaking, International applies:

• Only to relations between and among sovereign states.

• a clear distinction between the national (what goes on inside states) and the
international (what goes on outside states).

• But, a great deal of economic activity that occurs in the world today is

conducted and sometimes controlled by non-state actors.

• in ways that transcend national boundaries.
• E.g. large corporations engage in all sorts of economic transactions and
activities that cut across borders:
• buying, selling, and trading products and services

• building and investing in global chains of production:

• Single product is designed, manufactured, assembled, distributed, and marketed in various
locations throughout the world.

• Forging strategic alliances with other corporations based in a range of different

countries.
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• Due to this trend IPE’s definition is getting ever widened and deepened in content:

• The name of the field is changing from IPE to GPE (Global Political Economy).

• market economy cannot exist and operate without the state.

• What is the broader definition of IPE?

• A field of inquiry that studies the ever-changing relationships between governments,

businesses, and social forces across history and in different geographical areas.

• two central dimensions:

• political dimension:

• use of power by a variety of actors : individuals, domestic groups, states,

International organizations, NGOs, and TNCs.

• All of them are can make decisions about the distribution of tangible things such as
money and products or intangible things such as security and innovation.

• The economic dimension:

• deals with how scarce resources are distributed among individuals, groups, and
nation-states.
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3.2.Theoretical perspectivesofInternationalPolitical Economy

• Three major theoretical (often ideological) perspectives regarding the nature and functioning of the

International Political economy:

• liberalism, Marxism, Nationalism (mercantilism).

• Mercantilism is the oldest of the three ,

• Dates back to early 16th century (perhaps even earlier).

• Friedrich List(1789–1846) is the intellectual father ,

• response to classical economics of Adam Smith’s (1723–1790) liberal perspective.

• Marxism is the youngest of the three

• advanced by Karl Marx also emerged as a critique of classical economics.

• Since the mid-1980s, the relevance of the three perspectives has changed dramatically.
• With the end of both communism and the “import-substitution” strategies in LDCs:
• Marxism greatly declined.

• Liberalism has experienced a relatively considerable growth in influence:

• more and more countries are accepting liberal principles.

• 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.

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• Mercantilism/nationalism:
• Strong and pervasive role
of the state in the economy .
• in domestic and international
trade.
• In investment and finance.
• In international trade:
• extreme policy of autarky.
• promote national economic
self-sufficiency.
• 21st century neo-mercantilism:
• much more sophisticated and
interventionist state in the economy.
• identifying and developing strategic
and targeted industries.
• industries considered vital to
long-term economic growth.
• Methods:
• tax policy, subsidization,
• banking regulation,
• labour control, and
• interest-rate management.
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• states should also play a disciplinary role in the economy:

• ensure adequate levels of competition.

• Proof of the relevance of mercantilist in the contemporary

• IPE:

• recent experience of the Japanese, South Korean, Taiwanese and

Chinese.
• But they prefer to use a less politically laden term:

• developmental state approach to describe the nature of their

national political economy system.
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• Liberalism:
• mainstream perspective in IPE.
• defends the idea free market system :
• free trade/trade liberalization.
• free financial and Foreign
Direct Investment (FDI) flows.
• Foundational value and principle:
• Removing barriers to the free flow of
goods and services among countries.
• Why free trade:
• reduces prices,
• raises the standard of living,
• makes a wider variety of products available,
• improves the quality of goods and services,
• specialize in producing certain goods,
• optimum utilization of resources
• land, labour, capital, and entrepreneurial ability
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• comparative advantage:

• When countries focused on what they do best and freely trade their goods

with each other and all of them would benefit.

• Why do theory of comparative advantage has been undermined?

• economic globalization:
• MNCs complicates global trading.

• production of goods and services:

• strongly influenced by costs, arbitrary specialization, and government and corporate
policies.

• So, what happened?

• Competitive advantage:
• Governments engage in protectionism.
• E.g. EU and USA support their own commercial aircraft industries so that they can compete
more effectively in a market dominated by a few companies.
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• Marxism:
• Why did Marxism assumed to be failure?
• collapse of the Soviet Union in the 1990’s
• embrace of the free market economy
by a significant number of developing
countries .
• But not all or even more Marxist critique of
Liberalism is negated by historical and
present realities:
• Global and national income inequality
remains extreme:
• richest 20 percent of the world’s population
controlled 83 percent of the world’s income.
• poorest 20 percent controlled just 1.0 percent.
• Exploitation of labor shows no sign
of lessening:
• child labor and even child slave labor has become
endemic.
• So forth.
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• Where do all these crisis came from according to Marxist?

• inherent instability and volatility of a global capitalist system.

• increasingly reliant on financial speculation for profit making.

• Some actors are always making huge sums of money from the

speculative bubbles that finance capitalism produces.

• creating the illusion that everything is working well.

• Contemporary theories of IPE

• Hegemonic Stability Theory (HST):

• hybrid containing elements of mercantilism, liberalism, and even

Marxism.
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• Basic argument of HST:

• The causes of the economic troubles that bedevilled Europe and much of the

world in the Great Depression of the 1920s and 1930s is:

• Absence of a benevolent hegemon.

• Lack of a dominant state willing and able to take responsibility.

• international lender and a consumer of last resort for the

smooth operation of the International system as a whole.

• What happened during the Great depression?

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

• new (latent) hegemon, the United States, did not yet understand the need to take on

that role.

• What did HST contributed for IPE?

• The establishment of the Bretton Woods institutions: IMF and WB

• both being the products of American power and influence.

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• Structuralism:

• variant of the Marxist perspective:

• Diagnosis the main features of the specific structural problems of the

international liberal capitalist economic system:

• centre-periphery (dependency) relationship between the Global
North and the Global South.

• unequal (trade and investment) exchange.

• The perspective is also known as the Prebisch-Singer thesis:

• advocates for a new pattern of development based on industrialization.

• via import substitution based on protectionist policies.

• In 1950s, this Latin American model spread to other countries in Asia and

Africa:
• domestic promotion of manufacturing over agricultural and other types of primary
production became a central objective.
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• Developmental State Approach:

• The result of realizing the failure of neo-liberal development paradigm
of 1980’s.
• Various writers suggested the developmental state development paradigm
as an alternative paradigm.
• Variant of mercantilism and advocates for the robust role of the
state in the process of structural transformation.
• It refers to a state that intervenes and guides the direction and pace of
economic development.
• Core features of developmental state:
• Strong interventionism:
• Does not imply heavy use of public ownership enterprise or resources.
• Rather state’s willingness and ability to use a set of instruments:
• tax credits, subsidies, import controls, export promotion, and targeted and direct
financial and credit policies instruments.
• belong to the realm of industrial, trade, and financial policy.
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• Existence of bureaucratic apparatus:

• efficiently and effectively implement the planned process of

development.

• active participation and response of the private sector to state

intervention.
• Regime legitimacy:

• development results that ensured the benefits of development are

equitably shared.
• population is actively engaged in the process of formulating and

executing common national project.

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3.3.4. Differences among National Political Economy Systems

• National systems of political economy differ from one

another in many important respects:
• (1) the primary purposes of the economic activity of the nation.
• (2) the role of the state in the economy.
• (3) the structure of the corporate sector and private business
practices.
• Although every modern economy must promote the welfare
of its citizens, different societies vary in the emphasis given
to particular objectives:
• those objectives:
• range from promoting consumer welfare to pursuit of national power.
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3.4. Core Issues, Governing institutions and Governance of International Political Economy

• 1. International Trade and the WTO

• WTO:

• an international organization which sets the rules for global trade.

• set up in 1995 as the successor to the General Agreement on Trade and

Tariffs (GATT) created after the Second World War.

• about 150 members.

• All decisions are taken unanimously but the major economic powers

such as the US, EU and Japan:

• use the WTO to frame rules of trade to advance their own interests.

• developing countries often complain:

• non-transparent procedures
• being pushed around by big powers.
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• What is International Trade?

• Cross-border exchange of goods and services mediated by at least
two different national governments:
• each of which has its own set of interests and concerns,
• each of which exercises (sovereign) authority and control over its
national borders .
• On going debate revolving around both on practical political issues
of international trade:
• who benefits and who is harmed by trade?
• around deeper theoretical disagreements.
• 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.
• institutions like World Trade Organization (WTO) and North American Free
Trade Agreement (NAFTA) or similar other organizations.
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• How does this work?

• In the case of NAFTA:

• a trade agreement among the U.S., Canada, and Mexico.

• free trade” was initially meant a lesser degree of governmental constraints in

cross-border trade but not an elimination of government action.

• the notion of free trade in NAFTA had and still have significant element of
protectionist /mercantilist policies:

• a tax on specific imported goods (tariff) .

• nontariff barriers, or NTBs:

• prohibiting their importation (import ban),

• imposing a quantitative restriction (import quota).

• domestic health, safety, and environmental regulations; technical

standards (i.e., a set of specifications for the production or operation
of a good); inspection requirements .
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• always important to remind that the political and

theoretical debate on international trade:
• liberals’ argument:
• continue to centre on the principle of comparative advantage,
• mercantilists and Marxists:
• expound upon power differentials between national economies, or on
class inequality and exploitation.
• 2. International Investment and the WB
• WB:
• created immediately after the Second World War in 1945.
• focused on the developing countries.
• 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)
• governance (anti-corruption, development of legal institutions).
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• It provides loans and grants to the member-countries.

• it exercises enormous influence on the economic policies of
developing countries.
• criticized for setting the economic agenda of the poorer nations,
attaching stringent conditions to its loans and forcing free market
reforms.
• International/Transnational/global production (FDI:
• 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.
• consider the following case:
• production of one particular model of Swedish automobile:
• at least 38 major and minor components were manufactured in factories
spread throughout the world:
• Slovakia, Japan, France, Norway, Brazil, Germany, the United States, Canada,
Holland, the United Kingdom, and, of course, Sweden and others.
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• The hood latch, was manufactured by Klüster in Slovakia;

• the amplifier by Alpine (Japan);

• the engine control unit by Borgwarner (USA);

• the turbo diesel by Sanden (Japan);

• the drive shaft by GNK/Visteon (USA);

• the air conditioner by Valeo (France),

• the doors by Brose (Germany), and so on.

• each of these manufacturers had their own transnational system of

production.
• 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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• What then explains such International production structure?

• decrease in transport and communications costs:
• made transnational production much more economically efficient.
• developments of new and better technologies and improvements in global
finance:
• made it easier and more profitable to build integrated production systems across
borders.
• Investment and development process in the developing countries:
• directly or indirectly governed by the WB
• WB was primarily designed as a vehicle for the disbursement/payment
• Marshall Plan money set up to aid the (immediate) reconstruction of Europe.
• what the U.S. had hoped to achieve:
• financially, economically, politically more stable and stronger Europe.
• Later on, expanded its influence to all developing countries in Asia, Africa, and
Latin America.
• The impact of the WB on the development of developing countries has been at
best controversial and at worst negative.
• one size fits all’ types of excessive and hard to implement policy prescriptions
• neo-liberalism
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• 3. International Finance and the IMF

• International Monetary Fund (IMF):
• international organization that oversees those financial institutions and
regulations that act at the international level.
• 184 member countries, but they do not enjoy an equal say.
• top ten countries have 55 per cent of the votes.
• G-8 members (the US, Japan, Germany, France, the UK, Italy, Canada and Russia),
Saudi Arabia and China.
• US alone has 17.4 per cent voting rights.
• Global financial system is divided into two separate, but tightly inter-
related systems:
• 1) international monetary system:
• the relationship between and among national currencies.
• revolves around the
question of how the exchange rate among different national currencies is
determined.
• 2) a credit system:
• the framework of rules, agreements, institutions, and practices that facilitate the
transnational flow of financial capital for the purposes of investment and trade
financing.
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• Exchange Rates and the Exchange-Rate System:

• Exchange rate:
• 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 (¥),
• 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.
• implies that in August 1998, the yen was substantially “weaker”
• What does this mean in concrete terms?
• say you have $2,000. In 1998, if you had travelled to Japan you could have
exchanged that $2,000 for 291,000 yen,
• but in 2013 that same $2,000 could be exchanged for only 196,000 yen.
• In short, you would have a lot less Japanese yen to spend in 2013.
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• There are two main exchange rate systems in the world:

• 1) Fixed exchange rate:
• the value of a particular currency is fixed against the value of another
single currency or against a basket of currencies.
• 2) Floating exchange rate:
• the value of a currency is determined solely by money supply and
money demand.
• exists only when there is absolutely no intervention by governments or
other actors capable of influencing exchange-rate values through
nonmarket means.
• How is the global financial system governed?
• creation of the International Monetary Fund (IMF):
• voting power is determined by what the IMF calls a quota.
• quota (or capital subscription) is the amount of money that a member
country pays to the IMF.
• the more a country pays, the more say it has in IMF decision makings.
• it is the US that tops up in this regard.