CHAPTER THREE

INTERNATIONAL
POLITICAL ECONOMY (IPE)
 3.1. Meaning and Nature of IPE
 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.
 The field thus consists of two central dimensions namely: the political and economic dimension.
a) A political dimension accounts for the use of power by a variety of actors, including individuals,
domestic groups, states, IOs, NGOs, and TNCs.
 All these actors make decisions about the distribution of tangible things such as money and
products or intangible things such as security and innovation.
 In almost all cases, politics involves the making of rules pertaining to how states and societies
achieve their goals.
b) The economic dimension 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.
 The market can also be thought of as a driving force that shapes human behavior.
 3.2. Theoretical Perspectives of IPE
 There are three major theoretical perspectives regarding the nature and functioning of the
IPE: liberalism, Marxism, and nationalism (mercantilism).
 Mercantilism is the oldest of the three, dating back as early as the 16th century (perhaps
even earlier).
 Marxism, by contrast, is the youngest of the three and is advanced by Karl Marx who 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 of many less
developed countries (LDCs), the relevance of Marxism greatly declined, and 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.
 1. 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.
 As it developed in the 21st century, mercantilism (or neo-mercantilism) defended even a much
more sophisticated and interventionist role of the state in the economy-
 For example, the role of identifying and developing strategic and targeted industries
through a variety of means, including tax policy, subsidization, banking regulation, labor
control, and interest-rate management.
 According to mercantilists, states should also play a disciplinary role in the economy to ensure
adequate levels of competition.
 The proof of the relevance of mercantilist thought in the contemporary IPE is found in the
recent experience of the Japanese, South Korean, Taiwanese and Chinese national political
economies.
 Instead of the term mercantilism, however, these states the East Asian economies (especially Japan,
South Korea, and Taiwan) used the term ‘developmental state approach’.
 2. Liberalism
 is a mainstream perspective in IPE 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 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
 3. Marxism
 The report of Marxism’s death is greatly exaggerated. In fact, according to advocates of Marxism just
the opposite is the case.
 Global and national income inequality, for example, remains extreme:
 the richest 20 percent of the world’s population controlled 83 percent of the world’s income, while
the poorest 20 percent controlled just 1.0 percent;
 Exploitation of labor shows no sign of lessening;
 the problem of child labor and even child slave labor has become endemic and so on and so forth.
 Marxists then tell us that all of these crises are cut from the same cloth.
 In particular, they all reflect the inherent instability and volatility of a global capitalist system that has
become increasingly reliant on financial speculation for profit making.
 In addition to the above mentioned foundational theories of IPE, the following three contemporary
theories of International political economy are also worth considering.
 4. Hegemonic Stability Theory (HST)
 is a hybrid theory containing elements of mercantilism, liberalism, and even Marxism.
 Its closest association, however, is with mercantilism.
 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 for the smooth operation of the International (economic)
system as a whole.
 During its explanatory power to the Great Depression, HST has thus influenced the
establishment of the Bretton Woods institutions (IMF and WB) - both being the products of
American power and influence.
 U.S. dominance was manifested, in particular, by the adoption of the U.S. blueprint for the
IMF.
 5. 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 advocates for a new pattern of development based on industrialization via
import substitution based on protectionist policies.
 During the 1950s, this Latin American model spread to other countries in Asia and Africa and
then the domestic promotion of manufacturing over agricultural and other types of primary
production became a central objective in many development plans.
 6. Developmental State Approach:
 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, and targeted and direct financial and credit policies instruments that belong to
the realm of industrial, trade, and financial policy.
 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 the population is actively engaged in the process of formulating and executing
common national project of development....etc.
 3.4. Core Issues, Governing institutions and Governance of IPE
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.
 It has about 150 members.
 All decisions are taken unanimously but the major economic powers such as the US, EU and
Japan have managed to use the WTO to frame rules of trade to advance their own interests.
 The developing countries often complain of non-transparent procedures and being pushed
around by big powers.
 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).
 It provides loans and grants to the member-countries.
 In this way, it exercises enormous influence on the economic policies of developing countries.
 It is often criticized for setting the economic agenda of the poorer nations, attaching stringent
conditions to its loans and forcing free market reforms.
 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 percent of the votes.
 They are the G-8 members (the US, Japan, Germany, France, the UK, Italy, Canada and Russia), Saudi Arabia
and China.
 The US alone has 17.4 percent voting rights.
 The global financial system is divided into two separate, but tightly inter-related systems: a monetary
system and a credit system.
 The international monetary system can be defined as the relationship between and among national
currencies.
 More concretely, it revolves around the question of how the exchange rate among different national
currencies is determined.
 The credit system 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.
 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.
 There are two main exchange rate systems in the world namely: fixed exchange rate and
floating exchange rate.
1) In a pure floating-rate system, the value of a currency is determined solely by money supply
and money demand.
 In other words, this system exists only when there is absolutely no intervention by
governments or other actors capable of influencing exchange-rate values through nonmarket
means.
2) A pure fixed-rate system is one in which the value of a particular currency is fixed against the
value of another single currency or against a basket of currencies.
The question thus remains: How is the global financial system governed?
 The creation of the International Monetary Fund (IMF) provided the answer for this question.
 The IMF 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 finicial system.
 This can be seen, more concretely, from the way decision-making power within the IMF was
designed-i.e. voting power is determined by what the IMF calls a quota.
 A quota (or capital subscription) is the amount of money that a member country pays to the
IMF.
 Accordingly, the more a country pays, the more say it has in IMF decision makings.
 And, it is the US that tops up in this regard.