Chapter 7: Global Political Economy

Introduction: What Is Global Political Economy?

Global Political Economy is an academic discipline occupying the intersection of politics and economics at the global level. It is also referred to as International Political Economy. Global Political Economy analyzes interactions between private economic actors and states. It also employs history, sociology, and other relevant social disciplines to explain the interaction between the two systems of economics and politics.

Some of the core questions of Global Political Economy are:

• Who really governs the world economy?
• What are the political drivers of the global economy?
• Who benefits from economic globalization?

Two extraordinary developments in the early 1970s showed that there is a need for the intersection between economics and politics:

• The collapse of international monetary system
• Oil price shocks in world markets

Egypt and Syria attacked Israel, which caused the United States to aid Israel and which in turn resulted in Arab oil exporting countries ceasing all oil exports to America and Western countries. And this was the political dimension.

Economists focus on individual interest, efficiency and income, while political scientists concentrate on the state. States place trade embargoes as a tool of foreign policy, which is a politically-motivated behaviour. The 1973 oil embargo revealed (1) the interactions between domestic and international politics and (2) the complex interdependence of global economies.

For Susan Strange, there are four major structures constituting the organizational and operational dynamics of the global system: (1) the production and trade structure, (2) the finance structure, (3) the knowledge and technology structure, and (4) the security structure.

Theoretical Framework

Three theoretical perspectives dominate Global Political Economy studies: mercantilism, economic liberalism, and Marxism.

Mercantilism: From the sixteenth to the late eighteenth centuries the dominant paradigm in world economy was mercantilism. Among the variants of mercantilism are: étatism, statism, state-led development, neomercantilism, and economic nationalism. Mercantilism is associated with the IR theory of realism. According to mercantilism, politics drives economics. Mercantilists thought that economic gains were a zero-sum game, which is a situation in which an economic gain by one country results in an economic loss by another. For mercantilists, ethical considerations are irrelevant when it comes to political and military success.

In the 1980s, the neo-mercantilists came up with strategic trade policy, which involves supporting the growth of some selected sectors strategic for national income.

Economic Liberalism: Liberal thought emerged as the dominant paradigm with the Industrial Revolution and argued for free markets and free trade. In a free market environment, prices connect buyers and sellers and regulates markets in the best available way.

At the state kevel liberalism holds that economics drives politics. The laissez-faire principle contends that the state should leave the economy alone because liberal generally distrust the state’s potential to abuse power.

Keynesianism, which was represented by John Maynard Keynes and his followers, emerged in the 1930s as a new liberal school. Keynes suggested that the state should be involved in regulating the national economy by lowering unemployment, raising wages, and increasing consumer demand for goods, which was known as embedded liberalism.

As a theory of economics, liberalism believes that trade, when freely conducted, benefits both buyers and sellers. It also advocates specialization in production, which allows for economies of scale. Economies of scale is the cost advantage that arises with increased output of a product

Adam Smith introduced the concept of absolute advantage, which means a country enjoys an absolute advantage over another country in the production of a product when it uses fewer resources to produce that product than the other country. Later, David Ricardo improved on this theory with the concept of comparative advantage. A country enjoys a comparative advantage in the production of a good when that good can be produced at a lower cost in terms of other goods.

The Marxist School

Marxist thought proposes to examine political and economic issues through the concept of social class. According to Marxist thought, the analysis of social classes, class structures, and changes in those structures are key to understanding political economy. For Marx, classes are defined and structured by the relations concerning labor, ownership of property, and the means of production.

Marx identified five successive stages in world history: primitive societies, feudalism, capitalism, socialism, communism

Two major classes of the capitalist system are singled out in Marxist thought: the bourgeoisie and the proletariat. Other classes such as the petty bourgeoisie, peasants, and the lumpen proletariat also exist, but they are not central in terms of the dynamics of the economic structure.

One new version of Marxism, dependency theory, emerged in the 1950s and 1960s. Two issues are central to this approach: the structure of the world economy and the nature of trade relations between states.

Modern world systems theory, popularized by Immanuel Wallerstein, considers capitalism a world system that determines political and social relations. e capital-rich industrial core dominates the modern world system, exploiting the resource-abundant periphery. The semiperiphery exists in between the core and the periphery. The semi-periphery serves more of a political than an economic role in that it diffuses possible opposition of the periphery to the core region.

The Structure of Global Production and Trade

The structure of production and trade can be defined as the set of relationships between states and other actors that determine what, where, by whom, how, for whom, and at what price to produce.

Resolving trade disputes is one of the core activities of the World Trade Organization. A dispute arises when a member government believes another member government is violating an agreement or a commitment that it has made in the World Trade Organization.

International trade constitutes the main issue in global political economy. It causes fierce controversy among states. There is a variety of actors within the global production and trade structure; included are the nationstates, unions, international organizations, millions of workers and workplaces integrated into diverse local, national, regional, and global systems.

Global Production: Expanding international trade is a result of the internationalization of production processes. Today, the United States accounts for almost a quarter of the world’s global Gross Domestic Product. Combined with the European Union and other rich countries, the share of the West reaches 70%. In recent decades one of the most important global trends is that emerging powers, especially the BRIC countries. BRIC is an acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four economies would be wealthier than most of the current major economic powers. BRIC refers to the idea that China and India will, by 2050, become the world’s dominant suppliers of manufactured goods and services, while Brazil and Russia will become similarly dominant as suppliers of raw materials.

Transnational Corporations: A transnational corporation is a firm that owns and controls production facilities in two or more countries. Understanding the global production structure requires a close examination of transnational corporations. Most transnational corporations operate in such sectors as information technology, energy, car manufacturing, and finance.

International production, trade and direct investments are increasingly organized under the guidance of global value chains where the different stages of the production process are located across different countries. A value chain describes the full range of activities that firms and workers do to bring a product, good or service from its conception to its end use and beyond. is includes activities such as design, production, marketing, distribution and support to the final consumer.

Transnational corporations have become major actors in the domestic politics of many developing countries. To benefit from economies of scale and to save money, they have employed outsourcing and offshoring strategies. Outsourcing is a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. In the terms of business activities, offshoring is often referred to as outsourcing. This is the act of establishing certain portions of the business functions, such as manufacturing or call centers, in a nation other than the one in which the business most often does business.

International Trade: Economics is based on utility, money, profits, and interests; politics is about seizing power. Thus, governments sometimes employ their international economic connections to advance national interests. International trade theory teaches us that, since ancient times, governments have chosen either to avoid international trade by pursuing protectionist policies which establish autarky or they have preferred to encourage comparatively more open trade relations with their neighbors. Autarky is a nation or entity that is selfsufficient. Autarky is achieved when an entity such as a political state is self-sufficient and exists without external aid. Autarky is a state of independence.

GATT and the Liberal Postwar Trade Structure: Global trade rules have tended to favour dominant states. The design of the postwar international trade structure was deeply affected by

• The approach of some economists to free trade
• The interwar experience of protectionist trade policies that were destructive.

After the Great Depression, there was a need to set new rules for international trading. The legal framework created by 23 representative countries in Geneva in 1947 was called the General Agreement on Tariffs and Trade (GATT). The mission was to reduce trade barriers through multilateral negotiations and the system was based on two basic principles: reciprocity and non-discrimination.

Reciprocity is a principle under which one country agrees to reduce its level of protection in return for a reciprocal concession from its trading partner. Under the principle of nondiscrimination, a member government agrees that any tariff applied to the exports of a given product from one trading partner will apply equally to the exports of that product from all other trading partners.

GATT finally was replaced by the World Trade Organization in 1995. The World Trade Organization’s role in the world trade structure is to administer trade agreements; serve as a forum for trade negotiations; mediate trade disputes; monitor national trade policies; provide technical assistance and training with developing countries; and cooperate with other international organizations.

Regional Trade Blocs: In the postwar period a significant and noteworthy development has been the rise of regional trade agreements and regionalization efforts. In general, regional free trade arrangements are structured in one of two ways:

1. countries can establish a free trade area, where the goods of the members can move without any tariffs, but the members set tariffs against the outside world independent of one another.
2. countries may establish a customs union, where the member countries must agree on certain tariff rates.

The North American Free Trade Agreement, for example, has established a free trade area. The European Union, on the other hand, is a full customs union.

The Global Production of Knowledge and Technology

Today the possession of knowledge is the most important indicator of power in the global political system. The international knowledge structure is “a web of rules and practices that determine how knowledge is generated, commercialized, and controlled”.

Rules affecting knowledge structure may include national laws, international institutions and organizations, bilateral and multilateral agreements, business practices, and shared norms. Main actors affecting the knowledge structure include individuals, transnational corporations, universities, research centers, technology parks, states, and international and national organizations.

The knowledge economy is defined as “production and services based on knowledge-intensive activities that contribute to an accelerated pace of technical and scientific advance, as well as rapid obsolescence”. The key component of a knowledge economy is a larger concentration on intellectual capabilities than on physical inputs. Production of knowledge is worthless without turning it into commercial usage.

Commercialization could be defined as the processes undertaken by firms to transform knowledge and technology into new products or services, in response to market opportunities. Knowledge management is central to competitiveness, innovation, and economic prosperity. The most important competitive advantage is known as the VRIO framework: value (V), rareness (R), imitability (I), and organization (O). In commercialization processes, there are two types of innovation: product innovation and process innovation.

Governments and Innovation Policies: Supporting research and development, and formulating a national innovation policy, especially in developing countries, seems to be essential for economic growth and development. Under the rubric of national innovation systems, governments assume major roles in designing science, technology, and innovation policies. One step is to articulate a vision for science, technology, and innovation. Another governmental role is to establish priorities for public investment, public spending, and subsidies. Finally, governments must stress the crucial importance of innovation in strategic sectors and technologies.

Intellectual Property: The World Intellectual Property Organization (WIPO) is a global forum for intellectual property services, policy, information and cooperation. Its mission is to lead the development of a balanced and effective international intellectual property system that enables innovation and creativity for the benefit of all.

The United Nations Development Program scales countries on a technology achievement index and distinguishes among four categories of countries: Innovation leaders, Potential leaders, Dynamic adopters, Marginalized countries. In the distribution of worldwide patent activities there five leading economies: the US, Japan, South Korea, China, and European Patent Office.

According to WIPO,

Patents grant the exclusive right to make, use, or sell an invention for a period usually of twenty years.

Copyrights privilege the owner to prevent the unauthorized reproduction, distribution, and sale of original work.

Trademark is a sign or symbol registered by a manufacturer or merchant to identify goods and services.

Geographical Indication is a sign used on products that have a specific geographical origin and possess qualities or reputation that are due to that origin.

Traditional Knowledge accumulated knowledge and practices of indigenous or local communities as they relate to such things as plants, plant uses, agriculture, land use, folklore, and spiritual matters.

The World Economic Forum proposes that we are on the brink of another technological revolution. The Third Industrial Revolution was about electronics and information technology. The Fourth Industrial Revolution will bring about digital revolution.

The Organization for Economic Co-operation and Development (OECD) emphasizes ten key emerging technology trends: big data, the internet of things, artificial intelligence, addictive manufacturing, nano/microsatellites, neurotechnologies, synthetic biotechnology, nanotechnology materials, advanced energy storage technologies, and blockchain.

Global Finance Structure

Exchange rate is a critical criterion in foreign trade and currency values vary relative to other currencies, so exchange rate influence the value of every commodity on international markets. Economists see money, interest rates, and exchange rates basically as tools in macroeconomic management.

A Brief History of the International Monetary System: Since the Industrial Revolution, there have been five major episodes in the modern history regarding international monetary structures.

Pre-1870 (Bimetallism): This regime was based on the usage of gold and silver.

The Classic Gold Standard (1870-1914): A fix exchange rate system was observed until the beginning of World War I. Major countries fixed their national currencies to the price of gold.

The Interwar Years (1915-1944): This period was characterized by persistent economic volatility, recessions, banking crisis, the Great Depression, and the rise of fascism in Europe. Military expenditures were financed by printing money. Exchange rates were mostly floating and protectionism increased around the globe.

The Bretton Woods System (1944-1971): Past mistakes taught two big lessons: another depression would be avoided by the creation of a stable global monetary system and a relatively free world trade system. The Bretton Woods monetary system relied on an American- backed gold standard. The United States declared its commitment to fix the dollar price of gold as $35 per ounce. All other national currencies fixed their exchange rates against the United States dollar. The International Monetary Fund, the IBRD (World Bank), and the General Agreement on Tariffs and Trade were the major institutions of the Bretton Woods system.

The Flexible (Hybrid) System (1972-Present): International Monetary Fund members have been free to choose any form of exchange arrangement:

• allowing the currency to float freely
• pegging it to another currency or a basket of currencies
• adopting the currency of another country
• participating in a currency bloc
• forming part of monetary union

Reform Needs in Global Financial Structure: The Bretton Woods Institutions – the World Bank, the International Monetary Fund, GATT and later the World Trade Organization – were created in the spirit of global liberalism.

The first shock to this spirit was experienced in the early 1970s with the collapse of the gold standard. In the 1990s, the Mexican Crisis erupted and later the East Asian financial crises hit almost all regional countries. In 1998- 99 Russia became the next domino to fall; it was followed by Argentina. All these financial crises damaged the reputation of the International Monetary Fund and the World Bank. The collapse of the United States housing market, the mortgage crisis of 2007, triggered a credit crisis. The EU went into a deep recession. Countries like Greece, Italy, Spain, and Portugal were the most affected.

Following the 2008 global financial crisis, reform voices were heard. China initiated an alternative to the Bretton Woods institutions: The Asian Infrastructure Investment Bank. The Chinese initiative reflected the greater economic importance of emerging markets in general.

An emerging market economy is a nation’s economy that is progressing toward becoming advanced, as shown by some liquidity in local debt and equity markets and the existence of some form of market exchange and regulatory body. China, along with other emerging market economies, pointedly complained in the twenty-first century about its limited vote in such global financial institutions as the International Monetary Fund. Emerging markets include: Brazil, Chile, China, Colombia, Hungary, Indonesia, India, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Thailand and Turkey.

Concerning global governance issues, the Group of 20 is also important. e G-20 has several channels to influence policy: issuing collective statements, setting collective targets, developing international standards, and advising on the functioning of global institutions.