Unit 5: International Political Economy

Introduction

Political economy is a discipline analyzing the relationship between economy and politics, or vice versa. The basic assumption on which the discipline is based is that neither politics, nor economy can be fully understood in the absence of the other.

International Political Economy (IPE), focuses on the interaction between international economic variables and international relations. Economic events in one country may have economic and political implications for other countries. Similarly, political events in one country can have economic implications for others. In this respect, contemporary IPE scholars and researchers deal with issues such as, global market, international trade, international finance, monetary systems, hegemony, multinational corporations, transnational economic problems, and so on.

Historical Background

The roots of IPE are closely related to development of global economy, which is rooted in the expansion of Western colonialism. In the period from the late Middle Ages through the end of the 18th century, there were a number of key developments in technology and ideas. Mainly due to the advances in ship design and navigation system, the European explorers opened up new frontiers in the American continent and the Middle East to trade.

From the beginning of the 19th century to the First World War, the rapid expansion of colonialism and the Industrial Revolution occurred as a result of other major technological improvements in communications, transportation, and manufacturing processes.

The economic links were also followed by political and cultural domination. The Great Britain, in particular, was the center of the Industrial Revolution, the major trading state and source of international capital. It facilitated trade by lowering its own tariffs and opening its markets. These policies encouraged investment abroad. This period was called as “Pax Britannica” which refers to the period between the end of the Napoleonic Wars in 1815 and the start of the First World War in 1914. That period, under the leadership of the Great Britain, was comparatively free of military conflict among major powers.

The most recent phase of the internationalization of the economy began at the end of the Second World War. That phase was a response to the interwar period when the Great Depression of the early 1930s saw a major decline in trade and investment. States enacted policies to protect themselves from the effects of the crisis. Then, at the end of the war, the goals were to promote free trade to stimulate international capital flow and to establish a stable exchange rate system.

Three Major Approaches to International Political Economy

There are three broad theoretical approaches that are generally used to characterize the politics of the international economy: Economic liberalism, economic nationalism, and economic structuralism.

Economic Liberalism: According to the liberals, all economic decisions should be made by the market place and by the market place, it is meant free market. The government should be out of foreign trade, as well as domestic economy, as much as possible. Winners and losers in the economy are not decided by the government, but by the market. The sum of all the decisions made by consumers is the marketplace, the “invisible hand”. The term “invisible hand” is a metaphor for how self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society in a free market economy. The term was introduced by Adam Smith, a famous English economist.

The economic liberals believe that individuals act in rational ways to maximize their self-interests, that when individuals act rationally, markets are created to produce goods and services that people need, and that market functions best when it is free of government interference. At the macro level, international wealth is believed to be maximized with free exchange of goods and services on the basis of comparative advantage.

Economic Nationalism: Economic nationalism refers to an ideology that favors state interventionism in the economic sphere. The nationalists believe that closing off an economy to external influences can be beneficial to growth and economic progress. Thus, economic nationalism can be defined as a mixture of trade protectionism and economic planning, with an aim to preserve national interests in the context of world markets.

The rise of economic nationalism in recent history occurred particularly in the first part of the 20th century and it was essentially a response to the economic crises, nationalist movements, and enlarged states.

Economic nationalism emerged as a criticism of economic liberalism as well. It is argued that states compete economically. This is very different from liberalism. The liberals believe that companies compete economically, but states do not. However, the nationalists see companies as elements of state power. The nationalists also believe that free trade only benefits the wealthiest, most advanced nations. In head-to-head competition, the advanced or “mature” industries can easily defeat the less advanced or “infant” industries. Therefore, infant industries should be protected by the state from foreign competition,

The nationalists assume that competition among states for wealth and power is inescapable. Thus, the state should direct the economy for the sake of the nation.

Economic Structuralism : Economic structuralism is concerned with the international division of labor created by the capitalist system. It sees that the division of labor is unfair, creating categories of rich and poor people, as well as rich and poor nations, at the macro level. Within the structuralist approach, there are actually two subapproaches: The Marxist approach, which rejects capitalism completely, and the dependency approach, which aims to reform it.

• Marxist approach : Karl Marx and Friedrich Engels claimed that advanced capitalism divides people into several classes, two of which are especially important: the capitalists and the workers, or the rich and the poor. Lenin also developed a theory that applied Marxism to international affairs. Lenin basically argues that wealthy capitalist nations exploit poor nations.
• Dependency approach : The dependency approach, rejects the idea that free market economy is the best means of economic development for underdeveloped countries and instead argues that participation in international capitalism by poorer countries traps them in relationships of dependency and subordination to wealthier states.

Economic structuralism makes the point that the relationship among individuals, society, state and the market, in general, can be characterized by severe competition which is conflictual and exploitative.

International Trade and Finance

International trade played a key role in the earlier phases of the development of the global economy. In the late 19th century, the gold standard system was first adopted by the economically-developed nations, under the leadership of the Great Britain. The gold standard was a monetary system where a country’s currency or paper money had a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that used the gold standard set a fixed price for gold and bought and sold gold at that price. That fixed price was used to determine the value of the national currency. Yet with the First World War, the system collapsed, because of the declining power of Great Britain and of the terrible economic conditions during and after the war.

Towards the end of the war, a stable finance and monetary system was aimed to be established by the Western countries. Delegates from 44 countries met in the United States, in Bretton Woods, New Hampshire in July 1944. The main goals were to ensure a foreign exchange rate system, prevent competitive devaluation, encourage international trade, and eventually promote economic growth. With the intention of realizing these goals, the Bretton Woods Agreement was signed on July 22, 1948, whereby the so-called Bretton Woods system came into being. The system became fully functional and had worked well for a while. Yet by the early 1960s, the United States dollar became overvalued. The Bretton Woods system was eventually dissolved between 1968 and 1973.

Even though the Bretton Woods monetary system itself collapsed this way, the so-called Bretton Woods institutions, which were set up along with the Bretton Woods Agreement, the World Bank, the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT), now the World Trade Organization (WTO), have survived, still directing international trade and finance to a great extent.

The World Bank was initially designed to facilitate the reconstruction of Europe in the post-World War II era. The IMF, on the other hand, was designed to monitor exchange rates, secure financial stability, and promote sustainable economic growth by providing policy, advice and financing the members, and by working with developing nations to help them achieve macroeconomic stability.

The GATT was essentially a series of multilateral trade negotiations, with an aim to stimulate international trade by lowering trade barriers. In 1995, the GATT became a formal institution, renaming itself as the World Trade Organization (WTO). The major goal of the WTO, trade liberalization, has remained controversial. After more than two decades, the talks reached an impasse between the United States and the European Union, on the one hand, and the Group of 20 (G20) emerging economies, on the other. The G20 is made up of 19 countries and the European Union. The 19 countries are Argentina, Australia, Brazil, Canada, China, Germany, France, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States.

Hegemony

A hegemon is a powerful state supplying public goods to the international system. These public goods include stable money, security and a system of free trade that can be shared by all. If the World system prospers, the hegemon necessarily prospers too.

The theory of hegemonic stability holds the assumption that the world system is most prosperous when there is a hegemon to organize the international political and economic system, and when hegemony breaks down, the international system falls into disorder, with the resulting decline in peace and prosperity.

Undoubtedly, the world has become politically and economically more complex in the post-Cold War era, during the last three decades. Despite the relative erosion of its position within the global economy, the United States continues to bear roughly the same major share of the international strategic burden, as it has done before.

Multinational Corporations

Multinational corporations (MNCs) are huge companies that are incorporated in one country, producing or selling goods and services in many other countries. Their worldwide activities are centrally controlled by the home country. Many large MNCs have varying degrees of monopoly in certain areas because of economic and technical strength or production advantages.

The history of MNCs is closely related to the history of colonialism. Some of the first multinationals were directed by European monarchs in order to conduct expeditions. Right after the Second World War, the United Statesbased MNCs heavily dominated foreign markets for a few years. Then from the 1950s on, European and Japanese MNCs started to show up and in time, they quickly increased in number. At the same time, major technological advances in shipping and communication accelerated the expansion of these MNCs almost all over the world. By the early 1970s, major MNCs had come to control about 70-80 percent of the world trade outside the centrally planned economies.

MNCs have long been subject to serious discussions. Advocates of MNCs argue that they create job opportunities for many and technologically advanced goods. It is also said that MNCs tend to establish operations in markets where their capital is most efficient or wages are lowest. Those opposed to MNCs, on the other hand, say that multinationals have undue political influence over governments, exploit developing nations, and create job losses in their own home countries. In addition, they argue that MNCs tend to develop a monopoly for certain products, driving up prices for consumers. Some critics further claim that MNCs breach ethical standards, accusing them of evading ethical laws and leveraging their business agenda with capital.

The Post-Cold War Era: The Problematic Areas and Challenges

After the end of the Cold War, the globalization of the world economy has been occurring at an extraordinarily rapid pace. Even for countries where the size of the market and the abundance of internal resources have made much of the economy relatively self-contained, the proportion of domestic economic activities exposed to trans-border flows of goods, services, capital, and technology has been increasing speedily.

There are basically five areas posing a serious challenge to economic globalization and the triumph of economic liberalism. These include high-tech trade rivalry, trade discrimination, unpredictable economic crises, NorthSouth inequalities, and illicit market.

High-Tech Trade Rivalry: As opposed to the predominant win-win nature of conventional trade interactions, special concerns have arisen about trade competition in high-tech sectors, such as telecommunications, advanced materials, computers, bio-chemicals, and so on. From any country’s point of view, strategic trade industries are valuable not only because they incorporate a large proportion of highwage, high skill jobs, but also because they are likely to generate economic, social, or defense-related benefits. Therefore, countries generally desire to ensure the presence of their own country’s companies in strategic industries.

Trade Discrimination: As the world is moving toward internationalism fast in the post-Cold War era, it has become fashionable to argue that trade discrimination among nations is now over. However, the observable reality is quite the otherwise. Even not counting the impact of natural determinants of trade patterns, such as geographic proximity or absolute size of the nations in question, we have seen the emergence of great trade blocs in Europe, the Western hemisphere, and Asia in the postCold War period. European Union (EU), North American Free Trade Agreement (NAFTA), Asia Pacific Economic Cooperation (APEC) and Commonwealth of Independent States (CIS) are the major examples. There are also many other smaller scale or less effective regional organizations that tend to display group-centric trade relations.

Unpredictable Economic Crises: The term economic crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. Many economic crises are associated with banking panics and many recessions coincide with these panics. Other situations that are often called economic crises include stock market crashes, currency crises, and sovereign defaults.

Whenever occurs, an economic crisis means high rates of unemployment, low level of income, recession, decreasing growth in local economy and subsequently, deprivation of human needs for many. Great economic crises frequently lead governments to regulate the financial sector, and especially take measures to protect local economy, limiting, thus, international trade. The limitation of international trade, in turn, is likely to exacerbate international tension, as it creates barriers for peaceful exchange among nations.

North-South Division: The post-Cold War period also witnessed the resurgence of North-South economic antagonism, resulting from deep inequalities between the two sides. The North refers to developed northern hemisphere countries, while the South refers to underdeveloped or developing southern hemisphere countries.

Illicit Market : The illicit market refers to economic activities that circumvent the institutional rules. To be more specific, what makes a market illicit can either be theillegal nature of goods and services themselves, or the illegal ways of their transaction. Thus, illicit market activities may include the illegal movement of commodities to evade tariffs, trade restrictions and sanctions, or the illegal movements of the banned materials, like drugs, human organs, endangered species, even protected intellectual property.

Although law enforcement agencies try to struggle against illicit market activities all over the world, with a varying degree of determination, their success has remained limited and the issue is continuing to be a threat to the international community.

Conclusion

While the post-Cold War period clearly witnessed a visible decline in ideological clashes and inter-state wars, the stability of international relations has begun to be challenged by some economy-related factors. Since economy affects almost all aspects of human life, economic stability is very important for societies and states alike.