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Last updated: November 2018

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International Political Economy (IPE)

International political economy or the global political economy is an academic
discipline within political science that analyzes international relations with reference to
economics. IPE dilate upon the ways the political forces like states, institutions, and individual
actors shape the economic systems and conversely the effects the economic systems have on
political structures and outcomes. Topics like international trade, international
development/poverty, international finance, global markets, and multistate cooperation in solving
cross-border economic issues also command the substantial attention of the IPE scholars.

Traditionally IPE analyzes the international trade, international finance, haves and have-nots
relations, multinational corporations and hegemony.

The growth of IPE:

According to authors such as Benjamin Cohen (2008), IPE emerged as a heterodox approach
to international studies during the 1970s after the world oil crisis of 1973 and the breakdown of
the Bretton Wood systems which alerted the weakness of the economic foundations of the world
order.

Scholars like Susan Strange maintained that earlier studies of international relations
emphasized more on law, politics and diplomatic dynamics, whereas neoclassical economics
emphasized more on economic history. But the IPE talked about the fusion of economics with
political analysis. However, IPE do examines the role of IMF and The World Bank which were
established in Bretton Woods.

After World War II the Bretton Woods system was established, that allowed governments to
manage international finance, while still allowing considerable freedom of action for private
commerce. In 1971 President Richard Nixon began the rolling back of the Bretton Woods
system, and until 2008 the trend has been for increased liberalization of international trade and
finance. However from 2008 onward world leaders have increasingly called for a new Bretton
Woods system.

The contemporary realists generally agree with liberals to view international trade as a win-
win phenomenon where firms should be allowed to collaborate or compete depending on market
forces. The chief point of contention with liberals is that realists assert national interests can be
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served best by protecting new industries from foreign competition with high tariffs until they’ve
built up the capability to compete on the world market.

Constructivism is now an emerging field in IPE according to which material interests, which
are central to liberal, realist and Marxist views, are not sufficient to explain patterns of economic
interactions or policies. But economic and political identities are important determinants of
economic activity.

International Economics and International Politics:

It is hard to imagine a world without International Political Economy because the mutual
interaction of International Politics/International Relations and International Economics is today
widely appreciated and the subject of much theoretical research and applied policy analysis. The
political actions of nation-states affect international trade and monetary flows, which in turn
affect the environment in which nation-states make political choices and entrepreneurs make
economic choices. It seems impossible to consider essential questions of International Politics or
International Economics without taking these mutual influences and effects into account. And
yet scholars and policy-makers often do seem to think about International Economics without
much attention to International Politics and vice versa.

It is sometimes argued that the wall between International Economics and International
Politics was especially formidable during the Cold War. The oil embargoes of the 1970s and the
breakdown of the Bretton Woods monetary system are frequently cited as critical events in IPE's
development as a field of study. These events posed practical and theoretical problems that
necessarily forced scholars and policy-makers to consider economics and politics together.

The rise of the Organization of Petroleum Exporting Countries (OPEC) and the Arab oil
Embargo of 1973-74 illustrated dramatically at least five following crucial dimensions of IPE.

1. It showed the power and influence of economic tools to affect the international politics.
After OPEC no state could dare make political policy without taking into consideration
the potential of foreign economic retaliation or reaction.
2. The oil embargo showed that East-West issues were not always the state's most important
concerns and that politics was the political economy.
3. The oil embargo revealed the complex interdependence of domestic politics, domestic
economics, international politics, and international economics.
4. The oil embargo also raised questions about the role of Trance National Corporations
(TNCs) in the international economics and politics. TNCs had previously been viewed as
agents of influence of their home country governments (especially of US-based TNCs),
but they failed to influence the host governments in favor of their home country
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governments. On the other hand, they acted as pure economic actors independent of
home or host political ties.
5. The shifting of international payments flows that the oil embargo stimulated the start of
the movement towards a global financial system and, with it, economic globalization
generally.

The breakdown of the Bretton Woods system in the 1970s also contributed to the
emergence of the International Political Economy as a distinct field of study. The Bretton Woods
system is generally considered a system of economic governance constructed to support the U.S.
hegemony in the post-world war II era. Each of the main Bretton Woods institutions, the World
Bank, the IMF, and the General Agreement on Trade and Tariff (GATT), depended upon the
United States to play a central leadership role.

The rise of OPEC, the fall of communist regimes in 1992, the growth of the East Asian
Newly Industrialized economies, the expansion of the EU, and the financial crises in Russia, and
East Asia in the late 1990s were very much instrumental in the growth and development of IPE
studies. The simple divisions between state and market, domestic and international, and politics
and economics were no longer isolated watertight compartments.

IPE, therefore, has been defined as a set of problems that bear some relationship to one
another and cannot be understood or analyzed merely as International politics or just as
International economics. These problems necessarily fall in the domain of International Political
Economy entailing following six questions:
 International trade
 International finance
 North-South relations
 TNCs
 Hegemony, and
 Globalization

The political analysis of IPE treats international trade as fundamentally different from the
domestic economic activity. The international exchange of goods, services, or resources with
another country raises many political questions of national interest, concerning both economy
and security of the state.

Exports have no risks hence desirable as they add to the state’s monetary reserves, and
create jobs whereas imports create dependency on others, reduce foreign reserves, and threaten
domestic business and production. This all makes international trade a complex subject. On the
other hand, even exports if these are related to technology having military applications may have
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negative impacts on national security in the long run. It, therefore, necessitates when done to
whom same is exported and on what terms.

Likewise, exports of primary products or raw materials at unfavorable terms with respect
to manufactured goods subsequently to be imported from the importing countries can create
economic dependency on a long-term basis. Furthermore though trade surplus does add to the
foreign reserves, but excessive exports over imports can also create political problems as those
that Japan and China experienced with the United States. A trade war between USA and China
can also be viewed in this perspective. A nation-state, therefore, has to manage its exports to
other countries and monitor its trade relationships with other countries.

As regards imports though these may reduce or threaten domestic jobs, create external
dependency, and reduce foreign reserves but these may be vital to domestic military and
economic security.

Willingness to permit imports from foreign nations can also be used as a foreign policy tool
to cultivate good friendly relations. In the recent times, this tool was used by the USA and EU
with China to make its entry into WTO possible.

Trade embargoes and sanctions are other economic tools of foreign policy, and a great deal
of IPE research has focused on trade policies in this regard. In the past, these tools were used
against South Africa as a sign of disapproval of its policy of ‘racial apartheid’ and recently
against Iran to cap its nuclear program.

The logic behind trade embargo and the imposition of sanctions are to shut off imports of
many vital items and reduce export earnings of the target country and thus creating a pressure to
come to terms. The South Africa embargo has been successful though this was not the only
reason for ending the ‘apartheid.’ Likewise, sanctions against Iran also helped the USA and its
allies to broker a deal with Iran in July 2015. But trade embargo against Cuba remained
ineffective in bringing down the Castro government to leave its pro-Soviet Union policies.

Thus conditions for the effective use of trade and trade embargoes in foreign policy are a
productive area of IPE research.

WTO is basically to progressively reduce the barriers to free trade through multilateral
negotiations. This movement towards global free trade, however, has not stopped states from
using trade tools to further their own foreign policy goals when they can. Thus we live in an
environment where the political and the economic viewpoints of international trade compete for
attention.
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In the present time's free trade areas like the North American Free Trade Area (NAFTA),
EU, and ASEAN are good examples of the political economy of international trade. Agreements
like NAFTA and EU frequently use economic tools to realize their political goals.

One of the political goals of European economic integration, for example, was to continue
and strengthen the western alliance of the cold war times. One of the political goals of NAFTA
was to stabilize and strengthen Mexico's democratic system against any communist onslaughts in
the vicinity of USA. However, there are political and economic costs at the same time. Politically
there is the problem of democracy deficit as more and more policy decisions are made at a level
above that of the nation-state. Hence link between citizens and policy is weakened.

Economically speaking regional free trade may not be consistent with the global free trade.
Regional trade blocks may experience trade diversion where production shifts from a more
efficient and competitive producer outside the regional bloc to a less efficient producer within
the bloc.

Trade is a mirror that reflects each era’s most important stats market tensions and trends.
During the cold war, for instance, international trade was reflecting US hegemony at the
international level. During the 1980’s and 1990’s, regional trade blocs became a tool of regional
growth and development. With the advent of globalization, a massive transfer of technologies
around the globe powered by information technology intellectual property rights in production
became a controversial IPE issue.

In the wake of the aforementioned, it is quite evident that international trade has always
been at the center of IPE analysis and is likely to remain so in the future as well.
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