CHAPTER -THREE

International Political Economy (IPE)

 Meaning and Nature of International Political Economy (IPE)

 Define international political economy?

 States and Markets are obviously the two key actors in the discussion of IPE.

 Now day’s political economy, IPE’s definition is getting ever widened and deepened
in content and even the name of the field is changing from IPE to GPE (Global
Political Economy).
 International political economy is an international event which emphasizes on
economic and political aspects of the world. International political economy (IPE)
can be termed as global political economy. It studies the relationship between
economics and international politics (relations).
 Political Economy- it is the study of the intersection of politics and economics
within a given country, while international political economy is the study of the
intersection of politics and economics at the international level.
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 International Political Economy is the study of the
intersection of politics and economics at the international
level. IPE emphases on globalization, international trade,
international finance, world financial crises, issues of
macroeconomics, development, global market, political risk,
multi-national corporation in solving trans-border economic
problems, and the structural balance of power between among
states and institutions. International Political Economy
focused on the study of economies of polities or nation-states
in the 18th century.
 ‘Economics’ ‘Politics’ and ‘International Relations’
 Political events in one country can have economic
implications for other countries and also economic events in
one country can have political implications for another
country. It means the political affair exerts impact on the
performance of domestic economy of a given state.
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Two dimensions of IPE (political and economic)
 International Political economy (IPE) is the field study consists of two main
dimensions namely which the political and economic dimension
 A political dimension accounts for the use of power by a variety of actors,
including individuals, domestic groups, states (acting as single units),
International organizations, nongovernmental organizations (NGOs), and
Transnational corporations (TNCs).
 In almost all cases, politics involves the making of rules pertaining to how states
and societies achieve their goals.
 Economic dimension deals with how scarce resources are distributed among
individuals, groups, and nation-states.
 All these actors make decisions about the distribution of tangible things such as
money and products or intangible things such as security and innovation.
 Theoretical Perspectives of International Political Economy
 There are three major theoretical (ideological) perspectives
regarding the nature and functioning of the International Political
economy: liberalism, Marxism, and nationalism (mercantilism).

1. Mercantilism Perspectives of International Political Economy

 Mercantilism is the oldest of the other theories which dating back

in to early as the 16th century (perhaps even earlier). The prominent

advocators of mercantilism theory were Friedrich List (1789–1846),
Adam Smith’s (1723–1790) and Karl Marx.

 Mercantilism theory termed as economic nationalism.

Mercantilism refers to the traditional theory of political economy.
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 Mercantilist theory supposes that each nation must regulate trade and

manufacture to increase its wealth and power. It advocates the involvement

of state in the economy for accumulation of wealth and strengthens power.

 Mercantilism/nationalism: is a theoretical and ideological perspective

which restricts the strong and pervasive role of the state in the economy
both in domestic and international trade, investment and finance.

 Mercantilism (economic nationalism)- it is a type of international political

theories which designed to maximize the trade of nation and especially to

maximize the accumulation of wealth and assets.

 It promoted governmental regulation of nation’s economy for the purpose

of augmenting state power at expense of rival national powers.

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 According to mercantilists, states should also play a disciplinary role in the

economy to ensure adequate levels of competition. Hence, Mercantilists theory

have advocated that governments of the ‘zero’ (loser) countries adopt
protectionist measures to save themselves from exploitation.

 The East Asian state such as Japanese, South Korean, Taiwanese and Chinese

termed as ‘developmental state approach’ (a less politically laden term) and give
priority for the nature of their national political economy system.

 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.
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 The pillars or features of mercantilism theory of are the following political economy.
These are:-

A. The government should involve itself in international trade/ economic system

 Mercantilism-was not Economic Liberals; because Mercantilists advocate that

governments should involve in matters of international economic system in order to protect
the interests of the state and their citizens.

B. Depending on Mercantilism International economics is competitive not cooperative. It

means international economics is competitive not cooperative

 In competitive arena the international political system ‘collective goods’ will never be
acquired and there will be losers as well as winners.

 It means the government should be protect and grantee the losers.

C. Protectionism- most prominent form of Mercantilism in the contemporary world is

protectionism, which refers to a variety of economic policies engaged by governments to
protect their domestic industries from foreign competition.
 Liberalism theory of international political economy

 Liberalism is a mainstream perspective in international political economy and it

defends the idea of free market system (i.e free trade/trade liberalization and free
financial and Foreign Direct Investment (FDI) flows).

 It is known as orthodox economic liberalism and association with the laissez-faire.

Economic Liberalism emerged in the era of industrialization.

 Accordingly, the central principle liberalism theory political economy is removing

the impediments (barriers) of free flow of goods and services among countries.

 The consensus among advocates liberalism is for free trade which 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.
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 In other words, liberal political economists believe that by removing

barriers of free trade to contribute the optimum utilization of resources

such as land, labor, capital, and entrepreneurial ability worldwide.

 Liberal political economists believe that by removing barriers to the free

movement of goods and services among countries, as well as within them,

countries would be encouraged to specialize in producing certain goods,
thereby contributing to the optimum utilization of resources such as land,
labor, capital, and entrepreneurial ability worldwide.

 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.
 Marxism theory of international political economy
 Following the collapse of Soviet Union in the 1990’s and the noticeable outbreak of free

market economy through a significant number of developing countries is an implication for

death of Marxism.

 Marxism is the opposite of liberalism (capitalism).

 According Marxism in a given community the presence of income inequality, exploitation of

labor shows no sign of lessening; the problem of child labor and child slave labor has
become endemic in several part of the world.

 Marxist theory the global economic structures are the chief determinants of international

political behavior and events.

 Marxists agree with Mercantilists that capitalist economics is a zero-sum game of losers and

winners rather than the Liberal’s sum-sum game of comparative advantage.

 Mercantilism rejects free market, global and national income inequality;

exploitation of labor and the problem of child labor.

 Three contemporary theories of International political
economy
A. Hegemonic Stability Theory (HST)

 Hegemonic Stability Theory (HST) is a hybrid theory of political economy which contains the features of
mercantilism, liberalism, and Marxism.

 The hegemonic stability theory the existence of a single dominant power in the international arena is necessary
for the establishment and maintenance of stable monetary systems.

 However, HST is more linked with mercantilism theory.

 The basic argument of HST is the root cause of economic troubles in Europe and much of the world in the Great
Depression of the 1920s and 1930s was the absence of a benevolent hegemony which can be dominate the state
willing and able to take responsibility with a sense of an international lender for the smooth operation of the
International (economic) system as a whole.

 Because, Great depression period the old hegemony which Great Britain has no capacity to ensure the stability
of the international system and the new hegemony which United States, did not yet understand the need of
global economic instability.

 The hegemonic stability theory the existence of a single dominant power in the international arena is necessary
for the establishment and maintenance of stable monetary systems.
 Structuralism theory of political economy

 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
Structuralism perspective is also known as the ‘Prebisch-Singer
thesis’ (named after its Latin American proponents Presbish and
Singer) and it advocates for a new pattern of development based on
industrialization via import substitution based on protectionist
policies.
 Developmental State Approach political economy
 Developmental state approach realizing the failure of neo-liberal development paradigm (in the 1980’s) in solving

economic problems in developing countries, various writers suggested the developmental state development paradigm
as an alternative development paradigm.

 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.
 Survey of the most influential national political economy
systems in the world
1. The American System of Market-Oriented Capitalism

 The American system of political economy is founded on the premise that the primary purpose of economic activity

is to benefit consumers through maximizing wealth creation; but the distribution of that wealth is the secondary
issue. American economy system associated the neoclassical model of a competitive market economy in which
individuals are assumed to maximize their own private interests (utility) and business corporations are expected to
maximize their profits.

 The American economy system of market-oriented capitalism also linked with neoclassical model which emphasize

on the assumption of markets is competitive and competition should be promoted through antitrust and other policies.

 The American economy system emphasis on consumerism and wealth creation results in a powerful pro-consumption

bias and insensitivity when compared with the Japanese and German models, which focused on social welfare impact
of economic activities.

 The role of the American government in their economy is determined not only by the influence of the neoclassical

model on American economic assumptions but also by fundamental features of the American political system.

 In American economy system authority over the economy is divided among the executive, legislative, and judicial

branches of the federal government and between the federal government and the fifty states.
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2. The Japanese System of Developmental Capitalism

 At the end of World War II, Japan’s economic and political elite have had different ideas to relegate Japan

to the low end of the economic and technological spectrum.

 In Japanese system of development economy is subordinate to the social and political objectives of society.

 According to Meiji Restoration (1868), Japan’s main objective of economy self-sufficient and catching up

with the West. In the pre–World War II years this ambition meant building a strong army and becoming an

industrial power.

 These political goals have resulted in a national economic policy for Japan best characterized as neo-

mercantilism; it involves state assistance, regulation, and protection of specific industrial sectors in order to

increase their international competitiveness and attain the “commanding heights” of the global economy.

 This economic objective of achieving industrial and technological equality with other countries arose from

Japan’s experience as a late developer and also from its strong sense of economic and political vulnerability.

 Another view of Japanese economy system is the superiority of their culture and their visible destiny to

become a great power.

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 Japanese economy system the state plays central role in the economy specifically the rapid

industrialization through a strategy employing trade protection, export-led growth, and other policies.

 The Japanese government supports the industries, trade protection, generous subsidies, and provision of

low-cost financing and to eliminate excessive competition. Japanese state’s “infant industry” protection

system deserves special attention.

 Among the policies and strategies of Japan economy system to promote its infant industries includes the

followings:

 Taxation, financial, and policies that encouraged extraordinarily high savings and investment rates.

 Fiscal and other policies that kept consumer prices high, corporate earnings up, and discouraged

consumption, especially of foreign goods.

 Strategic trade policies and import restrictions that protected infant Japanese industries against both

imported goods and establishment of subsidiaries of foreign firms.

 Government support for basic industries, such as steel, and for generic technology, like materials

research.
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3. The German System of Social Market Capitalism

 The German economy has similar characteristics with American economy and some characteristics

with Japanese systems of political economy, but it is quite different from both in other ways.

 On the one hand, Germany, like Japan, emphasizes exports and national savings and investment

more than consumption

 Furthermore, the German economy is highly oligopolistic and is dominated by alliances between

major corporations and large private banks.

 The German system of political economy attempts to balance social concerns and market efficiency.

 The German state and the private sector provide a highly developed system of social welfare.

 The German national system of political economy is representative of the “corporatist” or “welfare

state capitalism” of continental Europe in which capital, organized labor, and government
cooperate in management of the economy.
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 This corporatist version of capitalism is characterized by greater representation of labor and larger

society in the governance of corporate affairs than in Anglo-Saxon shareholder capitalism.

 In Germany system the major banks are vital to the provision of capital to industry and in Germany

labor has a particularly important role in corporate governance. Indeed, the “law of co-determination”
mandates equal representation of employees and management on supervisory boards.

 The most important contribution of the German state to the economic success of their economy has

been indirect. After WWII, the German federal government and the governments of the individual
Lander have created a stable and favorable environment for private enterprise

 . The German system has laws and regulations have successfully encouraged a high savings rate, rapid

capital accumulation, and economic growth.

 The core of the German system of political economy is their central bank,

 On the other hand, the role of German state in the microeconomic aspects of the economy involves the

advanced industrial countries; the government has spent heavily on research and development.

 On the whole, the German political economy system is thus closer to the American market-oriented

system than to the Japanese system of collective capitalism.

 Core Issues, Governing institutions and Governance of
International Political Economy
A. international monetary system

 International monetary system is a set of internationally agreed rules, conventions and supporting

institutions, that facilitate international trade, cross border investment and allocation of
capital between nation-states.
 Its objectives IMF are as follows:

i. To promote international monetary cooperation.

ii. To facilitate the expansion and balanced growth of international trade.
iii. To promote exchange stability, to maintain orderly exchange arrangements among members,
and to avoid competitive exchange depreciation.
iv. To assist in the establishment of a multilateral system of payments.
v. To give confidence to members by making the general resources of the Fund temporarily
available to them and to correct maladjustments in their balances of payments.
vi. To shorten the duration and lessen the degree of disequilibrium in the interactional balances
of payments of members.
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B. International Trade

What is International Trade?

 International trade is the buying and selling of goods and services across national borders

or territories, allowing both the buyer and seller to expand their markets for goods and

services.

 It is also possible to define international trade as foreign trade.

 International trade means exchange of goods and services with cross borders.

 International trade is a trade between two or more countries.

 International trade involves exchange of goods and service between individuals, private

organizations, governments, between individuals and private organizations, between

individuals and governments, or between private organizations and governments.

 The earliest (traditional way) exchange of good or service termed as barter trade.
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The three basic reasons why trade may take place are:

Reason for Trade #1: Differences in Technology

 Trade can occur between countries if the countries were different in their technological
abilities and capability to produce goods and services. The basis for international trade is
comparative advantage due to differences in technology.

Reason for Trade #2: Differences in Resource Endowments

 Trade can occur between countries if the countries were different in their resources
endowments. Resource endowments refer availability of natural resources within its borders
such as minerals, Oil, River and farmland. So the basis for trade is differences in resource
endowments.

Reason for Trade #3: Differences in Demand

 Trade can occur between countries if demands or preferences were different between
countries. Individuals in different countries may have different demands for various products.
For example, the Chinese are likely to demand more rice than Americans.
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C. World Trade Organization (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.

 The World Trade Organization (WTO) was created to manage this system of new

agreements, to provide a forum for regular discussion of trade matters.

 WTO headquartered was in Geneva, Switzerland, its primary aim is to

implement economic liberalization and also facilitates negotiation to resolve

trade disputes, and provides technical assistance and training programs to

developing countries.
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What is International Monetary Fund (IMF)?
 The International Monetary Fund (IMF) is an international organization that
oversees those financial institutions and regulations that act at the international
level.
 The International Monetary Fund (IMF)- an organization based in the US,
which would provide a source of money for governments facing economic
problems.
 The IMF’s primary role was to facilitate a stable and orderly international
monetary system and investment policies, to facilitate international trade, stabilize
exchange rates, and help members with balance-of-payments difficulties on a
short-term basis.
 IMF was designed to provide temporary assistance to all debtor countries while
they adjusted their economic structures to the emerging international economy.
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 The main Objectives of IMF

 To promote international monetary cooperation

 To facilitate balance of international trade

 To ensure exchange stability

 To facilitate foreign Aid and loan for the member states

 To promote employment

 To abolish trade restrictions

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 Exchange Rates and the Exchange-Rate System

 An exchange rate is the price of one national currency in terms of another.

 The exchange rate is just a way of converting the value of one country’s unit of measurement into
another’s.

 There are two main exchange rate systems in the world namely: fixed exchange rate and floating
exchange rate.

 In a pure floating exchange rate system, the value of a currency is determined solely by money
supply and money demand.

 On the other hand, fixed-rate system is the one in which the value of a particular currency is fixed
against the value of another single currency.

 Fixed exchange rates are determined by international agreements among states, while floating
(flexible) exchange rates are determined by market forces. For example, in 2013 rate, one U.S. dollar
($1) = 98.1 Japanese yen (¥) and e one British pound (£) = 1.54 U.S. dollars.