CHAPTER NO.

INTERNATIONAL POLITICAL ECONOMY

1.0 MERCANTILISM

Basic Concept

Mercantilism was an economic theory and practice, dominant in modernized parts of Europe
during the 16th to the 18th century, that promoted governmental regulation of a nation's
economy for the purpose of augmenting state power at the expense of rival national powers.

At the heart of mercantilism is the view that maximising net exports is the best route to
national prosperity. Boiled to its essence mercantilism is “bullionism”: the idea that the only
true measure of a country’s wealth and success was the amount of gold that it had. If one
country had more gold than another, it was necessarily better off. This idea had important
consequences for economic policy. The best way of ensuring a country’s prosperity was to
make few imports and many exports, thereby generating a net inflow of foreign exchange
and maximising the country’s gold stocks.

Negative effects of Mercantilism

1. Class System

The policy of mercantilism resulted in a nexus between the administration and the merchant
classes. The latter were encouraged to increase industrial output, and any competition in the
market was forbidden by law, which enabled the merchants to become even wealthier. The
government also benefited from levying taxes on the revenue earned by the merchants. On the
other hand, the oppression of the lower classes was encouraged, since it was thought that
keeping them poor was the key to obtaining labor for more industrial production.
2. Rise of Superpowers

Several European nations like Great Britain and France became economic and military
superpowers by focusing more on export, and increasing their stores of precious metals. Since
most of the trade was carried via sea routes, this gave them a reason to expand and strengthen
their navies, both to protect their trade routes and for territorial expansion to obtain more
colonies.
3. Smuggling

The passing of laws which favored mercantilism led to the establishment of a thriving smuggling
industry, especially in the colonies of America. Since a great expanse of ocean separated them
from England, the Crown was forced to send British inspectors to regulate colonial trade.

4. Triangular and Slave Trade

Great Britain's policy of mercantilism led to the development of the popular Triangular Trade in
the colonial province of New England. Rum was a major product of the province, which was
exported to Africa in exchange for slaves. These slaves were then traded in West Indies in
exchange for sugar and molasses.

5. Impoverishment of Colonies

The mercantile system led to the impoverishment of colonies like India. In the 17th and 18th
centuries, India was a colony controlled by a British monopoly, called the East India Company.
The country was forced to export raw materials like cotton, indigo, and salt to Britain, where they
were highly taxed on entry.

Positive Effects of Mercantilism

Despite all the drawbacks, mercantilism had a handful advantages. Since the colonies were
forced to export raw materials produced by them, this gave them a stable market. At the same
time, they were under the military protection of the 'mother' nation, which defended them from
possible attacks from other adversaries. As mentioned before, this policy brought about the
development of skilled labor in European nations, along with transforming them into military and
economic superpowers. Moreover, Adam Smith's criticism of mercantilism greatly influenced the
Founding Fathers of independent America, and paved the way for capitalism, a system where
markets are driven by profits and controlled by private entities, rather than by the administration.

The Principles of Mercantilism

 Mercantilism is based on the idea that strong nation states had the opportunity to create
a world economy by using a state's military power to ensure local markets and supply
sources were protected.

 Advocates of mercantilism believed the prosperity of a nation was reliant on its supply of
capital, and global volume of trade was static. The result was a system of economics
that required a positive balance of trade, with surplus exports. However, since it is
impossible for every country or nation-state to have a surplus of exports, with
many needing increased imports to fuel growth, the basis of mercantilism ensured it was
doomed for eventual failure.

 One notion behind mercantilism is the economic health of a nation could be assessed by
the amount of precious metal, gold or silver it owned. The system advocated for each
nation to strive to be economically self-sufficient, which meant the nation would have to
increase domestic production and build new homes and industries.

 Advocates of mercantilism also saw that agriculture was important and should be
promoted so a nation could reduce the need to import foods. They suggested a strong
nation-state needed colonies and a merchant fleet, both of which could provide
additional markets for goods and raw materials. Mercantilists also believed a large
population was integral to the domestic labor force of a nation.
How Did Mercantilism Impede Global Economic Growth?
Mercantilism impeded global economic growth by leading producers to specialize in goods and
services that do not take account of comparative advantage. From an economic perspective,
mercantilism promotes the overproduction of goods that carry a high opportunity cost. For
example, if trade restrictions prevent a country with a highly skilled labor force from importing
clothing, businesses might divert resources to its production. That clothing is relatively
expensive to produce because of the high wages that a skilled labor force demands. The
returns to the high-cost apparel will be lower than the returns from a more appropriate set of
activities. Economic growth is dampened for the country with the trade restrictions, and another
country with a low-skilled labor force loses an important potential market for its products, leading
to lower growth there as well.

1.1. ECONOMIC LIBERALISM

"Economic liberalism was the organizing principle of society engaged in creating a market
system”. (Anonymous)

The main Concept

Economic liberalism is the ideological belief in organizing the economy on individual lines,
meaning that the greatest possible number of economic decisions are made by individuals or
households and not by collective institutions or organizations. It includes a spectrum of different
economic policies, such as freedom of movement, but it is always based on strong support for
a market economy and private property in the means of production. Although economic
liberalism can also be supportive of government regulation to a certain degree, it tends to
oppose government intervention in the free market when it inhibits free trade and open
competition. However, economic liberalism may accept government intervention in order to
remove private monopoly, as this is considered to limit the decision power of some individuals.
While economic liberalism favours markets unfettered by the government, it maintains that
the state has a legitimate role in providing public goods.

Economic liberalism is most often associated with support for free markets and private
ownership of capital assets, and is usually contrasted with similar ideologies such as social
liberalism and social democracy, which generally favor alternative forms of capitalism such
as welfare capitalism, state capitalism or mixed economies. Economic liberalism also contrasts
with protectionism because of its support for free trade and open markets. Historically,
economic liberalism arose in response to mercantilism and feudalism. Today, economic
liberalism is also generally considered to be opposed to non-capitalist economic orders, such
as socialism and planned economies.

Economic Liberalism, the Ideal Concept In discussing any viewpoint about policy, it is important
to distinguish between the general principles on which it rests and the concrete policy proposals
to which these principles lead. The principles can and should be abstract, ideal and
uncompromising. Their application involves the weighing of alternative costs and returns and a
judgment about their quantitative importance. These applications can never be stated once and
for all. The liberal’s conception of the nature of man and the world recognizes that the full use of
modern knowledge and technology requires the coordination of a large number of imperfect
men lacking omniscience. It is trite to note that literally millions of people are involved in
providing one another with their daily bread, let alone their yearly automobiles. The challenge to
the liberal is how to reconcile this widespread interdependence with individual freedom.

Principles of Economic Liberalism

The following are the major principles of Economic Liberalism

1. Get Past Nationalism.

Liberalism should make an absolute commitment to free movement of labor and capital.
National borders should cease to exist for all practical purposes. Obviously, to make this
possible, the poorer parts of the world will have to be elevated, and if states have one important
function in the near future, it is to make heavy investments in infrastructure and productivity to
bring Africa and the poorer parts of Latin America and Asia to the point where emigration
becomes less of a necessity than a choice.
2. Lifelong Education. The concept of about a dozen years of preparatory schooling, followed
by four years of college, and if desired a few more years of graduate school, ought to be
abolished. This is a nineteenth-century notion of education, more suited to the training of
industrial workers, the creation of the mass mind, the mobilization of the citizenry for nationalist
purposes, including war and destructive economic competitiveness.
3. Make Technology Work for People. Either corporations or the government take a hold of all
new technologies and deploy them in the pursuit of profit-making or control of citizens. As soon
as the liberating potential of a new technology begins to be perceived, it’s dissipated in either of
the two well-known directions. The state and the corporation have come to symbiotic agreement
about the uses to which new technologies will be deployed.
4. Freedom to Opt Out. There ought to be the possibility of anonymity, privacy, disappearance,
the chance for not only starting over (starting over implies rejoining the mainstream, only at a
different position) but not to have to make a formalized effort at all. And this ought to come
without retribution. Today liberalism envisions the citizen as a cradle-to-grave participant in a
limited range of bounties, and shirking responsibility at any stage of the individual’s growth
invites lifelong penalties.
5. End Money. For the above prescriptions for diverse lifestyles to happen, the money economy
must end. Liberalism must start thinking about an eventual transition to an economy whose
measurements of progress and development are entirely different from those that exist now.
The bane of quantification has overwhelmed not just the economics profession, but all social
science and public policy as well. The root of quantification is money. Can we imagine a society
that functions without money?
1.2. NEO- MARXISM

In industrial economics, the Neo-Marxian approach stresses the monopolistic rather than the
competitive nature of capitalism.

The main concept

Neo-Marxism is a school of economic thought which applies Marxist ideas to the present global
economic conditions. It became prevalent during the 1960s and 1970s as neo-Marxist scholars
demonstrated how capitalist policies hindered development and increased the inequality
between the Global North and South. Henceforth, neo-Marxists produced the dependency and
modern world system theories as clear illustrations as to how neo-liberal capitalism has brought
increased inequality to the global economy. Therefore, in order to examine neo-Marxist
assessments of neo-liberal policies, it is firstly important to consider different neo-Marxist
perspectives in detail and analyse the elements which are contested and by whom. It is also
important to evaluate the arguments for and against the doctrine, which would help to gauge to
what extent the neo-Marxist assessments are credible. Thus it will be argued that neo-Marxist
theories provide an accurate analysis of how neo-liberal capitalism has created an increase in
political and economic subordination of the South to the North and further, its critical
examination of the New International Economic Order.

Argument

Big business can maintain selling prices at high levels while still competing to cut costs,
advertise and market their products. Competition is generally limited however with a few large
capital formations sharing various markets, with the exception of a few actual monopolies (such
as the Bell System at the time). The economic surpluses which result cannot be absorbed
through consumers spending more. The concentration of the surplus in the hands of the
business elite must therefore be geared towards imperialistic and militaristic government
tendencies, which is the easiest and surest way to utilise surplus productive capacity.

Exploitation focuses on low wage workers and groups at home, especially minorities. Average
earners see the pressures in drive for production destroy their human relationships, leading to
wider alienation and hostility. The whole system is largely irrational, since though individuals
may make rational decisions, the ultimate systemic goals are not. The system continues to
function so long as Keynesian full employment policies are pursued, but there is the continued
threat to stability from less-developed countries, throwing off the restraints of neo-colonial
domination.

Position on the labor theory of value

Baran introduced the concept of "economic surplus" to deal with novel complexities raised by
the dominance of monopoly capital. With Paul Sweezy, Baran elaborated the importance of this
innovation, its consistency with Marx's labor concept of value, and supplementary relation to
Marx's category of surplus value.

According to Baran's categories, "Actual economic surplus" is "the difference between what
society's actual current output and its actual current consumption," and hence is equal to current
savings or accumulation. Potential economic surplus," in contrast, is "the difference between
that output that could be produced in a given natural and technical environment with the help of
employable productive resources, and what might be regarded as essential consumption."
Baran also introduced the concept of "planned surplus" a category that could only be
operationalized in a rationally planned socialist society. This was defined as "the difference
between society's 'optimum' output available in a historically given natural and technological
environment under conditions of planned 'optimal' utilization of all available productive
resources, and some chosen 'optimal' volume of consumption."

Neo-Marxist and theory of Dependency

The neo-Marxist theories of Dependency and World System Theories both share the idea that
the Global North and South are in a structural relationship with one another. The former theory
originated in the South, and its subject area is explicitly geared towards the problems and
interests of the South and is seen as, ‘bottom up,’ approach to international political economy,
which prioritizes the conditions faced by the poor and the oppressed. Furthermore, having
emerged from the development economics studies of the 1960s, dependency theory
simultaneously links underdevelopment and capitalist exploitation to trade and monetary
relations, and the role of corporate actors and economic institutions. The theory claims that the
impoverishment of the South is a direct outcome of their exploitation by the advanced countries
in the age of imperialism, which led to the superior development of the North. While the
countries in the North accumulate sizeable capital, the countries in the South are further
plunged into underdevelopment. The dependency theory further claims that a new form of
imperialism is now dominant, ‘in which an economic imperialism continues the exploitation of
the South, without the direct political rule of colonialism.’

Criticism

Critical analysts, including those associated with World Systems Theory, neo-Marxism and
postcolonial theory; suggest that underdevelopment is actually a problem of dependency,
arising within a world system operating as a whole. Underdeveloped societies are not in the
position they are in due to internal inadequacies, but because of an ongoing history of
dependency, economic exploitation, political subordination and military violence. Whereas the
mainstream analysis suggests that any and all underdeveloped societies can in principle “catch
up” with the West through the adoption of development-led, typically neo-liberal policies, critical
theorists suggest that such a “catch-up” cannot happen in a world dominated by the developed
societies. Any improvement in the status of underdeveloped societies would require a radical
transformation of the entire world system, including the position within it of the developed
societies. It could not take the form of a “catch-up” but only of a general structural
transformation. This is because the position of developed countries is itself a product of the
world system and requires the continued existence of underdevelopment to sustain it.

Therefore, it is arguable that the neo-Marxist assessments of an increased inequality and

subordination between the Global South and North which has been constructed through neo-
liberal policies are valid and well-founded. The development of critical theories such as the
Dependency and Modern World System have accurately criticised neo-liberal policies of market-
led reforms and how underlying capitalism will lead to the core being concentrated in areas of
the North. However, there are flaws in the Dependency Theory, as mentioned, including the
need to address the solutions of development in peripheral countries. Furthermore,
Wallerstein’s World Systems Theory has successfully been able to incorporate not only core
and periphery states but that of the semi-periphery, which include emerging market economies
such of India, Brazil and China. These states act as a buffer between the core and periphery
countries. Despite these flaws both theories present an excellent assessment of neo-liberal
policies.

2.0 THEORIES OF IMPERIALISM

The main global primacy of united States never suited agenda of Marx’
ideologies. Imperialism according to issues of political developed was never considerable
because Marx never endorse trans-historical proceedings of political domination. The theory
suggests that there should be defined control whether is formal or informal.

2.0. DEPENDENCY THEORY

Dependency theory is the notion that resources flow from a "periphery" of poor
and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of
the former. It is a central contention of dependency theory that poor states are impoverished
and rich ones enriched by the way poor states are integrated into the "world system".

The theory arose as a reaction to modernization theory, an earlier theory of development which
held that all societies progress through similar stages of development, that today's
underdeveloped areas are thus in a similar situation to that of today's developed areas at some
time in the past, and that, therefore, the task of helping the underdeveloped areas out
of poverty is to accelerate them along this supposed common path of development, by various
means such as investment, technology transfers, and closer integration into the world market.
Dependency theory rejected this view, arguing that underdeveloped countries are not merely
primitive versions of developed countries, but have unique features and structures of their own;
and, importantly, are in the situation of being the weaker members in a world market economy.

Cardoso summarized his version of dependency theory as follows:

 there is a financial and technological penetration by the developed capitalist centers of the
countries of the periphery and semi-periphery;
 this produces an unbalanced economic structure both within the peripheral societies and
between them and the centers;
 this leads to limitations on self-sustained growth in the periphery;
 this favors the appearance of specific patterns of class relations;
 these require modifications in the role of the state to guarantee both the functioning of the
economy and the political articulation of a society, which contains, within itself, foci of
inarticulateness and structural imbalance.

THE CENTRAL PROPOSITIONS OF DEPENDENCY THEORY

There are a number of propositions, all of which are contestable, which form the core of
dependency theory. These propositions include:

1. Underdevelopment is a condition fundamentally different from undevelopment. The latter term

simply refers to a condition in which resources are not being used. For example, the European
colonists viewed the North American continent as an undeveloped area: the land was not
actively cultivated on a scale consistent with its potential. Underdevelopment refers to a
situation in which resources are being actively used, but used in a way which benefits dominant
states and not the poorer states in which the resources are found.

2. The distinction between underdevelopment and undevelopment places the poorer countries
of the world is a profoundly different historical context. These countries are not "behind" or
"catching up" to the richer countries of the world. They are not poor because they lagged behind
the scientific transformations or the Enlightenment values of the European states. They are poor
because they were coercively integrated into the European economic system only as producers
of raw materials or to serve as repositories of cheap labor, and were denied the opportunity to
market their resources in any way that competed with dominant states.

3. Dependency theory suggests that alternative uses of resources are preferable to the resource
usage patterns imposed by dominant states. There is no clear definition of what these preferred
patterns might be, but some criteria are invoked. For example, one of the dominant state
practices most often criticized by dependency theorists is export agriculture. The criticism is that
many poor economies experience rather high rates of malnutrition even though they produce
great amounts of food for export. Many dependency theorists would argue that those
agricultural lands should be used for domestic food production in order to reduce the rates of
malnutrition.

4. The preceding proposition can be amplified: dependency theorists rely upon a belief that
there exists a clear "national" economic interest which can and should be articulated for each
country. In this respect, dependency theory actually shares a similar theoretical concern with
realism. What distinguishes the dependency perspective is that its proponents believe that this
national interest can only be satisfied by addressing the needs of the poor within a society,
rather than through the satisfaction of corporate or governmental needs. Trying to determine
what is "best" for the poor is a difficult analytical problem over the long run. Dependency
theorists have not yet articulated an operational definition of the national economic interest.

5. The diversion of resources over time (and one must remember that dependent relationships
have persisted since the European expansion beginning in the fifteenth century) is maintained
not only by the power of dominant states, but also through the power of elites in the dependent
states. Dependency theorists argue that these elites maintain a dependent relationship because
their own private interests coincide with the interests of the dominant states. These elites are
typically trained in the dominant states and share similar values and culture with the elites in
dominant states. Thus, in a very real sense, a dependency relationship is a "voluntary"
relationship. One need not argue that the elites in a dependent state are consciously betraying
the interests of their poor; the elites sincerely believe that the key to economic development lies
in following the prescriptions of liberal economic doctrine.
Criticism on Dependency theory of Imperialism
Dependency theory has been criticized by free-market economists such as Peter
Bauer and Martin Wolf and others:

 Lack of competition. By subsidizing in-country industries and preventing outside imports,

these companies may have less incentive to improve their products, to try to become more
efficient in their processes, to please customers, or to research new innovations.
 Sustainability. Industries reliant on government support may not be sustainable for very
long, particularly in poorer countries and countries which largely depend on foreign aid from
more developed countries.
 Domestic opportunity costs. Subsidies on domestic industries come out of state coffers and
therefore represent money not spent in other ways, like development of domestic
infrastructure, seed capital or need-based social welfare programs. At the same time, the
higher prices caused by tariffs and restrictions on imports require the people either to forgo
these goods altogether or buy them at higher prices, forgoing other goods.
 Market economists cite a number of examples in their arguments against dependency
theory. The improvement of India's economy after it moved from state-controlled business to
open trade is one of the most often cited.
2.1. INTERDEPENDENCE THEORY

Interdependence theory in international politics was popularized by two scholars; Robert

Keohane and Joseph Nye through many of their works in advancing the theory. In order to fully
explicate the model, the theory had to reject Realist assumption on certain issues as not
sacrosanct thereby somewhat tilting their proposition towards liberalism. However, the theory
does not hold claim to be an open rejection of realism but rather, the need to combine both
Realism which stresses structure with Liberalism which stresses process. As the scholars
argued in Power and Interdependence 2001, to exchange realism for an equally simple view for
example “that military force is obsolete and economic interdependence benign would condemn
one to equally grave, though different errors”

The major assumption of interdependence theory will be discussed three sub-headings namely:

 Nature of Interdependence
 Complex interdependence
 International regime

INTERNATIONAL REGIME

Relations of interdependence often occur within and may be affected by networks of rules,
norms and procedures that regularize behavior of states. These set of governing arrangement is
what is referred to as international regime. Rules in world politics are not coherent and there
exist no overarching authority, as a result of this absence of well-ordered rules in world politics,
there is a need to integrate structure with process.
The structure refers to the existing form while the process refers to the bargaining behavior
within a power structure. International regime is very important in our interdependent world
because we continue to see how it affects the behavior of states and how governmental actions
influences patterns of interdependence. International regime help creates procedures,
institutions or rules for certain kinds of activity, regulates government actions and control
transnational as well as interstate relations. The importance of international institutions cannot
be overemphasized in that they act as an assurer for other states to enter into relations with
other states “by reducing uncertainty and the costs of making and enforcing agreements”
(Keohane1998). In a nutshell, international institutions are very important because they act as
free ground for interstate relations and an avenue to reach common beneficial ground. Insofar
as international institutions are important, international regime becomes even more central.

Basic Assumption of Interdependence Theory

 The costly nature of military force will lead to its minor usage in international politics by
states to achieve their national interest.
 International Institutions are very powerful in our contemporary world
 States are interconnected so much so that policies of one state may have costly effects
on other states.
 Issues in international politics are not ranked in any particular order
 International regimes (rules, procedure, laws) are fast becoming the guiding norm of
behavior for interstate relations.
 Bargaining tools are the usable means of reaching an advantageous position in
international relations.
 Asymmetric interdependence between and among states is the determinant of power in
international relations
 There are multiple channels of interactions in the international system such as Advocacy
groups, International Non-Governmental Organizations, Human Rights Movements etc.

INTERDEPENDENCE THEORY IN PRACTICAL POLITICS

Force has since the world wars disappeared particularly among industrialized, democratic
countries. The peculiar margin of safety has widened among them and fears of attacks by one
another are virtually non-existent. All of these claims are supported by the Democratic Peace
Theory which posits that democracies don't go to war if ever‟. For example, France has
abandoned the touts azimuts (defense in all directions) strategy advocated by De Gaulle.

During the cold war, National Security‟ was the slogan used by American presidents to argue
their points on the need for American increased involvement in world affairs. This is notice able
in that the key foreign policy coordinating unit was named the National Security Council
(NSC).However, after the cold war, the security-military connotation which the National Security
carried could no longer explain economic challenges facing the world.

The interdependence of the world through the lens of this theory can also help us explain the
growth in power and number of international organizations using what is referred to as
international regime as the rule of the game. These international regimes which are body of
rules, procedure, and norms agreed by states to follow includes arms control, foreign trade,
disarmament, environmental and wide life preservation, nuclear non-proliferation etc. United
Nations, European Union, World Trade Organization use the„ rule of the game‟ as set by
themselves to influence governmental decisions. The notion that territoriality and National
Interest of state which is defined in terms of power (Morgenthau, 1958) will always be at the top
of the hierarchy of issues, for state has lost its essence since the end of the Cold War. From the
foreign policy standpoint, a strict dichotomy between what constitutes domestic policy and
international policy is seen to overlap.

Sensitivity to policies from other nations can be clearly illustrated using the rise in the price of
crude oil in the 1970s. As a result of the oil boom in the 1970s, oil exporting countries increased
international price of crude oil in which countries in the West were seriously affected. As a result
of American reliance on oil from Oil producing Countries and the effect the rise in the price had
on the American economy, Henry Kissinger was reported to have threatened OPEC if its
strangulates the industrialized world in any way.

CONCLUDING COMMENTS

With increasing globalization around the world and globalism especially by the advanced
industrialized countries, the world is becoming „smaller‟ every day. This situation also creates
increasing agreement by states to abide by international regime like that of human rights, child
rights, nuclear non-proliferation, and arm control among others. Whether states will fade out and
transfer all its sovereignty to international organizations just like a social contract is something
the future will help us to unravel. But the important thing for us now is that with the borderless
form, in which the world is becoming, the rule of the game for state might soon be determined
externally and the concept of sovereignty might become even more abstract.