CHAPTER THREE
INTERNATIONAL POLITICAL
ECONOMY (IPE)
CHAPTER CONTENTS
MEANING AND NATURE OF IPE
THEORETICAL PERSPECTIVES OF IPE
 Liberalism
 Marxism
 Mercantilism/Nationalism
 CONTEMPORARY THEORIES OF IPE
 Hegemonic Stability Theory
 Structuralism
 Developmental State Approach
Survey of the Most Influential National Political Economy systems in the
world Oriented
Governing Institutions and Governance of IPE
3.1. MEANING AND NATURE OF IPE

 There is no universal agreement on how IPE should be defined.

 However, definitions are important because it tell us what to include in
our analysis and what to leave out.
 Definitions within a given area of inquiry tell us what is considered
legitimate, what matters, or what is relevant within that field, as well
as how it is supposed to be studied.
 Without definitions and clarity of concepts there can be no clarity of
thinking and action.
 WHAT IS IPE?
IPE is the study of the tension b/n the market, where individuals
engage in self-interested activities, and the state, where those
same individuals undertake collective action.
 This definition is based on several important assumptions.
 1st, it suggests that there are only two significant subjects of IPE:
a) Markets, which are composed of self-interested individuals, and
b) States, which are the primary political institutions of the modern
international system.
 Furthermore, it suggests that a clear-cut distinction exists b/n
economic (market-based activities) and political (state-centred) ones.
 2nd, this definition tells us that the most important aspect of the r/ship
b/n markets and states is based on tension (a strained state or
condition resulting from forces acting in opposition to each other).
Cont’d…
 This definition assumes that states and markets relate to one another
in fundamentally adversarial ways.
 Indeed, it has big truth in it b/c states and markets are obviously the
two key actors in the discussion of IPE and also the relationship b/n
the two is often antagonistic.
 However, it misses other important side of the story.
 For instance, political society is not solely represented by the state
in global/world politics.
 We have also equally or even more powerful non-state actors in
global politics such as Transnational Corporations/Multinational
Corporations (TNCs/MNCs).
Cont’d…
 Similarly, unlike what the definition suggests, state-market relation
in IPE could be cooperative or even mutually constitutive one.
 These problems force us to develop 2 contending definitions of IPE.
 One is state-centred definition of IPE
 The other Marxist -which focuses on social class based definition of
IPE b/c the state for Marxists is an appendage/addition and hence it is
not considered as relevant in the definition.
 The other significant limitation in defining the concept of IPE is the
use of the term ‘International’ in the concept.
 Strictly speaking, International applies only to relations b/n or
among sovereign states.
 It also implies a clear distinction b/n the national and the international,
(what goes on inside states and outside states).
Cont’d…
 It is clear though that a great deal of economic activity that occurs in
the world today is conducted and sometimes controlled by non-
state actors in ways that transcend national boundaries.
 Today, large corporations are engaging in all sorts of economic
transactions and activities that cut across borders: from buying,
selling, and trading products and services, to building and
investing in global chains of production to forging strategic alliances
with other corporations based in a range of different countries.
 These types of firms are named as Transnational Corporations
(TNCs).
Cont’d…
 IPE is a field of inquiry that studies the ever-changing r/ships b/n
governments, businesses, and social forces across history and in different
geographical areas.
 Defined this way, the field thus consists of two central dimensions:
 Political and
 Economic dimension.
 A POLITICAL DIMENSION accounts for the use of power by a variety of
actors, including individuals, domestic groups, states, IOs, NGOs, and
TNCs.
 All these actors make decisions about the distribution of tangible things such
as money and products or intangible things such as security and innovation.
 In almost all cases, politics involves the making of rules pertaining to how
states and societies achieve their goals.
Cont’d…
 The ECONOMIC DIMENSION, deals with how scarce resources
are distributed among individuals, groups, and nation-states.
 Today, a market is not just a place where people go to buy or exchange
something face to face with the product‘s maker.
 The market can also be thought of as a driving force that shapes
human behaviour.
 When consumers buy things, when investors purchase stocks, and
when banks lend money, their depersonalized transactions constitute a
vast, sophisticated web of r/ships that coordinate economic activities
all over the world.
3.2. THEORETICAL PERSPECTIVES OF IPE
There are three major theoretical perspectives regarding the nature and
functioning of the IPE:
i. Liberalism,
ii. Marxism, and
iii. Nationalism (mercantilism)
Mercantilism- oldest of the three, dating back as early as the 16th century.
 Many scholars point to Friedrich List(1789–1846) as the intellectual father
of the mercantilist thought and it is a thought in response to classical
economics and, more specifically, to Adam Smith‘s (1723-1790) liberal
perspective.
Marxism, by contrast, is the youngest of the three and is advanced by Karl
Marx who also emerged as a critique of classical economics.
Cont’d…
Since the mid-1980s, the relevance of the three perspectives has
changed dramatically.
 With the end of both communism & the import-substitution
strategies of many less-developed countries, the relevance of Marxism
greatly declined.
 liberalism -experienced a relatively considerable growth in influence.
 More and more countries are accepting liberal principles as they open
their economies to imports and foreign investment.
 Reduced the role of the state in the economy, and shift to export-led
growth strategies.
 Marxism as a doctrine of how to manage an economy has been
discredited, but as an analytic tool & ideological critique of
capitalism it survives & will continue as long as those defects of the
capitalist system exist.
Cont’d…
 Mercantilism: defends a strong and pervasive role of the state in
the economy both in domestic and international trade, investment
and finance.
 In arena of international trade, mercantilism emphasizes the
importance of balance-of-payment surpluses in trade with other
countries.
 Often promotes an extreme policy of autarky (Economic independence as
a national policy) to promote national economic self-sufficiency.
 As it developed in the 21st century, or neo-mercantilism defended
even a much more sophisticated and interventionist role of the
state in the economy.
Cont’d…
 According to mercantilists, states should also play a disciplinary
role in the economy to ensure adequate levels of competition.
 The proof of the relevance of mercantilist thought in the contemporary
international political economy is found in the recent experience of the
Japanese, South Korean, Taiwanese and Chinese national political
economies whose states fulfilled the above stated roles almost
perfectly.
 Instead of the term mercantilism, however, these states (the East
Asian economies) used the term Developmental State approach to
describe the nature of their national political economy system.
Cont’d…
Liberalism- is a mainstream perspective in International political
economy and it defends the idea of FREE MARKET SYSTEM.
 Accordingly, removing barriers to the free flow of goods and services
among countries is the foundational value and principle of liberalism.
 The consensus among advocates of free trade is that it 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.
 Liberal political economists believe that by removing barriers to the
free movement of goods and services among countries and within them,
countries would be encouraged to specialize in producing certain
goods, thereby contributing to the optimum utilization of resources
such as land, labour, capital, and entrepreneurial ability worldwide.
Cont’d…
 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.
 However, the theory of comparative advantage has been undermined
by the current wave of economic globalization.
 The growth of transnational or multinational corporations (MNCs)
complicates global trading.
 The production of goods and services is strongly influenced by costs,
arbitrary specialization, and government and corporate policies.
Cont’d…
 Marxism- Following the collapse of the Soviet Union in the 1990‘s
and the apparent embrace of the free market economy by a significant
number of developing countries, there was a widely held belief that
such phenomenon marks a clear failure and hence death of Marxism.
 Global and national income inequality, for example, remains
extreme: the richest 20% of the world‘s population controlled 83% of
the world‘s income, while the poorest 20% controlled just 1.0%;
Exploitation of labour shows no sign of declining; the problem of
child labour and even child slave labour has become endemic and so
on and so forth.
Contemporary Theories of IPE
The following three are contemporary theories of IPE:
1-Hegemonic Stability Theory (HST)
 Is a hybrid theory containing elements of mercantilism, liberalism,
and even Marxism.
 Its closest association, however, is with mercantilism.
 The basic argument of HST is simple- the root cause of the economic
troubles that be devilled Europe and much of the world in the Great
Depression of the 1920s & 1930s was the absence of a benevolent
hegemon- a dominant state willing & able to take responsibility for
the smooth operation of the International (economic) system as a
whole.
Cont’d…
 In this regard, what then happened during the Great depression period
was the old hegemon (Great Britain) had lost the capacity to stabilize the
international system.
 While the new hegemon (USA), did not understand the need to take on
that role or the benefits of doing so, hence global economic
instability.
 During its explanatory power to the Great Depression, HST has thus
influenced the establishment of the Bretton Woods institutions (IMF and
WB); both being the products of American power and influence.
 On this point, it is specifically worth noting that Great Britain was given
an important role to play but British interests and desires were clearly
secondary.
 USA dominance was manifested, in particular, by the adoption of the
USA blueprint for the IMF.
Cont’d…
2- Structuralism
 A variant of the Marxist perspective & 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 exchange.
 Advocates for a new pattern of development based on
industrialization via import substitution based on protectionist
policies.
 During the 1950s, this Latin American model spread to other countries
in Asia & Africa, then the domestic promotion of manufacturing over
agricultural & other types of primary production became a central
objective in many development plans.
Cont’d…
3- 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.
Cont’d…
The core features of developmental state is Strong interventionism.
 Intervention here does not imply heavy use of public ownership
enterprise or resources.
 It is 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.
 3.3. Survey of the Most Influential National Political Economy systems in the world Oriented

The American System of Market-Capitalism

 Founded on the premise that the primary purpose of economic activity is
to benefit consumers;
 Maximizing wealth creation and the distribution of that wealth is of
secondary importance.
 With certain exceptions, the American economy approaches 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 profits.
 Based on the assumption that markets are competitive and that, where
they are not competitive, competition should be promoted through
antitrust and other policies.
Cont’d…
 The American economy is based upon the abstract theory of
economic science to a greater degree than is any other economy.
 At the same time, it is characterized as a system of managerial
capitalism.
 Management was separated from ownership, and the corporate elite
virtually became a law unto itself.
 Subsequently, with the New Deal of the 1930s, the power balance
shifted noticeably away from big business when a strong regulatory
bureaucracy was established and organized labor was empowered; in
effect, the neoclassical laissez-faire ideal was diluted by the notion
that the federal government had a responsibility to promote economic
equity and social welfare.
Cont’d…
 Industrial policy represents another great difference b/n the USA and
other economies.
 Industrial policy refers to deliberate efforts by a government to
determine the structure of the economy through such devices as
financial subsidies, trade protection, or government procurement.
 Industrial policy may take the form either of sectoral policies of
benefit to particular industrial or economic sectors or policies that
benefit particular firms; in this way such policies differ from
macroeconomic and general policies designed to improve the overall
performance of the economy, policies such as federal support for
education and Research and Development.
Cont’d…
 These industries are frequently associated with national defense or
are believed to produce a highly beneficial effect on the rest of the
economy; the computer industry and other high-tech sectors provide
examples of such industries.
 In general, however, the only justification for an industrial policy
considered legitimate in the USA is to overcome a market failure.
 In practice, most American economists, public officials, and business
leaders are strongly opposed to industrial policy.
 Their principal objection is that governments are incapable of
picking winners; many argue that politicians will support particular
industries for political reasons rather than for sound economic reasons.
 American economists argue that the structure and distribution of
industries in the United States should be left entirely to the market.
Cont’d…

The Japanese System of Developmental Capitalism

 At the end of World War II, American occupation officials advised the
Japanese that they should follow the theory of comparative
advantage and hence concentrate on labor-intensive products in
rebuilding their economy.
 Japan‘s economic and political elite, however, had quite different
ideas and would have nothing to do with what they considered an
American effort to relegate Japan to the low end of the economic and
technological spectrum.
 Instead, the Japanese Ministry of International Trade and Industry
(MITI) and other agencies of the Japanese economic high command
set their sights on making vanquished Japan into the economic and
technological equal, and perhaps even the superior, of the West.
Cont’d…
 In the Japanese scheme of things, the economy is subordinate to the
social and political objectives of society.
 Ever since the Meiji Restoration (1868), Japan‘s overriding goals have
been making the 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.
 Since its disastrous defeat in World War II, however, Japan has
abandoned militarism and has focused on becoming a powerful
industrial and technological nation, while also promoting internal
social harmony among the Japanese people.
 There has been a concerted effort by the Japanese state to guide the
evolution and functioning of their economy in order to pursue these
socio - political objectives.
Cont’d…
 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 very important source of this powerful economic drive is the
Japanese people‘s overwhelming belief in their uniqueness, in the
superiority of their culture, and in their manifest destiny to become a
great power.
Cont’d…

 Many terms have been used to characterize the distinctive nature of

the Japanese system of political economy: developmental state
capitalism, collective capitalism, welfare corporatism, competitive
communism, network capitalism and strategic capitalism.
 Each of these labels connotes particularly important elements of the
Japanese economic system, such as its overwhelming emphasis on
economic development, the key role of large corporations in the
organization of the economy and society, subordination of the
individual to the group, primacy of the producer over the consumer,
and the close cooperation among government, business, and labor
Cont’d…

 Developmental state capitalism best captures the essence of the system,

because this characterization conveys the idea that the state must play a
central role in national economic development and in the competition with
the West.
 Despite the imperative of competition, the Japanese frequently subordinate
pursuit of economic efficiency to social equity and domestic harmony.
 Many aspects of the Japanese economy that puzzle foreigners are a
consequence of a powerful commitment to domestic harmony; and over-
regulation of the Japanese economy is motivated in part by a desire to
protect the weak and defenseless.
 The Japanese system of life time employment has also been utilized as a
means to promote social peace; Japanese firms, unlike their American
rivals, are very reluctant to downsize and lay off thousands of employees.
Cont’d…

 Following Japan‘s defeat in WWII, the ruling tripartite alliance of

government bureaucracies, the governing Liberal Democratic Party
(LPD), and big business began to pursue vigorously the goal of catching
up with the West.
 To this end, the state assumed central role in the economy and specifically
the elite pursued rapid industrialization through a strategy employing
trade protection, export-led growth, and other policies.
 The Japanese people have also supported this extensive interventionist
role of the state and believe that the state has a legitimate and important
economic function in promoting economic growth and international
competitiveness.
 The government bureaucracy and the private sector, with the former
frequently taking the lead, have consistently worked together for the
collective good of Japanese society.
Cont’d…
 Among the policies Japan has used to promote its infant industries
include the followings: Taxation, financial, and other 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 supports for the basic industries, such as steel, and for
generic technology, like materials research.
Cont’d…

The German System of Social Market Capitalism

 The German economy has some characteristics similar to the
American and some to the 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.
 However, Germany permits the market to function with considerable
freedom; indeed, most states in Western Europe are significantly
less interventionist than Japan.
 Cont’d…

 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.
 This corporatist version of capitalism is characterized by greater representation of labor
and the larger society in the governance of corporate affairs than in Anglo-Saxon share
holder capitalism.
 Although the continental economies differ from one another in many respects, in all of
them the state plays a strategic role in the economy.
 It is significant, especially in Germany, that major banks are vital to the provision of
capital to industry.
 While, in many European countries, employee councils have some responsibility for
running the company, in Germany labor has a particularly important role in corporate
governance.
Cont’d…

 The most important contribution of the German state to the economic success of
their economy has been indirect.
 During the postwar era, the German federal government and the governments of the
individual Lander (states) have created a stable and favorable environment for
private enterprise.
 Their laws and regulations have successfully encouraged a high savings rate, rapid
capital accumulation, and economic growth.
 Germany has a highly developed system of codified law that reduces uncertainty
and creates a stable business climate; the American common law tradition guides
U.S. business, and the Japanese bureaucracy relies on administrative guidance.
 At the core of the German system of political economy is their central bank, or
Bundesbank.
 The Bundesbank‘s crucial role in the postwar German economy has been compared
to that of the German General Staff in an earlier German domination of the
Continent.
Cont’d…

 Movement towards the European Economic and Monetary Union

has further increased the powerful impact of the Bundesbank.
 Although the Bundesbank lacks the formal independence of the
American Federal Reserve, its actual independence and pervasive
influence over the German economy have rested on the belief of the
German public that the Bundesbank is the defender of the mark
(euro) and the staunch opponent of dreaded inflation.
 Indeed, the Bundesbank did create the stable macroeconomic
environment and low interest rates that have provided vital support to
the postwar competitive success of German industry.
Cont’d…

 The German government has not also intervened significantly in the

economy to shape its structure except in the support it has given
through subsidies and protection to such dying industries as coal and
shipbuilding and the state-owned businesses such as Lufthansa and
the Bundespost (mail and telecommunications).
 However, since the early 1990s, these sectors have increasingly been
privatized.
 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.
Cont’d…
Differences among National Political Economy Systems
 While national systems of political economy differ from one another
in many important respects, differences in the following areas are
worthy of particular attention:
 The primary purposes of the economic activity of the nation,
 The role of the state in the economy, and
 The structure of the corporate sector and private business practices.
Cont’d…

 Although every modern economy must promote the welfare of its

citizens, different societies vary in the emphasis given to particular
objectives; those objectives, which range from promoting consumer
welfare to pursuit of national power, strongly influence and are
influenced by such other features of a national economy as the role of
the state in the economy and the structure of that economy.
Cont’d…
 As for the role of the state in the economy, market economies include the generally
laissez-faire, non - interventionist stance of the United States and the Japanese state‘s
central role in the overall management of the economy.
 And the mechanisms of corporate governance and private business practices also differ;
the relatively fragmented American business structure and the Japanese system of
tightly integrated industrial groupings contrast dramatically with one another.
 Very different national systems of political economy result from the variations in the
basic components of economies.
 The purpose of economic activity in a particular country largely determines the role of
the state in that economy.
 In those liberal societies where the welfare of the consumer and the autonomy of the
market are emphasized, the role of the state tends to be minimal.
 Although liberal societies obviously differ in the extent to which they do pursue social
welfare goals, the predominant responsibility of the state in these societies is to correct
market failures and provide public goods.
Cont’d…

 The system of corporate governance and private business practices

constitutes another important component of a national political
economy.
 American, German, and Japanese corporations have differing
systems of corporate governance, and they organize their economic
activities (production, marketing, etc.) in varying ways.
 The policies of each government have also shaped the nature of
business enterprise and business behavior through regulatory,
industrial, and other policies; furthermore, some national differences
in corporate structure and business practices have evolved largely in
response to economic and technological forces.
3.4. Core Issues, Governing institutions and Governance of International Political Economy

3.4.1. International Trade and the WTO

 The WTO is an IO 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 WWII.
 It has about 150 members.
 All decisions are taken unanimously but the major economic powers
such as the US, EU and Japan has managed to use the WTO to frame
rules of trade to advance their own interests.
 The developing countries often complain of non-transparent
procedures and being pushed around by big powers.
Cont’d…

 The exchange of a good or service for another illustrates a particular

type of trade, referred to as barter trade.
 In the contemporary period, however, the great preponderance of trade
involves the exchange of money for goods and services. This type of
trade can take place entirely within a domestic economy or
internationally.
 But there are a number of critical distinctions between domestic and
cross - border trade.
 While in cross-border trade the exchange of goods and services is
mediated by at least two different national governments, each of
which has its own set of interests and concerns, and each of which
exercises (sovereign) authority and control over its national borders
(In practice, this means that even the "free trade”.
Cont’d…

 The unrestricted purchase and sale of goods and services between

countries without the imposition of constraints such as tariffs, duties
and quotas.
 To the liberal economists, convinced that cross - border trade is
beneficial, both for individual national economies and for the world as
a whole.
 But even in the general public, most people acknowledge that the
antithesis of trade—namely, autarky is essentially impossible and
self-defeating in the industrial and post-industrial eras.
Cont’d…
 International/global trade governed Global/Regional Free Trade
Agreements govern it-i.e institutions like World Trade Organization
(WTO) and North American Free Trade Agreement (NAFTA) or
similar other organizations.
 How does this work? In the case of NAFTA- a trade agreement among
the U.S., Canada, and Mexico - for example, 'free trade' was initially
meant a lesser degree of governmental constraints in cross-border
trade, but not an elimination of government action.
 The tariffs were eliminated by mutual agreement in 2008; at the same
time, both Mexico and the U.S. also agreed that 'import-sensitive
sectors' could be protected with emergency safeguard measures in the
event that imports cause, or threatened to cause, serious injury to
domestic producers.
Cont’d…
3.4.2. International Investment and the WB
 The World Bank was created immediately after the WWII in 1945.
 Its activities are focused on the developing countries.
 It works for human development (education, health), agriculture
and rural development (irrigation, rural services), environmental
protection, infrastructure and governance.
 It provides loans and grants to the member-countries. In this way, it
exercises enormous influence on the economic policies of developing
countries.
 It is often criticized for setting the economic agenda of the poorer
nations, attaching stringent conditions to its loans and forcing free
market reforms.
Cont’d…
 International/Transnational/global production (global FDI) is a type of
production in which different parts of the overall production process
for a particular product take place across different national territories
and it is one major element of the international or global political
economy.
 To appreciate how many countries participate today in the production
of a single product, consider the following case for example.
 One would observe that in a production of one particular model of
Swedish automobile, at least 38 major and minor components were
manufactured in factories spread throughout the world: Slovakia,
Japan, France, Norway, Brazil, Germany, the United States,
Canada, Holland, the United Kingdom, and, of course, Sweden and
others.
Cont’d…
 In addition, it is likely that each of these manufacturers had their own
transnational system of production.
 This thus tells us that today transnational production networks are
immensely more complex and larger in scale and scope than at any other
time in history.
 The WB which was primarily designed as a vehicle for the disbursement of
Marshall Plan money set up to aid the reconstruction of Europe. And, the
end result was exactly what the U.S. had hoped to achieve: a financially,
economically, politically more stable and stronger Europe. Later on, the
bank expanded its influence to all developing countries in Asia, Africa, and
Latin America.
 However, unlike in the case of Europe, the impact of the WB on the
development of developing countries has been at best controversial and at
worst negative.
 Cont’d…
3.4.3. International Finance and the IMF
 IMF is an international organization that oversees those financial institutions and
regulations that act at the international level.
 The IMF has 184 member countries, but they do not enjoy an equal say. The top ten
countries have 55 per cent of the votes.
 They are the G- 8 members (the US, Japan, Germany, France, the UK, Italy,
Canada and Russia), Saudi Arabia and China. The US alone has 17.4 per cent
voting rights. The global financial system is divided into two separate, but tightly
inter-related systems: a monetary system and a credit system.
 The international monetary system can be defined as the relationship between and
among national currencies.
 More concretely, it revolves around the question of how the exchange rate among
different national currencies is determined. The credit system refers to the framework
of rules, agreements, institutions, and practices that facilitate the transnational flow
of financial capital for the purposes of investment and trade financing.
Cont’d…
3.5. Exchange Rates and the Exchange-Rate System
 An exchange rate is the price of one national currency in terms of
another.
 There are two main exchange rate systems in the world namely: fixed
exchange rate and floating exchange rate.
 In a pure floating-rate system, the value of a currency is determined
solely by money supply and money demand.
 In other words, this system exists only when there is absolutely no
intervention by governments or other actors capable of influencing
exchange-rate values through non-market means.
 A pure fixed-rate system, is one in which the value of a particular
currency is fixed against the value of another single currency or against a
basket of currencies.
Cont’d…
 The IMF, which was set up as an ostensibly neutral international
financial institution, was designed to clearly represent U.S. interests
and power first and foremost, and the interests of the other major
capitalist countries (the developed economies) secondarily while
governing the global finical system.
 This can be seen, more concretely, from the way decision-making
power within the IMF was designed-i.e. voting power is determined
by what the IMF calls a quota.
 A quota is the amount of money that a member country pays to the
IMF.
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