Global Chapter Three: International Political Economy (IPE) PDF

**Chapter Three: International Political Economy (IPE).** ========================================================= **3.1. Meaning and Nature of International Political Economy (IPE)** -------------------------------------------------------------------- There is no universal agreement on how IPE s...

**Chapter Three: International Political Economy (IPE).** ========================================================= **3.1. Meaning and Nature of International Political Economy (IPE)** -------------------------------------------------------------------- There is no universal agreement on how IPE should be defined. The definition which tells us that International Political Economy "is the study of the *tension* between 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, but un-clear assumptions. First, it suggests that there are only two significant subjects of International Political Economy: - *markets, which are composed of self-interested individuals (and the firms that they operate),* - *States, which are the primary political institutions of the modern international system.* Furthermore, it suggests that a clear-cut distinction exists between economic or market-based activities and political or state-centered ones. This definition also tells us the most important aspect of the relationship between markets and states is based on *tension,* which is "a strained state or condition resulting from forces acting in opposition to each other". In other words, the definition assumes that states and markets relate to one another in fundamentally adversarial ways. Indeed, such definition has big truth in it because states and markets are obviously the two key actors in the discussion of IPE and also the relationship between the two is often antagonistic. Yet, the definition misses other important side of the story. For instance, political society is not solely represented by the state in today's world politics. We have also equally or even more powerful (than states) non-state actors in global politics such as Transnational Corporations/Multinational Corporations (TNCs/MNCs). The definition that excludes these important actors in IPE thus becomes misleading. Similarly, unlike what the definition suggests, state-market relation in IPE could be reciprocal/cooperative or even mutually constitutive one making the definition useless. Such problems have thus forced many to develop two contending definitions of IPE. One is **state-centered definition** of IPE and the other **Marxist definition** of IPE which focuses on social class based definition of IPE because the state for Marxists is an appendage (nothing more than the instrument of the dominant class) and hence it is not considered as relevant in the definition. There is also other significant limitation in defining the concept of IPE. This limitation stems from the use of the term *International in the concept*. Strictly speaking, *International* applies only to **relations between and among sovereign states**. The term also implies a clear distinction between the national and the international between what goes on *inside* states and what goes on *outside* states. 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. Most of us know, for example, that large corporations engage 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 (whereby a single product is designed, manufactured, assembled, distributed, and marketed in various locations throughout the world), to forging strategic alliances with other corporations based in a range of different countries. These types of firms are named as **Transnational Corporations (TNCs**). Due to this trend in today'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). A broader definition of IPE is adopted because a market economy cannot exist and operate without some kind of political order (the state). This is not a new observation, nor is it one that many (political) economists, even neoclassical economists, would disagree though there is a great deal of disagreement over exactly what kind of political order is needed. Some take **a minimalist view:** the best political order is one in which the state *only* provides the legal-institutional framework for enforcing contracts and protecting private property (this is a view with which most neoclassical economists would agree). Others are convinced that the most appropriate political order is one in which the state plays an active and direct role in a much wider range of economic activity. **International Political economy (IPE**) is a field of inquiry that studies the ever-changing relationships between governments, businesses, and social forces across history and in different geographical areas. Defined this way, the field thus consists of two central dimensions namely: the political and economic dimension. - A ***political dimension*** accounts for the **use of powe**r 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. Another aspect of politics is the kind of public and private institutions that have the authority to pursue different goals. - ***The economic dimension***, on the other hand, 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 behavior. When consumers buy things, when investors purchase stocks, and when banks lend money, their depersonalized transactions constitute a vast, sophisticated web of relationships that coordinate economic activities all over the world. **3.2. Theoretical perspectives of International Political Economy** There are three major theoretical perspectives regarding the nature and functioning of the International Political economy: liberalism, Marxism, and nationalism (mercantilism). Each of these perspectives has been around for a long time. Mercantilism is the 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. 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. Around the world, more and more countries are accepting liberal principles as they open their economies to imports and foreign investment, scale down 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 and ideological critique of capitalism it survives and will continue to survive as long as those flaws of the capitalist system remain-e.g. widespread poverty side by side with great wealth, and the intense rivalries of capitalist economies over market share. A. ***Mercantilism/nationalism:*** is a theoretical and ideological perspective which **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, for instance, mercantilism emphasizes the importance of balance-of-payment surpluses in trade with other countries and to this end it often **promotes an extreme policy of autarky** to promote national economic self-sufficiency. As it developed in the 21^st^ century, mercantilism (or neo-mercantilism) defended even a much more sophisticated and interventionist role of the state in the economy-for example, the role of identifying and developing strategic and targeted industries (i.e. industries considered vital to long-term economic growth) through a variety of means, including tax policy, subsidization, banking regulation, labor control, and interest-rate management. 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 (especially Japan, South Korea, and Taiwan) used the term *'developmental state approach*' (a less politically laden term) to describe the nature of their national political economy system. B. ***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). Accordingly,* removing impediments (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. In other words, 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**. 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. These developments thus mark a shift from the conventional theory of comparative advantage to what is known as **competitive advantage**. As a result, despite global acceptance of the concept of free trade, governments continue to engage in protectionism. For example, the European Union (EU) and the United States each support their own commercial aircraft industries so that those industries can compete more effectively in a market dominated by a few companies. C. **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. However, while it is certainly true that **central planning** in **command economies** has proven to be a failure, it is *not* necessarily true that all or even most of the Marxist critique of capitalism has been negated by any historical and contemporary realities. In fact, according to advocates of Marxism just the opposite is the case. Global and national income inequality, for example, remains extreme: the richest 20 percent of the world's population controlled 83 percent of the world's income, while the poorest 20 percent controlled just 1.0 percent; Exploitation of labor shows no sign of lessening; the problem of child labor and even child *slave* labor has become endemic and so on and so forth. Marxists then tell us that all of these crises are cut from the same cloth. In particular, they all reflect the inherent instability and volatility of a global capitalist system that has become increasingly reliant on financial speculation for profit making. Some actors are always making huge sums of money from the speculative bubbles that finance capitalism produces, and this is creating the illusion that everything is working well. Give all the above realities about contemporary International political economy, therefore, the report of Marxism's death is greatly exaggerated. In addition to the above mentioned foundational theories of International Political economy, the following three **contemporary theories of International political economy** are also worth considering. 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 connection with mercantilism may not be immediately apparent, but it is not difficult to discern. The basic argument of HST is simple: the root cause of the economic troubles that bedeviled Europe and much of the world in the Great Depression of the 1920s and 1930s was the absence of a benevolent hegemon---that is, a dominant state willing and able to take responsibility (in the sense of acting as an international **lender of last resort** as well as a consumer of last resort) for the smooth operation of the International (economic) system as a whole. 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 (latent) hegemon,** the **United States,** did not yet 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. U.S. dominance was manifested, in particular, by the adoption of the U.S. blueprint for the IMF. 2. ***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 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. During the 1950s, this Latin American model spread to other countries in Asia and Africa and then the domestic promotion of manufacturing over agricultural and other types of primary production became a central objective in many development plans. 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. 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.* **3.3. Survey of the Most Influential National Political Economy systems in the world** **3.3.1. 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 while maximizing wealth creation; the distribution of that wealth is of secondary importance. Despite numerous exceptions, the American economy does approach 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. The American model like the neoclassical model rests on the assumption that markets are competitive and that, where they are not competitive, competition should be promoted through antitrust and other policies. Almost any economic activity is permitted unless explicitly forbidden, and the economy is assumed to be open to the outside world unless specifically closed. Emphasis on consumerism and wealth creation results in a powerful pro-consumption bias and insensitivity, at least when compared with the Japanese and German models, to the social welfare impact of economic activities. Although Americans pride themselves on their pragmatism, 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, however, the American economy is appropriately characterized as a system of managerial capitalism. Put differently, the economy was profoundly transformed by the late nineteenth-century emergence of huge corporations and the accompanying shift from a proprietary capitalism to one dominated by large, oligopolistic corporations. 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. The economic ideal of a self-regulating economy was further undermined by passage of the Full Employment Act of and the subsequent acceptance of the Keynesian idea that the federal government has a responsibility to maintain full employment through use of macroeconomic (fiscal and monetary) policies. Although at the opening of the twenty-first century the federal government retains responsibility for full employment and social welfare, a significant retreat from this commitment began with the 1980 election of Ronald Reagan as President of the United States and the triumph of a more conservative economic ideology emphasizing free and unregulated markets. Commitment to the welfare of individual consumers and the realities of corporate power have resulted in an unresolved tension between ideal and reality in American economic life. Whereas consumer advocates want a strong role for the government in the economy to protect the consumer, American economists and many others react negatively to an activist government because of their belief that competition is the best protection for consumers except when there are market failures. In addition, there has been no persistent sense of business responsibility to society or to individual citizens. Japanese corporations have long been committed to the interests of their stakeholders, including labor and subcontractors, and German firms acknowledge their responsibility to society and are more accepting of the welfare state than are American firms. This explains why Japanese and German firms are much more reluctant to shift industrial production to other countries than are their American rivals. However, over time, the balance between the ideal and the reality of the American economy has shifted back and forth. In the 1980s, the election of Ronald Reagan as President and then his Administration's emphasis on the unfettered market diluted the welfare ideal of the earlier post--World War II era. The role of the American government in the economy is determined not only by the influence of the neoclassical model on American economic thinking but also by fundamental features of the American political 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. Whereas the Japanese Ministry of Finance has virtual monopoly power over the Japanese financial system, in the United States this responsibility is shared by the Treasury, the Federal Reserve, and several other powerful and independent federal agencies; furthermore, all of those agencies are strongly affected by actions of the legislative and judicial branches of government. In addition, the fifty states frequently contest the authority of the federal government over economic policy and implement important policies of their own. Industrial policy represents another great difference between the United States 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 (R &D). Although Japan has actively promoted sector specific policies throughout the economy, the United States has employed these policies in just a few areas, notably in agriculture and national defense. However, the United States in the 1980s took a major step toward establishing a national industrial policy. The rationale or justification for industrial policy and associated interventionist activities is that some industrial sectors are more important than others for the overall economy. The industries selected are believed to create jobs of higher quality, like those in manufacturing, to produce technological or other spillovers (externalities) for the overall economy, and to have a high "value-added." 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 United States 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. This belief is supported by the assumption that all industries are created equal and that there are no strategic sectors. Nevertheless, despite the arguments against having an industrial policy in America, such policies have developed in the areas of agriculture, national security, and research and development. **3.3.2. 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. At the opening of the twenty-first century, this objective has remained the driving force of Japanese society. 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 sociopolitical objectives. 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. 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. Yet, the term "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. For example, the large redundant staffs in Japanese retail stores developed from an effort to employ many individuals who would otherwise be unemployed and discontented. This situation is also a major reason for the low level of productivity in non-manufacturing sectors, and it accounts in part for Japan's resistance to foreign direct investment by more efficient foreign firms. The Japanese system of lifetime 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. At the opening of the twenty-first century, however, Japan's economic problems are causing this situation to change. Nevertheless, the commitments to political independence and social harmony are major factors in the Japanese state's determination to maintain firm control over the economy. Following Japan's defeat in World War II, 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. Industrial policy has been the most remarkable aspect of the Japanese system of political economy. In the early postwar decades, the Japanese provided government support for favored industries, especially for high-tech industries, through trade protection, generous subsidies, and other means. The government also supported creation of cartels to help declining industries and to eliminate excessive competition. Through subsidies, provision of low-cost financing, and especially administrative guidance by bureaucrats, the Japanese state plays a major role in the economy. In this regard the Japanese state's extensive use of what is known as the "infant industry" protection system deserves special attention. 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 support for basic industries, such as steel, and for generic technology, like materials research.* - *Competition (antitrust) and other policies favorable to the keiretsu and to interfirm cooperation*. Japanese industrial policy was most successful in the early postwar years when Japan was rebuilding its war-torn economy. However, as Japan closed the technology gap with the West and its firms became more powerful in their own right, Japan's industrial policy became considerably less significant in the development of the economy. Yet the population and the government continued to believe that the state should play a central or at least an important supportive role in the continuing industrial evolution of the economy. **3.3.3. 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. Furthermore, except for the medium-sized business sector (*Mittelstand*), the nongovernmental sector of 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. This corporatist version of capitalismis characterized by greater representation of labor and the larger societyin the governance of corporate affairs than in Anglo-Saxon shareholdercapitalism. 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. Indeed, the "law of co-determination" mandates equal representation of employees and management on supervisory boards. Although the power of labor on these boards can be easily overstated, the system is a significant factor in Germany's postwar history of relatively smooth labor relations. 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. 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. On the other hand, the role of the German state in the microeconomic aspects of the economy has been modest. The Germans, for example, have not had an activist industrial policy although, like other advanced industrial countries, the government has spent heavily on research and development. 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. **3.3.4. 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: (1) the primary purposes of the economic activity of the nation, (2) the role of the state in the economy, and (3) the structure of the corporate sector and private business practices. 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. As for the role of the state in the economy, market economies include the generally laissez-faire, noninterventionist stance of the United States as well as 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 (the *keiretsu*) 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. On the other hand, in those societies where more communal or collective purposes prevail, the role of the state is much more intrusive and interventionist in the economy. Thus, the role of such states can range from providing what the Japanese call "administrative guidance" to maintaining a command economy like that of the former Soviet Union. 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. For example, whereas shareholders (stockholders) have an important role in the governance of American business, banks have played a more important role in both Japan and Germany. In addition, regarding business practices, whereas the largest American firms frequently invest and produce abroad, Japanese firms prefer to invest and produce at home. 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** +-----------------------------------------------------------------------+ | ***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. It has about 150 | | members. All decisions are taken unanimously but the major economic | | powers such as the US, EU and Japan have 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.* | +-----------------------------------------------------------------------+ What is International Trade? Most of you might have a basic understanding of trade but if someone gives you his/her laptop computer in exchange for your brand new iPad it means that you are engaged in trade. 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'' we know it from the standard definition of free trade as "The unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas" is never entirely free). Any ways, despite the long history of trade, it is important to recognize that the scope and scale of cross-border trade is, today, immensely greater than at any other time in human history. Why this is so? To the liberal economists, this is not a surprise because they are 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 (especially in wealthy capitalist economies), most people acknowledge that the antithesis of trade---namely, **autarky** (i.e., a policy premised on complete economic independence or self-sufficiency)---is essentially impossible and self-defeating in the industrial and **post-industrial** eras. Yet, one has to also bear in mind that there is still ongoing debate revolving around both on practical political issues---e.g., who benefits and who is harmed by trade---and also around deeper theoretical disagreements. As a result, it is common to observe in the world disputes and frequently serious tensions over trade. This brings the question: "how is international/global trade governed?" One most common answer is the idea that 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". In other words, the notion of free trade in NAFTA had and still have significant element of protectionist /mercantilist policies such as a tax on specific imported goods (*tariff*), prohibiting their importation (*import ban*), or imposing a quantitative restriction (*import quota*). The latter two policies are examples of *nontariff barriers*, or NTBs. Other types of NTBs include domestic health, safety, and environmental regulations; technical standards (i.e., a set of specifications for the production or operation of a good); inspection requirements; and the like. Finally, it is always important to remind that the political and theoretical debate on international trade will continue to mount high as the trade itself grows more and more. In this debate, the liberals' argument would continue to center on the principle of comparative advantage, while mercantilists and Marxists expound upon power differentials between national economies, or on class inequality and exploitation. **3.4.2. International Investment and the WB** +-----------------------------------------------------------------------+ | ***WB*** | | | | *The World Bank was created immediately after the Second World War 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 (pollution reduction, establishing and enforcing | | regulations), infrastructure (roads, urban regeneration, and | | electricity) and governance (anti-corruption, development of legal | | institutions). 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.* | +-----------------------------------------------------------------------+ International/Transnational/global production (in short 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. From the above picture, 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. The hood latch cable, for instance, was manufactured by Klüster in Slovakia; the amplifier by Alpine (Japan); the engine control unit by Borgwarner (USA); the turbo diesel by Sanden (Japan); the drive shaft by GNK/Visteon (USA); the air conditioner by Valeo (France), the doors by Brose (Germany), and so on. 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. What then explains such International production structure? Well, casual observers have identified a number of major factors but one of the most important is the drastic decrease in transport and communications costs which made transnational production much more economically efficient. This is also reflected in the rise of efficiency-seeking FDIs worldwide. Besides, the developments of new and better technologies and improvements in global finance have also made it easier and more profitable to build integrated production systems across borders. While investment and the development process in general in the developed countries is predominantly governed by the interactions of multinational companies, investment and development process in the developing countries, on the other hand, are directly or indirectly governed by the WB (some times more powerfully than the governments of sovereign states). The WB which was primarily designed as a vehicle for the disbursement of Marshall Plan money set up to aid the (immediate) 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. This has largely to do with the 'one size fits all' types of excessive and hard to implement policy prescriptions (mostly of the neo-liberal versions) of the bank to developing countries and the tough aid/loan conditionality it often puts for policy conformance. That is also why the bank's relationship with the governments of the developing countries who seriously want to defend their policy freedom has often been not smooth. **3.4.3. International Finance and the IMF** +-----------------------------------------------------------------------+ | **IMF** | | | | *The International Monetary Fund (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, on the other hand, 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. From these two very general definitions, it should be easy to see how the monetary and credit systems are inextricably related to one another. Yet, for a deeper understanding, let us separately discuss the main components of the monetary and credit systems. **3.5. Exchange Rates and the Exchange-Rate System** An *exchange rate* is the price of one national currency in terms of another. For example, according to July 2013 rate, one U.S. dollar (\$1) was worth 98.1 Japanese yen (¥), while one British pound (£) was worth 1.54 U.S. dollars. Yet, in August 1998, one U.S. dollar was worth 145.8 yen. Compared to the rate in July 2013, the difference is then almost 50 percent. This implies that in August 1998, the yen was substantially "weaker" (the quotation marks are used because a weak currency is not necessarily a disadvantage). What does this mean in concrete terms? Well, say you have \$2,000. In 1998, if you had traveled to Japan you could have exchanged that \$2,000 for 291,000 yen, but in 2013 that same \$2,000 (to keep things simple, disregard inflation) could be exchanged for only 196,000 yen. In short, you would have a lot less Japanese yen to spend in 2013. 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 moneydemand. 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 nonmarket means. A pure fixed-rate system, on the other hand, 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. The question thus remains: How is the global financial system governed? The creation of the International Monetary Fund (IMF) provided the answer for this question. 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 (or capital subscription) is the amount of money that a member country pays to the IMF. Accordingly, the more a country pays, the more say it has in IMF decision makings. And, it is the US that tops up in this regard.