International Political Economy Chapter Three PDF

Chapter Three: International Political Economy (IPE) 3.1. Meaning and Nature of International Political Economy (IPE) Political economy is the study of the intersection between politics and economics within a given country  International Political economy (IPE) is a field of inquiry that studies...

Chapter Three: International Political Economy (IPE) 3.1. Meaning and Nature of International Political Economy (IPE) Political economy is the study of the intersection between politics and economics within a given country  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. IPE is concerned with the way in which political and economic factors interact at the global level The field consists of two central dimensions namely: the political and economic dimension. A political dimension accounts for the use of power by a variety of actors, including individuals, domestic groups, states (acting as single units), International organizations, (NGOs), and Transnational corporations (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. 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. 3.2. Theoretical perspectives of International Political Economy There are three major theoretical (often ideological) perspectives regarding the nature and functioning of the International Political economy: 1. 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 field of international trade, for instance, mercantilism emphasizes the importance of balance-of-payment surpluses in trade with other countries.  According to mercantilists, states should also play a disciplinary role in the economy to ensure adequate levels of competition. Eg. Japanese,South Korean, Taiwanese and Chinese  Mercantilism  The 16th and 17th centuries economic policies of the great powers and the overall economic systems are often referred to by the term mercantilism  international economic relations were carried out within the context of imperialism.  Mercantilists advocated self-serving states of favouring exports so that wealth could be accumulated  Basic tenets include:  The government should involve in international trade  International economics is competitive not cooperative  Self-sufficiency  Protectionism  classical mercantilism is based on three central propositions. These are National power and wealth are tightly connected  Cont… Trade provides countries one way for countries to acquire wealth from abroad Manufacturing activity should be promoted, whereas agriculture and other non-manufacturing activities should be discouraged  Modern mercantilism applies these three propositions to contemporary international economic policy in the following propositions. Economic strength is a critical component of national power Trade is to be valued for exports, but government should discourage imports whenever possible Some forms of economic activities are more valuable than others  Mercantilism, in general, argued that state should play a large role in determining how society’s resources are allocated.  2. Liberalism: Emerged in the 18th century Challenged all the three propositions of mercantilism It defends the idea of free market system (i.e free trade/trade liberalization and free financial and Foreign Direct Investment (FDI) flows). The purpose of economic activity is to enrich individuals, not to enhance state power Countries do not enrich themselves by running trade surpluses Efficiency and effectiveness – not just by producing manufacturing products rather than primary goods It is based on people’s natural inclination to cooperation  Accordingly, removing impediments (barriers) to the free flow of goods and services among countries is the foundational value and principle of liberalism. 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 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. 3. 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. 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% of the world’s population controlled 83% of the world’s income,  Cont.…  while the poorest 20% controlled just 1.0%; Exploitation of labor shows no sign of lessening/decrease/; the problem of child labor and even child slave labor has become endemic and so on and so forth.  they all reflect the inherent instability and volatility of a global capitalist system that has become increasingly reliant on financial speculation for profit making.  Give all the above realities about contemporary International political economy, therefore, the report of Marxism’s death is greatly exaggerated NB: each perspective have different response to the questions: How politics shape the allocation of resources?  Mercantilist: state guides resource allocations  Liberalist: politics play little role  Marxist: decision are made by large capitalist class What are the consequences of resource allocation?  Mercantilist: to enhance state power  Liberalist: to improve the welfare of the people  Marxist: to concentrate wealth in the hands of capitalists.  The following three contemporary theories of International political economy are also worth considering. Hegemonic Stability Theory (HST) is a hybrid theory containing elements of mercantilism, liberalism, and even Marxism.  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 /generous/ 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.  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.  Developmental State Approach: Realizing the failure of neo-liberal development paradigm in solving economic problems in developing countries. The concept of the developmental state is a variant of mercantilism and it advocates for the strong 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. 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. The American economy does approach the neo- classical 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.  3.3.2. The Japanese System of Developmental Capitalism  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.  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/dominance/ 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. Industrial policy has been the most remarkable aspect of the Japanese system of political economy. 3.3.3. The German System of Social Market Capitalism 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, the nongovernmental sector of the German economy is highly oligopolistic and is dominated by alliances between major corporations and large private banks. 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. At the core of the German system of political economy is their central bank, or Bundesbank.  3.3.4. Differences among National Political Economy Systems 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. 3.4. Core Issues, Governing institutions and Governance of (IPE) 3.4.1. International Trade and the WTO The World Trade Organization 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 WWII. It has about 150 members.  All decisions are taken collectively 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. 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 (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 rigid conditions to its loans and forcing free market reforms. The WB which was primarily designed as a vehicle for the expense 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. 3.4.3. International Finance and the IMF IMF-Govern global financial system both the monitory and credit system The IMF has 184 member countries, but they do not enjoy an equal say. The top ten countries have 55% 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 voting rights. 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 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 holder of currencies. The IMF, which was set up as supposedly 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.