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Chapter Eleven: International Political Economy
Review |
This chapter examines international political economy. This subfield of international relations deals with the intersection of politics and economics and the issues at this intersection. The chapter begins by looking at the origins of the global political economy. It then introduces the three principle theoretical approaches to IPE—mercantilism, economic liberalism, and Marxism. It then examines the key global economic institutions: the International Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO). The chapter concludes with an examination of transnational corporation and a discussion about the future of the global economy.
1. The beginnings of a global economy
The global economy emerged slowly during the late Middle Ages and Europe’s subsequent voyages of discovery and trade.
2. Theories of political economy
There are three major theories of international political economy: mercantilism, liberalism and Marxism. Economic liberalism is the dominant perspective today owing to the end of the Cold War, the influence of free-market capitalism, and globalization.
a) Mercantilism
- Mercantilists believe that economic activity should increase state power. They favored accumulating precious metals and achieving self-sufficiency.
- Mercantilism thrived in an era when Europe’s states were centralizing their authority, building specialized bureaucracies, and hiring mercenaries for their armies and navies.
- Mercantilism began to give way to economic liberalism during the industrial revolution.
- Today, neomercantilism persists in the form of economic nationalism that advocates nontariff barriers to trade to protect home industries.
b) Economic Liberalism
- Economic liberals assume that economic policies should increase people’s prosperity. They favored specialization to achieve comparative advantage, free trade, and free markets. Since the 1980s, the global economy has witnessed its renewed dominance.
- Today’s neoliberal economists see a greater role for economic institutions than did classical economic liberals.
c) Marxism
- Marxism sees history evolving through class conflict and revolution in which inequality is progressively eliminated. It achieved great influence after the Russian Revolution but has become less significant since the end of the Cold War.
- Today the only countries that call themselves Marxist are China, North Korea, Laos, Vietnam, and Cuba.
- Marxian economics remain influential in analyses of underdevelopment.
3. The Great Depression
The Great Depression brought an end to global economic cooperation, witnessed a collapse of the global trading system, and triggered the train of events leading to World War II.
a) The Depression Begins
- The Depression began with the 1929 collapse of stock prices in the United States and spread economic hardship to America’s farmers and workers.
- At the time, governments and economists opposed intervention in the economy, believing that the Depression would be self-correcting.
b) The Depression Spreads
- Economic cooperation deteriorated as countries adopted beggar-thy-neighbor policies including competitive tariffs and currency devaluations.
- The Depression lasted until World War II, during which time military conscription and high budget deficits reduced unemployment and raised US industrial production.
4. The Bretton Woods institutions
After World War II, three major international economic institutions were established to prevent a return to the beggar-thy-neighbor policies of the 1930s: the IMF, the World Bank, and the GATT.
a) The International Monetary Fund
- The IMF promotes monetary stability by providing loans to countries in economic crisis. Its loans are based on strict conditions that reflect neoliberal preferences.
- The IMF is often viewed as an advocate of the interests of the wealthy countries.
b) The World Bank
The World Bank group provides loans and grants to stimulate economic development and reduce global poverty.
c) The General Agreement on Tariffs and Trade/World Trade Organization
- The GATT and its successor, the WTO, enforce international trade rules. The WTO has a legally binding procedure for judging complaints brought to it.
- The steel case
The WTO judged against the US in a case in which the US had imposed tariffs on imported steel.
- Genetically modified crops
The EU’s reluctance to accept genetically-modified grain exports from the US tests the question of whether health and safety regulations are really nontariff barriers.
5. Hegemonic stability
a) According to hegemonic stability theory, the global economic order will survive only so long as a hegemonic state is prepared to support it.
b) The US is currently the leader of the global economic order, but recent US unilateralism and protectionism raise questions about the US abandoning this leadership role.
6. Transnational corporations: engines of global capitalism
TNCs, with facilities in many countries, are among the most important sources of investment and play a major role in creating and sustaining a global market.
a) The Global Reach of TNCs
- TNCs are among the wealthiest institutions in global politics, and the need of countries for foreign investment and employment makes many of them amenable to corporate penetration.
- Neoliberals see TNCs as generators of wealth and sources of economic development; Marxists, however, are suspicious of TNCs because of their connections to wealthy states.
b) Criticisms of TNCs
- Critics argue that TNCs use a variety of disreputable tactics to achieve their ends, including bribery.
- Critics point out that TNC policies have undesirable side effects for host countries in the developing world. They do not reinvest in the host country, they hire few locals for senior positions, and they abuse local environmental resources and human rights.
c) Reforming TNCs
Led by the UN, there have been several efforts to improve corporate behavior including a Global Compact to which TNCs are invited to adhere.
7. States and markets
a) Today, markets transcend the boundaries of states, and states are less and less able to control their economic destinies in the face of economic forces that originate outside their boundaries.
8. The Asian Contagion
The 1997-98 Asian financial crisis illustrates the problems that arise from states’ inability to insulate themselves from globalizations economic effects.
a) The contagion unfolds
- The economic crisis began with speculators dumping Thai currency and other assets.
- It then engulfed the rest of Southeast Asia, including Indonesia, Malaysia, and the Philippines, all of which had borrowed heavily to finance earlier economic growth.
b) The contagion spreads
- The crisis spread like wild fire to East Asia, Russia, and Brazil as investors feared that the economies of all emerging markets were vulnerable owing to mountains of debt and inadequate liquidity.
- The rapid spread of the crisis was a product of the high level of integration into the global economy, economic interdependence among trading partners, the dramatic increase in the size and speed of global capital movements and financial transactions, the tendency of investors to view all emerging economies in exactly the same way, and the weakness of local banking systems.
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Focus Questions |
Q1 What are the main theories in international political economy?
A1 The three dominant theoretical perspectives in international political economy are mercantilism, liberalism, and Marxism. Mercantilism, which dominated international economics until the 19th century, was based on the assumption that wealth was to serve the power of the state and, as such, was an economic version of realism. Like realist versions of power, mercantilists believed that relative wealth was more important than absolute wealth. In their heyday, mercantilists advocated the accumulation of precious metals and high tariffs to reduce imports that might create dependence on other countries, would reinforce control over colonies and imperial possessions, and would protect infant industries. Neomercantile practices continue to exist in many countries today in the form of nontariff barriers to trade such as "voluntary" export restraints and protection of uncompetitive countries. Liberalism associated most closely with Adam Smith and David Ricardo, assumed that the purpose of wealth was to enrich citizens and increase their absolute wealth, and its advocates argued for free trade based on Ricardo's theory of comparative advantage in which all countries prospered if each concentrated on producing and exporting only what it could produce most efficiently. British repeal of its protectionist Corn Laws in 1846 was a major step toward economic liberalism, and Great Britain became the leading advocate of free trade and competition internationally. Although markets today no longer permit unfettered competition owing to their dominance by giant transnational corporations, the basic tenets of liberalism—free markets, elimination of trade barriers, free movement of capital investment, and minimal government interference in markets—dominate international political economy. This perspective is reinforced by the major international economic institutions such as the International Monetary Fund (IMF), the World Trade Organization (WTO), and transnational corporations and banks. Marxism sees history evolving owing to changing modes of production that allow some economic classes to exploit others. Such exploitation leads to revolution and the dominance of new classes until the proletariat finally overthrows capitalism at which point the cycle of revolutions would end and the state would wither away.
Q2 What were the causes and consequences of the Great Depression?
A2 The Great Depression which began with the stock market crash in New York and became worldwide in the early 1930s brought an abrupt end to the liberal economic system and brought an end to the gold standard under which the value of currencies was pegged to the price of gold. Speculation and borrowing led to overpriced stocks and an accumulation of debt. Higher interest rates then made the repayment of debt more difficult, impoverished investors, and brought a decline in industrial production and employment. In addition, agricultural overproduction and low prices led to foreclosures of farms and added to bank failures that were the result of unpaid loans. One result was the collapse of the post-World War I system in which American investment in Germany allowed that country to pay reparations to France and Britain that, in turn, repaid what it owed the United States. Another result was widespread poverty and unemployment in the United States and then in Europe and Japan. As each country tried to stave off economic disaster by devaluing its currency and imposing high tariffs on imports so as to stimulate exports, the result was intensification of the depression by drying up international trade. And as the Western democracies became preoccupied by their domestic woes, they cut back on defense expenditures and took little interest in international politics. Unemployment and economic distress in Germany and Japan, two countries that were especially hard hit by the depression, produced massive political alienation and the flight to radical political movements on the right and left. In this way, the Great Depression contributed significantly to the rise of Hitler and the Nazis in Germany and the militarists in Japan and to the failure of the Western democracies to resist German and Japanese aggression in the 1930s.
Q3 What were the three Bretton Woods institutions, and what were their major functions?
A3 The three institutions established at the 1944 Bretton Woods conference were the International Monetary Fund (IMF), the World Bank (IBRD), and, somewhat later, the General Agreement on Tariffs and Trade (GATT). All were established to regulate the international economic system and prevent the "beggar-thy-neighbor" policies such as competitive devaluations that countries had pursued during the Great Depression. The IMF was designed to promote economic stability by regulating monetary policy and currency exchange rates, both necessary for international trade to flourish. Its main task was to restore a monetary system based on convertible currencies and fixed exchange rates. Under fixed exchange rates with world currencies pegged to the dollar, countries could not devalue their currencies and thereby increase exports and reduce imports. The IMF was to maintain stable exchange rates by providing short-term loans to help countries manage temporary balance-of-payment deficits. After 1971, when the United States forced a shift from fixed to floating exchange rates in which supply and demand would determine the value of currencies relative to one another, IMF responsibilities grew as it became a lender of last resort in the event a loss of confidence caused the rapid devaluation of a state's currency, thereby threatening a collapse of the country's economy. IMF loans would restore confidence, help arrange for creditors to reschedule the country's debt, and help stabilize the country's currency in exchange for which the IMF would require the country to make painful reforms in its economic system, reforms that reflected the organization's role as a guardian of free-market capitalism. The IMF also assumed the task of providing debt relief for poor countries. The World Bank was originally established to fund postwar reconstruction but soon turned to providing loans for economic development. In recent years, it has increasingly focused on encouraging development in the world's poorest countries by providing low-interest loans and, with the IMF, reducing the debt burdens of poor countries that prove they are dedicated to eliminating poverty at home. The GATT was established after the United States refused to support a powerful International Trade Organization. Its task was to encourage a liberal trading order based on the norm of non-discrimination in trade. Over the years, the GATT has sponsored a series of global trade talks or "rounds" that have led to the dramatic reduction of most tariffs and many nontariff barriers. In 1995, as a result of the Uruguay Round, the GATT was replaced by a more powerful trade body, the World Trade Organization (WTO).
Q4 How does the World Trade Organization work?
A4 The WTO is based on norms of non-discrimination in trade, reciprocity of access to markets, lower trade barriers, stability of trade relations, and elimination of unfair trade practices such as government subsidies. These norms and the rules governing trade relations are codified in a series of treaties and are policed and enforced by the WTO. The WTO is empowered to resolve trade disputes, and its decisions stand unless all members oppose them. If a complaint is made, the WTO Dispute Settlement Board is empowered to render mandatory decisions. A panel hears the complaint, Initially encourages disputants to resolve their differences and if necessary renders a decision that can be appealed. If the appeal is turned down and a country is judged to have violated trade rules, it must changes its policies or the WTO may authorize countries harmed by those policies to impose retaliatory trade sanctions. Critics of the WTO argue that like the IMF the organization is guardian of free-market capitalism and that if often fails to take adequate account of national environmental and health regulations which it interprets as illegal trade restrictions.
Q5 What is the theory of "hegemonic stability"?
A5 According to hegemonic stability theory, the institutions and practices that sustain the global economy can survive only so long as there is a single powerful state or hegemon to provide leadership, enforce trade and monetary rules, and prevent other countries from pursuing narrow self-interest. In this way the hegemon—whether Great Britain in the 19th century or the United States in the 20th and 21st centuries—benefits itself and provide all countries a collective good. In the absence a hegemon, the theory predicts that countries will pursue their own interests at the expense of others as they did in the 1930s during the Great Depression. Although hegemonic stability theory became popular in the 1980s when it appeared that Japan might surpass the United States economically, it is again relevant during a period in which the United States has been increasingly prone to follow unilateralist policies.
Q6 What role do transnational corporations play, what is their impact on global politics and economics?
A6 Transnational corporations (TNCs) knit people together in vast networks of production and distribution and in this way are agents of economic interdependence and globalization. Their sheer size and wealth, their ability to move assets and outsource jobs, and their control over most of the world's private direct investment provide them with potent political as well as economic influence. TNCs are criticized by some observers for expropriating local resources and exporting them for their own benefit, creating little employment in host countries, increasing local demand for useful, unsafe or unhealthy products, harming the environment, bribing local officials, meddling in local politics, and subjecting employees in poor countries to working conditions that would be illegal in rich countries. Publicity has forced some firms to reform their operations, and in recent years the United Nations has become more active in persuading corporation to follow to principles of good corporate behavior. Other observers regard TNCs as promoting economic efficiency, providing necessary capital for development, and connecting national economies in a globalizing world in which markets have outgrown national economies. |
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