GT-ShortNote, Ch-3

CHAPTER THREE
I N T E R N AT I O N A L P O L I T I C A L E C O N O M Y
(IPE)
3.1. MEANING AND NATURE OF INTERNATIONAL
POLITICAL ECONOMY (IPE)
• Political Economy teaches how a nation become rich” : ‘The
Wealth of Nations’.
• Central points in IPE are:
Debates on international level over the responsibilities of the
state in economy.
The relation between state and market in economy.
 How the international trade, investment, foreign loan and debt
and foreign aid should be governed.
The role of international institutions in the governance of
international finance, investment and trade.
• What kind of political order is needed?
 Minimalist view (neoclassical economists): the state only
provides the legal-institutional framework.
Others convince an active and direct role of state in economic
activity.
IS MARKET OR STATE LEADING AGENT ?
CONT’D
• IPE studies;
 the ever-changing relationships between governments, businesses,
and social forces across history and in different geographical areas.
 the political battle between the winners and losers of the global
economy exchange.
• The two central dimensions are:
• A political dimension; use of power and making of rules by a variety
of actors (set of institutions/rules governing social and economic
interactions).
• The economic dimension; how scarce resources are distributed among
individuals, groups, and nation-states(system of producing,
distributing and using wealth).
• Aspects of the global economic exchange include:
competition conflict
Cooperation Exploitation
THE GEOMETRY OF GLOBAL POLITICAL ECONOMY
Society
ECONOMICS
IP Politics
E
3.2. THEORETICAL PERSPECTIVES OF IPE
• Regarding the nature and functioning of the IPE, there are three
major theoretical/ideological perspectives. These are:
1. Mercantilism/Economic Nationalism
• The oldest of the three, dating back as early as the 16th century.
• Is a response to classical economics.
• Defends a strong and pervasive role of the state in the economy.
• promotes an extreme policy of autarky to promote national
economic self-sufficiency.
• Emphasizes the importance of balance-of-payment surpluses in
trade with other countries.
• It based on three ideas:
A. Not market rather state should compete economically
B. Free trade only benefits the wealthiest or rich nation
C. Protecting infant industries from competition with rich countries
• The main theorists are Alexander Hamilton and Friedrich List.
2. LIBERALISM
• The root of liberalism is related to Adam Smith’s ‘‘the wealth of
Nations”-1776’
• Defends the idea of free market system.
• It is based on the following ideas:
 the key to national wealth is economic growth : the key to
economic growth is free trade.
 Free market operation without any barrier.
 Minimal state role in economy.
• free trade would encourage countries to specialize in producing certain
goods- (comparative advantage).
• Comparative advantage has been undermined by the current wave of
economic globalization.
• This mark a shift from the comparative advantage to competitive
advantage.
• As a result, governments continue to engage in protectionism, despite
global acceptance of free trade.
3. MARXISM
• Is the youngest of the three and is advanced by Karl Marx
• Emerged as a critique of classical economics.
• According to advocates of Marxism:
Global and national income inequality remains extreme.
Inherent instability and volatility of a global capitalist system.
• Some of the central arguments are:
 historical changes are the reflection of economic development
Capitalism is the main driving force of the global economic
relations
Class conflict is pervasive and the world system is exploitative
The world should be analyzed in totality
SUMMARY
CONTEMPORARY THEORIES OF IPE
1. Hegemonic Stability Theory (HST):
• Containing elements of mercantilism, liberalism, and even
Marxism.
• Charles Kindleberger (1973) argues that the root cause of the
economic troubles (Great Depression) in the 1920s and 1930s-
absence of a benevolent hegemon.
• Benevolent hegemon is a dominant state willing and able to take
responsibility for the smooth operation of the International
(economic) system as a whole.
• The Hegemonic power plays instrumental role in Counter-cyclical
lending.
• It solves currency convertibility challenges . By doing so it ease
currency exchange between countries.
• HST has thus influenced the establishment of the Bretton Woods
institutions (IMF and WB) by American power and influence
2. STRUCTURALISM
• Is a variant of the Marxist perspective.
• Is Latin American model .
• starts analysis from a practical diagnosis of the specific structural

problems of the international liberal capitalist economic system.
• The main feature of capitalist system is centre-periphery
(dependency) relationship between the Global North and the Global
South -resulted in an “unequal exchange.”
• it advocates for a new pattern of development- industrialization via
import substitution based on protectionist policies.
• Since 1950s, this model spread to other countries in Asia and Africa,
and became a central objective in many development plans.
3. DEVELOPMENTAL STATE APPROACH
• Is an alternative development paradigm to the failure of neo-liberal
development paradigm (in the 1980s) in solving economic
problems in developing countries.
• Is a variant of mercantilism
• advocates for the robust role of the state in the process of
structural transformation.
• Some of the core features are:
Strong interventionism
Existence of bureaucratic apparatus
active participation and response of the private sector
Regime legitimacy built on development results and active
public engagement
3.3.4. DIFFERENCES AMONG NATIONAL
POLITICAL ECONOMIC SYSTEMS
• National systems of political economy differ from one another in:
The primary purposes of the economic activity of the nation.
The role of the state in the economy
The structure of the corporate sector and private business
practices.
• In terms of state role, market economies include:
the generally laissez-faire
noninterventionist stance of the United States
• On the other hand, there is state’s central role in the overall
economic management stance of the Japanese.
• The purpose of economic activity in a particular country largely
determines the role of the state in that economy.
CONT’D
• In general, the emphasis of liberal societies is on:
welfare of the consumer
the autonomy of the market - minimal state role.
Limited role of state (limited to correct market failures and
provide public goods).
• In terms of the system of corporate governance and private
business practices;
In the American business- shareholders (stockholders) have an
important role .
In both Japan and Germany-banks have played a more
important role .
• In business practices:
The largest American firms- prefer to invest and produce abroad,
Japanese firms-prefer to invest and produce at home.
3.4. CORE ISSUES, GOVERNING INSTITUTIONS AND GOVERNANCE OF IPE
3.4.1. International Trade and the WTO:

• WTO sets the rules for global trade.
• was set up in 1995 as the successor to the GATT after the WW II.
• has about 150 members.
• All decisions are taken unanimously
• but the major economic powers have managed the rules of WTO
to advance their own interests.
• International Trade: involves the exchange of money for goods
and services across national border.
• Cross-border trade is mediated by at least two different national
governments with their own set of interests and concerns.
• Generally, global trade is governed by the idea of
Global/Regional Free Trade Agreements.
3.4.2. INTERNATIONAL INVESTMENT AND THE WB
WB- was created immediately after the WW II in 1945.
 primarily designed as a vehicle for the disbursement of Marshall

Plan money set up to aid the reconstruction of Europe.
 Later on, it expanded to influence all developing countries in Asia,
Africa, and Latin America.
 Today, it focused on the developing countries .
 provides loans and grants to the member-countries.
• Generally, investment and development process in the developing

countries are directly or indirectly governed by the WB.
• But, its impact has been at best controversial and at worst negative with
the ‘one size fits all’ types.
3.4.3. INTERNATIONAL FINANCE AND THE IMF
• IMF-is an international Financial organization that oversees those
financial institutions and regulations that act at the global level.
• has 184 member countries, but they do not enjoy an equal say.
• The global financial system is divided into:
 a monetary system and
 a credit system.
• The monetary system is Related with how the exchange rate among
different national currencies is determined.
 Is defined as the relationship between and among national
currencies.
• 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.
• Generally, the IMF provided governance for the global financial
system.
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:
 Pure fixed exchange rate: the value of a particular currency is
fixed against the value of another single currency or against a
basket of currencies.
 Pure floating exchange rate : the value of a currency is
determined solely by money supply and money demand in the
absence of intervention by governments or other actors.
• While IMF is governing the global finical system, voting power is
determined by quota.
• A quota (capital subscription) is the amount of money that a
member country pays to the IMF.
• The more a country pays, the more say it has in IMF decision
makings
The End!!!

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CHAPTER THREE

• starts analysis from a practical diagnosis of the specific structural

3.4.1. International Trade and the WTO:

WB- was created immediately after the WW II in 1945.

 primarily designed as a vehicle for the disbursement of Marshall

 provides loans and grants to the member-countries.

• Generally, investment and development process in the developing

• An exchange rate is the price of one national currency in terms of

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