International Political Economy

Chapter Summary
I. Introduction

Economic globalization describes the international political economy of 2010.

o Goods and services are produced and traded globally.
o A global virtual world ties us together through new technology.

New technologies and economic ties also lead to the decreasing territorialization of
daily life.

II. The Evolution of the International Economy: Clashing Ideas and Practices

The era from the late Middle Ages to the end of the eighteenth century saw a number
of key changes in technology, ideas, and practices.
o European explorers opened up new frontiers in the Americas, Asia, and Africa.
o The exchange of good and people tied the colonies and the home states
together.

Adam Smith wrote of the idea that human are rational and self-interested.
o To Smith, markets develop through individual, rational action.
o Markets need to be free from government action to function properly.

Mercantilism (statism) was the common practice of many governments at the time.
o Mercantilisms goal is to build economic wealth to build the power of the
state.
o Jean-Baptiste Colbert (1617-83) argued that states should accumulate gold and
silver as well as build a strong central government.
o Alexander Hamilton (1757-1804) made similar arguments in the United
States.

From the start of the nineteenth century to World War I colonialism expanded greatly.

During the same period the states of Europe industrialized.

o Industrialization was spurred by technological change

o Economic links in global trade were followed by political and cultural
domination by the industrial states.

Britain acted as a hegemon to promote a more peaceful world order.

o The Pax Britanica is an example of hegemonic stability theory.
o A large, dominant state provides collective goods to the global system.

Radicalism emerged in this period as a response to the excesses of the time.

o Based in the teaching of Marx and others, radicalism attacked the inequalities
of the time.
o Radicals argued that society was conflictual.
1. Conflict was focused on competition between groups.
2. Owners of wealth versus workers
o Radicals argued that the state would support the owners of wealth.
o The holders of capital must expand their markets and the capitalist system
until it embraces the entire world.
1. This pressure for expansion creates tensions and creates the seeds of
the destruction of the system as a whole.

After the end of World War II, we enter the most recent phase of internationalization
o The 1930s saw the spread of harmful beggar thy neighbor policies that shut
off international trade
o At the end of World War II, the goal was to create a new system that could
prevent the disaster of the 1930s.
o The post-World War II system sought to promote the following:
1. Open trade
2. Free flow of capital
3. Stable exchange rates
o These three goals are the foundation of globalization in the post-World War II
period

How can we study these developments?

o Rational choice offers one way
1. Individuals are rational actors with known and fixed preferences.
2. In the rational choice approach the study of international political
economy is the study of how states make strategic choices.
o Social constructivists argue against rational choice.
1. Preferences cannot be assumed.
2. Preferences change with time.

III. The Basis of the Contemporary International Economy

Key Concepts in the Liberal Economy

o Liberal economics is based on the recognition that states differ in their
resource endowments. Worldwide wealth is maximized if states engage in
international trade.
o David Ricardo (1772-1823) developed a theory that states should engage in
international trade according to their comparative advantage. That is, states
should produce and export those products which they can produce most
efficiently (specialize), relative to other states. Thus, gains from trade are
maximized for all because each state minimizes its opportunity cost.
o National currencies should be bought and sold in a free market system. In such
a system of floating exchange rates, the market determines the value of one
currency as compared with other currencies. Floating exchange rates will lead
to market equilibrium.

Roles of Multinational Corporations (MNCs)

o MNCs play a key role as engines of economic growth.
1. They act as the vanguard of the liberal economic order.
2. They have taken the integration of national economies beyond trade
and money to include the internationalization of production
o Liberals see MNCs as positive
1. Economic improvement is driven through efficiency and MNCs
promote efficiency.
o MNCs perform many activities.

1. Direct importing and exporting

2. Making significant investments in a foreign country
3. Buying and selling licenses in foreign markets
4. Engaging in contract manufacturing
5. Opening manufacturing facilities in foreign countries
o MNCs choose to operate in international markets for various reasons, all of
which are based in economics, but which are affected by the political relations
of the host state.
1. Reduce transport costs by moving production closer to customers
2. Tax and license advantages from local governments
3. Find cheaper labor markets
4. Obtain the services of foreign technical personnel
o Some liberals go further in discussing the benefits of MNCs
1. The international liberal economy may promote peace.
o Liberal economics suggests a basic set of policies, all based on the minimal
involvement of governments
1. Open markets
2. Free trade
3. Free flow of goods and services

Roles of the International Economic Institutions

o Economic liberalism has been supported by the establishment and expansion
of the Bretton Woods institutions, the World Bank, the International Monetary
Fund (IMF), and to a lesser extend the General Agreement on Tariffs and
Trade (GATT)now the World Trade Organization (WTO).
o The World BankStimulating Economies
1. The World Bank was designed initially to facilitate reconstruction in
the post-World War II Europe.

2. In the 1950s the bank shifted its emphasis from reconstruction to

development. It generates capital funds from member-states
contributions and from borrowing in financial markets.
3. A high proportion of the World Bank funding has been used for
infrastructure development
o The International Monetary FundStabilizing Economies
1. The task of the International Monetary Fund (IMF) was to stabilize
exchange rates.
2. Originally the fund established a system of fixed exchange rates
3. In 1972 this system collapsed when the United States announced that it
would no longer guarantee the system.
4. In 1976 the fund formalized the system of floating exchange rates
currently in use.
o GATT and the WTOManaging Trade
1. The General Agreement on Tariffs and Trade (GATT) enshrined
important liberal principles:

Support of trade liberalization

Nondiscrimination in trade

Exclusive use of tariffs for protecting home markets

Preferential access in developed markets to products from the

South

Support concept of nation al treatment of foreign enterprises.

2. The GATT established a continual process of multilateral negotiations

among those countries sharing major interests in the issue at hand; the
agreements reached were then expanded to all GATT participants.
3. Most of the work was carried out over the course of eight negotiating
roundseach round progressively cutting tariffs and addressing new
problems, such as intellectual property rights.

IV. How the Globalized Economy Works Today

International Finance

o Capital movements played a key role in the earlier phases of the development
of the international political economy and they continue to do so today
o Capital moves in two ways:
1. Foreign direct investment (FDI) includes the building of factories and
other facilities
2. Portfolio investment (PI) includes investments in the stocks and
bonds of a country
3. MNCs play a major role in the movement of capital, both in the form
of FDI and in the form of PI

There are currently more than 60,000 MNCs employing 90

million people in the global economy

Of the largest 100 MNCs, 90 are based in the United States,

Europe, Japan, and a handful of developing states

o Critics from all perspectives realize that some states have more difficulty
attracting private investment than others.
1. Africa receives only 8 percent of private capital
2. The World Bank has expanded its mission to include development
lending to these countries.
3. Two separate institutions within the World Bank were created to deal
with these issues.

The International Finance Corporation (1956) provides loans

for the development of private enterprises in developing
countries

The International Development Association (1960) provides

capital to the poorest countries, usually in the form of interest
free loans

The Multilateral Investment Guarantee Agency (1988) provides

insurance against losses from events like expropriation, civil
war, or conflict

4. Even with the expansion of World Bank programs, these efforts

continue to decline as a proportion of total capital flows
o Financial flows accelerated in the 1980s due to a range of mechanisms

1. Exchange rates were no longer fixed, so traders in currency exchange

markets and in MNCs could capitalize on buying and selling currencies
2. The market developed new financial instruments, such as derivatives
which could be packaged and sold around the world
3. New economic actors, sovereign wealth funds, formed in capitalsurplus countries
4. Economic liberalization has led to the emergence of offshore financial
centers with low taxation and little or no regulation
o The Asian financial crisis of the 1990s illustrates the possible outcomes of the
globalization of finance.
1. Beginning in Thailand in 1997, in a relatively short period of time, 2
percent of GDP fled that country.
2. Within weeks the crisis spread to Indonesia, Malaysia, the Philippines,
and beyond, eventually reaching Russia and Brazil.
3. The IMF responded to the political and social upheaval with large,
controversial bailout packages to three of the affected countries
(Thailand, Indonesia, and South Korea) that included sets of lengthy
conditions that each country was supposed to follow.
4. Governments had to agree to carry out significant structural reforms
that would transform their economies from semi-mercantilist to more
open ones.

Lifting restrictions on the movement of capital

Cutting the government budget, particularly in social programs

5. Critics of the IMF response focus on the moral hazard problem:

states were rescued from the consequences of their reckless behavior,
providing little incentive for them to change that behavior

International Trade
o The goal of economic liberal thinking was to create a free trade system.
o For various reasons, leaders may want to protect their home markets.
o The goal of the post-World War II GATT was to promote international trade by
lowering trade barriers.
o The GATT accomplished this in a series of negotiating rounds dealing with
issues such as tariff cuts and favorable treatment for developing countries.

o The final GATT round, the Uruguay Round, covered new items such as
services, intellectual property, and agriculture.
o In 1995, GATT became a formal institution, renaming itself the World Trade
Organization (WTO).
o Two important procedures were initiated in WTO:
1. The Trade Policy Review Mechanism (TPRM), which conducts
periodic surveillance of trade practices of member states
2. The Dispute Settlement Body, designed as an authoritative panel to
hear and settle trade disputes. The WTO can impose sanctions against
violators and is more powerful than other economic dispute resolution
arrangements.
o Getting global participation in the WTO has proved a painstaking task.
1. Chinas accession to the WTO in 2001 required that it make
commitments to move toward a market economy.
2. Vietnam, which acceded in 2007, has made similar commitments
o Trade liberalization, the major goal of the WTO, remains controversial. The
Doha Round, launched in 2001, was announced as a development round to
help developing countries correct the inequities of the previous trade
agreements. The North and the South remain deadlocked over the issue of
agricultural export subsidies.
o Domestic groups and NGOs in many countries feel that the WTO is usurping
the decisions and degrading the welfare of individuals and is undermining
labor and environmental standards.

International Development
o The Doha Round has bought out some of the differences between the
developed North and the developing South.
1. The North is relatively wealthy.
2. Parts of the South lie mired in poverty, struggling to meet basic needs.
o Proponents of economic liberalism point to the progress made in closing the
development gap.
o Detractors of economic liberalism point to a different set of indicators, arguing
that the gap between rich and poor is actually increasing.

o In liberal economic theory, trade liberalization is based on comparative

advantage and is a key engine of economic growth.
1. It is unclear whether aggregate growth leads to the economic
improvement of the lives of individuals.
o The World Bank has changed its orientation over time without undermining its
commitment to liberal economics. In the 1990s, sustainable development, an
approach to economic development that incorporates concern for renewable
resources and the environment, became part of the banks repertoire.
o The banks support of private-sector participation has become known as the
Washington Consensus, a version of liberal economic ideology. Its adherents
hold that only with liberalization of trade and privatization will development
occur.
o While the IMF was not originally charged with development, it realized that
many countries seemingly temporary balance of payments problems were
actually long-term structural problems.
1. During the 1980s the IMF began to provide longer-term loans if states
adopted structural adjustment programs consistent with the
Washington Consensus.
2. In the 1990s it became apparent that some countries could not get out
from under the weight of debt even with structural adjustment
programs.
3. The Heavily Indebted Poor Countries (HIPC) Initiative began an effort
to eliminate or reduce the debt of the poorest states.

By 2008 fourteen states had all of their debts canceled

o Until the 1990s the Soviet Union and its allies were not members of the
Bretton Woods organizations. The demise of the Soviet Union gave the IMF
an active role in helping former Soviet and Soviet satellite countries make the
transition to capitalist economies
o As the IMF has implemented these programs the line between the IMF and the
World Bank has become blurred. A broad consensus has come to exist
regarding the viability of the market-oriented policies and political pluralism
as the foundation for economic development.
1. This has included a greater emphasis on human development
education and health
o NGOs play a critical role in this new approach, organized at the grassroots
level to carry out locally based projects.

1. A particular effort has been the work of the Grameen Bank. It now has
more than two thousand branches.
o Yet the important question is, with economic globalization, are benefits being
distributed fairly?
1. The UN has undertaken the task of setting the goals of sustainable
development and monitoring progress, setting forth eight Millennium
Development Goals designed to reduce poverty and promote
sustainable human development.

V. Critics of International Economic Liberalism

The triumph of economic liberalism is not without its critics, both tradition critics of
the theory of liberalism and the critics of particular policies.

Old-style mercantilists argue that economic policy should be subservient to the state
and its interests.
o This mercantilist explanation dominated explanations of the economic success
of Japan in the 1960s and 1970s.

Radical theorists argue development has not occurred.

o Dependency theorists argue that MNCs are to blame through the exploitation
of the poor.
o Radicals see the interdependencies MNCs create as instruments of dependency
and exploitation.

Radicals argue that international regulation was necessary to limit the power of
MNCs. The New International Economic Order (NIEO) and the Group of 77
represent examples of these ideas, attempts to make the international economy more
favorable to least developed countries (LDCs).

Reformers outside and within international financial institutions question both

governance and specific policies of the IMF and World Bank.
o The voting rules of these organizations favor the donor states.
o The development dollars distributed by the bank bring economic returns only
to the North.

The WTO has also become a lightning rod for domestic groups from many countries.
They feel that the WTO is usurping local decisions and degrading the welfare of
individuals.

VI. The Key Role of Petroleum Markets

No international issue or single commodity is more connected to economic

globalization than petroleum.
o The fundamental interdependency between consumers and producers has
changed over time.
o Demand for oil is growing fastest in emerging markets.
o In 1960 the Organization of the Petroleum Exporting Countries (OPEC) was
born.
1. Oil exporting countries won significant concessions from the oil
MNCs.
o OPECs twelve members produce 40 percent of the worlds oil.
o In 1974 the Arab members of OPEC began an embargo of states that
supported Israel, leading to a significant increase in the oil price
o Inspired by OPECs success other developing states formed cartels in primary
products, although these largely failed.
o A second shock came with the Iranian Revolution in 1979.
o The most recent shocks have come from demand for oil in the developing
world.

These changes in the international petroleum market have had political implications.
o Oil-dependent states vying for contracts have changed or modified political
allegiances.
o Oil producing states have enjoyed a massive increase in oil revenue.
1. Some states can use oil as a strategic weapon
2. Even international institutions have found it harder to exercise their
influence in getting the oil-producing states to comply with
international agreements.
3. As oil has become more valuable, it has become a target for groups
trying to disrupt established governments.
o With globalization an integrated market has emerged, linking key producer
and consumer states not only with MNCs, but also with international investors
and financial markets

VII. Economic Globalization and Regionalism

Since the 1990s, more regional economic arrangements have been negotiated and
those already operational been strengthened.

European Economic Integration

o Integration was predicated on the notion that the larger market with the free
movement of goods and services would permit economies of scale,
opportunities for investment, and growth.
o The overall results have been positive, with the growth of all types of
economic transactions across state borders. There is broad consensus that
European integration has resulted in greater trade creation and positive
welfare.
o During the discussions for the single market, the outlines of a monetary union
were negotiated. States that have agreed to the single currency, the euro, no
longer can use exchange rates and interest rates as economic policy.
o The European Union (EU) recognized that agriculture was different. The EU
adopted the Common Agricultural Policy (CAP), where the EU purchases
surplus crops and pays guaranteed prices to farmers.
o Aside from the CAP, most economists agree that the openness of the European
markers has not only benefited Europeans but has become compatible with the
goals of the multilateral global system.

The North American Free Trade Agreement (NAFTA)

o The free trade agreement negotiated by the United States, Canada, and Mexico
differs substantially from the EU:
1. It comprises one dominant economy and two dependent ones.
2. The driving force in NAFTA is not political elites but MNCs that seek
larger market shares.
3. The social, political, and security dimensions in the EU are absent
from NAFTA. Cooperation in trade is not intended to lead to free
movement of labor.
4. NAFTA supports the phased elimination over ten years of tariff and
nontariff barriers. NAFTA protects the property rights of those
companies making investments in the three countries.
o The economic controversies generated by NAFTA continue to be profound:
1. U.S. labor unions claim that hundreds of thousands of workers have
lost their jobs to Mexico.

2. Environmental groups in the United States fear free trade with Mexico
comes at the expense of the environment, as U.S. firms relocate to
Mexico to skirt domestic environmental regulations.
o Agricultural markets are better integrated, tariffs on manufactured goods have
been almost entirely eliminated, and trade between the three countries has
increased substantially.

VIII. Emerging Challenges to Economic Globalization

Economic globalization resulting from the triumph of economic liberalism has been
confronted with several challenges.
o Individuals who feel that economic decisions were beyond their control have
resulted in antiglobalization movements at WTO, World Bank, and IMF
meetings around the world, as well as the guerilla movements in Mexico
opposed to NAFTA.
o The Asian financial crisis in the late 1990s highlighted the problem of too
much capital flowing out of the region. Many countries were unable to adjust
to this rapid withdrawal, and thus exchange rates plummeted, individuals lost
their jobs as companies went bankrupt, and stock markets fell.
o Antiglobalizers have also been stimulated by other repercussions resulting
from the openness of economic markets. Two trends have become vexing:
1. The movement of labor: The EU adopted the goal, but it has not
occurred. This has resulted in a flood of illegal aliens seeking better
paying jobs in EU countries. This has led to a new market in illicit
labor, trafficking in people, including women and children.
2. The rise of illicit markets: this can include the illegal movement of
arms, money, drugs, human organs, endangered species, and protected
intellectual property.

The Global Economic Crisis

o International crises have been a recurrent feature of the global economic
system.
1. Liberal theory argues that the economy will regain its equilibrium and
that booms and busts will not bring down the global system.
2. What began as a crisis in the United States rapidly became a global
economic crisis.
o Initial responses to the crisis were mostly unilateral.
o International institutions provided loans and credit to developed states.

o The crisis has led to calls for reform of the system, including reform of the
intergovernmental regulatory arrangements.
o The G20 has emerged as a major player in the crisis, but the G20 may prove
too large for macroeconomic coordination.
o The crisis has also weakened the power of MNCs in the international system.
o What remains to be seen is how the crisis will affect economic globalization.
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