Sei sulla pagina 1di 13
BSc in International Business and Politics Copenhagen International Political Economy 24-hour Home Exam Lecturer Leonard

BSc in International Business and Politics Copenhagen

International Political Economy

24-hour Home Exam

Lecturer Leonard Seabrooke

Character with space 20.150

Copenhagen, 26th June 2008

Assignment by Nenad Krstevski

131082-2945

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

Table of Contents

The question for the IPE exam, June 2008:

3

1. Introduction to the discusion

4

2. The economic nationalist perspective

6

3. The liberal perspective

8

4. Is there a transition from a state as leading actor to corporations as leading and key actors in international

political economy?

10

5. Conclusion

11

6. References

13

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

The question for the IPE exam, June 2008:

“The state is the only actor that can ensure the effective and equitable regulation of the international political economy?” - Discuss this statement with reference to the key perspectives from the O'Brien and Williams textbook, and then contrast two empirical examples that match with two of the three key perspectives.”

3

|

P

a g e

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

1. Introduction to the discusion

Political economy is about relationship between politics and economics. It is all about power and money.

“Who governs? And who benefits?”

Whether we are looking at domestic or international systems, power and money are under the analyses. International political economy is all about how political and economic dynamics change an international and transnational arena. 1

What are we talking about? Best way to find out is to give you some examples.

During 1996 and into 1997 a small number of investors and foreign exchange (Forex) traders were in doubt if Thailand economy was going to continue its record of remarkable growth. Fearing for their high profits and growth, some of the investors began to withdraw their money and investments from Thailand. This outflow of money forced the Thailand central bank to devalue its currency, the Baht. This event was counted as the start of the Asian financial crisis, where several Asian countries experienced economic depression, even some countries changed their governments and were forced to seek loans from International Monetary Fund (IMF) and World Bank (WB).

What happened really here? It was unclear from the beginning what caused these events, what were its most significant aspects and what we can learn from it so we can prevent from happening again the same crisis.

There are more approaches to explain and understand what happened in that time.

One point of view would stress the significance of state power in creating and exploiting the crisis. The problem that is given by this view is that because the developing countries liberalized their economies prematurely and allowed large amounts of money to flow into and out of their countries too quickly. This undermined the East Asian model of political economy and caused crisis. The economic

1 Seabrooke; slides from class

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

nationalist perspective would stress how the US used the Asian crisis as an opportunity to force some of the states to reform along lines that benefited American business. During the crisis the Asian states tried to counter US initiatives at the IMF and to continue to resist the undermining of their form of capitalism. Economic nationalist teach us the lesson from the crisis that states need to be careful about liberalizing their economic activity and must pay attention to guarding their national interest.

Second point of view is the liberal explanation of it. Liberal explanation locates the causes of the crisis primarily in the financial policies followed by Asian states. It is saying that the resources were directed to insufficient uses because of the corruption business practices and political influence over financial institutions. “Crony capitalism” was the term to be developed to describe this model of political economy. What the liberal explanation is teaching us is that every financial market will punish economic activity which violates or ignores liberal economic principles. Liberals give solution that developing countries should have more transparent financial practices and to follow more liberal economic model.

The critical point of view would focus on the role of US private business interests and the US government in creating the conditions for a financial collapse. The view suggests that the US government pressured developing countries into liberalizing their economies because this suited the interests of the US Treasury and leading financial firms on Wall Street. Once the crisis took place, the same interests pressed the IMF to demand that Asian economies reform in a way that would open markets for US firs. This approach is stressing that even this crisis had devastating results in most of the Asian economies, the impact of the crisis was not been even distributed, like the wealthy financial interests in those countries were relatively untouched. For the critical view, the international financial system facilitates the rapid movement of money and it needs to be taken some actions to curb financial speculation, such as a tax on large short-term forex transactions, and that states should find a way to limit the ability of investors rapidly to move their funds out of the country.

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

2. The economic nationalist perspective

One school of thought brings together analysts who focus on the role of the state and the importance of power in shaping outcomes in the international political economy. These theories stress the importance of the interest of the nation or the state in understanding activity in international relations. This grouping is variously termed mercantilist, neomercantilist, statist, state-based theory or economic nationalist. The origin of this school can be traced back to the creation of the nation-state in Europe in 15 th century. Mercantilists believed that there was only a limited amount of wealth in the world and that each state must secure its interests by blocking the economic interests of the other states. For mercantilists that was zero-sum game. One state’s gain is another state’s loss. Trade between neigbouring countries was almost impossible. Some of their advocates, like Alexander Hamilton and Frederick List, urged that the states should protect their manufacturers from foreign competition by trade barriers, so that they could industrialize and catch up the more developed countries. They believe that the gains from trade are unequally distributed and favour those with greater economic and political power.

They were on believe that the state should protect strategic industries against foreign rivals or attempt to export more than they import for long periods of time. Japan has been accused of being a mercantilist state because in comparison to other advanced industrialized countries, its economy is relatively closed. The same is the example for part of China industries. 2 They don’t allow foreign direct investment (FDI) in some part of their industries. But they have target industries where the FDI is allowed to invest.

Economic nationalist theories see the state as the main actor in the global political economy and it has two main assumptions. The first is that the inter-state system is anarchical and that it is therefore the duty of each state to protect its own interests. The second assumption concerns the primacy of the state in political life, and as it is the central instrument through which people can fulfill their goals, it follows that it (the state) remains the pre-eminent actor in the domestic and international domains.

2 Asian tigers: China; Textbook for CPE I

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

Economic nationalist recognize the importance of market-based actors such as firms but subordinate their importance to that of the state. The same for the transnational corporation, the economic power is acknowledged but their overall power is very limited, sometimes even subject to dictates from the state.

The participating in markets is sometimes positive, but also sometimes can be negative for the states. The continued salience of economic nationalist sentiment is visible in arguments concerning the continued production of some good or service within particular national borders. This can be seen in terms of security concerns, that is, a state should not be reliant on the import of a specific good otherwise in times of conflict this good may be unavailable. Some countries like France protect their agriculture while the US defends defence technology. In some part it can be seen as a preservation of the cultural values of the nation.

Good example how the state is the actor in international political economy is International Monetary Fund (IMF). It is based from most of the world countries, but the most important are the ones who have the biggest percentage of the votes and those are the ones who contribute with money the most.

Even its power is not based on hard power like laws and constitution, but on soft law e.g. regimes, which function on a base that if one member doesn’t obey the rules it can face some sanctions from another states. The biggest influence has US and the G-7 group with more than 47% of the votes, so if the US government wants to put some pressure to other country to open the market, and in the same time US market to stay not so available for the other states, it can easily do it because of its voting power. That is what happened in South Korea during the Asian crisis, when IMF loans made Korea to open the manufacturing and financial industries for foreign investors, many of whom were from US.

The states retains pivotal role in creating and maintaining governance in the global system because of the centrality if the connection between law and political authority. The state is the central legal actor and primary representative of individuals in the international system. Agreements binding the population of a country can only be made by a state. While its representative function is often imperfect, the state is the only institution that can make a legitimate claim to represent its entire

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

population on its territory. Not all of the states are equally important in international political economy. The most developed and wealthy states are the most significant because they can veto or coerce other states to follow particular sets of policies. Thus, the US is the central actor because of its wealth and power.

But, since the Bush Junior presidency posed a decisive question for global governance as to whether the US would continue through international organizations and treaties (multilateralism) or just dominate over other states (bilateralism), the whole process of global governance is in question if you don’t have a state powerful as US in there.

3. The liberal perspective

In contrast to the economic nationalist theories, liberals focus either upon the individual or a wide range of actors from the state to the corporation to interest groups. They don’t see the state as a unitary actor, but as an influence by a numerous factors. Rather than stress the inevitability of conflict, liberals search out the conditions for cooperation. They tend to play down the role of force and coercion in human affairs and emphasize the ability of an individual’s to choose between attractive courses of action. Liberals see the world system as one of interdependence rather than anarchy. States and people can cooperate for mutual benefit in the liberal view. Rather than a zero-sum game where one’s gains are other’s losses, liberals see a positive-sum game where the pie grows bigger and everyone gains. Liberal theories emerged in 18 th and 19 th century Britain in the wake of industrial revolution.

Today’s global economy is governed largely according to liberal principles. For example, the trade regimes are based upon the goal of free trade; money flows into and out of the most countries without great difficulty and all forms of economic activity are increasingly liberalized. There is a wide variety of thought. It ranges from those who see the state fading away in an emerging borderless world (Ohmae, 1990) that will be dominated by private business to liberal institutionalists (Keohane and Nye,

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

1977) 3 who stress the continuing importance of the state, but see it enmeshed in webs of interdependence and international organization.

Within the liberal perspective there are a number of key actors. For liberals the starting point of analysis is the individual. In the context of analysis of the global economy, liberal theorists focus on the behavior of individuals, firms and states. Unlike the economic nationalism, the key economic actor is the individual rather than a state. Individuals in pursuit of self-interest will maximize the benefits of economic exchange for society. Unlike the mercantilists who view the firm with a degree of suspicion liberals see the firm as a source of economic wealth. The state is viewed with hospitality by many liberals since it brings politics into the realm of economics. From a liberal perspective the transnational corporation (TNCs) is a positive force. TNCs bring advantages to both home and host countries. From perspective of the home country the TNC represent an optimal mix of technology, managerial skill and capital. For the host countries TNCs boost their economies through the transfer of capital, technology and access to markets.

For liberal theorists the market lies at the centre of economic life. Economic progress results from the interaction of diverse individuals pursuing their own ends. While liberals acknowledge that market relations are not always optimal they tend to argue that intervention in the market is most likely to produce suboptimal outcomes.

For many liberals (hyper-liberals) globalization breaks down artificial barriers and by unleashing the force of production it can contribute to enhance happiness for humankind.

Liberal theorists view international relations and international political economy as essentially cooperative. Indeed, they believe that market relations will lead to positive outcomes for all. The increase of international interaction liberals see as a source of prosperity and peace.

With the end of the Cold War and the rapid spread of liberal economic models to many states in the 1990s, it appeared that the liberal faith in cooperation and progress was justified.

3 O’Brien and Williams, p.18

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

But not all examples in the world shows that liberalization was good. Example for that is Mexico in 1990s. Mexico in 1990s was restructuring after the great debth crisis in 1980s. When they signed the NAFTA agreement in beginning of 90s they had convinced the investors that the government was committed to liberalization. In the period from 1990 to 1993 $91 billion flowed into the country, a fifth of all capital going to the developing states (Strange, 1998, p.103) 4 . The economy was boosting. However, a series of events including higher interest rates in the US, rebellion in parts of Mexico, and assassination of a presidential candidate caused investors to doubt whether Mexico could maintain its fixed exchange rate with the US dollar. In December 94 investors sold the Mexican peso in so large quantities that the government was forced to abandon the link with the dollar. When it was over Mexico was $55 billion in debt. The poor suffered enormously and the middle class was in huge dets. This crisis was notable for several reasons; there was a spillover effect in Brazil and Argentina. This was known as the “Tequila” effect. The second effect was that Mexico suffered a severe financial crisis even it was having over a decade of liberalization and economic restructuring. The third, the dangers of the flow of short-term capital into and out of a developing country were highlighted by the Mexico event. And the last, the player on the creditor side had changed. In the first crisis it was the banks that were in losses but now it was non-bank actors such as pension funds, mutual funds, hedge, and stock market investor.

4. Is there a transition from a state as leading actor to corporations as leading and key actors in international political economy?

The view that the state is losing power has been widely challenged. Some have suggested that globalization is exaggerated, by arguing that the degree of internalization as measured percentage of trade and investment flows has precedents in the early 1900s (Hirst and Thompson, 1996) 5 .these scholars deny that the state is weaker or is unable to protect its citizens, but they suggest that if

4 O’Brien and Williams, p.233

5 O’Brien and Williams, p.391

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

political forces advocating social protection gather the political will and organize themselves properly, the government can be directed in the direction of social protection.

Controversies about the relative importance of state-corporate power continue to rage, but some trends appear undeniable. First, most states around the world, actively seek multinational investment. Second, in contrast to earlier decades states seem more intent upon furnishing those companies with an attractive environment than with regulating their activity. Some have referred to states engaging in “beauty contests” in an effort to attract foreign investment (Palan an Abbott, 2000) 6

Of course the balance of power between any particular state and any particular firm will vary depending upon their position in the global economy. As bigger are the firms the better position will have.

5. Conclusion

“The state is the only actor that can ensure the effective and equitable regulation of the international political economy?”

In the era of globalization I cannot give a clear answer of this question. As I have shown in the discussions before, there are a lot of theories that are trying to give an answer to this question.

I can only say something alike Susan Strange, that the states are the most effective regulation of the world economy, but she is questioning herself are they doing that, and if they are in whos interest is that?

The only think that I can conclude is that I see the international organizations as some kind of

regulators of the international political economy. I say this because those organizations and bodies

(UN, WTO, IMF, WB, BIS

them that is in common interest for all of them, is probably the best guarantee of effective and fair

)

are established on a base of more countries, so the compromise between

6 O’Brien and Williams, p.391

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

regulation of the international political economy. There will be always issues about the more powerful or more wealthy states who contributes more for those organizations and whose influence is always bigger, but that is why we are seeing groups inside those big organizations like G70, or some similar that are confronting with the power that they have to the big powerful states.

So if the countries are making those organizations of course that they will indirectly be the main actors, even we can see that the big TNCs are influencing almost everywhere in the society.

IPE

Copenhagen Business School

Nenad Krstevski

Regular exam

Int. Business & Politics

CPR: 131082-2945

June 2008

2 nd semester

6. References

1. O’Brien, Robert and Williams, Mark; Global Political Economy, 2 nd edition; 2007; Palgrave MacMillan, New York

2. Compendium for CPE I: Asian tigers: China; 2008; Copenhagen Business School;