W. W. Norton & Company | Essentials of International Relations 4th Edition

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Chapter 9: International Political Economy

Chapter Summary

I. Introduction

International political economics is the study of the interrelationship between politics and economics and between states and markets.
The increasing importance of the international political economy (IPE) stems from several trends:

Economic transactions among states have been rising dramatically.
There has been increasing expectations about the responsibilities of national governments for economic policies.
As economic issues become the subject of public discussion, they become more transparent to people who are potentially affected by the decisions.

These changes have been facilitated by a number of key technological transformations that began in the 1800s, expanded in the 1900s, and then accelerated during the late twentieth and early twenty-first century.
Most commentators have concluded that the twenty-first century international economy can best be described as the century of economic globalization.

Globalization is the broadening and thickening of economic ties among states, international organizations, and individuals.
Thomas Friedman, in The World is Flat, describes a new wave of globalization where technology, open sources, outsourcing of jobs, offshoring, and supply chaining have all converged to create a new political economy.

II. Economic Liberalism

Economic liberalism's roots can be found in the writings of eighteenth-century economist Adam Smith.

Smith began with the notion that human beings act in rational ways to maximize their self-interest.
When individuals act rationally, markets develop to produce, distribute, and consume goods.
Market competition ensures that prices will be as low as possible, maximizing economic welfare and stimulating economic growth. Thus, markets epitomize economic efficiency.

For markets to function most effectively, economics and politics must be separated as much as possible (i.e. markets must be free).

Although government should provide basic order in society, its institutions should largely be developed to facilitate the free flow of trade and to maximize economic intercourse.

At the international level, if national governments and international institutions do not interfere in the markets, then interdependence among economies will lead to greater economic development for all states involved.
Multinational corporations (MNCs) play a key role as engines of this growth.

MNCs invest in capital stock worldwide, they move money to the most efficient markets, and they finance projects that industrialize and improve agricultural output.
MNCs should act independently of states, and there is little need to control or regulate their behavior because the market self-regulates.
Most MNCs are located in Western industrialized countries. The top 1,000 MNCs account for more than 80 percent of the world's gross domestic product.
MNCs take many different forms, ranging from those that participate only in importing and exporting to those making significant investments in a foreign country.
MNCs choose to participate in international markets for a variety of reasons. They seek to avoid tariff barriers, reduce transportation costs, obtain incentives, and capitalize on cheaper labor markets.
Some liberal economists see a positive relationship between the international economy and war and peace.

Key Concepts in the Liberal Economy

Liberal economics is based on the recognition that states differ in their resource endowments. Worldwide wealth is maximized if states engage in international trade.
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.
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.

Neither in international trade nor international finance have liberal economic policies been consistently implemented.

Governments often restrict free trade as protectionist measures in order to benefit some domestic groups.
Currency exchange rates have not always been allowed to float freely. After World War II, a system of fixed exchange rates was established. Governments still intervene in currency markets by changing interest rates in order to regulate supply and demand.

Roles of the International Economic Institutions

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—now the World Trade Organization (WTO).
The World Bank—Stimulating Economies

The World Bank was designed initially to facilitate reconstruction in the post-World War II Europe.
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. A high proportion of the Bank's funding has been used for infrastructure projects.
To aid in meeting the needs of developing countries, the International Finance Corporation (IFC) and the International Development Association (IDA) were created.
The IDA provides capital to the poorest countries in the form of interest free loans.
The IFC provides loans to promote the growth of private enterprises in developing countries.
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 bank's repertoire.
The Bank's 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.

The IMF-Stabilizing Economies

The task of the International Monetary Fund (IMF) was different: to stabilize exchange rates by providing short-term loans for member states confronted by temporary balance-of-payments difficulties.
The Fund established a system of fixed exchange rates and guaranteed currency convertibility. Today the exchange rates float.
The IMF has been involved in two major issues:

States that are in debt crisis: Since the 1980s, the IMF has been providing longer-term loans and encouraging structural adjustment programs, requiring countries to institute certain policies in order to receive IMF assistance. In the 1990s, recognizing that countries needed more help, the IMF provided debt relief to forty-one debt-distressed countries under the Heavily Indebted Poor Countries (HIPC) initiative.
Helping Russia and other former communist countries make the transition to market economies. The most advanced economies were able to achieve success; the less advanced, like Russia, have not been as successful.

New programs initiated by the IMF and the Bank have come under intense criticism. Some argue that both have strayed too far from their liberal economic foundations and that their commitment to growth should be replaced by an emphasis on poverty reduction.

GATT and the WTO-Managing Trade

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.

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.
Most of the work was carried out over the course of eight negotiating rounds-each round progressively cutting tariffs and addressing new problems, such as intellectual property rights.
In 1995, GATT became a formal institution, renaming itself the World Trade Organization (WTO)
Two important procedures were initiated in WTO:

Trade Policy Review Mechanism (TPRM), which conducts periodic surveillance of trade practices of member states.
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.

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 around the issue of agricultural export subsidies.
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.

III. Contending Approaches to the International Political Economy

Mercantilism or Statism

A modern version of mercantilism emphasizes the role of the state and the subordination of all economic activities to the goal of state building. Thus politics and the state are used to make economic policies that enhance state power.
Statists see the international economic system as anarchic, and therefore as inherently conflictual. Each state is continually trying to improve its own economic potential, acting defensively at the expense of other states.

Radicalism: Marxist and Dependency Alternatives

Core beliefs:

Individuals when in society act in conflictual ways.
Conflict emerges from the competition among owners of wealth and the workers over resource distribution
State acts to support the owners of the means of production, placing the state and workers in opposition to each other.
In capitalist systems, owners of capital are determined to expand at the expense of the working class

For radical theorists and dependency theorists, MNCs are one of the major culprits exploiting the resources of the poor in favor of the rich. MNCs perpetuate the dominance of the North and are responsible for the dependency of the South.
Radical political economists also blame the World Bank and the IMF for perpetuating economic inequality by promoting the interests of private international capital.
Not all radicals are as critical; instead, they suggest reforms to alter the weighted voting system used by the Bank and the IMF and to develop a more inclusive bureaucracy.
Most radicals share the belief that the distribution of international economic power must significantly be altered if the disadvantaged cannot adequately control MNCs. Thus, radicals have sought international regulations in many forms.
Marxists also take a normative position that resources must be more equitably distributed both within societies and between societies. Radicals seek system-level change.
The anticapitalism and anti-imperialism of Marxism has had a strong appeal among developing countries and many embraced the dependency theory. Dependency theorists believe that major change is the only way to break the dependency.

IV. Global Inequalities: The Development Gap

How to address the gap and one's view of whether the gap is actually being bridged through economic globalization depends on one's theoretical perspective.

Proponents of economic liberalism point to the average per capita incomes in developing countries that have doubled over a fifty-year period.
Many radicals and those working within the UN development community contend that the gap between the rich and poor is increasing.

A New International Economic Order?

During the late 1960s, the Group of 77, a coalition of countries of the South, brought their demands to a special session of the UN. The South sought changes in five major areas:

Change the terms of international trade
Link prices of commodities together and establish a Common Fund
Regulate MNCs
Review the debt burden of the South
Increase foreign aid to the South
Change the structure of the World Bank and IMF

Of the NIEO issues, only debt renegotiation and cancellation has remained prominent on the international agenda. The HIPC was instituted, putting into place a plan to relieve debt.
By the 1990s, most developing states had embraced economic liberalism and tempered their radical perspectives. The confrontational tactics of the past have been replaced by an emphasis on consensus building.

New Thinking about Economic Development

Acceptance of liberal economics to achieve development was possible because of four trends:

The role of foreign direct investment from MNCs
The development community has turned to an alternative view of development—sustainable development. Debts must be rescheduled in the poorest countries and the focus should be on human development—education, health—and not on large projects that harm the environment. The people should have a say in how funds are allocated.
NGOs have an important role to play; they were instrumental in shifting the thinking of the development community toward sustainable development.

NGOs work in networks and organize both at the project level and at the international level to lobby states and IGOs.
NGOs can be alternative channels for assistance when a state is either too weak or unwilling to aid in an economic development effort. The Grameen Bank (micro-finance) is one successful example.

The formation of partnerships among the different actors in economic development. Partnerships are founded on an emerging normative consensus that poverty is also bad for private-sector business.

Is Development Occurring? A Progress Report

Setting the goals of sustainable development and monitoring the progress have been tasks undertaken by the UN.
In 2001, a UN-sponsored summit set forth eight goals known as the Millennium Development Goals (MDGs), designed to reduce poverty and promote sustainable development. For each substantive goal, there are specific targets, time frames, and performance indicators.

The report card shows that the Asian and Pacific countries are on track to meet the development goals. Projections are less promising in sub-Saharan Africa.

V. Economic Globalization and Regionalism

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

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.
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.
During the discussions for the single market, the outlines of a monetary union were negotiated. States who have agreed to the single currency, the euro, no longer can use exchange rates and interest rates as economic policy.
The 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.
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

The free trade agreement negotiated by the U.S., Canada, and Mexico differs substantially from the EU:

It comprises one dominant economy and two dependent ones.
The driving force in NAFTA is not political elites but MNCs that seek larger market shares.
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.
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.

The economic controversies generated by NAFTA continue to be profound:

U.S. labor unions claim that hundreds of thousands of workers have lost their jobs to Mexico.
Environmental groups in the U.S. fear free trade with Mexico comes at the expense of the environment, as U.S. firms relocate to Mexico to skirt domestic environmental regulations.

Agricultural markets are better integrated, and tariffs on manufactured goods have been almost entirely eliminated, and trade between the three countries has increased substantially.

VI. Energy Independence

The Economics of Petroleum

Economists call the responsiveness of supply-and-demand levels to price changes elasticity. Finding and extracting oil is an expensive and risky activity. In the short term, oil is inelastic because new oil supplies will not come online quickly in response to increased demand. In the long term, if demand if high, there will be incentive to find new supplies.
Oil is located only in certain geologic regions of the world, making it more susceptible to political manipulation by those who have control. Over 60 percent of the world's reserves are located in the Middle East.
Consuming country demand for petroleum products is largely determined by rates of economic growth. Thus, demand is not as responsive to price except at very high price levels when demand could shift to substitutes.

The Role of OPEC and the Politics of Oil

The establishment of the Organization for Petroleum Exporting Countries provided momentum for the oil-producing countries to assume greater control over the international oil markets from the MNCs that had dominated since the 1930s.
After consolidation with oil exporting countries in the 1960s, the balance of power shifted from the MNCs to the oil-exporting states themselves and their state-owned companies.
The structure and the international oil market changed through four oil shocks:

In 1974, the Arab members of OPEC used an embargo to withhold oil from states supporting Israel. It brought home to American policy-makers the issue of natural resource independence and vulnerability
In the late 1970s, Islamic fundamentalists seized power in oil-rich Iran. Prices dramatically escalated and panic set in.
With the 1991 Gulf War, a short-term doubling of oil prices occurred. Iraq's invasion of Kuwait cut both Iraq and Kuwaiti production.
The most recent shock developed from rapidly changing and unexpected acceleration of demand. The dramatic economic growth in China and India has led both countries to seek more oil. Continued high U.S. demand and supply-shortfalls in Iraq have led to unprecedented price increases.

These oil shocks have called attention to changing economic and political interdependencies. Oil-dependent states vying for oil contracts have modified their political allegiances to enhance their opportunity for a reliable supply.
Oil-producing states with a massive increase in oil revenue have found themselves able to pursue domestic policies that are more immune to international influences. Petrostates like Russia and Nigeria have been able to continue repressive domestic practices knowing that criticism will be muted.
International institutions have found it more difficult to utilize their influence in getting oil-producing states to comply with international agreements.
As oil has become more valuable, it has become a target for groups trying to disrupt established governments, blowing up pipelines, and interrupting supply.

VII. Emerging Challenges to Economic Globalization

Economic globalization resulting from the triumph of economic liberalism has been confronted with several challenges.

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.
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.
Antiglobalizers have also been stimulated by other repercussions resulting from the openness of economic markets. Two trends have become vexing:

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.
The rise of illicit markets: this can include the illegal movement of arms, money, drugs, human organs, endangered species, and protected intellectual property.

StudySpace: Essentials of International Relations 4e.