International Political Economy

INTERNATIONAL POLITICAL ECONOMY

What is international Political Economy?

• Relationship between states: black box
• IPE also studies the relationship between the States.
• But… most often we open up the box and we look at the State.

• Negotiators: how they do negotiations.  
• Elites

• Economic organizations: WTO, IMF, World Bank.
• After WWII the term  “embedded liberalism” (Ruggie)
• Free trade promises two things: peace and prosperity. This is economic liberalism.

CLASS I: What is International Political Economy.

• The inter-relationship between the state, market and society in different nations.
• A synthesis of methods, insights from economics, political sciences, sociology, (history and philosophy). It is a broad field.
• “an attempt to synthesize analytical elements of separate academic disciplines to better explain complex, real-world problems that span physical and intellectual boundaries” (Balaam and Dillman 2014). This definition is too broad.
• What kinds of questions are we asking in the field of international political economy?
•  The complexity of IPE. International relations: how much has the financial crisis detracted from the ability of states to pay for defense. International Economics: how has the crisis impacted foreign investment, trade, and the values of different currencies? Comparative Politics: what is the capability of domestic institutions to respond to the needs of those adversely affected?. Sociology: what is the impact of the crisis on consumption trends for different groups, such as the wealthy, middle class and labor.

Debates on methodology

• Note that your source outline perspectives
• This reflects the diversity, as well as major methodological debates in the field.
• Some argue that specialization promotes a scholarly blindness that comes from relying on one method, one perspective.
• Others aim for parsimony (specialization).

Key dimensions of IPE

• The political dimensions: the use and distribution of power
• The economic dimensions: deals with how scarce economic resources are distributed among central actors.
• Who are the central actors in IPE?: States. IO.
• Domestic level: governments, Transnational corporations. MNC’s

We rely on various perspectives to study IPE

• mercantilism/nationalism, economic liberalism, Strcuturalism/Marxism

Why perspectives? Theoretical perspectives allow:

• Focusing on the relationships between a variety of political, economic, and social actors, as well as institutions.
• Emphasizing different values, actors and solutions.
• Basically, perspectives are “lenses” that allow us to analyze and understand events.

IPE perspectives

• Central question: Why do we operate with different perspectives

Four levels of analysis

• The global level of analysis: focuses factors such as changes in technology, commodity prices, the climate.
• The interstate level of analysis: emphasizes the relative balance of political, military and economic power between states.
• The State/Societal level of analysis: domestic configurations: interests groups, electoral pressures, and culture.
• The individual level of analysis: state leaders: emphasizes psychology, preferences, political interests, and aspirations.

Globalization

• The term “globalization” began appearing in IPE literature in the mid-1980’s
• Used to describe growing inter-dependence
• Global inter-dependence has been facilitates by information and communication technology.
• Some trace globalization to the economic policies advocated by Ronald Reagan and Margaret Thatcher in the 1980’s. They are responding to the economic problems. In the 1970’s there is oil shocks. In 1979 there is the Iranian Revolution.

• Associated with the promotion of neo-liberal economic ideas and policies.
• Exported-led growth strategies resulted in larger global networks of trade.

• The Complexity of Globalization

• Analytically, we can see globalization as:
• An economic process: increase in the mobility of goods and capital. A process that involves integrating national and regional markets: single global market?
• A political process: implications for sovereignty? There is autonomous policy?
• A cultural process: a threat to national/local practices?

• Is Globalization a Positive Force?

• Globalization is not always seen as a positive force
• Ex: Multinational corporations:

• Factory conditions /exploitation
• Environmental concerns/ problems

• Critical questions: are country equally affected by globalization? Can globalization be managed? If so how?

CLASS II- 18 August 2015

Perspective in International Political Economy

• As alredy mentioned, we operate with different perspectives in IPE. We will focus on:

• The mercantilist perspective
• The economic liberal perspective
• The structural/Marxist perspective.

The Mercantilist Perspective

• Mercantilist economic policies are associated with state-building in the 16th century, particularly in Europe. Security and money is very important. You need resources that can be converted to military power.
• Europe was characterized by warfare: consequently, states sought to sustain wealth and power in order to protect their borders.
• Historically, classical mercantilist connoted efforts by states to maximize power. Hence, it is closely related to the Realist perspective in IR.
• The English mercantilist literature generally encouraged state regulation of trade.
• However, as Irwin (1998) explains, the goals of state regulation varies:

• The accumulation of resources
• The promotion of national wealth and economic growth
• The achievement of a favorable balance of trade
• The maximization of employment
• The protection of home industry
• The increase of state power

• From our perspective, its is important to study mercantilism because:

• Mercantilist doctrines constitute a major epoch in economic thought
• Mercantilism provides the immediate backdrop for the emergence of free trade arguments
• Mercantilist or protectionist policies are still pursued by states.

• The first notable mercantilist publication appeared in 1581.

• “The discourse of Commonwealth of this realm of England” By Sir Thomas Smith.
• On one hand, T. Smith recognized that trade was indispensable. He also acknowledged that domestic prices would increase as a result of trade barriers.
• On the other hand, T. Smith belonged to a school who associated imports with superfluous consumption.  Hence, he advocated heavy taxes on luxury goods. It limits the imports because it disuades the foreigner to export to that country. Second, prices increase and you will decide to go for the national product. You divert consumption patterns.
• As most mercantilist after him, T. Smith advocated the promotion of exports to get “specie”. However, he objected to exporting goods that would have to be processed abroad and imported once again.
• 2 conclusions emerged from Smith’s 1581 publication:

• States should maintain a favorable balance of trade. That is, states should export more than they import. This creates accumulation of wealth.
• Raw materials should be processed at home. The value-added would stay in the home market

• Note: the emergence of the nation-state as the primary actor in international relations set clear boundaries to trade policy. That is, rivalries between states gave rise to the view that an increase in a country’s trade gave rise to the view that an increase in a country’s trade must come at the expense of other countries. Trade was seen as a “zero sum gam”.
• Britain’s merchant class did not always support mercantilist policies. However, many mercantilists argue that there was an inherent tension between the interests of the merchants. (FALTA)
• To resolve the tensions between private and national interest, many mercantilist advocated the state assuming an active role in trade policy. From their perspective, national leaders were better situated to see the larger picture.
• Mercantilist argued that the principal benefit of trade from exports, not imports. Hence, the policy regarding exports was clear: remove al possible impediments. Grains and raw materials were exceptions. As such, many argue that the tax burden should be shifted from domestically produced goods to imports.
• Toward the end of 1500’s mercantilist started to move away from advocating a favorable balance of trade policy. Instead, we see arguments emerging around the use of protective policies to promote economic development.
• At the same time, mercantilists started to argue that protectionist policies were effective in terms of creating employment. Especially in the manufacturing sector.
• The focus thus shifted to the use of protectionist policies to promote domestic manufacturing.
• The argument was essentially that economic activities that generated (a) high value-added productions and involved (b) extensive processing should be produced at home.
• In 1967, John Stuart Mill published “an inquiry into the principles of political economy”: often described as mercantilism at its most extreme.

• Essential to his work is the promotion of economic development through the use of trade intervention
• To achieve development, he proposed creating and protecting “infant industries”.
• Hence, a development policy centered on protecting “infant industries” is often accredited to Mills. These were defines as industries that were not initially capable of surviving in the faced import competition.
• The argument was that with time, “infants” would be able to compete on the world market.

• According to mercantilists, infant protection would

• Create new wealth and capital
• Stimulate domestic producers to acquire new technology
• Generate long-term economic development.

• Economic liberals saw no justification for infant protections, disagreed. Adam Smith published the Wealth of Nations in 1776. In the U.S., Alexander Hamilton argued that subsidies were the most effective policy to spur industrialized development.  Hamilton was the Secretary of treasury (1788-1791). U.S Declaration of Independence was written in 1776.
• Hamilton stated that

• Subsidies have the most immediate effect
• Unlike tariffs, subsidies are less likely to produce scarcity
• Subsidies promote exports.

Neo-Mercantilism

• Today, we use to term neo-mercantilism to account for a variety of instruments to protect wealth and power.
• The term “protectionism” is generally used to describe the existence of trade barriers.

The Economic Liberal Perspective

• The core ideas of liberalism derive from Adam Smith’s the wealth of nation (1776).

• “Laissez faire”: let the market be

• We will also look at the ideas of

• David Ricardo
• Friedrich Hayek
• Keynes
• Friedman

• The economic liberal perspective

• Liberalism is the most influential perspective in IPE
• Most international economic institutions are founded upon liberal principles. “Embedded liberalism” (Ruggie).
• The economic policies of most states are also heavily influenced by liberalism

• Neoliberalism

• As we will learn, 2 strands of economic liberalism have emerged.

• The orthodox school: Hayek
• The heterodox school: Keynes

• At the international level, liberals tend to support the establishment of strong institutions

• Liberal institutionalism
• The WTO. The GATT was established in 1947
• The IMF: was established for financial stability
• The World Bank:  reconstruction

• Adam Smith’s The Wealth of Nation (1776) is seen as a direct response to mercantilism

• Smith’s main argument was simply that the nation is best served if power is used to create wealth
• Smith reflected on the reliance of protective trade instruments and argued that these policies were inefficient. He is looking at the competitiveness of the State against other state.

• A minimal role for Government

• Smith envisioned a different role for the government than mercantilist had advocated.
• Laissez fair: let the market be: the invisible hand
• However, orthodox liberals outline important functions for the government:

• Providing internal and external security.
• Establishing essential public goods such as infrastructure.
• Preventing the spread of disease (public health)
• Establishing property rights and enforce contracts: John Locke (1632-1704).

• This essentially means that the individual and individual rights is at the center of orthodox liberalism. Example: private property rights.
• 1815: Corn Laws: don’t let the corn be exported, it increases prices.

• Rationality

• Human beings are assumed to be rational
• Definition of rationality:

• Our behavior is purposeful and goal-oriented
• We rank order our preferences
• We pursue these preferences systematically
• That is, human beings are “utility” maximizers.

• Rational Choice Theory assumes that

• We have perfect information (to know every available option)
• We purposely calculate the cost of our alternatives.

• Specialization and the Division of Labor

• Efficiency is the core principle of economic liberalism:

• Economic theory assumes that resources are scarce
• Therefore

• Smith assumed that the manufacturing capitalist seeks to better his position by saving and accumulating revenue:

• The manufacturer uses profit to buy additional machinery in order to expand output.
• The addition of equipment will improve the division of labor.

• To illustrate this argument, Smith described a factory in which 10 people were employed in making pins
• Smith wrote that by dividing the task into its constituent parts and assisting the process with machinery, the factory was able to produce 48,000 pins a day. This stood in contrast to one pin per worker a day if they work alone.

• The logic of free trade

• The proposition of free trade is a “positive sum game” is based on the concept of absolute advantages in production.
• Stated simply, if one country can produce a product at a lower cost than other country, then it would make sense to trade. This is the concept of “absolute advantage”.
• The comparative advantage: is taking into account the opportunity cost.
• The idea of comparative advantage was formulated by David Ricardo
• Ricardo’s formulation of comparative advantage refined the orthodox economic argument for opening the international trade system.
• In his famous example, Ricardo discussed trade between Portugal and England. His model encompassed the following assumptions:

• Both countries produced 2 types of good: cloth and wine
• Labor is the sole input of production
• Labor productivity vary between industries and countries.

• Ricardo differed from Smith in that he assumed about one country (Portugal) had more productivity.
• The lesson is that to identify a country’s comparative advantage, a comparison of production costs across countries is necessary.

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