University of the West Indies, Mona

Department of Government

GT12A Introduction to International Relations

Lecturer: Ms. Diana Thorburn

Lecture Eleven

Topic: Introduction to International Political Economy

Objectives:

1. To be able to define the term “international political economy”

2. To understand main IPE issues in international relations

3. To have an overview of IPE issues in the Caribbean

One. What is international political economy?

• The nexus of economics and politics in international relations
• Relationship between the state and the market
• The study of how economics affects politics and how politics affects economics in the structure of the international system and in the behaviour of nation-states and international actors
• Considers politics and economics as interdependent forces

Three ways politics and economics are linked at the international level:

one. A nation-state’s economy can contribute to its foreign policy

• e.g. Argentina and Malvinas/Falklands War

two. Domestic politics shapes a country’s foreign economic policy

· Depending on the nature of the political system, policy makers may have to please various domestic actors in its foreign economic policy—unions, the political opposition, the private sector, contributors to its party

three. Trade and investment relations between countries are related to the political relations between those countries

· Aid can be tied to political demands e.g. US aid to Pakistan today

Main issues in IPE

• Trade, investment, monetary relations, transnational business activities, foreign aid, loans and other financially denominated activities
• Assesses the nature of the international system and a country’s place in it by analyzing these main issues
• Considers both domestic and international factors
• Considers both political and economic variables
• Asks—how do these different factors and variables affect each other? How are these four aspects of countries’ behaviour related?
• Analyses the interdependence of politics and economics in the international system
• Has its origins in Marxist approaches to international relations—where the view is that economic relations provide the basis for international relations
• Emerged as a field of study in the 1970s (though the phenomena analysed go back many centuries)
• Just as the development of liberal and realist approaches to IR can be traced to what was happening in the world
• Other approaches acknowledge economic issues and economic relations between states, but do not consider them the most important factors in analyzing international relations and foreign policy
• Realists see issues of security, national interest and war as preeminent
• Liberals see issues of cooperation, peace and interdependence as the focus of IR

Three factors in the 1970s bringing about IPE as a field of study:

one. Growing awareness of the interdependence of nation-states in the world economy in the 1970s, particularly as it began to affect the U.S. and prompted academic inquiry on the part of U.S. analysts

o US participation in the Vietnam war wreaked havoc on its economy

o US domestic economic problems brought about its withdrawal from the Bretton Woods system, causing it to collapse

o Oil crisis with widespread economic repercussions as a result of US intervention in Arab-Israeli conflict

two. As mainstream development theories were implemented and failed in newly independent countries—mostly developing countries with serious issues of social and economic development to be addressed—they began to be questioned

N.B. Development theories and their application to developing countries began in the 1960s as developed countries sought to help solve the problems of newly independent countries

e.g. W.W. Rostow’s “Stages of Economic Growth” – the economic determinants of transition from a “primitive” society to a capitalist society

1. Traditional societies – mainly agricultural, low productivity

2. Preconditions for take-off – technology transfers from and trade with more developed societies = economic growth

3. Take-off – the economy grows exponentially and consistently

4. Road to modernity – modernization of all factors of the economy with the use of new technology

5. High mass consumption

three. The emergence of dependency theory in the 1970s, partly as a response to the failure of theories such as Rostow’s

o New International Economic Order (NIEO)

o UNCTAD

IPE today

• IPE an important subfield of IR in the post-Cold War era
• No longer considered the “radical” critique of international relations, but a legitimate approach to IR that is not weighed down by a discredited ideology
• The end of the Cold War attributed in large part to political economy reasons
• Clinton: “It’s the economy, stupid.”
• Also world economy opens and expands, and more countries join the global economy
• Former Soviet republics and clients who were economically tied to COMECON choose to join capitalist world economy
• No longer considered a strictly Marxist approach to IR but a legitimate sub-field of international relations
• Contemporary international system gauges power based on economic power as much as if not more so than military might
• In part because the Soviet “defeat” in the Cold War was seen as due to their failed economy
• The study of globalization entails political economy analysis—examining how international economic forces affect domestic politics and economics, and how some countries’ economics and politics affect the international economy

Three approaches to IPE

1. Realist approach

· Mercantilism

· Definition: “the philosophy and practice of government regulation of economic life to increase state power and security”

· Politics has primacy over economics

· Power is enhanced by wealth so it is worthwhile to pursue wealth in the international system as a means of increasing power

· However wealth is finite—has to be won in war, or taken by force

· Markets are controlled and trade barriers used to prevent other countries from being enriched

· Economic dependence on other states (e.g. via trade) should be avoided

· Mercantilism was the world-view of European states that were the creations of the Treaty of Westphalia

· Economic activity should be subordinated to the primary goal of building a strong sovereign state

· Economics seen as a tool of politics—the basis for political power

· Economic strength necessary for military power

· Colonialism a manifestation of mercantilist policy

· Colonial powers sought control over other territories to have greater access to resources to increase their own wealth

· The colonies existed to supply the colonial power

· Politics and economics are related—but only insofar as economics is used by politics to increase state/political power

2. Liberal approach
• Economic liberalism emerged as a critique of the mercantilist policies
• Heralded by Adam Smith (1723-90) “The Wealth of Nations”
• The father of economic liberalism
• Economic market place the centre of human progress
• Economic growth = development
• Followed by David Ricardo’s (1772-1823) concept of comparative advantage
• Free trade = prosperity (laissez-faire economy)
• Economic interdependence = peace and prosperity
• Peace = prosperity
• Wealth is infinite and can be created
• Liberalized international market economy can bring about wealth for everyone
• Countries’ domestic economic policies prevent them from benefiting from the opportunities of the global economy
• Politics and economics related only insofar as politics disrupts the market
• The state should stay out of the economy and let the rules of the market work to maximize efficiency and consumption
• Same ideas that we call “neoliberalism” today

NB. Most liberals (and neoliberals) see a role for the state in addressing issues of inequalities in wealth, income and power

3. Structuralist/Marxist approach

· Critique of liberal approach

· Sees the economy as the site of human exploitation and class inequality

· At the international level the same structure holds

· States are the agents of ruling-class interests and the interests of the capitalist bourgeoisie

· Politics and economics closely intertwined

· Historical approach—economic relationships between countries have developed over centuries, creating and establishing patterns and structures that can only be overcome by radical means (such as revolution)

· Global capitalist development is uneven and bound to produce crises and contradictions between states and social classes

· Dependency Theory emerges out of this critique

Dependency Theory

- underdevelopment is caused by factors external to the poor countries

- third world countries are dominated by foreign interests originating in the developed West

- Underdevelopment is not a phase of “traditional society” (Rostow) experienced by all countries

- Both development and underdevelopment are results of a simultaneous process of global capitalist development

- Underdevelopment is due to external, primarily economic forces

- These forces result in unequal societal structures inside developing countries

- To overcome underdevelopment developing countries need to disengage from historical relationships and patterns of trade and capital flows

· Concerned with North-South issues and problems of underdevelopment and global economic inequality

· NIEO and UNCTAD

· In part led to closed markets and heavy borrowing for industrialization in the 1970s

· At the same time, what became the “Asian Tigers” were pursuing export-led economic strategies(i.e. production based on comparative advantage), focusing on primary education, and getting remarkable results in terms of sustained economic growth and general improvement in social development

· Dependency theory considered strong in its analysis of the situation, but weak in its proposals to fix the situation

Two. IPE issues in international relations

• The Bretton Woods System and the relationship between international financial institutions and nation-states
• The activities of multinational corporations and their relations with nation-states
• Economic aid

• Globalisation
• The relationship of a country’s foreign policy with its economic relations with other countries

E.g. The Marshall Plan

E.g. USSR & Cuba during the Cold War

• The flow of financial resources between countries and the links between the flow of resources and international relations
• Trade agreements and trade relations

• The influence of politics on commodity prices and vice versa
• The relationship between domestic economic interests and foreign policy
• Links between the international economy and domestic politics

E.g. democratization in Latin America after the Debt Crisis

E.g. Unemployment and decrease in union power in economic restructuring

E.g. The military-industrial complex

The Bretton Woods System

• The IMF and the World Bank
• Established at a conference in Bretton Woods, New Hampshire in 1944
• Original purpose was to provide institutional structures so that the world could avoid economic crises
• Based on the principles of economic liberalism—economic stability and development are best achieved when trade and financial markets are allowed to operate with as little intervention from government as possible

The World Bank

• Gets capital from member states and from borrowing in international capital markets
• Lends funds, with interest (usually lower than market rates), to states for economic development projects
• World Bank initially established to facilitate reconstruction in post-War Europe
• “Proper” name: International Bank of Reconstruction and Development
• 1950s—shifted its focus to developing countries and infrastructure for liberal economic development, then later to poverty reduction and basic human needs in the 1970s, now focuses on sustainable development (which includes the environment and poverty alleviation)

IMF

§ Purpose is to stabilize exchange rates by providing short-term loans to members states in balance of payments crises

§ Originally worked on a basis of fixed exchange rates

§ When US withdrew from its position as guarantor of the exchange rate, that system collapsed (1971)

§ Since 1980s IMF provides longer term loans to developing countries with debt problems

§ Also provides an imprimatur, or stamp of approval, to countries seeking capital from other states, on either international capital markets or from other multilateral financial institutions (such as the Inter American Development Bank, IADB)

§ In return for assistance, IMF requires that countries implement structural adjustment programmes

§ SAPs are often aimed at reducing government expenditures and increasing government income

§ Sometimes they require countries to reduce spending on social services and redirect funds to longer term growth areas, such as infrastructure

§ Usually include market liberalization policies

§ Heavily criticized for “forcing” nation-states to implement policies that “cause” poverty and hardship for their people

§ Decision-making in IMF and World Bank based on members’ contributions

§ The largest contributors are the wealthy industrialized countries

§ Their views are therefore most widely represented

§ Their views are often pro-market liberalization strategies

§ Many of the technocrats in the BW institutions are trained in Western universities where economic liberalism is also taken for granted as the correct policy model for all countries

Multinational corporations (MNC)

• A multinational corporation (MNC) is any company that does business in more than one country
• It can be any type of company
• The first multinationals were those with bases in developed countries who had set up in colonies to extract raw materials for export back to the home country
• There are many different types of MNCs today—franchises of food or other retail companies, manufacturing, financial services, consulting
• MNCs exist to:
• take advantage of markets beyond their home countries
• avoid tariff and non-tariff barriers that would prevent them from freely importing or exporting their good or service
• take advantage of labour cheaper
• reduce transportation costs
• service clients who have gone overseas
• avoid taxes or other restrictions (such as environmental regulations or minimum wage) laid down by their home government

IPE issues related to MNCs

• Privatization of state resources
• Control of MNCs over key economic sectors

e.g. Jamaica and the bauxite companies in the 1970s—the levy had repercussions on US foreign policy toward Jamaica

• The relationship of the home government with the MNC
• The relationship of the overseas government with the MNC

• Realist approach to MNCs: Useful ways of consolidating a state’s interests overseas as long as they are on the same page as the home government’s foreign policy

• Liberal approach: MNCs embody ideal interdependence in the world economy and help to create networks of cooperation which lead to peace and prosperity

• Structuralist/Marxist approach: MNCs are instruments of economic exploitation of poorer countries by wealthier countries; perpetuate dependence and unsustainable and unequal development or rather “underdevelopment”

Three. IPE issues in Caribbean international relations

· Most, if not all Caribbean IR issues can be considered political economy issues

· Caribbean issues are mainly about securing resources for economic development, regional integration, and status and prestige in the international arena

· Caribbean IR issues largely based on Caribbean’s position in the international economy

· Structuralist approach useful for understanding the Caribbean becauseit so aptly describes Caribbean history and how we got to be where we are in the international system

· However the solutions it poses are hardly feasible

· Caribbean claims to have opted to liberalize having realized that is its best option considering the nature of the world economy

Main issues

· Inefficient and uncompetitive production of primary agricultural products in a world market that no longer holds preferential treatment

· Inability to diversify out of those sectors partly due to short term political ambitions

· Lack of economies of scale in domestic production and linkage to the international economy

· Comparative advantage and linkage to the international economy

· Foreign debt and national politics

· MNCs and essential sectors of the economy

CONTENDING PERSPECTIVES ON IPE
	Statists	Economic Liberals	Structuralists (Marxists)
Views of Human Nature	Humans aggressive; conflictual tendencies	Individuals act in rational ways to maximize self-interest	Naturally cooperativew as individuals; in groups are conflictual
Relationship between individuals, society, state and market	Goal is to increase state power, achieved by regulating economic life; economics is subordinate to state interests	When individuals act rationally, markets are created to produce, distribute, consume goods; markets function best when free of government interference	Competition among groups, particularly between owners of wealth and labourers; conflictual and exploitative situation
Relationship between domestic and international society	Conflictual nature of international economics; insecurity of anarchy breeds competition; state defends itself	International wealth is maximized with free exchange of goods and services; based on comparative advantage, international economy gains	Conflictual relationships because of inherent expansion of capitalism; seek radical change in international economic system

Table taken from Karen Mingst, Essentials of International Relations, New York: Norton, 1999.