Theories of International Political Economy
POLI/INTL 365 International Political Economy (IPE)
This essay is intended to be a quick introduction to some of the key concepts and key terminologies of IPE. If you have questions about anything in the essay, let me know. In the essay, I will use the terms nations, states, and countries interchangeably.
What is IPE?
This is the most basic aspect of the discipline. Those of you who study economics in the business school may be taught that there are no political influences on economics; however, in a Political Science class you will get a different perspective. From this perspective, politics has a great role in economic life and the study of IPE is the study of how politics influences economics relations within nations and between nations. When I say economic relations I mean the buying and selling of goods and services across borders, the flow of investment around the world, the wealth or poverty of regions and nations, and the ways in which economic power influences the political relationships among states (everything from alliances to war).
From the perspective of a political leader (imagine you are President or Prime Minister of a nation), you are concerned with two major issues:
1. What makes a nation wealthy? How can you design policies that make your nation wealthy or wealthier than it is now?
2. How can you design policies that spread that prosperity to your people? In theory you must do that to get reelected if you rule a democracy. Or if you rule in an authoritarian state you need to spread the wealth to prevent yourself from being overthrown. Then again, you may just be trying to enrich yourself. So you hoard your own nation’s wealth, keep your own people poor and eventually face a potential backlash by millions of impoverished people when they discover how you have plundered the nations resources and the people’s work to make yourself wealthy.
From the perspective of scholars and political leaders alike, the first step in answering the above question is to answer the following questions:
· What is the proper role of government in economic activity?
· How much of a role should government play?
· Is deep involvement of the government they key to economic growth or is it the one thing that is sure to doom economic growth?
· To make a nation wealthy doe the government lead or get out of the way or lead in some areas while letting others flow naturally?
The role of theory
Theories of international political economy provide different ways of answering the above questions. Theories show the different ways these questions have been answered by scholars and policy makers and also allows for an assessment of how well these theories work. Below I am going to describe four leading theories. They will provide a framework through which you can analyze everything you are reading.
We’ll discuss three main bodies of theory: Economic Liberalism, Economic Nationalism, and Economic Structuralism. Economic Structuralism has two variants: Marxism and Dependency. Liberalism, Nationalism, and Dependency are capitalist theories. They all are based on the idea that creating wealth is the goal of economic activity. They differ on how that should be done. Marxism, however, is not a capitalist theory. Its argument is very different from the others: capitalism -- the creation of wealth and accumulation of profit -- is evil to Marxists.
One more thing about theory is important. Theories are models of how the world works. They are tools for analysis. You will find contradictions within the theories and aspects that don’t make sense to you. That’s good. The world is much more complex than any theory could ever illustrate, so be critical of theory and skeptical of theory.
Economic Liberalism (often called Laissez-faire liberalism, or internationalism, or globalism)
The theories of liberalism were stated best by Adam Smith in The Wealth of Nations, 1776. The key to national wealth and therefore national power is economic growth. The key to economic growth is free trade – the free flow of goods and services and investment across borders. Political leaders should allow trade between nations to expand and deepen and keep government intervention in that trade down to a minimum. This means that imports (products from other nations’ companies that are sold in your nation) and exports (products from your nations’ companies that you try to sell in other countries) should flourish with as little restriction as possible.
Liberals want the marketplace to make the economic decisions, not the government. This may not make sense yet, but it will further down the page. Just hold the thought for a moment.
Here’s the problem as liberals see it. Governments have several tools they use to
interfere or influence the flow of trade: tariffs, quotas, non-tariff barriers,
and bans. Let’s talk about tariffs first
and explain their purpose. A tariff is a
tax imposed by a government on a product as it crosses a border. So for instance a government might use a 10%
tariff on all foreign shoes being sold in the
So, let’s analyze a fictitious market for chalk. Assume we live in State A. Now there’s a company in
Now, when you go to Target or Wal-Mart to buy chalk
here are the prices:
Not according to liberals. Liberals see it differently. No one lives happily every after. Here’s how liberals see it:
· You now pay $10 more for each box of chalk. Not only that, but Richmond Chalk may raise its prices to $105 a box and it will still be cheaper than the Foreign Chalk Co. chalk.
· Richmond Chalk has been rewarded for its inefficiency. It could not compete against the Foreign Chalk Co., but it is rewarded for that.
· The Foreign Chalk Co. is punished for being efficient. It was winning the competition, but it winds up getting punished through a political deal.
· Essentially, it’s like this: Imagine a fast sprinter who wins every race. Someone decides it’s unfair for him to win so many races because it makes the other sprinters sad, so we force that sprinter to wear ankle weights to slow him down. We make Michael Jordan use only one hand; we tell Jerry Rice he’s only allowed to score one touchdown per game. We make Roger Clemons pitch from a lower pitcher’s mound.
This burns liberals up. Ultimately liberals argue this: Without competition and winners and losers, you will not have economic growth; you will not have innovation; you will not have progress. If Foreign Chalk Co. is punished because it is winning, then why should it or any other company try to win? If Richmond Chalk is rewarded for losing, then why not continue to lose; save the effort and it will still be rewarded.
Here’s what liberals want to happen. Richmond Chalk
and Foreign Chalk compete. Foreign sells
at $90; Richmond sells at $100. So
Richmond can do several things. It can
quit the chalk business and maybe go into erasers, or it can change the way it
does things. Maybe it automates and
makes the same amount of chalk with 20% fewer workers and it can sell for $88
per box. Maybe it simply cuts salaries
to make it to $88 per box and the employees are happy because a pay cut is
better than a layoff. So maybe Foreign
Chalk responds by going to $87 a box and then Richmond Chalk goes to $85, then
Foreign Chalk goes to $83 and
In this situation you can get innovation and excellence and a cut in prices. Competition creates new ideas and new things for consumers. And here the consumer is king. Getting better products for lower prices is the goal. It doesn’t sound like a big deal, but imagine we’re talking about building safer cars or developing new medicines or better engines that reduce pollution or save travel time. Then competition starts to benefit people in a big way. Think of it this way: would we have cell phones and computers and new Windows operating systems every few years if the companies in the telecommunications and computer industries didn’t feel the need to compete with each other for our business? Probably not.
Quotas do the same thing in a bit different way. Let’s say that in the
Nations around the world do all of these things and liberals generally hate them because they impede economic growth; they discourage excellence and innovation; they make consumers pay more for inferior products.
What liberals want is this: all economic decisions should be made by the marketplace – the free market. Get the government out of foreign trade (and the domestic economy) as much as you can. Then winners and losers in the economy are not decided by the government, but by the market – the aggregate decisions of consumers, sometimes called the “invisible hand.” What does this mean? People like Coke better than Pepsi. Who knows why, but they do. That’s the market decided. The sum of all the decisions made by consumers is the marketplace, the invisible hand. In this case the marketplace has decided that that it will buy more Coke than Pepsi. In 1985 Coke tried to change its formula – New Coke. The invisible hand slapped the company around. People wanted the old formula. Coke had to choose – go out of business or change back to the old formula. Coke changed back. Consumers won the argument. People don’t buy plaid cars; people don’t wear hats anymore to work; few people listen to jazz. Why? Who knows? The important thing here is that it is the decision of the consumers when you add up all their choices and that is the market and a free market creates growth and wealth. It creates growth and wealth because it gives the people what they want and forces companies to compete to find new ways of satisfying the needs of the people.
Liberals argue that along with innovation you get a
division of labor. Everyone finds a
niche to make a living. If you lose one
competition, you move on to compete in a new arena. You specialize. So the
Multi-National Corporations (MNCs, sometimes called Transnational Corporations – TNCs)
The world now has a global
marketplace. Much of what you will read
is based on that idea. Within this
global marketplace are MNCs – large corporations that operate all around the
world. They are present everywhere. For example, you can buy a Coke in just about
every place in the world. And little
slimy McDonald’s burgers infest just about every nation in the world. Exxon is everywhere. So are
More recently, there is something
besides MNCs that runs the world economy.
Products are losing their nationalities.
Something you buy on a shelf or a showroom may have been made by five,
ten, fifteen different companies based in five, ten, fifteen different
nations. Companies from all over the
world work together to produce a product.
They don’t care about where the company is based; they care about
skills, quality, and cost. Look around
your house or apartment and see where things were made. Call up Dell customer service and you are
likely to be talking to someone in
Liberals think this is a good thing. MNCs spread wealth and technology and jobs around the world.
Classical Liberalism vs. Modern Liberalism
Classical liberals have a tendency to believe that as long as the government doesn’t interfere in the economy, everyone will live happily every after. They look at economic growth and identify something called “the business cycle.” The economy grows then contracts then grows then contracts then grows again in a series of booms and busts. The bottom arrow represents time. The left arrow represents wealth. It looks like this:
Notice that in the long run the average of the series of booms and busts is always growth (the dotted line). Notice also that as time goes by the busts are at levels of higher wealth than the booms of the past. In the long run the economy grows, no matter how many booms and busts there are. Importantly, classical liberals believe the economy is self-regulating. The boom and bust cycle works and will work forever as long as the government doesn’t intervene and screw it up. Sure some booms will be longer than others and some busts will be nasty and you certainly don’t want to be born as a boom is ending and live your life in a bust. But the boom-bust cycle seems to take under a decade so everyone will experience everything.
This was the common belief until the Great Depression. The Great Depression was a global depression in which the world economy collapsed. It led to mass starvation and World War II among other things. Two ideas developed in response to the experience of the Depression.
– the belief that the business cycle is not always self- regulating. Sometimes a bust can be so bad it causes the
economy to collapse. The solution is for
the government to essentially jump start the economy by creating jobs and
creating investment – putting money in people’s pockets so they will begin to
buy and sell products. This happened all
over the world after the depression and in the
Faith in Free
Trade -- A belief that free trade and the expansion of free trade is the key to
preventing another economic collapse.
Before the Depression many nations responded to a slowdown in economic
growth by placing restrictions on trade.
Most economists believe that these restrictions on trade made a
particular deep bust into a world wide economic catastrophe. Since then end of WW II the
Economic Nationalism (sometimes called Neo-Mercantilism)
Economic nationalism developed theoretically as a criticism of liberalism. It is based on three basic ideas:
economically. This is very different
from liberalism. Liberals believe that
companies compete economically, but states do not. Nationalists see companies as elements of a
state’s power. So Exxon, and Ford, and
McDonalds’s and Coke contribute to US power.
Mitsubishi, and Honda, and
2. Free trade only benefits the wealthiest, most advanced nations. In head-to-head competition, which is what you get in free trade, only the advanced or “mature” industries will defeat less advanced or “infant” industries. Therefore free trade helps the rich get richer and the less advanced stay less advanced.
3. For the less advanced nations there needs to be an alternative way of getting rich. Free trade won’t lead to riches.
Its main theorists are Alexander Hamilton, the first
Industrial power = national power = independence.
he argued that if the
Hold that thought.
List lived in the
Less Advanced Economy
Type of Industry
So how often do you walk into a store and say give me the most expensive piece of crap you have. In almost all cases, in head-to-head competition, the consumer chooses the product of the industry from the advanced economy, the low cost, high quality product. How does the industry from the less-advanced economy ever gain? To List, it can’t, not under free trade.
1. Protect infant industries from foreign competition. Protectionism consists of using tariffs, quotas, non-tariff barriers, bans, whatever means possible to protect key industries.
does not mean ending trade with other nations.
It means protecting industries that are identified as being crucial to
national power. So Japan, for example,
which has had nationalist economic policies since WW II, traded with the US,
but has pushed US automobiles, US consumer electronics, and US
telecommunications out of its market.
3. When the less advanced economy catches up to the advanced economy then it can open up to free trade and compete head-to-head as equals.
MNCs in the Nationalist View
MNCs are agents of national power. Foreign MNCs operating in your nation are competitors to your industries. They may weaken your nation and your industries. Keep them out or key sectors of your economy or they will hurt your economic development.
The leading nationalist economies in
the world are
The reason why Marxism and dependency are placed together under the heading of structuralism is that both are concerned with the international division of labor created by capitalism. Both theories see that division of labor as unfair, creating categories of rich and poor people and rich and poor nations. The Marxist approach is to reject capitalism completely. The Dependency approach is to reform it.
Karl Marx and Friedrich Engels were two German economists who created a huge body of literature outlining a theoretical critique of capitalism. The developed these theories in the mid-19th century. The best place to look for details would be in The Communist Manifesto (1848) or The German Ideology (1845). There is so much on Marxism that this essay can only scratch the surface. Remember this is an ideology that spawned political movements and revolutions that shook the world for roughly 150 years. So, this will be the short version.
Marx and Engels examined advanced capitalist nations,
After the revolution, the theory gets a bit uncertain. There would be several phases of evolution until the development of Communism, a society which would have these characteristics:
· A system in which there is no private property; all property is owned by everyone and everyone shares
· There is no exploitation since workers are the owners
· Everyone gets what they need from the society as a whole
· Everyone contributes based on what they can contribute
· Capitalist ideas such as the idea that people work to gain reward are outmoded; people work to contribute and do not care if there is no relationship between what they give to society and what they receive in return. So a young healthy person who works like an ox, but has no family, contributes a great deal to society, but receives very little. The lazy person with a large family receives a great deal even though he/she contributes little.
We’ll get to what happened after the revolution in reality in just a minute.
The next big theorist was Lenin, a Russian intellectual. He wrote Imperialism in 1917 and in it he developed a theory that applied Marxism to international affairs. Essentially, he said wealthy capitalist nations exploit poor nations. They force people into slave labor; they steal resources; they dominate and impoverish these nations. He was talking about imperialism or colonialism. At this point in world history European nations had control of just about the entire rest of the world. Almost everything but the Western hemisphere was under European control. Lenin said that the poor nations would one day overthrow their colonial masters, reject capitalism because of its linkage to colonialism, and develop Communist societies.
Lenin also said, in other works and
through his deeds, that the workers revolution can be created by a clever and
committed leadership. Nations don’t have
to wait for the revolution to happen naturally.
A vanguard of the revolution can begin the revolution in any
nation. Lenin did just that. In 1917 his Bolshevik movement seized power
Now what were these nations
like? What was Marxism like when
actually put into practice in the
· Marx and Engels thought that after the revolution the government would wither away. Once having created the proper economic relationships, a government would not be necessary. However, in every Marxist state, the government became more powerful; power became more centralized; and the nation was ruled by one person or a handful of dictators, who ruled in a totalitarian manner through a Communist Party apparatus that penetrated every aspect of the society. The goal was total control over every individual. Their word was law and you risked your life if you questioned that word – imprisonment, torture, execution of the person who challenged the government his/her friends and family. It was not unusual for a dissident (someone who challenges the totalitarian state) to wind up in prison, his wife may end up being given to a Communist party leader to do with as he pleased, and their children would be given to a Communist Party leader’s family that didn’t have children.
In all these
nations the revolution was rammed down the peoples’ throats. Those who disagreed were considered enemies
of the state. In
· Ideological purity was a necessity to the leaders. One party was allowed to exist and any ideas not approved by the Communist Party were treasonous. People were executed for thinking the wrong thing. So in most Marxist states, the government tried to control what people thought.
these nations closed themselves off to trade with other nations. There were no economic freedoms. Every aspect of economic life was controlled
by the government, decided by the government, regulated by the government. These economies are called command economies
and every single one, even those that may have prospered for a bit, ran itself
into the ground – people became poorer than they were before; the states became
technologically backward; and many had severe problems even feeding their
and Engels never said: Kill everyone who disagrees with you. Marxism as implemented was very different
from Marxism the theory. The vagueness and paradoxes of Marxist theory were
interpreted by dictators to mean absolute power, death, and destruction. That doesn’t necessarily mean that Marxism
would have worked if its implementation hadn’t been accompanied by dictatorship
and slaughter. Marxism does give huge
amounts of power to revolutionary leaders and that much power usually leads to
corruption at best and carnage at its most typical. Also Marxism considers human nature to be one
in which people will be willing to share in ways that are counterintuitive --
where the person who works extremely hard is willing to receive less and
willing to allow the person who doesn’t work hard to receive much more if it is judged that he
needs more. Capitalism is based on a
less optimistic version of human nature – people will only work hard if they
are rewarded. It’s not pretty, but as
we’ll see in the class no communist system has ever sustained economic growth
for more than a generation. In fact, all
command economies have led to economic collapse. Currently, one of the last communist command
Dependency also argues that the rich nations exploit the poor nations. But this is not because capitalism is evil. It is because capitalism needs to be more regulated so it will be more just. The problem is that poor nations remain dependent on rich nations. Even after colonialism, when the poor nations became free, their economies remained dependent on the economies and the technology of the rich nations.
Dependency theorists see the world divided into two types of nations that have a clear division of labor:
Economically Developed Countries – EDCs (the Rich)
Less Developed Countries – LDCs (the Poor)
High tech goods, industrial products: cars, machine tools, planes, computers, chemicals, electronics
Primary products, commodities, things you grow or extract from the ground: bananas, coffee, minerals, rubber, timber
What kinds of jobs are created?
High skills, high wage jobs creating a middle class society
Low skills, low wage jobs, which create a society with a small wealthy elite (who own the land) and huge class of people on the edge of poverty or living in poverty (people who work the land). A small middle class exists.
The problem is this. What the LDCs produce is cheap. Minerals and farm products make landowners rich, but not the people who work the land and not the nations who rely on the land for its source of wealth. Even oil, the best of the primary products, because it can lead to wealth, is often seen as a curse. Nations who produce oil have a tendency to rely on it for their revenue and never develop a manufacturing base and it is a manufacturing base and the high skills and high wages that go along with it that make a nation wealthy. EDCs produce the manufactured goods then the LDCs and the EDCs trade. LDCs buy expensive things from the EDCs and the EDCs buy inexpensive things from the LDCs. The result is that the EDCs make money and the LDCs go into debt because they are paying more for the expensive products (aircraft, computer software, cars, or health care technology) than they are receiving for their coffee and bananas and oil. So the rich get richer, the poor get poorer.
Dependency theorists call for a number of solutions:
· International rules that raise the price of commodities (oil, coffee, bananas, timber, copper) regardless of market forces. EDCs refused to do this.
· Massive amount of aid to poor nations. Most EDCs refused to do this.
· Debt forgiveness. EDCs have agreed, but it doesn’t fix the problem because as soon as the old debt is forgiven, new debt accumulates.
Government seizure of the MNCs of the EDCs that operate in the LDCs. The profit of the home-controlled MNCs is
used to enrich the nation. But the EDCs
don’t like this and often retaliate with trade embargoes and even attempts to
overthrow the government that does this.
During the Cold War the
· Import Substitution: Banning the import of foreign manufactured goods from EDCs (like computers and cars) and forcing the nation to make its own. EDCs might retaliate with trade sanctions.
In the long run, none of these strategies have worked.
MNCs in Structural thought
As you may have guessed, neither Marxists nor dependency theorists are fond of MNCs. They are seen as the way rich nations exploit or dominate poor nations.
Globalization needs to be seen in a historical
context. When WW II ended in 1945 a new
era began. The Cold War was a struggle
Along with that development was another one. Ultimately, the only thing that has worked
to bring wealth to poor nations has been to open up their economies to foreign
investment, to become more liberal, but retain elements of nationalism in
certain sectors. It is called
globalization and it has led to the greatest wealth creation in world history.
It is the method pursued by the Four Tigers (
states that have not reformed:
Oil states that
still have command economies based on oil production (just about every nation
with Dependency remedies (
But all these economies are doing poorly, much worse than the economies that have embraced globalization. During the cold war, the issue was whether a free market or a command economy was better. The answer to that seems definitive – free markets work much better. They prospered while the command economies collapsed. That may have answered the first question that this essay posed: How does a nation generate wealth? The second question is still at issue: What is the proper role of government in economic activity? It seems clear that almost all governments in the world have decided that the government should not control the economy. But how much regulation or intervention is the right amount? That question is at issue throughout the world.
Having said all that, however, does not mean that everyone believes that globalization is the greatest thing in world history and the answer to all our problems. Some say yes; some say no. The readings in the class will debate that issue, but here are some questions:
· Does globalization benefit everyone or just the richest?
· Does globalization sacrifice the environment?
· Does globalization prevent or encourage higher wages and enforceable labor standards?
· Globalization may make everyone a little richer, but does it make the rich even more rich than everyone else?
· Does globalization help or hurt the poorest of the poor?
· Can we develop a smarter globalization?
· If you tried to stop globalization, how would you do it and what would be the consequences?
· For all of its flaws is there a better way to spread wealth or feed and clothe people or provide people opportunities to make their lives better or discover and invent new technologies that change the world or guarantee basic freedoms? In other words, what are the alternatives?
· You may find that globalization is like democracy. To paraphrase Churchill, globalization may the worst system imaginable, except for all the others. You may find that globalization is simply reality. It’s what happens when people are free. So how do we make it work for everyone?
These are some of the questions this class will address.