W.W.

Norton&Company
EssentialsofInternationalRelations,5e:AW.W.NortonStudySpace
Chapter9

InternationalPoliticalEconomy
ChapterSummary
I.Introduction
Economicglobalizationdescribestheinternationalpoliticaleconomyof2010.
Goodsandservicesareproducedandtradedglobally.
Aglobalvirtualworldtiesustogetherthroughnewtechnology.
Newtechnologiesandeconomictiesalsoleadtothedecreasingterritorializationofdailylife.

II.TheEvolutionoftheInternationalEconomy:ClashingIdeasandPractices
TheerafromthelateMiddleAgestotheendoftheeighteenthcenturysawanumberofkeychangesintechnology,ideas,and
practices.
EuropeanexplorersopenedupnewfrontiersintheAmericas,Asia,andAfrica.
Theexchangeofgoodandpeopletiedthecoloniesandthehomestatestogether.
AdamSmithwroteoftheideathathumanarerationalandselfinterested.
ToSmith,marketsdevelopthroughindividual,rationalaction.
Marketsneedtobefreefromgovernmentactiontofunctionproperly.
Mercantilism(statism)wasthecommonpracticeofmanygovernmentsatthetime.
Mercantilismsgoalistobuildeconomicwealthtobuildthepowerofthestate.
JeanBaptisteColbert(161783)arguedthatstatesshouldaccumulategoldandsilveraswellasbuildastrongcentral
government.
AlexanderHamilton(17571804)madesimilarargumentsintheUnitedStates.
FromthestartofthenineteenthcenturytoWorldWarIcolonialismexpandedgreatly.
DuringthesameperiodthestatesofEuropeindustrialized.
Industrializationwasspurredbytechnologicalchange
Economiclinksinglobaltradewerefollowedbypoliticalandculturaldominationbytheindustrialstates.
Britainactedasahegemontopromoteamorepeacefulworldorder.
ThePaxBritanicaisanexampleofhegemonicstabilitytheory.
Alarge,dominantstateprovidescollectivegoodstotheglobalsystem.
Radicalismemergedinthisperiodasaresponsetotheexcessesofthetime.
BasedintheteachingofMarxandothers,radicalismattackedtheinequalitiesofthetime.

Radicalsarguedthatsocietywasconflictual.
1.Conflictwasfocusedoncompetitionbetweengroups.
2.Ownersofwealthversusworkers
Radicalsarguedthatthestatewouldsupporttheownersofwealth.
Theholdersofcapitalmustexpandtheirmarketsandthecapitalistsystemuntilitembracestheentireworld.
1.Thispressureforexpansioncreatestensionsandcreatestheseedsofthedestructionofthesystemasawhole.
AftertheendofWorldWarII,weenterthemostrecentphaseofinternationalization
The1930ssawthespreadofharmfulbeggarthyneighborpoliciesthatshutoffinternationaltrade
AttheendofWorldWarII,thegoalwastocreateanewsystemthatcouldpreventthedisasterofthe1930s.
ThepostWorldWarIIsystemsoughttopromotethefollowing:
1.Opentrade
2.Freeflowofcapital
3.Stableexchangerates
ThesethreegoalsarethefoundationofglobalizationinthepostWorldWarIIperiod
Howcanwestudythesedevelopments?
Rationalchoiceoffersoneway
1.Individualsarerationalactorswithknownandfixedpreferences.
2.Intherationalchoiceapproachthestudyofinternationalpoliticaleconomyisthestudyofhowstatesmakestrategic
choices.
Socialconstructivistsargueagainstrationalchoice.
1.Preferencescannotbeassumed.
2.Preferenceschangewithtime.

III.TheBasisoftheContemporaryInternationalEconomy
KeyConceptsintheLiberalEconomy
Liberaleconomicsisbasedontherecognitionthatstatesdifferintheirresourceendowments.Worldwidewealthis
maximizedifstatesengageininternationaltrade.
DavidRicardo(17721823)developedatheorythatstatesshouldengageininternationaltradeaccordingtotheir
comparativeadvantage.Thatis,statesshouldproduceandexportthoseproductswhichtheycanproducemost
efficiently(specialize),relativetootherstates.Thus,gainsfromtradearemaximizedforallbecauseeachstateminimizes
itsopportunitycost.
Nationalcurrenciesshouldbeboughtandsoldinafreemarketsystem.Insuchasystemoffloatingexchangerates,the
marketdeterminesthevalueofonecurrencyascomparedwithothercurrencies.Floatingexchangerateswillleadto
marketequilibrium.
RolesofMultinationalCorporations(MNCs)
MNCsplayakeyroleasenginesofeconomicgrowth.
1.Theyactasthevanguardoftheliberaleconomicorder.
2.Theyhavetakentheintegrationofnationaleconomiesbeyondtradeandmoneytoincludetheinternationalizationof
production

LiberalsseeMNCsaspositive
1.EconomicimprovementisdriventhroughefficiencyandMNCspromoteefficiency.
MNCsperformmanyactivities.
1.Directimportingandexporting
2.Makingsignificantinvestmentsinaforeigncountry
3.Buyingandsellinglicensesinforeignmarkets
4.Engagingincontractmanufacturing
5.Openingmanufacturingfacilitiesinforeigncountries
MNCschoosetooperateininternationalmarketsforvariousreasons,allofwhicharebasedineconomics,butwhichare
affectedbythepoliticalrelationsofthehoststate.
1.Reducetransportcostsbymovingproductionclosertocustomers
2.Taxandlicenseadvantagesfromlocalgovernments
3.Findcheaperlabormarkets
4.Obtaintheservicesofforeigntechnicalpersonnel
SomeliberalsgofurtherindiscussingthebenefitsofMNCs
1.Theinternationalliberaleconomymaypromotepeace.
Liberaleconomicssuggestsabasicsetofpolicies,allbasedontheminimalinvolvementofgovernments
1.Openmarkets
2.Freetrade
3.Freeflowofgoodsandservices
RolesoftheInternationalEconomicInstitutions
EconomicliberalismhasbeensupportedbytheestablishmentandexpansionoftheBrettonWoodsinstitutions,theWorld
Bank,theInternationalMonetaryFund(IMF),andtoalesserextendtheGeneralAgreementonTariffsandTrade(GATT)
nowtheWorldTradeOrganization(WTO).
TheWorldBankStimulatingEconomies
1.TheWorldBankwasdesignedinitiallytofacilitatereconstructioninthepostWorldWarIIEurope.
2.Inthe1950sthebankshifteditsemphasisfromreconstructiontodevelopment.Itgeneratescapitalfundsfrom
memberstatescontributionsandfromborrowinginfinancialmarkets.
3.AhighproportionoftheWorldBankfundinghasbeenusedforinfrastructuredevelopment
TheInternationalMonetaryFundStabilizingEconomies
1.ThetaskoftheInternationalMonetaryFund(IMF)wastostabilizeexchangerates.
2.Originallythefundestablishedasystemoffixedexchangerates
3.In1972thissystemcollapsedwhentheUnitedStatesannouncedthatitwouldnolongerguaranteethesystem.
4.In1976thefundformalizedthesystemoffloatingexchangeratescurrentlyinuse.
GATTandtheWTOManagingTrade
1.TheGeneralAgreementonTariffsandTrade(GATT)enshrinedimportantliberalprinciples:
Supportoftradeliberalization
Nondiscriminationintrade
Exclusiveuseoftariffsforprotectinghomemarkets
PreferentialaccessindevelopedmarketstoproductsfromtheSouth
Supportconceptofnationaltreatmentofforeignenterprises.

2.TheGATTestablishedacontinualprocessofmultilateralnegotiationsamongthosecountriessharingmajorinterests
intheissueathandtheagreementsreachedwerethenexpandedtoallGATTparticipants.
3.Mostoftheworkwascarriedoutoverthecourseofeightnegotiatingroundseachroundprogressivelycutting
tariffsandaddressingnewproblems,suchasintellectualpropertyrights.

IV.HowtheGlobalizedEconomyWorksToday
InternationalFinance
Capitalmovementsplayedakeyroleintheearlierphasesofthedevelopmentoftheinternationalpoliticaleconomyand
theycontinuetodosotoday
Capitalmovesintwoways:
1.Foreigndirectinvestment(FDI)includesthebuildingoffactoriesandotherfacilities
2.Portfolioinvestment(PI)includesinvestmentsinthestocksandbondsofacountry
3.MNCsplayamajorroleinthemovementofcapital,bothintheformofFDIandintheformofPI
Therearecurrentlymorethan60,000MNCsemploying90millionpeopleintheglobaleconomy
Ofthelargest100MNCs,90arebasedintheUnitedStates,Europe,Japan,andahandfulofdevelopingstates
Criticsfromallperspectivesrealizethatsomestateshavemoredifficultyattractingprivateinvestmentthanothers.
1.Africareceivesonly8percentofprivatecapital
2.TheWorldBankhasexpandeditsmissiontoincludedevelopmentlendingtothesecountries.
3.TwoseparateinstitutionswithintheWorldBankwerecreatedtodealwiththeseissues.
TheInternationalFinanceCorporation(1956)providesloansforthedevelopmentofprivateenterprisesin
developingcountries
TheInternationalDevelopmentAssociation(1960)providescapitaltothepoorestcountries,usuallyinthe
formofinterestfreeloans
TheMultilateralInvestmentGuaranteeAgency(1988)providesinsuranceagainstlossesfromeventslike
expropriation,civilwar,orconflict
4.EvenwiththeexpansionofWorldBankprograms,theseeffortscontinuetodeclineasaproportionoftotalcapital
flows
Financialflowsacceleratedinthe1980sduetoarangeofmechanisms
1.Exchangerateswerenolongerfixed,sotradersincurrencyexchangemarketsandinMNCscouldcapitalizeon
buyingandsellingcurrencies
2.Themarketdevelopednewfinancialinstruments,suchasderivativeswhichcouldbepackagedandsoldaroundthe
world
3.Neweconomicactors,sovereignwealthfunds,formedincapitalsurpluscountries
4.Economicliberalizationhasledtotheemergenceofoffshorefinancialcenterswithlowtaxationandlittleorno
regulation
TheAsianfinancialcrisisofthe1990sillustratesthepossibleoutcomesoftheglobalizationoffinance.
1.BeginninginThailandin1997,inarelativelyshortperiodoftime,2percentofGDPfledthatcountry.
2.WithinweeksthecrisisspreadtoIndonesia,Malaysia,thePhilippines,andbeyond,eventuallyreachingRussiaand
Brazil.

3.TheIMFrespondedtothepoliticalandsocialupheavalwithlarge,controversialbailoutpackagestothreeofthe
affectedcountries(Thailand,Indonesia,andSouthKorea)thatincludedsetsoflengthyconditionsthateachcountry
wassupposedtofollow.
4.Governmentshadtoagreetocarryoutsignificantstructuralreformsthatwouldtransformtheireconomiesfrom
semimercantilisttomoreopenones.
Liftingrestrictionsonthemovementofcapital
Cuttingthegovernmentbudget,particularlyinsocialprograms
5.CriticsoftheIMFresponsefocusonthemoralhazardproblem:stateswererescuedfromtheconsequencesof
theirrecklessbehavior,providinglittleincentiveforthemtochangethatbehavior
InternationalTrade
Thegoalofeconomicliberalthinkingwastocreateafreetradesystem.
Forvariousreasons,leadersmaywanttoprotecttheirhomemarkets.
ThegoalofthepostWorldWarIIGATTwastopromoteinternationaltradebyloweringtradebarriers.
TheGATTaccomplishedthisinaseriesofnegotiatingroundsdealingwithissuessuchastariffcutsandfavorable
treatmentfordevelopingcountries.
ThefinalGATTround,theUruguayRound,coverednewitemssuchasservices,intellectualproperty,andagriculture.
In1995,GATTbecameaformalinstitution,renamingitselftheWorldTradeOrganization(WTO).
TwoimportantprocedureswereinitiatedinWTO:
1.TheTradePolicyReviewMechanism(TPRM),whichconductsperiodicsurveillanceoftradepracticesofmember
states
2.TheDisputeSettlementBody,designedasanauthoritativepaneltohearandsettletradedisputes.TheWTOcan
imposesanctionsagainstviolatorsandismorepowerfulthanothereconomicdisputeresolutionarrangements.
GettingglobalparticipationintheWTOhasprovedapainstakingtask.
1.ChinasaccessiontotheWTOin2001requiredthatitmakecommitmentstomovetowardamarketeconomy.
2.Vietnam,whichaccededin2007,hasmadesimilarcommitments
Tradeliberalization,themajorgoaloftheWTO,remainscontroversial.TheDohaRound,launchedin2001,was
announcedasadevelopmentroundtohelpdevelopingcountriescorrecttheinequitiesoftheprevioustradeagreements.
TheNorthandtheSouthremaindeadlockedovertheissueofagriculturalexportsubsidies.
DomesticgroupsandNGOsinmanycountriesfeelthattheWTOisusurpingthedecisionsanddegradingthewelfareof
individualsandisundermininglaborandenvironmentalstandards.
InternationalDevelopment
TheDohaRoundhasboughtoutsomeofthedifferencesbetweenthedevelopedNorthandthedevelopingSouth.
1.TheNorthisrelativelywealthy.
2.PartsoftheSouthliemiredinpoverty,strugglingtomeetbasicneeds.
Proponentsofeconomicliberalismpointtotheprogressmadeinclosingthedevelopmentgap.
Detractorsofeconomicliberalismpointtoadifferentsetofindicators,arguingthatthegapbetweenrichandpooris
actuallyincreasing.
Inliberaleconomictheory,tradeliberalizationisbasedoncomparativeadvantageandisakeyengineofeconomic
growth.
1.Itisunclearwhetheraggregategrowthleadstotheeconomicimprovementofthelivesofindividuals.

TheWorldBankhaschangeditsorientationovertimewithoutunderminingitscommitmenttoliberaleconomics.Inthe
1990s,sustainabledevelopment,anapproachtoeconomicdevelopmentthatincorporatesconcernforrenewable
resourcesandtheenvironment,becamepartofthebanksrepertoire.
ThebankssupportofprivatesectorparticipationhasbecomeknownastheWashingtonConsensus,aversionofliberal
economicideology.Itsadherentsholdthatonlywithliberalizationoftradeandprivatizationwilldevelopmentoccur.
WhiletheIMFwasnotoriginallychargedwithdevelopment,itrealizedthatmanycountriesseeminglytemporarybalance
ofpaymentsproblemswereactuallylongtermstructuralproblems.
1.Duringthe1980stheIMFbegantoprovidelongertermloansifstatesadoptedstructuraladjustmentprograms
consistentwiththeWashingtonConsensus.
2.Inthe1990sitbecameapparentthatsomecountriescouldnotgetoutfromundertheweightofdebtevenwith
structuraladjustmentprograms.
3.TheHeavilyIndebtedPoorCountries(HIPC)Initiativebegananefforttoeliminateorreducethedebtofthepoorest
states.
By2008fourteenstateshadalloftheirdebtscanceled
Untilthe1990stheSovietUnionanditsallieswerenotmembersoftheBrettonWoodsorganizations.Thedemiseofthe
SovietUniongavetheIMFanactiveroleinhelpingformerSovietandSovietsatellitecountriesmakethetransitionto
capitalisteconomies
AstheIMFhasimplementedtheseprogramsthelinebetweentheIMFandtheWorldBankhasbecomeblurred.Abroad
consensushascometoexistregardingtheviabilityofthemarketorientedpoliciesandpoliticalpluralismasthe
foundationforeconomicdevelopment.
1.Thishasincludedagreateremphasisonhumandevelopmenteducationandhealth
NGOsplayacriticalroleinthisnewapproach,organizedatthegrassrootsleveltocarryoutlocallybasedprojects.
1.AparticularefforthasbeentheworkoftheGrameenBank.Itnowhasmorethantwothousandbranches.
Yettheimportantquestionis,witheconomicglobalization,arebenefitsbeingdistributedfairly?
1.TheUNhasundertakenthetaskofsettingthegoalsofsustainabledevelopmentandmonitoringprogress,setting
fortheightMillenniumDevelopmentGoalsdesignedtoreducepovertyandpromotesustainablehuman
development.

V.CriticsofInternationalEconomicLiberalism
Thetriumphofeconomicliberalismisnotwithoutitscritics,bothtraditioncriticsofthetheoryofliberalismandthecriticsof
particularpolicies.
Oldstylemercantilistsarguethateconomicpolicyshouldbesubservienttothestateanditsinterests.
ThismercantilistexplanationdominatedexplanationsoftheeconomicsuccessofJapaninthe1960sand1970s.
Radicaltheoristsarguedevelopmenthasnotoccurred.
DependencytheoristsarguethatMNCsaretoblamethroughtheexploitationofthepoor.
RadicalsseetheinterdependenciesMNCscreateasinstrumentsofdependencyandexploitation.
RadicalsarguethatinternationalregulationwasnecessarytolimitthepowerofMNCs.TheNewInternationalEconomicOrder
(NIEO)andtheGroupof77representexamplesoftheseideas,attemptstomaketheinternationaleconomymorefavorableto
leastdevelopedcountries(LDCs).

ReformersoutsideandwithininternationalfinancialinstitutionsquestionbothgovernanceandspecificpoliciesoftheIMFand
WorldBank.
Thevotingrulesoftheseorganizationsfavorthedonorstates.
ThedevelopmentdollarsdistributedbythebankbringeconomicreturnsonlytotheNorth.
TheWTOhasalsobecomealightningrodfordomesticgroupsfrommanycountries.TheyfeelthattheWTOisusurpinglocal
decisionsanddegradingthewelfareofindividuals.

VI.TheKeyRoleofPetroleumMarkets
Nointernationalissueorsinglecommodityismoreconnectedtoeconomicglobalizationthanpetroleum.
Thefundamentalinterdependencybetweenconsumersandproducershaschangedovertime.
Demandforoilisgrowingfastestinemergingmarkets.
In1960theOrganizationofthePetroleumExportingCountries(OPEC)wasborn.
1.OilexportingcountrieswonsignificantconcessionsfromtheoilMNCs.
OPECstwelvemembersproduce40percentoftheworldsoil.
In1974theArabmembersofOPECbegananembargoofstatesthatsupportedIsrael,leadingtoasignificantincreasein
theoilprice
InspiredbyOPECssuccessotherdevelopingstatesformedcartelsinprimaryproducts,althoughtheselargelyfailed.
AsecondshockcamewiththeIranianRevolutionin1979.
Themostrecentshockshavecomefromdemandforoilinthedevelopingworld.
Thesechangesintheinternationalpetroleummarkethavehadpoliticalimplications.
Oildependentstatesvyingforcontractshavechangedormodifiedpoliticalallegiances.
Oilproducingstateshaveenjoyedamassiveincreaseinoilrevenue.
1.Somestatescanuseoilasastrategicweapon
2.Eveninternationalinstitutionshavefoundithardertoexercisetheirinfluenceingettingtheoilproducingstatesto
complywithinternationalagreements.
3.Asoilhasbecomemorevaluable,ithasbecomeatargetforgroupstryingtodisruptestablishedgovernments.
Withglobalizationanintegratedmarkethasemerged,linkingkeyproducerandconsumerstatesnotonlywithMNCs,but
alsowithinternationalinvestorsandfinancialmarkets

VII.EconomicGlobalizationandRegionalism
Sincethe1990s,moreregionaleconomicarrangementshavebeennegotiatedandthosealreadyoperationalbeenstrengthened.
EuropeanEconomicIntegration
Integrationwaspredicatedonthenotionthatthelargermarketwiththefreemovementofgoodsandserviceswould
permiteconomiesofscale,opportunitiesforinvestment,andgrowth.
Theoverallresultshavebeenpositive,withthegrowthofalltypesofeconomictransactionsacrossstateborders.Thereis
broadconsensusthatEuropeanintegrationhasresultedingreatertradecreationandpositivewelfare.
Duringthediscussionsforthesinglemarket,theoutlinesofamonetaryunionwerenegotiated.Statesthathaveagreedto
thesinglecurrency,theeuro,nolongercanuseexchangeratesandinterestratesaseconomicpolicy.

TheEuropeanUnion(EU)recognizedthatagriculturewasdifferent.TheEUadoptedtheCommonAgriculturalPolicy
(CAP),wheretheEUpurchasessurpluscropsandpaysguaranteedpricestofarmers.
AsidefromtheCAP,mosteconomistsagreethattheopennessoftheEuropeanmarkershasnotonlybenefitedEuropeans
buthasbecomecompatiblewiththegoalsofthemultilateralglobalsystem.
TheNorthAmericanFreeTradeAgreement(NAFTA)
ThefreetradeagreementnegotiatedbytheUnitedStates,Canada,andMexicodifferssubstantiallyfromtheEU:
1.Itcomprisesonedominanteconomyandtwodependentones.
2.ThedrivingforceinNAFTAisnotpoliticalelitesbutMNCsthatseeklargermarketshares.
3.Thesocial,political,andsecuritydimensionsintheEUareabsentfromNAFTA.Cooperationintradeisnot
intendedtoleadtofreemovementoflabor.
4.NAFTAsupportsthephasedeliminationovertenyearsoftariffandnontariffbarriers.NAFTAprotectstheproperty
rightsofthosecompaniesmakinginvestmentsinthethreecountries.
TheeconomiccontroversiesgeneratedbyNAFTAcontinuetobeprofound:
1.U.S.laborunionsclaimthathundredsofthousandsofworkershavelosttheirjobstoMexico.
2.EnvironmentalgroupsintheUnitedStatesfearfreetradewithMexicocomesattheexpenseoftheenvironment,as
U.S.firmsrelocatetoMexicotoskirtdomesticenvironmentalregulations.
Agriculturalmarketsarebetterintegrated,tariffsonmanufacturedgoodshavebeenalmostentirelyeliminated,andtrade
betweenthethreecountrieshasincreasedsubstantially.

VIII.EmergingChallengestoEconomicGlobalization
Economicglobalizationresultingfromthetriumphofeconomicliberalismhasbeenconfrontedwithseveralchallenges.
Individualswhofeelthateconomicdecisionswerebeyondtheircontrolhaveresultedinantiglobalizationmovementsat
WTO,WorldBank,andIMFmeetingsaroundtheworld,aswellastheguerillamovementsinMexicoopposedto
NAFTA.
TheAsianfinancialcrisisinthelate1990shighlightedtheproblemoftoomuchcapitalflowingoutoftheregion.Many
countrieswereunabletoadjusttothisrapidwithdrawal,andthusexchangeratesplummeted,individualslosttheirjobsas
companieswentbankrupt,andstockmarketsfell.
Antiglobalizershavealsobeenstimulatedbyotherrepercussionsresultingfromtheopennessofeconomicmarkets.Two
trendshavebecomevexing:
1.Themovementoflabor:TheEUadoptedthegoal,butithasnotoccurred.Thishasresultedinafloodofillegal
aliensseekingbetterpayingjobsinEUcountries.Thishasledtoanewmarketinillicitlabor,traffickinginpeople,
includingwomenandchildren.
2.Theriseofillicitmarkets:thiscanincludetheillegalmovementofarms,money,drugs,humanorgans,endangered
species,andprotectedintellectualproperty.
TheGlobalEconomicCrisis
Internationalcriseshavebeenarecurrentfeatureoftheglobaleconomicsystem.
1.Liberaltheoryarguesthattheeconomywillregainitsequilibriumandthatboomsandbustswillnotbringdownthe
globalsystem.
2.WhatbeganasacrisisintheUnitedStatesrapidlybecameaglobaleconomiccrisis.

Initialresponsestothecrisisweremostlyunilateral.
Internationalinstitutionsprovidedloansandcredittodevelopedstates.
Thecrisishasledtocallsforreformofthesystem,includingreformoftheintergovernmentalregulatoryarrangements.
TheG20hasemergedasamajorplayerinthecrisis,buttheG20mayprovetoolargeformacroeconomiccoordination.
ThecrisishasalsoweakenedthepowerofMNCsintheinternationalsystem.
Whatremainstobeseenishowthecrisiswillaffecteconomicglobalization.
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