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International political economy (IPE), also known as global political economy

(GPE), is an academic discipline within political science that analyzes economics

and international relations.

International Political Economy (IPE) is a field of enquiry concerned with the

distribution of power, wealth and agency in a rapidly changing and contested global

IPE seeks to advance knowledge of how political institutions, processes, and actors
influence economic interactions, and conversely, how economic institutions,
processes, and actors affect political interactions. IPE scholars examine the role of
domestic drivers in shaping global politics as well as the influence of global drivers
on domestic politics. Substantive issues this section focuses on include international
and regional regimes, private authority structures, welfare policies, social and
environmental policies, monetary and exchange rate policies, global integration,
international trade, international development and equity, international finance,
multinational corporations, NGOs, and corporate social responsibility. We encourage
theoretical and methodological diversity, and welcome conceptual as well as
empirical contributions.

What is International Political Economy?

International Political Economy (IPE) is a social science that attempts to understand international
and global problems using interdisciplinary tools and theoretical perspectives. Although it
originally developed as a sub-field of International Relations, it has in recent years taken on a life
if its own. At the University of Puget Sound, 30 to 40 students graduate with a bachelor of arts
degree in IPE each year.

The growing prominence of IPE is one result of the continuing breakdown of boundaries
between economics, politics, and other social science disciplines. Increasingly, the most pressing
problems that scholars and policy-makers confront are those that can best be understood from a
multidisciplinary, interdisciplinary, or transdisciplinary point of view. IPE pulls down the fences
that restrict intellectual inquiry in the social sciences so that important questions and problems
can be examined without reference to disciplinary borders.

IPE is the study of a problmatique, or set of related problems. The traditional IPE
problmatique includes the political economy of international trade, international finance, North-
South relations, transnational enterprises, and hegemony. This problmatique has been
broadened in recent years to issues raised by globalization and climate change.

International Economics and International Politics

The interaction of International Politics and International Economics is today widely appreciated
and the subject of much theoretical research and applied policy analysis. Nation-states clearly
affect international trade and monetary flows, which in turn affect the environment in which
nation-states make political choices and businesses make economic decisions.

Yet scholars and policy-makers often think about International Economics without much
attention to International Politics and vice versa. Economists often assume away state interests
while political scientists sometimes fail to look beyond the nation-state. Two noteworthy Cold
War era exceptions to this rule stand out: economist Charles Kindleberger's work on hegemony
and political scientist Kenneth Waltz's attempt to integrate economics into politics in his path-
breaking book Man, the State, and War.

Dramatic events in the 1970s made plain how tightly international economics and politics were
intertwined. The oil embargoes of the 1970s and the breakdown of the Bretton Woods monetary
system were key events in IPE's development as a field of study. Moreover, subsequent events
such as the Third World debt crisis, the fall of communist regimes, the rise of the Newly
Industrialized Countries (NICS), the expansion of the European Union, and the financial crises in
Mexico, Russia, and East Asia made showed that simple divisions between state and market,
domestic and international, and politics and economics were no longer tenable. An increasingly
complex world required a complex approach to analysis, which IPE provided.

The IPE Problmatique

IPE in the 1970s and 1980s was centered in the International Relations community and took the
form of the analysis of what was called in book titles and course catalogues "The Politics of
International Economic Relations" or "The Political Economy of International Relations." In this
period, five sets of questions dominated the agenda: international trade, international finance,
North-South relations, MNCs, and the problem of hegemony. A sixth concern globalization
was added to the list in the 1990s. Since the 2000s, IPE has devoted significant attention to
global threats and crises, including climate change and worldwide financial instability.

International Trade

Politics and Economics approach international trade from different points of view using
completely different analytical frameworks. The problem is that states think in terms of
geography and population, which are the relatively stable factors that define its domain, while
markets are defined by exchange and the extent of the forward and backward linkages that derive
therefrom. The borders of markets are dynamic, transparent, and porous; they rarely coincide
exactly with the more rigid borders of states. A few markets today are even global in their reach.
When trade within a market involves buyers and sellers in different nation-states, it becomes
international trade and the object of political scrutiny.

International trade has always been at the center of IPE analysis and is likely to remain so in the
future. It is a mirror that reflects each era's most important state-market tensions. In the Cold
War, for example, international trade was simultaneously a structure of US hegemony and a tool
of East-West strategy. In the 1980s and 1990s, trade through regional economic integration was a
tool to consolidate regional interests. With the advent of globalization and the creative economy
powered by information technologies, trade in intellectual property rights became me a
controversial IPE issue.

International Finance

International Finance presents the second set of problems that have traditionally defined
International Political Economy. The IPE of International Finance includes analysis of exchange
rate policies, foreign exchange systems, international capital movements, and international
financial institutions such as the World Bank and the International Monetary Fund. Seemingly
technical aspects of international finance often hide profound political implications, a fact that
has attracted scholars such as Susan Strange and Benjamin J. Cohen to this field. Political
scholars may hesitate to engage in this analysis because of the necessity to master difficult
theories and arcane terminology, but there is no riper area for IPE analysis. Some issues of
current importance in IPE studies of finance include: political struggles over how to respond to
the post-2007 global financial crisis; how the complexity of financial markets affects economic
stability; and debates over how states should regulate financial markets.


The theory of hegemonic stability was arguably IPE's most important contribution to Cold War
international relations theory. A hegemon is a powerful state that supplies public goods to the
international system. These public goods include stable money, security (such as freedom of the
seas), and a system of free trade that can be shared by all. Providing these public goods is costly,
but the hegemon gains even if it disproportionately bears the expense alone. If the world system
prospers, the hegemon necessarily prospers as well. In fact, this provision of public goods may
be a strategy to secure or extend the hegemon's dominant position.

The theory of hegemonic stability holds that the world system is most prosperous when a
hegemon exists to organize the international political and economic system and coordinate the
provision of international public goods. Periods of Dutch (1620-72), British (1815-73), and U.S.
(post-1945) hegemony are commonly cited as evidence of this link between hegemony and
prosperity. When hegemony breaks down, however, the international system falls into disorder
and conflict, with the resulting decline in peace and prosperity. One can think of the theory of
hegemonic stability as a theory of U.S. Cold War economic statecraft, with the Bretton Woods
system and the Marshall Plan its clearest manifestations.

Some scholars argue that hegemony is a self-defeating and therefore temporary condition. While
the hegemonic state bears the burdens of organizing the international system and supplying
public goods, free-rider states prosper and increase the burdens on the hegemon. At some point
the hegemon finds itself over-committed and unable to bear the costs of the system it has created.
Either it begins to put domestic interests over its international obligations or it becomes too weak
to honors its widespread commitments. Britain's decline in the late 19th century and early 20th
century is an example of this dynamic. The Iron Curtain's fall in 1989 can also be seen as the
implosion of Soviet hegemony over Central and Eastern Europe.
Hegemony is a state-centered concept that includes security as a critical element, but that draws
upon the analysis of international trade and international finance to provide a richer and more
complex explanation of the rise and fall of great powers. One important question in IPE today is
whether China will challenge U.S. hegemony and threaten the liberal international order. Another
is whether Germany will move to establish itself as a hegemon within the European Union.

North-South Relations

The Cold War analysis of less-developed countries (LDCs) was focused on the East-West bipolar
alliances and the place of LDCs in geopolitical strategy. LDCs were strategic pawns in the Big
Power Cold War game. As international trade and international finance were increasingly used to
expand and strengthen the Cold War alliances (especially but not exclusively on the western
side), IPE scholars pursued the impact of economic relations generally on LDCs. Or, in the terms
associated with Immanuel Wallerstein, they probed the relationship between Core and Periphery.

The IPE problmatique therefore expanded to encompass a critique of economic development,

an analysis of neo-colonialism and imperialism, and a general study of Core-Periphery relations.
Security and geopolitical issues were not excluded from this North-South analysis; they merely
lost the privileged position that they enjoyed in traditional International Relations research. In
recent years, IPE scholars have focused on sustainable development, the reasons why failed
states have formed, and how the rise of the BRICs (Brazil, Russia, India, and China) is reshaping
North-South relations.

Multinational Corporations

Multinational corporations (MNCs)also called transnational corporationshave always been

objects of interest to IPE scholars and practitioners. During the Cold War, MNCs were often
viewed as being linked with their home government by an "invisible handshake." The home
country government created opportunities for these businesses and opened markets abroad (in
"host countries") for them. The businesses, in turn, advanced the economic and political interests
of their home country.

With the end of the Cold War, analysis of MNC behavior quickly spread to issues well beyond
their role in Cold War geopolitics. The rise of Asias newly-industrializing countries and the
increasing globalization of production and finance spurred research on the role of MNCs in the
allocation of capital and the control of technology. It became apparent that some MNCs
undertook business strategies that were not obviously in the interest of their home country. The
distinction between home country and host country also grew less clear. All countries are now
host countries in the sense that all countries compete for capital, technology, and jobs in the
global market.

IPE scholars have increasingly directed their research towards developing an IPE of Global
Value Chains (GVCs). GVCs are complex networks that link independent businesses into a
coordinated production and distribution process. New information technology allows firms to
coordinate their activities to an extent that was previously possible only within a large enterprise,
thereby facilitating the expansion of GVCs. Companies like Nike, Apple, and Wal-Mart
coordinate vast GVCs; they focus on design, marketing, logistics, and retailing. Much of the
actual manufacturing of products has been outsourced to independent firms in countries such as
China, Vietnam, and Malaysia. The IPE of global value chains challenges our understanding of
both markets and states and represents an advancing frontier of IPE research.


The globalization problmatique is quite different from the traditional state-centered concerns of
International Relations, which is one reason some IPE scholars consider IPE a distinct academic
discipline, not just a sub-field of International Relations. As a process driven by the global
expansion of production and finance, globalization forces us to look at the interrelationships
between politics, business, culture, technology, the environment, and migration, to name only the
most obvious areas.

At the heart of the globalization problmatique is the question of the state. Many scholars argue
that the nation-state is increasingly incapable of dealing with global issues and has lost
significant power relative to other actors in the global economy. For example, MNCs can easily
move capital from one country to another, and this mobility has allowed them to reduce the taxes
they pay.

Globalization has forced IPE scholars to search for new theories to explain complex global
interactions. One of the most recent theories is constructivism, which focuses on the power of
ideas to shape how states and institutions perceive and respond to global problems. An outgrowth
of this perspective is literature on how globally-coordinated groups of non-state, non-business
actorscalled transnational advocacy networkshave been able to convince governments to
care more about problems such as human rights and environmental destruction.

It is clear that globalization has generated an array of social and environmental problems that
demand the attention of IPE scholars. Growing economic inequality has had profound effects on
the quality of democracy and social stability. The rise of China and the creation of the euro
currency have reshaped geopolitics. Most importantly, globalization has helped produce serious
threats and crises that states and international institutions seem incapable of controlling, such as
global warming, financial turmoil, and refugee flows. The challenge for IPE is to develop
theories and concepts that help us make sense of what is now truly a global political economy.
International Political Economy

Chapter Summary
I. Introduction

Economic globalization describes the international political economy of 2010.

o Goods and services are produced and traded globally.

o A global virtual world ties us together through new technology.

New technologies and economic ties also lead to the decreasing

territorialization of daily life.

II. The Evolution of the International Economy: Clashing Ideas and Practices

The era from the late Middle Ages to the end of the eighteenth century saw a
number of key changes in technology, ideas, and practices.

o European explorers opened up new frontiers in the Americas, Asia, and


o The exchange of good and people tied the colonies and the home
states together.

Adam Smith wrote of the idea that human are rational and self-interested.

o To Smith, markets develop through individual, rational action.

o Markets need to be free from government action to function properly.

Mercantilism (statism) was the common practice of many governments at the


o Mercantilisms goal is to build economic wealth to build the power of

the state.

o Jean-Baptiste Colbert (1617-83) argued that states should accumulate

gold and silver as well as build a strong central government.

o Alexander Hamilton (1757-1804) made similar arguments in the United

From the start of the nineteenth century to World War I colonialism expanded

During the same period the states of Europe industrialized.

o Industrialization was spurred by technological change

o Economic links in global trade were followed by political and cultural

domination by the industrial states.

Britain acted as a hegemon to promote a more peaceful world order.

o The Pax Britanica is an example of hegemonic stability theory.

o A large, dominant state provides collective goods to the global system.

Radicalism emerged in this period as a response to the excesses of the time.

o Based in the teaching of Marx and others, radicalism attacked the

inequalities of the time.

o Radicals argued that society was conflictual.

1. Conflict was focused on competition between groups.

2. Owners of wealth versus workers

o Radicals argued that the state would support the owners of wealth.

o The holders of capital must expand their markets and the capitalist
system until it embraces the entire world.

1. This pressure for expansion creates tensions and creates the

seeds of the destruction of the system as a whole.

After the end of World War II, we enter the most recent phase of

o The 1930s saw the spread of harmful beggar thy neighbor policies
that shut off international trade

o At the end of World War II, the goal was to create a new system that
could prevent the disaster of the 1930s.

o The post-World War II system sought to promote the following:

1. Open trade
2. Free flow of capital

3. Stable exchange rates

o These three goals are the foundation of globalization in the post-World

War II period

How can we study these developments?

o Rational choice offers one way

1. Individuals are rational actors with known and fixed preferences.

2. In the rational choice approach the study of international

political economy is the study of how states make strategic

o Social constructivists argue against rational choice.

1. Preferences cannot be assumed.

2. Preferences change with time.

III. The Basis of the Contemporary International Economy

Key Concepts in the Liberal Economy

o Liberal economics is based on the recognition that states differ in their

resource endowments. Worldwide wealth is maximized if states engage
in international trade.

o 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.

o 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.

Roles of Multinational Corporations (MNCs)

o MNCs play a key role as engines of economic growth.

1. They act as the vanguard of the liberal economic order.

2. They have taken the integration of national economies beyond
trade and money to include the internationalization of

o Liberals see MNCs as positive

1. Economic improvement is driven through efficiency and MNCs

promote efficiency.

o MNCs perform many activities.

1. Direct importing and exporting

2. Making significant investments in a foreign country

3. Buying and selling licenses in foreign markets

4. Engaging in contract manufacturing

5. Opening manufacturing facilities in foreign countries

o MNCs choose to operate in international markets for various reasons,

all of which are based in economics, but which are affected by the
political relations of the host state.

1. Reduce transport costs by moving production closer to


2. Tax and license advantages from local governments

3. Find cheaper labor markets

4. Obtain the services of foreign technical personnel

o Some liberals go further in discussing the benefits of MNCs

1. The international liberal economy may promote peace.

o Liberal economics suggests a basic set of policies, all based on the

minimal involvement of governments

1. Open markets

2. Free trade

3. Free flow of goods and services

Roles of the International Economic Institutions

o 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 (GATT)now the World Trade
Organization (WTO).

o The World BankStimulating Economies

1. The World Bank was designed initially to facilitate

reconstruction in the post-World War II Europe.

2. 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.

3. A high proportion of the World Bank funding has been used for
infrastructure development

o The International Monetary FundStabilizing Economies

1. The task of the International Monetary Fund (IMF) was to

stabilize exchange rates.

2. Originally the fund established a system of fixed exchange rates

3. In 1972 this system collapsed when the United States

announced that it would no longer guarantee the system.

4. In 1976 the fund formalized the system of floating exchange

rates currently in use.

o GATT and the WTOManaging Trade

1. 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

2. 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.

3. Most of the work was carried out over the course of eight
negotiating roundseach round progressively cutting tariffs and
addressing new problems, such as intellectual property rights.

IV. How the Globalized Economy Works Today

International Finance

o Capital movements played a key role in the earlier phases of the

development of the international political economy and they continue
to do so today

o Capital moves in two ways:

1. Foreign direct investment (FDI) includes the building of

factories and other facilities

2. Portfolio investment (PI) includes investments in the stocks

and bonds of a country

3. MNCs play a major role in the movement of capital, both in the

form of FDI and in the form of PI

There are currently more than 60,000 MNCs employing 90

million people in the global economy

Of the largest 100 MNCs, 90 are based in the United

States, Europe, Japan, and a handful of developing states

o Critics from all perspectives realize that some states have more
difficulty attracting private investment than others.

1. Africa receives only 8 percent of private capital

2. The World Bank has expanded its mission to include

development lending to these countries.

3. Two separate institutions within the World Bank were created to

deal with these issues.

The International Finance Corporation (1956) provides

loans for the development of private enterprises in
developing countries
The International Development Association (1960)
provides capital to the poorest countries, usually in the
form of interest free loans

The Multilateral Investment Guarantee Agency (1988)

provides insurance against losses from events like
expropriation, civil war, or conflict

4. Even with the expansion of World Bank programs, these efforts

continue to decline as a proportion of total capital flows

o Financial flows accelerated in the 1980s due to a range of mechanisms

1. Exchange rates were no longer fixed, so traders in currency

exchange markets and in MNCs could capitalize on buying and
selling currencies

2. The market developed new financial instruments, such as

derivatives which could be packaged and sold around the

3. New economic actors, sovereign wealth funds, formed in

capital-surplus countries

4. Economic liberalization has led to the emergence of offshore

financial centers with low taxation and little or no regulation

o The Asian financial crisis of the 1990s illustrates the possible outcomes
of the globalization of finance.

1. Beginning in Thailand in 1997, in a relatively short period of

time, 2 percent of GDP fled that country.

2. Within weeks the crisis spread to Indonesia, Malaysia, the

Philippines, and beyond, eventually reaching Russia and Brazil.

3. The IMF responded to the political and social upheaval with

large, controversial bailout packages to three of the affected
countries (Thailand, Indonesia, and South Korea) that included
sets of lengthy conditions that each country was supposed to

4. Governments had to agree to carry out significant structural

reforms that would transform their economies from semi-
mercantilist to more open ones.

Lifting restrictions on the movement of capital

Cutting the government budget, particularly in social

5. Critics of the IMF response focus on the moral hazard

problem: states were rescued from the consequences of their
reckless behavior, providing little incentive for them to change
that behavior

International Trade

o The goal of economic liberal thinking was to create a free trade


o For various reasons, leaders may want to protect their home markets.

o The goal of the post-World War II GATT was to promote international

trade by lowering trade barriers.

o The GATT accomplished this in a series of negotiating rounds dealing

with issues such as tariff cuts and favorable treatment for developing

o The final GATT round, the Uruguay Round, covered new items such as
services, intellectual property, and agriculture.

o In 1995, GATT became a formal institution, renaming itself the World

Trade Organization (WTO).

o Two important procedures were initiated in WTO:

1. The Trade Policy Review Mechanism (TPRM), which conducts

periodic surveillance of trade practices of member states

2. The 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.

o Getting global participation in the WTO has proved a painstaking task.

1. Chinas accession to the WTO in 2001 required that it make

commitments to move toward a market economy.

2. Vietnam, which acceded in 2007, has made similar


o 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 over the issue of agricultural export subsidies.

o 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.

International Development

o The Doha Round has bought out some of the differences between the
developed North and the developing South.

1. The North is relatively wealthy.

2. Parts of the South lie mired in poverty, struggling to meet basic


o Proponents of economic liberalism point to the progress made in

closing the development gap.

o Detractors of economic liberalism point to a different set of indicators,

arguing that the gap between rich and poor is actually increasing.

o In liberal economic theory, trade liberalization is based on comparative

advantage and is a key engine of economic growth.

1. It is unclear whether aggregate growth leads to the economic

improvement of the lives of individuals.

o 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 banks repertoire.

o The banks 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.

o While the IMF was not originally charged with development, it realized
that many countries seemingly temporary balance of payments
problems were actually long-term structural problems.

1. During the 1980s the IMF began to provide longer-term loans if

states adopted structural adjustment programs consistent
with the Washington Consensus.
2. In the 1990s it became apparent that some countries could not
get out from under the weight of debt even with structural
adjustment programs.

3. The Heavily Indebted Poor Countries (HIPC) Initiative began an

effort to eliminate or reduce the debt of the poorest states.

By 2008 fourteen states had all of their debts canceled

o Until the 1990s the Soviet Union and its allies were not members of the
Bretton Woods organizations. The demise of the Soviet Union gave the
IMF an active role in helping former Soviet and Soviet satellite
countries make the transition to capitalist economies

o As the IMF has implemented these programs the line between the IMF
and the World Bank has become blurred. A broad consensus has come
to exist regarding the viability of the market-oriented policies and
political pluralism as the foundation for economic development.

1. This has included a greater emphasis on human development

education and health

o NGOs play a critical role in this new approach, organized at the

grassroots level to carry out locally based projects.

1. A particular effort has been the work of the Grameen Bank. It

now has more than two thousand branches.

o Yet the important question is, with economic globalization, are benefits
being distributed fairly?

1. The UN has undertaken the task of setting the goals of

sustainable development and monitoring progress, setting forth
eight Millennium Development Goals designed to reduce poverty
and promote sustainable human development.

V. Critics of International Economic Liberalism

The triumph of economic liberalism is not without its critics, both tradition
critics of the theory of liberalism and the critics of particular policies.

Old-style mercantilists argue that economic policy should be subservient to

the state and its interests.

o This mercantilist explanation dominated explanations of the economic

success of Japan in the 1960s and 1970s.

Radical theorists argue development has not occurred.

o Dependency theorists argue that MNCs are to blame through the
exploitation of the poor.

o Radicals see the interdependencies MNCs create as instruments of

dependency and exploitation.

Radicals argue that international regulation was necessary to limit the power
of MNCs. The New International Economic Order (NIEO) and the Group of 77
represent examples of these ideas, attempts to make the international
economy more favorable to least developed countries (LDCs).

Reformers outside and within international financial institutions question both

governance and specific policies of the IMF and World Bank.

o The voting rules of these organizations favor the donor states.

o The development dollars distributed by the bank bring economic

returns only to the North.

The WTO has also become a lightning rod for domestic groups from many
countries. They feel that the WTO is usurping local decisions and degrading
the welfare of individuals.

VI. The Key Role of Petroleum Markets

No international issue or single commodity is more connected to economic

globalization than petroleum.

o The fundamental interdependency between consumers and producers

has changed over time.

o Demand for oil is growing fastest in emerging markets.

o In 1960 the Organization of the Petroleum Exporting Countries (OPEC)

was born.

1. Oil exporting countries won significant concessions from the oil


o OPECs twelve members produce 40 percent of the worlds oil.

o In 1974 the Arab members of OPEC began an embargo of states that

supported Israel, leading to a significant increase in the oil price

o Inspired by OPECs success other developing states formed cartels in

primary products, although these largely failed.

o A second shock came with the Iranian Revolution in 1979.

o The most recent shocks have come from demand for oil in the
developing world.

These changes in the international petroleum market have had political


o Oil-dependent states vying for contracts have changed or modified

political allegiances.

o Oil producing states have enjoyed a massive increase in oil revenue.

1. Some states can use oil as a strategic weapon

2. Even international institutions have found it harder to exercise

their influence in getting the oil-producing states to comply with
international agreements.

3. As oil has become more valuable, it has become a target for

groups trying to disrupt established governments.

o With globalization an integrated market has emerged, linking key

producer and consumer states not only with MNCs, but also with
international investors and financial markets

VII. Economic Globalization and Regionalism

Since the 1990s, more regional economic arrangements have been

negotiated and those already operational been strengthened.

European Economic Integration

o 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.

o 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.

o During the discussions for the single market, the outlines of a

monetary union were negotiated. States that have agreed to the single
currency, the euro, no longer can use exchange rates and interest
rates as economic policy.
o The European Union (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.

o 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 (NAFTA)

o The free trade agreement negotiated by the United States, Canada,

and Mexico differs substantially from the EU:

1. It comprises one dominant economy and two dependent ones.

2. The driving force in NAFTA is not political elites but MNCs that
seek larger market shares.

3. 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.

4. 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.

o The economic controversies generated by NAFTA continue to be


1. U.S. labor unions claim that hundreds of thousands of workers

have lost their jobs to Mexico.

2. Environmental groups in the United States fear free trade with

Mexico comes at the expense of the environment, as U.S. firms
relocate to Mexico to skirt domestic environmental regulations.

o Agricultural markets are better integrated, tariffs on manufactured

goods have been almost entirely eliminated, and trade between the
three countries has increased substantially.

VIII. Emerging Challenges to Economic Globalization

Economic globalization resulting from the triumph of economic liberalism has

been confronted with several challenges.

o 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.

o 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.

o Antiglobalizers have also been stimulated by other repercussions

resulting from the openness of economic markets. Two trends have
become vexing:

1. 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

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

The Global Economic Crisis

o International crises have been a recurrent feature of the global

economic system.

1. Liberal theory argues that the economy will regain its

equilibrium and that booms and busts will not bring down the
global system.

2. What began as a crisis in the United States rapidly became a

global economic crisis.

o Initial responses to the crisis were mostly unilateral.

o International institutions provided loans and credit to developed states.

o The crisis has led to calls for reform of the system, including reform of
the intergovernmental regulatory arrangements.

o The G20 has emerged as a major player in the crisis, but the G20 may
prove too large for macroeconomic coordination.

o The crisis has also weakened the power of MNCs in the international
o What remains to be seen is how the crisis will affect economic