International political economy

Prof. Ahmed Elhussein

 Contents
• Contents
• Overview of International Political
Economy
• Definition of IPE
• The Elements and Dimensions of IPE
• States and Market
• Brief Notes on IPE Structures
 General View of IPE
• International political economy (IPE) is a perspective in
the social sciences and history that analyzes international
relations in combination with political economy.
• Ultimately, IPE is about the consequences on an
international level of the interaction between the state
(politics) and the market (economics).
• Scholars of IPE study trade relations and financial
relations among nations, and try to understand how
nations have cooperated politically to create and maintain
institutions that regulate the flow of international
economic and financial transactions.
 Definition
• In simple terms, we define IPE as the study
of those international problems and issues
that can not adequately be addressed by
recourse to economic, political or
sociological analysis alone
• It is the study of international affairs that
focuses on the elements of complex
interdependence that define many of our
most pressing problems today
 The need to study IPE
• The need arises because many important
contemporary questions cannot be addressed
from the standpoint of a single discipline- political
science, economics, or sociology
• These issues cannot be understood by the
analysis of actors and actions that take place at a
particular level of analysis- individual, state or
international system
• IPE breaks down the barriers that separate and
isolate methods of social science seeking a
comprehensive understanding of issues and
events
 The Elements of IPE
• One way to understand IPE is to pick apart its
name
• It is international meaning that it deals with
issues that cross national boundaries and with
relations among states
• It is political because it involves the use of state
power to make decisions about who gets what,
when and how in a society
• It is about the economy or economics which
means that it deals how scarce resources are
allocated to different uses and distributed throug
decentralized market processes
 The IPE Approach to International
Issues
• The IPE approach is to synthesize methods and insights
derived from economics, political science, and sociology
as conditioned by an understanding of history and
philosophy and an appreciation of the importance of
culture
• This synthesis is made necessary in part by the tendency
of the separate disciplines to focus on only certain
elements of complex problems and in part on the
tendency of interdependent real world issues to expand
beyond disciplinary boundaries
• Let us take 9/11 as an example of how different
disciplines look at this international issue
 Example
• 9/11 and the responses to them provide a good
example of the relationship between IPE and
academic disciplines
• A Short list of the ways that different academic
disciplines might address the events of 9/11 each
focusing on a particular element of this complex
issue
• The disciplines include, microeconomics,
macroeconomics, comparative politics,
international relations, political theory, sociology
Microeconomics and Macroeconomics
• A microeconomist would study how the terrorist
attacks affected individual prices and industries
and what the distribution of gains and losses was
• A macroeconomist would look at how 9/11
attacks and reactions affected the economy
overall in terms of inflation, unemployment, and
economic growth, and what monetary and fiscal
policies might appropriately considered to deal
with these issues
 comparative politics and international
relations
• A comparative politics specialist would be
interested in how reactions differed among
nations
• Political scientists who specialize in international
relations (or IR) focus on nation-states and their
interdependent relations as conditioned by the
nature of the international system
• An IR specialist would seek to understand how
the attacks affect USA relations with other
countries, for example Afghanistan, Saudi Arabia
 Political Theory
• A political theorist would have a lot of questions
to ask concerning the attacks
• Different governmental systems are, of course
based on different philosophies or theories about
government and the relationship between the
citizen and society
• One theory question involves the reaction to
terrorism
• A political theorist would also have opinions on
whether a program to introduce democracy to
Islamic nations would be likely to succeed or fail
 IPE Approach
• To understand an issue like 9/11
necessitates an IPE approach that draws
together methods and insights from several
different disciplinary perspectives and from
three levels of analysis: individual, state
and international system and takes
account of many actors and institutions
involved
 Building Blocks of IPE: States and
Markets
• IPE study focuses on the interaction of too highly
important social institutions: states and markets,
and on the nature of their interaction within the
international system( the international rules of the
game)
• This is why Robert Gilpin has defined IPE as “the
field of study that analyzes the problems and
questions arising from the parallel existence and
dynamic interaction of “state” and “market” in the
modern world
 The State
• The state is the realm of collective action and decision
• By state we mean the political institutions of the modern
nation-state, a geographic region with a relatively
coherent and autonomous system of government that
extends over that region
• The nation-state is a legal entity that has well defined
territory and population, with government capable of
exercising sovereignty
• We should however also consider the state more broadly
as the domain of collective political behavior that takes
place at many levels: e.g. EU, GCC
 The Market
• The market is the realm of individual actions and
decisions
• By market we mean the economic institutions of modern
capitalism.
• The market is dominated by individual self interest and
conditioned by the forces of competition
• Although a market is sometimes is a geographical
location, it is more often the force of supply and demand
• Individuals are driven by self interest to produce and
supply goods and services or to seek out bargain
products or high wage jobs
• They are driven by the market force of competition to
make product better, cheaper or more attractive
 Wealth and Power: The Tension
between States and Markets
• There are often tensions between markets
(economics) and states (politics) because
of their differing interests and values
• Markets creates and distribute wealth and
states creates and distribute power
• Power and wealth are related because
those who have wealth can have power
and those who have power can influence
how wealth is distributed
 Wealth and Power: The Tension
between States and Markets
• The tension between states and markets is because they have
different values and they may use different means
• Markets value efficiency and states value equality and both value
security for different reasons
• Static efficiency involves making the best use of today's scarce
resources and dynamic efficiency involves making the best use of
societies scarce resources overtime so as to maximized benefits that
society enjoys
• States look to achieve equality
• Usually the values of equality and efficiency do collide
• To summarize states and markets embody different values (efficiency
versus security), they employ different means (decentralized markets
and collective action and force,) They, therefore, have different goals
• The relation between the two is dynamic, changes in markets
(wealth) affect state (power) and the opposite is true
 Dimensions of IPE
• The most important dimensions of IPE are
• 1- Several types of power: relational power and
structural power, hard or soft power
• 2- Three levels of analysis: individual, state and
international system
• 3- Four international power structures: Security,
production, finance and knowledge
• Three perspectives: which are different ways of
looking at IPE based on different systems of
values and beliefs: realism or mercantilism;
liberalism; and structuralism
 Different Types of Power
• 1- relational power: the power of one actor to get another
actor to do something or not to do it
• 2- Structural power: the power to shape and determine
the structures of the global political economy within which
other states and their institutions have to operate
• 3- Hard power refers to military or economic power which
is used to influence other states
• Soft power is the power of culture, values and ideals
• Soft power is less direct but perhaps more effective in
some cases
 Three Levels of Analysis
• Most significant IPE problems involve all three
levels of analysis- individual, state, international
system
• 9/11 for example involves individual level, state
level and international level
• US policy sought to identify individuals such as
Osama Bin Laden, to identify states that foster or
tolerate terrorist organizations, and to organize
the IPE system to more effectively monitor for
terrorist activity and deny resources to terrorists
groups
 Four Global Structures
• The institutions, arrangements, and “rules of the game
”that govern behavior of states and markets in the IPE
can be analyzed as four power structures, which together
produce, exchange and distribute wealth and power
• It is useful to think of these power structures as networks,
bargains, or linkages that connect individuals and states
and form international systems and through which
relational and structural power are exercised
• In a way, you are tied to every other person on earth
through the complex interactions of these power
structures: security, production, finance, knowledge
 Security Structure
• Security- from natural forces or, more important, from the
threats and actions of others, is perhaps the most basic
need
• When one person or a group provide security for another
or contribute to that security, a security structure is
created
• The nature of this security structure depends on the kind
of bargain that is struck among participants
• Warsaw pact and NATO during the cold war
• Today the international security structure is very complex
 Production Structure
• A production structure is the sum of all arrangements
determining what is produced, by whom, and for whom,
by what methods and in what terms
• It is people at work and the wealth they produce by
working
• Production is the act of creating value and wealth, and
wealth is nearly always linked to power
• The issue of who produces what for whom on what terms
lies at the heart of international political economy
• Production structure has impact on other IPE structures
• For example the shift of producing automobiles from USA
to Japan, Korea affect the distribution of wealth and
power in the international system
 The Finance Structure
• One way to describe it is to say that it is the
pattern of money flows between and among
nations
• This structure defines who has access to money,
how, and on what terms
• Money buys scarce resources so the finance
structure tells us about how certain resources are
allocated and distributed among nations
• The movement of Money create obligations
among people, for example loans and foreign
investments
 Knowledge Structure
• It is often said that knowledge is power
• Knowledge is also wealth for those who can use it
effectively
• Who has knowledge and how it is used is an important
factor in IPE
• Nations with poor access to knowledge in the form of
industrial technology, scientific discoveries, medical
procedure or instant communications find themselves at a
relative disadvantage to others
• Increasingly in the world today, bargains made in security,
production and finance structure depend on access to
knowledge in its several forms
 The IPE system and the four
Structures
• Taken together, these four IPE power structures
form the international system within which the
interdependent relations of states occur
• The international system is, therefore, a set of
bargains and relationships
• They are human arrangements that condition
how states and individuals behave and determine
in part the mix of values that results from their
dynamic interaction
 Three Perspectives and three set of
values
• There are a variety of theories that attempt to describe
how states and nations should interact ( normative
theories that reflect a particular set of values)
• There are also theories that tell us how they really
behave (positive theories)
• These theories are like lenses that we can use to view
and interpret the IPE
• These theories are important in the history of IPE- the
history of international relation is a competition for
dominance among these theories
• These theories are: mercantilism, liberalism, and
structuralism
 Mercantilism
• Mercantilism or economic nationalism is a
viewpoint deeply rooted in political realism
• It looks at IPE issues mainly in term of
national interest
• Mercantilism is the IPE perspective that is
mostly closely associated political science
especially the political philosophy of
realism
 Liberalism
• Liberalism or economic liberalism which
looks at IPE issues in term of the individual
interests.
• Liberalism is most closely associated with
the system of markets that is the study of
economics
 Structuralism
• Structuralism is a viewpoint rooted in Marxists
analysis, but not limited to it
• It looks at IPE issues mainly in terms of classes,
class interests, and ultimately all of society are
shaped by the dominant economic structures
• Structuralism is most closely associated with
methods of analysis employed by many
sociologists.
• These philosophies and examples of
international policies they recommend are
considered briefly in the next section
 External links
• International Political Economy Network
• The Review of International Political Economy
• International Political Economy I (L2024), as-offered at the University of
Sussex
• International Political Economy Links
• The International Political Economy Major at Fordham
• The Program in International and Comparative Political Economy at Yale
• The B.Sc. in International Business & Politics at Copenhagen Business
School
• The International Center for Business and Politics at Copenhagen Business
School
• International Political Economy at IDSS, Nanyang Technological University
• International Political Economy at The University of Puget Sound
 Unit 2

Theories and IPE Perspective
Objective
To introduce basic Theories of IPE that include:
-Mercantilism
-Liberalism
- Structuralism
-Other Modern Perspectives
 Mercantilism
• Mercantilism is the oldest and perhaps the most
important IPE perspective
• Its central focus is the problem of security and
the role of the state and the market in providing
and maintaining a nation security in its all forms:
economic, political, military, culture
• Mercantilism was a period in World history
• It is also a world view that arose during that
history
• It is also a set of state policies and actions that
derive from that philosophy
A general overview Mercantilism
• Mercantilism is a theoretical perspective
that accounts for one of the basic
compulsion of all nation-states: to create
wealth and power in order to preserve and
protect national security
• Wherever you find a concern about foreign
threats and security- whether military,
economic or cultural, you will find evidence
of mercantile thought
 A Broader meaning of Mercantilism in
IPE
• Typically, Mercantilism is looked at in a narrow way in
term of state efforts to promote exports and limit imports,
thereby creating trade surpluses to create wealth and
power
• In IPE we think of Mercantilism in a broader way as a
theoretical perspective that put security at the centre of
national concerns
• A nation’s security can be threatened in many ways: by
foreign armies, by foreign firms and their product, by
foreign influence over international laws and institutions,
and even by foreign movies, magazines and television
shows which may weaken a nation’s social and cultural
cohesion
 Three Different Meanings of
Mercantilism
• The term mercantilism tends to be used in
three different meanings in IPE
• 1- as a period in history
• 2- As a theoretical perspective or
philosophy of IPE
• As a set of state policies that aim to secure
and maintain a nation’s security and
independence especially with respect to its
economy
 Mercantilism as history
• The mercantilist period in history is linked to the
rise of nation-state in Europe during the 15th
through the 18th centuries
• This was a period associated with the idea of
state building and intervention in the economy for
the sake of the security of the nation-state
• Security became the first priority of the state,
since efforts to bring prosperity were useless
without internal and external security
 Mercantilism as Philosophy
• Mercantilism in this period is called
classical mercantilism
• classical mercantilism focused on gaining
wealth by promoting export and limiting
imports
• Early European states followed mercantilist
policies that sought to produce wealth
through trade, by promoting exports and
limiting imports
Mercantilism as a set of policies
• These states often employed a variety of protectionist
policies to secure their trade
• They use many measures to along with other economic
devices to increase their wealth and military power
because of competition between states
• Colonialism, supplemented by state military power, were
used to control trade
• The merchant class therefore supported a strong state
• Mercantilist policies included: restriction of imports, state
subsidies to encourage exports and colonialism
• These policies were not end in themselves but rather
means to achieve wealth, power and national security
 The rise of Neo-mercantilism in
modern times
• Since World war and the collapse of communism
interdependence between states has revived
mercantilist policies again
• States see interdependence as threat to their
national security- for example the West dependence
on OPEC oil producing countries
• Neo-mercantilism is policies adopted by nation-
states to defend their economies in an insecure
international environment
• Neo-mercantilism is associated in modern times with
the approach of political realism which supported a
strong state and the preservation of national security
in all its form.
 Neo-mercantilist policies adopted by
modern states
• Some states used export subsidies to lower the
price of goods, making them more attractive to
importers
• Likewise a number of policies were used to limit
imports- these include
• 1-The use of import tariffs (taxes on imports)
• 2- Import quotas
• 3-Voluntary export restraints (VER)
• 4- Self sufficiency to reduce dependence on
other states
Globalization and Neo-Mercantilism
• Some mercantilists view globalization as a threat to the
fundamental sovereignty of the nation-state
• Globalization creates tensions between markets which
seek efficient allocation of resources and states which
seek to preserve nation security
• Economic sanctions on Iraq after the invasion of Kuwait
were policies designed by states and were opposed by
international companies ( markets)
• States were looking to preserve their national security
whereas companies were trying to further their on
individual interest
• USA war on Iraq was seen by many as a mercantilist
policy designed to preserve USA interests on the scarce
resource of oil in the Middle East
 Unit 2: The Liberal IPE Perspective:
“Laissez-Faire, Laissez- Passer”
• Liberalism like many terms in IPE has different
meanings in different contexts
• For example in USA today a “liberal” is one who
believes in a strong and active role of the state in
society, helping the poor and solving social
problems
• Liberalism in a classical sense means almost the
opposite because it seeks to liberate the
individual and society from the heavy hand of the
state oppression
• Liberals believe in freedom, individual rights, and
free markets
 Roots of the Liberal Perspective
• Adam Smith is the prominent founder of liberalism
• He stood against the mercantilist thought in his era
• The central idea in Liberalism is liberty under the law
• The liberal perspective sees individuals and states in a
different light from the mercantilist perspective
• Whereas mercantilism support a strong state to protect
international trade to accumulate wealth and power,
liberalism support a limited role of state in society and
free market
• Politically liberalism support democracy that weaken
central power while promoting individual freedom
• It is therefore more close today to conservative parties
 Liberalism and Mercantilism
• Liberalism believes that society and international relation
is a positive-sum-game
• In a positive-sum-game, everyone can benefit from
market exchange of good and services
• Mercantilist on the other hand tend to view life as a zero-
sum-game in which gains by one person or state come at
the expense of others
• Therefore the liberal view stand by the side of the market
when choosing between states and markets
• A free market is just one element of the liberal view and
democratic government is another but the free market is
the most important element
 The Economics and Politics of
Liberalism
• The liberal perspective on IPE is perhaps more
summarized by the French phrase laissez-faire meaning
let be
• Free individuals are best equipped to make choices to
make choices
• The role of the state is to perform the limited number of
tasks that individuals can not perform by themselves such
as:
• -Establish basic legal systems
• - Assure national defense
• - Coin money
• Basically the state’s job is to help create institutional
environment that foster individual action
 The Liberal View of International
Relations
• Liberals tend to focus on free international trade- free
international markets
• Free trade is seen as substitute for war between
countries
• Trade is seen as mutually advantageous not cutthroat
competition for wealth and power as in mercantilism
• Liberals generally oppose most state restrictions like
tariffs on free international markets
• Free commerce makes nations efficient and efficiency
is equally important as freedom
 The Evolution of the Liberal View
• Unlike Smith and other liberals, John Stuart Mill
(1806-1873) supported a relatively expanded role for
the state
• Mill believed that state should not interfere in most
but not all areas of life- he believed in the free market
but that the state should provide some service to the
poor like education
• In fact Mill’s views reflected the need of capitalism in
his time for an educated labor class because and
educated laborer is more apt to deal with the new
developed technology of production
 The Evolution of the Liberal View
• After the Great Depression in 1929 in which the free
market failed Keynes Theory emerged
• The crises started in the USA, like the financial crises
in 2008, and spread out to engulf all the economies of
the world
• In classical liberalism of Adam Smith, the belief was
that the market forces of supply and demand
automatically correct itself to address problems of
recession, depression and inflation.
• The crises of 1929 proved this belief wrong and it was
Keynes theory that helped out capitalism from the
crises of the great depression.
 Keynes Theory
• Keynes like other liberals believed in the free market
but unlike Adam Smith he supported the interference
of the state to correct the failures of the free market
• The state uses its monetary and fiscal policies to
correct the market failures of inflation and recessions
• This is called Keynesian compromise because it
stands in the middle between Marxist socialism and
pure free market capitalism
• Government policies based on Keynes theory help to
solve problems of post war recessions in free market
economies
 Neo Liberalism
• The 1970s witnessed the failure of policies based on
Keynes theory and the emergence of problems of
stagflation which means the existence of stagnation
(recession) and inflation at the same time
• Hence, there was a return in free market economies
to liberalism – This return is called neo- liberalism
• Neo- liberalism was introduced in Britain by Thatcher
and Regan in USA
• After the collapse of socialist states neo-liberalism
became dominant in the whole world as witnessed by
the policies of privatization, limited government
interference in the market and free international trade
 Unit Three

International Trade
 Overview
• International trade is one of the IPE’s oldest and most controversial
subjects
• International trade is considered to be part of the production structure
of IPE
• Production structure is the set of relationships between states and
other actors such as international businesses that determine what is
produced, where, by whom, how, for whom and what price
• Together with the international financial, technological and security
structures, trade links nation- states and other and other actors
furthering their interdependence, which benefits but also generate
tension between states and different groups within them
• Controversies about international trade stem from the compulsion of
the nation states and also businesses enterprises to capture the
economic benefits of trade while limiting its negative political,
economic and social effects on producers groups and society in
general
 The nature of trade
• Trade is always political and the economics of trade can not be
separated from its political aspects
• Trade is part of the production structure and when elements of that
structure cross international boarders the result is international trade
• Although the production structure is still largely domestic in the sense
that most of the goods and services consumed in nations today are
produced domestically, international trade has grown dramatically
• This reflects the increasing internationalization or globalization of
production
• Trade ties countries together and in doing so generates a good deal
of economic and political interdependence
• Because trade plays such an important role in most countries, states
are more than ever compelled to regulate it so as to capture its
benefits and limit its cost to their economies
 Three Perspectives on international
trade
• There are three perspectives in international trade pulling
in three direction at the same time: these are liberalism;
mercantilism and structuralism
• States use these three perspective in their international
trade policies
• There is a large consensus among states that a liberal
system of international trade (free trade) is desirable
(liberalism)
• Within this liberal structure, individual states and different
sectors within the economy favor mercantilist policies
while worrying about becoming dependent and being
exploited by other countries
The Use of The Three IPE Perspectives
today
• Thus it is possible for national leaders to support
the principles of the three IPE perspectives at
once
• They may support a global system of free trade
(liberalism), but protection for domestic firms and
workers that receive high wages and account for
many jobs (mercantilism) without doing major
harm to the environment around production
facilities (structuralism)
• No wonder international trade is so controversial
nowadays in international arenas
 Liberalism and free trade
• Liberals think that free trade increase efficiency
and have the potential to make everybody better
off
• It matters little to liberal who produce the goods,
where, how or under what circumstances, as
long as individuals are free to buy and sell them
in the open markets
• Free trade is justified by the law of comparative
advantage
 comparative advantage


• The law of comparative advantage says when people and

nations produce goods and services, they have to give up
something
• We normally think that the something we give up is money,
but that misses the point
• What we really give up are the other goods and services
that could have been produced instead
• This is called opportunity cost
• The law of comparative advantage holds that we gain when
we find ways to minimize the opportunity cost that we pay
• Thus for example, if we give up more when we produce oil
at home than what we have to give up in exchange when
buying it from another country, we are better off buying it
from another country
• The law of comparative advantage invites us to
compare the opportunity cost of producing an
item by ourselves with the opportunity cost of
buying it from others, and to make logical and
efficient choice between the two
• Thus trade can benefit all trading partners and by
causing goods and services to be produced
where their opportunity cost were the lowest, this
achieve efficiency and increase the wealth of
nations
• If trade were only about comparative advantage and whether
nations are better off trading versus the extreme of being self
sufficient, it would not be so controversial
• The question is “who benefits” from free trade
• According to liberals who benefits the most from these
efficiencies depends on “the terms of trade” and whether they
favor the importer or the exporter
• If the price of oil is relatively high compared to wheat, then
the oil exporter will benefit more than the wheat exporter
• Both countries gain from trade so they are encouraged to
trade and each struggle to get a little larger share of the
efficiency gains that trade creates
• For developing countries trade often serves as an engine of
growth and is looked to as one of the most important
elements of economic development
 Mercantilist View of Free Trade
• Mercantilist view challenge the concept of free trade on two
bases
• 1- the resistance of internal economic groups that seek the
protection of the state to their products
• 2- It is the state duty to protect society and businesses from the
negative effects of free trade
• 3- nation-states fear becoming too dependent on others for
certain goods
• Based mainly on security concerns, many nations prefer being
self sufficient when it comes to food, natural resources and raw
material that sustain a nation’s basic industries
• Protectionist policies are designed to discourage imports and
encourage exports
• By the turn of the 20th century, protectionist trade policies were on
the rise as the major powers raced to stimulate industrial growth
 Some Mercantilist Protectionist
Policies
• 1- Tariffs: a tax placed on imported goods to raise their
prices, making them less attractive to consumers; Tariffs
are used at times to raise government revenues in less
developed countries. Tariffs are more commonly a means
to protect domestic industry from foreign competition
• 2- Import quotas: a limit on the quantity of an item that
can be imported into a nation. By limiting the quantity of
imports, the quota tends to drive up the price of a good
at the same time it restricts competition
• 3-Export quota: these international agreements limit the
quantity of an item that a nation can export. The effect is
to limit the number of goods imported into a country
 Some Mercantilist Protectionist
Policies
• 4-Export subsidies: Any measure that effectively reduces
the price of an exported product making it more attractive
to potential foreign buyers
• 5-Currency devaluation: The effect of devaluing one’s
currency is to make exports cheaper to other countries
while imports from abroad become expensive
• Currency devaluation tends to achieve the effects of both
a tariff (raising import prices) and export subsidy
(lowering the costs of exports)
• Currency changes affect the prices of all traded goods,
while tariffs and subsidies generally apply to one good at
a time
 Structuralism View of Free Trade
• Structuralism view international free trade
as a tool to achieve the goals of
international big powers
• They believe that free trade makes third
world countries produce raw material
needed to feed big powers industries
• The terms of trade put third world countries
in unequal trade relation with international
powers
 GATT and the present liberal
framework of international trade
• After the World War 2 liberalism represented the framework
of international free trade
• This framework is based on the General Agreement for
Tariffs and Trade and (GATT)
• In 1948 the GATT became the primary organization for the
liberalization of trade
• The GATT sought to liberalize trade through a series of
multilateral negotiations, called rounds, where the trading
nations of the world would agree to reduce their own
protectionist barriers in return for freer access to each
other’s markets
• In Uruguay round in 1993 the WTO was established to
perform this task
• Mercantilist policies were also used under this liberal system