A20033

IR3026

BSc DEGREES AND GRADUATE DIPLOMAS IN ECONOMICS, MANAGEMENT,

FINANCE AND THE SOCIAL SCIENCES, THE DIPLOMA IN ECONOMICS AND
SOCIAL SCIENCES AND THE CERTIFICATE IN EDUCATION IN SOCIAL SCIENCES

IR3026 International Political Economy

Exam start time: 12:00 midday British Summer Time (BST), Wednesday 22 July 2020
Submission due by: 12:00 midday British Summer Time (BST), Thursday 23 July 2020
Expected time/effort: 3 hours

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Order of Questions attempted
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© University of London 2020

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Answer 3:

A multinational cooperation (MNC) is the reason behind technological innovation

and employment shifts, and is one of the compelling symbols of economic globalisation.
MNCs also dominate international trade. They virtually exist in all industrial areas due to
which their economic energy is felt in international politics dimension where large firms
rise as political actors parallel to states. The integration of production nationally rises due
to economic globalisation in the twentieth century. Manufacturing of consumer goods such
as vehicles are now carried under MNCs.
Since MNCs own subsidiaries abroad, in order to expand internationally they go
through foreign direct investment (FDI). FDI is an investment made by an MNC where they
either purchase a share in a foreign business or buy the entire company with the intention
of gaining complete control. MNCs are stronger since they invest more; 82,000 MNCs are
operating with 800,000 foreign affiliates, and four-fifth of the world’s global industrial
products are produced by MNCs. For developing states, FDI is the only way to be part of a
global economy. However, developed countries promote FDI in order to gain technological
innovation and world economy integration.
MNCs and their investments have various effects on the national economy. Their
investing internationally creates employment opportunities and a much-needed foreign
currency for developing countries. Since they’re larger, they can benefit from economies of
scale resulting in lower average costs. Dependency on imports also decreases. Inward
investment leads to improved balance of payments. Domestic firms also see advantages
of new technology. The profits earned by MNCs are subject to local taxes, creating a
valuable source of revenue for the domestic government. In cases where the MNC also
produces for domestic market, local consumers now have a wider choice of goods to
choose from, which are reasonable compared to imported substitutes. However, MNCs’
investments’ have a negative impact on the economy as-well. Presence of foreign
businesses can mitigate local cultures and traditional customs. George Ritzer composed
the term McDonaldization which describes how most American sectors and other parts of
the world adapted characteristics of a fast-food chain, resulting in diminished traditional
approaches and more standardisation.
Robert Reich argues that the increase in international operations has disconnected
MNCs from their home countries. However, MNCs excel in not only maintaining close links
with their home economies but simultaneously also in operating globally. MNCs prioritize
the preferences of their home nations and value their state’s support, while also protecting
their investments abroad.
Since MNCs are increasingly linking various economies together, the control of the
state over national economy is vulnerable. Neo-liberals consider this a small barrier to
greater economic growth but global capitalism critics feel threatened. However, a silent
power shift in international political economy is indeed occurring, away from local states
and towards MNCs. The extent to how much of a power shift is occurring can be analysed
by comparing the state-firm relationship.
The relationship focuses on bargaining between state and MNC over FDI which is
taken into account. Since MNCs guarantee technological innovation and job creation, they
are comparatively in a superior position to bargain between choosing where to
internationally invest. Henley (1991) points out that states face competition while attracting
FDI. States tend to offer advantageous conditions such as grants, subsidies, tax havens
and decreased regulatory duties in order to attract FDI. However, this results in a
‘regulatory race to the bottom’. If the government considerably depends on FDI, they will
have to withdraw from their previous assertive roles in the economy merely to reach the

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favourable climate conditions of the multinational businesses for investment. However, the
bargaining is not always favourable for the MNC. When MNCs invests abroad, once their
‘exist’ costs hike, the host country’s bargaining position will become more dominant. This
progress will lead to extractions of substantial concessions from the foreign firms. MNCs
do not pursue low labour and do not seek reduced regulatory costs while investing abroad.
MNCs commonly invest in markets where a high availability of skilled labour is present
along with higher consumer demand and stable regulatory conditions. Such markets
include Europe, North America and East Asia, from where most of the FDI flows arrive
from their developed states.
Corporate power has extensively increased due to global firms becoming
increasingly dominant. The reason behind this is that the world now accepts their
contribution to economic prosperity and success. MNCs now have remarkable access to
global markets. States tend to reject FDI due to their own uncertainties, while some are at
the mercy of mobile capital abroad. This includes poor developing countries which are
unsuccessful in capturing FDI. However, richer developed countries such as United States
and Britain not only successfully attract FDI but also simultaneously maintain enough
control over foreign businesses.
The trend of economic globalisation and dependence has definite advantages with
certain drawbacks. Success of MNCs abroad leads to stimulation of overall growth which
correspondingly promotes local growth and national economic prosperity. Economic
dependence results in increased levels of mutual interest and improves the relationship
between countries. Outsourcing creates chances for underdeveloped states to join the
developed world and can create a sense of equality. However, there are some dangers
relating to economic dependence. As MNCs become stronger, corporate power tends to
increase, making them more dominant and, in a position, to influence local government.
They can lobby laws that benefit their own firm. Due to economic dependence,
underdeveloped countries become poorer while developed countries tend to become
richer. 20% of the world’s richest parts are said to consume 85% of all world resources.
This creates inequality and is unfair to developing countries.
It can be seen that MNCs are dominant actors and are more powerful in the
International Political Economy and a powershift from states to foreign firms has indeed
occurred. To conclude, one can argue that the contemporary world has become a global
village in which MNCs are powerful actors but states are still predominant in International
Political Economy as states create rules of the game in which MNCs operate.

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Answer 8:

The first theory of International Political Economy (IPE) to surface in the modern
era is Mercantilism by Adam Smith. It is an economic theory in which the state tends to
regulate economy and trade for domestic industry promotion mostly at the expense of
other countries. Policies associated with Mercantilism restrict imports, increase gold
stocks and protect local industries. In the seventeenth century, the key tenets were
formed, which revolve around the need to maintain trade balance, dominance of local
interest and state role. Mercantilism argues with free trade theory that countries can
prosper after reduction of tariffs and free trade. Mercantilism is considered to be a
distinctive tradition of IPE since it is closely related to politics. It not only gives importance
to state and its structures but also takes states’ interest into regards, as it is a close nexus
between politics and economy. Mercantilism is based upon a few core foundations that
have remained constant. The following are few categories that can be taken into account;
According to Jacob (1948) Mercantilists consider power and wealth interlinked but
not dependant on state policies. Mercantilists believe, in the hunt of security, that the
government tends to maximise wealth as a means to power. Correspondingly, power is
crucial for wealth creation. Mercantilists conclude that government power dually satisfies
wealth security and acquisition. However, in the short-run, it may be required to sacrifice
economic wealth in best interest of the government’s survival as due to international
anarchy, government security cannot be compromised. International system is expressed
as a zero-sub game where various economies compete for wealth which consists of
metals. This concerns the ‘relative gains problem’ and the threats of imbalance of
payments. Basic objective of government intervention is the accumulation of gold and
silver bullion. In the sixteenth century, accumulation of gold reserves at the expense of
other countries was considered the ultimate way to economic prosperity. Due to industrial
policies, China has been accused of mercantilism because of excess supply of industrial
production combined with a policy that undervalues currency. China became biggest
foreign owner of US debt as it purchased US’s Treasury to engage trade. Modern
mercantilism is associated with policies such as undervaluation of currency. For instance,
state purchases foreign currency assets to maintain undervaluation of exchange rate and
competitive exports. Since they import less and export more their wealth increases. China
is often criticised for this policy.
Mercantilists emphasize that states should not only intervene in international
economic affairs but also in trade internationally. In the nineteenth century, mercantilism
explains how state-intervention is crucial to promote economic growth for industrial
‘latecomers’ and also how it helps building nations. This era of mercantilism is introduced
as economic nationalism due to boost of nationalism concerned with political though and
practice. States tend to intervene to achieve specific goals and policy objectives.
Governments undertake intervention in order to redistribute income within country. The
government may intervene to prevent market failure and generate revenue. A
contemporary example of state intervention is how the local government intervened during
the global pandemic caused by Coronavirus. In order to flatten the curve and slow down
the spread, the local states had to impose strict lockdowns. They may even provide firms
with subsidies and loans hire workers. Therefore, it is crucial for governments to intervene
during disasters to deal with economic costs associated with health measures. States may
use the power of their military or economic force to settle bargains and set favourable
trade terms. In France during the seventeenth century, the local state maintained a
controlled economy with strict regulations regarding the economy and labour market.
Intervention in trade is done to protect national security and local jobs. Firms associated

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with trade and shipping are granted state monopolies. In order to gain competitive
advantage in global economy, export industries are granted subsidies. China has been
accused of offering subsidies for industries supported by trade, causing other industries to
struggle due to oversupply of steel industries. US can use security dependence on allies
to settle certain economic policies. Trade intervention is done by implementing trade
barriers to restrict free trade to promote long-term national prosperity. These barriers
include, tariffs, quotas, subsidies to local market, and protectionism which is described
below.
Protectionism is a specific policy present to promote economic development. Free
trade primarily benefits advanced economies while developing countries face a loss. State
intervention in trade is needed protect domestic producers. This is carried-out by erecting
protectionism barriers. In modern Mercantilism, a policy associated with a surge of
protectionist sentiment is present, for-example US tariffs Chinese imports and US policies
to ‘Buy American’. The state also provides with infrastructure for industry, commerce and
education to promote learning and prevent market failure. The state tends to protect ‘infant
industries’ from foreign competition till they can withstand competition on their own, as the
main objective of protectionism is to protect growth of local firms. Keeping mercantilism
criticisms aside, certain arguments are present to support the restriction of free trade
under the following circumstances, which are twenty-first century lessons. Nations which
possess an excess supply of goods can significantly reduce prices to get rid of surplus.
However, this results in unprofitable domestic industries. Protectionism can be justified to
protect against dumping. For-example EEC dumped their excess agricultural production
on world agricultural markets. Tariffs may be justified to develop new economies to
diversify their industries. Once the industry is developed and benefits from economies of
scale, then all the imposed tariffs and protectionism can be removed. Supporters also
argue that as China’s steel is subsidized resulting to a glut in supply, it is imperative to
impose tariffs on steel imports to protect domestic industries from any unfair competition.
Mercantilism ideas revolve around political and economical forces with the state at
the core, providing a viewpoint of IPE. Mercantilism influences prevailing protectionist
policies and approaches pivotal to the state in order to promote economic prosperity
globally. Despite free-trade benefits, the state continues to seek trade protection against
harsh competition to protect and isolate their economies.

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Answer 4:

In the twenty-first century, globalization is considered to be the dominant trend of

International Political Economy (IPE). Anthony Giddens refers to globalization as ‘the
intensification of worldwide social relations which link distant localities in such a way that
local happenings are shaped by events occurring many miles away and vice-versa’.
Globalization displays itself in rising trade links and production lines across boundaries
while maintaining consumer preferences and political integration. Globalisation leads to
development of international influence due to growing interdependence. With the trends
towards global harmonisation countries move towards regional integration. Recent shifts
towards regional integration can be seen.
The establishment of an integrated interconnectedness within certain regions is
known as regionalism. Nations tend to move towards a collective system contributed by
nations present between the region from a central form of administration. Regionalism has
proceeded past economic and trade strategies and moved towards social security
concerns. Regionalism is known to favour regionalization, and also acts as a defence
mechanism in response to market failures. An example of regionalism is European Union
(EU) and MERCOSUL.
Global integration is a situation in which companies combine different activities to
operate globally such as MNCs. It also considers the extent to which a certain company
can use same products and techniques as other countries. Globalisation leads to global
cooperation amongst states whereas regionalism leads to cooperation between regions
only. However, it can be noted that both global integration and regional integration create
evolution of a nation state. A main concern of the state system is that it will not adjust to
either concepts and should be abolished. Instead either globalization or regionalism
system of governance should be implemented. Regionalism is known to thwart
globalisation.
The aftermath of world war two lead to the formation of many international
organisations. These include International Monetary Fund (IMF), United Nations (UN),
World Bank, and World Trade Organisation (WTO). Such organisations can provide
nations with financial assistance but on their own terms. Their unfavourable conditions
lead to a fall-back in achieving their own economic objectives. Globalisation also leads to
loss of power control for nations, meaning that they cannot fully work on their own
economic objectives. On the contrary, Regional Trade Agreements (RTAs) and Free
Trade Areas (FTAs) are institutions that help organisations achieve their goals. These
institutions simply demonstrate how developing nations can flourish because of the
economic stability created by them. The objectives are achieved as these markets are
more secure and stable. An example another such an institution is North American Free
Trade Area (NAFTA). Mexico was able to improve its economic and political situations
while simultaneously stabilizing, due to assistance provided by NAFTA.
In the twentieth century, a criticism arose against Free Trade, stating that it
appeared that richer developed countries mostly benefited while the poor developing
nations continued to struggle. Similarly, another argument was raised against institutions
such as WTO that they also prioritized richer nations. However, the presence of regional
organisations such as RTAs puts an end to such unfavourable conditions as they focus on
local problems without outside intervention.
Following the destruction caused by world war two, European nations elected
regional integration. This option was considered to mend the effected markets and fallen
industries as well as to strengthen the bond and create a sense of unity among European
states. Even when the EU was established (1950) its main focus circulated around

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economic cooperation. Therefore, the European Union that stands successful in front of us
all is the result of European countries joining hands for collective European prosperity.
In the 1990s, South Asia established, Association of South East Asia Nations
(ASEAN) with agreement to free trade. However, ASEAN had limited influence on
regionalism. Unlike the European Union, ASEAN did not gain much through trade internal
trade but instead widely traded more with non-ASEAN nations.
Globalisation has its own dangers present to economic growth. It leads to
progressing higher environmental costs due to the exchange among nations taking place
miles apart. Comparatively, this exchange is energy and non-renewable resource
concentrated leading to accelerated consumption of fossil fuels adding to global warming.
In contrast, this problem is not as extensive in regional trading blocs as distances are not
too far-apart, resulting in lesser fuel consumption. For instance, we can consider the
Copenhagen climate change conference. This conference resulted in failure of
implementation of rules regarding pollution that is inherent to globalisation. However, the
EU carbon trade market was successful in implementing laws against pollution. Overuse
of non-renewable resources is due to the concept that more trade results in more growth,
but this leads to diminishing of natural resources instead. Globalisation misses to enforce
regular rules in an international manner making it tough for all revelries to follow.
Globalisation tends to make nations more vulnerable due to increasing influence of the
global forces. A solution to deal with the growing international influence is that state
governments can constantly deregulate their economic frameworks to shield themselves
from more global impact. According to the trends of globalisation, in industrial economics
the role of the state has remained mostly constant in the last fifty years. However, in
contrast, with respect to regionalism, RTAs gradually caters to economic developments,
resulting in more time for local firms to develop and accordingly adapt.
As we have seen above, the drawbacks of globalisation are negated by the
presence of regionalism and its benefits. If globalisation tends off-track nations from
achieving their own economic goals, they should instead consider regionalism, as it
defends their personal political, economic, and social interests. We can see exhibition of
the security of objectives and success in FTAs such as ASEAN, APEC, NAFTA. It can be
deduced that the entire regional integration efforts do not detract from globalisation.
Therefore, in conclusion we can state that regionalism undermines and thwarts
globalisation rather than supporting it instead.

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