INTRODUCTION TO POLITICAL

ECONOMY

Political Science
 I. Introduction – Conceptual and
Analytical Issues
 1. What is Political Economy?
 2. What are the issues?
 A. Actor behavior
 B. System governance
 C. Globalization
 I. Introduction (cont’d)

 A. Actor Behavior. How do we explain

and evaluate the actions of states?

 1. Levels of analysis: international (structural,

systemic) vs. domestic
 2. State (government, public sector) vs.
society (markets, private sector)
 I. Introduction (cont’d)
 B. System Governance. Formulation,
implementation, and enforcement of rules;
promotion of cooperation; management of
conflict

 1. Governance without government; governance

mechanisms (regimes)
 2. Organizing principles: automaticity,
supranationality, hegemony, pluralism (negotiation,
cooperation)
 I. Introduction (cont’d)

 C. Globalization. Inter-national vs.

globalized model of world economy
 II. Analytical Perspectives on
Political Economy
 1. Liberalism
 2. Realism (statism, economic
nationalism, mercantilism)
 3. Structuralism (Marxism, historical
materialism)
II. Analytical Perspectives on PE -
Liberalism
 A. Focus: individuals, households,
enterprises
 B. Nature of economic relations:
harmonious; interests reconcilable
 C. Relationship between economics and
politics: economics drives politics
 II. Analytical Perspectives on PE -
Realism
 A. Focus: states
 B. Nature of economic relations:
conflictual (zero-sum game)
 C. Relationship between economics and
politics: politics drives economics
 II. Analytical Perspectives on PE -
Structuralism
 A. Focus: classes, social forces
 B. Nature of economic relations:
conflictual (zero-sum game)
 Relationship between economics and
politics: economics drives politics
 III. Alternative Perspectives on
Globalization
 1. Definition: a broadening, deepening, and
acceleration of interconnectedness of states and
markets; networks of connections at
intercontinental distances
 2. Alternative views: from “hyperglobalists” to
skeptics
 3. Why do we care? By creating a dissonance
between the jurisdiction of states and the
domains of markets, globalization problematizes
governance: who is in charge?
 III. Globalization (cont’d)

 4. Perspectives on causes and

consequences
 A. Liberalism: triumph of markets; good for
economic welfare
 B. Realism: product of state policy; bad for
power of states
 C. Structuralism: triumph of markets; bad for
poorer states and disadvantaged classes
IV. International Economic History
– Nineteenth Century
 1. Three major developments
 2. Political economy issues
 3. Key lessons
 IV. Nineteenth Century - three
major developments
A. Monetary system: classical gold standard
B. Trading system: movement toward free
trade in 1860s-70s, then back toward
protectionism
C. Core-periphery relations: rise of “new
imperialism” after 1870s
 IV. Nineteenth Century - political
economy issues
 A. Gold standard: What accounts for its
stability and relatively smooth operation?
 B. Trade: What accounts for the free
trade movement in the 1860s-70s? What
accounts for the subsequent return to
protectionism?
 C. Core-periphery relations: What
accounts for the “new imperialism?”
 IV. Nineteenth Century - key
lessons
 A. No single (mono-causal) explanations;
need to sift the evidence.
 B. No single rule for all regimes; different
governance mechanisms can exist side by
side
V. International economic history –
interwar period
 1. Major developments
 A. Breakdown during World War I
 B. Attempted reconstruction during 1920s
 C. Renewed breakdown (Great Depression)
during 1930s
 V. Interwar period (cont’d)
 2. Political economy issue: What explains
the failure of the attempted
reconstruction?
 A. Liberalism: markets failed because of
wrong-headed government policies
 B. Structuralism: internal contradictions of
capitalism
 C. Realism: absence of effective governance
(theory of hegemonic stability)
VI. International economic history
– postwar period
 1. Major developments
 A. Creation of new international institutions: IMF,
World Bank, GATT
 B. Cold War, leading to two separate blocs (East-
West) and the rest (Third World)
 C. Unprecedented economic growth (early years)
 D. Rise of Europe, Japan; East Asia; China and BRICs
 E. Globalization
 F. Increasing instability; slowing growth
 VI. Postwar period (cont’d)
 2. Political economy issues
 A. What explains the origins of the postwar
system?
 B. What accounts for the relative success of
the system in its early years?
 C. What accounts for the increased instability,
slower growth in more recent years?
 D. What can be done to manage the system
in the future?
 VII. International Trade
1. Basic issue: a tension between desire for
material benefits of an open system and
pressure to promote/defend state and/or
particularist interests
a. Advantages of free trade: efficiency, growth
b. Disadvantages of free trade: dependence,
losses to key constituencies
c. Collective action problem: how to manage
the basic tension
IV. International Trade (cont’d)
 2. Postwar experience: GATT/WTO
 a. Purposes: liberalization, dispute resolution
 b. Principles: non-discrimination, reciprocity,
safeguards

 3. Protectionism (actor behavior)

 a. Instruments of trade policy
 b. Arguments for protection
 c. Practical motivations
 VII. International Trade (cont’d)

 4. Managing the system (system

governance)
 a. Promotion of liberalization
 b. Dispute resolution
 c. Safeguards
 d. Other current issues
 VIII. Money and Finance
 1. Basic issue: as with trade, a tension between
desire for the material benefits of an open
system and pressure to promote/defend state
and/or particularist interests

 2. Basic concepts
 a. Balance of payments; deficits
 b. Financing: reserves, borrowing, liquidity
 c. Adjustment: the “Three D’s,” “Unholy Trinity”
 VIII. Money and Finance (cont’d)

 3. Postwar experience
 a. IMF, Bretton Woods system
 b. Financing/liquidity: US dollar, SDRS, capital
markets
 c. Adjustment: breakdown of pegged exchange-rate
system – currency wars?
 d. Debt problems; financial crises

 4. Managing the system

 a. Exchange rates
 b. International capital markets
 IX. Regionalism
 1. Basic issue: between the national and
global levels, regionalism can complicate the
issue of system governance

2. Trade Regionalism (regional trade

agreements)

3. Monetary regionalism (monetary unions,

etc.)
IX. Regionalism – Trade (RTAs)
 a. Types of RTAs (Regional Trade Agreements)
 b. Advantages and disadvantages
 i. For individual countries
 ii. For overall system (trade creation, trade diversion)
 c. Postwar experience
 i. First wave: 1950s-60s
 ii. Second wave since 1980s
 d. Why the renewed interest in RTAs?
 e. Significance for system governance
 IX. Regionalism - Money
 a. Types of monetary regionalism:
horizontal, vertical
 b. Advantages and disadvantages
 c. Recent experience
 i. Precedent of the euro
 ii. Rise of currency competition
 iii. Currency regime choices today
 d. Significance for system governance
 X. Economic Development

 1. The developing world: differentiated,

difficult to generalize
 2. Postwar rules: based on principle of
non-discrimination; trade was to function
as an “engine of growth”
 3. Postwar experience: mixed – some
success stories, many disappointments
 X. Development (cont’d)
 4. Why has trade failed as an engine of growth
for so many?
 a. Liberalism: market failures -- weak demand, weak
linkages, weak adaptive capacity
 b. Structuralism: natural result of capitalism
exploitation
 c. Realism: result of power politics
 i. Role of great powers in writing the rules
 ii. Attempts at collective action by LDCs
 iii. Outcomes: partial success
 X. Development (cont’d)
 5. Options for development strategies
 a. Export promotion
 i. Traditional exports
 Problems: inelastic demand, protectionism

 Cartels? Three conditions necessary for success:

control largest part of supply; no close substitutes;
agreement on the sharing of benefits
 ii. Non-traditional exports: manufacturing, services
 b. Import substitution (“import substitution
industrialization” – ISI)
 c. Regionalism
 XI. The Environment
 1. Basic problem: the environment is a
collective good, shared by all and owned by
none (“tragedy of the commons”); core issue is
“externalities,” which can cross borders
 2. Economic functions of the environment
 a. A consumption good
 b. A supplier of resources
 c. A receptacle of wastes
 d. The problem: not always mutually consistent,
hence a collective action problem – a system
governance issue
 XI. Environment (cont’d)
 3. Practical dimensions
 a. Pollution (air, water, etc.)
 b. Deforestation
 c. Endangered species
 4. Possible solutions – approaches to
governance
 a. Laissez faire
 b. National regulation
 c. Formal regimes
 d. Market approaches
 XII. Energy
 1. Importance: the world’s single most widely
traded product
 2. First regime: the Seven Sisters – a classic
cartel, successful because it met all three key
conditions necessary for success: control of
supply; no close substitutes; agreement on
sharing of benefits
 3. Second regime: OPEC
 a. Dramatic emergence in 1973
 b. Ups and downs of OPEC power since 1973
 XII. Energy (cont’d)
 4. Reasons for variations of OPEC power over
time – back to the three key conditions for a
successful cartel
 5. OPEC’s biggest challenge: agreement on
benefits (limiting free riding)
 a. Low absorbers vs. high absorbers
 b. Special role of Saudi Arabia
 6. Prospects
 a. Demand side (conservation)
 b. Supply side: exploration, alternative forms of
energy, technology
XIII. Multinational Corporations
 1. Definition
 2. Perspectives on the MNC
 3. History
 a. Until 20th century, mostly extractive (farming, mining, etc.)
 b. Real growth began in 1950s, for 2 reasons
 i. European Common Market (trade diversion)
 ii. Decolonization (ISI development strategies)
 c. Changing sources and destination of foreign direct investment
(FDI)
 i. Increasing share of FDI from developing world
 ii. Increasing share of FDI going to developing world
 XIII. MNCs (cont’d)
 4. Perspective of home country
 i. Advantages: profits, market share
 ii. Disadvantages: avoidance of taxes, regulation
 5. Perspective of host country
 i. Advantages: capital, technology, management
expertise, market access
 ii. Disadvantage: loss of control
 6. Shifting and uncertain balance of power
between states and markets
 i. The obsolescent bargain
 ii. Multinational production, supply chains
 XIV. Prospects for the Future
 1. Postwar period has seen major structural changes
 a. Distribution of power between states
 b. Distribution of power between states and markets
 c. Global security environment
 2. Future scenarios
 a. Automaticity?
 b. World economic government (supranationality)?
 c. Renewed hegemony (US? Europe? Japan? China?)?
 d. Cooperative regimes (automaticity + pluralism)?
 e. Governance by MNCs?
 f. Collapse and economic warfare?
 g. Most probable: a “mosaic” (all of the above)
 Thank you!!!