Smart Lecture Notes For BS International Political Economy
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•A short history of IPE
•Theories to IPE
•International Political Economy (IPE) is a sub-discipline of International Relations.
•Political Economy is the study of the interaction of politics and economics within a given country,
•International Political Economy is the study of this at the international level.
•The focus of IPE is trading relations.
•The origin of this subject is 1970s. An ‘IPE’ existed well before the 1970s.
•International trade has linked countries together since ancient times and.
•From the 15th and 16th centuries, it is possible to see such commercial exchanges as being clearly political as well as economic as the global market became more interlinked and more competitive
- Age of Mercantilism (1500-1780)
- Industrial Revolution (1789)
- Age of Liberalism (1815-1873)
- Return of Mercantilism (1873-1945)
- International Liberal Economic Order. (1945-2017)
Age of Mercantilism (1500-1780)
•In the early modern world of the 16th and 17th centuries, the economic policies of the great powers and the overall economic system are often referred to by the term ‘Mercantilism’.
•Mercantilism is a term that can also be applied today to refer to certain government policies.
•In the Age of Mercantilism, it was really the only approach that was in operation.
•During this phase of history international economic relations were very much carried out within the context of imperialism.
•A small number of states controlled most of the world both politically and economically.
•Hence these countries, such as Britain, France, Spain, Portugal, the Netherlands and Turkey, constructed their own international economic systems.
•In which they imported what they needed from their colonies whilst also using those territories as markets for their own surplus exports.
•These imperial powers also traded with each other where it was necessary
•But, in general, saw other trading giants as commercial rivals rather than partners
•And looked to beat them to the acquisition of any remaining colonized territories
•At the same time, jealously guarding their own possessions.
Industrial Revolution (1789)
•Industrial Revolution, in modern history, the process of change from an agrarian and handicraft economy to one dominated by industry and machine manufacturing.
•This process began in Europe in the 18th century and from there spread to other parts of the world.
•The main features involved in the Industrial Revolution were technological, socioeconomic, and cultural.
Age of Liberalism (1815-1873)
•Mercantilism never disappeared, and persists today.
•However, from the time of the Industrial Revolution and age of Enlightenment, it faced for the first time a rival philosophy, Economic Liberalism.
- A great leap in economic production occurred, due to the emergence of manufacturing industries, allied to an intellectual shift in favor of seeing other states more as partners than rivals in the international economy.
•In 1860, for example, that most bitter of regional and imperial great power rivalries, between Britain and France, entered a new era with the signing of a treaty,
•Drafted by Liberal politicians on both sides, which saw barriers to trade between the two countries significantly lowered.
•This period, in which Economic Liberalism began to flourish and challenge the logic of Mercantilism, was aided by the peace and diplomatic cooperation which marked the 19th Century Concert of Europe era.
Return of Mercantilism (1873-1945)
•A growth in nationalist ideologies allied to an economic recession at the end of the 19th Century saw governments look more inwardly again
•An economic downturn invariably encourages governments to be more cautious about trading and focus instead on holding on to what they have got.
•Mercantilism thus came back to the fore in the early 20th Century in the context of the global military conflicts and extremist ideologies that emerged in that era.
•A revival of cordial international relations between the great powers and of liberal thought again occurred in the 1920s, in the wake of the horrors of the Great War.
•Between 1929 and 1933 the value of world trade fell from $35 billion to just $12bilion
•As countries, such as many in Latin America, suddenly saw their main market for exports dry up.
•Many European countries followed the US example and put up barriers to trade.
•The world only came out of this depression as a consequence of the Second World War which prompted renewed industrial growth and international trade in order to support a burgeoning arms industry.
International Liberal Economic Order
•At the close of WWII, the Liberal International Economic Order- was initiated, based upon the Bretton Woods System of two institutions created within the newly-established UN system and an international treaty:
•GATT- a Treaty establishing a regime intended to promote international trade and prevent governments resorting to Mercantilist measures.
•The International Monetary Fund (IMF)- an organization based in the US, which would provide a source of money for governments facing economic problems.
•The International Bank for Reconstruction and Development (The World Bank)- an organization also based in the US, which would lend to governments in order to develop their economies.
Theories of IPE
•There are three approaches to IPE.
•Three broad theoretical approaches are generally used to characterize the politics of the international economy,
•Both in terms of understanding government policies vis a vis the global system and the functioning of the overall system itself.
•Mercantilism, Economic Liberalism, neo-Marxism.
•Liberalism’s basic tenet is the market economy.
•Liberals believe in the “invisible hand” that a market economy offers.
•Liberalism calls for little to no government intervention in economic affairs whatsoever.
•Natural laws of supply and demand work better than any government-made law, according to liberal theory.
•Liberalism, has different exclusive players.
•There are two groups of players in liberalism.
•The first are the states that interact with each other;
•The second is the market, which is increasingly becoming a single market.
•States interact with each other because they believe in the positive sum gains, i.e., that by working together, both sides may gain. One side need not lose for the other to win.
•The market acts alone, for the most part, sans state intervention.
•Liberalism calls for little to no interference in the markets.
•Orthodox liberals feel that the government should have no interference in the state.
•Adam Smith, one of the founders of liberal thought, found that monopolies are one flaw in a market economy. This would warrant governmental interference.
•John Keynes changed liberal viewpoints with his studies in economics.
•He found that markets naturally balance at a level that has poor utilization of production and consumption.
•Keynes felt that some government guidance, via monetary and fiscal policies, was necessary to keep a market efficient.
•Economic Liberalism emerged in the era of industrialization and the enlightenment as a branch of the wider political and philosophical Liberal movement that swept through Western Europe and North America.
•The approach is underpinned by the core Liberal tenet that people are naturally inclined to cooperate with each other and can be trusted by governments to control their own destiny without this producing disorder and problems in society.
Key Principles of EL
•Following key principles;
1.Free Trade: Economic Liberalism is at its fundament the belief in free trade.
•This is the minimization of government involvement in the affairs of international trade
•So that businesses are not restricted from exporting their goods and imports from other countries are not restricted by protectionist measures.
2. Invisible Hand: Adam Smith illustrated his thesis that freeing up international trade benefited all with the metaphor of the ‘invisible hand’.
The invisible hand refers to what is more commonly today known as ‘market forces’, meaning the way business and trade operates in the absence of governmental interference.
•An unregulated economy leads to anarchy and exploitation as greedy individuals enrich themselves without regard to the suffering this may inflict on others.
•The invisible hand posits that society would be better off without government interference because it is this that distorts the natural inclination of people to work together, exchange goods and make money.
•Adam Smith 18th Century Scottish Philosopher turned Economist Adam Smith is widely revered as the father of Economic Liberalism and, possibly, of the discipline of Economics itself.
•Smith’s landmark work The Wealth of Nations developed an economic rationale for why free trade was a good thing and, ultimately, to the advantage of all.
3. Comparative Advantage : David Ricardo gave theory of comparative advantage.
•The theory lends support to the notion of the invisible hand by offering an economic rationale for why free trade produces more trade and more wealth for all nations.
•Instead of producing many items states should produce few and specialized in it.
•In a system of unrestricted international trade states can concentrate on what they are good at producing rather than trying to do a bit of everything since they can freely import goods that are produced more efficiently elsewhere.
•More particularly, comparative advantage ensures that even the relatively disadvantaged countries gain from specialization.
4. Trade Brings Peace: In addition to the economic rationale for free trade, Economic Liberalism, in line with Liberal political thought, sees that there are political gains to be had from throwing off the shackles of government protectionism.
•In more recent times World War Two was the catalyst for the binding together of Western European states into the economic bloc that has now evolved to the European Union.
•Mercantilism falls under the realist school of thought.
•Mercantilism arose from the ashes of feudalism as a way for states to unify territory.
• An important belief of mercantilism is that it is a zero-sum situation. In order for one state to gain, another must lose.
•Mercantilist felt that having trade surplus was necessary at all cost.
•This theory was predominant between the sixteenth and nineteenth centuries.
•Some important names associated with mercantilist theory are Alexander Hamilton and Friedrich List.
•In the mercantilist school of thought, the important players are the domestic government, foreign states, and product producers.
•Mercantilists feel that the state should protect its home products as much as possible.
•An important figure in mercantilism, Alexander Hamilton, found an ideal situation for mercantilist ideology in the newly founded United States.
•As colonies, the US was not allowed to develop any substantial industry, leaving the US as primarily a natural resource producer.
•Hamilton realized the importance of natural resource production, especially agriculture, in the US, but also felt that strong protectionist measures were necessary in order to help infant manufacturing industries in the US.
•Mercantilists feel that states and markets are interconnected. The state helps the market to stay prosperous, and then, in turn, the market helps keep the state prosperous.
•States only interact with each other when they feel that they have something to gain, usually through means of war.
•In fact, war and trade protectionism are the few interactions between the home state and foreign states.
•In mercantilism, the state is the protector of the state’s market. Its goal is to have a trade surplus.
•To achieve this, mercantilists have to greatest form of protectionism of the three schools of thought addressed here.
•Mercantilism refers to the traditional, and still significant, approach to International Political Economy to which Economic Liberalism emerged as a challenge.
•Although it reached its height in the late Middle Ages, as for a back as Ancient Greece Plato advocated a self-serving strategy of favoring exports over imports so that wealth could be accumulated.
•Since then the Romans and other Empires have tried to put systems in place ensuring such an imbalanced pattern of trade which, of course, cannot be pursued by all states.
•The Government Should Involve Itself In International Trade In direct contrast to Economic Liberals, Mercantilists advocate that governments should involve themselves in matters of international commerce in order to protect the interests of the state and their citizens.
•Mercantilism in IPE shares the same Conservative logic as Realism that the world is anarchic and states are, by necessity, self-serving and inward looking entities.
•If this mindset is adopted, you cannot trust other states to fulfil their part of the comparative advantage bargain since they could easily switch their trade to another country or take an opportunity to plunder your resources if it suited them.
•A states’ economic resources are a key source of its power and should not be subjected to the vagaries of the international marketplace.
•A government should look to secure as many resources as it can and protect them.
•Hence Mercantilism advocates limiting imports to those absolutely necessary (important goods you cannot produce yourself) whilst exporting what you can in order to profit from it.
•International Economics is Competitive Not Cooperative :
•Mercantilists reject the notion of comparative advantage due to their more pessimistic take on human nature and the behavior of governments.
•In the fiercely competitive arena that is the international political system ‘collective goods’ will never be acquired and there will be losers as well as winners.
•Self sufficiency: The pessimistic assumptions of human nature and state behavior that underpin Mercantilism also mean that they advocate governments hording what they have and trying to reduce reliance on other states.
•An extreme manifestation of self-sufficiency is the policy known as autarky which is the pursuit of total self-reliance.
•Protectionism: The most prominent form of Mercantilism in the contemporary world is protectionism, which refers to a variety of economic policies employed by governments to insulate their domestic industries from foreign competition.
•Forms of Protectionism: •Tariffs– the taxing of imports
• Currency devaluations- changing the value of your currency so as to make exports cheaper and imports dearer.
• Quotas- allowing in imports only up to a certain number. (e.g. the EU stance which prompted the ‘bra wars’ with China)
• Export subsidies- giving government support to exporters to help them sell abroad.
•Government subsidizing of industry- giving handouts to struggling domestic industries so that they can be supported against foreign competition.
• Red tape- using domestic laws to unofficially restrict foreign competition by insisting on particular product standards more likely to be achieved by domestic goods.
•Marxism is a school of thought that is difficult to define because of the lack of experimental results.
•Marxism has not been used as a political theory in many states.
•The USSR, along with its Eastern European bloc, Cuba (which some might place under the USSR category), and China (along with North Vietnam) are the only experiments that we have seen in Marxism.
•Each has taken its own approach to Marxist theory as well, none having taken a very strict Marxist approach.
•Strict Marxist approach requires some prior understanding. Class struggles are the cause of all of history, according to Karl Marx and Frederick Engels, the founders of Marxist theory.
•Marxists believe that the capitalist governments help keep the bourgeoisie, or the capitalist business leaders, in power.
•The proletariat, or the working class, cannot rise to the equal level of the bourgeoisie without a revolution.
•This revolution would lead to the rule of the proletariat.
•The rule of the proletariat, however, would phase out into a state without a government.
•Marxism has three main players: the proletariat, the bourgeoisie, and the state.
•The state, in classical Marxism, is simply policy response to the socio-economic issues of the proletariat.
•The bourgeoisie would no longer exist after the revolution, therefore, it would no longer rule over the proletariat.
•Marxist views of state-market relations are very interesting.
•Firstly, one must recall that history comes in stages for Marxists. Feudalism led to capitalism, capitalism will lead to socialism, and socialism will lead to a classless society.
•Marx felt that capitalist states were important in bringing capitalism to non-capitalist areas of the world.
•This was necessary for these areas to move through capitalism towards socialism and then the classless society.
•Marx, along with Lenin, felt that capitalism leads to overproduction, which leads to lower wages, which in turn leads to under consumption.
•Lenin and Marx felt that this “invisible hand” was not always working for the better and would require attention, probably from the state.
•Marxists understand the economic world as “have’s” and “have-not’s.”
•They understand the world as the central world and the periphery.
•The periphery always gets the raw end of the deal for many reasons; one of these reasons is that the periphery is usually a natural resource provider.
•Marxists or dependency theorists in this case, feel that this center-periphery relationship leads to the majority of world economic interaction.
•Given the fall of the Soviet empire and the fact that Communist states which have persisted since the end of the Cold War, like China and Vietnam, have embraced capitalism in their international policies one might be given to conclude that Marxism was on the wane as an approach to International Political Economy.
•The sorts of exploitative working conditions Marx wrote about in regards to industrialized countries have become more apparent at the global level.
•Marxists agree with Mercantilists that capitalist economics is a zero-sum game of losers and winners rather than the Liberal’s sum-sum game of comparative advantage.
•Neo-Marxist approaches have evolved and economic globalization has intensified, the emphasis has shifted to seeing the competition in the global economy as not being between states but between transnational classes of ‘haves’ and ‘have-nots’.
•Neo-Marxists see IPE as based on a global bourgeoisie systematically exploiting a global proletariat.
•Some of that bourgeoisie is composed of small elites in poorer states who operate in ‘enclave economies’ profiting from the proceeds of exporting their country’s resources to the richer states.
•Some of the exploited transnational class reside in the richer states as underpaid workers or unemployed beggars also short-changed by the global system.
•It is concluded that IPE is a sub-discipline of IR dealing with trading relations that has spread over the last five centuries.
•There are three key theories of IPE depending upon governments attitudes towards trading relations.
•Currently trading relations are managed by WTO.