Lingnan University

Midterm Examination, Term 2, 2023-2024

SSC4207: International Political Economy

Time Allowed: 2 hours

Articles
INSTRUCTIONS This paper contains 3 articles that you should
read in order to answer the questions in the
accompanying paper of questions;

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From Lewis, W. A. (William A. (1978). The evolution of the international economic order.
Princeton University Press.

Europe has been a center of international finance for several centuries, as the Italians, the
Dutch, and the British followed in each other's footsteps. Britain assumed the mantle of chief
purveyor immediately after the Napoleonic war, but after a disastrous flurry with lending to
Latin America in the 1820s, concentrated for the next three decades on Europe and North
America, and did not lend significant sums to what is now the Third World until after the
creation of the Indian Empire in 1857. Thereafter Britain was joined by France and Germany,
and at the end of the century by the United States, which had previously been one of the
largest borrowers. The development of the Third World did not begin until the last third of the
nineteenth century when this flow of finance began to finance the railways, ports, and other
infrastructure without which commerce could not move.
Although foreign capital was important to the Third World, the Third World in the
nineteenth century was not all that important to foreign capitalists. In 1913 only about one-
third of outstanding investment was in the Third World (excluding Argentina). The bulk of
the investment was in Europe, North America, and the other temperate countries of recent
settlement. Foreign investment and imperialism do not coincide.
It is particularly important to note that foreign investment was not based on the rich
countries lending to the poor countries. Per capita income was higher in the United States or
Australia or Argentina, which were borrowers, than it was in the United Kingdom, France, or
Germany, which were lenders. If income per head were the chief determinant of self-
sufficiency in finance, we could not answer the question posed by opponents of foreign aid:
namely, if Britain and France were saving enough to be lending in the middle of the
nineteenth century, when they were not much richer than Ceylon or Brazil is today, why
cannot the developing countries now save for themselves all the capital they need?
The financial dependence of the developing countries on the developed is not due to
their poverty, since even the richest countries have been borrowers. Net domestic saving of
the developing countries averaged about 10 percent a year in the 1960s, which is not very
different from the ratios of Britain or France in the 1860s, when they were already lenders
and not borrowers.
The developing countries' dependence for finance derives ultimately from their high
rates of population growth, and intermediately from their high rates of growth of urbanization
—around 5 percent per annum and more—to which this population growth gives rise. Thus, it
is likely to be with us at least until the end of this century.
It should be noted that dependence on international borrowing and dependence on
foreign entrepreneurship are not the same thing. Britain was still borrowing from the Dutch in

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the eighteenth century, though not using Dutch entrepreneurship. The importance of direct
private investment in the international flow is always greatly exaggerated, both by those who
oppose it and by those who believe that it should be the principal channel for foreign
transfers. The current scope for direct foreign investment is rather small. Plantations, public
utilities, and mines were the usual sectors for private foreign investment up to 1929. The
investment in plantation companies, which was associated with the movement of Indian and
Chinese labor across the world, ended after the First World War as that movement ceased, and
the investment of foreign capital in agriculture is now almost zero. Investment in public
utilities is also at an end. Part of the reason for this is that it has become the conventional
wisdom that utilities should be in the public sector, so the private utilities are being bought
out one after another. In addition, inflation kills public utilities because their costs rise faster
than their prices, which are usually subject to elaborate public control. No knowledgeable
person would put private money into Third World public utilities today. In the 1950s and
1960s the unprecedented growth of world industrial production created a large demand for
minerals, including oil, and this sector became a magnet for foreign private investment.
However, its very profitability has killed it. One after another, the governments are buying
out the mineral enterprises, usually at substantially less than their market value, so this sector
will no longer attract much private foreign investment. The other profitable sector was the
financial sector, including banking and insurance. This sector took money out of the
developing countries, rather than putting money in, so the developing countries have been
clamping down here as well.
As these traditional sectors for private foreign investment fade out, the new sector is
manufacturing industry. It is at present a reluctant contributor; it is the only sector in which
Third World governments are actively encouraging foreign investment, and they are finding
fewer takers than they would like. Here the emphasis is not on finance but on technology and
management. If it were only a question of money, most developing countries could finance
their manufacturing sectors without foreign involvement. The foreigner contributes two
things, a market connection and managerial expertise. He may also contribute technology, but
in the standard light industry factory the technology is well-known, and one can purchase a
new cement factory or a new textile factory virtually off the rack. Advanced technology is
relevant only in a few highly sophisticated industries such as computers, motor cars, or
petrochemicals, and these are of immediate interest only to large, already industrially
sophisticated countries such as Brazil, Mexico, or India.

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From Nye, J. S. (1990). “The Changing Nature of World Power.” Political Science
Quarterly, 105(2), 177–192.

Some observers have argued that the sources of power are, in general, moving away from the
emphasis on military force and conquest that marked earlier eras. In assessing international
power today, factors such as technology, education, and economic growth are becoming more
important, whereas geography, population, and raw materials are becoming less important.
Kenneth Waltz argues that a 5-percent rate of economic growth in the United States for three
years would add more to American strength than does our alliance with Britain. Richard
Rosecrance argues that since 1945, the world has been poised between a territorial system
composed of states that view power in terms of land mass, and a trading system "based in
states which recognize that self-sufficiency is an illusion." In the past, says Rosecrance, "it
was cheaper to seize another state's territory by force than to develop the sophisticated
economic and trading apparatus needed to derive benefit from commercial exchange with it."

If so, perhaps we are in a "Japanese period" in world politics. Japan has certainly done far
better with its strategy as a trading state after 1945 than it did with its military strategy to
create a Greater East Asian Co-Prosperity sphere in the 1930s. But Japan's security vis-a-vis
its large military neighbors - China and the Soviet Union - depends heavily on US protection.
In short, even if we can define power clearly, it still has become more difficult to be clear
about the relationship of particular resources to it. Thus, we cannot leap too quickly to the
conclusion that all trends favor economic power or countries like Japan.

Like other forms of power, economic power cannot be measured simply in terms of tangible
resources. Intangible aspects also matter. For example, outcomes generally depend on
bargaining, and bargaining depends on relative costs in particular situations and skill in
converting potential power into effects. Relative costs are determined not only by the total
amount of measurable economic resources of a country but also by the degree of its
interdependence in a relationship. If, for example, the United States and Japan depend on
each other but one is less dependent than the other, that asymmetry is a source of power. The
United States may be less vulnerable than Japan if the relationship breaks down, and it may
use that threat as a source of power. Thus, an assessment of Japanese and American power
must look not only at shares of resources but also at the relative vulnerabilities of both
countries.

Another consideration is that most large countries today find military force more costly to
apply than in previous centuries. This has resulted from the dangers of nuclear escalation, the

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difficulty of ruling nationalistically awakened populations in otherwise weak states, the
danger of rupturing profitable relations on other issues, and the public opposition in Western
democracies to prolonged and expensive military conflicts. Even so, the increased cost of
military force does not mean that it will be ruled out. To the contrary, in an anarchic system
of states where there is no higher government to settle conflicts and where the ultimate
recourse is self-help, this could never happen. In some cases, the stakes may justify a costly
use of force.

A country may achieve the outcomes it prefers in world politics because other countries want
to follow it or have agreed to a system that produces such effects. In this sense, it is just as
important to set the agenda and structure the situations in world politics as it is to get others
to change in particular situations. This aspect of power - that is, getting others to want what
you want - might be called indirect or co-optive power behavior. It is in contrast to the active
command power behavior of getting others to do what you want. Co-optive power can rest on
the attraction of one's ideas or on the ability to set the political agenda in a way that shapes
the preferences that others express. Parents of teenagers know that if they have structured
their children's beliefs and preferences, their power will be greater and will last longer than if
they had relied only on active control. Similarly, political leaders and philosophers have long
understood the power that comes from setting the agenda and determining the framework of a
debate. The ability to establish preferences tends to be associated with intangible power
resources such as culture, ideology, and institutions. This dimension can be thought of as soft
power, in contrast to the hard command power usually associated with tangible resources like
military and economic strength.

Robert Cox argues that the nineteenth-century Pax Britannica and the twentieth century Pax
Americana were effective because they created liberal international economic orders, in
which certain types of economic relations were privileged over others and liberal
international rules and institutions were broadly accepted. Following the insights of the
Italian thinker Antonio Gramsci, Cox argues that the most critical feature for a dominant
country is the ability to obtain a broad measure of consent on general principles- principles
that ensure the supremacy of the leading state and dominant social classes - and at the same
time to offer some prospect of satisfaction to the less powerful. Cox identifies Britain from
1845 to 1875 and the United States from 1945 to 1967 as such countries. Although we may
not agree with his terminology or dates, Cox has touched a major point: soft co-optive power
is just as important as hard command power. If a state can make its power legitimate in the
eyes of others, it will encounter less resistance to its wishes. If its culture and ideology are
attractive, others will more willingly follow. If it can establish international norms that are
consistent with its society, it will be less likely to have to change. If it can help support

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institutions that encourage other states to channel or limit their activities in ways the
dominant state prefers, it may not need as many costly exercises of coercive or hard power in
bargaining situations. In short, the universalism of a country's culture and its ability to
establish a set of favorable rules and institutions that govern areas of international activity are
critical sources of power. These soft sources of power are becoming more important in world
politics today.

Such considerations question the conclusion that the world is about to enter a Japanese era in
world politics. The nature of power is changing and some of the changes will favor Japan, but
some of them may favor the United States even more. In command power, Japan's economic
strength is increasing, but it remains vulnerable in terms of raw materials and relatively weak
in terms of military force. And in co-optive power, Japan's culture is highly insular and it has
yet to develop a major voice in international institutions. The United States, on the other
hand, has a universalistic popular culture and a major role in international institutions.
Although such factors may change in the future, they raise an important question about the
present situation: What resources are the most important sources of power today?

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The Santiago Boys (adapted from excerpts: https://the-santiago-boys.com/)

Ambassador George H.W. Bush (later US President), told Chile’s President Salvador
Allende that American people believed deeply in free enterprise, capitalism, and
investment not in a selfish sense but because they felt that it was the best way to
provide a better standard of living for all. But this response did not answer Allende’s
fundamental question: should countries like Chile get their technologies from the US
or build their own? That’s what Allende wanted, and his utopian engineers couldn’t
wait to do this. And when they looked at the bills that Chile had to pay, they had a
point. All those fees for copyright licenses, trademarks, etc., cost a fortune.

US President Richard Nixon did his best to crush Allende but quietly. The Chilean
President pressed on with his radical economic reforms. The first companies that he
successfully nationalized were in the area of social property but there was a big
hurdle. Nobody stepped up to take charge of them. Allende needed managers,
badly. In Santiago, the US ambassador only made things worse. He actually
encouraged technicians and professionals to flee the country. As he said, “the fewer
the brains, the more difficult the management problem for Allende. If the economic
and administrative problems are sufficiently severe, Popular Unity could crumble. If
they are unable to cope, the Unity could dissolve; the revolution could turn into
chaos; and the people’s support for their government could melt away.”

In part to address the “brain-drain,” Allende’s government hired upper-middle class

British management expert, Stafford Beer, to improve the use of technology and
management in Chile. He's a tech guy, after all. He knew how to make it work and
how to make it sell. But did he really know what technology meant? And how it
came about and how it was connected to power? The Chilean engineers and
managers whom he supervises may not have been up to date on the latest tech
trends but they were ahead of Stafford in terms of the big things: the big picture.
They saw technology as more than just gadgets and machines. They saw it as a tool
of power and domination. They took their cues from a radical economic theory
popular in certain leftist circles that explained how technology keeps poor countries
poor and the rich countries rich.

The way these leftists saw it, technology wasn't just the path to progress. It was also
a way to keep some countries down and make them rely on others: especially poor
countries that don't have much of their own technology. They had to use what the

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rich countries gave or sold them. And that came with a price. You know how ordinary
economists always talk about industrialization as the key to growth and
development? Well, these radical economists said that it wasn’t not enough. Sure
you could have factories in Latin America making cars from Germany or Italy or the
US. But what would that really mean? If all the parts and designs for those cars
came from somewhere else, you would still be paying a lot of money to use the ideas
and inventions, and they would still be at the mercy of those who own them. Is that
really progress? Or is it just another way of being exploited? There's one clever guy
who said back then, a Volkswagen Republic is not very different from a banana
republic. Thus, without their own technological base, poor nations were doomed to
under-development. That was the situation that young and politically-aware
engineers our own Santiago Boys were hoping to change.

Gui Bonsiepe, a German designer who studied at the famous Ulm School of Design
and was recruited to work in the Chilean government. Sounding like a true believer,
he argued against the blind copying of foreign technologies and he warned that this
might perpetuate reliance. Technological autonomy was a much better goal. As he
said, “You see for me, design work or design particularly in these peripheral
countries has to do with ... a political concept of autonomy.”

But what did autonomy really mean here? Above all, it meant building your own
technological base. Leftists found a powerful ally in Allende. He passionately
championed Chile's need to break free from the shackles of foreign reliance. But he
also complained about the lack of technological progress in the country: “Today, our
capacity for the creation of technology is far from adequate as the result of our
history of dependence. The solution lies in defending our right to choose
technological sovereignty and also strengthening our own capacity for science and
technology.” Allende wanted Chile to have control over its own technological destiny,
and not just accept whatever is offered by companies such as America’s ITT which
ran Chile’s expensive, low-quality phone service. For that reason, Allende also
oversaw government takeovers of Chile’s copper mines, formerly owned by US
companies. Allende said it himself: “we demand the right to seek our own solutions.”
And that's still a very powerful message for today, mired as we are in the trap of
technological solutions. Allende’s trusted aid, Orlando Letelier, added “These
companies have the final right to decide whether a country can develop a new
industry, nothing can justify such power, technology or to serve humanity. Therefore,
we must create radically different mechanisms to which underdeveloped countries
would have access to technology and research.”