Global Political Economy Module, Nguc

NEW GENERATION UNIVERSITY COLLEGE
NEW GENERATION UNIVERSITY COLLEGE (NGUC)

Course Title: Global Political Economy (GPE)
Course Code: GSIR 612
Prepared by: Ayenew Birhanu (PhD)
Addis Ababa, Ethiopia

January 2021
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Table of Contents
CHAPTER-1: GLOBAL POLITICAL ECONOMY: MEANING AND HISTORY ............................................................. 8
1.1 Introduction ......................................................................................................................................... 8
1.2 Objectives ............................................................................................................................................ 8
1.3 What Is Global Political Economy? ...................................................................................................... 8
1.4 Components of Political Economy..................................................................................................... 16
Fig 1.1: Components of Political Economy ...........................................................................................17
1.5 Political Economy Behavior ............................................................................................................... 17
1.6 A Short History of GPE ....................................................................................................................... 18
1.7 Hegemony ......................................................................................................................................... 21
1.8 Summary............................................................................................................................................ 23
1.9 Self-check Questions ......................................................................................................................... 24
CHAPTER -2: APPROACHES TO GLOBAL POLITICAL ECONOMY .........................................................................25
2.1 Introduction ....................................................................................................................................... 25
2.2 Objectives .......................................................................................................................................... 25
2.3 Economic Liberalism .......................................................................................................................... 25
2.4 Mercantilism ...................................................................................................................................... 28
2.5 Marxist Approaches........................................................................................................................... 30
2.6 New Approaches to GPE .................................................................................................................... 33
2.6.1 What is `rational choice’ or neo-utilitarianism? ........................................................................33
2.6.2 Political economy: the application of rational choice to groups within the state ....................34
2.6.3 Institutionalism: the application of rational choice to states....................................................34
2.6.4 Social constructivism ................................................................................................................35
2.6.5 The neo-gramscian approach: a radical variant ........................................................................35
2.6 Survey of the Most Influential National Political Economy systems in the world ............................. 37
2.6.1 The American System of Market-Oriented Capitalism ..............................................................37
2.6.2 The Japanese System of Developmental Capitalism .................................................................40
2.6.3 The German System of Social Market Capitalism ......................................................................43
2.6.4 Differences among National Political Economy Systems ..........................................................44
2.7 Summary............................................................................................................................................ 46
2.8 Self-check Questions ......................................................................................................................... 46
CHAPTER-3: THE GLOBALIZATION DEBATE IN GLOBAL POLITICAL ECONOMY..................................................48
3.1 Introduction ....................................................................................................................................... 48
3.2 Objetives ............................................................................................................................................. 48
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3.3 The concept of globalization ............................................................................................................... 48
3.4 How new is globalisation? .................................................................................................................. 51
3.5 Is globalization diminishing the role of the state in the world economy? ........................................ 53
3.5.1 The globalists .............................................................................................................................53
3.5.2 The sceptics ...............................................................................................................................53
3.6 Benefits of Globalisation.................................................................................................................... 54
3.7 Globalisation and its discontents ......................................................................................................... 56
3.8 The impact of globalization on different kinds of states ................................................................... 59
3.9 Summary............................................................................................................................................ 61
3.10 Self-check Questions .......................................................................................................................... 62
CHAPTER-4: STRUCTURES OF GLOBAL POLITICAL ECONOMY AND GLOBAL GOVERNANCE .............................63
4.1 Introcuction ....................................................................................................................................... 63
4.2 Objectives .......................................................................................................................................... 63
4.3 Structures of GPE............................................................................................................................... 63
4.4 Governance in the Global Economy ................................................................................................... 65
4.4.1 The Need for Governance .........................................................................................................65
4.4.2 What Is Global Governance? .....................................................................................................67
4.4.3 The Significance and Relevance of Global Governance ...........................................................69
4.4.4 Global Governance: Beyond the State.......................................................................................72
4.5 Conclusion .....................................................................................................................................74
4.6 Self –check Questions ....................................................................................................................75
CHAPTER-5: THE INTERNATIONAL TRADE SYSTEM ...........................................................................................76
5.1 Intoduction ........................................................................................................................................ 76
5.2 Objective............................................................................................................................................ 76
5.3 Perspectives on International trade .................................................................................................. 76
5.3.1 Mercantilists ..............................................................................................................................77
5.3.2 Economic Liberals ......................................................................................................................79
5.3.3 Structuralist ...............................................................................................................................80
5.4 The Creation of the GATT .................................................................................................................. 82
5.5 Trade liberalisation under the GATT and the rise of the ‘new protectionism’ ................................. 87
5.6 From the creation of the WTO to the Doha Round ........................................................................... 89
5.7 Conclusion ......................................................................................................................................... 92
5.8 Review Questions .............................................................................................................................. 92
CHAPTER -6: THE GLOBAL FINANCIAL AND MONETARY ORDER .......................................................................94
6.1 Introduction ...................................................................................................................................... 94
6.2 Objectives .......................................................................................................................................... 94
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6.3 The rise and decline of the Bretton Woods system .......................................................................... 95
6.4 Global monetary order after Bretton Woods .................................................................................... 97
6.5 Issues in International Monetary and Finance Structure .................................................................. 99
6.6 Foreign Exchange............................................................................................................................. 100
6.6.1 Three Foreign exchange rate Systems ......................................................................................... 105
6.6.1.1 The Classic Gold Standard: ......................................................................................................106
6.7 The Bretton Woods System: Revisitng the Qualified Gold Standard and Fixed Exchange Rates:... 107
6.8 The IMF F and the balance of payments ......................................................................................... 110
6.9 The Float- or Flexible-Exchange-Rate System ................................................................................. 113
6.10 Structural management and alternative reserve Currencies .......................................................... 116
6.11 The IMF and international debt crises............................................................................................. 117
6.12 Conclusion ....................................................................................................................................... 118
6.13 Self-check Questions ....................................................................................................................... 119
CHAPTER-7: MULTINATIONAL CORPORATIONS .............................................................................................120
7.1 Introduction ..................................................................................................................................... 120
7.2 Objectives ........................................................................................................................................ 120
7.3 Multinational Corporations - Definition and Meaning .................................................................... 120
7.4 International, Multinational, Transnational & Global...................................................................... 122
7.5 The Difference between International, Multinational, Transnational & Global Companies
124
Fig 7.1 International, Multinational, Transnational & Global ................................................................... 125
7.6 Characteristics of a Multinational Corporation ............................................................................... 125
7.7 Reasons for Being a Multinational Corporation .............................................................................. 127
7.8 Models of MNCs .............................................................................................................................. 128
7.9 Advantages of Being a Multinational Corporation .......................................................................... 128
7.10 Role of Multinational Corporations (MNCs) .................................................................................... 129
7.11 Factors contributed for the growth of MNC’s ................................................................................. 130
7.12 Views on MNCs ................................................................................................................................ 132
7.12.1 Advantages of MNCs................................................................................................................132
7.12.2 Disadvantages of MNCs for the Host Country .........................................................................133
7.13 Multinational production and foreign investment in a global economy ........................................ 134
7.14 The rise of the global firm ............................................................................................................... 135
7.15 Power shift? State–firms relations in flux ....................................................................................... 137
7.16 Governing global firms: national and international rules ............................................................... 138
7.17 Conclusion ....................................................................................................................................... 141
7.18 Slef-check Questions ....................................................................................................................... 141
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Bibliography ................................................................................................................................................. 143
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Module Introduction
Global Political Economy (GPE) is the study of how states and markets affect the distribution of power
and wealth in the world. Analyzing the interactions of governments, businesses, and ordinary people,
GPE helps us understand the causes of global problems and the consequences of global exchanges.
The module introduces students to the study of Political Economy as it examines the life, ideas and
legacy of key political economists, as well introducing fundamental concepts relevant to Political
Economy. The module also discusses more contemporary ideas related to Political Economy. The
module focuses on developing key study skills, including time management, critical thinking, note
taking, and finding appropriate literature. Topics to be covered may include: capitalism, mercantilism,
neoliberalism, globalisation, austerity. The study of Political economy has always been dominated
by a national or/and international level debate over the responsibilities of the state with regard to the
economy. This debate still continues to occupy a central place in political economy of the 21st century.
Should the state be responsible for determining how the economy of a given country is to be organized
and run? Or should such responsibility be left to the market which is populated by self-serving
individuals acting as private agents? Should, for example, housing, medical care, education, welfare
be provided by private citizens using the resources they have available to them? Or should they be
provided by the state? At the international level of analysis, the debate also poses such pressing
questions as: how should international trade be governed? How should international investment be
governed? How should international finance be governed? Or more specifically what should/not be
the role of international institutions like the IMF, WB and WTO in the governance of international
finance, investment and trade? With these debates in mind, this course thus briefly but
comprehensively: i) discusses the meaning and nature of International Political economy, ii)
presents the most influential theoretical perspectives of International Political economy, iii)
surveys the most common national political economy systems/models in the world including their
major divergences, and iv) examines the core issues, governing institutions and governance of GPE.
Here, the discussion mainly focuses on International Trade and WTO, International Investment and
WB, and International finance and IMF.
Course Objectives
After completing this course, students will be able to:
 Examine and discuss key thinkers, theories and ideas in Political Economy
 Develop students' knowledge and understanding of fundamental questions and arguments in
Political Economy
 Explain the meaning and nature of GPE
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 Identify and analytically distinguish the most influential theoretical perspectives of GPE
 Figure out the most common national political economy systems/models in the world
and their major divergences
 Assess the issues and effects related to globalization
 Identify and examine the core issues, governing institutions and governance of GPE
 Examine the role that MNCs play in GPE
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CHAPTER-1: GLOBAL POLITICAL ECONOMY: MEANING AND

HISTORY
1.1 Introduction
Global Poltical Economy (GPE), often used interchangeably with International Political Economy, is
concerned with the interface between international economics and international politics. When
researching international affairs, economists usually focus on the international economy, while
international relations scholars tend to concentrate on matters political. In recent decades, however, a
new focus has arisen in both these disciplines– and among their practitioners – on the many ways in
which politics and economics are interlinked. Indeed, the study of Global Political Economy is
predicated on the assumption that in order to understand patterns of interaction and change at the global
level, we need to look at both international politics and economics in an integrated manner. This
chapter explores the meaning, components, and history of GPE.
1.2 Objectives
By the end of this chapter, you will be able to:
 Understand What is meant by Global Political Economy
 Discuss How Global Political Economy emerged as a discipline of International
Relations
 Expail How Global Political Economy has evolved over time
Brainstorming Question:
 What comes to your mind when you think of such concepts as ‘ Global
politics’, ‘Global economics’ and ‘Global Political Economy’?
1.3 What Is Global Political Economy?
Global Political Economy (GPE) is a field of study that deals with the interaction between political
and economic forces. At its centre have always been questions of human welfare and how these might
be related to state behaviour and corporate interests in different parts of the world. Despite this, major
approaches in the field have often focused more on the international system perspective. A side effect
of this has been the relative neglect of non-elites and an all-too often missing recognition of ordinary
individuals. While states remain central to international politics, they have gradually intensified their
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relations with multinational corporations and strengthened their engagement with international
organisations. Naturally, these changes in the world around us have led to a certain rethinking of the
way we understand and position individuals as actors in the global economy. To account for this, many
scholars now prefer to use the term ‘Global Political Economy’ over the more traditional term
‘International Political Economy’ (IPE). Although both terms are often used interchangeably, using
the word ‘global’ is important as it indicates a wider scope in political economy that reaches beyond
relations between states.
According Falker (2011), GPE is concerned with the way in which political and economic factors
interact at the global level. More specifically, political economists usually undertake two related kinds
of investigations. The first concerns how politics constrains economic choices, whether policy choices
by governments or choices by actors or social groups. The second concerns how economic forces
motivate and constrain political choices, such as individuals’ voting behavior, unions’ or firms’
political lobbying, or governments’ internal or external policies.
Robert Gilpin provided the - still widely used - standard definition of GPE along the cleavage between
the state and the market:
The parallel existence and mutual interaction of ‘state’ and ‘market’ in the
modern world create ‘political economy’(…) In the absence of the state, the
price mechanism and market forces would determine the outcome of economic
activities; this would be the pure world of the economist. In the absence of the
market, the state or its equivalent would allocate economic resources; this
would be the pure world of the political scientist (Gilpin 1987: 8).
Both spheres - state and market - are supposed to operate separately, with different functional logics.
While power politics dominates the political realm, market processes are driven by economic or
efficiency imperatives.
GPE is a sub-discipline of International Relations that arose in parallel with globalization. From the
1970s it came to be broadly accepted across the theoretical approaches to International Relations that
globalization had blurred the distinctions between two traditional demarcations of the discipline; i,
what is political and what is economic and ii, what is domestic and what is international. Hence,
Political Economy is the study of the intersection of politics and economics within a given country,
whilst GPE is the study of this at the international level (Leiteritz, 2005).
GPE is the study of a fundamental tension between and dynamic interaction of two spheres of life,
which we can call as:
• Society and individuals,
• Politics and economics, or
• States and markets
One way to understand the basic of GPE is to pick apart its name
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• Firstly, it deals with “GLOBAL”
• It means that it deals with issues that cross national borders and with relations between
and among nation-states.
• Secondly, GPE is “POLITICAL”
• It involves the use of state power to make decisions about who gets WHAT, WHEN
and HOW in the society.
• Political process is a complex and multi-layered, that involves nation-states, bilateral
relations among nation-states and many international organizations, regional alliances
and global agreements.
• Lastly, GPE is about the “ECONOMY” or “ECONOMICS
• It means that it deals with how scarce resources are allocated to different use and distributed
among individual through the market process.
Political economy is the intellectual discipline that investigates the rich interface between
economics and politics
GPE is the extension of that investigation to the international sphere.
The study becomes international when it focuses on the aspects of state-market

relations that extend beyond the borders of a single nation-state, becoming
international, regional or global in nature.
Susan Strange(1971:305) gave clearest definition of international political GPE EConomy as:
Global Political Economy concerns the social, political and economic
arrangements affecting the global systems of production, exchange and
distribution and the mix of values reflected therein. Those arrangements are
not divinely ordained, nor are they the fortuitous outcome of blind chance.
Rather they are the result of human decision taken in the context of manmade
institutions and sets of self-set rules and customs.
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 What are elements used to define GPE in the above definition?
There are several elements of this definition that are worthy to notice:
 GPE gives equal weight to social, political and economic arrangements and stresses that GPE
is not just the study of institutions or organizations, but also of the values they reflect.
 States and markets are connected by global systems of production, exchange and distribution.
Therefore, GPE looks at the ways that the states and markets of the world are connected to one
another.
 The arrangements that GPE studies are the arrangements of lives, with particular emphasis on
their global character. Some persons, like some nations, are wealthier than others and are more
powerful than others or have higher status or greater authority than others. These conditions
are the result of global structures or arrangements that produce, exchange and distribute social,
political and economic resources.
The study of GPE in academic circles and appreciation of it in governmental circles came to emerge
from the 1970s as a number of key realizations became apparent which challenged previous
assumptions about how to compartmentalize issues into the subjects of ‘Economics’,
‘Politics’ and ‘International Relations’;
 Economic events in one country can have economic implications for other countries
For example, the global ‘credit crunch’ recession of 2008-9 originated in the collapse of the US
housing market as numerous international banks began to either cease lending or collapse with
implications for businesses and individual borrowers throughout most of the world.
 Political events in one country can have economic implications for other countries
For example, the reunification of Germany in 1990 was a key factor in the collapse of the UK pound
in 1992. The Bundesbank had to raise German interest rates to pay for the absorption of their relatively
poor neighbour causing financial fluctuations in the European markets unused to such extravagance
from the Continent’s traditionally prudent economic leader.
 Economic events in one country can have political implications for another country
It has long been observed that the political fortunes of a government are closely linked to the
performance of the domestic economy. Increasingly, however, the performance of the domestic
economy is as much dictated by international economic events as it is by how a government manages
its fiscal (tax), monetary or industrial policy. Evidence for this can be found as far back as 1929 and
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the Wall Street Stock Market Crash in the US which precipitated the world’s worst ever economic
recession, which was then a contributory factor in the fall of many democratic governments and the
rise of the ideologies of Fascism and Communism as alternative models of economic management.
 Power in international relations can come from economic as well as military might
(West) Germany and Japan rose again as world powers in the 1950s and 60s not by rearming and
invading neighbouring countries, as they had done in the 1930s and 40s, but by building their
economies and trading their way to wealth and influence. During the oil crises of the 1970s countries
like Saudi Arabia, Iran and Iraq suddenly became much more influential players on the world stage
because of their possession of the world’s most important commodity
 International political structures reflect economics.

Intergovernmental Organizations set up to regulate the international economy after World War Two,
such as the International Monetary Fund and World Bank group, were from the start very much
dominated in their decision-making by one country; the United States. The US in 1947 accounted for
around half of all economic production in the world, a level of superiority never seen before and never
since repeated. As a consequence these organizations, along with emergent trading rules established
under the auspices of the General Agreement on Trade and Tariffs (GATT), were designed to further
the US economic interest of promoting more trade opportunities and political interest of propping up
the capitalist world against the threat of Communist expansion. Recognition of how international
organizations and rules can both reflect and reinforce national economic power, rather than serve to
diminish the importance of the state, gave new impetus to Realist thought in International Relations
with the emergence of Neo-Realism.
Raymond Williams suggested that when taking up a definition, one should start with basic social
practices, not fully formed concepts. He called for an etymology based on social as well as intellectual
history because the meaning of ideas is forged in concrete social practices (1977: 11). Offering a
conceptual point of view, a dictionary of economic terms tells us that “political economy is the science
of wealth” and “deals with efforts made by man to supply wants and satisfy desires” (Eatwell, Milgate,
and Newman, 1987: 907). But following Williams’ socially grounded etymology, it is important to
stress that before political economy became a science, before it served as the intellectual description
for a system of production, distribution, and exchange, political economy meant the social custom,
practice, and knowledge about how to manage, first, the household, and later, the community.
Specifically, the term “economics” is rooted in the classical Greek oikos for house and nomos for law.
Hence, economics initially referred to household management, a view that persisted into the work of
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founding influences in classical political economy, Scottish Enlightenment figures like Francis
Hutcheson and, crucially, Adam Smith. “Political” derives from the Greek term (polos) for the city-
state, the fundamental unit of political organization in the classical period. Political economy
therefore originated in the management of the family and political households. Writing fifteen years
before Smith’s Wealth of Nations, Steuart (1967: 2) made the connection by noting that “What
economy is in a family, political economy is in a state.”
It is also important to note that from the very beginning, political economy combined a sense of the
descriptive and the prescriptive. As communication scholar Dallas Smythe describes its driving force
or “meta-political economy,” it is “the body of practice and theory offered as advice by counsellors
to the leaders of social organizations of varying degrees of complexity at various times and
places” (Smythe, 1991). This is in keeping with the Dictionary of Economic Terms, which defined
the original intent of political economy as a “branch of state- craft,” but which is now “regarded as a
study in which moral judgments are made on particular issues” (Gilpin, 1977).
Other definitions concentrate on how the development of economics narrowed what was originally a
broadly-based discipline. As early as 1913, a standard economic dictionary noted that “although the
name political economy is still preserved, the science, as now understood, is not strictly political: i.e.,
it is not confined to relations between the government and the governed, but deals primarily with the
industrial activities of individual men” (Palgrave, 1913: 741). Similarly, in 1948, the Dictionary of
Modern Economics defined political economy as “the theory and practice of economic affairs” and
noted that:
Originally, the term applied to broad problems of real cost, surplus, and
distribution. These questions were viewed as matters of social as well as
individual concerns. … With the introduction of utility concepts in the late
nineteenth century, the emphasis shifted to changes in market values and
questions of equilibrium of the individual firm. Such problems no longer
required a broad social outlook and there was no need to stress the political.
(Horton, 1948)
At the same time, there is evidence that the transition from political economy to economics was not
inevitable. This same 1948 volume notes the beginnings of a revival of interest in a more broadly
defined political economy. It senses that “the emphasis is once again returning to political economy”
with the recent rise of state concern.
Drawing on these ways of seeing political economy, which emphasize that definitions are grounded in
social practice and evolve over time in intellectual and political debate, the next sections concentrate
on definitions and characteristics of the field that have influenced the political economy of
communication. One can think about political economy as the study of the social relations, particularly
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the power relations that mutually constitute the production, distribution, and consumption of resources.
From this vantage point the products of communication, such as newspapers, books, videos, films, and
audiences, are the primary resources. This formulation has a certain practical value for students of
communication because it calls attention to fundamental forces and processes at work in the
marketplace. It emphasizes how a company produces a film or a magazine, how it deals with those
who distribute the product and market it, and how consumers decide about what to watch, read, or
listen to. Finally, it considers how consumer decisions are fed back into the process of producing new
products.
But political economy takes this a step further because it asks us to concentrate on a specific set of
social relations organized around power or the ability to control other people, processes, and things,
even in the face of resistance. This would lead the political economist of communication to look at
shifting forms of control along the circuit of production, distribution, and consumption. Examples
include how the shrinking number of big media companies can control the diversity of content or how
international marketing firms have strengthened their power in the media business by using new
technologies of surveillance and measurement to produce valuable information about consumers. It
would also lead us to consider the extent to which activists can use new media tools like blogging and
social networking sites to resist the concentration of power in business and government.
The primary difficulty with this definition is that it assumes we can easily recognize and distinguish
among producers, distributors, and consumers. But this is not always so and particularly not in some
of the more interesting cases. For example, it is useful to separate film producers, those who organize
and carry out the steps necessary to create a finished product, from distributors or wholesalers who
find market outlets. But film-making is not so simple. Distributors are often critical to the production
process because they can guarantee the financing and marketing necessary to carry on with production.
Does that make our distributor in reality a producer or a producer- distributor? Similarly,
notwithstanding the common-sense value of seeing audiences as consumers of media products, there
is a sense in which they are producers as well. One might say that consumers produce the symbolic
value (or meaning) of media products (or texts) as they consume them. Similarly, producers consume
resources in the process of production. They also distribute by virtue of their reputation as producers.
This suggests that while the definition is a useful starting point, it is limited by what we miss when we
apply it in a too rigidly categorical or mechanistic fashion.
A far more general and ambitious definition of political economy is the study of control and survival
in social life. Control refers specifically to the internal organization of individual and group members,
while survival takes up the means by which they produce what is needed to reproduce themselves.
Control processes are broadly political in that they involve the social organization of relationships
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within a community. Survival processes are fundamentally economic because they concern the
production of what a society needs to reproduce itself. The strength of this definition is that it gives
political economy the breadth to encompass at least all of human activity and arguably all organic
processes. This is in keeping with the pattern of analysis in environmental, ecological, and science
studies which, among other things, aim to identify processes at work in all forms of life and to assess
their differences and interrelation- ships (Haraway, 2003; Meadowcroft, 2005; Rosewarne, 2002).
There are not many explicit examples of this view in communication and information research. James
Beniger (1986: 107–9) applied information systems theory to determine fundamental processes in
living systems: organization, metabolism and growth, responsiveness, adaptability, reproduction, and
evolution. Addressing the complexity and social contestation of control and survival, Dallas Smythe
(1991) drew on theories of complex systems or chaos theory to understand the dialectical relationship
of communication and information in living systems. Gunaratne (2002a 2002b, 2004, 2005) has made
new theories of living systems which draw from chaos theory the centerpiece of his research on global
systems of communication and power.
There is a great deal to be said for a definition that raises basic questions about the narrowness of both
political economy and communication studies. It is hard to question the claim that these disciplines
have been rooted in the study of human behavior (mainly male) in the present. The result is neglect of
how humans relate to the rest of life, and a neglect of social, particularly communication, practices in
human orders other than contemporary capitalism. The drawback of the approach is that it can lead
one to overlook what distinguishes human political economy from general processes of control and
survival. These include the power of a goal-oriented consciousness and a reflexive subjectivity literally
aware of its own awareness. It can also lead one to underestimate the overwhelming transformation,
what amounts to an historical break, forged out of contemporary capitalism. By looking for common
processes that transcend natural and historical differences, we can lose sight of how those processes
have been transformed in the contemporary world to a point where the one species uniquely
responsible for the transformation has the power to eliminate both nature and history for all species.
Notwithstanding these limitations, the broad reading of political economy reminds us that whatever
our specific entry point or focus of analysis, it is inextricably bound up with a long history and with a
vast organic totality.
Communication studies suffers deeply from the view that history takes place almost exclusively in the
West and began with the invention of the telegraph. This bias owes a great deal to the understandable
but limiting tendency to examine the field as a set of industries (broadcasting, telecommunication, and
publishing) that evolved from the development of technological forms (print, broadcasting, computer
communication).
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1.4 Components of Political Economy
Political economics is split into two sections: Classical Political Economy and Modern Political
Economy. Classical Political Economy studies the works of philosophers such as Machiavelli, Adam
Smith, and Karl Marx. Modern Political Economy, on the other hand, studies the work of modern
philosophers, economists, and political scientists such as John Maynard Keynes, Milton Freidman, and
Friedrich Hayek.
The study of political economy is influenced by game theory, as it involves different groups competing
for finite resources and power that assess which policies will provide the most beneficial results. It
also relates to the capability of the economy to achieve the desired results. The study of political
economy focuses on three major areas:
I. Interdisciplinary study
From an interdisciplinary standpoint, political economy focuses on economics, sociology, and political
science to understand how economic systems, political institutions, and the environment affect and
influence each other. The three areas in interdisciplinary study include economic models of political
processes, the GPE and how it affects international relations, and resource allocation in different
economic systems.
II. New political economy
The new political economy area treats economic policies as a belief or action that must be further
discussed rather than as a framework that needs to be analyzed. It unites the ideologies of classical
economics and new advances in the field of politics and economics. The approach dismisses old ideals
about agencies and the interest of states and markets and aims to encourage political debates about
societal wants and needs.
III. Global Political Ecoomy
Global Political Economy study, also known as International Political Economy, analyzes the
relationship between economics and international relations. It uses ideas from economics, sociology,
and political science. GPE focuses on how states and institutions use global economic interactions to
shape political systems.
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Fig 1.1: Components of Political Economy
1.5 Political Economy Behavior

Political economists are very interested in gains and losses incurred with the implementation of a
certain policy. It gives them an idea as to which groups support the policy and which groups don’t.
They also examine how individuals increase their utility by participating in political activity.
Capital and labor are used to influence political processes and generate policy outcomes with the most
benefit.
Brainstorming Question፡
 What are political behaviors that shape economy of a state?
The political behavior in an economy is shaped by:

 Interests
They include the interest of individuals and groups who are able to use their power to influence policy.
Individuals in government tend to promote their own economic and political interests that will help
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them retain power. People outside the government are often more concerned with the outcome of the
economic policies implemented.
 Ideas
Ideas are considered an important influence on policy, in addition to economic and political interests.
It is assumed that individuals are self-seeking and rational and that they are unable to assess the
outcomes of all the choices available to them.
Ideology allows an individual to decide what they should do in order to remain consistent with their
basic values and beliefs. Incorporating ideology into economic models allows some political action to
be guided by factors other than self-interest. Some people want to enter politics simply because they
want to make a change in the world.
 Institutions
There are political rules that include the Constitution and define how leaders are chosen and how a
new policy can be implemented. Institutions help structure incentives facing individuals and groups
within the economy.
1.6 A Short History of GPE

Although it may not have been a recognized academic discipline, there was, of course, a ‘GPE’ 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 in line with
transportation advances and the idea of compartmentalizing people into states. Box 1.1 gives an
overview of how it is possible to understand the evolution of the international economy in terms of
political ideas on how governments orientate themselves towards the rest of the world and how, as a
consequence, the intergovernmental system with regards to trade and money has operated.
Box 1.1 Timeline of GPE
1500 – 1780: Age of Mercantilism
1780+: Industrial Revolution
1815 – 1873: Age of Liberalism
1821 Great Britain adopts the gold standard
1834 Zollverein- economic union between Germanic states which precipitated the creation of a
unified Germany
1846 Repeal of the Corn Laws- landmark British act of Parliament which reduced protectionism
1860 Cobden-Chevalier Treaty- Franco-British agreement to free up bilateral trade.
18
1866 Latin Monetary Union- short-lived currency union based
on the French Franc involving several south European countries
1871 Germany adopts the gold standard
1873- 1945: Return of Mercantilism
1873-96 The Long Depression
1929 Great Depression
1930 Smoot-Hawley Act- Highly protectionist law passed in the US
1931 Collapse of the Gold Standard
1944: International Liberal Economic Order
1944 Bretton Woods Conference
1947 GATT launched
1971 Collapse of the Bretton Woods monetary system
1971-4 Oil Crisis
1995 World Trade Organization founded
1997-9 East Asian Financial Crisis
2008-10 Credit Crunch global Recession
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’. As will be discussed
in the next chapter, Mercantilism is a term that can also be applied today to refer to certain government
policies – as is explored later in the chapter- but, 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 uncolonized territories whilst, at the same time, jealously
guarding their own possessions from their covetous glances.
As will be discussed in the next chapter, 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. In the nineteenth century a significant precursor to contemporary
globalization took place in which there was a huge growth in the volume of trade, due to a rise in both
19
the economic capacity to and political willingness to engage in international commerce. A great leap
in economic production occurred, due to the emergence of manufacturing industries, allied to an
intellectual shift in favour 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 of the Channel, which saw barriers to trade between the two countries significantly lowered.
As a consequence of this a 200% increase in trade across the Channel occurred over the next two
decades with, most notably, a huge growth in French wine heading Northwards and British textiles,
from their booming newly- mechanized industry, heading south.
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 and, hence, it started to unravel in line with the renewal of political conflicts on the Continent from
the Franco-Prussian War of 1870-1. A growth in nationalist ideologies allied to an economic recession
at the end of the 19th Century saw governments look more inwardly again and renew their traditional
focus on acquiring resources for themselves, through force if necessary, rather than looking to enjoy
the mutual spoils from encouraging global trade. An economic downturn invariably encourages
governments to be more cautious about trading and focus instead on holding on to what they have got.
This, added to a political reluctance to trade with countries deemed to be rivals, saw international trade
slow down after this first era of globalization in the 19th Century.
As will be discussed in the next chapter, 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, but a potential new era of economic
and political globalization came to a crashing halt with the world’s worst ever global economic
recession, the Great Depression, which started in 1929. Illustrating the economic interconnectedness
of the world well before the contemporary era of globalization, the effects of the ‘Wall Street Crash’
quickly reverberated around much of the world and saw a massive downturn in international trade. A
sudden stock market collapse occurred due to the bursting of a ‘speculative bubble’ of stocks and
shares that had become over-priced on the back of a domestic economic boom. This caused banks and
businesses to collapse as the US economy shrunk by a third. This domestic crisis quickly
internationalized as the US government responded in a Mercantilist manner. Loans given to European
allies indebted by the Great War were recalled and measures were enacted to cut imports in order to
protect weakened US industries from being undercut by foreign competition. Between 1929 and 1933
the value of world trade fell from $35 billion to just $12bilion as countries, such as many in Latin
20
America, suddenly saw their main market for exports dry up and 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. Recognizing that relying on World Wars to ensure economic growth was not a viable long
term strategy, leading capitalist governments at the close of the war sought to take international
political steps to ensure that another Great Depression, as well as another world war, could not happen
again. At a 1944 Conference, held at Bretton Woods in the US, the governments of the host country
and the UK led discussions which created the institutional architecture of what would become known
as the ‘Bretton Woods System’. To support international capitalism both against Communism and
another depression it was decided that Intergovernmental Organizations were needed to provide
stability to the international economy and prevent governments lurching towards Mercantilism when
the going got tough.
Hence, at the close of the Second World War, the present era of GPE -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:
 The General Agreement on Trade and Tariffs (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.
GATT is anayzed later in chapter 5 whilst the roles and impact of the IMF and World Bank are explored
in chapter 6.
1.7 Hegemony
A key means of understanding the progression of the global economy and illustrating the maxim that
international political structures reflect economics comes from appreciating the importance of the role
of a hegemon and the phenomenon of hegemony in GPE.
21
Brainstorming Question፡
 What doyou understand by the word ‘hegemon’?
A hegemon is a term used in IR to refer to a government with sufficient political power and motivation
to dominate international affairs in ways that creates rules and institutions that serve to further its
interests. To a large extent, the emergence of GPE as a distinct discipline was built upon an
appreciation of the significance of this concept which transcended rival IR theories. Neo- Realists like
Robert Gilpin saw this as a new more sophisticated way of understanding how states could exert power
over others by using institutions and rules (Gilpin 1987). For Neo- Marxist or critical theories
(particularly those known as ‘Neo-Gramscian’) hegemony provided a way of understanding how a
dominant transnational economic class could exert power over a majority exploited global class of
people. Some Liberal thought also embraced hegemony as a means of achieving the goal of free trade
by getting over the collective goods problem. A dominant trading state is in a position to play an
entrepreneurial role by creating and enforcing international rules which promote trade. Getting a group
of equally powerful traders to set up such a system is more complicated since any one of them could
break ranks for short-term gain and bring it down.
All three of these theoretical perspectives could see hegemony as a key explanation for the emergence
of the Liberal International Economic Order. The United States’ economic power at the close of the
Second World War, allied to a desire to project it worldwide, allowed them to- from a Neo-Realist
perspective- mould the structures of international politics and commerce to their liking and / or- from
an Economic Liberal perspective- take the lead in promoting and freeing up international trade. A
Government which enjoy a preponderant share of international trade will naturally be inclined to take
steps to increase the overall volume of international trade since they will gain most from this. However,
there will be short term costs incurred from taking the lead in terms of lowering restrictions on imports
coming in to their country and funding international initiatives to get other countries to do the same.
In the period of 19th Century liberalization Great Britain emerged as the world’s leading economic
power, on the back of going through the world’s first industrial revolution and the fact that it had the
largest Empire. In 1860 the British were responsible for 20% of all industrial production and 24% of
international trade. Fourteen years earlier the British government had taken the landmark and
controversial decision to initiate opening up their agricultural industry with the Repeal of the Corn
Laws act. Additionally, the British took the lead in stablizing the international economy by devizing
the Gold Standard, in which most of the world’s many national currencies would agree to tie their
value to the price of gold. Other countries followed the British lead and reduced measures protecting
22
their economies, a more stable international economy emerged and international trade flourished to
the benefit of Britain and many other states.
Towards the end of the nineteenth century British hegemony diminished, not through their decline but
as a result of others, like Germany and the US, catching up and rivalling them. Under these conditions,
allied to the political circumstances described earlier, it was harder to maintain the gold standard and
prevent countries again resorting to Mercantilist policies and the liberalization of the mid nineteenth
century unravelled. By the 1920s, with the European powers economically weakened by the Great
War, the US was possibly strong enough to play the role of a new hegemon but, at this time, lacked
the political will to lead the world. Becoming embroled in the essentially European struggle that was
the First World War had reinforced in American culture a preference for a more isolationist foreign
and economic policy. The response of the US government to the 1929 Wall Street Crash was to look
inwardly rather than outwardly and in 1930 the Smoot-Hawley Act imposed the highest ever US tariffs
(taxes on imports). Other major powers followed suit and international trade collapsed.
By 1945, however, the US was far more powerful than in 1929 (and more powerful than Britain had
been in the mid 19th Century) and far more inclined to move away from its traditional isolationism
and involve itself in international affairs. Hence the US bankrolled the Bretton Woods institutions and
other international economic initiatives and took a strong lead in managing them in spite of the
significant costs of doing so.
1.8 Summary
The discipline of Global poltical economy, which is also called Internationl political economy (IPE)
is one of the most recent entries into the curricular canon of International Relations (IR).While the
term 'political economy' has of course a formidable intellectual pedigree, Global poltical economy
scholars came to associate themselves with this new label only during the 1970s, when a group of
political scientists defined Global poltical economy as an autonomous field of research apart from
economics.
Rather than thinking in terms of separate spheres, contemporary Global poltical economy can be
defined as the analysis of the interaction between the political and the economic sphere involving state
and non-state actors on the national and the international level. Politics and economics have
transcended their traditional disciplinary anchors and their fusion has given rise to numerous
theoretical research agendas and empirical analyses.
GPE is a social science that studies production, trade, and their relationship with the law and the
government. It is the study of how economic theories affect different socio-economic systems such as
Marxism, along with the creation and implementation of public policy. Different groups in an economy
have different beliefs as to how their economy should be developed; hence, GPE is a complex field
23
that covers a broad range of political interests. In simple terms,GPE refers to the advice given by
economists to the government on either general economic policies or on certain specific proposals
created by politicians.
1.9 Self-check Questions

1. What is GPE?
2. What are the issues in GPE?
3. One definition from a popular textbook tells us that GPE “is the study of the tension
between the market, where individuals engage in self-interested activities, and the state, where
those same individuals undertake collective action” (Balaam and Veseth 1996, p.6). What are
some issues with this definition?
4. Why is the word international problematic when studying the world or global economy
today? Why might the word global be a better alternative?
5. What is the role of hegemon?
6. Dicuss the history of GPE
7. Discuss components of political economy
8. Pick a recent news article that focuses on some international or global problem, and
give examples of how and where states, markets, and societies interact and at times
conflict with one another. How hard is it to determine the analytical boundaries between
the state, market, and society in this case?
9. Review the basic elements and features of the IPE approach: the three main theoretical
perspectives, the four structures, the levels of analysis, and the types of power. Which
ones do you feel you understand well and which ones need more work?
10. Discuss the connection between each of the three theoretical perspectives and your own
values related to IPE.
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CHAPTER -2: APPROACHES TO GLOBAL POLITICAL

ECONOMY
2.1 Introduction
Many 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. This chapter discusses the traditional theories including
Mercantilism, Economic Liberalism, and Marxism. In addition, it also inroduces a number of modern
theories emerged on GPE.
2.2 Objectives
 Identify rival theoretical approaches to understanding GPE
 Explore the traditional theories of GPE
 Explain the modern theories of GPE
2.3 Economic Liberalism

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. This logic applied to the economic sphere manifests itself
in a belief in the following key principles;
 Free trade
As already discussed, 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.
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Box 2.1 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. He reasoned that markets free from government interference were
not chaotic and more likely to achieve mutually beneficial cooperation through an efficient division
of labour. A well known illustration used in the book concerns the manufacture of pins. Ten people
making pins in which they cooperated by dividing up the tasks involved in the production between
them and specializing in them will make more pins than 10 people making them independently. In
the competitive and selfish arena of international commerce the less efficient method was operated
to the detriment of everyone.
Published in 1776 The Wealth of Nations influenced British policy and also the founding fathers of
the United States of America which declared its independence that same year.
 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. In
a direct riposte to Conservative (and Mercantilist) fears that 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. Governmental interference in the economy, rather than protecting its citizens, actually
serves to impoverish them by stifling their potential to enrich themselves and their fellow citizens.
Cautious governments reluctant to allow imports into their country, for fear of exposing their domestic
industries to cheaper competition and preferring to strive for self-sufficiency, serve to reduce the
overall volume of international trade. As a consequence of this, citizens are left to pay more than they
otherwise would for goods that were traded on the open world market and suffer from the overall
amount of money that could be generated from commerce being artificially restricted. In an example
of what is known as the collective goods problem self- serving governments, in the name of protecting
their own citizens, actually disadvantage them with their caution.
26
 Comparative Advantage
The English protégé of Adam Smith David Ricardo built on his work by developing a further rebuttal
to the Mercantilist approaches which had up until now dominated the policy of Britain and other great
powers, commonly known as the 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. For reasons of climate, terrain and the
abundance of natural resources it stands to reason that some countries have an advantage over others
in the growth of particular crops or production of particular goods. This advantage can be to the benefit
of all if allowed to flourish and not stifled by government interference in commerce. 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. For example, in a situation in which the economies’ of two
countries are based on the production of cars and corn but State A produces both more cheaply than
State B, State B can, nonetheless, still prosper because the relative costs of producing the two goods
will differ and give an incentive to trade. If State B , although less efficient in the production of both
corn and cars than State A, produces cars more efficiently than it produces corn this will make it
advantageous for both states to trade. Even though it appears cheaper for State A to produce its own
corn and cars it is cheaper still to produce more cars instead and trade for State B’s corn. Ricardo’s
work was a major influence on the British government’s decision to pass the Repeal of the Corn Laws
Act and trade with countries producing goods cheaper than they were and so usher in an era of much
freer trade.
 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. Though it tends to be best known for its advocacy of democracy, the notion of Kantian
peace also advocated tying states together through commerce and so giving an economic incentive for
peace. A motivation for the British and French politicians who designed the 1860 Cobden-Chevalier
Treaty, in addition to the opportunities for increased trade revenues, was to bind these two traditional
political rivals together with mutually beneficial economic ties. Concerns had begun to rise of the
possibility of another in a long line of wars between them due to rival interests in Italy. 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.
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2.4 Mercantilism
Mercantilism refers to the traditional, and still significant, approach to GPE 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 favouring 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 GPE 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 behaviour 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.
Governments thus should ‘beggar thy neighbour’ and just concentrate on ensuring that they are not
one of the losers. Whilst the logic that free trade leads to more trade and more goods can scarcely be
denied, it is far from certain that all participants in the global economy will gain from this increase.
Some states risk seeing their domestic industries decimated by being undercut by cheaper imports, as
in the ‘bra wars’ dispute highlighted at the start of the chapter. Weak states could be weakened further
by not being able to compete with the ‘big boys’, the big boys themselves could be weakened by
finding themselves unable to compete with lower priced goods from poorer states with lower wages
and slacker working conditions. This sort of gamble is one that many governments will be unwilling
to take. Telling recently laid-off steelworkers that importing cheaper steel from the other side of the
world is better for the country and the world in the long run is unlikely to be a wise political move for
a democratic government seeking re-election in the short term.
28
 Self sufficiency
The pessimistic assumptions of human nature and state behaviour 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. This would, of course, be straightforward for governments of countries blessed
with all the natural resources they could want but, in practise, this has never been achieved. Attempts
at achieving autarky have thus tended to be associated with states driven by ultra-nationalist ideologies.
On the one hand this can take the form of simply stealing resources from others. Hence Imperial
conquests, the rise of Fascism and Nazism and, Iraqi expansionist ambitions in the 1980s and ‘90s,
which sought to enhance national power through the acquisition of other countries’ resources, can be
seen in this context. On the other hand, autarky has occasionally been pursued by states through
isolationist strategies in order to jealously guard their own resources. Burma and Albania in the second
half of the twentieth century pursued such a strategy and North Korea have continued to do so, in the
guise of their state ideology of Juche (which seeks development as a communist country but without
reliance on external support). The poverty that accompanied such strategies in these three states,
however, is indicative of the poverty of such a strategy in the modern world. Hence, Mercantilist
strategies today tend not to be as purist as autarky and aim, instead, for the accumulation of resources
allied to the implementation of measures to protect domestic industries.
 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. The most common of such strategies are outlined in the follwing box box
29
Box 2.2 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.
2.5 Marxist Approaches
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 GPE. However, whilst
very few states take a Marxist or Maoist approach in their dealings with other countries, structuralist
perspectives on the global economy as a whole have actually become more prominent in academia as
the sorts of exploitative working conditions Marx wrote about in regards to industrialized countries
have become more apparent at the global level. Concerns over sweat shop labour in the urban slums
of 19th Century Europe mirror the anxieties many express today about sweat shop labour in the
industrializing world.
Marxist approaches to International Relations, explored in more depth in Chapter 8, assume that global
economic structures are the chief determinants of international political behaviour and events and,
hence, see GPE as being synonymous with IR, rather than a mere subset of the discipline. 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. Hence Dependency Theorists have advocated
that governments of the ‘zero’ (i.e. loser) countries adopt protectionist measures to save themselves
from exploitation. However, as Neo-Marxist approaches have evolved and economic globlalization
30
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 GPE 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.
Brainstorming Queastion:
 Compare and contrast the following theories of GPE based on their
assumptions, core propositions and policy prescriptions:
o Mercantilism
o Liberalism
o Marxism
Table 2.1: The main conerns of the Tradistional schools

• Mercantilism or Economic • It looks GPE issues mainly in terms of
Nationalism national interest
• It is closely associated with political
science
• Liberalism or Economic Liberalism • It looks GPE issues mainly in terms of

individual interests
• It is closely associated with the system
of markets that are the study of
economists
• Structuralism or Marxism • It looks GPE issues mainly in terms of

class interests
• It is closely associated with the
methods of analysis employed by many
sociologists
31
Table 2.2 Key Actors and Divergences of the Three Traditional Schools
Depiction of world Core actors Key driving forces Conditions for

economy order
Liberal potentially a seamless governments and free trade and the the invisible hand of
global marketplace economic actors free movement of competition
capital (unless (facilitated by
distortions are government policies)
introduced by
governments)
Mercantilist arena of interstate States maximising state balance of power or
competition wealth and hegemony
independence vis- a-
vis other states
Marxist arena of capitalist classes (capitalists the search for profits, submission of non-
competition and workers) and and the ensuing capitalists to the order
social groups struggle between
classes
Table 2.3
Basic Elements of the Three Traditional Schools of GPE
Mercantilism Liberalism Marxism
32
Important Actor The State Individuals Classes, particularly
the class
Role of the State Intervene in the Establish & enforce Uses state power to
economy to allocate property rights to sustain capitalist
resources facilitate market- system
based exchange
Image of the Conflictual: countries Harmonious: the int’l Exploitative:
International compete for desirable economy offers capitalists exploit
Economic System industries and engage benefits to all labor within
in trade conflicts a s a countries. The countries; rich
result of this challenge is to create countries exploit poor
competition a political framework countries in the int’l
that enables countries economy.
to realize these
benefits.
Proper Objective of Enhance power of the Enhance aggregate Promote an equitable
Economic Policy Nation-State in Int’l social welfare distribution of wealth
state system and income
2.6 New Approaches to GPE
GPE is divided by the different normative concerns and analytical questions which are highlighted by
traditions outlined above. Equally, the discipline is now subject to a lively methodological debate about
how scholars might best explain policies and outcomes in GPE. In essence this debate is about whether
you can assume what states’ (and other actors’) preferences and interests are. If you can, then rational
choice (or `neo-utilitarian’ as some say) approaches to GPE make sense. However, if you open up the
question as to why and how states and other actors come to have particular preferences, then you are
pushed towards approaches now often labelled `social constructivism’.
2.6.1 What is `rational choice’ or neo-utilitarianism?
In the United States, the study of GPE has become dominated by a `rational choice’ or neo-utilitarian
approach. This borrows economic concepts to explain politics. Instead of exploring the ideas,
personalities, ideologies or the historical traditions which lie behind policies and institutions, rational
choice focuses on the incentive structure faced by those making decisions. It is assumed that actors’
interests and preferences are known or fixed and that actors can make strategic choices as to how best
to promote their interests. The term `rational choice’ is a useful one to describe this approach since it
proposes that even though a particular policy may seem stupid or wrong, it may well have been
rational. `Rational’ in this sense means that for the actor or group concerned, this was the optimal
33
choice given the specific incentives and institutional constraints and opportunities that existed at the
time.
The rational choice approach can be applied to any one of the several levels of analysis highlighted
above: to individual decision-makers, to interest groups, to sectors in the economy, to parts of the
government bureaucracy, or indeed to states in their interactions with other states. Let us examine two
different applications of rational choice.
2.6.2 Political economy: the application of rational choice to groups within the state
Rational choice has been applied to interest groups and their influence on GPE in what has been called
a political economy approach to GPE. This approach has its roots in explanations of trade policy which
focus on interest groups. More recent applications have attempted to explain why countries adapt in
particular ways to changes in the world economy. The analysis proceeds on the assumption that
governments and their policies are important but that the policies and preferences of governments
reflect the actions of specific interest groups within the economy. These groups may emerge along
class or sectoral lines, indeed, the assumptions of rational choice are applied to explain how particular
groups within the economy emerge and what their goals and policy preferences are. Furthermore,
rational choice provides a framework for understanding the coalitions these groups enter into and their
interactions with other institutions. For example, in explaining developing country responses to the
debt crisis of the 1980s, a political economy approach starts out by examining the effect of economic
`shocks’ such as high interest rates and structural adjustment on interest groups. By demonstrating that
the power of some interests (such as those working in the export sector) has increased and the power
of others (such as those working in industries relying on diminishing state subsidies) has diminished,
the approach proffers an explanation for radical shifts in government policies.
2.6.3 Institutionalism: the application of rational choice to states
A different application of rational choice lies in the institutionalist approach to GPE (about which more
is said in the last section). This approach applies the assumptions of rational choice to states in their
interaction with other states. Drawing on theories of delegation and agency, it offers an explanation as
to why institutions exist and for what purposes. The core assumption is that states create international
institutions and delegate power to them in order to maximize utility within the constraints of world
markets and world politics. Frequently this comes down to the need to resolve collective-action
problems. For example, states realize that they cannot achieve their goals in areas such as trade or
34
environment, unless all other states also embark upon a particular course of action. Hence, institutions
are created to ensure that there is no defection or free- riding, and the collective goal is achieved.
2.6.4 Social constructivism

In contrast to rational choice analysis, other approaches to GPE assume that policies within the world
economy are affected by historical and sociological factors. Much more attention is paid to the ways
in which actors formulate preferences, as well as to the processes by which decisions are made and
implemented. In other words, rather than assuming that a state or decision-maker’s preferences reflect
rational choices within given constraints and opportunities, analysts in a broader tradition of GPE,
examine the beliefs, roles, traditions, ideologies and patterns of influence which shape preferences,
behaviour and outcomes. More will be said below about social constructivism in general. Let us focus
here on one particular variant.
2.6.5 The neo-gramscian approach: a radical variant
One strand of thinking about how and why actors have particular preferences draws on the ideas and
insights of Italian political theorist Antonio Gramsci to highlight the role of politics, law, culture, and
knowledge generally in shaping the preferences and policies of actors. The starting point here is that
interests, actions and behaviour in the world economy all take place within a structure of ideas, culture
and knowledge. We cannot simply assume that the preferences of actors within the system reflect
objectively definable competing ìnterests’. Rather, the way actors understand their own preferences
will depend heavily upon prevailing beliefs and patterns of thinking in the world economy, many of
which are embodied in institutions. The question this poses is: whose interests and ideas are embodied
in the rules and norms of the system?
For neo-Gramscians the answer to the question ìn whose interest’ lies in hegemony. The dominant
power within the system will achieve goals not just through coercion but equally by ensuring the
consent of other actors within the system. This means that dominant powers will promulgate
institutions, ideologies and ideas all of which help to persuade other actors that their best interests
converge with those of the dominant power. For example, neo-Gramscians interpret the dominance of
neo-liberalism since the 1980s as a reflection of US interests in the global economy, successfully
projected through structures of knowledge (it became the dominant paradigm in top research
universities), through institutions (such as the IMF which became forceful proponents of neo-liberal
policy prescriptions), and through broader cultural beliefs and understandings (the very language of
`free’ market contrasting with restricted or repressive regimes).
35
New approaches to GPE highlight a powerful debate within the subject about whether we should treat
states’ interests and preferences as given or fixed.
 Which is the best theory of GPE?
In addition to the above mentioned foundational theories of GPE, the following three contemporary
theories of GPE are also worth considering.
I. Hegemonic Stability Theory (HST): is a hybrid theory containing elements of mercantilism,
liberalism, and even Marxism. Its closest association, however, is with mercantilism. The
connection with mercantilism may not be immediately apparent, but it is not difficult to discern.
The basic argument of HST is simple: the root cause of the economic troubles that bedeviled
Europe and much of the world in the Great Depression of the 1920s and 1930s was the absence
of a benevolent hegemon—that is, a dominant state willing and able to take responsibility (in the
sense of acting as an international lender of last resort as well as a consumer of last resort)for the
smooth operation of the International (economic) system as a whole. In this regard, what
thenhappened during the Great depression period was the old hegemon, Great Britain, had lost
the capacity to stabilize the international system, while the new (latent) hegemon, the United
States, did not yet understand the need to take on that role—or the benefits of doing so-hence
global economic instability. During its explanatory power to the Great Depression, HST has thus
influenced theestablishment of the Bretton Woods institutions (IMF and WB)- both beingthe
products of American power and influence. On this point, it is specifically worth noting that
Great Britain was given an important role to play but British interests and desires were clearly
secondary. U.S. dominance was manifested, in particular, by the adoption of the U.S. blueprint
for the IMF.
II. Structuralism:is a variant of the Marxist perspective and starts analysis from a practical
diagnosis of the specific structural problems of the international liberal capitalist economic
system whose main feature is centre-periphery (dependency) relationship between the Global
North and the Global Southwhich permanently resulted in an ―unequal (trade and investment)
exchange.‖ The perspective is also known as the ‘Prebisch-Singer thesis’ (named after its Latin
American proponents Presbish and Singer) and it advocates for a new pattern of development
based on industrialization via import substitution based on protectionist policies.During the
1950s, this Latin American model spread to other countries in Asia and Africa and then the
domestic promotion of manufacturing over agricultural and other types of primary production
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became a central objective in many development plans.
III. Developmental State Approach:Realizing the failure of neo-liberal development paradigm (in
the 1980‘s) in solving economic problems in developing countries, various writers suggested the
developmental state development paradigm as analternative development paradigm.
 What is Developmental state?
 Can you mention some of the features of developmental state model?
The concept of the developmental state is a variant of mercantilism and it advocates for the robust
role of the state in the process of structural transformation. The term developmental state thus
refers to a state that intervenes and guides the direction and pace of economic development.
Some of the core features of developmental state include;
 Strong interventionism: Intervention here does not imply heavy use of public ownership
enterprise or resources but state‘s willingness and ability to use a set of instruments such
as tax credits, subsidies, import controls, export promotion, and targeted and direct financial
and credit policies instruments that belong to the realm of industrial, trade, and financial
policy.
 Existence of bureaucratic apparatus to efficiently and effectively implement the planned
process of development.
 Existence of active participation and response of the private sector to state intervention
 Regime legitimacy built on development results that ensured the benefits of development
are equitably shared and consequently the population is actively engaged in the process
of formulating and executing common national project of development....etc.
 Compare and contrast the following theories of GPE based on their assumptions, core
propositions and policy prescriptions
o Hegemonic Stability Theory (HST)
o Structuralism
o Developmentalism
2.6 Survey of the Most Influential National Political Economy systems in the world
2.6.1 The American System of Market-Oriented Capitalism
The American system of political economy is founded on the premise that the primary purpose of
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economic activity is to benefit consumers while maximizing wealth creation; the distribution of
that wealth is of secondary importance. Despite numerous exceptions, the American economy does
approach the neoclassical model of a competitive market economy in which individuals are assumed
to maximize their own private interests (utility), and business corporations are expected to maximize
profits.
The American model like the neoclassical model rests on the assumption that markets are
competitive and that, where they are not competitive, competition should be promoted through
antitrust and other policies. Almost any economic activity is permitted unless explicitly
forbidden, and the economy is assumed to be open to the outside world unless specifically
closed. Emphasis on consumerism and wealth creation results in a powerful pro-consumption
bias and insensitivity, at least when compared with the Japanese and German models, to the
social welfare impact of economic activities.
Although Americans pride themselves on their pragmatism, the American economy is based
upon the abstract theory of economic science to a greater degree than is any other economy.
At the same time, however, the American economy is appropriately characterized as a system of
managerial capitalism. Put differently, the economy was profoundly transformed by the late
nineteenth-century emergence of huge corporations and the accompanying shift from a proprietary
capitalism to one dominated by large, oligopolistic corporations. Management was separated from
ownership, and the corporate elite virtually became a law unto itself. Subsequently, with the New
Deal of the 1930s, the power balance shifted noticeably away from big business when a strong
regulatory bureaucracy was established and organized labor was empowered; in effect, the
neoclassical laissez-faire ideal was diluted by the notion that the federal government had a
responsibility to promote economic equity and social welfare. The economic ideal of a self-
regulating economy was further undermined by passage of the Full Employment Act of and the
subsequent acceptance of the Keynesian idea that the federal government has a responsibility to
maintain full employment through use of macroeconomic (fiscal and monetary) policies. Although
at the opening of the twenty-first century the federal government retains responsibility for full
employment and social welfare, a significant retreat from this commitment began with the 1980
election of Ronald Reagan as President of the United States and the triumph of a more conservative
economic ideology emphasizing free and unregulated markets.
Commitment to the welfare of individual consumers and the realities of corporate power have
resulted in an unresolved tension between ideal and reality in American economic life. Whereas
consumer advocates want a strong role for the government in the economy to protect the
consumer, American economists and many others react negatively to an activist government because
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of their belief that competition is the best protection for consumers except when there are market
failures. In addition, there has been no persistent sense of business responsibility to society or to
individual citizens. Japanese corporations have long been committed to the interests of their
stakeholders, including labor and subcontractors, and German firms acknowledge their responsibility
to society and are more accepting of the welfare state than are American firms.
This explains why Japanese and German firms are much more reluctant to shift industrial
production to other countries than are their American rivals. However, over time, the balance
between the ideal and the reality of the American economy has shifted back and forth. In the
1980s, the election of Ronald Reagan as President and then his Administration‘s emphasis on the
unfettered market diluted the welfare ideal of the earlier post–World War II era.
The role of the American government in the economy is determined not only by the influence of the
neoclassical model on American economic thinking but also by fundamental features of the
American political system. Authority over the economy is divided among the executive, legislative,
and judicial branches of the federal government and between the federal government and the fifty
states. Whereas the Japanese Ministry of Finance has virtual monopoly power over the Japanese
financial system, in the United States this responsibility is shared by the Treasury, the Federal
Reserve, and several other powerful and independent federal agencies; furthermore,all of those
agencies are strongly affected by actions of the legislative and judicial branches of government. In
addition, the fifty states frequently contest the authority of the federalgovernment over economic
policy and implement important policies of their own.
Industrial policy represents another great difference between the United States and other economies.
Industrial policy refers to deliberate efforts by a government to determine the structure of the
economy through such devices as financial subsidies, trade protection, or government procurement.
Industrial policy may take the form either of sectoral policies of benefit to particular industrial
or economic sectors or policies that benefit particular firms; in this way such policies differ from
macroeconomic and general policies designed to improve the overall performance of the economy,
policies such as federal support for education and Research and Development (R &D). Although
Japan has actively promoted sector specific policies throughout the economy, the United States
has employed these policies in just a few areas, notably in agriculture and national defense.
However, the United States in the 1980s took a major step toward establishing a national industrial
policy.
The rationale or justification for industrial policy and associated interventionist activities is that some
industrial sectors are more important than others for the overall economy. The industries selected are
39
believed to create jobs of higher quality, like those in manufacturing, to produce technological or
other spillovers (externalities) for the overall economy, and to have a high ―value-added. These
industries are frequently associated with national defense or are believed to produce a highly
beneficial effect on the rest of the economy; the computer industry and other high-tech sectors
provide examples of such industries.
In general, however, the only justification for an industrial policy considered legitimate in the United
States is to overcome a market failure. In practice, most American economists, public officials, and
business leaders are strongly opposed to industrial policy. Their principal objection is that
governments are incapable of picking winners; many argue that politicians will support particular
industries for political reasons rather than for sound economic reasons. American economists argue
that the structure and distribution of industries in the United States should be left entirely to the
market. This belief is supported by the assumption that all industries are created equal and that
there are no strategic sectors. Nevertheless, despite the arguments against having an industrial policy
in America, such policies have developed in the areas of agriculture, national security, and research
and development.
2.6.2 The Japanese System of Developmental Capitalism
At the end of World War II, American occupation officials advised the Japanese that they should
follow the theory of comparative advantage and hence concentrate on labor-intensive products in
rebuilding their economy. Japan‘s economic and political elite, however, had quite different
ideas and would have nothing to do with what they considered an American effort to relegate Japan
to the low end of the economic and technological spectrum. Instead, the Japanese Ministry of
International Trade and Industry (MITI) and other agencies of the Japanese economic high command
set their sights on making vanquished Japan into the economic and technological equal, and
perhaps even the superior, of the West. At the opening of the twenty-first century, this objective has
remained the driving force of Japanese society.
In the Japanese scheme of things, the economy is subordinate to the social and political
objectives of society. Ever since the Meiji Restoration (1868), Japan‘s overriding goals have
been making the economy self-sufficient and catching up with the West. In the pre–World War II
years this ambition meant building a strong army and becoming an industrial power. Since its
disastrous defeat in World War II, however, Japan has abandoned militarism and has focused on
becoming a powerful industrial and technological nation, while also promoting internal social
harmony among the Japanese people. There has been a concerted effort by the Japanese state to guide
the evolution and functioning of their economy in order to pursue these sociopolitical objectives.
These political goals have resulted in a national economic policy for Japan best characterized as neo-
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mercantilism; it involves state assistance, regulation, and protection of specific industrial sectors in
order to increase their international competitiveness and attain the ―commanding heights‖ of
the global economy. This economic objective of achieving industrial and technological
equality with other countries arose from Japan‘s experience as a late developer and also from its
strong sense of economic and political vulnerability. Another very important source of this powerful
economic drive is the Japanese people‘s overwhelming belief in their uniqueness, in the
superiority of their culture, and in their manifest destiny to become a great power.
Following Japan‘s defeat in World War II, the ruling tripartite alliance of government bureaucracies,
the governing Liberal Democratic Party (LPD), and big business began to pursue vigorously the goal
of catching up with the West. To this end, the state assumed central role in the economy and
specifically the elite pursued rapid industrialization through a strategy employing trade protection,
export-led growth, and other policies. The Japanese people have also supported this extensive
interventionist role of the state and believe that the state has a legitimate and important economic
function in promoting economic growth.
Many terms have been used to characterize the distinctive nature of the Japanese system of political
economy: developmental state capitalism, collective capitalism, welfare corporatism, competitive
communism, network capitalism and strategic capitalism. Each of these labels connotes particularly
important elements of the Japanese economic system, such as its overwhelming emphasis on
economic development, the key role of large corporations in the organization of the economy and
society, subordination of the individual to the group, primacy of the producer over the consumer,
and the close cooperation among government, business, and labor. Yet, the term ―developmental state
capitalism‖ best captures the essence of the system, because this characterization conveys the idea
that the state must play a central role in national economic development and in the competition with
the West. Despite the imperative of competition, the Japanese frequently subordinate pursuit of
economic efficiency to social equity and domestic harmony. Many aspects of the Japanese economy
that puzzle foreigners are a consequence of a powerful commitment to domestic harmony; and over-
regulation of the Japanese economy is motivated in part by a desire to protect the weak and
defenseless. For example, the large redundant staffs in Japanese retail stores developed from an effort
to employ many individuals who would otherwise be unemployed and discontented. This situation
is also a major reason for the low level of productivity in non-manufacturing sectors, and it accounts
in part for Japan‘s resistance to foreign direct investment by more efficient foreign firms. The
Japanese system of lifetime employment has also been utilized as a means to promote social peace;
Japanese firms, unlike their American rivals, are very reluctant to downsize and lay off thousands of
employees. At the opening of the twenty-first century, however, Japan‘s economic problems are
41
causing this situation to change. Nevertheless, the commitments to political independence and social
harmony are major factors in the Japanese state‘s determination to maintain firm control over the
economy.
The government bureaucracy and the private sector, with the former frequently taking the lead, have
consistently worked together for the collective good of Japanese society.
Industrial policy has been the most remarkable aspect of the Japanese system of political economy.
In the early postwar decades, the Japanese provided government support for favored industries,
especially for high-tech industries, through trade protection, generous subsidies, and other means.
The government also supported creation of cartels to help declining industries and to eliminate
excessive competition. Through subsidies, provision of low-cost financing, and especially
administrative guidance by bureaucrats, the Japanese state plays a major role in the economy. In this
regard the Japanese state‘s extensive use of what is known as the ―infant industry protection system
deserves special attention.
 Can you guess some of the policies used by Japan to promote its infant industries?
Among the policies Japan has used to promote its infant industries include the followings:
o Taxation, financial, and other policies that encouraged extraordinarily high savings and
investment rates.
o Fiscal and other policies that kept consumer prices high, corporate earnings up, and
discouraged consumption, especially of foreign goods.
o Strategic trade policies and import restrictions that protected infant Japanese industries
against both imported goods and establishment of subsidiaries of foreign firms.
o Government support for basic industries, such as steel, and for generic technology, like
materials research.
o Competition (antitrust) and other policies favorable to the keiretsu and to interfirm
cooperation.
 Does infant-industry protection work? Does it provide a reasonable justification for
protectionism?
Japanese industrial policy was most successful in the early postwar years when Japan was
rebuilding its war-torn economy. However, as Japan closed the technology gap with the West
and its firms became more powerful in their own right, Japan‘s industrial policy became
42
considerably less significant in the development of the economy. Yet the population and the
government continued to believe that the state should play a central or at least an important
supportive role in the continuing industrial evolution of the economy.
2.6.3 The German System of Social Market Capitalism

The German economy has some characteristics similar to the American and some to the Japanese
systems of political economy, but it is quite different from both in other ways. On the one hand,
Germany, like Japan, emphasizes exports and national savings and investment more than
consumption. However, Germany permits the market to function with considerable freedom;
indeed, most states in Western Europe are significantly less interventionist than Japan.
Furthermore, except for the medium-sized business sector (Mittelstand), the nongovernmental
sector of the German economy is highly oligopolistic and is dominated by alliances between major
corporations and large private banks.
The German system of political economy attempts to balance social concerns and market
efficiency. The German state and the private sector provide a highly developed system of social
welfare. The German national system of political economy is representative of the ―corporatist‖
or ―welfare state capitalism‖ of continental Europe in which capital, organized labor, and
government cooperate in management of the economy. This corporatist version of capitalismis
characterized by greater representation of labor and the larger societyin the governance of
corporate affairs than in Anglo-Saxon shareholder capitalism. Although the continental
economies differ from one another in many respects, in all of them the state plays a strategic role
in the economy. It is significant, especially in Germany, that major banks are vital to the
provision of capital to industry. While, in many European countries, employee councils have
some responsibility for running the company, in Germany labor has a particularly important role
in corporate governance. Indeed, the ―law of co-determination‖ mandates equal representation of
employees and management on supervisory boards. Although the power of labor on these boards
can be easily overstated, the system is a significant factor in Germany‘s postwar history of
relatively smooth labor relations. The most important contribution of the German state to the
economic success of their economy has been indirect. During the postwar era, the German federal
government and the governments of the individual Lander (states) have created a stable and
favorable environment for private enterprise. Their laws and regulations have successfully
encouraged a high savings rate, rapid capital accumulation, and economic growth. Germany has a
highly developed system of codified law that reduces uncertainty and creates a stable business
climate; the American common law tradition guides U.S. business, and the Japanese bureaucracy
43
relies on administrative guidance.
At the core of the German system of political economy is their central bank, or Bundesbank. The
Bundesbank‘s crucial role in the postwar German economy has been compared to that of the
German General Staff in an earlier German domination of the Continent. Movement towards the
European Economic and Monetary Union has further increased the powerful impact of the
Bundesbank. Although the Bundesbank lacks the formal independence of the American Federal
Reserve, its actual independence and pervasive influence over the German economy have rested
on the belief of the German public that the Bundesbank is the ―defender of the mark (euro) and the
staunch opponent of dreaded inflation. Indeed, the Bundesbank did create the stable
macroeconomic environment and low interest rates that have provided vital support to the
postwar competitive success of German industry.
On the other hand, the role of the German state in the microeconomic aspects of the economy has
been modest. The Germans, for example, have not had an activist industrial policy although, like
other advanced industrial countries, the government has spent heavily on research and
development. The German government has not also intervened significantly in the economy to
shape its structure except in the support it has given through subsidies and protection to such dying
industries as coal and shipbuilding and the state-owned businesses such as Lufthansa and the
Bundespost (mail and telecommunications). However, since the early 1990s, these sectors have
increasingly been privatized. On the whole, the German political economy system is thus closer to
the American market-oriented system than to the Japanese system of collective capitalism.
2.6.4 Differences among National Political Economy Systems

While national systems of political economy differ from one another in many important respects,
differences in the following areas are worthy of particular attention: (1) the primary purposes of
the economic activity of the nation, (2) the role of the state in the economy, and (3) the structure
of the corporate sector and private business practices. Although every modern economy must
promote the welfare of its citizens, different societies vary in the emphasis given to particular
objectives; those objectives, which range from promoting consumer welfare to pursuit of
national power, strongly influence and are influenced by such other features of a national
economy as the role of the state in the economy and the structure of that economy.
As for the role of the state in the economy, market economies include the generally laissez-faire,
noninterventionist stance of the United States as well as the Japanese state‘s central role in the
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overall management of the economy. And the mechanisms of corporate governance and private
business practices also differ; the relatively fragmented American business structure and the
Japanese system of tightly integrated industrial groupings (the keiretsu) contrast dramatically
with one another. Very different national systems of political economy result from the variations
in the basic components of economies.
The purpose of economic activity in a particular country largely determines the role of the state
in that economy. In those liberal societies where the welfare of the consumer and the autonomy
of the market are emphasized, the role of the state tends to be minimal. Although liberal societies
obviously differ in the extent to which they do pursue social welfare goals, the predominant
responsibility of the state in these societies is to correct market failures and provide public goods.
On the other hand, in those societies where more communal or collective purposes prevail, the role
of the state is much more intrusive and interventionist in the economy. Thus, the role of such states
can range from providing what the Japanese call ―administrative guidance‖ to maintaining a
command economy like that of the former Soviet Union.
 What is corporate governance?
The system of corporate governance and private business practices constitutes another important
component of a national political economy. American, German, and Japanese corporations have
differing systems of corporate governance, and they organize their economic activities (production,
marketing, etc.) in varying ways. For example, whereas shareholders (stockholders) have an
important role in the governance of American business, banks have played a more important role
in both Japan and Germany. In addition, regarding business practices, whereas the largest American
firms frequently invest and produce abroad, Japanese firms prefer to invest and produce at home.
The policies of each government have also shaped the nature of business enterprise and business
behavior through regulatory, industrial, and other policies; furthermore, some national differences
in corporate structure and business practices have evolved largely in response to economic and
technological forces.
 Compare and contrast the American, Japanese and German National Political
Economy systems based on their ideas on the following three issues:
 The primary purposes of the economic activity in a nation
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 The role of the state in the economy
 The structure of the corporate sector and private business practices
2.7 Summary
The Traditional economist’s theories are split into three ideologies.The liberal ideology stems from
the concept of labor and exchange and the use of land, labor, and capital to produce durable goods.
Liberal economists believe that economics can benefit everyone and that society can progress with the
improvement in the standard of living. They think that the wants of the community rather than of
individuals are most important for decision-making. They also believe in equal opportunity for
everyone and are concerned with the structure of civil society. Marxism states that inequality is bad,
and wealth is generated from labor and exchange. It does not support the private ownership of
resources, which it believes leads to inequality and only favors the needs of the elite and not of the
whole society. Economic nationalism is the belief that the state possesses all the power and that
individuals should work to make use of the economic benefits. The ideology states that the government
should control all resources and that individuals are ignorant and cannot create a cohesive society
without a strong state. Thus, political economy provides us with an understanding of how a country
and household are managed and governed by considering both the political and economic factors
associated with each.

1. Why are there strong disagreements among scholars studying Global political economy?
In other words, isn’t there a single, unified theory on which all or even most scholars agree?
2. The Theory of Comparative Advantage has been an important concept in international politics
for several centuries. What is the basic argument of this theory? What are its main
assumptions? In what way does it explain the rise of efficiency between two countries?
3. In what way is the theory of comparative advantage associated with the liberal approach to
international relations theory?
4. Mercantilism is the oldest of the foundational theories in GPE. For the most part, however, it has
been replaced by an updated variant referred to as neo-mercantilism. In what ways are mercantilism
and neo-mercantilism different?
5. Despite some disagreements, advocates of economic liberalism agree on several fundamental
tenets, or core features. What are these core features?
6. What is the logic of the Marxist criticism of free trade?
7. Using the principles of hegemonic stability theory, explain how and why the worldwide
46
economic depression of the 1930s happened.
8. Do traditional theories accurately describe the condition of the world economy in the 21st century?
Explain.
9. What does it mean to say that “free trade remains as much an abstraction as an actual
practice”?
10. In the mercantilist view, global poverty is a nonissue for individual states. What is the logic of
the mercantilist position?
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CHAPTER-3: THE GLOBALIZATION DEBATE IN GLOBAL

POLITICAL ECONOMY
3.1 Introduction
Nowadays globalization has become a favorite catchphrase of everyone; journalists, economists,
politicians, environmentalists, lawyers, and even farmers. Globalization is an unavoidable process that
incorporates practically every field in today’s life. This process, mainly driven by rapid and largely
unrestricted flows of information, goods, ideas, cultural values, capital, services and people shifts to the
more than ever integrated world economy. Globalization is a multidimensional concept referring to the
cross-border movements of capital, goods, and people. The nature and impact of globalization is the
subject of profound debate within GPE. In GPE several competing claims are made about globalization.
The aim of this chapter is to introduce the economic factor in international relations and to consider
the implications of globalisation in international political economy . It explores the meaning, history,
advantages, disadvantages and dimnstions of globalization.
3.2 Objetives
 Define the term globalization
 Explain the histroy of globalization
 Identify advantages and the effects of globalization
 Distinguish between different dimensions of globalisation
 Critically assess the competing visions of advocates and opponents of globalisation
3.3 The concept of globalization

 What is globalisation and in what ways does globalization affect global economy ?
What exactly does ‘globalisation’ mean? It is one of the most commonly used terms in contemporary
debates on global issues, yet few are able to provide a concise definition. In fact, many different
definitions exist, pointing to different aspects of global economic, political and social integration.
48
There is no one generally acceptable definition ofglobalization that has been provided, though the term
has been used to cover wide areas across borders in economic, political, social, cultural, religious,
technological, communication, governance, disease and other spheres. So there is no single formal
definition of the concept.
At the heart of the concept is the notion that the world is ‘shrinking’ in the sense that it is growing
together more and more as a consequence of an increasingly dense network of interactions. The
sociologist Anthony Giddens, for example, refers to ‘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’(Giddens, 1990). Robert Cox, on the other hand, sees a more
explicitly economic logic at work, pointing to ‘the internationalising of production, the new
international division of labor, new migratory movements from the South to North [and] the new
competitive environment that accelerates these processes…’(Cox, 1996). What is clear from most
definitions is that globalisation is a process, and does not denote an end point in the historical
evolution of the world. What a fully globalised world would look like we may never know, but
whether such an imagined state of affairs is indeed the inevitable outcome of a process of
globalisation is less than certain. Globalisation should be seen as driving forward the process of
deepening the links that exist between different societies and individuals. But this process need
not be all-encompassing, and other trends pointing in other directions, such as a state of ‘standstill’
or even greater fragmentation, are occurring at the same time. When we discuss globalisation, it
is therefore always important to bear in mind the possibility and actual reality that some societies
or communities experience not greater integration into the global economy but fragmentation and
isolation.
In its general definition, globalization can be defined as an extensive network of economic, cultural, social
and political interconnections and processes which goes beyond national boundaries’ (Yeates 2001).
 What are manifestations of globalization?
Several trends and processes of change are commonly referred to as exemplars of globalisation.
In recent decades, the global economy has seen a dramatic rise in levels of trade across boundaries.
49
Global production by multinational corporations is now common in most industrial sectors. Global
brands and products can be found in the most distant places of the world. And the integration of
financial markets has helped to tie the fate of different national economies more closely together
as markets respond to economic signals in faraway places within seconds. Moreover, the
communications revolution has allowed people to enter into contact with others regardless of
national boundaries. Telephony, the internet and the electronic media have created 24-hour news,
a world around which information and ideas can flow much more freely than ever before.
A question remains about the fate of the states system and ‘the international’ in an era of
globalisation. In its more extreme manifestations, the debate on globalisation has suggested that
the states system may be an anachronism that is no longer well suited to a world of interconnected
societies and economies, and that new forms of governance, below and above the nation state, will
need to be found to match the emerging global networks of interaction. In this view, globalisation
tends to undermine the nation state basis of political organisation and brings with it the emergence
of a global political space in which individuals and peoples will create new forms of political
authority and governance. The emergence of global civil society and the proliferation of
international organisations can be seen as an early manifestation of this process of political
globalisation.
Yet others remain sceptical as to the potential for such a profound transformation in the political
sphere. Paul Hirst and Grahame Thompson point to the continuing role of states in providing
international security and an international framework within which economic and social
globalisation can take place. In their view, globalisation needs a supportive political environment
that in the past has been provided by leading states, such as the United States. Rather than making
the states system redundant, globalisation depends on a supportive framework provided
by states. These scholars therefore prefer to speak of ‘internationalisation’ rather than globalisation,
a concept that highlights the continued role of states in the integration of the world economy and
society.
 What are the limits of globalisation?
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3.4 How new is globalisation?

In recent years the term of globalization has been used enormously by media and academics however, it
is not a totally new phenomenon. Globalisation is often thought to have emerged in the post-1945
era, and more specifically since the 1970s. The rise of multinational corporations, first in the United
States and later in Europe and East Asia, the expansion of international trade and the emergence
of globally integrated financial markets are all seen as interconnected trends that have begun to
transform the global economy in the last 40 years. But in one form or another, these phenomena
have existed for much longer, and the process of global economic integration can be traced back
much further, not just to the late twentieth century but at least to the nineteenth century. Some
scholars, such as Immanuel Wallerstein, argue that the current global capitalist system originated
in the sixteenth century and has seen a continuous expansion ever since. This begs the question of
just how new globalisation is.
Trading links were among the first significant forms of the growing interconnectedness of national
economies in the late medieval and early modern era. From the Hanseatic League to Venetian
trading fleets and the Dutch and British East India Companies, corporations from maritime
countries were at the forefront of establishing international trading routes that connected first
countries within Europe and later European economies with those of Asia, Africa and the Americas.
Globally operating companies have thus been in existence for at least 500 years, often working in
close cooperation with state authorities. But these companies were largely trading firms, and it
was only in the mid-nineteenth century that manufacturing firms began to establish facilities in
different countries. By the time of the First World War, the European economies were already tied
together by international capital flows and transnationally integrated production. Some scholars
such as Kenneth Waltz have argued that the high level interdependence of the pre-1914 Gold
Standard era has never been achieved again. Others, such as Michael Bordo et al. (1999), point to
the more limited nature of globalisation before the twentieth century.
But while debate on this question continues, it is fair to say that the late twentieth century
witnessed a much wider and more comprehensive process of global economic integration,
encompassing trade, foreign direct investment, short-term financial flows and technology
exchange across borders. Not all indicators of global economic integration, such as trade openness,
are at the same level as in the late nineteenth century, but this is due in part to the dramatic growth
51
of the domestic economy in the twentieth century and particularly the rise of the services sector
that is less likely to be internationalised. What matters more is the degree to which leading
companies in the major industrialised economies are pursuing corporate strategies
that are globally oriented. Innovation, product development, branding and marketing are now
routinely carried out to serve global sales strategies.
It remains important, however, to reflect on the longer historical dimension of the current process
of globalisation. The political problems and challenges that globalisation poses are not entirely
new, and a rich history of international political economic thought exists that addresses the threats
and opportunities that societies face from global economic integration .
Box 3.1: Three aspects of globalization
Internationalization describes the increase in transactions among states reflected in flows of trade,
investment and capital (cf the argument that these flows have not increased as much as is claimed:
UNDP 1997). The processes of internationalization have been facilitated and are shaped by inter-state
agreements on on trade, investment, and capital, as well as by domestic policies permitting the private
sector to transact abroad.
The technological revolution refers to the way modern communications (internet, satellite
communications, high-tech computers) made possible by technological advances have made distance
and location less important factors not just for government (including at local and regional levels) but
equally in the calculations of other actors such as firms’ decisions to invest or in the membership and
activities of social movements.
Liberalization describes government policies which reduce the role of the state in the economy such as
through the dismantling of trade tariffs and barriers, the deregulation and opening of the financial sector
to foreign investors, and the privatization of state enterprises.
In the section below, the debate between sceptics and enthusiasts is examined in asking whether
globalization is eroding the sovereignty and power of the state. The subsequent section examines the
differences in the impact of globalization on strong and weak states.
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3.5 Is globalization diminishing the role of the state in the world economy?
3.5.1 The globalists
À global economy is emerging’ claim those who depict a world in which multinational trade, production,
investment, and financing moves in and out of countries ever more easily. The `globalists’ tell us that as
a result, governments and states are losing their capacity to control economic interactions. This is partly
because the quantity and rapidity of flows make it more difficult for governments to regulate trade,
investment or capital. Equally important is the fact that firms and investors can more easily take their
business elsewhere puts new constraints on governments trying to retain and encourage investment. The
argument here is that `footloose’ modern businesses will simply exit from a country if a government does
not pursue liberalizing policies which foster corporate profitability and flexibility. For this reason,
governments are under pressure to reduce taxes and to cut back state expenditure on health, education,
pensions and so forth. When it comes to regulating international business, governments are permitting
investors themselves to set the rules and these private actors are doing so though new private international
networks and self-regulatory agencies. In sum, states are losing power in a global economic order in which
state borders and governments are less influential. This eventuality is, of course, embraced by those
interpreting it from a `liberal’ (see box 6) starting point.
BOX 3.2 : The globalists

`The nation state has become an unnatural, even dysfunctional, unit for organizing human activity and
managing economic endeavour in a borderless world. It represents no genuine, shared community of
economic interest; it defines no meaningful flows of economic activity'.
Kenichi Ohmae, The Borderless World: Power and Strategy in the Interlinked Economy (London:
Harper Collins, 1990, reprinted 1994), p.24.
3.5.2 The sceptics
Countering the `global economy’ view are a variety of sceptics who highlight flaws in the argument and
the evidence proposed by those who argue that the state is losing power. The proposition that states are
under pressure to cut taxes and reduce expenditure is attacked by scholars who examine data of
53
industrialized countries and demonstrates that the evidence does not back up this claim. Nor does the
evidence suggest that MNEs relocate investment to areas where there are lower wages and lower taxes.
Rather contemporary research into actual patterns of MNE investment discloses that in the new
knowledge-intensive economy, factors such as the availability of skilled and semi-skilled labour, good
infrastructure and proximity to market are crucial ingredients to choices of location. The conclusion drawn
from this evidence is that the role of states is not eroding. To the contrary, states and government still have
a very important and substantial role to play in a successful economy.
BOX 3.3 : The sceptics

`The closer we looked the shallower and more unfounded’ became the claims of the more radical
globalists. In particular, we began to be disturbed by three facts: first, the absence of a commonly
accepted model of the new global economy and how it differs from previous sates of the international
economy; second...the tendency casually to cite examples of internationalization of sectors and
processes as if they were evidence of the growth of an economy dominated by autonomous global
market forces; and third, the lack of historical depth, the tendency to portray current changes as both
unique and without precedent and firmly set to persist long into the future’ Paul Hirst and Grahame
Thompson, Globalization in Question (Cambridge, Polity Press, 1996), p.2.
3.6 Benefits of Globalisation
 What are advantages of globalization?
1. Increase in Competitive Strength of domestic industry: Globalisation exposes domestic

industry in developing countries to foreign competition. This put domestic companies under
pressure to improve efficiency and quality and reduce costs. Under a protective regime
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industry lose the urge to improve efficiency and quality. Globalisation helps to improve the
competitive strength and economic growth of developing nations.
2. Access to Advanced Technology: For a developing country like India, globalisation
provides access to new technology; Indian companies can acquire sophisticated technology
through outright purchase or through joint ventures and other arrangements.
3. Access to Foreign Investment: Globalisation has attracted the much needed foreign capital
towards developing countries like India. Foreign multinationals have invested billion of dollars
in India. In addition, foreign institutional investors have brought in huge funds in stock
markets in India.
4. Reduction in Cost of Production: In a globalised environment, companies can secure
cheaper sources of Reduction of trade barriers so as to ensure free flow of goods and
services across national frontiers; Creation of an environment in which free flow of capital
can take place among nations; Creation of an environment which permits free flow of
technology between nations; Creation of an environment in which free movement of labour
can take place in different countries of the world; and Creation of a global mechanism for
the settlement of economic disputes between various countries.
5. Growth and Expansion: When the domestic market is not large enough to absorb the
entire production, domestic companies can expand and grow by entering foreign markets.
Japanese firms flooded the US markets with automobiles and electronics because of this
reason. Companies from USA, Europe and other developed regions are increasing their
presence in Asia due to growing population and increasing income levels in Asian
countries.
6. Higher Volume of Trade: Due to globalisation, each country can specialize in the
production of goods and services in which it has a comparative advantage. It can export its
surplus output and import their items freely from other nations. This will lead not only to a
phenomenal increase in the world trade but also to better allocation and utilization of
resources in each country.
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7. Consumer Welfare: Better quality and low priced goods and services will become
available to consumers. This along with a wider choice in consumption will help improve
standards of living of people in developing countries. Over a period of time, the proportion
of people below the poverty line will go down. Consumers also get access to products
manufactured in any part of the world.
8. Other benefits: Globalisation also offers some spin off benefits. It helps in the
professionalization of management. Globalisation brings people of different races and
ethnic backgrounds closer. It helps to promote mutual cooperation and world peace.
Today, globalisation has undeniable effects on almost all countries around the world. Its
influence has been seen especially in economic, political and social fields. Moreover, for
developing countries, it could be considered as a propulsive force to sustain and/or raise
their growth via multinational companies. Multinational companies’ share in the developing
countries Growth Domestic Product (GDP) is getting bigger day by day and it is
correspondingly affecting those countries in various aspects from economy, policy to
politics or the position of country in international trade to regional economy.
3.7 Globalisation and its discontents
The globalisation of the world economy will most likely continue to tie societies and economies
more closely together. Liberal economists and others see in this process of integration the hope for
greater cooperation and prosperity for all nations involved. They welcome the opportunities that
globalisation offers for extending markets, deepening the division of labour and raising
productivity in production. Even if globalisation brings with it economic dislocation in the short
run, it will contribute to alleviating poverty in the longer run. However, all observers do not share
this optimistic view of globalisation. The late 1990s saw the emergence of a transnational
movement of protest against globalisation, which gave expression to widespread fears about the
ever-deeper integration of the world economy. For the anti-globalisation movement and other
critical observers, globalisation holds the threat of economic marginalisation and global inequality,
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cultural homogenisation and the erosion of national sovereignty. Globalisation is seen as a process
that benefits the rich rather than the poor, multinational corporations rather than local
communities, and the West and the United States in particular rather than the developing world.
Furthermore, the global financial crisis and economic recession that started in 2008 have
highlighted the profound dangers of ever greater global integration of financial markets amidst
weak regulatory oversight of the banking sector by governments.
 How can globalization reduce the role of a country?
 How does globalization affect the independence of nations?
The growing unease about the consequences of globalisation has manifested itself in a number of
high-profile protests against international conferences and organisations. In 1999, protesters
fought street battles with the police of Seattle (USA) outside the meeting of the Ministerial
Conference of the World Trade Organization (WTO). Other high-profile meetings of the
International Monetary Fund (IMF), the World Bank and G8 have since provoked similar public
demonstrations. These protests are but the most visible manifestation of an anti-globalisation
sentiment that has spread throughout the world. It is worth considering the main objections that
are being raised against the process of globalisation:
 Distribution of wealth and inequality: One of the most contested questions in the debate on
globalisation is whether it will lead to a more equal or unequal distribution of wealth
worldwide. Proponents of greater economic integration argue that it will stimulate economic
growth in all countries that are opening up their economies, and particularly in those that are
starting out from a lower level of prosperity. The recent economic success of economic
liberalisation in countries such as China and India, which has seen annual growth rates of
between eight and 10 per cent for more than a decade, is seen as an example of what
globalisation and economic reform can achieve. Critics of globalisation point to the serious
economic dislocations that countries experience when they open their economies to
international trade and capital flows. In their view, globalisation allows for a greater
concentration of economic wealth and power in the hands of global corporations and the most
industrialised economies of the North. Cases of economic growth in developing countries in
fact result in greater inequality within those countries, leaving many local communities exposed
57
to the destructive forces of market competition. To some extent, the different perspectives of
proponents and critics of globalisation reflect their different time horizons. The former point
to the long-term growth prospects for all sections of society, while the latter focus on the short-
term dislocations that economic change brings with it. But beyond this, real differences in
opinion persist with regard to the question of what opportunities and threats the spread of
global capitalism produces for workers, local communities and developing countries.
 Loss of national autonomy: A central argument of critics of globalisation is the eroding effect
global integration has on national autonomy, that is the ability of states to set and pursue
independent policy objectives. No country in the world is, of course, entirely autonomous. But
globalisation is seen to enmesh countries in a growing web of transnational links that leaves
them increasingly exposed to global market forces. Critics argue that the resulting power shift
from states to global firms puts pressure on governments to provide an attractive investment
climate for multinationals. Governments are locked into a ‘race to the bottom’ in which they
compete with each other for foreign investment by deregulating the economy and dismantling
welfare states. Proponents of globalisation counter this argument by highlighting the contrary
empirical evidence. The role of the state in industrialised economies has changed little over the
last 40 years. Despite sustained periods of deregulation in the 1980s and 1990s, state spending
as a proportion of GDP has actually increased during that period. The recent financial crisis
has forced governments to reduce public spending again in an effort to cut fiscal deficits but
spending levels will likely remain high, at levels last seen shortly before the financial crisis.
Furthermore, there has been little convergence between the different models of capitalism in
the industrialised world, with central European and Scandinavian countries continuing to rely
on a significantly larger role for the state in the economy than Anglo- Saxon countries.
 Environmental costs: Trade liberalisation and global market integration have been linked to
environmental degradation around the world. Ecologists argue that international trade
promotes an energy-intensive exchange of goods between distant communities that
contributes to global warming through higher fossil fuel consumption, and erodes local and
regional forms of sustainable production and exchange. In that trade fuels higher economic
growth and the spread of unsustainable patterns of production, it acts as a major force behind
the exploitation of natural resources. Advocates of free trade respond by pointing to the
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efficiency-raising effects of international trade that help reduce resource inputs in production.
By extending competition and forcing inefficient companies out of business, trade can be a
force for higher resource-efficiency in the economy. An important condition for reducing the
environmental side-effects of trade liberalisation is, however, that all costs of moving goods
around the world are fully integrated into their prices. An important step in that direction
would be to raise energy prices in transport, be it by air, sea or land, to reflect the so-called
‘environmental externalities’ especially of fossil fuels (e.g. their contribution to global
warming).
As this brief review of concerns over globalisation has shown, global economic integration poses
serious dilemmas for states and societies around the world. Globalisation has changed, and will
continue to change, the nature of international relations. But it is unlikely to lead to the demise of
the nation state. States continue to play a key role in determining how much societies benefit from
globalisation and how well they are protected from its negative consequences. The interaction
between states and global markets thus remains a key focus in the study of GPE.
 In what ways can globalisation be said to be limiting the power of states?
 List the benefits and costs that globalisation has produced for your own country
3.8 The impact of globalization on different kinds of states
 Why is globalization often perceived as a threat in developed countries?
While sceptics knock holes in some of the arguments about the erosion of state power in the face of global
multinational enterprises, other aspects of globalization do constrain all states. In particular, the fact that
billions of dollars can flood in, or out, of a country overnight sets a new constraint on monetary policy
and opens up new vulnerabilities in the financial sectors of all countries. In other words governments have
to be very careful in managing interest rates and managing or floating exchange rates. Equally they need
59
robust domestic banking and financial systems to weather the onslaught or recession of a tidal wave of
capital.
The punishment for poor policy is instantaneous and devastating. Furthermore, as the Asian financial crisis
of 1997 showed, it is not only the culprit country who bears the punishment. The financial crisis in Asia
highlighted the potential vulnerability of all countries to massive inflows and outflows of capital. It also
underlined that some states suffer the impact of globalization more than others.
The Asian crisis highlights that states have different capacities to respond to globalization. Even though
all states in the region were affected by the crisis, their responses suggested that some enjoyed more choice
or `sovereignty’ than others. Indonesia, Thailand and Korea turned to the IMF for assistance conditional
on a raft of policies mostly defined in Washington DC. Meanwhile Malaysia formulated its own policies
of adjustment and imposed policies such as capital controls which were greatly disapproved of in
Washington DC. Although globalists and sceptics treat all states as equal in their arguments about
globalization, it is worth questioning this.
One way to think about the impact of globalization is to distinguish between `strong states’ and `weak
states’. At the extreme end of strong states are those which shape the rules and institutions which have
made a global economy possible: we have already seen the way US policies shaped the creation,
implementation, and breakdown of the Bretton Woods system. A more general description of strong states
is that they can control - to some degree - the nature and speed of their integration into the world economy.
Into this category we might place not only relatively strong industrialized countries, but also developing
countries such as Brazil, Malaysia, China, Iraq, and Iran. In all of these cases, globalization is having a
powerful effect, as is evidenced by the restructuring of national and private industries in industrialized
countries, the past decade of economic liberalization in Brazil, and in a radically different way, through
international coercive interventions in Iraq. Yet at the same time, in each of these countries there are high
protective barriers in important sectors of the economy, and measures such as capital controls or the
regulation of international capital are seriously debated. The capacity of these countries to control their
integration into the world economy is doubtless related to their size, resources, geostrategic advantages,
and economic strength. However, interestingly, it seems also to be related to their national ideology and
the domestic power of the state. One thing that all `strong states’ have in common is that they guard with
equal ferocity their independence in economic policy, foreign policy, human rights and security issues.
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`Weak states’ by contrast suffer from a lack of choice in their international economic relations. They have
little or no influence in the creation and enforcement of rules in the system and they have exercised little
control over their own integration into the world economy. For example, in the aftermath of the debt crisis
of the 1980s, many `weak states’ opened up their economies, liberalized and deregulated, more as a result
of coercive liberalization than of democratic policy choice. In the 1990s, this continued with what an
international economist called `forced harmonization', whereby, for instance, in the case of trade
negotiations on intellectual property, developing countries were coerced into an agreement which transfers
`billions of dollars' worth of monopoly profits from poor countries to rich countries under the guise of
protecting the property rights of inventors' (Rodrik, 1999).
Distinguishing among states according to their capacity to shape and respond to globalization is vital in
analysing the impact on GPE. The example of the international financial system demonstrates that some
states, in particular the United States, are rule-makers in the world economy, while less powerful states
are rule-takers.
3.9 Summary
Globalisation means the flows of ideas, capital, commodities and people across different parts of the
world. It is a multidimensional concept. It has political, economic and cultural manifestations and these
must be adequately distinguished. As a concept, globalisation fundamentally deals with flows. These
flows can be ideas moving from one part of the world to another, commodities being traded across borders
and so on.
The crucial element is the worldwide inter connectedness which is created and sustained as a consequence
of these constant flows. Globalisation has involved greater trade in commodities across the globe as it has
reduced the imposing of restrictions on the imports of one country on another. Economic globalisation has
created an intense division of opinion all over the world. Globlalisation has invited strong criticism all
over the globe. For some globalisation represents a particular phase of global capitalism that makes the
rich richer and the poor poorer. Culturally, they are worried that traditional culture will be harmed and
people will lose their age-old values and ways. It is important to note here that anti-globalisation
movements too participate in global networks, allying with those who feel like them in other countries.
Hence, Globalization has made the world as a small village, and it tends to go further, like wiping all
61
borders among countries and also remove all economic restrictions and hampers, this will hurt small
countries and will be in the interest of big powers.

1. Define globalization.
2. Due to which reason the latest models of different items are available within our reach?
3. Give major factor that has stimulated the globalization process.
4. Have the people played an important role in the struggle for a fair globalization? Give any
instance.
5. Globalization has grown much since 1980s. What trends in politics have been associated with
this growth?
6. What, if anything, is new about globalisation?
7. Why is it argued that globalisation benefits the richer countries more than the poorer
countries?
8. Does globalization have a direct impact on politics?
9. Does globalisation inevitably limit the autonomy of states?
10. In globalization, who wins and who loses? Explain.
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CHAPTER-4: STRUCTURES OF GLOBAL POLITICAL ECONOMY

AND GLOBAL GOVERNANCE
4.1 Introcuction
The global economy is exceedingly complex. Part of this complexity is due to the sheer number of
players: not only are there innumerable market actors, from ordinary workers to multibillion-dollar
transnational corporations, but there are also states and state-based actors as well as other nonmarket actors
such as churches, civic organizations, social movements, and the like. The existence of states, in particular,
means that the global economy is rife with political and jurisdictional divisions and vast power
differentials, structural and otherwise; jurisdictional division and power differentials, in turn, tend to
exacerbate the often-competing interests and concerns of states (and their societies). In this state of
affairs, the potential for discord or serious conflict is ever present. At the same time, virtually all state
actors share a range of common interests and concerns, not the least of which is avoiding serious conflicts
that might lead to economic crises and political instability. Indeed, international organizations function,
in large part, as the main apparatus of global governance: they provide the concrete forum for state-to-
state negotiations, and are key mechanisms for monitoring and enforcing rules. This chapter explores
structures of GPE and the need and relevance of global governace.
4.2 Objectives
 Identify structures of GPE
 Define global governance
 Examine the need for global governance
 Explore the relevance of global governance
4.3 Structures of GPE
GPE is a network of bargains between and among STATES (that deal in power) and MARKETS (that
deal in wealth). These bargains determine the production, exchange and distribution of wealth and power.
The GPE bargains, according to Strange are;
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 Relational Power
• the power of one player to get another player to do something
 Structural Power
• the power to shape and determine the structures of the GPE within which other states, their
political institutions, their economic enterprises and professional people have to operate
 What are global structures?
The previously mentioned structures are the institutions and the “rules of the game” that govern the
behavior of states and markets in the GPE, which together produce, exchange and distribute wealth and
power.
The four global structures are;
• Security
• Production
• Finance
• Knowledge
I. The Security Structure
• The most basic human need
• When one person or group provides security for another, a security structure is created
II. The Production Structure
• The production structure is defined as the sum of all arrangements determining what is produced,
by whom and for whom, by what methods and on what terms.
• Production is the act of creating value and wealth and wealth is closely linked to power.
• The issue of who produces what – for whom – on what terms – lies at the heart of GPE.
• Recent decades have seen dramatic changes in the production structure, with production of certain
high-value items such as automobiles shifting from the USA to Japan and now to other countries,
such as Korea, Mexico, Brazil and China.
• These structural changes affect the distribution of wealth and power in the world.
III. The Finance Structure
• It is the pattern of money flows between and among nations
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• This structure defines that who has access to money, how and on what terms
• Finance structure is a description of how certain resources are allocated and distributed between
and among nations
• In this respect, money is a means, not an end
IV. The Knowledge Structure
• Knowledge is power, knowledge is wealth for those who can use it effectively.
• Nations with poor access to knowledge in the form of industrial technology, scientific discoveries,
medical procedures and communications are at disadvantage relative to others.
• In today’s world, the bargains made in the security, production and finance structures depend on
access to knowledge.
4.4 Governance in the Global Economy
4.4.1 The Need for Governance

 Do you think the global economy needs governace? Why?
The global economy is exceedingly complex. Part of this complexity is due to the sheer number of
players: not only are there innumerable market actors, from ordinary workers to multibillion-dollar
transnational corporations, but there are also states and state-based actors (i.e., international organizations
and institutions), as well as other nonmarket actors such as churches, civic organizations, social
movements, and the like. The existence of states, in particular, means that the global economy is rife with
political and jurisdictional divisions and vast power differentials, structural and otherwise; jurisdictional
division and power differentials, in turn, tend to exacerbate the often-competing interests and concerns
of states (and their societies). In this state of affairs, the potential for discord or serious conflict is ever
present. At the same time, virtually all state actors share a range of common interests and concerns, not
the least of which is avoiding serious conflicts that might lead to economic crises and political instability.
These common interests and concerns, moreover, invariably grow stronger and more significant as cross-
border interdependence and globalization increases. One reason for this is clear: since interdependence
means “your business is my business” and vice versa, more cross-border collaboration becomes a
practical and even necessary part of resolving an increasingly wide range of issues. It is important to
65
add that the chain of causation can move in the other direction as well; that is, economic crises or political
instability can lead to serious conflict between and among states. This is because economic crises tend
to spread—the so-called contagion effect. The contagion effect is particularly pernicious in the absence
of a hegemonic leader, as states, in an effort to protect themselves, typically impose beggar-thy-neighbor
policies, thereby deepening the crisis. The classic example is the 1930s, when economic turmoil led to,
among other things, the rise of Adolf Hitler and one of the most destructive interstate conflicts in history—
i.e., World War II. Clearly, such an outcome is not in the interest of any state.
States’ shared interest in an era of globalization, in sum, suggests that states not only have a reason
for cooperating or collaborating on a variety of issues, but also have an interest in building a strong
framework for mutually beneficial economic activity at the regional, international, or global levels.
Accomplishing this latter task, however, has become potentially more difficult over the decades, as the
growth and deepening of cross-border trade, inter- economy competition, globalized financial flows,
transnational production, and globalization more generally, have created extremely dense and complicated
linkages. These linkages, from a concrete perspective, make cross-border collaboration more difficult,
in part because the topics of negotiation are increasingly more sensitive to questions of sovereignty and
are more subject to politicization. Consider, on this point, an example discussed in chapter 4: agricultural
subsidies for the U.S. farm industry. Agricultural subsidies are deeply embedded in domestic political
processes; more specifically, they reflect the dynamics and pressures of local electoral politics, of
lobbying by agribusiness, of partisan politics, and a host of other primarily domestic factors. Yet, to use
a trite phrase, “local is global”: U.S. agricultural policy is inextricably linked to global agricultural
markets, and to other domestic markets around the world. For the most part, however, U.S. congressional
representatives, in particular, are loath to change their positions on what they view as an essentially
domestic policy issue. And what is true in the U.S. is generally true for other countries as well.
Returning to the main point, the dense and complicated linkages created by increasing cross-border
interdependence make virtually all the world’s economies more interdependent and arguably more
productive and efficient, but they also make them more sensitive and vulnerable to economic
instabilities anywhere in the world. The upshot is fairly clear: to address this growing complexity,
there must be some sort of mechanism for managing the processes and dynamics of globalization to
minimize instabilities, both great and small, that could damage— and even devastate—every state,
society, and market. The type of mechanism that is needed is, not surprisingly, subject to a great deal of
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debate. Some liberals—or perhaps more accurately, some neoliberals—believe that the market
mechanism is sufficient, since, in their view, freely operating markets are not only self-correcting, but
also produce socially optimal results, or at least results that are always superior to a nonmarket
mechanism. (Remember a key lesson from chapter 2: not all liberal economists are sanguine about the
self-correcting power of markets; Keynesians, for instance, believe that government intervention is
sometimes necessary to restore markets to equilibrium.) Most other analysts, however, argue that such a
view is naive, even utopian, especially in a world comprised of sovereign states. After all, as long as the
world remains politically divided, a market-only solution would effectively require all states to give up
their sovereignty to “the market.” And while most states are willing to cede a part of their sovereignty to
markets, very few, if any, are willing to cede all their sovereignty. In fact, no state thus far—including
the most ostensibly liberal ones, such as the United States—has been willing to allow market forces to
completely determine its economic fate. It is clear, then, that any mechanism for organizing and
governing the global economy must continue to include a role, and likely a central role, for states.
But this suggests that governance of the global economy might simply be an extension of state
governance and power—that is, a type of governance in which state actors make and enforce all the rules.
Yet, in the global economy today, states are not the only important (or necessarily the most
powerful) actors. The increasing diffusion of power through the closer and more complex intersection
of the security, finance, production, and knowledge structures in a globalizing world has helped to ensure
that no single actor, or set of actors, is capable of controlling the global economy. It is in this context that
the concept of global governance has emerged. Global governance, in the most general sense, reflects
both the fact that the global economy has grown too complex for any one set of actors to manage, and
the fact that the global economy cannot simply be “left alone.”
4.4.2 What Is Global Governance?

 What do you understand by the term Global Governace?
 What does Global Governace constitutes?
Although there is still considerable debate on what the term global governance means (Dingwerth and
Pattberg 2006), there is growing acceptance of its theoretical and analytical utility. Theoretically, global
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governance is understood as a necessary corrective to traditional theories of international relations (i.e.,

realism and neorealism) that focus almost exclusively on state power. Again, while states are clearly
important, they are just as clearly not all-important. For this reason, it is important to find an approach
that can account for the power and influence of both state and nonstate actors in the global economy.
Analytically, the concept of global governance provides a very useful way of understanding the processes,
particularly since the end of World War II, through which major concerns and issues are being concretely
addressed within the global economy. On this point, consider how Heywood (2011) conceptualizes the
term. He begins with a very broad definition: global governance, as he puts it, is “the management
of global polices in the absence of a central government” (p. 458). Again, this suggests that global
governance might be nothing more than state governance. However, Heywood’s definition goes much
further, as he identifies five key features of global governance:
 Polycentrism. This means that there are multiple centers of authority governing the world economy
and world affairs more generally, with different institutional frameworks (which include
international regimes) and decision-making mechanisms in different issue areas. An important
characteristic of polycentrism is the notion that the multiple centers of authority are horizontally, as
opposed to hierarchically, organized; that is, in polycentrism, a clear-cut hierarchy of power is
difficult, if not impossible to discern (Dingwerth and Pattberg 2006).
 Intergovernmentalism. Recognizes that states and state-based, or international,
organizations, such as the United Nations and the WTO, continue to play an important role in
making, implementing, and overseeing the rules that govern economic, political, and social relations
at the international level.
 Mixed-Actor Involvement. Recognizes that the system of rules that govern economic, political,
and social relations are not just the product of state action, but also the product of action and
activities by nongovernmental organizations, transnational corporations, transnational advocacy
networks, and other elements of a global civil society.
 Multilevel Processes. Unlike traditional conceptions of international relations, where decision
making is limited to the national and international levels, global governance recognizes that decision-
making processes operate through the interactions between and among individual actors, groups, and
organizations at various levels, from the municipal to the global (this conceptualization is akin to
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two-level games, but arguably includes more than two levels).

 Deformalization. Refers to the increasing importance of norms and informal rules of conduct in
governing economic, political, and social relations.
The five features identified above, it is important to emphasize, also tell us what global governance is
not. Most obviously, according to Heywood (2011), it is not “world government”; that is, global
governance is not and does not connote a situation in which a single, overarching political authority is
permanently vested with the power to make and enforce rules for the entire world. The prospect of such
a political authority emerging remains, at best, an extremely distant and unlikely possibility (although,
in keeping with the principles of social constructivism, it is not necessarily impossible). Perhaps the
closest real-world analogue to a world government is the European Union (not the United Nations1), but
the EU is, and will almost assuredly remain, a strictly regionally based organization. While global
governance through a world government is exceedingly unlikely, the world has seen something not
completely dissimilar: global hegemony. Scholars of many (theoretical) strands, as discussed in
previous chapters, agree that hegemony has played an important role in establishing, institutionalizing,
and enforcing rules for the world economy; this is evident in the postwar international financial and
monetary order, and to a lesser extent, in the regime for cross-border or international trade. Still, those
same scholars also agree that hegemony invariably breaks down, and can do so relatively quickly (e.g.,
over a two- or three-decade period). Thus, while the United States may have used its overwhelming
power to lay the groundwork for a liberal postwar order in the few decades following the end of
World War II, that power has gradually and necessarily diminished, meaning that something must replace
it. Moreover, even during the height of its dominance, the idea that the U.S. state single- handedly and
unilaterally governed all aspects of the (capitalist) global economy is, at best, exaggerated. So even while
there is wide agreement that global hegemony has played an important governing role in the world
economy, there is equally wide agreement that hegemony has never operated as a sole governing force.
4.4.3 The Significance and Relevance of Global Governance

 What is international regime?
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An international regime, you should recall, is a set of explicit or implicit “principles, norms, rules,
and decision-making procedures around which actor expectations converge in a given issue-area
(Krasner 1983, p. 1). Regimes, it is important to reemphasize, do not just magically appear. Typically,
they are the product of multilateral state-to-state negotiations, which themselves take place primarily
within international organizations such as the United Nations and the World Trade Organization
(WTO). Indeed, international organizations function, in large part, as the main apparatus of global
governance: they provide the concrete forum for state-to- state negotiations, and are key “mechanisms
for monitoring and enforcing rules” (O’Brien and Williams 2007, p. 385). States engage in international
negotiations and create regimes because they understand that, on many issues and in many areas,
noncooperative or unilateral action is either counterproductive or inimical to their own interests. Even
states that feel disadvantaged by a particular regime may largely abide by its rules because the cost of
not doing so are higher than the costs of participation. This is especially true for poor or developing states,
or those that have traditionally had less power to shape negotiations in their favor. This suggests that the
fruits of global governance are not always, or even mostly, fair or just. Indeed, it is reasonable to say that,
for the regimes established in the early postwar years, they almost assuredly were unfair or unjust
to poor or developing states. Most poor countries today did not even participate in the formation of the
Bretton Woods regimes because they were colonies of major Western powers, and therefore not
independent countries.
Even if global governance has frequently failed to produce fair and just results, there is little doubt
that international regimes are an integral and extremely important part of the global economy. Imagine,
on this point, if the world had proceeded without the frameworks for cross- border trade, finance, and
monetary relations established by the Bretton Woods negotiations. Minimally, there would have been
a much higher degree of both economic and political instability in the international realm; moreover,
it is not unlikely that any one of a number of postwar financial crises could have created the conditions
for large-scale, internecine warfare à la World War II. In this regard, the role of the IMF should be
highlighted. Although subject to a great deal of criticism—some of which is very likely deserved—the
IMF’s increasing power in the global economy is all but impossible to dispute. On this point, it is
important to emphasize that, over the years, the IMF has gradually moved from being a lender of last
resort to playing a central role as a global crisis manager (Momani 2014). This transition was in full swing
by the mid-1980s, as the IMF played a particularly prominent role in promoting policy coordination
70
among developed countries’ currency and exchange-rate systems, especially in negotiations for the Plaza
Accord (1985), the Louvre Accord (1987), and the Brady Plan (1989) (Momani 2014). The IMF’s crisis-
management role was further tested in the 1990s with the Asian financial crisis, and the financial crises
in Russia, Brazil, Argentina, and Turkey. The biggest test, perhaps, was with the global financial crises
that began in 2007–2008. As Momani (2014) puts it, the global financial crisis of the late 2000s “re-
energized the IMF as the provider of ideas, policy coordination, surveillance, and catalytic financing” (p.
543). Moreover, the IMF was given an expanded mandate by the G20 as it was asked to “facilitate and
support the coordination of the macro-economic policies of the world’s pre-eminent economies, and the
accountability of these countries to agree upon norms and policy commitments” (p. 544). The IMF’s role
in Europe was particularly important: during the height of a financial crisis that threatened to break
up the eurozone (the eurozone is the group of 18 European Union member states that have adopted the
euro as their common currency and sole legal tender), the IMF pledged !34 billion (about $44 billion)
to Greece in 2010, as well as another !28 billion in 2012 (IMF 2012). In addition, the IMF also approved
bailout loans to Ireland (2010) and Portugal (2011). All theses loans, it should be pointed out, were
part of a much larger loan package involving a “troika” of institutions; the other two were the European
Central Bank and the European Commission. Still, many consider the IMF’s role to have been crucial, in
part because the IMF “has more say over crisis management than many euro zone members”, and the
managing director of the IMF, Christine Lagarde, is considered a quasi head of state, “whose views
carry more weight than those of elected leaders” (Ewing 2013). Significantly, IMF intervention in
Greece, Ireland, and Portugal also highlighted the institution’s role in shaping the discourse on how to
deal with financial crises. Originally, and not surprisingly, a great deal of emphasis was put on austerity.
But, three years after the loan to Greece, the IMF admitted that austerity might not have been the best
policy choice for Greece (Stevis and Talley 2013). The main lesson is clear: managing international
financial crises is obviously a critical task, and without institutions of global governance, such as the
IMF, it could very well be an unmanageable task.
Crisis management, however, is not the only area in which international organizations and regimes
have played a crucial role. The GATT/WTO, discussed in the next chapter, was instrumental in building
a framework that allowed for a major and generally smooth expansion of cross-border trade for the entire
postwar period. There is no need to repeat the statistics on the growth of cross-border trade here, but it is
worth reiterating that the expansion of trade was part and parcel of a political process in which trade
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barriers were gradually reduced, and new rules, norms, and procedures governing international trade
were created and institutionalized, first through GATT, and then through the WTO. One of the most
important creations was the dispute settlement mechanism, which was used to adjudicate over 450
disputes between the establishment of the WTO in 1995 and 2013 (Hoekman 2014). The long-standing
deadlock in WTO negotiations (on the Doha Development Agenda)—which finally saw a breakthrough in
December 2013 after more than a decade In sum, then, the global trade regime that was created through
GATT and the WTO has provided a strong framework for countries to exchange trade policy
commitments; it has also served an important role in establishing an effective mechanism through which
those commitments can be enforced (Hoekman 2014). In this regard, the international trade regime has
clearly contributed to the dramatic and unprecedented expansion of wealth and prosperity on a global scale.
However, more wealth, even immense wealth, does not necessarily translate into optimal
outcomes for everyone, or even for the majority of the world’s population. There are still many
countries and more than one billion people living in abject poverty—and billions more living in less
severe but still serious poverty, and in relative poverty. There are still hundreds of millions of hyper-
exploited workers, and severe inequities between the haves and the have-nots. There is still child slavery
and forced labor. There are still growing environmental problems, primarily the product of
economic activity, some of which could have catastrophic effects. More broadly, too, “development”
remains a brightly burning issue.
4.4.4 Global Governance: Beyond the State

Arguably, all the aforementioned issues (as well as others) cry out for action and resolution, so a key
question is, can they be resolved? There is no simple answer. But any resolution will minimally, and
perhaps necessarily, require broad-based collective state action. In a world that is divided by political
boundaries and characterized by the absence of an overarching central government, states (and state-
based organizations) remain—for good or bad—the locus of rule-making and rule-enforcing power.
At least for the foreseeable future, then, there is simply no alternative or substitute for states. At the
same time, states are often an obstacle, and sometimes the primary obstacle, to effective action on
problems or issues that cross national boundaries. This is especially the case for the most powerful states,
such as the United States, which are in the best position to ignore or challenge international agreements
that do not fully represent their national interests and concerns. (It should be noted that, from the Marxist
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viewpoint, the notion of a state having a national interest is highly debatable. In Marxist analysis, scholars
assert that a state’s interest is primarily a reflection of the interests of dominant class actors, especially
transnational corporations.)
Consider, for example, the U.S. policy on global warming: the United States was the only major country
that never ratified the Kyoto Protocol on climate change (although one country, Canada, formally
withdrew from the agreement in December 2012 after it had ratified the treaty in 2002; significantly,
the Canadian government based its decision, in part, on the fact that the U.S. had not agreed to abide
by the terms of the treaty [“Canada to Withdraw from Kyoto Protocol” 2011]). The U.S. refusal
to ratify the Kyoto Protocol, it is important to note, was primarily justified on economic grounds:
because China was not obligated, under the terms of the agreement, to reduce greenhouse emissions to
the same extent as the United States, U.S. politicians argued that American industry would be put at a
serious competitive disadvantage. Indeed, even before the protocol was signed, the U.S. Senate pledged
not to ratify the agreement if it did not include commensurate mandates for large developing countries
(China being the main target). And though President Clinton did sign the agreement, the Senate held fast
to its promise; when George W. Bush took office, the U.S. withdrew its signature (Hoffman 2014). Bush,
too, consistently reiterated, even parroted, the concerns of the U.S. Senate. In a speech he made in April
2008, for example, he justified his administration’s position by asserting, in part, that “the Kyoto Protocol
would have required the United States to drastically reduce greenhouse gas emissions. The impact of this
agreement, however, would have been to limit our economic growth and to shift American jobs to other
countries—while allowing major developing nations to increase their emissions” (Bush 2008). All of
this suggests that U.S. policy was not just driven by the state, but by corporate actors as well (a point that
Marxist analysts would certainly highlight).
For other global problems, such as poverty, labor exploitation and child slavery, human rights abuse,
and the like, many states simply do not have a compelling reason—i.e., a national interest—to act at
all, in the absence of significant exogenous pressure. (Exogenous pressure refers to pressure from
outside the state itself, but not necessarily from outside a country. Thus, pressure from domestic groups
within a particular country is exogenous to the state, just as pressure from nondomestic groups or
organizations can be considered exogenous.) Global governance, in this regard, becomes an even
more relevant process, as exogenous pressure, or more specifically, the impetus for state action, must
often come from the nonstate level and from nonstate actors. Most frequently, the nonstate actors are
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transnational organizations, a somewhat nebulous catch-all category that is comprised of nonstate and
nonmarket (e.g., corporate) actors. Included under the label of transnational organizations are churches
(the Roman Catholic Church is a particularly prominent example2), other NGOs

(nongovernmental organizations), transnational social movements, some think tanks (e.g., the
Heritage Foundation and the Brookings Institution), and large charitable foundations (such as the
Ford, Bill and Melinda Gates, and Rockefeller foundations). “Today”, as Marshall (2014) puts it,
“there are many thousand transnational organizations . . . that operate in every sector and virtually every
country worldwide” (p. 573). Given their growing presence, it is important to consider the impact of
transnational organizations on global governance.
In addition to their sheer numbers, though, examining the impact of transnational organizations (TNOs)
is useful for a less obvious reason: unlike state and market-based actors, TNOs typically pursue objectives
that cannot be described as essentially self-interested. Whether their focus is on poverty, human rights,
the global environment, gender equality, disease prevention, education, or democracy, these actors
generally advocate for broad-based social transformation and the global good. It should be emphasized,
though, that definitions of “the global good” vary widely. On economic issues, in particular, there are
huge variations. For instance, some nongovernmental organizations, such as the Cato Institute, might
be categorized as laissez-faire liberalizers (Armijo 2005). Laissez-faire liberalizers, as the name implies,
advocate for free global capital markets as way to maximize efficiency, which in turn brings the greatest
benefit to the greatest number of people. On the other end of the spectrum are antiglobalizers, some of
whom oppose capitalism in general, but are primarily focused on reining in the free market. “All
antiglobalizers”, according to Armijo (2005), “are suspicious of free trade, multinational corporations,
and international financial flows” (p. 282). Thus, for these two groups, their definition of the global good
is exactly opposite: laissez-faire liberalizers see the global good as a world in which markets are
completely free, while antiglobalizers see the global good as a world in which capitalist markets are
tightly constrained, or even eliminated.
4.5 Conclusion
Analytically, the concept of global governance provides a very useful way of understanding the processes,
particularly since the end of World War II, through which major concerns and issues are being concretely
addressed within the global economy. Even if global governance has frequently failed to produce fair and
74
just results, there is little doubt that international regimes are an integral and extremely important part of
the global economy. Imagine, on this point, if the world had proceeded without the frameworks for cross-
border trade, finance, and monetary relations established by the Bretton Woods negotiations. Minimally,
there would have been a much higher degree of both economic and political instability in the
international realm; moreover, it is not unlikely that any one of a number of postwar financial crises could
have created the conditions for large-scale, internecine warfare à la World War II. In this regard, the role
of the IMF should be highlighted. Although subject to a great deal of criticism—some of which is very
likely deserved—the IMF’s increasing power in the global economy is all but impossible to dispute. On
this point, it is important to emphasize that, over the years, the IMF has gradually moved from being a
lender of last resort to playing a central role as a global crisis manager.
4.6 Self –check Questions
1. One of Mao Zedong’s famous quotes is, “Political power grows out of the barrel of a gun.” In this
quote, Mao was suggesting that military power is the only type of power that matters in the world.
Is this really the case? How might you argue that other forms of power are equally important,
especially in the contemporary period of globalization?
2. What is structural power?
3. Why is it important to understand structural power when analyzing the international or GPE?
4. What are some of the key international institutions in the GPE?
5. What happens when international institutions lack legitimacy, or are too weak to be effective? On
this last question, consider how a lack of legitimacy and effectiveness may have allowed the
aggressive economic nationalism in the 1930s to lead to World War II.
6. Is global governance simply another term for state governance? Explain.
7. Does global governance imply world government? Explain.
8. Does global governance actually describe what is happening in the global economy today?
9. While global governance is clearly not a panacea, some of the most compelling global
problems—e.g., poverty, child slavery, and the abuse of human rights—cannot be resolved in its
absence. Why?
10. What lessons about global governance can we derive from negotiations over the MAI (Multilateral
Agreement on Investment)?
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CHAPTER-5: THE INTERNATIONAL TRADE SYSTEM

5.1 Intoduction
International trade existed long before the modern capitalist world economy came into existence. It plays
a vital part in supplying a nation with the goods that it either cannot produce (e.g. certain natural
resources) or that it cannot produce as efficiently and cheaply as other nations (e.g. because of the lack
of technology). Trade is thus a simple economic necessity, and in today’s world it seems impossible to
imagine a situation of autarkic economies not connected with each other through trade. Yet, trade is also
an eminently political issue, raising questions about which goods can and should be traded (e.g. arms,
endangered species), how much dependence on foreign suppliers is acceptable (e.g. energy, food), and
how much state intervention is needed to direct trade flows. It should therefore come as no surprise that
trade has always been at the centre of the politics of international economic relations. The aim of this
chapter is to consider the evolution of the international trading system and the recent challenges the World
Trade Organization has faced. It explores the meaning, history, and regulation of international trade.
5.2 Objective
By the end of the chapter, you should be able to:

 Explain What is meant by International Trade
 Describe How the global Trade has evolved over time
 Explore How trade is regulated in the contemporary world
 Explain the differences between liberal and mercantilist perspectives on international trade
 Discuss the GATT’s key principles and its nature as a multilateral negotiation forum
 Assess the contemporary challenges that characterise the WTO’s current agenda and the Doha
Round.
5.3 Perspectives on International trade
From the sixteenth through the eighteenth centuries, there were no international trade rules as we know
them today. Early European states aggressively sought to generate trade surpluses as a source of wealth
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for local producers, for royalty, and later for the bureaucratic state. To help local industries get off the
ground, leaders discouraged imports so that people would have to buy locally produced goods.
Mercantilists used trade to enhance their wealth, power, and prestige in relation to other states. In their
fabulous collection of vignettes about trade since the 1400s, historians Kenneth Pomeranz and Steven
Topik point out that states often adopted a mix of mercantilist, imperialistic, and free-trade policies to
advance their interests, depending on their level of economic development and changes in technology.
They argue that although in theory free trade should benefit all countries, there are virtually no examples
of successful industrialization with ‘pure’ free trade (or for that matter with pure self-sufficiency.
The economics and politics of trade has been one of the most contentious areas of debate between different
schools of GPE. Even today, trade liberalisation continues to be a controversial aspect of the globalisation
debate. It is important to outline the key arguments in this long-standing debate before we turn to the
evolution of the international trading order over the last half century.
5.3.1 Mercantilists
 What is the basic argument of Mercantilists on international trade?
Mercantilists in the sixteenth and seventeenth centuries saw international trade essentially as a ‘zero-
sum’ game in which one nation’s gain was another nation’s loss (see Chapter 2). Based on the assumption
that wealth was a fixed quantity that was measured in precious metals, mercantilists argued that trade
served the purpose of acquiring wealth in the form of bullion (i.e. silver and gold). A nation stood to grow
richer if it managed to export more than it imported, and the role of the state was therefore to manipulate
international trade to achieve a favourable trade balance. Mercantilists advocated the use of protectionism
and even military force to influence trade flows. To be sure, they were not opposed to trade as such but
sought to promote ‘good’ forms of trade (exports and imports of essential goods) and discourage ‘bad’
forms of trade (mainly imports of so-called luxury goods). Given the ‘zero-sum’ perspective on
international economic exchange, it should come as no surprise that mercantilists viewed trade as a
potential source of international conflict. Alexander Hamilton and Friedrich List challenged what became
accepted economic liberal doctrine about trade. From their mercantilist perspective, free-trade policies
were merely a rationale for England to maintain its dominant advantage over its trading partners on the
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Continent and in the New World. For Hamilton, supporting U.S. infant industries and achieving national
independence and security required the use of protectionist trade measeures. Likewise, List argued that
in a climate of rising economic nationalism, protectionist trade policies such as import tariffs and export
subsidies were necessary if Europe’s infant industries were to compete on an equal footing with
England’s more efficient enterprises.11 More importantly, List maintained that in order for free trade
to work for all, it must be preceded by greater equality between states, or at least a willingness on their
part to share the benefits and costs associated with it.
Many neomercantilists today challenge the assumption that comparative advantage unconditionally
benefits both or all of the parties engaged in trade. People employed in different industries or sectors of
any economy can be expected to resist being laid off or moving into other occupations as comparative
advantages shift around to different nations. In many cases, states can intentionally create comparative
advantages in the production of new goods and services simply by adopting strategic trade policies such
as provision of cheap loans and export subsidies to domestic producers. New technologies and other
resources such as cheap labor can easily help one state’s new industries gain a comparative (competitive)
advantage over the industries of another state. This has been the case for farming and auto, steel, and
textile manufacturing.
Moreover, it is a political reality in democratic nations with representative legislatures that the state is
expected to protect society and its businesses from the negative effects of trade. When many domestic
groups and industries appeal to the government for protection, they are likely to receive help because
politicians fear the wrath of constituents who face layoffs or competition from cheaper imports. In many
cases, protection is a built-in feature of many democratic systems. Those who benefit from a small savings
on the price of an imported article of clothing or new car due to free trade, for instance, usually do not
speak as loudly as displaced workers who seek protection from free trade. Trade protectionism is also
associated with a fear of becoming too dependent on other nations for certain goods, especially food
and items related to national defense. For example, Japan and China have worried that too much
dependency on other states for energy imports can lead to economic or political vulnerability. Finally,
some neomercantilists are concerned that the protectionist trade policies of a regional trade alliance
such as the North American Free Trade Agreement (NAFTA) or the EU (discussed below) which are
designed to help local industries might intentionally or unintentionally disrupt another country. As many
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mercantilists see it, economic liberal theories about trade cannot account adequately for the real political
world in which states constantly manipulate production and trade.
5.3.2 Economic Liberals

Liberals in the eighteenth century criticised mercantilists for misrepresenting the nature of trade and for
ignoring the dynamic benefits from it. Adam Smith argued forcefully that all nations stood to gain from
trade, as it allowed for a greater division of labour and thus stimulated the productive powers of every
economy.
 What is the basic argument of liberals on international trade?
Trade was seen by liberals as a ‘positive-sum’ game in which nations could improve their own prosperity
and the welfare of the world as a whole. Moreover, because of the mutual advantage to be had from free
trade, greater economic openness would foster closer ties and understanding between societies, and reduce
tension in international relations. Some liberals in the nineteenth century even went as far as arguing that
free trade would help to eradicate war.
Although an emerging consensus among economists supported the free trade doctrine, the debate between
mercantilists and liberals continued well into the twentieth century. Neo-mercantilists identified cases
where state intervention in trade could benefit the domestic economy, for example through the use of
protectionism to nurture so-called infant industries. In response, neo-liberals argued that industries that
benefited from trade protectionism would fail to become competitive and that states would find it difficult
to eliminate trade barriers once they had erected them.
Many economic liberal ideas about trade are rooted in the late eighteenth- and early nineteenth-century
views of Adam Smith and David Ricardo, who were reacting to what they viewed as mercantilist abuses
at the time. They proposed a distinctly liberal theory of trade that dominated British policy for more than
a hundred years and is still influential today. Smith, of course, generally advocated laissez-faire policies.
Ricardo went one step further; his work on the law of comparative advantage demonstrated that free trade
increased efficiency and had the potential to make everyone better off. It mattered little who produced the
goods, where, or under what circumstances, as long as individuals were free to buy and sell them on open
markets.
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 What are laws of comparative advantage?
The law of comparative advantage suggests that when people and nations produce goods, they give up
other things they could have produced but that would have been more expensive to make than the goods
they actually created. This is what economists call opportunity cost. The law of comparative advantage
invites us to compare the cost of producing an item ourselves with the availability and costs of buying it
from others, and to make a logical and efficient choice between the two. In Ricardo’s day, the law of
comparative advantage specified that Great Britain should import food grains rather than produce so much
of them at home, because the cost of imports was comparatively less than the cost of local production.
For many economic liberals in the late 1800s, the world was supposedly becoming a global workshop
where everyone could benefit from free trade, guided by the invisible hand of the market. Today, lightly
regulated trade is also an integral part of other policies associated with the Washington Consensus
promoted by the United States and other members of the World Trade Organization (WTO). A large (but
far from universal) consensus exists that the benefits of a liberal, open international trade system far
outweigh its negative effects.
5.3.3 Structuralist
A different argument against free trade began to emerge in the second half of the twentieth century,
suggesting that the existing trade order benefited the rich countries at the expense of the developing
world. Inspired by dependency theory, this perspective pointed to the unequal trade relations, with
developed economies exporting high- value manufactured goods in exchange for low-value primary
products from the South. More recently, critics of globalisation have argued thatthe trade system of the
GATT/WTO systematically benefits the countries of the North where protectionism in agriculture
continues to disadvantage developing country producers and thus thwarts developmental efforts in the
South.
Structuralists label the early mercantilist period as one of classical imperialism. Economic problems in the
major European powers drove them to colonize underdeveloped regions of the world. Mercantilist policies
that emphasized exports became necessary when capitalist societies experienced economic depression.
Manufacturers overproduced industrial products, and financiers had a surplus of capital to invest abroad.
Colonies served at least two purposes: they were places to dump goods and places where investments
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could be made in industries that profited from cheap labor and access to plentiful (i.e., inexpensive)
natural resources and mineral deposits. Trade helped imperial countries dominate and subjugate the
people and economies of the colonized territories.
 What do classical imperialism refer to?
Lenin and other Marxist theorists argued that national trade policies mostly benefited the dominant class
in society—the bourgeoisie. During the early colonial period, underdeveloped regions of the world
remained on the periphery of the international trade system, providing European powers with primary
goods and minerals. Toward the end of the nineteenth century, capitalist countries used trade to spread
capitalism into their colonies. Lenin attempted to account for the necessity of states with excess finance
to take colonies in order to postpone revolution at home. The “soft” power of finance as much as the
“hard” power of military conquest helped to generate empires of dependency and exploitation.
Structuralists argue that industrializing core nations converted colonies’ resources and minerals into
finished and semifinished products, many of which were sold to other major powers and back to their
colonies. Although particular sectors (enclaves) in core economies developed, peripheral nations and
regions became underdeveloped after being linked with industrialized nations through trade.
Immanuel Wallerstein stresses the linkages between core, peripheral, and semiperipheral regions of the
world. Today, patterns of international trade are determined largely by an international division of labor
between states in these three regions that drives capitalism to expand globally. The integration of global
markets and free-trade policies associated with globalization are extensions of the same economic motives
of imperial powers of the nineteenth and twentieth centuries.
 Discuss the linkages between core, peripheral, and semiperipheral regions of the world.
In sum, each of the three GPE perspectives on trade contains a different ideological outlook. Today, a
majority of academics and policy officials still favor an international trade system that is supposed to be
progressively liberalizing and opening up. And yet, as we will see, most nations tend to behave in a
mercantilist fashion and adopt protectionist measures when their national interests are threatened. Some
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developing and industrialized nations are concerned that trade may be more exploitative than mutually
advantageous.
 To what extent is the debate between mercantilists and liberals on international trade still
relevant in today’s GPE?
5.4 The Creation of the GATT
To assess the different claims made in the contemporary debate on trade, it is first important to review the
history and nature of the current trading order. The origins of the current trading system lie in the
immediate aftermath of the Second World War, when the leaders of the Allied forces sought to establish
a new international economic order. The challenge was not only to overcome the economic distortions of
the war but also to remove the barriers to trade and capital movement that had been created in the interwar
years. Monetary relations were put on a new, more stable, foundation in the form of the Bretton Woods
system, which was based on fixed exchange rates with the aim of facilitating free capital flows. A similar
attempt was made to create an international regime with a strong organisation at its heart to restore
international trade. But the agreement on the International Trade Organization (ITO) failed to win support
in the US legislature and was consequently shelved. Instead, a much more limited agreement on trade
liberalisation in manufactured goods, the General Agreement on Tariffs and Trade (GATT) of 1948, came
to form the institutional home for the new international trade order.
The GATT is a multilateral treaty, not an international organisation, which provides a forum for successive
trade liberalisation talks in the post-war era. It lays down principles and norms for trade policy, but the
authority to take decisions on tariff reductions lies firmly with the contracting parties (i.e. the member
states). Its ultimate aim has been to reduce trade barriers, focusing originally on tariffs on manufactured
goods. The contracting parties of the GATT have always been keen to retain some degree of control over
trade policy, and built into the agreement several safeguard provisions and exceptions from the free trade
principle. The GATT never aimed at creating a world of free trade. Instead, the GATT was envisaged as
an ongoing attempt at lowering trade barriers through reciprocal agreements in a multilateral setting. It is
this principle of reciprocity that stipulates that tariff reductions are negotiated on a ‘give- and-take’ basis,
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which makes GATT trade talks often look more like a form of mercantilist bargaining than enlightened
free trade practice.
 What are most important principles?
The GATT’s most important principles are reciprocity, transparency and non-discrimination. Reciprocity
is present in the system of negotiated, multilaterally balanced, agreements on trade liberalisation. All
parties are to conduct their trade relations and trade interventions in as transparent a way as possible, so
as to avoid hidden forms of protectionism and facilitate multilateral negotiations on reducing trade
barriers. The principle of non-discrimination ensures that all members of the GATT can enjoy the benefits
of trade liberalisation in the same way, irrespective of their economic size and power. Two variants of
this principle exist in Articles I and III of the agreement respectively:
 the most-favoured nation (MFN) principle, which states that the rights and obligations given to
one party extend to all parties of the agreement
 the principle of national treatment, which obliges all parties to treat domestic and foreign
producers in the same manner (i.e. not discriminate against foreign competitors to help domestic
firms).
At the same time, the GATT recognises that countries may wish to protect certain areas and industries
from foreign competition. When a country experiences a sudden influx of imports that cause substantial
harm to a domestic industry, Article XIX of the GATT allows this country to take safeguard measures in
the form of tariffs or import restrictions, provided that this is done in a non-discriminatory way and that
compensation is paid to those foreign companies affected by the measures. Other exemptions concern the
exclusion of agriculture from the GATT’s early trade liberalisation efforts, trade restrictions for human
health or environmental reasons (Article XX) and the use of regional trade agreements and preferential
rules for developing countries.
The many exceptions that are allowed under the GATT – and under the Bretton Woods system – have
led some analysts to argue that the post-war international economic order embodied a form of
‘embedded liberalism’ rather than a return to nineteenth century-style classical liberalism. John Ruggie’s
notion of embedded liberalism points to the fact that the United States and its allies had to ensure that
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the move towards opening up international markets did not harm the domestic effort to rebuild war-
torn economies and the welfare state. A compromise was therefore needed between the liberal ideal of
creating an open international order and the need for a sufficiently high degree of state intervention in the
domestic economy to create a stable and legitimate international order.
 Some observers argue that the GATT’s compromise of embedded liberalism has come under
threat. Why might this be the case?
 What role, if any, did developing countries play in the creation and evolution of the GATT’s
central norms?
In an illustration of the difficulties inherent in steering governments away from Mercantilism, even with
the scale of hegemony that the US enjoyed in 1944 what was intended to be the third institution of Bretton
Woods, the International Trade Organization, failed to get off the ground owing to the number of
governments who sought special exceptions to far-reaching plans to eradicate protectionist measures. In
place of the International Trade Organization a lesser non-institutional arrangement was agreed based on
the 1947 General Agreement on Trade and Tariffs (GATT) Treaty.
Central to GATT was the resurrection of an old idea for facilitating trade which the British had used in
their nineteenth century hegemony and had periodically been employed between European powers as far
back as the fifteenth century, the Most Favoured Nation principle. The Most Favoured Nation principle is
an undertaking between two governments that, in granting trade concessions to each other (e.g. mutually
reducing tariffs on certain goods), they also agree not to grant even greater concessions to another country.
Hence if State A and State B have a Most Favoured Nation agreement they are both committed not to then
conclude a new deal with even greater concessions to States C or D, no matter how mutually beneficial it
may be. The point of this principle is to give some order and openness to international trade and avoid the
otherwise likely endless series of undercutting deals and ensuing rows. Also, in terms of liberalising trade,
if Most Favoured Nation agreements multiply between states, this will see tariffs start to be cut on a multi-
lateral basis. Hence the early ‘Rounds’ of GATT- periodic phases of negotiation amongst parties to the
Treaty over new initiatives- were dominated by the extension of Most Favoured Nation agreements before
then moving on to get agreement on the phase out of tariffs and other forms of government protectionism.
The key features of the nine GATT Rounds are summarized in box 5.1
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Box 5.1 GATT / WTO Rounds

Round Number of states Key agreements
 1947 Geneva 23 Extension of the use of Most Favoured Nation Agreements
between parties. Tariff cuts between some parties.
 1949 Annecy 13
 1951 Torquay 38
 1956 Geneva 26
 1960-1 Dillon 26
 1964-7 Kennedy 62 35% average cut in industrial tariffs.
 1973-9 Tokyo 102 25% average cut in industrial tariffs.
Principle of exempting Less Developed Countries from
Most Favoured Nation obligations established. Rules on Non-
Tariff Barriers introduced for the first time (on government subsidies).
 1986-93 Uruguay 123 40% average cut in industrial tariffs.
Some (limited) measures to reduce agricultural
protectionism introduced for the first time. Creation of the WTO.
 1999- Doha 153 Impasse over liberalization of agricultural trade.
On the face of it GATT has been hugely successful in liberalizing international trade. In 1947 the average
tariff its members were imposing on industrial imports was 38% but, by the end of the Uruguay Round, it
was only 4% and covering most countries in the world. During this period international trade grew twenty-
fold. By 1995 globalization and the end of the Cold War prompted the International Trade Organization
idea, abandoned half a century earlier, to be revived in the guise of the World Trade Organization (WTO).
The WTO absorbed the 1947 Treaty and regime and added to it measures committing its members not to
violate the rules and mechanisms to enforce decisions lacking under the GATT regime. Hence the WTO
became widely referred to as ‘GATT with teeth’. The ambition of the new institution was evident from
the words of its first leader in a speech to United Nations Conference on Trade and Development after the
close of the Uruguay Round: “(the WTO) is no longer writing the rules of interaction among separate
national economies. We are writing the constitution of a single global economy” (Renato Ruggiero1996).
However, despite unprecedented international political efforts to liberalize international trade, the
contemporary global system is far from being entirely free and government recourse to Mercantilist
measures is still regularly seen. Whilst progress on reducing industrial tariffs may be impressive the
liberalization of the trade in food and textiles is far more limited. In striking contrast to the figures for
industrial protection, the tariffs imposed on agricultural imports are at an average of 30% in the European
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Union and nearly 33% in Japan (Josling & Hathaway 2004). Steps were taken to tackle agricultural
protectionism in the Uruguay Round with the Europeans agreeing to cut export subsidies (unpopular in
the rest of the world for artificially reducing high EU prices so that their surpluses could be ‘dumped’ on
the international market). Further liberalization concessions could not be won, due to the political
sensitivity attached to protecting farmers in some EU states and particularly France, but the subject was
now on the table and the principle of more significantly freeing up this area of commerce was agreed to
for the next Round. The Doha Round has, however, proved more intractable than any of its predecessors
and agricultural trade remains largely as unfree as it ever was, with particular implications for Less
Developed Countries whose economies tend to be based on food rather than industrial exports.
In addition to the issue of agricultural protectionism, over the course of the GATT/WTO era there have
emerged so many exceptions to the Most Favoured Nation principle that some posit that industrial trade
is not as free as the tariff reduction figures would suggest. It was agreed upon in the 1947 Treaty that
members forming Trade blocs which freed up trade between them could be exempted from the Most
Favoured Nation principle (ie, they could give greater concessions to their trade bloc partners than to their
‘Most Favoured Nation’s). At the time this was not all that significant, since there were very few trade
blocs, but the proliferation of these arrangements is such that today all WTO members bar Mongolia are
in a regional free trade area and most are simultaneously members of several. Whether this phenomenon
is good or bad for the cause of freeing up international trade is hotly disputed. Some see trade blocs as a
positive development for liberalization since they are, after all, freeing up trade and so can be seen as
stepping stones towards global free trade. Others, however, voice concern that Trade Blocs are detrimental
to global free trade since they produce ‘trade diversion’ by increasing trade amongst their own members
but at the expense of trading with the rest of the world. The European Union, for example, has greatly
facilitated flows of trade amongst its members but this has been accompanied by those states’ trading less
with countries outside of the EU. Hence, although it is indisputable that there is more trade then ever in
the world some contend that this is misleading since the logic of the invisible hand and comparative
advantage are only really being applied at the regional rather than global level.
A further exception to the Most Favoured Nation principle was established in the Tokyo Round by
allowing Less Developed Countries preferential access to developed country markets. The intention of
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this was to help their infant economies grow by giving them some protection from competition with
stronger economies but has also sometimes proved controversial. During the ‘banana wars’ of the 1990s,
for example, the US government complained that the EU was using this principle as a means of capturing
the fruit exports of Caribbean ex-colonies.
An additional complication in regards to freeing up international trade is that there is more to protectionism
than tariff-cutting but these ‘Non-Tariff Barriers’ are for more difficult to legislate for. Quotas and
subsidies have come to be restricted by GATT but such measures tend to be harder to implement than
tariffs since they are less explicit and more easily disguised than a tax. Protectionism through creating red
tape is harder still and governments have taken to ingenious measures to seek to protect domestic industries
in this way. In the 1990s Japan’s government defended unique national standards for the construction of
skis on the basis that Japanese snow was different than that found in the rest of the world. Hence we see
the central dilemma of achieving free international trade. Strong domestic pressures will often be exerted
on governments to bail out or protect domestic jobs and industries from foreign imports, whilst the
realization of global collective goods is rarely prominent in the demands made by the public of the officials
who represent them.
5.5 Trade liberalisation under the GATT and the rise of the ‘new protectionism’
The compromise of embedded liberalism in the GATT allowed for an unprecedented level of trade
liberalisation after the Second World War, through successive rounds of trade talks. The GATT system
proved to be a great success both in terms of driving down tariff levels for manufactured goods and in
terms of attracting a growing number of members. GATT negotiation rounds became a regular feature on
the international diplomatic calendar, with the Kennedy Round (1963–67) achieving average tariff cuts of
35 per cent for over 60,000 internationally traded products. At that time, the major industrialised countries
experienced average economic growth rates of four per cent per year but trade volume grew by eight per
cent per year.
But maintaining the momentum in trade liberalisation proved to be difficult. The relative success in
reducing tariffs on manufactured goods contrasted with the failure to agree a reduction of trade barriers in
areas outside the GATT’s original remit. Agriculture was one of the most controversial areas where GATT
rules did not apply. As global economic integration proceeded, the GATT’s inadequate rules for trade in
services and international investment also gave rise to concern. The Kennedy Round had also failed to
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deal with the growing use of non-tariff barriers, and with the onset of a prolonged economic crisis in the
1970s, it seemed as if support for the GATT was beginning to wane. Yet, with hindsight we know that
the GATT’s inbuilt flexibility and gradualist approach to multilateral negotiations helped to overcome the
difficulties of the 1970s.
The conclusion of the Uruguay Round in the early 1990s signalled a renewed consensus among the major
industrialised countries to push ahead with a widening and deepening of the GATT’s trade liberalisation
agenda.
One of the most intricate issues that came to the fore during the economic disturbances of the 1960s and
1970s was the rise of the so-called ‘new protectionism’. The economic difficulties that brought down the
Bretton Woods system, and that were further aggravated by two oil crises in the 1970s, created renewed
incentives for countries to fall back on protectionist practices. External economic shocks and inflation
combined with a stagnant economy (‘stagflation’) posed severe challenges to many of the major industrial
sectors in the North. The economic success of Japan and other East Asian countries also increased the
pressure on Western governments to shield their economies from the new competitive pressures. Tariffs
having been removed from the protectionist toolbox, governments resorted to non-tariff barriers (NTBs)
to keep out unwanted competition from abroad. Such NTBs comprised a wide range of instruments:
voluntary export controls that set a quantitative limit on imports from certain countries; government
procurement policies that favoured domestic producers; or national standards (e.g. in the area of health,
consumer protection and environment) that discriminated against foreign producers. The key problem with
such measures has been that they lack the transparency that the GATT requires, which complicates the
task of multilaterally agreeing on a reduction of NTBs; and they erode the boundary between what can be
considered a legitimate domestic instrument of regulation and what foreign competitors perceive as a
hidden form of protectionism.
In the end, the GATT survived the economic disturbances and renewed protectionist pressures of the 1960s
and 1970s. The Tokyo Round (1973– 79) made a first, though incomplete, attempt to deal with non-tariff
barriers. But the major breakthrough came with the Uruguay Round in the 1980s, by which time a renewed
multilateral consensus on the need for trade liberalisation had swept away the doubts and threats of the era
of the new protectionism. Why was it possible to avert a deeper crisis for the GATT? With hindsight, it is
clear that the major industrialised countries had maintained their support for the GATT’s trading order
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despite the growing domestic pressure for protectionism. Jagdish Bhagwati (1988) suggests that resorting
to NTBs may have been a necessary means of ‘appeasing’ domestic interest groups and allowing for a
more gradual adaptation to the new competitive environment in the global economy. But as Helen Milner
(1988) argues, the balance between nationalist industries favouring protectionism and internationalist
industries supporting free trade had shifted sufficiently in favour of the latter by the 1970s to allow the
GATT to survive. Unlike in the 1930s, when the rise of protectionism contributed to the collapse of the
international economic order, global economic integration had progressed sufficiently in the post-war era
to withstand economic shocks and structural shifts in competition.
 Which non-tariff barriers are still widely used by the major trading nations? Can you think of
recent examples?
 What reasons may lead companies to support either trade protectionism or trade liberalisation?
5.6 From the creation of the WTO to the Doha Round

The Uruguay Round, which lasted from 1986 to 1993 and came into force in 1995, produced a 22,000-
page treaty with the broadest coverage of trade issues ever in the history of the GATT. The Contracting
Parties signed 29 separate accords, covering areas such as agriculture, textiles, services, intellectual
property rights and investment. Tariff levels on most manufactured goods were reduced to only a few
percentage points, thus making them insignificant for most industrialised countries. Economists estimated
that the achievements of the Uruguay Round would result in an increase of global welfare by 2002 in the
region of $270 billion.
Apart from widening the trade agenda, the Uruguay Round’s lasting achievement was a deepening of trade
rules through the creation of the World Trade Organization (WTO) and a binding dispute settlement
mechanism. The WTO is a fully-fledged international organisation that puts the GATT and its associated
trade agreements on a more comprehensive and permanent footing. It serves as an umbrella organisation
for all trade rules and obligations created by the member states. Through the newly introduced Single
Undertaking, all trade rules are now applicable to all member states, irrespective of their level of economic
development (with some minor exceptions). This is an important development as it reverses a previous
trend that had granted developing countries preferential treatment under the GATT, which included
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asymmetrical rights and obligations as enshrined in the principle of Special and Differential Treatment
(SDT).
One of the key institutional innovations of the WTO is the dispute settlement mechanism with independent
panels that adjudicate trade disputes. Whereas the GATT’s dispute settlement procedure allowed for long
delays in the panels’ proceedings, the outcomes of which were not legally binding unless both sides of a
dispute accepted the ruling, the Uruguay Round agreement built on this procedure and strengthened it in
several important ways. It made the panels’ rulings binding unless overturned by a decision of all
contracting parties, including those involved in a dispute; it added the Appellate Body to review the
decisions of the dispute panels and to take final decisions; and, most controversially, it enabled the WTO
to authorise the use of sanctions against parties that were found to be in breach of WTO rules. The
WTO’s dispute settlement mechanism has since been used repeatedly to settle conflicting interpretations
of trade disciplines, and has not only found in favour of the most powerful trading countries but also
against them. On some occasions, even developing countries have won cases brought against the United
States or the European Union, signalling also a greater resolve among developing countries to enforce,
rather than seek exemption from, international trade disciplines.
 The WTO website gives details and rulings of cases decided by the dispute settlement
mechanism. Look up cases that involve developing countries, such as DS283 on export subsidies
on sugar, and consider the panel’s reasons for reaching its decision.
But the position of the developing world in the WTO has remained controversial ever since the Uruguay
Round came into force in 1995. Despite the fact that developing countries are now in a majority in the
WTO, allowing them to block decisions by the Ministerial Conference, the highest authority of the trade
body, many remain marginal in the trading system, both in terms of share of international trade flows and
participation in decision-making. The poorest member states especially complain that for them, the
Uruguay Round’s promises remain largely unfulfilled. Among the manifold complaints they have voiced
are the problems they face with implementing the Uruguay Round’s vast range of agreements; the lack
of progress that has been made in improving market access for producers from the South, particularly
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in Northern agricultural markets; and the creation of new trade rules and disciplines in areas that are
highly asymmetrically structured and favour Northern industry interests over Southern developmental
needs. This last concern has been given powerful expression in debates over the Trade-related Aspects of
Intellectual Property Rights (TRIPs) Agreement. Some of the least developed countries have argued that
their efforts to overturn rules that prevent them from acquiring cheap medicines from generic fight diseases
such as malaria or AIDS were being hampered by TRIPS drug producers. In response to this debate, the
WTO decided in 2003 that under certain narrowly defined circumstances, the TRIPS’s overriding concern
with protecting the rights of pharmaceutical companies had to be sacrificed in favour of the public health
needs of developing countries.
While the partial victory of developing countries in the TRIPS/ medicines conflict has signalled an
improvement in their bargaining position, their influence in the WTO remains uneven. On the one hand,
developing countries have forced the WTO to focus more clearly on their developmental needs. The move
to name the current trade liberalisation round the ‘Doha Development Round’ signals at least recognition
among the leading industrialised countries of the failures and shortcomings of the trading order in the area
of promoting development. Of course, the fact that developing countries now are in a majority in the
WTO’s ‘one country one vote’ decision-making system has given them an effective veto power over any
future trade deal. In this sense, the trade body’s future depends to a large extent on its ability to
accommodate the demands of the increasingly assertive group of developing countries.
On the other hand, however, it is some of the larger emerging economies, most notably China, India and
Brazil, which have become important and powerful players in international trade negotiations. In fact,
their disagreements with the established powers in the WTO (chiefly the US and Europe) are one key
reason behind the difficulties in reaching a broader international agreement in the Doha Round. By
contrast, smaller and poorer developing countries continue to complain about their inability to shape
specific outcomes in ongoing trade talks.
The Doha Round, which started in 2001 and was temporarily suspended in 2008, has so far failed to narrow
the differences between the main powers. The disagreements focus on the removal of barriers to trade in
agriculture, market access and implementation issues, among others. They pit developed and developing
countries against each other as well as the US against the European Union. The complexity of striking
multiple bargains between different groups of countries, combined with a diminution of the perceived
benefits of a trade deal, have frustrated negotiators to date. At the time of writing (December 2010), a
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fresh attempt was being launched to restart negotiations, but it is far from clear whether this will break the
deadlock in the Doha Round.
 Identify the key areas of concern to developing countries as identified in the official agenda of
the Doha Development Round (available on the WTO website).
5.7 Conclusion
International trade occurs when goods and services cross national boundaries in exchange for
money or the goods and services of other nations. Although most locally produced goods and
services are consumed in confined markets, international trade has grown dramatically as a
reflection of increased global demand and the internationalization of production. For now, the
production and trade structure appears to almost be waiting for recovery from the latest financial
crisis and for new emerging country coalitions to find their position in a new global order. Thus,
the WTO members’ current mixture of economic liberal, mercantilist, and sometime structuralist
trade practices is best described as a managed trade system. In many cases the state is unwilling to
prevent private interests from playing the role of gatekeep- ers between domestic and international
interests. At the same time, many states are still strong enough in the face of international
calamities to fend off many of the forces that would weaken their power.
5.8 Review Questions
1. How free is world trade today?

2. Contrast Liberal and Mercantilist theories of GPE and consider which approach is most apparent in
the contemporary world.
3. Is a hegemon an essential pre-requisite for the construction of a liberal world economy?
4. Why did the GATT survive the rise of the ‘new protectionism’ in the 1970s?
5. To what extent is the GATT/WTO system a ‘free trade’ order?
6. Why have developing countries felt disadvantaged in the GATT/WTO trading order?
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7. how does international trade contribute to poverty?

8. Why does the conflict between advocates of free markets (or global neoliberalism) and
advocates of managed markets persist? Why hasn’t there been a resolution?
9. The WTO has been criticized by some as an instrument used primarily by powerful Western
countries to impose a liberal economic order on the rest of the world. Over time, however, this
criticism has lost a lot of its weight. Why?
10. To what extent was the Bretton Woods system a product of hegemonic action?
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CHAPTER -6: THE GLOBAL FINANCIAL AND MONETARY ORDER
6.1 Introduction
A stable international monetary order is important for several reasons. It gives predictability and stability
to foreign exchange markets, whether through fixed exchange rates or a managed system of floating
exchange rates, which in turn provides a conducive environment for the expansion of international trade
and economic growth. International monetary cooperation helps with the gradual elimination of balance-
of-payments problems that occur because of shifting patterns of economic activity and growth across
different countries. And as we have seen, in the post-1945 era in particular, international monetary systems
provide access to credit in emergency situations, where economic shocks threaten the stability of countries
and, through international contagion, the international economy as a whole. Although recent trends
towards financial liberalisation have created a highly integrated global financial market which has
allowed new economic actors to flex their muscles, states remain central to the provision of international
order and stability. is usually in times of financial crises and economic shocks that the regulatory role
of states, and sometimes their failure to provide stability, comes to the fore. The aim of this chapter is to
review the importance and history of international monetary cooperation, and consider the role of the
International Monetary Fund.
6.2 Objectives
By the end of the chapter, you will be able to:

 Explain the importance of international monetary cooperation
 Eescribe the key elements of the Bretton Woods system
 Asess the meaning and factors affecting exchange rates worldwide
 assess the role and challenfes of the IMF
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6.3 The rise and decline of the Bretton Woods system
The last two centuries have seen a succession of different international monetary systems, none of which
have managed to provide a lasting, long-term, international order. The era of the Gold Standard, which
lasted from the 1870s to 1914, is widely credited with providing stability and confidence in the major
currencies that formed part of the system. Its stability, however, was to a large extent dependent on the
willingness of participating countries to subject domestic economic objectives to the overriding concern
for exchange rate stability (e.g. by repressing domestic economic growth in order to support the fixed
currency rate).
The Gold Standard was suspended during the the First World War, but following the end of the war there
was a futile attempt to restore the Gold Standard at pre-war exchange rates. From the 1930s onwards,
the economic dislocations of the war forced one country after another to abandon attempts to peg their
currency to the Gold Standard, and the system quickly collapsed amid growing restrictions on international
capital flows and protectionist trade policies. The economic crisis of the inter-war years, which was one
of the factors contributing to the outbreak of the Second World War, forced policy-makers to reconsider
the need for international monetary cooperation and led to international efforts to create a more lasting
order based on the institutions of the Bretton Woods system.
At the Bretton Woods conference in 1944, the United States and Britain played a pivotal role in designing
a new framework for international monetary relations. Bretton Woods was to provide international
stability while avoiding the shortcomings of previous monetary systems. The leading economic powers
restored a system of fixed exchange rates and international cooperation linked with the promise of
domestic autonomy in economic policy-making, which John Ruggie dubbed the ‘compromise of
embedded liberalism’. Domestically, many countries adopted the new economic doctrine of
Keynesianism, which saw a much greater role for the state in stimulating domestic economic activity and
promoting full employment. They were keen to balance the need to intervene in the economy at home with
the desire to create greater economic openness abroad.
 What are the elements of the Bretton Woods system?
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The Bretton Woods system was based on four key elements:
 The member states adopted fixed but adjustable exchange rates, with the US dollar serving as an
anchor currency. The dollar itself was linked to gold, and other currencies were allowed to
fluctuate within 1 per cent of their fixed rate to the dollar. If a fundamental disequilibrium made
this fixed exchange rate untenable, then currency rates could be adjusted by up to 10 per cent on a
unilateral basis or over 10 per cent with the approval of three quarters of the members of the
International Monetary Fund.
 Although the removal of restrictions on capital movement was the ultimate goal, the Bretton
Woods system allowed countries to retain capital controls initially to help them stabilise the
system and adjust their domestic economy to it.
 A ‘scarce-currency’ clause was established that allowed restrictions of imports from countries that
ran persistent payment surpluses and whose currencies became scarce within the Fund. This
provision served predominantly the interests of European countries that faced severe dollar
shortages in the aftermath of the Second World War.
 The International Monetary Fund (IMF) and the International Bank for Reconstruction and
Development (IBRD, better known as The World Bank) were created as the main institutions
supporting the new international monetary order. The IMF’s task was to provide policy guidance
and short-term financial loans to aid governments in dealing with severe balance-of-payments
imbalances. The World Bank’s remit was to offer more long-term lending to support economic
restructuring and growth.
In many ways, the Bretton Woods system was a compromise, chiefly between the USA and Britain. It
represented a significant improvement on the system of the interwar years, in that it provided institutional
and financial backup to deal with severe payments imbalances and allowed for a more flexible mechanism
of currency adjustment should those imbalances persist. But it worked well only as long as international
capital flows were limited and did not pose a threat to fixed exchange rates. Indeed, psychological and
political problems prevented countries from using the adjustment mechanism in a timely and effective
fashion. Most countries delayed a change in their currency’s exchange rate, which was considered
politically embarrassing, until it could no longer be avoided. Moreover, IMF lending became
increasingly insufficient as global financial flows grew in the post-war era, and the IMF’s supervisory
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role turned out to be a blunt instrument; member states defended their economic policy autonomy against
any intrusion from an international authority.
With hindsight, the shortcomings of the Bretton Woods system suggest that it was bound to fail. Indeed,
economists now argue that the fact that the system allowed European countries to retain capital controls
until the late 1950s – an aberration from its intended goal of financial liberalization – explains why it
functioned relatively smoothly in the first 10 to 15 years. The lack of convertibility kept capital flows
under control during that time. As soon as convertibility was restored, however, the strains in the
system began to show. The 1960s saw both a growth in international financial flows and growing balance-
of-payments difficulties in the United States. Both factors were to seal the fate of Bretton Woods. The
USA’s increasingly inflationary policy threatened the fixed gold-dollar rate that was at the heart of the
system, eventually forcing the Nixon Administration to end the dollar’s gold convertibility and devalue
the dollar in 1971. If the USA had exercised some form of hegemonic leadership in creating and
maintaining the Bretton Woods system in the early post-war years, it no longer had the desire to do so.
Other nations also chose to prioritise domestic policy objectives, and a switch to floating exchange rates
thus became the only practical alternative. In 1973, the Bretton Woods system came to an end with the
decision to let exchange rates float.
 What are the major benefits of a fixed-exchange rate system? What are its costs?
6.4 Global monetary order after Bretton Woods
Advocates of the move towards flexible exchange rates argued that this solved the fundamental conflict
between domestic policy autonomy and maintaining fixed exchange rates. In their view, national
economies would be more independent of each other, with the floating exchange rate moderating the
impact of differing business cycles in the major economies. In contrast, critics of the new system argued
that flexible rates would spell disaster in the global economy. The possibility of wildly fluctuating rates
would threaten trade and undermine the long-term planning of companies operating internationally.
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Moreover, governments might be tempted to use aggressive devaluations of their currency to boost
export industries.
While it is true that the switch to flexible rates made currencies more volatile, especially in the case of
the dollar, the fluctuations between the major currencies did not lead to economic turmoil. The dollar
continued to be the main reserve currency in the international system, giving the USA continued leverage
as the predominant economic power. And ad hoc coordination of macroeconomic policy and stabilisation
of currency markets replaced the more institutionalised system of the Bretton Woods. Throughout the
1980s, the world’s leading economies met to stabilise international monetary relations, and particularly
the wildly fluctuating dollar, first in the Plaza Accord of 1985 and then in the Louvre meeting of1987.
These attempts at policy coordination helped somewhat to restore order in currency markets, but never
managed to lock in the necessary policy adjustments that were needed to reach previous levels of
monetary cooperation.
Frustrated by a lack of international cooperation, the European countries sought their own solution for
the volatility of currency markets by creating a separate monetary order for Europe. Europe’s leading
economies were more open to international trade than the USA and thus placed a higher premium on
stability and predictability. These efforts were supported by the underlying institutional framework of
European integration, in the form of the European Economic Community. A first step towards that goal
was made by the creation of the ‘European Snake’ in 1971, which limited the fluctuations of European
currencies against each other to 4.5 per cent. But in an environment of severe external shocks, mainly in
the form of oil price rises and inflationary pressures, the Snake failed to live up to expectations. It was
replaced in 1979 with the European Monetary System (EMS), a much stronger institutional arrangement
that included an element of policy oversight that was missing in the Snake. For some, the EMS could
only serve as an interim step towards a full monetary union and single currency, as only this final merging
of monetary authority would remove the possibility of reckless national policies. The withdrawal in 1992
of Britain and Italy from the EMS underlined the weakness of its monetary disciplines. The EMS crisis
of 1992 gave the final impulse to the creation of a full monetary union, which came into existence in 1999
as European Monetary Union (EMU), with the Euro replacing national currencies as the new single
currency. By eliminating national monetary autonomy, EMU provided the ultimate solution to the
inherent conflict between fixed rates and domestic autonomy.
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The Eurozone, as the group of countries that adopted the Euro came to be known, enjoyed years of
stability after the creation of the single European currency. In the wake of the 2008 global financial crisis
and under the strains of rapidly rising budget deficits, however, the Euro itself has come under pressure.
In 2010, the EU needed to set up a mechanism for supporting members of the Eurozone that experience
difficulties in refinancing their public debt amidst growing unease among international lenders over
European countries’ long-term fiscal stability. The Euro crisis has thus brought into sharp focus the
difficulty of sustaining a common currency system that is not based also on a full political union with
centralised control over economic and fiscal policy.
 What were the major arguments for and against creating European Monetary Union
(EMU)?
6.5 Issues in International Monetary and Finance Structure

Since the 1990s the globalization of the international political economy has enhanced the speed and
extended the reach of cross-border flows of capital. Like the other three international structures,
oftentimes the monetary and finance structure is embroiled with tensions that render it difficult to
manage effectively. With globalization and deregulation of the global economy since the 1980s have
come increased currency exchange and transnational financial flows that influence employment, trade,
and foreign direct investment, but also state programs and their security. One of the themes that stands
out in this chapter is that, although economic liberal ideas called for states to deregulate their economies
and cooperate with other states and IOs to open the global economy, some negative effects of
globalization—including the recent global financial crisis—have compelled many states to re-regulate
their societies and the monetary and finance structure.
We make six interconnected arguments in this chapter. First, after World War II the United States and its
allies constructed a fairly tightly controlled international monetary and finance system that complemented
their mutual goals of containing communism and gradually deregulating currency and finance markets.
These measures manifested a situation where the United States could pursue “hegemony on the cheap,”
work toward the stabilization of Western capitalist economies, and contain communism. Second, as some
of the security and economic interests of the Western alliance changed and diverged, exchange rates and
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capital controls were gradually allowed to reflect market conditions. The 1970s and 1980s, however,
were marked by OPEC oil price hikes, increasing interdependence among states, and later globalization,
along with many efforts to open up international currency and finance markets. At the same time, many
states made efforts to control direct economic growth in ways that gradually weakened the international
monetary and finance structure.
Third, since the end of the Cold War and pursuant to its continued hegemonic role in the international
political economy, the United States has continued to run huge deficits in the current account of its
balance of payments. Recently emerging economies such as China and Saudi Arabia have been investing
their surplus capital into the United States and other current account deficit nations, which has enabled
the United States to cover its balance-of-payments deficits. Fourth, the current financial crisis
jeopardizes this U.S. strategy and continues to weaken the U.S. dollar and U.S. leadership of the
current monetary and finance structure.
Fifth, the financial crisis has also severely weakened efforts by IOs, others states, and many
nongovernmental organizations (NGOs) to resolve problems in debtor countries as well as help the
developing nations overcome poverty. Sixth and finally, the global monetary and finance structure
remains vulnerable to fluctuating market conditions, which should lead to increased state cooperation
to deal with a number of problems that, if not resolved, could result in a global financial meltdown.
This chapter describes a number of fundamental elements of the international monetary and finance
structure, including its institutions and who manages them, who determines its rules, how and why
these rules change, and who benefits from its operation. This topic has its own specialized vocabulary.
Once a student understands and appreciates the role of the basic pieces of this puzzle, it is easier to grasp
other important ideas related to international political economy.
6.6 Foreign Exchange
 What is currency exchange?
Foreign or currency exchange rates affect the value of everything a nation buys or sells on international
markets. It also impinges on the cost of credit and debt, and the value of foreign currencies held in
national and private banks. A special vocabulary is used when discussing currency or foreign exchange.
Just as people in different nations speak different languages (requiring translation to understand one
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another), they also do business in different currencies, requiring the exchange of money from one
denomination to another. Travelers and investors are often exposed to currency exchanges when they
decide how much of their national currency it will cost to buy or invest in another country. Travelers
can go to a local bank, exchange kiosk, or automated teller machine (ATM); slip in their debit card; and
withdraw the needed amount of local currency. The machine (representing the banks that sponsor them)
automatically calculates an exchange rate.
No wonder exchange rates are more important to banks and investors than to travelers: Each day they
are buying and selling millions of dollars, British pound sterling, yen, euros, and other currencies. A
change in the value of one currency can mean huge gains or losses depending on how much market prices
for currencies have changed in the recent past or might change in the future. What concerns states the
most are short- and long-term shifts in the values of certain currencies to one another.
 What does a change in the value of one currency mean?
Before moving on let’s look at how currency exchange rates work. While most people no longer pay
much attention to the math behind these transactions, it is important to learn more about the connection
between foreign exchange and the money in your own bank at home. Until the advent of ATMs, most
travelers quickly became accustomed to exchange-rate math used to convert one currency into another and
back again. If the exchange rate was around $1.50 per British pound sterling, as it often was in the
1990s, it follows that a £10 theater ticket in the West End of London really cost $15 in U.S. currency
(£10 at $1.50 per £ = $15). In the same way, that ¥1,000 caffé latte at the airport in Tokyo really cost
$10—if the yen–dollar exchange rate was ¥100 per U.S.$ (¥1,000 ÷ ¥100 per $ = $10). Before long,
tourists found themselves able to perform complex mental gymnastics to convert from one money,
especially the longer they visited another country.
 What is the diffence between soft and hard currency?
Yet another important feature of foreign exchange is related to how hard or soft certain currencies are.
Hard currency is money issued by large countries with reliable and predictably stable political
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economies. This legal tender is traded widely and has recognized value associated with the wealth and
power of many industrialized developed nations, including the United States, Canada, Japan, Great
Britain, Switzerland, and the Euro zone. A hard-currency country can generally exchange its own
currency directly for other hard currencies, and therefore for foreign goods and services—giving it a
distinct advantage. Therefore, a hard currency like the U.S. dollar (USD), the euro, or the yen is easily
accepted for international payments.
Soft currency is not as widely accepted, and is usually limited to its home country or region. Its value
may be too uncertain or the volume of possible transactions insufficient based on an absence of trade
with other countries or conditions that raise suspicions about the stability of its political economy.
Many less developed countries (LDCs) have soft currencies, as their economies are relatively small
and less stable than those of other countries. A soft-currency country must usually acquire hard currency
(through exports or by borrowing) in order to purchase goods or services from other nations. Another
problem with a soft currency is that international lenders are generally unwilling to accept payment in
soft currencies. These countries need to earn hard currency to pay their debts, which tend to be
denominated in hard currency. Because only hard currencies get much international use, we focus on
hard currencies in this chapter.
An important point to remember is that the exchange rate is just a way of converting the value of one
country’s unit of measurement into another’s. It does not really matter what units are used. What does
matter is the acceptability of the measurement to the actors (banks, tourists, investors, and state officials
in different countries) involved in a transaction at any given time, and how much values change over
time. Shifts in exchange rates can vary over different periods of time, depending on a variety of
circumstances that impact the demand for one cur-rency or another.
 What are the main factors that affect exchange rates?
Many political and economic forces affect exchange rates. These include the following:
 currency appreciation and depreciation
 currency-rate manipulation
 whether one’s currency is fixed to the value of another currency
 interest rates and inflation
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 speculation
 When do we say current appreacites or depreciates?
When a currency’s exchange price rises—that is, when it becomes more valuable relative to other
currencies—we say that it appreciates. When its exchange price falls and it becomes less valuable relative
to other currencies, we say it depreciates. For example, the USD depreciated relative to the Japanese yen
between 2009 and 2012. A USD cost ¥ 90 in November 2009, but only ¥ 80.02 in November 2012. The
fact that the USD depreciated relative to the yen also means that the yen appreciated against the USD.
Or simply put, in terms of the USD, the yen increased in price from about 1.11 cents to 1.24 cents during
this period. In the case of trade, changes in the exchange rates tend to alter the competitive balance
between nations, making one country’s goods a better value than another.
 What are the poltical and social consequences tha comes with Changes in currency values?
Changes in currency values have profound political and social consequences. As currency values change,
there are always winners and losers. For example, as a nation’s currency appreciates, companies that
export goods and services will be hurt as their products become less competitive internationally.
However, importers in the same country (consumers of foreign goods and services and companies using
foreign inputs in their production processes) will benefit as those imports become cheaper.
Often exchange rates are set by the market forces of supply and demand. However, we will see that there
is also considerable temptation for nations to purposefully manipulate currency values so as to achieve a
desirable outcome for that state. At times, states (secretly) intervene in currency markets, buying up
their own currency or selling it in an attempt to alter its exchange value. A central bank will buy (demand)
and sell (supply) enough of its own currency to alter the exchange rate. At other times when the demand
for the country’s currency declines, a central bank will use its foreign reserves to buy (demand) its own
currency, pushing up the value of its currency again.
Regardless of market conditions, for many states an undervalued currency that discourages imports
and increases exports can be politically and economically good for some domestic industries. This shifts
production and international trade in that state’s favor. The dark side of currency depreciation is that
when goods such as food or oil must be imported, they will cost more if the currency is undervalued.
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Undervaluation can also reduce living standards and retard economic growth, as well as cause inflation.
Sometimes LDCs overvalue their currency to gain access to cheaper imported goods such as technology,
arms, manufactured goods, food, and oil. This may benefit the wealthy and shift the terms of trade in
their favor. Although their own exported goods would become less competitive abroad, these LDCs
could at least enjoy some imported items at lower cost.
In practice, it is hard for LDCs to reap the benefits of overvaluation in any meaningful way because their
currencies are usually soft and not used much in international business and finance. This does not stop
them from trying, depending on political circumstances. In many cases, this invariably winds up chok-
ing domestic production and leaving the LDCs dependent on foreign sellers and lenders for help.
Agriculture seems to be especially sensitive to this problem. In some cases, developing countries with
overvalued currencies have unintentionally destroyed their agricultural sectors and become dependent
on artificially cheap foodstuffs.
In the 1990s, until the end of the decade, the value of the USD steadily climbed relative to the value of
the currencies of many developing nations. While this helped the exports of the emerging nations, their
consumers paid higher prices for many technological imports and value-added products. To stabilize the
relationship between the USD and other currencies, many countries decided to peg (fix) their currency
to the dollar. China pegged the yuan at 8.28 per USD. Because the United States and the EU are major
importers of Chinese goods, if the USD depreciated relative to the euro and most other world currencies,
so did the yuan. While the weaker currencies gained some stability in their relationship to the USD, devel-
opments in the U.S. economy were easily transferred into the developing nations, depriving them of
some flexibility in currency exchange rates.
Two other important issues are inflation and interest rates. All else being equal, a nation’s currency
tends to depreciate when that nation experiences a higher inflation rate than other countries.
Inflation—a rise in overall prices— means that currency has less real purchasing power within its home
country. This makes the currency less attractive to foreign buyers, and it tends to depreciate on foreign
exchange markets to reflect its reduced real value at home.
Likewise, interest rates and investment returns in general influence the value and desirability of the
investments that a particular currency can purchase. If interest rates decline in the United States, for
example, as they did in the 1990s and throughout the 2000s, then the demand for dollars to purchase
U.S. government bonds and other interest-earning investments decreases, pushing the dollar’s
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exchange rate to a lower value. In the same way, higher interest rates lead to an increased demand for
the dollar, as dollar-denominated investments become more attractive to foreigners.
Finally, one of the major currency and finance issues that concerned John Maynard Keynes a great
deal was speculation, that is, betting that the value of a currency or market price for a certain item or
service will go up and earn the owner a profit when it is sold. A currency generally rises and falls in
value according to the value of goods, services, and investments that it can buy in its home market. If
those who invest in currencies (speculators) believe (based on their understanding of the foreign
exchange market model and anticipated changes in the various determinants of demand and supply)
that a currency like the peso will appreciate in the future, they will want to buy pesos now to capital-
ize on the exchange rate fluctuations.
However, the increase in demand for pesos can easily raise their price as a direct result of investors
speculating—predicting the value of the peso will rise because the Mexican economy is steadily growing
or that it has discovered a new oil field in Baja California. This sort of speculation, which occurred in
U.S. real estate after 2001, can drive up the value of an item, generating a big gap (bubble) between the
normal market value of the item and a new value that reflects what Alan Greenspan labeled “irrational
exuberance.” Most real estate agents would say that actually the higher market value is the real price,
to the extent that some- one is willing to buy the item at that price.
Yet, as the cases of the Asian and the current global financial crises indicates , bubbles can form when
hot money (foreign investment in stocks and bonds not regulated by the state) moves quickly into a
country, and bubbles can burst when investors rapidly pull their money out in anticipation that market
prices will fall. While bubbles in the past caused hardship for many people, the severity of the current
global financial crisis has caused many to question whether states and the IMF should not do more to
regulate global capital movements.
6.6.1 Three Foreign exchange rate Systems
 Can you mention some of the structures and sets of rules related to foreign exchange rates?
Since the nineteenth century, there have been three structures and sets of rules related to foreign
exchange rates. The first was the gold standard, a tightly integrated international order that existed
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until the end of World War I. The second was the Bretton Woods fixed-exchange-rate system created by
the United States and its allies before the end of World War II and managed by the IMF. The current
system is the “flexible” or floating exchange-rate regime. As we explore some of the basic features of
these systems, we will also highlight capital mobility across national borders, an issue directly related to
currency exchange.
6.6.1.1 The Classic Gold Standard:

We tend to think of the related issues of interdependence, integration, and globalization as post–Cold
War phenomena, but from the end of the nineteenth century until the end of World War I, the world was
supposedly even more interconnected than it is today. Cross-border flows of money increased in
response to, among other things, interest rates and inflation in other countries. The leading European
powers also invested heavily in their colonies. The currencies of these nations were part of a fixed-
exchange-rate system that linked currency values to the price of gold, thus the “gold standard.” Similar
to the European Union today, some countries in specific geographic regions created “monetary unions”
in which their currencies would circulate.3
Under the prevailing liberal economic theory of the time, the system was a self- regulating international
monetary order. Different currency values were pegged to the price of gold. If a country experienced a
balance-of-payments deficit—that is, it spent more money for trade, investments, and other items than
it earned— corrections occurred almost automatically via wage and price adjustments. A country’s gold
would be sold to earn money to pay for its deficit. This resulted in tighter monetary conditions that
curtailed the printing of money, raised interest rates, and cut government spending in response to a
deficit. In turn, higher interest rates were supposed to attract short-term capital that would help finance
the deficit. Domestic monetary and fiscal policy was “geared to the external goal of maintaining the
convertibility of the national currency into gold.”4 Before World War I Great Britain’s pound sterling
was the world’s strongest currency. And as the world’s largest creditor, Great Britain loaned money to
other countries to encourage trade when economic growth slowed.
The gold standard had a stabilizing, equilibrating, and confidence-building effect on the system. But by
the end of the war the gold standard had died, though it was temporarily resurrected again in the early
1930s during the Great Depression. After World War I, Britain became a debtor nation and the U.S.
dollar took the place of the pound sterling as the world’s strongest and most trusted currency. According
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to many hegemonic stability theorists, the gold standard folded because the United States acted more
in its own interest and failed to meet the international responsibility commensurate with its economic
and military power.
Another argument is that while elites were committed to economic liberal values, public policy often
reflected the growing influence of labor unions, the poor, and foreign investors who often controlled
monetary policy in the colonies. The extension of the electoral franchise produced more government
intervention, pres- suring governments to avoid the automatic policy adjustments the gold standard
required in order to meet domestic needs. Some states preferred to depreciate their currencies to generate
trade rather than slow the growth of their economies or cut state spending. In a move to further insulate
their economies, many of them adopted capital controls (limits on how much money could move in and
out of the country).
An important point is that many states gradually found that the “embedded” economic liberal ideas of
a self-regulating economy did not work. The structuralist economic historian and anthropologist Karl
Polanyi wrote that, by the end of World War I, 100 years of relative political and economic stability
ended when economic liberal ideas no longer seemed appropriate given world events and conditions.6
As the European and U.S. economies became more industrialized and interdependent (even more so
than today), they had been willing to cooperate with one another in order to live under the rules of a
fixed-exchange-rate system. However, the negative effects of capitalism led to increased demands for
more and different types of protection in various states. Many societies sought relief from a brand of
capitalism that periodically failed as evidenced during the Great Depression.
6.7 The Bretton Woods System: Revisitng the Qualified Gold Standard and Fixed Exchange Rates:
During the Great Depression, the international monetary and finance structure was in a shambles.
“Beggar thy neighbor” trade policies that put national interests ahead of international interests resulted in
some of the highest trade tariffs in history. The nonconvertibility of currency was also blamed for
increasing hostility among the European powers that ultimately resulted in World War II.
In July 1944, the United States and its allies met in Bretton Woods, New Hampshire, to devise a
plan for European recovery and create a new postwar international monetary and trade system that
would encourage growth and development. In an atmosphere of cooperation, most of the fifty-five
participating countries wanted to overcome the high unemployment conditions of the Great Depression
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and the malevolent competitive currency devaluations of the 1930s. Keynes, Great Britain’s
representative, believed that unless states took coordinated action to benefit each other, their individual
efforts to gain at the expense of their competitors would eventually hurt them all.
At Bretton Woods the Great Powers created the International Monetary Fund (IMF), the World Bank,
and what would later become the General Agreement on Tariffs and Trade (GATT). Many argue that
these institutions were empty shells that represented only the values and policy preferences of the major
powers, especially the United States.7 The World Bank was to be concerned with economic recovery
immediately after the war and then development issues. The IMF’s primary role was to facilitate a stable
and orderly international monetary system and investment policies. It is still the IMF’s role to facilitate
international trade, stabilize exchange rates, and help members with balance-of-payments difficulties on
a short- term basis. However, today the IMF also attempts to prevent and resolve currency and financial
crises that have recently occurred in developing countries.
Two distinct GPE perspectives give primary responsibility for the institutional design and mission of the
IMF to different players. From the economic liberal perspective, John Maynard Keynes was instrumental
in convincing the Allied powers to construct a new international economic order based on liberal ideas
proposed at the time. Note though that the “Keynesian Compromise” allowed individual nation-states
to continue regulating domestic economic activities within their own geographic borders. In the
international arena, in order to avoid another Great Depression, the IMF would collectively manage
financial policies with the goal of eventually freeing up financial markets and trade. Global financial
crises and collapse were to be avoided by isolating each nation’s financial system and then regulating
it in consideration of international conditions and developments.
At the conference, Keynes himself worked on setting up the World Bank. He was committed to creating
an institution that could provide generous aid to both the victors and the vanquished nations after
World War II. He especially wanted to prevent a repeat of the brutal and ultimately destructive terms
the winners imposed on the losers at the end of World War I. He was adamant that creditors should
help debtors make adjustments in their economies. Meanwhile, U.S. Treasury official Harry Dexter
White’s plan for the bank was to put nearly all of the adjustment pressure on debtor countries, without
any symmetric obligation for creditors to make sacrifices.
In the case of the IMF, White’s suggestions reflected the best interests of the United States, which emerged
from World War II as the world’s biggest creditor nation, and with no plans to give up that role. The U.S.
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Congress would not have approved a treaty that forced the United States to sacrifice just because Britain
or another debtor country could not pay its bills. (In fact, the United States was adamant that Great
Britain honor its wartime debts once the war was over.) The IMF, then, was designed to provide
temporary assistance to all debtor countries while they adjusted their economic structures to the
emerging international economy. The burden of adjustment ultimately fell on the debtors, not on both
debtors and creditors, as Keynes had intended.
Immediately after the war, many realists viewed the United States as an emerging but reluctant
major power, unwilling to assume the hegemonic role that Great Britain had played in the nineteenth
century. The United States, which had the most votes on policy decisions (based on holding 31 percent
of the IMF reserves at the time), used the IMF as an indirect way to promote an orderly liberal financial
system that would lead to nondiscrimination in the conversion of currencies, confidence in a new
order, and eventually more liquidity. These goals complemented U.S. liberal values, beliefs, and policy
preferences at little cost to the United States.
For both mercantilists and realists, the IMF’s institutional structure and monetary rules also reflected the
interests of the Great Powers (as they were called at the time). Under pressure from the United States, the
IMF adopted a modified version of the former gold standard’s fixed-exchange-rate system that was
more open to market forces, but not divorced from politics. At the center of this modified gold standard
was a fixed-exchange-rate mechanism that fixed the rate of an ounce of gold at $35. The values of other
national currencies would fluctuate against the dollar as supply and demand for those currencies
changed. Additionally, governments agreed to intervene in foreign exchange markets to keep the value
of currencies within 1 percent above or below par value (the fixed exchange rate).
As supply and demand conditions for other currencies changed, the trading bands established by the
IMF defined limits within which exchange rates could fluctuate. (See Figure 7-6 on the GPE web page
at www.upugetsoundintroGPE.com for a representation of this arrangement). If the value of any currency
increased above or fell below the band limits, central banks behind those currencies were required to
step in and buy up excess dollars or sell their own currency until the currency value moved back into the
trading bands limits, reestablishing a supply– demand equilibrium (par value). As in the earlier system,
central banks could also buy and sell gold to help settle their accounts, which the United States often did.
What officials liked about this system was that its quasi-self-adjusting mechanism allowed for diverse
levels of growth in different national economies.
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Confidence in the system relied on the fact that dollars could be converted into gold at a set price. At the
end of World War II, the United States started with the largest amount of gold backing its currency. This
arrangement politically and economically stabilized the monetary system, which desperately needed
the members’ confidence and a source of liquidity if recovery in Europe was to be realized. Once the Cold
War began in 1947, the United States consciously accepted its hegemonic role of providing the collective
good of security for its allies. This arrangement boosted Western European and Japanese recovery from
the war and preserved an environment for trade and foreign investment in Western Europe. These
policies also helped tie together the allies into a liberal-capitalist, U.S.-dominated monetary and finance
system that complemented U.S. efforts to divide the West from the Soviet-dominated Eastern Bloc.
Capital movements into and out of the communist nations were severely limited.
In this monetary arrangement, the U.S. dollar became the hegemonic currency, or top currency, one in
great demand often used in international trade and financial transactions. This position afforded the
United States many privileges when it came to using the dollar as a tool of foreign policy, but also imposed
on it many management responsibilities. The United States benefited both economically and politically
from this arrangement because, as part of the postwar recovery process, dollars were in great demand in
most of Western Europe and in other parts of the world. When it came to trade and investments, other
states often had to convert their currencies into U.S. dollars, which saved the United States a good deal
of money on foreign exchange transactions and helped maintain the strength of the U.S. dollar against
other currencies. The dollar was also the reserve currency that, because its international market value
was fixed to gold, was held in central banks as a store of value.
6.8 The IMF F and the balance of payments

At Bretton Woods, the IMF was set up to create stable and responsive international financial relations,
just as central banks seek to create a favorable financial climate within the borders of each country. As
of August 2012, it had a membership of 188 countries, a staff of 2,475 from 156 countries, and reserves
of $360 billion. As of October 2012, the IMF had outstanding loans of $63 billion to 46 countries (Greece,
Portugal, and Ireland accounted for 53 percent of all lending). The IMF director heads a board made
up of twenty-five members from different countries who meet twice a year. Although members try to
reach consensus, major policy decisions are decided on a weighted voting basis. The weight of a state’s
vote is related to how much it contributes to the IMF’s reserves. Currently the United States has the most
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votes, with 16.8 percent. Japan is a distant second at 6.2 percent, with Germany at 5.8 percent and Great
Britain and France both at 4.3 percent.
The balance of payments registers an accounting of all the international monetary transactions between
the residents of one nation and those of other nations in a given year. It reflects what a nation produces,
consumes, and buys with its money. Much like a personal check register (see Table 7-2), the current
account records “deposits” or money inflows. For each nation, these deposits are derived from sales of
produced goods and services (exports), receipts of profits and interest from foreign investments, and
unilateral transfers of money or income from other nations. These transfers include foreign aid a nation
receives, private aid flows, and money migrants send home to friends and families. According to the
IMF, these receipts should equal money outflows related to the purchase of goods and services from
other countries (imports), payments of profits and interest to foreign investors, and unilateral transfers
to other nations.
When a state has a current account surplus, its receipts or earnings are greater than its “withdrawals”
(expenditures), so that on net these international transactions increase national income. However, when
a nation has a current account deficit, outflows or withdrawals are greater than inflows or deposits in a
particular year, and the net effect of these international transactions is to reduce the national income of
the deficit country.
What is commonly referred to as the balance of trade is usually defined and analyzed separately from
other items in the current account. It registers a nation’s payments and receipts for the exchange of goods
and services only (receipts for exports minus payments for imports). Therefore, the balance of trade
only partially reflects a nation’s current account and so provides only a glimpse of the changes in a
nation’s financial position. The trade balance is important because of its direct effect on employment, as
a large number of jobs in most economies rely on trade.
The other account in the balance of payments—the capital and financial account—includes longer-term
economic transactions related to net foreign investments, borrowing and lending, and sales and
purchases of assets such as stocks, real estate, and rights to natural resources. The capital account is
an indicator of the effect of international transactions on changes in a nation’s holdings of assets or
wealth with respect to other countries. If there is an overage (surplus) or net inflow of money to the
capital and financial account, foreigners are net purchasers of a country’s assets. If there is a net outflow
(deficit) of funds, the country has increased its net ownership of foreign assets.
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Normally, a surplus in one account must be offset by a deficit in another— establishing an accounting
balance of zero. However, it is important to note that because the technical language of the balance of
payments is quite confusing, it is a common practice to say that a nation has a “balance-of-payments
deficit (or surplus)” when what is actually meant is a “current account deficit (or surplus),” with
payments for goods, services, and transfers exceeding the corresponding receipts. When determining
whether a nation is going into debt, state officials tend to regard the current account as being more
important than the capital account. A nation with a current account deficit must either borrow funds
from abroad or sell assets to foreign buyers to pay its international bills and achieve an overall payments
balance. A current account deficit also requires a capital account surplus in order to balance the two
accounts. Likewise, a current account surplus gener- ates excess funds that can purchase foreign assets.
There are many political consequences of any nation’s balance-of-payments status. If a state has a large
foreign debt, for instance, it will need to increase output at home to generate more exports and/or decrease
consumption of imports.
Economically, politically, and socially, these are not easy choices for states and their societies to make,
given the consequences for those who benefit and lose from different situations. Increasing output, for
instance, might mean asking workers to accept lower wages, giving tax incentives to business firms, or
remov- ing regulatory roadblocks to more efficient production. Decreasing consumption might also
involve raising consumer taxes, reducing government subsidies, cutting government programs, or
increasing interest rates to discourage consumption, attract savings, and encourage foreign investment
in the home economy. In these circumstances, it is easy to see why currency devaluation is so attractive
to states, as it can quickly generate more exports by making goods less expensive. However, as we noted
earlier, such a move is also likely to invite retaliatory “defensive” moves by other states, negating the
economic gains of the first state and generating tension between states, as was the case during the interwar
years.
Ideally, the IMF would like to see equilibrium in a state’s balance of payments. Theoretically, nations
should spend only as much as they take in. Yet, in order for businesses to expand and the economy to
grow, banks lend out more than they have on deposit to back their loans. So the international economy
needs a source of liquidity (assets that can be converted to cash) for new investments and production
that comes when a country runs a current account deficit, which the United States did for all but two
years under the Bretton Woods monetary and finance system. A country that performs this collective
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good for the rest of the system is usually a hegemon, and in these circumstances it is often referred to as
a “locomotive.” When the hegemon’s economy heats up, it helps generate growth that benefits other
members of the system. On the other hand, if the United States cut its deficit by buying fewer automobiles,
then Japan would probably produce fewer autos and Saudi Arabia would probably produce less
petroleum. In essence, one state’s falling deficit would be another’s decreased surplus. Likewise, our
political and economic tensions become their tensions.
6.9 The Float- or Flexible-Exchange-Rate System

In 1973 a new system emerged that is commonly referred to as the float- or flexible- exchange-rate system,
or managed float system. The major powers authorized the IMF to further widen the trading bands so
that changes in currency values could more easily be determined by market forces. Some states
independently floated their currencies, while many of the countries that joined the European Economic
Community (EEC) promoted regional coordination of their policies. Many states still had to deal with
balance-of-payments issues, but the framework of collective management was meant to be less
constraining on their economies and societies.
Several other developments contributed to the end of the fixed-exchange-rate monetary system. In the
early stages of the Bretton Woods system, investment funds could not move easily among countries to
take advantage of possible higher returns on interest or investments. Capital controls (restrictions on
money moving in and out of a nation) and fixed exchange rates were manipulated to allow states to
respond to domestic political forces without causing exchange-rate instability. Policy makers
intentionally limited the movement of finance and capital between countries for fear that financial crises
like those in the 1920s and 1930s could easily spread from one country to many others. Widespread
currency convertibility (achieved by 1958), the large numbers of U.S. dollars pumped into the interna-
tional economy via U.S. current account deficits, and the expansion of U.S. transnational corporation
investments in Western Europe all led to pressure on state officials to bring down capital controls and
to allow money to move more freely in the international economy.
By the late 1960s, many officials and businesses were looking outward for new markets and investments,
leading to increased private capital flows in the form of direct TNC investments, portfolio investments
(such as purchases of foreign stocks by international mutual funds), commercial bank lending, and
nonbank lending. Flexible-exchange rates complemented the relaxation of capital controls, which added
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yet another source of global liquidity to complement lending by states and loans by the IMF, the World
Bank, and regional banks.
The adoption of and structure of the flexible-exchange-rate system reflected several other influential
political and economic developments, including the growing influence of the Japanese and West
European economies, the rise of the Organization of Petroleum Exporting Countries (OPEC), and the
shift toward a multipolar security structure (see Chapter 9). By the early 1970s, Japan’s rising living
standards and high rates of economic growth had turned Japan into a major player in international
monetary and finance issues. Robert Gilpin and other realists make a strong case for the connection
between the diffusion of international economic growth and wealth at the time and the emergence of a
new multipolar security structure.9 The flexible-exchange-rate system helped entrench a multipolar
international security structure that would be cooperatively managed by the United States, the EU, Japan,
and (later) China.
The rise of OPEC and tremendous shifts in the pattern of international financial flows after oil price
increases in 1973–1974 and 1978–1979 transformed the system into a global financial network. Almost
overnight, billions of dollars moved through previously nonexistent financial channels as OPEC states
demanded dollars as payment for oil. This increased the demand for U.S. dollars in the international
economy, which helped maintain the dollar’s status as the top currency. Many of the OPEC
“petrodollars” deposited in Western banks were recycled in the form of loans to developing countries
that were viewed as good investment risks because of the increasing demand for consumer goods and
natural resources (especially oil). However, between 1973 and 1979, the debt of developing nations
increased from $100 billion to $600 billion, generating a debt crisis.
In the early 1980s, trade imbalances in the developed countries contributed to stagflation, or slow
economic growth accompanied by rising prices—two phenomena that do not usually occur together.
As the oil crises subsided, the U.S. dollar weakened in value. U.S. officials focused on fighting domestic
inflation by raising interest rates to tighten the money supply, which slowed down the economy and
contributed to an international recession. At this time a change in political- economic philosophy occurred
in Great Britain and the United States. The prevailing Keynesian orthodoxy was swept aside in favor
of a return to the classical liberal ideas of Adam Smith and Milton.
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The governments of British Prime Minister Margaret Thatcher and U.S. President Ronald Reagan
privatized national industries, deregulated financial and currency exchange markets, cut taxes at home,
and liberalized trade policy. Theoretically, these measures were supposed to produce increased savings
and investments that would stimulate economic growth. In 1983, economic recovery did begin,
especially in the United States, stimulated by higher rates of consumption, a less restrictive monetary
policy, and attention to fighting inflation—all policies that mainly benefited wealthier people. However,
many experts suggest that a drop in world oil prices—more than anything else—stimulated economic
growth in the industrialized nations.
Despite the laissez-faire rhetoric, Reagan’s defense budget was the biggest since World War II,
aimed at renewing the West’s effort to contain the Soviet Union and communist expansion. These
expenditures and a strong dollar led to increased prices for U.S. exports and lower import prices, which
resulted in record U.S. trade deficits, especially with Japan. In order to shrink the U.S. trade deficit, the
Reagan and the first Bush administrations, rather than cutting back on government spending or raising
taxes, pressured Japan and other states to adopt adjustment measures that included revaluing the
yen. Many mercantilist- oriented trade officials also accused Japan, Brazil, and South Korea of not play-
ing fair when they refused to lower their import barriers or reduce their export.
Paradoxically, much like the case of China today, this situation also benefited the United States to the
extent that high U.S. interest rates attracted foreign investments in U.S. businesses and real estate. The
Reagan version of “hegemony on the cheap” helped correct the U.S. current account deficit and sustain
the value of the U.S. dollar. More importantly, a strong dollar helped sustain U.S. hegemonic power
and the Reagan administration’s struggle against the “evil empire” of the Soviet Union. As was the case
in the past, many U.S. allies did not agree with this outlook and pursued monetary and finance policies
contrary to those of the United States.
By 1985, the United States had become the world’s largest debtor nation, with a balance-of-payments
deficit of some $5 trillion.11 Many countries and U.S. exporters complained that the dollar was
overvalued. Rapid capital flows were now contributing to volatile exchange rates, which interfered with
FDI and international trade. As it had done 20 years earlier, the United States resisted making hard
choices about currency adjustments that could threaten its economic recovery or lead to cutbacks in
defense spending. Instead, in 1985, the United States pressed the other G5 states (Great Britain, West
Germany, France, and Japan) to meet in New York, where they agreed to intervene (contrary to the
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Reagan administration’s preferred policy of nonintervention) in currency markets to collectively

manage exchange rates. The Plaza Accord committed the G5 to work together to “realign” the dollar
so that it would depreciate in value against other currencies, thereby raising interest rates in the other
economies.
6.10 Structural management and alternative reserve Currencies

For now, management of the global monetary and finance structure remains weak and ambiguous. The
IMF and the World Bank increasingly play less important roles in regulating currency exchange and
lending funds. The IMF’s role was weakened significantly due to its handling of the Asian crisis when
it resisted rec- ommendations from Japan and West European partners. During the recent financial crisis,
the IMF has resisted seriously evaluating the United States, its main benefactor. However, it is now
trying to help some of the developed Euro zone nations such as Greece, Ireland, and Spain.
Since the 1970s, the G8 (the United States, the United Kingdom, Germany, France, Japan, Italy, Canada—
and later Russia) have managed difficult negotiations between finance ministers and central bank
presidents. There are other lesser-known IOs that also cooperate on international financial and banking
issues. The Basil Committee on Bank Supervision includes twenty-seven member states that coordinate
to ensure standards for capital adequacy and supervise banking practices. The International Organization
of Securities Commissions (IOSCO) sets standards on securities. The Bank of International Settlements
(BIS) is an invitation-only group comprised of the central banks of important countries and others the
members choose to include.
The global financial crisis has since spurred the finance G20 (not the same as the WTO’s G20),
representing more emerging economies that increasingly want to play a bigger role in negotiations on
monetary and finance structure rules. Brazil, Russia, India, and China (the BRICs) have gained attention
for their intransigence in some negotiations, but also for their hesitation to support stricter economic
liberal policies and development strategies. Likewise, a number of the more successful Southeast Asian
economies such as Indonesia, Malaysia, Thailand, and the Philippines stand in support of tamer versions
of capitalism and a wider variety of emerging countries’ (and even poor nations’) interests in international
negotiations related to FDI and currency exchange.
At the meeting of G20 finance ministers in Mexico City in early November of 2012, most states were
worried that another great recession could come about if the debt crisis in Europe was not soon resolved.
Likewise, there was fear that a failure by U.S. politicians to reach a deal to prevent automatic tax hikes
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andn spending cuts from going into effect at the beginning of 2013 (the so-called fiscal cliff) could
also trigger another recession. These types of events could easily increase or decrease the value of the
major hard currencies in the world, signaling an adjustment in the global distribution of wealth and
power.
6.11 The IMF and international debt crises
 What is the original role of IMF?
The IMF’s original role was to provide short-term lending to countries with balance-of-payments
problems. With the end of the Bretton Woods system of fixed rates, however, this role was no longer
central to the IMF’s mission. With global financial liberalisation and greater capital flows to emerging
economies in the developing world during the 1970s, the IMF shifted its focus to dealing with problems
of indebtedness and long-term structural economic problems. In a sense, therefore, the IMF managed to
reinvent itself to retain relevance in the post-Bretton Woods era. One of the key events of the 1980s that
was to underline the importance of the IMF was the debt crisis that afflicted a number of developing
countries.
Between the early 1970s and the mid-1980s, total debt by governments rose from around $100 billion to
nearly $900 billion. While being indebted is not in itself an economic problem – the United States has
one of the highest sovereign debt levels in the world – countries that are unable to service, let alone
repay, their debt are faced with stark economic dilemmas. In the case of the developing countries that
took on an ever- growing debt burden in the 1980s, indebtedness became a key factor holding back their
developmental efforts. In Latin America – with some of the most heavily indebted countries of all, such
as Mexico, Argentina and Brazil – the 1980s became known as the ‘lost decade’.
The debt crisis started in 1982, when the Mexican government nearly defaulted on its loan obligations.
With a debt burden of $86 billion, Mexico’s debt crisis soon assumed international dimensions. Heavily
exposed creditor nations such as the United States could not afford to let indebted countries default, as
this would threaten the stability of their own financial system. The USA and European governments,
private banks and the IMF responded by setting in motion a process of debt rescheduling that aimed at
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averting a global crisis while allowing for structural reforms to take place. In this context, the IMF
assumed the central role of negotiating rescheduling terms with debtor nations, leading the way for
agreements between debtors and private banks. The creditors thus acted like a cartel, and were able
largely to impose their preferences on the affected developing countries. However, the threat of
international contagion effects should large debtor nations default, served to rein in the power of creditors
and forced them to continue to supply capital to pull the international financial system back from collapse.
 Who was responsible for the onset and depth of the 1980s debt crisis: debtor countries,
creditor countries, or both?
6.12 Conclusion
In the United States and Western Europe, post– World War II monetary and finance policies were
heavily influenced by fresh memories of the Great Depression. By isolating each nation’s financial
system and then regulating it, policy makers wanted to avoid another global financial crisis and
collapse. Under the Bretton Woods system (1947–1971), investment funds could not move easily among
countries to take advantage of higher returns. To stabilize and generate confidence in the system, the
value of the U.S. dollar was fixed to gold, and exchange-rate fluctuations were limited to narrow foreign
exchange trading margins. As the Western economies recovered, the structure and rules of the
international financial system restricted states that wanted to realize more economic growth. The
Bretton Woods fixed-exchange-rate system gave way to a flexible-exchange-rate system and less control
over exchange rates and capital transfers.
The 1970s marked both an era of increasing interdependence and two international recessions related to
high oil prices. In the 1980s, neoliberal policies and the onset of the globalization campaign spurred
deregulation of finance, currency exchanges, and trade. After the Cold War ended, laissez-faire domestic
policies and globalization grew in popularity, resulting in record amounts of global capital transfers. Many
emerging economies, including Brazil and China, acquired huge amounts of capital from exports to
developed nations. By the mid-1990s, globalization and a wildcat version of capitalism were also
gradually undermining the global monetary and finance structure, along with the U.S. leadership position.
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Currency and financial crises in Asia and the United States have raised serious challenges to a structure
that allowed U.S. hegemonic privileges to continue.
1. How, and why, has the role of the IMF changed over the last 50 years?
2. ‘The Bretton Woods system could have worked if the United States had not abandoned it.’ Discuss.
3. Why has the IMF found it so difficult to prevent and respond to international financial crises?
4. Outline the political, economic, institutional, and procedural features of the gold standard, the fixed-
exchange-rate, and the flexible-exchange- rate systems. What are some of the political and economic
advantages and disadvantages of each system?
5. Outline the institutional features of the IMF and its role in settling current account deficits.
6. How have globalization and economic liberal ideas shaped developments in the monetary and finance
structure? Cite specific examples from the chapter and in news articles.
7. What kind of a foreign exchange condition occurs when the domestic producer benefits, but
the foreign exporter is hurt?
8. Exchange rates are critical to a country’s economic position. Why do exchange rates matter? In what
way do they affect a country’s economy?
9. What are the implications of a weaker currency for a country?
10. Which is better, a fixed exchange-rate system or a floating exchange-rate system? Explain.
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CHAPTER-7: MULTINATIONAL CORPORATIONS
7.1 Introduction
One of the most potent symbols of economic globalization is the multinational corporation (MNC). Huge
corporate empires now straddle the world and rival some states in terms of economic significance and
power. MNCs exist in virtually all industrial sectors and dominate the global production and trade of oil,
minerals and foods. They are the main driving force behind technological innovation, shifts in employment
and the integration of the world economy. Increasingly, MNCs’ economic strength is also felt in the realm
of international politics, where large firms have emerged as political actors alongside states and civil
society groups.
The development of the multinational corporation' as a global force ranks as one of the key features of
the second half of the twentieth century. Giant firms came to rely on the seemingly limitless expansion of
a world system characterized by a relatively free flow of investment and goods among nations and the
abundant supply of cheap energy. This chapter focuses on the meaning and impact of multinational
corporations on the economic, cultural and political processes of nations.
7.2 Objectives
By the end of the chapter, you will be able to:
 Define the term ‘Multinational Corporation’
 Identify the factors that contributed to the growth of MNCs
 State the advantages and disadvantages of MNCs
 Examine the role that MNCs play in GPE
 Assess the ability of nation states and the international community to regulate the behavior of
global firms
7.3 Multinational Corporations - Definition and Meaning
 What is Multinational Corporation?
There is no generally agreed definition of a "multinational corporation," nor agreement on how many
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multinational corporations there are. A multinational corporation has its base in one country and operates
in other nations through branch plants or subsidiaries which may be wholly or partially owned or by
means of joint venture or management arrangements.
According to Dunning ed. (1971), the concept of the international or multinational producing enterprise
is simply an enterprise which owns or controls producing facilities (i.e., factories, mines, oil refineries,
distribution outlets, offices, etc.) in more than one country.) Similarly, according to Rolfe and Dami eds.
(1970), an International company may be defined as one, with foreign content of 25 percent or more;
'foreign content' is defined as the proportion of sales, investment, production or employment abroad.
According to U.N. Dept. Of Economic and Social Affairs, (1975), the term 'multinational corporation' is
used in the broad sense to cover all enterprises which control assets - factories, mines, sales offices and
the like - in two or more countries. Vernon (1971), also argues that MNCs are large in size, operate in a
substantial number of countries, have access to a common pool of human and
financial resources, control their widespread activities.
In general, the multinational enterprise can be defined as the embodiment of foreign direct investment
by a single business enterprise which straddles several economies and divides its global activities between
different countries with a view to realizing over-all corporate objectives. Its refere to an enterprise that is
headquartered in one country but has operations in one or more countries. Sometimes it is difficult to
know if a firm is an MNC because multinationals often downplay the fact that they are foreign held. A
corporation that controls production facilities in more than one country, such facilities having been
acquired through the process of foreign direct investment, firms that participate in international business,
however large they may be, solely by exporting or by licensing technology are not multinational
enterprises.
 What are elements that define multi nationality?
The various benchmarks sometimes used to define “multi nationality” are that the company
must:
1. Produce (rather than just distribute) abroad as well as in the headquarters country
2. Operate in a certain minimum number of nations (six for example)
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3. Derive some minimum percentage of its income from foreign operations (e.G.,
25%)
4. Have a certain minimum ratio of foreign to total number of employees, or of foreign
total value of assets
5. Possess a management team with geo-centric orientations.
6. Directly control foreign investments (as opposed simply to holding shares in foreign
companies).
7.4 International, Multinational, Transnational & Global
1. International Companies
a) The operations of such companies lie in one single home country as the base center. b) These
companies only export or import products from the home country.
c) The offices, hence, only exist in the home country and there is no foreign direct
investment in other countries.
d) The functioning and strategies are derived mostly from the primary market which is the
domestic home country market.
e) They have to continuously adjust to trading norms of the home country.
 Can you guess an example of international companies?
2. Multinational Companies
a) As the name suggests, these companies have direct operations in more than a single country,
however, it is usually not a very large number.
b) However, MNC’s have a centralized structure, with the head office in the home country
calling all the shots.
c) In this case, products are decided and developed by the head office and subsidiary offices do
have options to adapt to local markets if needed.
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 Can you guess an example of multinational companies?
3) Transnational Companies
a) These companies are operating in multiple countries, having foreign direct

investment in all of them.
b) Such companies follow a flexible approach, understanding and adapting to the local
culture and demand of each country.
c) Hence, offices in each country work in a decentralized manner with decision- making
powers.
d) Infact, subsidiary offices can launch and make products which might not be
manufactured in the original home country, if there is a chance of demand.
 Can you guess an example of transnational companies?
4) Global Companies
1. These companies work to have a foothold in a large number of countries, usually larger
than a Multinational Corporation.
2. They, however, do not follow the system of having an official head office.
3. Various subsidiaries are set but standard products are sold, without any flexibility in terms of
adapting to local consumers.
4. There is no change in branding or information about a global company, even if the country
of operations changes.
 Can you guess an example of Global companies?
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7.5 The Difference between International, Multinational, Transnational & Global

Companies
Each term is distinct and has a specific meaning which defines the scope and degree of
interaction with their operations outside of their “home” country.
1. International companies are importers and exporters; they have no investment outside of their
home country.
2. Multinational companies have investment in other countries, but do not have
coordinated product offerings in each country. More focused on adapting their products and
service to each individual local market.
3. Global companies have invested and are present in many countries. They market their products
through the use of the same coordinated image/brand in all markets. Generally one corporate office
that is responsible for global strategy. Emphasis on volume, cost management and efficiency.
4. Transnational companies are much more complex organizations. They have invested in foreign
operations, have a central corporate facility but give decision-making, R&D and marketing powers
to each individual foreign market.
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Fig 7.1 International, Multinational, Transnational & Global
7.6 Characteristics of a Multinational Corporation
 Can you mention some characteristics that define MNCs?
The following are the common characteristics of multinational corporations:
I. Very high assets and turnover
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To become a multinational corporation, the business must be large and must own a huge amount of
assets, both physical and financial. The company’s targets are high, and they are able to generate
substantial profits.
II. Network of branches
Multinational companies maintain production and marketing operations in different countries. In each
country, the business may oversee multiple offices that function through several branches and
subsidiaries.
III. Control
In relation to the previous point, the management of offices in other countries is controlled by one head
office located in the home country. Therefore, the source of command is found in the home country.
IV. Continued growth
Multinational corporations keep growing. Even as they operate in other countries, they strive to
grow their economic size by constantly upgrading and by conducting mergers and acquisitions.
V. Sophisticated technology
When a company goes global, they need to make sure that their investment will grow substantially. In
order to achieve substantial growth, they need to make use of capital- intensive technology, especially
in their production and marketing activities.
VI. Right skills

Multinational companies aim to employ only the best managers, those who are capable of handling
large amounts of funds, using advanced technology, managing workers, and running a huge business
entity.
VII. Forceful marketing and advertising
One of the most effective survival strategies of multinational corporations is spending a great deal
of money on marketing and advertising. This is how they are able to sell every product or brand they
make.
VIII. Good quality products
Because they use capital-intensive technology, they are able to produce top-of-the-line products.
7.7 Reasons for Being a Multinational Corporation

Brainstormin Question:
 Can you mention possible motivations for MNCs investments?
There are various reasons why companies want to become multinational corporations. Here are some
of the most common motivations:
I. Access to lower production costs

Setting up production in other countries, especially in developing economies, usually translates
to spending significantly less on production costs. Though outsourcing is a way of achieving the
objective, setting up manufacturing plants in other countries may be even more cost-efficient.
Due to their large size, MNCs can take advantage of economies of scale and grow their global brand.
The growth is done through strategic manufacturing/service placement, which allows the corporation to
take advantage of undervalued services across the globe, more efficient and inexpensive supply chains,
and advanced technological capacity
II. Proximity to target international markets

It is beneficial to set up business in countries where the target consumer market of a company is located.
Doing so helps reduce transport costs and gives multinational corporations easier access to consumer
feedback and information, as well as to consumer intelligence.
International brand recognition makes the transition from different countries and their respective
markets easier and decreases per capita marketing costs as the same brand vision can be applied
worldwide.
III. Access to a larger talent pool

Multinational corporations are also known to hire only the best talent from around the world,
which allows management to provide the best technical knowledge and innovative thinking to their
product or service.
IV. Avoidance of tariffs

When a company produces or manufactures its products in another country where they also sell their
products, they are exempt from import quotas and tariffs.
7.8 Models of MNCs
The following are the different models of multinational corporations:

I. Centralized
In the centralized model, companies put up an executive headquarters in their home country and then
build various manufacturing plants and production facilities in other countries. Its most important
advantage is being able to avoid tariffs and import quotas and take advantage of lower production
costs.
II. Regional
The regionalized model states that a company keeps its headquarters in one country that supervises a
collection of offices that are located in other countries. Unlike the centralized model, the regionalized
model includes subsidiaries and affiliates that all report to the headquarters.
III. Multinational
In the multinational model, a parent company operates in the home country and puts up subsidiaries in
different countries. The difference is that the subsidiaries and affiliates are more independent in their
operations.
7.9 Advantages of Being a Multinational Corporation

Braistormin Question:
 What are benefits of becoming MNCs?
There are many benefits of being a multinational corporation including:
I. Efficiency
In terms of efficiency, multinational companies are able to reach their target markets more easily
because they manufacture in the countries where the target markets are. Also, they can easily access
raw materials and cheaper labor costs.
II. Development
In terms of development, multinational corporations pay better than domestic companies, making them
more attractive to the local labor force. They are usually favored by the local government because of
the substantial amount of local taxes they pay, which helps boost the
country’s economy.
III. Employment
In terms of employment, multinational corporations hire local workers who know the culture of
their place and are thus able to give helpful insider feedback on what the locals want.
IV. Innovation
As multinational corporations employ both locals and foreign workers, they are able to come up
with products that are more creative and innovative.
V. Foreign Direct Investment

Foreign direct investments are prevalent within multinational corporations. The investments occur when
an investor or company from one country makes an investment outside the country of operation.
Foreign investments most often occur when a foreign business is established or bought outright. It can
be distinguished from the purchase of an international portfolio that only contains equities of the
company, rather than purchasing more direct
7.10 Role of Multinational Corporations (MNCs)
i. Huge Assets and Turnover
Because of operations on a global basis, MNCs have huge physical and financial assets. This also
results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many MNCs are
bigger than national economies of several countries.
ii. International Operations Through a Network of Branches
MNCs have production and marketing operations in several countries; operating through a network of
branches, subsidiaries and affiliates in host countries.
iii. Unity of Control
MNCs are characterized by unity of control. MNCs control business activities of their branches in
foreign countries through head office located in the home country. Managements of branches
operate within the policy framework of the parent corporation.
iv. Mighty Economic Power
MNCs are powerful economic entities. They keep on adding to their economic power through constant
mergers and acquisitions of companies, in host countries.
v. Advanced and Sophisticated Technology
Generally, a MNC has at its command advanced and sophisticated technology. It employs capital
intensive technology in manufacturing and marketing.
vi. Professional Management
A MNC employs professionally trained managers to handle huge funds, advanced technology and
international business operations.
vii. Aggressive Advertising and Marketing
MNCs spend huge sums of money on advertising and marketing to secure international business. This
is, perhaps, the biggest strategy of success of MNCs. Because of this strategy, they are able to
sell whatever products/services, they produce/generate.
viii. Better Quality of Products
A MNC has to compete on the world level. It, therefore, has to pay special attention to the quality of
its products.
7.11 Factors contributed for the growth of MNC’s

Braistormin Question:
 Why do you think the number of MNCs increasing from time to time?
The main factors which have contributed towards the growth of multinational corporations are given
below:
 Market Expansion: The growth of GDP and per capita income in various countries led to
increasing demand for goods and services. Companies in developed economies, explained
their operations overseas to exploit the expanding markets abroad.
 Marketing Superiorities : Multinationals enjoy the following marketing superiorities over the
following over the domestic companies :
a. Availability of more reliable and up-to-date information about market conditions.
b. Reputation in the market due to popular brands and image.
c. More effective advertising and sales promotion techniques.
d. Wide distribution network.
e. Quick transportation and warehousing facilities.
 Financial Superiorities : Multinationals are financially superior to domestic companies in the

following respects :
a. Huge financial resources.
b. More effective and economical utilisation of funds through transfer of excess funds
from one country to another.
c. Easy access to foreign capital markets.
d. Easy mobilisation of high quality resources of different types.

e. Access to international banks and financial institutions.
 Technological Superiorities : Multinationals have strong R & D departments. They can invent
and innovate new products and processes more easily and frequently. This provides
them an edge over national companies. Developing countries invite
multinationals for advanced technology due to the following reasons :
a. Developing countries do not have the resources to develop advanced technology and
the level of industrialisation is low.
b. They are unable to exploit their rich mineral and other natural resources due to
shortage of funds and low level technology.
c. They do not have adequate foreign exchange reserves to import raw materials,
capital equipment and technology on their own.
d. They face difficulty in marketing their products in highly competitive world

markets.
7.12 Views on MNCs

The advantages and disadvantages ascribed to MNCs in the debate about them are many and complex.
Between 1960 to 1980, the revenue of top two hundred multinational firms escalated as their combined
share of world’s gross domestic product increased from 18 to 29 percent (Kegley and Wittkopt, 1989).
There are many views for and against the MNC. The growing number and economic wealth of MNCs
contribute to the controversy surrounding their impact.
 Can you identify impacts of MNCs?
7.12.1 Advantages of MNCs

a. Access to Consumers – Access to consumers is one of the primary advantages that the MNCs
enjoy over companies with operations limited to smaller region. Increasing accessibility to
wider geographical regions allows the MNCs to have a larger pool of potential customers and help
them in expanding, growing at a faster pace as compared to others.
b. Accesses to Labor – MNCs enjoy access to cheap labor, which is a great advantage over
other companies. A firm having operations spread across different geographical areas can have its
production unit set up in countries with cheap labor. Some of the countries where cheap labor is
available is China, India, Pakistan etc.
c. Taxes and Other Costs – Taxes are one of the areas where every MNC can take advantage.
Many countries offer reduced taxes on exports and imports in order to increase their foreign
exposure and international trade. Also countries impose lower excise and custom duty which
results in high profit margin for MNCs. Thus taxes are one of the area of making money but it
again depends on the country of operation.
d. Overall Development – The investment level, employment level, and income level of the
country increases due to the operation of MNC’s. Level of industrial and economic development
increases due to the growth of MNCs.
e. Technology – The industry gets latest technology from foreign countries through MNCs which
help them improve on their technological parameter.
f. Exports & Imports – MNC operations also help in improving the Balance of payment.This can
be achieved by the increase in exports and decrease in the imports.
g. MNC help in breaking protectionalism and also helps in curbing local monopolies, if at all it
exists in the country.
7.12.2 Disadvantages of MNCs for the Host Country
a. Laws – One of the major disadvantage is the strict and stringent laws applicable in the country.
MNCs are subject to more laws and regulations than other companies. It is seen that certain countries
do not allow companies to run its operations as it has been doing in other countries, which result in
a conflict within the country and results in problems in the organization.
b. Intellectual Property – Multinational companies also face issues pertaining to the intellectual
property that is not always applicable in case of purely domestic firms.
c. Political Risks – As the operations of the MNCs is wide spread across national boundaries
of several countries they may result in a threat to the economic and political sovereignty of host
countries.
d. Loss to Local Businesses – MNCs products sometimes lead to the killing of the domestic
company operations. The MNCs establishes their monopoly in the country where they operate thus
killing the local businesses which exists in the country.
e. Loss of Natural Resources – MNCs use natural resources of the home country in order to make
huge profit which results in the depletion of the resources thus causing a loss of natural resources
for the economy.
f. Money flows – As MNCs operate in different countries a large sum of money flows to foreign
countries as payment towards profit which results in less efficiency for the host country where the
MNCs operations are based.
g. Transfer of capital takes place from the home country to the foreign ground which is unfavorable
for the economy.
133
Table 7.1: Multinational Corporations in International Relations: A balance sheet of claims and
criticisms.
Major Views for MNCs Major Views against MNCs
• Increase the volume of world trade. • Give rise to oligoplistic conglomerations
that reduce competition and free
enterprise
• Assist the aggregation of investment • Raise capital in host countries but export
capital that can fund development. profits to home countries.
• Lobby for free trade and the removal of • Limit the availability of commodities by
barriers to trade, such as tariffs. monopolizing their production and
controlling their distribution
• Technology transfer • Export technology ill suited to
underdeveloped economies.
• Generate employment. • Labour exploitation
• Disseminate marketing expertise and • Erode traditional cultures and national
mass-advertising methods worldwide. differences, leaving in their place a
homogenized world culture dominated by
costumer-oriented values.
• Promote national revenue and economic • Widen the gap reach and poor nations.
growth; facilitate modernization of the
less-developed countries.
• Generate income and wealth • Increase the wealth of local elites at the
expense of the poor.
• Advocate peaceful relations between and • Support and rationalize repressive regimes
among states to create an environment in the name of stability and order.
conducive to trade and profits.
• Break down national barriers and • Challenge national sovereignty and
associate and globalization of the jeopardize the autonomy of nation-state.
international economy and culture
7.13 Multinational production and foreign investment in a global economy

Economic globalization in the twentieth century brought with it not only an expansion of international
trade but also the integration of production across national boundaries. Many consumer products, such as
cars and computers, are now routinely manufactured using input factors from several locations around the
world. Likewise, such manufacturing is now often carried out under the umbrella of a large multinational
corporation, with subsidiary operations in many different countries, and servicing a multitude of markets
around the world.
Multinational corporations (MNCs) are firms that own subsidiaries in at least one other country. They
expand abroad through a process of foreign direct investment (FDI). FDI takes place where an MNC buys
either a share in a foreign business or acquires an entire company abroad with the aim of gaining
134
partial or complete control over that business. Whereas so-called portfolio investments are aimed at
making a short-term financial return, foreign direct investment is part of a wider, and more long-term,
strategy to expand business operations into other markets.
Foreign direct investment has grown phenomenally over the last twenty years. FDI inflows amounted to
$59 billion in 1982, $209 billion in 1990, $560 billion in 2003 and $1,114 billion in 2009. Their annual
growth rate in the late 1980s was c.23 per cent and nearly 40 per cent in the late 1990s. Although FDI
flows have fluctuated and even declined in more recent years, the year 2010 saw signs of a recovery of
international investment activities. Irrespective of cyclical variations in the level of FDI activity, the
record of the last thirty years points to a dramatic increase in the level of economic globalization in the
corporate sector.
 Compare different regional patterns in foreign direct investment as recorded by
UNCTAD’s annual statistical review. Which regions are major exporters of FDI flows,
and which are major recipients? The 2010 report can be found at:
www.unctad.org/en/docs/ wir2010_embargo22_en.pdf
7.14 The rise of the global firm

In a famous article, ‘Who Is Us?’ published in 1990, Robert Reich questioned the political fixation with
national ownership of productive facilities and argued that global firms had disconnected themselves from
their national context. The growth of international investment and production has indeed created a
situation in which many MNCs have outgrown their national market and are now operating in a global
market context. But just how ‘global’ these firms are remains a contested issue among researchers and
policy-makers. For example, companies such as the oil giant Shell or the drinks manufacturer Coca-Cola
are operating in nearly all countries of the world. Their production and sales strategies take a global view,
and their home markets often provide a diminishing share of their global sales volume. At the same time,
however, MNCs continue to have close links with their home countries. They value the support they get
from their governments, particularly when it comes to defending their investments abroad. And they
continue to maintain close links with the home economy, which provides sources of finance and hosts
important research and development activities. Very few, if any, large firms are truly global in the sense
of being footloose.
135
The rise of the multinational firm is a distinctively twentieth-century phenomenon, and continues
unabated in the twenty-first century. To be sure, the history of global firms goes back much further. In
the era of colonialism, merchant companies such as England’s East India Company maintained trading
posts and even armies in a number of countries, mixing global trade with military occupation to sustain
their global business. But while colonial trading companies were interested primarily in the extraction of
natural resources and agricultural products, today’s MNCs engage in the full range of economic activities
across national boundaries. Companies such as Microsoft, Nestlé and Toyota pursue global strategies in
manufacturing, services and retailing.
An estimated 82,000 MNCs operate today with over 800,000 foreign affiliates between them. These
figures include the world’s largest companies, such as BP and DaimlerChrysler, but also small and
medium- sized enterprises operating in only a limited number of countries. Their economic importance
has grown significantly in the era of globalisation. MNCs account for around four-fifths of the world’s
industrial output. They dominate international trade and play a critical role in promoting technological
innovation and providing channels for technology transfer and diffusion. For many developing countries,
foreign investment is the only way to tap into the innovative potential of the global economy. But even
developed economies tend to promote foreign direct investment by multinationals, as a source of both
technological innovation and employment.
Although the current global economic climate favours a free flow of foreign investment, the activities
of multinationals continue to cause concern, and indeed moral outrage, around the world. Where global
firms seek to exploit cheap labour and lack of worker protection, and pay little regard for human rights
and environmental protection, they are routinely confronted by the transnational campaigns of trade
unions, human rights groups and environmental organisations. The massive size and economic power of
MNCs invariably invokes suspicion and fear, particularly in developing countries. The growth of
international production has thus given rise to a renewed debate over the power balance between global
firms on the one hand, and states and local communities on the other.
 List the reasons why some countries may question the economic benefits of foreign
direct investment.
136
7.15 Power shift? State–firms relations in flux
Many see global firms as the new ‘sovereigns’ in international politics (i.e. as rivals to states and their
claim to national sovereignty). As multinational firms weave an increasingly dense web of production
across boundaries, inexorably linking different economies together, the state’s control over the national
economy is coming under threat. Some see this as a positive development: in the neo-liberal vision of
Kenichi Ohmae, global firms are the agents of a new global economy, bringing greater efficiency and
productivity, and ultimately prosperity, to the world. States and state intervention in the economy are
seen by neo-liberals as a mere hindrance to greater economic welfare. Others, especially those critical
of global capitalism, fear that the growing power of global firms is undermining the authority of
democratically elected governments and threatening social welfare systems around the world. Writers
such as Noreena Hertz argue that a ‘silent takeover’ is taking place, with corporate leaders effectively in
control of society’s future.
 Critically assess Noreena Hertz’s argument in her 2001 book that the world faces a
‘silent takeover’ by the corporate sector
While these two perspectives fundamentally disagree on the desirability of the rise of global firms, they
nevertheless agree on one thing: that a power shift is occurring in international political economy, away
from nation states and towards multinational firms. Both advocates and radical critics of global capitalism
see the states system as inevitably losing out to the corporate sector. But is this really the case? To speak
of a power shift implies that we can compare the power of states with the power of global firms. Can this
be done? To answer these questions, we need to look more closely at the way in which global firms
exercise influence and power in international political economy.
Much recent research on the state–firm relationship has focused on the bargaining between these two
types of actors over foreign investment. Because multinationals hold the promise of access to technology
and job creation, they are usually in a strong bargaining position when it comes to choosing the right
location for their international investments. As Stopford, Strange and Henley (1991) point out, states
may find themselves in competition when seeking to attract foreign investment. Offering preferential
conditions such as tax havens and reduced regulatory burdens is but one way for states to attract business
investment, with a ‘regulatory race to the bottom’ as the result. In this perspective, states have had to
137
retreat from their previously dominant position in the economy in order to provide multinational
businesses with a favourable climate for investment.
But the state–firm bargain works in more than one way, and not always in favour of firms. Once a
multinational has invested in a country and its ‘exit’ costs have risen, the host government’s bargaining
position will improve and it can begin to extract greater concessions from foreign
firms. Moreover, MNCs do not simply seek low labour and regulatory costs when they move abroad. In
fact, the majority of foreign direct investment flows is occurring among the most developed countries
of North America, Europe and East Asia. Here, multinationals invest in markets where consumer demand
is high, skilled labour is abundant and the regulatory environment is stable.
Global firms have become more powerful in the sense that their key contribution to economic growth
and prosperity is now generally accepted around the world. Governments reject foreign investment at
their own peril. With the economic opening of the former socialist economies and many developing
countries, MNCs now have unprecedented access to global markets. At the same time, not all governments
are at the mercy of internationally mobile capital. This may be the case for some of the poorest developing
countries, which are failing to attract sufficient foreign investment. A different picture emerges, however,
for countries such as the United States, Britain and Japan. These rich countries attract foreign firms while
maintaining considerable control over them.
 To what extent can we compare the economic size and strength of multinationals with
the economic and political power of nation states?
 Can you think of examples of MNC–government bargaining that illustrate the arguments
in favour of, and against, a ‘power shift’ from states to firms?
7.16 Governing global firms: national and international rules

Global firms may not have eroded the sovereign power of nation states, but with increasing globalisation
the question arises as to whether there is a sufficient international system of governance for multinational
firms. The short answer is ‘no’. Compared to the global governance of international trade and finance,
the international institutions and regimes dealing with global firms and investment are weak and
138
fragmented. There is no equivalent to the World Trade Organization or the IMF in the world of
transnational investment.
Investment issues and conflicts continue to be dealt with on the basis of national, bilateral and regional
agreements. The United States, for example, has long provided protection for its multinational companies
through an extensive network of bilateral and regional investment treaties. As a consequence, the existing
rules on investment differ greatly across the world. Corporate leaders frequently complain about the
lack of a global level playing field, but governments, including those in the developing world, are reluctant
to surrender their sovereign rights in this area to an international body. Efforts to establish an international
investment regime have therefore been fruitless.
 Can you mention some of the regulations of global frims?
Among the many attempts to regulate the activities of global firms are:
 the UN Code of Conduct on Transnational Corporations (TNCs), which was developed in the 1970s
 the International Labour Organization’s (ILO) Tripartite Declaration of Principles concerning
Multinational Enterprises and Social Policy (1977)
 the OECD Declaration on Multinational Enterprises and appended Guidelines (1976)
 the Agreement on Trade-Related Investment Measures (TRIMS) under the World Trade Organization
 the OECD’s Multilateral Agreement on Investment (MAI), negotiated but eventually abandoned in
the 1990s.
While the international community never adopted the UN Code, the ILO and OECD declarations remain
non-binding documents, which are voluntary and non-enforceable. The TRIMS agreement is now
enforceable with the help of the WTO dispute settlement mechanism, but was never designed nor
expected to be a fully-fledged investment regime. Of all the efforts to regulate MNCs, the MAI was the
most far-reaching international treaty. The failure of the MAI negotiations in 1998 (see below), however,
dealt a serious blow to the drive towards a global investment regime.
In the absence of state-sponsored international regulation of firms, new initiatives have sprung up at the
global level that seek to establish so- called ‘private regimes’ (i.e. voluntary agreements and standards
created by firms and/or civil society groups). In the business world, the concept of corporate social
responsibility (CSR) has rapidly gained ground as more and more multinationals are subscribing to their
own, or industry- wide, sets of norms and principles of responsibility to the communities within which
139
they operate. This can have far-reaching consequences for global business operations, as is the case in
certification schemes. Such transnationally established schemes provide independent verification of,
for example, environmentally sustainable business behaviour, as is the case with the Forest Stewardship
Council (FSC). The FSC is a body set up by the forest industry and environmental organisations, and
certifies those companies that produce or trade only in sustainable timber and timber products. The UN
has recently acknowledged the importance of such private initiatives by setting up its own forum for
developing voluntary standards and promoting best practice among MNCs, in the form of the Global
Compact.
 What doyou thik are weakness of CSR?
Critics of CSR approaches point out that as long as these initiatives remain voluntary, they will not have
a lasting impact on the behaviour of global firms. What is needed, therefore, is a global regulatory
framework that imposes a duty of social and environmental responsibility and establishes principles of
transparency and accountability. At best, they argue, CSR schemes are a mere public relations exercise
for companies whose reputation has been damaged in the past. At worst, they serve to prevent states from
taking action and undermine democratic principles of public governance.
In the mid-1990s, the member states of the Organization for Economic Cooperation and Development
(OECD), a kind of ‘rich countries’ club’, embarked on the ambitious project of creating an international
treaty on global investment rules. The so-called Multilateral Agreement on Investment (MAI) was meant
to harmonise existing rules set by different states and create a level playing field for the major industries.
In the end, the effort failed, and leading industrialised countries have sought to strengthen bilateral and
regional investment-related agreements instead. The collapse of the MAI negotiations means, however,
that there is no overarching international treaty to govern the investment-related behaviour of firms and
states.
On the one hand, the MAI was intended to set in stone the principles of economic liberalisation in the
field of investment and guarantee global firms free access to all participating countries. For this reason,
the global business community was strongly in favour of this treaty. On the other hand, the negotiations
on the MAI led to the insertion of an increasing number of exceptions that governments were demanding
if they were to agree to the accord. As a consequence, the final draft text looked more like a document
that confirmed the status quo and reaffirmed existing rights of governments to interfere with foreign
140
investment. Business support for the MAI was therefore declining rapidly, and disagreements between
the key negotiating parties led to a collapse of the talks in late 1998.
Although the negotiations failed primarily because of disagreements among the OECD member states,
organised protests by demonstrators outside the OECD’s headquarters in Paris ensured that the issue of
foreign investment protection became a hotly debated issue in civil society circles. The growing
opposition to the MAI by human rights groups, environmental organisations and trade unions eventually
became the starting point for a wider anti-globalisation campaign that was to lead to highly public
confrontations at the 1999 Seattle WTO ministerial conference and other gatherings of world leaders.
 List the key factors behind the failure of the MAI negotiations.
 How important were civil society protests in ending the MAI effort?
7.17 Conclusion
MNCs are giant business enterprises organized in one society with activity abroad growing out of direct
investment. Typically, MNCs are hierarchically organized and centrally directed. A distinctive
characteristic of MNC is it is broader than national perspective with respect to the pursuit of highly
specialized objectives, such as profit making, through a central optimizing strategy across national
boundaries. Over the past seven decades, the multinational corporation (MNC) has grown dramatically in
size and influence in the expanding world economy.
7.18 Slef-check Questions

1. Give the benefits enjoyed by a local company in a joint production with a MNC.
2. What controversies can multinational companies face in developing countries?
3. Can multinational companies have a positive influence on developing countries?
4. Do you agree with the view that there has been a power shift from states to firms in the era of
globalisation?
5. ‘The global firm is a new sovereign entity in the international system.’ Discuss.
6. What are MNCs and how are they different from other business firms?
7. Why do MNCs engage in foreign direct investment?
8. Explain whether or not the following statement accurate: “Most MNCs invest in less developed
141
countries because of the low wages that they can pay there.”
9. What are some of the basic, or general, reasons for the increase in MNCs?
10. It is relatively easy to argue that corporations have power in the global economy, but what
about ordinary citizens working together in grassroots organizations, unions, social movements,
et cetera? Do they have power? Explain.
142
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144

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NEW GENERATION UNIVERSITY COLLEGE

NEW GENERATION UNIVERSITY COLLEGE (NGUC)

Prepared by: Ayenew Birhanu (PhD)

Addis Ababa, Ethiopia

CHAPTER-1: GLOBAL POLITICAL ECONOMY: MEANING AND

1.3 What Is Global Political Economy?

GPE is the extension of that investigation to the international sphere.

The study becomes international when it focuses on the aspects of state-market

 International political structures reflect economics.

Fig 1.1: Components of Political Economy

1.5 Political Economy Behavior

The political behavior in an economy is shaped by:

1.6 A Short History of GPE

1.9 Self-check Questions

CHAPTER -2: APPROACHES TO GLOBAL POLITICAL

2.3 Economic Liberalism

 The government should involve itself in international trade

 Tariffs- the taxing of imports

2.5 Marxist Approaches

Table 2.1: The main conerns of the Tradistional schools

• Liberalism or Economic Liberalism • It looks GPE issues mainly in terms of

• Structuralism or Marxism • It looks GPE issues mainly in terms of

Depiction of world Core actors Key driving forces Conditions for

2.6 New Approaches to GPE

2.6.1 What is `rational choice’ or neo-utilitarianism?

2.6.3 Institutionalism: the application of rational choice to states

2.6.4 Social constructivism

2.6.5 The neo-gramscian approach: a radical variant

2.6.3 The German System of Social Market Capitalism

2.6.4 Differences among National Political Economy Systems

2.8 Self-check Questions

CHAPTER-3: THE GLOBALIZATION DEBATE IN GLOBAL

3.3 The concept of globalization

 What are the limits of globalisation?

3.4 How new is globalisation?

BOX 3.2 : The globalists

3.5.2 The sceptics

BOX 3.3 : The sceptics

3.6 Benefits of Globalisation

1. Increase in Competitive Strength of domestic industry: Globalisation exposes domestic

3.7 Globalisation and its discontents

3.8 The impact of globalization on different kinds of states

3.10 Self-check Questions

CHAPTER-4: STRUCTURES OF GLOBAL POLITICAL ECONOMY

4.3 Structures of GPE

4.4 Governance in the Global Economy

4.4.1 The Need for Governance

4.4.2 What Is Global Governance?

governance is understood as a necessary corrective to traditional theories of international relations (i.e.,

two-level games, but arguably includes more than two levels).

4.4.3 The Significance and Relevance of Global Governance

4.4.4 Global Governance: Beyond the State

(the Roman Catholic Church is a particularly prominent example2), other NGOs

4.6 Self –check Questions

CHAPTER-5: THE INTERNATIONAL TRADE SYSTEM

By the end of the chapter, you should be able to:

5.3 Perspectives on International trade

5.3.2 Economic Liberals