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GLOBAL TRENDS (GLTR-1012)

COURSE

CHAPTER THREE

INTERNATIONAL POLITICAL
ECONOMY (IPE)

BY: YIRGA ABEBE

 Introduction
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 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.
 At the domestic level, the debate poses the following
pressing questions:
 Should the state be responsible for determining how the economy of
a given country is to be organized and run?
 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?
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 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?
 What should/not be the role of international institutions like
the IMF, WB and WTO in the governance of international
finance, investment and trade?
 Meaning and Nature of IPE
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 There is no universal agreement on how IPE should be

defined.
 IPE 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”.
 However, a broader definition of IPE considers that a
“market economy cannot exist and operate without some
kind of political order (the state)”-
 There is a great deal of disagreement between minimalist
and maximalists over exactly what kind of political order is
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 Minimalist view: the best political order is one in which the state
only provides the legal-institutional framework for enforcing
contracts and protecting private property (neoclassical
economists).
 Maximalist: the most appropriate political order is one in which
the state plays an active and direct role in a much wider range of
economic activity.
 In general, IPE is a field of inquiry that studies the ever-changing
relationships between governments, businesses, and social forces
across history and in different geographical areas.
 As such, it encompasses two central dimensions; A political
dimension (the use of power, and decision making) and the
economic dimension (how scarce resources are distributed).
 Theoretical perspectives of IPE
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 There are three major theoretical perspectives regarding

the nature and functioning of the IPE: liberalism,
marxism, and nationalism (mercantilism).
 Mercantilism/nationalism
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 It defends a strong and pervasive role of the state in the economy –

both domestically and international trade.
 It emphasizes the importance of balance-of-payment surpluses in trade
with other countries
 It promotes an extreme policy of autarky to promote national
economic self-sufficiency.
 It defended even a much more sophisticated and interventionist role
of the state in the economy-for example, the role of identifying and
developing strategic and targeted industries through a variety of means.
 States should also play a disciplinary role in the economy to ensure
adequate levels of competition.
 Eg. the experience of Japanese, South Korean, Taiwanese and Chinese
national political economies
 Liberalism
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 It defends the idea of free market system (i.e free trade/trade

liberalization and free financial and FDI flows)
 Removing impediments (barriers) to the free flow of goods and
services among countries is the foundational value and principle of
liberalism.
 It encourages comparative advantage (countries focused on what
they do best and freely trade their goods with each other): specialize
in producing certain goods, thereby contributing to the optimum
utilization of resources .
 There is a shift from the conventional theory of comparative
advantage to competitive advantage- despite global acceptance of
free trade, governments continue to engage in protectionism whereby
states support their own industries so that they can compete more
 Marxism
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 It reflects and critiques the inherent instability and

volatility of a global capitalist system that has become
increasingly reliant on financial speculation for profit
making.
 It considers that global and national income inequality,
exploitation of labor, the problem of child labor and
even child slave labor are byproducts of capitalism.
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 In addition to the above mentioned foundational theories

of International Political economy, the following three
contemporary theories of International political economy
are also worth considering:
 Hegemonic Stability Theory (HST)
 Structuralism
 Developmental State Approach
 Hegemonic Stability Theory (HST)
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 It advocates for 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.
 E.g. Great Depression of 1920s and 30s
 It influenced the establishment of the Bretton Woods
institutions (IMF and WB) - both being the products of
American power and influence.
 Structuralism
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 It 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 South which permanently resulted in an
unequal (trade and investment) exchange.
 The perspective is also known as “Prebisch-Singer
thesis” Latin American model in the 1950s
 It advocates for a new pattern of development based
on industrialization via import substitution based on
protectionist policies.
 Developmental State Approach
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 It is presented as an alternative development paradigm to neo-liberal

development paradigm.
 It advocates for the robust role of the state in the process of structural
transformation.
 The term developmental state 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:
 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-equitably shared and
population is actively engaged
 Survey of the Most Influential National Political
Economy systems
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 The differences among national systems of Political

Economy is based up on;
 the primary purposes of the economic activity of the nation,
 the role of the state in the economy, and
 the structure of the corporate sector and private business
practices.
 The most influential national political economy systems in
the world are;
 The American System of Market-Oriented Capitalism
 The Japanese System of Developmental Capitalism
 The German System of Social Market Capitalism
 Core Issues, Governing institutions and
Governance of IPE
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 International Trade and the WTO

 The World Trade Organization (WTO) is an international
organization which sets the rules for global trade.
 It was set up in 1995 as the successor to the General Agreement
on Trade and Tariffs (GATT) created after the Second World War.
 It has about 150 members.
 All decisions are taken unanimously but the major economic
powers such as the US, EU and Japan have managed to use the
WTO to frame rules of trade to advance their own interests.
 The developing countries often complain of non-transparent
procedures and being pushed
around by big powers
 International Investment and the WB
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 International/Transnational/global production (global

FDI) is a type of production in which different parts of the
overall production process for a particular product take place
across different national territories.
 The World Bank was created after WWII in 1945.
 Its activities are focused on the developing countries. It
provides loans and grants to the member-countries.
 It exercises enormous influence on the economic policies of
developing countries.
 It is often criticized for setting the economic agenda of the
poorer nations, attaching stringent conditions to its loans and
forcing free market reforms.
 International Finance and the IMF
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 The IMF is an international organization that oversees those

financial institutions and regulations that act at international
level.
 The IMF has 184 member countries, but they do not enjoy an
equal say. The top 10 countries have 55 % of votes.
 The global financial system is divided into two systems:
 The international monetary system can be defined as the
relationship between and among national currencies- it revolves
around the question of how the exchange rate among different
national currencies is determined.
 The credit system, refers to the framework of rules, agreements,
institutions, and practices that facilitate the transnational flow of
 Exchange Rates and the Exchange-Rate System
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 An exchange rate is the price of one national currency in

terms of another.
 There are two main exchange rate systems in the world
namely: fixed exchange rate and floating exchange rate.
 In a pure floating-rate system, the value of a currency is
determined solely by money supply and money demand.
 A pure fixed-rate system, on the other hand, is one in
which the value of a particular currency is fixed against the
value of another single currency or against a basket of
currencies.
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