COLLEGE OF SOCIAL SCIENCE AND HUMANITIES

DEPARTMENT OF CIVICS AND ETHICAL STUDIES

International Political Economy (IPE)

Compiled
By

Mesele W/Michael (Ass/Professor Governance)

April, 2024
Wolaita Soddo University
 INTRODUCTION
 The academic IR debates presented so far are mainly concerned with
international politics.
 Economic affairs play a secondary role.
 There is little concern with the weak states in the developed world .
 Decades after WWII were a period of decolonization.
 Large numbers of countries are decolonized and given political
independence
 Then there is the formation of new independent states.
 Many of the new states are weak in economic terms; they are at the
bottom of the global economic hierarchy and constitute a third (now
developing ) world.
 The third world ( now developing ) countries started to press for
changes in the international system to improve their economic position
in relation to developed countries.
 Around this time, Neo-Marxism emerged as an attempt to theories
about economic underdevelopment of developing countries.
 This becomes the basis for a third major debates in IR about
international wealth and international poverty, i.e. about
international political economy.
 Thus, IPE is basically about who gets what in international economic
and political system.
 WHAT IS IPE
 IPE is the study of the tension between the market and state.
From this definition, we can understand that:-
 There are only two significant subjects of IPE: markets and states

 And also there is a clear-cut distinction exists between economy

and politics.
 The other point is that, the definition tell us that the most
important aspect of the relationship between markets and states is
based on tension.
 Though the definition assumes that states and markets relate to
one another in fundamentally adversarial ways, the truth is states
and markets are the two key actors in the discussion of IPE.
 In this view, there are two significant subjects of IPE.
 Markets:-which are composed of self-interested individuals and the
firms that they operate.
 States:-which are the primary political institutions of the modern
international system.
 Thus, IPE studies the political battle between the winners and the
losers of global economic exchange.
 Despite, global economic exchange raises the income of some people
lowers the income of the others.
 The distributive consequences of global economic exchange generate
political competition in national and international arena.
3.1. MEANING AND NATURE OF INTERNATIONAL
POLITICAL ECONOMY (IPE)
 Ultimately, IPE is about wealth and poverty, about who gets what in
international economic and political system.
 In some fundamental ways, our lives are about political economy.
 To survive we need food, clothes and many other things.
 Most of us obtain these provisions in the market place, paying for
them with money we have earned.
 Modern market is based on political rules (if not, it would a Mafia
market based on threats, bribes and forces).
 Thus, political rules and regulations constitutes a framework with in
which the market functions.
 At the same time, economics strength is an important basis for
political power
 If economics is about pursuit of wealth and politics is about pursuit of
power, the two interact is complicated and puzzling ways.
 Naturally in discussion of IPE, states and markets are the two key
actors and the relations between the two is often antagonistic.
 However, Marxism considered state as the instrument of the
dominant class.
 Marxists explanation of IPE focuses on social class.
 There is also the concept “ international “ in IPE.
 The term implies the difference between national and the
international between what goes on inside states and what goes on
outside states.
 The economic activity today in the world is conducted and controlled
by non-state actors and transcend national boundaries.
 Example; MNCs, buying, selling, and trading products and services,
to building and investing in global chains of production.
 Thus, IPE is changed to GPE.

 Generally, the filed of IPE consists of two central dimensions.

1. The political dimensions; account for use of power by variety of

actors like, individuals, domestic groups, states, IGOs, NGO and
TNCs.
 These actors make decisions about the distribution of tangible things
like money and products or intangible things such as security and
innovation.
2. Economic dimensions;- deals with how scarce resources are
distributed among individuals, groups, and nation-states.
3.2. THEORETICAL PERSPECTIVES OF
INTERNATIONAL POLITICAL ECONOMY
 There are three major theoretical perspectives in IPE
1. Mercantilism (Economic Nationalism )
2. Liberalism(Economic Internationalism)
3. Marxism(Economic Structuralism).
 Mercantilism= Friedrich List intellectual
father(1789–1846).
 Liberalism=Adam Smith(1723–1790)
 Marxism= Karl Marx (1818-1883).
 MERCANTILISM/NATIONALISM
 Mercantilism is commonly called Economic nationalism.
 It was the most influential in Europe from 15thc to the 17thc.
 In this view, economic markets are not natural, but exist with in the
social context largely shaped by the exercise of state power.
 Mercantilism emphasizes the importance of balance-of-payment
surpluses in trade with other countries.
 To this end it often promotes an extreme policy of autarky to promote
national economic self-sufficiency.
 Balance-of-payment refers to a system of recording all of a countries
economic transactions with the rest of the world over a period of one
year.
 Mercantilist (Economic Nationalism) advocate using
state power to build its economic strengthen.
 Friedrich List advocated strong government action
to promote and protect domestic industry.
 Friedrich List rejected the idea of free trade and
instead believe in protectionism and other policies
designed to gain economic advantage.
 Friedrich List argued for gov’t the actions like :-

1. Subsidies for industries

2. Investment in transportation
3. Investment in education, and other infrastructure would
benefits the economy.
 For Mercantilism international economy is Zero-Sum game
in which one side can gain only if other loses.
 Thus, for Mercantilism political goals should be govern
economic policy.
 This is mainly because the aim is to maximizes state power
in order to secure state interest.
 Also, protectionism like tariffs and domestic support such
as tax breaks for companies that manufacture exports are a
set of tools that Mercantilist favors .
 Mercantilism and realism share the assumption that, the
world economy is an arena of competition among states
seeking to maximize relative strength and power.
 Neo-mercantilism in 21stc defended interventionist role of
the state in the economy .
 The role of identifying and developing strategic and targeted
industries.
 This implies industries considered vital to long-term
economic growth through a variety of means, including:-
 tax policy
 Subsidization
 banking regulation
 labor control and
 Interest-rate management.
 As of mercantilists, states should play a disciplinary
role in the economy to ensure suitable levels of
competition.
 The proof relevance of mercantilism thought in the
contemporary IPE is found in the experience of:-
 Japanese
 South Korean
 Taiwanese and
 Chinese national political economies.
 Theyalso described as developmental state
approach.
 Basic Ideas of Mercantilism
 Establish colonies
 Control/regulate trade

 Export finished goods & import resources from colony to

Mother Country
 Export finished products from Mother Country to colony

 Favorable Trade Balance for Mother Country

 Wealth cannot be created, only acquired

 Through conquest and theft (imperialism)
 Through exporting more than you import and protecting
domestic industries
 Economics is a zero-sum game
 One country’s gain is another’s loss
 Emphasis on relative gains.
 Liberalism
 Liberalism is also commonly called Economic internationalism
 Other associated terms includes ;
 Capitalism
 Laissez faire( non-interference of gov’t in commercial affairs).
 Free trade.
 As of liberalism international economic relations should be and can be
conducted cooperatively.
 This is because international economy is Zero-sum game in which
prosperity is available for all.
 Also, liberalism as the mainstream of IPE is defends the idea of free
market system such as;
 free trade.
 Trade liberalization
 Free financial
 Foreign Direct Investment flows.
 The foundational values and principle of liberalism
is also removing barriers to the free flows of goods
and services among the countries.
 As of Liberal political economists, removing
barriers to the free movement of goods and services
among countries would encouraged to specialize in
producing certain goods.
 This in turn contributing to the best utilization of
resources like ;-
 land
 labor
 Capital and
 entrepreneurial ability worldwide .
 If the countries do best and freely trade their goods with
each other all of them would benefit.
 The concept that captures this idea is also known as
comparative advantage.
 But the theory of comparative advantage has been
undermined by the recent wave of economic globalization.
 The growth of transnational or MNCs complicates global
trading.
 The production of goods and services is strongly influenced
by:-
 costs
 arbitrary specialization and
 government and corporate policies.
 Thus, these developments mark a shift from the
conventional theory of comparative advantage to
what is known as competitive advantage.
 Significantly, to spread prosperity, liberalist favor
freeing trade and other forms of economic exchange
from political exchange.
 Liberalism opposed the concept of;-
 Tariffbarriers
 Domestic subsidies
 Sanctions and other economic tools that distort the free
follows of trade, investment and currencies .
 Marxism
 The Marxian tradition sees the world economy as an arena
of competition, not among the states.
 Capitalism is the driving force in the world Economy.
 As of Marx's the world economic relations are best
considered as the class struggle between oppressor and the
oppressed.
 The oppressors or capitalists are those who own the
means of production (trade and industry).
 The oppressed are the working class.
 The struggle between the two arises because capitalists
seek to increases their profits and this requires them to
exploit the working class every more harshly.
 In IRs this description of class relations in capitalist system has been
applied to describe relations between core(industrialized countries)
and periphery (developing countries) unequal exchange occurs
between the two.
 For Marxist also world economy is best described as an arena of
capitalist competition in which class(Capitalist and workers) and
social groups are in constant conflict.
 Marx a famous 19th c political economist, focused on capitalism in
Europe.
 He argued that the bourgeoisie or capitalist class used its economic
power to exploit and oppress the proletariat, or working class
Neo-Marxist
 It extend that analysis of developing countries by arguing that the
global capitalist economy controlled by wealthy capitalist states is
used to impoverish the world’s poor countries.
 Dependency is the core concept for Neo-Marxism.
 Developing countries are subject to unequal exchange in order to participate in global

capitalist economy.
 They must sell their raw material at cheap price and have to buy finished good at high price.

 Focus of Marxism is classes, social forces.

 Nature of economic relations is conflictual (zero-sum game).

 Relationship between economics and politics, economics drives politics.

 Prominent perspective in the 20th century (particularly after the Bolshevik Revolution in

1917), but popularity has declined since fall of communism in FSU/Eastern Europe.
 The class struggle has always existed between the “haves”
and the “have nots’’.
 Market economies are social arrangements created by
specific historical forces.
 Private property is a social construct, not something created
by nature
 Workers produce surplus value

 Owners of capital (capitalists) take all or most of it

 Accumulation of capital in the hands of capitalists

 Power is rooted in ownership and control of capital
Impoverishment of workers
 Division of society into classes based on their roles in the
economy and the state
 Struggle between classes for power for control of the
economy and the state
 Capitalism will inevitably collapse due to its
inherent contradictions.
 Key actors include social classes, MNCs, and
transnational elites (states are tools of these elites
and works in the capitalist system not independent
entities).
 Assumes capitalism contains seeds of its own
destruction
 Communism extreme form of socialism in which
all people own the means of production as the state
withers away and produces a classless society.
CONT.…
 Hegemonic Stability Theory (HST)
 Holds that international order and stability can be
achieved only if there is a hegemonic power in the
system.
 Also the basic argument of HST is that the root
cause of the economic difficulties that has been
faced Europe and the world in the Great
Depression of the 1920s and 1930s was the absence
of a benevolent hegemon.
 Thus, the dominant state willing and able to take
responsibility for the smooth operation of the
International economic system as a whole.
 Hegemons successively dominated the world
 Spanish and Portuguese empires –Since the 16th C. to the 17th C
 United provinces of Netherlands – In the 17th and 18th C.
 The British –-In the 18th and 19th C., and
 The US and Soviet Union(partly) — in the 20th century
 During the Great depression the old hegemon, Great
Britain had lost the capacity to stabilized the system.
 The new Hegemon USA did not yet understand the need to
take on that role or benefits global of economic instability.
 HST has influenced the establishment of the Bretton
Woods institutions (IMF and WB).
 Both are being the products of American power and
influence.
 Structuralism
 It is a variant of the Marxist perspective.
 It is focused on structural problems of the international liberal
capitalist economic system.
 International liberal economic main feature is centre-periphery
(dependency) r/s b/n the Global North and the Global South which
permanently resulted in an unequal trade and investment exchange.
 Dependency theory like Marxism holds that underdevelopment and
poverty in the LDCs is the result of exploitation by EDCs.
 Dependency theorists contend that the EDCs exploitation of the LDCs
is driven by the EDCs need for:-
 Cheap primary products (like oil) and
 Large external markets for the EDCs
 Expensive manufactured goods
 profitable investment opportunities and
 low wage labors.
 This is because the economic structure enriches the EDCs
and impoverishes the LDCs.
 Dependency theory argued that the EDCs follow policies
designed to keep LDCs dependent.
 For this reason economic structuralism call the system that
has been created Neocolonialism because it operates
without colonies but is nevertheless imperialism.
 Dependency of LDCs is maintained in numbers of ways.

 1. Some are subtle, like giving rich countries much greater

voting in IMF and some others IGOs, thereby allowing the
EDCs to manipulate the world economy to their advantage .
 The other techniques includes ;-
 corrupting and co-opting the local elite in LDCs by allowing them
personal wealth in return for governing their countries to benefits the North
or
 If the local elite defiant, using military forces to overthrown it and replace it
with a friendly regime
 Developing countries are subjected to unequal exchange in the
global market.
 In order to participate in the global capitalist economy they must sell
their raw material at the cheap price and have to buy finished good in
the higher price.
 Example, Ander Gunder Frank claims that the unequal exchange
and appropriation of economic surplus by the few at the expense
of the many are inherent in capitalism.
 Developmental State Approach
 Realizing the failure of Neo-liberal development
paradigm in 1980’s in solving economic problems
in developing countries.
 The concept of the developmental state is a variant
of mercantilism and advocates for the healthy role
of the state in the process of structural
transformation.
 Developmental state refers to a state intervenes and
guides the direction and pace of economic
development.
 The core feature of Developmental states are;-
1. Strong interventionism:- this implies state’s willingness and ability
to use a set of instruments like ;-
 Tax credits
 Subsidies
 Import controls
 Export promotion
 Direct financial and credit policies instruments that belong to the realm of
industrial, trade and financial policy.
 2. Existence of bureaucratic apparatus to efficiently and effectively
implement the planned process of development.
 3. Existence of active participation and response of the private
sector to state intervention.
 4. Regime legitimacy built on development that ensured the benefits
of development are equitably shared and the result is executing
common national project of development.
3.3. Survey of the Most Influential National Political Economy
systems in the world
 1. The American System of Market-Oriented

Capitalism
 The primary purpose of the American political economic activity is
started to benefit consumers while maximizing wealth creation, the
distribution of that wealth is of secondary importance.
 The American model of economy approaches is the Neoclassical
competitive market economy.
 This is a model in which individuals are assumed to maximize their
own private interests and business corporations are expected to
maximize profits.
 Neoclassical model rests on the assumption that markets are
competitive and competition should be promoted through antitrust and
other policies.
 The American economy is based upon the abstract theory of
economic science to a greater degree than is any other economy.
 The American economy is characterized as a system of managerial
capitalism.
 The economy was deeply transformed by the late 19th c rise of
huge corporations and the accompanying shift from a proprietary
capitalism to one dominated by large oligopolistic corporations.
 Regarding to industry, most American economists, public
officials, and business leaders are strongly opposed to industrial
policy.
 American economists argue that the structure and distribution of
industries in the United States should be left entirely to the
market.
2. The Japanese System of Developmental Capitalism
 In the Japanese scheme of things, the economy is
subordinate to the social and political objectives of society.
 With the restoration of Meiji (1868), Japan’s overriding
goals have been making the economy self-sufficient and
catching up with the West.
 Also, pre-WWII- the ambition has been building a strong
army and becoming an industrial power.
 After the tragic defeat in WWII, Japan has abandoned
militarism and has focused on becoming a powerful
industrial and technological nation.
 Japan has been concentrated to guide their economy in
order to pursue these sociopolitical objectives.
 The political goals have resulted in a national economic policy for
Japan best characterized as Neo-mercantilism.
 Neo-Mercantilism contains state regulation, and protection of
industrial sectors to increase their international competitiveness and
attain the commanding heights of the global economy.
 The Japanese people also uniquely belief in superiority of their
culture, and the destiny to become a great power.
 Many terms describe the Japanese nature of political economic system.
 Developmental state capitalism
 collective capitalism
 welfare corporatism
 competitive communism
 Network capitalism and strategic capitalism.
 Developmental state capitalism;-state must play a central
role in national economic development and in the
competition with the West.
 The state assumed central role in the economy and
specifically pursued rapid industrialization through:
 strategy employing trade protection
 export-led growth and other policies.
 In the early decades the Japanese provided government
support for favored industries, especially for high-tech
industries, through trade protection, generous subsidies, and
other.
 Policy used to promote infant industries in Japan
were;-
 Taxation, financial, and other policies that encouraged
extraordinarily high savings and investment rates.
 Fiscal and other policies that kept consumer prices high
and discouraged consumption, especially of foreign
goods.
 Strategic trade policies and import restrictions that
protected infant Japanese industries against both imported
goods and establishment of subsidiaries of foreign firms.
 Government support for basic industries, such as steel,
and for generic technology, like materials research.
3. The German System of Social Market Capitalism
 Germany, like Japan, emphasizes exports and national savings and
investment more than consumption.
 Germany permits considerable market freedom.

 Most states in Western Europe are significantly less interventionist

than Japan.
 Except for medium business sector NGO sectors in German economy
is highly oligopolistic and dominated by alliances b/n major
corporations and large private banks.
 The German system of political economy attempts to balance social
concerns and market efficiency.
 The German national system of political economy is representative of
the corporatist or
 “welfare state capitalism in which capital, organized labor, and
government cooperate in management of the economy
 In Germany major banks are vital to the provision of
capital to industry.
 In Germany labor has particularly important role in
corporate governance.
 At the time of the postwar era, the German federal
government and the individual Lander (states) have
created a stable and favorable environment for
private enterprise.
 The laws and regulations have successfully
encouraged:-
 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.
 The Japanese bureaucracy relies on administrative
guidance.
 At the core of the German system of political
economy is their central bank, or Bundesbank.
 Movement towards the European Economic and
Monetary Union has further increased the powerful
impact of the Bundesbank.
4. Differences among National Political Economy Systems
 National systems of political economy differ from one another in
many important respects.
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.
 Every modern economy must promote the welfare of its citizens.
 United state =laissez-faire and nonintervention of state.
 Japan=state’s central role in the overall management of the economy.
 In liberal societies, the welfare of the consumer and the autonomy of
the market are emphasized, state play minimal roles.
3.4. Core Issues, Governing institutions and Governance of
International Political Economy
 International Trade and the WTO

 The exchange of a good or service for a particular type of trade,

referred to as barter trade.
 In the modern period trade involves the exchange of money for goods
and services.
 This type of trade can take place within a domestic economy or
internationally.
 Generally, there are domestic and cross-border trade.

 Cross-border Trade:- the exchange of goods and services is mediated

by two or more different national governments.
 Each of them have their own set of interests and concerns, and each of
which exercises (sovereign) authority and control over its national
borders.
 WTO
 It is the successor to the General Agreement on Tariffs and Trade
(GATT), which was created in 1947 specialized agency of the
United Nations (UN) called International Trade Organization (ITO)
 Following the completion of the Uruguay Round (1986–94) of
multilateral trade negotiations, the WTO began operations on January
1, 1995.
 The WTO has six key objectives:
 (1) to set and enforce rules for international trade,
 (2) to provide a forum for negotiating and monitoring further trade
liberalization,
 (3) to resolve trade disputes,
 (4) to increase the transparency of decision-making processes,
 (5) to cooperate with other major international economic institutions
involved in global economic management, and
 (6) to help developing countries benefit fully from the global trading system.
 For instance, free Trade is, the unlimited purchasing of good and
services between countries without the imposition of constraints
like:-
 tariffs
 duties and
 quotas” (is never entirely free)
 To the liberal economy, cross-border trade is beneficial, both for
individual national economies and for the world as a whole.
 But there are debate revolving around on practical political
issues, as who benefits and who is harmed by trade.
 It is common to observe in the world disputes and frequently
serious tensions over trade.
 As a result of these problem, there are the question raised that,
how is international/global trade governed?
 One most common answer is the idea that Global/Regional
Free Trade Agreements govern it.
 Also, WTO and North American Free Trade Agreement (NAFTA) are
the organizations to govern it.
 NAFTA, is free trade agreement among the US, Canada, and Mexico.
 The tariffs were eliminated by mutual agreement in 2008.
 The notion of free trade in NAFTA had and still have significant
element of protectionist /mercantilist policies like tax on specific
imported goods (tariff), prohibiting their importation or imposing a
quantitative restriction.
 Generally, liberals’ argument continue to the principle of
comparative advantage, mercantilists and Marxists explain the power
difference between national economies, or on class inequality and
exploitation.
 International Investment and the WB
 The World Bank was created immediately after the WWII in
1945.
 Its activities are focused on the developing countries.

 It works for human development (education, health).

 Agriculture and rural development (irrigation, rural services)

 Environmental protection (pollution reduction, establishing

and enforcing regulations)
 Infrastructure (roads, urban regeneration, and electricity)
and governance (anti-corruption, development of legal
institutions).
 It provides loans and grants to the member-countries.

 In this way, it exercises huge influence on the economic

policies of developing countries.
 Primarily WB was planned as payment of Marshall Plan money to
reconstruction of Europe.
 The end result was exactly what the U.S. had hoped to achieve:-
 a financially
 Economically
 politically more stable and
 stronger Europe.
 Later on, the bank expanded to all developing countries in Asia,
Africa, and Latin America.
 It has the Neo-liberal versions to developing countries and the tough
aid/loan conditionality it often puts for policy conformance.
 In short for liberalist institution like IMF and WB have its own
purpose for developing state.
 So WB has the purpose of:-
 Provide long term loan
 Technical assistance
 Funding development projects
 International Finance and the IMF
 The IMF is an international organization that oversees those financial
institutions and regulations that act at the international level.
 The IMF has 184 member countries, but they do not enjoy an equal
say.
 The top ten countries have 55 per cent of the votes.
 They are the G-8 members (the US, Japan, Germany, France, the UK,
Italy, Canada and Russia), Saudi Arabia and China.
 The US alone has 17.4 per cent voting rights.
 The global financial system is divided into two separate.
1. Monetary system and
2. a credit system
 The international monetary system is refers to relationship between
national currencies among countries.
 It is related with how the exchange rate among different national
currencies is determined.
 The credit system, refers to the framework of rules, agreements,
institutions and the flow of financial capital for the purposes of
investment and trade financing.
 In short the purpose of IMF are
 Monitoring system
 Providing short term loans for developing countries .
 To provide loan there are conditionality.
 Reduction of public sector, provide for privet sector
 Elimination of subsidies
 Private sectors should be competent in the market
 In short SAP of IMF are:-
 Liberalization
 Democracy
 Human right
 Devaluation.
 Exchange Rates and the Exchange-Rate System
 An exchange rate is the price of one national currency in terms of
another.
 Example, as of 2013 rate one U.S. dollar ($1) was worth 98.1 Japanese
yen (¥).
 one British pound (£) was worth 1.54 U.S. dollars.

 There are two main exchange rate systems in the world.

Fixed exchange rate and

Floating exchange rate.
 Fixed-rate system, 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.
 In Floating-rate system, the value of a currency is determined solely
by money supply and money demand.
 In this system exists only when there is absolutely no intervention by
governments or other actors capable of influencing exchange-rate
values through nonmarket means.
THE END
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