International Political Economy

Spring 2010

Lecture Two

Zainab Shakir

The Structures of IPE

• States and markets are connected by “global systems of production, exchange, and distribution” which are termed as the STRUCTURES of the IPE.

• These structures are the institutions and arrangements that govern the behavior of states and markets in the international political economy, which together produce, exchange and distribute wealth and power.

The Structures of the International Political Economy

• The four global structures are:

SECURITY PRODUCTION

FINANCE KNOWLEDGE

The Security Structure• Security from natural forces or from the threats and actions of others is

perhaps the most basic human need.

• When one person or group provides security for another or contributes to that security, a security structure is created.

• The nature of the security structure was a contributing factor in the debate over China’s MFN status in 1994. Sometimes China has been thought of as a threat to US security interests, at other times it has been seen as a part of a trilateral balance of power along with the US and the Soviet Union.

• Until the 1970s, all trade with China was forbidden for national security reasons. Although this ban is now gone, it is clear that uncertainty and doubt remain regarding what threat, if any, China represents to the US. This security question tempers to some degree relations between the US and China in all areas.

The Production Structure• The Production Structure can be 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 wealth and wealth is nearly always linked to power. The issue of who produces what and for whom therefore lies at the heart of international political economy.

• Recent decades have seen dramatic changes in the production structure with the production of certain high value products such as cars shifting from the US to Japan and now to other countries including Korea, Mexico and China.

• These structural changes affect the distribution of wealth and power in the world and therefore impact the other structures of IPE.

The Finance Structure

• The pattern of money flows between and among nations.

• Defines who has access to money, how and on what terms.

• Money directly amounts to wealth and is therefore central to IPE.

• Can you think of any transfers of money between nations that actually take away from the wealth of the recipient nation?

The Knowledge Structure• Knowledge can lead to wealth for those who can use it

effectively.• Who has knowledge and how it is used is therefore an

important factor in IPE.• Nations with poor access to knowledge in the form of

industrial technology, scientific discoveries, medical procedures, or instant communications for example, find themselves at a disadvantage relative to others.

• One reason China desired MFN status in 1994 was that it hoped that increased economic interaction with the US would give it greater access to industrial technology. To move up in the international production structure, China needed to accelerate its acquisition of science,technology and know how from abroad.

Theoretical Perspectives on IPE•Variety of theories that attempt to describe how states and nations should interact or how they really do behave.

•Lenses through which we can view and interpret IPE.

•Useful to think of IPE perspectives as “points of view”

•The three main IPE theories are broadly termed:

Liberalism

Structuralism or Marxism

Mercantilism

Mercantilism

• Mercantilism or Economic Nationalism

• Looks at IPE mainly in terms of NATIONAL INTEREST.

• IPE perspective most closely associated with political science, especially the political philosophy of Realism.

Mercantilism

• National power comes from economic strength

• Exports strengthen state power, imports weaken state power

• Some exports are more valuable than others

– Manufactured goods are preferred to primary products

Liberalism

• Liberalism or Economic Liberalism• Looks at IPE issues mainly in terms of

INDIVIDUAL INTERESTS.• IPE perspective most closely associated with the

system of markets that are the study of economists.

Liberalism

• Countries gain from trade

• Comparative advantage

• Export what can be produced relatively cheaply at home

• Import what would be produced at relatively high costs at home

Structuralism or Marxism

• Looks at IPE issues mainly in terms of CLASS INTERESTS.

• Most closely associated with the method of analysis employed by most sociologists.

Marxism

The key feature of the IPE1. Private ownership of capital (means of production) and wage labor

2. Natural tendency towards concentration of capital (competition efficiency small wealthy elite)

3. Falling rate of profit (diminishing rate of return from capital) lower wages

4. Imbalance between ability to produce (efficient capital) and ability to purchase (falling wages)

5. Growing inequality eventually leads to revolution

6. Role of the state is to protect capital (agent of capitalist class)

Traditional schools of thought

Mercantilism Liberalism Marxism

Most important actor

The state Individuals Capitalist class

Role of the state Intervene to allocate resources

Property rights Protect/sustain the capitalist system

Image of the IPE Conflict between states over trade

Harmony Exploitation of labor

Proper objective Enhance national power

Enhance aggregate social welfare

Promote equal income distribution

Jurassic IPE

Mercantilism

• Overview• Intellectual roots of Mercantilism

Mercantilism: Overview• First Important Coherent IPE perspective• Central Focus: Problem of security and the role of the state and market in

providing and maintaining security in all its forms.• Theoretical perspective that accounts for one of the basic compulsions of all

nation states: to create and sustain wealth and power to preserve and protect their national security and independence.

• Wherever you find a concern about foreign threats to security whether military, economic or cultural, you will find evidence of mercantilist thought.

• Narrow definition of Mercantilism: state efforts to promote exports and limit imports thereby generating trade surpluses to create wealth and power.

• IPE thinks of mercantilism in BROADER terms: as a theoretical perspective that puts security at the center of national concerns. A nations security can be threatened in many ways: foreign armies, foreign firms and their products, foreign influence over international laws and institutions and even by foreign movies, magazines and television.

Classic Mercantilism• Classic mercantilist period-Grew out of developments related to the rise of nation

states in Europe during the 15th through 18th century.• New identity as ‘nation-states’-wanted to increase the power and wealth of their

nations-mercantilist way to achieving this goal-generation of trade surpluses.• To the extent that wealth enhanced a state’s military power by producing or

purchasing weapons, it enhanced national security as well.• Therefore, Wealth came to be regarded as an essential key to achieving and

preserving national security.• Power and Wealth intertwined in a VIRTUOUS CYCLE where power generates

wealth—can be used to buy weapons and finance armies—increases power which leads to more wealth.

• At the same time, power and wealth also part of a VICIOUS CYCLE—policies adopted by one nation state to generate and protect their national wealth and security were often perceived to be at the expense of another state.

• Mercantilism is therefore a ZERO SUM worldview—gain by one state are seen as a loss by competing states.

Mercantilism: Overview

Trade SurplusWealth Generation

Power to produce/purchase weapons increases

National Security Increases

17th Century-Birth of “nation states” in Europe

Desire to increase wealth and power

How???

Classic Mercantilism

• Colonialism as a instrument to control trade. HOW???

• Mercantilists established colonies to be exclusive markets for the goods of the mother country, a source of raw materials or a source of cheap labor.

Classic Mercantilism

• Classic Mercantilism then refers to a period of history when newly emerging nation states faced the problem of using their economies as a means to achieve wealth and power for the sake of national security.

• The political philosophy of Mercantilism suggested how national leaders can create a virtuous cycle of wealth and power that would allow them to prosper while making them more powerful.

• Policies included the use of subsidies—generate exports—restrictions on imports—along with the development of colonial empires.

Mercantilism: Intellectual Roots• As a philosophical outlook, mercantilism describes the role of the state in the economy.• Alexander Hamilton, one of the founders of the US was proponent of mercantilism.• Argued for trade protection and a strong role for the state in protecting domestic industries.• To successfully industrialize, the US should adopt protectionist trade policies that would

help its industries compete with the more mature state-assisted industries of other nations.• 19th Century political economist Friedrich List made similar case for mercantilism with

respect to Germany.• National interest lies in state promotion of industry and short term sacrifice for future gain.• State action needed to promote PRODUCTIVE POWER in the form of education,

technology, and industry.• According to List, the power of producing is..infinitely for important than wealth itself.• Argued that manufacturing and not agriculture form a more desirable basis for national

wealth and power as manufacturing developed greater human skills and opportunities.

Mercantilism: Intellectual Roots

• The writings of Hamilton and List incorporate a spirit of PATRIOTIC NATIONALISM to the extent that they emphasize the state’s use of the economy to do what is in the best interests of the nation.

• Robert Reich writes that “the idea that the citizens of a nation shared responsibility for their economic well-being was a natural outgrowth of this budding patriotism.”

• This kind of patriotic political economy still found everywhere in the world.• Many officials in Less Developed Countries (LDCs) view the development

and nation building process as one of ‘catching up’ to the western industrialized nations.

• Look at the state to protect infant domestic industries against the more mature industries and protectionist policies of the industrialized nations.

• At some level or another, these are the emotions that drive mercantilism.

What is Neomercantilism?

• Accounts for the variety of ways that states in today’s increasingly interdependent international political economy attempt to create political and economic advantages for its industries and counter the advantages that other states give to their industries.

• Critics of neomercantilism, such as economic liberals usually oppose state policies that enhance domestic welfare by promoting trade surpluses at the expense of consumers and other countries. Examples??

Next Class

• Mercantilism Continued…