Chapter three of the document discusses the theoretical perspectives of international political economy (IPE), defining its meaning and significance before exploring various national political economy systems, such as liberalism, mercantilism, and marxism. It highlights the evolving nature of IPE, including the impact of globalization, the governance systems of international trade, and the roles of institutions like the WTO and the World Bank. The chapter emphasizes the complexities of market-state relationships and the importance of understanding the core issues in global political economy.

1. Chapter Three
International Political Economy (IPE)
By
Fekadu Tefera
April 2024

2. Objectives
After successfully completed this chapter, students should be
able
to:
Explain Identify And Analytically Distinguish The Most
Influential Theoretical Perspectives Of International Political
Economy
 The Meaning And Nature Of International Political Economy
Figure Out The Most Common National Political Economy
Systems/Models In The World And Their Major Divergences
 Identify And Examine The Core Issues, Governing Institutions
And Governance Of International Political Economy
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3. Brainstorming Question
1. What comes to your mind when you think of such
concepts as ‘International politics’, ‘International
economics’ and ‘International political economy?
2. How important do you think are these concepts in a
given society/state?
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4. Meaning and Nature of International Political
Economy (IPE)
• There is no universal agreement on how IPE should be defined.
• International Political Economy “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”.
• This definition is based on several important, but un-clear
assumptions.
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5. • First, it suggests that there are only two significant subjects of International
Political Economy: (a) markets and (b) states.
• Second, this definition tells us that the most important aspect of the
relationship between markets and states is based on tension, related on an
adversarial(characterized by conflict or opposition) way.
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6. Yet, the definition misses other important side of the story.
 Political society
 Non-state actors in global politics
 On the other hand, the name it self (IPE) have limitation for not
including other non-state actors like trans-national corporations.
 Due to this trend in today’s political economy, IPE’s definition is getting
ever widened and deepened and even the name of the field is changing
from IPE to GPE (Global Political Economy).
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7. “International political economy (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.”
• These definition consists of two central dimensions namely:
1. The political and
2. Economic dimension.
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8. 1. The political dimension:- it accounts for the use of power by a
variety of actors, including individuals, domestic groups, states
(acting as single units), and non-state actors.
 They also make decisions about
 The distribution of tangible things such as money and products or
 Intangible things such as security and innovation.
 Making of rules pertaining to how states and societies achieve their
goals.
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9. 2.The economic dimension:- deals with how scarce resources are
distributed among individuals, groups, and nation-states.
 People exchange goods and thoughts,
 Investors purchase stocks
 Banks lend money
All these relationships coordinate economic activities all over the
world.
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10. Theoretical perspectives of International
Political Economy
 There are three major theoretical perspectives regarding the nature
and functioning of the International Political economy:
1. Liberalism,
2. Marxism by karl marx , (the youngest) and
3. Nationalism (mercantilism). The oldest
 Since the mid-1980s, the relevance of the three perspectives has
changed dramatically.
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11.  With the end of both communism and the “import-substitution”
strategies of many less developed countries (ldcs), the relevance of
Marxism greatly declined, and liberalism has experienced a
relatively considerable growth in influence.
 This scale down the role of the state in the economy, and shift to
export-led growth strategies.
 Marxism as a doctrine of how to manage an economy has been
discredited but as an analytic tool and ideological of capitalism
survives due to the capitalist system.
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12. 1. Mercantilism/Nationalism
 Is an ideological perspective which defends a strong and
pervasive(unwelcome influence or physical effect) role of the state in the economy both in
domestic and international trade.
 Mercantilism emphasizes the importance of balance-of-payment
surpluses in trade with other countries and this promote national economic
self-sufficiency.
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13. Cont.….
As it developed in the 21st century, mercantilism (or neo-
mercantilism) 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.
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14. Cont.….
 Including tax policy, subsidization, banking regulation, labor control,
and interest-rate management.
And also states should play a disciplinary role in the economy to ensure
adequate levels of competition.
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15. Cont.….
 Japanese, South Korean, Taiwanese and Chinese national political
economies instead of the term mercantilism, they used ‘Developmental
State Approach’.
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16. 2. Liberalism
 It defends the idea of free market system by removing barriers to the
free flow of goods and services among countries.
 It reduces prices,
 Raises the standard of living for more people,
 Makes a wider variety of products available, and
 Help contributes to improve the best “comparative advantage”.
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17. Cont.….
 By strongly influenced of costs, arbitrary specialization, and
government and corporate policies, comparative advantage theory
shifts to what is known as competitive advantage.
 Because of the shift governments continue to engage in protectionism.
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18. 3. Marxism
 Following the collapse of the soviet union in the 1990’s and the apparent
embrace of the free market economy by a significant number of developing
countries, marks a clear failure and death of marxism.
 Even most of the Marxist critique has been negated by any historical and
contemporary realities which brings failures to the system.
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19. Cont.….
 They were not true communists though that it has proven to be a failure.
E.g. The richest 20% of the world’s population controlled 83% of the world’s
income.
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20. Cont.…
 In addition to the above mentioned foundational theories of International Political
economy, the following three contemporary theories also worth considering.
 Hegemonic Stability Theory (HST)
 Structuralism
 Developmental State Approach
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21. Hegemonic Stability Theory (HST)
 Is a hybrid theory containing elements of mercantilism, liberalism, and
even Marxism. Its closest association, however, is with mercantilism.
 The basic argument of HST is simple: the root cause of the economic
troubles in Europe and much of the world in the Great Depression of the
1920s and 1930s was the absence of a benevolent(Charitable rather than profit making)
hegemon.( a supreme leader)
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22. Cont.…
 Then after, HST has thus influenced the establishment of the Bretton
Woods institutions (IMF and WB) both being the products of American
power and influence.
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23. Structuralism
 Is a variant of the Marxist perspective whose main feature is center-
periphery (dependency) relationship between the Global North and the
Global South which permanently resulted in an “unequal (trade and
investment) exchange.”
 Also known as ‘‘Prebisch-Singer thesis’’ and it advocates for a new
pattern of development based on industrialization via import
substitution based on protectionist policies.
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24. Developmental State Approach
 Is a variant(a form of version of something that differs in some respect from other forms of something) of
mercantilism and it advocates for the robust(strong & healthy) 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.
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25. Some of the core features of developmental
state include:-
 Strong interventionism:- 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.
 Existence of bureaucratic apparatus to efficiently and effectively
implement the planned process of development.
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26. Cont.….
 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 on common national project of
development.
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27. Survey of the Most Influential National
Political Economy systems in the world
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28. The American System of Market-Oriented
Capitalism
 It is founded on the premise that the primary purpose of economic activity
is to benefit consumers while maximizing wealth creation.
The approach focuses on competitive market economy in which individuals
are assumed to maximize their own private interests (utility), and business
corporations are expected to maximize profits.
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29.  Competition is the determinant factor and the
economy is open for the outside world.
 The economy is dominated by big corporations.
 The government have the responsibility to regulate
business, full employment and economic equality.
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30. Cont.….
 Consumer advocates want a strong role for the government in the
economy to protect the consumer.
American economists and many others react negatively because of their
belief that competition is the best protection for consumers except when
there are market failures.
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31. The Japanese System of Developmental Capitalism
 In the Japanese scheme of things, the economy is subordinate
to the social and political objectives of society.
 In the pre-World War II years, this ambition meant building a
strong army and becoming an industrial power.
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32. Cont.….
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.
They used to put strong effort to guide the evolution and
functioning of their economy in order to pursue these socio-
political objectives.
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33.  National economic policy for Japan best characterized as
neo-mercantilism.
It involves
 State assistance, Regulation, and Protection of specific
industrial sectors to attain the “commanding heights” of
the global economy.
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34. Source of this powerful economic drive for the japan
were from:-
 Its strong sense of economic and political vulnerability.
 The Japanese people’s overwhelming belief in their uniqueness,
 The superiority of their culture, and
 Their manifest destiny to become a great power.
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35. Cont.….
 Many terms have been used to characterize the distinctive nature of the
Japanese system of political economy but it best suit to developmental
state capitalism.
 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.
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36. Japanese industrial policy
 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.
 “infant industry” protection system deserves special attention.
Among the policies Japan has used to promote its infant industries
include the followings:
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37.  Taxation, financial, and other policies that encouraged
extraordinarily high savings and investment rates.
 Fiscal and other policies that kept consumer prices high, corporate
earnings up to discouraged consumption 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.
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38. Cont.….
 Government support for basic industries, such as steel, and for generic
technology, like materials research.
 Competition (antitrust) and other policies favorable to the keiretsu (business
network) and to inter-firm cooperation.
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39. The German System of Social Market Capitalism
 Germany emphasizes on exports, national savings and investment
more than consumption.
 Germany permits the market to function with considerable freedom.
 The non-governmental sector of the German economy is highly
oligopolistic( An economic setup in which a few companies rule over many in a particular market or
industry) 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.
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40. Cont.….
 In Germany, that major banks are vital to the provision of capital to
industry and 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.
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41. Cont.….
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 states have created a stable and
favorable environment for private enterprise by:-
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42. Cont.….
1
• Encouraged a high savings rate.
2
• Rapid capital accumulation, and economic growth.
3
• Reduces uncertainty and creates a stable business climate.
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43. On the other hand, the role of the German state in the microeconomic
aspects of the economy has been MODEST.
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44. Core Issues, Governing institutions and Governance of International
Political Economy
International trade and the WTO
 Barter trade and the exchange of money for goods and services.
 Trade can take place entirely within a domestic economy or internationally.
 But there are a number of critical distinctions between domestic and cross-border
trade.
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45. Cont.….
 In cross-border trade
 The exchange of goods and services is mediated by at least two different
national governments.
 Each of which exercises (sovereign) authority and control over its
national borders.
 In practice, this means that even the “free trade’’ .
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46. Cont.….
 Standard definition of free trade as “the unrestricted purchase and sale
of goods and services between countries without the imposition of
constraints such as tariffs, duties and quotas”
 But in reality free trade is never entirely free.
 So “how is international/global trade governed?”
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47. Cont.….
 One most common answer is the idea that Global/Regional free trade
agreements govern it.
 i.e institutions like world trade organization (WTO) and north American
free trade agreement (NAFTA) or similar other organizations.
E.g., Protectionist /mercantilist policies.
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48. Cont.….
 The world trade organization (WTO) is an international organization which
sets the rules for global trade.
 This organization was set up in 1995 as the successor to the general
agreement on trade and tariffs created after the second world war.
 It has about 150 members.
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49. Cont.….
• 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.
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50. International Investment and the WB
WB (world bank)
 The world bank was created immediately after the second world war in
1945.
 Its activities are focused on the developing countries issues like:-
 Human development , (education, health)
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51. Cont.….
 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.
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52. International Investment
• Foreign direct investment (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.
• FDI creates favorable conditions for the developments of new and
better technologies.
• Also brings improvements in global finance which made it easier
and more profitable to build integrated production systems across
borders.
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54.  While investment and the development process in general in the
developed countries is predominantly governed by the interactions of
multinational companies.
 Investment and development process in the developing countries, on
the other hand, are directly or indirectly governed by the WB (some
times more powerfully than the governments of sovereign states).
i.e. Because of the aid/loan conditionality which often puts developing
countries unable to defend their policy freedom and the relationship
with WB has often been not smooth. 54

55. International Finance and The IMF
 The International Monetary Fund (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 10 countries have 55% of the votes.
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56. Cont.….
 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% voting rights.
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57.  The global financial system is divided into two.
1. Monetary system:- relationship between and among national currencies.
 It answer question of how the exchange rate among different national
currencies is determined.
2. A credit system:- refers to the framework of rules, agreements,
institutions, and practices that facilitate the transnational flow of financial
capital for the purposes of investment and trade financing.
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58. Cont.….
 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.
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59. 1. In a pure floating-rate system
 The value of a currency is determined solely by money
supply and money demand.
 There is absolutely no intervention by governments.
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60. 2. A pure fixed-rate system
 Is the value of a particular currency is fixed against the value of
another single currency.
 So, How is the global financial system governed?
The creation of the International Monetary Fund (IMF) provided the
answer for this question.
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61. Cont.….
 The IMF, which was set up as an ostensibly(seemingly) neutral
international financial institution, was designed to clearly
represent U.S. interests and power on first and the interests of
the other major capitalist countries (the developed economies)
secondarily while governing the global finical system.
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62. Cont.….
 The decision-making power within the IMF was designed by Voting
power which determined by what the IMF calls a Quota.
 A Quota is the amount of money that a member country pays to the
IMF.
Accordingly, the more a country pays, the more say it has in IMF
decision makings.
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