This document provides an overview of international political economy (IPE). It discusses the meaning and nature of IPE, focusing on the political and economic dimensions. It outlines three major theoretical perspectives on IPE: mercantilism/economic nationalism, liberalism, and Marxism. Differences in national political economy systems are examined through case studies of the US, Japan, and Germany. Finally, core issues in IPE governance are discussed, specifically international trade and the role of the World Trade Organization.

1. CHAPTER THREE
INTERNATIONAL POLITICAL ECONOMY (IPE)
3.Introduction
The study of political economy has been dominated by a national and
international level debate over the responsibilities of the state with regard to
the economy.
The study deals on the role of state in economy and the relation between
state and market in economy.
At the international level of analysis, political economy focuses on how
international trade, investment, foreign loan and foreign aid should be
governed.
 It also deals with the role of international institutions like the IMF, WB and
WTO in the governance of international finance, investment and trade.

2. 3.1. Meaning and Nature of International Political Economy (IPE)
 Meaning: International Political economy is a field of inquiry that
studies the ever-changing relationships between governments,
businesses org’ and social forces across history and in different
geographical areas.
 Defined this way, the field consists of two central dimensions
namely:
A. Political dimension.
B. Economic dimension.

3. A. The political dimension: It accounts for the use of power by a
variety of actors, including individuals, states, International
organizations, nongovernmental organizations and Transnational
corporations (TNCs).
 All these actors make decisions about the distribution of tangible
things such as money and products or intangible things such as
security and innovation
B. The economic dimension: It deals with how scarce resources are
distributed among individuals, groups, and nation-states.

4. 3.2. Theoretical perspectives of International Political Economy
There are three major theoretical ( ideological) perspectives regarding
the nature and functioning of the IPE:
1. Economic Nationalism (Mercantilism)
2. liberalism 3. Marxism
1. Mercantilism/ Economic Nationalism
 Mercantilism is the oldest of the three, dating back as early 16th C.
 Mercantilism: is a theoretical perspective which defends a strong and
all-encompassing role of the state in the economy both in domestic
and international trade, investment and finance.
 Many scholars point to Friedrich List considered as the intellectual
father of the mercantilist thought and it is a thought in response to
Adam Smith’s liberal perspective.

5. According to mercantilists, states should play a disciplinary
role in the economy to ensure adequate levels of competition.
It emphasizes on an extreme policy of autarky to promote
national economic self-sufficiency.
In 21th century mercantilism/neo mercantilist defended the
sophisticated and interventionist role of the state in the economy
through a variety of means, including tax policy, subsidization,
banking regulation, labor control, and interest-rate management.
Example Japanese, South Korean, Taiwan and Chinese.

6. 2. Liberalism
 It defends the idea of free market system (i.e free trade/trade
liberalization and free financial and Foreign Direct Investment flows).
 Removing barriers to the free flow of goods and services among
countries is the foundational value and principle of liberalism.
 In this approach, governments continue to engage in protectionism
which means, gov’t correct market failures and provide public goods.
At early liberalism advocate the concept of comparative advantage.
But later it shift from the conventional theory of comparative advantage
to competitive advantage.

7. 3.Marxism
 The collapse of the Soviet Union in the 1990’s can resulted to a
clear failure and death of Marxism.
 Marxism is the youngest of the three and it is advanced by Karl
Marx who are emerged on critique of classical economics.
 it is true that central planning in command economies that existed
in socialist/communist states.
 According to Marxism, global and national income inequality
remains extreme b/n the rich &poor; Exploitation of labor shows no
sign of reduction; the problem of child labor and even child slave
labor has become endemic and so on and so forth.

8.  Marxists tell us that all of these crises are reflect the inherent
instability and volatility of a global capitalist system.
 Marxism as a doctrine of how to manage an economy has been
discredited but as an analytic tool and ideological critique of
capitalism it survives and will continue to survive as long as those
flaws of the capitalist system remain.
 In addition to the above mentioned foundational theories of IPE, the
following three contemporary theories of IPE are also worth
considering.
A. Hegemonic Stability Theory (HST)
B. Structuralism Theory
C. Developmental State Approach

9. A. Hegemonic Stability Theory It is a hybrid theory containing elements of
mercantilism, liberalism, and even Marxism
 HST argues that, the root cause of the world Great Depression of the
1920s and 1930s was the absence of a benevolent hegemony that is, a
dominant state willing and able to take responsibility to smooth operation
of the International economic system as a whole.
 During the Great depression period the old hegemony, Great Britain, had
lost the capacity to stabilize the international system, while the new
(latent) hegemony, the United States, did not yet understand the need to
take on that role for global economic instability.
 During its explanatory power to the Great Depression, HST has
influenced the establishment of the IMF and WB.

10. B. Structuralism
 Structuralism starts analysis from a practical diagnosis of the specific
structural problems of the international liberal capitalist economic system
whose main feature is dependency relationship between the Global North
and the Global South which permanently resulted in unequal trade and
investment exchange.
 It advocates for a new pattern of development based on industrialization
through 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 became a central
objective in many development plans.

11. C. Developmental State Approach
 The term developmental state refers to a state that intervenes and
guides the direction and pace of economic development.
 it advocates for the robust role of the state in the process of structural
transformation.
Some of the core features of developmental state include;
 State strong interventionism
 Efficiently and Effectively bureaucratic apparatus
 Active participation and response of the private sector
 Regime legitimacy built on development results that ensured equitably
shared of benefits to all.

12. 3.3. Differences among National Political Economy Systems
(The case of USA, Japan and German)
 National systems of political economy differ from one another in
many aspects. The ff are some of driving force that states make
differ its national political economy from the one anther:
(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.

13. 1. The case of USA
The American system of political economy is founded on:
 The primary purpose of economic activity is to benefit consumers by
maximizing wealth creation of its people.
 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 neoclassical model rests on the assumption that markets
are competitive.
 The role of the state tends to be minimal

14. The predominant responsibility of the state in these
societies is to correct market failures and provide
public goods.
Concerning the system of corporate governance and
private business practices, shareholders (stockholders)
have an important role in the governance of American
business.
Regarding business practices, whereas the largest
American firms frequently invest and produce abroad.

15. 2. The case of Japanese
 In the Japanese case, the national economy is subordinate to the social and
political objectives of society.
 Japan best characterized as neo-mercantilism; it involves state assistance,
regulation, and protection of specific industrial sectors in order to increase
their international competitiveness.
 The Japanese frequently subordinate, the pursuit of economic efficiency to
social equity and domestic harmony.
 The role of the state is much more intrusive and interventionist in the
economy.
 Concerning the system of corporate governance and private business
practices, banks have played a more important role in both Japan and
Germany
 Japanese firms prefer to invest and produce at home.

16. 3. The case of German
The German economy has share some characteristics from American and
some from Japanese systems of political economy, but it is quite different from
both in other ways.
Germany economy, like Japan, emphasizes exports and national savings and
investment more than consumption.
Unlike Japan , Germany permits the market to function with considerable
freedom.
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.
In German, bank play a crucial role in the postwar German economy.

17. 3.4.Core Issues, Governing institutions and Governance of International
Political Economy
3.4.1. International Trade and the WTO
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 (GATT) created after the WWII.
It has about 150 members.
All decisions are taken commonly 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.

18. 3.4.2. International Investment and the WB
WB
The World Bank was created immediately after the Second World War
in 1945.
Its activities are focused on the developing countries.
It works for human development, agriculture and rural development,
environmental protection, infrastructure and governance, anti-corruption,
development of legal institutions.
It provides loans and grants to the member-countries.
In this way, it exercises enormous influence on the economic policies
of developing countries.

19. It is often criticized for setting the economic agenda of the poor
nations, attaching strict conditions to its loans and forcing free market
reforms.
Investment and development process in general in the developed
countries is predominantly governed by the interactions of multinational
companies
While 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).

20. 3.4.3. International Finance and the IMF
 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 ten countries have 55 per cent of the votes.
They are the G-8 members ( US, Japan, Germany, France, UK, Italy,
Canada, Russia, Saudi Arabia and China.
The US alone has 17.4 per cent voting rights.

21. The global financial system is divided into two separate systems: a
monetary system and a credit system.
I. The international monetary system: can be defined as the
relationship between and among national currencies.
More concretely, it revolves around the question of how the exchange
rate among different national currencies is determined.
II. The credit system, on the other hand: 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.

22. 3.5. Exchange Rates and the Exchange-Rate System
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.
In this case there is absolutely no intervention by governments or other
actors capable of influencing exchange-rate values through nonmarket
means.
A pure fixed-rate system: In this case the value of a particular currency
is fixed against the value of another single currency.

23. The question thus remains: How is the global financial system
governed?
The creation of IMF provided the answer for this question and it was set
up as neutral international financial institution. However, IMF was
designed to clearly represent U.S. interests and power first and
foremost and the interests of the other major capitalist countries.
This can be seen, from the way decision-making power within the IMF
was designed-i.e. voting power is 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. And, it is the US that tops up in this regard.

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