International Political Economy

I INTERNATIONAL POLITICAL ECONOMY

International Political Economy, field of study that deals with the interaction of politics and economics among the world’s nations. The most important of these interactions concerns foreign trade. Students of international political economy also examine the politics of international financial relations, regional political and economic cooperation, international environmental management, international investment patterns of multinational corporations (MNCs), foreign aid, and relations between rich and poor regions of the world.

Military and defense issues dominated the study of international relations after World War II ended in 1945. In the decades that followed, attention focused on the Cold War conflict between the United States and the Soviet Union. However, since the end of the Cold War in 1991, policy makers and scholars have directed new attention to the importance of the international political economy in the study of international relations.

Students of international political economy examine how government policies affect economic trends and why nations adopt specific economic policies. They also seek to understand the foundations of global or regional economic cooperation in a world of growing, independent national governments.

II TRENDS IN INTERNATIONAL POLITICAL ECONOMY

Since the end of World War II, the pace of international economic transactions has risen steadily. At the same time, different regions of the world have experienced dramatically uneven patterns of economic growth. New international institutions have emerged to coordinate policy efforts and resolve international disputes that have accompanied these transformations in the global economy.

A International Trade

In the 1990s, international trade has grown to nearly 20 percent of the world’s total production of goods and services—around $4 trillion a year. This volume of trade is almost five times larger than the world’s military spending.

New institutions have developed to promote and manage the world’s trade. From 1948 to 1995, nations negotiated a series of treaties through the General Agreement on Tariffs and Trade (GATT), which gradually lowered tariffs for most manufactured goods.

In the 1990s the GATT transformed itself into the World Trade Organization (WTO), with more powers of enforcement and a broader mandate to promote trade. Overall, most political activity related to trade is concentrated in the industrialized countries of North America, Western Europe, and East Asia. Together, these countries account for 75 percent of all international trade.

In the 1990s, however, students of international political economy have also examined trade issues in the formerly Communist “transition economies” of Russia and Eastern Europe (see Communism). Nations in this region face formidable challenges as they try to join the capitalist world economy (see Capitalism).

B International Currency

Explosive growth in the exchange of foreign currencies in international markets has also transformed the global political economy (see foreign exchange). Advanced telecommunication technologies now link these markets in major financial trading centers, such as Tokyo, Hong Kong, Zürich (Switzerland), and New York City. By the mid-1990s, well over $1 trillion in foreign exchange transactions occurred daily. This huge sum of privately controlled money exceeds annual global expenditures on military forces. It also dwarfs the amounts of money available to national governments, which have lost some of their former ability to influence the international purchasing power of a given currency in foreign exchange markets.

C International Integration

The growth of international integration has been equally dramatic, with the most important developments occurring in Europe. The European Union (EU), formed in the 1950s, started with six countries coordinating coal and steel policies, then lowering tariffs to allow free trade among themselves. By the mid-1990s the EU had 15 member nations, with a waiting list of would-be members. The organization closely coordinates virtually all aspects of the economic policies of member nations, from trade and immigration to labor regulations and agricultural policies.

In 1999 a group of EU member nations adopted the euro, a single currency intended to replace the national currencies in most European countries. Outside of Europe regional integration has proceeded more slowly, with the implementation of the North American Free Trade Agreement (NAFTA) in 1994 and less influential agreements in other regions of the world.

D Multinational Corporations

The nature of international business has shifted dramatically as well since World War II. In the past, multinational corporations based their operations in one country, with their activities in other countries limited primarily to the sale of products. Today, the MNCs manufacture products in locations around the world. This allows corporations to take advantage of the various conditions in each country, such as cheap labor, skilled workers, natural resources, and favorable trade or tax regulations.

MNCs have also created global markets for their products, a trend that has led to the standardization of brand name products worldwide. For example, McDonald’s hamburgers are sold in dozens of countries, and every half-second a Barbie doll is sold somewhere in the world. The growing power of MNCs, however, raises difficult issues for national governments, which must weigh the need for foreign trade and investment against the desire to preserve national sovereignty and culture.

E Growth of Asian Economies

As the world economy has grown in the 1980s and 1990s, the center of economic activity has shifted from Europe and North America to the Asia-Pacific region. In East Asia, South Korea, Taiwan, and Singapore have registered dramatic economic growth and prosperity by using strategies based on foreign trade and export growth. China achieved 10 percent average annual growth in the late 1980s and early 1990s using a similar model of economic development.

Other East and Southeast Asian countries seek to emulate these successes. Meanwhile, most of Africa and several smaller areas have been left behind, with low and falling standards of living. Global economic change has also transformed the balance of political power. For example, U.S. policy makers pay more attention to Japan and China and less to Europe than they did several decades ago.

III THE STUDY OF INTERNATIONAL POLITICAL ECONOMY

The study of international political economy developed rapidly as an academic discipline in the 1980s and 1990s. Scholars in this subject area generally adopt the theoretical perspectives of either liberalism or mercantilism in their efforts to understand the operations of the global economy.

A Liberalism and Mercantilism

Advocates of liberal policies in international economics support free economic markets and trade and oppose active legislative or regulatory intervention of governments. A commitment to free trade is the foundation of comparative advantage, an idea developed by British economists Adam Smith and David Ricardo in the late 18th and early 19th centuries. According to the idea of comparative advantage, a country can produce and export certain goods and services more efficiently than another country because it has a greater abundance of natural resources and labor skills needed to produce these goods and services.

Nations should specialize in producing goods and services in which they have a comparative advantage, using the revenues gained to import other needed goods and services. Liberals argue that such practices maximize the creation of global wealth, increasing the fortunes of each individual country, although not necessarily equally.

Mercantilist policies, by contrast, favor greater political control over markets and exchanges. In particular, mercantilists advocate the use of protectionistpolicies—tariffs, subsidies, and other measures to protect domestic industries against foreign competitors. Mercantilists regard policies involving trade, money, and business as a basis to strengthen the power position of a nation relative to others.

In the 16th and 17th centuries, for instance, monarchies controlled national economies in Europe. At that time, government officials viewed a trade surplus (when export revenues exceed import costs) as a way to build a “war chest” of gold and silver that would be available for military needs in the event of war. Mercantilists concern themselves less than liberals with maximizing global wealth. They focus more upon the political and economic strength of their nations in relation to rival countries.

Liberals tolerate temporary protection of domestic industry in selective cases, as when an automotive or steel industry in a country needs time to establish itself before competing in global markets. Policies may also focus on protecting industries considered essential to national security. In the 1980s, for example, the U.S. government developed policies to protect the militarily strategic semiconductor industry from Japanese competitors. Specific industry and labor groups threatened by foreign competition often lobby government officials to protect the markets for their products by raising tariffs or other barriers to trade.

B Marxism

The ideas of 19th-century German philosopher Karl Marx offer a third political approach toward understanding economic behavior and policies. Marxism focuses on the inequality of relationships between economic classes and the vulnerability of the poorest economic groups to exploitation from wealthier and more powerful groups. Marxists view international economic relations as an extension of the class struggle between the rich and poor.

The Marxist approach has declined in prominence since the late 1980s, especially with the collapse of socialism in the former Soviet bloc, and the movement towards capitalism in China. However, Marxist theories still receive some attention from scholars, especially in the study of relations between the world’s rich and poor nations.

IV THE PROBLEM OF COLLECTIVE GOODS

Scholars who study how nations achieve cooperation despite the lack of a centralized world government to enforce rules pay special attention to the collective goods problem. A collective good is any benefit enjoyed by all members of a group regardless of their individual contribution. Each member faces the temptation to contribute less than other members towards maintaining the collective good. However, if too many members fail to meet their responsibilities, the good will not exist for anyone.

For example, the stocks of fish in the world’s oceans are a collective good. Each country benefits by catching more fish, yet if all countries maximize their catch the fish stocks decline, as happened around 1990 when global fish catches dropped sharply. In domestic political arenas, governments solve the collective goods problem by enforcing laws, such as making people pay their taxes or repair cars that pollute excessively. Collective goods problems present difficult dilemmas because no governmental authority exists to enforce agreements internationally.

Collective goods problems affect almost every issue studied by students of international political economy. In trade relations, each nation benefits from the ability to export its products to other national markets, but may gain by raising its own tariffs to restrict imports from other nations. In international currency exchange, each nation benefits from stable exchange rates that facilitate trade and business, but may seek to unilaterally devalue its own currency to rectify a trade deficit. In global environmental management, each nation benefits from sustainable fisheries, stable climate, and an intact ozone layer, but would rather have other nations bear the costs of maintaining these benefits.

Solutions to collective goods problems in the international political economy generally involve international agreements and institutions that coordinate the actions of various nations. Neoliberal institutionalist scholars generally find such solutions workable, though imperfect. However, realist scholars are far more pessimistic about solving collective goods problems, because they see nations as self-interested and mainly motivated by the desire to maximize power relative to other nations.

V FUTURE DIRECTIONS

In the 1990s, liberalism has generally prevailed over mercantilism and Marxism in academic and policy debates regarding the international political economy. The global expansion in international trade, business, and currency exchange has largely sustained the liberal argument about the benefits of free trade and open markets. Despite the collective goods problems and other obstacles to international cooperation, national governments and international organizations alike have found ways to make cooperation effective.

The international political economy faces a number of challenges in the coming decades. While regional integration among national economies has advanced, the potential has emerged for the division of the world into three rival trading blocs: Europe, the Americas, and Asia. While separate nations in Western Europe have merged economically through the EU, the economies of the former Soviet Union and Yugoslavia have split into separate pieces, at great cost.

The increased economic interdependence of rich and poor nations has resulted in a global backlash, leading to increased isolationism in the United States, violence against immigrants in Germany, and anti-Western Islamic movements in the Middle East. The deep economic depression in the former Soviet Union and economic and social deterioration in Africa also threaten the stability of an interdependent global economy.