Ph.D.

Economics (Morning Program)

Globalization and Economic Integration
Semester-II, Session, 2022-27
School of Economics
University of the Punjab, Lahore

The International Political Economy

(I)
I. Introduction

II. Theories of International Political Economy

This section introduces the student to three approaches to IPE: mercantilism,
liberalism, and structuralism.

A. International Political Economy – an approach to the study of international

relations that is concerned with the political determinants of international
economic relations and also with the economic determinants of international
political relations.
1. We have often discusses the interdependent nature of the contemporary
international system. Now, we will examine this more closely.

B. Economic Nationalism – the belief that the state should use its economic strength
to further national interests, and that a state should use its power to build its
economic strength, also known as mercantilism

1. Realist approach – conflict characterizes international economic relations

a. IPE as a zero-sum game
b. Emphasis on political goals (should govern economic policy)
c. Mercantilists believe that you should subvert the market to the state

2. Practices of economic nationalism

a. Imperialism/Neoimperialism
(1) Imperialism – direct control of another land and its people to further
your own states economic gain
(2) Colonial legacy (no longer exists)
(3) Neoimperialism – indirect control of another land and its people to
further your own states economic gain
(4) EDCs over LDCs through means such as MNCs, FDI, IMF, etc.

b. Economic incentives and disincentives

(1) Carrot versus stick
(2) Incentives (carrots) – foreign aid, favorable trade policies
(3) Disincentives (sticks) – economic sanctions

c. Protectionism and domestic support

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 (1) Economic nationalists want their states to use trade barriers, economic
subsidies, and protect domestic industries
(2) Opposed to economic internationalism because they believe it erodes
sovereignty and the national economic base
(3) These are the “Buy American” people

C. Economic Internationalism – the belief that international economic relations

should and can be conducted cooperatively because the international economy is a
non-zero sum game in which prosperity is available to all, also known as
capitalism, laissez-faire, liberalism, or free trade

1. Liberal approach
a. IPE as a non-zero sum game, meaning that everyone can benefit from
prosperity

2. Practices
a. Separate politics from economics – opposed to tariff barriers, domestic
subsidies, sanctions (opposed to economic nationalists), let the market be
competitive and don’t interfere
(1) Adam Smith’s exposition on capital theory: The Wealth of Nations
(1776), classic or pure capitalism, not adhered to much today

b. Keynesian economics, use the state to regulate the worst aspects of

capitalism (monopolies, unfair competition), more likely to be used today
(1) Use IGOs and national governments to regulate international economic
interchange
(2) IMF, GATT, and other organizations to promote trade

c. Two main goals of IGOs:

(1) Ensure spread of capitalism and free trade
(2) Ease worst inequalities

D. Economic Structuralism or Radicalism – the belief that economic structure

determines politics, as the conduct of world politics is based on the way that the
world is organized economically. A radical restructuring of the economic system
is required to end the uneven distribution of wealth

1. Haves (EDCs) exploit the have-nots (LDCs)

2. Marxism – the philosophy of Karl Marx that the economic (material) order
determines political and social relationships. Thus, history, the current
situation, and the future are determined by the economic struggle
a. Marx saw the economy as a site of human exploitation and class
inequality. Marx takes the zero-sum argument of mercantilism and
applies it to relations of classes instead of states.
b. For Marxists, the capitalist economy is based on two antagonistic social
classes: One class, the bourgeoisie, owns the means of production; the

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 other class, the proletariat, owns only its labor power which it must sell to
the bourgeoisie. But labor puts in more work than it gets back in pay;
there is a surplus value appropriated to the bourgeoisie. So the capitalists
(bourgeoisie) profit and it is derived from labor exploitation.
c. Marx believed that capitalism paves the way for a socialist revolution
where the means of production will be placed under social control for the
benefit of the proletariat who are the vast majority. Therefore, Marxists
advocate overthrowing the capitalist world economy and replacing it with
socialism.

3. Lenin took Marxism one step further in Imperialism: The Highest Stage of
Capitalism where he formulated the Law of Uneven Development. Lenin
says that the revolution inherent in the capitalist societies has not occurred
because of colonialism and imperialism, the EDCs are transferring the wealth
gap (bourgeois versus proletariat, no longer within the state, rather within the
system, or between states) to the LDCs

a. Marxists have little use for the state (because it is a tool of the capitalists),
once the revolution has occurred the state will no longer exist
b. Marxism is an economic theory that tries to make all the social classes
equal
c. Marxists put economics first and politics second

4. Dependency theory (neo-Marxist theory) – the belief that the industrial North
has created a neocolonial relationship with the South, in which the LCDs are
dependent on and disadvantaged by their economic relations with the
capitalist industrial countries

a. The starting point for dependency theory is underdevelopment.

Underdevelopment is not a condition which once characterized all
countries. Rather, it is a process within the framework of the global
capitalist system to which LDCs have been subjected: they have been
underdeveloped as an intentional by-product of the development of the
EDCs
b. The idea is that global capitalism in one single process generates
development and wealth (in the industrialized world) and
underdevelopment and poverty (in the Third World)
c. Dependency theorists (Cardoas, Dos Santos) advocate import substitution
– LDCs must cut off, or severely limit, their ties to the capitalist world
market. Through reliance on their own strength, as well as mutual
cooperation, real economic development becomes possible, outside the
reach of the capitalist world

4. Modern World Systems theory – (Immanuel Wallerstein), According to

Wallerstein a world system is characterized by a certain economic and a
certain political structure with the one depending on the other. The modern

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 world economy is tied together economically in a single division of labor, but
politically, authority is decentralized, residing in multiple states.
a. Within this division of labor, a process of specialization took place. In
other words, the capitalist world economy is built on a hierarchy of core
areas – the core, the periphery, and the semi-periphery
(1) Core – the core areas contain the advanced and complex economic
activities (high profit manufactured goods and sophisticated
agriculture). These activities are controlled by the bourgeoisie.
(2) Periphery – peripheral areas are at the bottom of the hierarchy; they
produce staple goods such as grain, wood, sugar, etc. (primary
products, raw materials) They often employ slave or coerced labor;
what little industrial activity that exists is mostly under the external
control of capitalists for core states.
(3) Semi-periphery – semi-peripheral areas are economically mixed; they
are a middle layer between the upper stratum of core countries and the
lower stratum of peripheral countries.
(4) Because of the unequal exchange, tensions are created in the system.
The semi-periphery has an important function in this regard. They
provide an element of political stability, because the core countries are
not facing a unified opposition. They act as a buffer zone or shock
absorber.

III. Two Economic Worlds: North and South

This section characterizes the divisions between the North and South
A. Two Economic Worlds: Analyzing the Data, not so much a geographic distinction
as an economic distinction
1. Economic strength of North – diverse economic base
2. Economic weakness of South
a. Greater focus on agriculture, raw materials

3. Problems with classification

a. Not a clear dichotomy
(1) Newly industrializing countries (NICs) – less developed countries
whose economies and whose trade now include significant amounts of
manufactured products. As a result, these countries have a per capita
GNP significantly higher than the average per capita GNP for less
developed countries (most of Latin American and Asian states)

(2) Countries in transition (CITs) – former communist countries such as

Russia whose economies are in transition from socialism to capitalism

(3) Inaccurate statistics – most poor countries do not have the skill
(manpower and technology) or the will (why discuss your poor
economic condition) to keep accurate economic, social, or political
statistics
(4) Makes research very difficult

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 (5) Questionable relevance of data (GNP), GNP-PPP – items tend to have
a wide range regarding their costs in different countries, GNP is a
rough indicator, but hard to compare states, PPP tries to correct for this
(bundling goods) but it is still lacking

4. Common political experiences among LDCs – history of domination

B. Two Economic Worlds: Human Conditions

1. Disparities
a. LLDCs – those countries in the poorest of economic circumstances.
(1) Lower life expectancy
(2) Lower literacy rate
(3) Poor health
(4) Less access to food, water, and sanitation services
b. Declining condition in some LLDCs – the situation is only getting worse
(1) 85% of the world’s population lives in the South
(2) 25% live on about $1/day
(3) Indications that the wealth gap between the North and the South is
widening, so the rich are getting richer and the poor are getting poorer

C. Two Economic Roads: Approaches to North-South Relations

1. Circumstances – Why did the wealth gap develop?
a. Industrialization first in the North – provided wealth and advanced
technology
(1) Nationalism led to colonialism – technology lead to weapons that
could easily overpower the LDCs, needed these states for raw
materials, new markets, cheap labor

D. What can be done to help the LDCs?

1. Economic nationalism: Current rules and system adequate
a. National self-interest (look out for your own state first)
b. Political economy viewed as a zero-sum game
c. View foreign aid as counterproductive – LDCs trying to upset the status
quo
d. Self-help

2. Economic internationalism: Prosperity for all through economic interchange

a. Free trade
b. Foreign investment
c. Loans and aid
d. Global economy viewed as a non-zero sum game (prosperity for all)
e. If the LDCs will only plug into the capitalist world economy, they will
prosper

3. Economic structuralism: Current system must be altered

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 (1) Marxists advocate a revolution and the replacement of capitalism with
socialism
(2) Dependency theorists don’t advocate a revolution, rather they look to
cultural, political, and economic solutions (import substitution)

IV. The Growth and Extent of International Political Economy

This section offers a brief history of IPE and an analysis of its growth and scope.
A. Trade
1. General pattern of expandable trade (2 types)
a. Merchandise trade – the import and export of tangible manufactured
goods and raw materials
b. Service trade – the import and export of intangible goods
(1) India and the computer trade
c. Merchandise trade still accounts for the overwhelming majority of trade,
but service trade is gaining

2. Trade expansion – rapid growth in international trade since the end of WWII
a. Productive technology – industrial revolution increased industrial
productivity which in turn increased the volume of trade, states could
produce more than what they could consume, without trade their
economies would have stagnated
b. Resource requirements – the industrial revolution outstripped the states of
their natural resources, so they looked elsewhere
c. Materialism – the citizens of economically developed countries have
higher wages which allows them to consume a higher percentage of both
domestic and imported goods
d. Transportation – improvements in transportation reduced transportation
costs as well as increased the volume of goods that could be shipped
e. Free trade philosophy – prior and after WWI, the US maintained an
isolationist view, after WWII (and the Great Depression) the US lead the
way toward a free trade environment – reduction of tariff barriers, GATT
system (which has now become what?), the contemporary world sees a
significantly reduced number of tariff barriers among EDCs
(1) Democratic peace – democracies rarely, if ever, fight wars with one
another
(2) Liberal peace – not only are these countries democratic, but they also
don’t fight wars because their economies are so intertwined that they
would be damaging themselves

3. Uneven pattern of trade: North and South

a. Trade is dominated by North
b. LDCs dependent on EDCs for export earnings (only a small percentage of
trade occurs among LDCs)

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 c. LDCs rely on primary products (raw materials such as food, minerals,
timber, etc.), prices are lower than manufactured products, and they are
often in flux
EDCs rely on a diverse economy of manufactured goods, services, and
processed products
(1) Ex – LDCs receive the profit for provide rubber for tires, whereas the
EDCs get the profit from the completed car

B. International Investment
1. Foreign direct investment – buying stock, real estate, and other assets in
another country with the aim of gaining controlling interest in a foreign
economic enterprise. Different from portfolio investment, which involves
investment solely to gain appreciation through market fluctuations
a. Stake in foreign companies or real estate (trying to gain control)

2. Foreign portfolio investment – investment in the stocks and the public and
private debt instruments (such as bonds) of another country below the level
where the stock or bondholder can exercise control over the policies of the
stock-issuing company or the bond-issuing debtor
a. Does not involve control of companies

3. International investment and multinational corporations (MNCs)

a. Private enterprises
b. Subsidiaries operating in more than one state
c. Growth accelerated after WWII
d. Ownership of plants and/or resource extraction in other countries
e. Most based in North (headquarters, research and development)
f. MNCs are controversial in that they provide jobs and revenue to LDCs,
but they are also considered neoimperialist, corrupt the local elite (head
slave), capital-intensive, remove resources, environmental concerns

C. Monetary Relations – the entire scope of international monetary issues, such as

exchange rates, interest rates, balance of payments, and regulating institutions
(like the IMF)
1. Evolution of the monetary system
a. Bretton Woods system – creation of GATT, IMF, and World Bank, also
created the gold standard for currency evaluation (ended in 1973, now we
use the dollar)
b. Globalization of money
(1) Four main banking centers – Germany, Japan, UK, and US
c. North-South patterns of money and banking
(1) Dominated by North
2. Exchange rates – the values of two currencies relative to each other – for
example, how many pounds equal a dollar

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 (1) Exchange rates are constantly changing are have both positive and
negative consequences
3. Balance of payments – a figure that represents the net flow of money into
and out of a country due to trade, tourist expenditures, sale of services (such
as consulting), foreign aid, profits, and so forth (credits minus debits)
a. Credits – exports, tourism, foreign aid, etc.
b. Debits – imports, travel abroad, giving foreign aid, etc.
c. The US has a negative balance of payments (however, the number is a
small percentage of the GDP), LDCs generally carry a much larger blance
of payments deficit

D. The Impact of Expanded Economic Interchange

4. Trade
5. Foreign direct investment
6. Foreign portfolio investment
7. Domestic portfolio investment
8. All of these factors work together to produce an increased interdependent
economic environment – the close interrelationship and mutual dependence of
two or more domestic economies on each other
9. Autarky – economic independence from external sources, an unrealistic
concept, being completely self-sufficient