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9: INTERNATIONAL POLITICAL ECONOMY

ROBERT GILPIN: The Nature of Political Economy (pg 479-486)


• International society is increasingly divided between its political and economic
organization
• 2 contending propositions
◦ diminution of the power of the nation-state in order to give full rein to the productive
potentialities of the multinational corporation
◦ powerful nationalism can counterbalance American corporate domination

Meaning of political economy


• relationship between economics and politics is a reciprocal one
• economic process tends to redistribute power and wealth
• politics determines the framework of economic activity
• economics and politics in terms of 2 levels of analysis: those of structure and of
process
• politics is the realm of power
• economics takes as its province the creation and distribution of wealth
◦ WEALTH IS ANYTHING THAT CAN GENERATE FUTURE INCOME

**in the real world wealth and power are ultimately joined

3 major ideologies of political economy


1. Liberalism
-politics and economics as relatively separate and autonomous
-Adam Smith
-economic growth is primarily a function of the extent of the division of labour
-pursuit of wealth would determine the nature of the political order
-state should not interfere with economy
-public policy is the outcome of struggle between interest groups
-takes for granted the existing social order and given institutions
2. Marxism
-economics determines politics and political structure
-economic relations as a zero-sum game
-distribution of wealth among social classes is central
-interest of the dominant class determine the foreign policy of the state
-Marxism is essentially a theory of social change
3. Mercantilism
-economic relations as a zero-sum game
-distribution of power
-national interest determines foreign policy
-Rousseau's “general will”
-politics determines economic organization

**Marxists & Mercantilism: every interdependent international economy is essentially an


imperial or hierarchical system
**Liberals: system is maintained by the mutuality of the benefits provided by trade &
investment

Comparison of the Three Conceptions of Political Economy


Liberalism Marxism Mercantilism
Nature of economic Harmonious Conflictual Conflictual
relations
Nature of the Actors Households and firms Economic classes Nation-states
Goal of Economic Activity Maximization of global Maximization of class Maximization of national
welfare interests interests
Relationship between Economics should Economics does Politics determines
economics and politics determine politics determine politics economics
Theory of Change Dynamic equilibrium Tendency toward Shifts in the distribution of
disequilibrium power

HELEN V. MILNER: Globalization, Development and International Institutions:


Normative and Positive Perspectives (pg 486-502)
• at the end of WW2 several institutions were established to manage the world economy
and prevent another Great Depression
◦ IMF
◦ WB
◦ GATT --> WTO
• criticisms:
◦ see them as instruments for the domination of the developing countries
◦ interfering with market cycles

Role of the international economic institutions


• they were designed to help the developed countries create a cooperative and stable
world economy in a non-globalized world
• IMF
◦ support the fixed exchange rate system created at the Bretton Woods Conference
in 1944
◦ lender of last resort and a provider of funds in crisis
◦ started dealing less with the developed countries and more with the developing
◦ attachment of conditions to loans
• WB
◦ concentrated mostly on reconstruction and later on development
◦ gives interest-free loans and grants
• WTO
◦ central mission has been to promote trade liberalization by fostering negotiations
among countries

The Experience of the Developing Countries


• except for the WB, the original and primary mission of these institutions was NOT
promoting growth in the developing world
• prominent among the conditions attached to these loans was the liberalization of
policies toward trade and FDI
• progress has been mixed in many developing countries

Theories about the functions and benefits of International institutions


• membership is voluntary

4 reasons for the existence of these institutions


1. constraining the great powers
-without the GATT or WTO would the developing countries be better off if they had to
negotiate bilaterally with the large, rich countries?
-multilateralism provides protection against the asymmetries of power
-decisions in the IMF and WB are highly influenced by the US
-bilateral aid tends to be more oriented toward the political and economic interactions
of donors than is multilateral aid
2. providing information and reducing transaction costs
-international institutions also reduce uncertainty by monitoring the member states'
behaviour
-monitoring on the compliance of states with the commitments they have made to each
other
-complaints: advice given by IMF and WB fails to take into account the circumstances
of developing countries
-IMF programs lower economic growth and redistribute income away from the most
needy
-IMF programs DO reduce inflation and return greater macroeconomic stability
3. facilitating reciprocity
-cooperation in anarchy relies on reciprocity
-Reciprocity enhanced by the WTO's rules and monitoring can provide a context in
which these big countries can achieve more efficient, cooperative outcomes
-US, EU and Japan have used the WTO to enforce reciprocity strategies and lower
their trade barriers
-for most of the developing world, ensuring reciprocity has not been a main function of
the trade regime
4. promoting reform in domestic policies
-help domestic leaders to alter policies at home that they otherwise would not be able
to do
-we do not know what the overall domestic effect of IMF and WB membership on
countries has been

4 sources of the problems with international institutions


1. No impact
-the developing countries have experienced increasing globalization while the IFIs
capacity has not kept up with the rising demands for funds
-globalization may have done more to affect these countries than these international
institutions
-political instability, corruption, civil war, lack of the rule of law and authoritarianism are
viewed as the bigger sources of their problems
2. Capture by the powerful developed countries
-idea that the institutions were created by and for the rich
-aid has been used to prop up authoritarian governments and to continue with failed
policies longer than they otherwise would have
-studies show that donor interests often dictate which countries receive what aid, and
when
-privatization in the absence of a legal framework of corporate governance only helped
cause economic and political problems
-US exerts a great deal of influence over which countries get IMF loans
3. capture by private producers and investors
-interest of the IMF and WB have been increasingly dominated by interests of private
producers and investors
4. internal dysfunctions and failure of accountability
-organizations have developed their own internal logics, which may not serve the
interests of the poor countries
-focus on giving aid and making loans, but not on monitoring the results

*IMF to become more like an independent central bank

THOMAS L. FRIEDMAN: The First Law of Petropolitics (pg. 543-550)


• BAHRAIN -> first Arab Gulf state expected to run out of oil
◦ first Arab Gulf state to hold a free and fair election, women could run and vote
◦ first in the region to sign a free trade agreement with the US
• CORRELATION BETWEEN THE PRICE OF OIL AND THE PACE OF FREEDOM

First law of petropolitics:


-the price of oil and the pace of freedom always move in opposite directions
• the higher the average global crude oil price rises, the more free speech, free press,
etc... are eroded
• the lower the price of crude oil falls, the more petrolist leaders are sensitive to what
outside forces think of them

PETROLIST STATES -> dependent on oil production for the bulk of their exports or GDP and
have weak state institutions or outright authoritarian governments
-ex) Angola, Chad, Egypt, Saudi Arabia, Sudan, Venezuela

DUTCH DISEASE: process of industrialization that can result from a sudden natural resource
windfall
-value of their currency rises
-citizens start importing a lot
-domestic industrial sector gets wiped out

Mechanisms through which oil dampens democratization


1. TAXATION EFFECT
-no representation without taxation
-don't have to listen to the will of the populace because they don't get taxed
2. SPENDING EFFECT
-oil wealth leads to greater patronage spending, which in turn dampens pressures for
democratization
3. GROUP FORMATION EFFECT
-gvt can use new found wealth to prevent independent social groups from forming
4. MODERNIZATION EFFECT

GEOLOGY TRUMPS IDEOLOGY


• collapse in global oil prices around the late 1980s and early 1990s played a key role in
the collapse of the Soviet Union

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