UNIT 1

Theory of IPE
 Introduction

• IPE is the study of how politics influences economics relations within nations and
between nations.

• Economic relations refers to:

- the buying and selling of goods and services across borders,
- the flow of investment around the world,
- the wealth or poverty of regions and nations,
- the ways in which economic power influences the political relationships
among states (everything from alliances to war).
• From the perspective of a political leader(say, president or prime minister of a
nation), there are two major issues:
1. What makes a nation wealthy? How can you design policies that make your
nation wealthy or wealthier than it is now?
2. How can you design policies that spread that prosperity to your people?

In theory you must do that to get reelected if you rule a democracy.

Or if you rule in an authoritarian state you need to spread the wealth to prevent
yourself from being overthrown.
Then again, you may just be trying to enrich yourself. So, you hoard your own
nation’s wealth, keep your own people poor, and eventually face a potential backlash
by millions of impoverished people when they discover how you have plundered the
nations resources and the people’s work to make yourself wealthy.
• From the perspective of scholars and political leaders alike, the first step in
answering the above question is to answer the following questions:

• What is the proper role of government in economic activity?

• Is deep involvement of the government they key to economic growth or is it the

one thing that is sure to doom economic growth?

• To make a nation wealthy does the government lead or get out of the way or
lead in some areas while letting others flow naturally?
 The Role of Theory

• Theories of international political economy provide different ways of answering

the above questions.

• Theories are models of how the world works.

• They are tools for analysis.

• However, the world is much more complex than any theory could ever
illustrate, so be critical of theory and skeptical of theory.
 Three main bodies of Theory

• Economic Liberalism,
• Economic Nationalism, and
• Economic Structuralism. : Marxism and Dependency.
• Liberalism, Nationalism, and Dependency are capitalist theories.
• They all are based on the idea that creating wealth is the goal of economic
activity.
• They differ on how that should be done.
• Marxism, however, is not a capitalist theory. -- the creation of wealth and
accumulation of profit -- is evil to Marxists.
 Economic Liberalism
(often called Laissez-faire liberalism, or internationalism, or globalism)

• The theories of liberalism were stated best by Adam Smith in The Wealth of
Nations, 1776.
• The key to national wealth and therefore national power is economic growth.
• Wealth – material goods produced annually
• Different aspects of wealth
• production of wealth
• Productivity of labour: Division of labour
• Division of labour dependent on market size

• distribution of wealth
 Economic Liberalism
(often called Laissez-faire liberalism, or internationalism, or globalism)
Division of labour dependent on market size
• When the market is very small, no person can have any encouragement to dedicate himself
entirely to one employment. In the lone houses and very small villages which are scattered
about in so desert a country as the Highlands of Scotland, every farmer must be butcher,
baker and brewer for his own family.
• The nations that, according to the best authenticated history, appear to have been first
civilized, were those that dwelt round the coast of the Mediterranean sea. That sea, by far the
greatest inlet that is known in the world
• On the coast of the Mediterranean sea, Egypt seems to have been the first in which either
agriculture or manufactures were cultivated and improved to any considerable degree.
• The improvements in agriculture and manufactures seem likewise to have been of very great
antiquity in the provinces of Bengal in the East Indies, and in some of the eastern provinces
of China
• Since such, therefore, are the advantages of water-carriage, it is natural that the first
improvements of art and industry should be made where this conveniency opens the whole
world for a market to the produce of every sort of labour
 Economic Liberalism
(often called Laissez-faire liberalism, or internationalism, or globalism)

• The key to economic growth is free trade – the free flow of goods and services
and investment across borders.
• Political leaders should allow trade between nations to expand and deepen and
keep government intervention in that trade down to a minimum.
• This means that imports and exports should flourish with as little restriction as
possible.
• Liberals want the marketplace to make the economic decisions, not the
government.
 Case Example to understand Liberals’ stance
• Let’s analyze a fictitious market for chalk.
• There’s a company in Richmond (Richmond Chalk) that sells its chalk for $100
per box (great chalk!).
• There is also the Foreign Chalk Co. from State B – a foreign country, and it
makes its chalk, ships it across the Pacific and into Richmond and sells it for
$90 per box.
• The quality of the chalk is the same, but the price is different.
• Maybe Foreign Chalk Co. pays its workers less or has some new process
technologies which make it cheaper to make chalk.
• Anyway, as a chalk consumer you will go down to Target or Wal-Mart and you
will probably buy the $90 chalk from the Foreign Chalk Co. because you want
to save $10.
 Case Example to understand Liberals’ stance
• There is a local congressman in Richmond. He’s worried that Richmond Chalk will go
out of business
• He wants to protect that local business from the foreign competition.
• There are 3,000 Richmond Chalk jobs that will be lost if Richmond Chalk goes out of
business. The congressman may be blamed for it.
• But if he can somehow protect the home company from foreign competition, he gets
the credit and gets reelected. So he lobbies the leaders of the House of Representatives
and he tries to make some deals.
• There’s a big vote coming up. The President of the US wants to invade Iran and he
asks for a congressional resolution in support of overthrowing the Iranian government.
• The Richmond congressman thinks it’s a bad idea and is inclined to vote against it, but
he then proposes a deal. He says: “Mr. President, I will support the resolution calling
for the overthrow of the Iranian government if you impose a 20% tariff on foreign
chalk.” The president says, “Deal!”
 Case Example to understand Liberals’ stance
• Now, when you go to Target or Wal-Mart to buy chalk here are the prices:
• Richmond Chalk $100 per box and Foreign Chalk Company $108 per box ($90 per
box, plus the 20% tariff -- $18).
• Now which one will you buy? You’ll buy Richmond Chalk and save $8 per box.
Richmond jobs are saved. And they lived happily ever after.

Not according to liberals. Liberals see it differently.

No one lives happily every after.
 Case Example to understand Liberals’ stance
• Here’s how liberals see it:

• You now pay $10 more for each box of chalk. Not only that, but Richmond
Chalk may raise its prices to $105 a box and it will still be cheaper than the
Foreign Chalk Co. chalk.

• Richmond Chalk has been rewarded for its inefficiency. It could not compete
against the Foreign Chalk Co., but it is rewarded for that.

• The Foreign Chalk Co. is punished for being efficient. It was winning the
competition, but it winds up getting punished through a political deal.
 Case Example to understand Liberals’ stance
• Ultimately liberals argue this:
Without competition and winners and losers, economy will not have economic growth; will not have
innovation; will not have progress. If Foreign Chalk Co. is punished because it is winning, then why
should it or any other company try to win? If Richmond Chalk is rewarded for losing, then why not
continue to lose; save the effort and it will still be rewarded.

• Here’s what liberals want to happen.

Richmond Chalk and Foreign Chalk compete. Foreign sells at $90; Richmond sells at $100.
So Richmond can do several things. It can quit the chalk business and maybe go into erasers, or it can
change the way it does things.
Maybe it automates and makes the same amount of chalk with 20% fewer workers and it can sell for $88
per box. Maybe it simply cuts salaries to make it to $88 per box, and the employees are happy because a
pay cut is better than a layoff. So maybe Foreign Chalk responds by going to $87 a box and then
Richmond Chalk goes to $85, then Foreign Chalk goes to $83 and Richmond goes to $82. Then they
can’t cut prices anymore so they try another tact.
Maybe Richmond uses research and development and comes up with dustless chalk and colored chalk
and maybe dry erase markers and sells them for over $100 per box.
 Case Example to understand Liberals’ stance
• This situation can lead to innovation and excellence and a cut in prices.
• And here the consumer is king.
• Getting better products for lower prices is the goal.
• This is more significant in case of, say, building safer cars or developing new
medicines or better engines that reduce pollution or save travel time.
• Then competition starts to benefit people in a big way.
• Think of it this way: would we have cell phones and computers and new
Windows operating systems every few years if the companies in the
telecommunications and computer industries didn’t feel the need to compete
with each other for our business? Probably not.
 Case Example to understand Liberals’ stance
• Liberals argue that along with innovation there division of labor.
• Everyone finds a niche to make a living.
• If you lose one competition, you move on to compete in a new arena. You
specialize.
• So the US, with its huge amount of land and great soil, has the largest food
companies in the world. Saudi Arabia has oil, so its companies produce oil.
Japanese and South Korean companies go into shipbuilding. Chinese
companies make inexpensive, labor intensive products because China has an
abundance of people.
• This is called comparative advantage. You find your niche – what you can
excel in --- and you do it.
 Case Example to understand Liberals’ stance
• Multi-National Corporations
• The world now has a global marketplace. Within this global marketplace are MNCs – large
corporations that operate all around the world For example, you can buy a Coke in just about every
place in the world. And McDonald’s burgers infest just about every nation in the world. Exxon is
everywhere. So are Toyota, Honda, British Petroleum, and General Motors. About 90% of the
taxis in Shanghai, China are Volkswagens because VW has a plant there. Shell Oil is Dutch.
Nestlé’s is Swiss; Siemens is German. Bayer is German. And these companies have been in the
US so long they are as American as French Fries!

• More recently, there is something besides MNCs that runs the world economy. Products are losing
their nationalities. Something you buy on a shelf or a showroom may have been made by five, ten,
fifteen different companies based in five, ten, fifteen different nations. Companies from all over the
world work together to produce a product. Call up Dell customer service in USA and you are likely
to be talking to someone in India. Much of the medical transcription business – the business of
taking medical records dictated by a doctor and typing them up – is based in the Philippines.
• Liberals think this is a good thing. MNCs spread wealth and technology and jobs around the world.
 Classical Liberalism vs. Modern Liberalism
• Classical liberals have a tendency to believe that as long as the government doesn’t interfere in the economy, everyone will live happily
every after. They look at economic growth and identify something called “the business cycle.”
• This was the common belief until the Great Depression. Two ideas developed in response to the experience of the Depression.

• Modern Liberalism – the belief that the business cycle is not always self- regulating. Sometimes a bust can be so bad it causes the
economy to collapse. The solution is for the government to essentially jump start the economy by creating jobs and creating investment –
putting money in people’s pockets so they will begin to buy and sell products. Now it is expected that the government will have some role
in economic life to make sure that the economy keeps growing. In the US it is accepted by both parties, no matter what their rhetoric.
Republicans have a tendency to talk like Classical Liberals, but they won’t get very far if they talk about doing away with Social Security,
Medicare, Unemployment Insurance, etc.

• Faith in Free Trade -- A belief that free trade and the expansion of free trade is the key to preventing another economic collapse. Before the
Depression many nations responded to a slowdown in economic growth by placing restrictions on trade Since then end of WW II the US
has based its foreign policy on expanding free trade – doing away with tariffs, quotas, non-tariff barriers, and bans. This belief in free trade
was one of the pillars of US policy in the Cold War. The US has worked very hard to create an international economic order based on
liberal beliefs. The International Monetary Fund, the World Bank, the General Agreement on Tariffs and Trade, which gave way to the
World Trade Organization, all have as their founding principal a belief in free trade. Globalization is the success of that liberal
international economic order. The US has been able to write the rules and since the collapse of the USSR those rules are accepted by more
and more of the globe.

• Currently, the US is the leading liberal state in the world.

 Economic Nationalism

• Economic nationalism developed theoretically as a criticism of liberalism. It is based

on three basic ideas:

• States compete economically. Liberals believe that companies compete economically,

but states do not. Nationalists see companies as elements of a state’s power. So
Exxon, and Ford, and McDonalds’s and Coke contribute to US power. Mitsubishi,
and Honda, and Fuji contribute to Japanese power.
• Free trade only benefits the wealthiest, most advanced nations. In head-to-head
competition, which is what you get in free trade, the advanced or “mature” industries
will defeat less advanced or “infant” industries.
• For the less advanced nations there needs to be an alternative way of getting rich.
Free trade won’t lead to riches.
• Its main theorists are Alexander Hamilton, the first US Secretary of the Treasury, and
Friedrich List, a Prussian economist.
 Economic Nationalism
• Hamilton was writing at the early stages of US independence and his concern was
how the US might structure its economy to make sure the US remained independent.
Industrial power = national power = independence.

• If the US wished to remain independent it had to become an industrial power.

• At this time Jefferson was arguing that the US would be better off as a nation of
farmers.
• Hamilton felt that a nation of farmers would lose the next war with a European power
because it could not produce manufactured goods – housing, clothing, particularly
boots, and of course, weapons.
• So the US needed to end its dependency on the British economy for many of its
manufactured items.
• So to Hamilton, political independence from Britain required economic independence
from Britain.
 Economic Nationalism

• List lived in the US during the early days of US independence and read all of
Hamilton’s writings.
• He traveled back to his native Prussia and wrote about how Prussia could get out from
under the economic dominance of Britain.
• Britain was the most economically advanced nation in the world at the time.
• List felt free trade was essentially a scam.
• It was a British trick to get everyone to move toward free trade in hopes of creating
wealth, but instead only the British would prosper.
• In a nutshell, the advanced economies would always win the economic competition
against the less advanced economies.
 Economic Nationalism
• How does the industry from the less-advanced economy ever gain?
• To Hamilton and List then the answer was this.
1 Protect infant industries from foreign competition. Protectionism consists of using
tariffs, quotas, non-tariff barriers, bans, to protect key industries.
2 Importantly, this does not mean ending trade with other nations. It means protecting
industries that are identified as being crucial to national power.
• So Japan, for example, with nationalist economic policies since WW II, traded with the
US, but has pushed US automobiles, US consumer electronics, and US
telecommunications out of its market. This way Japan could build up its own industries in
those areas.
• The US, a liberal nation, allowed Japanese companies to export to the US and resultantly
US consumer electronics industry died off due to Japan’s success, and the US has had to
restrict sales of Japanese cars in the US in retaliation and to keep US auto makers from
collapsing.
3 When the less advanced economy catches up to the advanced economy then it can open up
to free trade and compete head-to-head as equals.
 Economic Structuralism

• Here Marxism and Dependency are placed together because both are concerned with
the international division of labor created by capitalism.
• Both theories see that division of labor as unfair, creating categories of rich and poor
people and rich and poor nations.

• The Marxist approach is to reject capitalism completely.

• The Dependency approach is to reform it.

 Economic Structuralism
• Karl Marx and Friedrich Engels were two German economists who created
a huge body of literature outlining a theoretical critique of capitalism.
• This is an ideology that spawned political movements and revolutions that
shook the world for roughly 150 years.
• Marx and Engels examined advanced capitalist nations, particularly
England and Prussia - in the midst of industrial revolution – manufacturing
was booming; people were working in factories; rapid urbanization had
begun.
• To Marx and Engels this advanced capitalism divided people into several
classes (owners and workers, or rich and poor or haves and have-nots).
• Owners own everything, and have all the power, and all the money.
Workers do all the work, and have no power, and no money.
 Economic Structuralism
• Marx and Engels hypothesized that one day the workers would realize
that they were being exploited by the owners and rise up to overthrow the
owners’ control of society.
• This would include overthrowing the government of the country because
the government’s main purpose was to enforce owner control of society.
• Marx and Engels felt that this revolution – workers’ revolution or
proletarian revolution – was a natural phenomenon, something that would
occur naturally in any nation that reached an advanced capitalist stage.
• So they predicted it would happen first in England or Prussia and would
not happen in more agricultural societies
• There would be several phases of evolution until the development of
Communism
 Economic Structuralism
• The next big theorist was Lenin, a Russian intellectual - developed a theory that
applied Marxism to international affairs.
• He said wealthy capitalist nations exploit poor nations. They force people into
slave labor; steal resources; impoverish these nations.
• He was talking about imperialism or colonialism.
• At this point in world history European nations had control of just about the entire
rest of the world.
• Lenin said that the poor nations would one day overthrow their colonial masters,
reject capitalism because of its linkage to colonialism, and develop Communist
societies.
• Workers revolution can be created by a clever and committed leadership. Lenin did
just that-In 1917 his Bolshevik movement seized power in Russia and led the first
Marxist revolution. In 1949 Mao Zedong led the second big Marxist revolution.
• Many nations followed their examples from the 1940s to the 1970s. This was the
Communist or Soviet Bloc during the Cold War.
 Economic Structuralism
Marx: Communism, a society which would have these characteristics:
• A system in which there is no private property; all property is owned by
everyone and everyone shares
• There is no exploitation since workers are the owners
• Everyone gets what they need from the society as a whole
• Everyone contributes based on what they can contribute
• Capitalist ideas such as the idea that people work to gain reward are
outmoded; people work to contribute and do not care if there is no relationship
between what they give to society and what they receive in return.
• So a young healthy person who works like an ox, but has no family,
contributes a great deal to society, but receives very little. The lazy person
with a large family receives a great deal even though he/she contributes little.
 Economic Structuralism
What was Marxism like when actually put into practice in the USSR and the
People’s Republic of China?

• Marx and Engels thought that after the revolution the government would
wither away. Once having created the proper economic relationships, a
government would not be necessary.
• However, in every Marxist state, the government became more powerful;
power became more centralized; and the nation was ruled by one person or a
handful of dictators, who ruled in a totalitarian manner through a Communist
Party apparatus that penetrated every aspect of the society.
• The goal was total control over every individual. Their word was law and you
risked your life if you questioned that word – imprisonment, torture,
execution of the person who challenged the government, and his/her friends
and family.
 Economic Structuralism
• In all these nations the revolution was rammed down the peoples’ throats.
Those who disagreed were considered enemies of the state. In Russia, Lenin
killed millions who opposed the revolution. Stalin, killed more - Roughly 20
million people from the 1920s to the early 1950s because they opposed his
government and/or its policies. Mao in China was worse. The number of
deaths may be as high as 100 million from 1949 to 1976, many from
starvation; many from execution, torture, and the long-term effects of
imprisonment.

• Economically these nations closed themselves off to trade with other nations.
Every aspect of economic life was controlled by the government, decided by
the government, regulated by the government. These economies are called
Command Economies – people became poorer; the states became
technologically backward; and many had severe starvation problems. China,
Russia, Viet Nam, North Korea, Ethiopia all had famines.
 Economic Structuralism
• Marx and Engels never said: Kill everyone who disagrees with you. Marxism
as implemented was very different from Marxism the theory.
• That doesn’t necessarily mean that Marxism would have worked if its
implementation hadn’t been accompanied by dictatorship and slaughter.
• Marxism does give huge amounts of power to revolutionary leaders and that
much power usually leads to corruption at best and carnage at its most typical.

• Also Marxism considers human nature to be one in which people will be

willing to share in ways that are counterintuitive. Capitalism - less optimistic
version of human nature – people will only work hard if they are rewarded.
• No communist system has ever sustained economic growth for more than a
generation. In fact, all command economies have led to economic collapse.
North Korea, a nation where millions of people starved to death in the 1990s.
South Korea has a capitalist economy and has accepted globalization. It has a
 Dependency Theory
• Dependency also argues that the rich nations exploit the poor nations.
• But this is not because capitalism is evil - capitalism needs to be more
regulated so it will be more just.
• The problem is that poor nations remain dependent on rich nations. Even
after colonialism, when the poor nations became free, their economies
remained dependent on the economies and the technology of the rich nations.
• The problem is this. What the LDCs produce is cheap.
• Minerals and farm products make landowners rich, but not the tillers of land
and not the nations who rely on the land for its source of wealth.
• Even oil, the best of the primary products, because it can lead to wealth, is
often seen as a curse. Nations who produce oil have a tendency to rely on it
for their revenue and never develop a manufacturing base, and it is a
manufacturing base and the high skills and high wages that go along with it
that make a nation wealthy.
 Dependency Theory
• LDCs buy expensive things from the EDCs and the EDCs buy inexpensive
things from the LDCs. The result is that the EDCs make money and the LDCs
go into debt because they are paying more for the expensive products (aircraft,
computer software, cars, or health care technology) than they are receiving for
their coffee and bananas and oil. So the rich get richer, the poor get poorer.

• Dependency theorists call for a number of solutions:

• International rules that raise the price of commodities (oil, coffee, bananas,
timber, copper) regardless of market forces. EDCs refused to do this.
• Massive amount of aid to poor nations. Most EDCs refused to do this.
• Debt forgiveness. EDCs have agreed, but it doesn’t fix the problem because
as soon as the old debt is forgiven, new debt accumulates.
 Dependency Theory
• Nationalization. Government seizure of the MNCs of the EDCs that operate in
the LDCs. The profit of the home-controlled MNCs is used to enrich the
nation. But the EDCs don’t like this and often retaliate with trade embargoes
and even attempts to overthrow the government that does this. During the
Cold War the US would label such governments as communist (some of them
were) and tried to overthrow the government.

• Import Substitution: Banning the import of foreign manufactured goods from

EDCs (like computers and cars) and forcing the nation to make its own.
EDCs might retaliate with trade sanctions.

• In the long run, none of these strategies have worked.

 Globalisation in historical context
• When WW II ended in 1945 a new era began.
• The Cold War was a struggle between the US and its allies vs. the USSR
(Soviet Union) and its allies.
• From an economic standpoint, it was Liberal and Nationalist economies vs.
Marxist economies or relatively free traders vs. economies closed off to trade.
• The economic struggle was one over how best to organize economic life:
should nations choose capitalism or communism.
• The capitalist world, by the 1980s had economic growth and a technological,
telecommunications, and information revolution, all the changes and benefits
that computers brought – an economic revolution as important as the
agricultural and industrial revolutions.
• The communist world missed the boat. Why would anyone develop computers
since there was no reward for innovation except fear that your innovative
ideas may lead you to prison?
 Globalisation in historical context
• The economic ideas of the capitalist world proved to be better.
• The capitalist world generated wealth and innovation and the communist
world just generated shortages of everything and a lack of productive
ideas.
• Nation after nation, beginning with China in 1978, abandoned command
economies for some level of capitalism.
• By 1986 the Soviets began to move toward capitalism. By 1991 the Soviet
Union collapsed.
• The cold war ended and little by little everyone moved toward capitalism,
and a capitalism that grows more liberal every year.
 Globalisation in historical context
• Along with that development was another one.
• Ultimately, it seems one strategy has worked to bring wealth to poor nations
-- open up their economies to foreign investment, to become more liberal,
but retain elements of nationalism in certain sectors.
• It is a strategy that takes advantage of globalization and protects some
industries from globalization at the same time.
• It has led to the greatest wealth creation in world history.
• It is the method pursued by the Four Tigers (South Korea, Taiwan,
Singapore, and Hong Kong – the only non-oil economies to go from poor to
rich since WW II).
• It is the strategy pursued by China since 1978. China is the world’s fastest
growing economy. India has been following this since 1991, and it has the
best economic performance in its history.
 Globalisation in historical context
• There are some exceptions:
• Socialist/Communist states that have not reformed: North Korea and Cuba
• Oil states that still have command economies based on oil production (just
about every nation in the Middle East)
• States flirting with Dependency remedies (Venezuela, Bolivia)
• But all these economies are doing poorly, worse than those that have
embraced globalization.
• During the cold war, the issue was whether a free market or a command
economy was better. The answer to that seems definitive – free markets
 Globalisation in historical context
• That may have answered the first question that this essay posed: How does a
nation generate wealth?
• The second question is still at issue: What is the proper role of govt in
economic activity?
• It seems clear that almost all govts. in the world have decided that the govt
should not control the economy. But how much regulation or intervention is
the right amount? That question is at issue throughout the world.

• Having said all that, however, does not mean that everyone believes that
globalization is the greatest thing in world history and the answer to all our
problems. Some say yes; some say no.