GLOBAL TREND CHAPTER THREE HISTORY AND CIVICS

global trend

1. Chapter Three International Political Economy (IPE ) By Fekadu Tefera A pril 2024

2. Objectives After successfully completed this chapter, students should be able to: Explain Identify And Analytically Distinguish The Most Influential Theoretical Perspectives Of International Political Economy The Meaning And Nature Of International Political Economy Figure Out The Most Common National Political Economy Systems/Models In The World And Their Major Divergences Identify And Examine The Core Issues, Governing Institutions And Governance Of International Political Economy PREPARED BY FEKADU TEFERA 2

3. Brainstorming Question What comes to your mind when you think of such concepts as ‘International politics’, ‘International economics’ and ‘International political economy? How important do you think are these concepts in a given society/state? PREPARED BY FEKADU TEFERA 3

4. Meaning and Nature of International Political Economy (IPE) T here is no universal agreement on how IPE should be defined. International Political Economy “is the study of the tension between the market, where individuals engage in self-interested activities, and the state , where those same individuals undertake collective action”. This definition is based on several important, but un-clear assumptions. PREPARED BY FEKADU TEFERA 4

5. First, it suggests that there are only two significant subjects of International Political Economy: (a) markets and (b) states. Second , this definition tells us that the most important aspect of the relationship between markets and states is based on tension, related on an adversarial (characterized by conflict or opposition) way. PREPARED BY FEKADU TEFERA 5

6. Yet, the definition misses other important side of the story. Political society Non-state actors in global politics On the other hand, the name it self (IPE) have limitation for not including other non-state actors like trans-national corporations. Due to this trend in today’s political economy, IPE’s definition is getting ever widened and deepened and even the name of the field is changing from IPE to GPE (Global Political Economy). PREPARED BY FEKADU TEFERA 6

7. “ International political economy (IPE) is a field of inquiry that studies the ever-changing relationships between governments, businesses, and social forces across history and in different geographical areas.” These definition consists of two central dimensions namely: The political and Economic dimension. PREPARED BY FEKADU TEFERA 7

8. The political dimension :- it accounts for the use of power by a variety of actors, including individuals, domestic groups, states (acting as single units), and non-state actors. They also make decisions about The distribution of tangible things such as money and products or Intangible things such as security and innovation . Making of rules pertaining to how states and societies achieve their goals. PREPARED BY FEKADU TEFERA 8

9. 2.The economic dimension :- deals with how scarce resources are distributed among individuals, groups, and nation-states. People exchange goods and thoughts, Investors purchase stocks Banks lend money All these relationships coordinate economic activities all over the world. PREPARED BY FEKADU TEFERA 9

10. Theoretical perspectives of International Political Economy There are three major theoretical perspectives regarding the nature and functioning of the International Political economy: Liberalism, Marxism by karl marx , (the youngest) and Nationalism (mercantilism). The oldest Since the mid-1980s, the relevance of the three perspectives has changed dramatically. PREPARED BY FEKADU TEFERA 10

11. With the end of both communism and the “import-substitution” strategies of many less developed countries ( ldcs ), the relevance of Marxism greatly declined , and liberalism has experienced a relatively considerable growth in influence. This scale down the role of the state in the economy, and shift to export-led growth strategies. Marxism as a doctrine of how to manage an economy has been discredited but as an analytic tool and ideological of capitalism survives due to the capitalist system. 11

12. 1. Mercantilism/Nationalism Is an ideological perspective which defends a strong and pervasive (unwelcome influence or physical effect) role of the state in the economy both in domestic and international trade. Mercantilism emphasizes the importance of balance-of-payment surpluses in trade with other countries and this promote national economic self-sufficiency. PREPARED BY FEKADU TEFERA 12

13. Cont.…. As it developed in the 21 st century, mercantilism (or neo-mercantilism) defended even a much more sophisticated and interventionist role of the state in the economy . For example , T he role of identifying and developing strategic and targeted industries. PREPARED BY FEKADU TEFERA 13

14. Cont.…. Including tax policy, subsidization, banking regulation, labor control, and interest-rate management. And also states should play a disciplinary role in the economy to ensure adequate levels of competition . PREPARED BY FEKADU TEFERA 14

15. Cont.…. Japanese, South Korean , Taiwanese and Chinese national political economies instead of the term mercantilism , they used ‘Developmental State Approach’. PREPARED BY FEKADU TEFERA 15

16. 2. Liberalism It defends the idea of free market system by removing barriers to the free flow of goods and services among countries. It reduces prices, Raises the standard of living for more people, Makes a wider variety of products available, and Help contributes to improve the best “comparative advantage”. PREPARED BY FEKADU TEFERA 16

17. Cont.…. By strongly influenced of costs , arbitrary specialization , and government and corporate policies , comparative advantage theory shifts to what is known as competitive advantage . Because of the shift governments continue to engage in protectionism . PREPARED BY FEKADU TEFERA 17

18. 3. Marxism Following the collapse of the soviet union in the 1990’s and the apparent embrace of the free market economy by a significant number of developing countries, marks a clear failure and death of marxism . Even most of the Marxist critique has been negated by any historical and contemporary realities which brings failures to the system. PREPARED BY FEKADU TEFERA 18

19. Cont.…. They were not true communists though that it has proven to be a failure . E.g. The richest 20% of the world’s population controlled 83% of the world’s income. PREPARED BY FEKADU TEFERA 19

20. Cont.… In addition to the above mentioned foundational theories of International Political economy, the following three contemporary theories also worth considering . Hegemonic Stability Theory (HST ) Structuralism Developmental State Approach PREPARED BY FEKADU TEFERA 20

21. Hegemonic Stability Theory (HST) Is a hybrid theory containing elements of mercantilism , liberalism , and even Marxism. Its closest association, however, is with mercantilism . The basic argument of HST is simple: the root cause of the economic troubles in Europe and much of the world in the Great Depression of the 1920s and 1930s was the absence of a benevolent ( Charitable rather than profit making) hegemon .( a supreme leader) PREPARED BY FEKADU TEFERA 21

22. Cont.… Then after, HST has thus influenced the establishment of the Bretton Woods institutions (IMF and WB) both being the products of American power and influence . PREPARED BY FEKADU TEFERA 22

23. Structuralism Is a variant of the Marxist perspective whose main feature is center-periphery (dependency) relationship between the Global North and the Global South which permanently resulted in an “unequal (trade and investment) exchange.” Also known as ‘‘ Prebisch -Singer thesis ’’ and it advocates for a new pattern of development based on industrialization via import substitution based on protectionist policies . PREPARED BY FEKADU TEFERA 23

24. Developmental State Approach Is a variant (a form of version of something that differs in some respect from other forms of something) of mercantilism and it advocates for the robust (strong & healthy) role of the state in the process of structural transformation . The term developmental state thus refers to a state that intervenes and guides the direction and pace of economic development. PREPARED BY FEKADU TEFERA 24

25. Some of the core features of developmental state include:- Strong interventionism : - state’s willingness and ability to use a set of instruments such as tax credits, subsidies, import controls, export promotion, and targeted and direct financial and credit policies instruments. Existence of bureaucratic apparatus to efficiently and effectively implement the planned process of development . PREPARED BY FEKADU TEFERA 25

26. Cont.…. Existence of active participation and response of the private sector to state intervention. Regime legitimacy built on development results that ensured the benefits of development are equitably shared and consequently the population is actively engaged on common national project of development. PREPARED BY FEKADU TEFERA 26

27. Survey of the Most Influential National Political Economy systems in the world PREPARED BY FEKADU TEFERA 27

28. T he American System of Market-Oriented Capitalism It is founded on the premise that the primary purpose of economic activity is to benefit consumers while maximizing wealth creation. The approach focuses on competitive market economy in which individuals are assumed to maximize their own private interests (utility), and business corporations are expected to maximize profits . PREPARED BY FEKADU TEFERA 28

29. Competition is the determinant factor and the economy is open for the outside world. The economy is dominated by big corporations . The government have the responsibility to regulate business , full employment and economic equality . PREPARED BY FEKADU TEFERA 29

30. Cont.…. Consumer advocates want a strong role for the government in the economy to protect the consumer. American economists and many others react negatively because of their belief that competition is the best protection for consumers except when there are market failures. PREPARED BY FEKADU TEFERA 30

31. The Japanese System of Developmental Capitalism In the Japanese scheme of things, the economy is subordinate to the social and political objectives of society. In the pre-World War II years, this ambition meant building a strong army and becoming an industrial power. PREPARED BY FEKADU TEFERA 31

32. Cont.…. Since its disastrous defeat in World War II, however, Japan has abandoned militarism and has focused on becoming a powerful industrial and technological nation , while also promoting internal social harmony among the Japanese people . They used to put strong effort to guide the evolution and functioning of their economy in order to pursue these socio-political objectives. PREPARED BY FEKADU TEFERA 32

33. National economic policy for Japan best characterized as neo-mercantilism . It involves State assistance, Regulation, and Protection of specific industrial sectors t o attain the “commanding heights” of the global economy . PREPARED BY FEKADU TEFERA 33

34. Source of this powerful economic drive for the japan were from:- Its strong sense of economic and political vulnerability. The J apanese people’s overwhelming belief in their uniqueness, T he superiority of their culture, and T heir manifest destiny to become a great power. PREPARED BY FEKADU TEFERA 34

35. Cont.…. Many terms have been used to characterize the distinctive nature of the Japanese system of political economy but it best suit to developmental state capitalism . Because this characterization conveys the idea that the state must play a central role in national economic development and in the competition with the West. PREPARED BY FEKADU TEFERA 35

36. Japanese industrial policy Industrial policy has been the most remarkable aspect of the Japanese system of political economy . In the early postwar decades, the Japanese provided government support for favored industries , especially for high-tech industries . “ infant industry” protection system deserves special attention . Among the policies Japan has used to promote its infant industries include the followings: PREPARED BY FEKADU TEFERA 36

37. Taxation , financial, and other policies that encouraged extraordinarily high savings and investment rates . Fiscal and other policies that kept consumer prices high, corporate earnings up to discouraged consumption of foreign goods . Strategic trade policies and import restrictions that protected infant Japanese industries against both imported goods and establishment of subsidiaries of foreign firms . PREPARED BY FEKADU TEFERA 37

38. Cont.…. Government support for basic industries , such as steel, and for generic technology, like materials research. Competition (antitrust) and other policies favorable to the keiretsu (business network) and to inter-firm cooperation. PREPARED BY FEKADU TEFERA 38

39. The German System of Social Market Capitalism Germany emphasizes on exports, national savings and investment more than consumption. Germany permits the market to function with considerable freedom. The non-governmental sector of the German economy is highly oligopolistic ( An economic setup in which a few companies rule over many in a particular market or industry) and is dominated by alliances between major corporations and large private banks . The German system of political economy attempts to balance social concerns and market efficiency . PREPARED BY FEKADU TEFERA 39

40. Cont.…. In Germany, that major banks are vital to the provision of capital to industry and labor has a particularly important role in corporate governance . Indeed , the “law of co-determination” mandates equal representation of employees and management on supervisory boards. PREPARED BY FEKADU TEFERA 40

41. Cont.…. The most important contribution of the G erman state to the economic success of their economy has been indirect. During the postwar era, the G erman federal government and the governments of the individual states have created a stable and favorable environment for private enterprise by:- PREPARED BY FEKADU TEFERA 41

42. Cont.…. PREPARED BY FEKADU TEFERA 42

43. On the other hand, the role of the G erman state in the microeconomic aspects of the economy has been MODEST. PREPARED BY FEKADU TEFERA 43

44. Core Issues, Governing institutions and Governance of International Political Economy International trade and the WTO Barter trade and the exchange of money for goods and services. Trade can take place entirely within a domestic economy or internationally. But there are a number of critical distinctions between domestic and cross-border trade. PREPARED BY FEKADU TEFERA 44

45. Cont.…. In cross-border trade The exchange of goods and services is mediated by at least two different national governments. Each of which exercises (sovereign) authority and control over its national borders. In practice, this means that even the “free trade’’ . PREPARED BY FEKADU TEFERA 45

46. Cont.…. Standard definition of free trade as “the unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas” But in reality free trade is never entirely free. So “how is international/global trade governed?” PREPARED BY FEKADU TEFERA 46

47. Cont.…. One most common answer is the idea that Global/Regional free trade agreements govern it. i.e institutions like world trade organization (WTO) and north A merican free trade agreement (NAFTA) or similar other organizations. E.g., Protectionist /mercantilist policies. PREPARED BY FEKADU TEFERA 47

48. Cont.…. 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 created after the second world war. It has about 150 members. PREPARED BY FEKADU TEFERA 48

49. Cont.…. All decisions are taken unanimously 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. PREPARED BY FEKADU TEFERA 49

50. International Investment and the WB WB (world bank) The world bank was created immediately after the second world war in 1945. Its activities are focused on the developing countries issues like:- Human development , (education , health) PREPARED BY FEKADU TEFERA 50

51. Cont.…. Agriculture and rural development (irrigation, rural services ), Environmental protection (pollution reduction, establishing and enforcing regulations), Infrastructure (roads, urban regeneration, and electricity) and Governance (anti-corruption, development of legal institutions). It provides loans and grants to the member-countries. PREPARED BY FEKADU TEFERA 51

52. International Investment Foreign direct investment (FDI):- is a type of production in which different parts of the overall production process for a particular product take place across different national territories. FDI creates favorable conditions for the developments of new and better technologies. A lso brings improvements in global finance which made it easier and more profitable to build integrated production systems across borders . 52

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54. While investment and the development process in general in the developed countries is predominantly governed by the interactions of multinational companies . Investment and 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). i.e. Because of the aid/loan conditionality which often puts developing countries unable to defend their policy freedom and the relationship with WB has often been not smooth. 54

55. International Finance and The 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 10 countries have 55% of the votes. PREPARED BY FEKADU TEFERA 55

56. Cont.…. They are the G-8 members (the US, Japan, Germany, France, the UK, Italy, Canada and Russia), Saudi Arabia and China. The US alone has 17.4% voting rights. PREPARED BY FEKADU TEFERA 56

57. The global financial system is divided into two. 1. Monetary system :- relationship between and among national currencies. It answer question of how the exchange rate among different national currencies is determined. 2. A credit system :- 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 . PREPARED BY FEKADU TEFERA 57

58. Cont.…. 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 . PREPARED BY FEKADU TEFERA 58

59. 1. In a pure floating-rate system T he value of a currency is determined solely by money supply and money demand . There is absolutely no intervention by governments . PREPARED BY FEKADU TEFERA 59

60. 2. A pure fixed-rate system I s the value of a particular currency is fixed against the value of another single currency. So, How is the global financial system governed? The creation of the International Monetary Fund (IMF) provided the answer for this question. PREPARED BY FEKADU TEFERA 60

61. Cont.…. The IMF, which was set up as an ostensibly (seemingly) neutral international financial institution, was designed to clearly represent U.S. interests and power on first and the interests of the other major capitalist countries (the developed economies) secondarily while governing the global finical system . PREPARED BY FEKADU TEFERA 61

62. Cont.…. T he decision-making power within the IMF was designed by Voting power which determined by what the IMF calls a Q uota . A Q uota 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. PREPARED BY FEKADU TEFERA 62

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