Chapter- 9, International Political Economy

- Chapter starts with Nicaragua’s problem. Its huge and costly infrastructure project financed by a
Chinese development group. Rural Nicaraguans fear eviction.
- For the world’s poor, is development elusive?
- What is economic globalisation?

Historical Evolution of the International Economy:

- The era from the late Middle Ages through the end of the 18 th century saw key changes in
technology, ideas and practices that altered the international economy. European explorers
opened up new frontiers in the Americas, Asia, and the Middle East to trade and commerce.
- When there are many buyers and sellers, market competition ensures that prices will be as low
as possible. Low prices result in increased consumer welfare. Thus, in maximizing economic
welfare and stimulating individual (and therefore collective) economic growth, markets
epitomize economic efficiency. Those markets need to be virtually free from government
interference; only through a free flow of commerce will efficient allocation of resources occur.
That is the rationale underpinning the theory of economic liberalism.
- Mercantilism - the mercantilist view held that states needed to accumulate gold and silver to
guarantee power. A strong central government was needed for efficient tax collection and
maximization of exports, both geared toward guaranteeing military prowess. Such governments
encouraged exports over imports and industrialization over agriculture, protected domestic
production against competition from imports, and intervened in trade to promote employment.
- Radicalism - Having seen the harsh living conditions of the working class during nineteenth-
century industrialization and imperialist expansion, and cognizant of the economic chasm
between the developed and the developing worlds during the twentieth century, economic
radicals blamed the capitalist system under liberalism. Society basically is conflictual. Conflict
emerges from the competition among groups of individuals—namely, the owners of wealth and
the workers—for scarce resources.
- The worldwide depression of the 1930s saw a major decline in trade and investment. The goal of
the Western victors then was to promote openness of trade and simulate international capital
flows while establishing a stable exchange rate system.

Post-World War II Economic Institutions

- World Bank: World’s formal name is International Bank for Reconstruction and Development.
During the 1950’s, the World Bank shifted its primary emphasis from reconstruction to
development. It now generates capital funds from member-state contributions and from
borrowing in international financial markets. Like any bank, its purpose is to loan these funds,
with interest, and in the case of the World Bank, to loan them to states for their economic-
development projects. The bank funds governments and the private sector to carry out a wide
array of economic-development activities, including those in the social sector.
- IMF: was designed to provide stability in exchange rates. Originally, the fund established a
system of fixed exchange rates and, with the United States, guaranteed currency convertibility.
However, in 1972, States announced that it would no longer guarantee a system of fixed
exchange rates. This decision was revised in 1976 when the International Monetary Fund
formalized the system of floating exchange rates, a policy more consistent with economic
liberalism. Then, monetary cooperation became the responsibility of the Group of 7.
- General Agreement on Tariffs and Trade: this treaty enshrined important liberal principles. (pg
8 of the compilation).
- For 20 years after the end of World War II, economic growth occurred much as liberal economic
theory had predicted. Growth rates in the developed and the developing world averaged more
than 4 percent. Trade volume increased over sevenfold, and poverty rates fell dramatically
worldwide. And the volume of international finance exploded, as the communication revolution
expanded the possibilities for international financial transactions. The groundwork of economic
globalization had been laid.
- Pg 9 to see how internationalization of finance and free unfettered trait is a positive good is seen
differently by different schools of thought.

How the Globalised Economy works today:

- International Finance: Int’l capital traditionally moves in 2 ways. First, national currencies, like
goods and services are bought and sold. Second, capital moves through investment. Direct
foreign investment (FDI) includes the building of factories and investing in the facilities for
extraction of natural resources. Portfolio investment includes investing in another country’s
stocks or bonds, either short or long term, without taking direct control of those investments.
- It’s quite difficult for poorest of states to attract private investment. So, International Finance
Corporation (IFC) and the International Development Association (IDA) were created in 1956
and 1960, respectively, for that purpose. The IFC provides loans to promote the growth of
private enterprises in developing countries.
- International Trade: Worldwide wealth is maximized if states engage in international trade.
David Ricardo developed a theory of comparative advantage. Because each state differs in its
ability to produce specific products—because of differences in natural-resource bases, labor
force characteristics, and land values—each state should produce and export that which it can
produce most efficiently and import goods that other states can produce more efficiently. Thus,
states maximize gains from trade. However, individual actors can be hurt in this process,
necessitating periodic government intervention to ensure that all people gain. Liberal economics
posits that under comparative advantage, production is oriented toward an international
market. Efficiency in production is increased, and worldwide wealth is maximized.
- International Trade Negotiations: Kennedy Round, Tokyo Round and Uruguay Round. Pg 14.
- In 1995, GATT became a formal institution – renaming itself the World Trade Organisation
(WTO). The WTO incorporated the general areas of GATT’s jurisdiction and expanded
jurisdiction in services and intellectual property. Regular ministerial meetings give the WTO a
political prominence that GATT lacked.
- Two important procedures were initiated in the WTO. First is the Trade Policy Review
Mechanism (TPRM), which conducts periodic surveillance of the trade practices of member
states. Under this procedure, there is a forum where states can question each other about trade
practices. Second is the Dispute Settlement Body, designed as an authoritative panel to hear
and settle trade disputes. With the authority to impose sanctions against violators, this body is
more powerful than earlier GATT arrangements.
- WTO’s one of the many failures is quite visible from the 2001 Doha Round. The contention was
about farm subsidies. US and the EU were pitted against emerging economies like the India,
Brazil and China. Many blamed the WTO’s director-general Roberto Azavedo for not exercising
more leadership to iron out disagreements. More generally, however, the Doha Round failed
over the perception of fairness in trade. Already dissatisfied with new rules that opened
competition in investment and government procurement, the developing countries sought more
advantages in the politically sensitive areas of agriculture and other labor-intensive sectors.
However, the impasse was broken in 2013-14.

Role of MNCs

- Multinational corporations play a key role as engines of economic growth, providing both
international finance and items to trade. To many economic liberals, MNCs are the vanguard of
the liberal order. They are the “embodiment par excellence of the liberal ideal of an
interdependent world economy. [They have] taken the integration of national economies
beyond trade and money to the internationalization of production.

Economic Challenges in the 21st century – page 24 of the compilation.

Technology and Changing Face of Warfare:

- What role do technology and strategy play in global politics?

War as an extension of politics?

- Karl Maria von Clausewitz was a Prussian strategist. He was spokesperson for this perspective
that warfare was a tool of statecraft. He argued that war was a political instrument – like
diplomacy or foreign aid.
- Wars should be “political acts” intended to compel our opponent to fulfil our will. Force is only a
means – a real political instrument, as was diplomacy, in a politician’s arsenal.

World Wars: Absolute war –

- Word War 1 was first total war in the sense that it was waged by huge armies of conscripted
citizens, equipped with modern weapns and sustained by modern industry. To sustain a war of
this magnitude required both the fruits of industrialisation and the fervour of nationalist
xenophobia.
 - Technology and World War One:
Bessemer process for making steel, canned food, barbed wire. The best-known artillery piece
was manufactured by the German firm of Krupp. Even Airplanes and Tanks were important
innovations in these times. Poison Gas - chlorine and mustard gas.
- Technology and World War Two:
Development of Blitzkrieg – lightening war. It combined mechanized and armoured warfare with
tactical air support and psychological warfare. Panzers (tanks); Stuka (dive-bombing).
- Technology and the Cold War standoff
USSR and US introduced intercontinental ballistic missiles (ICBMs)
- Nuclear war would have four related environmental consequences – “obscuring smoke in the
troposphere, dust in stratosphere, fallout of radioactive debris, and the partial destruction of
the ozone layer” – combined would cause a period of darkness and cold on earth. This nuclear
winter would destroy agriculture.
- World Leaders also sought ways to defend their countries against missiles. Proposed
technologies included space satellites to give warning of attacks, an anti ballistic missile system –
missiles that shoot down other missiles. President Reagan’s strategic defence initiative in 1983
was popularly known as “star wars” because it was based on satellite based sensors and
weapons. In 2001, George Bush approved a limited system of ground-based anti-ballistic missile
in Eastern Europe. In 2009, Obama altered the Bush plan partly to reduce tensions with Russia
and because many believed that the technology would not work. Instead, Obama decided to
construct NATO missile defense system.
- Concern has grown about chemical and biological weapons which are potentially available to
terrorists and “rogue” states. Nerve agents – like sarin gas. Blood agents – hydrogen cyanide.
Choking agents – chlorine – irritates respiratory tracts. Blistering agents – mustard gas – cause
painful burns. Even biological weapons which deliberately inflict disease using microorganisms.
- In 1925 – Geneva protocol banned the use of chemical weapons. By 2003 – Chemical Weapons
Convention. By 1972, Biological weapons convention.

Global Terrorism:

- Bin Laden was a wealthy Yemeni-born militant. He espoused a form Sunni Islam that interprets
the Muslim duty of jihad to mean holy war against infidels and forcible imposition of Islam on
non-Muslims. He was leader in many attacks. But 2001 – New York’s World Trade Center and
Pentagon in Washington DC. XXX
- There are 5 domains of War – land, sea, air, space, cyberspace.

(skipped the global governance reading)

Global Economy Reading