What are the main theories on Global Political Economy? - Chapter 1


What is the Global Political Economy? 

In 1997, the ‘Asian financial crisis’ started with the Thai Central Bank devaluing its currency (baht). During the crisis several Asian countries experienced economic depression. Although the Asian financial crisis represents an important development in the Global Political Economy (GPE), its causes were not immediately apparent. A number of interpretations of the events are available:

  • Liberal: the causes of the crisis relate to financial policies followed by the states. The resources were directed to inefficient uses because of corrupt businesses and political influence over financial institutions (also coined as ‘crony capitalism’).
  • State power: root of the problem lies in the fact that countries prematurely liberalised their economies.
  • Critical: based on the argument that the US government pressured developing states into pre-mature liberalisation of their economies for profit of own firms. It stresses the high human suffering caused by the crisis.

The brief example of the Asian financial crisis demonstrates that the same event can be analysed in different ways. Theories are used for a variety of purposes:

  • To prioritize information
  • To make predictions about the future so action can be taken to prepare for upcoming events
  • To plan action or mobilize support for particular action

The main purpose of this book is to describe a number of theories to guide the reader in understanding the world. The development of the International Political Economy (IPE) is often presented as a debate between three contending schools of thought which will be subsequently introduced here.

What is the Economic Nationalist Perspective?

The economic nationalist theories stress the importance of the interests of the state in understanding how international relations (IR) unfold. Central issue relates to protection of the national unit.

The emergence of this school of thought can be traced to Mercantilism period in the 15th century Europe. Mercantilists believed that there is a limited amount of wealth in the world and therefore each nation acts to secure their interests first by obstructing other states in achieving their goals. Two famous advocates of the theory were Alexander Hamilton (1791) and Fredrick List (1885).

The main actor in the global political economy is the state. This is based on two main assumptions. Firstly, inter-state system is anarchical and as a result it is every state’s duty to protect its own interests. Generally, economic community acts for the good of all of its members. Secondly, there is a recognised primacy of political over other aspects of social life. For instance, economic policy is designed to strengthen the state. Therefore, market relations and operations are perceived to have a secondary role because they are shaped by political power. The importance of the market-based actors (e.g. corporations) is subordinated to the state.

IPE is seen to be constituted by the actions of rational states; therefore, the nature of global economy reflects the interests of the dominant countries.

Within the IR theory, realism, with its focus on the primacy of the state, the anarchical nature of relations and inevitability of conflict, provides for a foundation for economic rationalist thought. The relations between states are characterised by unending conflict and pursuit of power.

The theory remains relevant today as countries continue to protect their markets from foreign competition even though they have committed themselves to free trade. In times of economic downturn, economic nationalism concerns become more prevalent. Such an approach has a damaging effect on the interests of all states because it reduces the possibility of growth through trade.

Notable theorist: Susan Strange, a British professor at London School of Economics and Warwick University. She viewed IPE as a method of understanding the world and focused on the relationship between markets and authority. Her textbook ‘States and Markets’ (1988) argued that in additional to relational power, power also resides in structures. She defined structural power as the ability of actors to shape the rules of the game in a particular sphere.

What is the Liberal Perspective? 

Liberals focus on either individual or on a wide range of actors from the state to the corporation interest groups. In their view, the state is not unitary but is a result of influences of a number of factors.

Liberals search out for conditions of cooperation instead of focusing on conflict. They believe in individuals’ ability to choose between attractive courses of action and the ability to negotiate their differences.

The Liberal theories emerged in the 18th and 19th century in Britain, alongside with the Industrial Revolution. Adam Smith (1776) is known for advocating for freeing up trade and creating larger national and international markets as method of generating wealth for everyone. David Ricardo (1817) has introduced as comparative advantage theory, demonstrating that all nations can benefit from free trade and cooperation. Today’s global economy is largely based on liberal principles: e.g. goals of free trade. However, liberal thought is not uniform, there are divergences between different theories. 

For liberals, the starting point of analysis is about individuals who are perceived as key economic actors. They focus on the behaviour of individuals, firms and states. In addition, liberals view firms as sources of wealth. The state is viewed with caution and even hostility by many liberals because it brings political influences into economics; insertion of control of the markets is perceived to have damaging effects on the market participants through reducing the benefits and increasing the costs of participation.

For liberal theorists, the market is central to the economic life. While liberals acknowledge that market relations are not always optimal, they tend to argue against any form of intervention. The IPE is established by the pursuit of wealth. Globalization is viewed as reality and a positive force in achieving this goal. Keynesian influenced liberals or those of a reformist stance are more reserved about the benefits of globalization.

Liberal theorists view international relations and IPE as essentially cooperative; they focus on the positive outcomes because they perceive international cooperation as a source of prosperity and peace. According to liberals, economic nationalist policies lead to conflict.

Liberal neoclassical economics, who stress the importance of rational decision-makers in free markets, dominate the contemporary field of economics. However, the Great Financial Crisis in 2008 has stirred a debate among liberals about the importance of the government intervention as well as the role of the state in times of crises.

Notable theorist: Robert Keohane, a professor at Harvard, Stanford, Duke and Princeton Universities. His research developed a liberal institutionalist approach to IPE and world politics. Its basic idea is that institutions or sets of rules and norms can have a significant impact on state behaviour as long as they are bound by mutual interests.

What is the Critical Perspective? 

Marxist theory emerged in the 19th century as a response to the liberalist view. The theory focuses on class and the interests of workers rather than the state interests. These critical theories stress the nature of oppression within and across societies and the struggle for justice waged by or on behalf of workers, women and environment.

The main actor in global political economy is perceived to be ‘class’. In this book, class is defined as arising from one’s position in the structure of production. Within Marxist theory, the firm is an instrument of exploitation. Marxists oppose the notion of individualism that is found in the liberal theory and built upon the economic nationalist perspectives’ collectivist approach.

Dominance and exploitation among and within classes is central to the Marxist theories of IPE. They perceive relations inherently exploitative. There are three main sources (tendencies of capitalism) of international economic relations’ instability:

  1. The tendency for the rate of profit to fall sees capitalists engaged in fierce competition with each other, which tends to drive the wages of workers down.
  2. Capitalism leads to uneven development as some centres increase their wealth and growth at the expense of others.
  3. Capitalism leads to overproduction and underconsumption, which leads to fluctuations in business cycle and undermining social stability.

A revision of Marxists theory, so-called 'dependency theory' suggests that poor states faced immense obstacles to development because they were vulnerable to economic exploitation from developed states. Underdevelopment in some parts of the world was caused by development in other parts. Globalisation was perceived as evil because it was just a new version of imperialism.

Critical writers view international economic relations as fundamentally conflictual (zero sum game).Two forms of conflict are prevalent: within the state, capitalists and workers have the competing interests and the state is the scene for these classes’ interests to clash; on a global scale, the conflict is often driven by the nationalism and the intervention of the state. Through the mechanism of imperialism, stronger states oppress weaker ones. International conflict is seen to be inevitable because of the drive for profit.

The collapse of Soviet Union and communism resulted in the diminishing power of Marxist states. However, the theory survived, and is relevant in a number of areas for analysis, especially of inequalities driven by capitalism and reoccurring crises.

Notable theorist: Robert Cox, who has developed a historical realist approach. He recognises that each historical era has its own institutions and understanding of them, therefore, the human behaviour is not universal, but changes over the time. At the centre of analysis is the organisation of production and social relations surrounding it. Class and class conflict allows for a greater understanding of the realities of world political economy.

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