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Summary International Political Economy - Thomas Oatley
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Summary of the book International Political Economy, written by Thomas Oatley, sixth edition. Contains chapters 1 - 15.
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Chapter 1 – International Political EconomyWhat is international political economy?
IPE studies the political battle between the winners and losers of global economic exchange, and how
it shapes the economic policies that governments adopt. One way scholars simplify the study of the
global economy is to divide the substantive aspects of global economic activity into distinct issue
areas. Typically, the global economy is broken into four such issue areas: the international trade
system, the international monetary system, multinational corporations (or MNCs), and economic
development. Rather than studying the global economy as a whole, scholars will focus on one issue
area in relative isolation from the others.
The international trade system is centred upon the WTO, to which some 164 countries
belong and through which they have created a non-discriminatory international trade system. In the
international trade system, each country gains access to all other WTO members’ markets on equal
terms. In addition, the WTO and its predecessor, the General Agreements on Tariffs and Trade
(GATT), have enabled governments to progressively eliminate tariffs and other barriers to the cross-
border flow of goods and services. As these barriers have been dismantled, world trade has grown
steadily. During the last 10 years, however, regional trading arrangements have arisen to pose a
potential challenge to the WTO-centred trade system. These regional trade arrangements, such as
the NAFTA, are trading blocs composed of a small number of countries who offer each other
preferential access to their markets. Scholars who study the international trade system investigate
how the political battle between the winners and losers of global economic exchange shapes the
creation, operation, and consequences of the WTO-centred system and the emerging regional
trading frameworks.
The international monetary system enables people living in different countries to conduct
economic transactions with each other. The international monetary system facilitates the functions
of converting currencies. When it performs these functions well, international economic exchange
flourishes. When it doesn’t, the global economy can slow or even collapse. Scholars who study the
international monetary system focus on how political battles between the winners and losers of
global economic exchange shape the creation, operation, and consequences of this system.
Multinational corporations occupy a prominent and often controversial role in the global
economy. A multination corporation is a firm that controls production facilities in at least two
countries. MNCs shape politics because they extend managerial control across national borders.
Corporate manages based in the US, for example, make decisions that affect economic conditions in
Mexico and other Latin American countries, in Western Europe, and in Asia. Scholars who study
MNCs focus on a variety of economic issues, such as why these large firms exist and what economic
impact they have on the countries that host their operations. Scholars also study how the political
battle between the winners and losers of MNC activity shapes government efforts to attract and
regulate MNC activities.
Finally, a large body of literature studies economic development. Throughout the post-war
period, developing-country governments have adopted explicit development strategies that they
believed would raise incomes by promoting industrialization. The success of these strategies has
varied. Students of the politics of economic development focus on the specific strategies that
developing countries’ governments adopt and attempt to explain why different governments adopt
different strategies. In addition, these students are concerned about which development strategies
have been relatively more successful than others (and why), and about whether participation in the
international economy facilitates or frustrates development. In trying to make sense of these aspects
of development, IPE scholars emphasize how the political battle generated by the distributive
consequences of the global economy shapes the development strategies that governments adopt.
There are two very different research traditions within IPE. One tradition focuses on
explanation, and the second focuses on evaluation. Explanatory studies are oriented toward
explaining the foreign economic policy choices that governments make. Such studies most often
,attempt to answer “why” questions. Evaluative studies are oriented toward assessing policy
outcomes, making judgments about them, and proposing alternatives when the judgment made
about a particular policy is a negative one. A welfare evaluation is interested primarily in one
whether a particular policy choice raises or lowers social welfare. Because such evaluations are
concerned with the economic welfare consequences of policy outcomes, they are typically based on
economic criteria and rely heavily upon economic theories.
Studying International Political Economy
Scholars working within the field of IPE have developed a large number of theories. Three traditional
schools of political economy – the mercantilist school, the liberal school, and the Marxist school –
have shaped the development of these theories over the last 100 years. Although the three
traditional schools remain influential, more and more often, students of IPE are developing theories.
One prominent approach, and the approach that is developed throughout this book, suggests that
the foreign economic policies that governments adopt emerge from the interaction between societal
actors’ interests and political institutions. We begin our examination of how people study IPE with a
broad overview of these alternative approaches.
Traditional Schools of IPE
Historically, theories of IPE have been developed in three broad schools of thought: mercantilism (or
nationalism), liberalism, and Marxism. Mercantilism is rooted in seventeenth- and eighteenth-
century theories about the relationship between economic activity and state power. The mercantilist
literature is large and varied, yet mercantilists generally do adhere to three central propositions.
First, the classical mercantilists argued that national power and wealth are tightly connected.
National power in the international state system is derived in large part from wealth. Wealth, in turn,
is required to accumulate power. second, the classical mercantilists argued that trade provide one
way for countries to acquire wealth from abroad. Wealth could be acquired through trade, however,
only if the country ran a positive balance of trade, that is, if the country sold more goods to
foreigners than it purchased from foreigners. Third, the classical mercantilists argued that some
types of economic activity are more valuable than others. In particular, mercantilists argued that
manufacturing activities should be promoted, whereas agriculture and other non-manufacturing
activities should be discouraged. “Modern” mercantilism applies these three propositions to
contemporary international economic policy:
1. Economic strength is a critical component of national power
2. Trade is to be valued for exports, but governments should discourage imports whenever
possible
3. Some forms of economic activity are more valuable than others
Liberalism, the second traditional school, emerged in Britain during the eighteenth century to
challenge the dominance of mercantilism in government circles. Adam Smith and other liberal
writers, such as David Ricardo, were scholars who were attempting to alter government economic
policy. The theory they developed to do so, liberalism, challenged all three central propositions of
mercantilism. First, liberalism attempted to draw a strong line between politics and economics. In
doing so, liberalism argued that the purpose of economic activity was to enrich individuals, not to
enhance the state’s power. Second, liberalism argued that countries do not enrich themselves by
running trade surpluses. Instead, countries gain from trade regardless of whether the balance of
trade is positive or negative. Finally, countries are not necessarily made wealthier by producing
manufactured goods rather than primary commodities. Instead, liberalism argued, countries are
made wealthier by making products that they can produce at a relatively low cost at home and
trading them for goods that can be produced at home only at a relatively high cost. According to
liberals, governments should make little effort to influence the country’s trade balance or to shape
the types of goods the country produces. Government efforts to allocate resources will only reduce
national welfare.
, Marxism originated in the work of Karl Marx as a critique of capitalism. According to Marx,
capitalism is characterized by two central conditions: the private ownership of the means of
production (or capital) and wage labour. Marx argued that the value of manufactured goods was
determined by the amount of labour used to produce them. However, capitalists did not pay labour
the full amount of the value they imparted to the goods they produced. Instead, the capitalists who
owned the factories paid workers only a subsistence wage and retained the rest as profits which to
finance additional investment. Marx predicted that the dynamics of capitalism would lead eventually
to a revolution that would do away with private property and with the capitalist system that private
property supported.
Three dynamics would interact to drive this revolution. First, Marx argued that there is a
natural tendency toward the concentration of capital. Economic competition would force capitalists
to increase their efficiency and increase their capital stock. As a consequence, capital would become
increasingly concentrated in the hands of a small, wealthy elite. Second, Marx argued that capitalism
is associated with a falling rate of profit. Investment leads to a growing abundance of productive
capital, which in turn reduced the return to capital. As profits shrink, capitalists are forced to further
reduce wages, worsening the plight of the already impoverished masses. Finally, capitalism is
plagued by an imbalance between the ability to produce goods and the ability to purchase goods.
Large capital investments continually augment the economy’s ability to produce goods, whereas
falling wages continually reduce the ability of consumers to purchase the goods being produced. As
the three dynamics interact over time, society becomes increasingly characterized by growing
inequality between a small wealthy capitalist elite and a growing number of impoverished workers.
These societal conditions eventually cause workers (the proletariat) to rise up, overthrow the
capitalist system, and replace it with socialism.
In contrast to liberalism’s emphasis on the market as the principal mechanism of resource
allocation, Marxists argue that capitalists make decisions about how society’s resources are used.
The three traditional schools of political economy thus offer three distinctive answers to our
question of how politics shapes the allocation of society’s resources. Mercantilists argue that the
state guides resource allocation in line with objectives shaped by the quest for national power.
Liberals argue that politics ought to play little role in the process, extolling instead the role of market-
based transactions among autonomous individuals. Marxists argue that the most important decisions
are made by large capitalist enterprises supported by a political system controlled by the capitalist
class.
Mercantilism Liberalism Marxism
Most important actor State Individuals Classes, particularly
the capitalist class
Role of the state Intervene in the Establish and enforce Instrument of the
economy to allocate property rights to capitalist class uses
resources facilitate market- state power to sustain
based exchange capitalist system
Image of the Conflictual: countries Harmonious: the Exploitative: capitalists
international compete for desirable international economy exploit labour within
economic system industries and engage offers benefits to all countries; rich
in trade conflicts as a countries. The countries exploit poor
result of this challenge is to create countries in the
competition a political framework international economy
that enables countries
to realize these
benefits
Proper objective of Enhance power of the Enhance aggregate Promote an equitable
economic policy nation-state in social welfare distribution of wealth
international state and income
, system
Interests and Institutions in International Political Economy
Interests are the goals or policy objectives that the central actors in the political system and in the
economy – individuals, firms, labour unions, other interest groups, and governments – want to sue
foreign economic policy to achieve. We focus on two mechanisms to explain the formation of these
policy interests.
First, people have material interests that arise from their position in the global economy. the
essence of this approach can be summarize din a simple statement: tell me what you do for work,
and I’ll tell you what your foreign economic policy preferences are. One’s position in the economy
powerfully shapes one’s preferences regarding foreign economic policy.
Second, interests are often based on ideas. Ideas are mental models that provide a coherent
set of beliefs about cause-and-effect relationships. In the context of economic policy, these mental
models typically focus on the relationship between government policies and economic outcomes.
Not surprisingly, therefore, economic theory is a very important source of ideas that influence how
actors perceive and formulate their interests.
To understand how interests are transformed into policies, we need to examine political
institutions. political institutions establish the rules governing the political process. By establishing
rules, they enable groups within countries, and groups of countries in the international state system,
to reach and enforce collective decisions. Political institutions determine which groups are
empowered to make choices and establish the rules these “choosers” will use when doing so.
The Global Economy in Historical Context
People have conducted long-distance trade for hundreds of years, but the first true “global”
economy emerged only in the 19th century. This “first wave” of globalization was driven by the
interaction between technological change and politics. Technological innovation, in particular, the
invention of the steam engine and the telegraph, made it profitable to trade heavy commodities
across long distances. Capitalizing on the new possibilities required governments to establish an
infrastructure that facilitated global exchange. This infrastructure was based on a network of bilateral
trade agreements and a stable international monetary system. Governments began to reduce
barriers to trade in the mid-nineteenth century.
The failure to reconstruct the global economy after WWI and the subsequent depression and
war had a dramatic impact on American policy. American policymaker drew two lessons from the
interwar period. First, they concluded that WWII was caused in part by the failure to reconstruct a
stable global economy after WWI. Second, American policymakers concluded that the US alone
controlled sufficient power to establish a stable global economy. These conclusions encouraged the
US to embrace an internationalist orientation. The resulting Bretton Woods system continues to
provide the institutional structure at the centre of the global economy. The contemporary global
economy was established as an explicit attempt to return to the “golden years” of the late
nineteenth century to prevent a recurrence of the economic and political disasters of the interwar
period. The post-WWII global economy differed from the classical liberal system of the nineteenth
century in important ways. At the broadest level, the difference reflected changed public attitudes
about the government’s proper economic role. In the nineteenth-century liberal system,
governments eliminated trade barriers and made little effort to manage domestic economic activity.
The Great Depression encouraged governments to play a more active role in the economy.
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