Module 9: International Political Economy

The field of International Political Economy has emerged as a substantial subfield of global politics relatively recently. It broadly examines the intersection of global politics, international economics, and all the actors involved in both fields. IPE focuses on international trade, international finance, international development, and international economic governance. It explores and unpacks the consequences of each of these domains in our increasingly globalized world. In this module, we will define the subfield of IPE, including the four factors that shape contemporary debates in IPE: global power structures, Multinational Corporations, the impact of globalization, and the impact of growing global inequality. We will then contextualize the study of IPE in the post-war international economic order. This includes unpacking the international financial institutions created under the Bretton Woods System: the IMF, the World Bank, and the GATT/WTO. Finally, we will conclude by parsing IPE and the post-war international order through our theories and approaches to global politics. In the end, the study of IPE asks questions about the tension between states and markets. Do states govern markets? Or do markets discipline states? And what is the significance of the answers to those questions?

As discussed earlier in the course, global politics is often thought of in terms of a state-based world, focused on questions of high politics. High politics focuses on big picture questions of the national interest, diplomacy, and, above all else, security. This view has been part of global political discourse since Hobbes wrote that survival requires a leviathan because the condition of man is a condition of war of everyone against everyone.(1991) For some, the fight between imperial powers, two world wars, the ColdWar, and the threat of nuclear war all validate high politics’ privileged position. From this perspective, economics and all other concerns are of secondary importance and ultimately depend upon power relations. For example, the long peace and the rise of global economic integration in the 19^th century depended on British hegemony. However, International Political Economy (IPE), a subfield of global politics, sees things quite differently.

International Political Economy emerged as a distinct area of enquiry in the 1970s because of economic events that deeply impacted global politics. This included the OPEC oil crisis, the American decision to end the Gold Standard, the end of the Bretton Woods System, and the struggle of post-colonial states to achieve meaningful and sustainable economic development. IPE scholars argue that a focus on high politics misses many, if not most, of the mechanisms that shape global politics. Some IPE scholars argue that global politics focuses on the rarefied field of minority world issues to the detriment of the majority world’s lived experience. Looking back, IPE scholars saw major historical events differently. Rather than British hegemony fostering the long peace and global economic integration, IPE scholars suggest the economic forces of the industrial revolution and colonialism/imperialism facilitated British hegemony. They argue that the first world war was facilitated, at least in part, by the economic rivalry of the principal actors and the German quest to build their own colonial empire. An unstable economy caused the Great Depression and, in turn, contributed to the outbreak of World War Two. The Cold War was not just a political and military rivalry. It was also an economic rivalry. The breakdown of the Bretton Wood System, an economic regime, led to the Latin American Debt Crisis in the 1970s and 80s. The  IMF and World Bank imposed Structural Adjustment Programs have deep and lasting impacts on the majority world’s lived experiences. The 2008 global economic crisis instigated a global recession that left millions of people unemployed, the welfare state under pressure, and broad social consequences in both the minority and majority world. All of this supports the position that the relationship between global politics and economics is intimate and significant. It suggests that low politics, although that is a slightly condescending term, is as important, if not more important, to understanding global politics than focusing on high politics. Low politics speaks to domestic politics, economic policy, and welfare policy. In the global sphere, low politics also speaks to the complex interdependence and intersectionality of people, groups, governmental bodies, bureaucracies, states, and institutions.

International Political Economy is exactly what its title suggests: a focus on the intersection of politics and economics at the global level. IPE asks questions of how ‘states’ and ‘markets’ constitute each other. To what degree do markets discipline states? Conversely, to what degree do states govern markets? This is a question of structure and agency. What are the norms, rules, laws, and governance bodies that guide or frame the interaction between states and markets? How do these interactions create and perpetuate international regimes? Regimes are the explicit and implicit “principles, norms, rules, and decision-making procedures around which actor expectations converge.” (1982) How and two what degree do economic structures and the distribution of economic resources in the global economy privilege particular state and non-state actors? What impact has economic and political regimes had on the global economy, global politics, and questions of peace and prosperity?

Four factors are shaping the contemporary debates in International Political Economy. Some of these reflect the discussion in the globalization module. The first factor is the change in global power structures. The US remains the world’s foremost military power. In 2019, the US spent 732 billion US$ on the military. This is more than the next ten states combined, including China, India, Russia, Saudi Arabia, France, Germany, the UK, Japan, South Korea, and Brazil. However, economically, the US has been losing its economic hegemony since the 1980s. While the US economy as measured by GDP was larger than the next ten economies combined in the early 1970s, this was no longer true by the end of the decade as Japan, Germany, the UK, and France began to gain on the US in relative terms. China, which was not even in the top 10 world economies in 1990, is the biggest economic rival to the US in 2021. The 2008 financial crisis and the COVID pandemic have potentially accelerated China’s relative gains on America’s economic dominance.  The US has other potential rivals, including Japan, the EU, and the Asian Tigers: Hong Kong, Taiwan, Singapore, and South Korea. New economic blocs, institutions, and trade systems are challenging the US-led order. For example, the BRICS (Brazil, Russia, India, China, and South Africa) have challenged the dominance of the West and the International Financial Institutions (IFIs). The G20, or group of the twenty largest economies, are challenging the dominance of the G7. This economic challenge to the US is raising questions by IPE scholars. Will the decline of US economic power undermine the liberal international order established after World War Two? If so, what are the consequences of this? Will the rise of China create a new global rivalry with the West? What form might this take? Essentially, IPE scholars are looking at how these economic shifts will influence the shape and functioning of global politics

Second, the US and other states are increasingly being challenged by powerful Multinational Corporations (MNCs). In the 1950s and 60s, it was axiomatic that what was good for leading national companies was also good for the country – they provided jobs, advanced technology, paid taxes, and increased the influence of states in the world. But MNCs have become increasingly deterritorialized. The largest MNCs may be headquartered in particular states, but their supply chains, customer, base, and taxation jurisdictions are increasingly global. MNCs potentially challenge the dominance of states in global politics. MNCs are able to move capital quickly across borders, creating capital flight risks if states do not make concessions on taxation or regulatory barriers. This puts domestic pressure on governments as capital flight can result in unemployment and a loss of tax revenue. In emerging economies, MNCs are a threat to small local competitors and to local cultural traditions. They also hinder economic development in emerging economies by depriving local companies and governments of the surplus value generated through their activities. Most early MNCs were involved in the resources extraction sector, but they have become dominant in capital and technologically intensive manufacturing, and more recently in the financial and utility industries. The challenge of MNCs to state influence in global politics is apparent if we look at the top ten global economic entities. In 2016, the World Economic Forum assessed Walmart as the 10^th largest global economic actor, just after Canada. For IPE scholars, this raises questions about the ability of states to act independently. How much influence do MNCs wield in government decision-making? To what degree are states catering to MNCs to avoid capital flight and potential electoral rebuke?

Third, and building on the first two points, the world is becoming increasingly interdependent. The processes of globalization are making the world smaller and increasingly networked. Technology, transportation, trade, finance, culture, institutions, and personal networks create increasingly dense connections that transcend geopolitical boundaries. This makes every corner of the planet susceptible to shocks started elsewhere. When Latin America or South East Asia faced a currency crisis, the impact was felt globally. When the US experienced a sub-prime mortgage crisis in 2007, it rippled across the world, creating waves of unemployment and setting back economic development in some places by decades. For IPE scholars, globalization and especially economic interdependence raise questions of vulnerabilities. How do economic crises in one state or region impact the global economy? How can such crises be managed or even avoided? To what degree do these vulnerabilities undermine state sovereignty? If there is a significant erosion of state sovereignty, who or what is filling that gap and to what end?

Fourth, there is a growing awareness of inequity and inequality in global politics. It is most evident in economic terms, but it is also political. The key term here is awareness. There has never been a time where poverty and income inequality did not exist. However, the years immediately following World War Two were defined by growing prosperity in the industrialized economies. This was the golden age of the middle class between 1948 and 1973. In the US during this period, real GDP grew 169%, employment by 75%, manufacturing by 30%, and per capita income doubled. In the minority world, this created a perception that progress was possible, perhaps even unstoppable. The lived experience of the minority world reinforced this perception, from increasing availability of cheap consumer goods and increased leisure time to technological advancement, like putting a person on the moon. There was also rising optimism in the majority world as liberation and national independence movements created a vast increase in the number of states in the world. All of this created an expectation that poverty would be conquered at home and abroad. However, stagnation in the 1970s, the imposition of neo-liberal policies in the 1980s and 90s, the growth of global supply chains, the constant chasing of profit, and the recurring cycle of economic crises brought this optimism crashing down. While advocates of globalization point to the decrease in absolute global poverty, many note the increase in inequality both within states and between states. In both cases, the rich are getting much richer and the poor and getting marginally less poor. In Canada, for example, the wealthiest 0.5% of the population controls 20.5% of the country’s wealth in 2020, a number likely to increase due to the Covid Pandemic. Globally, the 26 richest people have the cumulative wealth of half the world’s population, equal to 3.8 billion people. There are 2,208 billionaires and 47 million millionaires in the world, with Jeff Bezos topping the list at a net worth of 113 billion US$. Meanwhile, half of the world’s population lives on less than 5.50 US$ per day. The growth of millionaires and billionaires is not restricted to the majority world. China now has the most billionaires in the world at 819, followed by the US at 585. More broadly, the UNDP reports an average 11% increase in income equality in economically developing states. (2015) For IPE scholars, the growing inequality within and between states raises important questions. Is the global economic system as it stands sustainable? Is there a linkage between income inequality and the pattern of recurring economic crises? Is the vast concentration of wealth undermining sustainable development in the majority world and, more specifically, post-colonial states? If so, what happens when the system is no longer sustainable? These four points highlight the main issues of contention in the field of IPE. However, to make sense of them, we need to unpack the post-war liberal international economic order and the stress it currently faces. This is the subject of the next section in the module.

We briefly introduced the post-war international economic order in the globalization module. However, in order to understand the rise of IPE and assess its central insights, we need to unpack this order. Following World War Two, the victorious powers were deeply concerned about the possibility of history repeating itself. More specifically, they were concerned about the possibility of states again resorting to beggar-thy-neighbour policies and creating the conditions for another Great Depression. In response, forty-four allied powers convened in 1944 at the UN Monetary and Financial Conference in Bretton Woods, New Hampshire. The attendees of the conference concluded with three recommendations. First, to create the International Monetary Fund (IMF) to promote exchange rate stability. Second, establish the International Bank for Reconstruction and Development (IBRD) to help pay for rebuilding war-torn Europe and facilitate economic development. The IBRD would later become the World Bank, and through five development institutions, provide loans for infrastructure projects in economically developing states. Third, there was a recommendation to build other means to facilitate economic cooperation, notably an International Trade Organization (ITO). The ITO failed to materialize, but the General Agreement on Tariffs and Trade (GATT) was negotiated in 1947, coming into force in 1948. The GATT would become the World Trade Organization (WTO) in 1995 as part of the Uruguay Round Agreements. Each of these institutions would evolve over the latter half of the  20^th century, but together they define the post-war international economic order even after the demise of the Bretton Woods System in 1971.

It is important to note that underlying the Bretton Woods System was an assertion of American power. The US was the strongest economic state following World War Two. They held three-quarters of the world’s monetary gold. They had an intact and booming industrial base. They had the financial liquidity to transition the global economy from a war-time footing to a flourishing trade system. Moreover, the US was keenly aware of the consequences of Great Power isolationism given the results of such policies after World War One. Therefore, the UN Monetary and Financial Conference was more than just an effort to establish a functional post-war economic order. It was about demonstrating a commitment by the United States to establishing and maintaining a stable global economic order.

It is helpful to briefly review the three primary International Financial Institutions regarding their initial mission statements and how they evolved. The IMF was arguably the most important institution in the Bretton Woods System. Put most broadly, the delegates at Bretton Woods established the IMF to stabilize currency exchange, provide loans to member states experiencing balance of payment difficulties, and offer member states advice. There are two important mechanisms to unpack in the early operation of the IMF. First, the IMF stabilized the currency exchange through a modified gold standard. Since the US held an overwhelming percentage of monetary gold, IMF member states pegged their currency to the US dollar. The US, in turn, promised to convert its dollars to gold at 35 US$ per ounce. There was some flexibility in the system in that member states could adjust their currency valuation vis-à-vis the US$ but only with the IMF’s approval and only within certain margins. Second, loans to member states experiencing a balance of payment problem came from a pool of funds contributed by all member states. Importantly, this pool of funds was created by member state subscriptions and quotas. Member state quotas are set by their relative economic strength – the stronger the economy, the larger the quotas. In compensation, the larger the quotas, the more votes the member state receives. Essentially, the subscriptions and quotas system has allowed the US to exercise a de facto veto power within the IMF. However, the Bretton Woods System came to an end when President Nixon ended the convertibility of the US$ to gold between 1973 and 1976. The US abandoned gold convertibility due to an increasing balance of payment problem at home, growing distrust in the strength of the US$ abroad, and the subsequent increase in demand for gold convertibility which the US could no longer meet. In terms of the IMF, this undermined one of its principal objectives: to manage a stable currency exchange system.

However, the end of the Bretton Woods System did not mean the IMF was defunct. Rather, the IMF pivoted towards its other founding missions: providing loans to member states experiencing difficulties and offering advice on the international financial/monetary system. This pivot coincided with trouble brewing in the post-colonial and economically developing states. As we discussed in the globalization module, these states had become heavily indebted from low-interest loans provided by the petro-dollars that OPEC states had cycled into the system. This would not have been a problem if interest rates had remained low. However, these loans were denominated in US$, and when the US raised interest rates to stem domestic inflation, these states spiralled into unsustainable levels of debt. The possibility of sovereign debt default raised the spectre of systemic contagion where the default by one state starts a chain reaction leading to default by lenders and more borrowers. The IMF stepped in to protect the system, providing loans to these indebted states to avoid default. However, the IMF attached conditions to these loans called Structural Adjustment Programs (SAPs). SAPs included measures to reduce inflation, government expenditures, and generally limit the government’s role in the economy. In so doing, the IMF was implementing neoliberal policies known as the Washington Consensus: trade liberalization, privatization, market deregulation, and improving competitiveness. These policies may have prevented systemic contagion. However, they were overly simplistic, top-down, and a one size fits all approach. They also allowed international capital to significantly expand in emerging economies, local industries to struggle with foreign competitors, sharp cuts to social welfare spending, growing inequality, and rising poverty. In the 2000s, the IMF has sought to employ more nuanced conditions that consider local conditions, but they still see this as a balance of payment problem. Therefore, the IMF advice and, at times, requirements focus on solving payment issues, most often through austerity measures. This issue is once again coming to the fore with IMF loans intended to help struggling economies dealing with the Covid19 pandemic

The World Bank, originally known as the International Bank for Reconstruction and Development in 1944, was established to finance war-torn Europe’s reconstruction. However, Marshall Plan quickly eclipsed the role of the IBRD for funding Europe’s recovery. Over time, the IBRD was joined by the International Development Association, the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Center for Settlement of Investment Disputes. Together, these agencies are called the World Bank Group. The World Bank shifted from reconstructing Europe, towards lending money to governments for development projects, most often to post-colonial and emerging economies. The World Bank started with loans for physical capital infrastructure projects, like damns, roads, and rail networks. However, its focus has expanded over time to include programs to meet basic needs, environmental programs, and, most recently, poverty reduction. For example, the World Bank has set two goals for 2030. First, to end global poverty measured by those living on less than 1.90 US$ a day. Second, lessen inequality by promoting income growth for the bottom 40% of earners in each country.

The World Bank has a less problematic image than the IMF. This is primarily due to the IMF’s status as being a ‘lender of last resort’, meaning those who receive IMF funding literally have few other options. Therefore, the IMF is dealing with the most challenging cases and applying ‘balance of payment’ solutions as its main policy prescription. Finally, perhaps due to the power imbalance between the IMF and borrowers, the IMF has also earned a reputation for paternalistic policies. On the other hand, the World Bank is working with states to fund projects that are advancing economic growth, reducing environmental externalities, and addressing social welfare deficits. The World Bank has also actively built relationships with NGOs (they use the term Civil Society Organizations) since 1981. However, the World Bank faces significant criticism. Part of this criticism is due to the visibility of the World Bank. They have become a target for anti-capitalism, anti-globalization, and anti-austerity protestors. And the World Bank has also been involved in the imposition of SAPs with the IMF, leading to accusations of being part of an effort by the IFIs to maintain the privileged position of the most powerful states in the system.

The General Agreement on Tariffs and Trade was the compromise created in 1947 when negotiations on an International Trade Organization failed. The GATT is a multilateral agreement and not a formal institution. As such, it existed as an agreement between ‘contracting parties’, supported by a very small secretariat. Essentially, the GATT consisted of rounds of trade liberalization talks, and it was quite successful. GATT negotiations significantly reduced import duties, and trade flourished in the 1950s and 60s. However, the same tensions that ended the Bretton Woods System led states to use non-tariff barriers (NTBs) to protect their economies in the 1970s and 1980s. These NTBs led to tension in the international economy, as did the changing nature of the international economy in the post-Bretton Wood System world. The international economy was dealing more with the rise of private finance, increased services, and issues around copyright than just tariffs on manufactured goods. The GATT was struggling to deal with dispute settlement between members. All of this led to the creation of the World Trade Organization in 1995, which replaced the GATT

The WTO is a permanent institution based in Geneva. It administers WTO trade agreements, provides forums for negotiations, monitors national trade policies, supplies technical assistance, offers training to developing economies, and cooperates with other international organizations. Importantly, the WTO also has a robust and binding dispute settlement mechanism. This dispute settlement mechanism makes the WTO the most supranational of the IFIs since it can penalize member states by overriding sovereignty issues. However, the WTO also faces significant criticism. The WTO promotes free trade, and this can hinder emerging economies as they cannot protect and foster their own industrial base and service sectors. There is an element of hypocrisy in this since the advanced economies historically benefitted from protecting their infant economies. There is also a degree of hypocrisy in the rules between sectors. The WTO liberalizes trade in manufactured goods and services while protecting agricultural goods. This benefits the minority world and harms the majority world since the minority world is less competitive in agriculture and more competitive in the industrial and services sectors. More recently, the WTO has been criticized for ignoring environmental concerns by privileging GDP growth without accounting for the impact of negative externalities like emissions or states lowering environmental standards to increase competitiveness. Finally, the WTO has been the center of an ongoing debate over intellectual property rights, with implications ranging from economic development to access to expensive but life-saving pharmaceuticals.

The Group of Seven (G7) and, more recently, the Group of Twenty (G20) are important albeit less formal actors in the international economy. The G7 is an informal group of the seven largest industrialized democratic states, including Canada, France, Germany, Italy, Japan, the UK, and the US. They meet annually in different member states to discuss political, economic, and financial issues facing the global economy. In 2018, the G7 met in Canada. Between 1991 and 2014, Russia attended the meetings, making it the G8. However, in a rebuke to Russia’s illegal annexation of Crimea, they were removed from the club. The G7 operates as ‘summit diplomacy’, where state leaders meet in private to discuss high-level threats and opportunities to the global economy. These might be economic, like the 2008 financial crisis, or political, like the Russian annexation of Crimea. More recently, the environment has become a common topic for discussion. However, the G7 is criticized for representing the interests of the minority world at the majority world’s expense. Moreover, the justification that the G7 represents the largest economies, even if limited to democracies, is no longer true. India, Brazil, Mexico, and Indonesia are much larger economies than Canada and are challenging the positions of Italy, France, and the UK. Emerging economies are more populous and are achieving higher GDP growth. They have a dynamism that is lacking in the G7 countries.

This tension between the G7 and emerging economies has led to the creation of the G20. The G20 includes the G7 members, the BRIC countries, and six regional and emerging economies. Together the G20 represents over 85% of global GDP and 67% of the global population. The G20 held its first summit in 2008 but grew out of meetings between the G20 finance ministers held since 1999. The G20 finance ministers’ early meetings were intended to address the growing debt crises in developing and emerging economies. Between 1999 and 2008, there was a growing recognition that emerging and regional economies were crucial to shaping the global economies. The 2008 global financial crisis suggested the need for a G20 summit, similar to that held by the G7. The first G20 summit focused on global economic stability, but subsequent summits have discussed a range of topics, including international security, health care, gender, climate change, migration, the refugee crisis, and economic development. It is unclear whether the G20 is capable of setting broad policy directions, the usual purpose of the summits, given the broad range of states with an equally broad range of interest involved. Some question whether the G20 is a meaningful body or another attempt by minority world states to gain legitimacy from leading states in the majority world.

Figure 9-7: Source: https://flic.kr/p/25gzp67 Permission: CC BY-NC-ND 2.0 Courtesy of Number 10.

Taken together, the IMF, World Bank, WTO, and the G7/G20 are important actors in shaping the global economy. For IPE scholars, more happens in these institutions and summits to shape our world than other more glorified bodies such as the United Nations General Assembly and United Nations Security Council. These bodies meet regularly. They make decisions that directly impact the shape of the global economy. Their decisions have concrete implications on economic development, welfare provisions, environmental regulations, and poverty reduction. In order to understand the debates with IPE, it is useful to examine the post-war international economic order through our theories and approaches of global politics, the subject of our next section.

Of all the theories and approaches to global politics that we have introduced, Realism has the least space for IPE. Realism focuses on the state, the relative distribution of capabilities in the system, and the need for self-help. These Realist assumptions in-turn privilege high politics and security concerns. However, that doesn’t mean that Realists completely ignore the global economy. Rather, it suggests that Realists consider it a secondary concern and are primarily interested in how it affects the distribution of capabilities in the system, security, and power. For example, Realists are less interested in the argument supporting comparative advantage in trade and more interested in the question of absolute versus relative gains. Comparative advantage suggests that in absolute terms, all states benefit from trade. As each party produces those goods and services that they have a lower opportunity cost, they can trade the surplus with other states. In so doing, all parties leave with more goods than they could produce on their own. This is an example of absolute gains. In a world without security concerns, absolute gains make sense as everybody is better off. But if you believe, as Realists do, that all other states pose potential security risks because of global politics’ anarchical nature, absolute gains are irrelevant. Realists are concerned with relative gains. They ask how will this trade deal shift the distribution of capabilities in the system. They ask how it will enhance or detract from one’s relative power. This focus on power carries forward to the Realist view on the IFIs and the G7/G20. Realists view these institutions as manifestations of Great Power interests that facilitate and legitimate the status quo. If they fail to serve the interests of the powerful, they will no longer function. Realists argue the state must make decisions based on the national interest, regardless of promises made or institutional constraints. For example, when President Trump was concerned that imports of Canadian steel and aluminum went against American interests, he applied pressure on the Canadian Government to self-impose quotas on exports. When Canada refused, Trump used tariffs in contravention of NAFTA and the new USMCA Free-Trade Agreement that had just come into effect. From a Realist perspective, power is the central concern, and IPE is not different. If joining an institution or agreement facilitates more power, legitimates the exercise of power, or lowers the cost of using power it may have value. If not, it is an impediment to be avoided.

Liberalism is the natural home of IPE as they share many of the same assumptions and prescriptions. Understood most broadly, Liberalism sees the global economy as an opportunity to achieve peace and prosperity. Liberals believe a world where individual rights are protected, and people can pursue their interests freely is a world with a natural harmony of interests. Liberals emphasize the benefits that accrue from voluntary exchange in a free market. They believe that free trade, comparative advantage, and absolute gains produce prosperity and interdependence. In such a system, capital and goods flow to where they are most needed for the benefit of all. This, in turn, raises the cost of conflict and lowers the cost of cooperation. However, beyond this broad view, there are significant differences in the Liberal variants when it comes to IPE.

Most notably, there is a tension between Classical Liberals that are suspicious of government involvement in the economy and Social Liberals who believe the government has a critical role in the economy. At the Bretton Woods System negotiations, John Maynard Keynes championed a form of Social Liberalism when he argued the global economy required intervention to provide stability and avoid the economic nationalism that created the Great Depression. When the Bretton Woods System ended in the 1970s, a more Classical Liberal approach to the global economy took form in Neoliberalism. Neoliberalism privileges the role of the market in disciplining states and companies alike. A failure to heed market discipline creates inefficiency and ultimately threatens the viability of the economy. However, it is important to distinguish between Neoliberalism of the Washington Consensus variety and Neo-Liberal Institutionalism. Neo-Liberal Institutionalism argues that cooperation is facilitated by engaged and continuous interaction, especially through formal institutions. When actors interact, the distinction between ‘self’ and ‘other’ is lessened, trust is built, and actors begin to focus on absolute versus relative gains. Further, formal institutions help actors overcome collective action problems by facilitating agreements, monitoring compliance, and lowering the cost of cooperation. This logic runs contrary to Neoliberalism which advocates for unfettered markets as a disciplining mechanism.

Constructivist approaches to IPE look to how ideas and historical norms shape identities and, therefore, economic preferences regarding the global economy. These preferences, in turn, inform practices. As we have seen previously, Constructivists are most interested in moments of change and seek to unpack how and why change happens as well as the connection that change has to identities, interests, and practices. For example, they might ask to what degree UK hegemony in the 19^th-century influenced the free trade system and shaped the identities, interests, and practices of other emerging industrial powers like the US or Germany. They may ask similar questions of American leadership in the post-war international economy. The constructivist analysis extends beyond states, looking at the role that institutions or ideologies play in shaping identities, interests, and practices. For example, they may ask how the IFIs or Neoliberalism have shaped preferences and practices in the global economy. Currently, questions of declining American leadership, or at least a willingness to lead, raises interesting questions on whose preferences will shape the practices of the global economy going forward.

Figure 9-11: Source: https://www.flickr.com/photos/lowfive/162544310/ Permission: CC BY-NC-ND 2.0 Courtesy of just.in.

Critical and Post-Structural approaches view IPE as another means to reinforce the privilege of elites within the global economy. Essentially, both approaches are critical of global capitalism. The most prominent Critical approach to IPE is Marxism. Marxists see the global economy as a sphere of capitalist competition. Rather than a world carved up by sovereign states, Marxists and Marxist-derived approaches see a world constituted by capitalists who own the means of production and labour which the capitalists exploit. The search for surplus value and profit drives capitalism’s expansion across the globe, creating a global class struggle between the oppressor and the oppressed. While we have already introduced Dependency Theory, it is useful to mention it again. Dependency Theory argues the global economy is a system that keeps periphery states in a subordinate and subjugated position to the advantage of core states. This relationship allows the core countries to exploit the periphery for cheap labour, resources, and a market to sell their goods. Meanwhile, the periphery is unable to industrialize because they are locked into this subjugated position. Often core states will co-opt elites within the periphery to maintain this exploitive relationship. Dependency Theory advocates for periphery states to adopt import substitution to break out of dependency on the core states. Other critical approaches critique the capitalist nature of the global economy, like Feminism which highlights the marginalization of women and Environmentalism that highlights the negative environmental externalities generated by the capitalist economy.

Post-Structural approaches unpack the discursive practices that maintain the global economy. Post-structural theorists posit the relationship between states, the economy, and global politics as political and social contestation in a particular historical context. The struggle for the 19^th-century free trade system was rooted in colonialism and imperialism. The British proudly declared the sun never set on their empire. British hegemony defined the global economy and established a free trade system that subjugated and exploited its empire. This privileged a discourse of Western superiority and colonial inferiority that justified the global economy. More recently, the discourse of Neoliberalism framed the West and the IFIs as the saviour of debt-ridden and poorly governed post-colonial and emerging economies. If only these poor states could live within their means, pay their debts, and take care of their people, the West and the IFIs wouldn’t have to intervene. However, Neoliberalism as a discourse subjugates other discourses like the lived experiences of colonial subjects, the consistent plundering of resources from the majority world by the minority world, and the role of IFIs in entrenching post-colonial and emerging economies in SAPs to rescue the global capitalist economy.

[box title=”Importance and Impact” box_color=”#BDBDBD”]When we apply our theories and approaches to global politics to IPE, a variety of insights emerge. Realists view IPE as a secondary order to high politics. They see economics as a means to enhance or erode power. They focus on questions of absolute versus relative gains and see institutions and regimes as representing or legitimating the interests of the powerful. Liberalism is a natural home for IPE and sees the global economy as a means to foster peace and prosperity. Trade and interdependence are important Liberal prescriptions. They raise the cost of war and therefore encourage peace. They break down the dichotomy of us vs them and foster a virtuous cycle of cooperation based on a natural harmony of interests. However, there is tension between Classical/Neoliberals and Social Liberals over the government’s appropriate role in the economy. Constructivists are most interested in the ways that states, institutions, and ideologies shape identities, interests, and practices in the global economy, especially during moments of structural change. Finally, Critical and Post-Structural approaches critique the global economy as an extension of capitalist exploitation[/box]

International Political Economy does exactly what its name suggests, assesses the intersection of politics and economics at the global level. However, it also does more than that. IPE doesn’t just look at the point where the two meet. Rather, IPE unpacks the consequences of that intersection. It asks whether politics tames economics or whether economics disciplines politics. And it explores the consequences of the different answers to that question. This module has defined IPE, exploring the four contemporary tensions that structure debates in the field. This includes the impact of changing power structures, notably those economies that are challenging American power. We looked at the way that MNCs are challenging the privileged role of the state in global politics. We assessed the degree to which globalization has impacted the global economy. And we have addressed the implications of growing global inequality. Having defined IPE and the tensions in the field, we turned to the post-war international order, most notably the rise and fall of the Bretton Woods System. We examined the most important international financial institutions, including the IMF, IBRD/World Bank, and GATT/WTO, as well as the G7 and the G20. Finally, we closed with an assessment of IPE through our theories and approaches to global politics. This revealed some of the tensions involved in IPE. Realists highlight the role of power in the global economy as well as the debates over absolute and relative gains. Liberals explore the ways that international trade, finance, and economic governance provide an opportunity to foster peace and prosperity. Constructivists unpack the relationship between identities, interests, and practices in the global economy, especially at points of structural change. And Critical and Post-Structural approaches critique the ways in which the global economy’s capitalist underpinnings reinforce the privilege of the powerful. Overall, this module introduces and explores the intersection of politics and the economy at the global level.

International Political Economy emerged as a distinct area of enquiry in the 1970s because of economic events that deeply impacted global politics. This included the OPEC oil crisis, the American decision to end the Gold Standard, the end of the Bretton Woods System, and the struggle of post-colonial states to achieve meaningful and sustainable economic development. IPE scholars argue that a focus on high politics misses many, if not most, of the mechanisms that shape global politics. IPE suggests that the relationship between global politics and economics is intimate and significant. It suggests that low politics is as important, if not more important, to understanding global politics than focusing on high politics. Low politics speaks to domestic politics, economic policy, and welfare policy. In the global sphere, low politics also speaks to the complex interdependence and intersectionality of people, groups, governmental bodies, bureaucracies, states, and institutions.

The international financial institutions (IFIs) are the IMF, World Bank, and WTO. They were the result of the 1944 Bretton Woods negotiations and formed the Bretton Woods System that operated until 1971. They were intended to help Europe recover from World War Two and to avoid the economic nationalism and beggar-thy-neighbour policies that led to the Great Depression. The IMF was arguably the most important institution in the Bretton Woods System. Put most broadly, the delegates at Bretton Woods established the IMF to stabilize currency exchange, provide loans to member states experiencing balance of payment difficulties, and offer member states advice. When the Bretton Woods System ended, a core function of the IMF was no longer necessary – maintaining the currency exchange system. The IMF pivoted towards its other founding missions: providing loans to member states experiencing balance of payment difficulties and offering advice on the international financial/monetary system. However, as the IMF became heavily involved in the economic crises in post colonial and emerging economies, they also came to use the highly controversial Structural Adjustment Programs (SAPs). SAPs included measures to reduce inflation, government expenditures, and generally limit the government’s role in the economy. In so doing, the IMF was implementing neoliberal policies known as the Washington Consensus: trade liberalization, privatization, market deregulation, and improving competitiveness. The World Bank, originally known as the International Bank for Reconstruction and Development in 1944, was established to finance war-torn Europe’s reconstruction. However, Marshall Plan quickly eclipsed the role of the IBRD for funding Europe’s recovery. Over time, the IBRD was joined by the International Development Association, the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Center for Settlement of Investment Disputes. Together, these agencies are called the World Bank Group. The World Bank shifted from reconstructing Europe, towards lending money to governments for development projects, most often to post-colonial and emerging economies. The World Bank started with loans for physical capital infrastructure projects, like damns, roads, and rail networks. However, its focus has expanded over time to include programs to meet basic needs, environmental programs, and, most recently, poverty reduction. The WTO replaced the more informal GATT as a permanent institution based in Geneva. It administers WTO trade agreements, provides forums for negotiations, monitors national trade policies, supplies technical assistance, offers training to developing economies, and cooperates with other international organizations. Importantly, the WTO also has a robust and binding dispute settlement mechanism. This dispute settlement mechanism makes the WTO the most supranational of the IFIs since it can penalize member states by overriding sovereignty issues.

The tension between absolute versus relative gains highlights a key difference between a Realist and Liberal view of the global economy. Liberals emphasize the benefits that accrue from voluntary exchange in a free market. They believe that free trade, comparative advantage, and absolute gains produce prosperity and interdependence. In such a system, capital and goods flow to where they are most needed for the benefit of all. This, in turn, raises the cost of conflict and lowers the cost of cooperation. Importantly, Liberals do not worry about relative gains from this system but rather focus on everyone being better off in absolute terms. Realists are less interested in the argument supporting comparative advantage and absolute gains in trade and more interested in the question of relative gains. In a world without security concerns, absolute gains make sense as everybody is better off. But if you believe, as Realists do, that all other states pose potential security risks because of global politics’ anarchical nature, absolute gains are irrelevant. Realists are concerned with relative gains. They ask how will this trade deal shift the distribution of capabilities in the system. They ask how it will enhance or detract from one’s relative power. They argue that a trade deal or a trading system that provides more benefits to someone else creates a greater security threat, regardless if everyone is better off in absolute terms.

Marxists see the global economy as a sphere of capitalist competition. Rather than a world carved up by sovereign states, Marxist-derived approaches see a world constituted by capitalists who own the means of production and labour which the capitalists exploit. The search for surplus value and profit drives capitalism’s expansion across the globe, creating a global class struggle between the oppressor and the oppressed. Dependency Theory is a prominent Marxist-derived theory. It argues the global economy is a system that keeps periphery states in a subordinate and subjugated position to the advantage of core states. This relationship allows the core countries to exploit the periphery for cheap labour, resources, and a market to sell their goods. Meanwhile, the periphery is unable to industrialize because they are locked into this subjugated position. Often core states will co-opt elites within the periphery to maintain this exploitive relationship. Dependency Theory advocates for periphery states to adopt import substitution to break out of dependency on the core states.

Post-Structural approaches unpack the discursive practices that maintain the global economy. Post-structural theorists posit the relationship between states, the economy, and global politics as political and social contestation in a particular historical context. For example, the discourse of Neoliberalism framed the West and the IFIs as the saviour of debt-ridden and poorly governed post-colonial and emerging economies. If only these poor states could live within their means, pay their debts, and take care of their people, the West and the IFIs wouldn’t have to intervene. However, Neoliberalism as a discourse subjugates other discourses like the lived experiences of colonial subjects, the consistent plundering of resources from the majority world by the minority world, and the role of IFIs in entrenching post-colonial and emerging economies in SAPs to rescue the global capitalist economy.