Post on 15-Apr-2017
Running head: INTERNATIONAL POLITICAL ECONOMY
Economics and International Relations:
A Conceptual and Analytical Consideration of Global Economic Drivers
Austin Lee
Embry-Riddle Aeronautical University
INTERNATIONAL POLITICAL ECONOMY 2
The study of economics and the study of international relations (IR) have two things in
common. Both can drown you in theories and neither are particularly agreed upon. Each
economist and each international relations academic will have their own opinions on what makes
the world tick, and all are convinced that they’re right. Politics in international relations and the
global economy don’t have a striking causal relationship on the surface, but when you dig below
the surface of the IR theories, it becomes evident that one drives the other. The study of this
phenomenon is called International Political Economy (IPE). IPE is a relatively new school of
thought in social sciences; one that attempts to connect the dots between economics and
international relations. The scope of IPE is flexible, the scholars within the discipline have
disagreements on what exactly constitutes the boundaries of the study. However, the basis of the
study is to find the connection between political actions shaping the global economy. The
broadness of IPE leaves it fraught with critics, attacking the discursive analysis of the
trichotomy. IPE focuses on the three major theoretical concepts of International Relations;
Realism, Liberalism, and Constructivism. The divides of these extents are not always clear, in
fact, often the means on which each theoretical construct attains its end are similar, but the
perception of the ends is what differentiates them. However, the question in economics is never
what happened (economics is often reactionary), but why it happened. From a purely economic
perspective, money is the driver of the global economy. This is an agreeable and understandable
motive for states while constructing policy, but International Political Economy draws the
conclusion that influence on the global markets is much more of a chess game than it seems. This
paper will discuss the three main schools of International Political Economy, and then analyze
the actual economic drivers.
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To begin, there must be an understanding of the history that led to an International
Political Economy. The initial stages of a global economy were mercantilism. The mercantile
system was coined by Adam Smith, a leading economist in the 18th century. The Library of
Economics and Liberty defines mercantilism as economic nationalism for the purpose of
building a wealthy and powerful state. The goal of a mercantilist system is to maintain a highly
favorable trade balance, accomplished by imposing high tariffs on imports and maximizing
domestic resources. The decline of mercantilism bred the rise of Free-Trade agreements (FTA),
Intergovernmental Organizations (IGO) and Multinational Corporations (MNC). World War I
was the first stage of failure of autarkic protectionist economies. The proceeding economic chaos
caused by WWI eventually led to the uprising of the regimes responsible for World War II.
World leaders recognized the need for inter- and post-war economic stabilizers, birthing the
Bretton Woods institutions. 43 countries met in Bretton Woods, New Hampshire to repair the
devastated post-war economy and encourage global economic cooperation (Ghizoni, 2013). Two
institutions were immediately established, the World Bank and the International Monetary Fund,
their purpose being to stabilize exchange rates, lend reserve currencies with balance-of-payments
deficits, and to provide financial assistance in the reconstruction of the world economy.
Following the stream of economic globalization set about by Bretton Woods, the General
Agreement on Tariffs and Trade (GATT) was negotiated in 1957, dropping or reducing
thousands of tariffs, opening the door for billions of dollars of world trade (Rose, 2009). GATT
evolved into the World Trade Organization (WTO), further constructing the cooperation of an
international economy. Along with these three Bretton Woods Institutions, there have been
several intellectual forums of world leaders, most recently and still prominently, the G20. The
INTERNATIONAL POLITICAL ECONOMY 4
G20 is a summit of leaders from the economically leading 19 countries and the European Union,
to continue the growth of a supportive global economy. G20 nations account for 80% of global
GDP, three quarters of international trade and two thirds of the world population (G20 Germany,
2016). With the parameters of our current IPE elucidated, the question remains of why a state
actor would be willing to contribute to this international system.
The oldest vein of thought in international relations is realism. Since the commencement
of ancient civilization, states, which are the principle actors of realism, have been focused on
security by means of power. Self-survival is the most critical agenda in any established state, and
especially with an emerging state. What differentiates realism from all other IR paradigms, is
realists want power, and will do anything to get it. In classical realism, ethics play no part in the
endeavor for power, and their gain will almost certainly come at someone else’s loss. This zero-
sum game concept is the basis of action for realists, whether politically or economically. They
believe the global system is anarchic, and conflict takes the place of politics. Realism considers
things as they are, not as they should be. One of the first theorists to outline this concept was
Thucydides (460-411 B.C.E.), unwittingly outlining the foundations of the realist perspective for
centuries to come. In his account of the History of the Peloponnesian war, the famous “Melian
Dialogue”, a debate between Spartans and Athenians, explains the cause for the Peloponnesian
War. The line from the dialogue, “Right, as the world goes, is only in question between equals in
power, while the strong do what they can and the weak suffer what they must.”, identifies the
moral code of the realist (Maye, 2013). In this era, wealth and military strength were causally
related. In Thucydides’ History, he explains conflict as, “a matter not so much of arms as of
INTERNATIONAL POLITICAL ECONOMY 5
money, which makes the arms of use”.1 The International Political Economy during this time
was simple; conquer territory, and gain resources, wealth, and power. There are other examples
of this theory at work, such as the Trojan war. Historians argue that the Achaeans were in pursuit
of Troy because it was a wealthy, prosperous city with a location that controlled trade routes,
rather than the pursuit of Helen, as Homer’s Iliad would suggest. The Roman Empire, always
striving for increased power, defeated Carthage, likely motivated by the financial gains of
controlling the Mediterranean Sea and its trade network (Kat, 2015). This sentiment of achieving
wealth being the primary objective of states continued into to the Current Era, and evolved into
Mercantilism. Mercantilist economic policy assumes that all states achieve wealth for the
purpose of increasing military power and therefore security. Realists and mercantilists go hand in
hand, for the focus of the theories is to be self-sufficient. However, as industrialization and
globalization became inevitable, the thesis of mercantilism became less realistic and applicable.
With free trade evolving rapidly, the realist approach became nationalist, and bred the
process of protectionism, which is the theory of shielding a state’s domestic industries by
limiting imports, whether through quotas or substantial tariffs. Conceptually, protectionism and
mercantilism ends seem similar, but protectionism limits free trade, instead of abandoning it. At
this stage, we begin to see the arguments for the realist course of economic action clash against
the rising liberal tide, as states begin to grow wary of global competition. Free Trade is
conceptually contradictive to a realist; it requires parties to mutually benefit from the transaction,
instead of providing zero-sum gains for the stronger state involved. Unfortunately for realists,
Classical Trade Theory, or simply, competitive advantage, provided too strong of an argument to
1 Thucydides, History of the Peloponnesian War, Book 1, Chapter 83
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ignore. Realists did then, and still do now, endorse “Import Substitution Industrialization”, the
policy of replacing foreign imports with domestic production. (Baer, 1972). Industrialization is
important in developing strong manufacturing, not only allowing for higher quality military
products, but because of the fact that manufactured goods are more valuable than raw materials.
Strong manufacturing means the ability to maintain a positive trade balance, which in many
realist minds, is the key to a strong state, politically and economically. Realists abhor
intergovernmental organizations such as the World Trade Organization because it means further
opening boundaries to change. A realist could also argue that intergovernmental organization’s
such as the WTO are incredibly inefficient (Perry, 2008). The WTO has been stuck on the Doha
round of negotiations since 2001, with talks disintegrating between the United States and India in
2008, over agricultural trade and special safeguard mechanism (SSM).2 From an economic
standpoint, their apprehensions are somewhat valid. Historically most of the major free trade
agreements internationally are “Hub and Spoke”, meaning that one large state negotiates with
multiple small actors (Barfield, 2013). These smaller states often see a large amount of benefit
trading with the wealthier state, and occasionally, the large state actually suffers from the FTA.
For example, the North American Free Trade Agreement (NAFTA), an FTA between the United
States, Canada, and Mexico, set the precedent for US corporations outsourcing labor, and then
selling back to their own country (Faux, 2013). The result was a landslide decline of
manufacturing in the US. NAFTA is arguably responsible for a net loss of up to 600,000 jobs
and as of 2015 a $58 billion trade deficit with Mexico (McBride, 2016). Similar trade deficits
can be found worldwide, and realists angered with the results of free-trade have formed an
2 In Doha Round agriculture: a tool that will allow developing countries to raise tariffs temporarily to deal with import surges or price falls.
INTERNATIONAL POLITICAL ECONOMY 7
alternative form of trade policy, described as “retaliatory protectionism”, using trade subsidies
and tariffs to pressure other nations to end market-distorting policies (Boudreaux, 2011). The
predictable pattern of realist behavior is when the economy declines, protectionist policies
increase, exacerbating the downturn. While trade increases at a faster rate than output during
times of economic prosperity, trade growth falls at three times the rate of GDP growth during
times of economic recession, assuming the crises are not special (Freund, 2009). Powerful states
continue to attempt to establish trade in their favor, setting up free trade agreements, like the
biggest kid on the block asking for a fair fight (Yeager & Tuerk, 1984/85). Providing further
arguments for the need for realism in IPE, Charles Kindleberger, the creator of the Hegemonic
Stability Theory stated, “for the world economy to be stabilized, there has to be a stabilizer – one
stabilizer.”3
The modern economist would like to think otherwise, the modern economist would argue
that they key to a successful IPE is not a winner takes all economy, it’s a cooperation between
states to create financial continuity. In International Relations, liberalism is focused on
interdependence between nations to avoid conflict, instead of cultivating it. In realism, anarchy is
the natural state of being for international relations, but liberalists would argue that the
individuals and states corrupt the international system, creating anarchy. A liberal state is
interested in security as is a realist, they just use different means to achieve the end. Liberals
believe that peace must be constructed, and a way of creating that peace is through
intergovernmental organizations such as the WTO, UN and G20. Flipping to the other side of the
argument for NAFTA, the benefits from a liberal perspective are clear. The argument from the
3 Kindleberger 1986, pg. 304
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realist point of view only held weight if one were to only consider the benefits to the United
States, however, there were three countries involved. Trade between the triad quadrupled from
1993-2015, from $297 billion to $1.14 trillion, boosting economic growth for all countries
involved. The US increased exports from $142 billion to $517 billion, NAFTA trading now
accounts for a third of total US exports (Amadeo, 2016). It reduced the cost of commerce, which
benefits multinational corporations (MNC) and small businesses alike, spurring an increase of
international investment and growth. All parties involved gained a mutual benefit, which is the
basis of liberalist theory of economic interdependence. For the supposed lack of action that a
realist suggests the WTO takes, the growth of free trade and trade interdependence is undeniable;
over 300 bilateral FTA’s are in place and various others are in the process of negotiation,
covering the exchange of goods, services, and intellectual property. The variety of topics covered
by the WTO shows the commitment to democratic principles such as human rights, law, and
property rights, as the base of promotion for free markets. Liberalists have more in mind than
just economic and military power; they strike complex and varied compromises to attain their
economic, social, and political goals (Moravcsik, 2010). The trading world is essentially
experiencing an experiment of how fast and how far free trade can go. There is little empirical
evidence to suggest the value of a truly libertarian “Laissez-Faire” economy, and liberalism does
not necessarily plan to ever achieve utopian trade, but the international benefits of integrating a
cooperative economic society are substantial. Liberalism still recognizes the value of appropriate
regulation, although at a level far less stringent than a realist such as Adam Smith claims. In
1776, he stated that Great Britain would never see free trade, purporting that, “Not only the
prejudices of the public, but what is much more unconquerable, the private interests of many
INTERNATIONAL POLITICAL ECONOMY 9
individuals irresistibly oppose it. [Domestic manufacturers defend their “monopoly” of the home
market.]” (Smith, 1937).4 As it turns out, Smith was wrong, on a massive scale. Instead of seeing
stunted trade growth, we are in the midst of “hyperglobalization”, which takes form as rapid
trade growth and surges in direct foreign investment (Subramanian & Kessler, 2013). The
causation being multinational companies, expanding as fast as FTA’s will allow. While the
World Bank and the IMF provide regulation and capital support, the true drivers of the growing
free trade policy are MNC’s. As of 2011, the ten largest multinational corporations are
responsible for revenues of $2.8 trillion and employed 6.9 million workers. The sheer size of
these companies alone is enough to create economic interdependence, with MNC’s utilizing
several nations in their supply chain.
This economic interdependence invokes Capitalist Peace, a theory simply stating that
highly developed nations are unlikely to invoke military conflict when parties involved have
direct economic investments in each other. A sophisticated cost-benefit analysis of economic
cost versus the benefit of war would certainly show that disrupting the global economy would be
far more expensive to a state than any benefit of winning a war (Moravcsik, 2010). An example
of this would be the US and China. With the immense amount of trade conjoining the dyad, a
conflict would one, cripple the global economy, and two, with the amount of capital invested in
the two from international states and individuals, the bifurcation of trade caused by conflict
would undoubtedly escalate into a third world war. The parameters of Capitalist Peace are only
expanding, with the Trans Pacific Partnership (TPP), Trans-Atlantic Free Trade Agreement
4 Smith 1937, pg. 437-438
INTERNATIONAL POLITICAL ECONOMY 10
(TAFTA), and Regional Comprehensive Economic Partnership (RCEP) under negotiations.5
Unfortunately, with President-Elect Donald Trump vowing to dismiss the US from the TPP,
protectionist policy could again be providing roadblocks for Capitalist Peace.
In the International Political Economy, it is agreed upon that interests are not natural,
they are constructed and become identity. Constructivism is the third conceptual theory in
International Relations and IPE. Constructivists abandon the idea of state actors and focus on the
individual that makes up the greater society. Driven by ideas, knowledge, and norms
constructivism attempts to decipher state interests and their individual construction. This is
largely the most analytical of the three theories, requiring hermeneutic sensibility and value
rationality (Alder, 2013). The study of constructivism in IPE implies none of our essential states
are made naturally, rather constructed and influenced over time by society. The IPE is a society
rather than a system, and the ideas of the constructed social environment have a causal efficacy
on the actions of states. Instead of categorizing actions and states into the bifurcation of realism
and liberalism, both of which have assumed normative order, constructivism attempts to analyze
the facts more philosophically, using priori reasoning to explain the actions (Konings, 2015).6
Liberalism and realism have two main issues in IPE that constructivism argues against. The
couplet of realists and liberalists contain themselves into essentialism, meaning that they assign
themselves withstanding attributes in which create their identities. For realism, they become
“Black Boxes”, which assumes that all states are unitary, self-interested, and rational actors, and
the decision-making process by which they come to action is of minimal importance (Konings,
5 RCEP is between ASEAN (Association of Southeast Asian Nations) and the six states which ASEAN has existing FTA’s. TPP consists of 12 Pacific Rim countries (Not including China). TAFTA is a FTA proposal between the EU and the United States of America. 6 Priori – reasoning that proceeds from theoretical deduction rather than empirical evidence.
INTERNATIONAL POLITICAL ECONOMY 11
2015). Liberalism assumes the opposite, theorizing that states would be automatically willing
and would prefer to work in unison. One could illustrate this with game theory. Take the game of
Prisoner’s Dilemma, where two prisoners given equal circumstance, are given the choice to
confess, or cooperate. If both stay quiet, they get to go free and split the profits; if one sells out
the other that does not talk, the sentence is harsh; if both confess, there is a light sentence
(Dufwenberg & Kirchsteiger, 2001). Convert that into economic terms, and make the prisoners
state actors, and the environment global conflict and trade, a liberalist will trust that through built
relationships, both will choose to cooperate, and split the profits. This would mean presupposing
that a state takes their opposites outcomes into consideration. This has exceedingly proven to be
untrue in IPE, considering that each actor values the variables at stake. The perception of fairness
for each actor is different. A constructivist digs deeper than the state and looks deeper into the
ideas driving each decision that is made. Constructivism attempts to be the midpoint of the
liberalist/realist dichotomy, by using the actor-network theory, which is understanding the
combinations and interactions of elements that make it successful (Konings, 2015). This exercise
of discursive mapping is a sophisticated way to see the world, a view that says that globalization
is dependent on political choices (Siles-Brugge, 2013). The EU is an example of constructivism
in practice in the IPE, where the administration must value each countries values, benefits and
concerns when making policy decision.
There is a glaring issue with all three of these theories. None of the three hold weight by
themselves in the current International Political Economy. The EU, that has been so expertly
socially constructed by committing to the interests of all its constituents, has just has its largest
member, the United Kingdom, decide to remit their membership. The cause was disenfranchised
INTERNATIONAL POLITICAL ECONOMY 12
individuals, suffering local economies, and immigration. The individuals went against economic
state and possibly individual interest to change into the unknown. 63% of trade in the UK is
linked with European Union free trade, all of which stands to be restructured once the
referendum is ratified.7 Neither priori or posteriori reasoning is used, in fact, it seems no
rationality was used at all, other than emotional reaction.8 The future of the EU with the UK
leaving seems to leave the door open for restructuring at best, and degradation at worst. For its
sophisticated concepts, it seems constructivism has provided little substantive benefit to the IPE.
That is not to say that international relations and the economy are not interrelated, they
inextricably are, but the constructs of traditional IR theories are difficult to comprehensively
explain economic actions. The argument is that humans are inexplicably complex and
unpredictable. They are also quite different, some are impulsive by nature, and some are rational.
Some will make decision deliberating only their self-interests, while others will pursue solutions
that appease all parties involved. The global economy has only one predictable attribute, that it is
unpredictable. Socially and institutionally the world is in constant change, the only thing you can
depend on is the certainty of change. The nature of economics, as it relates to international
relations, is that the actions of an actor will depend on the social, political, and economic
environment at the time they are faced with that particular decision. The volatile beast that is the
IPE leaves room for multiple lines of thinking, with blurred lines and grey areas between them.
Less recognized conceptual veins apply, such as positivism, empiricism, and instrumental
rationality. Positivism argues that observation and testing is the only way to justify claims to
knowledge of the world, in other words, fact is key. Empiricism claims that only by experience 7 The UK must invoke Article 50 of the Lisbon Treaty, allowing two years to negotiate the terms of the split. Talks are expected to begin March 2017 and end summer of 2019.8 Posteriori is the knowledge or justification dependent on experience or empirical evidence.
INTERNATIONAL POLITICAL ECONOMY 13
can one gain sensory knowledge. Instrumental rationality says that an actor will pick a suitable
means to their end (Kolodny & Brunero, 2013). Rational thought is the way things ought to be,
although even then, evades our current reality. The theory that seems most applicable is homo
economicus, which states that humans are consistently rational and narrowly self-interested
agents who pursue their subjectively-defined ends optimally (Houston, 2010). Which would
work, if actors acted rationally. Also, the theory require that a decision would mean the non-
consideration of the trade partner. Although, when you look at US-China relations, both sides
have conducted currency wars against each other, manipulating each their exchange rates to
devalue the others imports, although it hurts certain domestic industries as well. Risking their
own skin to get ahead or retaliate shows that narrow self-interest applies, but rational thought,
does not (Gagnon, 2013).
The only clarity that comes from the IPE is that actors do what is necessary when it is
needed. Sometimes that means being a realist, other times a liberalist, and often a constructivist.
Countries follow reciprocity, not because they want to, but because they must. In a global
economy where competitive advantage is no longer the binding principle of trade, states need to
interconnect themselves to allow for continued growth and security. That sounds like liberalism,
except for there is still international conflict. Sure, the closest thing to a militarized war between
established states is the proxy conflict between Russia and the United States in Syria, but that
discounts the financial war that has been consistently waged throughout history. Aggressive use
of economic foreign policy tools such as sanctions, can cripple an economy, and possibly do
more damage than an actual militarized war would (Kat, 2015). Take both world wars into
account, economic sanctions crippled Germany post-WWI, causing the rise of the Nazi regime
INTERNATIONAL POLITICAL ECONOMY 14
which was a socially constructed regime, not a forceful takeover. Nazi economic policy was one
of protectionism, constricting foreign trade. By the end of WWII 90% of Germany’s GDP was
short-term debt, and Europe’s economy was in tatters. In comes the United States with the
Marshall Plan, aid offered to all of Europe to ease the burden of rebuilding their economies,
which many accepted. A liberalist measure it would seem, however the US had more up their
sleeve. The plan included a measure that restricted claims against German debt until Germany
had paid back the US for the Marshall plan, as well as reducing trade barriers (Ritschl, 2012).
The plan was offered to the Soviet Union and its allies as well, which they rejected and forced
their allies to reject the aid as well. Although the aid was partially for the repair of Europe, the
deeper core mission of the plan was to influence American ideals into European business and
stifle the spread of communism by extending free trade. This was a perfect example of a state in
the grey area with multiple schools of thought, using their power to influence, while constructing
a cooperative force against their common enemy through free trade. Another example of a state
going against traditional IPE theory is North Korea. Even though it is economically inefficient,
and therefore against their military interest, they continue to close off their borders to change,
resorting instead to creating security by the means of becoming an existential nuclear threat to
the rest of the world. The curious case of communism, is borne out of misunderstanding of the
variety of state interests. Each individual and each state has their own set of values that are based
in normative order that is constructed by our societies. That is an undeniable fact. What states
fail to understand when considering economics is that each society has a different normative
order and values. Empirically, things are experienced differently, materials are valued on diverse
rationality and power is subjective. A truly efficient member of the heterogenous IPE is one that
INTERNATIONAL POLITICAL ECONOMY 15
can adapt to each situation as it is presented, being able to obtain what they want, while being
able to concede certain things. The key to constructing a deal in the IPE is one that leaves both
with a perceived advantage. As is shown, wealth is not the principle driver in the IPE, but each
state has something specific that is. Discover what that is and it is possible to create a world
where concise rational self-interest and morality can find common ground.
For all the discursive theories and analysis that has been applied to IPE, the surprising, or
unsurprising, depending on which part of the world you are sitting in, is that there has been
remarkably little impact on the economy when the theories are applied. When the Great
Recession stuck the world economy in 2007, protectionist policies began to creep their way back
into the IPE. However, the IPE remain relatively unchanged. Just before the recession took hold
in July of 2007, the Federal Reserve Board’s broad nominal exchange rate was 102.8, after the
worst 26 months of the recession, the nominal exchange rate stood at 102.0. The largest bilateral
exchange rate, US dollar to Euro, fluctuated only 3 cents, from $1.36/euro in August 2007 to the
end of 2008 where it finished the year at $1.39/euro (Rose, 2009). The point being, that the
current IPE stands, because it is too large to be disabled. If any major state actor removed
themselves from the global economy by closing its borders, not only would that state suffer, but
the entire international system would. Realism shows strength from the actors; “give me what I
want because I have more money and a bigger stick”. The contemporary application of realism to
the IPE can produce results, but on a short-term basis and at the cost of other states. Creating
imbalances with other major states will eventually lead to conflict, and in the current reality, this
means trillions of dollars, rising debt, and the possibility of nuclear war. Militarized conflict is
simply unacceptable, and cost inefficient. The IPE must then adopt forms of liberalism, affording
INTERNATIONAL POLITICAL ECONOMY 16
free trade between all sizes of nations in an effort to form capitalist peace. This means
abandoning a zero-sum game and adhering to reciprocity, allowing for mutual benefit. This is the
ideal utopian fantasy we would all like to live in, however, as stated before, humans are by
nature unpredictable, and regimes change constantly, rendering a full free trade economy
impossible. States and individuals are also sometimes greedy, and not working at an advantage is
unbearable to them regardless of who has to suffer the consequences. Constructivists try to
explain why human nature is the way it is, such as the study of behavioral economics. Working
to get a deeper understanding of the decisions made in the IPE, constructivists use ideas to
influence the economy. These ideas are often validated by facts and constructed with values, but
the infinite fluctuating variable of irrational actors voids these ideas. The main problem as
outlined by Leonard Gomes, is that economic arguments rarely create change, rather the
economic environment forces policy alteration.9 The answer is a posteriori positivist approach,
with societal hermeneutic sensibilities to define the perceived values on a case by case basis.
There is hope with the current systems in place that we as a society, can continue to grow
relations through a sustainable IPE, that is focused on provided what is necessary for each state,
while not retracting material of importance from another.
9 Gomes 2003, pg.214
INTERNATIONAL POLITICAL ECONOMY 17
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