POL208 notes on notes on notes
International Political Economy
Prosperity as a means versus as a goal
Production possibility frontier
Total war is not sustainable over time. In cases like the Second World War, it helped
integrate women into the economy. But also lowers morale, casualties.
Economic warfare: sanctions, embargoes. Mixed success. Can be used as incentives
(WTO membership, concessions, aid) as well. (Krasner and Pakistan)
Direct and indirect costs of war (ind. includes higher oil prices, healthcare costs). Peace
dividend: during peacetime, demand for guns will go down and butter will increase.
Liberalism: increased efficiency ▯growth, maximizes welfare. Free markets, economic
interdependence through trade, absolute gains. Main actors are individuals and firms.
Economic nationalism: mercantilism, IR realism, protectionism. Wealth as a source of
power, econ competition for primacy and imperialism. Industrialization, some
government ownership. Strategic trade but sometimes focused on autarky. Relative
gains. State is the main actor.
Marxism: capitalists maximizing profit ▯overproduction ▯instability and crisis.
Imperialist aim is to flood colonial markets with goods and make a profit. Wealth and
power in an elite. Unsustainable, irrational. Imperialism helps it stay alive a while longer
by dumping abroad, but that’s it. Main actors are classes (Marx) and capitalist
mercantilist state (Lenin). Here in a stateless world, the entire world is one system of
Liberalism calls for minimal intervention by state, Marxism for complete control,
Keynesianism and welfare state for some central planning.
Modern theory of trade:
o Transaction costs – transportation, risk
o Opportunity cost – next best alternative. Amount of some good that could be
produced lost by choosing to obtain one unit of another good.
o Relative prices – barter price.
Absolute advantage, Adam Smith: one country can produce more of a good or service.
Opp cost of serving good A rather than good B – produce the one with lower opportunity
costs (compared across countries, not within one). If both countries specialise fully,
efficiency is maximized.
Comparative advantage, David Ricardo: As long as two states differ in relative
productivity of two goods, trade can occur. Trade incentivized when one country has
absolute advantage in both but not comparative.
o Global welfare maximized by free trade. Relative gains (Liberalist perspective).
o HecksherOhlin theorem: a country has comparative advantage in producing
goods that make use of their intensive factor (in which they are most abundant).
Out of capital, land or labour. o StolperSamuelson theorem: owners of abundant factor benefit from free trade
and scarce factor owners from protectionism.
E.g. free trade raises wages in labourabundant and lowers them in labour
scarce countries. Demand will decrease for expensive labour, and price
will go down to reach a longrun equilibrium.
Political implication: protectionism in some countries. Domestic winners
and losers. Generates ‘sectorial’ politics – skilled and unskilled workers,
Internationally, terms of trade determine winners and losers. Ratio of export to import
prices. Improvement in terms of trade = cheaper exports = beneficial.
Protectionism: Free trade measured as (X+M)/GDP.
o Protectionist measures include: domestic subsidies, dumping goods abroad,
voluntary export restraints, nontariff barriers (redtape, standards), manipulation
of exchange rates.
o Why? Domestic politics and proprotectionist coalitions. Tariffs bring revenue.
No interdependence. Strategic implications of trade and problem of relative gains
(i.e. it is a zerosum game).
Free trade under anarchy: no guarantee that others will respond.
Repeal of the corn laws:
o Unilateral adoption of free trade by hegemon (UK). Grains brought into Canada at
no cost from UK, but high tariffs for other countries.
o Industrial revolution – capital vs land. Urbanisation and more factory workers.
o 1832: Great Reform Act – capital better rep in parliament. 1842: intro of income
tax in the UK by Robert Peel ▯lower tariffs. 1846: repeal, first shift towards free
trade. Combination of societal pressure, potato famine, ideology.
o Hegemonic action made other countries stop charging tariffs too.
1840: growth rate of global trade increases greatly. Reduced transaction costs, growth of
industry and banking, increased pol power of capital over land, Pax Britannica
Hegemonic stability theory (Krasner): Realist – assumes that states want to avoid
vulnerability and protectionism is costly (for small states, but hegemon can do what it
wants without compromising on stability).
o Hegemon decides whether free trade or not. Decline of hegemon coincides with
decline in free trade.
o Comparative advantage in favour of hegemon, suggests security and stability, can
use its power to force other states, can prevent beggar thy neighbour. Because it
benefits, it will be okay with paying for collecive goods: policing, enforcement of
o Structural variable (power) ▯econ and pol outcomes (neorealism)
o Works when applied to 18401870 rise of Britain, and some others, but not fully.
After great Depression, laissezfaire was found not to work. Further protectionism
and decline in world trade.
Bretton Woods conference: 1944, 44 nations. Harry White (US) and Keynes (UK).
o Creates IMF to stabilize exchange rates between countries (including a small bail
out contribution from all), International Bank for Reconstruction and Development (postwar, later the World Bank) and General Agreement on Tariffs
and Trade (WTO since 1995)
o Aimed to support intl trade: low tariffs, stable exchange rates, IMF as lender of
last resort, rebuild Europe. Capital controls persist. US is key (new gold standard
based on dollar – pulled out in 1971, after which free floating exchange rates).
o Worked to the extent that trade is now 22.5% of world output, was 15 two decades
ago. Manufac goods about half, services becoming important.
1971 onwards: floating exchange rate. World Bank helps developing countries. IMF
offering loans to atrisk countries. Increased capital mobility.
Institutions have persisted from Bretton Woods (Keohane) and US still remains sort of
hegemon so free trade unaffected.
Globalisation: process by which geography and geographic location become
increasingly irrelevant for economic activities.
o New combination of goods, capital, labour. Less transaction costs, higher volume.
o Comes from states deciding to open up (helps coalition of winners within),
institutions created by states help. Systemic factors include hegemonic interests,
technology, seems reversible.
o FDI: grew by 75% from 1980 to 1991. 90% is between developed countries. Easy
exit option for capital – more pressures from capitalists.
o Race to the bottom: argues that globalisation eventually leads to governments
lowering taxes, having lax labour and environmental laws to incentivize
companies to invest in their countries. E.g. Toyota incentivized to start factories in
US and Canada because of lax labour/environmental laws.
State and MNC: state not entirely powerless, antiglobalisation movement.
Rodrik’s trilemma: trilemma of econ integration, mass politics and the nation state. EI
and NS (golden straitjacket) is the race to the bottom, but then there is a democratic
deficit. EI and MP is global federalism. NS and MP is Bretton Woods – limited
integration, lower growth.
Factor price equalisation theorem (Samuelson): idea that prosperity will bring
prosperity to all. Free trade will eliminate price diffeerences for commodities, and
eventually bring about an equalisation in factor prices (capital and labour) as well.
o Applies to NAFTA – unskilled labour wages up in Mexico, down in US.
o Does not apply in Africa:
Initially believed to be modernisation theory, which argues that
industrialization ▯urbanization ▯middle class ▯democracy and modernity.
Essentially economic modernization brings about pol and soc
modernization as well. But predicted that Africa would grow like Europe,
which it did not. Liberal model – no govt intervention.
Mod theory did not work because econ policies were not followed,
institutions not implemented, war and climate and geography.
Import substitution industrialization (ISI): An economic policy that attempts to enable
a developing country to substitute products which it imports, mostly finished goods, with
locally produced substitutes. Less reliance on imports.
o Govt decides which industries. Exports also decline because goods are being
produced for domestic use. Mercantilist, protectionist. Ignores comparative
advantage. Latin America until 1980, India till late 1980s. Inefficient. o Africa chose ISI because of pol and institutional reasons too. Mozambique
cashew industries banned exporting raw cashews (sell to govt, who refines them).
World Bank said no. Ban hurt farmers (lower price). Deregulation collapsed the
processing industry, but in favour of farmers.
o World Bank not entirely right: urban unemployment and pol unrest created, and
no major efficiency gains. Trust in govt lost.
Exportled industrialization (ELI): An economic policy that aims to speed up the
industrialisation of a country through the export of goods in which it enjoys a
comparative advantage. Domestic markets opened to foreign competition.
o Neoliberal policy, could involve some protection (infant industries etc, but not for
long), worked for Asian Tigers, India. Works better than ISI.
Jcurve: moving from ISI to ELI is politically challenging when pol institutions are weak
and legitimacy low (as in Africa)
Why weak institutions?
o Weak institutions because colonial legacy left no inst infrastructure – instead it
left traditional authority structures. Cultural and geographical factors ▯instability
▯weak institutions ▯instability.
o Curse of natural resoures: cheaper exports and bad manufac sector. Govt doesn’t
rely on taxation. Corruption.
o Poverty ▯war ▯poverty. Tropical regions, poor soil, remote locations high
transport and border costs. Jeffrey Sachs poverty trap. Escape comes from small
things like clean water, fertilizer for agriculture etc.
o Colonial legacy, imperialism, late industrialization and unfavourable terms of
trade, dependence on few cheap commodities, neocolonialism ▯state failure.
Solutions to structural underdevelopment:
o Political power.
1955 Bandung. 29 postcolonial nations, Third World, tried to create a new
Nonalignment, Organisation of African Unity (63), UNGA.
UN Conference on Trade & Development: new branch to deal with econ
things, unintended function of UN. 77 ▯132 members. Did not work.
New International Economic Order: Raul Prebisch puts forth the Singer
Prebisch thesis arguing that terms of trade between North and South
deteriorate over time. Advocates ISI and direct intervention in markets (north giving access to south). Cartels to be allowed, north to tolerate
unfair trade. South has power because of raw materials. Didn’t work by
end of 1970s.
Dependency theory (Wallerstein): sees world economy as one system, divides it into
core and periphery. South prevented from developing by rules of the game. Only solution
is to stop playing the game. OR revolution and shaking capitalism at its core.
o Implications: ISI, protectionism, rejection of FDI, creation of cartels (oil crises of
73 and 79!)
80s and 90s revealed more countries playing by the rules, Washington consensus. New
issues: environment, HIV, human rights. Shift.
Underdevpt now being solved by foreign aid from US, EU. Successful for Europe, S
Korea and Indonesia but not for Tanzania, Sudan, other African nations. No empirical
relationship between growth and aid. Difference between crisis relief and long term
Help with cooperation, stability and also arose from the need for governance (not
government) because of complexity of crossborder interaction.
Costs: decreased sovereignty, new conflicts, restricted state sovereignty.
Institutions: set of customs, practices, relationships or behavioural patterns of
importance in a community or society. Rules of the game, norms that regulate behaviour.
IR institutions deal with sovereignty, balance of power, reciprocity, negotiations.
Also includes international organisations (IGOs, NGOs) as well as international regimes
(formal or informal rul