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Chapter 1 - The study of global political economy

International Business (Edith Cowan University)

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CHAPTER 1
THE STUDY OF GLOBAL POLITICAL ECONOMY

I. Great Recession of 2008-9

II. The World Economy Pre-1914
III. The World Economy in the Inter-War Period
IV. The World Economy Post-1945
V. The Study of Global Political Economy

1. Great Recession of 2008-9

The American financial service firm, Lehman brothers was the largest bankruptcy in U.S. The effect of the
bankruptcy soon spread around the world. This make the start of what became known as the great recession, in
2009.
 World output fell by 0.8%
 World trade declined by 12%
 FDI dropped by 40%
 EU falling by 4% ad U.S along 3.2%
 Worst affected are counties which depend on international business, such as Singapore, Taiwan
 Oil price decline by 36% and 19% decline in non-fuel commodities
 On the other hand China and India grow strongly
 IMF written down of bad debts, total around $ 3.4Trillion

One reason for the severity (Harshness) of the recession that began in 2008 was that, unlike the previous post-
war downturns, all regions of the world were in economic decline simultaneously.

The second consequence was the complexity of the new financial instruments. This create the problem of panic
because of the uncertainty created in transaction among financial institution. Institutions had the trouble of
recognizing their liabilities.

A striking feature of the early governmental response to recession was the acknowledgement of the inadequacy
of previous policy approaches, particularly in the area of financial sector regulation.

The recession prompted unprecedented (first time) policy interventions at the national and global levels, and
produced significant changes in global governance, with emergence of the G20 as the principle
intergovernmental body for global economic management.

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2. World Economy Pre-1914

 The modern economy came to existent in 15 th century. In the era of Mercantilism Political power
equated with wealth, and vice versa. Wealth in the form of bullion (Precious metal) generated by trade
surpluses or seized from enemies.
 New concertation of military power could be projected both internally and externally to extract
further resources.
 Most part of the world were enmeshed (trapped) in a Eurocentric economy as suppliers of raw
materials and luxury goods.
 However this did not bring a noticeable growth to the global wealth.
 The steam power revolutionized the transportation both internally and internationally. Introducing
the refrigerated ships contributed to shrinking of the world.
 This deepen the international division of labour.
 Tariff continued to constitute a significant barrier to international trade to protect their domestic
producers from the international competition
 Thought the barriers are high for the movements of goods in the 2 nd part of the 19th century, the capital
and people moved freely. This facilitated by the transportation and communication
 No significant institutionalization of international trade or finance.

The rapid growth of economic integration was facilitated by the international adoption of gold standard.
Countries fixed the value of its national currency in terms of gold.
– Each country had a fixed exchange rate
– Reduced uncertainty and risks with foreign exchange
– Relied on the commitment of governments
– Undermined by increasing democratization and popular demands

3. World Economy in the Inter-War Period

 The outbreak of the 1 st world war was devastating blow to cosmopolitan liberalism. It destroyed the
credibility of the liberal argument that economic interdependence in itself would be sufficient. WW-I
bought the end of unprecedented economic interdependence among leading industrial countries.
 The most fundamental problem was the inability of states to construct a viable international financial
system.
 Governments disagreed on measures to restore international economic stability
 Gold standard broke down. Misalignment of currencies contribute to the problems of economic
adjustment. Abandonment in 1931
 States did not negotiate any significant institutionalization of international economic relation in the
inter-war period

4. The World Economy Post-1945

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 The economy emerge after the WW-II was qualitatively different from before. Two fundamental
principles that that distinguish the post-war economy from its predecessors (Previous version).
 Embedded liberalism
 Multilateralism
 Embedded liberalism refer to the compromise that the government made by safeguarding their
domestic objectives and opening up the domestic economy to allow for the restoration of the
international trade.
 The embedding of the commitment to economic openness within the domestic objectives was attained
through inclusion of provisions in the rules of international trade and finance that would allow the
government to opt-out (Choose).
 The Institutionalization of international economic cooperation is another fundamental change in
international economic relation. Multilateralism (Bretton Woods institutions-IMF, World Bank)
 Multilateralism involves collaboration among 3 or more nations, not only the number but qualitative
elements.
 Coordination of relation is on the basis of generalized’ principles of conduct. An example most-favored
nation (MFN) principle. With this all the partners must be treated in the same way regardless the
countries involved.
 The unprecedented rate of economic growth achieved after 1945 attest to the success of the pursuit of
multilateral economic collaboration. Global GDP at 5%
 Moreover, world trade grew faster than the world production. Export expanded by 8%.
 The gap between rich and poor widened substantially. The absolute gap between the industrialized
economies and the rest of the world continued to widen. Few east Asian counties showed progress in
closing the gap
 Africa detached from the globalizing economy. Poor export result in fall in per capita income.
 Another characteristic of post 1945 international economy was the growth in the number of
Transnational Corporation (TNCs). These were primarily trading companies such as East India
Company. This has become key actor in the globalizing economy. Global FDI amounted about 15Tn and
the value added by TNC subsidiaries equal 10% of the world GDP
 TNCs have transformed the nature of the international trade fundamentally. In particular the
composition of the trade.
 Since 1980 less developed countries have also been integrated in to the international production
network led by TNCs. Developing countries have changed their tariff to give preference to the processing
and assembling components.
 As the colonies of European countries have gained the independence, the number of states and in the
diversity of the international community become more than double. Collaboration became increasingly
complex.
 This growth in developing counties also brought institutional change such as United Nation Conference
on Trade Development (UNCTAD) in 1964
 Another characteristic was vast expansion of NGOs which were focused on the alleviation (mitigation)
of poverty.

5. The Study of Global Political Economy

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5.1 The Emergence of International Political Economy As A Distinct Subfield

International most often describes interaction between nations, or encompassing two or more nations,
constituting a group or association having members in two or more nations, or generally reaching beyond
national boundaries.
The rise of technology has allowed our environment to be characterized as a global one. ― The global
economy" gave business the ability to market products and services all over the globe. It has also allowed them
to develop partnerships and alliances throughout the world.
Ex: as an international relationship, SL build a relationship with china or India. But when it comes to the global,
when SL creating better relationship with China, India may not like it much.

 In the 1970 IPE had developed as a significant subfield in the study of international relation. During this
period global economy entered a period of turbulence.
 Commodity price had risen substantially
 Westerners started concern about the future availability of raw materials and this result in forming
OPEC

5.2 What is IPE?

 Is a subject matter whose central focus is the interrelationship between public and private power in
the allocation of scare resources. It is not a specific approach (a theory) to studying this subject
matter.
 IPE seeks to answer the classis question such as who gets what, when and how? It also point the
importance of power.
 Power in two forms: defined in terms of relationship, the capacity of one actor to change the
behaviour of the other. Also exercised in the capacity of actor to set agendas and to structure the
rules in various areas, as to privilege some actors and disadvantage others.
Ex: As U.S being the largest economy, being able to exercise relational power to force changes behavior
of other countries.
 The rule of international financial regime (Administration) have also been structured so that they
privileged more economically developed states and not only the industrialized economies enjoy more
votes within the IMF and World Bank.
Basic votes assigned equally to all the members. Much larger number, Weighted Votes that are linked
directly to the money members subscribed to the two institution. G7 industrialized countries still control
45% of the voting of the IMF.
 Early IPE work concerned centrally in two elements. That is, in the distribution of power within the
global economy and potential for state to engage in collaboration.
The theory of hegemonic stability suggests that international economic collaboration in pursuit of an
open (liberal) economic order is more likely to occur when the global economy is dominated by a single
power. (In the 19th century the British was the hegemonic power and US dominance from 1945-1971)

5.3 Approaches To The Study Of Global Political Economy

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 Approaches to the study of IPE have conventionally been divided in to the 3 categories. Liberalism,
nationalism and Marxism. Of these labels, only liberalism has been used universally in other
categorization.
 Statism, mercantilism, realism or economic nationalism are substitutes for nationalism.
 Marxism have variously been identified as radical, critical, structuralist, dependency, underdevelopment
and world system.
 The use of a variety of labels points to one of the problems with the trichotomous categorization of
approached to the study of IPE. Trichotomous categorization does not capture the wealth of
methodological and theoretical approaches used in the contemporary studies.
 Most of the contemporary work in IPE focus on theory, that is, attempting to explain why things happen,
rather than on policy prescription

Additional Notes:

World Bank (July 1944, Washington, D.C)

The World Bank is an international financial institution that provides loans to developing countries for capital
programs. It comprises two institutions:
The International Bank for Reconstruction and Development (IBRD) - 189 countries
The International Development Association (IDA) - 173 countries
The World Bank is a component of the World Bank Group, which is part of the United Nations system. The World
Bank's stated official goal is the reduction of poverty. However, according to its Articles of Agreement, all its
decisions must be guided by a commitment to the promotion of foreign investment and international trade and
to the facilitation of Capital investment.

International Monetary Fund (189 countries, 1945)

Purpose:
Working to foster global monetary cooperation, secure financial stability, facilitate international trade,
promote high employment and sustainable economic growth, and reduce poverty around the world.
Formed in 1944 at the Bretton Woods Conference primarily by the ideas of Harry White and John
Keynes. It came into formal existence in 1945 with 29 member countries and the goal of reconstructing the
international payment system.
It now plays a central role in the management of balance of payments difficulties and international financial
crises. Countries contribute funds to a pool through a quota system from which countries experiencing balance
of payments problems can borrow money.
Through the fund, and other activities such as statistics-keeping and analysis, surveillance of its members'
economies and the demand for particular policies, the IMF works to improve the economies of its member
countries.

Special Drawing Rights (SDR) are supplementary foreign exchange reserve assets defined and maintained
by the IMF. The XDR is the unit of account for the IMF, and is not a currency per se. XDRs instead represent a
claim to currency held by IMF member countries for which they may be exchanged. The XDR was created in
1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and the U.S. dollar.
The Balance Of Payments

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The balance of payments of a country is the record of all economic transactions between the residents of the
country and the rest of the world in a particular period. These transactions are made by individuals, firms and
government bodies. Thus the balance of payments includes all external visible and non-visible transactions of a
country. The balance of payments provides detailed information concerning the demand and supply of a
country's currency. These transactions can be broadly categorized into two types –

International trade and payments (current account)

 Imports and exports of goods
 Imports and exports of services (Financial, legal, medical, travel)
 Income on financial assets. (If a U.S. invests in a Mexican company, the dividends will be recorded in the
current account
 Transfers between countries. (Foreign aid, remittances, and international gifts)

International investment (financial account)

 Foreign direct investment
 Portfolio investment

World Trade Organization (1995, Geneva, Switzerland)

The World Trade Organization (WTO) is an intergovernmental organization which regulates international
trade. Replace the General Agreement on Tariffs and Trade (GATT).
The WTO deals with regulation of trade between participating countries by providing a framework for
negotiating trade agreements and a dispute resolution process aimed at enforcing participants' adherence to
WTO agreements, which are signed by representatives of member governments and ratified by their
parliaments.

G20 (19 individual countries & EU

An international forum for the governments and central bank governors from 20 major economies. It was
founded in 1999 with the aim of studying, reviewing, and promoting high-level discussion of policy issues
pertaining to the promotion of international financial stability. Purpose is to bring together systemically
important industrialized and developing economies to discuss key issues in the global economy.
It seeks to address issues that go beyond the responsibilities of any one organization. The G20 heads of
government or heads of state have periodically conferred at summits since their initial meeting in 2008, and the
group also hosts separate meetings of finance ministers and central bank governors.

G7 (France, West Germany, Italy, Japan, the U.K and U.S PLUS European Union)
These countries are the seven major advanced economies as reported by the I.M.F. the G7 countries represent
more than 64% of the net global wealth.
The organization was originally founded to facilitate shared macroeconomic initiatives by its members in
response to the collapse of the exchange rate 1971, during the time of the Nixon Shock, the 1970s energy crisis
and the ensuing recession. Its goal was fine tuning of short term economic policies among participant countries
to monitor developments in the world economy and assess economic policies

Most Favored Nation (MFN)

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In international economic relations and international politics, "most favored nation" (MFN) is a status or level
of treatment accorded by one state to another in international trade. The term means the country which is the
recipient of this treatment must, nominally, receive equal trade advantages as the "most favored nation" by the
country granting such treatment. (Trade advantages include low tariffs or high import quotas.)
Benefits
 Increases trade creation and decreases trade diversion. A country that grants MFN on imports will have
its imports provided by the most efficient supplier if the most efficient supplier is within the group of
MFN. Otherwise, that is, if the most efficient producer is outside the group of MFN and additionally, is
charged higher rates of tariffs, then it is possible that trade would merely be diverted from this most
efficient producer to a less efficient producer within the group of MFN
 MFN allows smaller countries to participate in the advantages that larger countries often grant to each
other
 Granting MFN has domestic benefits: having one set of tariffs for all countries simplifies the rules and
makes them more transparent.
As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free
trade in general.

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