International Political Economy Exam Paper

BSc in International Business and Politics
Copenhagen
International Political Economy

24-hour Home Exam
Lecturer Assignment by
Leonard Seabrooke Nenad Krstevski
131082-2945
Character with space 20.150
Copenhagen,
26th June 2008
IPE Copenhagen Business School Nenad Krstevski
Regular exam Int. Business & Politics CPR: 131082-2945
June 2008 2nd semester
Table of Contents
The question for the IPE exam, June 2008: ........................................................................................................... 3

1. Introduction to the discusion ........................................................................................................................ 4
2. The economic nationalist perspective ........................................................................................................... 6
3. The liberal perspective .................................................................................................................................. 8
4. Is there a transition from a state as leading actor to corporations as leading and key actors in international
political economy? .............................................................................................................................................. 10
5. Conclusion................................................................................................................................................... 11
6. References .................................................................................................................................................. 13
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The question for the IPE exam, June 2008:
“The state is the only actor that can ensure the effective and equitable regulation of the international
political economy?” - Discuss this statement with reference to the key perspectives from the O'Brien
and Williams textbook, and then contrast two empirical examples that match with two of the three key
perspectives.”
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1. Introduction to the discusion
Political economy is about relationship between politics and economics. It is all about power and
money.
“Who governs? And who benefits?”
Whether we are looking at domestic or international systems, power and money are under the analyses.
International political economy is all about how political and economic dynamics change an
international and transnational arena.1
What are we talking about? Best way to find out is to give you some examples.
During 1996 and into 1997 a small number of investors and foreign exchange (Forex) traders were in
doubt if Thailand economy was going to continue its record of remarkable growth. Fearing for their
high profits and growth, some of the investors began to withdraw their money and investments from
Thailand. This outflow of money forced the Thailand central bank to devalue its currency, the Baht.
This event was counted as the start of the Asian financial crisis, where several Asian countries
experienced economic depression, even some countries changed their governments and were forced to
seek loans from International Monetary Fund (IMF) and World Bank (WB).
What happened really here? It was unclear from the beginning what caused these events, what were its
most significant aspects and what we can learn from it so we can prevent from happening again the
same crisis.
There are more approaches to explain and understand what happened in that time.
One point of view would stress the significance of state power in creating and exploiting the crisis. The
problem that is given by this view is that because the developing countries liberalized their economies
prematurely and allowed large amounts of money to flow into and out of their countries too quickly.
This undermined the East Asian model of political economy and caused crisis. The economic
1
Seabrooke; slides from class
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nationalist perspective would stress how the US used the Asian crisis as an opportunity to force some
of the states to reform along lines that benefited American business. During the crisis the Asian states
tried to counter US initiatives at the IMF and to continue to resist the undermining of their form of
capitalism. Economic nationalist teach us the lesson from the crisis that states need to be careful about
liberalizing their economic activity and must pay attention to guarding their national interest.
Second point of view is the liberal explanation of it. Liberal explanation locates the causes of the crisis
primarily in the financial policies followed by Asian states. It is saying that the resources were directed
to insufficient uses because of the corruption business practices and political influence over financial
institutions. “Crony capitalism” was the term to be developed to describe this model of political
economy. What the liberal explanation is teaching us is that every financial market will punish
economic activity which violates or ignores liberal economic principles. Liberals give solution that
developing countries should have more transparent financial practices and to follow more liberal
economic model.
The critical point of view would focus on the role of US private business interests and the US
government in creating the conditions for a financial collapse. The view suggests that the US
government pressured developing countries into liberalizing their economies because this suited the
interests of the US Treasury and leading financial firms on Wall Street. Once the crisis took place, the
same interests pressed the IMF to demand that Asian economies reform in a way that would open
markets for US firs. This approach is stressing that even this crisis had devastating results in most of
the Asian economies, the impact of the crisis was not been even distributed, like the wealthy financial
interests in those countries were relatively untouched. For the critical view, the international financial
system facilitates the rapid movement of money and it needs to be taken some actions to curb financial
speculation, such as a tax on large short-term forex transactions, and that states should find a way to
limit the ability of investors rapidly to move their funds out of the country.
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2. The economic nationalist perspective
One school of thought brings together analysts who focus on the role of the state and the importance of
power in shaping outcomes in the international political economy. These theories stress the importance
of the interest of the nation or the state in understanding activity in international relations. This
grouping is variously termed mercantilist, neomercantilist, statist, state-based theory or economic
nationalist. The origin of this school can be traced back to the creation of the nation-state in Europe in
15th century. Mercantilists believed that there was only a limited amount of wealth in the world and
that each state must secure its interests by blocking the economic interests of the other states. For
mercantilists that was zero-sum game. One state’s gain is another state’s loss. Trade between
neigbouring countries was almost impossible. Some of their advocates, like Alexander Hamilton and
Frederick List, urged that the states should protect their manufacturers from foreign competition by
trade barriers, so that they could industrialize and catch up the more developed countries. They believe
that the gains from trade are unequally distributed and favour those with greater economic and political
power.
They were on believe that the state should protect strategic industries against foreign rivals or attempt
to export more than they import for long periods of time. Japan has been accused of being a
mercantilist state because in comparison to other advanced industrialized countries, its economy is
relatively closed. The same is the example for part of China industries.2 They don’t allow foreign
direct investment (FDI) in some part of their industries. But they have target industries where the FDI
is allowed to invest.
Economic nationalist theories see the state as the main actor in the global political economy and it has
two main assumptions. The first is that the inter-state system is anarchical and that it is therefore the
duty of each state to protect its own interests. The second assumption concerns the primacy of the state
in political life, and as it is the central instrument through which people can fulfill their goals, it
follows that it (the state) remains the pre-eminent actor in the domestic and international domains.
2
Asian tigers: China; Textbook for CPE I
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Economic nationalist recognize the importance of market-based actors such as firms but subordinate
their importance to that of the state. The same for the transnational corporation, the economic power is
acknowledged but their overall power is very limited, sometimes even subject to dictates from the
state.
The participating in markets is sometimes positive, but also sometimes can be negative for the states.
The continued salience of economic nationalist sentiment is visible in arguments concerning the
continued production of some good or service within particular national borders. This can be seen in
terms of security concerns, that is, a state should not be reliant on the import of a specific good
otherwise in times of conflict this good may be unavailable. Some countries like France protect their
agriculture while the US defends defence technology. In some part it can be seen as a preservation of
the cultural values of the nation.
Good example how the state is the actor in international political economy is International Monetary
Fund (IMF). It is based from most of the world countries, but the most important are the ones who
have the biggest percentage of the votes and those are the ones who contribute with money the most.
Even its power is not based on hard power like laws and constitution, but on soft law e.g. regimes,
which function on a base that if one member doesn’t obey the rules it can face some sanctions from
another states. The biggest influence has US and the G-7 group with more than 47% of the votes, so if
the US government wants to put some pressure to other country to open the market, and in the same
time US market to stay not so available for the other states, it can easily do it because of its voting
power. That is what happened in South Korea during the Asian crisis, when IMF loans made Korea to
open the manufacturing and financial industries for foreign investors, many of whom were from US.
The states retains pivotal role in creating and maintaining governance in the global system because of
the centrality if the connection between law and political authority. The state is the central legal actor
and primary representative of individuals in the international system. Agreements binding the
population of a country can only be made by a state. While its representative function is often
imperfect, the state is the only institution that can make a legitimate claim to represent its entire
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population on its territory. Not all of the states are equally important in international political economy.
The most developed and wealthy states are the most significant because they can veto or coerce other
states to follow particular sets of policies. Thus, the US is the central actor because of its wealth and
power.
But, since the Bush Junior presidency posed a decisive question for global governance as to whether
the US would continue through international organizations and treaties (multilateralism) or just
dominate over other states (bilateralism), the whole process of global governance is in question if you
don’t have a state powerful as US in there.
3. The liberal perspective
In contrast to the economic nationalist theories, liberals focus either upon the individual or a wide
range of actors from the state to the corporation to interest groups. They don’t see the state as a unitary
actor, but as an influence by a numerous factors. Rather than stress the inevitability of conflict, liberals
search out the conditions for cooperation. They tend to play down the role of force and coercion in
human affairs and emphasize the ability of an individual’s to choose between attractive courses of
action. Liberals see the world system as one of interdependence rather than anarchy. States and people
can cooperate for mutual benefit in the liberal view. Rather than a zero-sum game where one’s gains
are other’s losses, liberals see a positive-sum game where the pie grows bigger and everyone gains.
Liberal theories emerged in 18th and 19th century Britain in the wake of industrial revolution.
Today’s global economy is governed largely according to liberal principles. For example, the trade
regimes are based upon the goal of free trade; money flows into and out of the most countries without
great difficulty and all forms of economic activity are increasingly liberalized. There is a wide variety
of thought. It ranges from those who see the state fading away in an emerging borderless world
(Ohmae, 1990) that will be dominated by private business to liberal institutionalists (Keohane and Nye,
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1977)3 who stress the continuing importance of the state, but see it enmeshed in webs of
interdependence and international organization.
Within the liberal perspective there are a number of key actors. For liberals the starting point of
analysis is the individual. In the context of analysis of the global economy, liberal theorists focus on
the behavior of individuals, firms and states. Unlike the economic nationalism, the key economic actor
is the individual rather than a state. Individuals in pursuit of self-interest will maximize the benefits of
economic exchange for society. Unlike the mercantilists who view the firm with a degree of suspicion
liberals see the firm as a source of economic wealth. The state is viewed with hospitality by many
liberals since it brings politics into the realm of economics. From a liberal perspective the transnational
corporation (TNCs) is a positive force. TNCs bring advantages to both home and host countries. From
perspective of the home country the TNC represent an optimal mix of technology, managerial skill and
capital. For the host countries TNCs boost their economies through the transfer of capital, technology
and access to markets.
For liberal theorists the market lies at the centre of economic life. Economic progress results from the
interaction of diverse individuals pursuing their own ends. While liberals acknowledge that market
relations are not always optimal they tend to argue that intervention in the market is most likely to
produce suboptimal outcomes.
For many liberals (hyper-liberals) globalization breaks down artificial barriers and by unleashing the
force of production it can contribute to enhance happiness for humankind.
Liberal theorists view international relations and international political economy as essentially
cooperative. Indeed, they believe that market relations will lead to positive outcomes for all. The
increase of international interaction liberals see as a source of prosperity and peace.
With the end of the Cold War and the rapid spread of liberal economic models to many states in the
1990s, it appeared that the liberal faith in cooperation and progress was justified.
3
O’Brien and Williams, p.18
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But not all examples in the world shows that liberalization was good. Example for that is Mexico in
1990s. Mexico in 1990s was restructuring after the great debth crisis in 1980s. When they signed the
NAFTA agreement in beginning of 90s they had convinced the investors that the government was
committed to liberalization. In the period from 1990 to 1993 $91 billion flowed into the country, a fifth
of all capital going to the developing states (Strange, 1998, p.103) 4. The economy was boosting.
However, a series of events including higher interest rates in the US, rebellion in parts of Mexico, and
assassination of a presidential candidate caused investors to doubt whether Mexico could maintain its
fixed exchange rate with the US dollar. In December 94 investors sold the Mexican peso in so large
quantities that the government was forced to abandon the link with the dollar. When it was over
Mexico was $55 billion in debt. The poor suffered enormously and the middle class was in huge dets.
This crisis was notable for several reasons; there was a spillover effect in Brazil and Argentina. This
was known as the “Tequila” effect. The second effect was that Mexico suffered a severe financial crisis
even it was having over a decade of liberalization and economic restructuring. The third, the dangers of
the flow of short-term capital into and out of a developing country were highlighted by the Mexico
event. And the last, the player on the creditor side had changed. In the first crisis it was the banks that
were in losses but now it was non-bank actors such as pension funds, mutual funds, hedge, and stock
market investor.
4. Is there a transition from a state as leading actor to corporations as

leading and key actors in international political economy?
The view that the state is losing power has been widely challenged. Some have suggested that
globalization is exaggerated, by arguing that the degree of internalization as measured percentage of
trade and investment flows has precedents in the early 1900s (Hirst and Thompson, 1996) 5.these
scholars deny that the state is weaker or is unable to protect its citizens, but they suggest that if
4
5
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political forces advocating social protection gather the political will and organize themselves properly,
the government can be directed in the direction of social protection.
Controversies about the relative importance of state-corporate power continue to rage, but some trends
appear undeniable. First, most states around the world, actively seek multinational investment. Second,
in contrast to earlier decades states seem more intent upon furnishing those companies with an
attractive environment than with regulating their activity. Some have referred to states engaging in
“beauty contests” in an effort to attract foreign investment (Palan an Abbott, 2000)6
Of course the balance of power between any particular state and any particular firm will vary
depending upon their position in the global economy. As bigger are the firms the better position will
have.
5. Conclusion
“The state is the only actor that can ensure the effective and equitable regulation of the international
political economy?”
In the era of globalization I cannot give a clear answer of this question. As I have shown in the
discussions before, there are a lot of theories that are trying to give an answer to this question.
I can only say something alike Susan Strange, that the states are the most effective regulation of the
world economy, but she is questioning herself are they doing that, and if they are in whos interest is
that?
The only think that I can conclude is that I see the international organizations as some kind of
regulators of the international political economy. I say this because those organizations and bodies
(UN, WTO, IMF, WB, BIS..) are established on a base of more countries, so the compromise between
them that is in common interest for all of them, is probably the best guarantee of effective and fair
6
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regulation of the international political economy. There will be always issues about the more powerful
or more wealthy states who contributes more for those organizations and whose influence is always
bigger, but that is why we are seeing groups inside those big organizations like G70, or some similar
that are confronting with the power that they have to the big powerful states.
So if the countries are making those organizations of course that they will indirectly be the main actors,
even we can see that the big TNCs are influencing almost everywhere in the society.
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6. References
1. O’Brien, Robert and Williams, Mark; Global Political Economy, 2 nd edition; 2007; Palgrave MacMillan,
New York
2. Compendium for CPE I: Asian tigers: China; 2008; Copenhagen Business School;
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BSc in International Business and Politics

International Political Economy

Character with space 20.150

The question for the IPE exam, June 2008: ........................................................................................................... 3

The question for the IPE exam, June 2008:

1. Introduction to the discusion

“Who governs? And who benefits?”

2. The economic nationalist perspective

3. The liberal perspective

4. Is there a transition from a state as leading actor to corporations as

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