“By organizing the text in the way they have, the authors tie together several critical areas of international political economy. The material flows nicely from topic to topic, demonstrating what we have learned from economic analysis, how political science approaches the same issue, and then the best results from both disciplines. It really captures the ‘state of the art’ in our field.”–Mark R. Brawley, McGill University

“Analyzing the Global Political Economy shows how a critical engagement with economics contributes to a thorough understanding of international political economy. The volume represents an antidote to approaches that ignore economic rationality and to much post-9/11 thinking that reduces matters in international relations to realist impulses. Walter and Sen focus on what really matters, and provide a smarter, more purposeful introduction to the field.”–Timothy J. Sinclair, University of Warwick

“This book will attract teachers seeking a compact core text that introduces key findings from economics and political science in accessible form. The authors are fans of the turn to economics in international political economy but they also note some of its shortcomings.”–John Odell, University of Southern California

“Walter and Sen do a magisterial job of surveying classic and contemporary literature across the areas of trade, investment, and money. Identifying the major literature and arguments, this textbook is a valuable pedagogical contribution. I know of no other book that is as thorough and concise.”–David Leblang, University of Colorado

“There is much to admire about this book–it is short, well-written, and covers the subject matter comprehensively. It does a good job reviewing the literature on the multilateral trading system and explaining the trend toward greater exchange rate flexibility.”–Jeffrey A. Hart, Indiana University

Andrew Walter is senior lecturer in international relations at the London School of Economics and Political Science. His latest book is Governing Finance. Gautam Sen is a political risk consultant and former lecturer in politics of the world economy at the London School of Economics and Political Science.

Analyzing the Global Political Economy

By Andrew Walter Gautam Sen

PRINCETON UNIVERSITY PRESS

Copyright © 2009 Princeton University Press
All right reserved.
ISBN: 978-0-691-13959-3

Contents

List of Figures and Tables………………………………………………………..viiForeword Benjamin J. Cohen………………………………………………………..ixPreface…………………………………………………………………………xiAbbreviations……………………………………………………………………xv1. International Political Economy…………………………………………………12. The Emergence of a Multilateral Trading System……………………………………273. The Political Economy of Trade Policy……………………………………………604. The Evolution of the International Monetary System………………………………..855. The Consequences of International Financial Integration……………………………1336. The Political Economy of Foreign Direct Investment………………………………..1717. The Regulation and Policy Consequences of Foreign Direct Investment…………………2018. Conclusion: Looking Forward…………………………………………………….228Bibliography…………………………………………………………………….241Index…………………………………………………………………………..265

Chapter One

International Political Economy

What is international political economy (IPE)? A simple answer is that IPE is concerned with the way in which political and economic factors interact at the global level. More specifically, political economists usually undertake two related kinds of investigations. The first concerns how politics constrains economic choices, whether policy choices by governments or choices by actors or social groups. The second concerns how economic forces motivate and constrain political choices, such as individuals’ voting behavior, unions’ or firms’ political lobbying, or governments’ internal or external policies.

An example of the first kind of investigation is provided by the European Union’s policies protecting domestic agriculture and restricting trade in agricultural products. The EU’s resistance to the liberalization of such trade, as demanded by agricultural exporting countries, may stem from the political organization of farm lobbies, the sympathy of urban consumers for the plight of national farmers (which may in turn stem from a concern to protect a national identity or way of life), a desire to promote “food security,” or perhaps other factors. The political economist’s task is to investigate which of these factors matter in explaining the EU’s stance in negotiations over trade in agriculture.

An example of the second kind of investigation is provided by the claim that growing financial integration between countries has constrained the political choices of left-of-center governments more than those of right-of-center governments. Global financial integration makes possible the movement of capital to environments investors find most congenial. Has the threat of capital flight encouraged such left-of-center politicians as Brazil’s President Lula (Luiz Inácio da Silva) and Britain’s Gordon Brown to adopt “conservative” economic policies to reassure panicky investors? Manifestations of this phenomenon might include political pledges to pursue fiscal balance, to limit or reduce taxes on capital, and to place responsibility for monetary policy in the hands of politically independent and conservative central bankers. Do financial markets systematically punish left-wing financial policies? Is the asserted shift in policy by leftist political figures a myth? If it is real, is it due to some factor other than capital mobility? These have been popular questions for political economists in recent years (see chapter 5).

As we shall see, asking how politics and economics interact makes good sense. Economic outcomes have political implications because they affect opinions and power. For example, where individuals or groups fall in the hierarchy of wealth influences their political preferences. Similarly, decisions about economic policies are almost invariably politicized because different choices have different effects on the distribution of wealth. Political power is therefore a means by which individuals or groups can alter the production and distribution of wealth, and wealth is a means of achieving political influence. Although the pursuit of wealth is not the only motivating factor in human behavior, it is an important one, and often the means by which other goals can be achieved. In short, economic and political factors interact to determine who gets what in society.

In light of the preceding comments, one would be forgiven for assuming that the academic subjects of economics and political science were nearly indistinguishable. Although they indeed were aligned for many decades, new boundaries between the emerging academic disciplines of economics and political science in the early twentieth century led to distinct research questions, methods, and empirical focus. Furthermore, as we explain later, cross-disciplinary dialogue was muted because IPE grew out of international relations and because its founding scholars saw it as a response to irredeemable flaws in the discipline of economics.

We argue that IPE should move on—and indeed for the most part it has—from this early position of hostility to international economics. Most observers accept that contemporary students of political economy need more understanding of economic concepts than was initially thought necessary. As the purposes of studying political economy evolve, so too does appropriate methodology. Today, when so many IPE scholars plunder economics for testable theories of political economy, some ask whether the pendulum has swung too far in that direction. We cannot answer this question without a clear sense of both the benefits and the costs of close engagement between economics, political science, and international relations. Hence our argument for an IPE that engages fully but critically with economic theory and method.

ECONOMICS AND POLITICAL ECONOMY

Although most scholars in our subject could agree with the general definition of political economy offered at the beginning of this chapter, students coming to the subject for the first time may be confused by the plethora of approaches to the field, which include, among others, formal political economy within the neoclassical economic tradition, Marxist or neo-Marxist historical sociology, mainstream political sciences, and offshoots of international relations. These different orientations have soft boundaries, and authors often straddle one or more of them. The intellectual antecedents of modern approaches go back to the mercantilist thinkers of early modern Europe and to strands of Enlightenment thought.

In our view, political economy is not any particular approach or tradition but an attitude to social science that does not privilege any single category of variable, whether political or economic. In this way, it harks back to a pre-twentieth-century tradition of political economy, in which thinkers as different as Adam Smith and Karl Marx understood that governments made economic policy in a political context and that economic outcomes had political and social implications.

As political economy developed over the course of the nineteenth century and as the modern subject of economics took shape, economics and political economy diverged. By the mid-twentieth century, most economists asked questions quite different from those political economists were asking. A central concern of economists has been to develop theoretical arguments about the relative optimality of different public policies. For example, economists often claim that one of the crowning achievements of their subject is the theory of comparative advantage, which holds that free trade policies generally maximize national and global (economic) welfare. Although many political economists have disputed this claim, the scholarly territory of optimal economic policy is not one where political economy has, so to speak, a comparative advantage.

Political economists more often ask what factors explain actual policy outcomes. Even when there is a consensus on the best policies (such as on the optimality of free trade), actual policies vary across countries and often diverge from economists’ prescriptions. Why do most countries ignore economists and raise barriers to trade, and why do levels of protection vary across countries and sectors? These are classic questions of political economy. Indeed, the gap between standard economic prescription and the reality of trade policy is so large that most textbooks on international economics include sections on the political economy of trade policy (although new developments in the theory of strategic trade policy have opened new debates about the theoretical superiority of free trade). In a range of areas, policies that are bad from the perspective of economic welfare can make good politics, opening up space for explorations in political economy.

Moreover, as Kirshner has pointed out, in most areas economics generally has not reached a consensus on the relative optimality of particular policies. Once again, this means that explanations of actual economic policy outcomes must turn to other factors, especially political variables. For example, there is little consensus in economics regarding the net benefits of financial openness, especially for developing countries, but in practice countries have widely varying patterns of financial openness. The position is similar with respect to policies in areas such as exchange rates, labor markets, welfare, education and training, corporate governance, and accounting regulation, to name but a few. Even in areas where there is a broad consensus among economists, such as the optimality of politically independent central banks, the empirical evidence in favor of the policy can be quite weak. Hence, it seems that in a range of areas, factors other than empirically validated economic theory explain actual choices among policies.

One important strand of political economy explains such choices using the language and methods of neoclassical economics. This strand is often called positive political economy in reference to its relative lack of concern with normative questions and its use of deductive theories and rigorous empirical methods to explain outcomes. With respect to one of the issues we have mentioned—the question of why many developed countries protect domestic agriculture—positive political economy answers that the beneficiaries of such policies (farmers) are better organized and more politically influential than the consumers of food. Other economists have analyzed how different kinds of political institutions can affect choices on economic policy.

Building on this tradition of positive political economy within economics, a number of political scientists, mainly in the United States, have also employed economic theory to explain broad patterns in policy outcomes. They share the economist’s goal of achieving progress (i.e., factual knowledge) in the explanation and understanding of social outcomes. In so doing, they often accept the methodological principle that political variables, like economic ones, can be measured, compared, and (often) quantified. The method of positive political economy is straightforward: competing hypotheses are derived from theories built on simplifying assumptions, and these hypotheses are tested empirically. More often than not, the theories themselves are drawn from neoclassical economics and adopt its standard assumption of rational actors.

Another broad strand of political economy is critical of positive political economy and suspicious of its proximity to the theory and methodology of economics. Often this critique begins from an explicitly normative standpoint, arguing that political economy must be concerned with equity, justice, and questions of what constitutes the “good life.” In this view, political economy needs not only to bring political variables into explanatory theories, but return to the original unity of the social sciences and humanities, including ethics and philosophy. That is, political economy should be “critical” and politically engaged. For these authors, focusing simply on explanation risks entrenching the status quo and ignoring the cui bono (who benefits?) question. school usually defines political economy as the investigation of power and wealth, the central subject matters of politics and economics respectively. The study of power is especially important to this approach and distinguishes it from mainstream economics, which, according to Galbraith, is largely blind to the social phenomenon of power. The “Who benefits?” question should be addressed both to economic outcomes and to economic theories themselves, which can be seen as part of social power structures. Marx held that capitalism and classical economic theory, preoccupied with exchange relations and other surface phenomena rather than the reality of class struggle, privileged the interests of the bourgeoisie.

In our view, these positive and normative perspectives on political economy are not incompatible. Indeed, both are necessary. A well-grounded desire to change the world can only proceed from a proper understanding of it. Furthermore, explanation is often a precursor to a deeper understanding of social relations, including relations of power and domination. After all, even Marx was interested in explaining both the emergence and the working of capitalism as a means to understanding why it was unjust. Similarly, if one wished to argue, for example, that existing global economic institutions operate against the interests of poorer countries, one would first have to demonstrate that they have causal effects in the expected direction. Any amelioration of the plight of the poorest countries would also require a systematic understanding of the factors that result in poverty and low levels of economic development. Hence, positive explanation and normative critique are compatible approaches within the social sciences. This provides another reason why political economy should engage actively though critically with economics.

THE EVOLUTION OF IPE AS A SUBJECT IN THE SOCIAL SCIENCES: EARLY APPROACHES

All the founders of IPE shared the view that economics, and international economics in particular, had failed to explain the shape and evolution of the international economic system. This was because it ignored power, especially the distribution of power between states in the international political system. In retrospect, this critique was hardly surprising given that these founding scholars came from the academic discipline of international relations (IR). Their disciplinary origin naturally led to a focus on big questions about the shape and dynamics of the international system. These scholars also argued that IR, in particular the realist tradition, had ignored economic issues, which, they claimed, were of growing salience in international affairs. With the breakdown of the Bretton Woods pegged exchange rate system, the 1973–74 oil shock and associated global recession, and the “new” protectionism, international economic conflict appeared to be growing. Important questions for these early IPE scholars included why the world economy has oscillated between phases of relative economic openness and closure, and why international economic relations had become more institutionalized over the past century.

Most of these scholars sought answers to such questions in the structure of the international political system rather than in domestic politics or in economic theory. Indeed, the main theories in early IPE were drawn from scholarly orientations familiar to IR researchers, such as realism, liberalism, and Marxism. Economic issues became increasingly important in part because of the emergence of superpower détente, which apparently reduced the threat of major war and nuclear catastrophe. Another source of interest in economics was the growing contradiction between international economic interdependence on the one hand and national political sovereignty on the other, with the demand for national stabilization that the latter produced. For realists, it was natural to argue that the decentralization of political power in the states-system militated against coordination of policy in response to economic interdependence. For liberals, realists ignored how economic interdependence could transform state interests and promote international peace.

Approaching IPE from the perspective of IR fostered the “states versus markets” dichotomy that characterized the dominant IPE approaches exemplified by Gilpin and Strange. These authors criticized economics for privileging the interaction of actors in economic markets and for conceptualizing politics as a mere “constraint” on the pursuit of optimal policies (as, they argued, Cooper had done). From the perspective of IR, it seemed obvious that a strictly economic approach ignored the preeminence of the state as a political actor in the international system, with its demand for national security and sovereignty in its policies. However, in its obsession with war and security, IR was guilty of ignoring the central importance of economic factors in international affairs. For Gilpin and Strange, IPE should investigate the interaction between states (as the source of political authority in the international system) and markets (as the main source of wealth).

Rather than draw on contemporary economic theory for inspiration, these scholars returned to classical sources of political economy. For Strange most explicitly, a key motivation for doing IPE was a deep-rooted opposition to economics and the direction it had taken toward formal theory and depoliticization. Her stance had considerable appeal in the 1970s, when economic instability and the apparent breakdown of the Keynesian policy paradigm made the achievements of economics subject to greater skepticism. And yet economics still produced a certain defensiveness in the other social sciences, partly driven by the “imperialistic” ambitions of some economists (notably the Chicago school, led by figures such as Gary Becker). For some scholars, opposition to economics derived from an aversion to formal theory; others were concerned that rapprochement with economics would lead to a colonization of their fields by economists.

(Continues…)

Excerpted from Analyzing the Global Political Economyby Andrew Walter Gautam Sen Copyright © 2009 by Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.