International Political Economy

International Political Economy

1. Summarize the main ideas behind each of the three “classic” IPE perspectives. Be sure to reference a real-world example for each, to help show you understand the perspectives. What are some of the strengths and weaknesses of these perspectives? Do you identify with one in particular, and if so, why?

The subject of International Political Economy, which explains how politics shape economic outcomes and vice versa, has been studied as early as the sixteenth century. It is certainly not an easy task to come up for it with a clear definition, due to the fact the lines between political and economic or domestic and international are blurred. Besides its complexity, there are various theories that believe in different ways, how the government of the country and its economy should function.

The earliest systematic theorizing on IPE is classical mercantilism, which is about economic nationalism, where a powerful state is creating a wealthy society by restraining imports and encouraging exports. This IPE theory dominated Western Europe from the early sixteenth century till the nineteenth century. The mercantilist believe that an extensive state regulation of economic activity can foster the national economy, where their main goal is to bring silver and gold back to the country through trade with other countries. The state protected the activities of the merchants and served their interest by protecting their business against foreign competition. Tariffs and quotas were imposed on foreign goods in order to protect local producers. In the mercantile system, not only the domestic goods were favored but even the local employment by not allowing the migration of skilled labor from foreign countries. Mercantilists have a strong focus on collectivities instead of the individuals. If everyone is pursuing self interest then the outcome is a brutal state of nature according to this theory. Mercantilist thinkers believe that maximizing state power and wealth can bring the highest prosperity for the society. Adam Smith challenges these mercantilist ideas by showing that actually trade, when it functions freely, benefits both parties and better for the general public as well, unlike the mercantilist system that only benefited the government. In addition, the prohibition of foreign goods can also create black market activity, where the goods would be smuggled into the country. For the mercantilist the world political-economic struggle was a zero-sum game. Self-interested (statist) countries must run a trade surplus in order to keep their position in world economy. While labor unions in the past argued that imports reduce domestic employment, by today many examples have showed that it might put some jobs at risk, in general it simply reallocates the jobs to other industries. Japan's economy would be a good example of mercantilist policies applied in real life. After the Second World War its economy started booming and Japan managed to focus on high exports (technological goods) and minimal imports. By not allowing foreign goods into the market Japan was able to foster its economy by selling locally produced products (i.e. Japanese skis vs. American ones). While the mercantilist era has passed by now and Adam Smith's ideas about free trade are widely accepted among economists, some mercantilist policies (i.e. protectionism) are still continue to exist though.

Adam Smith ideas about a freely functioning market and self-interest created a whole IPE theory. His idea was the complete opposite of mercantilists by believing in free trade without the intervention of the government. The ''invisible hand'' of the market naturally ensures to pursue self-interest that in the long run leads to greater prosperity for the public. The freely functioning market is much more able to maximize efficiency and prosperity than the state controlled one. Smith's Wealth of the Nations argued that when individuals act on self-interest they advance the well being of the whole society. To Smith individualism and competition were the two legs on which the economy and society could stand tall. After more than 200 years Smith's ideas are still powerful influence in the analysis of economic issues. Ricardo also adds to both the content and methodology of Smith's liberalism by developing the theory of comparative advantage, which has formed the basis of the theoretical justification for free trade. For Ricardo specialization is an important element of the economy for prosperity and efficiency. Unlike mercantilism, liberalism allows private ownership of properties. While liberals want no government intervention in the market, they believe that it's the government's duty to provide public goods (roads, schools, bridges) that cannot be efficiently made by private entities.

Marxism is again another form of IPE theory that was developed by Karl Marx in the mid nineteenth century. Marx predicted the demise of capitalism. In his work, The Communist Manifesto, he calls all the workers of the world to unite against capitalism. He believed that the capitalist system was increasing inequality among the two classes (owners and workers) that will eventually lead to the up rise of the proletariat. The capitalists extract surplus value from the workers and enjoy the profits. Marxists argue that capitalism as a system alienates people to creatively plan and control their collective fate. Marx argued that the competition in capitalism will create monopolies and drive out the weaker producers, who will later fall into the level of the working class and create a larger labor supply, drop the wages and lead eventually to a greater unemployment. Marxist believed in a fully planned society, where the economic system is self-managed and does not create alienation. As we can see today, Marx was wrong about the competition creating monopolies, furthermore real wages have risen and the unemployment rate dropped. In practice, Marxism clearly failed to create a self-sustaining and fully planned society. Moreover instead of uniting the public and lift them up from the working class, it crushed them with statism and with the abuse of state power. In contrast nations that adopted liberal ideas have enjoyed remarkable level of economic growth.

All in all I would say that liberalism seems the most acceptable one to me, due to individual liberty, private property rights and free trade. I believe that people most of the times if not always act on their own self-interest, which can definitely be a much better driving force for a prosperous economy, where the competition among individuals lead to better and cheaper products. If economy is controlled by the government, I do not think it is possible to achieve as high prosperity for the society as a whole as it is possible through liberalism.

2. Compare and contrast the “developmental state” as it operated in Japan and Taiwan (draw on Balaam and Veseth and Amsden, respectively). Would you attribute the success of these cases to domestic factors, or to international factors, primarily? Incorporate some discussion of statist IPE theories in your answer. In your opinion, should other developing countries try to follow this type of path?

Developmental state is a mixture of a centrally planned model and liberal open economy. It is based on the positive role of government in the economy and on the advantages of private businesses. The government intervenes, but only till a certain extent to regulate conditions for development and guard certain freedoms. This unique mixture of free market, capitalist economic system and the centrally planned (mercantilist) system led to a high economic development both in Taiwan and Japan. In a developmental state there is cooperation between the private sector and the government. To put it in other way, it is the cooperation of the private and public sector, where private businesses become partners of the government to achieve higher development. If the system is such a success, how come that United States and the United Kingdom did not adopt this economic system, instead of a free market economy? Well, it is important to keep in mind that those countries created a stable domestic capital by accumulation and interventionist policies of the nineteenth century. Also, Great Britain's colonial past significantly contributed to the country's economic development. These developmental states (Taiwan, Japan) did not have the advantage of an economic background like United States or the United Kingdom; hence in order to expand their wealth and foster the economy, they had to follow a different path. Furthermore, developmental state can be looked at from a global perspective as well, due to the fact that the global economy is not that liberal as most people believe it is. There are still trade barriers, need for World Trade Organization negotiations and the influence of powerful international corporations, governments and economies. This theory was meant to ensure national survival and fight against the Western imperialism.

In East Asia, Japan was the first state that adopted this neo-liberal economy with government intervention, the developmental state. Moreover it became the second largest economy in the world. The 'iron triangle' of Japan's political economy that links together politicians, business and bureaucracy stayed in a powerful coalition and led to a economic development, even when the world outside Japan has changed. The formation of the development state in Japan can be traced back all the way to Meiji era, which was an undemocratic time period, where the burecrats managed the country's affairs, while the democratically elected politicians influenced the state. The location of the country and its homogeny society created a strong sense of nationalism in the country and allowed the Japanese to adopt a mercantilist view of the world that later transformed to a development state. Japanese leaders believed in economic development and industrialization and on the other hand in military and political power. After centuries of isolation, in 1853 Matthew Perry arrived with U.S warships and tried to open trade negotiations with Japan. After that Japan got involved with wars with China and Russia then later on with the United States and its Western allies. It is interesting that some of Japan's political economy today - such as high savings rates, trade barriers, lifetime employment, and close government ties with industry... - are the direct results of policies that were adopted in 1940 to prepare the country for war. These policies certainly maximized the military and industrial resources by squeezing consumers and smaller businesses. The culture of Japanese people also helped to adopt the developmental state theory. Japanese people in general are more cooperative than most of other nations. Unlike the 'individualistic' Americans, Japanese tend to favor group solidarity and consensus. Also, the domestic features of the economy - semi-lifetime employment, seniority wage scales and companywide unions - contribute to employee loyalty and to a high degree of harmony between workers and management. Furthermore the U.S - Japanese relations during the Cold War contributed a lot to Japan's economic growth. The United States guaranteed security for Japan; hence resources were used for industrial production. While U.S defended the country, the Japanese were busy catching up with the economies of the West. Second, the United States provided cheap technology after the Second World War that helped to accelerate the development process of high growth industries. Finally, United States helped the Japanese economy by its international trade policy, which generated an open market for Japanese products in the United States. Protectionism, focus on domestic economy and exports led to a huge economic development in Japan, however on the other hand the international political and economic environment that the state operated and the support of the United States also add to Japan's economic growth. Since the 1990s the growth of Japan has significantly slowed down, which can be the result of a more competitive global economy, where mercantilist policies are not tolerated in the same way as they were in the past.

Taiwan's economic growth is similar to Japan's, where partnership with United States also played an important role in the development of the economy. Taiwan was aided by U.S, which diminished the extent of resource competition. The 50 years of Japanese occupation created a deliberate planning and government ownership of resources. In the 1930s Japan transformed Taiwan's economy into the source of food for the home market. The two-crop economy (sugar and rice) was encouraged by them. One of the most remarkable legacies of the occupation was the improvement of living standards and a creation of a relatively well educated population, which is the basic foundation for subsequent development. Agriculture played an important role in Taiwan's economy (90% of exports) that was subsidies and protected by the government and the surplus was used to finance the growth of other sectors. In the 1950s - 1960s the government introduced reforms to reorient the economy toward an export-led growth. Inflation was brought under control and exports were made highly profitable. Foreign investment of the United States also played a crucial role in capital formation in Taiwan, because it not only helped to bring down inflation, but also opened up a market for the low cost products of Taiwan. The advanced public educational system of the country, that was financed by the tax system led to the rapid rise of labor productivity. Taiwan benefited from the Japanese colonialism by realizing that export-led growth was a viable strategy. Taiwan again is a perfect example where state intervention contributed to economic development. The state transformed Taiwan's economy and also has been transformed by it.

Even though developmental state theory worked well in Asian countries in the past, I do not believe that it would be a good idea for developing countries today to adopt this theory, due to the fact that the global economic market became much more competitive and mercantilist and export focused policies are less likely tolerated today by the international community as they were in the past. Personally I really like the idea of a balanced partnership between the government and the free market, however Japan and Taiwan heavily benefited from U.S support as well and not only thrived from the policies of state.

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