International Political Economy

International Political Economy (IPE) focuses on the interaction between international economic variables and international relations (by utilizing interdisciplinary tools and theoretical perspectives) based on the assumption that international relations cannot be analyzed, nor understood, without taking economic variables into account.

Pax Britannica refers to the period between the end of the Napoleonic Wars in 1815 and the start of the First World War in 1914. That period, under the leadership of the Great Britain, was comparatively free of military conflict among major powers.

According to the liberals, all economic decisions should be made by the market place and by the market place, it is meant free market. The government should be out of foreign trade, as well as domestic economy, as much as possible. Winners and losers in the economy are not decided by the government, but by the market. 

Invisible hand is a metaphor for how self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society in a free market economy. The term was introduced by Adam Smith in his book “An Inquiry into the Nature and Causes of the Wealth of Nations” in 1776.

By comparative advantage Ricardo meant states should produce and export those products which they can produce most efficiently, relative to other states.

In liberal view, national currencies should be bought and sold in free market, like goods and services. In this system of floating exchange rates, the market determines the actual value of one currency in comparison with other currencies. Just like for a good, there is a supply and demand for each national currency and the prices of currencies are adjusted continually in response to market supply and demand. This way, floating exchange rates result in market equilibrium eventually.

Economic nationalism refers, in a generic sense, to an ideology that favors state interventionism in the economic sphere. The nationalists also believe that closing off an economy to external influences can be beneficial to growth and economic progress. Thus, economic nationalism can be defined as a mixture of trade protectionism and economic planning, with an aim to preserve national interests in the context of world markets.

The nationalists believe that free trade only benefits the wealthiest, most advanced nations. In head- to-head competition, the advanced or “mature” industries can easily defeat the less advanced or “infant” industries. Therefore, infant industries should be protected by the state from foreign competition, or else, they simply perish.

Economic structuralism is concerned with the international division of labor created by the capitalist system. It sees that the division of labor is unfair, creating categories of rich and poor people, as well as rich and poor nations, at the macro level.

Direct foreign investment includes the building of factories or investing in the facilities for extraction of natural resources. Portfolio investment, on the other hand, includes investing in another country’s stock markets.

The gold standard was a monetary system where a country’s currency or paper money had a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that used the gold standard set a fixed price for gold and bought and sold gold at that price. That fixed price was used to determine the value of the national currency.

Towards the end of the Second World War, a stable finance and monetary system was aimed to be established by the Western countries fighting against Nazi Germany under the leadership of the United States. To that end, delegates from 44 countries met in the United States, in Bretton Woods, New Hampshire in July 1944. The main goals were to ensure a foreign exchange rate system, prevent competitive devaluation, encourage international trade, and eventually promote economic growth.

The theory of hegemonic stability holds the assumption that the world system is most prosperous when there is a hegemon to organize the international political and economic system. Historically, the periods of the Dutch (1620- 72), British (1815-73), and United States (post- 1945) hegemony are commonly cited as evidence of the link between hegemony and prosperity.

Multinational corporations (MNCs) are huge companies that are incorporated in one country, producing or selling goods and services in many other countries. Their worldwide activities are centrally controlled by the home country.

High-tech trade rivalry, trade discrimination, unpredictable economic crises, North-South inequalities, and illicit market.