Gilpin, Global Political Economy

n Global Political Economy, Princeton University Professor of Public and International Affairs Robert Gilpin provides a comprehensive overview of the field of global political economy and examines the impact of the end of the Cold World, the triumph of neoliberal market-oriented economies, and the important technological advances in telecommunications, transportation, and information technology (the latter two may be lumped together as globalization) on the contemporary international economy. While states are not the only actors in the international political economy, they are the most important for Gilpin. Gilpin is a theoretical eclectic for whom theories provide value by leading us to ask good questions. He does not believe one theory will eventually triumph over others. Gilpins version of realism incorporates the impact of domestic factors and allows that these factors can influence the international political economy. While Gilpin sees economics as valuable for providing an understanding of the logic of markets, he asserts its central weakness is the tendency for economists to treat political forces as exogenous for modeling purposes. Yet, political structures are part of the context in which market activities take place. Gilpin addresses how the new economic theories complement international political economy analysis. He examines the international trading system, the international monetary system, the international financial system, foreign direct investment, and economic development. He also examines the impact of globalization, which has become a defining feature of the international economy. While globalization is an important factor, he does not see it undermining the importance and relevance of states. He ends with a discussion of the possibilities and challenges of global economic governance. One. The New Global Economic Order Although globalization had become the defining feature of the international economy at the beginning of the twenty-first century, the extent and significance of economic globalization have been greatly exaggerated and misunderstood in both public and professional discussions; globalization in fact is not nearly as extensive nor as sweeping in its consequences (negative or positive) as many contemporary observers believe. This is still a world where national policies and domestic economies are the principal determinants of economic affairs. (3) International finance is the one area to which the germ globalization is most appropriately applied. (7) Although the end of the Cold War provided the necessary political condition for the creation of a truly global economy, it is economic, political, and technological developments that have been the driving force behind economic globalization. (8) The idea that globalization is responsible for most of the worlds economic, political, and other problems is either patently false or greatly exaggerated. (9) Last decades of the 20th century saw a shift in distribution of world industry from older industrial economics (US, Western Europe, Japan) toward Pacific Asia, Latin America, and other rapidly industrializing economies. (10) Regionalism is not an alternative to the nation-state, as some believe, but rather embodies the efforts of individual states to collectively promote their vital national interests and ambitions. (11)

 Realism and nationalism are not identical. Nationalists may be realists, but realists are not necessarily nationalists. (15) It is possible, I believe, to analyze international economic affairs from a realists perspective and at the same time to have a normative commitment to certain ideals. (16) See page 17 for analysis of realism. Global political economy defined interaction of the market and such powerful actors as states, multinational firms, and international organizations. (17 18) National governments still make the primary decisions regarding economic matters; they continue to set the rules within which other actors function, and they use their considerable power to influence economic outcomes. (18) Constructivism (1) human structures determined by shared ideas rather than material forces and (2) identities and interests of humans are constructed or are the products of shared ideas rather than products of nature. International politics is socially constructed rather than constituting an objective reality. Realists neglect importance of identity and focus only on material interests and power considerations. (19 20) Realists disagree with the constructivists position that identity is the most important or the only determinant of a nations foreign policy. (21) In the study of political economy the purpose of economic activity is a fundamental issue: Is the purpose of economic activity to benefit individual consumers, to promote certain social welfare goals, or to maximize national power? (24) Two. The Nature of Political Economy The polity is much more influences by economic developments than many political scientists have appreciated, and the economy is much more dependent upon social and political developments than economists in general have admitted. (25) Chicago School methodology of economics is applicable to all types of human behavior. (26) Endogenous particular human action can be fully explained as a self-conscious effort of an individual to maximize his or her economic interests. (27) Exogenous particular action can be explained best by a noneconomic motive. (27) Economic imperialists assume that political and other forms of social behavior can be reduced to economic motives and explained by formal methods of economic science. (27) Neoclassical institutionalism attempts to explain the origin, evolution, and functioning of all types of institutions (social, political, economic) as the result of the maximizing behavior of rational individuals. (28) Public-choice school of economists also applies the methods of formal economics to the analysis of political behavior and institution, especially to the political organization of free men. (28) The new political economy school of economics examines the political determinants of economic policy. (28) Three broad meanings of political economy: (1) application of formal economic methodologies to all types of human behavior, (2) employment of a specific economic theory to explain social behavior, or (3) questions generated from the interaction of economic and political affairs. (30 31)

 Interpretations of economic affairs are highly dependent upon the analytic perspective of the observer and upon his or her assumptions as these determine what the observer looks for or emphasizes. (31) Economics and political economists were interested in different phenomena and asked different questions. (35) Whereas economists regard an economy as a market composed of impersonal economic forces, specialists in political economy interpret it as sociopolitical system populated by powerful actors. (38) The neoclassical economic interpretation is that the economy is a market or a collection of markets composed of impersonal economic forces over which individual actors, including states and corporations, have little control. (38) The political economy interpretation defines the economy as a sociopolitical system composed of powerful economic actors or institutions such as giant firms, powerful labor unions, and large agribusinesses that are competing with one another to formulate government policies on taxes, tariffs, and other matters in ways that advance their own interests. (38) Social, political, and economic institutions are significant in that they determine, or at least influence, the incentives that shape the interaction of individuals and groups as political and economic actors. (39) Political economists argue that institutions are built on the idea of path dependence and that economic and other institutions are the result of accidents, random choices, and chance events that frequently cannot be explained as the result of rational economic processes. (39) The central idea that markets are embedded in larger sociopolitical systems underlies my interpretation of both political economy and international political economy. (41) I believe, on the other hand, that the market is inherently political. (44) Three. The Neoclassical Conception of the Economy Economics is the study of choice under conditions of scarcity. (48) Key ideas opportunity costs, There is no such thing as a free lunch (TSTFL), ceteris paribus, rational end/means calculations, stable preferences, markets develop naturally, competitive equilibrium, self-regulating and self-correcting market. (48 55) According to neoclassical economics, history is generally irrelevant to an economic explanation of an event. (59) Economics cannot account for the causes of the disequilibrium because the exogenous variable that produce the equilibrium lie outside the realm of economic analysis. (59) Economic analysis alone does not substitute for historical, political, and sociological analysis. (60) Normative assumptions of neoclassical economists individual rather than groups or classes is the basic unit of society, harmony of interests among individuals over the long term, which accounts for social and political stability; purpose of economic activity is to increase the welfare of the individual consumer and to maximize global wealth, state should not intervene in the economy, bias in favor of efficiency over equity, distribution of income lies outside primary focus, commitment to Pareto optimality. (64 69)

 This writer believes that combining the insights and theories of economics with the more intuitive and less rigorous techniques of history and the other social scientists leads to a more profound and useful comprehension of economic affairs than does adherence to any one field alone. (74) There will always be exogenous variables such as culture, technology, and institutions that affect economic outcomes but cannot themselves be explained endogenously by the methods of economics; that is, in terms of rational individuals attempting to maximize their economic self-interest. (76) Four. The Study of International Political Economy The study of International Political Economy presumes that states, multinational corporations, and other powerful actors attempt to use their power to influence the nature of international regimes. (78) IPEs state-centric interpretation, on the other hand, argues that economic actors are attentive not only to absolute but also to relative gains from economic intercourse that is, not merely to the absolute gain for themselves, but also to the size of their own gain relative to gains of other actors. (78) While the content of an international regime must be grounded on sound technical and economic considerations, it is important to recognize that regimes do produce political effects. (87) In practice, public goods have been and can be provided only by a leader (or hegemon) with an interest in supplying the good for all or in forcing others to share payment for the good. (100) Five. New Economic Theories Economic analysis gives short shrift to the role of government and other institutions. (103) New growth theory, new economic geography, and new trade theory challenge fundamental assumptions of neoclassical theory as perfection competition, constant returns to scale, and complete information. These new theories emphasize the importance of oligopolistic competition, economies of scale, and technological innovation, and they also incorporate historical processes, institutions, and spatial relations. (103 104) Rather than technology being a public good equally available to all economic actors, in reality national differences in innovation and utilization of technology have become vital determinants of variations in national rates of economic growth, national competitiveness, and international trade patterns. (105) These new theories depart from conventional neoclassical economics as they (1) assume that there are imperfect or oligopolistic markets, (2) emphasize the importance of technological innovation, and (3) utilize history or path dependence as an explanatory variable. (106) Neoclassical growth theory leads to the conclusions that government policies can do littler to accelerate the long-term rate of economic growth. (110) The new theory incorporates technological progress and advances in knowledge as endogenous factors within the growth model. Technological advance is considered

endogenous because technological innovations are the results of conscious investment decisions taken by entrepreneurs and individual firms. (113) New theory postulates that eh possibility of increasing returns means that the growth rate need not decline. (113) New economic geography argues noneconomic factors, path dependence, chance, and cumulative processes frequently account for the origins and concentration of manufacturing and many other economic activities in particular locations. (117 118) Phenomenon of path dependence historical past and cumulative processes largely determine the choices available to a decision-maker and the context within which decisions are made, implying the economic universe is largely the consequence of many minor random events. (118 119) The theory of strategic trade provides a rationale for nations to use protectionist measures, for subsidies to particular industries, and for other forms of industrial policy to provide domestic firms with a decisive advantage in both home and world markets. (123) Six. The Political Significance of the New Economic Theories Despite the increasing significance of the market and economic globalization, economic outcomes are determined not only by economic forces but also by governments and their policies. Yet, national societies differ fundamentally in the degree to which their governments play a meaningful role in the economy and in the ways in which they attempt to manage their economies. (147) Seven. National Systems of Political Economy The role of domestic economies and the differences among those economies have become significant determinants of international economic affairs. (148) Differences in the following areas are worthy of particular attention: (1) the primary purposes of the economic activity of the nation, (2) the role of the state in the economy, and (3) the structure of the corporate sector and private business practices. (149) The chapter analyzes the three factors above in the American system of market-oriented capitalism versus Japanese system of developmental capitalism versus German system of social market capitalism. An economic system strongly reflects the values of the society in which it is embedded and must be judged, at least to some extent, in terms of those values. (176) Convergence economic interdependence will ultimately lead to a convergence in economic performance among national economies as rates of economic growth, productivity levels, and national incomes more toward one another. (184) Harmonization approach maintains that eradication of significant national differences should be an explicit goal of international negotiations. (192) The most contentious issues lie outside the jurisdiction of international organizations, and governments everywhere prefer that no international organization should have the authority to enact, enforce, or prescribe universal rules or regulations for conducting business. (193) Mutual recognition every nation should accept the legitimacy of the rules by which other nations manage their economies. (194)

Eight. The Trading System Although nations want to take advantage of foreign markets, they are frequently unwilling to open their own economies. (196) Postwar Trade Regime Bretton Woods, GATT, WTO (Uruguay Round 1995) The GATT, and later, the WTO, serve the important political purpose of facilitating the reduction of trade barriers. (219) WTO, World Bank, and IMF have become the symbols of globalization for all those groups and individuals who blame globalization for their own and the worlds problems. (230) Nine. The International Monetary System Whereas the purpose of the international monetary system is to facilitate transactions in what economists call the real economy (trade, manufacturing, etc), the purpose of the financial system is to provide the investment capital required for economic activities and development around the globe. (234) It seems inevitable that over the long term, smaller economies will link their currencies closely to their major trading partners. (259) Ten. The International Financial System Emergence of an international financial market has greatly facilitated efficient use of the worlds scarce capital resources and has enabled capital-poor LDCs to borrow funds for economic development. (261) The reemergence of international finance has increased interdependence of trade, monetary, and other aspects of the international economy. (277) Eleven. The State and the Multinationals Some commentators believe that the multinational corporation has broken free from its home economy and has become a powerful independent force determining both international economic and political affairs. Others reject this position and believe that the MNC remains a creature of its home economy. (278) Vernons product cycle theory every product follows a life cycle from innovation through maturity to decline to eventual obsolescence. So, FDI is principally a devise used by firms to preempt foreign competition and to maintain their monopoly rents. (282 283) Reading Schools Eclectic Theory emphasizes technology as a factor in MNC development; greatly reduced transaction and other costs of internationalizing. (283 284) Porters Strategic Theory MNC has entered an era of strategic management. MNS provides access to a wide array of possible strategies through which it can tap into the value chain. (285 286) The increasing importance of the MNCs has profoundly altered the structure and functioning of the global economy. (290)

 One of the most important recent developments in the world economy has been the internationalization of services and of industrial production, a development facilitated by falling costs for communication and transportation that have enabled firms to integrate production and other activities around the globe. (292) MNCs do represent huge concentrations of economic and frequently, political power. (302) MNCs pay higher wages, create more jobs than do domestic firms, and have higher labor standards; and the economy gains capital and technology from the MNCs. (303) Twelve. The State and Economic Development The World Bank, IMF, and regimes governing the world economy were established primarily to serve the interests of the dominant powers. (305) A compromise must be found somewhere between the two extremes of abandonment of neoliberalism and total reliance on the market. (340) Thirteen. The Political Economy of Regional Integration The new regionalism is more global in scope and involves integration not only of trade but also of finance and foreign direct investment. (341) Regionalism has become a central strategy used by groups of states to increase their economic and political strength and therefore has become an extremely important feature of the global economy. (361) Fourteen. The Nation-State in the Global Economy The nation-state continues to be the major actor in both domestic and international affairs. (362) Many of the problems alleged to be the result of economic globalization are really the consequence of unfortunate national policies and government decisions. (367) The tendency to blame globalization for many vexing problems of modern life is due in part to nationalistic and xenophobic attitudes on the political right and an anticapitalist mentality on the political left. (368) Although economic globalization does constrain government policy options, it does not impose a financial straitjacket on national macroeconomic policies. (370) The most important constraints on macroeconomic policy are found at the domestic level. (373) Fifteen. Governing the Global Economy Neoliberal institutionalism accepts the continued existence and importance of the nationstate in international affairs; however, it generally assumes that the state is a liberal, market-oriented state in the American sense, more interest in the cooperation and absolute gains that in conflicts over relative gains. Neoliberal institutionalists believe that international institutions have become sufficiently strong to meet the challenges of a globalized international economy. (379) The task of reforming existing regimes and creating new ones is exceptionally difficult. (380)

 Democratic deficit international economic institutions are criticized because they are not accountable to any democratic electorate. (381) This discontinuity between authority and power must one day be rectified if these institutions are to survive. (386) The new medievalism, based on the belief that the world is experiencing the end of national sovereignty, implicitly rejects the idea of a liberal international economic order based on cooperation among sovereign states. (390) Transgovernmentalism third possibility. It accepts the continued existence of nationstates. However, the nature of the state envisioned by this intellectual position is fundamentally different from that in state-centric liberal internationalism and political realism. It assumes that the governance functions of the state can be divided an delegated to intergovernmental bodies or networks dealing with specific policy issues. Nation-states (1) divided into their component parts which can deal directly with counterparts in other governments, (2) technical and other functional problems can be solved in isolation from larger national concerns and parochial political matters, and (3) it ignores matters of national security and foreign policy and assumes no hierarchy or priority among the issues of interest to governments. (398 399) Governance first and last is about the exercise of power to achieve political, social, and other objectives. Every scheme to govern the global economy, therefore, must confront the fundamental question: Governance for what? The primary purpose to be served by the proposed mechanisms for governance of the global economy is the first issue that must be resolved. (400) Governance at any level, whether national or international, must rest on shared beliefs, cultural values, and most of all, a common identity. (402) The best for which one can hope is that the major powers, in their own self-interest as well as that of the world in general, will cooperate to fashion a more stable and humane international political and economic order. (402)