Introduction to Political

Economy
Course Title: Political Economy
Course Instructor: Mirza Bilal Hassan (PSP)
 Introduction
• Political Economy field are mutually dependent.
• Political Economy is the basis of the government in decision making.
• Use political power to deal economic resource.
• Economic situation also influence political decision.

Political Economy PS 451 SW Attray 2

 Definition of Political Economy
• Two Fields grafting namely political and economy
• Economic Politics Master:
• Classical: Adam Smith, David Recardo, James Stuart, Karl Marx
• Modern: David N Balaam, Robert Gilpin, JA Frieden, I. Wallerstein

Political Economy PS 451 SW Attray 3

 Definitions
• Economy – from the Greek word “household” – assets and activities for
production and exchange
• Economics – how to organize production and exchange most efficiently (minimal
cost, maximum gain)
• Political economy (Adam Smith) – “branch of science of a statesman or
legislator” concerned with:
• “providing a plentiful revenue or subsistence for the people”
• “supplying the state or commonwealth with a revenue sufficient for the public
service”

Political Economy PS 451 SW Attray 4

 Conti…
• In other words, political economy is about:
• the role of the state with regard to the economy,
• interactions between political and economic processes, and
• distribution of social power based on property and wealth.
• Global political economy, or international political economy – the same,
applied to the entire world

Political Economy PS 451 SW Attray 5

 Conti…
• Adam Smith (1723-1790)
• Key works:
“The Theory of Moral Sentiments”
“The Wealth of Nations”

Political Economy PS 451 SW Attray 6

 Classical political economy (Adam Smith, David Ricardo)

• The economy is seen as a complex natural organism

• Human labour is a key source of wealth
• Seeking balance between self-interest and cooperation
• ―It is not from the benevolence of the butcher, the brewer, or the baker that we
expect our dinner, but from their regard to their own interest. We address
ourselves, not to their humanity but to their self-love, and never talk to them of
our own necessities but of their advantages. ― (The Wealth of Nations‖)
• Division of labour
• Key role of the market as an integrating force
• Harmony of interests between classes is possible
• Key role of the state in maintaining a market economy

Political Economy PS 451 SW Attray 7

 Understanding of Politics
• Definition of Politics
 The art and science of government.
 Can be formulate as arrangement to seek, use or empowering to an
individual or a group of individual.

Political Economy PS 451 SW Attray 8

 Economy Insight
• Limited Recourses VS Unlimited will focus to:
• Production system and exchange
• Allocation of recourses by optimum and rational
• Gather and divide wealth

Political Economy PS 451 SW Attray 9

 Economic Politics Definition
• Use of Political Power to determine distribution of limited economic
resources.
• Involving two important mechanism namely:
Government (State) & Market
Can exist in domestic level.

Political Economy PS 451 SW Attray 10

 Domestic
• Focus on how government use political power to deal economic resources in
countries
• Depends on form of government that is practiced
• Example: Monarchy, autocracy, republic and democracy

Political Economy PS 451 SW Attray 11

 International
• Focus on how government use political power to deal economic resourses
between countries
• Depends on pact between countries at international level.
• Example: ASEAN, EU, AFTA, NAFTA

Political Economy PS 451 SW Attray 12

 Conclusion
• Political Economy is the field which discusses how political factor can
influence and produce result or economy policy or economic arrangement
which influence political decision.

Political Economy PS 451 SW Attray 13

 Ideologies of Political Economy
• Three major ideology according to Gilpin in his book ―The Political
Economy of International Relations‖
• Liberal
• Nationalist
• Marxism

Political Economy PS 451 SW Attray 14

 Liberal
• Must occur separation between economy and government intervention
• To reduce bureaucracy and give plenty of freedom to traders and dealer.
• In the opinion of liberalist: logic will determine market and with freedom, healthy
competition will incur.
• Efficiency and economic development can produce batter life standard.
• Human will always want best benefit by giving priority to cost reduction and
maximize income.
• Finally, human wants equality among products and cost so that the people are
pleased with the market.
Political Economy PS 451 SW Attray 15
 Nationalist
• Almost alike with the concept of mercantilism, protectionism and statism.
• All economic activities are supervised by government or country
• Intends to fulfill national interest
• Gove priority national interest, country‘s defense system, national security
and development.
• Economy must be contributed to nation building

Political Economy PS 451 SW Attray 16

 Conti…
• Extreme National thought says,
• ―International Economy is the stage to extend the country‘s mastery and
field to seek out maximum wealth for national treasury.‖
• Wealth – Power – National Security

Political Economy PS 451 SW Attray 17

 Karl Marx (1818-1883)

• Key works:
• “Das Kapital”
• “The Communist Manifesto” (with Friedrich Engels)

Political Economy PS 451 SW Attray 18

 Marxism
• Discussion is focused to questions relating to production that can be felt by all
layers in community.
• According to Marx (1818-1883), although man originally are rational and can use
logic with balance in wealth accumulation and wealth distribution, eventually
rational and logic would force human to reap more profit to ensure their own
future.
• Associated with interclass competition concept (Class struggle) and finally change
the world to socialism concept (National property ownership and equal distribution
of property)

Political Economy PS 451 SW Attray 19

 Conti…
• Marx's views was further developed by Lenin (1870-1924)
• New Theories such as ‗Modern World system‘ came into existence; dual
concept namely ‗core and periphery‘ and also dependency theory concept.

Political Economy PS 451 SW Attray 20

 Marxist political economy

• Market economies are social arrangements created by specific historical forces

• Private property is a social construct, not something created by nature
• Workers produce surplus value
• Owners of capital (capitalists) take all or most of it
• Accumulation of capital in the hands of capitalists
• Power is rooted in ownership and control of capital Impoverishment of workers
• Division of society into classes based on their roles in the economy and the state
• Struggle between classes for power – for control of the economy and the state
• Capitalism will inevitably collapse due to its inherent contradictions

Political Economy PS 451 SW Attray 21

 Conti…
• The two great traditions have determined the bounds of political-economic thinking since the
19th century
• Whenever capitalism stumbles, Marxism gains attention and influence
• Whenever capitalism recovers and shows its strength, classical political economy looks more credible
• Policies of governments oscillate between these two poles
• The key variables:
• ability of the state to correct the inherent flaws of the market system
• inherent flaws of the state (bureaucracy, waste, concentration of power, etc.)
• Capitalism continues to exist so long as the state and the market system complement each other
effectively
Political Economy PS 451 SW Attray 22
 World Economy Political Structure
• Divided into 4 Structures:
• Production Structure
• Security Structure
• Financial Structure
• Knowledge and technology structure

Political Economy PS 451 SW Attray 23

 Production Structure
• How products are issued and traded
• International trading's are bound by various regulation (GATT, WTO)
• Also discusses on who are the manufacturer and who the users

Political Economy PS 451 SW Attray 24

 Security Structure
• Safety factor in economy politics especially during the Cold War
(components of the world fell into two main block:
 support US
 Support the Soviet union
Also means that the country can handle various threat in or out and give
protection to other countries ad well.

Political Economy PS 451 SW Attray 25

 Financial Structure
• Discusses the cash flow (way to get and ways to use) as atool to get the
resources in the world.
• Example: A country which takes up a loan from IMF is forced to follow the
reshuffle their economy to suit IMF‘s will.

Political Economy PS 451 SW Attray 26

 Knowledge & Technology Structure
• Emphasize the importance of interest and use of Knowledge.
• Nations that have the knowledge and technology will advance in comparison
to those without either.
• Example: Japan, US, South Korea

Political Economy PS 451 SW Attray 27

 Conclusion of Four Structures
• Altogether this perspective would be the elements to see tendency / level of
cooperation framework of one country.
• Although they differ from one another, sometimes they are joined.

Political Economy PS 451 SW Attray 28

 International Political Economy Issues
• OPEC oil Crisis 1970
• Influenced by political crisis then: Arab-Israel War
• In 1973, war between Arab-Israel caused Arab (which is the main country in
OPEC) to increase the world oil price
• This was to retaliate towards the American and British who supported Israel.
• OPEC controls almost 85% world oil production

Political Economy PS 451 SW Attray 29

 Conti…
• Crisis worsened with the fall of Shah of Iran.
• This proves that economic activities are influenced by politic and vice versa.
• Multinational Corporations (MNCs)
• Important in the economic development
• Rich and can move around the whole world without restrictions
• MNCs readily acceptable (Modal injection / factories constraction)

Political Economy PS 451 SW Attray 30

 Conti…
• Has 2 or more branches in other countries
• Developing countries make the effort to attract outside investor (Foreign
direct investment-FDI) because lack of capital and skill.
• US also requires MNCs to their economy. In the year 1980, 40% world FDI
encroached US.
• However in 1990‘s, FDI distribution was stable in the Cold War post era.

Political Economy PS 451 SW Attray 31

 Conti…
• Basically, FDI gives positive impact to the host country: gives revolving
capital, job opportunities, new market, technology transfer.
• Weakness: MNCs will move to other country if the operation in the present
country is more remunerative.
• For example: when China opne her door to world economy, many MNCs
moved there due to cheaper labour cost.

Political Economy PS 451 SW Attray 32

 Globalization

• Capitalism is historically rooted in international trade

• Division of labour on the international scale
• Movement of goods, money, people between countries creates a global network of
economic ties
• A global capitalist economy gradually emerges as a result of integration of national
economies into a single world system
• Key role of states in its creation and development
• First leader – Holland (17th-18th centuries), then - Great Britain (18th - 19th centuries)
• Challenged by others (France, Germany), displaced by the United States in the 20th century

Political Economy PS 451 SW Attray 33

Political Economy PS 451 SW Attray 34
 Global trade and capital flows, 1400-1800

Political Economy PS 451 SW Attray 35

 19th century globalization led to World War I

• The Great War triggered off the global crisis of capitalism

• The 1917 Russian revolution
• The Great Depression
• The rise of fascism
• World War II
• Challenge to political leaders: restructuring the global system

Political Economy PS 451 SW Attray 36

 United Nations Monetary and Financial Conference

• 730 delegates from 44 countries

• 2 global institutions created:
• International Monetary Fund – to coordinate monetary policies of states
and render financial assistance to governments
• International Bank for Reconstruction and Development (now called the
World Bank) – to help rebuild national economies on a capitalist basis
• proposed 3d global institution: International Trade Organization – would be
set up as World Trade Organization in 1995

Political Economy PS 451 SW Attray 37

 1940s-1970s:

• Government regulation of markets, welfare state, a relatively liberal regime

of international economic relations
• Global capitalism was saved by government policies which regulated the
market economy and redistributed wealth

Political Economy PS 451 SW Attray 38

 The rise of global capital

Transnational (or multinational) corporations

The first in history was established in 1600 – British East India Company
There are 63,000 transnational corporations worldwide, with 690,000 foreign affiliates
51 of the world's top 100 economies are corporations
Three quarters of all transnational corporations are based in North America, Western Europe and Japan
Ninety-nine of the 100 largest transnational corporations are from the industrialized countries
Royal Dutch Shell's revenues are greater than Venezuela's Gross Domestic Product. Using this measurement,
WalMart is bigger than Indonesia. General Motors is roughly the same size as Ireland, New Zealand and
Hungary combined
---------------------------------------------
http://www.corpwatch.org/issues/PID.isp?articleid=378

Political Economy PS 451 SW Attray 39

 Conti…
• Success and growth of the global capitalist economy led to concentration of
enormous power in the hands of multinational corporations
• Global capital was chafing at the limitations imposed on it by states
• From late 1970s:
• A shift in state policies toward deregulation of business activities and
reduction of taxes on wealth
• ―Triumph of freedom‖

Political Economy PS 451 SW Attray 40

 The Washington Consensus
• ―The Washington Consensus‖, or Neoliberal Orthodoxy – dominant
Western economic ideology since the early 1980s
• Liberalization – maximum possible freedom of market interactions
• Stabilization – balanced state budgets, limits on government spending
• Privatization – selling off public enterprizes to private owners
• In sum: changing the balance of power between global capital and the state

Political Economy PS 451 SW Attray 41

Political Economy PS 451 SW Attray 42
Political Economy PS 451 SW Attray 43
Political Economy PS 451 SW Attray 44
Political Economy PS 451 SW Attray 45
Political Economy PS 451 SW Attray 46
Political Economy PS 451 SW Attray 47
Political Economy PS 451 SW Attray 48
Political Economy PS 451 SW Attray 49
 Globalization seen as progress

• Import-export of goods
• Investment of capital in another country to produce goods there
• Creation of international production networks – the world as a factory
• Removal of obstacles to trade and financial flows
• Migration of workers to seek employment anywhere
• Capital is free to go anywhere to seek a higher rate of profit
• Global division of labour reaches unprecedented scale: everybody depends on
everybody else

Political Economy PS 451 SW Attray 50

 Globalization seen as disaster

• Concentration of capital on a global scale accelerates

• Capital acquires global control over production, exchange, government policies,
people‘s lives
• Downward pressure on wages
• Global demand for goods and services declines
• Solution: borrow money against future income
• Pyramid of debt grows to stimulate the global economy
• At a certain point, the pyramid collapses – inevitably (see current affairs)

Political Economy PS 451 SW Attray 51

 The global economy: a snapshot

• Global population – 7.3 bln. people

• http://www.poodwaddle.com/clocks/worldclock/
• Global labour force - 3,3 bln. (2010 est.)
• Global GDP - $87 trln. (measured by Purchasing Power Parity, 2013, est.)
• Composition:
• agriculture: 6%
• industry: 31%
• services: 63% (2013 est.)
Political Economy PS 451 SW Attray 52
 Conti…
• Global GDP per capita (PPP) - $13,100
• Household income:
• lowest 10%: 2.8%
• highest 10%: 28.2% (2008 est.)
• Taxes and other revenues:
• 30% of GDP (2013 est.)
• Public debt
• 63.3% of GDP (2013 est.)
• Source: https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html

Political Economy PS 451 SW Attray 53

 Holly Peterson
• Holly Peterson: ―If you look at the original movie Wall Street, it was a phenomenon where
there were men in their 30s and 40s making $2 and $3 million a year, and that was disgusting.
But then you had the Internet age, and then globalization, and you had people in their 30s,
through hedge funds and Goldman Sachs partner jobs, who were making $20, $30, $40
million a year. And there were a lot of them doing it. I think people making $5 million to
$10 million definitely don‘t think they are making enough money.‖
• As an example, she described a conversation with a couple at a Manhattan dinner party:
―They started saying, ‗If you‘re going to buy all this stuff, life starts getting really expensive.
If you‘re going to do the NetJet thing‘‖—this is a service offering ―fractional aircraft
ownership‖ for those who do not wish to buy outright—―‗and if you‘re going to have four
houses, and you‘re going to run the four houses, it‘s like you start spending some money.‘‖

Political Economy PS 451 SW Attray 54

 Conti…
• The clincher, Peterson says, came from the wife: ―She turns to me and she
goes, ‗You know, the thing about 20‘‖—by this, she meant $20 million a
year—―‗is 20 is only 10 after taxes.‘ And everyone at the table is nodding.‖

Political Economy PS 451 SW Attray 55

 Conti…
• ….In general, the goals for globalism are created by Corporate. Academic then
provides studies and white papers that justify Corporate's goals. Political sells
Academic's arguments to the public and if necessary, changes laws to accommodate
and facilitate Corporate in getting what it wants.
• An important ancillary player in globalism is the media, which we will call Press in
this report. Press is necessary to filter Corporate, Academic and Political's
communications to the public. Press is not a fourth column, however, because it's
purpose is merely reflective. However, we will see that Press is dominated by
members of Corporate, Political and Academic who sit on the various boards of
directors of major Press organizations.‖ -
http://www.newswithviews.com/Wood/patrick6.htm
Political Economy PS 451 SW Attray 56
 The Life of the Super-Rich:

• http://www.youtube.com/watch?v=tFAvvk9gM9U

Political Economy PS 451 SW Attray 57

 Global poverty: A crime against humanity?

• http://www.youtube.com/watch?v=GP7wHi3nOEg

Political Economy PS 451 SW Attray 58

 Class Division
The world‘s population can be divided into 3 classes
Upper class: 11% (real income higher than the average income in Italy)
Middle class: 11% (real income between the average income in Italy and the
poverty line, adjusted for purchasing power)
The poor: 78% (real income below the poverty line)
Branko Milanovic, True World Income Distribution, 1988 and 1993: First Calculations
Based on Household Surveys Alone. Economic Journal , Jan.2002

Political Economy PS 451 SW Attray 59

 Conti…
• ―When people observe each other and interact, it is no longer simply a national
yardstick that they have in mind when they compare their incomes with the incomes
of others, but an international or global one. What globalization does is to increase
awareness of other people‘s incomes, and therefore, the perception (knowledge) of
inequalities among both the poor and the rich. If it does so among the poor, then
their aspirations change: they may no longer be satisfied with small increases in their
own real income, if they know that other people are gaining much more. Therefore,
the process of globalization by itself changes the perception of one‘s position, and
even if globalization may raise everybody‘s real income, it could exacerbate, rather
than moderate, feelings of despondency and deprivation among the poor.‖*
• *Branko Milanovic. Global Inequality: What It Is and Why It Matters? – DESA Working Paper
No.26, August 2006 - http://www.un.org/esa/desa/papers/2006/wp26_2006.pdf

Political Economy PS 451 SW Attray 60

Political Economy PS 451 SW Attray 61
Political Economy PS 451 SW Attray 62
Political Economy PS 451 SW Attray 63
 Key international organizations dealing with GPE issues:

Key international organizations dealing with GPE issues:

• The International Monetary Fund (IMF) - http://www.imf.org/external/index.htm

• The World Bank - http://www.worldbank.org/

• The World Trade Organization (WTO) - http://www.wto.org/

• International Labor Organization (ILO) - http://www.ilo.org/global/lang--en/index.htm

• United Nations Development Program (UNDP) - http://www.undp.org/

• Organization for Economic Cooperation and Development (OECD) -

http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html
• World Economic Forum (WEF) - http://www.weforum.org/en/index.htm

Political Economy PS 451 SW Attray 64

 Role of the state – the key issue

• The state is the key intermediary between transnational forces and citizens
• How does it use its power?
• The state can totally yield to the logic of global capital
• Or it can try to influence its behaviour (tame it) though sticks and carrots
• Impossible to do on a national scale
• Need for concerted international actions
• Creation of a global political regime (norms, laws, regulations) to shape corporate
behaviour

Political Economy PS 451 SW Attray 65

 Thank You

Political Economy PS 451 SW Attray 66