Understanding International Political Economy: How Does it Impact States?

Understanding International Political Economy: How Does it Impact States?

The following article, Understanding International Political Economy: How Does it Impact States?“, is written by Laiba Shahbaz, a student of Sir Syed Kazim Ali. Moreover, the article is written on the same pattern, taught by Sir to his students, scoring the highest marks in compulsory subjects for years. Sir Kazim has uploaded his students’ solved past paper questions so other thousands of aspirants can understand how to crack a topic or question, how to write relevantly, what coherence is, and how to include and connect ideas, opinions, and suggestions to score the maximum.

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1- Introduction

2- Understanding International Political Economy (IPE)

  • ✓Debunking the term, ‘International Political Economy’
  • ✓Theories of International Political Economy and their struggle to understand International Political Economy   

3- How has the contemporary International Political Economy been shaped?

  • ✓From Mercantilism and Colonialism to the rise of imperialism
  • ✓End of World War II and the emergence of neo-colonialism
  • ✓Various economic systems and their tussle for survival 

4- Impacts of International Political Economy on states

4.1-Social Impacts

  • Widening gap between living standards and opportunities in societies of developed and developing states 
  • Case in Point: Austerity measures of IMF and their worst impact on Pakistan
  • Owing to globalization, the rise of xenophobic, racism, and anti-Muslim sentiments
  • Case in Point: Anti-Muslim rules of France and Germany

4.2-Economic Impacts

  • Increasing avenues of wealth for developing nations due to globalization and open markets all over the world 
  • Case in Point: Emergence of South Korea, Singapore, Taiwan and Hong Kong as Asian Tigers
  • Delicate nature of International Political Economy
  • Case in Point: 70 % rise in the temporary unemployment rate of less educated people globally

4.3-Political Impacts

  • Controlling policies by hegemonic Western nations and the rise of nationalistic sentiments
  • Case in Point: Third-world states are compelled to sell raw materials to run the engines of Western nations and support nationalist parties in Russia, Turkey and many other states
  • Rise in migration for a better life and strict anti-immigration laws to counter them
  • Case in Point: Migration of 450000 Pakistanis for better opportunities in 2023 only

5- Case Studies

  • ✓Pakistan
  • ✓Zambia

6- Critical Analysis

7- Conclusion

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Answer to the Question

The subject of International Political Economy has been a crucial tool for understanding the influence of politics and economies on each other. However, as a system, it exerts different impacts on different states. For example, International Political Economy and its theories helped us understand the causes of the 2008 global financial crisis and provided a way to avoid it in the future. The complex dynamics of International Political Economy highlight a paradoxical scenario, marked by the growing gap in living standards and opportunities between developed and developing states. Globalization, despite bringing increased wealth to developing nations through open markets, also gives rise to complex challenges, including the resurgence of xenophobic, racist, and anti-Muslim sentiments. The hegemonic strategies of Western nations contribute to the simultaneous emergence of nationalistic sentiments, shaping migration patterns, which, in turn, prompt the implementation of strict anti-immigration laws to address the complexities of this evolving global economic and political landscape. This article explains the International Political Economy and its different impacts on the state. 

“The fate of our times is characterized by rationalization and intellectualization, and, above all, by the “disenchantment of the world.”

(Max Weber)

      As a term, International Political Economy is a subject that incorporates two dimensions, like politics and economy, and explains the influence of each other internationally. Adam Smith, a Scottish scholar, explained ‘Political Economy’ as the enforcement of specific policies by a state’s government to increase its nation’s wealth. It is called International Political Economy when repeated between two states. Several scholars interchange the term International Political Economy with Global Political Economy; however, the former explains the political economy of two or more states, and the latter discusses the political economy of all the states of the world. Thus, IPE explores how politics influences the economy of one or more states and vice versa. 

     Furthermore, theories of International Political Economy provide frameworks to understand the complex nature of economy and politics at state, regional, and international levels. All theories of IPE are classified under three main theories: Economic Liberalism, Economic Structuralism and Economic Nationalism. First, Economic Liberalism says that the national power of a state depends on its economic growth, which in turn relies on unrestricted trade. Economic liberalism demands minimum intervention of the state in financial decisions. Adam Smith, David Ricardio, Theodore Moran, and Martin Wolf are the famous proponent of Economic Liberalism. Second, Economic Structuralism criticizes the system created by capitalists and liberalists. Proponents of this theory are Karl Marx, Vladimir Lenin, Antonio Gramsci, David Harvey, and many others, who strictly opposed the division of labour into various classes and offered that there should be only two classes: Owners and Workers. The Workers would have all power and no money while the owners would have all the money without the power. Lastly, Economic Nationalists, such as Alexander Hamilton and Friedrich List, have state-centric views on how a nation can strengthen its economy to secure its interests. They oppose the idea of free trade as it only benefits wealthy nations. Thus, these theories contradict each other’s concepts and offer different explanations of a particular problem in IPE. 

    After the theoretical understanding of the concept, it is essential to understand the practical implementation of it. Historically, the interconnectedness of politics and economics has been a critical part of empires’ security, survival, and external relations. They adopted different policies to achieve their objectives. For example, Great Britain adopted mercantilism as a model for its colonies in the 17th and 18th centuries to secure trade. Similarly, with the emergence of the Industrial Revolution, a modern wave of colonization, also referred to as imperialism, emerged. For example, Britain and Russia’s control of southern and northern Iran for oil resources at the dawn of the 20th century and Britain and the French mandate system in the Middle East to secure their oil and trade routes are all examples of the complex interplay of political and economic interests internationally. In addition, after the two World Wars, the norms of International Political Economics also changed with the rise of new actors on international grounds. Two superpowers, the US and the USSR, have been engaged for survival and dominance. With it, two economic systems, Liberalism or free trade and Structuralism or Marxist economy, were also battling. At Last, Liberalism and Capitalism won, and institutions, such as the International Monetary Fund (IMF), World Bank (WB), and World Trade Organization (WTO) appeared. As a result, the new tussle of securing interests by powerful states with new norms is presently underway, exerting different influences on different states. 

    Before analyzing the case study of states, the social, political and economic impacts of International Political Economy will be discussed. First, by delving into the social consequences, the International Political Economy provides various benefits, such as better life standards, job opportunities, health and education to multiple nations’ societies. However, unfortunately, this is not the case for every nation, especially developing ones, which are exploited by the selfish and hegemonic policies of developed nations. For example, in Pakistan, the country’s inhabitants have been hardly affected due to severe policies of the IMF, such as excise duties on various sectors, devaluation of the currency, and cutting of subsidies. This is not the single case; several states in the Middle East and Africa are suffering from abject poverty with minimum opportunities, as they are unable to compete in the prevailing system.

    Furthermore, due to the globalized world, people from different races, languages, religions and regions migrated from their developing states to developed states. However, they have to face various issues, such as racism, xenophobia, anti-immigrant laws, strict religious laws, and border control rules in the emigrant state. Anti-Muslim rules of France and Germany are examples of it. These people are workers or students; in both cases, they support a state’s economy. But resistance against them is growing in nations for outsiders. This depicts nothing but the conservative mindsets of liberal nations.

     Moving towards economic impacts, the interconnectedness of states and open markets worldwide open the doors of wealth for developing nations. For example, owing to capitalism, four countries, like South Korea, Singapore, Taiwan and Hong Kong, emerged as Asian Tigers of the South East Asia region since World War II (WW II). Indeed, markets are expanding, jobs are being created, and foreign investment is rising; these are all the repercussions of the International Political Economy. On the other hand, some countries failed to adopt liberal economic policies. For example, the communist states of North Korea and Cuba and the authoritarian states of the Middle East are not enjoying the benefits of the global capitalist system. It shows that if a state keeps following the rules of the liberalist market, it will be successful; otherwise, it will be alienated from the globalized world. 

      Along with it, the global nature of the International Political Economy is delicate and can be disturbed even with the slightest shock. For example, According to the World Bank, in 2020, “The temporary unemployment rate of less educated people rose to 70 per cent globally.” With unemployment, trade, businesses, and investments have also been widely disturbed. Similarly, in the wake of the Russia-Ukraine war, the global natural gas supply decreased from 500 thousand cubic per day in 2019 to 100 thousand cubic per day in 2022. Thus, it is proven that the fragile system of capitalism has a highly minimal tendency to suffer a sudden global shock. 

     Looking at the political impacts, international organizations, especially IMF, WB and WTO, are under the supervision of a group of powerful states and control the policies and decisions of other sovereign states. For example, markets are organized so that third-world states sell raw materials at low prices to developed states, which would re-sell the manufactured products at high prices to third-world states. In reaction, the wave of nationalism and loss of faith in the prevailing system are emerging in liberalist states. For instance, mass support for nationalist parties and politicians has been observed in Russia, Hungary, France, Turkey, Brazil, Egypt, Venezuela, the Philippines and the US (Trump). These parties and rulers viewed international cooperation as a compromise on their nation’s sovereignty because they wanted to secure their domestic industries and reduce inequalities promoted by the system. Thus, the contemporary International Political Economy exploits the state’s sovereignty, resulting in anti-liberal ideas.

     Last but not least, due to unemployment, poverty, injustice and inequality in various developing states, people start migrating from their states to the prosperous nations of the West for better life opportunities. For example, Al Jazeera said, “In 2023, 450000 Pakistanis left the country to find suitable job options.” But unfortunately, western nationals, to preserve their own working class, industries and culture, are tightening the immigration laws, which is against the main essence of liberalism. With the help of a report published by the Danish Integration Ministry, “It could be illustrated that the country saved 6.7 billion euros after the strict reforms in immigration laws.” It shows that strict policies to close the border and to stop the working people are not the rules of liberalism or capitalism, but developed states are forced to opt for them to save their primary interests.

      Next, the impact of International Political Economy could be understood further with the help of case studies of various states, such as Pakistan and Zambia. In the case of Pakistan, the country always needs external assistance to run itself. As a result, Pakistan’s total debt reached almost 77.1 trillion rupees in the fiscal year 2023. Just from the IMF, Pakistan received a loan of 3 billion dollars in 2023. It is challenging for a state to maintain its sovereignty in this situation. Since 1950, Pakistan has been severely caught by the hegemonic policies of its lenders. For example, the US gave loans to Pakistan in the 1980s to fight against the United Soviet Socialist Republic of the USSR in Afghanistan and in the 2000s to fight terrorism. Similarly, Saudi Arabia gave loans and expects Pakistan to have anti-Iranian policies. Lastly and most importantly, IMF brought austerity measures to cut spending on poor, working-class or marginalized communities for Pakistan so that the country can stabilize itself. But in reality, Pakistan has been caught in a vicious debt trap, and Western nations leave no chance to exploit the situation further. Thus, debt has become a mechanism to control the internal affairs of developing states, especially for the IMF and WB.

     Similarly, African states can also not survive from the tight grasp of the International Political Economy. Developing states always need capital to run their infrastructures, hospitals, industries, schools or offices. In that case, they are forced to borrow a readily available loan but at high-interest rates with additional policies. States like Zambia, Ethiopia and Chad are suffering from severe debt traps. Zambia was the first and only African state to borrow money from private lenders in 2023. In such situations, the IMF again intervenes in states with its austerity measures to stabilize their economy, further aggravating the situation. Because of how a state can secure itself by cutting its subsidies for its local industries and sectors, it’s spending on poor and needy people and increasing its electricity bills. In reality, developed states wanted these states to be in an unstable situation for their interests, such as cheaper raw materials to run their engines.

      In critical analysis, for several centuries, the West has been controlling the world first through colonialism, then imperialism, and now through neo-colonialism. They have widely designed the structure of the International Political Economy; monetary institutions are controlling and exploiting the developing states. The headquarters of both IMF and WB are located on the same street in Washington DC, and the president of the World Bank always comes from the US, and the managing director of the IMF comes from European states. States with strong economies have more votes in the IMF; for example, the US has 17%, and China has 7% of total IMF voting power. All this shows how well the system is designed by the West and for the West. Not only these institutions but global financial crises, inflation, economic trends, global shocks, and International businesses are also discussed under IPE.

    To cap it all, International Political Economy is a subject of International Relations (IR), which helps people understand the current trends of global markets, the effects of certain events or global shocks, and the behaviours of states regarding their states’ economy, inflation, or financial crises. Further, it analyses the impact of economies and politics on each other, which is why they regulate their foreign and national policies. Indeed, due to these, they also express their behaviour, such as zero-sum, win-win, etc. Thus, understanding the critical aspects of global relations from the IPE prism provides an excellent framework.

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