Naeem Inayatullah and David L. Blaney
Heterodox work in Global Political Economy (GPE) finds its motive force in challenging the ontological atomism of International Political Economy (IPE) orthodoxy. Various strains of heterodoxy that have grown out of dependency theory and World-Systems Theory (WST), for example, emphasize the social whole: Individual parts are given form and meaning within social relations of domination produced by a history of violence and colonial conquest. An atomistic approach, they stress, seems designed to ignore this history of violence and relations of domination by making bargaining among independent units the key to explaining the current state of international institutions. For IPE, it is precisely this atomistic approach, largely inspired by the ostensible success of neoclassical economics, which justifies its claims to scientific rigor. International relations can be modeled as a market-like space, in which individual actors, with given preferences and endowments, bargain over the character of international institutional arrangements. Heterodox scholars’ treatment of social processes as indivisible wholes places them beyond the pale of acceptable scientific practice. Heterodoxy appears, then, as the constitutive outside of IPE orthodoxy.
Heterodox GPE perhaps reached its zenith in the 1980s. Just as heterodox work was being cast out from the temple of International Relations (IR), heterodox scholars, building on earlier work, produced magisterial studies that continue to merit our attention. We focus on three texts: K. N. Chaudhuri’s Asia Before Europe (1990), Eric Wolf’s Europe and the People Without History (1982), and L. S. Stavrianos’s Global Rift (1981). We select these texts for their temporal and geographical sweep and their intellectual acuity. While Chaudhuri limits his scope to the Indian Ocean over a millennium, Wolf and Stavrianos attempt an anthropology and a history, respectively, of European expansion, colonialism, and the rise of capitalism in the modern era. Though the authors combine different elements of material, political, and social life, all three illustrate the power of seeing the “social process” as an “indivisible whole,” as Schumpeter discusses in the epigram below. “Economic facts,” the region, or time period they extract for detailed scrutiny are never disconnected from the “great stream” or process of social relations. More specifically, Chaudhuri’s work shows notably that we cannot take for granted the distinct units that comprise a social whole, as does the IPE orthodoxy. Rather, such units must be carefully assembled by the scholar from historical evidence, just as the institutions, practices, and material infrastructure that comprise the unit were and are constructed by people over the longue durée. Wolf starts with a world of interaction, but shows that European expansion and the rise and spread of capitalism intensified cultural encounters, encompassing them all within a global division of labor that conditioned the developmental prospects of each in relation to the others. Stavrianos carries out a systematic and relational history of the First and Third Worlds, in which both appear as structural positions conditioned by a capitalist political economy. By way of conclusion, we suggest that these three works collectively inspire an effort to overcome the reification and dualism of agents and structures that inform IR theory and arrive instead at “flow.”
Regional integration theory seeks to explain the establishment and development of regional international organizations. Key questions are why and under which conditions states decide to transfer political authority to regional organizations; how regional organizations expand their tasks, competencies, and members; and what impact they have on states and societies in their regions. Whereas regional integration theory started with a broad comparative regional and organizational scope in the 1950s and 1960s, it has since focused on European integration and the European Union.
The main (families of) theories explaining the development of European integration—rather than decision making and policy making in the EU—are intergovernmentalism, neofunctionalism, and postfunctionalism. The key debates in regional integration theory have taken place between variants of intergovernmentalist and neofunctionalist integration theory. Intergovernmentalism assumes national governments to be the key actors in regional integration. Governments use regional integration to maximize their national security and economic interests in the context of regional interdependence. Integration outcomes result from intergovernmental bargaining and reflect the regional preference and power constellations. Governments delegate authority to regional organizations to secure their bargaining outcomes but remain in control of regional organizations and the integration process. By contrast, neofunctionalism disputes that governments are able to control the integration process. Transnational corporations and interest groups as well as supranational actors are empowered by the integration process and shape it in their own interest. In addition, integration creates a variety of “spillovers” and path-dependencies that push integration beyond the intergovernmental bargain. More recently, postfunctionalism has enriched and challenged the theoretical debate on regional integration. In contrast to neofunctionalism, postfunctionalism assumes a backlash mechanism of integration. As regional integration progresses and undermines national sovereignty and community, it creates economic and cultural losers who are mobilized by integration-skeptic parties. Identity-based and populist mass politicization constrains regional integration and may even cause disintegration.
Regional integration theories have closely followed and adapted themselves to the development of European integration. They cover the establishment and progress of supranational policies and institutions but also the recent crisis of the EU. An exemplary review of their explanations of major development in European integration shows that they are more complementary than competing.
Mary Anne Madeira
International trade and state efforts to liberalize or restrict trade generate very contentious politics. Trade creates winners and losers at the individual level, firm level, industry level, national level, and even regional level. It also generates conflict among transnational social groups, such as environmental advocacy organizations, human rights organizations, and transnational business alliances. Because of this complexity of the politics of international trade, scholars of international political economy (IPE) can focus on different levels of analysis and a variety of stages of the political decision-making process. Scholars agree that not only societal preferences but collective action problems, domestic institutions, and international factors all affect trade politics and policy outcomes. These aspects of trade politics together form the key influences on trade policy and whether it is liberal or protectionist in nature.
Societal preferences constitute the initial inputs into the trade policy-making process. Understanding how different groups of economic actors within society win or lose from trade liberalization or protection is the first step toward understanding trade politics and trade policy outcomes. Once societal trade preferences are formed, they must be aggregated into cohesive pressure groups or grass-roots movements whose purpose is to influence trade policy. This is easier for some groups of actors to achieve than others. In lobbying government actors on policy, interest groups find that domestic institutions play an important role translating societal inputs into policy outputs. Policy-making institutions vary in the degree to which they are susceptible to special-interest lobbying versus the preferences of broader societal coalitions, and electoral rules and party structures also affect policy outcomes, with certain configurations creating a bias toward more protectionism or liberalization.
In addition to these domestic-level influences on trade policy, IPE scholars have extensively studied the ways that international factors also affect trade policy outcomes such as the extent of liberalization and the content of what is liberalized (e.g., manufactures versus agricultural goods versus services). International factors such as the distribution of power, the character of international institutions and trade agreements (e.g., multilateral versus bilateral), transnational civil society and diffusion processes may be thought of as inputs into the policy-making process as well. Systemic conditions may constrain the types of policies that governments can adopt, or they may open the door to a range of possible policy outcomes that are nevertheless limited by the preferences of domestic societal actors.
Studies of Western development assistance conclude that aid is effective only when recipients have good governance, measured as pro-investment policies, democratic institutions, and political stability, or when recipients lack strategic importance to donors. Underlying the theoretical frameworks in these studies is a common mechanism: compliance with conditions on aid agreements, which, in turn, depends on recipient incentives to comply. With the exception of donors’ emphasis on the quality of governance in the early 2000s, donors generally overlook recipient incentives to comply with aid agreements and thus fail to capitalize on opportunities for aid effectiveness suggested by the academic studies. A paucity of data has limited direct analysis of compliance with conditions, but studies have relied on their own data collection or have leveraged data from the World Bank to assess determinants of compliance with conditions. Importantly, these studies of compliance support the findings from the aid-effectiveness literature, indicating that the initial incentives to comply with aid agreements are the driving force in agreement compliance and therefore aid effectiveness.
Based on these findings, future research on compliance with conditions on aid is encouraged, beginning with study of the direct influence of compliance on economic development. In addition, future research should analyze whether certain types of aid influence compliance with Western aid agreements, including tied aid and aid from non-Western donors. The implication for policy is that donors should enthusiastically support recipients who face incentives to comply because compliance drives aid effectiveness. When recipients lack such incentives, donors should try to change the underlying incentive structure of recipients rather than adding conditions on aid.
The first CBs were private institutions that were given a monopoly over the issuance of currency by government in return for help in financing the budget and adherence to the rules of the gold standard. Under this standard the price of gold in terms of currency was fixed and the CB could issue or retire domestic currency only in line with gold inflows or outflows. Due to the scarcity of gold this system assured price stability as long as it functioned. Wars and depressions led to the replacement of the gold standard by the more flexible gold exchange standard. Along with restrictions on international capital flows this standard became a major pillar of the post–WWII Bretton Woods system. Under this system the U.S. dollar (USD) was pegged to gold, and other countries’ exchange rates were pegged to the USD. In many developing economies CBs functioned as governmental development banks.
Following the world inflation of the 1970s and the collapse of the Bretton Woods system in 1971, eradication of inflation gradually became the explicit number one priority of CBs. The hyperinflationary experiences of the first half of the 20th century, which were mainly caused by over-utilization of the printing press to finance budgetary expenditures, convinced policymakers in developed economies, following Germany’s lead, that the conduct of monetary policy should be delegated to instrument independent CBs, that governments should be prohibited from borrowing from them, and that the main goal of the CB should be price stability. During the late 1980s and the 1990s numerous CBs obtained instrument independence and started to operate on inflation targeting systems. Under this system the CB is expected to use interest rate policy to deliver a low inflation rate in the long run and to stabilize fluctuations in economic activity in the short and medium terms. In parallel the fixed exchange rates of the Bretton Woods system were replaced by flexible rates or dirty floats. The conjunction of more flexible rates and IT effectively moved the control over exchange rates from governments to CBs.
The global financial crisis reminded policymakers that, of all public institutions, the CB has a comparative advantage in swiftly preventing the crisis from becoming a generalized panic that would seriously cripple the financial system. The crisis precipitated the financial stability motive into the forefront of CBs’ policy concerns and revived the explicit recognition of the lender of last resort function of the CB in the face of shocks to the financial system. Although the financial stability objective appeared in CBs’ charters, along with the price stability objective, also prior to the crisis, the crisis highlighted the critical importance of the supervisory and regulatory functions of CBs and other regulators. An important lesson from the crisis was that micro-prudential supervision and regulation should be supplemented with macro-prudential regulation and that the CB is the choice institution to perform this function. The crisis led CBs of major developed economies to reduce their policy rates to zero (and even to negative values in some cases) and to engage in large-scale asset purchases that bloat their balance sheets to this day. It also induced CBs of small open economies to supplement their interest rate policies with occasional foreign exchange interventions.
To what extent is the “Euro-crisis” a problem for the EU’s international standing and role? A conceptual framework has been developed based on the five distinct analytical categories: (a) financial resources, (b) changes in the internal political structure and balance of the European Union, (c) shift of priorities, (d) output and effectiveness of EU foreign policy, and (d) soft power and normative dimension. These categories reveal that in Europe, the crisis led to an erosion of the financial and budgetary basis of foreign policy—even if it is more pronounced on the national than the European level. It also accelerated a trend toward the economization of political priorities resulting—among other things—in deepening conflicts among EU member states. These developments have, in turn, eroded both the effectiveness and the soft power of EU foreign policy. The crisis is therefore not only a strain on the European integration process but also a central challenge for the European Union as an international actor.
First-generation research in International Political Economy focused considerable attention on the relationship between hegemony and global economic stability. This focus was the result of a confluence of scholarly and policy concerns about the impact that the apparent decline of U.S. hegemony would have on international trade and investment regimes. Interest in this hegemonic stability hypothesis waned, however, as deeper explorations of the theoretical logic indicated that hegemony was not a necessary condition for international economic openness, and as the collapse of the Soviet Union and the consequent “unipolar moment” suggested that American hegemony was hardly in decline.
Interest in hegemony resurfaced in the wake of the 2008 financial crisis. The crisis triggered many scholars to proclaim the end of the era of American global hegemony. Scholars argued that the U.S. government’s attachment to a large budget and trade deficits and the resulting growth of foreign debt were likely to weaken foreign confidence in the dollar and encourage the shift to an alternative reserve currency such as the Euro. At the same time, China’s rapid industrialization and emergence as a large creditor nation was creating a new pole in the international economy that constituted a meaningful alternative to a global economy organized around the United States’ economy. Thus, a shift toward a Beijing hegemony was all but inevitable.
The predicted decline of American hegemony has yet to materialize. The U.S. economy remains the world’s largest, and the U.S. government continues to play the leading role in system making—creating new rules to govern international economic cooperation—and in privilege taking—manipulating these rules in ways that advantage U.S. public and private sector actors. Moreover, the U.S. government plays this role in all three economic subsystems: finance, knowledge, and production. Empirical scholarship conducted over the last decade encourages one to conclude by paraphrasing Mark Twain: Recent reports of the death of American hegemony are premature.
How Did American International Political Economy Become Reductionist? A Historiography of a Discipline
W. Kindred Winecoff
First-wave international political economy (IPE) was preoccupied with the “complex interdependencies” within a world system that (it believed) was rapidly devolving following the 1971 collapse of the Bretton Woods system of fixed exchange rates. The original IPE scholars were more dedicated to theorizing about the emergence and evolution of global systems than any strict methodology. As IPE developed, it began to emphasize the possibility that institutions could promote cooperation in an anarchic environment, so IPE scholarship increasingly studied the conditions under which these institutions might emerge.
Second-wave IPE scholars began to focus on the domestic “level of analysis” for explanatory power, and in particular analyzed the role of domestic political institutions in promoting global economic cooperation (or conflict). They also employed a “second-image reversed” paradigm in which the international system was treated as an explanatory variable that influenced the domestic policymaking process.
In opening up the “black box” of domestic politics, in particular as it pertained to foreign economic policy, the “American school” of IPE thoroughly explored the terrain with regression-based statistical models that assume observational independence. As a result, complex interdependencies in the global system were increasingly ignored. Over time the analytical focus progressively shifted to micro-level units—firms and individuals, whenever possible—using neoclassical economic theory as its logical underpinning (with complications for political factors). This third wave of IPE, “open economy politics,” has been criticized in the post-crisis period for its narrow focus, rigid methodology, and lack of systemic theory. Leading scholars have called modern IPE “boring,” “deplorable,” “myopic,” and “reductionist,” among other epithets.
A “fourth-wave” of IPE must retain its strong commitment to empiricism while re-integrating systemic processes into its analysis. A new class of complex statistical models is capable of incorporating interdependencies as well as domestic- and individual-level processes into a common framework. This will allow scholars to model the global political economy as an interdependent system consisting of multiple strata.
The recent global economic crisis has renewed interest in the nature and history of monetary policy, the distributional effects of central bank policy, central bank governance, and the personalities at the helm of major central banks. In modern times, a country’s central bank formulates, or, to a minimum, implements, a country’s monetary policy, or the process of adjustment of a country’s money supply to achieve some combination of stable prices and sustainable economic growth. Monetary policy depends heavily on a country’s exchange rate system. Under fixed exchange rates, the country’s commitment to keep the level of the currency at a certain level dictates monetary policy to a great degree. As the gold standard was unraveling after World War I, many countries experienced high inflation or even hyperinflation. A similar situation faced monetary policy after the collapse of the Bretton Woods system of fixed exchange rates in the 1970s. By the 1980s, however, countries turned toward central bank independence as an institutional arrangement to control inflation. The current issues surrounding monetary policy have emerged from the historical increase in central bank independence and the 2007 economic and financial crisis. In particular, the opacity of central bank decisions, given their autonomy to pursue stable prices without political interference, has increased the demand for transparency and communication with the government, the public, and financial markets. Also, the 2007 crisis pushed central banks toward unconventional measures and macro-prudential regulation, and brought back into focus the monetary policy of the euro area.
Hyo Joon Chang and Scott L. Kastner
Recent studies on commercial liberalism have paid more attention to microfoundations linking economic interdependence to peace. Using a bargaining model of war, these studies have specified and tested different causal mechanisms through which economic ties function as a constraint, a source of information, or a transformative agent. Recent scholarly efforts in theoretical development and some empirical testing of different causal processes suggest the need to consider scope conditions to see when an opportunity cost or a signaling mechanism is likely to be salient. Future research can be best benefited by focusing on how economic interdependence affects commitment problems and empirically assessing the relative explanatory power of different causal arguments.