International Political Economy

Capitalist peace theory (CPT) has gained considerable attention in international relations theory and the conflict literature. Its proponents maintain that a capitalist organization of an economy pacifies states internally and externally. They portray CPT either as a complement or as a substitute to other liberal explanations such as the democratic peace thesis. They, however, disagree about the facet of capitalism that is supposed to reduce the risk of political violence. Key contributions have identified three main drivers of the capitalist peace phenomenon: the fiscal constraints that a laissez-faire regimen puts on potentially aggressive governments, the mollifying norms that a capitalist organization creates; and the increased ability of capitalist governments to signal their intentions effectively in a confrontation with an adversary. Defining capitalism narrowly through the freedom entrepreneurs enjoy domestically, this article evaluates the key causal mechanisms and empirical evidence that have been advanced in support of these competing claims. The article argues that CPT needs to be based on a narrow definition of capitalism and that it should scrutinize motives and constraints of the main actors more deeply. Future contributions to the CPT literature should also pay close attention to classic theories of capitalism, which all considered individual risk taking and the dramatic changes between booms and busts to be key constitutive features of this form of economic governance. Finally, empirical tests of the proposed causal mechanism should rely on data sets in which capitalists appear as actors and not as “structures.” If the literature takes these objections seriously, CPT could establish itself as central theory of peace and war in two respects. First, it could serve as an antidote to the theory of imperialism and other “critical” approaches that see in capitalism a source of conflict rather than of peace. Second, it could become an important complement to commercial liberalism that stresses the external openness rather than the internal freedoms as an economic cause of peace and that particularly sees trade and foreign direct investment as pacifying forces.

The 2008 Global Financial Crisis (GFC) and subsequent European Debt Crisis had wide-sweeping consequences for global economic and political stability. Yet while these twin crises have prompted soul searching within the economics profession, international political economy (IPE) has been relatively ineffective in accounting for variation in crisis exposure across the developed world. The GFC and European Debt Crisis present the opportunity to link IPE and comparative political economy (CPE) together in the study of international economic and financial turmoil. While the GFC was prompted by the inter-connectedness of global financial markets, its instigators were largely domestic in nature and were reflective of negative externalities that stemmed from unsustainable national policies, especially those related to financial regulation and household debt accumulation. Many in IPE take an “outward looking in” approach to the examination of international economic developments and domestic politics; analysis rests on how the former impacts the latter. The GFC and European Debt Crisis, however, demonstrate the importance of a (CPE-based) “inward looking out” approach, analyzing how unique policy and political features (and failures) of individual nation states can unleash economic and financial instability at the global level amidst deepened economic and financial integration. IPE not only needs to grant greater attention to variation in domestic politics and policies in a time of closely integrated financial markets, but also should acknowledge the impact of a wider array of actors beyond banks and financial institutions (specifically more domestically rooted actors like households) on cross-national variation in the consumption of foreign credit.

Emerging powers are usually referred to as states whose increasing material capacities and status-seeking strategies may potentially have an impact on the international system and also affect the dominant position of the hegemonic powers therein. The rising of new powers is a recurrent phenomenon in international relations. When talking about emerging powers, scholars associate the words with the so-called BRICS states: Brazil, Russia, India, China, and South Africa. The emergence of BRICS, and especially of China, poses the question of whether the rising process is a peaceful one. Realism, institutionalism, and constructivism have all dealt with the possible systemic impacts of the BRICS states. BRICS nations seem to be reformist rather than disruptive, meaning that they are pushing for the better representation of their self-perceived new status in multilateral institutions rather than challenging the current system per se. In terms of foreign policy, BRICS states interact with well-established powers such as the United States and European ones—herein they display balancing or bandwagoning strategies, as they do also toward each other. Moreover, well-established powers either accommodate or contest the rising process and status claims of these emerging powers. However, BRICS states are also regional powers. Regional peers contest the rising processes of BRICS and particularly claims to global powerhood.

While BRICS can be seen as striving for the reform of multilateral institutions, the traditional view of BRICS as a homogenous force, comprising countries with similar interests, is sometimes misleading. Even though BRICS states have their own institution with a new bank, they also pursue different interests within traditional institutions. Therefore, the existing literature on BRICS is tilted toward systemic and institutional concerns. Although works taking into consideration the interplay between the domestic and international levels in foreign policy analysis do exist, they are not necessarily related to emerging processes and rarely go beyond foreign economic policy issues. People, leaders, and governmental institutions are decision makers or are part of the decision-making process in foreign policy, and thus they form perceptions and act according to how the rising process of the state is unfolding. An integration of the systemic, state, and personal levels captures the essence of the foreign policies of BRICS states in the context of rising and can take into consideration the ups and downs and stalemates of rising-process trajectories in international politics.

Even the most critical observers of the creation of the euro found some nice words on the occasion of its 10th anniversary. And yet it needed only a marginal event like the announcement of the newly elected Greek government that the previously stated public debt ratio was gravely miscalculated to move the euro into a critical crisis zone. Swiftly the attention of private credit markets turned to more member states of the eurozone, only to eventually detect that financial stability of banks did not meet sustainability indicators.

What is often labeled as “eurozone crisis” is better understood by a political-economic forensic analysis that rather speaks of eurozone crises. First, the causes for financial and then sovereign debt crises of Greece, Spain, Portugal, and Ireland (to name only the most prominent) differ fundamentally. They were triggered by the same events but caused by differing factors. Second, it is a crisis of economic governance, and thus an institutional crisis that needs fundamental institutional changes. Third, it is a crisis of political leadership.

The overlapping character as well as the interplay of those three dimensions hampers a proper understanding of the dynamics of the processes that started in 2010. By differentiating between national crisis causes, triggering mechanisms, policy responses, and multi-level crises management, we suggest a comprehensive analytical framework that may guide current as well as future research in the operating of an incomplete currency union.

On the one hand, the idea of a capitalist peace is a set of loosely integrated, but testable propositions. On the other hand it is part of a wider, libertarian philosophy of life. The spirit of this wider conception is best expressed by a quote from a pioneer of quantitative international politics, in 1981 Rummel wrote, “If you want peace, then minimize the power of government.” Although there has been a proliferation of variables assessing capitalism and economic interdependence—from economic freedom via contract intensity to the avoidance of state ownership or protectionism—the most frequently analyzed proposition about the capitalist peace says that trade makes military conflict and war less likely. By and large, the evidence supports this proposition in dyadic designs as well as in monadic designs. This cross-design validity of the proposition is important, because it distinguishes the peace by trade proposition from the democratic peace proposition. Most researchers agree that war is extremely unlikely in dyads where both nations are democracies. But only a minority contends that democracies are less frequently involved in military conflict than other states. The dyadic and the monadic findings are compatible because military conflict looks even more likely between an autocracy and a democracy than between two autocracies. Whereas the democratic peace is limited in application, the pacifying impact of trade or economic interdependence is more general. Moreover, the democratic peace may be embedded in a wider economic or capitalist peace. There is strong evidence that democracy rests on a foundation of capitalism or economic freedom and the prosperity that has been gained only by capitalism or some degree of economic freedom. Moreover, economic freedom and prosperity contribute to the avoidance of civil war. Better still: Economic freedom does not only promote economic growth and prosperity among those nations where people enjoy economic freedom, but the economic freedom of rich countries provides poor countries with the advantages of backwardness and catch-up opportunities.

Capitalist peace theory evolves. It has been suggested that the pacifying impact of trade rests on the expectation that trade, or access to resources and markets, will continue. This suggestion requires a new look at economic sanctions, too. By interfering with trade, sanctions must undermine the expectation of future benefits of trade and globally interconnected markets. Given the rareness of evidence in favor of the effectiveness of economic sanctions in eliminating undesirable policies of other nations, a capitalist peace perspective implies the recommendation to use sanctions much less frequently than politicians do. They are likely to eliminate a pacifying factor when it is most urgently needed.

The wider or visionary perspective on the capitalist peace is useful not only in connecting it with the issue of sanctions, but also in demonstrating the inherent limitations of capitalism as a tool to achieve peace. From a static perspective, capitalism, economic freedom, or trade may exert some pacifying impact, as argued above. But capitalism is a dynamic economic order. It is about “creative destruction”. Capitalism is not egalitarian. Nations grow at different speeds. They rise and decline. Capitalism and unequal economic growth upset pecking orders and contribute to power transitions that are related to risks of war, especially great power war. Whether the contribution of capitalism to power transitions—or its pacifying impact prevails—cannot be judged with much confidence.

The topic of fiscal politics includes taxation and spending, budget balances and debt levels, and crises and the politics of austerity. The discussion often focuses on how some variable—such as the international environment, or political institutions—constrains “politics” in this realm. Almost omnipresent concerns about endogeneity run through this research. While this is a “big” policy area that deserves study, tracing causation is difficult.

This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Politics. Please check back later for the full article.

First-wave international political economy (IPE) was preoccupied with the complex interdependencies within a world system that (it believed) was rapidly devolving following the collapse, in 1971, 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 assumed observational independence. As a result, complex interdependencies in the global system were increasingly ignored. Over time, the analytics focused progressively micro-level processes—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, reductionist, and other epithets.

A fourth wave of empirical IPE must retain its commitment to strong empirics while re-integrating systemic processes. 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 IPE as an interdependent, multi-level system.

Immigration has largely been neglected as part of the study of International Political Economy (IPE) until recently. Currently, IPE scholars have focused on two questions regarding immigration: what explains variation in public opinion on immigration and what explains variation in immigration policy.

The scholarship on public opinion on immigration has largely been divided into two camps, those who argue that economic factors drive opinion and those who argue that cultural factors are the driver. Those who study the role economic factors have played in shaping opinion on immigration often start with the Stolper-Samuelson theorem. The Stolper-Samuelson theorem shows that while immigration increases the overall size of the economy, it has different distributional effects. Immigration increases the size of the labor pool and, thus, should increase the returns to capital while decreasing wages. As such, those who derive most of their income from capital should favor immigration while those who derive most of their income from wages should oppose immigration. Additionally, the Stolper-Samuelson model shows that openness to trade should have the same effects as open immigration; thus, people should oppose or favor both trade and immigration. Early scholarship examined these predictions and found that opposition to immigration was much higher than opposition to trade and that those who derive much of their income from capital also oppose immigration at high rates. In response, one set of scholars focused on the additional costs that immigration, but not trade, brings. Immigrants, unlike goods, may place a burden on the social welfare system and thus, opposition to immigration especially by the wealthy may be driven by these costs. Other scholars noted that immigrants work in many industries that are unaffected by trade—most notably the service sector—and this may explain opposition to immigration. Finally, a third group has argued that opposition to immigration is largely driven by cultural concerns and xenophobia. Currently, this debate continues with both sides examining more nuanced survey data.

Scholarship on immigration policy has similar divides. Immigration policy has become more restrictive since the late 19th and early 20th centuries, when most countries had very few restrictions on immigration. To explain these restrictions, one school of scholars has argued that labor unions oppose immigration, as it hurts the wages of their members. As unions gain strength, immigration should become more restricted. Others focus on the rise of the welfare state, arguing that immigration has been restricted to keep costs low. A third group has argued that greater political rights in the early and mid-20th century for the generally xenophobic working class has led to the restrictions. Finally, new scholarship argues that increased globalization—in the form of increased trade and increased foreign direct investment—has sapped business support for immigration, which has allowed anti-immigrant groups to have more say. Using a wealth of newly collected data, scholars are testing these different theories.

In a comparison of today’s global political economy with that of the last great era of globalization, the late nineteenth century, the most prominent distinction is be the high degree of institutionalization in today’s system. While the nineteenth-century system did have some important international institutions—in particular the gold standard and an emerging network of trade agreements—it had nothing like the scope and depth of today’s powerful international economic institutions. We cannot understand the functioning of today’s global political economy without understanding the sources and consequences of these institutions. Why were international organizations (IOs) such as the World Trade Organization (WTO) or International Monetary Fund (IMF) created? How have they gained so much influence? What difference do they make for the functioning of the global economy and the well-being of individuals around the world?

In large part, understanding IOs requires a focus on the tension between the use of power, and rules that are intended to constrain the use of power. IOs are rules-based creatures. They create and embody rules for gaining membership, for how members should behave, for monitoring, for punishment if members renege on their commitments, etc. However, these rules-based bodies exist in the anarchical international system, in which there is no authority above states, and states continue to exercise power when it is in their self-interest to do so. While states create and join IOs in order to make behavior more rule-bound and predictable, the rules themselves reflect the global distribution of power at the time of their creation; and they only constrain to the extent that states find that the benefits of constraint exceed the costs of the loss of autonomy.

The tension between rules and power shapes the ways in which international institutions function, and therefore the impact that they have on the global economy. For all their faults, international economic institutions have proven themselves to be an indispensable part of the modern global political economy, and their study represents an especially vibrant research agenda.

How does liberalization of trade and investment (i.e., economic globalization) as well as membership in international organizations (i.e., political globalization) affect the natural environment? Does economic and/or political globalization lead to ecological improvement or deterioration? This article reviews the existing literature on international political economy (IPE) and the environment in view of these and related questions.

While globalization has various dimensions—economic, social, and political—IPE focuses mainly on the economic dimension when analyzing the effect of globalization on the environment. In particular, IPE puts most emphasis on the environmental implications of trade in goods and services as well as foreign direct investment (FDI). Even though both trade and investment are thought to have a substantial impact on the natural environment, the existing literature demonstrates that the effects of economic globalization on the environment are neither theoretically nor empirically one-dimensional. This means that existing research does not allow for a clear-cut overall assessment in terms of whether globalization leads to an improvement or deterioration of the environment. This is the case because the impact of economic globalization on the environment materializes via different mechanisms, some of which are supposedly good for the environment, and some of which are bad.

On the one hand, economic globalization may improve environmental quality via its positive effect on economic growth, since trade and FDI facilitate specialization among countries according to their comparative advantage and the transfer of resources across countries. On the other hand, relevant economic theory gives little reason to believe that free trade and FDI will influence all countries in the same way. Instead, when considering the relationship between economic globalization and the environment, it is important to consider the interactions between scale, composition, and technique effects created by different national characteristics and trade and investment opportunities. In particular, the scale effect of openness to trade and capital mobility increases environmental degradation through more intensive production. The technique effect predicts a positive effect of trade and FDI on the environment through the use of cleaner techniques of production. And the change in the sectoral composition of a country as a consequence of trade and FDI, the composition effect, could positively or negatively affect the environment of a country (e.g., a change from agriculture to industry may lead to higher energy consumption and air pollution while a change from industry or agriculture to service is expected to decrease environmental degradation). Consequently, the overall effect of trade and FDI on environmental quality can be positive, negative, or nonexistent strongly depending on the specific situation of the country under investigation.

Furthermore, both theory and empirical research highlight the potential for government policy and environmental regulations to affect the relationship between trade/FDI and the environment. On the one hand, increased competition between economic actors (usually companies) due to increased market openness (globalization) might cause a race to the bottom or at least regulatory chill in formal and informal environmental standards as well as pollution havens attracting foreign direct investment. The reason is that countries might weaken (or at least not increase) their environmental policies in order to protect industries from international competition or attract foreign firms and FDI motivated by the expectation of lower costs of environmental protection. Hence the (theoretical) expectation here is that developed countries will refrain from adopting more stringent environmental regulations and might even reduce existing standards due to competition with countries that have laxer environmental regulation. And less-developed countries will adopt lax environmental standards to attract FDI flowing into pollution-intensive sectors and export the respective goods to jurisdictions with higher environmental standards.

In contrast, the Porter hypothesis states that a tightening of environmental regulations may stimulate technological innovation and thus help improve economic competitiveness. In addition, trade openness may induce an international ratcheting up of environmental standards (trading up) as higher environmental standards of richer and greener countries spread—via trade and investment relationships—to countries starting out with lower environmental standards. Furthermore, multinational corporations engaging in FDI and applying universal environmental standards throughout their operations tend to transfer greener technology and management practices to host countries, thus promoting the upgrade of local environmental standards and improving the environmental quality in those countries (the so-called pollution halo effect).

Echoing the many theoretical pathways through which globalization can affect the natural environment, empirical studies estimating the impact of trade and FDI on environmental standards and environmental quality deliver quite heterogeneous results. In particular, the literature points to various factors mediating the effect of trade and FDI on the environment, such as differences in technology between industrial and developing countries, stringency of environmental regulations, property rights and political institutions, corruption levels as well as the pollution intensity of multinationals.

More recently, IPE scholars have started to study the political dimensions of globalization and how they are related to environmental protection efforts. Memberships in international organizations are at the center of this research and recent studies analyze, for example, how they may affect the quality of the environment. Other studies focus more on specific organizations, such as the World Trade Organization, and, for instance, evaluate whether in trade disputes over environmental standards economic or environmental concerns prevail. Finally, a new strand of the IPE and environment literature deals with the micro level and studies how citizens evaluate economic openness in light of potential environmental concerns.