International Political Economy, Trade, and Development

International Political Economy of Trade International political economy: how politics influences economic interactions and vice versa International trade is the movement of goods, and increasingly services also, across borders. Although trade has many domestic policy implications, it is also a foreign policy issue.

Trends in the International Political Economy Growing transactions in trade, investment Expectation that governments are responsible for economic policies Increasing visibility of economic problems Policy outcomes more controversial Facilitated by new technologies

Contending Theoretical Approaches to the International Political Economy Statism or Mercantilism Economic Liberalism Marxist and Dependency interpretations

Mercantilism/Statism states dedicated to pursuit of economic wealth; encourage exports over imports and industrialization over agriculture; protect domestic production emphasizes the role of a strong state and the subordination of all economic activities to state interest national self-sufficiency, limited trade, restricted foreign investment

Mercantilism/Statism emphasizes the role of the state and the subordination of all economic activities to state interest national self-sufficiency, restricted foreign investment Maximize exports, limit imports Role of colonies in traditional mercantilism (modern a bit different)

Economic Liberalism Adam Smith Humans act rationally to maximize self- interest When individuals act rationally, markets develop to produce, distribute, and consume goods Markets enable individuals to carry out necessary transactions to improve their own welfare

Economic Liberalism …maintains that the free interplay of market forces leads to a more efficient allocation of resources, to the benefit of the majority. free markets, separation of economics from politics, non-interference of governments – “laissez-faire” economics through “the invisible hand” of the market, economic growth and well-being can be achieved

Economic Liberalism By maximizing economic welfare and stimulating individual economic growth, markets epitomize economic efficiency Later versions posit both economic and political advantages: economic wealth comes with formation of an international market

Dependency Theory Marxism projected on global scale International capitalist system creates inequalities across and within states World divided into North and South (core and periphery) State supports capitalist class, pushes to expand markets at expense of others Less developed states trapped in dependent relationships that keep them poor

Barriers to Trade Tariffs, or import duties Quotas VERs Subsidies Non-tariff barriers to trade

World Trade Organization (WTO) Initially GATT (General Agreement on Tariffs and Trade) Its main goal: trade liberalization …has managed eight rounds of multilateral trade negotiations …has 153 members WTO was established in 1995 Initially, a forum only for developed countries. Now, developing countries interests also represented.

WTO Two main areas of focus: -Multilateral trade negotiations -Dispute settlement Each round has more areas of negotiations and achieves a certain reduction of tariffs.

WTO In the current round of negotiations (Doha): Some of the areas of negotiation in the current round of talks – agriculture, anti-dumping, subsidies, technical barriers to trade, trade in services, intellectual property rights, electronic commerce, environment; etc.

WTO Dispute Settlement There is a Dispute Settlement Body within the WTO If one state is found guilty of violating WTO agreements– the WTO directs the losing member to bring its laws and policies into conformity with the WTO agreements and can authorize punitive trade measures by the agreeved state against the offending state.

Globalization Defining globalization What are the effects of globalization? Distance and time Interdependence Economic Effects Social and cultural effects

Trade Policy How does globalization affect calculations in trade policy? What are the benefits and drawbacks to liberal and protectionist trade policies?

Inequalities Among States Economic North (first and some second world countries) Economically Developed Countries Countries in transition Economic South (third, fourth, and some second world countries) LDCs (Less Developed Countries) LLDCs (Least Developed Countries

Effects of Interdependence Benefits Vulnerabilities

Modernization Theory Causes of underdevelopment Path to development

Liberal Economic Theory and Causes of Development Shortage of capital Lack of infrastructure Faulty economic policies Political instability Corruption

Liberal Economic Theory and Solutions Foreign aid Technical assistance Foreign investment Trade Political stablility and better economic policies

Structuralist Theories Dependency Theory Assumptions Explanations for economic inequalities

Dependency Theory, Causes of Underdevelopment Trade Capital Multinational Corporations

Dependency Theory, Solutions to Underdevelopment Import-Substitution Industrialization (ISI) Increased South-South Trade Restructuring of international trade agreements

International Development Aid Loans Grants Organizations involved in development UN World Bank IMF

Foreign Aid Motivations Humanitarian Economic Political

Potential Effects of Foreign Aid Economic growth Debt problems Potential for dependence Potential to disrupt local economies

Foreign Direct Investment (FDI) Motivation (for MNCs) Labor Capital Market Access Benefits (for host country) Technology Expertise Global Markets

Foreign Direct Investment Potential Costs for Host Country FDI compared to other international investment