International Political Economy (IPE) is a social science that attempts to understand international and global problems using interdisciplinary tools and theoretical perspectives. Although it originally developed as a sub-field of International Relations, it has in recent years taken on a life if its own. At the University of Puget Sound, 30 to 40 students graduate with a bachelor of arts degree in IPE each year.
The growing prominence of IPE is one result of the continuing breakdown of boundaries between economics, politics, and other social science disciplines. Increasingly, the most pressing problems that scholars and policy-makers confront are those that can best be understood from a multidisciplinary, interdisciplinary, or transdisciplinary point of view. IPE pulls down the fences that restrict intellectual inquiry in the social sciences so that important questions and problems can be examined without reference to disciplinary borders.
IPE is the study of a problématique, or set of related problems. The traditional IPE problématique includes the political economy of international trade, international finance, North-South relations, transnational enterprises, and hegemony. This problématique has been broadened in recent years to issues raised by globalization and climate change.
The interaction of International Politics and International Economics is today widely appreciated and the subject of much theoretical research and applied policy analysis. Nation-states clearly affect international trade and monetary flows, which in turn affect the environment in which nation-states make political choices and businesses make economic decisions.
Yet scholars and policy-makers often think about International Economics without much attention to International Politics and vice versa. Economists often assume away state interests while political scientists sometimes fail to look beyond the nation-state. Two noteworthy Cold War era exceptions to this rule stand out: economist Charles Kindleberger's work on hegemony and political scientist Kenneth Waltz's attempt to integrate economics into politics in his path-breaking book Man, the State, and War.
Dramatic events in the 1970s made plain how tightly international economics and politics were intertwined. The oil embargoes of the 1970s and the breakdown of the Bretton Woods monetary system were key events in IPE's development as a field of study. Moreover, subsequent events such as the Third World debt crisis, the fall of communist regimes, the rise of the Newly Industrialized Countries (NICS), the expansion of the European Union, and the financial crises in Mexico, Russia, and East Asia made showed that simple divisions between state and market, domestic and international, and politics and economics were no longer tenable. An increasingly complex world required a complex approach to analysis, which IPE provided.
IPE in the 1970s and 1980s was centered in the International Relations community and took the form of the analysis of what was called in book titles and course catalogues "The Politics of International Economic Relations" or "The Political Economy of International Relations." In this period, five sets of questions dominated the agenda: international trade, international finance, North-South relations, MNCs, and the problem of hegemony. A sixth concern — globalization — was added to the list in the 1990s. Since the 2000s, IPE has devoted significant attention to global threats and crises, including climate change and worldwide financial instability.
Politics and Economics approach international trade from different points of view using completely different analytical frameworks. The problem is that states think in terms of geography and population, which are the relatively stable factors that define its domain, while markets are defined by exchange and the extent of the forward and backward linkages that derive therefrom. The borders of markets are dynamic, transparent, and porous; they rarely coincide exactly with the more rigid borders of states. A few markets today are even global in their reach. When trade within a market involves buyers and sellers in different nation-states, it becomes international trade and the object of political scrutiny.
International trade has always been at the center of IPE analysis and is likely to remain so in the future. It is a mirror that reflects each era's most important state-market tensions. In the Cold War, for example, international trade was simultaneously a structure of US hegemony and a tool of East-West strategy. In the 1980s and 1990s, trade through regional economic integration was a tool to consolidate regional interests. With the advent of globalization and the creative economy powered by information technologies, trade in intellectual property rights became me a controversial IPE issue.
International Finance presents the second set of problems that have traditionally defined International Political Economy. The IPE of International Finance includes analysis of exchange rate policies, foreign exchange systems, international capital movements, and international financial institutions such as the World Bank and the International Monetary Fund. Seemingly technical aspects of international finance often hide profound political implications, a fact that has attracted scholars such as Susan Strange and Benjamin J. Cohen to this field. Political scholars may hesitate to engage in this analysis because of the necessity to master difficult theories and arcane terminology, but there is no riper area for IPE analysis. Some issues of current importance in IPE studies of finance include: political struggles over how to respond to the post-2007 global financial crisis; how the complexity of financial markets affects economic stability; and debates over how states should regulate financial markets.
The theory of hegemonic stability was arguably IPE's most important contribution to Cold War international relations theory. A hegemon is a powerful state that supplies public goods to the international system. These public goods include stable money, security (such as freedom of the seas), and a system of free trade that can be shared by all. Providing these public goods is costly, but the hegemon gains even if it disproportionately bears the expense alone. If the world system prospers, the hegemon necessarily prospers as well. In fact, this provision of public goods may be a strategy to secure or extend the hegemon's dominant position.
The theory of hegemonic stability holds that the world system is most prosperous when a hegemon exists to organize the international political and economic system and coordinate the provision of international public goods. Periods of Dutch (1620-72), British (1815-73), and U.S. (post-1945) hegemony are commonly cited as evidence of this link between hegemony and prosperity. When hegemony breaks down, however, the international system falls into disorder and conflict, with the resulting decline in peace and prosperity. One can think of the theory of hegemonic stability as a theory of U.S. Cold War economic statecraft, with the Bretton Woods system and the Marshall Plan its clearest manifestations.
Some scholars argue that hegemony is a self-defeating and therefore temporary condition. While the hegemonic state bears the burdens of organizing the international system and supplying public goods, free-rider states prosper and increase the burdens on the hegemon. At some point the hegemon finds itself over-committed and unable to bear the costs of the system it has created. Either it begins to put domestic interests over its international obligations or it becomes too weak to honors its widespread commitments. Britain's decline in the late 19th century and early 20th century is an example of this dynamic. The Iron Curtain's fall in 1989 can also be seen as the implosion of Soviet hegemony over Central and Eastern Europe.
Hegemony is a state-centered concept that includes security as a critical element, but that draws upon the analysis of international trade and international finance to provide a richer and more complex explanation of the rise and fall of great powers. One important question in IPE today is whether China will challenge U.S. hegemony and threaten the liberal international order. Another is whether Germany will move to establish itself as a hegemon within the European Union.
The Cold War analysis of less-developed countries (LDCs) was focused on the East-West bipolar alliances and the place of LDCs in geopolitical strategy. LDCs were strategic pawns in the Big Power Cold War game. As international trade and international finance were increasingly used to expand and strengthen the Cold War alliances (especially but not exclusively on the western side), IPE scholars pursued the impact of economic relations generally on LDCs. Or, in the terms associated with Immanuel Wallerstein, they probed the relationship between Core and Periphery.
The IPE problématique therefore expanded to encompass a critique of economic development, an analysis of neo-colonialism and imperialism, and a general study of Core-Periphery relations. Security and geopolitical issues were not excluded from this North-South analysis; they merely lost the privileged position that they enjoyed in traditional International Relations research. In recent years, IPE scholars have focused on sustainable development, the reasons why failed states have formed, and how the rise of the BRICs (Brazil, Russia, India, and China) is reshaping North-South relations.
Multinational corporations (MNCs)—also called transnational corporations—have always been objects of interest to IPE scholars and practitioners. During the Cold War, MNCs were often viewed as being linked with their home government by an "invisible handshake." The home country government created opportunities for these businesses and opened markets abroad (in "host countries") for them. The businesses, in turn, advanced the economic and political interests of their home country.
With the end of the Cold War, analysis of MNC behavior quickly spread to issues well beyond their role in Cold War geopolitics. The rise of Asia’s newly-industrializing countries and the increasing globalization of production and finance spurred research on the role of MNCs in the allocation of capital and the control of technology. It became apparent that some MNCs undertook business strategies that were not obviously in the interest of their home country. The distinction between home country and host country also grew less clear. All countries are now host countries in the sense that all countries compete for capital, technology, and jobs in the global market.
IPE scholars have increasingly directed their research towards developing an IPE of Global Value Chains (GVCs). GVCs are complex networks that link independent businesses into a coordinated production and distribution process. New information technology allows firms to coordinate their activities to an extent that was previously possible only within a large enterprise, thereby facilitating the expansion of GVCs. Companies like Nike, Apple, and Wal-Mart coordinate vast GVCs; they focus on design, marketing, logistics, and retailing. Much of the actual manufacturing of products has been outsourced to independent firms in countries such as China, Vietnam, and Malaysia. The IPE of global value chains challenges our understanding of both markets and states and represents an advancing frontier of IPE research.
The globalization problématique is quite different from the traditional state-centered concerns of International Relations, which is one reason some IPE scholars consider IPE a distinct academic discipline, not just a sub-field of International Relations. As a process driven by the global expansion of production and finance, globalization forces us to look at the interrelationships between politics, business, culture, technology, the environment, and migration, to name only the most obvious areas.
At the heart of the globalization problématique is the question of the state. Many scholars argue that the nation-state is increasingly incapable of dealing with global issues and has lost significant power relative to other actors in the global economy. For example, MNCs can easily move capital from one country to another, and this mobility has allowed them to reduce the taxes they pay.
Globalization has forced IPE scholars to search for new theories to explain complex global interactions. One of the most recent theories is constructivism, which focuses on the power of ideas to shape how states and institutions perceive and respond to global problems. An outgrowth of this perspective is literature on how globally-coordinated groups of non-state, non-business actors—called transnational advocacy networks—have been able to convince governments to care more about problems such as human rights and environmental destruction.
It is clear that globalization has generated an array of social and environmental problems that demand the attention of IPE scholars. Growing economic inequality has had profound effects on the quality of democracy and social stability. The rise of China and the creation of the euro currency have reshaped geopolitics. Most importantly, globalization has helped produce serious threats and crises that states and international institutions seem incapable of controlling, such as global warming, financial turmoil, and refugee flows. The challenge for IPE is to develop theories and concepts that help us make sense of what is now truly a “global political economy.”
*”What is International Political Economy?” is based upon an article written by Michael Veseth in 2004 for a UNESCO international encyclopedia project. © Michael Veseth, 2004. He updated it in March 2007. Bradford Dillman revised and updated it in December 2015.