Question

Within the last decade, we have had two major financial crises: the 2008-2009 global financial crises and the 2009 Eurozone crises. Describe how you think these crises illustrate how international finance and international trade can impact states today. Given these effects, which economic theory - liberalism, mercantilism/statism, and radicalism - do you think best describes the state of the international polical economy today?

Answer 1

Developing countries were hit hard by the financial and economic crisis, although the impact was somewhat delayed. Every country had different challenges to master. The closer the developing countries are interconnected with the world economy, the crasser the effects. And the incipient recovery that is becoming noticeable is, for the time being, restricted to only a few countries and regions.
The crisis was transmitted primarily by trade and financial flows forcing millions back into poverty. Attainment of the Millennium Development Goals is seriously jeopardised in many countries. Many developing countries did not and do not have the resources to stimulate the economy and protect their socially disadvantaged populations to the same extent as the industrialised countries. However, many countries have made considerable efforts to mitigate the effects. Developing countries have also increased their cooperation with one another and are urgently demanding a greater voice in global economic affairs.
The industrialised countries are for the most part more concerned with their own problems. Their readiness to provide more extensive aid is limited. They are under pressure from the international institutions to relax their previous dominance in favour of the increasingly strong emerging countries. A shift in power and influence that was already noticeable before the financial crisis is deepening.The world economy in 2008-09 experienced its most severe financial shock since the “Great Depression” of the 1930s and the deepest economic downturn since the Second World War. Although national financial crises occur fairly periodically, global financial crises are extremely rare, this being only the third such global crisis since the “Long Depression” of 1873-79.2Concomitant with the current “Great Recession” was a “Great Trade Collapse” whereby world trade declined rapidly beginning in the third quarter of 2008 through the second quarter of 2009. As shown in figure 1, the decline was the largest in the last forty years, although not significantly larger than the one which accompanied the first oil price shock and recession of 1973-74; significant but smaller declines in trade also occurred in 1982 and 2001.

By the third quarter of 2009 as the global economic recovery began, there was a rapid bounce-back in trade; this followed the basic historical pattern of most of the other steep declines which were followed by a steep recovery as well. For the year 2009, world trade declined in real or volume terms by 12.2 per cent. Because of significant price declines, especially for primary commodities such as petroleum and minerals, the decline in dollar terms was 23 per cent. The current forecast is for growth to resume its pre-crisis growth trend and for the volume of trade to increase by 9.5 per cent in 2010. At this rate the volume of world trade will probably reach its pre-crisis peak obtained in mid-2008 sometime in the spring of 2011 . On a monthly basis the decline in trade was larger; the value of trade was its lowest in February 2009 when it was 42 per cent lower than its peak in July 2008.

Theories of international political economy provide different ways of answering the above questions.  Theories show the different ways these questions have been answered by scholars and policy makers and also allows for an assessment of how well these theories work.  Below I am going to describe four leading theories.  They will provide a framework through which you can analyze everything you are reading.

            We’ll discuss three main bodies of theory: Economic Liberalism, Economic Nationalism, and Economic Structuralism.  Economic Structuralism has two variants: Marxism and Dependency.  Liberalism, Nationalism, and Dependency are capitalist theories.  They all are based on the idea that creating wealth is the goal of economic activity.  They differ on how that should be done.  Marxism, however, is not a capitalist theory.  Its argument is very different from the others: capitalism -- the creation of wealth and accumulation of profit -- is evil to Marxists.

            One more thing about theory is important.  Theories are models of how the world works.  They are tools for analysis.  You will find contradictions within the theories and aspects that don’t make sense to you.  That’s good. The world is much more complex than any theory could ever illustrate, so be critical of theory and skeptical of theory.

Economic Liberalism (often called Laissez-faire liberalism, or internationalism, or globalism)

The theories of liberalism were stated best by Adam Smith in The Wealth of Nations, 1776.  The key to national wealth and therefore national power is economic growth.  The key to economic growth is free trade – the free flow of goods and services and investment across borders.  Political leaders should allow trade between nations to expand and deepen and keep government intervention in that trade down to a minimum.  This means that imports (products from other nations’ companies that are sold in your nation) and exports (products from your nations’ companies that you try to sell in other countries) should flourish with as little restriction as possible.

Economic Nationalism (sometimes called Neo-Mercantilism)

Economic nationalism developed theoretically as a criticism of liberalism.  It is based on three basic ideas:

1.      States compete economically.  This is very different from liberalism.  Liberals believe that companies compete economically, but states do not.  Nationalists see companies as elements of a state’s power.  So Exxon, and Ford, and McDonalds’s and Coke contribute to US power.  Mitsubishi, and Honda, and Fuji contribute to Japanese power.

2.      Free trade only benefits the wealthiest, most advanced nations.  In head-to-head competition, which is what you get in free trade, only the advanced or “mature” industries will defeat less advanced or “infant” industries.  Therefore free trade helps the rich get richer and the less advanced stay less advanced.

3.      For the less advanced nations there needs to be an alternative way of getting rich.  Free trade won’t lead to riches.

Its main theorists are Alexander Hamilton, the first US Secretary of the Treasury, who wrote the Report on the Subject of Manufactures (1791) and Friedrich List, a Prussian economist who wrote The National System of Political Economy (1841).

Economic Structuralism

The reason why Marxism and dependency are placed together under the heading of structuralism is that both are concerned with the international division of labor created by capitalism.  Both theories see that division of labor as unfair, creating categories of rich and poor people and rich and poor nations.  The Marxist approach is to reject capitalism completely.  The Dependency approach is to reform it.

Marxism

Karl Marx and Friedrich Engels were two German economists who created a huge body of literature outlining a theoretical critique of capitalism.  The developed these theories in the mid-19^th century.  The best place to look for details would be in The Communist Manifesto (1848) or The German Ideology (1845).  There is so much on Marxism that this essay can only scratch the surface.  Remember this is an ideology that spawned political movements and revolutions that shook the world for roughly 150 years.  So, this will be the short version.

Dependency

Dependency also argues that the rich nations exploit the poor nations.  But this is not because capitalism is evil.  It is because capitalism needs to be more regulated so it will be more just.  The problem is that poor nations remain dependent on rich nations.  Even after colonialism, when the poor nations became free, their economies remained dependent on the economies and the technology of the rich nations.

Globalization

Globalization needs to be seen in a historical context.  When WW II ended in 1945 a new era began.  The Cold War was a struggle between the US and its allies vs. the USSR (Soviet Union) and its allies.  From an economic standpoint, it was Liberal and Nationalist economies vs. Marxist economies or relatively free traders vs. economies closed off to trade.  Countries all over the world chose one or the other, in what people called a bipolar world.  Nations were seen as either communists allied with the USSR and using command economies or allies of the US with capitalist economies.  It was never that simple and there were some big exceptions to this from time to time (India was a Democracy with a command economy – no dictators bringing the deaths of thousands, but a really crappy economy; China became an exception after 1972 when its rivalry with the USSR led it to establish ties to the US – the far enemy in this case was less dangerous than the near one and both the US and China had one thing in common; they were both sure that the spread of Soviet power was against their interests).  The economic struggle was one over how best to organize economic life: should nations choose capitalism or communism.  The capitalist world, by the 1980s had economic growth and a technological, telecommunications, and information revolution, all the changes and benefits that computers brought – an economic revolution as important as the agricultural and industrial revolutions