Mandana Vakil
Professor Jordan Branch
TA: Timothy Turnbull (Section: Thursdays 5-5:50pm)
POLS0400 Take-Home Essay
October 30th, 2018
Setting IPE Theory on a Spectrum: Liberalism with a Touch of Mercantilism
The inescapable interconnectedness of today’s markets makes it increasingly difficult for states, especially developing nations, to entirely separate themselves from the global network and thrive independently. Thus, globalization has sparked an increased state interest in political economy and international trade, as it is increasingly necessary to consider the merits of each international political economy (IPE) theory when creating foreign policy. The three major IPE theories, liberalism, mercantilism and Marxism, differ in their presumptions about the economic and political world that globalization has fostered. Since theories tend to gravitate towards extremes, if we set liberalism, which posits that economics should determine politics, and mercantilism, which postulates the contrary, on opposite ends of a spectrum of IPE theories, it would be best for a developing state to land somewhere in the middle whilst remaining liberalist-leaning. While using liberalism to determine the majority of its policies, a developing state could employ mercantilist ideas when liberalism fails to present an adequate response.
Liberalism is the most useful IPE theory for a developing state due to globalization, “one of the most powerful forces to have shaped the post-war world” – increasingly promulgated by reduced transportation and communication costs as well as barriers to trade (Frankel 314). This works to seemingly ‘shrink the world’ by making trade easier across time and remote locations due to increased mobility of people, goods, and services. The contemporary world economy is stretched on this web of connections that spans the globe thanks to institutions that were set up following World War II, thereby creating trade relationships intended to ensure a lasting peace. These institutions were, at their core, a result of ideas concerning liberal trade – three pillars meant to ensure systematic cooperation: The World Bank, the International Monetary Fund (IMF) and the World Trade Organization (WTO). These institutions have the power to promote economic cooperation and importantly aid developing nations. The World Bank is able facilitate reconstruction and development alongside the IMF’s offers of short-term, emergency loans to countries in need. Lastly, the WTO promotes reciprocity between nations, which stimulates economic cooperation by providing states with an increased notion of fairness across the board. While these institutions cannot legally impose on states’ actions, they are internationally recognized, which grants them a certain symbolic legitimacy in their actions. Their counsels are, thus, taken seriously and developing states can take advantage of their aid alongside liberalism.
Liberalism premises that economic relations are in essence harmonious and that states should not interfere in economics across national borders. The most important market actors, individuals, households, and firms, benefit from “a more efficient utilization of the world’s scare resources,” which liberalists believe follows a “free exchange of commodities, removal of restrictions on the flow of investment, and an international division of labor” (Gilpin 286). Their resulting claim is that national and cosmopolitan interests in the free market are tied to each other; when a state aims to improve its own situation, it is inherently bettering the conditions for others. Furthermore, the stress on cooperation as opposed to conflict allows developing nations to focus on improving in the economic arena without having to manage situations of conflict and war. In terms of game theory, liberalists believe that political economy is positive-sum game, in which absolute gains are achievable for all parties involved.
Liberalist policies of free market trade are especially useful to developing nations due to the theory of comparative advantage. Adam Smith claimed that specialization in pursuit of self-interest leads to collective gains for all – an idea that can be applied in a discussion of states’ policies as well. David Ricardo’s theory of comparative advantage, hence, claims that in a free market, states should specialize in the areas where they are most efficient. The assumption is that in a situation, in which the “government restricts trade, resources are wasted in the production of goods that could be imported more cheaply than they can be produced domestically” (Frankel 324). Trade, in turn, provides the state with all necessary resources for survival and maintenance of a healthy society, while increasing efficiency and allocation of scarce resources.
Comparative advantage is a notion that “underlies the theory of international trade” (Frankel 324). However, while very compelling, unfortunately this idea is unrealistically utopian assuming fixed competition as well as fixed technological and static gains; new trade theory arose as a consequence (Frankel). It supports agreements which reduce trade barriers and allow countries to benefit from comparative advantage – liberalist ideas in practice. Frankel claims that following this theory, a state should be able to permanently impact its growth rate writing that, “a high rate of economic interaction with the rest of the world speeds the absorption of frontier technologies and global management best practices, spurs innovation and cost-cutting, and competes away monopoly” (325). This was supported by a study that he conducted with David Romer, which found a causal relationship between openness and growth (326). Frankel further maintains this idea asserting that openness in trade and investment has generally been beneficial to developing countries in “helping them catch up with those who are ahead in endowments of capital and technology” (327).
However, states are wary when it comes to opening their borders up entirely to free trade and blindly following the theory of comparative advantage. This is due to an inherent fear of becoming vulnerably dependent on other states – a core realist principle, which gave rise to dependency theory. As a result of studying Latin American countries following World War II, social scientists discovered that the interconnectedness of markets made these developing countries poorer as a result of their dependency on nations that suffered the consequences of engaging in the war as third, uninvolved parties. Hence, contrary to liberalism, the Marxist IPE theory posits that due to world-system theory, in which core states create poverty in peripheral states, trade will inevitably lead to conflict as richer countries will exploit poorer ones in a capitalist system.
While macroeconomic interdependence can act as a trade stabilizer, it also allows for economic crises to infiltrate other countries without the consideration of borders as a limit (Frankel). For instance, the financial crash of 2008, which originated in the United States and seriously affected European markets due to the high extent of connections between these two dominating markets, furthermore had worldwide repercussions causing the world economy to enter a severe recession (Helleiner). For a developing state strictly following liberalist free trade policy, this might have devastating effects as the more economically powerful states would turn to self-preservation, following world-system theory, without an acknowledgement of their economic ties to a dependent, developing nation. As Naim writes, collaboration is very needed in solving such global economic crises, but it is difficult to achieve as “collaborating with others often means relinquishing power, a concession that does not come easily to sovereign nations” (335). Addressing this issue means acknowledging states’ realist concerns about sovereignty and security and turning to the three pillars that support economic cooperation in liberalism. While liberalism does not assert that gains are equal for all parties involved, unlike Marxism it provides structures that work to support its execution.
Furthermore, liberalist free trade poses underlying issues for a developing state including a growing inequality in income distribution (Rodrik). Frankel describes the general trend as one in which income inequality initially worsens but improves further down the line. While in a highly developed country such as the US, social scientists estimate “trade contributes one-third of the net increase in the wage gap,” a more extensive study by Chakrabati over 73 countries found that trade has the potential to reduce “inequality, as measured by the Gini coefficient… for each income class” (Frankel 327). It follows that the liberalist idea of free trade could greatly benefit a developing nation even with the consideration of a possible increase in income inequality. Keeping this in mind, the government could set in place preventative measures to diminish the anticipated effects, and still benefit in the long run from a free-trade policy. As Rodrik writes, “since economic restructuring generates efficiency gains, and sectors with comparative advantage will expand while others contract, redistribution is often the necessary handmaiden of the gains from trade” (308).
Nevertheless, due to the problems caused by over-dependency on another nation, the negative implications of possible income inequality and realist concerns, it is important to keep mercantilist principles in mind alongside liberalism when constructing a state’s political economy. When liberalism fails, mercantilism can step in placing the nation’s overall self-interest above all else in determining foreign policy. Mercantilism posits that economic relations are “conflictual” and concerned primarily with the idea of relative gains (Gilpin 286). In terms of game theory, mercantilists see political economy as a zero-sum game; in order for one state to gain, another must necessarily lose. In this IPE theory, intervention is necessary in order to protect the state. Hence, mercantilists argue for protectionism in order to solve the problems described by dependency theory. Protectionism negates exposure to influences from abroad and vulnerability to the actions of other states in order to maintain security and assert power. Furthermore, mercantilism suggests that states consider autarky for more sustained, and less vulnerable, economic development. However, while saving states from the repercussions of global crises such as the aforementioned 2008 Financial Crash, mercantilism also prevents them from being able to take advantage of the positive effects of trade and liberalist institutions which have been proven to aid poor, developing nations (Frankel).
Nonetheless, a developing nation should consider a specific case study: the rise of the Asian Tigers – countries including, but not limited to, Hong Kong and South Korea, which have shown that developing nations can reach sustained economic growth. Their rise challenged both dependency and liberal theory as the nations followed import substitution (ISI) theory, focusing on exporting goods produced domestically. This ‘new type of mercantilism’ combined liberalist ideas with mercantilism to provide a viable route for developing nations to consider.
Arguably, each one of the IPE theories reveals a certain amount of truth about the nature of political economy in today’s world and adds something valuable to the discussion. However, in order to fully take advantage of the institutions in place to support economic growth and development, a developing state should primarily turn to liberalist thought using mercantilism to complement it when liberalism falls short. While the forces of globalization and economic interdependence fostered in liberalism appear to weaken the sovereignty of developing states, they simultaneously offer a realm of possibilities for economic growth which facilitate achieving economic sustainability for developing states. In a world in which connections are seamlessly interwoven like threads across borders, is finding a compromise between two seemingly entirely different theories so hard to fathom?