Theories of International Political Economy

POLI/INTL 365 International Political Economy (IPE)

Bill Newmann

This essay is intended to be a quick introduction to some of the key concepts and key terminologies of IPE. If you have questions about anything in the essay, let me know. In the essay, I will use the terms nations, states, and countries interchangeably.

What is IPE?

This is the most basic aspect of the discipline. Those of you who study economics in the business school may be taught that there are no political influences on economics; however, in a Political Science class you will get a different perspective. From this perspective, politics has a great role in economic life, and the study of IPE is the study of how politics influences economics relations within nations and between nations. When I say economic relations I mean the buying and selling of goods and services across borders, the flow of investment around the world, the wealth or poverty of regions and nations, and the ways in which economic power influences the political relationships among states (everything from alliances to war).

From the perspective of a political leader (imagine you are president or prime minister of a nation), you are concerned with two major issues:

1. What makes a nation wealthy? How can you design policies that make your nation wealthy or wealthier than it is now?

2. How can you design policies that spread that prosperity to your people? In theory you must do that to get reelected if you rule a democracy. Or if you rule in an authoritarian state you need to spread the wealth to prevent yourself from being overthrown. Then again, you may just be trying to enrich yourself. So, you hoard your own nation’s wealth, keep your own people poor, and eventually face a potential backlash by millions of impoverished people when they discover how you have plundered the nations resources and the people’s work to make yourself wealthy.

From the perspective of scholars and political leaders alike, the first step in answering the above question is to answer the following questions:

· What is the proper role of government in economic activity?

· Is deep involvement of the government they key to economic growth or is it the one thing that is sure to doom economic growth?

· To make a nation wealthy does the government lead or get out of the way or lead in some areas while letting others flow naturally?

The role of theory

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 allow 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.

Liberals want the marketplace to make the economic decisions, not the government. This may not make sense yet, but it will further down the page. Just hold the thought for a moment.

Here’s the problem as liberals see it. Governments have several tools they use to interfere or influence the flow of trade: tariffs, quotas, non-tariff barriers, and bans. Let’s talk about tariffs first and explain their purpose. A tariff is a tax imposed by a government on a product as it crosses a border. So for instance a government might use a 10% tariff on all foreign shoes being sold in the US. This means that for the privilege of access to the US marketplace every foreign shoe company must pay the US government a 10% tariff. So if a pair of shoes cost $40, then $4 goes to the US government for every pair of shoes that enters the US. Generally, that means that a shoe that might have cost $40 without the tariff winds up costing you $44 when you try to buy it. Traditionally every government in the world places tariffs on every product that enters its marketplace. A 10% tariff is a low one.

So, let’s analyze a fictitious market for chalk. Assume we live in State A. Now there’s a company in Richmond (Richmond Chalk) that sells its chalk for $100 per box (great chalk!). There is also the Foreign Chalk Co. from State B – a foreign country, and it makes its chalk, ships it across the Pacific and into Richmond and sells it for $90 per box. The quality of the chalk is the same, but the price is different. Maybe Foreign Chalk Co. pays its workers less or has some new process technologies which make it cheaper to make chalk. Anyway, as a chalk consumer you will go down to Target or Wal-Mart and you will probably buy the $90 chalk from the Foreign Chalk Co. because you want to save $10. But there is a local congressman in Richmond. And he’s worried that Richmond Chalk will go out of business because the Foreign Chalk Co. sells the same quality chalk for less money. He wants to protect that local business from the foreign competition. There are 3,000 Richmond Chalk jobs that will be lost if Richmond Chalk goes out of business. The congressman may be blamed for it. But if he can somehow protect the home company from foreign competition, he gets the credit and gets reelected. So he lobbies the leaders of the House of Representatives and he tries to make some deals. There’s a big vote coming up. The President of the US wants to invade Iran and he asks for a congressional resolution in support of overthrowing the Iranian government. The Richmond congressman thinks it’s a bad idea and is inclined to vote against it, but he then proposes a deal. He says: “Mr. President, I will support the resolution calling for the overthrow of the Iranian government if you impose a 20% tariff on foreign chalk.” The president says, “Deal!”

Now, when you go to Target or Wal-Mart to buy chalk here are the prices: Richmond Chalk $100 per box and Foreign Chalk Company $108 per box ($90 per box, plus the 20% tariff -- $18). Now which one will you buy? You’ll buy Richmond Chalk and save $8 per box. Richmond jobs are saved. And they lived happily ever after.

Not according to liberals. Liberals see it differently. No one lives happily every after. Here’s how liberals see it:

· You now pay $10 more for each box of chalk. Not only that, but Richmond Chalk may raise its prices to $105 a box and it will still be cheaper than the Foreign Chalk Co. chalk.

· Richmond Chalk has been rewarded for its inefficiency. It could not compete against the Foreign Chalk Co., but it is rewarded for that.

· The Foreign Chalk Co. is punished for being efficient. It was winning the competition, but it winds up getting punished through a political deal.

· Essentially, it’s like this: Imagine a fast sprinter who wins every race. Someone decides it’s unfair for him to win so many races because it makes the other sprinters sad, so we force that sprinter to wear ankle weights to slow him down. We make Michael Jordan use only one hand; we tell Jerry Rice he’s only allowed to score one touchdown per game. We make Roger Clemons pitch from a lower pitcher’s mound.

This burns liberals up. Ultimately liberals argue this: Without competition and winners and losers, you will not have economic growth; you will not have innovation; you will not have progress. If Foreign Chalk Co. is punished because it is winning, then why should it or any other company try to win? If Richmond Chalk is rewarded for losing, then why not continue to lose; save the effort and it will still be rewarded.

Here’s what liberals want to happen. Richmond Chalk and Foreign Chalk compete. Foreign sells at $90; Richmond sells at $100. So Richmond can do several things. It can quit the chalk business and maybe go into erasers, or it can change the way it does things. Maybe it automates and makes the same amount of chalk with 20% fewer workers and it can sell for $88 per box. Maybe it simply cuts salaries to make it to $88 per box, and the employees are happy because a pay cut is better than a layoff. So maybe Foreign Chalk responds by going to $87 a box and then Richmond Chalk goes to $85, then Foreign Chalk goes to $83 and Richmond goes to $82. Then they can’t cut prices anymore so they try another tack. Maybe Richmond uses research and development and comes up with dustless chalk and colored chalk and maybe dry erase markers and sells them for over $100 per box.

In this situation you can get innovation and excellence and a cut in prices. Competition creates new ideas and new things for consumers. And here the consumer is king. Getting better products for lower prices is the goal. It doesn’t sound like a big deal, but imagine we’re talking about building safer cars or developing new medicines or better engines that reduce pollution or save travel time. Then competition starts to benefit people in a big way. Think of it this way: would we have cell phones and computers and new Windows operating systems every few years if the companies in the telecommunications and computer industries didn’t feel the need to compete with each other for our business? Probably not.

Quotas do the same thing in a bit different way. Let’s say that in the US there are 1 million boxes of chalk sold annually (I’m just making a number up; I have no idea how much chalk is sold in the US). The US government might decide that of those 1million, only 100,000 can be boxes of chalk made outside the US. This saves Richmond Chalk’s market share another way. Non-Tariff barriers are ways of keeping out foreign products through other means. For example, the US government could declare that foreign chalk has carcinogens in it or does not meet some new US-government standard imposed just to keep out foreign chalk. There are also outright bans – simply saying that a foreign product cannot be sold in the US.

Nations around the world do all of these things and liberals generally hate them because they impede economic growth; they discourage excellence and innovation; they make consumers pay more for inferior products.

What liberals want is this: all economic decisions should be made by the marketplace – the free market. Get the government out of foreign trade (and the domestic economy) as much as you can. Then winners and losers in the economy are not decided by the government, but by the market – the aggregate decisions of consumers, sometimes called the “invisible hand.” What does this mean? People like Coke better than Pepsi. Who knows why, but they do. That’s the market deciding. The sum of all the decisions made by consumers is the marketplace -- the invisible hand. In this case the marketplace has decided that that it will buy more Coke than Pepsi. In 1985 Coke tried to change its formula – New Coke. The invisible hand slapped the company around. People wanted the old formula. Coke had to choose – go out of business or change back to the old formula. Coke changed back. Consumers won the argument. People don’t buy plaid cars; people don’t wear hats anymore to work; few people listen to jazz (I do, but I’m a mutant). Why? Who knows? The important thing here is that it is the decision of the consumers when you add up all their choices, and that is the market, and a free market creates growth and wealth. It creates growth and wealth because it gives the people what they want and forces companies to compete to find new ways of satisfying the needs of the people.

Liberals argue that along with innovation you get a division of labor. Everyone finds a niche to make a living. If you lose one competition, you move on to compete in a new arena. You specialize. So the US, with its huge amount of land and great soil, has the largest food companies in the world. Saudi Arabia has oil, so its companies produce oil. Japanese and South Korean companies go into shipbuilding. Chinese companies make inexpensive, labor intensive products because China has an abundance of people. This is called comparative advantage. You find your niche – what you can excel in --- and you do it.

Multi-National Corporations (MNCs, sometimes called Transnational Corporations – TNCs)

The world now has a global marketplace. Much of what you will read is based on that idea. Within this global marketplace are MNCs – large corporations that operate all around the world. They are present everywhere. For example, you can buy a Coke in just about every place in the world. And little slimy McDonald’s burgers infest just about every nation in the world. Exxon is everywhere. So are Toyota, Honda, British Petroleum, and General Motors. About 90% of the taxis in Shanghai, China are Volkswagens because VW has a plant there. The majority of taxis in Beijing, China are Hyundai’s because Hyundai has a plant there. Hyundai is South Korean; VW is German. Also, this is not new. Shell Oil is not an American company; it’s Dutch. Nestlé’s is Swiss; Siemens is German. Bayer is German. And these companies have been in the US so long they are as American as French Fries!

More recently, there is something besides MNCs that runs the world economy. Products are losing their nationalities. Something you buy on a shelf or a showroom may have been made by five, ten, fifteen different companies based in five, ten, fifteen different nations. Companies from all over the world work together to produce a product. They don’t care about where the company is based; they care about skills, quality, and cost. Look around your house or apartment and see where things were made. Call up Dell customer service and you are likely to be talking to someone in India. Much of the medical transcription business – the business of taking medical records dictated by a doctor and typing them up – is based in the Philippines. The doctor’s office e-mails the audio file to the Philippines at the end of the work day. Overnight a Filipino company types them up and they are e-mailed back to the US for the start of the next business day.

Liberals think this is a good thing. MNCs spread wealth and technology and jobs around the world.

Classical Liberalism vs. Modern Liberalism

Classical liberals have a tendency to believe that as long as the government doesn’t interfere in the economy, everyone will live happily every after. They look at economic growth and identify something called “the business cycle.” The economy grows then contracts then grows then contracts then grows again in a series of booms and busts. The bottom arrow represents time. The left arrow represents wealth. It looks like this:

Notice that in the long run the average of the series of booms and busts is always growth (the dotted line). Notice also that as time goes by the busts are at levels of higher wealth than the booms of the past. In the long run the economy grows, no matter how many booms and busts there are. Importantly, classical liberals believe the economy is self-regulating. The boom and bust cycle works and will work forever as long as the government doesn’t intervene and screw it up. Sure some booms will be longer than others and some busts will be nasty and you certainly don’t want to be born as a boom is ending and live your life in a bust. But the boom-bust cycle seems to take under a decade so everyone will experience everything.

This was the common belief until the Great Depression. The Great Depression was a global depression in which the world economy collapsed. It led to mass starvation and World War II among other things. Two ideas developed in response to the experience of the Depression.

1. Modern Liberalism – the belief that the business cycle is not always self- regulating. Sometimes a bust can be so bad it causes the economy to collapse. The solution is for the government to essentially jump start the economy by creating jobs and creating investment – putting money in people’s pockets so they will begin to buy and sell products. This happened all over the world after the depression, and in the US is known as the New Deal and was administered under FDR. It changed the way the US government and most nations’ governments deal with economic issues. Now it is expected that the government will have some role in economic life to make sure that the economy keeps growing. It’s usually tinkering, but it is now an expected part of life in the industrialized world. In the US it is accepted by both parties, no matter what their rhetoric. Republicans have a tendency to talk like Classical Liberals, but they won’t get very far if they talk about doing away with Social Security, Medicare, Medicare, Unemployment Insurance, etc.

2. Faith in Free Trade -- A belief that free trade and the expansion of free trade is the key to preventing another economic collapse. Before the Depression many nations responded to a slowdown in economic growth by placing restrictions on trade. Most economists believe that these restrictions on trade made a particular deep bust into a world wide economic catastrophe. Since then end of WW II the US has based its foreign policy on expanding free trade – doing away with tariffs, quotas, non-tariff barriers, and bans. This belief in free trade was one of the pillars of US policy in the Cold War. For reasons described below, the USSR – a Marxist state – was against free trade. The US has worked very hard to create an international economic order based on liberal beliefs. The International Monetary Fund, the World Bank, the General Agreement on Tariffs and Trade, which gave way to the World Trade Organization, all have as their founding principal a belief in free trade. Globalization is the success of that liberal international economic order. The US has been able to write the rules and since the collapse of the USSR those rules are accepted by more and more of the globe.

Currently, the US is the leading liberal state in the world.

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, 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).

Hamilton was writing at the early stages of US independence and his concern was how the US might structure its economy to make sure the US remained independent. He said this:

Industrial power = national power = independence.

Essentially, he argued that if the US wished to remain independent it had to become an industrial power. At this time Jefferson was arguing that the US would be better off as a nation of farmers. Hamilton felt that a nation of farmers would lose the next war with a European power because it could not produce manufactured goods – housing, clothing, particularly boots, and of course, weapons. So the US needed to end its dependency on the British economy for many of its manufactured items. The US needed to become self-sufficient so if the US and British had another war, the British would not win it by using an economic embargo against the US. Obviously, if the US cannot feed itself or make enough weapons without British help, the British could bully us. So to Hamilton, political independence from Britain required economic independence from Britain.

Hold that thought.

List lived in the US during the early days of US independence and read all of Hamilton’s writings. He traveled back to his native Prussia and wrote about how Prussia could get out from under the economic dominance of Britain. Britain was the most economically advanced nation in the world at the time. List felt free trade was essentially a scam. It was a British trick to get everyone to move toward free trade in hopes of creating wealth, but instead only the British would prosper. Here is List’s analysis of why the British would win. In a nutshell, the advanced economies would always win the economic competition against the less advanced economies. Imagine you are a consumer and you walk into Target or Wal-Mart or maybe it’s an automobile showroom. Here’s what you have a choice of:

Characteristic	Advanced Economy	Less Advanced Economy
Type of Industry	Mature industry	Infant industry
Product Cost	Low cost	High cost
Product Quality	High quality	Low quality

So how often do you walk into a store and say give me the most expensive piece of crap you have. In almost all cases, in head-to-head competition, the consumer chooses the product of the industry from the advanced economy, the low cost, high quality product. How does the industry from the less-advanced economy ever gain? To List, it can’t, not under free trade.

To Hamilton and List then the answer was this.

1. Protect infant industries from foreign competition. Protectionism consists of using tariffs, quotas, non-tariff barriers, bans, whatever means possible to protect key industries.

2. Importantly, this does not mean ending trade with other nations. It means protecting industries that are identified as being crucial to national power. So Japan, for example, which has had nationalist economic policies since WW II, traded with the US, but has pushed US automobiles, US consumer electronics, and US telecommunications out of its market. This way Japan could build up its own industries in those areas. The US, a liberal nation, allowed Japanese companies to export to the US and the result has been that the US consumer electronics industry essentially died off due to Japan’s success, and the US has had to restrict sales of Japanese cars in the US in retaliation and to keep US auto makers from collapsing (Chrysler did collapse, but the US government, in a huge exception to its typical policies, bailed it out.). So to nationalists, this is evidence of the wisdom of their policies. It protected its industries from foreign competition and prospered, while the liberal US saw its industries founder. To liberals, you win some, you lose some. US companies should have been better prepared to face Japanese competition.

3. When the less advanced economy catches up to the advanced economy then it can open up to free trade and compete head-to-head as equals.

MNCs in the Nationalist View

MNCs are agents of national power. Foreign MNCs operating in your nation are competitors to your industries. They may weaken your nation and your industries. Keep them out or key sectors of your economy or they will hurt your economic development.

The leading nationalist economies in the world are Japan, South Korea, France, and Germany. However, they are reforming their economies and becoming more liberal.

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.

Marx and Engels examined advanced capitalist nations, particularly England and Prussia. These were nations in the midst of the industrial revolution – manufacturing was booming; people were working in factories; rapid urbanization had begun. To Marx and Engels this advanced capitalism divided people into several classes. For our purposes two classes are important: owners and workers, or rich and poor or haves and have-nots. Owners own everything, and have all the power, and all the money. Workers do all the work, and have no power, and no money. Marx and Engels hypothesized that one day the workers would realize that they were being exploited by the owners and rise up to overthrow the owners’ control of society. This would include overthrowing the government of the country because the government’s main purpose was to enforce owner control of society. Marx and Engels felt that this revolution – workers’ revolution or proletarian revolution – was a natural phenomenon, something that would occur naturally in any nation that reached an advanced capitalist stage. So they predicted it would happen first in England or Prussia and would not happen in more agricultural societies such as France or Russia until much later in those nations’ histories.

After the revolution, the theory gets a bit uncertain. There would be several phases of evolution until the development of Communism, a society which would have these characteristics:

· A system in which there is no private property; all property is owned by everyone and everyone shares

· There is no exploitation since workers are the owners

· Everyone gets what they need from the society as a whole

· Everyone contributes based on what they can contribute

· Capitalist ideas such as the idea that people work to gain reward are outmoded; people work to contribute and do not care if there is no relationship between what they give to society and what they receive in return. So a young healthy person who works like an ox, but has no family, contributes a great deal to society, but receives very little. The lazy person with a large family receives a great deal even though he/she contributes little.

We’ll get to what happened after the revolution in reality in just a minute.

The next big theorist was Lenin, a Russian intellectual. He wrote Imperialism in 1917 and in it he developed a theory that applied Marxism to international affairs. Essentially, he said wealthy capitalist nations exploit poor nations. They force people into slave labor; they steal resources; they dominate and impoverish these nations. He was talking about imperialism or colonialism. At this point in world history European nations had control of just about the entire rest of the world. Almost everything but the Western hemisphere was under European control. Lenin said that the poor nations would one day overthrow their colonial masters, reject capitalism because of its linkage to colonialism, and develop Communist societies.

Lenin also said, in other works and through his deeds, that the workers revolution can be created by a clever and committed leadership. Nations don’t have to wait for the revolution to happen naturally. A vanguard of the revolution can begin the revolution in any nation. Lenin did just that. In 1917 his Bolshevik movement seized power in Russia and led the first Marxist revolution. In 1949 Mao Zedong led the second big Marxist revolution. Dozens of nations followed their examples from the 1940s to the 1970s. This was the Communist or Soviet Bloc during the Cold War.

Now what were these nations like? What was Marxism like when actually put into practice in the USSR and the People’s Republic of China?

· Marx and Engels thought that after the revolution the government would wither away. Once having created the proper economic relationships, a government would not be necessary. However, in every Marxist state, the government became more powerful; power became more centralized; and the nation was ruled by one person or a handful of dictators, who ruled in a totalitarian manner through a Communist Party apparatus that penetrated every aspect of the society. The goal was total control over every individual. Their word was law and you risked your life if you questioned that word – imprisonment, torture, execution of the person who challenged the government, and his/her friends and family. It was not unusual for a dissident (someone who challenges the totalitarian state) to wind up in prison, his wife may end up being given to a Communist party leader to do with as he pleased, and their children would be given to a Communist Party leader’s family which didn’t have children.

· In all these nations the revolution was rammed down the peoples’ throats. Those who disagreed were considered enemies of the state. In Russia, Lenin killed millions who opposed the revolution. He would have been seen as a huge mass murderer except his successor, Stalin, killed more. Roughly 20 million people were killed by Stalin’s regime from the 1920s to the early 1950s because they opposed his government and/or its policies. Mao in China was worse. The number of deaths may be as high as 100 million from 1949 to 1976, many from starvation; many from execution, torture, and the long-term effects of imprisonment.

· Ideological purity was a necessity to the leaders. One party was allowed to exist and any ideas not approved by the Communist Party were treasonous. People were executed for thinking the wrong thing. In most Marxist states, the government tried to control what people thought.

· Economically these nations closed themselves off to trade with other nations. There were no economic freedoms. Every aspect of economic life was controlled by the government, decided by the government, regulated by the government. These economies are called Command Economies and every single one, even those that may have prospered for a bit, ran itself into the ground – people became poorer than they were before; the states became technologically backward; and many had severe problems even feeding their people. China, Russia, Viet Nam, North Korea, Ethiopia all had famines.

· Importantly, Marx and Engels never said: Kill everyone who disagrees with you. Marxism as implemented was very different from Marxism the theory. The vagueness and paradoxes of Marxist theory were interpreted by dictators to mean absolute power, death, and destruction. That doesn’t necessarily mean that Marxism would have worked if its implementation hadn’t been accompanied by dictatorship and slaughter. Marxism does give huge amounts of power to revolutionary leaders and that much power usually leads to corruption at best and carnage at its most typical. Also Marxism considers human nature to be one in which people will be willing to share in ways that are counterintuitive -- where the person who works extremely hard is willing to receive less and willing to allow the person who doesn’t work hard to receive much more if it is judged that he needs more. Capitalism is based on a less optimistic version of human nature – people will only work hard if they are rewarded. It’s not pretty, but as we’ll see in the class no communist system has ever sustained economic growth for more than a generation. In fact, all command economies have led to economic collapse. Currently, one of the last communist command economies is North Korea, a nation where millions of people starved to death in the 1990s. South Korea has a capitalist economy and has accepted globalization. It has a growing economy and corporations that are building factories in Europe to find cheaper labor.

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.

Dependency theorists see the world divided into two types of nations that have a clear division of labor:

Characteristics	Economically Developed Countries – EDCs (the Rich)	Less Developed Countries – LDCs (the Poor)
Who?	North America, Western Europe, Northeast Asia (Japan, South Korea, Taiwan)	Asia (except North East Asia), Africa, Middle East, Latin America
Producing what?	High tech goods, industrial products: cars, machine tools, planes, computers, chemicals, electronics	Primary products, commodities, things you grow or extract from the ground: bananas, coffee, minerals, rubber, timber
What kinds of jobs are created?	High skills, high wage jobs creating a middle class society	Low skills, low wage jobs, which create a society with a small wealthy elite (who own the land) and huge class of people on the edge of poverty or living in poverty (people who work the land). A small middle class exists.

The problem is this. What the LDCs produce is cheap. Minerals and farm products make landowners rich, but not the people who work the land and not the nations who rely on the land for its source of wealth. Even oil, the best of the primary products, because it can lead to wealth, is often seen as a curse. Nations who produce oil have a tendency to rely on it for their revenue and never develop a manufacturing base, and it is a manufacturing base and the high skills and high wages that go along with it that make a nation wealthy. EDCs produce the manufactured goods then the LDCs and the EDCs trade. LDCs buy expensive things from the EDCs and the EDCs buy inexpensive things from the LDCs. The result is that the EDCs make money and the LDCs go into debt because they are paying more for the expensive products (aircraft, computer software, cars, or health care technology) than they are receiving for their coffee and bananas and oil. So the rich get richer, the poor get poorer.

Dependency theorists call for a number of solutions:

· International rules that raise the price of commodities (oil, coffee, bananas, timber, copper) regardless of market forces. EDCs refused to do this.

· Massive amount of aid to poor nations. Most EDCs refused to do this.

· Debt forgiveness. EDCs have agreed, but it doesn’t fix the problem because as soon as the old debt is forgiven, new debt accumulates.

· Nationalization. Government seizure of the MNCs of the EDCs that operate in the LDCs. The profit of the home-controlled MNCs is used to enrich the nation. But the EDCs don’t like this and often retaliate with trade embargoes and even attempts to overthrow the government that does this. During the Cold War the US would label such governments as communist (some of them were) and tried to overthrow the government.

· Import Substitution: Banning the import of foreign manufactured goods from EDCs (like computers and cars) and forcing the nation to make its own. EDCs might retaliate with trade sanctions.

In the long run, none of these strategies have worked.

MNCs in Structural thought

As you may have guessed, neither Marxists nor dependency theorists are fond of MNCs. They are seen as the way rich nations exploit or dominate poor 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. The communist world missed the boat. Why would anyone develop computers since there was no reward for innovation and no incentives for research and development except fear that your innovative ideas may lead you to prison? The computer revolution never hit the communist world. Many people think that fact is the best explanation for the end of the Cold War. The economic ideas of the capitalist world proved to be better. The capitalist world generated wealth and innovation and the communist world just generated shortages of everything and a lack of productive ideas. Nation after nation, beginning with China in 1978, abandoned command economies for some level of capitalism. By 1986 the Soviets began to move toward capitalism. By 1991 the Soviet Union collapsed. The cold war ended and little by little everyone moved toward capitalism, and a capitalism that grows more liberal every year.

Along with that development was another one. Ultimately, it seems one strategy has worked to bring wealth to poor nations -- open up their economies to foreign investment, to become more liberal, but retain elements of nationalism in certain sectors. It is a strategy that takes advantage of globalization and protects some industries from globalization at the same time. It has led to the greatest wealth creation in world history. It is the method pursued by the Four Tigers (South Korea, Taiwan, Singapore, and Hong Kong – the only non-oil economies to go from poor to rich since WW II). It is the strategy pursued by China since 1978. China is the world’s fastest growing economy. India has been following this since 1991, and it has the best economic performance in its history. It is a strategy used by many nations in the world and has lead to huge wealth and job creation. There are some exceptions:

· Socialist/Communist states that have not reformed: North Korea and Cuba

· Oil states that still have command economies based on oil production (just about every nation in the Middle East)

· States flirting with Dependency remedies (Venezuela, Bolivia)

But all these economies are doing poorly, much worse than the economies that have embraced globalization. During the cold war, the issue was whether a free market or a command economy was better. The answer to that seems definitive – free markets work much better. They prospered while the command economies collapsed. That may have answered the first question that this essay posed: How does a nation generate wealth? The second question is still at issue: What is the proper role of government in economic activity? It seems clear that almost all governments in the world have decided that the government should not control the economy. But how much regulation or intervention is the right amount? That question is at issue throughout the world.

Having said all that, however, does not mean that everyone believes that globalization is the greatest thing in world history and the answer to all our problems. Some say yes; some say no. The readings in the class will debate that issue, but here are some questions:

· Does globalization benefit everyone or just the richest?

· Does globalization sacrifice the environment?

· Does globalization prevent or encourage higher wages and enforceable labor standards?

· Globalization may make everyone a little richer, but does it make the rich even more rich than everyone else?

· Does globalization help or hurt the poorest of the poor?

· Can we develop a smarter globalization?

· If you tried to stop globalization, how would you do it and what would be the consequences?

· For all of the flaws of globalization, is there a better way to spread wealth or feed and clothe people or provide people opportunities to make their lives better or discover and invent new technologies that change the world or guarantee basic freedoms? In other words, what are the alternatives?

· You may find that globalization is like democracy. To paraphrase Churchill, globalization may the worst system imaginable, except for all the others. You may find that globalization is simply reality. It’s what happens when people are free. So how do we make it work for everyone?

These are some of the questions this class will address.