Introduction to International Political Economy in IR

• Political Economy is not a new branch of social science; it evolved with the spread of capitalism in Europe.
• It advanced through academic discourses led by scholars like Adam Smith, David Ricardo, Karl Marx, Friedrich Engels, Max Weber and others.
• It examines how economic activities impact politics and statecraft, and how politics and economy interact with each other.
• International Political Economy (IPE) studies international relations through the lens of global economic activities and their analyses.
• The onset of globalization from the mid-1980s revived scholarly interest in IPE.
• Modern IR now integrates economic analyses along with political and security perspectives.
• The significance of trade and commerce in international relations remains strong.
• Economic institutions like the WTO, IMF, and FTAs increasingly influence global politics.
• The rising importance of Multinational Corporations (MNCs) shapes contemporary world politics.
• Due to these developments, IPE has become one of the most significant areas in the study of international relations.
• IPE covers a vast scope, including:
  • International trade regime
  • International monetary regime
  • International investment regime, focusing on institutions, organizations, and economic activities
  • FTAs among states
  • Economic development and global disparities
  • Globalization
  • The North–South divide
  • The future of capitalism and socialism
• These issues have generated academic debates and produced multiple theories in IPE.

• The international economic system promotes free trade, free investment, free markets, and strict market discipline, but it is rooted in the economic models of developed countries.
• The world economy today is vastly different from what it was 60+ years ago when the system was first established.
• The global economic landscape has undergone major changes since the end of the Cold War.
• The global financial crisis introduced a “new normal” in the world economy.
• New challenges have emerged that the current global governance system struggles to address effectively.
• The post–World War II economic architecture was largely shaped by the United States.
• Institutions like the IMF, World Bank, and GATT were created to establish a liberal international economic system.
• The Marshall Plan enabled the USA to expand its influence and support the economic rebuilding of its allies.
• In the 1970s, U.S. hegemony declined, giving rise to demands from developing countries for a New International Economic Order (NIEO).
• The Bretton Woods system collapsed in 1973, compelling the USA to coordinate macroeconomic policies with other developed nations.
• The 1997–98 Asian financial crisis cast doubt on the IMF’s governance and the Washington Consensus.
• The crisis led to greater regional cooperation in Asia.
• The 2007 U.S. subprime crisis and the European sovereign debt crisis exposed vulnerabilities in developed economies.
• Regional and cross-regional platforms have become essential in addressing global economic challenges.
• These platforms aim to detect, prevent, and resolve issues worsened by globalization.
• Regionalization has expanded, with new institutions and agreements to manage globalization-related pressures.
• Key examples include the strengthening of BRICS, the multilateralization of the Chiang Mai Initiative, and the rise of mega-regional FTAs such as RCEP, TPP, and TTIP.

From Bretton Woods to WTO

• As the Second World War neared its end, Allied leaders began planning the post-war global political and economic order.
• In July 1944, 730 delegates from 44 Allied nations met at Bretton Woods, New Hampshire, during the UN Monetary and Fiscal Conference.
• The conference concluded with the signing of the Bretton Woods Agreement to regulate the post-war international economic system.
• The agreement created the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) (now part of the World Bank Group).
• These institutions became operational in 1945 after ratification by participating countries.
• A key feature was that countries must maintain fixed exchange rates, ensuring currency stability.
• The primary aim was to prevent currency disorders and stabilize exchange rates through a regulated economic system.
• The IMF was tasked with addressing temporary balance of payments imbalances.
• Bretton Woods leaders favored a regulated market system with strict controls on currency values.
• Although implementation methods were debated, all agreed on tight controls, influenced by the Great Depression and wartime economic setbacks.
• The agreement was grounded in Keynesian economics, which supported a controlled market economy with state intervention.
• Keynesian thinkers supported free trade, reduced tariffs, and a liberal market economy, but with the state remaining visible in economic activities.
• The international system required high cooperation among states, monitored by institutions like the IMF and IBRD.
• Economic crises between WWI and WWII were blamed on poor cooperation and the absence of regulatory institutions.
• Bretton Woods sought to correct these flaws by creating cooperative and supervisory bodies, laying the foundation for the modern international economic system.
• This system still depends on state cooperation, though private economic actors now play a major role.
• In line with Bretton Woods, the General Agreement on Tariffs and Trade (GATT) was created in 1947 to shape the international trade regime.
• While IMF and IBRD governed monetary and investment regimes, GATT governed trade.
• Plans for an International Trade Organization (ITO) failed in 1946, so GATT emerged as a treaty, not an organization.
• GATT became operational on 1 January 1948, signed by 23 countries.
• Its core objective was to reduce global trade barriers, achieved through lowering tariffs, restricting quotas, and regulating subsidies.
• From its first round in Annecy (1949) to the Uruguay Round (1986–1993), GATT achieved 45% reduction in global tariffs.
• By 1993, tariff concessions valued at US$1,200 billion had been secured.
• Membership expanded from 23 countries (1948) to 123 countries in the Uruguay Round.
• GATT negotiations covered non-tariff barriers, services, IP rights, dispute settlement, agriculture, textiles, labour, competition, environment, and investment rules.
• The Uruguay Round decided to establish the World Trade Organization (WTO) to replace GATT as the central authority for monitoring the international trade regime.
• The WTO became operational in 1995 after the Marrakesh Agreement.
• With 153 member-states, it represents 90% of global trade.
• Its membership, functions, structure, and impact on world economy and politics are discussed subsequently.