International political economy - module 1

International political economy mod.1

Introduction to international political economy

What is international political economy about? It is about economic interactions, economic relations, accountability, relation between countries, the study of economy, international development, interaction, markets, strategy, model, policy, management, balance, globalization, trade, world politics, interdependence, commerce, economy between states, growth, influence, international relations, regulations, the theorist’s studies, tendency, states resources, markets interactions.

Economics and the economy

Nowadays you see, especially in the Anglo-Saxon world, the word ‘economics’ and not the word ‘political economy’. In the past the discipline was born as ‘political economy’ but nowadays it is called ‘economics’. There are several definitions of Economics (from Greek oikos, home, and nomos, rule). Economics = is a Social Science that studies how individuals, firms, and governments choose to allocate scarce resources. Or in a simpler way, Economics as the discipline that studies how agents respond to incentives. This definition comes from one particular school, relatively recent: the Neoclassical school. Before that economics did not exist, the discipline was ‘political economy’ and it was treating economics phenomena together with political and social phenomena. According to this discipline, economic phenomena could not be studied separately from social and political aspects. Nowadays the modern discipline of ‘economics’ works in a different way: it is less dependent on the historical and social background.

Political economy

Economics was born as Political Economy in the early 18th century. Classical Economists (e.g. Adam Smith, David Ricardo, and Karl Marx) shared the view that the historical, social, and institutional processes cannot be separated from the economic ones. An approach that treats Politics, Society, and the Economy as non-separable phenomena.

International political economy

We will study International (Economic) Relations, i.e., those among sovereign States. Topics such as: International Trade, Foreign Exchange Market, Migrations, International treaties and supra-national institutions. There are a bunch of issues that are extremely important for the world economy but not only for it. These are gonna be the issues that broadly affect the well-being of people living all around the world, the relationships among sovereign states, etc. Both the kind of phenomena that we are gonna study and the birth of a discipline that started to study these kinds of issues 200/250 years ago, both happen because of a series of unprecedented changes in certain economic phenomena in the world.

Some economic and social phenomena that were unprecedented in terms of their scale, in terms of their speed, etc. Something that we have never seen to this scale before. So, there was a need to create an entire paradigm to face this unprecedented change.

Nowadays, especially in the last 20 years, there was a lot of discussion both among the economists and among people that study any other discipline about the fact that certain tools were not very good to explain some problems that we had in the last 20 years like for example the global crisis that follow the 2008 crisis in the US. In the discipline we have an established set of tools. The big claim that some people had, especially in the aftermath of the 2008 crisis, that the tools of economics were unable to express this problem or to predict it is a false tool. It is demonstrated by the fact that most of these supposed heterodox economics that came after to try to explain this fact is 95% the reuse of the staff from the 19th and even 18th century.

Growth

Growth has been one of the most important and struggling phenomena. For thousands of years growth didn’t exist in the world. GDP is the amount of output, the production that a certain country manages to produce. Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

Per capita gross domestic product (GDP) measures a country's economic output per person and is calculated by dividing the GDP of a country by its population. Per capita GDP is a global measure for gauging the prosperity of nations and is used by economists, along with GDP, to analyze the prosperity of a country based on its economic growth. Small, rich countries and more developed industrial countries tend to have the highest per capita GDP.

Growth is a recent phenomena, for hundreds of years the world didn’t have any growth until the 17th century. Growth is the ability of producing output, so producing goods and services of a certain economy. All of us were born in a society where growth is the norm. The process has been taking over in a dramatic way during the last two centuries. The growth that we have experienced since the industrial revolution is an unprecedented phenomena in human history.

Globalization

The second unprecedented phenomenon was globalization. There is much more why than less well-defined phenomena. The world became much more interconnected in terms of trade. This index is the sum of world exports and imports, divided by world GDP. As we have seen before, the world GDP went up so much. And despite the incredible growth of GDP, the trade went up dramatically during the last years. We take it for granted nowadays but if you think about it, it is an incredible source of potential future growth.

The last important step of globalization, that now we are starting to take about in a more defined way, is the incredible globalization of ideas and knowledge that we had in the last century.

Interconnection

A lot of other dimensions of interconnection have been growing dramatically during the last century. Another way to think about a side aspect of globalization is interconnection. This is just one possible interconnection you can think about: the volume of air transport freight, a particular measure that is based on metric tons multiplied by kilometers traveled. The more tons of material traded on a plane and the more they traveled, the more this index went up.

Inequality and growth

What could be interesting, specifically for the international political economy, is that this enormous explosion of growth and development for those countries that were not there a few years ago has been incredibly assimilated. So there are certain parts of the world that have experienced a dramatic growth and others that were behind. Growth has been unequal. It has been a pretty generalized phenomena but the extent of it has been very different in these two different regions of the world.

The most important thing to relate growth with international relations is inequality. This graph shows us the real GDP per capita on average of different countries. Real GDP pro capita is a measure of GDP that is just for prices. In the last 20 years the degree at which most of the previously poor countries have been catching up is impressive. Cross-country inequality is the first aspect that we are going to deal with. But there is another kind of inequality that is very important for international comparisons: inequality within countries.

This graph here is trying to give us a snapshot of a particular measure of within countries inequality. This is called the GINI coefficient or GINI index, which is a very simple index that measures inequality. First you look at a phenomena, you try to describe it. Then you try to measure it, and then you identify some irregularity. The next step for becoming a social science (and more) is to develop a theory. The final step is the empirical test.

Inequality

Inequality is not just certain countries that are richer than others but also that within each country there are some countries in which there are extremely rich people and some other countries in which instead this within country inequality is not as bad. There seems to be an overlap between those countries that are poor on average and those countries that are unequal within their own population. Once we have understood how income is produced and how growth of income can be generated or not, then an important part of this course will be to try to understand how this affects poverty.

Poverty

Poverty is one of the biggest challenges of our world. It has been for a long time in some good and bad news: in the 60s we started to talk a lot about poverty, about growth. It was the time of decolonization, so there were new countries that were starting to face the international political arena. After the period of decolonization people started to think that perhaps there was a problem that we should address. Bad news is that ‘extreme poverty’ is still there. It is a very broad concept and there are many different ways to define it. One way is to define an absolute level of poverty, which nowadays it sets around 1.9 equivalent dollars per day. Dollar here is not like an actual dollar but it is a measure that is supposed to be an equivalent consumption capacity converted in US dollars. There are still a lot of countries that have a substantial part of their population that lives below this level. 1.9 equivalent dollars per day is a very small amount, which means that we are talking about people that are living in extreme poverty.

One of the aims of the discipline of economics is of course one of understanding phenomena but is not like a purely speculative discipline. Understanding this phenomena is gonna be one of the most important things to try to tackle. One positive thing is that, at least some regions of the world (especially Far East and SouthEast Asia) have experienced an incredible improvement in terms of these measures of absolute poverty during the last 30 years. One thing that cannot be denied is that China was a country that 40 years ago was affected by extremely high rates of absolute poverty, and in 40 years it has declined dramatically.

Why did South East Asia and Far East Asia do pretty well in fighting this while Sub-Saharan Africa didn't manage to? In terms of growth and in terms of poverty there are some countries in Sub-Saharan Africa that didn't improve at all during the last 40 years. First thing that we will learn is that free market economies opening to international trade under certain conditions are beneficial for everyone. Those countries that embrace free market economy and open up after an initial period of difficulty, they speed up out of poverty.

The second thing that we will learn is that indeed there is an effect of opening up trade across the world on inequality but is typically on a rich country. What happens when you open up to international trade is that poor countries tend to reduce their inequality and get out of poverty, but within rich countries possible that the difference between rich and poor increases because the idea is that: if when there is international trade is open up certain countries tend to specialize in certain things and others in other stuff. Typically, when developing countries open up their trade, they tend to specialize in stuff like agriculture or simple manufacture. This gives an advantage to those part of the population that will work in simple factories, conversely this model will tell us that in rich countries we specialize in those very high skilled activities.

The idea is that in aggregate we are all better off but this an average, is possible that in some places some get worse off. One side economics tries to say what we should do but on the other side there is also positivity which means what actually happens if we do something.

Environment: GHG emissions

The pollution of international economic growth. Growth is unprecedented. We have an incredible change in the material ability of consuming not only goods but also services for an important part of the population in the world, and nowadays for all the population in the world. There are a number of environmental problems that we are gonna tackle and one of the most important is Greenhouse gases.

Nowadays there is no scientific evidence about a relationship between greenhouse gases and global warming. Global warming has a lot of quantifiable effects that are damaging our lives: effects on agriculture, on biodiversity, etc. This is a cost. Economy cares about revenue and cost, which means that when we think about economic factors we are not just thinking about profits and losses.

Environment: biodiversity

Policy matters. It can implement and not solve these problems, but at least can mitigate them. What the causes are and the possible solutions, and finally development economics, proper branch discipline in economics which tries to study those problems of development, so those countries that are in an situation of underdevelopment, measured in a broader term, so not just growth or GDP, but there are matters of education, health etcetera and there are disciplines that measures impact of each of these parts of development and the relationship between growth and development. Sent, famous for his studies about poverty, originally a political economist and a theorist. Growth and inequality, economic policy, role of supranational institutions.

GRAPH> What should be done for development? Importance of words. In the 60s “liberalization" people said it a lot after Reaganomics and then followed by privatization in the 90s. At the end global warmth and climate change. A lot of different global problems to tackle.

What is political economy?

The history of economic thought can be divided into 3 groups. Early classical economists, Smith, Ricardo and Marx, are part of the people that created the discipline of political economy. In the marginalists (2 group) the discipline had a great change of paradigm, that is not going to be called political economy anymore, is going to be called “economics”. Political economy thinks about economic phenomena together with the political, social, cultural and environmental situation of certain countries, or groups of countries etc. They do not have to be studied separately. Marginalist revolution (Marshall) economics developed as a discipline that tries to be as general as possible, so that it has mathematical tools that can applied to every situation regardless of the political, social future of the area that you are studying. Then Keynes and his radical and really discussed way of thinking, controversial.

This idea is summarised by this other quote. Most famous concept developed by Smith is that there is no idea of promoting any common intention, but in pursuing their own interest a person frequently promotes that of the society. Like if it was led by a sort of invisible hand. It is trying to pursue its own interest and in doing that for some reason there is this hypothetical invisible hand that leads this guy to do what is in some sense the interest of the society as a whole, a very paradoxical concept. Just a way to deliver the idea that coordination is an outcome of individual selfish choices.

The industrial revolution

Adam Smith lived during the Industrial Revolution (approx 1750 - 1850)➔ According to Smith, the division of labour is a durable source of prosperity. Labour ➔ can be either productive or unproductive E.g., manufacturing work, which “adds value to the does at of the material to which it ➔ is applied" is productive labour. The labour which not change the value of an object is unproductive ➔ Workers spend their salary for subsistence ➔ Land owners use rents for subsistence and to buy luxury goods ➔ Capitalist entrepreneurs, after satisfying their needs, the residual surplus in new ➔ activities that leads to hire new productive labour, leading to a growth process.

Why does this come about? He became an economic writer in a crucial time for England: in the industrial revolution. It was an incredible time because in England, and it started to catch up in other places, it is exactly that time in which that line of economic growth started to go up, after centuries and centuries that it was virtually flat, it started to stagnate. It is the beginning of that unprecedented process of growth seen in the outline of the course. Moreover, the industrial revolution is related to a lot of phenomena, that need very basically that this new idea that Smith was proposing that people act in their own interest, and this generates coordination was the way to go for that society.

Because before the industrial revolution a lot of the economy was happening in the countryside, it was less physical. It was still driven by a sort of semi feudal institution. There was a landlord with a lot of powers that told people what to do, some economic activity in the city, but a lot of the interest of what was happening in the city would be about politics. Where the aristocrats and the king ruled the country from, or from a castle just outside the city. It would be very easy in that semi feudal world to think that the only way to coordinate was having someone that told peasants exactly what to do.

When the industrial revolution kicks off it was pretty clear to everybody that was living in London that, with new industries popping out everywhere, new entrepreneurs investing their money and trying to generate profits and hiring people, people deciding to move from the countryside to the city to find a private job in a firm, this people are paid and therefore trade started to explode. Because of the so many people going to the city there was the need to transport goods from the countryside to the city to feed them etc and there would be a lot of entrepreneurs ready to catch this opportunity and organise profitable trade to bring food from the countryside to the people living in the city etc. The development.

Adam Smith

Adam Smith, father of the discipline: early 18th century. He was born in 1723 in Scotland, he travelled a lot and in France he started to write a book considered to be the beginning of political economy, “The wealth of nations''. It started from