International political economy (IPE) is the study of how politics shapes the global economy and how the global economy shapes politics. A key focus in IPE is on the power of different actors such as nation states, international organizations and multinational corporations to shape the international economic system and the distributive consequences of international economic activity. It has been described as the study of "the political battle between the winners and losers of global economic exchange."
A central assumption of IPE theory is that international economic phenomena do not exist in any meaningful sense separate from the actors who regulate and control them. Alongside formal economic theories of international economics, trade, and finance, which are widely utilised within the discipline, IPE thus stresses the study of institutions, politics, and power relations in understanding the global economy.
The substantive issue areas of IPE are frequently divided into the four broad subject areas of 1. international trade, 2. the international monetary and financial system, 3. multinational corporations, and 4. economic development and inequality. Key actors of study may include international organizations, multinational corporations, and sovereign states.
International political economy initially emerged as a subdiscipline of international relations in the 1960s and 1970s, prompted by the growth of international economic institutions such as the World Bank, International Monetary Fund, and the General Agreement on Tariffs and Trade, alongside economic turmoils such as the fall of the gold standard, 1973 oil crisis, and 1970s recession. The study of multinational corporations also featured prominently in the early IPE, in close interaction with scholars in adjancent disciplines and the regulatory initiatives championed by the United Nations Centre on Transnational Corporations (1975–1992). IPE eventually developed into an independent field also linked to international economics and economic history, where scholars study the historical dynamics of the international political economy.
History and emergence International political economy has its historic roots in the discipline of political economy; the study of the national economy and its interactions with governance and politics. Adam Smith's publication of The Wealth of Nations profoundly influenced the development of the field of political economy.
While the newly founded discipline of economics; which studies economic phenomena absent of political and social considerations; began to diverge from political economy studies in the late 19th century, political economy continued to live as an academic tradition within political science departments, as well as within modern economics as a pluralist approach.Mark Robbins (2016) "Why we need political economy," Policy Options, While notable works from John Maynard Keynes' General Theory and Karl Polanyi's The Great Transformation published in the early 20th century are still written in the tradition of political economy, economics in its narrower form was dominating economics departments from the 1920s and onward.
The emergence of international political economy can be traced to the late 1960s and early 1970s, when deepening economic interdependence prompted by the growth of post-war economic institutions such as the International Monetary Fund, World Bank, and General Agreement on Tariffs and Trade, drew increasing attention within international relations scholarship towards the study of these institutions, and more broadly, to the study of governance of the world economy. The need for a more comprehensive understanding on global economic governance within political science circles became increasingly apparent through the crises of the 1970s; with the end of the gold standard, the 1973 oil crisis, 1973-1975 recession and calls for greater trade protection. Influential figures in the emergence of the discipline were international relations scholars Robert Keohane, Joseph Nye and Robert Gilpin in the United States, as well as Susan Strange in the United Kingdom. IPE has since become a key pillar in political science departments as well as a major subdiscipline of international relations, alongside traditional international relations scholarship centred on material security.
Topics of enquiry
International Finance
International finance and monetary relations is one of the core areas of study in IPE. In IPE scholarship, the interrelation of economic and political interests in international finance assumes it impossible to separate the financial system from international politics in any meaningful sense. The IPE of international finance is characterized by political network effects and international externalities, such as beggar-thy-neighbour effects and contagions.
A key concept in IPE literature on international finance is the impossible trinity, derived from the Mundell–Fleming model, which holds that it is impossible to simultaneously pursue all of the following three economic policies:
a fixed foreign exchange rate free capital movement; absence of capital controls an independent monetary policy
Another key dilemma in monetary policy is that governments have to balance the inflation rate (the price of money at home) and the exchange rate (the price of money outside the home market).
There is no agreement in the economics literature on the optimal national exchange rate policy. Rather, national exchange rate regimes reflect political considerations. National exchange rate policies can be 1. fixed, floating, or a hybrid of the two, and 2. entail a strong or weak currency. Different groups benefit disproportionately depending on the national exchange rate policies that is chosen.
The liberal view point generally has been strong in Western academia since it was first articulated by Smith in the eighteenth century. Only during the 1940s to early 1970s did an alternative system, Keynesianism, command wide support in universities. Keynes was concerned chiefly with domestic macroeconomic policy. The Keynesian consensus was challenged by Friedrich Hayek and later Milton Friedman and other scholars out of Chicago as early as the 1950s, and by the 1970s, Keynes' influence on public discourse and economic policy making had somewhat faded.
After World War II, the Bretton Woods system was established, reflecting the political orientation described as embedded liberalism. In 1971 President Richard Nixon ended the convertibility of gold that had been established under the IMF in the Bretton Woods system. Interim agreements followed. Nonetheless, until 2008 the trend has been for increasing liberalization of both international trade and finance. From later 2008 world leaders have also been increasingly calling for a New Bretton Woods System.
Topics such as the International Monetary Fund, Financial Crises (see 2008 financial crisis and 1997 Asian financial crisis), exchange rates, Foreign Direct Investment, Multinational Corporations receive much attention in IPE.
International Trade
There are multiple approaches to trade within IPE. These approaches seek to explain international bargaining between states, as well as the foreign economic policies that states adopt. In terms of domestic explanations for the foreign economic policies of states, the two dominant approaches are the factor model and sector model, both of which build on David Ricardo's theory of comparative advantage.
The factor model (which has been called the H-O-S-S model) is shaped by the Heckscher-Ohlin model and the Stolper-Samuelsson theorem. According to the Heckscher-Ohlin model of trade, the comparative advantage of countries in trade stems from their endowments of particular factors of trade (land, labor, capital). This means that a country abundant in land will primarily export land-intensive products (such as agriculture), whereas a country abundant in capital will export capital-intensive products (such as high-technology manufacturing) and a country abundant in labor will export labor-intensive products (such as textiles). Building on this model, the Stolper-Samuelsson theorem holds that groups that possess the factors will support or oppose trade depending on the abundance or scarcity of the factors. This means that in a country which is abundant in land and scarce in capital, farmers will support free trade whereas producers in capital-intensive manufacturing will oppose free trade. The factor model predicts that labor in developed countries will oppose trade liberalization (because it is relatively scarce), whereas labor in developing countries will support free trade (because it is relatively abundant).
Building on these insights, influential research by Ronald Rogowski argued that factor endowments predicted whether countries were characterized by class-conflict (capital vs. labor) or urban-rural conflict. Similarly, an influential study by Helen Milner and Keiko Kubota argues that factor endowments explain why developing countries liberalize their trade after they democratize (the abundant factor, labor, supports trade liberalization). A 2023 study by Milner and Lindsay R. Dolan found that factor endowments help explain trade preferences in Africa. Research has substantiated the predictions of the Stolper-Samuelsson theorem, showing that trade openness tends to reduce inequality in developing countries, but exacerbate it in advanced economies.
The sectors model of trade, the Ricardo–Viner model (named after David Ricardo and Jacob Viner), challenges the notion that factors are key to understanding trade preferences. Factors can be highly immobile, which means that capital-owners and labor who work in a particular sector may have similar interests. As a consequence, trade preferences are better understood by examining which economic sectors win or lose on trade liberalization. Whereas the factor model assumes that capital-owners in different sectors have similar trade preferences and that labor across different sector have similar trade preferences, the Ricardo-Viner model holds that in sectors where factors are immobile, labor and capital-owners in one sector may have the same trade preferences. As a result, the Ricardo-Viner model predicts that class conflict over trade is more likely when factors are highly mobile, but that industry-based conflict is more likely when factors are immobile.
Adam Dean has challenged the economic assumptions in both models, arguing that workers' wages do not consistently correspond to increases in productivity in a given industry (contradicting Ricardo-Viner) nor do workers consistently benefit from import restrictions when labor is the scarce factor of endowment (contradicting Heckscher-Ohlin). The degree to which Ricardo-Viner and Heckscher-Ohlin are correct is conditioned by whether workers have profit-sharing institutions or are unionized (which helps them to bargain for higher wages amid productivity increases). He has also challenged Milner and Kubota's study on trade liberalization in developing countries, as he shows that democratic developing countries frequently repressed labor unions amid trade liberalization.
Studies by Dani Rodrik and Anna Mayda, as well as Kenneth Scheve and Matthew J. Slaughter have found support for the factor models, as they show that there is greater support for trade openness in developing countries (where labor is abundant and thus benefits from trade openness). Other studies find no support for either model, and argue that the models have limited explanatory value. A 2022 study in the Journal of Politics found that comparative advantage predicts attitudes on free trade among individuals and legislators. According to a 2017 assessment by Thomas Oatley, there are "no strong conclusions" in IPE scholarship as to which of these models better characterizes the sources of individual trade policies.