International political economy and globalisation

International Relations · Institutions and the international economy. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

International political economy studies how politics and economics shape each other across borders. Its modern institutions date from the Bretton Woods conference of July 1944 in the USA. The conference created the International Monetary Fund and the World Bank, and a system of fixed but adjustable exchange rates tied to the US dollar, which was itself convertible into gold.

Trade rules came separately, first through the GATT of 1947 and then through the World Trade Organization.

Globalisation is the growing integration of economies, societies and cultures through trade, investment, technology and movement of people. Scholars disagree about who gains. Liberals stress interdependence, in which states need each other. Dependency writers stress unequal ties between the rich North and the poor South.

Rules to remember

IMF: lends to members with balance-of-payments difficulties, often with policy conditions (conditionality). Special Drawing Rights (SDRs) are a reserve asset created by the IMF in 1969.
World Bank: began as the International Bank for Reconstruction and Development, to rebuild war-damaged economies; now lends for long-term development. Both it and the IMF are based in Washington, DC.
End of Bretton Woods: in August 1971 President Nixon ended the convertibility of the dollar into gold.
WTO: began work in 1995, replacing the GATT (1947). Based in Geneva. Most-favoured-nation rule: an advantage given to one member must be given to all.
Free trade area: no tariffs between members. Customs union: the same, plus a common external tariff.
Mercantilism: wealth and power come from trade surpluses. Ricardo's comparative advantage: countries gain by specialising where their opportunity cost is lowest.
North-South: Group of 77 (1964) speaks for developing countries; the Brandt Report (1980) was headed by Willy Brandt. Dependency is linked with Raúl Prebisch and Andre Gunder Frank; complex interdependence with Keohane and Nye.

Common mistake

Students swap the roles of the two Bretton Woods bodies. The IMF deals with short-term balance-of-payments problems and monetary stability; the World Bank lends for reconstruction and long-term development projects.

Worked example

A developing country is running out of foreign exchange and cannot pay for its imports. Separately, it wants a long-term loan to build a dam. Which institution fits each need?

A shortage of foreign exchange to pay for imports is a balance-of-payments difficulty.
Balance-of-payments support is the task of the IMF, usually with policy conditions attached.
A dam is a long-term development project, and lending for such projects is the task of the World Bank.

Answer: The IMF for the foreign exchange shortage; the World Bank for the dam.

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