The state plays a very important role in international political economy and is considered as the ultimate decision maker in both economic and political decisions. International Political Economy (IPE) is about the interaction between state and market. Based on tangible and intangible power or, military and economic power, the world can be divided into two blocks: North and South.
The North contains the countries which are highly powerful and strong; militarily, economically and politically: whereas, South is characterized with weaker, less developed and poor states of the world with weak economies, governments and military. IPE and International Relations (IR) scholars also characterize the North as ‘Centre’ and South as ‘Periphery’. In contemporary age of globalization, states (with special reference to powerful states) are the main players in IPE.
There are many institutional arrangements like International Monitory Fund (IMF), World Bank, World Trade Organization (WTO), and certain other global, regional, and bilateral organizations in IR serving as platforms for states to come together and work for the smooth functioning of IPE. It is pertinent to argue that although North comprises the main economy of the world and dominate the major economical institutions but South comprises of the majority of population and can longer be ignored in IPE due to certain emerging powers of the North like China, Brazil, and India. However, in this anarchic world where each state is sovereign and there is no sovereign authority above state, the hegemonic and powerful players like the United States of America (USA) will never give up their dominant position in the world and uses both economic and political means to pursue and further their objectives world wide. There are different theoretical perspectives in IR such as liberalist, structural constructivist, and realist used for economic-political analyses. But realist approach is used in the following analysis of IPE and the North-South relations in terms of disadvantaged position of South are scrutinized. In this anarchic world state is ascribed a dominant position despite of growing globalization where major International Organizations are made up of states of North and South. However, it is also pertinent to note that developing states have not been able to exercise their sovereignty and self-determination.
The Significance of IPE
In international politics, state is the main actor which plays a very crucial role in IPE. One can argue that in the current era of globalization with many global institutions and arrangements like WTO, IMF, regional arrangements like European Union (EU), multinational corporations (MNCs) like Nokia, Gazpom, General Motors (GM), internet, media, pressure groups etc. have diminished the state power. But, state still plays a very important role in political and economic spheres of IR as states are the final decision makers in International Organizations (IO), being their members and decision makers. It should be noted that DCs are the major shareholders, hence exert considerable influence in major decisions of International Financial Institutions (IFIs). Anderson et al. argue that the US political interests do often undermine the said purposes of foreign loans and aid allocation policies of IFIs like the World Bank in general.
Their said purposes of poverty alleviation and development of developing countries in South are often been compromised in front of the US interests (Anderson, Thomas Barnebeck, Hansen, Henrik & Markussen, Thomas (2005). As for instance, there are unequivocal instances of World Bank lending decisions where it lends loan to Pakistan, influenced by the US political interests. As for instance, the World Bank Official Development Assistance to Pakistan tripled from $226 million in 2001 to $860 million in 2002, after the 9/11 terrorist attacks on US soil and its military engagement in Afghanistan (Anderson et al.:3). The reason behind this assistance is that Pakistan has been identified as ‘frontline state’ by the Bush Administration in the ‘Global War on Terror’ (GWOT) and is neighboring state of Afghanistan.
The states have foreign policies about both security and economics. But it is evident that the tangible powers of states are very much dependent upon the intangible powers like economical leverage. At the domestic level, states make policies for the protection of private property rights and the provision of infrastructure like communications and transportation which regulates market interactions effectively. While states make foreign policies and make IFIs and International Organizations (IOs) to pursue and protect their interests abroad. Therefore, Cohn H. Theodore (2008: 4) contends that “a state’s wealth and market size are often closely related to its military and political power.” In IPE, DCs compete with each other for international influence and furtherance of their interests, hence exploit LDCs through carrots and sticks.
Realist Assertions of IR and IPE
According to the Realist assertions, there is no central authority above state due to the anarchic nature of international system in which each state (weaker and stronger alike) has to protect its interests and ensure its survival; ‘Self-help’ is the norm of IR. Thus, “realists consider the state to be the principle actor in IR, and they place considerable emphasis on the preservation of national sovereignty.” (Cohn H. Theodore, 2008:52). If the state has internal monopoly and control over power and violence, it said to be sovereign internally; while it is externally sovereign when it is not occupied by any other outside state. There could be controversy in this assertion because the world is anarchic where each state has to maximize its military and economic power and in this scenario the powerful states of the North or Centre does not let other states of South to exercise their will and sovereignty. The former often interfere with latter’s sovereignty through different strategies, both economic and military. Moreover, powerful states also influence weaker states through economic incentives offered by international economic institutions such as WTO, IMF, World Bank etc. Hence, “realists studying foreign economic policymaking discuss sub national and transnational actors in explaining a state’s policies.” (Cohn H. Theodore 2008:52)
Although realism can be criticized by liberals and Marxists for being over occupied by the security issue; but there are factors which contributed to the renewed interest of realists in international trade and economy. Firstly, “the decline of the Cold War and increasing disarray in the global economy forced many realists to broaden their focus beyond security issues.” (Cohn H. Theodore, 2008: 56). One can argue that Western economic relations were flourishing under US leadership during the 1950s and 1960s, but major changes in the 1970s and 1980s (great power of Organization of Petroleum Exporting Countries (OPEC), the relative decline of the US hegemony, and the foreign debt crisis) has had destabilizing consequences for the global economy. These new complex developments have stressed realists to acknowledge the inevitability and significance of economic issue which had formerly been regarded as the issues of “low politics”. Second factor for realists interest in IPE was their argument of liberal and Marxists studies for being “economistic”; as “they exaggerated the importance of economics and underestimated the necessity for realist studies of IPE that emphasized the role of state.” (Cohn H. Theodore, 2008: 57).
However, it should be noted that the states are “rational actors” of IR; irrespective of belonging to North or South. For assurance of survival and maximization of power, wealth is inevitable. So, periphery states are aware of the complexity and importance of international economic institutions without which it is not feasible to prosper. As for instance, China has decided to become full member of WTO in 1990s; given the need of time and maximization of its economic power.
International Economic Relations
International economic relations between North-South and South-South mark an environment of mistrust and competition. Due to the security dilemma, ‘relative gains’ are given more importance. Policy makers give special consideration to the policies aiming at countering other states; competing them through different economic strategies like providing aid to developing countries, tariffs, and other trade barriers. Realists argue that “even if two states are gaining absolutely in wealth, in political terms it is the effect of these gains on relative power positions which is of primary importance.” (Cohn H. Theodore, 2008:52). Realists analyze international economic relations in terms of zero-sum game where one state’s gain is regarded as others loss. As for instance, the US presence in Afghanistan and due to this in Pakistan which is regarded as front-line state in the Global War on Terror (GWOT) can be seen as China’s containment. China is posing an open challenge to the US dominant position in the world economy. Pakistan is another South Asian less developed state which is strategically very important for China’s economic development. Through Gwadar Port (a deep sea port situated in Pakistan’s province Balochistan) China being a neighboring state to Pakistan can reach the Gulf region which can serve a very important energy corridor for China. And interestingly, China is well aware of its importance and there was a joint Gwadar Port Project going on, but due to the insurgency in Balochistan, progress can not be made and hence a set back for both China and Pakistan.
It is claimed that the US, and North Atlantic Treaty Organization (NATO) forces are responsible for fomenting trouble in Balochistan. Shah, Anup (2009) argues that the ‘Security dilemma’ is common fears of competing states because the resources are limited and the rivals are many. Therefore, states build armaments for self-defense and for this purpose LDCs look outside for backing.
As far as the international economic regimes or institutions are concerned “liberals assume that the IMF, World Bank, and WTO are politically neutral and benefit all states that adhere to their liberal economic guidelines.” (Cohn H. Theodore, 2008:52). Whereas, realists disagree with them on the basis that most powerful states shape the rules of these organizations to fit their own national interests and that IOs serve as “arenas for acting out power relationships.” (Cohn H. Theodore, 2008: 52). As for instance, a simple majority is needed in most IMF decisions, but majorities of 75 and 85 percent are required for some important decisions; these special majority votes give an effective veto to the United States, the EU, and the LDCs. However, the LDCs are such large, unstructured group of states with few resources that they can hardly unite to block an IMF decision. Thus, the IMF’s weight voting system favors the interests and objectives of North (Cohn H. Theodore, 2008:132).
Developing Countries in International Trade
In the current age of globalization, this fact can not be denied that the South can not be ignored by the powerful North as countries belonging to South like China, India and Brazil are the important players in IR. United Nations (UN) Conference on Trade and Development (2004: 2) asserts that the patterns of international trade are transforming with increasing share of the South in international trade and development. South’s share in world trade has been increased from 20 percent in mid 1980s to 30 percent. The share of manufacturing goods of developing countries also has risen from 20 percent of their exports ($115 billion) in 1980 to nearly 70 per cent ($1,300 billion) in 2000. Furthermore, the US has imported more goods from developing countries than that of developed one in 2003 with an increase of 40 percent in its share of exports to developing countries. Nearly half of Japan’s exports and one third of these of EU (Excluding intra-EU trade) are delivered to South.
Similarly, Mohammad Razzaque (2007) contends that from 1985-2005, intra-developing countries’ imports increased from $97 billion to more than $1000 billion. However, one should be meticulous in noting that in reality East Asia is most active which account for 72% of all manufactured South-South trade. Ten leading South economies account for 90% of manufactured goods and 72% of agricultural products. However, except for East Asia and few others, South-South trade is dominated by primary commodities. For many countries natural resource intensive products have been the most dynamic sectors like ores and precious metals, synthetic rubber, nickel, coal, and petroleum products. The developing countries also face tariff and non-tariff barriers which affect their performance in international trade.
The realists view the problems of LDCs as caused not only by poverty, but also from their weak position in IR. The weak position of South in comparison to North is always vulnerability for them in this anarchic world. As for instance the post WW II order was designed by the most powerful and victorious nations of the world and international institutions are still dominated by these powerful actors of IR. This is evident from the United Nations more powerful and influential Security Council which is totally in control of the most powerful states of the world like the US, United Kingdom (UK), France, Russia, and China. Same is the case with international financial institutions which could not be run without financial and political support of the West or North; hence dominating them (Gruffydd Jones, Branwen: 1). However, there are certain strategies which are used by the South to minimize their vulnerability, including
1. LDCs depend on their greater numbers to engage in collective action vis-à-vis the North because they have little power individually.
2. LDCs depend on government involvement to promote their development. LDCs have opted for policies such as import substitution and export-led growth in which the government supplements the market.
3. LDCs try to alter international economic regimes and organizations. At the end of World War II, the United States as hegemon helped establish international regimes upholding liberal principles, norms, rules, and decision making procedures. (Cohn H. Theodore, 2008:65)
China in the World Economy and Implications for the ‘South’
Due to its growing involvement in international trade, China has entered into WTO by becoming a full member of it on December 11, 2009. China’s entry in WTO is not independent but has certain implications for the rest of countries of South. China is the 4th largest industrial economy of the world but identified as a ‘developing country’ and according to official statements, delivered since or before joining the WTO, China is in favor of developing countries. As for instance, “during the Third Ministerial Meeting, when China’s accession to the WTO became imminent, Chinese Minister for Foreign Trade and Economic Cooperation, Shi Guangsheng submitted five proposals in support of incorporating the developing countries’ development objectives in trade negotiations.” (Khan Tanzimuddin Mohammad, 2004: 13)
After China’s membership with WTO, its official newspaper, the People’s Daily says that “China’s participation in a new round of trade negotiations, as the largest developing country, will boost the developing countries’ collective negotiating capability, thereby rendering it possible to change the balance of force between “North and South”. It further says that it will “speed up the remedy for problems such as an imbalanced multilateral trading system, and the ineffective implementation of the Uruguay Round Accords.” (Khan Tanzimuddin Mohammad, 2004: 14). This shows the possibility of change in the balance of power in favor of developing countries with the help of China’s leadership which is also a developing country. The realists assert that “a rising hegemonic state prefers an open international system because this can contribute to its economic growth, national income, and political power.” (Cohn H. Theodore, 2008: 59).
However, if we analyze China’s position in realist terms of competition or zero-sum game, it is susceptible that a fear become visible that the exports of the developing countries would face increased competition from China or could eventually be displaced by the latter due to similar comparative advantages and the same export destinations (Khan Tanzimuddin Mohammad, 2004:14); as the realists also portray the hegemon as coercive. Thus, neo-realist theory asserts that a hegemonic state creates “international regimes for the purpose of preserving its economic and political interests” and “international regimes are premised on the anarchical structure of international relations, reflecting distribution of capabilities in the international system.” (Khan Tanzimuddin Mohammad, 2004: 15)
The US Reaction to Rising Chinese Trade
The US is well aware of China’s rising economic power which is taken as threat to the US hegemony. The realists, according to the hegemonic stability theory warn about the “coercive hegemon” (Cohn H. Theodore, 2008: 59) which can use certain coercive measure like threats, sanctions, cutting off trade, and creating other trade barriers to the challenger. The US is the largest market of China overseas and second largest source of foreign direct investment. According to the Congress Research Service (CRS) Report (Lum Thomas, Nanto K. Dick, 2007) prepared for the US Congress, the US imports from China increased dramatically not only in labor-intensive sector but also in some advanced technology sectors such as office and data processing machines, telecommunication and sound equipment, and electrical machinery and appliances. All these developments show an explicit threat from country of South to the US hegemony. In return, Congress considers accessing Chinese markets, intellectual property rights (IPO) protection; it also focuses on mounting US trade deficit with China; there are also allegations of China’s dumping policies by selling products internationally at low prices, engagement in currency manipulation, and exploitation of its workers for economic purposes. Hence, the US 109th Congress has introduced bills imposing trade sanctions of china, anti-dumping policies, and safeguards against Chinese products and forcing it to remove non-tariff trade barriers (Lum Thomas, Nanto K. Dick, 2007). This analysis shows a competition and state of economic confrontation between the powerful state of the North and emerging power of the South.
Disparity between the North and South and Challenges facing ‘South’
However, some countries of the South (China, Singapore, South Korea) are making unprecedented progress in IPE but majority of the developing countries face low living standards and marginal share in international trade. The most recent UNDP Human Development Report of 2005 (Jones Grffydd, Branwen) says that one in five people in the world—more than 1 billion people—still survive on less than $1 a day. These people are living in abject poverty which threatens their survival. Another 1.5 billion people live on $1–$2 a day. More than 40% of the world’s population live in the conditions of extreme poverty and are under privileged. More than 850 million people, including one in three preschool children are under nourished and badly affected. More than 1 billion people lack access to safe water and 2.6 billion lack access to improved sanitation (Jones Grffydd, Branwen: 3). These majority poor people belong to the South and are non-Europeans living in the former European colonies concentrated in Asia and Africa.
The North being dominant and powerful will resist the attempts of the South in international trade. According to the UN Conference on Trade and Development “the primacy of the North in international economic relations will remain.” (June 13-18, 2004: 3) Paul Prebisch, one of the eminent proponents of New International Economic Order (NIEO), argues that “institutions at the core of the world economy have more influence on the world economy than institutions in the periphery.” (Diehl F. Paul, 2001: 265). So, it is challenging for the South to revise the international economic relations. The South will continue to influence developments in the world economy and trade. There are stark differences between the economies and living standards of North and South and it will take time to revise these trends. There have been several attempts by the South to counter the North’s influence in world trade and economy in attempts like NIEO, non-aligned movement, OPEC oil cartel of 1970s, and creation of other regional and economic organizations. There are many indicators of North-South disparity: income levels; share in world trade, including in value added in trade; size of economic operators; pattern of specialization, and other structural and institutional factors.
We can see that the average GDP per capita of developed countries sets at nearly $27,000, which is 20 times higher than that of developing countries. Fewer than five Members of the WTO with developing country status are within $10,000 of developed country per capita income (UNCTAD 11th Session, June 2004:3). It further says that the difference in economic indicators of the developed and developing countries become explicit when we look at the Trans-National Corporations (TNC). In terms of value added services the large developed country TNCs are larger than the size of the economies of most developing countries: for example, the value added of Exxon Mobil is larger than the size of the economies of Pakistan or of Chile, and its total foreign assets are nearly equal to the total foreign assets of the top 50 developing country TNCs taken together (UNCTAD 11th Session, June 2004:3). Moreover, the foreign sales of Daimler-Chrysler AG are 40 per cent higher than the total exports of Africa as a whole, while those of Honda Motor Corporation are greater than the total value of India’s exports (UNCTAD 11th Session, June 3004: 3). These statistics clearly indicate the stark differences between the North and South in terms of economy and world trade which is by no means easy to abolish or revise.
International Financial Institutions (IFIs) and South
After the WW II the IFIs were designed by the powerful states of North and these are seen as highly influenced by them due to their economic power and leverage. Developing countries are the main sponsors of these institutions as well so it is easy for them to mould their decisions in their favor. These IFIs like WTO, IMF, World Bank are said to regulate and harmonize the international finance and trade. They also provide international norms, laws, institutional arrangements, principles, guidelines etc. and play a major role in the process of globalizations. Therefore, realists contend that “globalization (to the extent it is occurring) increases only because states permit it to increase.” (Cohn H. Theodore, 2008: 53). In the post WW II it was feasible for the West to open international markets where their finished goods and technologies find the buyers, who are less capable and could not compete them due to lack of sophisticated technology. As the realists say that “the largest states can either open or close world markets and can use globalization to improve their power positions vis-à-vis weaker states.” (Cohn H. Theodore, 2008: 53).
Theoretically, the IFIs are said to be established to relieve the weaker states, providing them assistance, and based on the norms and rules of equality and self-determination. But, in reality, things are very different and these IFIs are seen as hindrance in the way of the development of developing countries. As for instance, due to considerable complexity of WTO rules and its institutional structure, a developing country delegate cannot possibly follow all WTO developments. According to an estimate, “there are over seventy different WTO councils, committees, working parties, and other groupings, involving over 2,800 meetings each year.” (Tanzimudin Mohammad, 2004: 4). It is believed that most developing countries cannot afford to attend the WTO meetings in metropolitan capitals of the North as little support is received by delegates from South. The realistic analysis of WTO shows that multilateral trade regimes are solely concerned with the heavy weights’ interest which includes the developed countries form the North like the USA, the European Union, Japan, and Canada, to disadvantage of developing countries (Khan Tanzimuddin Mohammad, 2004: 16), while sideling the interests of less developed states and exploiting their weaknesses. Shaffer Gregory (2006: 1) contends that although developing countries vary considerably in terms of their size, geography, populations, economy etc. but the challenges they face from WTO can be classified into three categories:
(i) A relative lack of legal expertise in WTO law and the capacity to organize information concerning trade barriers and opportunities to challenge them;
(ii) Constrained financial resources, including for the hiring of outside legal counsel to effectively use the WTO legal system, which has become increasingly costly; and
(iii) Fear of political and economic pressure from members exercising market power, and in particular the United States and EC, undermining their ability to bring WTO claims. We can roughly categorize these challenges as constraints of legal knowledge, financial endowment, and political power, or, more simply, of law, money and politics.
Similarly, IMF is also criticized by developing countries, and certain Non Governmental Organizations (NGOs) for being influenced by the North in its decisions and policies. Graham Bird (Diehl F. Paul, 2001: 277) criticizes the IMF for its impartial decisions and for deliberating impeding the progress of developing countries. He argues that “at its inception, the IMF had been seen as having no specific role in developing countries, but now it became exclusively these countries that form its clientele.” One of the allegations against IMF is that “it had inappropriately become a development agency.” (Diehl F. Paul, 2001: 277). NGOs also argue that IMF has been an inadequate development agency because “IMF supported policies did more harm than good and that developing countires, particularly the poorest of them, would be better off without it.” (Diehl F. Paul, 2001: 277-278).
Moreover, the IMF exerts an influence over the design of economic policy of countries that receive its financial assistance. Therefore, the IMF has a powerful say on “exchange rate, domestic credit creation, interests rates and fiscal imbalances.” (Diehl F. Paul, 2001: 283). It also exercises its influence and interference in “structural conditionality covering pricing policy, trade liberalization, and privatization, the structure of taxes and government expenditures, as well as reform of the financial sector” (Diehl F. Paul, 2001:283) “The weakest performance seems to be with respect to monetary restraint. The policy outcomes are also discouraging indicating weaker performance in economic growth. Sebastian Edward records an average failure rate for economic growth of 72%, and similarly discouraging results as discovered by P.S. Heller et al. and by Zulu S.M. Nsouli in the case of Africa.” (Diehl F. Paul, 2001: 301). These research findings show that not only the progress of developing countries is impeded by these North dominated institutions but it also undermines their sovereignty and the right of self-determination for which collective action of developing states is required besides supporting economic policies.
International political and economic relations are based on the self-help system marked with mistrust and competition between the states, especially ‘North’ and ‘South’. It is not to suggest that there is no cooperation within IPE and IR; however, the self-interest and underlying political objectives are at the back of such cooperation. Instead of helping and assisting the majority poor nations of the South, the wealthy North’s created IFIs impede the development of developing states and powerful hegemonic states interfere with their sovereignty and often destabilize them for their vested interests. IPE is very important in politics where states actions and intentions are marked with self-interests and survival. Although, there are developing states like China which are big players in international trade but majority of the countries form ‘South’ have only meager share in international trade and usually are trading only in basic commodities or scarce natural resources.
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