The Global Political Economy - Case Study Example

Running head: Current Global Political Economy Global Political Economy and Development in the South Insert Insert Grade Insert Name 05 July 2012 Introduction The global political economy focuses on the interaction between politics, global trade, development and markets. The global economy mutually supports the political and international affairs of countries. Unlike local markets, international markets depend on the laid down rules and procedures. In the same token, politicians do not have control over global markets. There is more integration in the global economy than ever before. This interdependence culminated in the ripple effects of the global recession of 2008- 9. Development typically relates to growth, structural transformation and improvement in quality of life (Ravenhill, 2008). The linkage of international banks, financial institutions, and trade illustrates the difficulties facing current government systems. There are suggestions that the current global political economy is beneficial to the Global South. In this paper, I will outline the extent to which the international political economy has undermined development in the South. Global Political Economy With the advent of globalization, the relevance of the role of how nation state should manage economic systems in the development process has taken center stage. The reasoning behind this is that the economic systems presume that there is a political structure. Consequently, this means that development occurs in a global framework; at the same time, it arouses the question of the relevance of individual, national development plans. National development strategies become peculiar when there are other actors in the development process other than the nation state. The importance of understanding the nature of global political economy is because economic systems can not exist without stable political framework. The North- South divide of the world represents the developed and the underdeveloped world. This division can be conceived as ongoing due to the global arrangement of the political and economic systems. The Global North refers to the industrialized countries mainly in the northern hemisphere, while countries in the Global South are mostly found in the southern hemisphere; in Africa, Asia, Caribbean and Latin America (Kegley, 2008). The global political economy took a different turn after the oil shock of 1973. The member countries of OPEC established an oil cartel which saw the price of oil increased dramatically. Marxist offers the explanation that the oil crisis was not caused by OPEC but rather the Nixon administration. This premise asserts that the administration wanted to safeguard the interests of America capital and control the international money market (Hoogvelt, 2010). Furthermore, after the collapse of the Bretton Woods institutions (IMF and World Bank) there were a lot of dollars in circulation, in the world, than inside the United Sates of America. In order to minimize the inflationary pressures of dollars, the government instituted demand for dollars. Thus, countries were forced to hold on to dollars regardless of the wane in influence of the Bretton Woods institutions. This argument also posits that the use of dollars would counteract the rising influence of Japan and Europe. The OPEC countries would in turn benefit through buying military hardware in dollars. The demise of the Bretons woods institutions paved the way for the hegemonic dominance of the US in the global political economy. In the contemporary world, the North has a lot of influence in the global political economy. However, there is an emerging group of countries whose power and influence is on the rise. The global system is changing to the extent that there is diffusion of power to these countries and regional power houses (Hurrell & Sengupta, 2012). There is debate as to whether the dominance of the North will ultimately give way to the emerging countries (Brazil, India, China, and South Africa) or whether it will lead to a more multipolar world. The growing economic clout and dynamism and political influence of the emerging countries is evidence of this phenomenon. Despite the rise in influence in these countries, they have shied away from undertaking more responsibilities in the world. In the field of global political economy, various theories have been advanced to explain the international political and economic development (Frieden & Lake, 2000). The theories advanced include, liberalism, Marxism and Realism. The Marxist school of thought analyses the political economy from the issue of class conflicts. There are two classes of people; the owners of means of production and the workers. The theorists say that the economic interests of the classes are different and in conflict with one another. Capitalism is exploitative in nature as it denies the workers better pay for their work. In the contemporary global political economy, the Marxists deal with the issue of the outcomes of labor and globalization of capital. They also deal with the expansion of Multinational Corporations from the North to the South. The growth of globally linked financial markets has led to the weakening of labor’s economic and political supremacy. Equally, it is easier for the MNCs to shift their bases to other countries when calls for higher wages in one country occur. An opposing theory on Realism focuses on the role of the nation state in pursuit of power and economic determination. The nation states are the main actors in the global political economy. The nation states govern with authority without being answerable to any figure of authority. All parties and actors become answerable to the nation state with other actors as secondary. Citizens of different countries can interact with each other; nevertheless, their relations are governed by nation states. The focus on power relations means that the theorists assume that economic deliberations are complimentary to power. Their main concern is how international power affects international economic balance. Liberalism is the theory advocated by adherents of capitalism and the system occurs under minimal government intervention and little regulation. Trading in the international markets ought not to be interfered by the nation states through trade restrictions or government interventions. Capitalist tendencies are the cornerstones of the global political economy as advocated by organizations such as World Trade Organization (WTO). In regards to the global political economy, the issue of globalization elicits intense debate. The first aspect of globalization is internalization in which trade volumes have increased tremendously across borders. Another dimension of this is the impact of technological innovations in communication. Lastly is the issue of liberalization which has been possible through the policy formulation of states. Smaller states have also had a stake in globalization through the liberalization of trade, investment and production incorporating local economies to the global economy (Woods, 2001). Many countries in the Global South are dependent on the North through international financial institutions and MNCs. This dependence occurs in the case where the South transfers resources and funds to the North through a global political economic system. The transfer of these resources and funds exceeds the aid that the countries receive; the aid includes loans at exorbitant rates, which negates the purpose of helping development. The global political economy has increased the negative impacts of the South’s dependency on the North capitalist nations. With the fall of communism in the Soviet Union, the restrictions on the flow of funds have been loosened (Lawal, 2006). The transfer of resources and funds to the North from the South occurs since the global political economy is tilted in favor of the North. Power and economic relations of the system resides in the North in which the South relocates economic resources by way of debt servicing, trade deficits and profit outflows. The drain in resources makes the South depend more on the North in a vicious cycle where countries fail to meet their needs. Their contribution to the global political economy does not enhance their economic development. The assumption that the global political economy would open markets for all countries is not true. The growth and continued development of the North have left the South behind with marginalization of most of the countries. Nevertheless, some countries like Brazil which is endowed with natural resources and bigger population than most countries have been able to integrate into the global political economy. The gap between the North and South is wider than before due to the uneven distribution of the trade benefits. Through global institutions like the WTO, there is consensus that opening up of markets would lead to development in the South. However, the opposite has occurred where the investment opportunities in the South have been taken by countries in the North. There is no doubt that foreign direct investment is essential to economic development, but most of the profits are repatriated back to the parent companies in the North. The removal of barriers benefits large corporations from the North leaving corporations in the South compete for lesser business opportunities. Opening up of the markets is detrimental to the domestic players who cannot compete with the bigger corporations. Additionally, the North determines the prices of commodities from the South, while the prices of finished products are much higher and expensive for the South. There is tariff escalation under WTO guidelines such that it is cheaper to export raw agricultural products than export of processed goods. Thus, Africa still lags behind as there is no incentive beyond primary agricultural production. There are also tariff peaks that lock out African countries from comparative advantage. The south faces numerous challenges in developing their manufacturing sectors due to deterrent from North’s influence on global organizations. The global political economic system perpetuates economic liberalism and advocates for reduction in import tariffs. This leads to greater reduction in government revenue for the countries in the South; combined with the reduction in government support, the economies in the south face trade deficits. On a reduction on export subsidies, it harms the economies of developing countries more than the developed ones. Agricultural production contributes more to the economies of developing countries. In the same token, their share of subsidies to the economy is also bigger. Reduction in tariffs leads to cheaper importation of agricultural goods; at the same time it causes loses to the local agricultural production. Proponents of economic liberalism argue that benefits of the system trickle down to all people in the production process. In reality, the system widens the uneven income distribution in the host countries. This is mostly with the entry of MNCs. Persistent or widening income distribution undermines growth in the long run. The impact of this is that development and poverty alleviation become harder (Rabbanee, Haque & Hasan, 2010). To explain the continued underdevelopment of the South in the global political economy, the dependency theory which draws inspiration from Marxism proves appropriate. This theory posits that the advanced countries influence the global political economy for their self interests. The peripheral countries in the South engage in economic activities, but the beneficiaries are mainly in the North. The relevance of the Dependency theory is due to its adoption by Asian, African and Latin American scholars. Furthermore, the theory argues that the relationship between the core country and the dependent one is unequal, with the dominant country influencing the political economy of the dependent country. The historical nature of the South is intertwined with the issue of colonialism. Colonialism affected the political economies of the countries to the extent that even today they mostly export primary products. The importing countries add value to these products and resell them to the South at a higher price. With the current global political economy, this has been made easier. With more capital, the developed countries influence the infrastructural network of the periphery countries enhancing their exploitation of the resources. In conclusion, international organizations like the WTO aim to minimize trade barriers between countries through negotiations. For the global political economy to function there is a need for consensus and rules on how to conduct international trade under diverse political systems. The economic clout of the North translates to better bargaining power for the North thus leaving the South at a disadvantage. In theory, trade restrictions should be minimal while countries ought to open up their markets. However, in reality, the North imposes tax restrictions on the South undermining development. In order for the South to attain development, there is a need for better integration into the global political economy. In addition, the advent of the global political economy cannot be wished away. Bibliography Frieden, J.A. and Lake, D.A., 2000. International Political Economy: Perspective on Global Power and Wealth. New York: Roultledge. Hoogvelt, A., 2010. Globalization Crisis and the Political Economy of the International Monetary (Dis) order. Globalizations, 7(1-2): 51-66. Hurrell, A. and Sengupta, S., 2012. Emerging powers, North- South relations and global climate politics, International Affairs, 88:463-484. Kegley, C.W., 2008. World Politics: Trends and Transformation. Connecticut: Cengage Learning. Lawal, G., 2006. Globalization and Development: The Implications for the African Economy, Humanity & Social Science Journal, 1(1): 65-78. Rabbanee, F.K., Haque, M.M.and Hasan, F., 2010. Globalization and Human Development- Realities and Recommendations for Developing Countries, Asian Affairs, 30(1):32-49. Ravenhill, J., 2008. Global Political Economy, 2nd ed, New York: Oxford University Press. Woods, N., 2001. ‘International Political economy in the age of globalization’, in J.Baylis, S. Smith and P.Owens (eds), The Globalization of World Politics. Oxford: Oxford University Press. Read More