Theories and Issues in
International Political Economy
The Interwar Period
• Crucial here is the role of an International Lender of the Last Resort.
• For Kindleberger the Great Depression was caused by the failure of a
hegemon, either the Brits or the US, to
1. maintain a relatively open market for distress goods
2. provide stable long-term lending
3. police a stable system of exchange rates
4. ensure the coordination of macroeconomic policies
5. act as a lender of the last resort.
• Kindleberger wrties: ‘These functions, I believe, must be organized and
carried out by a single country that assumes responsibility for the system’.
The two critical elements of the Bretton Woods system were the creation of:
1. A Fixed Exchange Rate Regime to provide international monetary
stability (given the problems associated with monetary stability since
World War One).
2. The construction of an international trade regime to encourage free
trade and discourage the beggar-thy-neighbour policies of the
1920s and the Great Depression.
Both of these aims reflected the ‘compromise of embedded liberalism’,
whereby societies welcomed international trade and financial liberalization in
return for a greater social welfare role for states. States would therefore
engage in a multilateral framework while also having domestic autonomy.
Nixon Shocks and Stagflation
• Thus, the dollar was devalued by 8.57 per cent and the official gold price increased to
$42.22 an ounce. Nixon famously stated that “I don’t give a f*ck about the lire”.
• European states wanted a new system based on a non-national currency, the IMF’s
Special Drawing Right.
• The 1973-74 oil embargo imposed by the OPEC quadrupled world oil prices and
dramatically increased the number of dollar-denominated assets in the Euromarkets –
adding to the effects of the early 1970s ‘dollar overhang’.
• In 1974 offshore banks took approximately $30 billion in deposits from OPEC members,
and lent out $60 billion to non-oil exporting states whose balance of payments where
sent into disarray.
• Western states fall into stagflation - unemployment and inflation at the same time.
Banks lent big internationally…
1980s and Structural Adjustment
• Petrodollar recycling leads to ‘Jumbo’ and ‘Mammoth’ loans. The average size
of international banks loans increased from $49.6 billion in 1975 to $92.2
billion in 1979. Chronic overlending.
• Latin American nations increased their total debt between $159 billion in
1979 to $327 billion in 1982. Most loans to developing states had variable
interest rates, so rises in world interest rates dramatically increased their
payments, especially when the US fought inflation and brought interest rates
into double figures. Mexico asked for delayed payment in 1982. Structural
adjustment packages follow from the IMF and the World Bank
• In international trade this is a period of ‘surplus capacity’, making debt
• This is period when US scholars talk about the rise of a new hegemon, Japan,
or a joint hegemony - perhaps influenced by this:
The 1990s and Rapid Financial Globalization
• During the 1990s a ‘carry trade’ emerged with investors borrowing cheap and investing in
countries with high interest rates. A change in the nature of financial crises from current to the
• The International Monetary Fund is heavily criticised for misdiagnosis and then being too
heavy-handed following the Asian financial crisis
• International trade regime legalised and codified through the World Trade Organisation
(1995) and then ignored through booms in preferential trade agreements
• Regionalisation intensifies more generally, including within the EU, NAFTA, APEC…
• Economic boom period in the US, creating the foundations for the current crisis.
• How successfully does the term “globalisation” capture
the essence of the contemporary world’s political
• Is globalisation primarily the consequence of political
choices or of technological change?
• What is distinctive about state-market interactions in the
current era of economic globalisation as compared to the
pre-1914 international economic system??