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I. Introduction * review course so far (a) started with basic ingredients of international relations (i) one big question: what are the sources of conflict and the prospects for cooperation? (ii) two major theoretical issues -realism vs. liberalism debate -levels of analysis (iii) traced those questions through the essential building blocks of any study of international relations -who are the actors -what are their goals -what are their instruments (b) then looked at International Security, a major sub-field, which takes up the issue of conflict directly -origins of military conflict, i.e. war -the management of power -the special role of nuclear weapons and so on (c) now we will consider the next major sub-field, international political economy -still considering conflict and cooperation, but now in the economic realm instead of the security realm -professors tend to distinguish themselves based on whether they do IS or IPE - IPE considers a wide range of issues: (a) trade: buying and selling of goods (b) finance: capital flows and investment (c) markets and other mechanisms designed to govern the relationship between countries -for more on any of this take courses by Profs. Randall Stone, Mark Kayser, *fundamental issue for IPE: the inter-relationship between politics and economics. The way the logic of one gets all discombobulated with the logic of another * two dilemmas drive IPE II. The Economic Paradox * On the one hand, participation in the world economy is a good thing, especially over the long haul. On the other hand, participation in the world economy is a painful thing, especially over the short haul.

A. The Benefits of Participation (1) specialization allows us to produce and consume an ever more elaborate array of goods -back when everything was done by the family, you did not get much variety. -goods were only as good as the average Joe and Jane could produce (2) greater production and consumption means more growth, and more wealth for everyone -economy is booming, more jobs and more income -just think of the kinds of jobs that exist today that were entirely unheard of even one generation ago * software programmers * Compact Disk manufacturing * MTV V-J's (3) participation in the world economy provides some discipline, forces countries to behave in an economically and fiscally responsible fashion or else their economy will be hammered -integration acts a little like Darwin's survival of the fittest -countries learn what works and imitate it

* big proviso: these are benefits in theory and over the long haul. Short term outlook in fact may not be so rosy B. Costs of Participation (1) specialization kills some domestic industries (a) countries no longer have to produce everything themselves (b) some industries, e.g. labor intensive ones, will flee to areas where they can be done more cheaply (c) think of the number of industries that have died in the US over the last generation * ship-building * computer chip making * steel-making * consumer electronics * almost car manufacturing * recall Ross Perot "That great big sucking noise will be the jobs heading south to Mexico" (c) now in the long run this is healthy, but what do you do with the people who are now unemployed? -economic policy produces major political problem at home (2) integration with the world economy makes you vulnerable to big shocks (a) deliberate shocks

-classic case is the Oil Crisis, when the OPEC cartel used their oligopolist position to quintuple the price of oil virtually overnight * sent western economies into a tail spin * inflation, unemployment  stagflation (b) unintended shocks -when bad weather hurts crops it hurts countries who import food -the spread of inflation *Germans are very good about keeping their monetary supply under control in order to control inflation *but because their economy is linked to the Italians, French, and the British, who are less controlled, they can experience some inflationary pressures * Canadians experience the same problem because of their interconnectedness with the U.S. (3) governments like to control things -all of the above is anathema to domestic governments who love to control their domestic economy * pump it up right before election like Bush did * pump it up to keep election promises like Clinton did -economic forces means change while politicians like things to be stable * even those politicians who want change will be frustrated by economic forces because they bring change beyond their control III. The Political Paradox * On the one hand, the political logic of the anarchic international system encourages countries to pursue self-sufficiency (called autarky). On the other hand, economic logic punishes states that seek autarky eventually worsening their political position in the international system. A. Political incentives for Autarky 1) recall effects of anarchy * self-help * security dilemma * states must be prepared to check any other state's rise in power, and must not depend on any other state to do the dirty work for them 2) rely on your own army * rely on your own military industrial base * cannot lose any vital industries, and must not depend on others for those critical goods -this is the logic inspiring fears of dependence on Japanese electronics industry, eg. Michael Crichton's novel, Rising Sun

3) worry about any cooperation with another country which may invoke the relative gains problem * according to economic theory, economic cooperation produces absolute gains for both sides * however, even though both sides are gaining absolutely, one side may be gaining relatively more than another * over time, the country that gains more relatively will out strip the other country -Britain's economy grew at an average say 3% since WWI. Not bad -Japan and Germany's economy grew at an average of say 5% since the same time. -Britain is a backwater and Japan and Germany are economic powerhouses * therefore countries will worry about any integration into the world economy that will benefit other countries relatively more 4) in economic terms, these factors encourage a state to seek autarky selfsufficiency * the pioneer ideal where you make everything you need for yourself * if you could pull this off in the international system, you would be insulated from most but not all of the negative effects of anarchy B. Economic penalty of Autarky 1) the problem is that states which pursue such a strategy will be punished for it by the logic of economics -they will experience lower growth rates -standards of living will go down 2) Albania during the Cold War is a good example * Burma or Myanmar now is an excellent example * basically they are driving themselves back into the economic stone age by withdrawing from the world economy -if it weren't for their drug traffic, Myanmar would be a basket case 3) this reintroduces the relative gains problem * since other countries will be growing so fast, the autarkic country will fall hopelessly behind * not just wealth: also access to emerging technologies, a big factor in military power *so ironically, the country will eventually be in an even more vulnerable position in the international system. -unless no one cares about it (eg. Albania), the country could be a prey to regional ambitions

* Think of the Soviet Union: -put national security ahead of everything -was excluded from the global economy, in part because we forced them out and in part because they would not join -overtime the exclusion got too costly -they lost the cold war even though in pure military terms they remained very strong * so country's are left managing these economic and political tensions day in and day out -want to get benefits of participating without vulnerabilities of participating -want to get benefits of self-reliance without penalties of doing so IV. Role of Institutions 1) countries do not need to manage these tensions on their own 2) in the political economy world, pure anarchy is mitigated by institutions which help smooth over the rough edges 3) institutions are designed to resolve collective action problems -mentioned before the coordination problem * try to get 5 dorm mates together to go select a video -in collective action there are incentives to defect * Stag Hunt scenario or Prisoner's Dilemma -in political economy terms, efforts by individual countries to gain the benefits from integration into the world economy without any of the costs can take the form of defection forcing the costs onto other countries * eg. when Japan unilaterally sets trade barriers so it can export alot without importing much 4) institutional arrangements commit various countries to "proper" behavior and help them deal with the costs 5) eg. IMF -loans money to needy countries -helps resolve some of the shocks of integrating with the world economy  helps stabilize currency markets  forces some fiscal discipline on states so they will not experience rampant inflation 6) eg. Bretton Woods -until early 1970s, the Bretton Woods exchange rate system pegged the dollar to gold which provided a stable base for all other currencies - designed to help control inflation and provide steady growth 7) the tricky thing about institutions is that it is hard for countries independently and under anarchy to develop them -collective action problems too great -but the largest power, particularly one that is so dominant it can dictate the rules, can do so -this is the significance of the readings on Hegemony - a hegemonic power can set up institutions and force others to join

8) so you see a link back to earlier discussions about the distribution of power in the international system and outcomes -in military terms we talked about the problem of whether bipolarity or multipolarity was more militarily stable -in political-economic terms we now see that one kind of distribution--economic hegemony--may be necessary to set up the institutions which resolve political and economic paradox

* there are other issues in political economy, -problems of uneven growth and benefits (the North vs. South debate, rich vs. poor) -using economics as a weapon * we will cover some of these in the next few weeks

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