Global Political Economy

The term ‘Political economy’ which was formerly studied to understand the relations of production to laws, customs and the government in a framework of a polity or economy was replaced by the term ‘economics’ in the 19th century. This was designed mainly to study the functioning of the economy on an axiomatic and mathematical basis rather than delving into the above mentioned structural relations. [br]

The term ‘Political economy’ which was formerly studied to understand the relations of production to laws, customs and the government in a framework of a polity or economy was replaced by the term ‘economics’ in the 19th century. This was designed mainly to study the functioning of the economy on an axiomatic and mathematical basis rather than delving into the above mentioned structural relations. [br]

The term ‘political economy’ originally meant the study of conditions under which production took place in the nation states which operated under the new doctrine of capitalism. The main proponents of the theory were David Ricardo, Karl Marx and Adam Smith. But the definition has undergone much change and now means a set of interdisciplinary studies or related approaches to understand economic and political behaviour of a country or many countries. It is generally believed that politics influence economic policies in a significant manner. To this end, political economy draws on areas such as economics, politics and law.

Global political economy or international political economy is an interdisciplinary field concerned with global trade and finance and monetary and fiscal policies of different countries’ affecting global trade and output. That the foreign policies adopted by particular countries related to tariffs and cartels affect the economy and even the stability of the government in another country falls under the purview of global political economy. A domestic rebellion or any form of instability which affects the production of a raw material can have serious economic and political repercussions abroad if it is an export good. This can also lead to social instability in the foreign country. Besides, domestic foreign policies such as devaluation can reduce the level of imports by making them more expensive but can also discourage foreign investment and protect the local industries. [br]

It has been widely believed that poor or developing nations would do well by incorporating economic policies such as liberalization in their structure which would in turn free them from the shackles of poverty and bring about improved standards of living. But many studies have shown that financial liberalization would actually do harm for the poor nations with slowdowns in economic growth, rise in interest rates and increase in income inequality. As Christian Weller, Robert Scott and Adam Hersh in a 2001 study have shown, median income of the ten richest countries which was 77 times that of the ten poorest countries in 1980, shot up to 149 times in the year 1999. The income of the richest 10% of the world’s populace which was 70 times that of the poorest 10% in 1980 increased to 122 times in 1999. It is common knowledge that markets need to be regulated well by political institutions such that the government to function effectively and equitably to lead the economy on a path of success. Some sort of government intervention is needed to ensure transparency in market transactions and also to protect the poor from extremely volatile market situations. But the fanatic following for the free market with political institutions lacking in sound monetary and fiscal policies have allowed situations like East Asian currency crisis, fall of the Mexican peso and financial crises in Latin America to emerge.

Lack of political will on the part of leaders of the G-3, G-7 or G-8 to restructure the global economy have resulted in very few measures being taken place after the Asia crisis of 1997.

In order to ensure success for the global political economy, issues such as the Doha Round of World Trade Talks, the issues of globalization and corruption need to be properly addressed by world political leaders. Environmental degradation and depletion of natural resources is also a burning issue to be dealt with effectively. Reduction on availability of fresh water worldwide with traditional oil reserves being exhausted must require the global polity to look for alternative sources of energy which will also have serious economic and political fallouts worldwide.

In addition, the absence of institutions that can regulate and stabilize global demand, with encouragement for export oriented growth in all the countries much of the world is at the mercy of the USA, EU and Japan which will provide the markets and capital investment needed to accelerate development in the world. This entails important political decisions lack of which will push the developing world further into low level equilibrium trap.