Making the international economic interdependence and political order

Project team
Dr Simon Bromley, Course team chair

Dr William Brown, Co-chair

Course team
Dr Suma Athreye
Dr George Callaghan
Dr Ranjit Dwivedi
Ann Garnham
Dr Jef Huysmans
Dr Bob Kelly
Professor Maureen Mackintosh
Dr Giles Mohan
Professor Chandan Mukherjee

Dr Raia Prokhovnik
Dick Skellington
Dr Mark Smith
Hedley Stone
Professor Grahame Thompson
Professor David Wield
Dr Gordon Wilson
Professor Marc Wuyts
Dr Helen Yanacopulos

The OU would like to acknowledge the valuable contribution made to the course team and the development of A World
of Whose Making? by Dr Robert Garson of the University of Keele.
Dr Hazel Johnson, critical reader
Maria Ana Lugo, St Antony’s College, Oxford,

critical reader
Kirsten Adkins, BBC
Sally Baker, OU Library
Brenda Barnett, secretary
Pam Berry, composition services
Karen Bridge, project manager
Maurice Brown, software development
Lene Connolly, materials procurement
Mick Deal, software QA
Marilyn Denman, course secretary
Wilf Eynon, audio-visual
Fran Ford, Politics and Government
Secretary
Sarah Gamman, rights adviser
Carl Gibbard, designer

Richard Golden, production and presentation
administrator
Dr Mark Goodwin, lead editor
Gill Gowans, copublishing advisor
Celia Hart, picture research
Avis Lexton, Economics Secretary
Lisa MacHale, BBC
Vicki McCulloch, designer
Magda Noble, media consultant
Eileen Potterton, course manager
Andrew Rix, audio-visual
David Shulman, BBC
Kelvin Street, OU Library
Colin Thomas, software development

Gill Tibble, BBC
Gail Whitehall, audio-visual
Chris Wooldridge, editor

Contributors to this volume
Dr Suma Athreye, Lecturer in Economics, Faculty of Social Sciences, The Open University.

Aditya Bhattacharjea, Reader in Economics, Delhi School of Economics, University of Delhi.

Dr Simon Bromley, Senior Lecturer in Government and Politics, Faculty of Social Sciences, The Open University.

Dr William Brown, Lecturer in Government and Politics, Faculty of Social Sciences, The Open University.

Dr George Callaghan, Staff Tutor (Economics), Faculty of Social Sciences, The Open University.

Dr Sudipta Kaviraj, Department of Politics, School of Oriental and African Studies, University of London.

Professor Maureen Mackintosh, Professor of Economics, Faculty of Social Sciences, The Open University.

Dr Judith Mehta, Research Associate, School of Economic and Social Studies, University of East Anglia.

Thandika Mkandawire, Director, United Nations Research Institute for Social Development (UNRISD), Geneva.

Dr Amrita Narlikar, Junior Research Fellow, St Johns College, Oxford and Lecturer-Elect in International Relations,

University of Essex.

Professor Carlos Salas Paez, Sociology Department, Universidad Auto´noma Metropolitana, Iztapalapa, Mexico.

Dr Rathin Roy, Public Resource Management Advisor, United Nations Development Programme (UNDP), New York.

Dr Rafael Sanchez, Associate Researcher, School of International Relations, Universidad Nacional, Costa Rica.

Professor Samuel Wangwe, Principal Research Associate, Economic and Social Research Foundation, Dar es Salaam.

Professor Marc Wuyts, Professor in Quantitative Applied Economics, The Institute of Social Studies, The Hague.




This publication forms part of the Open University courses DU301 A World of Whose Making?
Politics, Economics, Technology and Culture in International Studies and DU321 Making the
International: Viewpoints, Concepts and Models in International Politics and Economics. Details of
these and other Open University courses can be obtained from the Course Information and
Advice Centre, PO Box 724, The Open University, Milton Keynes MK7 6ZS, United Kingdom:
tel. +44 (0)1908 653231, email
Alternatively, you may visit the Open University website at , where
you can learn more about the wide range of courses and packs offered at all levels by The
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First published 2004 by Pluto Press in association with The Open University.
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292350/du301b1i1.2v1


Contents
Preface
Chapter 1 Economic interdependence and political order: introducing

international political economy
Simon Bromley, Maureen Mackintosh, William Brown
and Marc Wuyts

xi


1

2
3

1

4

8


Introduction
Studying politics and economics in parallel
Looking forward

Part 1 Trade and states
Chapter 2 Playing by the rules? Developing countries in the world

trade regime
Aditya Bhattacharjea
1
2
3
4
5

1


9

11


Introduction
The road to Doha
What went wrong?
The rocky road ahead
Conclusion
Further reading

11

15

17

26

30

31


Chapter 3 Gaining from trade?
Maureen Mackintosh

33


1

2
3
4
5
6
7
8

33

34

46

51

56

60

64


Introduction
International trade and tariffs: political economics
The gains from trade
Sharing the gains: the terms of trade
Gainers and losers within countries
Losing from trade
Dynamic comparative advantage: escaping the trade poverty trap

Do openness, ‘outward orientation’ and ‘globalization’ reduce

poverty?

67



9

Conclusion
Further reading

Chapter 4 Who makes the rules? The politics of developing country

participation and influence in the WTO
Amrita Narlikar
1
2
3
4
5
6

Introduction
From the GATT to the WTO: a historical perspective
Making the rules for international trade
Decision-making processes and developing countries
Strategies for developing countries
Conclusion

Further reading

Chapter 5 International politics: states, anarchy and governance
Simon Bromley
1
2
3
4
5
6
7

Introduction
The nature of politics
The state and the political community
Waltz’s realist theory of international politics
Questioning Waltz’s realist model
Anarchy or governance?
Conclusion
Further reading

71

72

75

75

76

80

85

89

92

93

95

95

100

104

110

117

125

127

129

Part 2 Making state policy

131


Chapter 6 The politics of liberalization in India
Sudipta Kaviraj

133


1
2
3
4

133

134

138

146


Introduction
States and the politics of economic governance
The political economy of Nehru’s India
Formulating India’s national interest

5
6
7

Questioning the Nehruvian legacy
Liberalization, the BJP and the reshaping of Indian politics
Conclusion
Further reading

Chapter 7 Trade policy, industrialization and growth in India
Suma Athreye
1
2
3
4
5
6
7
8
9

151

160

170

171

173


Introduction
173

The industrial roots of economic growth
176

Planned industrialization and growth: Indian industrial policy

between 1950 and 1980
186

Reviewing the growth performance of the Indian economy between

193

1950 and 1980
Retreating from import substitution: 1981 to 1990
195

Technological change and productivity as determinants

of growth
200

Liberalization in the 1990s
205

Industrial policy and economic growth: the Indian

software story
209

Conclusion
212

Further reading
213


Part 3 Inequality and power

215


Chapter 8 Labour and free trade: Mexico within NAFTA
Carlos Salas Paez and George Callaghan

217


1
2

217


3

4
5
6

Introduction
Mexico in the US shadow: economic policies and

labour relations
The North American Free Trade Agreement
Mexican labour under liberalization
Working conditions and labour organizing
Explaining wage decline

220

226

228

233

238



7
8

Income inequality
Conclusion

Further reading

245

251

252


Chapter 9 Power among states: Mexico’s membership of NAFTA
Rafael Sanchez

253


1
2
3
4
5
6

253

255

264

278

281

284

287


Introduction
Analysing Mexican politics
Interdependence in international politics
Do relative gains matter?
Governing interdependence
Conclusion
Further reading

Part 4 Autonomy, sovereignty and macroeconomic policy

289


Chapter 10 Can Africa have developmental states?
Thandika Mkandawire

291


1
2
3
4

5
6

291

294

306

311

324

327

329


Introduction
The developmental years and the African developmental state
The crisis years
The adjustment years
The years of recovery?
Conclusion
Further reading

Chapter 11 Macroeconomic policy and trade integration: Tanzania in the

world economy
Marc Wuyts

1
2
3

331


Introduction
331

Foreign exchange, aid and the trade gap: macroeconomic

constraints on growth
335

Tanzania’s macroeconomic strategy, from structural change to

market-led development
348



4
5
6

Creating transition to an open economy: foreign exchange and
exchange rate policies
Does structure matter under structural adjustment?
Conclusion

Further reading

Chapter 12 The politics of autonomy and sovereignty: Tanzania’s aid

relationship
Samuel Wangwe
1
2
3
4
5
6
7
8

Introduction
Autonomy, sovereignty and the loss of voice
The pattern of aid to Tanzania and the pressure for a liberal state
The first phase (1967–79): aid with relatively few strings
The second phase (1980-85): the challenge to Tanzania’s

autonomy
The third phase (1986–94): the loss of voice
The fourth phase (1995–2002): regaining voice?
Conclusion
Further reading

356

368

376

378

379

379

383

387

393

394

400

402

410

411


Part 5 International collective action

413

Chapter 13 The collective action problem
Judith Mehta and Rathin Roy

415


1
2
3
4
5
6
7
8

415

418

422

431

435

439

442

453

454


Introduction
The Tragedy of the Commons
The Prisoners’ Dilemma
Assurance
Chicken
Intermediate review: analysing collective action problems
What can be done to elicit co-operation?
Conclusion
Further reading


Chapter 14 Global warming, the USA and the failure of collective action
William Brown
1
2
3
4
5
6

455


Introduction
455

Global warming as an international collective action problem: a first

459

look
Achieving co-operation? The obstacles to overcoming a global

warming Prisoners’ Dilemma
467

Co-operative options on global warming
472

Reconsidering the analysis of collective action
485

Conclusion
491

Further reading
492


Chapter 15 International political economy and making the international
Simon Bromley, Maureen Mackintosh, William Brown
and Marc Wuyts

493

1
2
3
4
5
6
7

493

493

495

497

500

501

503


Introduction
Economics and politics
Specificity and difference
Interdependence, asymmetry and power
Anarchy and governance
Models as metaphors

Theory and voice

Answers to activities

505


References

523


Index

543


Acknowledgements

561



Preface

Preface

Making the International: Economic Interdependence and Political Order is part of
A World of Whose Making? Politics, Economics, Technology and Culture in
International Studies, a course from The Open University’s Faculty of Social

Sciences. As its subtitle implies, Making the International is the product of
collaboration between economists and political scientists to produce an
international text in International Political Economy.
As with other Open University texts, Making the International has been
produced by a ‘course team’ of academics and support staff. The Open
University has been especially fortunate in that the course team responsible
for Making the International has included international scholars from outside
The Open University and the English-speaking world. This international
collaboration was essential to realizing a key aim of the book: namely, to
combine the teaching of core theory in economic and political analysis with
an exposure to a diversity of voices and standpoints. The editors are
extremely grateful to all of our outside colleagues and authors for their time
and commitment to the project as a whole, their willingness to work with us,
including reworking and editing material, and the ways in which,
individually and collectively, they have joined in the course team process and
made it possible for us to produce a truly international text. The end result is
much richer for their input.
The course team played a vital role in shaping the book as a whole as well as
in helping to refine successive drafts into a coherent text. We owe a large debt
of thanks to them all. Our external assessors, Professor Anthony Payne and
Professor Rhys Jenkins, provided critical and supporting advice on how to
improve the text and we are grateful for their careful work on our behalf.
The academic staff of the Open University are also especially lucky to be able
to draw on the skills and patience of excellent administrative, production and
support staff. Brenda Barnett, Marilyn Denman, Fran Ford and Avis Lexton
worked on successive drafts of the text with efficiency and cheerful
forbearance. Marilyn Denman also provided great and cheerful support to
the course team as course secretary. Mark Goodwin, as lead editor, oversaw
the composition of the book with his customary attention to detail, care and
good humour, making our lives so much easier despite the perennial

difficulties academics have with deadlines. Thanks too to Vicki McCulloch
and Carl Gibbard for their work on the design of the book. Gill Gowans
oversaw the copublication process with Pluto Press, and our thanks go to her
and Pluto for their support in this project. Last, but definitely not least,
thanks to Eileen Potterton, our Course Manager on A World of Whose Making?

xi


Preface

Eileen oversaw the production of Making the International, as well as the
course as a whole, with such unflappable efficiency, energy and all round
goodwill that even the difficult bits were easy.
Making the International is the first of a two book series. Its companion volume
(which forms the second half of the course A World of Whose Making?) is
Ordering the International: History, Change and Transformation, also copublished
with Pluto Press. Whereas Making the International focuses on viewpoints,
concepts and models in International Political Economy, Ordering the
International is oriented towards International Studies as a whole, focusing on
states and the states-system; culture, rights and justice; technology, inequality
and the network society; and general theories of world order and
transformation.
Simon Bromley, Maureen Mackintosh, William Brown and Marc Wuyts

xii


Chapter 1 Economic interdependence and political order: introducing international political economy

Chapter 1 Economic
interdependence and political
order: introducing international
political economy
Simon Bromley, Maureen Mackintosh, William Brown and
Marc Wuyts

1

Introduction

Contemporary debates about the international system centre on two deeply
intertwined themes: extensive and increasing economic interdependence and
the nature of the international political order. This text sets out to develop an
economic and political analysis of the international in the contemporary
world. It recognizes that political debate draws extensively on contentious
economic arguments and findings, and that economic analysis has to come to
terms with key political issues of governance and conflict that profoundly
shape economic change. It approaches international political economy, not as
a self-contained academic discipline, but as the bringing together of two
disciplines, politics and economics, to explore international issues.
This bringing together of the two disciplines is reflected in the organization of
the text. It explores some central topics of international political debate, such
as the nature and impact of the World Trade Organization, the nature of the
bargaining process that has created free trade areas between unequal states,
the varied fortunes of different states in the international economy, and the
failure of international collective action to address global warming. At the
same time it develops, in parallel and through an analysis of these and other
topics, the key tools of economic and political analysis needed to understand
and evaluate these debates. In our view, the ability to engage with

international political economy requires a command of both economic and
political analysis. The book has emerged from an unusual collaboration
between political scientists and economists, and we aim to convey along the
way some of what we have learned about the similarities and differences
between the theoretical tools deployed by these disciplines. You need no
prior knowledge of economics or political theory to understand this book,
but if you come to it with some experience of one discipline we believe that
the challenge of interpreting that experience in relation to the other discipline
will be illuminating.

1


Chapter 1 Economic interdependence and political order: introducing international political economy

The content of the book is presented as a genuinely international set of
analyses and debates in two senses. First, it is international in the sense that
the analyses and arguments that follow are part of a shared, international
social science that informs debates among intellectuals and decision makers
across the world. Concepts, models and theories drawn from economic and
political analysis are used to examine how the international is made,
identifying and debating the nature of social agency. Thus the basic tools
employed are part of the repertoire of a shared set of international debates in
the social sciences. At the same time, however, there are divergent voices to
be heard in different parts of the world. Moreover, the international is
marked by massive economic inequalities and disparities in political power.
We have attempted to recognize and to exemplify these themes in this book.
It combines a focus on the dominant tools of economic and political analysis
with some recognition of the different ways in which divergent voices
employ those tools. And it pays particular attention to issues of inequality

and power in the international system.
This approach has shaped the structure and the international authorship of
the book. The teaching of economics and politics is integrated across the text
as a whole. However, each part is located in particular experiences and
vantage points. Parts 2 to 4 address key arguments and shared international
concerns from the perspectives of particular regions of the world. Parts 1 and
5 explore core aspects of international political economy from the perspective
of particular political debates. Each key question of international concern is
thus addressed from a particular vantage point. While the terms and tools of
political and economic analysis are shared, there is no single voice in those
debates that speaks for us all.
We start, in Part 1, with a view of the international trading regime, and an
examination of the World Trade Organization written from the experiences of
developing countries both as relatively poor economies with little leverage
over the patterns of international trade and as relatively weak states in terms
of their bargaining power in international negotiations over trade policy. This
gives us a point of entry into, as well as a distinctive perspective on, debates
about international trade and the agreements negotiated among states.
Part 2 is located in, and written from, the Indian experience of making state
policy since independence. In its political analysis, it addresses general
questions about the social shaping of states’ interests; in its economic
analysis, it examines the roots of industrial growth in capital accumulation
and technological innovation. The part gives a strong flavour of these issues
as they have been played out in the vibrant context of Indian political and
economic debates. In terms of its international politics, India has been a
prominent member of the non-aligned countries, and its economic strategy of
import-substituting industrialization was similar to that adopted in many

2

Chapter 1 Economic interdependence and political order: introducing international political economy

other post-colonial states in the first decades after independence. One of the
authors in Part 2 draws on an Indian standpoint to set out a view of how
state preferences are formed in the international system – a view which
contests the dominant approach in political analysis that is set out in Part 1.
This illuminating process of writing general economic and political analysis
from a particular standpoint runs through the book. To see the world, as in
Parts 1 and 2, from the standpoint of developing countries raises questions
about inequality and the exercise of power. These questions are addressed in
Part 3, which is rooted in the Mexican experience of economic liberalization
and, in particular, the Mexican predicament of proximity to the largest
economy and most powerful state in the world: the USA. Mexico is also a
developing country; it shares a common border with the USA and has a long
history of antagonistic relations with it. The country’s membership of the
North American Free Trade Agreement (NAFTA) represents a fascinating
vantage point from which to consider both the impact of freer trade and
investment on inequality within weaker states (a particular issue for middle
income economies) and the issue of the exercise of power in the process of
international political bargaining.
The fate of weaker states is taken up again in Part 4, which is written from an
African perspective. The general theme is Africa’s experience of negotiating
the shape and direction of macroeconomic policy with international aid
donors. The authors draw on African experiences of structural adjustment –
and on the particular story of Tanzania – as the basis for economic and
political analysis of state autonomy in determining policies for economic
development. It also addresses how constraints on autonomy affect the
ability of states to give voice to their sovereignty. The African experience
since the early 1980s has been one of a struggle with powerful external

agencies to define economic policy choices in a situation of acute aid
dependency. The authors explore that dilemma within frameworks that also
recognize the considerable scope for state agency and political action within
the continent.
Finally, in Part 5, we return to the analysis of the international system as a
whole – as in Part 1. This time, however, the analysis is situated in the context
of collective action (and the failure of collective action) among states. The
focus is on the difficulties experienced by the richest and most powerful
countries (specifically the USA and the European Union) in formulating a
common response to global warming and climate change. Like the earlier
parts, Part 5 develops analytical tools of general applicability – in this case, a
game theory approach to the collective action problem – and then explores
their relevance and limitations in a particular context.

3


Chapter 1 Economic interdependence and political order: introducing international political economy

All the contributors to this book take seriously the internationally dominant
discourses of economics and politics – and with good reason. These
traditions carry significant analytical force and provide real insights into the
making of the international system. In our view, they are not to be lightly
dismissed. Moreover, dominant actors draw upon these discourses in
articulating and defending their conduct, so that the interests of the rich and
the powerful are often framed in these terms. This means that, if we are to
understand, to criticize and to formulate alternative courses of action, there is
no substitute for working through these arguments. If you want to gain a
critical understanding of the making of the international economy and
political system, and to be in a position to debate it, you have to grasp the

tools of political and economic analysis and consider the alternative uses to
which those tools may be put.

2

Studying politics and economics in parallel

Each set of issues addressed in Parts 1 to 4 involves economic analysis and
debate presented alongside political analysis and discussion. This parallel
presentation of politics and economics is our way of bringing the resources of
both disciplines to bear on a common set of international issues. In Part 5, the
disciplines come together in the game-theoretic analysis of collective action
problems.
At the same time, the discussion in each part builds on what has gone before,
so that there is a progressive development of the core tools used by both
economists and political scientists to analyse the international system.

2.1

Conceptual progression in politics

International political order is rooted in the actions of states in the context of
constraints produced by the states system, the different interests and
identities of states as they strive to give voice to their own particular
concerns, relations of power between and among states, and the ability (or
otherwise) of states to act collectively. The politics teaching in this book aims
to equip you with the tools to analyse and debate these elements of political
order at an international level, and to give you the confidence to make your
own judgements about key matters of international politics.
So, in Part 1, we start with the idea of the state as the dominant institution in

contemporary politics, and with the basic and stark idea that relations among
states are anarchic, that is, ungoverned. International politics is presented as
an ungoverned realm in which states pursue power in competition with one
another. We explain the concept of international anarchy at work in this
realist model, and the ideas of the state and of state sovereignty that lie
behind it. We argue that this model provides a powerful insight into the
4


Chapter 1 Economic interdependence and political order: introducing international political economy

workings of international politics, but that its views of the state and of the
character of international politics can be challenged. The processes of
governance are not confined to the domestic level; they can and do operate
internationally. The idea of international governance opens up a series of
questions that run through the book as a whole: how are the interests and
identities of states constructed, what is the nature of power and authority in
international politics, and how can we understand governance at an
international level?
India’s national interest and the identity of the Indian state were defined in
the context of the country’s newly-won independence, when a state-led
national strategy of development and anti-colonial non-alignment had the
upper hand in an explicitly secular political culture. This is contrasted with
the very different context of economic liberalization and the assertion of
Hindu nationalism that characterized the Indian political scene from the
early 1990s. While altered international circumstances are part of this story,
Part 2 looks at the social shaping of the Indian national interest by the
particular culture and society of the state. Whereas the realist model explored
in Part 1 suggests that the interests of a given state in the international arena
are determined by its power position in relation to other states, the

experience of post-independence India suggests that the national interest is,
to an extent, subject to influences from powerful social groups that are
enfranchized by the political system. As societies and political systems
change, so will the national interest and even the very identity of the state.
This presents an inside-out, bottom-up view of international politics in
contrast to the outside-in, top-down view of political realism presented in
Part 1. It considers the social shaping of the agency of the state, rather than
the constraints that result from the system of states.
Mexico has also experienced a major process of economic (and political)
liberalization during recent decades, and it has done so in the shadow of the
power of the USA. This provides a fascinating vantage point from which to
bring together questions of power and the social shaping of national
interests, and it allows us to examine what happens when states interact with
one another. It builds on the analysis in Parts 1 and 2 to suggest that
interaction is structured not only by the distribution of power between states
but also by the nature of the interests they seek to pursue. How the
international interests of one state align with those of others is highly
variable, ranging from outright conflict, through various forms of mixed cooperation and competition, to a pure harmony of interests. If we assume that
both Mexico and the USA have something to gain from mutual economic
liberalization, we can expect a process of bargaining to distribute the gains,
and Part 3 shows you how to think about the bargaining power of states in
these circumstances. The model is then extended to show you how a different
kind of power operates: a coercive situation in which the USA is able to
5


Chapter 1 Economic interdependence and political order: introducing international political economy

impose costs on Mexico, and one in which the latter loses out from
liberalization. The general point is that both power and interests are

important in shaping international outcomes.
A state’s position in the international system can also have profound
implications for its ability to realize its sovereign claims and gain sufficient
autonomy to manage macroeconomic policy. The contested political and
economic experiences of African states, marked by aid dependence and the
external influence of other states and institutions such as the World Bank and
the International Monetary Fund, illustrate the social shaping of states, their
interests and their agency, by other states acting collectively. To what extent is
the formal, legal sovereignty of an African state such as Tanzania given voice,
and to what extent are Tanzanians able to achieve the autonomy that is
required to conduct macroeconomic management? The analyses developed
in Part 4 – of sovereignty and, especially, autonomy – show how the
international serves to shape, or construct, the nature of the state and the
economy.
Finally, in Part 5, we conclude by looking at the prospects for and problems
of states acting collectively to achieve mutual benefits at the international
level. Given pressing problems such as global warming and climate change,
it asks about the circumstances in which states are able to act collectively in
the international arena, and whether international interaction can change the
nature of states’ interests such that co-operation becomes more likely. Part 5
therefore deals with a fundamental question in international politics: how far,
and by what means, are states able to act collectively for mutual benefit?

2.2

Conceptual progression in economics

International economic interdependence is rooted in international trading, in
the movement of capital, and to a lesser extent labour, around the world, and
in the interconnections of policy processes instituted by the exercise of

political power across the globe. The economics teaching in this text aims to
give you the tools and confidence to dismantle and reconstruct many of the
common economic arguments you will come across in the international
sphere, and to make effective judgements about the quality of the economic
evidence used in these policy debates.
We start therefore, in Part 1, with the theory of comparative advantage: a
cornerstone of the economic analysis of international interdependence and
the oft-cited basis for many of the claims about the benefits of international
trade. We explain the concept and argue for its importance, then use it to
explore the distribution of the gains and losses from a policy of freeing trade.
Not all countries gain from trade, nor do all groups within countries. In this
exploration a theme appears that runs right through the book: the
importance of prices and market processes in shaping the international.
6


Chapter 1 Economic interdependence and political order: introducing international political economy

International markets are powerful sources of agency that are not easily
directed by national policy or collaborative treaty.
Part 2 turns to a consideration of the determinants of growth in the national
economy, and focuses on the industrial roots of economic growth. By
‘industrial roots’ we mean the role of investment by firms in generating
growth, the way in which this takes growth in particular directions, and the
key role of technological change in economic growth. The part argues that the
Indian liberalization of foreign investment – inviting foreign firms into India
during the 1980s after 30 years of promoting Indian-owned industrial growth
– was driven by a need to import technology, and not by the conventional
‘comparative advantage’ arguments outlined in Part 1. In the process, it
explains the tools of analysis for industrial technical change, and the

measurement of growth, and defines the strategy of ‘import-substituting
industrialization’, which came under international attack from free traders in
the 1980s.
Free trade can promote growth; it also can, and does, promote inequality.
Gainers and losers change as patches of rapid economic growth appear in
different parts of the world. A continent that has faced serious problems in
trying to benefit from rising economic interdependence is Latin America. Part
3 turns to address free trade in conditions of inequality from the perspective
of Mexico. In this middle income country, inequality rose under trade
liberalization in the 1980s and 1990s. In asking why, Part 3 develops some
general tools of analysis for wages, wage setting and the pattern of
inequality. Liberalization of trade and investment is seen from the
perspective of labour, and the authors emphasize that workers’ agency, in
labour bargaining, and the links between Mexican organized labour and both
the Mexican state and activists elsewhere, are key variables in understanding
how trade influences workers’ incomes.
A core role of governments is to manage the national economy, but when
economies run out of control through inflation, economic crisis and the
failure to pay debts, international agencies move in, under the control of (and
largely funded by) rich countries. The resulting substitution of action by aid
donors for government control can create a long-term loss of state capability,
with severe consequences for development prospects. Part 4 explains what is
meant by macroeconomic stabilization, and examines how aid-dependence
colours policy formation within the national economy, using the changing
character of Tanzanian macroeconomic policy as an example. The part
explains the tools of macroeconomic management – national accounting, the
balance of payments, and the foreign exchange market. It then uses those
tools to argue that the core policy problem for low income countries – and
Tanzania is one of the poorest in the world – is to bring together structural
change in the economy and effective management of the country’s role in

trade in such a way as to promote growth. The current international trade
7


Chapter 1 Economic interdependence and political order: introducing international political economy

and policy regimes exercise sharp constraints on the autonomy and
capability of states attempting to undertake such macroeconomic
management.
Finally, Part 5 identifies a core aspect of economic policy both within and
between countries: the need for collective action to create economic goods
and services that cannot be provided efficiently by markets. It argues that
economic incentives frequently block effective collective action, and uses
game theory to analyse these incentive problems. Game theory is used as a
tool of analysis by both economics and politics, which is not surprising as this
is the area of economic behaviour that is fundamentally inseparable from
political activity (and vice versa). Again, these are methods of general
applicability. Part 5 completes a progression of economics teaching that will
provide you with many of the core tools used by economists to analyse
economic interdependence, and, we hope, will allow you to apply a critical
eye to the debates that employ those tools.

3

Looking forward

Several features of the text are designed to support your study. Each part has
its own introduction, and this sets out in detail the key features of the
chapters. In addition, the chapters contain in-text questions and study
activities that will allow you to pause and reflect on the analysis as it unfolds;

to develop your understanding and use of the key concepts and models; and
to consolidate and check your grasp of the main ideas. Marginal notes
provide easy reference to the key concepts and important definitions, and
some suggestions for further reading are provided at the end of each chapter.
In the final chapter of the book, we shall return to some of the issues raised by
an attempt to understand how the international is made using the tools of
economics and politics. We hope that you will gain as much stimulation and
enlightenment from studying this book as we have gained from producing it.

8


Part

1

Trade and states


International trade in goods and services is one of the most important forms
of international economic interdependence between countries, exercising an
enormous influence on the living standards of people across the globe.
International trade is a market process, shaped by opportunities to make
profits from buying, selling and investing. It is also strongly governed by
international negotiations, international treaties and the trade policy
decisions of sovereign governments. As a result, in this arena, economic
analysis is highly politically charged, and politics is deeply imbued with
assumptions and propositions about economic change.
In Part 1, we begin with international trade, and we start with a view from
the developing countries. In Chapter 2, Aditya Bhattacharjea argues that the

current governance of international trade through the World Trade
Organization (WTO) is systematically weighted against low and middle
income countries, and it identifies a tendency for rich countries to prescribe
free trade for others but not for themselves. The following three chapters pick
up different aspects of this challenge. In Chapter 3, Maureen Mackintosh
explores the economic case for free trade, arguing that there are enormous
economic gains from trade, but that markets inherently distribute those gains
unequally between and within countries. In Chapter 4, Amrita Narlikar turns
to the politics of the WTO, picking up the issue of bias in trade rules,
examining the politics of rule making within the organization, and asking
whether the WTO rules are necessarily a reflection of the dramatically
unequal power of states or whether they can be a force for change. Finally, in
Chapter 5, Simon Bromley in turn asks about the concepts of international
politics that underlie these alternative positions about the WTO. Is
international politics fundamentally conflictual, a reflection of the unequal
coercive power of states? Or, on the contrary, can we understand
international politics as a more co-operative exercise than this, as a system of
multi-level international governance?
We hope that you will gain from Part 1, not only knowledge of the debates
about the WTO, but also some tools from economics and politics that will
allow you to analyse those debates with evidence to hand. The economics in
Chapter 3 develops some of the core economic theory and evidence that are
deployed in political debates about trade. The politics in Chapter 5 presents
some of the core political theory that underpins political differences about the
nature of sovereign states and the governance of trade.
The two modes of thought, economic and political, are very different, yet
there are a number of common strands in the theories presented here.
Perhaps the most striking is the contrast, in both the economics and the

Part 1 Trade and states

politics, between theories that analyse international relationships as entailing
the ungoverned interaction of agents (countries, firms or people) and theories
that allow for international governance of those relationships. In economics,
the basic models of markets are ‘anarchic’, that is, independent buyers and
sellers operate without any specified framework of law or governance. In
politics, the realist theory of international politics is also anarchic, seeing only
sovereign states exercising power. Both frameworks examine the
characteristics of an ‘anarchic order’, that is, an ordered outcome of
ungoverned interactions. In both economics and politics, these anarchic
models of reality are challenged by frameworks that emphasize the
governing of markets through policy and rule setting, and the possibility of
collaborative international governance. The contrasts introduced here will
reappear elsewhere in this book, and in particular are contemplated afresh in
Part 5, when we turn directly to analyse co-operation and failures of cooperation at the international level.

10


Chapter 2 Playing by the rules? Developing countries in the world trade regime

Chapter 2 Playing by the rules?
Developing countries in the
world trade regime
Aditya Bhattacharjea

1

Introduction

The Ministerial Declaration adopted by WTO members at Doha on 14
November 2001 fails to address the most pressing needs either of the poorest
countries or of the world’s most vulnerable communities. This means that the
people who most need a share in global prosperity are still those least likely
to obtain it.
(A joint statement by Actionaid, CAFOD, Christian Aid, Oxfam,
Save the Children and five other charities and non-governmental
organizations, January 2002)
Underlying the WTO’s trading system is the fact that freer trade boosts
economic growth and supports development. In that sense, commerce and
development are good for each other.
(‘Ten common misunderstandings about the WTO’, WTO

website: www.wto.org, 20 October 2002)


In December 1999, the world’s attention was focused on riots and
demonstrations taking place in the streets of the American city of Seattle,
where trade ministers representing more than a hundred countries were in
conclave. The organization under whose auspices this controversial meeting
was held, the World Trade Organization (WTO), had come into existence
barely five years earlier. It was supposed to have created a system of
unanimously accepted rules governing international trade, which would
lead to worldwide economic benefits, but it became evident at Seattle that not
everyone shared this view.
The demonstrators who received the greatest media attention were American
trade unionists protesting against job losses which they blamed on cheaper
imports, and environmentalists protesting against ecological damage which
they blamed on free trade. Both groups claimed that they were also speaking
for poor people in developing countries. Almost drowned out in the media

11


Part 1 Trade and states

Seattle police use tear gas to push back WTO protesters on 30 November 1999 (left); President Clinton addresses a lunch in
honour of ministers attending the WTO meeting on 1 December 1999 (right)
coverage of what came to be known as ‘the Battle in Seattle’ were the voices
of the official representatives of those developing countries, who felt they
were being excluded from the decision-making process. They too had serious
concerns about the WTO, some of which were diametrically opposed to those
of the demonstrators who were claiming to speak on their behalf. Whether
because of the protests outside or inside the conference rooms, the Seattle
meeting was a failure in that it ended without agreement.
Ministerial meetings of the WTO are held every two years. Learning the
lessons of Seattle, the next one was held in November 2001 in Doha, in the
Middle Eastern state of Qatar, where strict control could be exercised on the
entry and behaviour of potential demonstrators. Here the developing
countries managed to extract several concessions in the final declaration, and
indeed the new round of international negotiations launched at that meeting
is known as the ‘Development Round’. But many developing countries
remain unhappy, and as the first quotation above indicates, their
unhappiness is shared by influential groups in Britain.
This chapter will, I hope, help you to understand the concerns of developing
countries under the WTO regime, and the problems they face in trying to
extract a better deal from the Development Round negotiations launched at
Doha. The roots of these problems lie in the Uruguay Round (UR)
agreements that gave birth to the WTO, and further back in the international
trading system as it evolved after the Second World War. Section 2 gives a
potted history, and also introduces the major rules and principles regulating

international trade. Section 3 spells out what went wrong with the UR
agreements: the developing countries’ expectations that were unfulfilled, and
the onerous costs they had to incur. Section 4 explores aspects of the road
ahead from Doha, with particular attention to the two issues that so exercised
the demonstrators at Seattle and are likely to come up again at future
meetings: environmental damage and labour standards.
12


Chapter 2 Playing by the rules? Developing countries in the world trade regime

In examining the WTO trade regime from the point of view of developing
countries, I shall also establish several key themes of this first part of the
book. International trade – that is, the buying and selling of goods and
services between countries – has a hugely important influence on countries’
economic growth and development, and negotiated rules governing trade
strongly influence who benefits most, a theme picked up in Chapter 3. Highprofile trade negotiations among states that are formally sovereign reflect
unequal power and modify the exercise of national sovereignty in practice, a
theme developed in Chapters 4 and 5.

1.1

The WTO

What is this organization, the WTO, to raise such passions? Misconceptions
abound: in particular, that it is a kind of supranational government that
imposes its policies on sovereign nations. Although there is much that is
wrong with the WTO, this particular complaint is off the mark. The WTO
deals with the rules governing international trade, but neither devises nor
enforces them. It provides a forum for international negotiation, in which the

rules are usually agreed by consensus. This is not to say that the process of
arriving at the consensus is a convivial one, nor that everyone is happy with
the outcome. There is hard bargaining involved, and the resulting trade regime
reflects the asymmetries of a world in which countries differ widely in
respect of their economic and political muscle. But there is no ‘WTO view’
that is forced on countries: in principle, the rules have been agreed by all
members and ratified by their parliaments, and no country is forced to
become a member.

Trade regime
A trade regime is a
framework of rules and
institutions governing
international trade.

Most WTO members are states. As the agreements concern trade policy,
administrative units that govern trade policy for a particular region can also
be members. For example, the European Union has free trade between its
member states and a unified policy on trade with non-members, so it is a
WTO member in its own right, as are its member states. Hong Kong, a
founding member of the WTO in 1995, retained its membership even after
reunification with China; China itself joined only in 2001 as a distinct
member with a very different trade policy.
The WTO has a mechanism for periodically reviewing each member’s
compliance with the agreed rules, and another mechanism for impartially
settling disputes between them, but it cannot enforce its rulings. In these
respects, it is unlike the two international organizations with which it is
frequently clubbed: the World Bank and the International Monetary Fund
(IMF). Both these organizations have their own very definite views on
economic policies, which overlap considerably in what has come to be

known as ‘the Washington Consensus’ (explained in Chapter 8). These
financial institutions ensure that sovereign governments in developing

13