Q1. Compare and contrast the realist and liberal approaches to international political economy.

How do their core beliefs about state behavior and the nature of the international system shape
their perspectives on trade and finance?

Ans INTRODUCTION

International Political Economy (IPE) examines the intersection of politics and economics on a
global level, exploring interactions between states and non-state actors in trade, finance, and
economic policies. Realism and liberalism, two central theories in IPE, offer distinct views on state
behavior and the structure of the international system.

Realism perceives the international system as anarchic, where states compete for power and
security. It considers economic activities, such as trade and finance, as tools to enhance relative
power. Realists focus on the potential risks of economic interdependence, advocating self-reliance
and protection of national sovereignty. They see international relations as a zero-sum game, where
one state's gain often comes at another's expense.

In contrast, liberalism adopts a more positive outlook, emphasizing cooperation and mutual
benefits. It argues that economic interdependence fosters peace and prosperity by aligning state
interests. Liberals stress the significance of international institutions and norms in maintaining
stability and fairness in global economic interactions. Trade and finance, from a liberal perspective,
are positive-sum activities, where open markets and specialization lead to shared benefits.

Core Beliefs

A. Realism

Realism, a dominant theory in international relations, regards states as key players operating in an
anarchic system without a central authority to enforce rules. This absence of global governance
compels states to prioritize self-help and focus on power and security.

 State Behavior: Realists see states as rational, unitary actors aiming to maximize power.
Economic policies, including trade and finance, are viewed as tools for enhancing national
security and relative power.

 International System: Realists perceive the system as inherently competitive and zero-sum,
where a state's gain often equates to another's loss. They approach economic
interdependence cautiously, viewing it as a potential vulnerability exploitable by
adversaries.

B. Liberalism

Liberalism challenges realism's pessimistic view, presenting a more optimistic perspective on

international relations. It contends that cooperation, not just competition, is achievable within the
international system.

 State Behavior: States, while rational, are not solely concerned with power. They pursue
various goals, such as economic prosperity, peace, and development. Non-state actors,
such as multinational corporations and international organizations, also hold significant
roles.
  International System: Liberals emphasize interdependence and the role of institutions in
mitigating anarchy. Cooperation among states can yield mutually beneficial outcomes,
especially in trade and finance.

Perspectives on Trade

A. Realism

Realists' stance on trade is heavily influenced by mercantilism, a historical economic theory

emphasizing national power and self-sufficiency. For realists, trade is not purely economic but a
strategic means to achieve broader political objectives.

1. Zero-Sum View: Realists interpret trade through the lens of relative gains. Even if all parties
benefit in absolute terms, they focus on which state gains more, as this could shift the
balance of power.

2. Economic Independence: Realists prioritize reducing dependence on foreign goods,

technology, and markets to avoid strategic vulnerabilities. Protectionist policies and
investment in critical domestic industries are central to their approach.

3. Historical Examples: Cold War trade policies, where the U.S. and Soviet Union used trade
strategically to support allies and undermine adversaries, and modern trade disputes like
the U.S.-China trade war, illustrate realist principles.

B. Liberalism

In contrast, liberalism views trade as a positive-sum activity, where all participants benefit. This
perspective is rooted in the theory of comparative advantage, which argues that states should
specialize in their most efficient industries and trade for others.

1. Mutual Gains: Liberals assert that trade promotes shared benefits, increasing global
wealth and efficiency.

2. Trade as Peace Promoter: According to the "commercial peace theory," trade

interdependence reduces the likelihood of conflict, as states integrated into global
networks are less likely to disrupt mutually beneficial relationships.

3. Role of Institutions: Liberals highlight institutions like the World Trade Organization (WTO)
in ensuring fair trade practices and resolving disputes.

4. Historical Examples: Post-World War II economic systems, such as the Bretton Woods
framework and the European Union, reflect liberal ideals of economic integration fostering
peace and prosperity.

Perspectives on Finance

A. Realism

Realists view international finance as a realm of power and security, emphasizing the risks of
financial dependence and openness.
 1. Monetary Sovereignty: Realists stress the importance of maintaining control over national
monetary policies and minimizing reliance on foreign capital or institutions like the
International Monetary Fund (IMF).

2. Finance as a Strategic Tool: Financial resources are used to project power or coerce
adversaries, such as through economic sanctions.

3. Skepticism Toward Institutions: Realists view global financial institutions like the IMF as
serving the interests of dominant states rather than promoting equitable outcomes.

B. Liberalism

Liberals advocate for open, integrated financial systems, considering them vital for global
economic efficiency and stability.

1. Financial Integration: Liberals argue that open financial markets facilitate efficient resource
allocation, benefiting all participants.

2. Institutional Role: Institutions like the IMF and World Bank are seen as crucial for
managing global crises and supporting developing economies.

3. Interdependence: Financial interdependence, like trade, is seen as reducing conflict

likelihood.

4. Historical Examples: The 2008 global financial crisis demonstrated both the challenges of
liberal financial integration and the stabilizing role of international cooperation among
central banks.

Comparison and Contrast

 Competition: Realists view the economy as zero-sum, prioritizing relative gains, while
liberals see it as positive-sum, emphasizing mutual benefits.

 Cooperation: Realists see cooperation as short-term and driven by necessity, while liberals
believe in long-term cooperation fostered by shared interests and institutional
frameworks.

 Institutions: Realists view institutions as tools of dominant states, whereas liberals see
them as essential for ensuring fair and stable economic interactions.

 Policy Implications: Realists advocate protectionism and reducing foreign dependencies,

while liberals support open markets and institutional mechanisms to manage
interdependence.

Conclusion

The realist and liberal approaches to IPE offer contrasting perspectives on global economic
interactions. Realism prioritizes power and security, advocating caution toward interdependence
and international institutions. Liberalism, on the other hand, emphasizes cooperation and mutual
benefits through open markets and global institutions. Together, these perspectives provide
valuable insights for navigating the complexities of the global economy, balancing national
interests with collective prosperity.
Q2. Analyze the causes and effects of recent global financial crises. How do various international
political economy theories interpret these crises and their influence on international political
economy?

Ans INTRODUCTION

Global financial crises are transformative events that profoundly influence economies, societies, and
governance systems globally. They expose systemic vulnerabilities in financial markets and highlight
the interconnected nature of the global economy. Two major crises in recent history are the 2008
Global Financial Crisis (GFC) and the 2020 COVID-19 Economic Crisis. The GFC resulted from
mismanagement in the financial sector, excessive risk-taking, and regulatory failings, while the
COVID-19 crisis arose from a global health emergency that severely disrupted economic activities.
Both crises underline the urgent need for a resilient, equitable, and robust global financial system,
providing valuable lessons for the international political economy.

Causes of Global Financial Crises

Causes of the 2008 Financial Crisis

1. Excessive Risk-Taking by Financial Institutions

The 2008 crisis stemmed from excessive risk-taking by financial firms, especially in the
housing sector. Subprime mortgages, loans given to individuals with poor credit histories,
were bundled into complex financial products like Mortgage-Backed Securities (MBS) and
Collateralized Debt Obligations (CDOs). These products spread risk across global markets but
also increased financial instability. The repeal of the Glass-Steagall Act in 1999 allowed banks
to engage in speculative activities, heightening their exposure to market shocks. Excessive
leverage made institutions like Lehman Brothers vulnerable to minor financial disruptions.

2. Regulatory Failures
Weak oversight of financial institutions failed to address the risks posed by complex financial
products. Credit rating agencies, such as Moody’s and Standard & Poor’s, issued favorable
ratings for risky securities, misleading investors and encouraging high-risk behavior.
Inadequate regulation of major financial firms allowed dangerous practices to grow
unchecked.

3. Global Economic Imbalances

High borrowing levels in the U.S. were financed by savings surpluses from countries like
China and Germany, fueling speculative investments in real estate and financial markets. The
bursting of this economic bubble sent shockwaves through global markets, particularly
affecting economies reliant on Western financial systems.

Causes of the COVID-19 Crisis

1. Pandemic-Induced Economic Shutdowns

Lockdowns and restrictions implemented to curb the spread of COVID-19 brought production
and trade to a standstill in many industries. Consumer spending fell drastically in sectors like
tourism, retail, and aviation, leading to significant job losses. For example, U.S.
unemployment reached 14.7% in April 2020, the highest since the Great Depression.

2. Vulnerable Global Supply Chains

The pandemic revealed the fragility of global supply chains. Businesses operating on just-in-
time inventory models faced severe disruptions. Factory closures in countries like China
 caused shortages of essential goods, such as semiconductors and medical supplies,
exacerbating the crisis.

3. High Pre-Crisis Debt Levels

Even before the pandemic, governments and businesses were burdened by high debt levels
due to prolonged low-interest rates and post-2008 stimulus measures. This left limited fiscal
space for emergency responses. By the end of 2020, global debt had risen to 256% of global
GDP.

Consequences of Global Financial Crises

Effects of the 2008 Financial Crisis

1. Global Economic Contraction

The global economy contracted by 0.1% in 2009, marking the first worldwide economic
shrinkage since World War II. In the U.S., over 8.7 million jobs were lost, with similar effects
seen globally. Declines in trade and investment deepened the economic downturn.

2. Rising Government Debt

Governments incurred significant debt to bail out failing financial firms, transferring private
sector liabilities to public budgets. This led to debt crises in countries like Greece, Spain, and
Italy, particularly in the Eurozone, where international bailouts and austerity measures
intensified economic challenges.

3. Political and Social Shifts

The crisis heightened inequality and dissatisfaction with globalization, fueling populist
movements. Leaders like Donald Trump in the U.S. and nationalist parties in Europe
capitalized on public discontent. Events like Brexit in 2016 underscored growing anti-
globalization sentiment.

4. Regulatory Reforms
Governments introduced measures to strengthen financial stability. Reforms like Basel III
required banks to maintain higher capital reserves, while the Dodd-Frank Act in the U.S.
aimed to increase transparency and curb risky trading practices.

Effects of the COVID-19 Crisis

1. Severe Economic Losses

The pandemic caused a 3.4% drop in global GDP in 2020, marking the largest contraction
since World War II. Prolonged closures and travel restrictions devastated sectors such as
tourism and aviation. Small businesses, particularly in developing economies, faced
permanent closures, resulting in widespread income loss.

2. Exacerbated Inequalities
The crisis deepened existing inequalities. Wealthy individuals and corporations adapted
more readily, benefiting from stock market recoveries and government support. Meanwhile,
informal workers, constituting 60% of the global workforce, experienced severe hardships
without social safety nets. Billionaires’ collective wealth increased by $540 billion during the
pandemic, while low-income workers bore the brunt of economic disruptions.

3. Accelerated Trends
Trends like remote work and online shopping accelerated during the pandemic. For instance,
Zoom’s daily active users skyrocketed from 10 million in December 2019 to 300 million by
 April 2020. Governments and companies began prioritizing self-reliance in critical sectors,
such as semiconductors and healthcare, to reduce dependency on global supply chains.

Theoretical Interpretations of Global Financial Crises

Liberalism

 Core Idea: Liberalism highlights the importance of free markets, global cooperation, and
robust international institutions. Crises occur due to inadequate regulation and insufficient
global coordination.

 2008 Financial Crisis: Liberals emphasize the lack of effective global financial governance,
pointing to regulatory gaps in managing instruments like MBS. They advocate stronger global
bodies, such as the Financial Stability Board (FSB), to enforce standards and provide early
crisis warnings.

 COVID-19 Crisis: Liberals stress the need for global coordination in health and economic
policies, citing initiatives like COVAX for equitable vaccine distribution. However, they note
shortcomings in multilateral implementation, underscoring the role of organizations like the
WHO.

Realism

 Core Idea: Realism views states as self-interested actors prioritizing national goals over global
stability.

 2008 Financial Crisis: Realists argue that powerful nations prioritized their interests, as seen
in the U.S.’s $700 billion TARP bailout for domestic banks. Wealthier states’ reluctance to
assist developing economies further reflects realist priorities.

 COVID-19 Crisis: Realists highlight vaccine nationalism, with wealthier nations hoarding
supplies and imposing export bans, prioritizing domestic needs over global cooperation.

Marxism

 Core Idea: Marxism attributes financial crises to capitalist contradictions, where profit
motives deepen inequality and exploitation.

 2008 Financial Crisis: Marxists link the crisis to financialization, benefiting elites while
burdening homeowners and workers. Policies like TARP bailed out banks but neglected
struggling families, with low-income groups disproportionately affected.

 COVID-19 Crisis: The pandemic exposed capitalism’s inequities, as billionaires gained wealth
while low-income workers faced job losses. The recovery favored tech giants like Amazon,
leaving essential workers underpaid and overexposed.

Constructivism

 Core Idea: Constructivism focuses on the role of ideas, norms, and perceptions in shaping
responses to crises.

 2008 Financial Crisis: Constructivists argue that the "too big to fail" narrative drove large-
scale bailouts, creating moral hazards. The crisis also shifted global discourse toward financial
sustainability and resilience, influencing frameworks like Basel III.
  COVID-19 Crisis: The pandemic spurred discussions on sustainability and equitable recovery.
Initiatives like the European Green Deal tied economic recovery to environmental goals,
while public narratives on inequality pushed for healthcare investments.

Impact on International Political Economy

The 2008 and COVID-19 crises reshaped the international political economy, exposing weaknesses in
Western systems and enabling emerging powers like China to expand influence through initiatives
like the Belt and Road Initiative and vaccine diplomacy. These crises tested global institutions, such as
the IMF and G20, and led to changes in economic governance, including stricter financial regulations
after the GFC and sustainability-driven stimulus policies post-COVID-19. Both crises underscored the
growing role of state intervention in global economic management.

Conclusion

The 2008 Financial Crisis and COVID-19 Economic Crisis exposed systemic vulnerabilities in global
economies. The GFC revealed unchecked risk-taking, regulatory failures, and global imbalances, while
the COVID-19 crisis highlighted fragile supply chains and high debt levels. Both crises reshaped
international political economy dynamics, enhancing China's global influence and increasing scrutiny
of institutions like the IMF. By applying insights from liberalism, realism, Marxism, and
constructivism, it is clear that addressing future challenges requires stronger regulations, equitable
collaboration, and sustainable policies to ensure a resilient global financial system.