International Political Economy
International Political Economy
Interest groups, domestic politics, and institutions, both domestic and international, are important factors that determine the foreign economic policy of a given country. Interest groups perform certain obligations, based on their capability to regulate competing industries to ensure safe and free trade. Besides, political leaders are required to execute some demands from the voters as pertains to the economy of the country to secure them a win in next elections. Finally, institutions form a link between countries undertaking international trade as they sign treaties to facilitate this trade. Economists have come up with some theories, which illustrate the interplay of interest groups and coalitions in the development of international trade. Political support for the free trade in a given country is determined by varying coalitions among owners of different factors of production.
According to the Heckscher-Ohlin (HO) model, there is perfect mobility among production factors within any country. As pertains to this model, people who own the majority of the production factors get the most benefits from free trade as compared the players who own the minority factors (Stolper and Samuelson, 1941). For instance, capital is a major production factor in the United States. Among the capital factor is high skilled labor. Companies that utilize high skilled labor get better incomes as compared to those who utilize low-skilled labor (Milner & Kubota, 2005). In addition, highly skilled workers get better salaries as compared to low-skilled workers because there is always an increasing demand for highly skilled workers in the industry. On the other hand, there is always a decrease in the demand for lowly skilled workers and these results in a decrease in their salaries. This model, thus, puts more emphasis on the production factors, especially capital and the labor force but not the policies of trade (Rogowski, 1989).
The Ricardo-Viner (RV) model, on the other hand, states that some production factors that cannot shift across the sections in the short term. If the shifting of labor and capital from one section to the other is not easy, then the preference of the owners of these factors will be based on the policies of trade. Therefore, these two factors, that is, labor and capital may be affected by competition from international trade. Therefore, the HO model emphasizes on free trade being influenced by production factors, whereas the RV model emphasizes on the free trade being influenced by trade policies (Rogowski, 1989).
Some interest groups are in favor of free trade under the HO model because there are several research programs that have shown that trade associations are formed along the line of production factors. This leads to a rise in the conflicts between classes, contrary to the rise of industrial conflicts (Rogowski, 1989). In addition, Mayda and Rodrik (2005), O’Rourke, and Sinnott (2002) assert that a free trade mostly applies the HO model. However, other interest groups still favor free trade under the RV model. For instance, Busch and Reinhardt (2000) in their examination of the trade policy of the United States spell that laborer in the production sections prefer free trade based on the RV model as compared to the HO model.
These domestic institutions that influence trade include political institutions within a given country. These institutions determine the factors within the country, which pose a great effect on trade. These political institutions represent the capacity of the state to regulate the aforementioned interest groups, alter the characteristics of the players in the private sector, and manipulate the internal economy. According to Katzenstein (1978), governments, which possess the ability to be independent of giant industrial players finds it very hard to implement the interests of the state.
A countries political regime has a great effect on trade. For example, research has shown that democratic countries have an open trade system than autocratic countries. This finding is supported by the fact that in democratic countries, the citizens have the capability to punish government officials who mismanage their offices. In addition, there is transparency in the economic policies in democratic countries and since the citizens always pass their cruel judgments on the leaders they elected when there is an economic crisis, officials find it had to alter the country’s economy to benefit themselves. Democratic countries trade freely as compared to other political regimes in international trade. According to Milner and Kulota (2005), democracy enhances trade among developing countries. Since these developing countries have more labor factors than capital factors, the HO model in application, would imply that they export products that require more labor to manufacture and instead import products that require more capital to manufacture. In addition, Milner and Kulota (2005) present that democracy advocates for liberal trade among developing nations. This liberalization of trade is beneficial to labor, leading to an increase in the wages and cutting down on the cost of the goods imported. Since there is free trade in developing countries, which is beneficial to many people, leader who need support from these people will have the responsibility of liberalizing trade in other foreign countries. In democratic countries, trade tariffs are public thus; the voters have adequate information about these tariffs. If the tariffs are high, the opponents of the current leaders will have an upper hand in challenging their counterparts on reducing the tariffs; therefore, the serving leaders will be keen on keeping the tariffs minimal, which promotes trade.
Countries with a large economic base are capable of improving their conditions of trade through the imposition of high or maximum tariffs. If many countries with a large economic base maximize their tariffs, most of the countries will not profit from international trade. This will lead to the rise of a tough economic war. Therefore, to avoid this crisis, countries enter into trade treaties, and these treaties assist the big nations in the coordination of trading policies (Bagwell and Staiger, 1999). In addition, international institutions are helpful in such a way that countries can share their economic situations with other countries and in so doing assistance can be granted in case of a crisis whether domestic or international. For example, because of the help from the United States, there is a connection in the agricultural sector and the industrial sector in Japan and Europe, which has liberalized agriculture in these two regions.
In cases where a crisis arises between two countries, a developed and a developing country, international institutions play a significant role in ending the crisis because the developed country may look down upon the developing country because it has no power to revenge. The developed country, on the other hand, can opt to cut its entire economic links with the developing country because it is has a market advantage and can produce most goods. In such situations, international institutions will intervene to in order to calm the situation and create a peaceful environment, which will promote the economy of both the countries.
Autocratic Versus Democratic Systems
In order to comprehend the effects of the various political regimes to the economy it is, a deeper concept of democracy and autocracy needs to be applied besides their distinction (Acemoglu, 2009). In democracies, the economic growth is determined by the time duration of a political leader in office. The longer the political leader takes in office, the greater the economic growth. This can be attributed to the political milestones gained by the same political poor in control of the state which increases the stability of the country, both politically, socially, and economically leading to intense investments, thus, resulting to an economic growth. In an autocratic regime, however, there is minimal freedom to engage in political activities, minimal rights to the ownership of wealth, and minimal freedom for one to express his feelings or opinions publicly. Therefore, the policies in such a political setting are very ineffective leading to less or no investments at all, thus, resulting to an economic decline. Besides, in a democratic setting, there are other opposition parties which act as watchdogs to the ruling party in the implementation of policies. This watchdog parties will work to ensure efficiency in government operations, which will lead to a conducive economic environment yielding an economic growth. In autocratic settings, there is a limited number of political parties if not the ruling party only. Therefore, the government is at liberty to function as it wishes resulting to an economic downfall.
Congressional to Presidential Leadership
These two political organization styles are different in a number of ways. Their difference is in the allocation of power in running the state. In the presidential leadership, most of the powers are assigned to the president while in the congressional system most of the powers are assigned to the parliament. In a parliamentary system, the parliament has total control of both the executive and the legislative arms of the government. The parliament/congress oversees the operations of these arms of the government. Therefore, before policies are implemented they have to go through the parliament. The president and his or her assistants cannot make independent decisions that favor a certain group of people because the parliament will not approve it. Therefore, only economic policies that are for the good of the entire nation can be implemented. In the presidential system, the president dictates all the other arms of the government, therefore, he or she can pass any law, in favor of a section of the nation which might lead to any economic crisis in the country thus discouraging international trade.
Single-member district/majoritarian v. proportional representation/coalitional systems
In the coalition systems, there are greater expenditures incurred as compared to single party systems (Poterba, 1994). Since there is a distribution of power in the coalition, system chances of lack of efficiency in budgeting are very high. For instance, in the American history budgets in the previous decades had many cases of resources not accounted for because coalition parties and not a party with the majority representatives ruled the government. In addition, coalition governments have a large number of political parties and legislators, thus, causing an increase in the budget estimates as compared to a single party system (Shepsle, Weingast, and Johnsen 1981). According to Scartascini and Crain (2001), with an increase in the number of political parties the stability of coalitions reduces and since there is an increase in the number of legislators, the budget increases tremendously.
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