324 CHAPTER NiNE ■ InternatIonal Po lItI cal economy
For 20 years after the end of World War II, economic growth occurred much as
liberal economic theory had predicted. Growth rates in the developed and the devel-
oping world averaged more than 4 percent. Trade volume increased over sevenfold, and
poverty rates fell dramatically worldwide. And the volume of international finance
exploded, as the communication revolution expanded the possibilities for international
financial transactions. The groundwork of economic globalization had been laid.
These changes in the international po liti cal economy are viewed differently by the
major theories. Adherents of liberal economic theory, as introduced in Chapter 3 and
expanded in this chapter, represent the majority of academics and policymakers in the
Western world. They believe that internationalization of finance and free unfettered
trade is a positive good, leading to greater economic welfare for all. Economic nation-
alists, the old mercantilists, are not so sure. Their goal is the accrual of individual state
power; economic gain by one results in a diminution of power in others. Hence, trade,
investment, and finance are all other arenas in the strug gle for national power. Marxists
see internationalization as leading to domination by a few and hence underdevelop-
ment and exploitation of the poorer classes and states. Therefore, radical reforms are
needed for the re distribution of power. By contrast, social constructivists recognize that
polices are affected by historical and societal factors. Neither individual nor state prefer-
ences are stable or consistent; rather, there is a contestation over beliefs and ideologies.
How then does the international economy function in the twenty- first century? We
examine three diff er ent areas: international finance, international trade, and economic
regionalization. Then we turn to two of the major challenges of con temporary po liti-
cal economy— the gap between the rich and poor, both between states and within states,
and con temporary global economic crises. Fi nally, we examine the arguments of the crit-
ics of international economic liberalism.
How the Globalized economy
Works today
i ternational Financen
Capital movements played a key role in the earlier development phases of the inter-
national po liti cal economy, as they do today. International capital traditionally moves in
two ways. First, national currencies, like goods and ser vices, are bought and sold in a
free market system. In such a system of floating exchange rates, the market— individuals
and governments buying and selling currencies— determines the actual value of one cur-
rency compared with other currencies. Just as for a tangible good, each national cur-
rency has a supply and demand, and the prices of each currency adjust continually in