ARTICLES SUMMARY ASSIGNMENT

INTRODUCTION TO INTERNATIONAL POLITICAL ECONOMY

PUTRI OKTOVIANITA
016201500091

Lecturer:
Dr. Muhammad A. S. Hikam, MA

FACULTY OF HUMANITIES
INTERNATIONAL RELATIONS
PRESIDENT UNIVERSITY
BEKASI
2016
British and American Hegemony Compared:

Lesson for the Current Era of Decline

David A. Lake

Scholars who study American hegemony often relate the hegemon with Britain who once
became the central power of international economy in 19 th century. It is not surprising since
both Britain and the United States are similar in some ways. First, in historical analogy, they
both played leading roles in opening the international economy, but then brief successes were
soon followed by increasing challenges to global liberalism afterwards.
Nevertheless, one needs to identify the differences between the two cycles of
hegemony, because they are just as important as the similarities. It should be noted that the
two periods of declining hegemony are alike, but not identical. The differences of both
periods can be viewed from four categories: international political structure, international
economic structure, international political processes, and international economic processes.
First, it can be said that the international political structure during the period of British
hegemony and American hegemony is different. When Britain became the hegemon in
nineteenth century, the United Kingdom, France, and Germany practised imperialism, and all
of them turned toward their colonies. After the decline of its economic strength in the late
nineteenth century, Britain turned toward to its empire. However, after 1945, during the
regime of the latter hegemon, exists a system of sovereign states, or also known as anarchical
system. Furthermore, the colonies in during the Britain hegemony did not have abridged
decision-making powers and are not fully sovereign. On contrary, even if two countries agree
to a bilateral treaty, each remains fully sovereign and capable of cheating and exploiting the
other.
Second, the international economic structure of British of and American hegemony
has a different base. British hegemonys international economic structure was based on
control of international trade. On the other hand, the United States depended on the relatively
greater size of its domestic economy. Both hegemons also do not pursue the same path of
falloff. The absence of Anglo-American cooperation caused by war and its repercussion
marked the wane of British hegemony. Contrasts to the previous hegemon, too many partners
and the corresponding potential for free riding become the greatest threat to American
hegemony.
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Another difference between British and American Hegemony can be seen from its
international political processes. According to Scott James and David A. Lake, there are three
strategies or faces of hegemonic leadership, namely: the use of positive and negative
sanctions by the hegemon aimed directly at foreign governments to influence their political
choices, the hegemon uses its ability to influence the price of specific goods, to alter the
incentives and political influences of social actors in foreign countries, and the hegemons use
of ideas and ideology to structure public opinion and the political agenda in other countries so
as to determine what are legitimate and illegitimate policies and forms of political behaviour.
Because the United States does not have domination of international trade to the same
extent as Britain, but bases its leadership on its large domestic market as a substitute, it
depends on the first face strategy, while Britain depends solely on the second face hegemony.
Additional related difference in the international political processes of British and
American hegemony is a greater dependence of the United States upon international
institutions and international economic regimes. Oppositely, in nineteenth century, Britain
directed the international economy without reserve to any formal international institutions
and with few rules governing exchange relations between countries.
Also, under the British leadership, the free trade order connected the political divide
by including both friends and foes, compared to the American hegemony which was built
entirely one side of a bipolar political divide.
Finally, the difference of international economic processes between British and
American hegemony is, the latter has been intra-industry or the exchange of similar
commodities between similarly endowed countries, while the previous hegemon was built
upon a pattern of complementary trade. In addition, during its regime, Britain involved in
almost only portfolio investment, while the United States depended on a greater level upon
foreign direct investment.

Third World Governments and Multinational Corporations:

Dynamics of Hosts Bargaining Power
Shah M. Tarzi

To observe the degree of how host states in the Third World can affect the behaviour of
multinational corporations, according to Shah M. Tarzi, there are several factors that
influence the potential power and the actual power of the state.
Potential power signifies the relative bargaining of the host state which is relying on:
(1) the level of the host governments expertise, (2) the degree of competition among
multinationals, (3) the type of direct foreign investment, and (4) the degree or extent of
prevailing economic uncertainty. Conversely, actual power refers to the ability and
willingness of host governments to exercise their bargaining power in order to extract more
favourable terms from foreign firms.
The level of hosts government expertise can influence the potential power of a state.
The majority of host states have obsolete government structure, pairs with insufficient laws
for collecting taxes and controlling foreign business. This condition can be worsened with the
shortages of competent, trained, and independent administrators which later will result in the
difficulty of host states to handle MNCs and supervise their behaviour.
Level of competition of multinational corporations for investment opportunities in a
Third World country also affects the bargaining power of host countries. The higher the level
of competition, the more likely the bargaining power of the host government will be
increased. On the other hand, when the level of competition among the MNCs is low, the
bargaining power of host country would likely become weak.
The next factor that influences the potential power of a state is the level of prevailing
economic uncertainty, which encompasses the uncertainty of the success of a particular
investment project, its final cost, and the desire of a host country to attract investment create a
noticeable asymmetry of power favouring the MNCs.
Another factor that affects the bargaining power of a host country is the type of direct
foreign investment that is engaged. There are four characteristics of foreign direct investment
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projects that affect the result of the bargaining process, those are: (1) absolute size of fixed
investment; (2) ratio of fixed to variable costs; (3) the level of technological complexity of
the foreign investment regime; and (4) the degree of marketing complexity.
However, there are some constraints in which, according to Tarzi, would likely to
impede the host state to exploit the bargaining advantage. Those constraints can be
categorised into domestic politics within a host country and international political and
economic pressures from multinationals (or their home government).
The domestic constraints within a host country consist of various things such as: (1)
the attitudes and beliefs of the governing elite concerning the foreign investment, and their
readiness and ability to ignore international economic and political pressure in their encounter
with multinational corporations, (2) the weak labour movement group, which has been
involved in the host countrys political processes, nonetheless, remains a major source of
institutional weakness in underdeveloped countries, as well as (3) the lack of competition
from local businesses creates another source of institutional weakness.
Despite the domestic constraints, there are also international constraints that could
hinder the host country to exploit the bargaining advantage. The first one is constraints posed
by non-state actors comprise the level of global integration (includes the flow of raw
materials, components and final products as well as flows of technology, capital and
managerial expertise between the units and subsidiaries of a global corporation) of
multinationals, local political risk and transnational risk management strategies.
The host governments desire to gain access to the global network and the reliance of
host states on the foreign firms who created it creates a constraint on the formers bargaining
power. Also, the use of political risk management strategies by multinational corporations
becomes another constraint for the host government to exert power. MNCs often form
transnational alliances that significantly amplify the cost to the host state of changing the
foreign investment regime in their favour, so that they can weaken their political risks. One
tactic employed by the MNCs is to spread the impartiality in the foreign investment project
over a number of companies from other developed countries.
The second international constraint comes from home government of multinational
corporations. The degree of how MNCs can mobilise the support of their home government,
and the ability or inability of the Third Wold government to resist retaliation from the
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powerful governments of the United States and Western Europe in support of multinational
corporations can also influence the bargaining power. For various national security reasons,
to maintain entry to cheap sources of foreign raw materials, to enhance position or to use the
corporations to transfer aid to pro-Western governments in the Third World, are several
reasons why the home government might support multinational corporations.

Hegemonic Stability Theories of the International Monetary System

Barry Eichengreen

Barry Eichengreen examines whether the presence or absence of a hegemon is necessary for
the establishment and maintenance of stable monetary systems. He finds that international
cooperation also has the same importance to its design and functioning, although hegemon
might contribute to the smooth operation of international monetary regimes. He draws
evidence from three international monetary systems: the classical gold standard, the interwar
gold exchange standard, and Bretton Woods.
From the classical gold standard, according to Eichengreen, Birtish example or
suggestion did not dictate the form of the monetary system, since at that time, countries such
as Germany and France adapted the gold standard to their own needs. Both countries
continue to permit large internal gold circulation, while other countries limited gold coin
circulation to low levels.
Under the interwar gold exchange standard, with the absence of an American
delegation, along with its dominance of the proceedings at Genoa, Britains mark on the
interwar gold exchange standard was clear, despite a noticeable wane in Britains position in
the world economy and the opposition of influential American officials suggests that planning
and effort were substitutes, to some degree, for economic power.
Another monetary system is the Bretton Woods system. The system shows that the
U.S. dominance of the Bretton Woods negotiation is obvious. Still, though the signs of
hegemony and American dominance of the proceedings at Bretton is apparent, Great Britain
was able to obtain a large amount of concessions in the design of the international monetary
system.
From the three cases it can be concluded that a hegemon significantly influence the
form of the international monetary system, but it is incapable of dictating the form of the
monetary system.
Despite the genesis of monetary systems, Eichengreen also examines how the theory
of hegemonic stability applies to the operations of such systems. He considers adjustment,
liquidity, and the lender-of-last-resort function in turn.
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Eichengreen argues that under the two hegemons, the effectiveness of the adjustment
reflected not just their market power, but also the existence of an international consensus on
the objectives and formulation of monetary policy that allowed central bank policies to be
harmonized. The important role of Britain before 1914 and the United States after 1944 was
not so much to influence other countries to change their policies as to provide a focal point
for policy harmonization.
Besides, the presence or the absence of a hegemon plays a critical role in resolving
liquidity. The liquidity crisis of the 1960s proves the importance of U.S. dominance of
international market to resolve the crisis. Also, the absence of a hegemon during the interwar
years and the failure of competing financial centres to regulate their policies successfully
caused the liquidity shortage. In addition, with the presence of a hegemon, it is difficult to
rely on that power with single responsibility to ensure the sufficient provision of liquidity.
Under the gold standard, Britain contributed to the provision of liquidity only to the extent
that its financial height encouraged other countries to expand their specie holdings with
sterling reserves.
As for the lender of last resort, British economic power in the 1870s and U.S.
economic power in 1960s were insufficient enough to act as lender of resort, because to
effectively act as lender of last resort, the market power of a hegemon must exceed all its
rivals, but also it must do so by a very extensive margin. In order to provide lender of last
resort according to Eichengreen, other economic powers such as France for the first
instance, and the Group of Ten in the latter, were needed to cooperate.