International Political Economy: Beyond Hegemonic Stability


Helen Milner, "International Political Economy: Beyond Hegemonic Stability," 
Foreign Policy, No. 110, Spring 1998



International political economy is a growth industry. Beginning its boom after 
the oil crises in the 1970s shook both world markets and states, the field now 
encompasses not only a great deal of political economy but of comparative and 
international politics as well. The end of the Cold War also helped shift 
attention to the field's main focus: how markets and states affect one another.
Scholars in the field have tried to explain at least four aspects of the 
international political economy. First, many of its pioneers thought that 
economics was too narrow to explain central aspects of the international 
economy. Consider one of the more visible theoretical gaps: Although economic 
theory showed that free trade was optimal, in reality, protectionism 
characterized most states' trade policies for years. Seeking to explain such 
paradoxes created by economic theory, scholars have proposed explanations that 
are more political. In particular, they have emphasized how politics determines 
the stability and openness of the international economy, a focus inspired by the 
trauma of the Great Depression in the 1930s and the desire to avoid repeating 
any such experience.
Second, scholars have focused on explaining states' foreign economic policy 
choices. In part, many believe that these choices are the most important factor 
shaping the nature of the international economy. For example, explaining why 
states choose to protect their economies, or how they set their exchange rates, 
or why they give foreign aid have been central preoccupations for the field. 
These explanations, however, have sought to interpret such choices by adducing 
domestic and international factors as well as economic and political ones.
Third, the field has paid attention to why certain states grow rapidly and 
develop over time, while others fail to do so or decline. This interest in the 
changing positions of states in the world economy has also been approached 
eclectically. Economic causes for such changes are usually supplemented by 
political ones, while domestic causes of the rise and decline of states are 
paired with international factors.
Finally, scholars have been interested in the impact of the international 
economy on domestic politics, an issue often explored under the rubric of the 
globalization of national economies.
Researchers in this field have generally sought answers to these kinds of 
questions by looking into four categories of explanatory factors: 1) the 
distribution of world power, especially the role of a hegemonic state; 2) the 
structure, function, and consequences of international institutions; 3) the 
impact of nonmaterialist factors such as ideas and beliefs; and 4) the effect of 
domestic politics.
DOES HEGEMONY BREED STABILITY?
Robert Gilpin, Stephen Krasner, and other scholars from the realist tradition 
have identified the distribution of power among states as a central factor in 
explaining the openness and stability of the international economy. "Hegemonic 
stability theory," first espoused by Charles Kindleberger in the 1970s, focuses 
on the role of leading states for example, Great Britain in the nineteenth and 
the United States in the twentieth centuries - and on how changes in the 
distribution of capabilities affect the world economy. This theory argued that 
the overwhelming dominance of one country was necessary for the existence of an 
open and stable world economy. Such a hegemon served to coordinate and 
discipline other countries so that each could feel secure enough to open its 
markets and avoid beggar-thy-neighbor policies. Conversely, the theory asserted 
that the decline of a hegemon tends to be associated with economic closure, 
instability, and the creation of competing regional blocs.
During the nineteenth century, Britain exercised a form of economic hegemony 
over much of the world. Britain's leadership was associated with the 
globalization of markets, the openness of international trade and capital 
movements, the rise of multinational corporations, and the general economic and 
political stability that characterized at least Europe. World War I brought an 
abrupt end to both British hegemony and the conditions that it had promoted. 
Increasing protectionism, the formation of regional blocs, and the decline in 
capital mobility in the 1920s and early 1930s ate away at the foundations of the 
global economy, contributing to growing economic instability and the depression.
The cause of this tragic chain of events has often been laid at America's 
doorstep. The United States was, at the end of World War I, the world's 
strongest economic power. But it steadfastly refused to take on the leadership 
role that Britain could no longer play. This "irresponsibility" was most vividly 
exemplified in the minds of many people by the infamous Smoot-Hawley Tariff 
(1930), which raised the average tax on imports to the United States by about 40 
percent. At the beginning of the depression, the United States shut its markets 
to foreign goods and thus helped propel the world economy into its worst swoon 
ever. The unwillingness of the United States to coordinate its monetary and 
currency policies with other countries merely exacerbated the situation. This 
isolationist posture on the part of the world's economic hegemon had negative 
consequences for most other countries and the United States itself.
The perils of isolationism seemed to have been well learned by American 
policymakers after the end of World War II. Then, the United States quickly 
assumed a leadership role and steadily moved forward to create an open 
international trade system based on the General Agreement on Tariffs and Trade 
(GATT) and a stable monetary system founded on the Bretton Woods system. The 
Marshall Plan was perhaps the direct antithesis of the Smoot-Hawley tariff. It 
symbolized recognition of America's special role and responsibility for peace 
and prosperity beyond its borders - indeed, globally. U.S. leadership, it is 
asserted, helped create the conditions necessary for the steady economic growth 
experienced by the industrial countries up to the 1970s and the rapid 
development of countries such as Japan and South Korea.
Concerns about U.S. power arose again in the late 1960s and early 1970s. 
America's economic advantages over the rest of the world seemed to be rapidly 
dissipating, while other countries were catching up. In response, protectionist 
sentiment within the United States grew, leading to many domestic challenges to 
the traditional policy of freer trade. The stability of international currency 
markets was also disrupted by American behavior. The simultaneous pursuit of the 
Vietnam War and the Great Society program helped fuel inflation in the United 
States, which was exported abroad because of the dollar's role in international 
exchange. America's allies, especially France and Germany, became very concerned 
over the impact of this erosion in the dollar's value as the world's reserve 
currency. Ultimately, these problems led to the U.S. abandonment of the Bretton 
Woods fixed exchange rate system and to the emergence of a more volatile era of 
floating exchange rates. Hence, although American policy may have laid the 
groundwork for the growing globalization of markets, the decline of American 
leadership prompted many, especially in the United States, to worry about the 
future stability and direction of the world economy. Critics of U.S. power, 
however, especially Susan Strange, have either denied any decline in U.S. 
capabilities or lauded the effects of the decline of "irresponsible" U.S. power.
WHY POWER ISN'T EVERYTHING
Nowadays, such concerns about American power have receded. By the mid-1990s, the 
decline of U.S. hegemony no longer seemed so assured. Claims about the decrease 
in U.S. power appeared exaggerated given the demise of the Soviet Union, 
persistent recession in Japan, high unemployment and slow growth in Europe 
combined with the challenge of integrating Eastern Europe into the European 
Union, and American industry's return to competitiveness. Moreover, the 
relationship between hegemony and an open, stable world economy has been cast 
into doubt by a number of scholars, such as Robert Keohane and David Lake. As 
U.S. behavior during the interwar period illustrates, the possession of superior 
resources by a nation does not translate automatically into great influence or 
beneficial outcomes for the world.
Institutions to Govern the World Economy
One reason why the distribution of power among countries is not seen as the 
exclusive factor shaping the workings of the international economy is the 
important role played by international institutions. Keohane has made the most 
ambitious claims about the role of these institutions. He argues that although 
hegemony might be necessary for creating such institutions, once begun, they 
take on a life of their own, and states come to see them as worth preserving. 
Multilateral institutions such as the United Nations, International Monetary 
Fund (IMF), World Bank, World Trade Organization (WTO), and EU provide 
information to states about each others' behavior, reduce the cost of 
negotiating agreements, and can expose, and sometimes even punish, violations of 
agreements by states. The claim is that without these institutions the 
international economy - and international politics - would be much more 
unstable, less open, and more conflictual. In the case of the EU, for example, 
many see peace in Western Europe over the past 40 years as partially a product 
of this institution; and scholars and politicians often cite the maintenance of 
peace in Europe as a primary motivation for monetary union.
The impact and role of international institutions are controversial. Realists, 
with their emphasis on power, denigrate the role of such institutions, often 
seeing them as having little independent impact, and argue that their influence 
is derived from the actions of the states within them. In the EU example, they 
might cite the hegemonic role of Germany as the key to monetary union. Others, 
especially European scholars, believe that many international institutions are 
controlled by the United States, and thus reflect its interests. In particular, 
the United States is seen as using the IMF and World Bank as subtle mechanisms 
to exert its influence on countries. As realists, these scholars emphasize the 
impact of state power over the character of the institutions themselves.
The Power of Values
The emphasis on power and international institutions misses a central element 
necessary to explain political behavior: the purposes or goals that states and 
their leaders choose to pursue with their resources. Nonmaterialist explanations 
of the international political economy attach key interest to how states' 
purposes or goals are defined. Two central approaches have taken on the task of 
explaining this. The "ideas approach," exemplified by the work of Keohane and 
Judith Goldstein, proposes that the ideas that policymakers carry in their heads 
are very important in explaining their policy choices. Ideas, whether about the 
proper role of the state in the economy or the means-ends relationship between 
economic policy instruments and outcomes, shape how policymakers act.
Dominant ideas - ones that capture the attention of large segments of the 
policy-making community - define states' actions and coordinate their behaviors 
in critical ways. Scholars have identified both the rise of the belief in 
Keynesian macroeconomics after World War II and the later dominance of 
monetarist beliefs as central explanations for the creation of various 
international institutions and the coordination of states' policies within them. 
Some attribute the movement toward European monetary union to the spread of 
monetarist ideas among European policymakers. In another area, Anne Krueger has 
shown how changes in the prevailing ideas on how to induce economic development 
led, in the 1950s, to the use of import substitution policies and, more 
recently, to their abandonment.
Like scholars who emphasize ideas, the so-called constructivists focus on how 
policymakers' and states' purposes are defined. This approach goes beyond the 
adoption of ideas to the definition of social identity. A core proposition of 
this approach is that the social construction - hence, the term "constructivism" 
- of states' identities constrains the choices that states can make and propels 
them toward certain behaviors. For instance, Peter Katzenstein has argued that 
the Japanese embrace of pacifism since the end of World War II has affected 
Japan's behavior and its policy choices in the security area. Others have 
suggested that the construction of a European social identity has helped promote 
European integration. And certainly the growing concern with nationalism and 
national identity as sources of conflict or cooperation in international 
politics has been part of the constructivists' agenda; as evidenced in the work 
of Ronald Jepperson and Alexander Wendt. These nonmaterialist explanations of 
the international political economy emphasize states' purposes and choice of 
goals, which their proponents see as fundamental to states' behavior.
The Impact of Domestic Politics
Domestic political explanations of the international political economy also 
focus on the definition of states' purposes, but they tend to emphasize 
political processes and examine the way that national interests are defined 
through a struggle among domestic actors. Scholars in this area usually focus on 
two sets of factors: In the first case, they see social groups such as labor 
organizations, capitalists, multinational corporations, import-competing firms, 
and ethnic groups as having identifiable preferences about international 
economic policy that often translate into national policy. Those domestic groups 
who benefit from international economic exposure or have strong international 
ties already will favor greater international openness and stability and press 
their governments to enact policies that promote such market characteristics. 
The more such groups exist domestically, the greater will be the pressure on 
policymakers to orient their policies in this direction. For example, Jeffrey 
Frieden has argued that European monetary union has become more tenable because 
of the growing external orientation of European firms and banks and their 
concomitant interest in European economic openness and currency stability.
In the second case, some scholars point to a greater role for the state and 
policymakers in both the definition and execution of international economic 
policy. For them, the character of the state is what matters. The institutional 
structure of the state and its imperviousness to societal pressures shape the 
policy preferences of political actors and their capacity to implement these 
preferences. For example, Katzenstein and others identified France and Japan as 
states with institutional structures that allow technocratically inclined 
policymakers to play a leading role in defining foreign economic policy and 
pursuing interventionist policies.
The impact of a state's institutional structures on its development prospects 
has also been a topic of interest. Why is it that in some countries (mostly in 
East Asia) the state has played a central role in fostering economic 
development, while in others (mostly in Africa and Latin America) state action 
seems to have impaired economic progress? Some scholars such as Chalmers Johnson 
and Stephan Haggard have concluded that certain institutional characteristics 
are more conducive than others to making the state an effective promoter of 
economic development. These institutional traits often enable the state to 
mediate between the international and domestic economies. More recently, 
concerns have grown about the extent of democracy within states. Some scholars 
such as Donald Wittman and Gerald Scully have argued that economic growth and 
international openness depend greatly on whether a state's institutions are 
democratic or not.
In more recent work, scholars such as Judith Goldstein, Beth Simmons, and I have 
tried to focus on both societal actors and state institutions, realizing that 
each plays a role in shaping foreign economic policy. Moreover, scholars have 
tried to connect international and domestic factors. Thus, two-level games, 
which link both the international and domestic environments and societal and 
state actors, have become more prominent. Robert Putnam's early version of this 
approach has been refined by others seeking to derive more specific propositions 
about how all of these factors interact. For example, a number of scholars have 
shown how divided government affects trade policy choices. These two-level 
models promise a better understanding of the interaction of the complex factors 
that create the international political economy.
THE PRESSURES OF GLOBALIZATION
Globalization refers to the increasing integration of national economies into a 
global one. As mentioned before, globalization peaked in the late nineteenth 
century, reached its nadir in the early 1940s, and has since rebounded to levels 
comparable to the earlier highs. Globalization has thus increased, as most 
agree, but it is far from being complete. For many economists, globalization is 
a beneficial process since it produces net gains for most countries. More 
concern has been raised by political scientists over its political effects, 
especially domestic ones.
In the 1970s, the buzzword for globalization was interdependence. It was argued 
that rising interdependence was not only changing international politics but 
also rendering the nation-state obsolete. The expectation was that it would 
severely limit the range of action that states could take. The state would 
gradually become less and less important to its citizens as interdependence 
rose. This debate aroused much controversy and inspired a strong defense of the 
continuing relevance of the state in international and domestic politics.
In the 1990s, this debate has revived as globalization reaches new heights. 
Three issues are central to it: First, globalization has been seen as exerting 
pressure on all states to change their policies and institutions in certain 
ways. Globalization, scholars have argued, is forcing convergence in policies 
among countries most exposed to it. Liberalizing trade policy, removing capital 
controls, opening financial markets to foreign investors, and downsizing the 
role of the state in the economy are the generic policy prescriptions for 
effective participation in a global economy. Pressure for the reduction - or 
even abandonment of - the welfare state in developed countries, and for the 
liberalization of the economy in developing ones, has been seen as a byproduct 
of globalization.
Second, globalization has been seen as giving increased power to the holders of 
capital - investors, multinational firms, and global financial institutions. 
These actors now can demand that states make changes in their economic policies 
and can punish them if they do not comply by exiting the country or, better yet, 
speculating against the country in world currency markets. In contrast, labor 
has been weakened. Having less freedom to move from country to country, workers 
find their power to bargain with firms impaired. Membership in unions worldwide 
has declined, and unions have faced challenges to their acquired power in many 
states. Globalization moves jobs around the world and imposes constraints on 
wage increases as never before.
Finally, globalization, it is sometimes claimed, is irreversible. That is, no 
actor can resist its advance. This again calls into question the role of the 
nation-state. Can any state resist, or even reshape, the pressures generated by 
global markets? Or must a state submit to the ineluctable pressures of 
globalization and lose the capacity to direct its national economy?
On none of these issues is there much consensus. Although many events seem to 
support the above views - the rush to free trade and capital market 
liberalization, the reforms of many welfare states, and the creation of 
independent central banks globally - some critics have seen the other side of 
the coin. They note that the percentage of government spending in the economy 
has declined only slightly or not at all (even in Margaret Thatcher's England), 
countries have maintained extensive and distinct welfare systems, national ways 
of doing business have persisted, and unions have actually made a resurgence 
lately in some nations, including in the United States and France. These events 
suggest that globalization is neither producing convergence nor undermining 
labor, and may not be irreversible. States in fact are ever more important, for 
they are the means for countries to resist and reshape the pressures generated 
by globalization. In this view, strengthening the institutions of the state may 
be the most effective way for countries to reap the maximum benefits from a 
world of global markets. These contradictory perspectives on globalization are 
likely to persist until we have more evidence about its effects.
The relationship between American power and globalization is also a topic of 
much interest. It is undeniable that U.S. policies have helped create the 
current international economy. But some claim that globalization is not only a 
creation of the United States but also a creature controlled by it. Countries 
such as France and Malaysia have vehemently expressed the view that 
globalization is basically the extension of American economic practices and 
ideals to the world, and a tool for the exertion of American power. They see 
resistance to global market pressures as defiance of the United States. Or, as 
some South Koreans have claimed during the recent financial crisis there, the 
IMF is just doing America's bidding. That may be leadership, but it is not the 
type of leadership these countries would like to see.
Ironically, many Americans see globalization as beyond their country's control. 
Indeed, in their eyes, the United States is ever more constrained by global 
forces, just like everyone else: All states must heed the dictates of 
international bond traders and investors or face the consequences. The United 
States let globalization out of the bottle and now cannot contain it. This loss 
of national control is bemoaned by some and applauded by others, but none doubt 
its reality. What is striking in this debate is the difference in perception 
between Americans and the rest of the world about the relationship between 
globalization and American influence.
The impact of globalization remains an area of intense research. The recent 
economic travails in Asia have underlined how even well-developed states can be 
affected by international investors and the vast capital flows they now control. 
How this crisis is resolved will have important consequences for many countries 
and for the future of the global economy. Will the pressures exerted by 
international financial actors fundamentally change the relationship between 
Asian governments and their economies? Will the crisis lead to greater 
convergence between the economic practices of Asian institutions and those 
common in the West? Will the famed "industrial policy" practiced by many Asian 
governments disappear? This issue is especially important for China and other 
developing countries seeking models of how best to foster economic development.
Such questions beg a look at the role of the state in economic policy, both 
foreign and domestic. In the aftermath of the two world wars, government 
intervention in the economy became accepted practice at both the micro and macro 
levels for eliminating boom and bust cycles in the economy. Indeed, the 
twentieth century has witnessed the greatest growth in government intervention 
in the economy ever seen. Globalization and the spread of more "orthodox" 
economic ideas, however, have undermined confidence in such intervention in many 
areas. As states' roles in their economies are reduced, what will happen to both 
the economy and the states? Or is the withdrawal of the state from the economy a 
passing trend? Will new ideas arise that sanction a greater role for the state 
in the economy?
Finally, the impact of power and international policies on the global economy is 
of great interest. After all, political conflict and war after 1914 destroyed 
the global economy created in the late nineteenth century. What effects will the 
post-Cold War international system have on the world economy? Will major 
international conflicts reappear, thus fracturing it into blocs? Will 
institutions that have helped to keep the peace such as the EU, NATO, and UN 
disappear, while new political alliances form, reshaping economic flows? 
Critically, what impact will such changes in the distribution of power and the 
organization of international politics have on the global economy? These issues 
will form some of the general research agendas for scholars in international 
political economy.
WANT TO KNOW MORE?
While students of international political economy hold contradictory 
perspectives on the causes and effects of globalization, they admire the work of 
several scholars who have illuminated the pillars of the world economy. A 
respected primer is Robert Gilpin's The Political Economy of International 
Relations (Princeton, NJ: Princeton University Press, 1987). The father of 
hegemonic stability theory is Charles Kindleberger; see his seminal work, The 
World in Depression, 1929-39 (Berkeley, CA: University of California Press, 
1973). David Lake presents an updated case for the theory in "Leadership, 
Hegemony, and the International Economy" (International Studies Quarterly, 
Winter 1993-94).
The spirited debate over the role of ideas is presented in Ideas and Foreign 
Policy (Ithaca, NY: Cornell University Press, 1993), edited by Judith Goldstein 
and Robert Keohane. Those wanting to learn how societal actors shape foreign 
economic policy can turn to Ronald Rogowski's Commerce and Coalitions 
(Princeton, NJ: Princeton University Press, 1990). Beth Simmons' Who Adjusts? 
Domestic Sources of Foreign Economic Policy During the Interwar Years 
(Princeton, NJ: Princeton University Press, 1994) provides an in-depth 
exploration of how domestic politics can affect a state's approach to the world 
economy. Helen Milner's Interests, Institutions and Information (Princeton, NJ: 
Princeton University Press, 1997) develops two-level games. Keohane makes 
ambitious claims about the role of international institutions in International 
Institutions and State Power (Boulder, CO: Westview Press, 1989). The national 
security aspect of this field is outlined in Joanne Gowa's Allies, Adversaries, 
and International Trade (Princeton, NJ: Princeton University Press, 1993). 
Chalmers Johnson considers the effects of a state's institutional structures in 
his book MITI and the Japanese Miracle (Stanford, CA: Stanford University Press, 
1982). FOREIGN POLICY has published several articles on globalization, including 
Dani Rodrik's "Sense and Nonsense in the Globalization Debate" (Summer 1997).
For links to relevant Web sites, as well as a comprehensive index of related 
articles, access www.foreignpolicy.com.
HELEN V. MILNER is professor of political science at Columbia University.



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