Political Economy and Development
Political economy studies the interaction of states and markets, and development asks how growth, distribution, and welfare change. The exam tests trade, fiscal and monetary policy, development strategies, inequality, and institutional explanations.
Core concepts
- Smith's comparative advantage predicts gains from trade, but adjustment creates winners and losers. Tariffs protect domestic producers while raising costs for consumers and input-using firms.
- Keynesian policy uses government spending and demand management to counter recession; monetarism stresses money supply and rules. Fiscal policy concerns taxation and spending; monetary policy concerns interest rates and money.
- Growth is not development. HDI combines income, health, and education; the Gini coefficient measures inequality. Poverty can fall while inequality rises.
- Import substitution protects domestic industry; export-oriented strategies compete globally. The Washington Consensus favoured liberalisation, privatisation, and fiscal discipline. Developmental-state accounts stress strategic industrial policy. Dependency theory highlights unequal core-periphery relations.
Worked example
A government imposes a tariff on imported steel. Domestic steel producers gain protection and may expand employment. Steel-using firms face higher input costs, consumers pay more, and trading partners may retaliate. Net welfare usually falls through deadweight loss, but the policy may survive because benefits are concentrated and costs are diffuse. The reasoned answer identifies winners, losers, and political incentives, not only the tariff's stated goal.
Traps
Do not equate GDP growth with development. Do not infer policy success from correlation. Do not ignore distributional effects or assume trade is always zero-sum.