Economic interdependence is a concept from the international political economy area of study, and it

relates to the level of interconnectedness between two nation-states. The idea of political economy
dates back to the birth of liberalism in the seventeenth century and is further discussed by eighteenth-
century European philosophers Immanuel Kant, Baron de Montesquieu, and Adam Smith. The modern
discussion of economic interdependence dates primarily to the 1970s. States may be dependent on each
other for trade and investments but may also be sensitive and vulnerable to events and trends in the
global economy. States today are typically economically interdependent on other states, although the
degree of dependence varies across states. North Korea is relatively isolated and is the least
economically dependent state in the global economy, whereas small export-based economies, such as
Singapore’s, rank as highly dependent on other states.

Some nation-states may be sensitive to events or trends in other states and thus alter their domestic
and foreign policies in response. However, states that are highly interdependent economically may be
vulnerable to shifts in the global economy and the specific economic actions taken by sensitive states. As
such, the level of economic interdependence between states may not be symmetric. For example, one
state may be highly dependent on and thus vulnerable to another state for energy, such as Ukraine has
been vis-à-vis Russia in recent years. In this situation, Ukraine is vulnerable to any fuel embargo by
Russia, which provides political leverage for the latter.

The conception of economic interdependence was obstructed first by imperialism in the nineteenth and
early twentieth centuries and then by the Great Depression in 1929 and the cold war from 1945 to 1991.
Levels of economic interdependence between states were extant but low leading into the twentieth
century. There was hope by economic and political liberals such as Norman Angell (1933) that economic
interdependence would bind states together peacefully, but this hope was dashed by the onset of World
War I (1914–1918) and the Great Depression, followed by World War II (1939–1945). Still, policy makers
in the leading capitalist states, particularly the United States and the United Kingdom, identified the lack
of cooperation between liberal states in the face of economic interdependence during the Great
Depression. As World War II was coming to a close, the existing liberal economic regime, led by the
United States, the United Kingdom, and the Allied nations was established to manage the postwar
world. Key western leaders and policy makers had come to the conclusion that World War II was
potentially incited by the breakdown of economic cooperation among major European nations.

In addition, the Great Depression was exacerbated by the major global economic powers’ raising tariffs
against each other in the hope of obtaining external revenue to fix their own economic problems, which
led to a collapse in international trade.

While the new postwar economic policies and practices led to much higher levels of economic
interdependence between global states, the concept of economic interdependence remained unnoticed
or irrelevant by many political scientists during the cold war for two reasons. The first is that the specter
of nuclear holocaust and the cold war arms race drew attention to policies related to military strength,
acquisition, and security. The second is that because Marxist-Leninist theory and rhetoric provided a
connection between economics and politics, the discussion of this nexus became stigmatized as radical
and class based. However, the Vietnam War from 1959 to 1975 demonstrated military prowess did not
equate to economic immunity as the oil crises, discontinuation of the gold standard to back currencies,
hyperinflation, and the economic stagnation of the 1970s led to a renewed recognition that even the
military powers of the world were sensitive and vulnerable to trends or fluctuations in the global
economy.

At the beginning of the twenty-first century, the concept of economic interdependence is intermixed
with the term globalization. While the economic dependence of states has grown in the past sixty years,
so have the global connections between people as a consequence of significant increases in direct
foreign investments, portfolio investments, trade, telecommunication technologies, and foreign travel.
This growth in economic interdependence is a by-product of classical liberalism, emphasizing free
economic markets and trade with limited government oversight, returning to the economic theories
emerging in the eighteenth century, and moving away from the broader theoretical perspectives of
realism and Marxism in international relations theory at times witnessed in the twentieth century. While
the European Union created a single common market for goods, labor, and investments contributing to
prosperity, it also provided a means for the once war-prone European states to form common
preferences and negotiate peace terms. Similarly, examples of geopolitical organizations are the Gulf
Cooperation Council, formed in 1981, and the Association of Southeast Asian Nations, formed in 1967.

However, there is still debate about whether the growth in economic interdependence in particular and
globalization more generally are beneficial.

Current debates about economic interdependence surround issues relating to world peace, prosperity,
and democratic stability. Recent leaders and some international scholars argue economic
interdependence contributes to world peace by making military conflicts between states too costly. In
contrast, realists tend to argue that current patterns of economic interdependence reinforce the power
of the major power states in the world and the prospect for future wars is not reduced. Marxists point
out that although there have been increases in total wealth in the world economy, there is still a gap
between the rich and poor states of the world because of exploitation by multinational corporations,
including the World Trade Organization and the International Monetary Fund. Last, some academics and
policy makers debate whether economic interdependence makes some states, specifically third world or
developing nations, more politically unstable and/or unable to sustain democracy by their vulnerability
to global economic and market trends.