The Neo-Liberal Approach in International Relations

Why do countries that compete fiercely for power still manage to sign trade deals, honour arms-control agreements, and cooperate on climate change? Classical realists struggle to answer this, since they see a world without a global government as one destined for conflict. Neo-liberalism offers a different answer. It accepts that the international system is anarchic, yet argues that states can and do cooperate sustainably, largely because of the institutions they build together. This approach, which rose to prominence in the 1980s, has become one of the two dominant frameworks in international relations theory.

What is the neo-liberal approach? 🔗

Neo-liberalism, often called neo-liberal institutionalism, emerged as a direct response to neo-realism. It shares many of neo-realism’s starting assumptions but reaches very different conclusions. Both schools agree that the international system is anarchic, that states are the principal actors, and that states behave as rational, self-interested agents. The disagreement lies in what follows from these premises.

Neo-realists, led by Kenneth Waltz, are sceptical about lasting cooperation. They believe anarchy pushes states into competition and conflict. Neo-liberals do not deny anarchy, but they argue that its importance and effect have been exaggerated. For them, cooperation is feasible and can be sustained over time. The mechanism that makes this possible is the network of international institutions, regimes, and organisations that states create to manage their interactions.

How neo-liberalism differs from classical liberalism 🔗

It is important to separate neo-liberalism from the older classical liberal tradition. Classical liberals tended to emphasise human nature, democratic values, moral progress, and the pacifying effects of trade and democracy. Neo-liberals shifted the focus toward structural explanations. Rather than appealing to the goodness of states or the spread of democracy, they explain conflict and cooperation through the structure of the international system, the incentives states face, and the rules that govern their behaviour. This is why neo-liberals lean heavily on tools like game theory and behavioural economics, which model how rational actors behave under specific conditions.

The central role of international institutions 🔗

The heart of the neo-liberal argument is the claim that international institutions matter. Institutions are not just talking shops or symbolic gestures; they actively shape what states do. Robert Keohane, the most central figure in this school, developed an approach that emphasises how states use international institutions to advance their interests through cooperation.

So how exactly do institutions help? They perform several practical functions that make cooperation easier even in an anarchic world.

Reducing transaction costs and providing information 🔗

The single most important reason institutions facilitate cooperation is that they provide information, which reduces collective action problems among states. When states negotiate from scratch every time, the process is slow, expensive, and uncertain. Institutions establish standard rules and procedures, making negotiations easier and less frequent. Keohane defined international regimes as sets of principles, norms, rules, and decision-making procedures around which the expectations of states converge in a particular area. By creating these shared frameworks, institutions lower the cost of doing business between nations.

Transparency, monitoring, and reciprocity 🔗

A major obstacle to cooperation is the fear of cheating. If you sign an agreement but suspect the other side will break it, you are less likely to commit. Institutions address this by providing transparency and monitoring mechanisms. They make state behaviour more visible, so cheating becomes easier to detect and harder to hide. This builds an environment where reduced fears of cheating and free-riding make cooperative arrangements more durable. Reciprocity reinforces this further: states cooperate today partly because they expect the relationship to continue, and they know that betrayal now invites retaliation later.

Keohane and After Hegemony 🔗

Robert Keohane’s 1984 book After Hegemony: Cooperation and Discord in the World Political Economy is the foundational text of neo-liberal institutionalism. It tackled a puzzle that realist theory could not easily explain: why do international regimes survive even after the powerful state that created them begins to decline?

Realist hegemonic stability theory suggested that cooperative arrangements depend on a dominant power, or hegemon, to enforce them. The post-war economic order, including institutions like the IMF and the World Bank, was backed by American power. As the relative dominance of the United States waned in the 1970s, realists expected these arrangements to unravel. They did not. Keohane explained why. In his analysis, he accepted the neo-realist premise that states are rational egoists but argued that the pursuit of self-interest can lead to cooperation. Once institutions exist, states find them useful and worth maintaining, because rebuilding cooperation from nothing would be far more costly than keeping the existing structures alive.

Complex interdependence 🔗

Keohane’s thinking built on earlier work he co-authored with Joseph Nye in Power and Interdependence (1977). Together they developed the idea of complex interdependence, which challenged the realist assumption that military power is always the dominant currency in world politics. In an interconnected world, especially in economic affairs, states are tied together in ways that make brute force a clumsy and often counterproductive tool. Multiple channels connect societies, issues lack a clear hierarchy, and military force loses much of its usefulness. This does not mean military power vanishes, but its role becomes more limited and context-dependent.

Game theory and the logic of cooperation 🔗

Neo-liberals frequently use game theory to explain why states cooperate or fail to do so. The most famous model is the Prisoner’s Dilemma, where two rational actors, each pursuing their own interest, end up worse off than if they had cooperated. In a single round of this game, defection looks like the smart choice. But real international relations are rarely a single round.

Axelrod and the evolution of cooperation 🔗

This is where the work of Robert Axelrod becomes essential. His 1984 book The Evolution of Cooperation asked a deceptively simple question: under what conditions will cooperation emerge in a world of egoists without central authority? Notice how closely this matches the situation of states under anarchy.

To answer it, Axelrod organised a computer tournament for the iterated, or repeated, Prisoner’s Dilemma. Different strategies competed against each other over many rounds. The surprising winner was the simplest one of all, a strategy called Tit for Tat. It cooperates on the first move and then does whatever the other player did on the previous move. Tit for Tat succeeds because it is nice, meaning it never defects first; it is retaliatory, so it punishes betrayal; it is forgiving, returning to cooperation once the other side does; and it is clear, so others can easily understand and adapt to it.

The lesson for international relations is profound. When interactions are repeated and the future matters, rational egoists can develop stable cooperation without any world government forcing them to. There is even a striking historical example: game theorists have noted Tit for Tat behaviour among British and German soldiers in the trenches of the First World War, who developed informal ceasefires by simply not shooting at each other. Axelrod later collaborated directly with Keohane, and their joint work on achieving cooperation under anarchy tied this game-theoretic insight firmly to the study of institutions.

Absolute gains versus relative gains 🔗

One of the sharpest dividing lines in the neo-realist and neo-liberal debate concerns how states evaluate the benefits of cooperation. This distinction is worth understanding clearly.

Absolute gains is the neo-liberal focus. The question a state asks is simply whether cooperation makes it better off than before. If a trade deal grows your economy, it is worth pursuing, regardless of how much your partner gains. Relative gains is the realist focus. Here the state asks how much it gained compared to its rivals. Even if you are better off in absolute terms, a partner who gains more is seen as a threat, because the balance of power has shifted against you.

Neo-liberals argue that in many areas, especially economic ones, states care primarily about absolute gains. The realist Joseph Grieco challenged this directly. In his influential 1988 critique, he argued that states are positional rather than atomistic, meaning they worry not just about cheating but about how partners might benefit from cooperation. A friend who grows stronger today, the realist warns, could become a rival tomorrow. The neo-liberal reply is that institutions can shift state attention away from this anxiety, helping states focus on the joint gains available to everyone.

The neo-liberal approach in practice 🔗

The theory is not merely academic. The behaviour of states within institutions illustrates the neo-liberal argument vividly. The World Trade Organization and its predecessor, the GATT, are textbook examples of institutionalised cooperation, where shared rules allow countries to capture the benefits of trade while limiting the temptation to cheat.

India’s engagement with global climate governance offers a clear and relevant example. Rather than acting purely unilaterally, the country has worked extensively within institutional frameworks like the United Nations Framework Convention on Climate Change. Analysts describe a strategy of multilateral adaptation, where India seeks opportunities to work within the UNFCCC regime and engages with existing multilateral institutions. India has also built new institutions of its own, most notably the International Solar Alliance, which aims to promote solar energy across tropical countries. This is neo-liberal logic in action: a state advancing its national interest precisely by creating and participating in cooperative institutions, using them to attract investment, technology, and diplomatic influence.

The limits and criticisms 🔗

The neo-liberal approach is not without weaknesses. Critics point out that neo-liberals and neo-realists often study different worlds. Realists tend to focus on security and war, where the stakes of relative gains are highest, while neo-liberals more often examine trade, the environment, and economic affairs, where absolute gains dominate. As one analysis notes, neo-realists tend to see more conflict in the world than neo-liberals do, partly because of these differing focuses. Sceptics also argue that institutions may simply reflect existing power, working smoothly when powerful states want them to and collapsing when great-power interests clash, as can be seen when major powers ignore institutional rulings that go against them.

What do you think? If institutions only work when powerful states allow them to, are they genuinely independent forces for cooperation, or just a reflection of underlying power? And looking at India’s choices in global trade and climate forums, do you think states join institutions out of a real commitment to cooperation, or simply because cooperation happens to serve their self-interest?

References

1. https://encyclopedia.pub/entry/33867
2. https://www.britannica.com/biography/Robert-O-Keohane
3. https://banotes.org/international-relations/keohane-nye-neoliberal-global-interdependence/
4. https://link.springer.com/rwe/10.1007/978-3-319-16999-6_1220-1
5. https://ee.stanford.edu/~hellman/Breakthrough/book/pdfs/axelrod.pdf
6. https://heritage.umich.edu/stories/the-prisoners-dilemma/
7. https://www.e-ir.info/2012/06/11/neorealism-and-neoliberal-institutionalism-born-of-the-same-approach/
8. https://csep.org/policy-brief/indias-climate-diplomacy-new-priorities-and-policy-options/
9. https://medium.com/@iirstudents/between-neorealism-and-neoliberal-institutionalism-cooperation-and-international-institutions-in-55a52da70b62