I'm in the sciences, not political science, so I may be off base, but a literature review section of a few pages seems awfully long to me. In my field we will give an introduction to the problem or area (citing often along the way), and we will mention previous work if it's something that we're building on, modifying, or comparing to. So some of it might go in the intro, some in the methods, some in the discussion, etc. Generally, papers mentioned don't get more than a sentence or two, and often a lot of citations are lumped together (ie. "over the past 20 years, the relationship between x and y has been increasingly recognized (cite 7 papers)"). This creates something of a lit review, but it isn't presented or really organized as such. You shouldn't present a lit review just to present a lit review. Construct your argument and mention and cite previous work as it relates to what you're doing.
As to reviewers that don't get it, I've had a few of those. It can be frustrating, but remember that although you know your point inside and out, the readers are starting from zero. If one person doesn't get it, chances are good that other readers won't get it either. Now the reviewer might be an idiot, but it's more likely that your article/argument is not as clear as you think it is. That being said, you should also get to respond to the editor, and if you think that the reviewer is really unreasonable on something, you can say in the letter why you are not listening to their suggestion, as long as you have a good argument. Reviewers are sometimes out to lunch, and may have their own agendas, so as Urodacus says, you don't have to follow slavishly, but if you already know that the editor agrees with the reviewer, then you'd really better listen.
Anyway, good luck with it!