CHAPTER 2: THE GLOBAL ECONOMY

GLOBALIZATION
- Involves the broadening and deepening of
interdependencies among people and states
- Leads to an extension of geographic linkages,
encompassing societies and states and deepens
interaction among them such that policies and
events of one state also affect distant ones
- Multidimensional phenomenon comprised of
political, economic, and cultural features.

ECONOMIC GLOBALIZATION
- A process making the world economy an
“organic system” by extending transnational
economic processes and economic relations to
more and more countries and by deepening the
economic interdependencies among them
(SZENTES)
- BENCZES emphasizes that interpretation of the
current trends in the world economy must be
understood in the global context of an
integrated world economy
- Non-state actors such as international
organizations, non-governmental
organizations, and multinational or
transnational corporations play significant
roles in the international economic processes.

THE POST-WORLD WAR II ECONOMIC SYSTEM

Bretton Woods Conference

- July 1994
- United Nations Monetary and Financial
Conference
- Marked the birth of a new international
economic framework
- Delegates from 44 countries convened in
Bretton Woods, New Hampshire and United
States
- Creation of three international economic
 organizations: International Monetary Fund
(IMF), World Bank (International Bank for
Reconstruction and Development) and General
Agreement on Tariffs and Trade (GATT)
- GATT created in 1977 after the Bretton Woods
Conference
- REASON FOR CREATION: To address the
problems that occurred during the interwar
period, trade protectionism and exchange
controls, which led to the Great Depression and
World War II
- Bretton Woods Institutions known as keystone
international economic organizations because
of their central role in trade, development, and
monetary relations.

INTERNATIONAL MONETARY FUND (IMF)

- PRIMARY PURPOSE: To promote global
monetary cooperation and international
financial stability
- 1945 – designed to monitor the system of
pegged or fixed exchanges rates.
- OFFICIAL EXCHANGE RATES OF CURRENCIES –
gold and US Dollar
REASON: To prevent the trade wars that
occurred during the interwar period due
to competitive devaluations of states of
their currencies
- Balance-of-payment deficit occurs when a
country spends more than it takes in.
- ROLE: To provide short-term loans to prevent
devaluation and retain the state’s fixed
exchange rate in instances of the temporary
balance of payment deficits
- REASON FOR THE ROLE TO CHANGED: The
fixed-exchange-rate system collapsed and was
replaced by floating exchange rates in 1971
NOTE: It still had the role of providing
liquidity but has more focus on countries
to major currencies instead of countries
supplying them
 - Institution based on quotas which determined
the maximum amount of financial resources
that a state is obliged to provide to the fund
- Quota of state reflects their relative position in
the global economy and determines the voting
power of states in IMF decisions
- Dominated by the West
- Criticized for marginalizing the South and fails
to include emerging economies in its decision
making

Global Financial Crisis of 2007 – 2009

- Prompted the IMF to undergo a reform process
consisting of two elements:
1. IMF resource expansion to enhance
capacity for financial crisis management
2. Increase in quota and voting power of
emerging economies within the institution

2010 Reform Structure

- Doubling of Quota
- Shifting of quota shares
- Preserved quota and voting shares of poorest
member states
- OUTCOME:
- Trade-off between money and power
- Has not led to the long-expected reform
and strengthening of the IMF

Agreement between the BRIC

- Brazil, Russia, India and China
- Contribute to the Fund’s resources in exchange
to quota and governance reforms about the
redistribution of the quota and Executive board
seats from the West to the South
WORLD BANK
- ROLE: To grant long-term loans for the
economic development of less developed
countries and the reconstruction of war-torn
countries in Europe
- TWO INSTUTIONS:
1. International Bank for Reconstruction and
Develeopment (IBRD) – provides lending to
middle-income and creditworthy low-
income countries
2. International Development Association
(IDA) – grants credit and loans to lowest
income countries.
- Only a component of the World Bank Group
which is comprised of three other institutions:
International Finance Corporation (IFC),
Multilateral Investments Guarantee Agency
(MIGA), and International Centre for
Settlement of Investment Disputes.
- RENEWED ROLE: To reduce extreme poverty
while addressing the imperfections of global
capital markets continues to be secondary
importance.
- Impact on the growth outcomes has been
contested

IMPACTS OF THE WORLD BANK

- Severe macroeconomic distortions suffered by
loan recipients (Easterly)
- No statistical evidence of per capita growth
improving from increased structural adjustment
lending (Easterly)
- Bank’s structural adjustment resulted in
adverse effects on children in Sub-Saharan
Africa. (Shandra)
- Have detrimental effects on child and maternal
health in the developing world
- Policy reforms undermine access to health care
- Adversely impact on income and food
availability
GENERAL AGREEMENT ON TARIFFS AND TRADE
(GATT)
- PURPOSE OF GATT: To avoid trade wars by
raising protectionist barriers as witnessed
during the interwar period
- REASON OF CREATION:
- Refusal of the US to sign the Havana
Charter that would create an International
Trade Organization (ITO) at par with that of
the IMF and GATT
- Agricultural sector in the US feared for
losses that may be brought by the ITO
- Pressure in the US Congress
- EFFECT:
- Unable to address the expansion of trade
in services, investment, and intellectual
property
- Incapable of providing a strong and
efficient system for dispute settlement

WORLD TRADE ORGANIZATION (WTO)

- 1995
- Managed to address the issue that GATT fails to
do so.
- Establishment of global economic order was
heavily influenced by Western developed
countries
- South, comprised of less developed economies
and were marginalized
- Soviet Union refused to participate and with
attempts to create an alternative economic
framework
- Less developed economies became integrated
into the liberal economic order at the end of
the twentieth century.

INTERNATIONAL MONETARY SYSTEM

- Defined as a set of general rules, legal norms,
 instruments, and institutions shaping payment
conditions in foreign trade
- Brought by the multilateral international
agreements of trading participants, facilitated
by international financial organizations

Gold Standard
- Adopted by England in 1816 – first country to
industrialize
- First international monetary system
- Later joined by European countries and United
States
- Functioned as a fixed exchange rate regime
where countries determined the gold content
of their national currencies which would define
the fixed exchange rates.
- Primary features of the gold standard: (1)
Unlimited convertibility of currencies into gold,
(2) High stability facilitated by trade among
countries that eliminate exchange rate
fluctuations and risks.
- The system maintained the trade balance
automatically
- Deficit in balance-of-payments due to gold
reserve outflows result in fewer money supply
in the domestic market, causing a decline in
domestic prices
- Beneficial to exporting cheaper goods but not
on imports of higher priced goods
- Non-inflationary because the issuance of
money is dependent on a state’s gold resources
- WEAKNESS: Price fluctuation

World War I
- Marked the dissolution of the classical gold
standard
- Shift to paper money not tied to gold reserves
and whose exchange rate was determined by
the supply and demand in the foreign exchange
market
- Military spendings could not be backed up by
 gold reserves anymore

1922
- Attempt to return to the modified gold
standard
- Conference in Genoa

Gold Bullion Standard

- New international monetary system
- Bank notes were exchangeable for gold bullion
of fixed weight, therefore involving only the
exchange of large sums of money
- System failed to:
- Facilitate the free convertibility of
currencies to gold and it collapsed
- It collapsed in 1931 with the outbreak of
Great Depression in the 1930s

Great Crash or the Wall Street Crash of 1929

- First symptoms of the economic crisis
- Stock market prices delivered a wave of
bankruptcies
- Decrease in trade and population
- Unemployment in the United States

1930s interwar period

- Increase intensity beggar-thy-neigbor policies,
trade protectionism, competitive devaluation,
and rigid capital controls among the states.

Bretton Woods Conference of 1994

- 44 countries
- New international system that would prevent
the chaos that occurred during the interwar
period

Bretton Woods System

 - Also known as the dollar-gold standard or gold
exchange standard
- US Dollar as the only convertible currency that
is considered to be as good as gold
- US committed to purchase and sold US$35 an
ounce without restrictions
- 1959 – 1968
- Collapsed in 1973

Factors that contribute to the collapse of the Bretton

Woods System
- Growth of private and official private liquid
dollar claims of foreigners
- Reduction in official gold holdings
- Persistent balance-of-payments

1960s and 1970s

- Series of changes were introduced to maintain
the operations of the Bretton Woods system
- SOLUTIONS:
- Formation of Gold Pool
- Special Drawing Rights to expand
resources and means for payment

Shift from pegged-system to a floating one

- IMF allows flexibility among member states to
determine their exchange rates or tie them to
major currencies such as the dollar or the SDR
- IMF allows a managed float system where
central banks are allowed to intervene to
address the fluctuations in the exchange rate
by buying and selling currencies

NOTE: Currencies are not allowed to manipulate their

currencies to achieve short-term gains at the expense
of other economies.