M2: Lecture Notes

Welcome to the discussion of global economy!

Globalization is a multi-dimensional process although it has always been thought as an economic

phenomenon. This unit is written within the spirit of such approach. These lecture notes are divided
into four parts. The first section is dedicated to the definition of economic globalization. The second
section traces global economy as a historical process. The third section discusses the evolution of the
international monetary system. Lastly, the impact of global economy is analyzed. Good luck!

A. Definition of Economic globalization

As defined by Manfred Steger, globalization refers to the expansion and intensification of social relations
and consciousness across world-time and world-space (Claudio, p.7).

It refers to worldwide interconnectedness of all aspects of social life. It is a multidimensional

phenomenon (Giddens, 1999).

For anthropologist Arjun Appadurai, different kinds of globalization occur on multiple and intersecting
dimensions of intersections which he calls “scapes” such as ethnoscapes, mediascape, technoscape and
ideoscape (Claudio and Abinales, 2018).

According to one of the most often cited definitions, economic globalization is a historic process, the
result of human innovation and technological progress. It refers to the increasing integration of
economies around the world through the movement of goods, services, and capital across borders. The
term sometimes also refers to the movement of people (labor) and knowledge (technology) across
international borders (as cited by Benczes, IMF 2008).

For Benczes (2014), economic globalization can thus have several interconnected dimensions such as
the following:

1. The globalization of trade of goods and services;

2. The globalization of financial and capital markets;

3. The globalization of technology and communication; and

4. The globalization of production

To Szentes (2003), it is 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 interdependence among them.
B. History of Economic Globalization

To Grills and Thompson (2001), globalization began since homo sapiens began from migrating from the
African continent to populate the rest of the world.

Frank and Grills (1993) considered the Silk Road (Asia, Europe, Africa) the best example for archaic
globalization 5,000 years ago.

Adam Smith (1776) considered the discovery of America by Christopher Columbus in 1492 and the
discovery of the direct sea route to India by Vasco de Gama in 1498 as the two (2) greatest
achievements of human history.

According to Gereffi (2005), if global economy did exist during 1500 to 1800, it was only in the sense of
trade and exchange rather than production. Countries were mostly self-sufficient and autarkic, the UK
and the Netherlands being the only exceptions.

According to Maddison (2001), the real breakthrough came only in the 19th century. The annual average
compound growth rate of world trade saw a dramatic increase 4.2 per cent between 1820 to 1870, and
was relatively high, at 3.4 per cent between 1870 and 1913.

By 1913, trade equaled to 16-17 per cent of world income because of transport revolution: steam ships
and railroads reduced transaction costs and bolstered both internal and international exchange. The
relatively short period before World War I (1870-1913) is often referred to as the "golden age" of
globalization, characterized by relative peace, free trade and financial and economic stability (O'Rourke
and Williamson, 1999).

According to historians Dennis Flynn and Arturo Giraldez, the age of globalization began when “all
important populated continents began to exchange products continuously and its values sufficient to
generate crucial impacts on all trading partners.” They traced this back in 1571 with the establishment
of galleon trade that connected Manila in the Philippines and Acapulco in Mexico. This was the first time
the Americas were directly connected to Asian trading routes (as cited by Claudio and Abinales, 2018).

C. The International Monetary System (IMS)

According to Salvatore (2007), international monetary system refers to rules, customs, instruments,
facilities, and organizations for effecting international payments. In the liberal tradition, the main task of
IMS is to facilitate cross-border transactions involving trade and investment.

To Cohen (2000), IMS is, however, more than just money or currencies; it also reflects economic power
and interests as money is inherently political, an integral part of high politics of diplomacy.

The Gold Standard

To Einaudi (2001), the origin of first modern – day IMS dates back to the early 19th century when the UK
adopted gold mono- metallism in 1821. Half a century later, in 1867, the European nations, as well as
the United States, propagated a deliberate shift to gold at the International Monetary Conference in
Paris. Gold was believed to guarantee a non-inflationary, stable, economic environment, a means for
accelerating international trade.

According to Meisser (2005), Germany joined the IMS in 1872, France in 1878, United States in 1879,
Italy in 1884, Russia in 1897 and roughly 70 per cent of the nations participated in the gold standard just
before the outbreak of World War I.

During World War I, when countries depleted their gold reserves to fund their armies, many were forced
to abandon the gold standard. Since Europeans have low gold reserves, they adopted floating currencies
that were no longer redeemable in gold (Claudio, 2018).

The Bretton Woods System and its Dissolution

The dramatic consequences of the beggarthy -neighbor policies of the inter-war period and the wish to
return to peace and prosperity impelled the allied nations to start negotiating about a new international
monetary system in the framework of the United Nations Monetary and Financial Conference in Bretton
Woods, New Hampshire (US) in July 1944. Delegates of 44 countries managed to agree on adopting an
adjustable peg system, the gold -exchange standard. The US dollar was the only convertible currency of
the time, so the US committed itself to sell and purchase gold without restrictions at US$35 an ounce. All
other participating but not convertible currencies were fixed to the US dollar (Benczes, 2014).
Delegates agreed on the establishment of two (2) international institutions. The International Banks
Reconstruction and Development (IBRD or World Bank) became responsible for post-war
reconstruction, while the explicit mandate of International Monetary Fund (IMF) was to promote
international financial cooperation and buttress international trade. The IMF was expected to safeguard
the smooth functioning of the gold-exchange standard by providing short-term financial assistance in
case of temporary balance of payments difficulties (Benczes, 2014). Today, these international financial
institutions are key players in global economy.

The Bretton Woods system was largely influenced by the ideas of British economist John Maynard
Keynes who believed that economic crisis occurs not when a country does not have enough money, but
when money is not being spent and, thereby, not moving. When economies slow down, according to
Keynes, governments have to reinvigorate markets with infusions of capital. This is known as global
Keynesianism (Claudio and Abinales, 2018).

Shortly after the Bretton Woods, many countries committed themselves to further economic integration
through the General Agreement on Tariffs and Trade (GATT) in 1947. GATT’s main purpose was to
reduce tariffs and other hindrance to free trade (Claudio and Abinales, 2018).

In the 1970s, the prices of oil rose sharply as the result of the Organization of Arab Petroleum Exporting
Countries’ (OAPEC or OPEC) imposition of an embargo because of the US and its allies’ support to Israeli
military during the Yom Kippur War. When stock-markets crashed in 1973-74 after the US stopped
linking the dollar to gold, the Bretton Woods system was dissolved (Claudio and Abinales, 2018).

The Washington Consensus

A new economic thinking was beginning to challenge the Keynesian system in the 1970s. Friedrich Hayek
and Milton Friedman argued that the governments’ practice of pouring money into their economies had
caused inflation by increasing demand for goods without necessarily increasing supply. They believed
that government intervention in economies distort the proper functioning of the market. Critics labelled
this thinking as neo-liberalism (Claudio and Abinales, 2018).
The 1990s saw the triumph of the neo-liberal and pro-market economists. The Washington Consensus is
a set of 10 economic policy reform package set by Washington-based institutions such as the
International Monetary Fund (IMF), World Bank (WB), United States Department of the Treasury and
eventually by the World Trade Organization (WTO). The term was first used in 1989 by English
economist John Williamson (https://en.wikipedia.org/wiki/Washington_Consensus).

The following rules are set under the Washington Consensus:

1. Fiscal policy discipline

2. Effective public spending

3. Tax reform

4. Competitive exchange rates

5. Trade liberalization

6. Financial market liberalization

7. Trade liberalization of foreign direct investment

8. Privatization

9. Deregulation

10. Security of property rights

The European Monetary Integration

The United States started to advocate an economically and militarily strong Germany and Western
Europe. The Marshall Plan, in 1948, was administered by the Organization for European Economic
Cooperation, the predecessor of the Cooperation for Economic Cooperation and Development (OECD).
The economic growth resulted to regional cooperation which established the European Coal and Steel
Community in 1951. After the signing of the Rome Treaty in 1957, the European Economic Community
was established by Germany, France, Italy, Netherlands, Belgium and Luxembourg. The original six (6)
founding members created a common market where goods and services, capital and labor moved freely.

The collapse of the Bretton Woods system led to the setting up of the European Monetary System (EMS)
in 1979.
The European Union (EU) was formally established when the Maastricht Treaty came into force in 1993.
It founded the European Economic and Monetary Union (EMU). The members abandoned their national
currencies and delegated monetary policy to the

European Central Bank (ECB) in 1999. Euro became the second most widely used reserve currency
(European Commission, 2008).

D. Impact of Economic Globalization

To what extent is the nation-state still a relevant actor in economic globalization is a major topic of
current debates. According to Ohmae (1995), states ceased to exist as primary economic organization
units in the wake of a global market.

To Reich (1991), globalization transforms the national economy into a global one where there will be no
national products or technologies, no national corporations, no national industries.

Boyer and Drache (1996) admit that globalization is redefining the role of nation-state as an effective
manager of the national economy. The state is the main shelter from the perverse effects of a free
market economy. To Brodie (1996), governments are acting as the midwives of globalization.

Milner and Keohane (1996) admit states are not influenced uniformly by globalization.

According to Gereffi (2005), the major players of present global economy are the transnational
corporations (TNCs) which account roughly two-thirds of world export. These TNCs are concerned more
with profits than with assisting the social programs of the governments hosting them. The term “race to
the bottom” refers to countries’ lowering their labor standards, including the protection of workers’
interests, to lure foreign investors seeking high profit margins at the lowest cost possible. Government
weakens environmental laws to attract investors, creating fatal consequences on their ecological
balance and depleting them of their finite resources like coal, oil and minerals (Claudio and Abinales,
2018).
According to Bairoch (1993), contemporary globalization is, however, considered to be a myth. More
concerns have been raised with regard to its impact on the worldwide distribution of income.

Dollar and Kraay (2002) argue that only non-globalizer countries failed to reduce absolute and relative
poverty in the last few decades. On the other hand, countries that have embraced globalization (trade
openness) have benefited from openness considerably.

The World Bank (2002) claimed that globalization can indeed reduce poverty but it definitely does not
benefit all nations.

According to Maddison (2003), the ratio of richest region’s GDP per capita and that of the poorest was
only 1.1 in 1000, 2 in 1500 and still 3 in 1920. It widened to 5 in 1871 and stood at 9 at the outbreak of
WWI. In 1950, it climbed to 15 and peaked to 18 at the turn of the new millennium.

Bairoch (1993) said that while in the developed part of the world, industrial revolution and intensified
international relations reinforced growth and development on an unprecedented scale, the rest of the
world did not manage to capitalize on these processes. He claimed that the industrialization of the
developed countries led to the de-industrialization of the developing countries.

The best critical approach to the prevailing social division of labor and global inequalities is offered by
world system analysis. This claims that capitalism under globalization reinforces the structural patterns
of unequal change. According to Wallerstein (1983), capitalism, a historical social system, created a
dramatically diverging historical level of wages in the economic arena of the world system. Thus, the
growing inequality, along with economic and political dependence, are not independent at all from
economic globalization.