Notes for Module 2 UK, US and other European nations adopted the
The Global Economy gold standard at an international monetary
Silk Road Trade
Oldest known international trade route
A network of pathways from China to the
Middle east and to Europe.
It was called as such because the most
profitable product traded through this network
was silk.
It was regularly used by traders from 130 BC
when the Chinese han dynasty opened trade
to the West until 1453 BC when Ottoman
Empire closed it.
It was not a global trade, because it had no
ocean routes that could reach the American
continent.
Galleon Trade (1571)
-this was the first time that the Americas were
directly connected to the Asian trading routes.
-for Filipinos, it is crucial to note that economic
globalization started in our shores.
-was part of the age of mercantilism.
From 16th to 18th century
-countries primarily in Europe competed with
one another to sell more goods as a means to
boost their country’s income.
To defend their products from competitors who
sold more goods cheaply monarchies
-imposed higher tariffs
-forbade colonies to trade with other
nations
-restricted trade routes
-subsidized exports.
Mercantilism
-was a global trade with multiple restrictions.
A more open trade system in 1867
At the height of World War II
Other major industrialized countries followed .
conference in Paris.
Its goal was to create a common system that
would allow for more efficient trade and
prevent the isolationism of the mercantilist
era.
Countries established a common basis for
currency prices and a fixed exchange rate
system –all based on the value of gold.
During World War I
When countries depleted their gold reserves to
fund their armies, many ere forced to abandon
the gold standard.
Since European countries had low gold
reserves , they adopted floating currencies
which were no longer redeemable in gold.
Great Depression
It was the worst and longest recession ever
experienced by the western world.
Some Economists argue that it was largely
because of gold standard , it limited the amount
of money circulating and reduced demand and
consumption.
If governments could only spend money that
was the equivalent of gold , its capacity to print
money and increase the money supply was
severely curtailed.
According to an Economic historian, Barry
Eichengreen , the recovery of the United States
began when it abandoned the gold standard .
Fiat Currencies
Currencies are not backed-up precious metals
and whose value is determined by their cost
relative to other currencies.
This system allows governments to freely and
actively manage their economies by increasing
or decreasing the amount of money in
circulation as they see fit.
BrettonWoods Conference
Inaugurated in 1944
During the United Nations Monetary and
Financial Conference to prevent the
catastrophes of the early decades of the
century from re-occurring and affecting
international ties.
John Maynard Keynes
British Economist
His ideas influenced the BrettonWoods
conference .
He believed that economic crisis occur not
when a country does not have money , but
when money is not spent and thereby not
moving.
According to him when economies slow down
governments have to reinvigorate markets with
the infusion of capital.
The active role of the government in managing
spending served as the anchor for what would
be called system of global keynesianism
World Bank
Mandates :
1. to end extreme poverty by reducing the
share of the global population that lives in
extreme poverty by 3% by 2030.
2. to promote shared prosperity by
increasing income of the poorest 40% of
people in every country.
Delegates at the Bretton Woods agreed to
create :
1. International Bank for Reconstruction and
Development (IBRD or World Bank )-
responsible for post-war reconstruction
projects.
2. International Monetary Fund (IMF)-the
global lender of last resort to prevent
countries from spiraling into credit crisis.
If economic growth in a country slowed down
because of there was not enough money to
stimulate the economy , the IMF would step in.
To this day, both institutions remain key players
in economic globalization.
After the BrettonWoods
Various countries committed themselves to
further global economic integration through the
General Agreements on Trade and Tariffs
(GATT) in 1947.
GATT’s main purpose : to reduce tariffs and
other hindrances to free trade .
High Point of Global Keynesian
Was during 1940s to the early 1970s.
During this period, governments poured money
into their economies
Allowed people to purchase more goods
And in the process increase demand for these
products .
1970s
Prices of oil rose sharply as a result of OPEC’s
imposition of an embargo in response to the
decision of the United States and other
countries to resupply Israeli military with the
needed arms during the YOM KIPPUR WAR .
Resulted to stagflation .
Stagflation
Decline in economic growth and employment
(stagnation ) and alongside a sharp increase in
prices (inflation)
Neoliberalism from the 1980s onwards
Became the codified strategy of the
US Treasury Department
World Bank
IMF and
Eventually the World Trade Organization
World Trade Organization
Founded in 1995 to continue the tariff
reduction under the GATT.
The policies they forwarded came to be known
as Washington Consensus .
Washington Consensus
Dominated global economic thought from
1980s –early 2000s
It pushed for minimal government spending to
reduce government debt
Privatization of government –owned services
like water , power , communication and
transport.
Believed that free market can produce the best
results.
They pressured governments particularly in
developing countries to open -up their
economies arguing that it is the quickest way to
progress.
Global Financial Crisis of 2007-2008
Period when neoliberalism came under
significant strain .
The world experienced economic downturn
since the Great Depression
The crisis can be traced back in the 80s when
the United States systematically removed
various banking and investment restrictions .
The scaling back of regulations continued until
the 2000s paving the way for a brewing crisis.
In an attempt to promote free market ,
government authorities failed to regulate bad
investments in the United States housing
market.
Lehman Brothers
Their investments in the US collapsed in 2008.
The tipping point in the financial crisis.
Financial crisis
The crisis spread beyond the United States.
1. Iceland’s bank heavily depended on foreign
capital , so when the crisis hit them , they failed
to refinance their loans. Commercial banks in
Iceland defaulted .
From 2007-2008 , Iceland’s debt increased
more than seven-fold.
2. Spain and Greece were also heavily indebted
Greece has been forced by Germany and the
IMF to cut back on its social and public
spending. This affected services like pension,
health care and various forms of social security.
United States
Recovered quickly because of large Keynesian-
style stimulus package of Barack Obama.
Protectionist Policy
Developed countries are often protectionists .
They refused to lift policies that safeguard their
primary products.
Example :
Japan-rice
US-sugar
Trade Imbalances
Characterize the economic relations between
developed and developing countries.
Race to the Bottom
refers to countries lowering their labor
standards including the protection of workers’
interest to lure in foreign investors seeking high
profit margin at the lowest cost possible .
Governments weaken their environmental laws
to attract investors , creating fatal
consequences to ecological balance and
depleting of resources like oil, coal and minerals
Membership in the World Bank
There are189 countries that are shareholders
To become a member , a country must first join
the International Monetary Fund
Joining the IMF
Has variety of responsibilities :
1. subscription fee
2. buy 195 World Bank Shares =$120,635
per share
3.of these 195 shares , 60%must be paid in
cash (US Dollars ), others in local currency.
President of the World Bank
Comes from the largest shareholder which is
the United States of America.
Members are represented by Board of
Governors .
Largest Shareholders
United States
UK
France
Germany
Japan
International Monetary Fund
In 1944, representatives of 44 nations met in
Bretton Woods, New Hampshire to draw a plan
for Post -World War II economic order .
-their goal was to avoid a repetition of the
destructive policies that would spark another
conflict.
Ever since , the IMF has played a vital role in
maintaining global economic stability and
ensuring broadly shared prosperity .
It is an organization of 189 countries working
together to foster global monetary
cooperation .
$1 Trillion
Total amount that the IMF is able to lend to its
member-countries.
Reference:
Claudio, L. (2018). The Contemporary World.
C and E Publishing. Quezon City:
Philippines .