LESSON 2

THE GLOBALIZATION OF WORLD ECONOMICS

Learning Outcome(s):

1. Define economic globalization

2. Identify the actors that facilitate economic globalization
3. Narrate a short history of global market integration in the twentieth
century
4. Articulate your stance on global integration

The International Monetary Fund (IMF) regards Economic Globalization as

a historical process representing the result of human innovation and
technological progress. It is characterized by the increasing integration of
economies around the world through the movement of goods, services, and
capital across borders. These changes are the products of people,
organizations, institutions and technologies. As with all other processes of
globalization, there is a qualitative and subjective element to this definition.

Even while the IMF and ordinary people grapple with the difficulty of arriving
at precise definitions of globalization, they usually agree that a drastic

economic change is occurring throughout the world. According to IMF, the

value of trade (goods and services) as a percentage of world GDP increased
from 42.1 percent in 1980 to 62.1 in 2007. Increased trade also means that
investments are moving all over the world at faster speeds.

According to United Nations Conference on Trade and Development

(UNCTAD), the amount of foreign direct investments flowing across the world
was 57 billion USD in 1982. By 2015, that number was 1.76 Trillion USD.
These figures represent a dramatic increase in global trade in the span of just
a few decades. It has happened not even after one human lifespan.

Apart from the sheer magnitude of commerce, we should also note the
increased speed and frequency of trading. These days, supercomputers can
execute millions of stock purchases and sales between different cities in a
matter of seconds through a process called high-frequency trading. Even the
items being sold and traded are changing drastically. Ten years ago, buying
books or music indicates acquiring physical items. Today, however, a “book”
can be digitally downloaded to be read with an e-reader, and a music “album”
refers to the 15 songs on mp3 format you can purchase and download from
iTunes.

This lesson aims to trace how economic globalization came about. It will also
assess this globalization system, and examine who benefits from it and who is
left out.

International Trading Systems

International trading systems are not new. The oldest known international
trade route was the Silk road – a network of pathways in the ancient world
that spanned from China to what is now the Middle East and to Europe. It was
called as such because one of the most profitable products traded through
this network was silk, which was highly prized especially in the area that is
now the middle east as well as in the west (today’s Europe).

Traders used the silk road regularly from 130 BCE when the Chinese Han
Dynasty opened trade to the west until 1453 BCE when the Ottoman Empire
closed it.

Silk road was not really ‘global’ since it had no ocean routes that could reach
the American continent.

According to historians Dennis O. Flynn and Arturo Giraldez, the age of

globalization began when ‘all important populated continents began to
exchange products continuously. Flynn and Giraldez trace this back to 1571
with the establishment of Galleon trade that connected Manila in the
Philippines and Acapulco in Mexico. This was the first time when the
Americans were directly connected to Asian trading routes.

The galleon trade was part of the age of mercantilism. From the 16 th century
to the 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 goods more cheaply, these regimes
imposed high tariffs, forbade colonies to trade with other nations, and
restricted trade routes. Mercantilism was thus also a system of global trade
with multiple restrictions.

A more open trade systems emerged in 1867 when, following the lead of the
United Kingdom, the US and the other European nations adopted the gold
standard at an international monetary conference in Paris. Its goal was to
create a common system that would allow for more efficient trade and prevent
isolationism of the mercantilist era. The countries established a common basis
for currency prices and a fixed exchange rate system which are all based on
the value of gold.

Despite facilitating simpler trade, the gold standard was still a very restrictive
system, as it compelled countries to back their currencies with fixed gold
reserves. During WW1, when countries depleted their gold reserves to fund
their armies, many were forced to abandon the gold standard. Since
European countries had low gold reserves, they adopted floating currencies
that were no longer redeemable in gold.

Returning to a pure standard became more difficult as the global economic

crisis called the Great Depression started during the 1920s and extended up
to the 1930s, further emptying government coffers. This depression was the
worst and longest recession ever experienced by the Western world. Some
economists argued that it was caused by the gold standard, since it limited the
amount of circulating money and reduced demand and consumption.

Economic historian Barry Eichengreen argues that the recovery of the US

really began when, having abandoned the gold standard, the US government
was able to free up money to spend on reviving the economy.

Though more indirect versions of the gold standards were used until as the
late 1970s, the world never returned to the gold standard of the early 20 th
century. Today, the world economy operates based on what are called fiat
currencies – currencies that are not backed by precious metals whose value
is determined by their cost relative to the other currencies. This system allows
governments to freely and actively manage their economies by increasing the
amount of money in circulation as they see fit.
Bretton Woods System and Washington Consensus

The Bretton Woods Agreement was negotiated in July 1944 by delegates

from 44 countries at the United Nations Monetary and Financial Conference
held in Bretton Woods, New Hampshire. Thus, the name “Bretton Woods
Agreement.1

Under the Bretton Woods System, gold was the basis for the U.S. dollar and
other currencies were pegged to the U.S. dollar’s value. The Bretton Woods
System effectively came to an end in the early 1970s when President Richard
M. Nixon announced that the U.S. would no longer exchange gold for U.S.
currency.

Approximately 730 delegates representing 44 countries met in Bretton Woods

in July 1944 with the principal goals of creating an efficient foreign
exchange system, preventing competitive devaluations of currencies, and
promoting international economic growth. The Bretton Woods Agreement and
System were central to these goals. The Bretton Woods Agreement also
created two important organizations—the International Monetary Fund (IMF)
and the World Bank. While the Bretton Woods System was dissolved in the
1970s, both the IMF and World Bank have remained strong pillars for the
exchange of international currencies. 1

Though the Bretton Woods conference itself took place over just three weeks,
the preparations for it had been going on for several years. The primary
designers of the Bretton Woods System were the famous British
economist John Maynard Keynes and American Chief International Economist
of the U.S. Treasury Department Harry Dexter White. Keynes’ hope was to
establish a powerful global central bank to be called the Clearing Union and
issue a new international reserve currency called the bancor. White’s plan
envisioned a more modest lending fund and a greater role for the U.S. dollar,
rather than the creation of a new currency. In the end, the adopted plan took
ideas from both, leaning more toward White’s plan. 1
It wasn't until 1958 that the Bretton Woods System became fully functional.
Once implemented, its provisions called for the U.S. dollar to be pegged to the
value of gold. Moreover, all other currencies in the system were then pegged
to the U.S. dollar’s value. The exchange rate applied at the time set the price
of gold at $35 an ounce.

The Bretton Woods System included 44 countries. These countries were

brought together to help regulate and promote international trade across
borders. As with the benefits of all currency pegging regimes, currency pegs
are expected to provide currency stabilization for trade of goods and services
as well as financing.1

All of the countries in the Bretton Woods System agreed to a fixed peg
against the U.S. dollar with diversions of only 1% allowed. Countries were
required to monitor and maintain their currency pegs which they achieved
primarily by using their currency to buy or sell U.S. dollars as needed. The
Bretton Woods System, therefore, minimized international currency exchange
rate volatility which helped international trade relations. More stability in
foreign currency exchange was also a factor for the successful support of
loans and grants internationally from the World Bank.

The IMF and World Bank

The Bretton Woods Agreement created two Bretton Woods Institutions,
the IMF and the World Bank. Formally introduced in December 1945 both
institutions have withstood the test of time, globally serving as important
pillars for international capital financing and trade activities. 1

The purpose of the IMF was to monitor exchange rates and identify nations

that needed global monetary support. The World Bank, initially called the
International Bank for Reconstruction and Development, was established to
manage funds available for providing assistance to countries that had been
physically and financially devastated by World War II. 1 In the twenty-first
century, the IMF has 189 member countries and still continues to support
global monetary cooperation. Tandemly, the World Bank helps to promote
these efforts through its loans and grants to governments. 2
The Bretton Woods System’s Collapse
In 1971, concerned that the U.S. gold supply was no longer adequate to cover
the number of dollars in circulation, President Richard M. Nixon devalued the
U.S. dollar relative to gold. After a run on gold reserve, he declared a
temporary suspension of the dollar’s convertibility into gold. 1 By 1973 the
Bretton Woods System had collapsed. Countries were then free to choose
any exchange arrangement for their currency, except pegging its value to the
price of gold. They could, for example, link its value to another country's
currency, or a basket of currencies, or simply let it float freely and allow
market forces to determine its value relative to other countries' currencies. 3

The Bretton Woods Agreement remains a significant event in world financial

history. The two Bretton Woods Institutions it created in the International
Monetary Fund and the World Bank played an important part in helping to
rebuild Europe in the aftermath of World War II. 1 Subsequently, both
institutions have continued to maintain their founding goals while also
transitioning to serve global government interests in the modern-day.

Economists such as 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. More profoundly, they argued that government intervention in
economies distort the proper functioning of the market.

Economists like friedman used the economic turmoil to challenge the

consensus. What emerged was a new form of economic thinking that critics
labled neoliberalism. From the 1980s onward, neoliberalism became the
codified strategy of the US Treasury Department, the World Bank, IMF, and
eventually the World Trade Organization – a new organization founded in
1995 to continue the tariff reduction under GATT (general agreement on tariffs
and Trade). The policies they forwarded came to be called the Wahington
Consensus.

The Washington consensus dominated global economic policies from the

1980s until the early 2000s. it advocates pushed for minimal government
spending to reduce government debt. They also called for the privatization of
government – controlled services like water, power, communications and
transport, believing that the free market can produce the best results. Finally,
they pressured governments, particularly in the developing world, to reduce
tariffs and open up their economies, arguing that is the quickest way to
progress. Advocates of Washington Consensus conceded that, along the
way, certain industries would be affected and die, but they considered this
“shock therapy” necessary for long term economic growth.

The appeal of neoliberalism was in its simplicity. It advocates like US

President Ronald Reagan and British Prime Minister Margaret Thatcher
justified their reduction in government spending by comparing national
economies to households. Thatcher, in particular, promoted an image of
herself as a mother who reined in overspending to reduce the national debt.
The problem with the household analogy is that governments are not
households. Moreover, the constant taxation system of governments provide
them a steady flow of income that allows them to pay and refinance debts
steadily.

Despite the initial success of neoliberal politicians like Thatcher, the defects of
the Washington Consensus became immediately palpable. An example of this
is the post-communist Russia. After Communism had collapsed in the 1990s,
the IMF called for the immediate privatization of all government industries.
They assumed that such a move will free these industries from corrupt
bureaucrats and pass them on to more dynamic and independent private
investors. What happened was that only individuals and groups who had the
accumulated wealth under the previous communist order had the money to
purchase these industries, IN some cases, the economic elites relied on easy
access to government funds to take over the industries. This practice has
entrenched an oligarchy that still dominates the Russian economy to this very
day.
The Global Financial Crisis and the Challenge to Neoliberalism.

Neoliberalism came under significant strain during the global financial crisis of
2007-2008 when the world experienced the greatest economic downturn
since the Great Depression. The crisis can be traced back to the 1980s when
the US systematically removed various banking and Investment restrictions.

The scaling back of regulations continued until the 2000s, paving the way for
a brewing crisis. In their attempt to promote the free market, government
authorities failed to regulate bad investments occurring in the US housing
market. Taking advantage of ‘cheap housing loans’, Americans began
building houses that were beyond their financial capacities.

To mitigate the risk of these loans, banks that were lending houseowners’
money pooled these mortgage payments and sold them as “mortgage-backed
securities”. One MBS would be a combination of multiple mortgages that they
assumed would pay a steady rate.

Since there was no so much surplus money circulating, the demand for MBS
increased as investors clamored for more investment opportunities. In their
haste to issue these loans, however, the banks became less discriminating.
They began extending loans to families and individuals with dubious credit
records – people who were unlikely to pay their loans back. These high-risk
mortgages became known as sub-prime mortgage.

Financial experts wrongly assumed that, even if many of the borrowers were
individuals and families who would struggle to pay, a majority would not
default. Moreover, banks thought that since there were so many mortgages in
just one MBS, a few failures would not ruin the entirety of the investment.

Banks also assumed that housing prices would continue to increase.

Therefore, even if home owners defaulted on their loans, these banks could
simply reacquire the homes and sell them at a higher price, turning a profit.

Sometime in 2007, however, home prices stopped increasing as supply

caught up with demand. Moreover, it slowly became apparent that families
could not pay off their loans. This realization triggered the rapid reselling of
MBS as banks and investors tried to get rid of their bad investments. This
dangerous cycle reached a tipping point in September 2008, when major
investment banks like Lehman Brothers collapsed, thereby depleting major
investments.

The crisis spread beyond the US since many investors were foreign
governments, corporations, and individuals. The loss of their money spread
like wildfire back to their countries. These series of interconnections allowed
for a global multiplier effect that sent ripples across the world. For example,
Iceland’s banks heavily depended on foreign capital, so when the crisis hit
them, they failed to refinance their loans. As a result of this credit crunch,
three of Iceland’s top commercial banks defaulted. From 2007-2008, Iceland’s
debt increased more than seven fold.

Until now, countries like Spain and Greece are heavily indebted, and debt
relief has come at a high price. Greece, has been forced by Germany and the
IMF to cut back on its social and public spending. Affecting services like
pensions, healthcare, and various forms of social security, these cuts have
been felt most likely by the poor. Moreover, the reduction in government
spending has slowed down growth and insured high levels of unemployment.

The US recovered relatively quickly thanks to a large Keynesian style stimulus

that President Barack Obama pushed for in his first months in office. The
same cannot be said for many other countries. IN Europe, the continuing
economic crisis has sparked a political upheaval. Recently, far-right parties
like Marine Le Pen’s Front National in France have risen to prominence by
unfairly blaming immigrants for their woes, claiming that they steal jobs and
leech off welfare. These movements blend popular resentment with utter
hatred and racism.

Economic Globalization Today

The global financial crisis will take decades to resolve. The solutions
proposed by certain nationalist and leftist groups of closing national
economies to world trade will no longer work. The world has become too
integrated. Whatever one’s opinion about the Washington Consensus is, it is
undeniable that some form of international trade remains essential for
countries to develop in the contemporary world.
Exports, not just the local selling of goods and services, make national
economies grow at present. In the past, those that benefited the most from
free trade were the advanced nations that were producing and selling
industrial and agricultural goods. The US, Japan, and the member-countries
of the European Union were responsible for 65 percent of global exports,
while the developing countries only accounted for 29 percent. When more
countries opened up their economies to take advantage of increased free
trade, the shares of the percentage began to change. By 2011, developing
countries like the Philippines, India, China, Argentina, and Brazil accounted
for 51 percent of global exports while the share of advanced nations including
the US, had gone down to 45 percent. The WTO led reduction of trade
barriers, known as trade liberalization, has profoundly altered the dynamics of
the global economy.

IN the recent decades, partly as a result of these increased exports, economic

globalization has ushered in an unprecedented spike in global growth rates.
According to the IMF, the global per capita GDP rose over five-fold in the
second half of the 20th century. It was this growth that created the large Asian
economies like Japan, China, Korea, Hongkong and Singapore.

And yet, economic globalization remains an uneven process, with some

countries, corporations and individuals benefiting a lot more than others. The
series of trade talks under the WTO have led to unprecedented reductions in
tariffs and other trade barriers, but these processes have often been unfair.

First, developed countries are often protectionists, as they repeatedly refuse

to lift policies that safeguard their primary products that could otherwise be
overwhelmed by imports from the developing world. The best example of this
double standard is Japan’s determined refusal to allow rice imports into the
country to protect its farming sector. Japan’s justification is that rice is
“sacred”. Ultimately, it is its economic muscle as the third largest economy
that allows it to resist pressures to open its agricultural sector.

The US likewise fiercely protects its sugar industry, forcing consumers and
sugar dependent businesses to pay higher prices instead of getting cheaper
sugar from plantations of Central America.
Faced with these blatantly protectionist measures from powerful countries and
blocs, poorer countries can do very little to make economic globalization more
just. Trade imbalances, therefore, characterize characterized economic
relations between developed and developing countries.

The beneficiaries of global commerce have been mainly transnational

corporations (TNCs) and not governments. And like any other business, these
TNCs are concerned more with profits than with assisting the social programs
of the governments hosting them. Hosting countries, in turn, loosen tax laws,
which prevents wages from rising, while sacrificing social and environmental
programs that protect the underprivileged members of their societies. The
term race to the bottom refers to countries lowering their labor standards,
including the protection of workers’ interests, to lure in foreign investors
seeking high profit margins at the lowest cost possible. Governments weaken
environmental laws to attract investors, creating fatal consequences on their
ecological balance and depleting them of their finite resources (like oil, coal
and minerals).
International economic integration is a central tent of globalization. In fact, it is
so crucial to the process that many writers and commentators confuse this
integration for the entirety of globalization. As a reminder, economics is just
one window into phenomenon of globalization; it is not the entire thing.

Nevertheless, much of globalization is anchored on changes in the economy.

Global culture, for example, is facilitated by trade. Filipinos would not be
aware of American culture if not for the trade that allows locals to watch
American movies, listen to American music, and consume American products.
The globalization of politics is likewise largely contingent on trade relations.
These days, many events of foreign affairs are conducted to cement trading
relations between and among states.

Given the stakes involved in economic globalization, it is perennially important

to ask how this system can be made more just. Although some elements of
global free trade can be scaled back, policies cannot do away with it as a
whole. International policymakers, therefore, should strive to think of ways to
make trading deals fairer. Governments must also continue to devise ways of
cushioning the most damaging effects of economic globalization, while
ensuring that its benefits accrue for everyone.