The Globalization

of World Economics
Introduction
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. According to the IMF, the value of trade
as a percentage of world GDP increased. Increased trade also means that
investments are moving all over the world at faster speeds.
Introduction

The United Nations Conference on Trade and Development

(UNCTAD), the amount of foreign direct investments flowing across
the world was US$ 57 billion in 1982 and by 2015, that number was
$1.76 trillion. These figures represent a dramatic increase in global trade
in the span of just a few decades.

Apart from the sheer magnitude of commerce, we should also note

the increased speed and frequency of trading. Even the items being sold
and traded are changing drastically.
International
Trading
Systems
International Trading Systems

International trading systems are not new. The oldest known international trade
route was the Silk Road. It is a network of pathways in the ancient world that spanned from
China to what is now the Middle East to Europe. The most profitable products traded
through this network was silk and was highly prized especially in the Middle East as well as
in Europe.

While the Silk Road was international, it was not truly “global” because it had no
ocean routes that could reach the American continent. Historians Dennis O. Flynn and
Arturo Giraldez, the age of globalization began when “all important populated continents
began to exchange products continuously both with each other directly and indirectly via
other continents and in values sufficient to generate crucial impacts on all trading partners”.
International Trading Systems

Flynn and Giraldez trace this back to 1571 with the establishment of the galleon
trade that connected Manila in the Philippines and Acapulco in Mexico. This was the first
time that the Americas were directly connected to Asian trading routes. For Filipinos, it is
crucial to note that economic globalization began on the country’s shores.

The galleon trade was part of the age of mercantilism. On the 16th century to the
18th century, countries, primarily in Europe, competed with one another to sell more goods
as 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, restricted trade routes, and subsidized its exports. Mercantilism was thus also
a system of global trade with multiple restrictions.
International Trading Systems
The gold standard was considered a very restrictive system, as it compelled countries
to back their currencies with fixed gold reserves. During World War I, countries depleted
their gold reserves to fund their armies and 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.

A Global economic crisis called the Great Depression started further emptying
government coffers. This was the worst and longest recession ever experienced by the
Western world. Economist s argued that it was largely caused by the gold standard, since it
limited the amount of circulating money and, therefore, reduced demand and consumption.

Economic historian Barry Eichengreen argues that the recovery of the United States
really began when, having abandoned the gold standard, the US government was able to free
up money to spend on reviving the economy.
International Trading Systems

In 1867, following the lead of the United Kingdom, the United States and 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 the isolationism of the mercantilist era. The countries thus established a common
basis for currency prices and a fixed exchange rate system which is all based on the value of
gold.

Today, the world economy operates based on what are call fiat currencies –
currencies that are not backed by precious metals and whose value is determined by their
cost relative to other currencies. This allows governments to freely and actively manage their
economies by increasing or decreasing the amount of money in circulation as they see fit.
International Trading Systems
The stock market crashed in 1973-74 after the United States stopped linking dollar to
gold, effectively ending the Bretton Woods system. The result was a phenomenon that
Keynesian economics could not have predicted called stagflation, in which a decline in
economic growth and employment takes place alongside a sharp increase in prices.

Keynesian orthodoxy was challenge by a new form of economic thinking. 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.
International Trading Systems

They used the economic turmoil to challenge the consensus around Keynes’s ideas.
What emerged was a new form of economic thinking that critics labeled neoliberalism. It
became codified strategy of the United States Treasury Department, the World Bank, the
IMF, and eventually the World Trade Organization. The policies they forwarded came to be
called the Washington Consensus.

The Washington Consensus dominated global economic policies and 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 to reduce tariffs and open up their economies in believe to that it is the
quickest way to progress.
International Trading Systems
The appeal of neoliberalism was in its simplicity. Its advocates like US President
Ronald Reagan and British Prime Minister Margaret Thatcher justified their reduction in
government spending by comparing national economies to households. The problem with
the household analogy is that governments are not households. For one, governments can
print money, while households cannot. Moreover, the constant taxation systems 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 and Reagan, the
defects of the Washington Consensus became immediately palpable. A good early example is
that of post-communist Russia. 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
The Global Financial Crisis and the
Challenge to Neoliberalism

Russia’s case was just one example of how the “shock therapy” of neoliberalism did
not lead to the ideal outcomes predicted by economists who believed in perfectly free
markets. Neoliberalism came under significant strain during the global financial crisis of
2007-’08 when the world experienced the greatest economic downturn since the Great
Depression.

In their attempt to promote the free market, government authorities failed to regulate
bad investments occurring in the US housing market. To mitigate the risk of these loans,
banks that were lending houseowners’ money pooled these mortgage payments and sold
them as “mortgage-backed securities” (MBSs). One MBS would be a combination of multiple
mortgages that they assumed would pay a steady rate.
The Global Financial Crisis and the
Challenge to Neoliberalism

Since there was so much surplus money circulating, the

demand for MBSs increased as investors clamored for more
investment opportunities. 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 mortgages.
The Global Financial Crisis and the
Challenge to Neoliberalism
Financial experts wrongly assumed that, even if many of the
borrowers were individual and families who would struggle to pay, a
majority would not default. Moreover, banks though 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 homeowners defaulted on their loans, these
banks could simply reacquire the homes and sell them at a higher price,
turning a profit.
The Global Financial Crisis and the
Challenge to Neoliberalism

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. The crisis spread beyond the United States
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.
The Global Financial Crisis and the
Challenge to Neoliberalism
Countries like Spain and Greece are heavily indebted, and
debt relief has come at a high price. Greece in particular has
been forced by Germany and the IMF to cut back on its social
and public spending.

Affecting services like pensions, health care, and various

forms of social security, these cuts have been felt most acutely by
the poor. Moreover, the reduction in government spending has
slowed down growth and ensured high levels of unemployment.
The Global Financial Crisis and the
Challenge to Neoliberalism
The United States recovered relatively quickly thanks to a large
Keynesian-style stimulus package 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
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, however, will no longer work. The
world has become too integrated. 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. When more countries opened up their economies to
take advantage of increased free trade the shares of the percentage began
to change.
Economic Globalization Today

By 2011, developing countries like the Philippines, India, China,

Argentina, and Brazil accounted for 51 percent of global experts while
the share of advanced nations including the United States 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.
Economic Globalization Today

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

economic globalization has ushered in an unprecedented spike 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, Hong Kong, and Singapore. And yet, economic globalization
remains an uneven process, with some countries, corporations, and
individuals benefiting a lot more than others.
Economic Globalization Today

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 country.
Economic Globalization Today
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.
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 economic relations between
developed and developing countries.
Economic Globalization Today

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.
Conclusion
Conclusion

International economic integration is a central tenet 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 the phenomenon of
globalizations; it is not the entire thing.

Nevertheless, much of globalization is anchored on changes in the

economy. 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.
Conclusion

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.
The Globalization of World Economics
Group III
Shannen Louise Polleros Junester Ursora II
Kent Jasper Salazar Janine Christine Vallente
Olien Rey Santillan Brian David Verano
Julius Clint Silag Rei Colin Villacampa
Angelo Telamo Jirah Balacuit
Timothy Tuason