GE 5: THE CONTEMPORARY WORLD

JENELYN V. AÑONUEVO
UNIT 2 THE GLOBAL ECONOMY
Unit Outcomes:

At the end of this unit, the learners must have:

1. articulated the definition of market integration and its different types;

2. explained the importance of International Financial Institutions and The

Bretton Woods System.

Introduction

Globalization has brought enormous changes to the lives of the people.

Humans are the major contributors to the development of the economy. But
also, at the same time, humans are the direct descendants of the success and
failures of decisions made throughout history. It is therefore, a necessity to
be acquainted with the trends and changes of our modern world. With such,
knowledge and understanding of the various concepts of globalization and
how it affects each economy is vital for the survival and success of every
human.

The world is moving in fast pace as technology changes every quarter

of the year. Distance from each other is no longer an issue because of
technology and easy travel opportunities. There is shorter waiting time and
everything is fast because communication is reaching even at the farthest part
of the world.

This module aims to make the students better understand how each
economy and market works and how it is affects us. This module will discuss
about the basic concepts of global economy, market integration and global
city. It will also introduce the history and types of market integration and how
it affects our economy
 Lesson 1: Market Integration
Lesson Outcomes:

At the end of this lesson, the learners must have:

1. defined and articulated market integration and its different types;

2. reflected on how different types pf market integration affects their lives.

Economies around the world are already showing various spots of

homogeneity and it is all attributed to the integration of economies around
the world as a result of globalization. To fully understand the economy, one
should look at the different perspectives of the market and how it works and
how they adjust to the changes brought by globalization. Markets which
include companies and corporations are making tremendous efforts to adapt
to changes, with the challenges of rigid competition and trade rules. With
these developments in economy, trends in the market emerge and paved the
way to various types of market integration which has started in the 19th
century with the establishment of a better navigation and maritime
technology as well as the advancement in communication.

Fun Quiz!

Before we proceed with the topic, may I ask you to answer the following.
Give at least 5 corporations you are familiar with and their line of business.

1. ______________________________

2. ______________________________

3. ______________________________

4. ______________________________

5. ______________________________

Market Integration (Kohls and Uhl) is a process that refers to corporate

expansion by consolidating additional marketing functions and activities
within a single management framework. Integration shows the company’s
market relationship and its extent affects the company’s behavior.

It is the process by which company combines different activities around the

world so that they operate using the same methods. It is when two businesses
are brought together through a merger or takeover, and the nature and type
of integration is based on activities of each business and where they operate
in the supply chain of an industry.

Global Market Integration involves the process of product

standardization and technology development centralization.

History of Market Integration

It was during the 19th century when Market Integration showed
substantial advances in international market integration. The realization of
the creation of world economy had made technological advancement critical
in these times. It was in this century when the locomotive and marine steam
engine revolutionized world transportation. Steamships connected the world’s
ports and railroads ran inland. With these goods could be transported across
the world. The emergence of electric telegraph was evolutionary. The opening
of Suez Canal which allowed shorter travel make transport easier. And lastly,
the technological change in the shape of steel hulls and steel masts made
sailing ships larger and more efficient.

The imposition of taxes among countries was practiced at this century.

But in 1846 when the merchants of Manchester England struck a victory for
free trade by forcing the British government to abandon tariffs on imported
goods. Although these move has made countries vulnerable to the trade
surplus and deficit as major disadvantage of free trade.

In the second half of the 19th century, Asia saw market integration in
one of Asia’s key commodities, RICE. The transport and information networks
established and created an intra-Asian economy. This period also saw the
integration of the world wheat market and world rice market, creating a global
market in basic good grains.

Challenges because of Great Depression of 1930s hampered free trade

and forced countries to raise their tariffs to keep foreign product out and help
their local farmers.

The integration of the global market restarted when American

corporations began to emerge after the Second World War with the rise of new
conglomerates. It was then also when countries began to extend their reach
beyond boarders. There are changes in the patterns of trade and technology
that took place because of the advancement in shipping and navigation.
Types of Market Integration
1. Horizontal Market Integration - is a competitive strategy in which two
companies of the same nature merge or one larger company acquires a
smaller company.

Example: The acquisition of Miramax and Pixar of a much larger

company Disney.

The acquisition of Smart of a much smaller company Sun.

2. Vertical Market Integration - It is a competitive strategy of a firm own
to own the upstream suppliers and downstream buyers; this is an
arrangement in which supply chain of a company is also owned by that
company.

Example: A car company began making their own steel for their car
parts instead of investing to other corporations.

Nescafe Corporation buying their own land, and producing

their own coffee grain, employing their own coffee growers.

A. Forward Vertical Integration - This process occurs when a

company decides take control of the post-production process or is
acquiring a business further up into the supply chain.

Example: A car manufacturer acquires an automotive

dealership.
Starbucks has the production of its own coffee bean
to the cup of coffee sold to consumers.

B. Backward Vertical Integration - This process occurs when a

company decides to buy another company that makes an input
product acquiring company’s product.

Example: A car manufacturer acquires a tire manufacturer or

car parts distributor.

3. Conglomerate Market Integration - This involves a combination or

fusion of companies that are involved in unrelated business activities.

Two types of mergers of conglomerate:

 A. Pure Mergers conglomerates involves companies that have nothing
in common.

Example: Henry Sy of SM Investments Corp acquired a 34.5 percent

stake in 2GO Group Incorporation.

B. Mixed Mergers Conglomerates - combination of companies that are

looking for product extensions or market extensions.

Effects of Market Integration

1. Wider selection of goods and services that have not been previously
available. This is made available because of the ease of navigation and
transportation. The goods from one country can easily reach different
countries around the world because of trade. The consumers of one country
can choose different products from other country and enjoy a wide variety of
choices.

2. Acquisition of goods and services at a lower cost. The free flowing of goods
and services as a result of globalization can reach many countries. It makes
competition for buyers stiffer for companies resulting to the drop of prices to
keep up with the competition.

3. Political Cooperation. This cooperation happens because of strong

economic ties, which allows peaceful conflict resolution and allows greater
stability.

4. Erosion of national sovereignty. This happens when members of economic

unions are required to follow the rules on trade, monetary policies and other
agreements.

5. Employment opportunities. This tends to improve because trade

liberalization leads to market expansion, technology sharing and cross
boarder investment. Therefore, skilled workers are demanded in all parts of
the world which allows more opportunities to earn.
Bretton Woods System

Because of the increasing trade and development, in July 1944, The

United Nations Monetary and Financial Conference was held and an
international monetary system was developed in Bretton Woods, Hampshire.
They sought to create a system that would ensure exchange rate stability,
prevent competitive devaluations, and promote economic growth. The
delegates to the conference agreed to establish the International Monetary
Fund and what becomes to be the World Bank Group and a system developed
in order to address international monetary order. Bretton Woods Agreement
has a goal of creating a system that would facilitate international trade while
protecting the autonomous policy goals of individual nations.

The primary designers of the Bretton Woods System were the 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 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 towards White’s plan.

The delegates of the conference agreed to establish two new institutions:

1. The International Monetary Fund (IMF) that would monitor exchange rates
and lend reserve currencies to nations with balance-deficits. This institution
came into formal existence in December 1945.

2. The International Bank for Reconstruction and Development which is also

known as World Bank Group which is responsible for providing financial
assistance for the reconstruction after World War II and the economic
development of less developed countries.

In 1958, Bretton Woods System became fully functional as currencies

became convertible. Countries settled international balances in dollars, and
US dollars were convertible to gold at a fixed exchange rate at $35 an ounce.
Bretton Woods System was in place until persistent US Balance of payments
deficits led to foreign held dollars exceeding the US gold Stock. It was
President Nixon the dollar’s convertibility to gold in 1971. The system
collapsed but created a lasting influence on international currency exchange
and trade through its development of the IMF and World Bank.

International Financial Institutions and Its Role

International Financial Institutions are institutions that provide

financial support and professional advice for economic and social
development activities in developing countries and promote international
economic cooperation and stability. All IFI’s are active in supporting programs
that are global in scope, in addition to their primary role of financing and
providing technical assistance to programs at the country level.

The Traditional goals of these institutions are:

1. To reduce global poverty and improve people’s living condition and

standards.

2. To support sustainable economic, social and institutional development.

3. To promote regional cooperation and integration.

4. To enhance measures that promote economic growth and protection of the

environment.

IFI’s achieve these objectives through loans, credits and grants to

national government. Such funding is usually tied to specific projects that
focus on economic and socially sustainable development. IFI’s also provide
technical and advisory assistance to their borrowers and conduct extensive
research on development issues. These institutions provide businesses or
governments with loan for emergency purposes or for normal business
functions.

All IFI’s admit only sovereign countries as its owner members, but are
all characterized by a broad country membership, including both borrowing
developing countries and developed donor countries. Also, All IFI’s have
independent legal and operational status and a high level of cooperation is
maintained among them.
International Financial Institutions
1. World Bank and International Monetary Fund- were founded after
World War II. their establishment was mainly because of peace
advocacy after war. It aimed to help the economic stability of the world.
both of them are basically banks, but instead of being started by
individuals like regular banks, they were started by countries. they were
designed to complement each other. IMF main goal was to help
countries which were in trouble. The World Bank, in comparison
revolved around the eradication of poverty and it funded specific
projects that helped them reach thier goals, especially in poor countries.

• International Bank for Reconstruction and Develoment (IBRD)

• International Development Association (IDA)
• International Finance Corporation (IFC)
• Multilateral Investment Guarantee Agency (MIGA)
• International Centre for Settlement of Investment Disputes (ICSID)

2. Multilateral Development Banks

• African Development Bank (AFDB)
• Asian Development Bank (ADB)
• The Inter-American Development Bank
• European Bank

Summary
• Market integration is a process that refers to corporate expansion by
consolidating additional marketing functions and activities within a single
management framework.

• There are three types of market integration namely; vertical, horizontal and
conglomerate systems. • The Bretton Woods Agreement and system created a
collective international currency exchange and built International Financial
Institutions like the World Bank and International Monetary Fund.

• The Bretton Woods collapsed in the 1970’s but created a lasting influence
in trading and foreign currency exchange.
Let’s Do This!

I. Let us try to apply what you learned:

1. Identify the different types of market integration present in your

locality. Give 3 examples and narrate why you think they belong to
this type.

2. Browse the internet on how International Financial Institutions

helped our country Philippines and give your opinion about it by
writing a short reflection.

Note: This is due 2 weeks after you receive this lesson.

ASSESSMENT:

Let us assess your learning by answering the following questions:

1. How does market integration affect the lives of an ordinary man? (200
words)

2. Philippines has been one of the major borrowers of money from IFI’s ever
since. What do you think is the impact of the IFI’s to the Philippines as a
country? (200 words)

Note: Your answer should be based on your opinion and your understanding
of the different concepts. Please use Tahoma 12 and observe 1.5 spacing.
Submit a week after this lesson.