Republic of the Philippines

PALOMPON INSTITUTE OF TECHNOLOGY

Palompon, Leyte

COLLEGE OF MARITIME EDUCATION

Marine Transportation Department

The Global Economy and its Effects/Impacts to the Philippines

(The Globalization of Economic Relations, The Modern World-System as a Capitalist
Economy, Global Free Trade)

A Written Presentation Presented to

Ms. Elvenne Manila-Bate
In Partial Fulfilment of the Requirements
For the Course GEC 3 (The Contemporary World)

Submitted by:
Bernal, John Kenneth
Dela Cruz, Hans Isaac R.
Mellorin, Brylle
BSMT II-A

January 22, 2023

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 Table of Contents

I. Introduction
…………………………………………………………………………….. 3
II. Thesis Statement
……………………………………………………………………… 4
III. Detailed Discussion of the Topics ………………………………………………….. 5
 Global Trade and Global Economy ………………………………………….
5
 World Bank and International Monetary Fund ……………………………..
7
 Modern World-System as a Capitalist Economy ……….……….………..
10
IV. Analysis …………………………………………………………………….……….. 12
V. Conclusion …………………………………………………………………………… 15
VI. References …………………………………………………………………………. 16

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I. Introduction 

The global economy consists of interconnected economic activities that take

place between numerous countries worldwide. In the past several decades, its
landscape has changed profoundly, and these transformations can be attributed to the
ways in which the global economy is governed and organized by collaborating nations
(Gereffi, 2015). It was designed to accommodate the growing number of international
transactional aspects of financial institutions, industries, enterprises, and other types of
economic entities (Powell, 2019). In general, the implications of the changes in the
global economy are evident not only in flow of goods and services across borders, but
also in the increased number of movement of people across nations (Gereffi, 2015).
The importance of the global economy is undeniably given, especially to the
Philippines which is a developing country. This is significant because participating in the
production process at the global level results in economic growth supported by
creations of domestic jobs, foreign currency inflows, poverty reduction, and access to
information (Quimba et al., 2020). In fact, the economic resurgence of the Philippines
during the past several years may be attributed in large part to the country's increased
regional and global economic connectivity (Powell, 2019). Furthermore, as a developing
country, the Philippines rely largely on foreign direct investment (FDI) and trade
(Schumacher, 2016). While trade refers to the voluntary exchange of goods or services,
FDI is an investment made by an individual;, group, or company from another country
(Hayes, 2022). These aspects are also important because they support the economic
development of the country by creating a more conducive environment for businesses
and investors. According to Citi Global Realty and Development (2022), FDI acts as
capital that funds the expansion and operation of businesses in the country. Hence, jobs
are created and taxes are paid by the investors when they operate in the country.

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Meanwhile, the country also relies on trade because it leads to economic integration,
especially now that the total export earnings of the country was found to rise steadily
annually (Powell, 2019). Participating in trade leads to higher levels of production of
goods and services, thus higher earnings and economic growth.
The Philippine economy over the past decades has become more increasingly
integrated, interdependent, and intertwined with the global economy. This is evident
with the removal of restrictions on the flow of trade and investment within nations,
regional trading arrangements, and rapid technological advancement. But this is not
only perceived in the Philippines, because the emerging market economies (EME) have
also become closely integrated in terms of trade, finance, global value chains, and
migration. This phenomenon, however, is unavoidable because globalization, or the
mobility of goods, services, people, and knowledge across borders, has become much
more irreversible and inevitable nowadays. And as a result of globalization, there is now
a functioning system of industry and commerce between the Philippines and other
nations.

II. Thesis Statement 

The global economy is characterized by interdependent and highly dynamic
economic activities throughout the globe that may result in either positive or negative
impacts on the nations involved. This suggests that the global economy has both direct
and indirect impacts on the Philippine economy. Especially that the global economy is
innately associated with global trade, it may provide a good foundation for the country’s
economic growth, raise its productivity, and boost its competitiveness between other
countries in the global market. The Philippines is rich in natural resources and by
specializing in the production of these goods, the global economy sets its comparative
advantage among other nations especially in free trade areas. The high unemployment
rate in the Philippines remains to be a significant issue, but the interconnected
economies in the global scale allows it to send its labor force to other countries.
Additionally, integrating with the global economy is also a good opportunity to attract
both short-term and long-term investments that can help improve the country’s

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economy.

III. Discussion 

Global Trade and the Global Economy  

Being one of the indications of globalization, global trade, which refers to the
exchange of goods and services between countries, comprises a large part of the global
economy (Center for Global Development, 2010). Hence, it is regarded as the backbone
of the global economy because of its numerous significance to the global economic
growth (Powell, 2019). Specifically, it creates more job opportunities for the working
class because global trade expands the market. It also increases the revenues of
business owners because global trade allows them to enter the global market freely and
gives them a chance to sell their products globally. Furthermore, global trade is
important in keeping strong relations between nations (Brighton College, 2022). This is
because when countries participate in substantial amount of trade, conflicts between
nations are more likely to be avoided (Brighton College, 20220. In addition, the global
market also makes the global market highly competitive. It is worth noting that every
country has its own assets and natural resources they can consume and trade to other
nations. But due to the competition in the global market, some countries become
strategic by specializing in specific products and services, and also by having
comparative advantage over other nations (Powell, 2019). Comparative advantage
happens when a country can manufacture goods or services better than any other
country given the same amount of resources (Srivastav, 2022). For instance, catsup
made in the Philippines has a comparative advantage than other nations, especially the
Western countries, because the good production of bananas in the country allows to
manufacture the said product with better quality. Meanwhile, global trade also prompts
countries to have absolute advantage on the good or service, which helps them become
the best at producing it and are the most likely to export it to other countries. Absolute
advantage takes place when a country has the ability to produce an increased number

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of goods and services at better quality than competitors (Srivastav, 2022). Middle East
countries typically have an absolute advantage when it comes to oil production because
through inexpensive techniques to drill for the resource, they can acquire oil at large
quantities and sell them to the global market at a lower price.
Today, about 60% of world trade takes place within free trade agreements (FTA),
wherein the movement of goods, services, and labor across national borders occurs
without the interference of government-imposed trade barriers and regulations. In
general, global free trade is supervised by the World Trade Organization whose primary
objective is to open trade for the benefit of all (World Trade Organization, 2020).
Specifically, the said international organization creates a global system of trade rules to
ensure that trade between nations flows freely, smoothly, and predictably. This helps
the producers of goods and services, exporters, and importers carry out their business.
In addition, the said organization also allow governments to negotiate trade agreements
and sort out trade problems that the members encounter, thereby settling trade disputes
between nations (WTO, 2022). WTO also monitors trade policies in every nation,
provide technical assistance and training for developing countries, and cooperates with
other international organizations. Founded in 1995, the organization now consists of
164 members, which accounts to 98% of world trade.
During global free trade, the products and services being made and sold are
determined by the supply and demand in the market. Powell (2019) added that each
participating country has unique strengths that can be leveraged to benefit everyone on
the partnership. And although free trade has become the natural state of global trade,
trading nations can implement protectionist tendencies, called trade barriers, to protect
their own personal economy and sanction misbehaving countries in the global market
(Powell, 2019). As mentioned, WTO plays a major role in global free trade by imposing
regulations such as the reduction or removal of trade barriers in the global market, thus
liberalizing trade between trading partners. Trade barriers, such as tariffs, quotas, and
export subsidy, are government-imposed restraints to control the flow of international
goods or services. Tariff is basically a tax being added to the cost of imported goods
and is paid to the authority of the country that imposes it (Radcliffe, 2008). Meanwhile,
quota limits the number or monetary value of goods that a country can import or export

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during a specific period, which helps regulate the volume of trade between countries
(Barone, 2022). Whereas export subsidy are incentives that can be monetary or tax
programs designed to encourage businesses to export certain types of goods and
services. Indeed, trade barriers generally have the effect of raising the relative prices of
imported products as they enter in a country’s borders.
Under a free trade policy, goods and services can be bought and sold across
international borders with little or no government-imposed tariffs,quotas, subsidies, or
prohibitions impeding their exchange under a free trade policy. Since no restrictions are
imposed in free trade, it is often regarded as an antagonist to the goal of achieving a
sustainable economy. Critics assert that free trade just aggravates the existing
inequalities between nations and puts additional strain on the environment because of
industrialization. However, some economists and policy makers still argue that free
trade promotes sustainable growth and development of the global economy. As the
building blocks of international economic growth, free trade is crucial in expanding local
businesses to the foreign market. It also improves financial performance of businesses
because selling to the global market increases sales potential and relieves the pressure
to sell domestically. Furthermore, it is seen as a significant force that may help reduce
poverty by spurring economic growth, creating more jobs and opportunities, reducing
prices of goods and services, increasing the variety of goods for the consumers, and
acquiring new technologies

World Bank and the International Monetary Fund 

The growth of the global economy and the increasingly complex international
trade have resulted in several concerns about the competitiveness capacity of the
developing countries and their ability to integrate into the global economy (Arayssi,
2020). In today’s highly competitive global economy, poor countries are greatly
challenged as they find it difficult to finance needed investments solely through
domestic savings. Despite the advantages of globalization in a country’s economic
growth, these developing countries are unable to benefit in the global economy, leaving
only the great Asian and western countries to achieve great economic success (Arayssi,
2020).

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 On that note, the World Bank was established in 1944 during the United Nations
Monetary and Financial Conference to serve as a significant source of financial and
technical assistance to the developing countries in the world. As a development bank
having partnerships with over 100 developing countries, the main modalities of World
Bank are government loans and grants and it targets to reduce poverty, improve the
ways of life, and achieve long-term economic development. It raises funds for
development at the lowest possible interest rates by tapping the world’s capital market
and from the contributions of wealthier member governments. Ever since it began
lending money for population projects, it has grown to be one of the major “financiers of
global health projects and programs, a powerful voice in shaping health agendas in
global governance spaces, and a mass producer of evidentiary knowledge for its
preferred global health interventions” (Tichenor et al., 2021). Since then, the
organization has been considered as the “Knowledge Bank” wherein its critical
groundwork involve activities ranging from conducting economic research and analysis
to giving financial and advisory service to both private and government enterprises.
Moreover, it has also taken on critical roles within global health partnerships to improve
health and education, in boosting agricultural support, protecting the environment, and
fighting corruption.
The Philippines and World Bank have been partners for more than seven
decades already. This partnership has mobilized funding and global knowledge to assist
in poverty reduction and enable economic prosperity in the country especially during
calamities (World Bank, 2021). In fact, the World Bank is still supporting the Social
Welfare and Development Reform Project (SWDRP), the National Community Driven
Development Project (NCDD), and the Philippine Rural Development Project (PRDP),
which all intend to minimize poverty and vulnerability. Aside from these, the organization
also supports other development programs that seek to upgrade infrastructure, improve
health and nutrition, refine education, and strengthen the country’s resilience against
natural disasters and climate change (World Bank, 2021). And during the pandemic, the
World Bank has also supported the country’s public health by purchasing and
distributing vaccines and helping the private sectors continue to operate despite the
social restrictions. Additionally, the organization approved a loan of more than Php 400

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billion to fund the government pandemic response (Rosales, 2022). And as of April
2022, the government’s outstanding debt to the organization has hit a new record-high
of Php 12.763 trillion (Cordero, 2022).
Similarly, the International Monetary Fund (IMF) shares a common goal with the World
Bank in raising the living standards in their member countries (Sanford & Weiss, 2004).
However, IMF focuses on achieving macroeconomic and financial stability. It was also
established in 1944 as a response to the aftermath of the Great Depression in the
1930s (International Monetary Fund, 2022). From having 44 founding member countries
that sought to establish a framework for international economic cooperation, it is now
governed by 190 countries making up its global membership. Just like the World Bank,
the IMF provides loans to the member countries going through an actual or potential
problems on balance of payments (IMF, 2022). Hence, it seeks to rebuild the
international reserves, stabilize the currencies, and restore conditions for strong
economic growth of financially struggling nations (Masson & Mussa, 1996). Aside from
this, it also monitors the international monetary system and global economic
developments to determine the risks and propose policies crucial in financial growth and
stability (Sanford & Weiss, 2004). The financial resources that the IMF utilizes in
achieving its goals are mainly derived from the money paid by countries as capital
subscriptions or quotas when they become official members (Masson & Mussa, 1996).
However, the IMF is no longer lending financial assistance to the Philippine
government nowadays. This is because the country managed to strengthen its
economic performance through effective macroeconomic management, sustained
reforms, and also with the aid of the healthy global economy (International Monetary
Fund, 2008). It is worth noting that the Philippines had engaged in numerous loan
programs with the Fund before, but the year 2006 was a remarkable milestone in the
country’s relationship with the said organization. During this time, the Philippines pre-
paid its remaining obligations to the Fund and then withdrawn with a post-program
monitoring agreement, in which countries’ borrowing arrangement has expired but they
still owe the Fund’s money (IMF, 2008). Nevertheless, the organization still works
closely with the government to ensure its economic prosperity and to make its economy
more competitive.

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Modern World-System as a Capitalist Economy 

To tackle the concept of the world system as a capitalist economy, we can look
into theories set by Immanuel Wallerstein, an American economic historian and
sociologist that seeks to answer questions of how social interaction, consumerism, and
industrial output affects the economy of a country. Immanuel Wallerstein's model of the
modern world-system is a theoretical framework that seeks to understand the dynamics
of the global capitalist economy. A world-system is a concept in sociology and
economics that refers to the interconnected network of countries and regions that make
up the global economy. The term was first introduced by sociologist Immanuel
Wallerstein in the 1970s. According to Wallerstein, the modern world-system is a single,
integrated economic system that has been in existence since the 16th century. This
system is characterized by the existence of a global division of labor, a world market,
and a capitalist mode of production (Wallerstein, 2004).

Wallerstein argues that the capitalist world-economy is a singular, interconnected

system that has existed for the past five centuries, and that its origins can be traced
back to the late medieval period (Wallerstein, 2004). He contends that the capitalist
world-economy is composed of three main components: the core, the semi-periphery,
and the periphery. The core is made up of the countries that have the most advanced
and powerful economies, such as the United States, Western Europe, and Japan.
These countries are the ones that dominate the global economy and control the major
financial and political institutions. Meanwhile, the semi-periphery is made up of
countries that are not as powerful as the core, but are still more developed than the
periphery. These countries are usually former colonies or dependent territories that
have gained some degree of autonomy, but still remain economically and politically
subordinated to the core. Examples include countries like Brazil, India, and South Africa
(Wallerstein, 2004). And lastly, the periphery is made up of the poorest and most
underdeveloped countries in the world. These countries are often located in Africa, Asia,

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and Latin America, and are heavily dependent on the core and semi-periphery for
economic survival. They are typically exploited for their resources and labor, and are
often subject to various forms of economic, political, and cultural domination by the core
and semi-periphery.

Wallerstein also maintains that the capitalist world-economy is a hierarchical and

exploitative system that has been responsible for the ongoing poverty and
underdevelopment of the periphery. He contends that the core countries have used their
economic and political power to maintain their dominance over the semi-periphery and
periphery, and that this has led to a widening gap between the rich and the poor. The
model of the modern world-system provides a comprehensive and nuanced
understanding of the dynamics of the global capitalist economy. It emphasizes the role
of the core, semi-peripheral and peripheral countries, the importance of the world
economy and the impact of the actions of one country on the entire system, and the role
of the nation-state in maintaining the global hierarchy. Using the model Wallerstein had
produced, people can understand the power dynamic and its changing shifts, such as
China becoming a big player during the 21 st century. Capitalism and its main
benefactors and sponsors can be better understood, and therefore, one can better
understand the implications of stronger countries to ones lower in the capitalist
economic food chain.

Overall, the Philippines is typically considered a peripheral or semi-peripheral

country in world-system theory. This means that its economy is relatively
underdeveloped compared to the core countries, and it is heavily dependent on exports
and foreign investment from the core countries to drive its growth.

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IV. Analysis 
Accounting for about 72% of the country’s GDP in 2017, it was found that global
trade and free trade is indeed an integral component of the Philippine economy. In fact,
the Philippine Development Plan 2017-2022 highlights global trade as a key factor of
the Philippine strategy for industrial development through market expansions and
increasing affiliations of domestic firms such as the Micro, Small, and Medium
Enterprises (MSMEs) to Global Value Chains (GVC). The Philippines has pursued
establishing trade agreements with key partners in South East Asia and this has
allowed the country to import goods from its trading partners at zero tariff rates. In this
way, the government can expect increased revenue as imports enter the domestic
market. This idea is consistent with the findings of the study of Quimba et al. (2020)
which revealed that FTA imports have a positive and significant impact on the industry
growth and labor productivity in the Philippines. Hence, this indicates that the country is
gaining benefits from the trade agreements through improvements of industry output. In
addition, the study of Guinigundo (2018) noted that free trade improved the country’s
gross domestic product (GDP) from the 1990s to the 2000s, evident with the increase of
trade openness from 88.1% to 101%. Trade openness refers to the ratio of exports plus
the imports over GDP (Stein, 2016). According to Guinigundo, the increase in GDP can
be attributed to the country’s efforts toward open trade policies that started in the 1980s.
Other indicators of the positive impacts of global trade to the Philippine economy
are international migration and the rapid growth in the information and communications
technology-business process outsourcing (ICT-BPO) services in the country. According
to the data on ICT-BPO earnings, the said industry experienced an annual growth of
more than 50% from 2006 to 2008 (Guinigundo, 2018). In fact, the Philippines has
established itself as one of the two major BPO industry centers in Asia along with India.
And because of this, the total trade of the Philippines has increased further to 101.4% in
the year 2010. Meanwhile, the United Nations emphasized the significant increase in
the rate of international migration from the Philippines from 1995 to 2017. It is worth
noting that the Philippines has been open to labor mobility since the 1970s, hence, it

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became one of the primary sources of international migrants. And through this, the
unemployment rate in the country is gradually declining from 7.5% in 2009 to 5% in
2017 (Guinigundo, 2018). However, this remains to be seen as an indication of the
existing issues on unemployment and underemployment situations in the country
because Filipinos continue to search for jobs abroad, which are perceived to offer
higher compensation or salaries and better lifestyle packages. Nevertheless, Overseas
Filipino Workers (OFWs) are now scattered geographically more than ever according to
the latest estimate of Commission on Filipino Overseas (Guinigundo, 2018).
Additionally, the profile of Filipino migrants has changed significantly, from being mostly
middle and lower skilled workers in the 1970s to professional workers, services, and
production workers since the 1990s. This resulted in a substantial increase in the
country’s GDP from 2.5% in 1990 to 9.2% in 2017, making the Philippines as the third
highest recipient country for remittances in 2017 (Guinigundo, 2018).
On the other hand, international loans through the World Bank and International
Monetary Fund is also beneficial in the Philippine economy. Since 1945, the World Bank
has worked closely with the Philippines to alleviate poverty, improve the infrastructure,
enhance education, improve the status of health and nutrition, intensify the country’s
ability to withstand climate change and other natural disasters, and to promote peace.
After the second world war, World Bank funded several constructions of hydroelectric
power stations in the country, such as the Binga Power Project in Benguet, Angat
Power Project in Bulacan, Maria Cristina Falls Hydro Power Expansion Project in Lanao
del Sur, and Manila Water Supply Project in Metro Manila (World Bank, 2021).
Additionally, the organization has also contributed greatly to the construction of physical
facilities and equipment in University of the Philippines Los Banos College of
Agriculture, which is regarded as the country’s premier institution of higher learning and
research in the field of agriculture (World Bank, 2021). And just recently, the World
Bank has approved a new project to support the competitive and resilient recovery in
the Philippines which was severely affected by a series of strong typhoons in recent
years (The World Bank, 2021). Herein, the World Bank’s Board of Executive Directors
has approved a US$600 million loan on December 10, 2021 to support the
government’s reform program towards competitive and resilient economic recovery.

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This policy loan supports the reforms on Retail Liberalization Act, which supports the
reduction in the cost of doing business and the expansion of broadband services to
promote investment in information and communications technology. These reforms are
very essential since internet access has been significant during the shifting to home-
based work of some employees and distance learning of students in the times of
pandemic (The World Bank, 2021). And as discussed above, the IMF has already
stopped lending to the Philippines. However, it is still conducting an annual check-up to
the country’s economic growth, by examining fiscal indicators and monitoring inflation
(IMF, 2008). Specifically, under the Article IV of the IMF’s Articles of Agreement, a staff
team from the organization visits the country, collects economic and financial data, and
discusses with the country leaders the economic developments and policies of the
country. Additionally, the IMF has also helped in major reforms in economic policies of
the Philippines. In 2004, power tariffs have been raised by the government, which
significantly reduced the losses of National Grid Corporation of the Philippines and
costs to taxpayers. And in 2005, the value-added-tax (VAT) expanded its coverage to
include energy products whereas in 2006, the VAT rate increased.
Lastly, the Philippines as a peripheral country has been typically characterized by
low levels of industrialization, a small manufacturing sector, and a large agricultural
sector. The country also has a relatively low level of integration into the global economy,
with a relatively small share of exports and imports as a percentage of GDP. The
Philippines' position within the world-system theory is complex and multidimensional,
and it depends on the economic and political context and the time period in question. As
of the past decade, the country has been establishing several trade agreements with
many of the key producing countries located in the Asia Pacific or South East Asia.
Establishing a connection such as this allows the Philippines to gain access to
resources being produced by semi-peripheral or even core countries, where rates for
produce imports can stand competitively with the international market. Partnerships and
deals with other countries increase and maintain the industrial output of the Philippines,
as well as providing jobs for the local economy’s health (Quimba et al., 2020). Produce
of higher quality from other nations, at similar price points, can also help with the
development of local competition regarding certain produce. The introduction of such

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into the country will force the development of local economies to remain competitive
despite heavy import influence (Flint & Taylor, 2018)
V. Conclusion 
Overall, the Philippines as a developing country surely needs integration within
the global economy in order to survive. The high rate of unemployment and
underemployment, large income inequalities, and widespread poverty in the country
accentuate the necessity to engage in global trade. Through this, the Philippines can
expand its target markets and increase revenues without the fear of overproduction.
Engaging in global trade also means more job opportunities for Filipinos in the working
class. Additionally, participating in global trade, especially in free trade areas, is a good
opportunity for business owners to specialize in a particular market, which leads to
greater efficiency in production and higher levels of innovation. Similarly, the country
also needs the expert knowledge and funding assistance from the World Bank and
International Monetary Fund. These two organizations can improve the country’s access
to world markets and facilitate its participation in the global trading system. And most
importantly, the constant exposure to natural disasters is a threat to the country’s limited
resources, so the Philippine government needs international economic cooperation in
times of national crisis.

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 VI. References

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Arandela, M. (2007). Challenges of Globalization to Filipino Families. Journal of Theology,
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Arayssi, D. (2020). The developing countries: Challenges in the global economy. SSRN
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International Monetary Fund. (2008, January 15). Philippines: Less Vulnerable and Growing
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%20Philippines%20has,Dep artment%20of%20Finance%20(DOF)
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The World Bank. (2021, December 10). World Bank approves new project to support
competitive and resilient recovery in the Philippines. World Bank.
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