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The Global Economy

The Contemporary World (Polytechnic University of the Philippines)

Studocu is not sponsored or endorsed by any college or university

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SUBJECT: The Contemporary World

WEEK 3-5: The Structures of Globalization
TOPIC: The Global Economy.
RESOURCES:
 Chapter 9 of the textbook “The Globalization of
WRITTEN REPORT ON
Economic Relations” by Istvan Benczes
THE GLOBAL ECONOMY  “The Modern World-System as a Capitalist
World Economy Production, Surplus Value and
Polarization” In World Systems Analysis: An
Introduction” pages 23 to 41 by Immanuel
Wallerstein.

Chapter 9 of The Globalization of Economic

Relations
In Partial Fulfillment of the Requirement for By: Istvan Benczes
The Contemporary World
To be reported by: Jervee A. Sison

Globalization

- the widening, deepening and speeding up of

worldwide interconnectedness in all aspects of
contemporary social life (Held, et al., 1999)

Advances in technology such as mobile phones

airplanes telephones and the Internet have made the
Submitted by: growth of transport and communication networks
NODADO, Stephanie France H. possible. Among other things, this means that people
and countries can exchange information and goods
SISON, Jervee A. more quickly and in a less complicated way, this
SUBALA, John Christian process is called globalization. It is the process by
which businesses or other organizations develop
international influence or start operating on an
Bachelor of Science in Accountancy 1 – 1 international scale. Globalization represents the
global interaction & integration of international trade,
investment, information technology and cultures
among people, companies, and government.

- a multidimensional phenomenon

It covers different aspects which can refer to

political, technical, social, cultural, legal, and
Submitted to: economic features. Economically, globalization
involves goods and services, and the economic
Dr. Aileen L. Camba
resources of capital, technology, and data.
Professor Technically, advancements in IT and the flow of
information across borders have
increased awareness among populations
of economic trends and investment opportunities. In
social terms, globalization represents greater
interconnectedness among global populations.
July 16, 2018 Culturally, globalization represents the exchange of
ideas and values among cultures, and even a trend

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toward the development of a single world
culture. Politically, globalization has shifted countries'
political activities to the global level through
intergovernmental organizations like the United
Nations and the World Trade Organization. The
United Nations is an international organization
formed in 1945 to increase political and economic
cooperation among its member countries. (UN) was
formed in the wake of World War II as a way to
reduce international tensions, promote human rights
and reduce the possibility of other large-scale
conflicts. On the other hand, The World Trade
Organization (WTO) is essentially a mediation entity
that upholds the international rules of trade between
nations. The main function of the organization is to
help producers of goods and services, exporters, and
importers protect and manage their businesses. With
regards to law, globalization has altered how
international law is created and enforced.
Economic Globalization
- refers to the increasing integration of
economies around the world, particularly through
the movement of goods, services, and capital
across borders
Economic globalization is a spread of trade,
transportation, and communication systems on a
global scale in the interest of promoting international
commerce. There are two different economies we
should know about economic globalization. These
are protectionism and trade liberalization.
Protectionism is protecting one’s economy from
foreign competition by creating trade barriers while
trade liberalization is the act of reducing trade
barriers to make international trade easier between
countries. These trade barriers are usually tariffs
which are required fees on imports or exports and
quota which is the limited quantity of a particular
product that under official controls can be produced,
exported, or imported.
- a historical process, the result of human
innovation and technological progress
In ancient times, traders traveled vast distances
to buy rare commodities such as salt, spices and
gold, which they would then sell in their home
countries.
 Gills and Thompson (2006)- migration
According to Gills and Thompson, globalization
processes have been ongoing ever since Homo
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sapiens began migrating from the African continent
ultimately to populate the rest of the world. Minimally,
they have been ongoing since the sixteen-century’s
connection of the Americas to Afro-Eurasia.
 Silk Road- best known example of old-
fashioned globalization
The Silk Road was an ancient network of trade
routes, formally established during the Han Dynasty
of China, which connected Asia, Africa, and Europe.
 Adam Smith- magnum opus, An inquiry into the
nature and causes of the wealth of nations (1776)
When he wrote this masterpiece, he considered
the discovery of America by Christopher Columbus in
1492 and the discovery of the direct sea route to
India by Vasco de Gama in 1498 as the two greatest
achievements in human history which serve as
pathways to network and trade. However, in the
course of a couple of decades these remarkable
achievements were overshadowed by the
breathtaking technological advances and
organization methods of the British Industrial
Revolution.
 1800s- industrial revolution
From the early 1800s, following the Napoleonic
wars, the industrial revolution spread to Continental
Europe and North America, too. This time period saw
the mechanization of agriculture and textile
manufacturing and a revolution in power, including
steam ships and railroads which affected social,
cultural and economic conditions.
 The British and the Dutch East India
Companies- established in 1600 and 1602,
respectively
The economic nationalism of the 17th and 18th
centuries, coupled with monopolized trade (such as
the first multinational corporations, the British and the
Dutch East India Companies, established in 1600
and 1602, respectively) did not favor, international
economic integration.
 Between 1500 and 1800- total number of ships
sailing to Asia from major European countries rose
remarkably
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The total number of ships sailing to Asia from
major European countries rose remarkably between
1500 and 1800 (in numbers: 770 in the 16 th, 3,161 in
the 17th and 6,661 in the 18th century).
 World export to world Gross Domestic Product
(GDP)
However, world export to world GDP did not
reach more than one to two per cent in that period.
Gross domestic product (GDP) is the monetary value
of all the finished goods and services produced within
a country's borders in a specific time period. GDP is
commonly used as an indicator of the economic
health of a country, as well as a gauge of a
country's standard of living.
 19th Century
The real break-through came only in the 19th
century. The annual average compound growth rate
of world trade saw a dramatic increase of 4.2 per
cent between 1820 and 1870, and was still relatively
high, at 3.4 per cent between 1870 and 1913.
 1870 to 1913- golden age of globalization
The relatively short period before World War I is
often referred to as the ‘golden age’ of globalization,
since it was characterized by relative peace, free
trade and financial and economic stability.
 1913- trade equaled to 16-17 %
By 1913, trade equaled to 16–17 per cent of
world income, due to the transport revolution:
steamships and railroads reduced transaction costs
and strengthened both internal and international
exchange.
- The phenomenon has several interconnected
dimensions such as the globalization of trade of
goods and services, the globalization of financial and
capital markets, the globalization of technology and
communication, and the globalization of production.
Transnational Corporations (TNCs)
- the major players of present-day global
economy
- the main driving forces of economic globali-
zation of the last 100 years, accounting for
roughly two-thirds of world export
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Transnational corporations (TNCs) are
incorporated or unincorporated enterprises
comprising parent enterprises and their foreign
affiliates such as Procter & Gamble and Coca-Cola
Company. A parent enterprise is defined as an
enterprise that controls assets of other entities in
countries other than its home country, usually by
owning a certain equity capital stake. A foreign
affiliate is an incorporated or unincorporated
enterprise in which an investor, who is resident in
another economy, owns a stake that permits a lasting
interest in the management of that enterprise.
Multinational Corporation has an international identity
as belonging to a particular home country where they
are headquartered. A transnational company is
borderless, as it does not consider any particular
country as its base, home or
headquarters. Transnational Corporation is a type
of multinational corporations.
Global commodity chain
- an idea that reflects upon the increasing
importance of global buyers in a world of
dispersed production
As economic integration is becoming more
intensive, production disintegrates as a result of the
outsourcing activity of multinationals (Feenstra,
1998). This move induced Gereffi (1999) to develop
the concept of global commodity chains.
A commodity chain is a process used by firms to
gather resources, transform them into goods
or commodities, and finally, distribute them to
consumers. It is a series of links connecting the many
places of production and distribution and resulting in
a commodity that is then exchanged on the world
market.
Issues about Globalization
Economic globalization fosters universal
economic growth and development but we cannot
ignore the fact that it still result into issues affecting
the society.
Capitalism
Capitalism, also known as the free-enterprise or
free-market system, is an economic and political
system in which a country's trade and industry are
controlled by private owners for profit, rather than by
the state. According to Wallerstein, capitalism is a
historical social system which created the
dramatically diverging historical level of wages in the
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economic arena of the world system. Powerful
Transnational Corporations tend to transfer
manufacturing jobs from developed nations to less
developed countries through outsourcing in order to
reduce the cost of products because economically
disadvantaged countries have less government
regulations and cheaper labor cost. Workers in these
countries work for very little money therefore they
often remain poor and sometimes they do not have
sufficient social and health insurance cover.
Capitalism is exploitative in nature which divided
society and the rich has more power over the working
class posing threats to human rights.
Contractualization applied by these corporations treat
employees unfairly in order to benefit from their work
and maximize their profit.
Income Inequality
Income inequality is the unequal distribution of
household or individual income across the various
participants in an economy. It is often presented as
the percentage of income related to a percentage of
the population. Over the past two decades, income
inequality has risen in most regions and countries.
The ratio of the richest region’s GDP per capita to
that of the poorest was only 1.1 in 1000, 2 in 1500
and still only 3 in 1820. It widened to 5 in 1871 and
stood at 9 at the outbreak of World War I. In 1950 it
climbed to 15 and peaked at 18 at the turn of the new
millennium. Less equal societies have less stable
economies. High levels of income inequality are
linked to economic instability, financial crisis, debt
and inflation.
Environmental Problems
Globalization has produced ecological problems
such as global warming, climate change, and the
abuse of natural resources. The use of airplanes,
ships and trucks to transport goods over international
borders is constantly on the increase. Manufacturing
companies and factories release chemicals into the
atmosphere. This causes more carbon dioxide to be
released into the atmosphere which in turn is the
main cause of global warming which is the gradual
increase in the overall temperature of the earth's
atmosphere generally attributed to the greenhouse
effect caused by increased levels of carbon dioxide,
chlorofluorocarbons, and other pollutants.
To be reported by: John Christian Subala
INTERNATIONAL MONETARY SYSTEMS
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Regimes - all the implicit and explicit principles,
norms, rules, and decision-making procedures
around which actors’ expectations converge
(Krasner, 1983)
International monetary system or regime
(IMS) - refers to the rules, customs, instruments,
facilities, and organizations for effecting international
payments (Salvatore, 2007).
In the liberal tradition, IMS facilitates cross-
border transactions, especially trade and investment.
However, it also reflects economic power and
interests, as money is inherently political, an integral
part of “high politics” of diplomacy (Cohen, 2000)
THE GOLD STANDARD
The gold standard functioned as a fixed
exchange rate regime, with gold as the only
international reserve. Participating countries
determined the gold content of national currencies
(fixed exchange rates). Common adherence to gold
convertibility … linked the world together through
fixed exchange rates (Bordo and Rockoff, 1996).
The modern-day IMS originated back to the early
19th century, when the UK adopted gold mono-
metallism in 1821. In 1867, the European nations &
the United States, propagated a deliberate shift to
gold at the International Monetary Conference in
Paris.
Gold - believed to guarantee a non-inflationary,
stable economic environment, a means for
accelerating international trade (Einaudi, 2001)
In 1872, Germany joined the monetary regime
with gold as standard, then France (1878), United
States (1879), Italy (1984) and Russia (1897).
Roughly 70 percent of the nations participated in the
gold standard just before World War I (Meissner,
2005).
One of the main strengths of the system was the
tendency for trade balance to be in equilibrium.
Nations with trade surpluses exports (accumulates
gold) to nations with deficits (decrease in gold
reserve). But deficit nations were enforced to initiate
serious deflationary policies. The regime was indeed
able to create stability, restore equilibrium and
provided an almost unlimited access to world finance.
World War I ended the classical gold standard.
Participating nations gave up convertibility and
abandoned gold export in order to stop the depletion
of their national gold reserves. UK attempted to
return the gold standard but did not succeed due to
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overvalued pound sterling and the emergence of
new rivals (United States and France)
1930s became the darkest period of modern
economic history. Competitive devaluations, along
with tough capital controls and the imposition of
tariffs, induced a race to the bottom. (Eichengreen
and Irwin, 2009). The deep structural changes of the
time, which were the causes and the consequences
of universal suffrage made the governments reluctant
to defend a pegging system at any cost. (Karl
Polányi, 1944). In the classical gold standard regime,
deflationary policies were endorsed without much
hesitation. After World War I, however, labourers
became more and more successful in preventing
incumbents from adopting welfare reducing austerity
measures.
THE BRETTON WOODS SYSTEM AND ITS
DISSOLUTION
Inter-war period consequences and the wish to
return to peace and prosperity impelled the allied
nations to start a new IMS in the framework of the
United Nations Monetary and Financial Conference
in Bretton Woods, New Hampshire (US), in July
1944. Delegates of 44 countries agreed on adopting
the gold-exchange standard. The US dollar was the
only convertible currency of the time, so the United
States committed itself to sell and purchase gold
without restrictions at US$35 dollar an ounce. All
other participating but non-convertible currencies
were fixed to the US dollar.
Delegates also agreed on the establishment of
two international institutions:
1. International Banks for Reconstruction
and Development (IBRD) - responsible for post-war
reconstruction
2. International Monetary Fund (IMF) -
promotes international financial cooperation and
buttress international trade. The IMF was expected to
safeguard the smooth functioning of the gold-
exchange standard by providing short-term financial
assistance in case of temporary balance of payments
difficulties.
The Bretton Woods system did not prevent
countries from running large and persistent deficits
(or surpluses) in their balance of payments and were
allowed to correct the official exchange rate in order
to eliminate deficits.
During the first few years of the new regime, US
managed to maintain a surplus in its balance of
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payments. As soon as Europe regained its pre-World
War II economic power, the external position of the
United States turned into a persistent deficit as a
natural consequence of becoming an international
reserve currency. Nevertheless, by the mid-1960s,
the dollar became excessively overvalued vis-à-vis
major currencies. As a response, foreign countries
started to deplete the US gold reserves. Destabilizing
speculations, fed by the huge balance of payments
and trade deficit, along with inflationary pressures,
forced the United States to abandon the gold-
exchange standard on 15 August, 1971.
In early 1973, industrialized countries decided to
float their currencies and intervene in financial
markets. But managed floating did not perform any
better, either that advanced countries had to interfere
on a few occasions in order to avoid calamity
The 1990s saw the triumph of the Washington
Consensus. Its programme points were advocated
and disseminated by the major international financial
institutions such as IMF. Several countries, such as
Mexico, Brazil or the East Asian tigers, deregulated
their financial sectors and fully liberalized capital
transactions. However, reforms were not
supplemented by strengthened monitoring and these
currencies were pegged to the US dollar, which
appreciated substantially during the 1990s and
caused a financial crisis that first hit Mexico in 1994
and reached East Asia in 1997–8.
EUROPEAN MONETARY INTEGRATION
In the post-World War II era, the United States
advocated an economically and militarily strong
Germany and Western Europe. It activated its post-
war reconstruction programme, the Marshall Plan, in
1948, which was administered by the Organization
for European Economic Cooperation. European
Economic Community (EEC) was established and
was the first major step towards an ever-closer union.
European six (Germany, France, Italy,
Netherlands, Belgium and Luxembourg) aimed at the
creation of a common market, where goods,
services, capital and labour moved freely but not in
the field of finance or exchange rate policies. But the
collapse of the Bretton Woods system pressured
EEC to set up a regional monetary regime—the
European Monetary System (EMS) in 1979. The
EMS was a unique system, since neither the US
dollar, nor gold could play a role in the stabilization
process of exchange rates. Instead, a symmetric
adjustable peg arrangement, the European
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Exchange Rate Mechanism, was created (Gros and something. But the good or service has a low
Thygesen, 1998). opportunity cost for other countries to import.
 It became the rationale for free trade
The success of the EMS enabled Jacques
agreements
Delors, European Commission President, to
establish the new European Economic and Monetary  He (D. Ricardo) argued that a country boosts its
Union (EMU) in the Maastricht Treaty in 1992. By economic growth the most by focusing on the
1999, the member states of EMU abandoned their industry in which it has the most substantial
currencies and had it administered by the European comparative advantage.
Central Bank (ECB).  Example: Europe was able to manufacture
cheap cloth. Portugal had the right conditions to
The first ten years of the EMU succeeded but
make cheap wine. Ricardo predicted that Europe
the global financial and economic crisis of 2008–9
posed dramatic challenges for the European Union would stop making wine and Portugal stop making
(EU). The ECB cannot bail out individual countries cloth. He was right. Europe made more money by
which have lost their monetary authority. As a trading its cloth for Portugal's wine, and vice versa. It
response to the crisis, the EU enacted a three-pillar would have cost England a lot to make all the wine it
financial rescue programme in 2010, namely: needed because it lacked the climate. Portugal didn't
1. European Financial Stability have the manufacturing ability to make cheap cloth.
Mechanism; Therefore, they both benefited by trading what they
2. European Financial Stability Facility; produced the most efficiently.
and
3. the financial assistance of the IMF. Euro Portu
pe gal
Critics say that EMU would never be able to 20 30
qualify for a well-functioning and stable monetary Clothing
hrs/unit hrs/unit
zone without a common budget of the size of federal 10 5
countries such as the United States (Feldstein, Wine
hrs/unit hrs/unit
1997). The future of the EMU depends on the
willingness of member states to agree on more  Europe produces clothes more efficient than
fundamental changes in the governance of the
Portugal and Portugal produces wines more efficient
Eurozone.
than England. In this case, clothes and wine are the
To be reported by: Stephanie France H. Nodado absolute advantage of Europe and Portugal,
respectively.
INTERNATIONAL TRADE AND TRADE
POLICIES Absolute Advantage Theory
 is the ability of a
Paul Samuelson country/individual/company/region to produce a good
 gave one proposition that is both valid and non- or service at low cost price per unit than the cost that
trivial any other country produces on the same good or
 He gave David Ricardo’s Comparative service
Advantage Theory  anything that a country does more efficiently
than other countries
Comparative Advantage Theory
 Comparative advantage is when a country Competitive Advantage Theory
produces a good or service for a lower opportunity  Competitive advantage is what a country,
cost than other countries. Opportunity cost measures business, or individual does that provide a better
a trade-off. A nation with a comparative advantage value to consumers than its competitors. There are
makes the trade-off worth it. The benefits of buying three strategies companies use to gain a competitive
their good or service outweigh the disadvantages. advantage. First, they could be the low-cost provider.
The country may not be the best at producing

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Second, they could offer a better product or service.
Third, they could focus on one type of customer.
Comparative advantage causes Free Trade.
Alexander Hamilton and Friedrich List stated
that the Comparative Advantage Theory can hinder
the long-term development prospects of the country
producing the lower value added products.
Friedrich List developed the INFANT INDUSTRY
ARGUMENT which gave his insights on how the
national industry can protect its own economy. The
Infant Industry Argument states that …
 developing countries are justified to put tariffs
on imports if they are seeking to develop new
industries and diversify their economy
By the regulation of tariffs, imported goods are
taxed in order to minimize the trade with international
countries, especially with developed nations. This
also promotes the development of local products that
may contribute to establish new industries and the
progress in the nation’s economy.
 trade patterns should not be considered static
Some people might use trade patterns as a basis
for the day-to-day trading. They should see to it that
these are dynamic and has the capacity to change
because of different factors such as the supply,
demand, environmental changes, and etc.
 through temporarily restricting the free flow of
goods, a national industry can be established,
thereby fostering long term economic growth and
political power
Emmanuel (1972) developed the concept of
UNEQUAL EXCHANGE
 is a fundamental and systemic distinguishing
characteristic of modern world economy
 The social division of labour contributes to the
economic development of the core and hinders
Britain
development at the periphery
in its extreme form of de-linking, i.e. a total breaking
up of the ties between the subordinated developing
economies and the core.
“International trade can trigger tensions not
just between nations, but also within a particular
country.”
UNILATERAL TRADE ORDER
In seventeenth and eighteenth century Europe
international trade was basically a means to
accumulate surplus (gold reserves) in the balance of
payments by stimulating export and restricting import.
Monarchs from Portugal to England used gold
reserves to
 finance wars; and
 consolidate authority over domestic
constituents
The surge of international trade arrived only
with Europe’s industrial revolution and the
consequent repeal of the British Corn Laws in 1846
in particular.
 Industrialists triumphed over landowners and
farmers, opening the way for further industrialization
in Britain. The so-called Cobden-Chevalier treaty of
1860 allowed the UK and France to specialize in
commodities based on their respective comparative
advantages and to achieve further advances in
industrialization.
 Helped to avoid the eruption of an abrupt war
between the two countries.
Most Favoured Nation (MFN) Principle
 States that any negotiated reciprocal tariff
reductions between two parties should be extended
to all other trading partners without conditions
 (Lampe, 2008) Overall average tariffs
declined…
1859 1875
16.3% 6.3%

CORE – best in consumers of primary France 11.8% 6.5%

commodities and producers of manufactured articles
PERIPHERY – worst of both worlds, as Germany 7.1% 2.5%
consumers of manufactures and as producers of raw
materials Austria-Hungary 7.3% 3.6%

According to Amin (1993), if the world economy is

such that it benefits core countries at the expense of World War I, however, was a dramatic blow to
the periphery, the latter should adopt protectionism free trade.

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Protectionism, in turn, was detrimental to 3. Developed countries agreed to eliminate

development, peace and stability (Ruggie, 1982). tariffs on imports of developing countries to boost
Two rounds of World Economic Conferences in their economies.
1927 and 1933 failed to deliver tariff reductions and
exchange rate stabilization because of the
unwillingness of the United States to take the role of PROS: CONS:
the hegemon as a successor of a weakened Great
Britain. •Reduced tariffs •Destroy some
domestic industries
•Promoted world
The US Reciprocal Trade Agreements Act in
peace •High
1934
unemployment
 put a stop to any further decline in international
•Inspired other
trade trade agreements •Reduced the rights
 allowed the president to determine trade of a nation to rule its
policies and eased the pressure put on the congress •Improved own people
for protection communication
 a return to the principle of MFN •Destabilize
 provided a solid base for a renewed small, traditional
international trade regime following World War II economies

•Farmers that stay

MULTILATERALISM: FROM THE GATT TO WTO often grow opium, coca
or marijuana, just
 Dollar became the world currency, backed by because they can't grow
2/3 of the world’s gold reserves traditional crops and
stay in business.
 United States is the largest aid donor; wherein,
Afghanistan is its top recipient.
The major outcomes of the trade negotiations
General Agreement on Tariffs and Trade were the agreements on
(GATT)
 trade-related investment measures (TRIMs),
 was the first worldwide multilateral free trade
agreement  trade in services (GATS); and

 started June 30, 1948 until January 1, 1995  trade related aspects of intellectual property
rights (TRIPs).
 The purpose of GATT was to eliminate
harmful trade protectionism. That had sent global World Trade Organization (WTO)
trade down 65% during the Great Depression. By
removing tariffs, GATT boosted international trade.  January 1, 1995 – Uruguay Round of GATT
It restored economic health to the world after the
devastation of World War II.  The World Trade Organization is a global
organization made up of 164 member countries that
 3 PROVISIONS: deals with the rules of trade between nations. Its goal
is to ensure that trade flows as smoothly and
1. each member must confer the most predictably as possible.
favored nation status to every other member
DEVELOPING COUNTRIES AND
2. prohibited restriction on the number INTERNATIONAL TRADE
of imports and exports

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Developing nations did not participate actively in
multilateral trade negotiations for a relatively long
time. Apart from the so called East Asian newly
industrializing countries, which adopted an
outward-oriented development strategy, most of the
developing countries did not manage to integrate into
the post-World War II trading system successfully. On
the one hand, they followed an inward-looking,
import-substitution industrialization strategy, which
did not favour trade openness (Findlay and
O’Rourke, 2007)
Advanced economies were also reluctant to open
their markets to commodities such as textile or
agriculture products in which developing countries
had a natural comparative advantage.
United Nations Conference on Trade and
Development (UNCTAD)
 was established with the joint effort of the
developing world.
 The aim of UNCTAD was to promote trade and
cooperation between the developing and the
developed nations.
The change in the behaviour of developing
countries arrived with the Uruguay Round. Originally,
the round was meant to be a grand bargain between
developed and developing economies (Ostry, 2002).
The former were expected to open their markets,
especially to agricultural and textile products,
whereas the latter accepted the new regulation on
intellectual property rights and services. While
developing countries have opened up their service
markets, their export of agricultural products is still
blocked by advanced nations. Agriculture has a share
of one-third to a half of the total economic output in
most developing countries. Without the liberalization
of agriculture, it is simply impossible for developing
nations to fully integrate into the global economy.
Africa is the potential loser of the Uruguay Round.
Khor (1995) views the WTO as the means by
which industrialized countries can gain access to the
markets of developing countries.
All in all, the current trade regime and especially
its main propagator, the WTO, is heavily criticized for
‘a striking asymmetry. National boundaries should
not matter for trade flows and capital flows but should
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be clearly demarcated for technology flows and labor
flows … This asymmetry … lies at the heart of
inequality in the rules of the game for globalization’
(Nayyar, 2002: 158)
The Modern World System: Capitalist
Agriculture and the Origins of the European
World Economy in the Sixteenth Century
To be reported by: Jervee A. Sison
The world systems theory, developed by
sociologist Immanuel Wallerstein, is an approach to
world history and social change that suggests there
is a world economic system in which some countries
benefit while others are exploited. The world systems
theory is established on a three-level hierarchy
consisting of core, periphery, and semi-periphery
areas. This theory emphasizes the social structure of
global inequality.
Core countries are dominant capitalist countries
that exploit peripheral countries for labor and raw
materials. They are strong in military power and not
dependent on any one state or country. They serve
the interests of the economically powerful. They are
focused on higher skill and capital-intensive
production. Core countries are powerful, and this
power allows them to pay lower prices for raw goods
and exploit cheap labor, which constantly reinforces
the unequal status between core and peripheral
countries.
The first core region was located in northwestern
Europe and made up of England, France, and
Holland. Today, the United States is an example of a
core country. The U.S. has large amounts of capital,
and its labor forces are relatively well paid.
The world-systems analysis defines semi-
periphery regions as the primary structural elements
in the economy of the world. Currently, all semi-
periphery areas are industrialized, and they
contribute to the manufacture and export of various
commodities. The semi-periphery level plays a
significant role when it comes to stabilizing world
systems since it facilitates interactions and
connections between the high-income states to the
low-income nations by introducing a different level in
the hierarchy of the world systems. These regions
are essential elements in the global trade system
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since they alleviate the pressure which the core
regions exert on the periphery areas and vice versa.
Also referred to as the middle-class, they exist to
divide the economic power between the periphery
and core areas.
These nations are characterized by extensive
lands as demonstrated by Indonesia, Mexico, Iran,
Brazil, India, China, and Argentina. Although more
land means an increased market share and size,
there are other semi-peripheral regions smaller in
sizes like Greece, Poland, and Israel.
Periphery countries lack a strong central
government and possesses a disproportionately
small share of the world's wealth. These areas are
less developed than the core and the semi-periphery.
These countries export raw materials to the core
countries; are often dependent on more developed
nations for capital and; have underdeveloped
industry. These countries also have low-skill, labor-
intensive production, or in other words, cheap labor.
Periphery countries may have an unstable
government, inferior technologies, and poor health
and educational systems. At times, the exploitations
of these countries with regards to cheap labor,
agriculture, and natural resources may help the core
countries remain wealthy. Periphery countries are
commonly also referred to as third-world countries.
Eastern Europe and Latin America were the first
peripheral zones. An example nowadays is Cape
Verde, a chain of islands off the west coast of Africa.
World-economy- is a large geographic zone
within which there is a division of labor and hence
significant internal exchange of basic or essential
goods as well as flows of capital and labor.
The term world economy refers to all of the
economic activity within each country and between
countries around the world. The world
economy or global economy is considered as the
international exchange of goods and services that is
expressed in monetary units of account (money).
Capitalist system- the system gives priority to
the endless accumulation of capital.
Endless accumulation means that people and
firms are accumulating capital in order to accumulate
still more capital, a process that is continual and
endless. A capitalist economic system is one
characterized by free markets and the absence of
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government intervention in the economy. In practice a
capitalist economy will need some government
intervention, primarily to protect private property. This
system is consist of various features such as
economic freedom (individuals are free to set up
business and provide goods and services they want),
consumer sovereignty (consumers are free to decide
which goods and services to purchase), limited
government interventions (government intervention
are limited to protection of private property and
provision of public goods), finance sector (capitalism
requires a developed banking and financial system
which can provide loans to companies and banking
services to households), profit motive (is seen as
important for enabling an efficient distribution of
resources and encouraging innovation and
responsive markets), market forces (allocation of
goods is based on demand and supply), flexible labor
markets (easy to hire and fire workers), and free
trade (low tariff barriers to encourage international
trade).
Capitalist world-economy- a collection of many
institutions, the combination of which accounts for its
processes, and all of which are intertwined with each
other.
The basic institutions are the market, or rather
the markets; the firms that compete in the markets;
the multiple states, within an interstate system; the
households; the classes; and the status-groups. They
are all institutions that have been created within the
framework of capitalist world-economy.
Market- is both a concrete local structure in
which individuals or firms sell and buy goods, and a
virtual institution across space where the same kind
of exchange occurs.
A market is a medium that allows buyers and
sellers of a specific good or service to interact in
order to facilitate an exchange. This type of market
may either be a physical marketplace where people
come together to exchange goods and services in
person, as in a bazaar or shopping center, or a virtual
market wherein buyers and sellers do not interact, as
in an online market. Technically speaking, a market is
any medium through which two or more parties can
engage in an economic transaction, even those that
do not necessarily need to involve money. A market
transaction may involve goods, services, information,
currency or any combination of these things passing
from one party to another in exchange for one of
these or another combination.
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Firms- the main actors in the market
A firm is a business organization, such as
a corporation, limited liability company or partnership
that sells goods or services to make a profit. Firms
are normally the competitors of other firms operating
in the same virtual market. They are also in conflict
with those firms from whom they purchase inputs and
those firms to which they sell their products.
Core-periphery- the degree of profitability of the
production processes.
The center–periphery (or core–periphery) model
is a spatial metaphor which describes and attempts
to explain the structural relationship between the
advanced or metropolitan ‘center’ and a less
developed ‘periphery’, either within a particular
country, or (more commonly) as applied to the
relationship between capitalist and developing
societies. The center–periphery model thus suggests
that the global economy is characterized by a
structured relationship between economic centers
which, by using military, political, and trade power,
extract an economic surplus from the subordinate
peripheral countries. One major factor in this is the
inequality between
wage-levels between
core and periphery,
which make it profitable
for capitalist enterprises
to locate part or all of
their production in
underdeveloped regions.
The extraction of profit depends on that part of the
cost of the reproduction of the labor-force that is not
met by wages being met in the non-capitalist sector.
Thus, according to proponents of the core–periphery
model, the appearance that capitalism is developing
traditional and backward societies by locating
enterprises in underdeveloped regions masks the
structural relationship by which capital develops and
prospers at the expense (or progressive
underdevelopment) of non-capitalist economies.
To be reported by: Stephanie France H. Nodado
The world systems theory, as defined by Immanuel
Wallerstein in “World Systems Analysis,” is the
argument that the social reality within which we live
and which determines what our options are has not
been the multiple national states of which we are
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citizens, but something larger, which we call a world-
system (x),” World society models shape nation-state
identities, structures, and behavior through worldwide
cultural and associated processes (Meyer, Thomas,
& Ramirez, p.84). The rise of human development at
the global level was intensified by the aftermath of
World War II and the Cold War (Meyer p. 85). This
world system is composed of core, periphery, and
semi-periphery countries.
Whether or not a nation is considered a core or a
periphery country is directly related to the degree of
profitability of the production process (Wallerstein
p.28). Periphery countries supply core countries with
cheap labor and resources, while core countries reap
majority of the profits (Wallerstein p.28). In this way,
an unequal exchange of capital from politically weak
regions to politically strong regions occurs
(Wallerstein p. 28).” Semi-peripheral states have a
mix of core and periphery production, and are under
constant pressure to prevent themselves from
slipping into the periphery, while simultaneously
attempting to advance towards the core status
(Wallerstein p. 29). Historically, this system has
caused discontent amongst many periphery
countries, who feel the sting of this exploitative
system.
SEMI-PERIPHERY
 Semi-peripheral states have a mix of core and
periphery production, and are under constant
pressure to prevent themselves from slipping into the
periphery, while simultaneously attempting to
advance towards the core status (Wallerstein p. 29)
 In the beginning of the twenty-first century,
some obvious countries to be labeled semiperipheral
are South Korea, Brazil, and Indiacountries with
strong enterprises that export products (for example
steel, automobiles, pharmaceuticals) to peripheral
zones, but that also regularly relate to core zones as
importers of more "advanced" products.
A major leading industry will be a major
stimulus to the expansion of the world-economy and
will result in considerable accumulation of capital.
HOUSEHOLD
 consists of three to ten persons
 they pool multiple sources of income to survive
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 Households are quite different from clans or
tribes or other quite large and extended entities,
which often share obligations of mutual security and
identity but do not regularly share income.
5 KINDS OF INCOME:
1. WAGE INCOME
 is the payment (usually in money form) by
persons outside the household for work of a member
of the household that is performed outside the
household in some production process. Wage-
income may be occasional or regular. It may be
payment by time employed or by work accomplished
(piecework)
 Common for adult male aged 14-18 years old to
60-65 years old.
2. SUBSISTENCE ACTIVITY
 We usually define this type of work too
narrowly, taking it to mean only the efforts of rural
persons to grow food and produce necessities for
their own consumption without passing through a
market
 Common for adult women, children, elders
4. RENT
 Rent can be drawn from some major capital
investment (offering urban apartments for rent, or
rooms within apartments) or from locational
advantage (collecting a toll on a private bridge) or
from capital ownership (clipping coupons on bonds,
earning interest on a savings account). What makes
it rent is that it is ownership and not work of any kind
that makes possible the income.
5. TRANSFER PAYMENTS
 defined as income that comes to an individual
by virtue of a defined obligation of someone else to
provide this income or transfer payments may occur
through the efforts of the state (in which case one's
own money may simply be returning at a different
moment in time), or through an insurance scheme (in
which one may in the end benefit or lose), or through
redistribution from one economic class to another.
TWO MAJOR VARIETIES OF HOUSEHOLD:
1. Proletarian Household

 Example: When someone cooks a meal or  Households where wage-income accounts for
washes dishes at home, this is subsistence 50% or more of the lifetime income
production. When a homeowner assembles furniture
bought from a store, this is subsistence production.  receives the absolute minimum wage
And when a professional uses a computer to send an
e-mail which, in an earlier day, a (paid) secretary 2. Semi-proletarian Household
would have typed, he or she is engaged in
subsistence production.  Households where it accounts for less than the
proletarian household’s dependency on wage-income
 Common for adult women, children, elders
 receives below the absolute minimum wage
3. PETTY COMMODITY
TWO PRESSURES ON SEMI-PROLETARIAN
 defined as a product produced within the HOUSEHOLD
confines of the household but sold for cash on.a
wider market. 1. Wage-workers seek to be
“proletarianized” because proletarian household
 Example: When a small boy sells on the street are better paid.
cigarettes or matches one by one to consumers who
cannot afford to buy them in the normal quantity that 2. Pressure on the employers
is packaged, this boy is engaged in pettycommodity
production, the production activity being simply the
disassembly of the larger package and its transport To be reported by: John Christian Subala
to the street market.
CLASSES IN A CAPITALIST SYSTEM

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Classes are persons who are differently located
in the economic system with different levels of
income who have differing interests. For example, it
is in the interest of workers to seek an increase in
their wages, and it is in the interest of employers to
resist these increases. Individuals who wish to be
class-mobile often find that they must withdraw from
the households in which they are located and locate
themselves in other households, in order to achieve
such an objective.
STATUS GROUPS OR IDENTITIES
Classes however are not the only groups within
which households locate themselves. They are also
members of status-groups or identities.
1. Status-groups - one is emphasizing how
they are perceived by others, a sort of objective
criterion
2. Identities - one is emphasizing how they
perceive themselves, a sort of subjective criterion.
Status-groups or identities are ascribed labels,
such as races, ethnic groups, religious communities,
and also genders and categories of sexual
preferences. Most of these are often alleged to be
anachronistic leftovers of pre-modern times but, in
fact, are is very much a part of modernity. Far from
dying out, they are actually growing in importance as
the logic of a capitalist system unfolds further and
consumes us more and more intensively.
HOMOGENIZATION
If we argue that households locate themselves in
a class, and all their members share this location, is
this equally true of status-groups or identities?
There’s a pressure to be part of a single status-group
or identity especially to persons who are marrying.
This pressure is felt first of all by persons who are
marrying. But the modern world-system and the
ignorance on status-group or identity have led to
mixing of original identities and emergence of new
ones.
Why is it so important for households to maintain
singular class and status-group identities, or at least
pretend to maintain them? Such a homogenization
aids in maintaining the unity of a household as an
income-pooling unit and in overcoming any
centrifugal tendencies that might arise because of
internal inequalities in the distribution of consumption
and decision making.
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Households serve as the primary socializing
agencies of the world-system. They seek to teach us,
and particularly the young, knowledge of and respect
for the social rules by which we are supposed to
abide.
What however determines how the households
will socialize their members? A household that is
certain of its status-group identity-its nationality, its
race, its religion, its ethnicity, its code of sexuality-
knows exactly how to socialize its members. One
whose identity is less certain but that tries to create a
homogenized, even if novel, identity can do almost
as well. A household that would openly avow a
permanently split identity would find the socialization
function almost impossible to do and might find it
difficult to survive as a group.
SOCIALIZATION OF HOUSEHOLD MEMBERS
Socialization results in the acceptance of the
very real hierarchies that are the product of the
system and internalization of the myths, the rhetoric,
and the theorizing of the system. Households also
socialize members into rebellion, withdrawal, and
deviance. This anti-systemic socialization can be
useful to the system by offering an outlet for restless
spirits, provided that the overall system is in relative
equilibrium.
UNIVERSALISM AND RACISM & SEXISM
Universalism means in general the priority to
general rules applying equally to all persons, and
therefore the rejection of particularistic preferences in
most spheres. For example, the assigning of persons
to positions on the basis of their training and
capacities (a practice otherwise known as
meritocracy); on households, marriage should be
contracted for reasons of "love" but not those of
wealth or ethnicity or any other general particularism;
on state, it means such rules as universal suffrage
and equality before the law.
Universalism is a positive norm (most people
assert their belief in it and claims that it is a virtue).
Racism and sexism are negative norms (most people
deny their belief in them). Almost everyone declares
that they are vices, yet nonetheless they are norms.
But racism and sexism are observed at least as high
as (in fact for the most part much higher than) the
virtuous norm of universalism.
Racism and sexism (Anti-universalism) or the
active institutional discrimination against all the
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persons in a given status-group or identity. For each 1. On the board, four pictures will be
kind of identity, there is a social ranking. It can be a shown to the students. All of these have something in
crude ranking, with two categories, or elaborate, with common.
a whole ladder. But there is always a group on top in
2. The chosen student is tasked to
the ranking, and one or several groups at the bottom.
determine and guess the “common word”.
We are all quite familiar with the worldwide
Rules:
rankings within the modern world-system: men over
 If the player guessed the wrong answer,
women, Whites over Blacks (or non-Whites), adults
over children (or the aged), educated over less another player will be chosen.
educated, heterosexuals over gays and lesbians, the  There are 3 available life-lines for each round,
bourgeois and professionals over workers, urbanites namely:
over rural dwellers. o Call A Friend
- The player is allowed to ask help from only one
WHY ARE THEY IMPORTANT? of his or her friends.
Universalism is believed to ensure relatively
competent performance (a more efficient world-
economy), which in turn improves the ability to o Ask The Class
accumulate capital. That’s why, normally those who - The player is allowed to ask help from 3 of
control production processes push for such his/her classmates which will be chosen through
universalistic criteria. random counting.

Racism, sexism, and other anti-universalistic o Drop 2 (for words with up to 6 letters) or Drop 4
norms perform equally important tasks in allocating (for words with more than 6 letters)
work, power, and privilege within the modern world-
- The reporters will reveal 2 or 4 letters for the
system. These norms exist to justify the lower
ranking, to enforce the lower ranking, and perversely word that the class is guessing.
even to make it somewhat acceptable to those who Prize:
have the lower ranking.  Choko-choko or Choco Krinkles for each
correct answer.
They justify the polarization of the world -system.
Since polarization has been increasing over time,
racism, sexism, and other forms of anti-universalism 2. Competitive Jack-En-Poy (optional)
have become ever more important, even though the
political struggle against such forms of anti- 3. Quiz
universalism has also become more central to the
functioning of the world-system. The bottom line is 1. It refers to the increasing integration of
that the modern world- system needs the economies around the world, particularly
simultaneous existence, propagation, and practice of through the movement of goods, services,
both universalism and anti- universalism. and capital across borders.
2. It was the result of the Uruguay Round of the
ACTIVITY General Agreement on Tariffs and Trade.
1. 4 Pics, 1 Word 3. It is both a concrete local structure in which
individuals or firms sell and buy goods, and a
4Pics, 1 Word is a word-guessing game. This virtual institution across space where the
activity is divided into three (3) rounds. Each round is same kind of exchange occurs.
administered by each member before s/he starts his 4. This historic event brought an end to the
or her report. classical gold standard.
Materials needed: 5. This area lacks a strong central government
 Paper and pen and possesses a disproportionately small
share of the world's wealth.
Player/s:
 Student (based on random counting) 6. TNC –

Mechanics:

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 lOMoARcPSD|21211106

7. GATT –

8. IMF –

9. IBRD –

10. WTO –

11. to 13.5. Differentiate the core and the

periphery on your own words.
13.5 to 15. Give two kinds of income and explain
each on your own words.
16. to 20. What is your own stance with the
statement “The global free trade has
done more harm than good.”

Answers:
1. Economic Globalization
2. World Trade Organization or WTO
3. Market
4. World War I
5. Periphery Areas
6. Transnational Companies
7. General Agreement on Tariffs and Trade
8. International Monetary Fund
9. International Banks for Reconstruction and
Development
10. World Trade Organization
11. to 20. Answers may vary

Bibliography

(2013, May 05). Retrieved July 15, 2018, from

https://www.youtube.com/watch?v=cijnV8P5UHE

Amadeo, K. (n.d.). The First Global Trade

Agreement Saved Us From the Depression.
Retrieved from https://www.thebalance.com/gatt-
purpose-history-pros-cons-3305578

Amadeo, K. (n.d.). What Really Makes One

Country Better Than Another? Retrieved from
https://www.thebalance.com/comparative-advantage-
3305915

Benczes, István. (2014). The globalization of economic relations. 133-150. 10.4135/9781473906020.n9.

Pettinger, T. (n.d.). Infant Industry Argument. Retrieved from

https://www.economicshelp.org/blog/glossary/infant-industry-argument/

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 lOMoARcPSD|21211106

Steif, C. (n.d.). How the Core-Periphery Theory Divides Up the World's Countries. Retrieved from
https://www.thoughtco.com/core-and-periphery-1435410

Wallerstein, Immanuel. 2004. The Modern World-

System as a Capitalist World Economy Production,
Surplus Value and Polarization." In World Systems
Analysis: An Introduction. Durham and London: Duke
University Press, pp. 23-41.

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