Lecture Notes

THE GLOBALIZATION OF THE WORLD ECONOMIC

The International Monetary Fund (IMF) regards “Economic Globalization as a historical process
representing the result of human innovation and technological progress. It is characterized by the
increasing integration of economics around the world through the movement of goods, services and
capital cross borders. These changes are the products of people, organizations, institutions and
technologies. As with all other process of globalization, there are qualitative and subjective element in
this definition. How does one define “increasing integration”? when is it considered that trade has
increased? Is there a particular threshold? The World Bank in the other hand, as an international
development organization owed by 189 countries. Its role is to reduce poverty by lending money to the
government of the poorer members so that they can improve their economies and the standard of living
of their people. Since 1947, the World Bank has funded over 12,000 development projects via traditional
loans, interest free credits, and grants.

Even well the IMF and ordinary people grapple with the difficulty of arriving at precise
definitions of globalization they usually agree that a drastic economic change is occurring throughout
the world. According to the IME, the value of trade (goods and services) as a percentage of world GDP
increased from 42.1% in 1980 to 62.1% in 2007.8 Increased trade also means that investments are
moving all over the world at faster speeds. According to the United Nations Conference on Trade» and
Development (UNCTAD), the amount of foreign direct investments flowing across the world was US$ 57
billion in 1982. By 2015, that number was $1.76 trillion.' These figures represent a dramatic increase in
global trade in the span of just a few decades. It has happened not even after one human lifespan!

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

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

INTERNATIONAL TRADING SYSTEM

International trading systems are not new. The Silk Road is the oldest known international trade route. It
had a network of routes that connected different parts of the ancient world from China to what is the
Middle East today and to Europe. It was called such because one of the most profitable products traded
through this network was silk which was highly prized, especially in the area that is now the Middle East
as well as in the West (today's Europe). When the Han dynasty of China opened trade to the West in 130
BCE, traders utilized the Silk Road regularly. This continued until the Ottoman Empire closed it in 1453
BCE.

Although the Silk Road was considered international, its not exactly "global," as it did not include routes
to the Ameris continents. Thus, this results in the question: "When did economic globalization start?"
this was addressed by historians Dennis O. Flynn and Arthuro Giraldez, stating that globalization began
when “All important exchange products continuously—both with each other directly and indirectly via
other continents—and in values, sufficient generate crucial impacts in all trading partners”. Flynn and
Giraldez trace this back in 1571 with the establishment of the galleon trade that connected Manila in the
Philippines and Acapulco in Mexico. This was the first time Americans were directly connected to Asian
trading routes. For Filipinos, as crucial to note that economic globalization began on the country’s
shores.

The galleon trade took place during the age of mercantilism. During the 16 th century until the 184th
century, countries, mainly in Europe, competed with one another to sell more goods in order to increase
their country's income (which was soon termed monetary reserves). These regimes, particularly the
monarchies, applied various ways to defend their products from competition who sold goods at cheap
prices. They imposed high tariffs, prohibited colonies from trading with other countries, limited trade
channels and subsidized exports. Therefore, mercantilism was also global trade system that had multiple
restrictions.

A more open trade system emerged in 1867 when, following the lead of the United Kingdom, the United
States and other European nations adopted the gold standard at an international monetary conference
in Paris. Its overall purpose was to establish a common system that would enable more efficient trade
and at the same time, prohibit the isolationism of the mercantilist era. As a result, the countries
developed a common basis for currency prices as well as a fixed exchange rate system that are all based
on the value of gold.

The gold standard, though making trade easier, was nonetheless an extremely limiting system because it
required governments to back their currencies with set gold reserves.

The First World War forced countries to use their gold reserves to support their armies; thus, several
were obliged to abandon the gold standard. Since European countries had limited gold reserves, they
adopted floating currencies that were no longer redeemable in gold.

In the 1920s until the 1930s, a global economic crisis occurred called the Great Depression. This
significantly depleted government resources, which led to the difficulty of going back to a pure standard.
This economic depression was considered the worst and longest experienced by the West. Some
economists argued that it was largely caused by the gold standard as it limited the amount of circulating
money; therefore, reduced demand and consumption. If governments could only spend money that was
equivalent to gold, its capacity to print money and increase the money supply was severely curtailed.

According to Barry Eichengreen, an economic historian, the United States began to recover when it
abandoned the gold standard. The US government was able to free up money to spend on reviving the
economy. Other major industrialized countries followed suit during the height of the Second World War.

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

THE BRETTON WOODS SYSTEM

Following the two world wars, international leader endeavored to establish a global economic system
that would guarantee longer-lasting global peace. They believed that one of the ways to achieve this
goal was to set up a network of global financial institutions that would promote economic
interdependence and prosperity. Thus, during the 1944 United Nations Monetary and Financial
Conference, the Bretton Woods system was inaugurated with the goal of preventing past catastrophes
from happening again and impacting international connections.

It was the ideas of John Maynard Keynes that greatly influenced the Bretton Woods system. The British
economist believed that a country experiences economic crises not when it does not have sufficient
funds; rather, it happens when money is not being spent; thus, moved. When economies slow down
according to Keynes, governments have to reinvigorate market with infusions of capital. This active
participation of governments in managing economic crises became the foundation for what would be
called a system of global Keynesianism.

Delegates at Bretton Woods agreed to create two financial institutions. The first was the International
Bank for Reconstruction and Development (IBRD) or the World Bank, the one responsible for funding)
postwar reconsfruction projects. It was a critical institution at a time when many of the world's cities
had been destroyed by the war. The second institution was the International Monetary Fund (IMF) the
global lender of last resort to prevent individual countries from spiraling into credit crises. If economic
growth in a country slowed down because there was not enough money to stimulate the economy, the
IMF would step in. To this day, both institutions remain key players in economic globalization.

Shortly after Bretton Woods, various countries also committed themselves to further global economic
integration through the General Agreement on Tariffs and Trade (GATT) in 1947. GATT s main objective
was to reduce tariffs and other hindrances to free trade.

NEOLIBERALISM AND ITS DISCONTENTS

From the mid-1940s until the early 1970s, global Keynesianism was at its pinnacle. Governments
pumped money into their economies during this time, thus allowing consumers to buy more products; in
turn, increase the demand for such. As the demand grew, so did the cost of the products. This increase
in prices was tolerated by Western and certain Asian economies, such as Japan, because it resulted in
general economic expansion and lower unemployment. The notion was that when prices rose,
businesses would make more money and be able to employ more people. According to Keynesian
economists, these were necessary trade-offs for economic progress.

In the early 1970s, however, the price of oil rose sharply as a result of the Organization of Arab
Petroleum Exporting Countries' (OAPEC, the Arab member-countries of the organization of Petroleum
Exporting Countries or OPEC) imposition of an embargo in response to the decision of the United States
and other countries to resupply the Israeli military with the needed arms during the Yom Kippur War.
Arab countries also used the embargo to stabilize their economies and growth. The "oil embargo"
affected the Western economies that were reliant on oil." To make matters worse, the stock markets
crashed from 1973 to 1974 after the United States stopped linking the dollar to gold, therefore,
effectively ending the Bretton Woods system." The result was a phenomenon that Keynesian economics
could not have predicted-a phenomenon called stagflation, in which a decline in economic growth and
employment (stagnation) takes place alongside a sharp increase in prices (inflation).

Around this time, a new form of economic thinking was beginning to challenge the Keynesian orthodoxy.
Economists such as Friedrich Hayek and Milton Friedman argued that the governments' practice of
pouring money into their economies had caused inflation by increasing the demand for goods without
necessarily increasing the supply. More profoundly, they argued that government intervention in
economies distorts the proper functioning of the market.

Economists like Friedman used the economic turmoil to challenge the consensus around Keynes' ideas.
What emerged was a new form of economic thinking that critics labeled neoliberalism, From the 1980s
onward, neoliberalism became the codified strategy of the United States Treasury Department, the
World Bank, the IMF, and eventually the World Trade Organization (WTO)-a new organization founded
in 1995 to continue the tariff reduction under the GATT. The policies they forwarded came to be called
the Washington Consensus.

From the 1980s through the early 2000s, the Washington Consensus. controlled global economic
policies. Its proponents argued that government expenditure should be kept to a bare minimum in order
to minimize debt. They also advocated 105 the privatization of government-run services such as water
electricity, communications, and transportation, thinking that the tree market can deliver the best
results. Finally, they pressured governments, particularly in the developing world, to reduce tariffs and
open up their economies, arguing that it is the quickest way to progress. Although proponents of the
Washington Consensus acknowledged that particular industries would be harmed o would die in the
process, they believed that this "shock therapy was necessary for long-term economic success.

Neoliberalism's attraction was in its simplicity. Its proponents, such as Ronald Reagan of the United
States and Margaret Thatcher of the United Kingdom, justified their cuts in government expenditures by
equating national economies to homes. Thatcher, specitically, presented herself as a mother who
controlled expenditures in order to lower the national debt.

However, the comparison has a flaw in that governments are not households. For example,
governments have the ability to print money, whereas households do not. Furthermore, regular taxing
systems provide governments with a regular stream of revenue, allowing them to pay and restructure
debts in a timely manner.

In spite of neoliberal politicians, such as Thatcher and Reagan experiencing initial success, the
Washington Consensus flaws became apparent almost quickly. Post-communist Russia is an excellent
early example. After Communism had collapsed in the 1990s, the IMF called for the immediate
privatization of all government industries. The IMF hoped that by doing so, corrupt bureaucrats would
be removed from these industries and that they would be passed on to more active and independent
private investors. What happened, however, was that only individuals and groups who had accumulated
wealth under the previous communist order had the money to purchase these industries. In some cases,
the economic elites relied on easy access to government funds to take over the industries. This practice
established an oligarchy that continues to rule the Russian economy today.

THE GLOBAL FINANCIAL CRISIS AND THE CHALLENGE TO NEOLIBERALISM

Russia's case was just one example of how the "shock therapy' of neoliberalism did not lead to the ideal
outcomes predicted by economists who believed in perfectly free markets. The greatest recent
repudiation of this thinking was the global financial crisis of 2008-2009.

Neoliberalism came under significant strain during global financial crisis of 2007-2008 when the world
experiences the greatest economic downturn since the Great Depression The crisis can be traced back to
the logos when the United States systematically removed various banking and investing restrictions.

Regulations continued to decrease into the 2000s, which re leading to a looming crisis. Government
officials failed to regular risky investments in the US housing market in their efforts to promote the free
market. Taking advantage of "cheap house loans," Americans began building houses that were beyond
their financial capacities.

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

Since there was so much surplus money circulating, the demand for MBSs increased as investors
clamored for more investment opportunities. In their haste to issue these loans however, the banks
became less discriminating. They began extending loans to families and individuals with dubious credits
records—people who were unlikely to pay their loans back. These high-risk mortgages became known as
sub-prime mortgages.

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

Banks also assumed that housing prices would continue increase. Therefore, even if homeowners
defaulted on their loans these banks could simply reacquire the homes and sell them d higher price,
turning a profit. Sometime in 2007, however, home prices stopped increasing as supply caught up with
demand. Moreover, it slowly became apparent that families could not pay off their loans. As a result,
MBSs were quickly resold, as banks and investors wanted to get rid of their disastrous assets. This risky
cycle came to a breaking point in September 2008, when big investment banks such as Lehman Brothers
went bankrupt, wiping off large investments.

The crisis spread beyond the United States since many investors were foreign governments,
corporations, and individuals. The loss of their money spread like wildfire back to their countries.
These series of interconnections allowed for a global multiplier effect that sent ripples across the world.
For example, Iceland's banks heavily depended on foreign capital; so when the crisis hit them, they
failed to refinance their loans. Three of Iceland's largest commercial banks have defaulted because of
this credit crunch. Iceland's debt climbed by more than seven times between 2007 and 2008.

Until now, countries such as Spain and Greece, have been deeply indebted (nearly similar to Third
World countries), and debt relief has come at a heavy cost. To be specific, Germany and the IMF have
compelled Greece to reduce its social and public spending. Affecting services such as pensions, health
care, and various forms of social security, these cuts have been felt most acutely by the poor. Moreover,
the reduction in government spending has slowed down growth and ensured high levels of
unemployment.

The United States recovered relatively quickly; thanks to a large Keynesian-style stimulus package that
President Barack Obama pushed for in his first months in office. The same cannot be said for many other
countries. In Europe, the continuing economic crisis has sparked a political upheaval. Far-right parties,
such as Marine Le Pen's Front National in France, have recently gained popularity by unjustly blaming
immigrants for their troubles, saying that they steal jobs and take advantage of welfare. These
movements combine popular discontent with outright racism and bigotry. Their rise will be discussed
further in the final lesson.

ECONOMIC GLOBALIZATION TODAY

The global financial crisis will take decades to resolve. The solutions proposed by certain nationalist and
leftist groups of closing national economies to world trade, however, will no longer work. The world has
become too integrated. Whatever one. opinion about the Washington Consensus is, it is undeniable that
some form of international trade remains essential for countries to develop in the contemporary world.

Exports, not just the local selling of goods and services make national economies grow at present. In the
past, those that benefited the most from free trade were the advanced nations that were producing and
selling industrial and agricultural goods. The United States, Japan, and the member-countries of the
European Union were responsible for 65% of global exports while developing countries only accounted
for 29%. When more countries opened up their economies to take advantage of increased free trade,
the shares of the percentage began to change. However, the share of developing economies, such as the
Philippines, in global exports rose from 42.7% in 2016 to 43.4% in 2018 while their share of global
imports rose from 39.9% in 2016 to 41.1% in 2018, COVID-19 slowed down global trade considerably,
and major economies recorded negative trends. Developing countries however, experienced a relatively
lower decline mainly because of the resilience of East Asian economies. Between January and
September 2020, China, the Russian Federation, and South Korea had single-digit negative declines in
imports (-4%, -6.0%. and -8.7%, respectively), and only the United States among the developed
economies had the same number (-9.6%). Japan and the European Union had double-digit negative
imports (-11.55% and -12.77%, respectively), and only India, among Asian economies suffered a similar
fate (-28.77%). The Russian Federation, China and India suffered the largest negative decline in exports
(-23.33% =20.80 o, and -17.55%, respectively) during the same period and so did the United States (-
15%), followed by Japan (-13.22%) and the European Union (-11.22%). Among the Asian economies only
south Korea had a single-digit decline in exports (8.419) The WTO-led reduction of trade barriers, known
as trade liberalization, has profoundly altered the dynamics of the global economy.

In the recent decades, partly as a result of these increased exports, economic globalization has ushered
in an unprecedented spike in global growth rates. The gross world product per capita was $5,498 in
2000. By 2010, this rose almost double to $9,551 (or 73.7%); and by 2019, it stood at $11,436, or a 108%
increase since the start of the 21st century. The World Bank estimated that the gross world product per
capita averaged only 1.241% in the 1990s. This rose to 16.19% between 2000 and 2010 (or a rise of
1,204 percentage points) before settling to 13.70% between 2011 and 2019 (or a 1,003 rise in
percentage points since 1990).17 It was this growth that created large Asian economies such as Japan,
China, Korea, Hong Kong, and Singapore.

However, economic globalization remains an uneven process, with some countries, corporations, and
individuals benefiting a lot more than others. The series of trade talks under the WTO have led to
unprecedented reductions in tariffs and other trade barriers, but these processes have often been
unfair.

First, developed countries are often protectionists as they repeatedly refuse to lift policies that
safeguard their primary products that could otherwise be overwhelmed by imports from the developing
world. The best example of this double standard is Japan's determined refusal to allow rice imports into
the country to protect its farming sector. Japan's justification is that rice is sacred." Ultimately, it is its
economic muscle as the third largest economy that allows it to resist pressures to open its agricultural
sector.

The United States likewise fiercely protects its sugar industry, forcing consumers and sugar-dependent
businesses to pay higher prices instead of getting cheaper sugar from the plantations of Central America.

Faced with these blatantly protectionist measures from powerful countries and blocs, poorer countries
can do very little to make economic globalization more just. Trade imbalances, therefore, characterize
economic relations between developed and developing countries.

The beneficiaries of global commerce have been mainly transnational corporations (TNCs), not
governments. Like any other business, these TNCs are concerned more with profits than with assisting
the social programs of the governments hosting them. In turn, host countries ease tax regulations,
preventing wages from rising while sacrificing social and environmental initiatives that safeguard
society's most vulnerable citizens. The phrase "race to the bottom" refers to the practice of countries
decreasing their labor standards, especially worker protections. in order to entice international investors
looking for big profit margins at the lowest possible cost. Governments weaken environmental laws to
attract investors, thus, creating fatal consequences on their ecological balance and depleting them of
their finite resources such as oil, coal, and minerals.

Localizing the Material

Many Philippine industries were devastated by unfair trade deals under the GATT and eventually the
WTO. One sector that was particularly affected was Philippine agriculture. According to Walden Bello
and a team of researchers at Focus on the Global South, the US used its power under the GATT system
to prevent Philippine importers from purchasing Philippine poultry and pork- even as it sold meat to the
Philippines. Although the Philippines expected to make up losses in sectors like meat with gains in areas
such as coconut products. no significant change was realized. In 1993, coconut exports amounted to
$1.9 billion; and after a slight increase to $2.3 billion in 1997, it returned to $1.9 billion in 2000. Most
strikingly, Bello and company noted that the Philippines became a net food importer under the GATT. In
1993, the country had an agricultural trade surplus of $292 million. It had a deficit of $764 million in
1997 and $794 million in 2002. - Bello, Walden, Herbert Docena, Marissa de Guzman, and Mary Lou
Malig The Anti-Development State: The Political Economy of Permanent Crisis in the Philippines. London
and New York: Zed Books, 2006, 140-142.

CONCLUSION

International economic integration is a central tenet of globalization. In fact, it is so crucial to the

process that many writers and commentators confuse this integration for the entirety of globalization. It
should be noted that economics is just one window into the phenomenon of globalization; it is not the
entire thing.

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

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

Reference:

Abinales, P., & Claudio L. (2022). The Contemporary World. Second Edition.