The Global Economy

LEARNING OUTCOMES

1. Define economic globalization

2. Identify the actors that facilitate
economic globalization
3. Narrate a short history of global market
integration in the 20th century and
4. Articulate your stance on global
economic integration
 The Global Economy

❖ The economy of the whole planet, i.e., global GDP. GDP stands
for Gross Domestic Product- a value of everything a country produces in a
specific period.
❖ The way the world is today, with countries’ economies so intertwined and
interdependent that they all seem like parts of one whole. That ‘whole’ we
call the ‘global economy.’
• The Gross Domestic Product (GDP) in Philippines was worth 361.49
billion US dollars in 2020, according to official data from the World
Bank. The GDP value of Philippines represents 0.32 percent of the
world economy. source: World Bank
• From the deep economic contraction last year,
the Philippines is on the path to economic
recovery.
• There are clear signs of rebounds in domestic
activity, community mobility, industrial output,
and recently with bank lending activities.
• However, there are challenges to growth with the
continuing threat of the pandemic amid
narrowing policy space. The key policy challenges
are to protect long term fiscal sustainability,
leverage the private sector in the recovery, and
limit the economic scarring from the pandemic.-
December 2021 Regaining Lost Ground, Revitalizing the Filipino Workforce By
World Bank
• The Philippines recorded its lowest monthly
inflation rate for 2021, the National Economic and
Development Authority (NEDA) said.
• As reported by the Philippine Statistics Authority
(PSA) today, the headline inflation rate eased to
3.6 percent in December from 4.2 percent in
November 2021.
• The decline was primarily driven by slower food
inflation, which decreased to 3.2 percent in
December from 4.1 percent in the previous month.
• In particular, vegetable inflation fell to -10.0
percent from -1.8 percent, while fish inflation also
decelerated to 7.0 percent from 7.9 percent in the
same period.
• However, meat inflation slightly increased to 11.3
• In particular, vegetable inflation fell to -10.0
percent from -1.8 percent, while fish inflation also
decelerated to 7.0 percent from 7.9 percent in the
same period.
• However, meat inflation slightly increased to 11.3
percent in December from 10.7 percent in
November 2021, partly due to the increase in pork
inflation to 17.9 percent from 17.3 percent.

NEDA.GOV.PH Jan 5, 2022

• The Philippines has been one of the most
dynamic economies in the East Asia
Pacific region.
• Average annual growth increased to 6.4%
between 2010-2019 from an average of
4.5% between 2000-2009.
• With increasing urbanization, a growing
middle class, and a large and young
population, the Philippines’ economic
dynamism is rooted in strong consumer
demand supported by a vibrant labor
market and robust remittances.
 Global Economy
• Common to buy clothing anywhere in US which
has a tag labeled, ‘Made in Malaysia, China or
Sri Lanka’
• Simple observation reminds us that our
consumption of goods has a strong international
character
• Increasingly true to speak not only of national
economies but a larger, highly inter-connected
and interdependent- GLOBAL ECONOMY
• Before discussing basic mechanisms of
industrialization and economic change within
Third World, important to look at the broader
global industrial environment within which these
nations are forced to compete
 Setting the Stage: Origins of the Global
Economy
• Since 1970s world economy hit by
turbulent forces
• Unemployment in western countries
• Traditional industries (iron and steel) have
declined
• Less Develop countries (LDCs) bearing
huge financial debts which threaten drive
for development
• Trading tensions have emerged between
industrial countries and the newly
industrializing countries
 Causes of These Conditions?
• Some argue that continuing OPEC
(Organization of the Petroleum exporting
Countries) escalation of oil prices through
limited production is root cause
• More profound changes in world economic
structure were underway
• Increasingly growing consensus that world
economy has become more volatile,
complex and tightly connected
• Countries affected by what is happening
abroad and at larger geographical scale
 Internationalization of Trade and Labor

• As with Japanese autos, American

computers and Taiwanese calculators
there is an emergence of a “new
international division of labor”
• Basically a change in geographical pattern
of specialization at the global scale-
constantly changing and very dynamic
• Example: movement of textile and shoe
production from Indonesia to China
 International Division of Labor

• Division of labor has taken on spatial

dimensions- some areas come to specialize in
certain types of economic activity
• At broad scale : industrialized countries ---→
manufactured goods while non-industrialized
countries ---→ raw materials
• However this simple pattern no longer exists
• Now much more complex structure involving
fragmentation of many processes and their
geographical relocation on a global scale
 Forces Surrounding Global System of
Production
• These four factors are affecting production
patterns:
• 1. Trans-national or multi-national
corporations (MNCs)-firms that operate in
many nations
• Increasingly these firms have local production
points and suppliers that operate across national
boundaries providing and securing labor, capital
and other resources from a variety of places and
which have become very powerful and important
influences in the global economy
 Sequential Model of TNC Development

• Stage I- Serve domestic market only

• Stage II- Export to overseas markets through
independent channels (sales agents)
• Stage III- Establish sales outlets in overseas
markets by acquiring local firm and/or setting up
new facility
• Stage IV- Establish production facility overseas
by acquiring local firm and/or setting up new
facility
Geographical Growth of a Multinational
Corporation
1 2

Penetration of a National Market

Basic Enterprise

Nation

Center

Factory
Distribution center
Representative
Penetration of Foreign Markets

Multinational Corporation
3 4
 Forces Surrounding Global System of
Production
• 2. National governments- through their
industrial, trade and foreign policies especially
liberalization policies
• Liberalization refers to the way in which policies
facilitate transactions (trade and sales) of a
variety of products and services
• Deregulation refers to the easing of taxation,
entry and pricing of products or services dictated
by government policy
• Privatization refers to the ownership of former
public sector operations and firms by private
corporations and enterprises
 Forces Surrounding Global System of
Production
• 3. Enabling Technologies- transport,
communications, production and organizational
improvements
• Explosion of enhanced transport and
communication services such as air cargo,
integrators offering definite time delivery (FedEx
and UPS), electronic mail and electronic data
interchange (EDI)
• Advanced inventory management such (just-in-
time (JIT)) and new systems of distribution such
as third party logistics (3PL)
 Just in case (JIC) is an inventory
strategy where companies keep large
inventories on hand. This type of inventory
management strategy aims to minimize the
probability that a product will sell out of
stock.
 Forces Surrounding Global System of
Production
• 4. Shifts in Market Conditions and Demand
• Economic cycles affect markets and production,
e.g. the Asian financial crisis
• Dramatic shifts in demand affect over time
influence type of good being produced and
production schedules
• Application of new technology can mean product
obsolescence
• These changes can be described in part through
product life cycle
 Product Life Cycle

• Essence of PLC is that growth in sales of

product follows systematic path, from
initial introduction to market through
development, growth, maturity, decline
and obsolescence
 Product Life Cycle
Monopoly Competition
Sales

Decline of
Idea Promotion First competitors Mass production production

Research and
Growth Maturity Decline
development
Stage 1 Stage 2 Stage 3 Stage 4
Cellular Phones of Samsung

• Evolution of basic Cellular

phones are an example
of a product which is
especially applicable to
the notion of the product
life cycle
• phone to color
enhancement to camera
and email device
 Global Production Chains and Networks
• Production Chain: Materials >
Procurement > Transformation >
Marketing and Sales >Distribution >
Service
• Definition: transactionally linked sequence
of functions where each stage adds value
to the process of goods and services
production
• Two aspects important: coordination and
regulation and geographical configuration
• Production chains may be very localized
but increasingly are global in scale to take
advantage of international division of labor
 International Trading Systems

❖ is the exchange of capital, goods, and services across international

borders or territories.[1] In most countries, such trade represents a
significant share of gross domestic product (GDP)
 SILK ROAD

• The oldest known international trade route

• A network of pathways in the ancient world that
connected from China to what is now the Middle East
and to Europe.
• Silk was the most profitable product traded and was
highly prized especially on the area of Middle East as
well as the West (Europe today)
• It was considered to be international but not GLOBAL
DENNIS O. FLYNN and ARTURO GIRALDEZ

• Birth of globalization

• According to them “ all important populated continents

began to exchange products continuously-both with each
other directly and indirectly via other continents and in
values sufficient to generate crucial impacts on all trading
partners.

• About 1571 when they both trace back the establishment of

the galleon trade that connected Manila, Philippines and
Acapulco in Mexico.
 Mercantilism
• is a national economic policy that is designed to
maximize the exports of a nation.

• It promotes government regulation of a nation's

economy for the purpose of augmenting state
power at the expense of rival national powers.
Mercantilism includes a national economic policy
aimed at accumulating monetary reserves through
a positive balance of trade, especially of finished
goods. Historically, such policies frequently led to
war and also motivated colonial expansion
 1867
• More open trade system
• Adaptation of the gold standard at international monetary conferences

Gold Standard

• Goal is to create a common system that would allow for more efficient
trade and prevent isolationism of mercantilist era.
• Countries to established a common basis for currency prices and a fixed
exchange rate system-all based on the value of gold.
• Though once common, has proven to be very restrictive form of
globalizing trade
 GREAT DEPRESSION

• Started during 1920s and extended to 1930s, the

worst and longest recession ever experienced by the
Western world emptying the government coffers
• Cause by the gold standard
 BARRY EICHENGREEN

-an Economic Historian

-argues on the US recovery from the Great
Depression because of the abandonment of the
gold standard
 Fiat Currencies

• Fiat money is currency that a government has declared to

be legal tender, but it is not backed by a physical
commodity. The value of fiat money is derived from the
relationship between supply and demand rather than the
value of the material from which the money is made.
• This system allows government to freely and actively
manage their economies by increasing or decreasing the
amount of money in circulation as they see fit.
 Bretton Woods System
-inaugurated 1944 during the United Nations Monetary
and Financial Conference to prevent catastrophes of the
early decades of the century from reoccurring and
affecting international ties.
- Influenced by the British Economist John Maynard
Keynes believes” the economic crises occur not when
a country does not have money, but when money is
not being spent and, thereby not moving
- Mid 1940’s to 1970’s high point of Global
Keynesianism
- During this period, governments poured money into
their economies, allowing people to purchase more
goods and in the process, increase demand for these
products.
- As demand increased, so did the prices of these
goods.
 2 Financial institutions Bretton Wood System
created
1. International Bank for Reconstruction and
Development (IBRD or World Bank)- responsible for funding
postwar reconstruction projects
2. International Monetary Fund (IMF)- global lender to
prevent individual countries from spiraling into credit crises.
GLOBAL Keynesianism
-the active role of governments in managing and
spending

General Agreement on Tariffs and Trade

(GATT ) 1947
-various countries committed for further global economic
integration
- Reduce tariffs and other hindrances to free trade
The World Bank Group works in every major area of development. We
provide a wide array of financial products and technical assistance, and
we help countries share and apply innovative knowledge and solutions to
the challenges they face
The International Monetary Fund (IMF) is an international
organization that promotes global economic growth and financial
stability, encourages international trade, and reduces poverty.
 Early 1970’s

-the prices of oil rose sharply as a result of the Organization of Arab

Petroleum Exporting Countries’ (OAPEC, the Arab member countries of
the Organization of Exporting Countries) imposition of an embargo in
response to the decision of US and other countries to resupply the Israeli
military with needed arms during the Yom Kippur War.

OIL EMBARGO

-affected the Western economies that were reliant on oil.

1973-1974

-US stopped linking the dollar to gold effectively ending the Bretton Wood
System
- The result of the phenomenon that Keynesian economics could not
predicted is called STAGFLATION-decline in economic growth and
employment (stagnation) takes place alongside a sharp increase in prices
(inflation)
 NEOLIBERALISM
- new form of economic thinking
- Introduced by Milton Friedman
- Codified strategy of United States Treasury Department, the World
Bank,the IMF and eventually the World Trade Organization- a new
organization founded in 1995 to continue the tariff reduction under
the GATT- the policy they created called Washington Consensus

WASHINGTON CONSENSUS
-dominated the global economic policies from 1980’s until the early
2000’s
-advocates pushed fro minimal government spending to reduce
government debt.
- They also called for privatization of government- controlled services
like water, power, communications and transport believing that the
free market can produce the best results.
- Shock therapy necessary for long term economic growth.
 US PRESIDENT RONALD REAGAN AND BRITISH
PRIME MINISTER MARGARET THATCHER

- Advocates of neoliberalism
- Justified their reduction in government spending by comparing
national economies to household.
- Thatcher promoted an image of herself as mother, who reined in
overspending to reduce the national debt.
ECONOMIC GLOBALIZATION TODAY
global financial crisis will take decades to resolve