Learning Objectives:

1. To define economic globalization

2. To identify the actors that facilitate the international monetary system
3. To understand international trade issues and trade policies
4. To articulate a stance on global economic integration
 SOURCE: https://www.google.com/search?q=images/+photos+related+with+the+global+economy

LESSON 2
THE GLOBAL ECONOMY

This chapter discusses the summary of “The Globalization of Economic Relations” as presented
by Istvan Benczes (2014) which was adopted from the “SAGE Handbook of Globalization” edited by
Manfred B. Steger, Paul Battersby, and Joseph M. Siracusa (2014).

Introduction

This chapter discusses the definition, foundation, and effects of economic globalization. While
the second section tackles on the development of the key global monetary regimes that include the gold
standard, the Bretton Woods System, and European Monetary Integration. The last segment talks about
trade rules and relations, which will focus on the unilateral trade system of the late 19th and early 20th
centuries and the multilateral trade agreements of the post-World War II period (Benczes, 2014).

According to Held et al. (1999), globalization may be claimed as the broadening, deepening, and
rapid global interconnectedness in all facets (political, technological, cultural, and economic) of modern-
day social life (Giddens, 1999). Thus globalization is a multidisciplinary course.

What is Economic Globalization?

According to the International Monetary Fund (2008), this refers to a historical progression,
which is the consequence of humanity’s modernization and technological development. It may also
denote a growing interconnection of global economies via the mobility of goods, services, knowledge,
and all forms of capital around the world.

The following are the various interrelated scopes of economic globalization:

(a) the globalization of goods and services in trade;

(b) the globalization of monetary and capital markets;
(c) the globalization of know-how and communication; and
(d) the globalization of production.

Economic globalization differs from internalization since the former refers to functional
interconnectedness between globally isolated activities while internationalization speaks of the extension
of economic activities of one country to another (Dicken, 2004).

For hyperglobalists, nation-states are no longer the key economic institutions in the global
market. Humanity is now consuming extremely standardized international products and services created
by multinational corporations (Ohmae, 1995). According to Reich (1991), globalization converts the local
economy into an international one, thus products, technologies, corporations, and industries are no longer
treated as national.

The new actors of political and cultural globalization today refer to the United Nations (UN) and
non-governmental organizations (NGOs) or civil society organizations (CSOs). While the key actors of
this modern-day global market economy are the multinational corporations (MNCs) or transnational
corporations (TNCs). This MNCs or TNCs are the key motivating powers of economic globalization for
the last 100 years, and they account for about 67% of world exports (Gereffi, 2005).

For realists, they argue that these MNCs/TNCs still represent national interests (Gilpin, 2001).
However, for the pioneers of the Dependency School, they assert that these are the vehicles through
which the rich can exploit the underprivileged majority (Feenstra, 1998). On the other hand, Gereffi
(1999) introduced the idea on the “global commodity chains” which emphasizes on the growing
significance of international buyers in a global market of dispersed production.

Is Economic Globalization a New Phenomenon?

Gills and Thompson (2006) assert that the process of globalization began since Homo sapiens
started moving from the African continent to the rest of the globe. Frank and Gills (1993) argued that the
foundation of globalization dates back about 5,000 years ago as manifested by the Silk Road which linked
Asia, Africa and Europe.

When Adam Smith wrote his book “An Inquiry into the Nature and Causes of the Wealth of
Nations in 1776, he regarded the rediscovery of the Americas by Christopher Columbus in 1492 and the
rediscovery of the direct maritime route to India by Vasco de Gama in 1498 as the two ultimate
accomplishments in humanity’s historical accounts.

Other significant accomplishments were the technological developments of the British Industrial
Revolution after the Napoleonic Wars which spread to European and North American continents.
Monopolized trade during this period were controlled by the first transnational corporations, the British
East India Company (1600) and the Dutch East India Company (1602). However, these TNCs did not
favor global economic integration due to their idea of nationalism (Gereffi, 2005).
 The real global economic break-through came in the 19th century due to the transport innovations
via the use of steamships and railroads which decreased transaction expenses and boosted both local and
global economic exchanges (Held et al., 1999). The relatively short period from 1870 to 1913 before
World War I (1914 to 1919) is often regarded to as the “Golden Age of Globalization”. This period is
characterized by the presence of peace, free trade, and financial and economic permanence (O'Rourke &
Williamson, 1999).

The Neoclassical Solow Growth Model

Bairoch (1993) argues that the industrial revolution and global trade relations strengthened
economic growth and development among developed parts of the globe, the rest of the world did not
achieve such accomplishments. Thus, the industrialization of the developed regions led to the de-
industrialization of the poorer regions.

Structuralism

Structuralism is a set of models which emerged from the 1950s to the 1970s and affirm the notion
that the North and South regions are in a structural association (Brown, 2001). The most recognized
critical theory to the prevalent social partition of labor and global inequities is presented by the “World-
Systems Analysis”, which argues that capitalism under globalization strengthens the structural
arrangements of unequal change.

According to Wallerstein (1983), capitalism produced the differing historical level of wages in the
global economic stage of the global system. Thus, rising disparity, coupled with economic and political
dependency, are not independent from economic globalization.

For Rostow (1960), underdevelopment (i.e. the absence of economic growth and development,
coupled with poverty and malnourishment) is not the primary phase of a historical and evolutionary uni-
linear progress, rather the effect of colonialism and imperialism. Wallerstein (1983) acknowledged
imperialism as the product of the global capitalist structure which propagated imbalanced exchange.
The present capitalist structure produced political systems that ensure an infinite appropriation and
amassing of surplus products from less developed countries (the periphery) to the industrializing countries
(the semi-periphery) and the highly industrialized or highly developed countries (the core or metropole)
(Arrighi, 2005).

The International Monetary Systems

An international monetary system or regime (IMS) denotes the policies, practices, tools, services,
and institutions for carrying out global payments (Salvatore, 2007). In the liberal custom, the key
responsibility of an IMS is to assist international transactions on trade and investment. An IMS is more
than just money or currencies it also mirrors economic supremacy since money is essentially political and
is also considered as a vital aspect of “high politics” of diplomacy (Cohen, 2000).

The Gold Standard

The foundations of the first IMS dates back to 19th century, when Britain assumed gold mono-
metallism in 1821. In 1867, the European countries, including United States, shifted to gold at the
International Monetary Conference in Paris. Gold was viewed to ensure a non-inflationary, constant
economic atmosphere, and a vehicle for hastening global trade (Einaudi, 2001). When Prussia won over
France in 1872, Germany joined the global system. France decided to join six years later. The gold
standard developed to be the global monetary regime by 1880 when United States joined in 1879. In
1894, Italy decided to participate and Russia followed in 1897. About 70% of the countries took part in
the gold standard prior to the eruption of World War I (Meissner, 2005).

The gold standard operated as a fixed exchange rate system, which made gold as the lone global
reserve. Member countries ascertained the gold content of their national currencies which defined fixed
exchange rates (or mint parities). Monetary authorities were mandated to exchange their national
currencies for gold at the authorized exchange rate without restrictions on global markets (Bordo &
Rockoff, 1996).

Due to the outburst of World War I, the gold standard came to an end. Member countries gave up
convertibility and stopped gold export in order to halt the exhaustion of their national gold reserves. The
1930s turn out to be the gloomiest era of modern economic history (Eichengreen & Irwin, 2009).

The Bretton Woods System and its Dissolution

According to Destler and Henning (1989), the allied nations started to negotiate on a new global
monetary regime under the structure of the United Nations Monetary and Financial Conference in Bretton
Woods, New Hampshire (US), in July 1944. Forty-four countries decided to adopt the gold-exchange
standard. At that time, the US dollar was the lone exchangeable currency of the time. Thus, United States
devoted itself to trade and buy gold without limitations at US$35 per ounce. All participating countries
having non-convertible currencies were pegged to the US dollar.

The participating countries also established two global monetary institutions: (a) The
International Banks for Reconstruction and Development (IBRD) which was responsible for post-war
reconstruction and development; and (b) The International Monetary Fund (IMF) which encouraged
global financial collaboration and international trade. The IMF also provided short-term monetary
assistance to countries in cases of transitory balance of payments difficulties.

During the middle part of the 1960s, the US dollar became overvalued along with other major
currencies. As a reaction, foreign nations started to exhaust the US gold reserves. This forced the United
States to abandon the gold-exchange standard on August 15, 1971. In 1973, developed countries agreed to
float their currencies (prices of currencies were determined by demand and supply forces). This
arrangement in the exchange rate policy was mandated by the Jamaica Accords in 1976 (Destler &
Henning, 1989).

The Plaza Accord

In 1985, the G7 countries decided to devaluate the US dollar as a consequence of the heightening
pressure of local US manufacturers and farmers to reinstate their global competitiveness in the world
market.

The Louvre Accord

In 1987, the Louvre Accord was agreed upon in order to protect the US dollar from further
devaluation in the world market. The United States might have profited from these internationally,
however, one of the main losers was Japan. The appreciation of the Japanese yen proved to be devastating
for the Japanese local economy (Destler & Henning, 1989).

The Washington Consensus

 The neoliberal, pro-market Washington Consensus became successful in the 1990s. Its agenda were
promoted and disseminated by the IMF as part of its conditionalities in exchange for financial assistance.
The IMF and the Washington Consensus (and its free-market ideology) have been blamed for the
unsuccessful progress of the periphery. For Wallerstein (2005), the way for the periphery to develop is
not to “import-substitute” but to export orient productive activities.

The Morgenthau Plan

After World War II, the United States sought to carry out the Morgenthau Plan. The idea was to
downscale Germany’s economy to become a pastoral and agricultural one. This was a reaction to USSR's
(specifically, Russia) thrust for communism in the East European region coupled with the growth of
socialist and communist parties in the West. However, the plan did not materialize and was abandoned by
US. In contrary, United States shifted its plans and promoted an economically and militarily powerful
Germany and Western Europe.

The Marshall Plan and the European Monetary Integration

This was United States’ post-war reconstruction and development program in 1948 for Western
Europe, which was managed by the Organization for European Economic Cooperation, the forerunner of
the Organization for Economic Cooperation and Development (OECD). The astonishing growth and
development of Western Europe encouraged a closer collaboration of Western European countries which
consequently gave birth to the European Coal and Steel Community in 1951. The ECSC was followed by
the signing of the Rome Treaty in 1957, which founded the European Economic Community (EEC)
which consequently became the European Union (EU).

The six founding member-countries (West Germany, France, Italy, Netherlands, Belgium and
Luxembourg) aimed at the formation of a common market for the freer movement of goods, services,
capital and labor. The downfall of the Bretton Woods System pressured the member-countries in 1979 to
establish their own regional monetary regime (the European Monetary System, EMS). Here, neither the
US dollar, nor gold can function in the stabilization process of exchange rates. Instead, the European
Exchange Rate Mechanism (EERM) was created (Gros & Thygesen, 1998).

In 1992, with the help of the late French President Francois Mitterrand and German Chancellor
Helmut Kohl, the foundations of a new European Economic and Monetary Union (EMU) were
established under the Maastricht Treaty. As early as 1999, member-countries of the EMU replaced their
national currencies and deputized monetary policies to a supranational stage, managed by the European
Central Bank (ECB). Consequently, trade and capital transactions increased; local economies became
more interconnected; macroeconomic stability was reestablished, and the euro grew to become the second
most globally used currency (European Commission, 2008).

David Ricardo’s Comparative Advantage Theory

According to Ricardo (1817) as cited in Samuelson (1995), a country such as Britain could profit
from a voluntary trade with Portugal even if Portugal is more effective in producing both wine and
clothing. For Britain, it should concentrate in the production of the product with less disadvantage and let
Portugal produce the other product. The theory argues that every country must possess a comparative
(relative) advantage in the production of something irrespective of its original situation.
International Trade and Trade Policies

Reformist and radical (new left and neo-Marxian) theorists, such as Emmanuel (1972) or Amin
(1976), argued that the social partition of labor adds to the economic development of the highly
developed countries (HDCs or core) and hampers progress of the less developed countries (LDCs or
periphery). The economies of HDCs have the finest of two worlds (as buyers of cheap primary
commodities and as sellers of costly manufactured products. On the other hand, LDCs have the worst of
both worlds, as buyers of expensive industrial products and as producers of cheap raw materials (Singer,
1964). According to Amin (1993), if this global economy only benefits the HDCs at the loss of the LDCs,
then the periphery countries must implement a protectionist policy in its extreme form of de-linking (i.e.
to cut their ties with the HDCS or core countries).

Unilateral Trade Order

During the 17th to 18th century, global trade in Europe concentrated more on the accumulation of
gold reserves which encouraged nation-states to export and limit imports. This mercantilist or
protectionist policy was branded as a zero-sum game in global trade. Hence, trade and trade policies only
furthered the interest of the monarchs (royal family) from Portugal to Great Britain (now UK), which
utilized their accumulated bullions (gold) to support battles and consolidate power over their domestic
supporters (Dunham, 1930).

Bilateral Trade Agreements

Bilateral Trade Agreements also succeeded in Europe, one example of these is the most-favored
nation (MFN) policy. This policy demonstrates the principle which stated that any negotiated mutual
tariff cutbacks between two parties must benefit all other trading partners without conditions (Lampe,
2008).

The United States adopted a protectionist policy (import substitution industrialization) which
imposed tariffs on manufactured goods with an average of 45%. Even France, the Scandinavian countries,
and UK from the 1860s onwards, imposed protectionist measures due to the entry of low-cost agricultural
commodities from their foreign territories, Germany, and US. UK persisted to be hegemonic
economically and militarily. It also depended on the massive reserves of its territories, especially India
(Arrighi & Silver, 2003).

After World War I (1914-1919), the two World Economic Conferences in 1927 and 1933 did not
succeed in reducing tariffs due to the refusal of US to take the lead as the hegemonic descendant of a
declining United Kingdom. In 1930, the Hawley Act in US amplified tariffs in the country. As a
consequence, trading partners of US retaliated which lessened international trade by an average of 33 to
66 percent. To address the issue, US enacted the Reciprocal Trade Agreements Act in 1934 which halted
the further decline in global trade. This Law gave the US president the power to decide on trade policies
and lessened the burden put on the Congress for determining protectionist trade policies. This trade policy
was a return to the original notion of MFN policy prior to the eruption of World War II (Irwin, 1998).

Multilateralism: From the GATT to the WTO

In 1950, the US dollar became an international currency, supported by 67% of the world's gold
reserve (Green, 1999). US was also the leading aid donor (i.e., the Marshall Plan). Owing to the downfall
of the European and Japanese manufacturing industries after World War II, USA’s manufacturing
industry amplified which accounted for about 60% of the world's total in 1950, and its export amounted to
about 33% of the world's total (Branson et al., 1980).

At that time, the latest international trade regime must have been driven by the International Trade
Organization (ITO) agreement, which was one of the three pillars of the Bretton Woods System, aside
from the IMF and the IBRD, however, a series of rejections in the US Congress obstructed its creation. In
place of the ITO, nation-states dedicated to lower down tariffs agreed to create the General Agreement on
Tariffs and Trade (GATT) (Branson et al., 1980).

The GATT encouraged international trade through a sequence of multilateral trade negotiations
called “rounds”. The first five rounds concentrated on tariff cuts: (1) 1947 Geneva Tariffs; (2) 1949
Annecy Tariffs; (3) 1951 Torquay Tariffs; (4) 1956 Geneva Tariffs; (5) 1960 Dillon Round Tariffs; (6)
1964 Kennedy Round Tariffs and anti-dumping measures; (7) 1973 Tokyo Round Tariffs, non-tariff
barriers, and “framework agreements”; and (8) 1986 Uruguay Round Tariffs, non-tariff barriers, rules,
services, intellectual, property, dispute settlement, textiles, agriculture, and creation of the WTO (WTO,
2012).

The establishment of the European Economic Community (EEC) in 1957 forced US to implement
the Trade Expansion Act of 1962 and demanded for a new round, the Kennedy Round. Its consequence
was an across-the-board cutting (which replaced the practice of item-by-item cuts) and reduction of non-
tariff barriers (i.e., anti-dumping measures) (Evans, 1971).

During the 1970s, the Tokyo Round besides tariff cuts, also approved a series of codes of conduct
(i.e., the “subsidies code” or the “government procurement code” (Deardorff & Stern, 1983). The most
popular multilateral trade negotiations occurred under the Uruguay Round from 1986 to 1994. While
previous trade arrangements were successful in reducing tariffs, a series of other corrective measures (i.e.,
non-tariff barriers) were also implemented by nation-states. The Uruguay Round stretched multilateral
policies to current concerns and areas, such as agriculture which concluded in a harsh dispute between the
US and the EU.

According to Walter and Sen (2009), the foremost results of the trade arrangements were the
agreements on trade-related investment measures (TRIMs); trade in services (GATS) and trade-related
features of intellectual property rights (TRIPs). These agreements were promoted by highly developed
countries (HDCs) and targeted less developed countries (LDCs) with massive service market potentials in
finance and telecommunications.

After 50 years of trade negotiations, the Uruguay Round came up with a genuine global trade
institution, the World Trade Organization (WTO). The WTO was established on January 1, 1995 and
become a formal forum for trade dialogs. Unlike the GATT, it is a formally constituted association with
legal personality. However, in 1999, the developing nations epitomized a united movement for a new
round of trade negotiations in Seattle. This event revealed the power of NGOs/CSOs and anti-
globalization movements. These movements objected in favor of the LDCs and were against the current
status quo of international trade affairs; the hegemony of the US economy; the personal interests of
MNCs/TNCs; and the discriminatory mechanisms of the WTO in favor of HDCs (Narlikar & Tussie,
2004).

In 2001, the quasi-official Doha Round must have become a round on economic development,
however, it failed due to the interests of the opposing parties (HDCs vs. LDCs). LDCs asserted on the
proper and full execution of the Uruguay Agreement (especially in the area of agriculture), however, US
promoted to keep labor and environmental issues on the agenda. The deadlock between the two opposing
sides, motivated LDCs to cooperate and strengthen their leverage within the WTO by creating a pressure
group called the Group of 20 (G20). This conglomeration of countries accounts for almost 67% of the
world's inhabitants and 25% of world-wide agricultural export (Narlikar & Tussie, 2004).

Developing Countries and International Trade

Developing (third world) countries did not partake aggressively in multilateral trade agreements for
quite a long period of time. The so-called East Asian newly industrializing countries (NICs) embraced an
outward-oriented development approach. However, a majority of these developing nations were not able
to integrate successfully into this trading scheme. Rather, they promoted an inward-looking, import-
substitution industrialization policy, which did not encourage trade liberalization (Findlay & O'Rourke,
2007). Meanwhile, the HDCs were also hesitant to open their markets to products (i.e., textile or
agricultural) in which developing countries have a comparative advantage.

The key transformation in this economic affairs occurred in 1964 when the United Nations
Conference on Trade and Development (UNCTAD) was institutionalized with the collaborative stance of
the developing countries. The objective of UNCTAD was to encourage trade and mutual aid between and
among the HDCs and LDCs (Salvatore, 2007). However, due to the two oil crises dilemma which
affected the economic activities of the HDCs, these countries adopted highly protectionist measures (both
tariff and non-tariff) in order to address the damaging effects of the economic stagnation in the 1980s.

Developing countries started to aggressively participate in trade with the advent of the Uruguay
Round. This round was a grand bargain between the HDCs and LDCs (Ostry, 2002). The HDCs were
projected to open their markets to agricultural and textile products, while the LDCs must accept the new
rules on intellectual property rights and services. LDCS opened up their service markets, however, their
export of agricultural commodities is still blocked by the HDCs. Agricultural products have a share of
about 33% to 50% of the total economic production among HDCs. Without trade liberalization in
agriculture, it is difficult for LDCs to entirely assimilate themselves into the international economy.

For Khor (1995), he saw the WTO as a medium by the HDCs to gain entry to the markets of LDCs.
While Wade (2003) criticized the three major trade agreements (i.e. TRIMS, GATS, and TRIPS) saying
that they constrained the set of industrial policies to achieve development for the LDCS.