MODULE 2: THE STRUCTURES OF GLOBALIZATION

Lesson 2.1 – The Global Economy

I. Learning Outcomes: At the end of the lesson, the students should have:
1. comprehended the definition of global economy and the way of how it works;
2. identified the factors that facilitate economic globalization; and
3. articulated a report of status on global economic condition.

DIAGNOSTICS
Instructions: Write agree if you think the statement is correct; otherwise, write disagree.

____1. Economic globalization includes borderless exchange of goods and services.

____2. McDonalds is a transnational corporation.
____3. Global economy is influenced by global politics.
____4. Unilever is a multinational corporation.
____5. Economic globalization can refer to the increasing integration of economies around the
World.
 
II. Introduction

Over the last few decades, the global economy has evolved tremendously with the
manner that it is structured and controlled by collaborating countries. These developments have
consequences that impact not just the distribution of goods between countries and services, but
also the movement of citizens. As we’ve seen on occasions over the last century, too great a
fluctuation in this international economic system can lead to a global economic crisis. So, what
exactly is the global economy? How does it function and affect our lives? Here, we take a closer
look to help you understand the complexities of the force that governs the modern world!
 
A. Activity

Direction: Create an image or poster that reflects or best describes the definition of
Global economy. Illustrate your work in a sheet paper and make sure to color it with any type of
material (e.g., crayons, poster paints, colored pencils, and watercolor) you have at home.
 
III. Discussion

Global economy refers to the international exchange of goods and services that is
expressed in monetary units of money. It may also mean as the free movement of goods, capital,
services, technology, and information. These economic activities can have either a positive and
or negative impact on the countries involved.

The global economy comprises several characteristics, such as:

Globalization- describes a process by which national and regional economies, societies, and
cultures have become integrated through the global network of trade, communication,
immigration, and transportation.

International Trade- It is considered as an impact of globalization. It refers to the exchange of

goods and services between different countries, and it has also helped countries to
specialize
in products which they have a comparative advantage in. This is an economic theory that
refers to an economy's ability to produce goods and services at a lower opportunity cost
than
its trade partners.

International Finance– Money can be transferred at a faster rate between countries compared to
goods, services, and people, and making international finance one of the primary features
of
a global economy. International finance consists of topics like currency exchange rates and
monetary policy.

Global Investment- This refers to an investment strategy that is not constrained by geographical
boundaries. Global investment mainly takes place via foreign direct investment (FDI).
 
Who controls the global economy?

Many people think that the global economy is controlled by governments of the largest
economies in the world, but this a common misconception. Although governments do hold
power over countries’ economies, it is the big banks and large corporations that control and
essentially fund these governments. This means that the global economy is dominated by large
financial institutions. According to world economic news, US banks participate in many
traditional government businesses like power production, oil refining and distribution, also the
operating of public assets such as airports and train stations.  This was proven when certain
members of the US Congress sent a letter to the Federal Reserve Chairman Ben Bernanke. Here
is an excerpt from the letter:
“Here are a few examples. Morgan Stanley imported 4 million barrels of oil and
petroleum products into the United States in June, 2012. Goldman Sachs stores aluminum in vast
warehouses in Detroit as well as serving as a commodities derivatives dealer. This “bank” is also
expanding into the ownership and operation of airports, toll roads, and ports. JP Morgan markets
electricity in California.
In other words, Goldman Sachs, JP Morgan and Morgan Stanley are no longer just
banks – they have effectively become oil companies, port and airport operators,
commodities dealers, and electric utilities as well.”
-excerpt from letter  to the Federal Reserve Chairman Ben Bernanke-
 
What are the benefits of global economy?

There are numerous benefits of a global economy, which include:

 1. Free trade: Free trade is an excellent method for countries to exchange goods and
services. It also allows countries to specialize in the production of those goods in which
they have a comparative advantage.
2. Movement of labor:  Increased migration of the labor force is advantageous for the
recipient country as well as for the workers. If a country is going through a phase of high
unemployment, workers can look for jobs in other countries. This also helps in reducing
geographical inequality, and advantageous economic factors such as lower average costs
and lower prices for customers.
3. Increased economies of scale: The specialization of goods production in most countries
has led to.
4. Increased investment: Due to the presence of global economy, it has become easier for
countries to attract short-term and long-term investment. Investments in developing
countries go a long way in improving their economies.

How does the global economy work?

The functioning of the global economy can be explained through one word —
transactions. International transactions taking place between top economies in the world help in
the continuance of the global economy. These transactions mainly comprise trade taking place
between different countries. International trade includes the exchange of a variety of products
between countries. It ranges all the way from fruits and foods, to natural oil and weapons. Such
transactions have a number of benefits including:

a. Providing a foundation for worldwide economic growth, with the international economy
set to grow by 4% in 2019 (source: World Trade Organization);
b. Encouraging competitiveness between countries in various markets;
c. Raising productivity and efficiency across countries;
d. Helping in the development of underdeveloped countries by allowing them to import
capital goods (machinery and industrial raw materials) and export primary goods (natural
resources and raw materials).

Factors affecting global economy

According to the latest economic news, here are some of the key factors that influence
and affect how well the global economy works: Natural resources; Infrastructure; Population;
Labor; Human capital; Technology; and Law.

Global economy or economic globalization is concerned on the globalization of

production, finance, markets, technology, organizational regimes, institutions, corporations, and
labor. While economic globalization has been expanding since the emergence of trans-national
trade, it has grown at an increased rate due to an increase in communication and technological
advances under the framework of the General Agreement on Tariffs and Trade and World Trade
Organization, which made countries gradually cut down trade barriers and open up their current
accounts and capital accounts. This recent boom has been largely supported by developed
economies integrating with the majority world through foreign direct investment and lowering
costs of doing business, the reduction of trade barriers, and any cases, cross-border migration.

Steger's (2014) definition of globalization as the expansion and intensification of social

relations and consciousness across world time and space imply that there are various forms of
connectivity. Globalization is a multidimensional phenomenon, creating economic, political,
cultural, and even technological forms of connectivity. This section focuses on the economic
dimension.

Economic globalization refers to the expanding interdependence of world economies.

Shangquan (2000) attributes this to the growing scale of cross-border trade
commodities and services, flow of international capital, and wide and rapid spread of
technology. In the Philippines, cross-border trading can be best illustrated by the
country's trading partnerships with China, the United States, and Australia.

Moreover, the flow of international capital can be observed in foreign direct

investments (FDI), a type of investment in which a company establishes a business in
another country for production of goods or services and still takes part in the
management of that business. A good example of this is Toyota Motor Philippines
Corporation which is a subsidiary of Toyota Motor Corporation based in Toyota, Japan.
This flow of international capital can also be observed in foreign portfolio investments,

trade flows, external assistance and external commercial borrowings, and private loan
flows.

In 2008, the International Monetary Fund (IMF) defined economic globalization as a

historical process, the result of human innovation and technological progress. "It refers
to the increasing integration of economies around the world, particularly through the
movement of goods, services, and capital across borders" (IMF, 2008).

Economic globalization can be traced from the time when there was economic
movement in Asia, Africa, and Europe through the Silk Road, a network of trade routes
that connected the East, particularly China, and the West. Historically, these routes also
led to the discovery of the Philippine islands when Portuguese and Spanish envoys were
in search of spices, which then spawned colonization. In the contemporary period,
foreign expatriates come to the country to manage their company's foreign subsidiaries.
Likewise, the Philippines sends thousands of skilled workers to the Middle East as
construction workers, seafarers, and nurses.
Benczes (2014) identifies four interconnected dimensions of economy, namely:

(1) globalization of trade of goods and services;

(2) globalization of financial and capital markets;
(3) globalization of technology and communication; and
(4) globalization of production.

The first dimension of economic interconnectedness is demonstrated in the

establishment of the World Trade Organization (WTO) that eases trade among
countries. WTO, established in 1995, "ensures that trade flows as smoothly, predictably,
and freely as possible" (WTO, 2012). Another indicator is the emergence of China as a
major supplier and exporter of manufactured goods that has affected the world
economy. China-made products or parts are sent to the United States. To meet this
demand, China creates more jobs for its citizens. Another good example of economic
globalization of trade and services is the increasing number of business process
outsourcing (BPO) companies in the Philippines.

Why do American companies set up subsidiaries in the country? Cheap labor cost,
English proficiency, and customer service skills are the common reasons.

The second dimension is evident in the liberalization of financial and capital markets.
This is seen in cross-listing of shares on one or more foreign stock exchange, cross-
hedging and diversification of portfolio, and round-the-clock trading worldwide
(National Research Council, 1995).

The third dimension emphasizes that various transactions and interactivities that
transpire instantly due to the internet and communication technology. Moreover,

the fourth dimension best illustrated by the existence of multinational corporations

(MNC and transnational corporations (TNCs). The Coca-Cola Company is an example of
an MNC. Based in Atlanta, Georgia, USA, the company only manufactures syrup
concentrates and sells them to various bottlers that hold exclusive territories in different
countries including the Philippines. Toyota Motor Corporation is also an MNC. Through
its subsidiaries in Japan and in the other parts of the world, it has been selling millions of
vehicles every year since 1998.
 The most fitting definition of economic globalization is that of Szentes' (2003): the
process of making the world economy an 'organic system' by extending transnational
economic processes and relations to more and more countries and by deepening the
economic interdependencies among them."
This implies that the world economy is no longer controlled by the nation-states, but it
must be seen from a global context—the reliance and integration of world economies. To
illustrate, the price movements of imported fuels in the Philippines are affected not only by the
national Tax Reform for Acceleration and Inclusion Act's (TRAIN Law) excise tax on fuels, but
also by the peso-US dollar exchange rate. At the same time, this exchange rate is also affected
by the global market and the international economy's interest rates like the European Union
(EU) and the United States Federal Government's interest rates. It cannot be discounted that
global corporations directly affect the inflow of US dollars in the Philippines.

After recognizing the definition of economic globalization, it is important to discuss the

different agents that bring about the interdependencies of global economies. There are
different views on who or what the actors are that facilitate economic globalization. On one
hand, some scholars believe that it is still the nation-state but of different levels.

 Boyer and Drache (1996) state that the role of nation-states as manager of the
national economy is being redefined by globalization. Although such is the case,
nation-states still act as buffer to negative effects of globalization. In support,

 Brodie (1996) calls the government as the "midwives" of globalization. It means

that nation-states are still relevant despite assuming a global perspective and act
as mediators between the effects of globalization and the national economy.
Government policies and regulations either permit or deny the smooth
connection among world economies. In the looming trade war between China
and the United States, each government imposes high tariffs on goods and
services. Thus, this trade war does not only affect their economies but also the
rest of the world. On the other hand, some experts claim that the actors are now
the global corporations.

 Ohmae (1995) argues that the nation-state has ceased to exist as the primary
economic organization unit in the global market. Filipino consumers, for
instance, prefer to consume and avail of global products and services like H&M,
Uniqlo, Accenture, Amazon, Alibaba, and FedEx. As a result of transforming the
national economy into a global one,
  Reich (1999) posits that national products, technologies, corporations, and
industries become obsolete. San Miguel Corporation and Jollibee Foods
Corporation are good illustrations of this effect. These two Filipino SMART
companies have expanded outside their home country as they are present in
Europe, US, and the rest of Asia. According to

 Gereffi (2005), such TNCS are the main driving force of economic globalization
accounting for two thirds of the world export. Forbes lists down companies from
63 countries that together account for $35 trillion in revenue, $2.4 trillion in
profit, $162 trillion of assets and have a combined market value of $44 trillion
(Schaefer, 2016).

An international structure for money, power, and interest was created in order to set a
system in the financial and economic relations in the modern day. The establishment of an
international monetary system (IMS) is one of the actors that facilitate economic globalization.
IMS refers to internationally agreed rules, conventions, and institutions for facilitating
international trade, investments, and flow of capital among nation-states.

Historically, there are three global IMS

1. the gold standard,
2. the Bretton Woods System, and
3. the European Monetary System (EMS).

1. The gold standard functions as a fixed exchange rate regime, with gold as the only
international reserve and participating countries determine the gold content of
national currencies (Benczes, 2014).
2. In the Bretton Woods Systems, the US dollar was the only convertible currency. Thus,
it was agreed by 44 countries to adopt the gold-exchange standard. Also,
two financial institutions were established:
a. the International Bank for Reconstruction and Development (IBRD), now
known as the World Bank, is responsible for post-war reconstructions, and
b.the International Monetary Fund IMF which aims to promote international
financial cooperation and strengthen international trade.

3. Another form of integration is the establishment of the European Monetary System

EMS. It came about after the collapse of the Bretton Woods System. EMS was
successful in the stabilization process of exchange rates. It then prompted the
foundation of a new European Economic and Monetary Union (EMU). National
currencies were abandoned and member states delegated monetary policy onto
a supranational level administered by the European Central Bank (European
 Commission, 2008). The development of international trade and trade policy is
also a form of such economic integration. Trade patterns must not be stagnant.
Flow of goods must be voluntary but restricting it might affect the relationship
between and among states.

With the nation-states, global corporations, and international monetary systems as

actors of economic globalization, the world is now confronted with a number of ongoing
debates as to whether economic globalization unites or divides the world.

 Benczes (2014) believes that economic globalization fosters universal economic growth
and development. For one, globalization allows a worldwide distribution of incomes.
Australia, for instance, cannot provide all the raw materials they need for certain
products or services, so it needs other nation-states to produce or provide these
materials.
 Also, economic globalization reduces poverty (World Bank, 2002). As foreign countries
are in need of workforce and human capital, Filipino nurses become overseas workers;
they go to Europe and other foreign countries to support their families in the
Philippines.
 Lastly, globalization creates mutual dependence between developing and developed
countries (Arrighi, 2005). Some developing countries rely on developed countries for
employment and income while the latter relies on the former for raw materials and
services like labor.

On the other hand, some observers of economic globalization believe that

it divides the world further.
 First, one might observe that the sources of goods and services are exploited.
Since these economically poor nation-states depend on industrialized countries
for employment and income, these industrialized countries compensate their
labor with cheap cost. These industrialized countries even source materials from
natural resources of poor nation-states as another form of exploitation. Some
even destroy nature without doing anything to rehabilitate it.
 Second, economic globalization does not benefit all nations (World Bank, 2002).
There is an uneven experience among nations. Workers in TNCs are paid less
compared to their counterparts in the companies' home countries. This shows
how cheap labor is in the Philippines.

 Third, Wallerstien (2005) claims that capitalism created the different levels of
wages in the economic arena of world systems. It further divides the world for it
leads to inequality according to expertise, experience, and skills.
  In conclusion, economic globalization affects all nations and citizens through the
increasing integration of economies around the borderless world. Its important
players are the nation-states, global corporations, and the international
monetary systems.
 Though some people believe that economic globalization brings unity of all
economic movements, others believe that globalization furthers the separation
among nation-states around the world.

IV. Assessment

Activity No. 2. Let’s Do This

Make a status report of the current economic condition of our country, the Philippines as the
COVID-19 pandemic hits the world.

V. References
 
Ariola, Mariano M., (2018). The Contemporary World. Manila: Unlimited Books Library
Services & Publishing Inc. https://www.edology.com/blog/accounting-finance/how-does-
global-economy-work/
E-book:

Brazalote, T. and Leonardo, R. (2019). The Contemporary World Outcome-Based

Module, pages 15-27

 
FURTHER READINGS:
 
It is best fitting to read these online sources to further sharpen your ideas and comprehension:
https://www.ft.com/global-economy
http://oecd.org/coronavirus/en/themes/global-economy