2 The Global Economy

Learning
Outcomes: Pretest
At the end of the
lesson, you will be
able to:
Directionss: Discover how a pair of Niké Shoes is created. Using the link,
complete the data needed on the table below.
• Identify the actors
Name of International
that facilitate Niké Inc.
Company:
economic
globalization;
Leading Manufacturer (4)
• Trace the
development of Polyester –
global market
integration in the Rubber –
twentieth century;
and Eva Foam –
• Articulate your Raw Materials Producer
stance on global Cotton –
economic
integration. Synthetic Leather –

Leather –

Distributors in Asia (13)

Web Link: https://u.osu.edu/nikeshoes/

Write at least three statements about your realization from the creation of a Niké
shoe.

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Overview
Globalisation
What is meant by global economy? According to United Nations, global
economy refers to the interconnected worldwide economic activities
that take place between multiple countries. The International International
Trade
Monetary Fund (IMF) characterized it by the increasing
integration of economies around the world through the
International
movement of goods, services, and capital across borders. Finance

Three fundamental factors have affected the process of

Global
economic globalization and are likely to continue driving Investment

it in the future. First, improvements in the technology of

transportation and communication have reduced the
costs of transporting goods, services, and factors of production and of communicating
economically useful knowledge and technology. Second, the tastes of individuals and societies
have generally, but not universally, favored taking advantage of the opportunities provided by
declining costs of transportation and communication through increasing economic integration.
Third, public policies have significantly influenced the character and pace of economic
integration, although not always in the Directions of increasing economic integration.

Let’s Elaborate
The Global Economy
The Early International Trading System
The oldest known international trade route
was Silk Road(130 BCE – 1453 BCE) –a
network of pathways in the ancient world that
spanned from China to what is now the
Middle East and to Europe. It was called such
because one of the most profitable products
traded through this network was silk.
However, Silk Road was not truly global
because it had no ocean routes that could
reach other continent (Claudio, et al., 2018)
The historians Dennis O. Flynn and Arturo
Giraldez trace real globalization back to 1571
with the establishment of Galleon Trade, that
connected Manila in the Philippines and
Acapulco in Mexico. This was the first time
that the Americans were directly connected to
Asian trading routes. This trade was part of
the age of mercantilism.
In 1867, a more open trade system emerged,
Gold Standard –a monetary standard which
established
common basis for Mercantilism: A system of
currency prices global trade which imposed
and a fixed high tariffs with multiple
exchange rate restrictions.
system –all based
The Global Economy 3
 on the value of gold. Thus it compelled
countries to back their currencies withh fixed
gold reserves.
Great Depression: An economic
crisis beginning with the stock This system had
market crash and mass collapsed as a
unemployment which was largely result of World
caused by the gold standard. War I, Great
Depression and
World War II,
making it impossible to return a pure Gold
Standard.
Today, the world economy operates using the
Fiat Currency –currencies whose value is
determined by their cost relative to other
currencies.
The Bretton Woods System
After the two world wars, world leaders
believed that to achieve a long-lasting global
peace calls to set up a network of global
financial institutions that would promote
economic interdependence and prosperity.
The focus of the planners was on reducing
trade barriers, on creating condition
necessary for the free flow of money and
investment and financial stability around the
globe.This brought the establishment of the
Bretton Woods system.
The Bretton Woods system embraces the
global Keynesianism –founded by John
Maynard Keynes who believed that economic
crises occur not when a country does not
have enough money, but when money is not
being spent, and thereby not moving. Thus,
Government should reinvigorate market with
economic infusions of capital at times of
economic slowdown.
In general, the Bretton Woods system has
five key elements.
First element is the expression of currency in
terms of gold or gold value to establish a “par
value” (Boughton, 2007). For example, The
united states pegged its 35 U.S dollar per
ounce of gold, is the same as 175 Nicaragua
cordobas per ounce of gold.Therefore, the
exchange rate between the two currencies
was five cordobas for one dollar.
Second, the official monetary authority in
each country (a central bank or its equivalent)
would agree to exchange its own currency for
those of other countries at the established
exchange rates, plus or minus a one - percent
margin ” (Boughton, 2007). This made
international trade possible at or near the
exchange rate for the currencies of the
countries involved without the need for any
outside intervention.
"Par Value"
Currency exchange
Exchange rate overseer
Eliminating trade restriction
US dollar as global currency
The Global Economy 4

Third, the International Monetary Fund (IMF)
was created (Babb, 2007) (was the forerunner
of the World Bank) to establish, stabilize, and
oversee exchange rates. Forty states became
IMF members in 1946 and were required to
deposit some of their gold reserves with the
IMF. The IMF was empowered to approve the
par values of currencies and member states
could not change that value by more than 10
percent. If a currency was destabilized, the
IMF was prepared to lend member states the
money needed to stabilize their currency.
Fourth, the member states agreed to
eliminate, at least eventually, “ all restrictions
on the use of its currency for international
trade” (Boughton, 2007).
Finally, the entire system was based on the
US dollar (at the end of WW II the US had
about three - fourths of the world’s gold
supply and accounted for over one - fifth of
world exports). The US agreed to make the
dollar convertible into other currencies or gold
at the fixed par value. The dollar became, in
effect, a global currency.
The Bretton Woods created two financial
institutions: 1. International Bank for
Reconstruction and Development (IBRD or
World Bank) – responsible for funding
postwar reconstruction projects. Its main goal
revolved around the eradication of poverty
and it funded specific projects that help them
reach their goals 2. International Monetary
Fund (IMF) – served as a lender or a last
resort for countries which needed financial
assistance. To this day, both institutions
remain key players in economic globalization.
Shortly after Bretton Woods, various countries
also commited themselves to further global
economic integration.
General Agreement on Tariffs and Trade
(GATT)established in 1947 – aims to reduce
tariffs and other hindrances to free trade.
GATT was a forum for the meeting of
representatives from 23 member countries. It
conucted mutlinational trade agreement
“rounds” of negotiation. In th Uruguay Round
(1986-1993), an agreement was reached to
create the World Trade Organization (WTO).
World Trade Organization (WTO)
headquarters is located in Geneva
Switzerland with 152 member states as of
2008 (Trachtman, 2007). WTO is an
independent multilateral organization that
became responsible for trade in services,
non-tariff-related barriers to trade, and other
boarder areas of trade liberalization.
The Organization of Economic
Cooperation and Development (OECD) is
the most encompasing club of the richest
countries in the world. It has 35 member
states as of 2016, with Latvia as its lastest
member. It is highly influential despite the
group having little formal power. This
emanates from the member countries’
resources and economic power.
In 1960, the Organization of Petroleum
Exporting Countries (OPEC) was originally
comprised of Saudi Arabia, Iraq, Kuwait, Iran
and Venezuela, which are still major oil
exporters today. It was formed because
member countries wanted to increase the
price of oil, which in the past had relatively
low price and had failed in keeping up with
The Global Economy 5
inflation. Today, the United Arab Emirataes,
Algeria, Libya, Qatar, Nigeria and Indonnesia
are also included as members.
The North American Free Trade Agreement
(NAFTA) is a trade pact between the United
States, Mexico and Canada cretaed on
January 1, 1994 when Mexico joined the two
other nations as trading partners. NAFTA
helps in developing and expanding world
trade by broadening international cooperation.
Neoliberalism and Its Discontent
The high point of global Keynesianism came
in mid-1940s to early 1970s. during this
period the government poured money int their
economies, allowing people to purchase more
goods and, in the process, increase for these
goods. As demand increased, so did the
prices of these good but this increased price
was embraced by many economies since this
was also accompanied by general economic
growth and reduced unemployment.
In 1973-1974, the stock markets crashed after
the Unted States stopped linking the dollar to
gold, efectively ending the Bretton Woods
System. With this, along with the sharp rose
of oil prices results into a phenomenon called
stagflation.
Around this time, a new form of economic
thinking labeled neoliberalism emerged. The
term neoliberalism involves, in David
Harvey’s
(2005) view, a
Stagflation: a decline in
combination of
economic growth and
employment (stagnation)
alongside a sharp increase
in prices (inflation).
classical liberalism’s commitment to individual
liberty with neo-classical economics devoted
to the free market and opposed to state
intervention in that market.
The neoliberal theory came to be most
associated
with the US
and the The term Washington Consensus:
Washington - was coined by, and is associated
based global with the work of John Williamson
organizations (1990a, 1990b, 1993; Cavanagh
it exerted
and Broad, 2007).
great control
over (the IMF
and the World Bank are prime examples,
Plehwe, 2007). In fact, neo - liberalism
(Campbell and Pederson, 2001; Harvey,
2005) is often referred to as the
“Washington Consensus” (Serra and
Stiglitz, 2008) because of its linkage to the
political and economic position of the US
andthe physical location of such organizations
in that nation’s capital.
The Washington Consensus dominated gobal
economic policies from the 1980s until the
early 2000s. Its advocates pushed for minimal
government spending to reduce government
debt. They also calledfor the privatization of
government-controlled services like water,
power, communications, and transport,
believing that the free market can produce the
best results. Finally, they pressured
governmtents, particularly in the developing
world, to reduce tariffs and open up their
economies, argueing that it is the quickest
way to progress.
Despite the initial success of neoliberalism,
the defects of the Washington Consensus
became immediately palpable.
The Global Economy 6
Global economic integration is not a new phenomenon. Some communication and trade took place
between distant civilizations even in ancient times. Since the travels of Marco Polo seven centuries
ago, global economic integration—through trade, factor movements, and communication of
economically useful knowledge and technology—has been on a generally rising trend. This process
of globalization in the economic domain has not always proceeded smoothly. Nor has it always
benefited all whom it has affected. But, despite occasional interruptions, such as following the
collapse of the Roman Empire or during the interwar period in this century, the degree of economic
integration among different societies around the world has generally been rising. Indeed, during the
past half century, the pace of economic globalization (including the reversal of the interwar decline)
has been particularly rapid. And, with the exception of human migration, global economic
integration today is greater than it ever has been and is likely to deepen going forward.

Guide Questions
1. How do economic forces facilitate the deepening of globalization?
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2. How is the Philippines central to the history of economic globalization?

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3. What are the difference and similarities of the original Bretton Woods
System and with those of the Washington Consensus?
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The Global Economy 7

 Time to Connect

Activity 1:Identify and Discuss

Directionss: Identify and describe (in two sentences only) the actors that facilitate economic
globalization. Use the given format.

The Actors of Economic Globalization Discussion

The Global Economy 8

Activity 2 – Global Economy Timeline
Directionss: Create a Timeline showing the development of Global Economy. Make sure to observe
the guidelines in creating a timeline indicated in the given. Be Creative.

Web Link:
https://www.wikihow.com/Make-a-Timeline
The Global Economy 9
Activity 3: Tell Me
Directionss: From the learning you acquired from your readings on the different international financial
institutions, write an essay on your views/opinions with regard to global economic
integration. Do you think Philippines should or should not participate in such
organizations? Why? Why not?

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The Global Economy 1
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The Contemporary World 11