Global Economy

The Global Economy

The Bretton Woods Institutions/ members

Economic Organizations

Multi-National Corporations
Economic Globalization

 A historical process representing the result of

human innovation and technological progress –
IMF
 Characterized by
 increasing integration of economies around the world
 Increased speed and frequency of trading
The Global Economic System

Global economic development, both then and now,

depended on large-scale flows of capital.

central role of transporation in global development:

transportation railroad and the steam ship; airplane

global communications: telegraph/ internet

The Global Economic System
How Economies Interact Today
global economic specialization among the nations of the
world was encouraged
“law” of comparative advantage: that is, that nations
should concentrate on what they do best
BPO
?
a nation should concentrate on what it does best in
comparison to the other things it does not in comparison
to what other nations do
Competing with China's labour rates
Global Economy in the 20th Century

Before World War II

Economic collapse in countries involved in WW I,
the Great Depression, and WW II.
All of these events had negative effects on
almost all major economies
Autarky/ Fascism in Italy and Germany
After World War II

A great fear was the recurrence of the Depression

difficulties of societies in absorbing the massive
manpower created by the demilitarization
fear of a resurrection of barriers to trade (autarky/
protectionism) and the free flow of money that had
become commonplace prior to WW II.
The focus of the (Allied Powers/ reconstruction) planners
was on reducing trade barriers and on creating conditions
necessary for the free flow of money and investment
Bretton Woods Institutions

A key factor in the great depression was thought to be a

lack of cooperation among nation - states.
 high tariffs
import restrictions
protectionist practices
governments to devalue their currencies
After World War II

These were the background leading to the Bretton Woods

Conference
Bretton Woods Institutions

The Bretton Woods

agreement was created in a
1944 conference of all of the
World War II Allied nations. It
took place in Bretton Woods,
New Hampshire.
Bretton Woods Institutions
The Bretton Woods System

Under the agreement, countries promised that their central

banks would maintain fixed exchange rates between their
currencies and the dollar.
Bretton Woods Institutions
The Bretton Woods System
How?
If a country's currency value became too weak relative to
the dollar, the bank would buy up its currency in foreign
exchange markets.
That would decrease the supply, which would raise the
price.
If its currency became too high, the bank would print
more.
That would increase the supply and lower its price.
Bretton Woods Institutions
Members of the Bretton Woods system agreed to avoid
any trade warfare;
members will not lower their currencies strictly to increase
trade.
But they could regulate their currencies under certain
conditions.
they could take action if foreign direct investment began to
destabilize their economies.
adjust their currency values to rebuild after a war
Bretton Woods Institutions
5 key elements
1. each participating state would establish a “par value ’
for its currency expressed in terms of gold or
(equivalently) in terms of the gold value of the US
dollar as of July 1944
Bretton Woods Institutions

5 key elements

2. the official monetary authority (central bank) in each

country would agree to exchange its own currency for
those of other countries at the established exchange
rates, plus or minus a one - percent margin ”
 makes international trade possible at or near the exchange rate for
the currencies of the countries involved without the need for any
outside intervention.
 Bretton Woods Institutions
5 key elements
3. the International Monetary Fund (IMF) was created 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.
Bretton Woods Institutions

5 key elements
4. the member states agreed to
eliminate,“ all restrictions on the
use of its currency for international
trade ”
Bretton Woods Institutions

5 key elements
5. the entire system was based on the US dollar
 The US agreed to make the dollar convertible into other
currencies or gold at the fi xed par value.
 the dollar became a global currency.
Bretton Woods Institutions

The most powerful effects of the Bretton

Woods
global trade,
the global monetary order,
global investment
Bretton Woods Institutions

global trade
 the idea of the “unconditional most-favored nation” which
“ required governments to offer the same trade
concessions [reductions in trade barriers, non -
discrimination against a nation ’ s products] to all”
Restrictions on international trade were reduced over the
years through various rounds of meetings under the
guidance of GATT and later the WTO.
Bretton Woods Institutions
the global monetary order: the IMF
The goal was to provide security and flexibility, to the
monetary order.
What emerged between 1958 and 1971 was a system in
which the US could not change the value of its dollar,
while all other countries could
made exchange rates stable enough to encourage
international trade and investment which otherwise would
have been discouraged by dramatic fluctuations in rates
Bretton Woods Institutions
global investment: World Bank
A key development in terms of investment involved MNCs,
especially American - based firms
 the industries involved required very large, often global,
organizations in order to function effectively.
 this kind of investment made it possible to get around
trade barriers by opening plants within the countries with
such barriers.
Bretton Woods Institutions

global openness
 the emergence or expansion of social welfare programs,
Welfare states dealing with problems like recession,
layoffs, reductions in wages, and bankruptcies of
uncompetitive fi rms.
The creation of a social safety net within a given country
served to protect it and its citizens from these problems,
at least to some degree.
In the process, it gave a nation and its entrepreneurs the
cover they needed to be actively involved in the global
Bretton Woods and the Bretton Woods System

■ General Agreement on Tariffs and

Trade (GATT)
■ World Trade Organization (WTO)
■ International Monetary Fund (IMF)
■ World Bank
Other Important Economic Organizations

1. Organization for Economic Cooperation and

Development (OECD); 30 developed nations.
2. The European Union (EU); 27 member states.
3. The North American Free Trade Agreement (NAFTA);
US, Canada and Mexico
4. MERCOSUR; Southern Common Market: common
market in South America
5. The Organization of Petroleum Exporting Countries
(OPEC) major oil exporters
Multinational Corporations:
Drivers of Global Economy
transnational corporations = Multinational Corporations?
TNCs involve operations in more than one country
MNCs operate in more than two countries.
 MNC has grown more powerful than the nation - state
Multinational Corporations:
Drivers of Global Economy
companies rather than states will be the leading actors in
the world economy. ”
 there are about 61,000 MNCs in the world today carrying out
production through over 900,000 affi liates.
1/10 tenth of the world GNP
And the vast majority – 96 of the top 100 – are in the developed
world
However, as we will see, MNCs from developing countries are
increasing in number and importance
Multinational Corporations:
Drivers of Global Economy
MNC activity is usually measured by foreign direct
investment (FDI).
involves investments by one firm in another firm that
exists abroad in a different nation - state, with the
intention of gaining control over the latter’s operations.
It can also involve setting up a branch (subsidiary)
operation in another country.
FDI has grown substantially in recent years and this is a
major indication of the growth of MNCs. More than two -
thirds of the world ’ s FDI is directed toward developed not
less developed countries.
Multinational Corporations:
Drivers of Global Economy

portfolio investment (another MNC activity)

This involves the purchase of equity in companies in other
countries, but the motivation is financial gain and not to
obtain control over those companies.
How companies become multi-national?
geographic unevenness of markets.
A company may reach a saturation point in its domestic
market; identify new markets that require its direct
presence;
when markets are restricted because of political
regulations (e.g. import tariffs);
 there are strong cultural and political incentives for it to
be present in other countries.
the complexities of MNCs

However they are created, MNCs lead to the development

of far more complex networks.
production activities
 few of them are actually truly global; more likely regional
vary in terms of size and shape.
the complexities of MNCs

There are also always tensions where MNCs are involved,

including those with nation-states, local communities, labor,
consumers, and civil society organizations.
multi - scalar regulatory systems (e.g. the WTO),
international institutes of technical standards
 the resurgence of the nation - state.
Economic Globalization Today

 Global per capita GDP rose over five-fold in the second

half of the 20th century
 Created large Asian economies like Japan, China, Korea, Hong
Kong, and Singapore
 Economic globalization remains an uneven process
 First world countries are often protectionists
 Beneficiaries of global commerce have been mainly
transnational corporations and not governments
Conclusion

 International Economic Integration is a central tenet of globalization

 Much of globalization is anchored on changes in the economy (i.e.
global culture)
 Important to ask: How this system can be made more just?
GROUP ASSIGNMENT

10:30-11:00 AM
Bretton Woods and the Bretton Woods System
1. General Agreement on Tariffs and Trade (GATT)
2. International Monetary Fund (IMF)
3. World Bank
11:00-11:30
1. General overview of the institution: objectives, desired
outcomes, requirements for its members, etc,
2. What are the implications for the Philippines/ how has
the Philippines benefitted from this institution?