Lesson 2 The Globalization of the World Economics

Economics-the study of how a society organizes its money, trade and industry.

Economic Globalization

International Monetary Fund ( IMF)

-monitors ( check) the international monetary system and global economic developments to identify
risks and recommend policies for growth and financial stability.

Economic Globalization , according to the IMF, is "a historical process, the result of human
innovation and technological progress. It refers to the increasing integration of economies around
the world, particularly through trade and financial flows.

Characteristics of economic globalization:

 Increasing integration of economies around the world through the movement of goods,
services and capital across borders.
 there is qualitative and subjective element to this definition.

How does define “increasing integration?

When is it considered that trade has increased?

Is there a particular threshold?

IMF and ordinary people grapple with the difficulty of arriving at the precise definition of
globalization, they usually agree that a drastic economic change is occurring throughout the world.

According to IMF

Gross domestic product ( GPD) - is the monetary value of all finished goods and services made
within a country during a specific period.

GDP TRADE: From 42.1 % in 1980 to 62.1 % in 2007

According to UNITED NATIONS CONFERENCE on TRADE and DEVELOPMENT ( UNCTAD) the

amount of foreign direct investments across the world was US$ 57 billion in 1982, by 2015 the
number was $1.76 trillion.
( these figures represent a dramatic increase)

Drastic changes:
From Physical Matter to Downloadable Data

Eg. Books to E-books and CDs to iTunes

 International Trading System

Silk Road

-oldest known international trade route

-a network of pathways in the ancient world that spanned from China and to Europe.

-one of the most profitable product was silk.

-Opened by Han dynasty in 130 BC until closed by Ottoman empire in 1453 AD

-International only but not Global since it did not reach America.

Dennis O. Ellynn and Arturo Giraldez- the age of globalization began when “all important populated continents began to
exchange products continuously both with each other directly and indirectly via other continents.

Galleon trade connected Manila in the Philippines and Acapulco in Mexico

-they sell more goods as means to boost their country’s income.

-to defend their products from competitors who sold goods more cheaply, these regimes mainly monarchies imposed
high tariffs forbade colonies to trade with other nations.

-for Filipinos it is crucial to note that economic globalization began on country’s shores.
 Gold Standard

-UK, US and other European countries adopted the gold standard.

-it allows more efficient trade and prevents the isolationism of the mercantilist era

-these countries established a common basis for currency prices and fixed exchange rate system-all
based on the value of Gold.

-Gold standard was once the norm

-the world’s major economic powers were on the gold standard from 1900 to 1914. However, they
were unable to maintain it from 1914 to 1918, i.e., during World War I.

-the gold standard was still a very restrictive system, as it compelled countries to back their
currencies with fixed gold reserves.

Problem:

During the World War I when countries depleted their gold reserves to fund their armies many were
forced to abandon the gold standard since European countries had low gold reserves, the adopted
floating currencies that were no longer redeemable in gold.

Floating currencies- values change according to how the currency trades on foreign exchange.

The Great Depression –

-Started in 1920s to 1930s
-returning to a pure standard become more difficult as the global economic crisis.
-this is the worst and longest recession experienced by the Western World.
-some economists argued that it was largely caused by the gold standard.

The gold standard limited the amount of circulating money and therefore reduced demand and
consumption,
If governments could only spend money that was equivalent to gold, its capacity to print money
and increase the money supply was severely curtailed ( to reduce)
Most major powers, except for the United States, abandoned the gold standard during the Great
Depression. The Great Depression lasted during much of the 1930s.

Why did Great Depression happen?

What Caused the Great Depression? | St. Louis Fed

What were the major causes of the Great Depression? Among the suggested causes of the Great
Depression are: the stock market crash of 1929; the collapse of world trade due to the Smoot-
Hawley Tariff; government policies; bank failures and panics; and the collapse of the money supply.

Barry Eichengreen –argues that the recovery of the United States really began when having
abandoned the gold standard, the US government was able to free to spend to reviving the economy.

Today the world operates based on what are called , fiat currencies.

Fiat currencies- currencies that are not backed up by precious metals.

This system allows government to freely and actively manage their economies. By decreasing or
increasing the amount of money.

The Bretton Woods System

-it is a global economic system that would ensure a longer- lasting global peace

-one of the ways to achieve this goal was to set up a network of global financial institutions that
would promote economic interdependence and prosperity.

- the Bretton system was influenced by the ideas of British economist John Maynard Keynes

John Maynard Keynes 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.

When economies slow down according to Keynes governments have to reinvigorate (to give ) markets
with infusions of capital.

-Active role of governments in managing spending served as the anchor of global Keynesianism.

Two financial institutions

1. International Bank for Reconstruction and Development ( IBRD or World Bank)

-responsible of funding post-war reconstruction projects

2. International Monetary Fund ( IMF)

-if the economic growth in a country slowed down the IMF would step in.
 Neoliberalism and its Discontents

-the high point of Global Keynesianism came in the mid-1940s to the early 1970s.

-governments poured money into their economies, allowing people to purchase more goods

- as demand increased , so did the prices of these goods.

-Asian economies like Japan accepted this rise in prices because it was accompanied by general
economic growth and reduce unemployment.

- This theory as prices increased companies would earn more

-Keynesian believed that all this was necessary trade-off for economic development.

End of Bretton Wood System

-United States stopped linking the dollar to gold

-Stagflation—decline in economic growth and employment ( stagnation)

Friedrich Hayek and Milton Friedman

-they argued that the governments’ practice of pouring money into their economies had caused the
inflation by increasing demand for goods without necessarily increasing supply.

New form economic thinking emerged and it was labelled Neoliberalism

Neoliberalism became the codified strategy of the IMF, WORLD BANK, WTO.

A new organization founded in 1995 to continue the tariff. Reduction under the GATT.the policies
they forwarded came to be called the Washington Consensus.

Washington Consensus- it advocates pushed for the minimal government spending to reduce
government debt.

Despite the initial success, the defects of the Washington Consensus became immediately palpable (
tangible )

Example:

After the Communism had collapsed in the 1990s, the IMF called for the immediate privatization of
all government industries.

The IMF assumed that such a move would free these industries from corrupt bureaucrats

Only individuals and groups who had accumulated wealth under the previous communist order had
the money to purchase these industries.

The elites relied on easy access to government funds to take over the industries.