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Reading Essentials and Study Guide

Contemporary Global Issues 1989–Present
Lesson 3 Global Economies

ESSENTIAL QUESTIONS
What influences global political and economic relationships? How
do social and environmental issues affect countries differently?

Reading HELPDESK
Academic Vocabulary
currency coins, for example, that are in circulation and used as a medium of exchange
dynamic an activity or change that is continuous and productive

Content Vocabulary
multinational corporation a company with divisions in more than two countries
globalization the movement toward a more integrated and interdependent world economy
collateralized debt obligation a debt security collateralized by a variety of debt obligations
including bonds and loans of different maturities and credit quality
subprime investments investments based on loans that have an interest rate that is higher than a
prime rate and is extended especially to low-income borrowers

TAKING NOTES: Organizing

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ACTIVITY As you read, use a table like the one below to identify global economic organizations and
regional trade organizations.

Global economic organizations Regional trade organizations

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Reading Essentials and Study Guide

Contemporary Global Issues 1989–Present
Lesson 3 Global Economies, continued

IT MATTERS BECAUSE
Changes in technology have closely tied together people and nations. They have contributed to
globalization, or a more connected world. As a result, a global economy has been created.

Global Economic Organizations

Guiding Question What are the roles of global economic organizations in the world
economy?
The global economy began to develop after World War II. It gained momentum in the 1980s and
1990s. After World War II, the United States and other nations set up the World Bank and the
International Monetary Fund (IMF). These organizations were expected to expand global markets and
to help avoid economic crises. The World Bank is actually a group of five international organizations.
These organizations are mostly controlled by developed countries. The World Bank provides grants,
loans, and advice for economic development in developing countries. The World Bank’s stated goal is
“a world free of poverty.” The IMF was founded in 1945. It is now an organization of 188 countries. Its
goal is to oversee the global financial system. To achieve its goal, the IMF watches exchange rates. It
also offers financial and technical aid to developing nations.
Multinational corporations are another reflection of the global economy. Important examples of
multinational corporations include Siemens, General Motors, Exxon Mobil, Mitsubishi, and the Sony
Corporation. They are among the 200 largest multinational corporations. These 200 companies alone
are responsible for more than half of the world’s industrial production. These supercorporations also
control much of the world’s investment capital, technology, and markets.

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Corporate sales (the value of what businesses sell) and national gross domestic product (the value
of what countries make and sell) were recently compared. The results revealed that only 49 of the
world’s hundred largest economic entities, or units, are nations. The remaining 51 are corporations. For
this reason, some people believe that economic globalization might best be called “corporate
globalization.”
There is also a downside to the growing number of multinational corporations. They tie one
country to another more and more in a global economy. This means an economic downturn in one
country can cause the economy in other countries to stop growing. We live in an economically
interdependent world.
Global trade is another important part of the global economy. Over the years, many nations joined
in talks to make trade between countries free and easy. These talks led to the General Agreement on
Trade and Tariffs (GATT). In 1995 the nations that signed the GATT treaties agreed to create the World
Trade Organization (WTO). This organization includes 162 member nations. The WTO arranges trade
agreements and settles trade disputes, or disagreements, between countries.
The Group of Eight (G8) refers to eight industrialized nations in the West. These nations meet each
year to discuss global economic and security issues. This is an informal organization. It is very much
like the Group of Twenty (G20). The G20 is a group of twenty countries that meets to discuss
international financial issues.

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Reading Essentials and Study Guide

Contemporary Global Issues 1989–Present
Lesson 3 Global Economies, continued

Reading Progress Check

Contrasting How are the World Bank and International Monetary Fund different?

Regional Trade Organizations

Guiding Question What are the effects of regional trade organizations on national and
regional economies?
Groups of nations have also joined together to form trading blocs, or groups of countries that share a
goal. These countries work together to help the countries’ region prosper. For example, Mercosur is an
economic union in South America. It includes Argentina, Brazil, Paraguay, and Uruguay.

NAFTA
In 1992 Mexican president Carlos Salinas de Gortari began to work with U.S. president George H. W. Bush
and Canadian prime minister Brian Mulroney. The nations created the North American Free Trade
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Agreement (NAFTA). It was ratified, or given formal approval, and put into effect in the beginning of 1994.
It created a free trade area for Canada, the United States, and Mexico. Some economists argue that it has
helped business owners, but it has hurt other groups. For example, Mexican farmers were harmed. The
prices for their food products dropped when cheap American foods were imported to Mexico. U.S. industrial
workers were also hurt. American companies outsourced, or sent, jobs to Mexico. The companies wanted to
use cheap labor there. The United States and six Central American nations created a similar agreement in
the mid-1990s. This agreement was called CAFTA (Central America-U.S. Free Trade Agreement).

European Union
The European Community (EC) was chiefly an economic union. It included 344 million people by 1992.
The EC was the world’s largest single trading bloc. The Treaty on European Union tried to create a
true economic and monetary union of all EC members. The EC renamed itself the European Union (EU)
on November 1, 1993.
One of the EU’s first goals was to set up a common currency. It is called the euro. The euro was
adopted by 12 EU nations early in 1999. A European Central Bank was created on June 1, 1999. The
euro had officially replaced 16 national currencies by January 2010. Approximately 338 million people
use the euro. It is the world’s second-largest reserve currency after the U.S. dollar. That is, it is a
foreign currency that is held in large amounts by governments and institutions. It is used by them to
pay for international transactions, or business deals.
The EU has a single internal market for its members. The EU established a common currency. It also
established a common agricultural policy. It provides subsidies, or grants of money, to farmers to help
them sell their goods competitively on the world market. It also provides aid to the EU’s poorest
regions. It helps pay for job training, education, and modernization.
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Reading Essentials and Study Guide

Contemporary Global Issues 1989–Present
Lesson 3 Global Economies, continued

The EU has been less successful in setting common foreign policy goals. Individual nations still see
foreign policy as a national right. They are reluctant to give it up. The EU foreign ministers meet
periodically. But, they usually do not establish a standard policy that all nations agree to follow. Even
so, the EU did create a military force of 60,000. It is chiefly used for peacekeeping.
The European Union formally approved the Lisbon Treaty in 2009. The treaty created a full-time
presidential post for the EU. It also set up a new voting system that is simpler and that better reflects
population size. The Treaty also gave more power to the European Parliament in an effort to promote
the EU’s foreign policy goals.

Reading Progress Check

Classifying Would you describe the European Union as solely an economic entity?

Aspects of Globalization
Guiding Question What are the costs and benefits of globalization?

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Globalization is the process by which people and nations have become more dependent on each
other. Politically and socially, globalization has led to the development of citizen groups and
transnational organizations. These groups work in many nations to help solve common problems. Not
everyone approves of the globalization of the economy, however.

Protests
People have attacked global economic organizations. Both the World Bank and the IMF have received
criticism. People claim that these global economic organizations force Western economic practices on
non-Western nations. Critics also argue that World Bank and IMF policies make the poverty and debt
of developing nations worse. The World Trade Organization has been criticized for ignoring
environmental and health concerns. It has also come under attack for leaving out small and
developing countries.
Critics of globalization have also protested multinational corporations. These corporations have
been criticized for the way they make large profits. They sometimes do this by keeping workers’ wages
low and allowing poor working conditions. At the same time, they ignore environmental concerns.
Antiglobalization protesters try to disrupt meetings of the IMF and World Bank at cities around the
world. The protesters have clashed, or fought, with police in many places.
Another challenge to globalization comes from the wide gap between rich and poor nations. Rich,
or developed, nations are located mainly in the Northern Hemisphere. They include countries such as
the United States, Canada, Germany, and Japan. These countries have well-organized industrial and
agricultural systems, as well as effective education systems. They also have advanced technologies.
The poor, or developing, nations include many nations in Africa, Asia, and Latin America. They are
often mainly agricultural nations. These nations often have income inequality and little technology.
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Reading Essentials and Study Guide

Contemporary Global Issues 1989–Present
Lesson 3 Global Economies, continued

Global Financial Crisis

The global economy began to experience financial troubles in 2007. These worldwide troubles
followed the collapse of the United States housing market. In the early 2000s, many more people in
the United States were buying houses. They could do this because of low interest rates on home loans.
Also it was easier for them to get mortgages, or loans for homes. This drove up housing values. In
response, investors began selling financial investments called collateralized debt obligations (CDOs).
These investments were made up of many mortgages grouped together as one investment. Many of
the mortgages had been loaned to borrowers with low credit ratings and high rates of default, or of
not paying back loans. As a result, there was a good chance the loans would not be paid back. Banks
in New York sold CDOs to banks in Europe and elsewhere. This action spread both the possible gain
and the risk of investment. In the meantime, the low initial rates on the mortgages for borrowers were
expiring, or coming to an end. Default rates increased—borrowers were not able to pay for their home
loans. As a result, the investments, the CDOs, began to lose value. Homes also lost value. By September
2008, a number of insurance and mortgage companies, investment firms, and banks fell into
bankruptcy. They could not pay back the money they owed. Stock values fell by almost 8 trillion
dollars from mid-September to November that year.
This crash of the United States housing market in 2008 led to a worldwide recession, a time of slow
business activity. The American economy slowed, and trade decreased worldwide. American
consumers had been buying a great many goods because of high home values. They could no longer
buy as many goods. Production in Asia decreased. Commodity (things that are bought and sold) prices
fell, especially that of oil. This affected Middle Eastern countries and Russia.
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The United States responded to the financial crisis. An emergency program supplied financial
institutions with money to operate and invest. The government also set up a stimulus package to
support economic growth and slow unemployment. Europe faced less severe problems than the
United States. Even so, European banks that had subprime investments required government help
to recapitalize, or be supplied with money. Eastern Europe countries were new free market
economies. They experienced problems, too, and they had to lower the value of their currency. This
was because investors took out their money out of these countries to place it in the stronger dollar
and euro during the crisis. Governmental actions prevented a total failure of the world financial
system. However, high unemployment and weak consumption will likely be a problem for Western
nations for years to come.

Emerging Economic Powers

China and India are experiencing economic growth at a rate rarely seen before. For the past 15 years,
China’s annual growth rate has been impressive. It has moved between 7.3 to 14.2 percent. India’s
annual growth rate has changed greatly. It was 7.3 percent in 2014. Both have the potential for high
growth rates to continue for decades. Some economists predict that China’s economy will overtake, or
pass, that of the United States by 2050.
The bases of the economies of China and India are not the same. China is strong in mass
manufacturing. India is a growing power in design services and software. Globalization has allowed
multinational corporations to have their products built in China. The software used to build the
products is designed in India. One major result is the outsourcing of jobs from the United States to
both India and China. This mass outsourcing is a major concern of U.S. political leaders. However, they
seem helpless to stop the trend.
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Reading Essentials and Study Guide

Contemporary Global Issues 1989–Present
Lesson 3 Global Economies, continued

Despite this impressive economic growth, both countries have serious problems. Hundreds of
millions of people live in poverty. Also, environmental problems are growing. Fertile land is in
increasingly short supply. Air pollution, especially in China, is 10 times higher than that in the United
States. Smog, a mixture of smoke and chemicals, fills the air in both Shanghai and Bombay. As a
result, concerns about residents’ health grow. Finally, no one is sure that both countries can continue
on their dynamic, or strong, rate of economic growth. Per capita income, or income of each person, in
the United States is six times higher than in China. An estimated 21 percent of the population lives
below the international poverty line.

Reading Progress Check

Analyzing Why have some individuals protested the practices of global economic organizations?

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