ECONOMIC GLOBALIZATION Chapter II.

Unit 1

____________________________________________________________________________

Chapter II. Unit 1

GLOBAL ECONOMY
Objectives
_____________________________________________________________________________
1. To define economic globalization
2. To identify the actors that facilitate economic globalization
3. To explain the role of international financial institutions in the creation of a
global economy
____________________________________________________________________________

UNIT 2: Global Economy

The intensification of economic integration of nation-states marks the creation of

world economy. As emphasized by globalists, market is one of the major driving forces
of globalization. Thus, one of the identified processes of the said phenomenon is
economic globalization.

I. Definition of economic globalization

The following are definition of economic globalization by renowned scholars and
entities:

• It 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 the movement of goods, services, and capital across borders.
The term sometimes also refers to the movement of people (labor) and
knowledge (technology) across international borders (International Monetary
Fund, 2008).
• It is a functional integration between internationally dispersed activities (Dicken,
2004).
• In economic terms, globalization is nothing but a process making the world
economy an organic system by extending transnational economic processes and
economic relations to more and more countries and by deepening the economic
interdependencies among them (Szentes, 2003).

THE CONTEMPORARY WORLD Page 1! of 10

!
ECONOMIC GLOBALIZATION Chapter II. Unit 1

• It is an increase in the extensity, intensity and velocity of intercontinental

exchanges with a clear and direct economic impact (David Held, Anthony
Mcgrew, D. Goldblatt and J. Perraton, 1999).

II. Dimensions of economic globalization (Istvan Benczes, 2014)

1. globalization of trade of goods and services

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

III. History of economic globalization

The beginning of globalization is still debatable among scholars. Historians and

non-historians hold varying views as to when globalization really started. These
varying thoughts are individually discussed by Peer Vries in his study, “A brief history
of economic globalization since Columbus”.

Here are some of the renowned scholars and their individual insights regarding
the early beginnings of economic globalization:

1. Andre Gunder Frank and Barry Gills. They contend that the connected
world stretches back at least 5,000 years. According to them capital
accumulation, centre-periphery relations, the alternation between hegemony
and rivalry and economic cycles with alternating ascending and descending
phases, are not fairly recent phenomena but go back for thousands of years in
world history. Frank even claims that there was a single global world
economy with a worldwide division of labour and multilateral trade from
1500 onward (Frank 1998, cited by O’Rourke and Williamson 2002).
2. John Hobson. According to him, globalization existed as early as the 6th
century “as significant flows of goods, resources, currencies, capital,
institutions, ideas, technologies and peoples, flowed across regions to such an
extent that they impacted upon, and led to the transformation of societies
across much the globe”.
3. Samuel Adshead, For him, a continuous world history began with the
creation of the largest contiguous land empire in history, the Mongolian
Empire that existed during the 13th and 14th centuries.

THE CONTEMPORARY WORLD Page 2! of 10

!
ECONOMIC GLOBALIZATION Chapter II. Unit 1

4. Peter Frankopan. In his popular book on the silk roads, he claimed that there
already was a connected world during what Westerners use to call the Middle
Ages and that its centre was in Central Asia.
5. Janet Abu-Lughod. She assumed the existence of a network of globally
interconnected trade before the early modern age (1450s-1850s). She, however
admits that compared to the contemporary epoch, 13th century international
trade and the production associated with it was neither large nor
technologically advanced and that its exchanges were minuscule.
6. Adam Smith. He considered the discovery of America, and that of a passage
to the East Indies by the Cape of Good Hope, as the two greatest and most
important events recorded in the history of mankind.
7. Karl Marx. According to him, world trade and world market date from the
16th century, and from then on the modern history of capital starts to unfold.
8. Dennis Flynn and Arturo Giraldez. They claim that globalization began in
1571, when Manila became a Spanish stronghold connecting the Atlantic and
the Pacific. They focus strongly on global trade flows, in particular of bullion.
9. Pierre and Huguette Chaunu. They suggest that between 1500 and 1650 the
Carrera de las Indias, the sea routes over the Atlantic Ocean that connected
the different parts of the Spanish Empire, established the first outline,
however rough, of a world economy (Vries 2017).

IV. World Economy: the Concept of Divergence and Divergence

Aside from tracing the origins of economic globalization, the ideas of Wallerstein,
Frank and O’Rourke and Williamson introduced the concept of a fully integrated world
economy which consequently established the roots of divergence and convergence.

1. Immanuel Wallerstein. According to him a European capitalist world-

economy, “the modern world system”, came into existence during the the late 15th and
early 16th century. This world economy was distinctly modern and capitalist, which
means it thrived on ceaseless accumulation of capital. It is a world-system not because it
encompasses the whole world but because it is larger than any juridically-defined
political unit and a ‘system’ because it is largely self-contained and the dynamics of its
development are largely internal. He calls it a ‘world-economy’ because the basic
linkage between the parts of the system is economic.

This modern world system according to him has three constituent parts. They
are as follows:

THE CONTEMPORARY WORLD Page 3! of 10

!
ECONOMIC GLOBALIZATION Chapter II. Unit 1

• Core - the part of the system where free, often skilled labour
produces goods with high added value in strong states.
• Periphery - that part of the system where production is primarily
of lower- ranking goods that have less added value but are essential for
daily use in the core and that are produced predominantly by unfree,
unskilled, less well remunerated labour. The polities (states/
governments) in the periphery tend to be weak and have a strong
export orientation.
• Semi-periphery - that part of the system that is in between the core and
the periphery on a series of dimensions.

Wallerstein considered Western Europe as the core of the European world

economy. In the 16th and 17th century, the core included parts of Central and Eastern
Europe, parts of the Americas and the West Indies, parts of Africa and some parts of
Asia. He and his followers believe that with the division of labour in the modern world
system, the core regions developed at the cost of the periphery. This view introduced
the idea of the Great Divergence (Vries 2017). This pertains to structural patterns of
unequal change as reflected in social division of labor and global inequalities.

2. Andre Gunder Frank. Frank on the other hand believed that a global economy
encompassing the entire globe and functioning as a fully integrated, autonomous
system, with a logic of its own, predated the early modern era (1450s-1850s). He
analyzed this autonomous system by focusing on trade, particularly on the flows of
precious metals. In his analysis, he concluded that at the time Asia, particularly China,
was the global economy’s centre since it functioned as the big depository of precious
metals. In contrast to Wallerstein’s view, Frank claims that Europe’s role in the global
economy was marginal. He further emphasized that Asia was the big global silver sink
during the early modern era (Vries 2017).

3. Kevin H. O’Rourke and Jeffrey G. Williamson. Both economists define

globalization as the integration of international commodity markets. They believe that
the absence of transport costs and trade barriers, international commodity markets
would be perfectly integrated: prices would be the same at home and abroad. In their
analysis of the factors affecting the flow of international commodity markets, they
concluded that the only irrefutable evidence that globalization is taking place is a
decline in the international dispersion of commodity prices or what might be called
commodity price convergence (O’Rourke and Williamson, 2002).

THE CONTEMPORARY WORLD Page 4! of 10

!
ECONOMIC GLOBALIZATION Chapter II. Unit 1

V. Three Distinct Eras of Commodity Exchange and Specialization (O’Rourke and

Williamson)

Period Description Price convergence

Pre-18th Century Long distance trade in Since their presence or Causes:

this period is to non- absence in Europe had high transportation
competing goods impact only on the costs
* non-competing goods living standards of the economic nationalism of
- goods which are not or very rich and little on the 17th and 18th
hardly found in the domestic production, centuries
respective territories of price convergence is not monopolized trade
Asia and Europe possible in this era

Early 19th Century beginning of the of p r i c e c o m m o d i t y Causes:

trade in ‘basic’ convergence is evident Decline in
competing goods in this era transportation costs
Gradual fall of trade
barriers worldwide

Present Era trade in both basic and High price commodity Cause:
highly differentiated convergence Free trade
m a n u f a c t u r e d
commodities

VI. International Monetary Systems

As transnational transactions intensified in the 19th century, there was also a

need to set norms to ease trade processes among nation-states. This propelled the
promulgation of international monetary system or regime (IMS). IMS refers to the rules,
customs, instruments, facilities, and organizations effecting international payments
(Salvatore, 2007). Benczes (2014) emphasized in his publication that the main task of
IMS is to facilitate cross-border transaction, especially trade and investment.

1. The Gold Standard

THE CONTEMPORARY WORLD Page 5! of 10

!
ECONOMIC GLOBALIZATION Chapter II. Unit 1

The early 19th century is not only the ‘big bang of globalization’ as claimed by
O’Rourke and Williamson but also the beginning of the first modern-day international
monetary system/regime. This century also witnessed the dominance of the British
government and the worldwide advance of British companies. Since United Kingdom
was the predominant global economy of the time, it adopted gold mono-metallism in
1821. Although ancient societies such as Mesopotamia and Egypt already used gold as
means of economic exchange, United Kingdom’s adoption of the gold standard
facilitated transnational transactions around the globe. Gradually, the gold standard
was adopted by more and nations after the International Monetary Conference in Paris
in 1867. Before the outbreak of World War I, roughly 70% of the nations participated in
the gold standard (Meissner, 2005). In following gold standard as the new regime for
cross-border transactions, nations believed that ‘gold would guarantee a non-
inflationary, stable economic environment, as means for accelerating international trade’
(Einaudi, 2001).

‘In practice, the gold standard functioned as a fixed rate regime, with gold as the
only International reserve. Participating countries determined the gold content of
national currencies, which in turn defined fixed exchange rates (or mint parities) as
well’ (Benczes, 2014). Although the new regime created stability in foreign exchange
markets and provided nations an almost unlimited access to world finance, it came to
an end at the outbreak of World War I. ‘Participating nations gave up convertibility and
abandoned gold export in order to stop the depletion of their national gold
reserves’ (Benzces, 2014).

2. The Bretton Woods System

The results of World War I coupled with consequences of universal suffrage

(laborers managed to influence domestic politics) made governments reluctant to
defend a pegging system at any cost (Benzces, 2014). This, however, did not last long
after July 1944 when the United Nations Monetary and Financial Conference took place
in Bretton Woods, New Hampshire. In here, allied nations started to negotiate on the
new international monetary regime. In this conference, delegates of 44 countries
managed to agree on the following:

• adopting an adjustable peg system, the gold exchange standard (which was
based on US dollar since it is the only convertible currency of the time); and
the
• establishment of two international institutions: a) the International Banks for
Reconstruction and Development (IBRD) which is responsible for post-war

THE CONTEMPORARY WORLD Page 6! of 10

!
ECONOMIC GLOBALIZATION Chapter II. Unit 1

reconstruction; and b) the International Monetary Fund which has the

mandate to promote international financial cooperation and buttress
International trade (Benczes 2014).

Despite a fixed exchange rate based on the US dollar, the Bretton Woods
Agreement ran into challenges in the early 1970s. The US trade balance had turned to a
deficit as Americans were importing more than they were exporting.Gradually,
countries loss faith on the ability of the US government to convert all dollars in global
circulation to gold. Eventually, nations began demanding gold in exchange of their
dollars. This resulted to a huge global sell-off of the US dollar (International Business, v.
1.0). This prompted United States to abandon the gold-exchange standard in 1971.

Despite efforts to return to a controlled exchange rate mechanism under the

Smithsonian Agreement which devalued the US currency, industrialized countries
failed to stabilize world finances. ‘By 1973, the idea of fixed exchange rates was over
(International Business, v.1.0).

In response to the fall of Bretton Woods Agreement,’industrialized countries

decided to float their currencies in early 1973. Longer-term prices of currencies were
determined by demand and supply forces exclusively (Benczes, 2014). ‘In 1976,
countries met to formalize a floating exchange rate system as the new international
monetary system’ (International Business, v.1.0). This came to be known as the Jamaica
Accords/Agreement.

‘Managed floating, however, did not perform any better. In 1987, the Louvre
Accord was drawn up in order to defend the dollar from further devaluation on the
markets’ (Benczes, 2014). Although United States might have benefited from the Louvre
Accord, others became losers from these coordinated actions, one of which was Japan.

The 1990s however, showed a different situation. The triumph of the neo-liberals
through the Washington Consensus impelled countries to liberalize their markets. The
free market ideology of the Washington Consensus resulted to unregulated and free
flow of capital. Despite its introduction in the late 1980s and early 1990s, no new formal
system has replaced the Bretton Woods.

THE CONTEMPORARY WORLD Page 7! of 10

!
ECONOMIC GLOBALIZATION Chapter II. Unit 1

REFERENCES:

Benczes, I. (2014). The globalization of economic relations. SAGE Publications Ltd.

Discken, P. (2004). Global shift. Reshaping the global economic map in the 21st century.
London: SAGE

Einaudi, L. (2001). Money and politics: European monetary unification and the
international monetary gold standard, 1865-1973. Oxford: Oxford University
Press.

Held, D., McGrew A., Goldblatt, D. et. al. (1999). Global transformations: Politics,
economics, and culture. Stanford, CA: Stanford University Press.

Meissner CM (2005). A new world order: Explaining the international diffusion of the
gold standard. Journal of International Economics.

O’Rourke, K. and Williamson, J. (2002). When did globalization begin? European Review
of Economic History. Cambridge: Cambridge University Press.

Salvatore, D. (2007). International economics. Hoboke: John Wiley & Son.

Szentes, T. (2003). World economics 2. Budapest Akademiai Kiado.

Triffin, R. (1964). The evolution of the International Monetary System: Historical reppraisal
and future perspectives. International Finance Section. Princeton: Princeton
University.

Vries, P. (2017). A brief History of Economic Globalization since Columbus. International

Institute of Social History. Available at http://www.researchgate.net/
publication.

(https://saylordotorg.github.io/text_international-business/s10-international-
monetary- system.html). (accessed 08 December 2018).

Effects of Technological Developments on Globalization Process. Available at http://

www.mediaif.emu.edu.tr.(accessed 05 January 2019).

THE CONTEMPORARY WORLD Page 8! of 10

!
ECONOMIC GLOBALIZATION Chapter II. Unit 1

Following the Money: U.S. Finance in the World Economy (1995). The National
Academics of Sciences, engineering and Medicine. Available at http://
www.nap.edu. (accessed 05 January 2019).

Islam, R. (2015). Globalization of Production, Work and Human Development: Is a Race to the
Bottom Inevitable?.United Nations Development Programme: Human Development
Reports. Available at http://www.hdr.undp.org.(accessed 05 January 2019).

LEARNING ACTIVITY

CONVERGENCE VS. DIVERGENCE

Instructions:
The class will be divided into groups (each group must be composed of five
members). The students will have to:

1. Roam around the building and pick some objects that are usually seen in the
market, and do the following:

• Classify the objects as a. locally-produced-and-traded; b. Locally-produced-

and internationally-traded; or c. Internationally-produced and traded.
• For the locally and internationally produced and traded products, they have to
research from the internet whether their prices vary from one country to
another.
• Using the same objects (the ones mentioned in the previous item), they have to
determine whether they are competing or non-competing products.

2. Make a summary of the initial tasks in the form of a matrix.

3. Discuss the output in the class.

THE CONTEMPORARY WORLD Page 9! of 10

!
ECONOMIC GLOBALIZATION Chapter II. Unit 1

Rubric for the Learning Activity

Integration of lessons/concept discussed in class 15

Additional research related to the topic 10

Clarity of points 5

Total 30

ASSESSMENT

LONG QUIZ

THE CONTEMPORARY WORLD Page 10

! of 10
!