Module 2

THE GLOBAL ECONOMY

LEARNING OUTCOMES:

At the end of this chapter, you should be able to:

1. Define economic globalization.

2. Identify the actors that facilitate economic globalization.
3. Define the modern world system ; and
4. Articulate a stance on global economic integration.

LEARNING CONTENT

Introduction

The global economic system, beginning in 1896, had reached its peak in 1914. There are various
changes and improvements that characterize economic globalization before and at present. Structures
of transportation, communication, and capital are comparable then and now.

In terms of transportation, railroads and steamships are the significant inventions that hastened
development in the past. Today, airplanes have been transporting huamns and objects all over the world
isn a relatively shorter period of time.

When it comes to communication, the internet today made the world open to everyone. The
access to different social media and websites allows one to have access to overwhelming information of
other people, organizations and countries, in the past, it was the telegraph that assisted the early
twentieth century communication.

Today and even then, large-scale flows of capital and large-scale immigration are key processes
that became the worldwide norm. One key element of these is the remittance. These are transactios by
which migrants send money back to their countryof origin. Free trades and elimination of trade barriers
strenghtened global economic processes in both periods.

SURPLUSES AND DEFICITS

A good place to get a quick snapshotnof global trade as well as net economic flows in and out of
nation-state, is by looking at a nation’s trade surpluses and deficits.

Of special interest and importance as far as trade surpluses and deficits are concerned are the
positions of the two global economic giants----the US and China----in terms of their trade balances. On
the one side is the US which by the end of November, 2007, had a trade deficit of $701.6 billion (it
ended the year at $738.6 bllion) (Peters, 2007: (3). The deficit dropped slightly in 2008 and dramatically
in 2009 to about half the 2007 figure because of the Great Recession. For its part, China announced that
it had a record trade surplus of $177.47 billion. In 2006 (Peters, 2007) China’s surplus was 75% greater
than it had been in previous year (2005). Through November 2006, the Chinese surplus with the US was
almost equal to its surplus with all other countries in the world. The US deficit with China than with any
other country in the world. The US negotiating with China over the size of its deficit, blaming it, at least
in part on Chinese monetary policies that, in the Us view, artificially undervalue the yuan, thereby
making Chinese exports less expensive and therefore more affordable to Americans. Of course, there is
much more to the American attraction to Chinese products than their low prices traceable to China’s
undervalued currency. The fact is, many Chinese products are attractive because they are priced low,
mainly as a result of the low cost of labor there and because their quality is high, at least for the price
being paid.

ECONOMIC CHAINS AND NETWORK

Trade in goods and services is clearly central to the global economy. Much of that trade takes
place in interconnected circuits of one kind or another. Gary Gereffi (2005:160-83) has outlined several
of the most important economic chains and networks involved in global trade:

 Supply Chains. These are general label for value-adding activities in the production process. A
supply chain begins with raw materials and follows the value-adding process through a variety
of inputs and outputs and ultimately to a finished product. For example, the process might begin
with some comparatively inexpensive raw material, say cotton, and at various steps along the
way workers and technologies add value to the cotton.
 International Production Networks. These involve the networks of producers involved in the
process of producing a finished product. Multinational corporations (MNCs) are seen as playing
a central role, as being the “flagships,” in these networks.
 Global Community Chains. Gereffi and Korzeniewicz (1994) bring together the idea of value-
adding chains and the global organization of industries. They also accord a central place to the
growing importance of the sellers of global products. This includes buyer-driven chains such as
 Wal-Mart which play an increasing role in determining what industries produce and how much
they produce.
 Global Value Chains. Gereffi argues that global value chains are emerging as the overaching label
for all work in this area and for all such chains.

Global Value Chains: China and the US

To give specify to the idea of global value chains, look at the several specific examples of such
chains, all of which involves trade between China(Brandt and Rawski 2008) and the US, although many
other countries in the world are involved in these or similar chain.

SCRAP METAL

An important examples of global value chain involves scrap metal (Seabrook 2008: 47-59). This
seems like a rather prosaic commodity, but it more important than many think as its fate tells us a great
deal about globalization. For one thing, about two-thirds of the steel made in the US comes from
recycled steel rather than from iron ore and coke (“virgin steel”). For another, this is a big business,
espescially since prices for scrap metals have increased dramatically as a result of skyrocketing global
demand for such commodities. In addtion, it is not surprising that given its high level of consumption of
cars, lawnmowers, and the like, the major global source of scrap metal is the US. But increasingly, the
work involved in extracting usable metal from scrap is done elsewhere in the world espescially China.

WASTE PAPER

One of the richest women in the world is Zhang Yin (estimated to be worth $1.5 billion and her
family has worth billions more). The source of her wealth is her business, Nine dragon Paper (72% of
which is controlled by the Zhang family) and Los Angeles-based America Chung Nam (the largest
exporter to China), take mountains of waste paper from the US, ship it to China, recycle it into
corrugated boxes, the boxes are used to ship goods to various places around the world icluding the US
and, once the boxes have arrived at their destination and been unpacked, they are turned into scrap and
the process begins all over again.

T-SHIRTS

The neolibealism that undergrids the global market is based on the belief that market should be
free, open, and have no barriers to free and open trade. While there have been many efforts to lower or
remove such barriers remain in many areas. One particular interesting and instructive example is found
in Pietra Rivoli’s work on the global value chain for T-shirts. The global value chainn here involves,
among other things, cotton grown in and shipped from the US; T-shirts manufactured in China; the
shipping to, and sale in, the US of those new T-shirts; the eventual disposal of them; and finally the
shipping and sale of those T-shirts in Africa. Below, we look at this global value chain, but this time,
nstead of focusing on the various steps involved, we will deal primarily with the nature of the various
markets involved.

iPHONES
 The global value chain for the Apple iphone is fascinating. The story started with the mystery that
while 3.7 million iPhones were sold in 2007, only 2.3 million were registered on the wireless networks
that are Apple’s exclusive partners in the US and europe. The phones we, only supposed to be used on
these networks from which Apple earned a royalty (for example, perhaps $120 a year per phone from its
american network partner, AT&T). The loss of Royalty income to Apple over the three succeeding years
was expected to approach $1 billion. So, where were the other phones?

The phones themselves are manufactured in China and exported to US and Europe. However,
many of them end up being bought there, and then smuggled to other nations, mainly china, where
consumers love high-tech gadgets like the iPhone. In fact, within months of the introdution of the
iPhone in Mid-2007, “iClones” were sale in China at a fraction of the cost of the iPhone. While the clones
closely resemble the originals, many chinese consumers prefer the cachet of the iPhone and are willing
to pay the $400-$500 in additional cost for the original.

The phones are being bought in the US and Europe, sometimes in large quantities by tourist,
airline personnel, small businesspeople, and full-time smugglers, and brought back to China. They might
be paid $30 or so for each phone they bring to China. The phones needs to be “unlocked” and to have
Chinese software added so that they will work in China and outside the official networks, but that is
quick, easy, and expensive (perhaps costing as little as $25. In fact, stores in China that sell the Iphones
manufactured by Apple in China end up, contrary to the company’s policies and wishes, right back in
China (after a brief excursion to the US or Europe).

INCREASING COMPETITION for COMMODITIES

A wide range of commodities constitutes the starting point for many of the global value chains
discussed above. Howeverr, one of the most striking developments in recent years hav been the
increasing global competition for various commodities. The best known and most obvious example is oil,
but much the same thing has happened in the markets for natural gas, copper, lithium (espescially for
batteries for electric cars), nickel, silver, gold, as well as even more mundane commodities such as rice,
wheat, corn, and soybeans. The increasing demands for these commodities, and many others, is no
longer fueled mainly by the needs of the countries we traditionally think of as highly developed but now,
by massive development in other parts of the wwworld, espescially India (Dossani 2008) and China. The
latter, espescially China, are industrializing at a rapid pace (the Chinese economy grew at 10% in 2007;
the US economy grew at 2.5% in that year), and those relatively new industries place large increasing
demands on all sorts of commodities, espescially the oil needed to power them(China accounted for
31% of the increased demand for oil btween 2003 and 2007.

OUTSOURCING

Outsourcing is the transfer of activities once performed by an entity to a business or businesses in

exchange for money. It is a complex phenomenon that is not restricted to the economy, not only a
macro-level phenomenon, and not simply global in character. Dealing with the first issue, while
outsourcing in the economic realm is of greatest importance and the issue of concern here, it also
occurs in many other countries instirutions such as health care and the military. In terms of health care
and the military. In terms of health care, one example is the work of the radiologist, which is increasingly
being outsourced. This is made possible because the material with which radiologists deal (x-rays,
results of MRIs)is now usually digitized and therefore sent easily and quickly via the internet to
radiologists anywhere in the world. Thus, a digitized x-ray taken in London can be read quickly and easily
by a lower-paid radiologistin Asia. Similarly, the military has outsourced many of its functions. For
example, North Atlantic Treaty Organization (NATO) forces from various countries serving in Afghanistan
maybe flown there on leased Ukranian airplanes or by the commercial airlines of NATO nations rather
than on planes from their own air forces.

PROCESS QUESTIONS: Answer briefly

1. Do you think the Philippines is being harmed as other countries transfer thair activities to us also
known as outsourcing?
2. How do you assess globalization in the sphere of production?
3. Does the position of US and China as giants in the economic chain threaten the status of less
developed countries in the global market?

ACTIVITY: FOLLOW THE PRODUCT

The products that we consume and use-----foods, clothing, and gadgets---- are parts of our way of
life. Globalization allows for a worldwide exchange of these commodities and exposure to different
cultures as well. This activity will allow you to investigate the origin and spread of the products and
services sold in your country. You will also be able to know the countries involved in the production,
distribution, and consumption of the products being sold and consumed in the country.

1. Choose form the list one of the following foreign products being sold in the Philippines.
a. Starbucks Coffee
b. Lamborghini Sports Car
c. Iphone
d. Laptop
e. McDonald’s BigMac Burger
f. Rolex Wristwatch
g. Nike Shoes

2. List down the main ingredients or raw materials in manufacturing the chosen product. Identify
the corresponding country from which each ingredient or raw material came from.
3. Identify the countries invloved in the manufacturing of the chosen product. Indicate the
corresponding service the country does for the product(e.g. Costa Rica-planting of coffee beans)
4. Aside from the Philippines, list other countries in which the product is being sold.
5. Cite the kinds of technology that made the creation of the product possible. Consider
communications and transportation.
6. Write one to three statement/s about what you have learned from the activity.
7. There must be a video presentation of the manufacturing of the product

CONSUMPTION

While aspects of globalization that relate to consumption have been mentioned above, this section
focuses more directly on consumption itself in a global context (Sassatelli 2008)
 Consumption is highly complex, involving mainly consumer objects, consumers, the consumpton
process, and consumption sites. Before we get to those topics, it is important to note that there has
beena tendency to closely associate consumption, as well as the globalization of consumption, with
America and Americanization. This is largely traceable to the affluence of the affluence of the US after
the close of WWII and the economic difficulties encountered by most other societies in the world during
this period. Thus, the US developed an unprecedented an unmatched consumer society for several
decades after the end of the war and at the same time, began exporting it---- and its various elements to
much of the rest of the world. While much of American consumer society came to be adopted
elsewhere, it was also modified in various ways, even in the immediate aftermath of WWII in the
European nations ravaged by the war and being aided through America’s Marshall Plan (Kroen
2006:251-77)

CONSUMER OBJECTS AND SERVICES

Much of consumption revolves around shopping for and purchasing objects of all kinds (Quarter
Pounders, snowboards, and automobiles, among others.) but in recent years, an increasing amout of
consumption relates to various services (legal, accounting, and educational, among others.) while many
objects and services remain highly local (e.g. the khat mentioned above; the services of street-based
letter writers for illeterate Indians), an increasing number have globalized. On one hand, there are, for
example, the global objects such as automobiles from the US, Germany, and Japan.

On the other hand, there are global services such as those offered by accounting firms, as well as
package delivery services. Of particular importance in terms of objects and services is the issue of
branding (Holt 2004). Brands are of great importance both within nations as well as globally. Indeed ,
much money and effort is invested in creating brand names that are recognized and trusted throughout
the world. In fact, all of the corporate names mentioned in the previous paragraph have achieved global
brand recognition. In her best selling book No Logo: Taking Aim at the Brand Bullies,Naomi Klein details
the importance of the brand in the contemporary world and the degree to which brands are both
globalized (logo are virtually an international language) and having a global impact ( Klein 2000)

CONSUMERS

Increasing numbers of people throughout the world are spending more and more as consumers.
Not long ago, it was very different as most people spent most of their time as producers. Not only do
more people spend more time consuming, but they are increasingly more likely to define themselves by
what they consume, than by their roles as producers and workers. Furthermore, consumers are on the
move throughout the world, often as tourists. Not only is tourism a form of consumption, but much
tourism is undertaken in order to consume the goods and services on offer at other locales throughout
the goods and services on offer at locales throughout the world.

CONSUMPTION PROCESS

Icreasing numbers of people know what is expected of them as consumers; they generally know
what to do in the consumption process wherever they happen to be in the world. This includes knowing
how to work their way through a shopping mall, use a credit card, or make a purchase online. Others
have not yet encountered, let alone learned how to handle these processes but many of them certainly
will in the not-too-distant future. Where these processes are known, there is a remarkable similarity
throughout the world in the process of consuming in a supermarket, a shopping mall, or a fast-food
restaurant.

CONSUMPTION SITES

American-and-Western-style consumption sites-----shopping malls, fast-food restaurants, clothing

chains, discounters such as Wal-Mart, disney-like theme parks, Las Vegas-style casino hotels, internet
sites such as Amazon.com and Ebay.com---have spread throughout much of the world.

GLOBAL RESISTANCE

The global spread of chain stores, theme parks, and among others, has led to many concerns and
to resistance in many parts of the world (one now even sees resistance to consumption sites here, there
is far broader global opposition to all aspects of consumptin, espescially hyperconsumption.

For example, in Paris, there is much concern about the Champs-Elysees, “ the most beautiful
avenue on earth,” and the way it is increasingly dominated by large outlets, often megastores associated
with global chains such as McDonald’s, Adidas, Gap, Benetton, Disney, Nike, Zara, Virgin, Cartier, Louis
Vuitton, andSephora, as well as huge auto showrooms for Toyota,, renault, and Peugeot. A major reason
is that burgeoning rental costs on the champs-elysees increasinglymeans that it is only the large chains
that can afford them. As a result, local institutions such as clubs and movie theaters are disappearing
from the Champs-Elysees. A movement has emerged to stop the “banalization” of the most famous
avenue in Paris, if not the world; to stop what has already occured in other major areas such as Times
Square in New York and Oxford Street in London.

THE MODERN WORLD-SYSTEM

One of the famous works that captures the socio-historical and economic nexus of pre-capitalist
economies and the present world was that of Immanuel Wallerstein’s researh on the modern world-
system. His analysis focused on the broad economic entity with a division of labor that is not
circumscribed by political or cultural boundaries. This is to say that Wallerstein’s idea of the World-
System is larger than workers, classes, or even states. We can say that though the global economic
activity, countries around the world have been divided according to their economic power in the global
arena.

The world-system by definition, is largely self-contained system with a set of boundaries and a
definable life span; that is, it does not last forever. It is composed internally of a variety of social
structres and member groups.

The Modern-World system is also known as the modern capitalist world-economy. It is a system
which relies on economic domination. It encompasses many state and a built-in process of economic
stabilization. This means that is economic forces (and the economy of the world) that pull people, states,
and societies toward the arena of worldwide economic trnsactions.

WORLDWIDE DIVISION OF LABOR AND THE DEVELOPMET OF THE MODERN-WORLD SYSTEM

Not all countries or areas are equal in the modern-world-system according to Wallerstein. A
three-level heirarchy is a reamarkable feature of the modern capitalist world-economy. The world is
now divided into three categories and thereby creating the worldwide division of labor. They are the
following:

a. Core. These are areas that dominate the capitalist world-economy and exploits the rest of the
system (e.g. US and Japan)
b. Periphery. These are areas that provide raw mterials to the core and are heavily exploited (e.g.
many countries in the African region)
c. Semi-Periphery. A residual category that encompasses a set of regions somewhere between
between exploiting and the exploited (e.g., India)

The international division of exploitation is defined not by state borders but by the division of
the world. These are three things necessary for the rise of the capitalist world economy. The
first is geographical expansion. The era of exploration and colonization in europe created wider
networks of people and markets. It was incorporated with the crumbling feudal economy, slave
trade, and availability of commodities for exchange to other countries.

The division worldwide of labor was estimated to have begun in the 16th century as capitalism
replaced statism as the major mode of domination. The different parts of the world came to specialize in
specific functions. Different areas came to specialize in producing particular type of workers. For
example, Africa was the souremof slaves; Western and Southern Europe were home to peasant tenant
farmers; and Western Europe was dominated by wageworkers, ruling classes, and skilled and
supervisory personnel.

THE PRESSURE OF INCORPORATION

Why are countries being pulled toward this system? Can the countries or areas of the world
“resist” being part of it? Ritzer explained:

“the pressure for incorporation into the world-economy comes not from nations being
incorporated but ‘rather from the need of the world-economy to expand its boundaries, a need which
was itself the outcome of pressures internal to the world economy” (Wallerstein, 1989)

It seems that the world-systemgained an enormous power over the centuries. Today, it is highly
likely that it would grow even moredue to the rise of the global finacial market and modern ways of
producing, distributing, and consuming products and services all over the world.

In maintaining a good balance between maintaining state powerand being part of the modern-
world-system, the states must be strong enough to protect their own economies from external threats.
However, this strength of theirs which comes from, perhaps, theri external sovereignty should not be
too much for them to be able to stand on their own (at least, economically) and refuse to act in accord
with the demands of the capitalist world-economy. It is a matter of striking a balance between the
state’s power and the pressures of the global economy.

LEARNING REFERENCES/RESOURCES

1. The Contemporary World First Edition

- Prince Kennex Reguyal Aldama
GEC Series, OutCome Based Education
ed