THE GLOBAL ECONOMY

AND MARKET INTEGRATION

ALEXIE VERA P. MAGAWAY
THE GLOBALIZATION OF WORLD ECONOMICS

• THE INTERNATIONAL MONETARY FUND (IMF) REGARDS

“ECONOMIC GLOBALIZATION” AS A HISTORICAL PROCESS
REPRESENTING THE RESULT OF HUMAN INNOVATION
AND TECHNOLOGICAL PROGRESS. IT IS CHARACTERIZED
BY THE INCREASING INTEGRATION OF ECONOMIES
AROUND THE WORLD THROUGH THE MOVEMENT OF
GOODS, SERVICES, AND CAPITAL ACROSS BORDERS.
• THESE CHANGES ARE THE PRODUCTS OF PEOPLE,
ORGANIZATIONS, INSTITUTIONS AND TECHNOLOGIES.
• WHILE IT IS DIFFICULT TO ARRIVE AT A PRECISE
DEFINITION OF GLOBALIZATION, IT IS UNIVERSALLY
AGREED THAT A DRASTIC ECONOMIC CHANGE IS
OCCURRING THROUGHOUT THE WORLD.
• ACCORDING TO THE IMF, THE VALUE OF TRADE AS A
PERCENTAGE OF WORLD GDP INCREASED FROM 42.1% IN
1980 TO 62.1% IN 2007.
• INCREASED TRADE ALSO MEANS THAT INVESTMENTS
ARE MOVING ALL OVER THE WORLD AT FASTER SPEEDS.
• ACCORDING TO THE UNITED NATIONS CONFERENCE ON
TRADE AND DEVELOPMENT (UNCTAD), THE AMOUNT OF
FOREIGN DIRECT INVESTMENTS FLOWING ACROSS THE
WORLD WAS US$57 BILLION IN 1982 AND BY 2015 THAT
NUMBER INCREASED TO $1.76 TRILLION.
• APART FROM THE SHEER MAGNITUDE OF COMMERCE,
WE SHOULD ALSO NOTE THE INCREASED SPEED AND
FREQUENCY OF TRADING.
• THESE DAYS, SUPERCOMPUTERS CAN EXECUTE
MILLIONS OF STOCK PURCHASES AND SALES BETWEEN
DIFFERENT CITIES IN A MATTER OF SECONDS THROUGH
A PROCESS CALLED HIGH-FREQUENCY TRADING.
INTERNATIONAL TRADING SYSTEMS

• INTERNATIONAL TRADING SYSTEMS ARE NOT NEW

AND THE OLDEST EXAMPLE WAS THE
INTERNATIONAL TRADE ROUTE, THE SILK ROAD.
• WHILE THE SILK ROAD WAS INTERNATIONAL, IT
WASN’T TRULY GLOBAL BECAUSE IT HAD NO OCEAN
ROUTES THAT COULD REACH THE AMERICAS.
SO WHEN DID FULL ECONOMIC
GLOBALIZATION BEGIN?

• HISTORIANS, DENNIS O. FLYNN AND ARTURO GIRALDEZ, AGREED THAT

IT BEGAN WHEN ALL IMPORTANT AND POPULATED CONTINENTS
BEGAN TO EXCHANGE PRODUCTS CONTINUOUSLY-- WITH EACH
OTHER DIRECTLY AND INDIRECTLY VIA OTHER CONTINENTS– AND IN
VALUES SUFFICIENT TO GENERATE CRUCIAL IMPACTS ON ALL TRADING
PARTNERS.
• THIS WAS TRACED BACK TO 1571 WITH THE ESTABLISHMENT OF THE
GALLEON TRADE THAT CONNECTED MANILA, PHILIPPINES, TO
ACAPULCO, MEXICO.
MERCANTILISM
• THE GALLEON TRADE WAS PART OF THE AGE OF
MERCANTILISM. FROM THE 16TH CENTURY TO THE 18TH
CENTURY, EUROPEAN COUNTRIES COMPETED WITH ONE
ANOTHER TO SELL MORE GOODS AS A MEANS TO BOOST
THEIR COUNTRY’S INCOME (MONETARY RESERVES)
• AS A COUNTERMEASURE FOR COMPETITORS WHO SOLD
THEIR GOODS CHEAPLY, THEY IMPOSED HIGH TARIFFS,
FORBADE COLONIES TO TRADE WITH OTHER NATIONS,
RESTRICTED TRADE ROUTES AND SUBSIDIZED ITS EXPORTS.
• A MORE OPEN TRADE EMERGED IN 1867, WHEN THE US AND
OTHER EUROPEAN NATIONS TOOK AFTER THE FOOTSTEPS OF
UK.
• THEY ADOPTED THE GOLD STANDARD AT AN INTERNATIONAL
MONETARY CONFERENCE IN PARIS.
• THE GOAL WAS TO CREATE A COMMON SYSTEM THAT
WOULD ALLOW MORE EFFICIENT TRADE AND PREVENT
ISOLATION OF THE MERCANTILIST ERA.
• THE COUNTRIES DEVELOPED A COMMON BASIS FOR
CURRENCY PRICES AND A FIXED EXCHANGE RATE SYSTEM–
ALL BASED ON THE VALUE OF GOLD.
• DESPITE FACILITATING SIMPLER TRADE, THE GOLD
STANDARD WAS STILL VERY RESTRICTIVE.
• WHEN WORLD WAR I ERUPTED, GOLD RESERVES
WERE DEPLETED TO FUND THEIR ARMIES. THUS,
THEY WERE FORCED TO ABANDON THE GOLD
STANDARD.
• RETURNING TO A PURE STANDARD BECAME MORE
DIFFICULT AS THE ECONOMIC CRISIS CALLED THE
GREAT DEPRESSION STARTED DURING THE 1920S AND
AND EXTENDED UP TO THE 1930S.
• THIS DEPRESSION WAS THE WORST AND LONGEST
RECESSION EVER EXPERIENCED BY THE WESTERN
WORLD.
• ECONOMIC HISTORIAN, BARRY EICHENGREEN, ARGUES THAT
THE US ONLY BEGAN TO RECOVER WHEN, AFTER
ABANDONING THE GOLD STANDARD, THEY WERE ABLE TO
FREE UP MONEY TO SPEND ON REVIVING THE ECONOMY.
• THOUGH OTHER INDIRECT VERSIONS OF THE GOLD
STANDARD WERE USED UP TO THE LATE 1970S, THE WORLD
NEVER RETURNED TO THE GOLD STANDARD OF THE EARLY
20TH CENTURY.
• THE WORLD ECONOMY NOW OPERATES ON WHAT
ARE CALLED FIAT CURRENCIES.
• THIS SYSTEM ALLOWS GOVERNMENTS TO ACTIVELY
MANAGE THEIR ECONOMIES BY INCREASING OR
DECREASING THE AMOUNT OF MONEY IN
CIRCULATION.
THE BRETTON WOODS SYSTEM

• AFTER THE TWO WORLD WARS, WORLD LEADERS

SOUGHT TO CREATE A GLOBAL ECONOMIC SYSTEM
THAT WOULD ENSURE LONG-LASTING GLOBAL PEACE.
• TO ACHIEVE THIS, THEY WANTED TO SET UP A
NETWORK OF GLOBAL FINANCIAL INSTITUTIONS THAT
WOULD PROMOTE ECONOMIC INTERDEPENDENCE AND
PROSPERITY.
• THE BRETTON WOODS SYSTEM WAS INAUGURATED IN 1944
DURING THE UNITED NATIONS MONETARY AND FINANCIAL
CONFERENCE TO PREVENT THE CATASTROPHES OF THE
EARLY DECADES FROM REOCCURRING AND AFFECTING
INTERNATIONAL TIES.
• THE BRETTON WOODS SYSTEM WAS LARGELY INFLUENCED
BY BRITISH ECONOMIST JOHN MAYNARD KEYNES.
• HE 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, GOVERNMENTS HAVE TO
REINVIGORATE MARKETS WITH INFUSIONS OF CAPITAL.
• THIS ACTIVE ROLE OF GOVERNMENTS IN MANAGING
SPENDING SERVED AS THE ANCHOR FOR WHAT WE CALL
A SYSTEM OF GLOBAL KEYNESIANISM.
• DELEGATES AT BRETTON WOODS AGREED TO
CREATE TWO FINANCIAL INSTITUTIONS.
• THE INTERNATIONAL BANK FOR RECONSTRUCTION
AND DEVELOPMENT (IBRD, OR WORLD BANK)
• THE INTERNATIONAL MONETARY FUND (IMF)
• SHORTLY AFTER BRETTON WOODS, VARIOUS
COUNTRIES ALSO COMMITTED THEMSELVES TO
FURTHER GLOBAL ECONOMIC INTEGRATION
THROUGH THE GENERAL AGREEMENT ON TARIFFS
AND TRADE (GATT) IN 1947.
NEOLIBERALISM AND ITS DISCONTENTS

• FROM MID-1940S TO THE EARLY 1970S, GOVERNMENTS

POURED MONEY INTO THEIR ECONOMIES, ALLOWING PEOPLE
TO PURCHASE MORE GOODS AND, IN THE PROCESS INCREASE
DEMAND FOR THESE PRODUCTS.
• AS DEMAND INCREASED, SO DID THE PRICES OF THESE GOODS.
• KEYNESIAN ECONOMISTS BELIEVED THIS WAS A NECESSARY
TRADE-OFF FOR ECONOMIC DEVELOPMENT.
• IN THE EARLY 1970S HOWEVER, THE PRICES OF OIL
ROSE SHARPLY BECAUSE OF THE OAPEC’S IMPOSITION
OF AN EMBARGO IN RESPONSE TO THE USA AND OTHER
COUNTRIES’ DECISION TO RESUPPLY THE ISRAELI
MILITARY WITH FIREARMS DURING THE YOM KIPPUR WAR.
• THE RESULT WAS UNEXPECTED AND IT WAS CALLED
STAGFLATION.
• ECONOMISTS SUCH AS FRIEDRICH HAYEK AND
MILTON FRIEDMAN ARGUED THAT THE
GOVERNMENT’S PRACTICE OF POURING MONEY
INTO THEIR ECONOMIES HAD CAUSED INFLATION BY
INCREASING DEMAND FOR GOODS WITHOUT
NECESSARILY INCREASING SUPPLY.
• THE ECONOMIC TURMOIL BECAME THE FOUNDATION
TO CHALLENGE KEYNE’S IDEAS. WHAT EMERGED
WAS A NEW FOR OF ECONOMIC THINKING CALLED
NEOLIBERALISM.
 WASHINGTON CONSENSUS
• IT DOMINATED GLOBAL ECONOMIC POLICIES FROM THE 1980S UNTIL
EARLY 2000S.
• IT PUSHED FOR MINIMAL GOVERNMENT SPENDING TO REDUCE
GOVERNMENT DEBT; PRIVATIZATION OF GOVERNMENT-CONTROLLED
SERVICES LIKE WATER, POWER, COMMUNICATIONS AND TRANSPORT,
BELIEVING THAT A FREE MARKET CAN PRODUCE BEST RESULTS.
• THEY PRESSURED DEVELOPING WORLD GOVERNMENTS TO REDUCE
TARIFFS AND OPEN UP ECONOMIES.
• JUST LIKE OTHER SYSTEMS, CERTAIN INDUSTRIES WOULD BE
AFFECTED AND DIE BUT THEY CONSIDERED THIS AS “SHOCK
THERAPY” NECESSARY FOR LONG-TERM ECONOMIC GROWTH.
• ADVOCATES OF NEOLIBERALISM LIKE US PRESIDENT RONALD
REAGAN AND BRITISH PRIME MINISTER MARGARET THATCHER
JUSTIFIED THEIR REDUCTION IN GOVERNMENT SPENDING
AND COMPARED NATIONAL ECONOMIES TO HOUSEHOLDS.
• THE DEFECTS OF THE WASHINGTON CONSENSUS BECAME
NOTICEABLE. ONE EXAMPLE IS POST-COMMUNIST RUSSIA.
• ECONOMIC ELITES WHO HAD EASY ACCESS TO GOVERNMENT
FUNDS TOOK OVER THE INDUSTRIES AND THUS THIS
PRACTICE RESULTED TO OLIGARCHY AND CONTINUES EVEN
UP TO THIS DAY NOT ONLY IN RUSSIA BUT ALSO THE
PHILIPPINES.