The Global Economy

Mildred Megarbio-Estanda
Ateneo de Davao University
 • Objectives
• Economic globalization defined
• Factors facilitating economic
Outline globalization
• Modern World System
• Global economic integration
• Globalization in the Philippines
 Objectives
• Define Economic Globalization
• Identify the factors that facilitate economic
globalization
• Define the modern world system
• Articulate a stance on global economic
integration
A typical family with all their possessions in
the U.K., an advanced economy

GDP per capita: $35,580

Life expectancy: 79 years
Adult literacy: 99%
 A typical family with all their possessions in
Mexico, a middle income country

GDP per capita: $11,410

Life expectancy: 76 years
Adult literacy: 92%
A typical family with all their possessions in
Mali, a poor country

GDP per capita: $1,130

Life expectancy: 50 years
Adult literacy: 46%
 Incomes GDP per Growth rate,
capita, 2005 1960-2005
and Growth
China $6,572 5.8%
Around the Singapore 29,921 5.4%
World Japan 30,821 3.8%
Spain 26,125 3.2%
FACT 1: India 3,486 2.7%
There are Israel 25,670 2.7%
vast United States 41,854 2.2%
differences Canada 32,886 2.1%
Colombia 7,769 1.8%
in living
New Zealand 22,511 1.4%
standards
Philippines 4,920 1.4%
around the Argentina 14,421 1.0%
world. Saudi Arabia 14,729 0.8%
Rwanda 1,333 0.3%
PRODUCTION AND 7
GROWTH Haiti 1,836 –1.2%
 Incomes GDP per Growth rate,
capita, 2005 1960-2005
and Growth
China $6,572 5.8%
Around the Singapore 29,921 5.4%
World Japan 30,821 3.8%
Spain 26,125 3.2%
FACT 2: India 3,486 2.7%
There is Israel 25,670 2.7%
also great United States 41,854 2.2%
variation Canada 32,886 2.1%
Colombia 7,769 1.8%
in growth
New Zealand 22,511 1.4%
rates across
Philippines 4,920 1.4%
countries. Argentina 14,421 1.0%
Saudi Arabia 14,729 0.8%
Rwanda 1,333 0.3%
PRODUCTION AND 8
GROWTH Haiti 1,836 –1.2%
 Incomes and Growth Around the World

Since growth rates vary, the country

rankings can change over time:
– Poor countries are not necessarily doomed to
poverty forever – e.g., Singapore, incomes were
low in 1960 and are quite high now.
– Rich countries can’t take their status for
granted: They may be overtaken by poorer but
faster-growing countries.

PRODUCTION AND 9
GROWTH
 Incomes and Growth Around the World

Questions:
• Why are some countries richer than
others?
• Why do some countries grow quickly while
others seem stuck in a poverty trap?
• What policies may help raise growth rates
and long-run living standards?

PRODUCTION AND 10
GROWTH
 10 Richest Country (Source: WB)

Rank Nation GDP per Capita ($) Monthly Rent (900 sq ft)
1 Luxembourg 110,697.00 2,260 (in Luxembourg)
2 Norway 100,818.50 2,539 (in Oslo)
3 Qatar 93,714.10 3,353 (in Doha)
4 Macao SAR, China 91,376.00 1,864 (in Macao
5 Switzerland 84,815.40 3,506 (Zurich)
6 Australia 67458.40 2385 (Sydney)
7 Sweden 60,430.20 2088 (Stockholm)
8 Denmark 59,831.70 2206 (Copenhagen)
9 Singapore 55182.5 3750 (Singapore)
10 United States 53,042.00 4,208 (New York City)
 Top 10 Poorest Country (Source: WB)

Rank Nation GDP per Capita ($)

1 Malawi 226.50
2 Burundi 267.10
3 Central African Republic 333.20
4 Niger 415.40
5 Liberia 454.40
6 Madagascar 463.00
7 Congo, Dem. Rep. 484.20
8 Gambia, The0488.60
9 Ethiopia 505.00
10 Guinea 523.10
 Globalization
• Globalization is the process of increasing
interdependence among countries and
their citizens.
• Economic globalization is the process of
increasing economic interdependence
among countries and their citizens.

13 of 42
 Economic Globalization:
International Flows

14 of 42
 The Global Circular Flow
• Opening the economy adds ten new flows:
1. Filipino citizens buy foreign produced goods and
services (imports).
2. Filipino producers sell their goods and services
abroad (exports).
3. Filipino producers hire foreign workers.

4. Filipino producers finance investment with foreign

savings.

15 of 42
 The Global Circular Flow
• Opening the economy adds ten new flows:

5. Filipino citizens send saving abroad—buy foreign

stocks and bonds, put money in foreign banks
6. Filipino citizens supply labor to foreign companies or
in foreign countries
7. Foreign countries supply labor in the Philippine labor
market (Ex: Chinese)

16 of 42
 The Global Circular Flow
• Opening the economy adds ten new flows:

8. Foreign citizens place savings in the Philippines—

buy Philippines stocks and bonds, put money in
Philippine banks
9. Foreign producers hire workers in the Philippines

10. Foreign producers finance investment with

Philippine saving

17 of 42
 The Global Circular Flow
• Efficiency in any economy, even the
world economy, is achieved if capital and
labor can move freely to where their
productivity is the highest—where factors
of production are put to wok in their
“highest and best uses.”

18 of 42
 A Brief History of
Economic Globalization

• Economic historian Jeffrey Williamson

classifies the period of 1820-1914 as the
first great period of globalization and the
period since World War II as the second.

19 of 42
 A Brief History of
Economic Globalization
• Many dimensions of globalization are
new today:
– Sharp reductions in trade barriers
– Increases in the flows of information and
commerce over the Internet
– Increased speed and lower cost of travel
– Different nature of international relations.

20 of 42
 The Free-Trade Debate
Revisited
• The argument for free trade rests on two
pieces of intuition:
– Voluntary exchange is efficient, and
– Comparative advantage. A country enjoys a
comparative advantage in the production of a
good if the production of that good has a lower
opportunity cost than it would have if produced
in another country.

21 of 42
 The Free-Trade Debate Revisited
• Those who oppose trade make a number of
arguments:
– Buying imports simply ships jobs abroad
– How can we compete with countries who pay low
wages?
– Free trade will hurt the environment.
– The power of organizations like the WTO can
undermine national sovereignty.

22 of 42
 The Free-Trade Debate
Revisited
• Proponents of free trade have a number of
counter arguments:
– We can’t buy from countries unless they
simultaneously buy from us. Exports to
Mexico grew from $46 billion in 1995, just
after NAFTA went into effect to $111 billion by
2000.

23 of 42
 The Free-Trade Debate
Revisited
• Proponents of free trade have a number of
counter arguments:
• Protecting an industry from foreign competition to save
jobs will cost jobs in those sectors which would expand
with free trade.
• Protecting an industry can lead to inefficiency and a lack of
ability to compete in world markets later on.

24 of 42
 The Free-Trade Debate
Revisited
• Proponents of free trade have a number of
counter arguments:
• Keeping the unemployment rate low is a
macroeconomic issue. The correct tools for fighting
unemployment are fiscal and monetary policies, not
anti-trade policies.
• If the objective is to reduce poverty, how can preventing
trade help?

25 of 42
 The Free-Trade Debate
Revisited
• Proponents of free trade have a number of
counter arguments:
• The real hope for an improved environment is growth
and responsible government. Feeding the citizenry
comes first, and improving the environment comes later.

26 of 42
 The Free-Trade Debate
Revisited
• One final issue is the debate over genetically
modified (GM) foods which are strains of food that have
been genetically modified. Examples include insect and
herbicide-resistant soybeans, corn, and cotton and rice with
increased iron and vitamins.

27 of 42
 Inflation vs. Deflation
• Inflation • Deflation
• Decreases purchasing • Increases purchasing
power of a peso. power of a peso.
• Can cause people to
• Discourages saving. postpone spending.
• Reduces the value of • May cause firms to lay
savings. off workers, causing
• May cause people to unemployment to rise.
spend rather than hold • May cause wages to fall
cash in order to buy
before prices go up.
 • Read the Article of Pedro
Activity 1
– How does the number and variety of items in
your homes compare with those of Pedro’s list?
• Is there
– Where were most of your clothes purchased?
a pattern How about Pedro’s?

shown – How were Pedro’s clothes and HH items

on the produced? Why?

list? – Where and how were your clothes and HH

items produced?

– How has international trade affected production

and consumption of clothes and HH items?
Economic
Globalization
• A historical process, the result of
human innovation and technological
progress.

• It refers to the increasing integration

of economies around the world,
particularly through movement of
goods, services, and capital across
borders.

• Movement of people/ labor and

knowledge (technology) across
international borders. (IMF, 2008)
 Activity 2

• Read the article

A Filipino’s Journey and try
to locate yourself.
• How Filipino is the journey?
Do you know who are owners of these firms are?
Company/ Product Owned by
Jeep Mini Van USA

Shell Gas Royal Dutch Shell

7 Up Britain’s Cadbury Schweppes

Nestle Crunch Candy Bar Nestle SA of Switzerland

Bayer Aspirin Bayer AG in Germany

Burger King Hamburgers British Diageo

Microtel Inns and Suites Argentina, USA

Harlequin Canada

Sony Television Sony Japan

Lipton Tea Unilver, Anglo-Dutch Company

Total Gas Station French Mutinational

 Closed vs. Open Economies
• A closed economy does not interact with
other economies in the world.
• An open economy interacts freely with
other economies around the world.

34
 The Flow of Goods & Services

• Exports:
domestically-produced g&s sold abroad
• Imports:
foreign-produced g&s sold domestically
• Net exports (NX), aka the trade balance
= value of exports – value of imports

35
Factors facilitating economic globalization
• Nation State
– Globalization is redefining the role of national state as an
effective manager of the national economy (Boyer and
Drache)
• NOT obsolete nor irrelevant
• Midwives to globalization (Brodie)
• But Liberals-economic openness increase vulnerability and
influence vary

• United Nations and NGOs

• Transnational Corporations
– driving force,
– constantly evolving (results to outsourcing - MNC)
Economic Globalization New?
• Globalization process since Homo Sapiens (Gills and
Thompson)
• Archaic globalization: silk Road (Frank and Gills)
• Birth of sixteenth century long distance trade (Fernand
Braudel’s)
• Adam Smith: (2 greatest achievement of History)
– Discovery of America
– Direct sea route to India
• Technological advances: British Industrial Revolution
• Monopolized trade (7th and 8th century)
• 19th century world trade dramatic increase (4.2%
increase)
• Transportation revolution
• Golden Age of Globalization (before WWI)
• 2nd half of 19th century
– Division of labor
– Labor mobility
Philippine’s International Trade: EX
Philippine’s International Trade: IM
Top 5 Trading Partner (2015):
Japan, China, USA, Singapore and Hong Kong
 Modern world system?
• Globalist • Non-globalizer
– Foster universal – Fail to reduce
economic growth absolute pove
and development rty
– Benefited from
openness in Trade
 The modern World System…
• Catch up effect of
• Modern capitalist
Solow?
system is UNIQUE:
• Structural relationship – Inclusive
• World systems theory • Trade
• Financial Transactions
• Rostow’s model: not
linear development
• Imperialism: product
of capitalism
Globalization is the product of long process
of capitalist development, not necessarily
new but a relabelling of the old. (Arrighi)
• Since the World Bank and the International Monetary Fund (IMF)
were launched at Bretton Woods global economy has undergone
transformation in several important respects:
– globalization has progressed a great deal over the preceding
quarter century
– WWII destruction and economic recovery as well as expansion
led to rise of American corporations
– the poor performance of statist models of development—so
popular in the past—led to a re-examination of the role of the
state, which in turn motivated a strong shift towards private,
market-based approaches

• THUS, in these transformations, the private sector and private

international finance have become prime agents of economic
development
 Activity 3:
• Grasshopper and Ant are considering whether to
become partners in the StarHops business.
– If you were Grasshopper, would you make Ant a partner?
– What share of the profits from the business would you be willing to
give Ant?
– If you were Ant, would you want to put your savings into
Grasshopper’s business?
– What share of the profits would you want?
• What type of agreement should Grasshopper and Ant
have?
Let us
answer!

• In which type of firm would

you prefer to work?

• Which type of firm would

you prefer to own or
manage?

• Would a large
manufacturing firm more
likely be a corporation or a
proprietorship? A law firm?
A small restaurant? Why?
 Types of Business
Type of Description Advantages Disadvantage
Business s
Sole A business owned • Ease of • Unlimited
Proprietorshi and managed by starting and liability
p one going out of • Difficulty in
individual. The business raising
owner • Control over financial
receives all the profits and capital
profits business • Responsibilit
and bears all the operations y for all
losses. • Pride of losses
ownership • Managemen
• Lower taxes t knowledge
(no may be
corporate limited
 Type of Description Advantages Disadvantage
Business s
Partnership A business • Easier to • Shared
owned and raise profits
managed by financial
two or more capital • Possible
individuals. conflicts
The owners • Partners between
receive all may partners
the profits and combine
bear all the skills • Possible
losses instability
• Pride of after death
ownership of a partner

• Lower taxes • Unlimited

(no liability
corporate
 Type of Description Advantages Disadvantage
Business s
Corporation • a legal entity wholly • Transferability • more forms and
separate from the of shares and regulations than
shareholders who own unlimited life with
it. • Limited liability proprietorships
• It consists of at least • Ability to issue and partnerships;
five to 15 stocks and • corporate tax
incorporators, each bonds rates are often
of whom must hold higher than
at least one share personal tax
and must be rates for
registered with the owners of
SEC. partnerships
• Minimum paid up and
capital is P5,000. proprietorships,
• A corporation in the • double taxation
Philippines can in that
either be stock or corporations
non-stock company pay taxes on
regardless of profits,
The story of DELL (Case study)

•Michael Dell saw a business opportunity in selling

computers and components directly to customers, rather
than going through retail distributors.
•May 1984, Dell incorporated his business in Texas with an
initial capitalization of $1,000.
•In the first years of the business, the company’s growth was
financed by company earnings and loans from Dell’s family.
•Dell Corporation continued to grow, entering the British
market in 1987. In the fall of 1987, Goldman Sachs, a large
investment bank, worked with Dell on a private stock
placement. In a private placement, stocks are made
available to a small group of investors. Dell Corporation
raised $21 million through this stock issue in October 1987.
 How did modern financial markets make it
possible for Dell to grow as rapidly as it did?
 Global Corporations
• Corporations 101
• Defined:
• International companies are importers and exporters
• MNCs have investments in other countries “adapting
their products and service in each local market”
• Global companies market their products to each
individual local market
• TNCs are more complex, with central corporate facility
BUT decision making on R&D and marketing is
independent to each individual foreign market
 • OLD • New
• Location of natural
– Kinds of things resources used in
traded now are production of a good
(ex: computer) does
different in not determine where to
earlier era produce
• Value of physical
– Market materials in the final
integration product is often trivial
now go far • Technologies can be
repeatedly reused
beyond simple once discovered
goods • Rare to find purely
Japanese or Filipino
product
Market Integration
 Economic Integration
• International Monetary Systems
– The Gold Standard
– Bretton Woods System
• European monetary integration
• International Trade and Trade
policies
– Developing countries and
international trade
Trade, Economic Growth, and Development
• the main reasons why integration is formed is
economic, that is, to establish free trade, economic
communities, customs and monetary union
agreements making trade (import, export, services
and investment) between and among member
states easier.
– Examples of this kind of ingration includes the
European Union, the North American Free trade
Agreement (NAFTA), MERCUSOR, and the
ASEAN (Laursen 2010
Looking Back:
• contemporary globalization
• Economic recovery of capital structures (Japan and
Europe) and reentry to global markets
• 1970s-80s, 3 innovations changed global corporations
• Digitalization
• Global communications (CP)
• Structural transformation of global commerce
• From producer driven to consumer driven
• Post-war: 3 structural periods
• Investment based (1950-1970)
• Trade-based globalization (1970-95)
• Digital globalization (1995 onwards)
• Foreign Direct Investments (FDI)
• Major driver of extended global corporate
development
• World financial markets have witnessed
profound changes over the last few decades.
• strong growth of private capital flows to developing
countries
• 2001 was a turbulent year for the global economy and the
global financial markets
• collusion of foreign investors with bureaucracies in
search of competition restraints and privileges,
• the downgrading of value-added components in
enterprises acquired by foreigners.
• But, foreign direct investment (FDI) has contributed
positively to development and growth.
• reform process which opens opportunities for profitable
investment and which, through its impact on risks and
returns

Role of International Financial Institution

• Objectives of IFIs
– poverty alleviation,
– economic growth and
– protection of the environment
• IFIs have pursued these objectives with loans for public sector
projects or programmes, technical assistance, and policy-based
lending
• In the new economic environment, the importance of IFIs and
bilateral aid as sources of funds has decreased.
– central challenge for IFIs is to find ways of fostering development
through expanding opportunities for the private sector

Role of International Financial Institution

 The Role of the Financial
System
1. Providing payment services
2. Matching savers and investors
3. Generating and distributing information
4. Allocating credit efficiently
5. Pricing, pooling, and trading risks
6. Increasing asset liquidity
 More Developed Countries
(MDC)
• Monetary and financial policy plays a major direct
and indirect role in governmental efforts designed
to expand economic activity in times of
unemployment and surplus capacity and to
contract that activity in times of excess demand
and inflation.
• The money supply (currency plus commercial
bank demand deposits) is thought to be directly
related to the level of economic activity in the
sense that a greater money supply induces
expanded economic activity by enabling people to
purchase more goods and services.
 Less Developed
Countries(LDC)
• Markets and financial institutions in many developing
countries are highly unorganized. Many LDC commercial
banks are merely overseas branches of major private banking
institutions in developed countries.
• The ability of LDC governments to regulate the national
supply of money is further constrained by the openness of
their economies.
• Currency substitution – foreign currencies serve
as an alternative to the domestic currency (e.g. US
dollars in Northern Mexico)
• Most important, because of limited information and
incomplete credit markets, the commercial banking
system of many LDCs lacks transparency.
 The Role of Central Banks
– Issuer of currency and manager of foreign
reserves
– Banker to the government
– Banker to domestic commercial banks
– Regulator of domestic financial institutions
– Operator of monetary and credit policy
 Why isn’t the whole world
developed?
• Differences in resources
• Differences in culture
• Maybe part of the answer but not all of it
• Consider the next satellite photo of North
and South Korea, countries with similar
resources and culture
 Why do we care about economic
growth?
• Economic Growth is connected to well
being
• Correlation between GDP per capita and
life expectancy and literacy
GDP, Life Expectancy, and Literacy

Copyright©2004 South-Western
Let us look at the Mindanao and
Philippine context vis-à-vis
globalization.
7/3/2015 Forum on Wealth Creation 69
7/3/2015 Forum on Wealth Creation 70
7/3/2015 Forum on Wealth Creation 71
7/3/2015 Forum on Wealth Creation 72
7/3/2015 Forum on Wealth Creation 73
7/3/2015 Forum on Wealth Creation 74
7/3/2015 Forum on Wealth Creation 76
7/3/2015 Forum on Wealth Creation 77
 Development vs. Growth
• Growth is about increasing incomes.
• Development is about improving outcomes.

“Human development is a process of enlarging

people's choices. In principle, these choices can be
infinite and change over time. But at all levels of
development, the three essential ones are for people
to lead a long and healthy life, to acquire knowledge
and to have access to resources needed for a
decent standard of living. If these essential choices
are not available, many other opportunities remain
inaccessible.” (UNDP. 1990. p. 10.)

7/3/2015 Forum on Wealth Creation 78

7/3/2015 Forum on Wealth Creation 79
7/3/2015 Forum on Wealth Creation 80
7/3/2015 Forum on Wealth Creation 81
7/3/2015 Forum on Wealth Creation 82
7/3/2015 Forum on Wealth Creation 83
7/3/2015 Forum on Wealth Creation 84
7/3/2015 Forum on Wealth Creation 85
7/3/2015 Forum on Wealth Creation 86
7/3/2015 Forum on Wealth Creation 87
7/3/2015 Forum on Wealth Creation 88
7/3/2015 Forum on Wealth Creation 89
7/3/2015 Forum on Wealth Creation 90
7/3/2015 Forum on Wealth Creation 91
 Assessment: Has global trade done more harm
than good? Why?

• “The inexorable integration of markets, nation-states, and technologies

to a degree never witnessed before-in a way that is enabling
individuals, corporations and nation-states to reach around the world
farther, faster, deeper and cheaper than ever before . . . . the spread of
free-market capitalism to virtually every country in the world.” - Thomas
Friedman, The Lexus and the Olive Tree

• Globalization…a social process in which the constraints of geography

on social and cultural arrangements recede and in which people
become increasingly aware that they are receding. - Malcom Waters