THE CONTEMPORARY WORLD

LESSON 2 :
The Globalization of World
Economics
The world is a global
village.

What does it mean?

 Global Village…..
how small the world has become due to
globalization which has removed boundaries to
trade and communication between people in
different countries.
 LEARNING OUTCOMES

 At the end of this lesson you will be able to:

 1. Define economic globalization.
 2. Identify the actors that facilitate economic
globalization.
 3. Assess some of the key economic events that
transformed the world since early days.
 Academic literature commonly subdivides
globalization into three major areas:

1. economic globalization
2. cultural globalization
3. political globalization
 The global economy is comprised of the globalized, linked economies of the
world’s countries. 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.
 International Trading System
 International trade is the exchange of goods and services
between countries. Trading globally gives consumers and
countries the opportunity to be exposed to goods and services
not available in their own countries, or which would be more
expensive domestically. International Trading Systems are not
new.
So, how did it all start? .
The oldest international trade route was the Silk Road.
It is a network of pathways that spanned from China to Middle East
and Europe.
The Silk Road earned its name from Chinese silk, a highly valued
commodity that merchants transported along these trade networks.
Traders used the Silk Road regularly from 130BCE when the Chinese
Han Dynasty opened trade to Europe until 1453 when the Ottoman
Empire closed it.
The Silk Road was international but not truly global because it had no
ocean routes that could reach the American Continent.

When did full economic globalization begin?

 According to historians Dennis O. Flynn and Arturo Giraldez, the age of globalization began when “all
important populated continents began to exchange products continuously - both with each
other directly and indirectly via other continents and in values sufficient to generate crucial
impacts on all trading partners.”
* The two historians trace this back to 1571 with the establishment of the galleon trade
which connected Manila in the Philippines and Acapulco in Mexico.
* This was the first time that the Americas were directly connected to Asian trading routes.
* Economic globalization began in the Philippines, especially on the county’s shores.
* Through the Galleon Trade, commodities from all over the globe docked in Manila Bay,
carrying silver, gold, spices, silk and other items considered fashionable during that era.
When Magellan came, he became witness to the already then fantastic trading system in
the Philippines involving not just people from Southeast Asia but even with China and
others from across the globe, hence as Nick Joaquin noted, “…the first medium to reduce
the world to a village.”
* The galleon trade was part of the age of mercantilism.
* From 16th century to the 18th century, countries, primarily in Europe, competed with one
another to sell more goods as a means to boost their country’s income otherwise known
as “monetary reserves” later on.
* To defend their products from competitors who sold goods more cheaply, these regimes,
(mainly monarchies) imposed high tariffs, forbade colonies to trade with other nations,
restricted trade routes, and subsidized their exports.
* Mercantilism was thus also a system of global trade with multiple restrictions.
 
 
 
 
 
 
 
 
 
  

The Gold Standard

 
* Its goal was to create a common system that would allow for more efficient trade and prevent
the isolationism of the mercantilist era.
* Under the Gold Standard, the countries established a common basis for currency prices and a
fixed exchange rate system- all based on the value of gold.
* European countries wanted to standardize transactions in the booming world trade market,
so they adopted the gold standard by the 1870s.
* It guaranteed that the government would redeem any amount of paper money for its value in
gold, and meant transactions no longer had to be done with heavy gold bullion or coins, since
paper currency had guaranteed valued tied to something real.
* The Gold standard was still a very restrictive system, as it compelled countries to back up
their currencies with fixed gold reserves.
* Many were forced to abandon the gold standard during the World War when countries
depleted their gold reserves to fund their armies.
 

The Great Depression was a worldwide economic depression that lasted 10 years, from 1920s
to 1930s. This depression was the worst and longest recession ever experienced by the Western
world. Some economists believed that it was largely caused by the gold standard since it limited
the amount of circulating money and, therefore, reduced demand and consumption.
 “ the recovery of the United States really
began when, having abandoned the gold
standard, the US government was able to
free up money to spend on reviving the
economy ”

Barry Eichngreen
Economic Historian

What are fiat currencies?

Fiat currencies are national currencies that are not pegged to the price of a commodity such as
gold or silver. Their value is determined by their cost relative to other currencies. This system
allows governments to freely and actively manage their economies by increasing or decreasing
the amount of money in circulation as they see fit.
Well-known examples of fiat currencies include the pound sterling, the euro and the US dollar.
The Bretton Woods System

After the two world wars, world leaders sought to create a global
economic system that would ensure a longer-lasting global peace.
They believed that one of the ways to achieve this goal was to set
up a network of global financial institutions that would promote
economic interdependence and prosperity. Thus, Bretton Woods
System was created.

Delegates attend the Bretton Woods conference in July of

1944 at the Mt. Washington Hotel in Bretton Woods, New
Hampshire
Alfred Eisenstaedt / Time & Life Pictures / Getty
 
 Inaugurated in 1944 during the United Nations Monetary and Financial Conference to prevent
  catastrophies of the early decades from occuring and affecting international ties.

Bretton Woods System

   
Largely influenced by British economist John Maynard Keynes who believed that economic crisis occurs not when
a country does not have enough money, but when money is not being spent and, thereby, not moving. According
  to Keynes, when economies slow down, governments have to reinvigorate markets with infusion of capital.
    This active role of governments in managing spending served as the anchor for what would be called a system of
  global Keynesianism.

   
 
Created two financial institutions
1. World Bank - responsible for funding post war reconstruction projects
 2. International Monetary Fund ( IMF)- global lender of last resort to prevent individual countries from spiraling into credit
crisis. If economic growth in a country slowed down, because there was not enough money to stimulate the economy, the
IMF would step in..

 
 

Keynesian economics is an economic theory of total spending in the economy and its
effects on output and inflation. This was developed during the 1930s in an attempt to
understand the Great Depression. Keynes advocated for increased government
expenditures and lower taxes to stimulate demand and pull the global economy out of the
depression.
Various countries also committed themselves to
further economic globalization…

 General Agreement on Tariffs and Trade

(1947) was created

MAIN PURPOSE:
TO REDUCE TARIFFS AND OTHER
HINDRANCES TO FREE TRADE
Neoliberalism and Its Discontents
During the period of neoliberalism, 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. The theory went that, as
prices increased, companies would earn more, and would have more money to hire workers.
Keynesian economists believed that all these were a necessary trade-off for economic
development.
Friedrich Hayek and Milton Friedman challenged the Keynesian theory.
They argued that the government’s practice of pouring money into their
economies had caused by increasing demand for goods without necessarily
increasing supply. They also argued that government intervention in
economies distort the proper functioning of the market.
What emerged was a new form of economic thinking that critics labeled
Neoliberalism.
"Neoliberalism" is contemporarily used to refer to market-oriented reform policies such as
"eliminating price controls, deregulating capital markets, lowering trade barriers" and
reducing state influence in the economy, especially through privatization and austerity.
 From the 1980s onward, neoliberalism became the codified strategy of the United States Treasury
Department, The World Bank, the IMF, and eventually the World Trade Organization (WTO) – a new
organization founded in 1955 to continue the tariff reduction under the GATT. The policies they
forwarded came to be called the Washington Consensus which dominated global economic policies
from 1980s until the early 2000s. Its advocates pushed for minimal government spending to reduce
government debt. They also called for the privatization of government-controlled services like water,
power, communications , and transport, believing that the free market can produce the best results. And
lastly, they pressured governments, particularly in the developing world, to reduce tariffs and open up
their economies, arguing that it is the quickest way to progress.

Neoliberalism came under significant strain during the global financial crisis of 2007-2008 when the world experienced the greatest economic downturn since
the Great Depression. Among others,
1. government authorities failed to regulate bad investment – like cheap housing loans,
2. people were unable to pay their loans and crisis spread beyond the US. However, the United States recovered relatively quickly, thanks to a large Keynesian-
style stimulus that President Barack Obama pushed in his first months in office.
 Economic Globalization Today
 Global financial crisis will take decades to resolve.
 Exports, not just selling of local goods and services, make national economies grow at present.

In the past, those that benefited the most from free trade were advanced nations that were producing
and selling industrial and agricultural goods. The United States, Japan, and other member-countries of
the European Union were responsible for 65% of global exports, while developing countries only
accounted for 29%. When more countries opened up their economies to take advantage of free trade,
the shares of the percentage began to change.
In the recent decades, partly as a result of these increased exports, economic globalization has ushered
in an unprecedented spike in global growth rates. According to IMF, the global per capita GDP rose over
five-fold in the second half of the 20th century. It was this growth that created the large Asian economies
like Japan, China, Korea, Hong Kong, and Singapore.
And yet, economic globalization remains an uneven process, with some countries, corporations, and
individuals benefiting a lot more than others. The series of trade talks under the WTO have led to
unprecedented reductions in tariffs and other trade barriers, but these processes have often been unfair. To
cite an example of double standard is Japan’s determined refusal to allow rice imports into the country to
protect its farming sector. Japan’s justification is that rice is “sacred.” The US likewise fiercely protects its
sugar industry, forcing consumers and sugar-dependent businesses to pay higher prices instead of getting
cheaper sugar from plantations of Central America.
END