Module 1: The Structures of Globalization

LESSON 2: THE GLOBALIZATION OF WORLD

ECONOMICS

Objectives

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

 define economic globalization
 identify the actors that facilitate economic globalization.
 narrate a short history of global market integration in the twentieth century; and
 articulate your stance on global economic integration.

Introduction
Hi! Have you been well? I hope you are ready for another lesson.
Are you interested on how the economy of a certain country is doing? How it works? What is
it for? Even if you don’t care at all you are affected by it. You may not feel but indeed you
are part of an economic system. Countries have built economic partnerships to facilitate
exchange of goods over many centuries. In this lesson you will know Global economics’
looks at how trade has shaped the global economy and considers the costs and benefits of free
trade – it also provides an analysis of the major problems facing the global economy in the
21st Century. In this lesson, you will learn how wide and broad global economy affects our
lives.

Abstraction
 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. As with all other processes of
globalization, there is a qualitative and subjective element to this definition. How does one
define “increasing integration?” When it is considered that trade has increased? Is there a
particular threshold?
Even while the IMF and ordinary people grapple with the difficulty of arriving at
precise definitions of globalization, they usually agree that a drastic economic change is
occurring throughout the world. According to the IMF, the value of trade (goods and
services) as a percentage of world GDP increased from 42.1 percent in 1980 to 62.1 percent
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. By 2015, that number was $1.76 trillion. These figures represent a dramatic
increase in global trade in the span of just a few decades. It has happened not even after one
human lifespan.
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. Even the items being sold and traded are changing drastically. Ten years
ago, buying books or music indicates acquiring physical items. Today, however, a “book”
can be digitally downloaded to be read with an e-reader, and a music “album” refers to the 15
songs on mp3 format you can purchase and download from iTunes.
This lesson aims to trace how economic globalization came about. It will also assess
this globalization system, and examine who benefits from it and who is left out.

International Trading Systems

International trading systems are not new. The oldest known international trade route
was the Silk Road – a network of pathways in the ancient world that spanned from China to
what is now Middle East and to Europe. It was called as such because one of the most
profitable products traded through this network was silk, which was highly prized especially
in the area that is now the Middle East as well as in the West (today’s Europe). Traders used
the Silk Road regularly from 130 BCE when the Chinese Han dynasty opened trade to the
West until 1435 BCE when the Ottoman Empire closed it.
However, while the Silk Road was international, it was not truly “global” because it
had no ocean routes that could reach the American continent. So 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 via other continents—and in values sufficient to
generate crucial impacts on all trading partners.” Flynn and Giraldez trace this back to 1571
with the establishment of the galleon trade that connected Manila in the Philippines and
Acapulco in Mexico. This was the first time that Americans were directly connected to Asian
trading routes. For Filipinos, it is crucial to note that economic globalization began on the
country’s shores.
The galleon trade was part of the age of mercantilism. From the 16 th 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 (called monetary reserves later on). To defend their
products from competitors who sold goods more cheaply, these regimes (mainly monarchies)
impose high tariffs, forbade colonies to trade with other nations, restricted trade routes, and
subsidized its exports. Mercantilism was thus also a system of global trade with multiple
restrictions.
A more open trade system emerged in 1867 when, following the lead of the United
Kingdom, the United States and the other European nations adopted the gold standard at an
international monetary conference in Paris. Broadly, its goal was to create a common system
that would allow for more efficient trade and prevent the isolationism of the mercantilist era.
The countries thus established a common basis for currency prices and fixed exchange rate
system—all based on the value of gold.

The gold standard, though once common, has proven to be very restrictive form of global trade

Despite facilitating simpler trade, the gold standard was still very restrictive system,
as it compelled countries to back when their currencies with fixed gold reserves. During
World War I, when countries depleted their gold reserves to fund their armies, many were
forced to abandon the gold standard. Since European countries had low gold reserves, they
adopted floating currencies that were no longer redeemable in gold.
Returning to a pure standard became more difficult as the global economic crisis the Great
Depression started during the 1920s and extended up to the 1930s, further emptying
government coffers. This depression was the worst and longest recession ever experienced by
the Western world. Some economists argued that it was largely caused by the gold standard,
since it limited the amount of circulating money and, therefore, reduced demand and
consumption. If government could only spend money that was equivalent to gold, its capacity
to print money and increase the money was severely curtailed.
Economic historian Barry Eichengreen argues that 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. At the height of World War II, other major
industrialized countries followed suit.
 Though more indirect versions of the gold standard were used until as late as the
1970s, the world never returned to the gold standard of the early 20 th century. Today, the
world economy operates based on what are called fiat currencies—currencies that are not
backed by precious metals and whose 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 it.
The Bretton Woods System
After the two world wars, world leaders sought to create 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. The Bretton Woods system was inaugurated in 1994 during
the United Nations Monetary and Financial Conference to prevent the catastrophe of the early
decades of the century from reoccurring and affecting international ties.
The scenic Bretton Woods where policymakers established the contours of modern global economics

The Bretton Woods system was largely influenced by the ideas of British economist
John Maynard Keynes who 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, according to Keynes, governments have to reinvigorate markets with
infusions of capital. This active role of governments in managing spending served as the
anchor for what would be called a system of global Keynesianism.
Delegates at Bretton Woods agreed to create two financial institutions. The first was
the International Bank for Reconstruction and Development (IBRD, or World Bank) to be
responsible for funding postwar reconstruction projects. It was affected the Western
economies that were reliant on oil. To make matters worse, the stock markets crashed in
1973-1974 after the United States stopped linking the dollar to gold effectively ending
Bretton Woods system. The result was a phenomenon that Keynesian economics could not
have predicted—a phenomenon called stagflation, in which a decline in economic growth and
employment 9stagnation) takes place alongside a sharp increase in prices (inflation).
Around this time, a new form of economic thinking was beginning to challenge the
Keynesian orthodoxy. Economists such as Friedruch Hayek and Milton Friedman argued that
the governments’ practice of pouring money into their economies had caused inflation by
increasing demand for goods without necessarily increasing supply. More profoundly, they
argued that government intervention in economies distort the proper functioning of the
market.
Economists like Friedman used the economic turmoil to challenge the consensus
around Keynes’s ideas. What emerged was a new form of economic thinking that critics
labeled neoliberalism. 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 1995 to continue the tariff
reduction under the GATT. The policies they forwarded came to be called the Washington
Consensus.
The Washington Consensus dominated global economic policies from the 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. Finally, they pressured governments, particularly in the developing world, to
reduce tariffs and open up their economies, arguing that it is the conceded that, along the
way, certain industries would be affected and die, but they considered this “shock therapy”
necessary for long-term economic growth.
The appeal of neoliberalism was in its simplicity. Its advocates like US President
Ronald Reagan and British Prime Minister Margaret Thatcher justified their reduction in
government spending by comparing national economies to households. Thatcher, in
particular, promoted an image of herself as a mother, who reined in overspending to reduce
the national debt.
The problem with the household analogy is that governments are not households. For
one, governments can print money, while households cannot. Moreover, the constant taxation
systems of governments provide them a steady flow of income that allows them to pay and
refinance debts steadily.
Despite the initial success of neoliberal politicians like Thatcher and Reagan, the
defects of the Washington Consensus became immediately palpable. A good early example is
that of post-communist Russia. After Communism had collapsed in the 1990s, the IMF called
for the immediate privatization of all government industries. The IMF assumed that such a
move would free these industries from corrupt bureaucrats and pass them on to the more
dynamic and independent private investors. What happened, however, was that only
individuals and groups who had accumulated wealth under the previous communist order had
the money to purchase these industries. In some cases, the economic elites relied on easy
access to government funds to take over the industries. This practice has entrenched an
oligarchy that still dominates the Russian economy to this very day.
The Global Financial Crisis and the Challenge to Neoliberalism
Russia’s case was just one example of how the “shock therapy” of neoliberalism did
not lead to the ideal outcomes predicted by economists who believed in perfectly free
markets. The greatest recent repudiation of this thinking was the recent global financial crisis
of 2008-2009.
 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. The crisis can be traced back to the 1980s when the United Sate systematically
removed various banking and investments restrictions.
The scaling back of regulations continued until the 2000s paving the way for a
brewing crisis. In their attempt to promote the free market, government authorities failed to
regulate bad investments occurring in the US housing market. Taking advantage of “cheap
housing loans,” Americans began building houses that were beyond their financial capacities.
To mitigate the risk of these loans, banks that were lending house owner’s money
pooled these mortgage payments and sold them as “Mortgage-Backed Securities” (MBSs).
One MBS would be a combination of multiple mortgages that they assumed would pay a
steady rate.
Since there was so much surplus money circulating the demand for MBSs increased
as investors clamored for more investment opportunities. In their haste to issue these loans,
however, the banks became less discriminating. They began extending loans to families and
individuals with dubious credit record—people who were unlikely to pay their loan back.
These high risk mortgages became known as sub-prime mortgages.
Financial experts wrongly assumed that, even if many of the borrowers were
individuals and families who would struggle to pay, a majority would not default. Moreover,
banks thought that since there were so many mortgages in just one MBS, a few failures
would not ruin the entirety of the investment.
Banks also assumed that housing prices would continue to increase. Therefore, even if
homeowners defaulted on their loans, these banks could simply reacquire the homes and sell
them at a higher price, turning a profit.
Sometime in 2007, however, home prices stopped increasing as supply caught up with
demand. Moreover, it slowly became apparent that families could not pay off their loans.
This realization triggered the rapid reselling of MBSs, as banks and investors tried to get rid
of their bad investments. This dangerous cycle reached a tipping point in September 2008,
when major investment banks like Lehman Brothers collapsed, thereby depleting major
investments.
The crisis spread beyond the United States since many investors were foreign
governments, corporations, and individuals. The loss of their money spread like wildfire back
to their countries.
These series of interconnections allowed for global multiplier effect that sent ripples
across the world. For example, Iceland’s banks heavily depended on foreign capital, so when
the crisis hit them, they failed to refinance their loans. As a result of this credit crunch, three
of Iceland’s banks defaulted. From 2007 to 2008, Iceland’s debt increased more than seven-
fold.
Until now, countries like Spain and Greece are heavily indebted (almost like Third
World countries), and debt relief has come at a high price. Greece, in particular, has been
forced by Germany and the IMF to cut back on its social and public spending. Affecting
services like pensions, health care, and various forms of social security, these cuts have been
felt most acutely by the poor. Moreover, the reduction in government spending has slowed
down growth and ensured high levels of unemployment.
The United States recovered relatively quickly thanks to a large Keynesian-style
stimulus package that President Barrack Obama pushed for his first months in office. The
same cannot be said for many other countries. In Europe, the continuing economic crisis has
sparked a political upheaval. Recently, far-right parties like Mrine Le PEN’S Front National
in France have risen to prominence by unfairly blaming immigrants for their woes, claiming
that they steal jobs and leech off welfare. These movements blend popular resentment with
utter hatred and racism. We will discuss their rise further in the final sem.

Economic Globalization Today

The global financial crisis will take decades to resolve. The solutions proposed by
certain nationalist and leftist groups of closing national economies to world trade, however,
will no longer work. The world has become too integrated. Whatever one’s opinion about the
Washington Consensus is, it is undeniable that some form of international trade remains
essential for countries to develop in the contemporary world.
Exports, not just the local selling of goods and services, make national economies
grow at present. In the past, those that benefited the most from free trade were the advanced
nations that were producing and selling industrial and agricultural goods. The US, Japan, and
the member-countries of the European Union were responsible for 65 percent of global
exports, while the developing countries only accounted for 29 percent. When more countries
opened up their economies to take advantage of increased free trade, the shares of the
percentage began to change. By 2011, developing countries like the Philippines, India, China,
Argentina, and Brazil accounted for 51 percent of global exports while the share of advanced
nations—including the US—had gone down to 45 percent. The WTO-led reduction of trade
barriers, known as trade liberalization, as profoundly altered the dynamics of the global
economy.
In the recent decades, partly as result of these increased exports, economic
globalization has ushered in an unprecedented spike in global growth rates. According to the
IMF, the global per capita GDP rose over five-fold in the second half of the 20 th century 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 under the
WTO have led to unprecedented reductions in tariffs and other trade barriers, but these
processes have often been unfair.
First, developed countries are often protectionists, as they repeatedly refuse to lift
policies that safeguard their primary products that could otherwise be overwhelmed by
imports from the developing world. The best example of this 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.” Ultimately, it is its economic muscle as the third largest
economy that allows it to resist pressures to open its agricultural sector.
 The United States 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.
Faced with these blatantly protectionist measures from powerful countries and blocs,
poorer countries can do very little to make economic globalization more just. Trade
imbalances, therefore, characterize economic relations between developed and developing
countries.
The beneficiaries of global commerce have been mainly transitional corporations
(TNCs) and not governments. And likely any other business, these TNCs are concerned more
with profits than with assisting the social programs of the governments hosting them. Host
countries, in turn, loosen tax laws, which prevents wages from rising, while sacrificing social
and environmental programs that protect the unprivileged members of their societies. The
term “race to the bottom” refers to countries’ lowering their labor standards, including the
protection of workers’ interests, to lure in foreign investors seeking high profit margins at the
lowest cost possible. Governments weaken environmental laws to attract investors, creating
fatal consequences on their ecological balance and depleting them of their finite resources
(like oil, coal, and minerals).

Localizing the Material

 Many Philippine industries were devastated by unfair trade deals under the GATT
and eventually the WTO. One sector that was particularly affected was Philippine
agriculture. According to Walden Bello and a team of researchers at Focus on the Global
South, the US used its power under the GATT system to prevent Philippine imposters from
purchasing Philippine poultry and pork—even as it sold meat to the Philippines.
Although the Philippines expected to make up losses in sectors like meat with grains
in areas such as coconut products, no significant change was realized. In 1993, coconut
exports amounted to $1.9 billion in 2000.
Most strikingly, Bello and company noted that the Philippines became net food
importer under the GATT. In 1993, the country had an agricultural trade surplus of $292
million. It had a deficit of $764 million in 1997 and $794 in 2002.
- Bello, Walden, Herbert Docena, Marissa de Guzman, and Mary Lou Malig. The Anti-
Development State: The Political Economy of Permanent Crisis in the Philippines: London
and New York: Zed BOOks, 2006, 140-142

Conclusion
International economic integration is a central tent of globalization. In fact, it is so
crucial to the process that many writers and commentators confuse this integration for the
entirety of globalization. As reminder, economics is just one window into the phenomenon of
globalization: it is not the entire thing.
Given the stakes involved in economic globalization, it is perennially
important to ask how this system can be more just. Although some elements of global free
trade can be scaled back, policies cannot do away with it as a whole. International
policymakers, therefore, should strive to think of ways to make trading deals fairer.
Governments must also continue to devise ways of cushioning the most damaging effects of
economic globalization, while ensuring that its benefits accrue for everyone.