Lesson

THE
02 GLOBALIZATION OF WORLD
ECONOMICS
Welcome to the second lesson of Module 1! In this lesson, we will travel back in time
to discuss and learn the history of the global economy, i.e., before and during the
contemporary time. With this, it will help us in understanding the importance of
having to know what is happening in our world today. Let us understand the
development of the global economy and the different downfalls that occur in the
different time period. Let’s get started.

INTENDED LEARNING OUTCOMES

At the end of this lesson, the students 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

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 is it
considered that trade has increased? Is there a particular threshold?
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.

ABSTRACTION

International Trading System

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 the Middle East and 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 1453 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 Americans 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 and
indirectly 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 an
Acapulco in Mexico. This was the first time that the Americas 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 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 (called 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 its exports. Mercantilism was
thus also a system of global trade with multiple restrictions.
A more open trade system emerged in 1967 when, following the lead of the United
Kingdom, the United States and 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 a fixed exchange rate system-all based on the value of gold.
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
called 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 governments could only spend
money that was equivalent to gold, its capacity to print money and increase the money
supply 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 the 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 20th 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 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. The Bretton Wood System was
inaugurated in 1994 during the United Nations Monetary and Financial Conference to
prevent the catastrophes of the early decades of the century from reoccurring and
affecting international ties.
The Bretton Wood System was largely influenced by the ideas of British economist
John Maynard Keynes who believed that economic crisis occurred 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, government 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.
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. GATT’s main purpose was to reduce tariffs and other hindrances to
free trade.

Neoliberalism and Its Discontents

Neoliberalism is contemporarily used to refer to market-oriented reform policies such
as “eliminating price controls, deregulating capital markets, lower trade barriers” and
reducing state influence in the economy, especially through privatization and austerity.
The high point of global Keynesianism came in the mid-1940s to the early 1970s.
During this period, 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. Western and some Asian
economies like Japan accepted this rise in prices because it was accompanied by
general economic growth and reduced unemployment. The theory went that, as prices
increased, companies would earn more, and would have more money to hire workers.
Keynesian economists believed that all this was a necessary trade-off for economic
development.
In the early 1970s, however, the prices of oil rose sharply as a result of the
Organization of the Arab Petroleum Exporting Countries’ (OAPEC, the Arab
member-countries of the Organization of Petroleum Exporting Countries or OPEC)
imposition of an embargo in response to the decision of the United States and other
countries to resupply the Israeli military with the needed arms during the Yom Kippur
War. Arab countries also used the embargo to stabilize their economies and growth.
The “oil embargo” affected the western economies that were reliant on oil. To make
matters worse, the stock markets crashed in 19772-1974 after the United States s
topped linking the dollar to gold, effectively ending the Bretton Woods System. The
result was a phenomenon that Keynesian economies could not have predicted- a
phenomenon called stagflation, in which a decline in economic growth and
employment (stagnation) 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. Economist such as Friedrich 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.

Economist 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 labelled 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 found 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 advocate pushed for minimal government spending to reduce
government dept. They also called for the privatization of government- controlled
services like water, power, communication, 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 quickest way to progress. Advocates of the Washington Consensus 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 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 provided 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 have 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’s
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 f how the “shock therapy” of neoliberalism did not
lead to the ideal outcomes predicted by economist 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 States
systematically removed various banking and investment restrictions.

The scaling back of regulations continued until the 2000s, paving the way for a
brewing crisis. In their attempt to promote the fee 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 owners’ 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 records-people who were unlikely to pay
their loans back. These high-risk mortgages became known as sub-prime mortgages.

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 country.

Until now, countries like Spain and Greece are heavily indebted (almost like Third
World countries), and debt relief has come at 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 cut 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 Barack Obama pushed for in 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 Marine 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 lesson.

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 United States, 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 United States-had gone down to 45 percent. The WTO-led reduction of
trade barriers, known as trade liberalization, has profoundly altered the dynamics of
the global economy.

In the recent decades, partly as a result of these increased exports, economic

globalization has ushered in an unprecedented spike in global growth rate according to
the 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 other. 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.
Conclusion
International economic integration is a central tenet 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 a reminder, economics is just one window into the
phenomenon of globalization; it is not the entire thing Nevertheless, much of
globalization is anchored on changes in the economy. Global culture, for example, is
facilitated by trade. Filipinos would not be as aware of American culture if not for the
trade that allows locals to watch Americans movies, listen to American music, and
consume American products. The globalization of politics is likewise largely
contingent on trade relation. These days, many events of foreign affairs are conducted
to cement trading relations between and among states.

Given the stakes involved in economic globalization, it is perennially important to ask

how this system can be made 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.

Congratulations!!! You have successfully finished the second lesson of Module 1. In

this lesson, you were able to define and articulate your stance on economic
globalization.

In the third lesson of this module, you will learn the History of Global Politics. See
you in Lesson 3!