Lesson 2.

THE GLOBALIZATION OF WORLD ECONOMIC

The internation Monetary Fund(IMF) regards to “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 product 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? The
world bank, on the other hand, is an international development organization owned by 189
countries. It role is to reduce poverty by lending money to the governments of its poorer
members so they can improve their economies and standard of living of their people. Since 1947,
the World Bank has funded over 12,000 development projects via traditional loans, interest-free
credits, and grants.
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 increases from 42.1% in 1980 to 72.1% in 2007. Increased trade also
means that investments are moving all over the world at faster speeds. According to the United
Nations Conference Trade and Development (UNCTAD), the amount of foreign direct
investment flowing across the world was US$57 Billion in 1982. By 2015, that number was
$1.76 trillion. These figures represent a dramatic increase on global trade in the span of just few
decades. It has happened not even after one human lifestyle!
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 (in an mp3
format) an individual can purchase and download from iTunes or other music platforms.
This lesson aims to trace how economic globalization came about. It will also assess the
globalization system and examine who benefits from it and who is left out.
International Trading Systems
International trading systems are not new. The Silk Road is the oldest known
international trade route. It had a network of routes that connected different parts of the ancient
world from China to what is the Middle East today and to Europe. It was called 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). When
the Han dynasty of China opened trade to the West in 130 BCE, traders utilized the Silk Road
regularly. This continued until the Ottoman Empire closed it in 1453 BCE.
 Although the Silk Road was considered international, it was not exactly "global," as it did
not include routes to the American continents. Thus, this results in the question: "When did full
economic globalization start?" This was addressed by historians Dennis O. Flynn and Arturo
Giraldez, stating that 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 and 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 in the country's shores.
The galleon trade took place during the age of mercantilism. During the 16th century
until the 18th century, countries, mainly in Europe, competed with one another to sell more
goods in order to increase their country's income (which was soon termed monetary reserves).
These regimes, particularly the monarchies, applied various ways to defend their products from
competitors who sold goods at cheap prices. They imposed high tariffs, prohibited colonies from
trading with other countries, limited trade channels, and subsidized exports. Therefore,
mercantilism was also a global trade system that had multiple restrictions.
A more open trade system emerged in 1867 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. Its overall purpose was to establish a common system
that would enable more efficient trade and, at the same time, prohibit the isolationism of the
mercantilist era. As a result, the countries developed a common basis for currency prices as well
as a fixed exchange rate system that are all based on the value of gold.
The gold standard, though making trade easier, was nonetheless an extremely limiting
system because it required governments to back their currencies with set gold reserves. The First
World War forced countries to use their gold reserves to support their armies; thus, several were
obliged to abandon the gold standard. Since European countries had limited gold reserves, they
adopted floating currencies that were no longer redeemable in gold.
In the 1920s until the 1930s, a global economic crisis occurred called the Great
Depression. This significantly depleted government resources, which led to the difficulty of
going back to a pure standard. This economic depression was considered the worst and longest
experienced by the West. Some economists argued that it was largely caused by the gold
standard as it limited the amount of circulating money; 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.
According to Barry Eichengreen, an economic historian, the United States began to
recover when it abandoned the gold standard. The US government was able to free up money to
spend on reviving the economy. Other major industrialized countries followed suit during the
height of the Second World War.
 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 values are 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.

The Bretton Woods System

Following the two world wars, international leaders endeavored to establish a global
economic system that would guarantee 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, during the 1944 Unitel Nations
Monetary and Financial Conference, the Bretton Woods system was inaugurated with the goal of
preventing past catastrophes from happening again and impacting international connections.
It was the ideas of John Maynard Keynes that greatly influenced the Bretton Woods
system. The British economist believed that a country experiences economic crises not when
does not have sufficient funds; rather, it happens when money is not being spent; thus, moved.
When economies slow down. according to Keynes, governments have to reinvigorate markets
with infusions of capital. This active participation of government managing economic crises
became the foundation 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 the World Bank, the one
responsible for funding postwar reconstruction projects. It was a critical institution at a time
when many of the world's cities had been destroyed by the war. The second institution was the
International Monetary Fund (IMF), the global lender of last resort to prevent individual
countries from spiraling into credit crises. If economic growth in a country slowed down because
there was not enough money to stimulate the economy, the IMF would step in. To this day, both
institutions remain key players in economic globalization.
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 objective was to reduce tariffs and other hindrances to free trade.

Neoliberalism and Its Discontents

From the mid-1940s until the early 1970s, global Keynesianism was at its pinnacle.
Governments pumped money into their economies during this time, thus allowing consumers to
buy more products; in turn, increase the demand for such. As the demand grew, so did the cost of
the products. This increase in prices was tolerated by Western and certain Asian economies, such
as Japan, because it resulted in general economic expansion and lower unemployment. The
notion was that when prices rose, businesses would make more money and be able to employ
more people. According to Keynesian economists, these were necessary trade- offs for economic
progress.
In the early 1970s, however, the price of oil rose sharply as a result of the Organization of
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 from 1973 to 1974 after the United States
stopped linking the dollar to gold, therefore, effectively ending the 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 (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. Economists such as Friedrich Hayek and Milton Friedman argued that the
governments practice of pouring money into their economies had caused inflation by increasing
the demand for goods without necessarily increasing the supply. More profoundly, they argued
that government intervention in economies distorts the proper functioning of the market.
Economists like Friedman used the economic turmoil to challenge the consensus around
Keynes' 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.
From the 1980s through the early 2000s, the Washington Consensus controlled global
economic policies. Its proponents argued that government expenditure should be kept to a bare
minimum in order to minimize debt. They also advocated for the privatization of government-run
services such as water, electricity, communications, and transportation, thinking that the free
market can deliver 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. Although proponents of the Washington Consensus acknowledged that
particular industries would be harmed or would die in the process, they believed that this "shock
therapy" was necessary for long-term economic success.
Neoliberalism's attraction was in its simplicity, Its proponents, such as Ronald Reagan of
the United States and Margaret Thatcher of the United Kingdom, justified their cuts in
government expenditures by equating national economies to homes. Thatcher, specifically,
presented herself as a mother who controlled expenditures in order to lower the national debt.
However, the comparison has a flaw in that governments are not households. For
example, governments have the ability to print money, whereas households do not. Furthermore,
regular taxing systems provide governments with a regular stream of revenue. allowing them to
pay and restructure debts in a timely manner.
In spite of neoliberal politicians, such as Thatcher and Reagan experiencing initial
success, the Washington Consensus flaws became apparent almost quickly. Post-communist
Russia is an excellent early example. After Communism had collapsed in the 1990s, the IMF
called for the immediate privatization of all government industries. The IMF hoped that by doing
so, corrupt bureaucrats would be removed from these industries and that they would be passed on
to more active 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 established an oligarchy that
continues to rule the Russian economy today.

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 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.
Regulations continued to decrease into the 2000s, which was leading to a looming crisis.
Government officials failed to regulate risky investments in the US housing market in their
efforts to promote the free 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 houseowners' money pooled
these mortgage payments and sold them as "mortgage-backed securities" (MBSs). One MBS
would he 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.
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. As a
result. MBSs were quickly resold, as banks and investors wanted to get rid of their disastrous
assets. This risky cycle came to a breaking point in September 2008, when big investment banks
such as Lehman Brothers went bankrupt, wiping off large 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 a 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. Three of Iceland's largest commercial banks
have defaulted because of this credit crunch. Iceland's debt climbed by more than seven times
between 2007 and 2008.
Until now, countries such as Spain and Greece, have been deeply indebted (nearly similar
to Third World countries), and debt relief has come at a heavy cost. To be specific, Germany and
the IMF have compelled Greece to reduce its social and public spending. Affecting services such
as 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 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. Far-right parties, such as Marine Le Pen's Front National in France, have
recently gained popularity by unjustly blaming immigrants for their troubles, saying that they
steal jobs and take advantage of welfare. These movements combine popular discontent with
outright racism and bigotry. Their rise will be discussed 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 ones 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% of global exports while
developing countries only accounted for 29%. When more countries opened up their economies
to take advantage of increased free trade, the shares of the percentage began to change. However,
the share of developing economies, such as the Philippines, in global exports rose from 42.7% in
2016 to 43.4% in 2018 while their share of global imports rose from 39.9% in 2016 to 41.1% in
2018. COVID-19 slowed down global trade considerably, and major economies recorded
negative trends. Developing countries, however, experienced a relatively lower decline mainly
because of the resilience of East Asian economies. Between January and September 2020, China,
the Russian Federation, and South Korea had single-digit negative declines in imports (-4%, -
6.6%, and -8.7%, respectively), and only the United States among the developed economies had
the same number (-9.6%). Japan and the European Union had double-digit negative imports (-
11.55% and -12.77%, respectively), and only India, among Asian economies suffered a similar
fate (-28.77%). The Russian Federation, China. and India suffered the largest negative decline in
exports (-23.33%, -20.88%, and -17.55%, respectively) during the same period and so did the
United States (-15%), followed by Japan (-13.22%) and the European Union (-11.22%). Among
the Asian economies, only South Korea had a single-digit decline in exports (-8.44%). 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 rates. The gross world
product per capita was $5,498 in 2000. By 2010, this rose almost double to $9,551 (or 73.7%);
and by 2019, it stood at $11,436, or a 108% increase since the start of the 21st century. The
World Bank estimated that the gross world product per capita averaged only 1.241% in the
1990s. This rose to 16.19% between 2000 and 2010 (or a rise of 1,204 percentage points) before
settling to 13.70% between 2011 and 2019 (or a 1,003 rise in percentage points since 1990). It
was this growth that created large Asian economies such as Japan, China, Korea, Hong Kong,
and Singapore.
However, 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.
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 the
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 transnational corporations
(TNC), not governments. Like any other business,, these TNCs are concerned more with profits
than with assisting the social programs of the governments hosting them. In turn, host countries
ease tax regulations, preventing wages from rising while sacrificing social and environmental
initiatives that safeguard society's most vulnerable citizens. The phrase "race to the bottom"
refers to the practice of countries decreasing their labor standards, especially worker protections,
in order to entice international investors looking for big profit margins at the lowest possible
cost. Governments weaken environmental laws to attract investors, thus , creating fatal
consequences on their ecological balance and depleting them of their finite resources such as 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 Globa South, the US used
its power under the GAIT system to prevent Philippine importers 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 gains in
areas such as coconut products, no significant change was realized. In 1993, coconut exports
amounted to $1.9 billion; and after a slight increase to $2.3 billion in 1997, it returned to $1.9
billion in 2000.
Most strikingly, Bello and company noted that the Philippines became a 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 million in 2002.
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. It should be noted that 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 trade, which allows locals to watch American movies, listen to American music, and
consume American products. The globalization of politics is likewise largely contingent on trade
relations. 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. ?
Guide Questions
1. How do economic forces facilitate the deepening of globalization?
2. How is the Philippines central to the history of economic globalization?
3. What are the similarities and differences of the assumptions of the original Bretton Woods
system and those of the Washington Consensus?