The Contemporary World

Lecture Notes

CHAPTER 3 – GLOBALIZATION AND THE WORLD ECONOMY

LESSON 1: ECONOMIC DIMENSIONS OF GLOBALIZATION

- The economy is a social institution that greatly affects the
society and the lives of the people. It is a social institution as it is
composed of people who facilitate the production, consumption and
exchange of goods.

· Economic Globalization
- Steger: ‘the increasing linkage of national economies through
trade, financial flows, and foreign direct investment by
multinational firms’
- IMF: “a historical process, the result of human innovation and
technological progress. It refers to the increasing integration of
economies around the world, particularly through the movement of
goods, services, and capital across borders. The term sometimes
also refers to the movement of people (labor) and knowledge
(technology) across international borders.”
- UN: “the increasing interdependence of world economies as a
result of growing scale of cross-border trade of commodities and
services, flow of international capital, and wide and rapid spread of
technologies.”
- Economic globalization is characterized by the deepening
economic relations and interdependencies among countries.
- Production of goods and services is no longer confined within a
single country. Rather, it is characterized through a global context
creating an integrated world market. A good’s different raw
materials may be produced from different countries before the final
product is finished and exported by one country.

· Elements of Economic Globalization

- the globalization of trade of goods and services
- the globalization of financial, capital, and labor markets
- the globalization of technology and communication
- the globalization of production process

· Global Trade of Goods & Services

- Trade of goods and services allows economies to interact with
other economies which increases social relations among people.
This allows flowing and sharing of ideas and practices across
communities.
- Through international trade of goods and services, people from a
particular country can now consume goods and services that can
only be produced by certain countries. An example of this is
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developing countries having access to high-tech gadgets and

machineries manufactured in developed countries and developed
countries like the USA being able to import and consume fruits like
bananas from tropical countries like the Philippines.
- Two types of trade policies: Trade Liberalization and Trade
Protectionism
- Trade Protectionism: government intervention in foreign trade
with the objective of encouraging domestic production by reducing
trade. Under trade protectionism, international trade is regulated,
and domestic producers are favored over foreign competitors. This
is materialized through imposition of trade restrictions such as tariff
and quota.
- Trade Liberalization: government intervention opposite to
protectionism where trade restrictions are removed/reduced to
increase trade. Under trade liberalization, trade restrictions are
reduced or removed to allow goods and services to freely exit and
enter a country. Free trade is enacted in which there is little to no
government regulation that limits international trade but, rather,
market forces alone drive the global demand and supply for goods
and services
- To maximize the benefits of free trade, countries engage in or
create bilateral agreements and/or trade blocs to reduce or remove
trade restrictions. Examples of this are trade agreements within
ASEAN, NAFTA, EFTA, among others.
-

· Global Financial, Capital, and Labor Markets

FINANCIAL MARKET

A financial market is a marketplace where various financial instruments such

as bonds, equities, securities, and currencies are traded. These markets play
a crucial role in the smooth functioning of capitalist economies by allocating
resources and creating liquidity for businesses and entrepreneurs. Let’s
delve into the details:

Types of Financial Markets:

Stock Markets: These venues allow companies to list their shares, which
traders and investors buy and sell. Stock markets serve as a means for
companies to raise capital and for investors to seek returns. Stocks can be
traded on listed exchanges (like the New York Stock Exchange or Nasdaq) or
in the over-the-counter (OTC) market1.

Bond Markets: Bonds are debt securities issued by governments or

corporations. In bond markets, investors buy and sell these fixed-income
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instruments. Bond markets facilitate borrowing and lending by allowing

companies to raise funds and investors to earn interest on their investments.

Forex (Foreign Exchange) Market: Here, currencies are traded. It’s the
largest financial market globally, where participants exchange one currency
for another. Forex markets enable international trade and investment.

Derivatives Markets: These markets deal with financial contracts derived

from underlying assets. Examples include futures, options, and swaps.
Derivatives allow investors to hedge risks or speculate on price movements.

Commodity Markets: These markets involve raw materials (like gold, oil, or
agricultural products). Commodity markets provide a platform for producers,
consumers, and investors to trade these essential goods.

Functions of Financial Markets:

Resource Allocation: Financial markets channel funds from investors (with

excess capital) to borrowers (needing additional funds). This allocation
supports economic growth.

Liquidity Creation: By facilitating trading, financial markets enhance liquidity.

Investors can easily convert their holdings into cash.

Price Discovery: Markets set prices based on supply, demand, and available
information. Efficient pricing ensures fair value.

Risk Management: Derivatives help manage risks associated with price

fluctuations, interest rates, and currency movements.

Importance and Impact:

When financial markets fail, it can lead to economic disruptions, including

recessions and rising unemployment.

Transparency and efficiency are crucial for well-functioning markets.

Remember, financial markets are dynamic ecosystems where investors, businesses,

and governments interact to drive economic progress.

CAPITAL MARKET

Capital markets refer to the venues where funds are exchanged between suppliers
(such as banks and investors) and those who seek capital for their own use (including
businesses, governments, and individuals). These markets play a crucial role in our
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modern economy by facilitating the movement of money from those who have it to those
who need it for productive purposes. Let’s explore the key features of capital markets:

Types of Capital Markets:

Primary Markets: In the primary market, companies publicly issue new stocks or bonds
for the first time. This often occurs through an initial public offering (IPO). It’s where
capital is raised directly from investors.

Secondary Markets: These markets trade existing securities (stocks, bonds, etc.) that
were previously issued in the primary market. Investors buy and sell these securities
among themselves.

Financial Instruments in Capital Markets:

Equities (Stocks): Represent ownership shares in a company. When you buy a stock,
you become a partial owner of that company.

Debt Securities (Bonds): These are interest-bearing IOUs issued by governments or

corporations. Bondholders receive periodic interest payments and the principal amount
at maturity.

Importance of Capital Markets:

Resource Allocation: Capital markets channel funds from savers (individuals,

institutions) to borrowers (companies, governments) for productive use.

Liquidity Creation: By facilitating trading, capital markets enhance liquidity, allowing

investors to convert their holdings into cash.

Price Discovery: Efficient pricing ensures fair value for securities.

Economic Growth: Capital markets support economic growth by enabling investment

and financing.

Remember, capital markets are dynamic spaces where financial instruments are bought
and sold, contributing to economic vitality and development

LABOR MARKETS

The labor market, also known as the job market, encompasses the supply and demand
for labor. In this dynamic arena, employees provide the supply of labor, while employers
generate the demand. Let’s explore the intricacies of labor markets:

Macroeconomic and Microeconomic Perspectives:

Macroeconomic View: At this level, supply and demand are influenced by both
domestic and international market dynamics. Factors such as immigration, population
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age, and education levels play a role. Key measures include unemployment rates,
productivity, participation rates, total income, and gross domestic product (GDP).

Microeconomic View: Here, individual firms interact with employees. They hire, fire,
and adjust wages and working hours. The balance between supply and demand
determines the compensation employees receive in terms of wages, salary, and
benefits.

Significance of the Labor Market:

Resource Allocation: Labor markets allocate human capital to various sectors, driving
economic growth.

Liquidity Creation: By facilitating labor transactions, these markets enhance liquidity.

Price Discovery: Efficient pricing ensures fair compensation.

Economic Impact: Labor markets profoundly influence an economy’s health.

Remember, the labor market shapes employment opportunities, economic well-being,

and societal stability.

- Increased interconnectedness among countries has also allowed to create

global markets for money, capital, and labor. These flows of inputs have
helped improve productivity thereby expanding the production of goods and
services.
- The inflow of tourists as well as the outflow of overseas workers have
facilitated financial flows. In theory, financial integration or openness
enhances economic growth, especially in developing countries. Particularly,
financial flow augments domestic saving, consumption, and production.
- Physical capitals such as machineries are also imported or shared among
countries in order to improve efficiency and productivity among firms.
Globalization and the advancement of technology that it has brought have
shifted the production process from labor-intensive to capital-intensive. This,
in turn, has allowed expansion and innovation in the production of goods and
services.
- Globalization has also allowed for a smooth flow of people which includes
labor migration. People could go to other countries to work there. Examples
of this are overseas Filipino workers who travel outside the Philippines for
work and Chinese nationals who come to the Philippines to work in Manila-
based Philippine Offshore Gaming Operators (POGOs).

· Globalization of Technology and Communication

- Globalization has also allowed the transfer of technology and
communications across countries. In turn, they have also intensified
globalization thru strengthening social relations among people. Technology
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keeps improving and promoting innovations due to the global flows of ideas
brought about by the increased social relations among people.
- These technologies have been integrated in people’s everyday lives. Due
to globalization, it becomes easier for people across the different parts of the
world to communicate with each other.
- Advancement in technology and communication has allowed efficiency
and improvement of production of goods and services.

· Globalization of Production Process

- Production process has become globalized. Production of a particular
product is no longer confined within one single country but distributed to
different parts of the world. The driving force behind this is to lessen the cost
of production, thereby, making production more efficient.
- Firms from different countries engage in specialization by producing
inputs that they can manufacture more efficiently. For instance, in making a
laptop, a US-based company may import computer parts from China, other
electronic parts from the Philippines, and even outsource costumer service
from India.
- Countries tend to specialize in the production of inputs or materials from
which they have a comparative advantage (i.e. they have lower opportunity
costs in producing that good). In this manner, production becomes more
efficient and transaction costs and other costs of production are minimized.
- Technology is also advanced as firms are able to innovate more with
specialization.
- The globalization of the production process also has drastic impacts on
developing countries as much of raw materials and primary inputs are
supplied by these countries. Developed countries tend to outsource from
developing countries. For instance, in order to minimize costs, firms from
developed countries oftentimes outsource cheaper labor from developed
countries.
- Another instance of outsourcing is the use of call centers to outsource
customer service support. Rather than spend and create customer service
divisions, companies outsource this service to BPO companies. This allows
them to lessen their costs for customer service.

LESSON 2: GLOBAL ECONOMIC & FINANCIAL INSTITUTIONS

- With the help of the different international financial institutions and
economic organizations, economic globalization has brought closer together
the world economies creating market integration. These global institutions
have facilitated the relations of the different economies.
- With economic and market integration, the economy of one country can
make impacts on the global market. The gains and crises of such a country
can affect the world economy and the magnitude of such impacts depends
on the strength of the country’s economic power. Powerful countries affect
the world economy greatly while those with lesser economic powers have
less effect on other countries.
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Lecture Notes

· The Bretton Woods System

- To accelerate the recovery after World War II, the countries thought that
reducing trade barriers and encouraging free flow of money would address
the economic turmoil of the world and guarantee global financial stability.
Delegates from 44 countries in 1944 agreed on adopting an adjustable peg
system – the Bretton Woods System. It replaced the Gold standard in which
countries redeem their currency with the values of their golds.
- The Bretton Woods system fixed the dollar to gold at the existing conversion of
US$35 per ounce, while all other currencies had fixed, but adjustable, exchange rates to
the US dollar.
- It paved the way for the creation of two financial institutions:
o International Bank for Reconstruction and Development (IBRD)
o International Monetary Fund (IMF).
- IBRD was in charge of post-war reconstruction while the IMF was
responsible for promoting international financial cooperation, for
strengthening international trade, and overseeing the exchange rate
standard.

· The Bretton Woods System

- To regulate trade restrictions among countries, members of the Bretton
Woods system established the General Agreements on Tariffs and Trade
(GATT) in 1947. It served as a forum where representatives of member
countries meet to engage in multinational trade agreements. Rules and
systems of international trade were created and implemented by the GATT
- In January 1995, the World Trade Organization (WTO) was established as
the official organization to implement the trading system provided by the
GATT. WTO oversees trade in services, nontariff related barriers to trade, and
other areas of trade liberalization. Its neoliberal goal is reducing or
eliminating barriers in order for all nations to benefit from trade.
- The WTO oftentimes fails to counter the trade barriers, especially in
developed countries. This mainly because the decision-making processes in
the organization are heavily influenced by larger trading powers. For
instance, the existence of Green Room meetings that tend to favor
representation from large and high-income member countries. The WTO is
also protested by certain International Non-Governmental Organizations
(INGOs) because it excludes these INGOs in its decision-processes.

· International Monetary Fund (IMF) & World Bank

- The IMF and World Bank are both global financial institutions/banks with
the main advocacy of promoting economic stability across economies. They
are both financed and heavily influenced by rich powerful countries.
- Both of them were established after the world war thru the Bretton Woods
System. (i.e. the IBRD was later named World Bank).
- The IMF aims to promote financial stability and international monetary cooperation
and encourage the expansion of trade and economic growth. They help countries
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whose economies or currencies have collapsed by lending them money. On

the other hand, the World Bank have long term goals compared to the IMF.
These goals include the eradication of global poverty especially in poor
countries by investing in education, health, and other important sectors of
each country.
- These financial institutions play a big role in funding investments and
funding other local financial institutions among economies which help
enhance economic growth and development, thereby, strengthening
economic globalization.

· Organization for Economic Cooperation and Development (OECD)

- The OECD is an organization composed of the world’s richest and
economically powerful countries. It was established in 1961 by 19 founding
members including the world’s great economic powers like the USA, UK,
Canada, and Germany.
- The OECD member states use their resource and economic powers to
impose economic reforms which greatly influence the globe. The member
countries collaborate with each other to address global concerns and its
impacts on national, regional, and local levels.
- In the present, the organization has 38 member states.

· Organization of Petroleum Exporting Countries (OPEC)

- The OPEC is an intergovernmental organization established in 1960 by
Saudi Arabia, Iraq, Iran, Kuwait, and Venezuela.
- The OPEC was established to allow member states to coordinate and unify
petroleum policies among themselves. They aim to secure fair and stable
prices for oil and petroleum, efficient and regular supply of petroleum to the
world, and fair return on capital investment. OPEC helps stabilize the global
oil market to ensure efficiency on both the parts of the producers and
consumers.
- In the present, OPEC has 12 member states.

· International Labor Organization (ILO)

- The ILO was created in 1919 at the end of World War I to reflect the belief
that universal and lasting peace can be accomplished only if it is based on
social justice (i.e. against the exploitation of workers). It is a tripartite
organization that brings together representatives of governments, employers
and workers in its executive bodies.
- It is a specialized UN Agency that aims to set labour standards, develop
policies and devise programmes promoting decent work for all women and
men.
- In the present, it has 187 member states.

· Regional Blocs
- To preserve economic, political, and cultural stability, the states have responded
through regionalization or forming regional blocs.
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- Factors affecting country’s decision to form a regional bloc

o Security
o Political factors
o Economic factors
o Culture
- European Union (EU): The EU is an economic and political unit
composed of 27 European countries. The main goal of the EU was to foster
economic cooperation and interdependence among member countries to
promote economic growth among them. From a pure economic union, it has
evolved into an organization encompassing political and policy areas for
climate, environment, health, security, and justice. The EU established a
single market and a single currency, the Euro, to be used among its
members. It has also removed border and trade restrictions to allow free
travel and smooth flows of international trade among its members. Through
free trade and its single market, the EU has liberalized world trade and has
become the biggest trade block in the world. It has become the biggest
exporter of manufactured goods. It has also used its economic power to
exert political and economic influence on other countries around the world,
- Association of Southeast Asian Nations (ASEAN): The ASEAN was
established in 1967 by Indonesia, Malaysia, Philippines, Singapore, and
Thailand. ASEAN aims to accelerate economic growth, social progress, and
cultural development in the region and to promote regional peace and
stability in adherence to the principles of the UN. The realization of ASEAN’s end
goal of economic integration is the ASEAN Economic Community. It envisioned ASEAN
as a single market and product base, a highly competitive region, with equitable
economic development, and fully integrated into the global economy.
- North American Free Trade Agreement (NAFTA): NAFTA is a trade
agreement by the United States, Canada, and Mexico which was created on
January 01, 1994. The establishment of NAFTA created free trade among the
three North American countries. Many tariffs on trades among the three were
eliminated and phased out which created a huge free-trade zone in North
America. The free trade among the three also created jobs through
outsourcing. Some manufacturing processes were transferred to a country
that has lower cost in order to minimize the cost of production. Lower costs
of productions reduced market prices. With the reduction of trade barriers,
the markets of the three countries have expanded. However, in 2018, NAFTA
was replaced by the US-Mexico-Canada Agreement (USMCA) under the
Trump Administration.
- Southern Common Market (MERCOSUR, Spanish Abbreviation):
MERCOSUR is an economic and political bloc initially established by
Argentina, Brazil, Paraguay and Uruguay, and subsequently joined by
Venezuela and Bolivia. It aims to promote a common market and spur
development by generating business and investment opportunities. It also
aims for the competitive integration of the members’ national economies
into the international market.
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· Global Corporations
- Global corporations are also called multinational corporations (MNCs) or
transnational corporations (TNCs).
- They are considered multinational or transnational because their facilities and assets
are located in different countries to take advantage of the opportunities in
manufacturing, distribution, exchange and sell their products outside their home
countries. Hence, for a particular product from a multinational corporation, the different
stages of production may be operated in many different countries where the material or
the labor is least expensive.
- Global corporations play an important role in the global economy as they are seen
as the drivers of economic globalization by making the countries around the world more
interdependent.
o They tend to influence the different countries’ economy and politics.
o They affect the supply in the market.
o They also may lobby their interests to politicians and the policy
making process by donating to their political campaigns.
o They can also influence the global trade laws and other economic
decisions of the different international regulatory institutions.

LESSON 3: THE GLOBAL DIVIDE: GLOBAL NORTH AND GLOBAL SOUTH

- Economic globalization is widely attributed to rapid development across
the world. However, such development lacks equitable distribution among
countries. Some countries have developed while others' development has
remained gradual. This is manifested in the prevalence of global inequality
between developed and developing countries.

· The Global Divide

- Global inequality is exhibited in the Global North-South Divide. This
Global Divide is a socio-economic and political division of Earth popularized
in the late 20th century and early 21st century. The two groups are often
defined in terms of their differing levels of wealth, economic development,
income inequality, democracy, and political and economic freedom.
- The idea of global divide is much associated with the First World-Third
World classifications. During the Cold War, countries were categorized as
First World (for the capitalist west) and Second World (for the socialist east).
The classification was rooted to the differences of political and economic
ideologies among countries. The rest of the world were classified as Third
World for their neutrality during the Cold War.
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- After the Cold War, the classifications for First World and Third World
countries stuck around the public consciousness. The former was associated
with rich and developed countries while the latter became associated with
poor and economically disadvantaged countries.
- As they are founded
on political and economic
ideologies, the first-third
worlds classifications
have become inaccurate
in characterizing global
inequality across
countries.
- Hence, the Global
North-South Divide was
created to truly reflect
the disparity of wealth
and development across
countries. It is a result of
the Brandt Line from the
Brandt Report in 1983
which showed that countries above the line were fairly wealthy and
developed compared to those in the south.

· Characteristics of the Global North and Global South

- Countries that are generally seen as part of the Global North tend to be
wealthier, less unequal and considered more democratic and to be
developed countries who export technologically advanced manufactured
products.
- Countries that are generally seen as part of the Global South are
generally poorer developing countries with younger, more fragile
democracies heavily dependent on primary sector exports and frequently
share a history of past colonialism by Northern states.
- The North comprises one quarter of the world population and controls
four-fifths of the income earned anywhere in the world while the South
consists the three quarters of the world population and has access to one-
fifth of the world income. As nations become economically developed, they
may become part of the "North", regardless of geographical location;
similarly, any nations that do not qualify for "developed" status are in effect
deemed to be part of the "South"
- The Global North includes the United States , Canada , almost all the
European countries, Israel, Cyprus, Japan , Singapore, South Korea , Taiwan,
Australia , and New Zealand. The Global South is made up of Africa, Latin
America and the Caribbean, Pacific Islands, and the developing countries in
Asia, including the Middle East (i.e. Brazil, India and China , which, along with
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Indonesia and Mexico, are the largest Southern states in terms of land area
and population).
- The North is mostly correlated with the Western world, while the South
largely corresponds with the developing countries (previously called "Third
World") and Eastern world.

· Global Inequality & Economic Globalization

- Major sources of global inequality which is embedded in the Global North-
South Divide include:
o Industrial Revolution: While some developed countries took advantage
of the increase in the manufacturing sector, some countries remained
stagnant in small production. With the rise of industries and modern
technology, some countries economically developed while others were only
gradually developing. As time passed by, this economic gap between
developed and developing nations has continued to increase.
o Economic Globalization: Through trade and market integration, the poor
countries have gained and developed but the rich countries have gained and
developed more. Some economists argue that the triumph of globalization
has been concentrated on a few. As a result, the poor are doing a little
better, but the rich are becoming richer. In addition, while an integrated
global economy creates the prospects of unimagined wealth, it also
generates new vulnerabilities to political turmoil and increased economic
gap.
o Access to Technology: Developed countries have always had greater
access to technology which means higher technological efficiency in
production which, in turn, means higher growth and productivity. Economic
globalization facilitates the global flow of information and technology
allowing nations and firms to shift from labor intensive to capital intensive
production. Technological capital has replaced some labor, especially the
unskilled workers. This has allowed further efficiency in production and trade.
- Some argued, however, that economic globalization helps provide income
for workers in developing countries, thereby reducing economic gaps. To lift
people out of poverty, there is a need for them to be integrated and to
participate in the economy by providing them with employment and
investment opportunities. With the increasing interconnectedness among
world economies into a global economy, it will further help reduce and/or
eradicate poverty as more opportunities are created.
- Economic globalization may contribute greatly to global poverty and
inequality but it could also contribute to addressing these global issues.