ECONOMIC

GLOBALIZATION
Lesson 2
ECONOMIC GLOBALIZATION

■ It is characterized by the increasing

integration/interdependence of economies around
the world through the movement of goods, services,
and capital across borders brought about by human
innovation and technological progress.
- The International Monetary Fund (IMF)
How do we define
increasing integration?

When is it considered that

trade has increased?
Drastic economic change is occurring
throughout the world
GDP (Gross Domestic Product
■ The monetary value of all finished goods and services made within a country during
a specific period. GDP provides an economic snapshot of a country, used to
estimate the size of an economy and growth rate. GDP can be calculated in three
ways, using expenditures, production, or incomes
Increased in trade also means investments
are moving all over the world at faster
speeds.
Increased speed and frequency of
trading
Actors Facilitating Economic
Globalization:
I. Rapid development of Science and Technology
II. International Organizations
– Created financial and economic institutions such
as,
■ IMF
■ IBRD/World Bank
■ GATT
■ WTO
A. International Financial Institutions – provided financial support and professional
advice for economic and social development activities in developing countries and
promote international economic cooperation and stability. This typically refers to
the IMF and the five multilateral banks.
1. International Monetary Fund (IMF) – It policed the rules of the international
financial order. It intervened in national economies, especially in developing countries,
to impose stabilization programs when the balance of payments crises is deemed
structural rather than cyclical.
2. World Bank Group (WB) – It increasingly became a development agency for the
third World nations following the postwar reconstruction of Europe and Japan. Its
policy recommendations are closely tied to those of the IMF, especially after the
neoliberal agenda dubbed Washington Consensus became established in the 1980’s.
a. IBRD – focuses on middle income countries and creditworthy low-income
countries and lends only to government.
b. IDA – Worlds largest source of interest-free loans and grants to the poorest
countries’ governments.
 c. IFC – Focuses on financing private sector projects in which it may take an
equity stake in addition to lending.
d. MIGA – Promotes foreign direct investment in developing countries by
insuring investors against political or noncommercial risks in those countries.
e. ICSID – Provides a forum for mediating disputes between investors and
governments and advise governments in their efforts to attract investment.
3. African Development Bank
4. Asian Development Bank
5. Inter-American Development Bank
6.European Bank for Reconstruction and Development.
B. Economic Institutions
1. General Agreement on Tariffs and Trade (GATT) – A multilateral forum for trade
negotiations. It became the primary international trade agency by default when U.S.
president Harry S. Truman abandoned the international trade organization provided by
the 1947 Havana Charter after being opposed in the US congress. It was superseded
in 1995 by the much more powerful WTO, which sought to reduce or eliminate a
whole range of non-tariff barriers and uneven trading conditions between countries.
Actors Facilitating Economic
Globalization:
III. Global Corporations
 Transnational Corporations (TNCs)
 Multinational Corporations (MNC’s)
 International companies
 Global Companies
■ Global Corporations – These are corporations that has significant
investments and facilities in multiple countries and lacks dominant
headquarters. They are corporations governed by the laws of the state
where they are incorporated.
■ Multinational Companies – They have an investment in other countries
but do not have coordinated product offerings in each country. They
are more focused on adapting their products and services to each
local market. They invest directly in foreign nations but are usually
limited to a few areas. Products are customized to local preferences
rather than homogenized which restricted their ability to create
economies of scale.
■ Transnational Companies – Enterprise engaging in activities that add
value such as (manufacturing, extraction, services, marketing, etc.) in
more than one country. They invest directly in dozens of countries and
distribute decision-making capabilities to its various local operations.
■ International Companies – Importers and exporters but
typically without investment outside of their home country.
They have no direct foreign investment.
■ Global Companies – They have invested in and are present
in many countries and they typically market their products
and services to each local market.
International Trading System

■ Silk Road (130 BCE – 1453 BCE) Considered as the

oldest known trading route. It was a network of
pathways in the ancient world that spanned from
China to the Middle East to Europe.
When did the age of (economic)
globalization began?
■ When all important continents began to exchange
products continuously with each other directly and
indirectly via other continents and in values
sufficient to generate crucial impacts on all trading
partners.
Colonial Period:
■ Colonialism (Imperialism) – Refers to how
European powers had colonized or established
effective control over most of Africa, Asia,
America, and Oceania by the end of the
Nineteenth century. The management of the
colonies was designed to ensure a reliable
source of raw materials for import and a
market for exports of manufactured goods
from the imperial power. Cash taxes imposed
on colonial areas where a subsistence
economy predominated forced workers into the
money economy to produce plantation crops
and other export commodities.
Galleon Trade (est. 1571)

■ It connected Manila to Acapulco. Manila became one of the

world’s great ports, serving as a focus for trade between
China and Europe. Though Chinese silk was by far the most
important cargo, other exotic goods, such as
perfumes, porcelain, cotton fabric (from India),
and precious stones, were also transshipped via the
galleon. After unloading at Acapulco, this cargo normally
yielded a profit of 100–300 percent. On its return voyage,
the vessel brought back huge quantities of Mexican silver
and church personnel bearing communications from Spain.
Galleon Ships – Spanish trading ships
Hablon
Mercantilism (16th – 18th century)
■ A system of global trade with multiple
restrictions.
■ Mercantilism is an economic theory where
the government seeks to regulate the
economy and trade in order to promote
domestic industry – often at the expense
of other countries.
■ Mercantilism is associated with policies
which restrict imports, increase stocks of
gold and protect domestic industries.
Mercantilism
■ Countries in Europe, competed with one
another to sell more goods to boost their
country’s income
■ The goal of mother countries is to increase
trade surplus.
■ Mother countries defended their products
from their competitors by imposing high
tariffs, forbade colonies to trade with other
nations, restricted trade routes, and
subsidized its exports
 Manufactured
Manufactured
goods
goods

Raw Materials
 Gold standard (1867-1970’s)

■ 1867 - United Kingdom, United States and

other European Nations adopted the Gold
Standard at an International Monetary
Conference in Paris.
■ Commons system that would allow for
more efficient trade and prevent the
isolationism of the mercantilist era.
■ Compelled countries to back their
currencies with fixed gold reserves
Fixed the problems on:

■ 1. Inflation
■ 2. Exchange rates
 TIMELINES:

■ 1914-1918 - World War 1 reduced the gold reserves of

the countries for it was used in funding their armies
■ Great Depression (1920s-1930s) - Caused by
weakness in the economy: 1. Stock market crash and
financial panic 2. War debts 3. Unequal distribution of
wealth 4. Under production in industry and agriculture
■ 1939-1945 - World War II
■ 1945 - Establishment of the UNITED NATIONS (U.N)
 The Bretton Woods System (1944)
■ Established 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.
■ It established a system of payments based
on the dollar, which defined all currencies in
relation to the dollar, and the dollar itself is
convertible into gold.
■ Largely influenced by the British economist
John Maynard Keynes.
 John Maynard Keynes

■ Global Keynesianism – Refers to

the active role of governments in
managing spending.
■ “Economic crisis occurs not when
a country does not have enough
money, but when the money is
not being spent and, thereby,
governments have to reinvigorate
markets with infusions of capital.”
 The Bretton Woods System (1944)
■ Created financial and trade institutions”
1. International Bank for Reconstruction
and Development (IBRD, or World Bank)
– Responsible for funding postwar
reconstruction projects.
2. International Monetary Fund (IMF)
– The Global lender of last resort to
prevent individual countries from
spiraling into credit crises.
3. General Agreement on Tariffs and
Trade (GATT)
- The main purpose of the
implementation of GATT was to increase
cross-country trade in the world, so as to
reinforce economic soundness, after the
second world war. It is the foundation of
WTO (1995), that made open trade
between nations but also maintained
some barriers for the benefit of all.
Simply put, GATT was created to reduce
tariffs and other hindrances to free
trade.
Global Keynesianism (1940s-1970s)
■ Government poured money into their economies, allowing
people to purchase more goods and in the process it will
increase demand for these products. As demand increases
so are the prices. Thus, companies will earn more, and would
have more money to earn workers which will ultimately lead
to economic growth and will reduced unemployment. They
believed that all this was a necessary trade-off for economic
development.
■ More Money -> More Purchase -> More Demand -> Higher
Prices Price increased = Reduces unemployment
TIMELINES:
■ 1971 President Richard Nixon of the U.S.A took the dollar
out of the gold standard
– Fiat Currencies that are not backed by precious metals
and whose value is determined by their cost relative to
other currencies.
– Money as an idea rather than a thing
 TIMELINE:
■ On October 6, 1973, Yom Kippur War - Egyptian and Syrian
forces launched a coordinated attack against Israel on Yom
Kippur, the holiest day in the Jewish calendar, hoping to win
back territory lost to Israel during the Third Arab-Israeli
War/Six-Day War, in 1967,
– (OAPEC) Organization of Arab Petroleum Exporting
Countries and (OPEC) Organization of Petroleum Exporting
Countries– imposed “oil embargo as a response to U.S.
and other countries resupplying Israel of their needed
arms.
■ Result:
– Stagflation – (stagnation) decline in economic growth and
employment takes place alongside (inflation) sharp
increase in prices.
 Washington Consensus (1980’s -
2000’s
■ A set of economic
policy recommendations for developing
countries that became popular during
the 1980s. It usually refers to the level
of agreement between the International
Monetary Fund (IMF), World Bank,
and U.S. Department of the Treasury on
those policy recommendations. All
shared the view, typically
labelled neoliberal, that the operation of
the free market and the reduction of
state involvement were crucial to
development.
■ Policies forwarded:
– Advocates pushed for minimal
government spending to reduce
government debt
– Privatization of government-
controlled services (water,
power, communications, and
transport)
– Pressured governments of
developing countries to reduce
tariffs and open up their
economies as necessary for
long term growth.
Neoliberalism
■ Free-market Capitalism
– Premise: Government intervention in economies
distorts the proper functioning of the market
■ Adopted as the strategy of the US Treasury
Department, World Bank, IMF, and WTO (World Trade
Organization).
– WTO – New organization founded in 1995 to
continue the tariff reduction under the GATT
■ Goal: Reduction of Trade barriers or trade
liberalization
■ Capitalism – an economic political system in which trade
and industry are controlled by private owners for profit
rather than by the state. Private individuals and
corporations own the means of production such as land,
factories, machinery, and natural resources required to
manufacture and produce goods.
■ Global Capitalism – Capitalism that exceeds national
boundaries and is backed by international policies that
support the free movement of goods, which massively
increases the flexibility that corporations have to choose
where and how they operate.
– Five core characteristics
■ Production takes place on the global stage
■ Labor sourced around the world
■ The financial system operates globally
■ Power relations are transnational
■ The global system of governance
TIMELINE:
■ 2007-2008 – Global Financial Crisis
Cause:
– Removal of various banking and
investment restrictions which lead to
bad investments
Ex. Lehman Brothers –A US
Investment Bank which was the major
cause of the worst financial crisis in
2007 to 2008
Economic Globalization Today
Some form of international trade remains essential for countries to develop
however, economic globalization remains an uneven process.
■ 1. Developed countries are protectionist – they refuse to lift policies that
safeguard their primary products that could otherwise be overwhelmed by
imports from developing countries.
Result:
– Trade imbalance
■ 2. Beneficiaries of Global commerce are (TNCs) Transnational Corporations
rather than Governments.
– Ex. Nestle
Result:
Race to the bottom -Lowering of labor standards, tax laws, and weakening of
environmental law by countries to attract the foreign investors.
The Future?
■ Blockchain is a system of recording information in a way that makes
it difficult or impossible to change, hack, or cheat the system.
■ A blockchain is essentially a digital ledger of transactions that is
duplicated and distributed across the entire network of computer
systems on the blockchain. Each block in the chain contains a
number of transactions, and every time a new transaction occurs
on the blockchain, a record of that transaction is added to every
participant’s ledger. The decentralized database managed by
multiple participants is known as Distributed Ledger Technology
(DLT).
■ Blockchain is a type of DLT in which transactions are recorded with
an immutable cryptographic signature called a hash.
- https://www.euromoney.com/learning/blockchain-explained/what-is-
blockchain
Summary:
■ Global economic integration is not a new phenomenon, but at the
same time it has become greater than it has ever been and is likely
to deepen going forward.
■ The major driving forces of economic globalization include
marketization and the rapid growing significance of information in
all productive activities.
■ The market oriented reform carried out throughout the world is
regarded as the institutional driving force for economic
globalization, while the technological advancement and information
technology development are the technological driving force for
economic globalization.
■ The process of economic globalization has also been affected by
three fundamental factors.
1. Technology – improvements in transportation and
communication technology.
2. Taste – individuals’ and societal preference
3. Public Policy - a course of action created and/or enacted,
typically by a government, in response to public, real-world
problems.
■ Globalization has become a counterpoint to national
sovereignty. It has rendered borders obsolete, eroding
national sovereignty. In a globalized world economy,
governments have no alternative but to adopt neoliberal
economic policies of privatization, deregulation, reductions
in public expenditure, the opening up of national economies
to foreign firms, and the growing participation of national
economic actors in global markets. It has dramatically
changed the international economic system.
Additional Concepts:

■ Balance of trade - Situation in global trade where

export is equal to import
■ Trade Surplus- Condition in global trade where
export is greater than import
■ Trade Deficit -Condition in in global trade where
import is greater than export