The Global Economy

GE TCW
[ The Contemporary World ]
 Introduction
• Economic globalization – a prominent feature of the
contemporary world

• The framework of the global economy can be said to have

its roots in the planning for post-war economic order
before end of World War II: Bretton Woods Conference

• The institutions that were established have facilitated

integration of markets
 Learning Outcomes
• At the end of this lesson, learners are expected to:

1. Discuss the historical background of contemporary global

economy;
2. Elaborate the role of multilateral institutions;
3. Explain the emergence of multinational firms; and
4. Evaluate the competing views on economic globalization
 Historical Background
• Toward the end of World War II, Bretton Woods Conference
was held in order to:

– To set up a stable monetary system and an open trading system

that will help prevent another Great Depression, promote world
trade, and support economic rehabilitation efforts

• It led to the creation of three multilateral institutions:

– IMF, GATT, and World Bank
 Historical Background
1. International Monetary Fund (IMF)
– to supervise the fixed exchange rate system and help address
countries’ balance of payment problems
– Facilitates monetary system
2. World Bank
– To rehabilitate states devastated by war and address poverty
– Promotes development
3. General Agreement on Tariffs and Trade (GATT)
– To promote free trade
– Facilitates trade system
 Historical Background
Postwar Economic Institutions
Institution Year Established Headquarters Functions

International 1944 Washington, foster global monetary cooperation;

Monetary D.C. secure financial stability;
facilitate international trade;
Fund (IMF)
promote high employment and sustainable economic growth;
reduce poverty around the world

World Bank 1944 Washington, provide financial and technical assistance to developing
D.C. countries around the world

GATT 1948 Geneva promote international trade by reducing or eliminating trade

barriers such as tariffs or quotas

World Trade 1995 Geneva liberalize trade;

Organization settle trade disputes
(WTO)
 Historical Background
• On the international monetary or financial system:

– Because of the Cold War with the Soviet Union, the US took an
active role to manage global economy

– The US announced the Marshall Plan to help Europe

– It supported the Bretton Woods System – the postwar

international monetary system that depended on the US dollar
 Historical Background
• On the international monetary or financial system:

– Bretton Woods System – first fully negotiated international

monetary system

– It sought to achieve two goals: (1) a stable international monetary

system; (2) domestic autonomy in pursuing economic policies

– In the past, there was trade-off between those two goals. They
cannot be achieved simultaneously; one must be given up.
 Historical Background
• On the international monetary or financial system:

– How did the Bretton Woods System work?

1. If a state is suffering temporary balance of payment

disequilibria, the IMF would provide medium-term loan to that
state; and

2. if a state is suffering fundamental balance of payment

problems, the system would permit that state to change its
exchange rate
 Historical Background
• On the international monetary or financial system:

– Key to the system: US dollar – States pegged their currencies to

the dollar

– The system facilitated world trade and investment

– The system depended on the liquidity and international

confidence created by the US economy
 Historical Background
• On the international trade system:

– GATT – an interim agreement to lower trade barriers among

countries

– Creation of an International Trade Organization was envisioned,

but failed to materialize

– The provisions of the GATT endured for nearly fifty years, until the
creation of World Trade Organization in 1994
 US and Global Economy in Decline
• Starting the 1960s, the US economy was in decline, while European
and East Asian economies were catching up

• In the 1970s, the global economy slowed down, primarily because of

the Oil Crisis

• In the monetary system, the US eventually abandoned the Bretton

Woods System, which caused it to break down

• In the trading system, while at first states adopted free trade policies,
they eventually pursued protectionist policies, such as subsidies,
export restraints
Case Study 1. Liberal vs. Protectionist
Policies

Liberal Policies Protectionist Policies

• Liberalization • Tariff and non-tariff barrier
imposition
• Deregulation
• Tight state regulation
• Privatization • Subsidies
• Import quotas
• Health and environmental
standardization
• Import substitution
 Case Study 1.
Contemporary International Trade
Post-World War II international
organizations and agreements helped
facilitate opening up of markets.
International trade has increased
dramatically due to elimination and/or
reduction of restrictions such as
tariffs. The first image shows banana
export of the Philippines sold in a local
mart in South Korea, while the second
image shows an American brand of
chocolate being adapted to Korean
local consumer preferences.
 US and Global Economy in Decline
• The GATT was unable to:

– Keep countries from adopting protectionist policies, particularly on agriculture

and textile industry – the main source of exports from developing countries

– Settle trade disputes

• This led developing countries to establish a new international

economic order to protect the interests of developing nations,
though it was generally unsuccessful
 US and Global Economy in Decline
• Reasons for lack of success

– General Assembly in which it was launched could not implement

– Unsympathetic ideologies in US, UK and Western Germany

– Shift in US policy in the 80s

Era of Structural Adjustment Programs
• Prior to the 1980s

– US and European economies facilitated growth of global capital

markets

– Money was loaned to governments in developing countries

• The rise in US interest rates - wake-up call to both

borrowers and creditors (many were US-based banks)

– Realized many of the loans could not be repaid

Era of Structural Adjustment Programs
• IMF was called in to prevent any developing country
defaulting on loans

• IMF’s role: ensure countries undertook ‘structural

adjustment’

– Entails reducing inflation, government expenditure, role of

government

– Includes liberalization, privatization, and deregulation →

Washington Consensus
 End of Cold War
• Challenge: integrating transitional economies (socialist
states that were formerly part of the Soviet bloc)

– IMF (as well as the World Bank) became deeply involved

– Use of conditionality in “promoting good governance”

• But the 1997 East Asian Crisis showed that the IMF might
have gone too far in imposing conditionality
 End of Cold War
• While the IMF conditionality imposed on East Asian crisis-
affected states favored less interventionist role for the
government, Western countries used government
interventionism to recover from the subsequent crisis that
hit their economies hard

– These crises were the 2008 Global Financial Crisis and the 2012
Eurozone Crisis

– While East Asian economies were prevented intervene in the

economy to help it recover, Western countries used massive
stimulus package and bail-outs on affected firms
 Case Study 2.
Chiang Mai Initiative
The Chiang Mai Initiative is a
multilateral arrangement among
ASEAN Plus Three countries (that is,
the ten ASEAN members plus China,
Japan and South Korea) and Hong
Kong for the provision of financial
support in U.S. dollars through
currency swap transactions. It was
designed after the 1997-1998 East
Asian Crisis to have immediately
available funds to help parties faced
with financial troubles.
 End of Cold War
• Compared with the IMF whose reputation was tarnished by
the policies it prescribes developing countries to adopt, the
World Bank has better reputation

– The Bank enhanced relations with governments and non-

governmental organizations

• Apart from these two institutions, the World Trade

Organization now began its operations
 End of Cold War
• The WTO also seeks to promote free trade

– Unlike GATT which covers only trade in goods, WTO applies also to
trade in services

– WTO has faster and more automatic dispute settlement

mechanism less prone to blockages compared to the old GATT
system
 Multinational Corporations
• Their presence is another feature of contemporary global
economy
– We consume goods and services produced by MNCs

• MNCs - organizations that own or control overseas companies or

production or service facilities in one or more countries other than
the home country; also called transnational companies (TNCs)

• MNCs are engaged either in foreign direct investment (FDI)

or portfolio investment
 Multinational Corporations
• Foreign direct investment - entry into a business enterprise
in one country by an entity based in another country

• Portfolio investment - passive investment on securities (as

stocks and bonds) in a host country.
 Multinational Corporations
• Reasons for corporate investments:

1. Market seeking
2. Resource seeking
3. Strategic asset seeking
4. Efficiency seeking

• MNCs can be vital for developing countries – they increase

income of host states, provide jobs, among others
 Case Study 3.
Multinational Corporations
MNCs are common to find in the
country. The first and second images
show international fast food chains
that have penetrated the Philippine
market. They are common to find in
metropolitan and populated areas.
The third image shows a locally
owned fast food chain now
continuously entering different
markets abroad.
 Perspectives on Economic Globalization
• What causes the global economic interconnectedness in
the contemporary world?

• Why is it that despite the decline of the US in the 1970s,

the economic institutions it helped establish continued to
function?
 Perspectives on Economic Globalization
1. Hegemonic stability theory

– US preponderance of power and willingness to act as hegemon

made possible the establishment of a liberal global economy

– Today’s economic globalization could be traced back to US

postwar efforts

– Based on the idea that powerful states shape international

economic relations
 Perspectives on Economic Globalization
2. Neo-liberal institutionalism

– International institutions, such as the IMF, World Bank, and the GATT,
have an impact on the global economy independent of hegemon

– Governing arrangements called regimes create regularity in actors’

behavior and expectations

– Trade and monetary regimes facilitated by the GATT, WTO, and IMF
create norms and enforce rules among states
 Perspectives on Economic Globalization
• Neo-liberal institutionalism
– international institutions, such as the IMF, World Bank, and
the GATT, have an impact on the global economy
independent of hegemon

• Krasner: Regimes
– create regularity in actors’ behavior and expectations