“The Globalization of World Economics”

The International Monetary Fund regards “economic globalization” as a historical

process representing the result of human innovation and technological progress.

International Trading Systems

The oldest known international trade route was the Silk Road – a network of
pathways in the ancient world that snapped from China to what is now the Middle East
and to 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 th e West. It was international but not global.

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.”

Thus, in 1571, with the establishment of the Galleon Trade, as part of the age of
Mercantilism, this was the first time the Americas were directly connected to Asian
trading routes.

A more open trading 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 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.

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. 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.

The Bretton Woods System

The Bretton Woods System inaugurated in 1944 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 – a network of global
financial institutions that would promote economic interdependence and prosperity.

Those at Bretton Woods envisioned an international monetary system that would

ensure exchange rate stability, prevent competitive devaluations, and promote
economic growth. Although all participants agreed on the goals of the new system,
plans to implement them differed. To reach a collective agreement was an enormous
international undertaking. Preparation began more than two years before the
conference, and financial experts held countless bilateral and multilateral meetings to
arrive at a common approach. While the principal responsibility for international
economic policy lies with the Treasury Department in the United States, the Federal
Reserve participated by offering advice and counsel on the new system. The primary
designers of the new system were John Maynard Keynes, adviser to the British
Treasury, and Harry Dexter White, the chief international economist at the Treasury
Department.

The 730 delegates at Bretton Woods agreed to establish two new institutions.
The International Monetary Fund (IMF) would monitor exchange rates and lend reserve
currencies to nations with balance-of-payments deficits. The International Bank for
Reconstruction and Development, now known as the World Bank Group, was
responsible for providing financial assistance for the reconstruction after World War II
and the economic development of less developed countries.

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

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 the
demand increased, so did the prices of these goods.

The stock market crashed in 1973-1974 after the United States stopped linking
the dollar to gold, effectively ending the Bretton Woods System. The result was a
phenomenon the 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).

Economists like Milton Friedman used the economic turmoil to challenge the
consensus around Keynes’s 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 Unites States Treasury Department, the World Bank, the
International Monetary Fund, and eventually the World Trade Organization – 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. Its advocates
pushed for minimal government spending to reduce government debt.
Economic Globalization Today

The world has become too integrated. 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. Trade imbalances, therefore, characterize
economic relations between developed and developing countries.

Second, the beneficiaries of global commerce have been mainly transnational

policies (TNCs) and not governments. And like any other business, these TNCs are
concerned more with profits than with assisting with social programs of the governments
hosting them. The term “race to the bottom” refers to countries’ lowering their labor
standards, including the protection of workers’ interests, to lure in foreign investors
seeking high profit margins at the lowest cost possible.

References:

▪ Claudio and Abinales (2018) The Contemporary World

▪ https://www.federalreservehistory.org/essays/bretton_woods_created