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THE CONTEMPORARY WORLD

Introduction
The contemporary world is an ever-changing mix of social and political changes. While
religious, political, and ethnic conflicts continue, we are currently living in one of the
most peaceful eras in the history of the planet. Challenges of the 21st century include
emerging technologies, health care, overpopulation, climate change, poverty, illiteracy,
disease, and migration. How we choose to deal with these emerging frontiers will shape
this unit for future generations.1

Unit 1: The Structures of Globalization

This unit will introduce the student the various drivers of the globalization process, with
specific focus on economics and politics. Although it emphasizes student’s experience
globalization on an everyday level, also to realize that there are big institutions that
create large-scale changes. This unit will first trace the emergences of these institutions
historically. It will then move on to explain how they affect the countries and people
today.

Major learning outcomes of this unit are:

1. Analyze the various contemporary drivers of globalization; and
2. Describe the emergence of Global economic and political systems.

Lesson 2: The Globalization of World Economics

Learning outcomes:
1. Define economic globalization;
2. Identify the actors that facilitate economic globalization; and
3. Can articulate your stance on global economic integration.

This lesson aims to trace how economic globalization came about. It will also address
this globalization system, and examine who benefits it and who is left out.

The International Monetary Fund (IMF) 2 regards “economic globalization” as a historical

process representing the result of hu man innovation and technological process. It is
characterized by the increasing integration of economies around the world through the
1
https://www.freeman-pedia.com/today/

2
The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global
monetary cooperation, secure financial stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty around the world.

Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-
global membership.

The IMF's primary purpose is to ensure the stability of the international monetary system—the system of
exchange rates and international payments that enables countries (and their citizens) to transact with
each other. The Fund's mandate was updated in 2012 to include all macroeconomic and financial sector
issues that bear on global stability.

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movement of goods, services, and capital across the borders. These changes are the
product of people, organizations, institution and technologies.

70
60
50
According to the IMF the value of trade as a
40 percentage of world’s GDO increases from 42.1
world GDP
30 percent in 1980 to 62.1 percent in 2007. Increased
20 trade also means that investments are moving all
over the word at faster speeds.
10
0
1980 2007

According to the United Nations Conference on Trade and Development (UNCTAD), the
amount of foreign direct investments flowing acrros the word was US$ 57 billiom in
1982 by 2015, that the number was $1.76 trillion.

Apart from the sheer magnitude of commerce, it must be noted that 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.

A. International Trading Systems

The international trading system comprises many thousands of unilateral,

bilateral, regional, and multilateral rules and agreements among more than two
hundred nations.3 The oldest known international trade route was the Silk-Road
–a network of pathways in the ancient world that spanned from china to what is
known the Middle East and to Europe. I was called because such (Silk) because
of the most profitable products traded through this network, which was highly
prized especially in the area that is now Middle East as well as in the West
(today’s Europe). Traders used the Silk Road regularly from 130 BCE when the
Chinese Han dynasty opened trade the West until 1453 BCE when the Ottoman
Empire closed it.

3
https://unctad.org/en/Pages/DITC/TNCD/International-trading-system.aspx

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Silk Road

However, while the Silk Road was international, it was not truly “global” because
it had no ocean routes that could reach the American continent.

According to historians Dennis O. Flynn and Arturo Giraldez, the age of full
economic 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 back to 1571 with establishments 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 on the country’s shores.

The Galleon trade was part of the age of mercantilism. From the 16 th century to
the 18th century, countries primarily in Europe, competed with one another to sell
more goods as a means to boost their country’s income (called monetary
reserves4 later on). To defend their product from competitors who sold goods
more cheaply, these regimes (mainly monarchies) imposed the following:
(a) imposed high tariffs; (b) forbade colonies to trade with other nations; (c)
restricted trade routes; and (d) subsidized its exports. Mercantilism was thus also
a system of global trade with multiple restrictions.

A more open trade systems 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. Broadly, it goal was to
4
The total worth of foreign currency and gold and other precious metal, stockpiled by the government for setting
international obligation and transactions.

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create a common system that would allow for more efficient trade and prevent
the isolationism – a policy of remaining apart from the affairs or interests of
other groups, especially the political affairs of other countries., 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.

Despite facilitating simpler trade, the gold standard was still very restrictive
system, as it compelled countries to back to their currencies with fixed gold
reserves. During World War I, when countries depleted their gold reserves to
fund their armies, many were forced to abandon the gold standards. Since
European countries had low gold reserves, they adopted floating currencies that
were no longer redeemable in gold.

Floating currencies have a floating exchange rate, which changes based on the
demand and supply mechanisms of the foreign exchange market. When the
demand for a currency is high, the currency appreciates in value, thus impacting
the country’s exports. A strong currency shifts consumers to a cheaper currency,
thus lowering the demand for the exported goods.

In the long run, exporters have to lower their prices to attract consumers, thus
lowering their profits and facing the risk of going out of business. Conversely,
when the demand for a currency is low, the currency depreciates in value, thus
impacting the country’s importers. A weak currency makes imported goods
expensive. Therefore, consumers buy domestic goods, thus stimulating the
domestic economy. In both cases, a floating currency tends to be volatile. 5

In July 1944, the Bretton Woods Agreement introduced the concept of pegged
currencies against the US dollar that was tied to the price of gold. In 1973, the
system collapsed following a sharp appreciation in the price of the US dollar that
raised a red flag with respect to exchange rates and the ties of the US dollar to
the price of gold. From 1973 until today, countries are free to choose their
exchange agreement.

Today, most of the widely traded currencies, such as the US dollar, the Euro, the
British pound or the Japanese yen, have a floating exchange rate. However,
central banks often raise concerns about the implications of adopting a floating
exchange rate and how floating currencies can affect global foreign investment
and monetary policies.

Gold standard Floating currency

Connects a country's currency's value Floating currencies are money systems
to the value of gold that have a fluctuating value following
the volatility in the foreign exchange
5
https://www.myaccountingcourse.com/accounting-dictionary/floating-currency

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market.

Returning to a full pure standard became more difficult as the global economic
crisis called the Great Depression started during the 1920s and extended up to
the 1930s, further emptying government coffers. Thus depression was the worst
and longest recession ever experienced by the western world. Some economist
argued that it was largely caused by the gold standards, since it limited the
amount of circulating money and, therefore, reduced demand and consumption.
If government could only spend money that was equivalent to gold, its capacity
to print money and increase the money supply was severely curtailed.

Economic historian Barry Eichengreen argues that the recovery of the United
States really began when, having abandoned the gold standards, the US
government was able to free up money to spend in reviving the economy. At the
height of World War II, other major industrialized countries followed.

Through the more indirect versions of the gold standards were used until as late
as the 1970s, the world never returned to the gold standard of the early 20 th
century. 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. This system allows
government to freely and actively manage their economies by increasing or
decreasing the amount of money in circulation as they see fit.

B. The Bretton Woods System

After the world wars, world leaders sought to create a global economic system
that would ensure a longer-lasting global peace. They believed that one of the
way to achieve this goal was to set up a network of global financial institution
that would promote economic interdependence and prosperity. The Bretton
Woods system (BWS) was 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 internal ties.

The BWS was largely influenced by the

ideas of British economist John Maynard
Keynes6 who believed that “economic crisis
occur not when a country does not enough
money, but when money is not being spent
and, thereby, not moving.” This active role

6 John Maynard
John Maynard KeynesKeynes
was an early 20th-century British economist, known as the father of Keynesian economics.

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of governments in managing spending served as the anchor for what would be

called a system of global Keynesianism.

Global Keynesianism, It is the active role of the government in managing

spending. When the economies is slow down, according to Keynes, the
government must have to reinvigorate market with infusion of capital.

Delegates at Bretton Woods agreed to create two financial institutions: (1)

International Bank for Reconstruction and Development (IBRD or World Bank)
and (2) International monetary Fund (IMF). To this day, both institution remain
key players in economic globalization.

IBRD or World Bank IMF

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 global lender of last resort to
prevent individual countries form
spiraling into credit crisis. It economic
growth in a country slowed down
because there was not enough money
to stimulate the economy, the IMF
would step in.

Shortly after Bretton Woods, various countries also committed themselves to

further global economic integration through the General Agreement on Tariff and
Trade (GATT) in 1947. GATT’s main purpose was to reduce tariff and other
hindrances for free trade.

General Agreement on Tariffs and Trade (GATT), set of multilateral trade

agreements aimed at the abolition of quotas and the reduction of tariff duties
among the contracting nations. When GATT was concluded by 23 countries at
Geneva, in 1947 (to take effect on Jan. 1, 1948), it was considered an interim
arrangement pending the formation of a United Nations agency to supersede it.
When such an agency failed to emerge, GATT was amplified and further
enlarged at several succeeding negotiations. It subsequently proved to be the
most effective instrument of world trade liberalization, playing a major role in the
massive expansion of world trade in the second half of the 20th century.

C. Neoliberalism and its Discontents

Neoliberalism is contemporarily used to refer to market-oriented reform policies

such as "eliminating price controls, deregulating capital markets, lowering trade
barriers" and reducing state influence in the economy, especially through
privatization and austerity7.

7
Austerity is a set of political-economic policies that aim to reduce government budget deficits
through spending cuts, tax increases, or a combination of both
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The high point of global Keynesianism came in the mid-1940s to the early 1970s.
During this period, government poured money into their economies, allowing
people to purchase more goods, and in the process, increase demand of these
goods. Western and some Asian countries like Japan accepted this rise in prices
because it was accompanied by general economic growth and reduced
unemployment. The theory went that, as prices increased, companies would
earn more, and would have more money to hire workers. Keynesian economist
believed that all this was a necessary trade-off for economic development.

In the early 1970s, however the prices of oil rose sharply as a result of the
Organization of Arab Petroleum Exporting Council (OAPEC) compose of, UAE,
Bahrain, Algeria, Saudi Arabia, Syria, Iraq, Qatar, Kuwait, Libya and Egypt,
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 matter worse, the stock markets 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 that Keynesian
economics could not have predicted the following: (a) stagflation –decline of
economic growth; and (b) stagnation –decline of employment growth which
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. Economist such as Friedrich Hayek and Milton
Friedman argued that the government practice of pouring money into their
economies had cause inflation by increasing demand for goods without
necessary increasing supply. More profoundly, they argued that government
intervention in economies distort the proper functioning of the market.

Friedrich Hayek Milton Friedman

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Economist like Friedman used the economic turmoil to challenge the consensus
around Keyne’s idea. What emerge was a new form of economic thinking that
critic labeled neoliberalism. From the 1980 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.

The Washington Consensus refers to a set of free-market economic policies

supported by prominent financial institutions such as the International Monetary
Fund, the World Bank, and the U.S. Treasury. A British economist named John
Williamson coined the term Washington Consensus in 1989.

The ideas were intended to help developing countries that faced economic crises.
In summary, The Washington Consensus recommended structural reforms that
increased the role of market forces in exchange for immediate financial help.
Some examples include free-floating exchange rates and free trade. 8

The Washington Consensus dominated global economic policies from the 1980s
until the early 2000s. It advocates pushed for minimal government spending to
reduce government debt, they also called for privatization of government-
controlled services like water, power, communication and transport, believing
that the free market can produce the best results.

The transfer of ownership, property or business from

the government to the private sector is termed
privatization. The government ceases to be the owner
of the entity or business. The process in which a
publicly-traded company is taken over by a few people
is also called privatization.

Finally, they pressured governments, particularly in the developing world, to

reduce tariff and open up their economies, arguing that it is the quickest way to
progress. Advocates of the Washington Consensus conceded that, along the
way, certain industries could be affected and die, but they considered this “shock
therapy” necessary for long-term economic growth.

8
https://www.intelligenteconomist.com/washington-consensus/

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"Shock therapy" refers to the concept of figuratively

shocking, or shaking up, the economy, with sudden and
dramatic economic policies that affect prices and
employment. Characteristics of shock therapy include
the ending of price controls, the privatization of publicly-
owned entities, and trade liberalization.

The appeal of neoliberalism was in its simplicity. It advocates like US President

Ronald Reagan and British Prime Minister Margaret Thatcher justified their
reduction in government spending by comparing national economies to
households. Thatcher, in particular, promoted an image of herself as a mother,
who reined in overspending to reduce the national debt.

Problem with the household analogy is that government are not household: (1)
government can print money, while household cannot; and (2) the constant
taxation systems of governments provide them a steady flow of income that
allows them to pay and refinance debts steadily.

Despite the initial success of neoliberal politicians like Thatcher and Reagan, the
defects of the Washing Consensus became immediately palpable. A good
example is that of post-communist Russia. After the Communism had collapsed
in 1990s, the IMF called for the immediate privatization of all government
industries. The IMF assumed that such move would free these industries form
corrupt bureaucrats and pass them on the more dynamic 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 elite relied on
easy access to government funds to take over the industries. This practice has
entrenched an oligarchy that still dominates the Russian economy to this very
day.

D. The Global Financial Crisis and the Challenge of Neoliberalism

Russia’s case is an example how “shock therapy” of neoliberalism did not lead to
outcomes predicted by economists who believed in perfectly free markets. The
greatest recent repudiation of this thinking was the recent 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 carious baking and investment restrictions.

The scaling back of restrictions continued until the 2000s, paving the way for a
brewing crisis. In their attempt to promote the free market, government
authorities failed to regulate bad investments occurring in the US housing

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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 house owner’s
money pooled these mortgage payments and sold them as “mortgage-backed
securities” (MBSs). One MBS would be combination of multiple mortgages that
they assumed would pay a steady rate.
The mortgage-backed security turns the bank into
a middleman between the homebuyer and the
investment industry. A bank can grant mortgages
to its customers and then sell them on at a
discount for inclusion in an MBS.

Since there was so much surplus money circulating, the demand for MBS
increased as investors clamored for more investment opportunities. In their
haste issue these loans, however, the bank became less discriminating. They
began extending loans to families and individuals with dubious credit records –
people who 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
individual and families who would struggle to pay, majority would not default.
Moreover, banks though that since were so many mortgages in just one MBS, a
few failures would not ruin the entirety of the investment.

Bank also assumed that housing prices would continue to increase. Therefore,
even if homeowner defaulted on their loans, these banks could simply reacquire
the homes and sell then at a higher price, turning profit.

Sometime in 2007, however, home prices stopped increasing as supply caught

up with the demand. Moreover, it slowly became apparent that families could
not pay off their loans. This realization triggered the rapid reselling of MBS, as
banks and investors tried to get rid of their bad investments. This dangerous
cycle reached a tipping point in September 2008, when major investments bank
Lehman Brothers collapsed, thereby depleting major investments.

The crisis spread beyond United States since many investors were foreign
governments, corporation and individuals. The loss of their money spread like
wildfire back to their countries.

Because of such phenomenon, countries like Spain and Greece are heavily
indebted, and debt relief has come at a high price. Greece, in particular, has
been force by Germany and the IMF to cut back on its social and public
spending. Affecting services like pensions, health care and various form of
social security, these cuts have been felt mostly acutely by the poor. Moreover,

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the reduction in government spending has slowed down growth and ensured
high level of unemployment.

The United State recovered relatively because of a large Keynesian-style

stimulus package that the president Barack Obama pushed for in his first month
in office. In Europe, the continuing economic crisis has sparked a political
upheaval. Recently, far-right parties like Marine Le Pen’s Front National in
France have risen to prominence by unfairly blaming immigrant for their woes,
claiming that they steal jobs and leech off welfare. These movement blend
popular resentment with utter hatred and racism.

E. Economic Globalization Today

The global financial crisis will take decade to resolve. The solutions proposed by
certain nationalist and leftist group of closing the national economies to world
trade, however, will no longer work. The world has become too integrated.
Whatever one’s 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 form free
trade were the advance 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 percent of global exports, while the
developing countries only accounted for 29 percent. When more countries
opened up their economies to take advantage of increase free trade, the shares
of the percentage began to change. The WTO-led reduction of trade barriers,
known as trade liberalization, has profoundly altered the dynamics of the global
economy.

In the recent decade, partly as a result of these increased exports, economic

globalization has ushered in an unprecedented spike in global growth rates.
According to the IMF, the global per capita GDP rose over five-fold in the second
half of the 20th century. It was this growth created the large Asian economies like
Japan, China, Korean, Hong King and Singapore.

Still, the economic globalization remains an uneven process, with some countries,
corporations and individuals benefiting a lot more than the others. The series of
trade talk under the WTO have led to unprecedented reductions in tariffs and
other trade barriers, but these processes have often been unfair.

Developed countries are often protectionist, as they repeatedly refuse to lift

policies that safeguard their primary product that could otherwise be
overwhelmed by imports form the developing countries.

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Japan United States

Refusal to allow rice imports into the Fiercely protects its sugar industry,
country to protect its farming sector. forcing consumers and sugar-
Japan’s justification is that rice is independent business to pay higher
“sacred”. Ultimately, it is economic prices instead of getting cheaper sugar
muscle as the third largest economy from plantation of Central America.
that allows it to resist pressures to
open its agricultural section.

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 (TNCs) and not government. And like any other business, these
TNCs are concerned more with profits than with assisting the social programs of
the government hosting them. Host countries, in turn, loosen tax laws, which
prevent wages from rising, while sacrificing social and environmental programs
that protect the underprivileged members of their societies. The term “race to
bottom” refers to countries lowering their labor standards, including the
protection of workers’ interest, to lure in foreign investors seeking high profit
margins at the lowest cost possible. Government weaken environmental law to
attract investors, creating fatal consequences on their ecological balance and
depleting them of their finite resources (like oil, coal and minerals).

A transnational corporation (TNC) is "any

enterprise that undertakes foreign direct
investment, owns or controls income-gathering
assets in more than one country, produces goods
or services outside its country of origin, or engages
in international production"

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. Compare and contracts the assumptions of the original Bretton
Woods system with those of the Washington Consensus.

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