The Contemporary World

LESSON 2

THE GLOBALIZATION
OF
WORLD ECONOMICS
■ Do you agree that globalization affects the
world economy?
■ If yes, how?
ECONOMIC GLOBALIZATION
- historical process representing the result
of human innovation and technological process.
- It is characterized by the increasing
integration of economies around the world
through the movement of goods, services,
and capital across borders.

(International Monetary Fund)

The value of trade (goods and services)
as a percentage of world GDP increased
from 42.1 percent in 1980 to 62.1
percent in 2007.

(International Monetary Fund)

 Increased trade means that
investments are moving all over the
world at faster speeds.
 A book can be digitally
downloaded to be read with an e-
reader.
 Music album refers to the 15
songs on mp3 format you can
purchase and download from
iTunes.
When did globalization begin?
According to historians Dennis O. Flynn and Arturo
Giraldez, the age of globalization 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.
 It can be traced back to 1571 with the
establishment of the galleon trade that connected
Manila to Acapulco Mexico.
 For Filipinos, it is crucial to note that economic
globalization began on the country’s shores.
TRACING ECONOMIC
GLOBALIZATION
INTERNATIONAL TRADING SYSTEM
 The oldest known international trade route was the
‘silk road’.
 The silk road was not truly ‘global’ because it had
no ocean routes that could reach the American
continent.
 Traders used the silk road regularly from 130 BCE
when the Chinese Han dynasty opened the trade to
the West until 1453 BCE when the Ottoman
Empire closed it.
Galleon Trade
 Established in 1571.
 Connected Manila, Philippines and Acapulco in
Mexico.
 First time that the Americans were directly
connected to Asian trading routes.
 It was part of the age of mercantilism.
MERCANTILISM
 Mercantilism was an economic system of trade that spanned
from the 16th century to the 18th century.
 Mercantilism was based on the idea that a nation's wealth
and power were best served by increasing exports and so
involved increasing trade.
 Under mercantilism, nations frequently engaged their military
might to ensure local markets and supply sources were
protected, to support the idea that a nation's economic health
heavily relied on its supply of capital.
Source: https://www.investopedia.com/terms/m/mercantilism.asp
 Mercantilism was also a system of global
trade with multiple restrictions.
 A more open trade 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.
The GOLD Standard
■ The gold standard is a monetary system where a country's
currency or paper money has a value directly linked to gold.
With the gold standard, countries agreed to convert paper
money into a fixed amount of gold.
■ A country that uses the gold standard sets a fixed price for gold
and buys and sells gold at that price. That fixed price is used to
determine the value of the currency. For example, if the U.S.
sets the price of gold at $500 an ounce, the value of the dollar
would be 1/500th of an ounce of gold.

Source: https://www.investopedia.com/ask/answers/09/gold-standard.asp
 The countries established a common basis for
currency prices and a fixed exchange rate
system- all based on the value of gold.
 The gold standard was a very restrictive
system.
Great Depression
 Started in the 1920s and extended up to the
1930s.
 It was the worst and longest recession ever
experienced by the Western world.
Cause:
 Some economists argued that it was largely
caused by the gold standard, since it limited
the amount of circulating money, and
therefore, reduced demand and consumption.
■ Economic historian Barry Eichengreen argues
that the recovery of the US began when having
abandoned the gold standard, the US gov’t
was able to free up money to spend on
reviving the economy.
 WORLD ECONOMY TODAY

The gold standard was completely replaced by fiat money,

a term to describe currency that is used because of a
government's order, or fiat, that the currency must be
accepted as a means of payment. In the U.S., for
instance, the dollar is fiat money, and for Nigeria, it is the
naira.

Source: https://www.investopedia.com/ask/answers/09/gold-standard.asp
Fiat Currencies
- currencies that are not
backed up by precious metals
and whose value is determined
by their cost relative to other
currencies.
MILESTONES
■ After two 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 ways to achieve this goal
was to set-up a network of global financial
institutions that would promote economic
interdependence and prosperity.
THE BRETTON WOODS SYSTEM

■ Inaugurated in 1944 during the United Nations

Monetary and Financial Conference to prevent
catastrophes of the early decades of the
century from reoccurring and affecting
international ties.
Economic crisis occur not when a country does
not have money, but when the money is not
being spent, and thereby not moving .
-John Maynard Keynes
■ Global Keynesianism
- as prices increased, companies would earn more,
and would have more money to hire workers. Keynesian
economists believed that all this was a necessary trade-
off for economic development.
During this period, governments poured money
into their economies, allowing people to purchase more
goods and, in the process, increase demand for these
products.
■ Delegates at Bretton Woods agreed to create two
financial institutions:
– International Bank for Reconstruction and
Development (IBRD) or the World Bank
– International Monetary Fund (IMF)
■ After the Bretton Woods System, various countries
committed themselves to further global economic
integration through the General Agreement of Tariffs
and Trade (GATT) in 1947.
■ GATT’s main purpose was to reduce tariffs and other
hindrances to free trade.
 THE EMERGENCE OF NEOLIBERALISM

■ GLOBAL KEYNESIANISM (1940s to early 1970s)

- When economies slow down, according to Keynes,
governments have to reinvigorate markets with infusions of
capital. This is an active role of the government to managed
spending.
■ The theory went that, as prices increased,
companies would earn more, and would have more
money to hire workers. Keynesian economists
believed that all this was a necessary trade-off for
economic development.
Stagflation

■ A decline in economic growth and employment

(stagnation) takes places alongside a sharp
increase in prices (inflation).
■ Friedrich Hayek and Milton Friedman argued that
the government’s practice of pouring out money
into their economies had caused inflation by
increasing demands for goods without necessarily
increasing supply.
■ Neoliberalism emerged.
■ Neoliberalism became the codified strategy of the
United States Treasury Department, the World
Bank, the IMF, and eventually the World Trade
Organization.
■ World Trade Organization –new organization founded
in 1995 to continue the tariff reduction under the
GATT.
■ Washington Consensus dominated the global
economic policies from the 1980s until the early
2000s. Its advocates pushed for minimal government
spending to reduce government debt which led to
privatization of government controlled services like
water, power, communications, and transport believing
that the free market can produce the best results.
Advocates of neoliberalism:
US President Ronald Reagan
British Prime Minister Margaret Thatcher
■ The defects of the Washington Consensus
became immediately palpable (e.g., post-
communist Russia).
■ The IMF called for privatization of all
government industries.
 ECONOMIC GLOBALIZATION TODAY
■ Exports, not just the local selling of goods and services make
national economies grow at present.
■ Those that benefited from most from free trade were the
advanced nations that were producing and selling industrial and
agricultural goods.
■ Economic globalization remains an uneven process, with some
countries, corporations, and individuals benefiting a lot more
than others.
■ Economic globalization remains an uneven process (e.g.,
developed countries are often protectionists).
■ The beneficiaries of global commerce have been mainly
transnational corporations (TNCs) and not governments.
■ TNCs are concerned with profits more than the social programs
of the government hosting them, sacrificing the environment and
even the underprivileged members of the society.
■ Governments weaken environmental laws to attract investors.
Conclusion
■ International economic integration is a central tenet of
globalization.
■ Economics is just one window into the phenomenon of
globalization.
■ Much of globalization is anchored on changes in the
economy.
■ International policy-makers should strive to think of ways to
make trading deals fairer.
Group Activity 1

■ Form 4 groups.
■ Create clippings on the current economic issue/s in
the Philippines.
■ Be able to explain how it is related to economic
globalization.
■ Do not forget to cite your sources.