Global Economy

 
Trade is the oldest and most important economic nexus among nations. Indeed, trade along with war has
been central to the evolution of international relations.
- Robert Gilpin
 
Globalization involves the "broadening and deepening of interdependence among peoples and states"
(Cohn, 2011: 6). It leads to an extension of geographic linkages, encompassing societies and states and
deepens interaction among them such that policies and events of one state also affect distant ones.
Globalization is a multidimensional phenomenon comprised of political, economic and cultural features.
To dismiss the multifaceted nature of the globalization would be inappropriate; the same goes as to how
it would be incorrect to dismiss the essential and crucial role that economic dimension plays in as much
as it as a driving force of globalization (Benzes, 2014).
 
Szentes (2003) defines economic globalization as "a process making the world economy an "organic
system" by extending transnational economic processes and economic relations to more and more
countries and by deepening the economic interdependencies among them" (p. 69). Benczes (2014)
follows this definition and emphasizes that interpretation of the current trends in the world economy
must be understood in the global context of an integrated world economy. Moreover, while the state
does not remain as the sole unit of analysis; non-state actors such as international organizations, non-
governmental organizations, and multinational or transnational corporations play significant roles in the
international economic processes. This chapter will primarily discuss the concept of economic
globalization, the actors that facilitate it and the modern global economic system it has built today.
 
The Post-World War II Economic System
The Bretton Woods Conference in July 1944, formally known as the United Nations Monetary and
Financial Conference, marked the birth of a new international economic framework. Delegates from 44
countries convened in Bretton Woods, New Hampshire, United States and agreed on the creation of two
international economic organizations: International Monetary Fund (IMF) and World Bank or the
International Bank for Reconstruction and Development. These institutions are known as the Bretton
Woods Institutions. It also includes a third entity, the General Agreement on Tariffs and Trade (GATT).
Albeit created in 1947 after the Bretton Woods Conference, this much more informal institution than the
IMF and WB served as the primary global trade organization. The postwar institutional framework was
created to address the problems that occurred during the interwar period, trade protectionism and
exchange controls, which led to the Great Depression and the World War II (Cohn, 2011).
 
The Bretton Woods institutions were known keystone international economic organizations (KIEOs)
due to their central role in trade, development, andmonetary relations (Cohn, 2011; Jacobson and
Oksenberg, 1990). The functions of these institutions will be discussed in detail, as well as how their
roles have changed in the contemporary period.
 
 
International Monetary Fund (IMF)
The primary purpose of the IMF is to promote global monetary cooperation and international financial
stability. The institution, created in 1945, was designed to monitor the system of pegged or fixed
exchange rates. In this system, official exchange rates of currencies were related to gold and U.S. dollar.
It was designed to prevent the trade wars that occurred during the interwar period due to competitive
devaluations of states of their currencies (Cohn, 2011). When states suffer from balance-of-payments
deficits, they reduce the value of their currencies to boost exports with cheaper products and decrease
imports. A balance-of-payment deficit occurs when a country spends more than it takes in. The role of
IMF is to provide short-term loans to prevent devaluation and retain the state's fixed exchange rate in
instances of the temporary balance of payment deficits. The institution was designed for the mandate of
ensuring intemational financial cooperation and reinforces international trade (Benczes, 2014).
IMP's role changed when the fixed-exchange-rate system collapsed and was replaced Fy floating
exchange rates in 1971.It still had the role of providing liquidity but has I Thore focus on countries tied
to major currencies instead of countries supplying them (Garber, 1993)
 
 
The IMF is an institution based on quotas which determine the maximum amount of financial resources
that a state is obliged to provide to the fund. The quota of states reflects their relative position is the
global econory and determines the voting power of states in IMF decisions. The IMF has since been
dominated by the West and has been much criticized for marginalizing the South and failing to include
emerging economies in its decisionmaking. The Global Financial
Crisis of 2007-2009 has prompted the IMF to undergo a reform process consisting of two elements: (1)
IMF resource expansion to enhance capacity for financial crisis management and ) increase in quota and
voting power of emerging economies within the institution (Lesage et al., 2013). The 2010 reform
structure packag involved doubling of the IMF quota, shifting of quota shares; and preserved quota and
voting shares of poorest member states. The reform shifted more than six percent from over-represented
to under-represented member countries, and to developing and dynamic emerging market and
reshuffling seats of the Executive Board to both restore the institution's legitimacy and crisis
management capacity. 
 
 
Lesage et al. (2013) explain the outcome of the reform negotiations as a trade-off between money and
power. It was an agreement particularly between the BRIC grouping among Brazil, Russia, India, and
China to contribute to the Fund's resources in exchange to quota and governance reforms about the
redistribution of the quota and Executive Board seats from the West to the South. The 2010 reform,
however, has not led to the long-expected reform and strengthening of the IMF. While the IMF
resources have tripled with the doubling of the quota complemented by the New Arrangements to
Borrow (NAB), a supplementary source of funding from countries that are not tied to voting-rights,
there are still doubts on the capacity of the Fund to bailout larger countries (Lesage et.al., 2013).
Moreover, the quota and governance reform have not been revolutionary, with the status quo of power
relations remain intact as the USA remains to vote Shares constituting its veto power but not in the case
of the BRIC countries as a bloc (Lesage et al., 2013).
 
 
International Bank for Reconstruction and the Development or World Bank
While IMF was designed to provide short-term loans to aid countries facing balance-of-payments
deficits, the role of International Bank for Reconstruction and Development (the World Bank) was
created to grant long-term loans for the economic development of less developed countries and the
reconstruction of war-torn countries in Europe. The World Bank today is made up of two institutions.
One is the International Bank for Reconstruction and Development (IBRD) which provides lending to
middle-income and creditworthy low-income countries. The other is the International Development
Association (IDA) which grants credits and loans to lowest-income countries. The World Bank is only a
component of the World Bank Group
 
 
General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO)
 
The purpose of the GATT was to avoid trade wars by raising protectionist barter on Witnesed cur the
teresateortne 005. to sign the Havana Charter that would barriers as witnessed during the interwar
period. The forum was created years after the stet International Thate Organization (fO) a spar with that
of the IMF and CATa The agricultural sector in the US feared for losses that may be brought by the ITO
and pressures in the US Congress resulted to the failure of reaching an agreement, thus resulting to the
informal GATT. States who took part in the GATT were "contracting parties" instead of formal
members due to the nature of the agreement as a provisional treaty (Cohn, 2011: 23).
 
While it was effective in liberalizing trade, GATT was unable to address the expansion of trade in
services, investment, and intellectual property. It was also incapable of providing a strong and efficient
system for dispute settlement. GATT was eventually superseded by a more formal World Trade
Organization (WTO) in 1995 that managed to address these issues.
 
The establishment of a global economic order was heavily influenced by the Western developed
countries. The South, comprising of less developed economies, were marginalized while the Soviet
Union refused to participate, with attempts to create an alternative economic framework and institutions.
Less developed economies The South and the Soviet Union, however, gradually became integrated into
the liberal economic order at the end of the twentieth century
 
 
International Monetary System
The International Monetary System is defined as "a set of general rules legal norms, instruments, and
institutions shaping payment conditions in foreign trade (international scale)” (Mikita, 2015, p. 505). If
is brought by the multilateral international agreements of trading participants, facilitated by international
financial organizations. The Gold Standard adopted by England in 1816, being the first country to
industrialize, was the first international monetary system (Mikita, 2015). It would later be joined by
European countries and the United States. It functioned as a fixed exchange rate regime where countries
determined the gold content of their national currencies which would define the fixed exchange rates
(Benczes, 2014).
The primary features of the gold standard were the unlimited convertibility of currencies into gold and
high stability facilitated by trade among countries that eliminated exchange rate fluctuations and risks
(Mikita, 2015). The system maintained the equilibrium of the trade balance automatically. The deficit in
balance-of-payments due to gold reserve outflows would result in the fewer money supply in the
domestic market, causing a decline in domestic prices. This is beneficial to exporting cheaper goods but
not on imports of higher priced goods, which then contributes to the balance.
This can be derailed by financial policies of raising interest rates to promote capital inflow and to
maintain the gold reserves at a fixed level, reversing the downward pressures on prices and influencing
demands for imports and exports (Mikita, 2015). The Gold Standard was also non-inflationary because
the issuance of money is dependent on a state's gold resources. Price fluctuations would occur due to
gold outflows or discovery of gold mines. This, however, also served as the primary weaknesses of this
fixed exchange rate system are limited cash flow and curbed economic development (Cohn, 2011).
World War I marked the dissolution of the classical gold standard and the shift to paper money that is
not tied to gold reserves and whose exchange rate was determined by the supply and demand in the
foreign exchange market, Military spendings of states could not be backed up by gold reserves anymore
(Mikita, 2015).
 
 
An attempt to return to the modify the gold started was held in a 1922 conference in Genoa. The new
international monetary system was named the "Gold Bullion Standard." In this standard, bank notes
were exchangeable for gold bullion of fixed weight, therefore involving only the exchange of large sums
of money. The system failed to facilitate the free convertibility of currencies to gold, and it collapsed in
1931 with the outbreak of
Great Depression in the 1930s(Mikita, 2015). The first symptoms of the economic crisis were the Great
Crash or the Wall Street Crash of 1929, of stock market prices which delivered a wave of bankruptcies,
a decrease in trade and production, and unemployment in the United States, also hitting hard cities
around the world.
 
The period of the 1930s interwar period would increase intensity beggar-thy-neighbor policies, trade
protectionism, competitive devaluation, rigid capital controls among states. The harsh impacts of these
policies to the society steered economic policy toward state interventionism, with primary objectives of
increasing employment, income and production based on Keynesian principles of state intervention.
 
In the Bretton Woods Conference of 1994, 44 countries agreed in creating a new international system
that would prevent the chaos that occurred during the interwar period. The Bretton Woods System was
established, an adjustable-peg system that is also known as the dollar-gold standard or gold-exchange
standard, with the US dollar as the only convertible currency that is considered to be as good as gold. As
the emerging hegemon, US committed itself to purchase and sell gold at US$35
dollar an ounce without restrictions, while other currencies, in turn, were fixed to the dollar (Benczes,
2014). The stability of currency exchange rates was maintained, and the system bounded member states
to maintain the narrow limits of their currency exchange rate within the +/- 1% range (Mikita, 2015).
 
As the world leader sustaining the new regime, US managed to maintain its balance-of-payments
surplus. With the restoration and reemergence of the economic powers in Europe and (Japan), US
gradually faced persistent deficits which were an inevitable consequence of serving as the world's
reserve currency (Benczes, 2014).
 
The stability of operations of the Bretton Woods System was conceived to have only lasted from 1959 to
1968 (Garber, 1993). The growth of private and official private liquid dollar claims of foreigners,
reduction in official gold holdings especially that of the US, persistent balance-of-payments problems of
the US contributed to the collapse of the system (Cohn, 2011; Garber, 1993; Mikita, 2015). Problems of
the Bretton Woods system would be exposed in the 1960s when the United States began to suffer from
its balance-of-payments deficits. It was difficult to maintain the stable price of gold - maintaining the
fixed gold price in the face of constant price increase globally resulted in its reduction of production
(Mikita, 2015). International reserve of gold had stagnant growth due to low official price while most of
the growth was
seen in foreign-owned US dollars - the growth encountered problems due to deficits and states started
losing confidence in the strength of the dollar and began purchasing gold reserves from the US.
 
In the 1960s and the 1970s, a series of changes were introduced to maintain the operations of the Bretton
Woods system and to resolve its deficiencies. The series of interventions involved solutions such as the
formation Gold Pool and the Special Drawing Rights to expand resources and means for payment
(Garber, 1993; Mikita,
2015). However, these changes were insufficient in the face of worsening US deficit, currency
speculation, and inflation. The problems would eventually result to US abandonment of the gold-
exchange standard and the eventual collapse of the Bretton Woods system in 1973, forcing states to
fluctuate their exchange rates to be determined by market forces. Succeeding attempts to return to a
regulated exchange rate system would be pursued but to no avail.
 
With the shift from a pegged-system to a floating one, IMF allows flexibility among member states to
determine their exchange rates or tie them to major currencies such as the dollar or the SDR. The IMF
also allows a managed float system where central banks are allowed to intervene to address the
fluctuations in the exchange rate by buying and selling currencies. However, countries are not allowed
to manipulate their currencies to achieve short-term gains at the expense of other economies.
 
 
From a Unilateral to a Multilateral Trade Order
The mercantilist period during the seventeenth and eighteenth centuries in European international trade
was marked with colonial expansionism and surplus accumulation of gold stocks in the balance of
payments which boosted exports and curtailed imports (Benczes, 2014). This period was situated in a
zero-sum game in economic relations, the pursuit of beggar-thy-neighbor policies with led to trade wars.
Industrialization in the 194 century advanced trade liberalization under the leadership of United
Kingdom, the first country to industrialize and the hegemon, particularly in 1846 during the Repeal of
the British Corn Laws (Benezes, 2014). Not all states, however, embraced free trade during the era of
industrialization. The United States together with Germany initially pursued import substitution
industrialization, imposing tariffs on manufactured goods to protect their infant industries.
 
The outbreak of World War I resulted to the overturning of the free trade regime and the return of
protectionism. The US was unwilling to take over as hegemon after the decline of British hegemony and
served as the primary drivers of protectionist policies during the Great Depression of 1929-33 (Benczes,
2014). Other states would respond through a cycle of retaliation, severely reducing the extent and
amount of trade among countries. The US Reciprocal Trade Agreements Act in 1932 addressed the
decline in international trade by transferring authority to decide on trade matters to the US president,
freeing the Congress from pressure coming from protectionist interest (Benczes, 2014).
 
The post-World War II trade regime was established in the backdrop of what
Ruggie (1983) calls as "embedded liberal compromise," an offshoot of Keynesianism economics where
the promotion of an open global economy was accompanied by government safeguards that would
protect the domestic economy and social policies. The trade regime was unique because it was informal
and constituted by multilateral trade agreements. Negotiations are guided by the following principles:
trade liberalization via tariff reductions; nondiscrimination, reciprocity, safeguards, and development
(Cohn, 2011). The development principle, however, has not been sufficiently prioritized by major
trading powers. GATT was unable to fully impose the limitations of free trade in exceptional cases
concerning essential policy objects such as health, and public moral grounds, which ought to trump over
the market goals (Ala't
2011).
 
Other criticisms pertained to the inadequate the dispute settlement mechanisms of the institution.
Moreover, while GATT was successful in substantively reducing tariffs, these were eventually replaced
with non-tariff barriers (NTBs) in forms such as environmental regulations and health and safety
requirement, constituting new challenges and limitations to global trade (Ala'i, 2011).
 
Table 4.1 presents the trade negotiations rounds under the GATT. The first five founds of the GATT
focused on tariff reductions while the Tokyo and Uruguay rounds would gradually cover non-tariff
barriers (NTBs). The most notable multilateral negation would be the Uruguay and the Doha rounds.
The Uruguay round touched on controversial issues in the agricultural and textile sector and produced
treaties that would cover the transformation and expansion of global trade that GATT was unable to
Cover. These are the Agreement on Trade-Related Intellectual Property Rights (TRIPs), Agreement on
Trade-Related Investment, and the General Agreement on Trade in Services (GATS). More importantly,
the Uruguay round also led to the creation of the formal international institution in 1995 that would
serve as the counterpart of the INF and WB for trade, the World Trade Organization.
 
The creation of the WTO as "a legitimate multilateral institution, with formal regal status as an
international organization and formal diplomatic status for its icretariar" was a development from the
informal "club" of Western trading nations
19 CATt (Barton, Goldstern, Josling, & Steinberg, 2008, p. 1). Detailed rules e kensively prered not
confly goods but also intellectual property, investment, services WTO has Blo become "or For the most
legalized international institutions in the world" (.1) 'MIll its binding and automatic dispute settement
mechanism.
 
 
The developing states, however, were disillusioned by the outcomes of the Uruguay round where less
developed countries were perceived to have given up more with the inclusion of services trade and
intellectual property than what they have reaped from limited agreements for textile and agriculture
(Cohn, 2011). The Uruguay round would then proceed to the Doha round, cubbed as the "development
round," which was unable to produce successful agreements. The increasing membership of the
organization made it more difficult to reach consensus and countries were not willing to make
significant concessions to avoid the failure of the negotiations (Cohn,
2011). The opposing positions of parties also led to its demise. Demands of developing countries to fully
implement the Uruguay agreement particularly in the agricultural sector, and demands of the US and EU
focusing on matters such as labor, environment, and investment concerns became irreconcilable matters
(Benczes, 2014).
A political cartoon presenting the "globalization machine" and the adverse effects it emits
 
 
From Keynesianism to Neoliberalism
During the Great Depression in the 1930s, the ideas of John Maynard Keynes a prominent British
economist, have been influential in shaping the economic polit of developed countries. In his seminal
work entitled The General Theory of Employment Interests, and Money (1936), Keynes argued that
market-generated equilibrium results in unemployment which causes a decrease in demand. This, in
turn, is related to lie decrease in investment and production. He sees government spending as a solution
to revive the economy by bolstering aggregate demand through fiscal and moneta? policies. The Keynes'
liberal interventionism approach influenced states to invest big governments and shaped the post-war
global economic order that is grounds on the Keynesian compromise in of promoting open markets
without undermining the protection of the society and the domestic market. This allowed exceptions to
be scepted in the form of capital controls and domestic trade protections (Balaam & Dillman, 2014).
 
 
'The Keynesian paradigm, however, would be challenged during the economic crisis of stagflation (a
combination of rising unemployment and inflation) that occurred in the 1970s (Heywood, 2011). This
would mark the entry of resurgence of liberalism through neo-liberalism on a global scale due to the
technological advancement that allowed the free flow of capital and goods across the globe, Grounded in
the ideas of Friedrich Hayek and Milton Friedman, the neoliberal solution was to have an unregulated
market with as little state intervention as possible. It involved the having the market take over tasks and
services that ought to be provided by the government.
The key neoliberal policies were comprised of privatization, deregulation, lesser public spending, and
reduced corporate taxes, The economic paradigm would expand through British Prime Minister
Margaret Thatcher and U.S. President Ronald Reagan who popularized the policies and ideas dubbed as
Thatcherism and Reaganism, which would then be followed by the emerging economies of East and
Southeast Asia (Balaam & Dillman, 2014). The United States and Creat Britain, together with the
industrialized nations, would promote globalization and integration Into the global economy with the
promise that capitalism would lead to economic Prosperity alongside democratization. The IMF and
World Bank also aligned their policies to neo-liberalism through the "Washington Consensus," a set of
ten economic policy prescriptions for the recovering and crisis-ridden countries implemented by
Washington-based institutions; the IME, WB, and the US Treasury, The term was coined by John
Willarson (2004) which constituted the following principles;
1. Fiscal discipline
2. Reordering Public Expenditure Priorities
3. Tax Reform
4. Liberalizing Interest Rates
5. A Competitive Exchange Rate
6. Trade Liberalization
7. Liberalization of Inward Foreign Direct Investment
8. Privatization
9. Deregulation
10. Property Rights
 
These policies were applied through the structural adjustment programmes AP) of the IMF and the WB
that imposed conditionality clauses attached to loans which have been criticized for its adverse effects
on developing nations.
 
Source: Wikimedia Commons as cited in Smith (2014)
With the expansion of globalization came the reaction from the civil society in the form of transnational
and national resistance due to the widening gap between the North and the South. The Zapatista
Movement in Mexico against the North American Free Trade Agreement and the Battle of Seattle
during the WTO Ministerial Conference in the 1990s were the prominent transnational movements that
first sought to challenge against global capitalism and neoliberal globalization. Offshoots of these
movements would emerge in the twenty-first century, with the Spanish Indignados Movement, the Arab
Spring and the Occupy Movement. Such movements are part of the broader collective resistance known
as the "global justice movement" that fights against inequality and the concentration of wealth among
the wealthy minority.
 
These movements have yet to produce strong enough pressure to these international institutions.
However, the global civil society continues to persistently and relentlessly expose the ills of today's
global economic system.