Lesson 5 Market Integration LESSON OBJECTIVES When you finish reading this chapter, you should be able to: 1. explain the role of international financial institutions in the creation of a global economy; 2. narrate a short history of global market integration in the twentieth century; and 3. identify the attributes of global corporations. Definition of Terms * | Market integration is a process by which economies are becoming more interdependent and interconnected in terms of commodity flows including externalities and spillover of impacts (Genschel and Jacktenfuchs, 2017). International Financial Institutions or IFis are institutions that provide support through loans or grants and technical advices to promote acountry’s economic and social development (Bhargava, 2006: 393). Corporations are private institutions that produce or manufacture goods, products, and services for a more expanded market usually at the reach of regions or the world. Transnational corporations (TNCs) have a more complex setting where each foreign subsidiary is given some freedom to develop its own product lines and marketing, compared to multinational corporations (MNCs), which have more of a home or country base taking care of the R&D and marketing, and focus more on exporting their products and services (Iwan, 2007). INTRODUCTION Look at the common products sold in your local grocery stores. Where are they manufactured or made? Who marketed or distributed the product? Where do the companies source their raw materials? Most of the products sold in the Market are either sourced from one country, or imported and manufactured in another, and distributed worldwide. Unit Il “STRUCTURES OF GLOBALIZATION 4),check out the proliferation of call centers and business processing outsourcing (BPO) companies in the Philippines. Most of these companies cater to international consumers based in US, Australia, New Zealand, and Europe, According to Philippine Statistics Authority (2018), the Philippines has 851 BPO companies, more than half of which are call centers (429). The Philippines is the call center capital of the world, accounting to 18 percent of the global market share, US$24.4 B and 7.5 percent revenue increase in the first quarter of 2018 (Sea Limited, n.d.). These developments are due to intreasing market integration, which has two kinds—horizontal and vertical integration (Grossman & Hart, 1986). Horizontal integration happens when a firm gains control of other firms performing similar marketing functions at the same level in the marketing sequence. For instance, Disney bought Pixar, which is also in the entertainment media, for $7.4 billion (La Monica, 2006). In the Philippines, an example of a local market integration is when Landbank of the Philippines acquired the Philippine Postal Savings Bank, for the latter to focus on overseas Filipino worker clients (ABS-CBN News, 2017). Vertical integration happens when one company owns the operations and products from one stage to the other along the supply chain. For example, an iron mining company operates the steel manufacturing firm. Another instance is when McDonald’s owns the land where its supplies are located to avoid cost of lease. In this chapter, we will discuss the role of different institutions like international financial institutions and global corporations in market integration. The International Financial Institutions and their Role in the Global Economy International Financial Institutions or IFls are institutions that provide support through loans or grants and technical advices to promote a country’s economic and social development (Bhargava, 2006: 393), Global and regional IFls include International Monetary Fund (IMF) and multilateral development banks (MDBs) like the World Bank Group, the African Development Bank (ADB), the inter-American Development Bank, and the European Bank for Reconstruction and Development (Bhargava, 2006). IFls have a significant role in global economic development. Compared t Private financing institutions, IFIs provide financial and technical services and Products not for profit but for overall economic and social development (Buiter & Lankes, 2014). Fis provide loans, technical assistance, and policy-based lending’ Macroeconomic stability and providing the Necessary infrastructure a” systems, sectoral reforms, and creation of safety nets through policy-based 42 ACourse Module for The Contemporary World= lending (Bhavarga, 2006). IFls also work with the private sector for investment and policy reforms to promote private sector expansion (International Finance Corporation, 2011). IFls undeniably have been a critical actor in the contemporary world. Their contributions to social and economic development and Progress in the modern times are recognized (International Finance Corporation, 2011). However, there are four key issues with IFls, which include legitimacy, effectiveness, support conditionality and financial capacity, and sustainability (Bhargava, 2006: 404). First, Bhargava argues that some critics question IFis’ legitimacy given that majority of its shareholders and policy making powers lie with powerful, rich nations. Leaders of these IFls, also by default, have come from developed countries. Such heads of the IMF have always been a European, an American for World Bank, and a European for EDRD, thus a clamor for IFIs to select leaders based on merits and not on national origin (Bhargava, 2006: 404). Leadership roles in these powerful IFls are critical in steering the institution's policy and programs, including its reforms. Second, different sectors have questioned the effectiveness of the IFls’ development assistance programs and policy advices. Some of the IFls' investments have been controversial such as support to large-scale land use conversion (dam construction), which has displaced numerous indigenous peoples in some areas like in the Philippines’ case (Rivers Watch East and Southeast Asia (RWESA), 2003). Thus, social safeguards to ensure human rights, community, and environment well-being need to be instituted (Bhargava, 2006). There are initiatives to address these concerns. Examples of these are the adoption of the Paris Declaration on Aid Effectiveness, which focuses on the harmonization, alignment, and managing aid for results including monitoring systems and indicators (OECD, 2005). In 2006, MDBs agreed on a Common Performance Assessment System to produce a consolidated data source on MDB‘s contribution to development impacts (Bhagarva, 2006: 404) Third, the major products of IFis are loans to provide capital for cere ives of countries. However, it does not come for free and comes wit veer ° conditions that the borrowing country has to meet. This oe seh set in place as a form of safeguard to ensure that loans are arene fo for its intended use: Nevertheless, some conditions on Cas ade liberalization, elimination of subsidy, and limits to aioe rare mostly contested and argued against by some sectors (braneriZ4 oe ie have argued that these conditionalities impose Western free- Unit || STRUCTURES: OF GLOBALIZATION 43i r undesired by developing countries which could be ill-timed, inappropriate, © y receiving countries (Bhagarva, 2006: 405). ve bother conan Lastly, the financial capacity and sustainability of IIs iB ae een The IFis’ income base has reduced compared to what it was before, ; . the demand from IFis are increasing particularly in cone ean regional and global development initiatives. Some middle income coun nes also limit their loans with IFls due to a higher transactional cost as wells the conditionality commonly attached to these financial services. In ‘addition; some concessional financing has been transformed into grants from loans which may be more attractive to the recipient country but could take a toll to the financial sustainability of IFls. In 2002, developed countries pledged to provide further financial support to IFls during the Monterrey Conference on Financing for Development (World Economic Forum, 2006). COLLABOR. You could work individually or with groups to report on specific global economic institutions. You need to present your research in class either through report presentation or using creative means such as vlogs, short skit, among others. This will be a 15-minute presentation. ‘ATE AND CREATE. Key topics: 1. Short history of the institution Rationale for its creation or establishment Their role in the global economy RwN Benefits and limitations A Summarized History of the Global Economy . The modern capitalist world economy flourished ber ‘ centuries (Frieden, 2012). The start of the modern ioGal pene ba to 18th was considered the first period of globalization (Bhagarva, 2006 ng to 1914 trade, capital, and immigration flows grew tremendously and in \ ). Itis when but the global institutional architecture to manage these Were orge Volume, (ibid.). International convention and treaties also served as dnote limited large-scale global movements such as the International Telegraph U § fo Universal Postal Union in 1874, International Association Of Railway (1884), and International Sanitary Convention in 1892 (Freiden, 2012) NBresses (2006:2) argues that this was driven by the paradigm of Capital fea ‘stein 44 — ACourse Module for The Contemporary Worldthat resulted to technological advances and ex) ‘pansion of place \ and discoveries. Places, knowledge, From the Second World War to the late 1990s, the modern international economic enabling architecture was established (Freiden, 2012). In addition, we see the expansion of MNCs across the globe, supported by enabling policies and improved communications and transport (Bhagarva, 2006). Political changes like the fall of the Berlin Wall, establishment of regional networks, and trade agreements resulted to trade liberalization and free flow of capital in the world (Neubauer, 2014). However, the euphoria on globalization and global free trade was put into question with the 1994/95 Mexico crisis, when Mexico's multi-billion loan from IMF created a negative spillover effect on US, Europe, Portugal, and Spain (Neubauer, 2014). This was offset by the exponential rise of the Asian economy and the advancement in digitalization and technology that ushered in a new wave of globalization (Neubauer, 2014). From the late 1990s until very recently, Bhavarga (2006) contends and characterizes the third wave of market integration. We see the advent of the modern Internet, the WTO establishment, and formal entry of China into the trading system through its accession to international financial institutions (Frieden, 2012). Despite the world economy boom—where the world enjoyed “increased growth—the global debt crisis, political and civil unrests even in developed countries like the US resulted to market crash and started the war ~ on terror that affected global diplomacy and economy (Buiter, 2011). As the world enters what the World Economic Forum argues as the “Fourth ‘Industrial Revolution,” Mueller (2010) predicted that there will be slower economic growth, political destabilization, and diffusion of power. Some of his ‘recommendations to remedy these include reforms in work, economic spending, _ improving solidarity, openness, and cooperation among countries. _ The Global Corporations : Aside from IFls and governments, one of the major players in globalization i i tions. The number of id italist market is the global corpora’ T tal ccneuone ti ket economies listed in the Fortune global corporations from emerging market Global 500 rose from 47 firms in 2005 to 95 in 2010 (Neubauer, 2014). The modern global corporations are commonly referred to ey Orporations and transnational corporations. More often. a oe nee interchangeably. Iwan (2007) offers categorizations to distingui: Unit ll STRUCTURES OF GLOBALIZATION — 4S2 TNC. He argues that both types of corporations are importers and exporters, . and have investments in many countries. Nevertheless, he further contends that MNCs still provide central decisions compared to TNCs that provide individual foreign market investment to have their own operations and systems (Iwan, 2007). With the growth of global corporations from emerging economies, the capital flows have now started to change from the dominant North-North/ North-South to South-South and South-North capital flows, most of the South- North coming from China and India (Rajan, 2010). For instance, China’s Lenovo Corporation bought IBM's PC business (NBC News, 2005).These global entities, IFls and global corporations, play a significant role in global wealth creation and distribution, including global economic development (Neubauer, 2014). However, the significant growth of IFls and global corporations is complicated by ever-dynamic context and patterns. These trends include global inequality, systematic stability and viability of the global financial system and climate issues, and issues on human security. Although IFls have a stronger societal development outlook, they have a larger responsibility to safeguard against unintended negative outcomes of some of their investments and to balance rapid economic growth with social well-being and ensuring environmental health. Similarly, global corporations need to embrace that their impact to society and environment goes beyond profit, products, and employment but more so to social development and ensuring environmental ‘integrity in the midst of their operations and expansion (Neubauer, 2014). COLLABORATE AND CREATE. The Story of Stuff. Reflect on the impacts of corporations on your life and ‘that of your family and community. You could create a three-minute viog titled: _ “The Story of Stuff: Your Chosen Product or Service.” You may check https:// storyofstuff.org for reference. _ For the video, you need to: 2 trace the product life cycle from production to disposal and identify the positive as well as limits and issues on the impacts of the product and the corporation which made it on the environment, people, and economy. In this chapter, we first defined what IFls mean. IFls are institutions - that rovide support through loans or grants and technical advices to promote a ‘country’s economic and social development (Bhargava, 2006: 393). These support services and financial instruments are critical for the global economy, particularly E in Supporting capital flows and economic development. Nevertheless, IFls are €xPected to do more (Buiter and Lankes, 2014). Unit | STRUCTURES OF GLOBALIZATION = 47Next, we quickly traced the history of global market integration through globalization of capitals and trades flows from the sixteenth century to the Present. Bhavarga (2006) and Neuebauer (2014) identified at least three general Phases of globalization that promoted global market integration. These phases were fueled by developments in transport, communications, technology supported by enabling policy, and financial support from IFls and governments. Aside from IFls, the global corporations—MNCs and TNCs are also expanding and growing in numbers and influence. These global corporations have contributed to both national and global economies and have significantly affected commodity and services flows (Neubauer, 2014). However, similar to IFis, these global corporations are also met with criticism in terms of their corporate social and environmental responsibilities. Their growing economic operations have resulted in displacement of some workers, pollution, and political unrest. Thus, calls by communities and civil society groups for these corporations to improve safeguards and corporate social responsibility have strengthened. We have seen reform efforts by IFIS and global corporations to improve their operations, encouraging greater transparency and communicating their social and environmental impacts. These initiatives are welcomed in a world of uncertainty and greater complexity.