MODULE: (SS02) – THE CONTEMPORARY WORLD

CHAPTER 3: THE GLOBAL ECONOMY

A. Articulated the definition of market integration and its different types;

B. explained the importance of International Financial Institutions and The
Bretton Woods System.
C. Articulated the concept and feature of global city

Introduction
Globalization has brought enormous changes to the lives of the people. Humans are the major
contributors to the development of the economy. But also,at the same time, humans are the direct
descendants of the success and failures of decisions made throughout history. It is therefore, a
necessity to be acquainted withthe trends and changes of our modern world. With such, knowledge
andunderstanding of the various concepts of globalization and how it affects each economy is vital for
the survival and success of every human.The world is moving in fast pace as technology changes
every quarter of theyear. Distance from each other is no longer an issue because of technology and
easytravel opportunities. There is shorter waiting time and everything is fast because communication
is reaching even at the farthest part of the world. This module aims to make the students better
understand how each economy and market works and how it is affects us. This module will discuss
about the basic concepts of global economy, market integration and global city. It will also introduce
the history and types of market integration and how it affects our economy.
Economies around the world are already showing various spots of homogeneity and it is all
attributed to the integration of economies around the world as a result of globalization. To fully
understand the economy, one should look at the different perspectives of the market and how it works
and how they adjust to the changes brought by globalization. Markets which include companies and
corporations are making tremendous efforts to adapt to changes, with the challenges of rigid
competition and trade rules. With these developments in economy, trends in the market emerge and
paved the way to various types of market integration which has started in the 19th century with the
establishment of a better navigation and maritime technology as well as the advancement in
communication. Market Integration (Kohls and Uhl) is a process that refers to corporate expansion by
consolidating additional marketing functions and activities within asingle management framework.
Integration shows the company’s marketrelationship and its extent affects the company’s behavior.

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History of Market Integration It was

during the 19th century when Market
Integration showed substantial advances
in internationaLmarket integration. The
realization of the creation of world
economy had made technological
advancement critical in these times. It was
in this century when the locomotive and
marine steam engine revolutionized world
transportation. Steamships connected the
world’s ports and railroads ran inland.
With these goods could be transported across the world. The emergence of
electric telegraph was evolutionary. The opening of Suez Canal which allowed
shorter travel make transport easier. And lastly, the technological change in the
shape of steel hulls and steel masts made sailing ships larger and more efficient.
The imposition of taxes among countries was practiced at this century. But
in 1846 when the merchants of Manchester England struck a victory for free trade
by forcing the British government to abandon tariffs on imported goods. Although
these move has made countries vulnerable to the trade surplus and deficit as major
disadvantage of free trade.

Types of Market Integration

1. Horizontal Market Integration - is a competitive strategy in which two
companies of the same nature merge or one larger company acquires a
smaller company.
Example: The acquisition of Miramax and Pixar of a much larger company Disney.
The acquisition of Smart of a much smaller company Sun.

2. Vertical Market Integration - It is a competitive strategy of a firm own to

own the upstream suppliers and downstream buyers; this is an
arrangement in which supply chain of a company is also owned by that
company.

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Example: A car company began making their own steel for their car
parts instead of investing to other corporations. Nescafe Corporation buying their own land, and
producing their own coffee grain, employing their own coffee growers.

A. Forward Vertical Integration - This process occurs when a company

decides take control of the post-production process or is acquiring
a business further up into the supply chain.
Example: A car manufacturer acquires an automotive dealership.

Starbucks has the production of its own coffee

bean to the cup of coffee sold to consumers.

B. Backward Vertical Integration - This process occurs when a

company decides to buy another company that makes an input
product acquiring company’s product.
Example: A car manufacturer acquires a tire manufacturer or car parts distributor.

3. Conglomerate Market Integration - This involves a combination or fusion

of companies that are involved in unrelated business activities.
Two types of mergers of conglomerate:

A. Pure Mergers conglomerates involves companies that have

nothing in common.
Example: Henry Sy of SM Investments Corp acquired a 34.5

percent stake in 2GO Group Incorporation.

B. Mixed Mergers Conglomerates - combination of companies that

are looking for product extensions or market extensions.

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Effects of Market Integration

1. Wider selection of goods and services thathave not been previously available. This is made
available because of the ease of navigation and transportation. The goods from one country can
easily reach different countries around the world because of trade. The consumers of one country can
choose different products from other country and
enjoy a wide variety of choices.

2.Acquisition of goods and services at a lower cost. The free flowing of goods and services as a
result of globalization can reach many countries. It makes competition for buyers stiffer for companies
resulting to the drop of prices to keep up with the competition.

3. Political Cooperation. This cooperation happens because of strong economic ties, which allows
peaceful conflict resolution and allowsgreater stability.

4. Erosion of national sovereignty. This happens when members of Economic unions are required
to follow the rules on trade, monetary policies and other agreements.

5. Employment opportunities. This tends to improve because trade

liberalization leads to market expansion, technology sharing and cross
boarder investment. Therefore, skilled workers are demanded in all parts
of the world which allows more opportunities to earn.

BRETTON WOODS SYSTEM

Because of the increasing trade and
development, in July 1944, The United
Nations Monetary and Financial
Conference was held and an
international monetary system was
developed in Bretton Woods,
Hampshire. They sought to create a
system that would ensure exchange
rate stability, prevent competitive
devaluations, and promote economic
growth. The delegates to the

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conference agreed to establish the International Monetary Fund and what becomes
to be the World Bank Group and a system developed in order to address
international monetary order. Bretton Woods Agreement has a goal of creating a
system that would facilitate international trade while protecting the autonomous
policy goals of individual nations.

The delegates of the conference agreed to establish two new institutions:

1. The International Monetary Fund (IMF) that would monitor exchange

rates and lend reserve currencies to nations with balance-deficits. This
institution came into formal existence in December 1945.
2. The International Bank for Reconstruction and Development which is
also known as World Bank Group which is responsible for providing
financial assistance for the reconstruction after World War II and the
economic development of less developed countries.
In 1958, Bretton Woods System became fully functional as currencies
became convertible. Countries settled international balances in dollars, and
US dollars were convertible to gold at a fixed exchange rate at $35 an ounce.

Bretton Woods System was in place until persistent US Balance of payments

deficits led to foreign held dollars exceeding the US gold Stock. It was
President Nixon the dollars convertibility to gold in 1971. The system
collapsed but created a lasting influence on international currency exchange
and trade through its development of the IMF and World Bank.
International Financial Institutions and Its Role

International Financial Institutions are institutions that provide financial

support and professional advice for economic and social development activities in
developing countries and promote international economic cooperation and stability.

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All IFI’s are active in supporting programs that are global in scope, in addition to
their primary role of financing and providing technical assistance to programs at the
country level.
The Traditional goals of these institutions are:

1. To reduce global poverty and improve people’s living condition

and standards.
2. To support sustainable economic, social and institutional
development.
3. To promote regional cooperation and integration.
4. To enhance measures that promote economic growth and
protection of the environment.
IFI’s achieve these objectives through loans, credits and grants to national
government. Such funding is usually tied to specific projects that focus on economic
and socially sustainable development. IFI’s also provide technical and advisory
assistance to their borrowers and conduct extensive research on development
issues. These institutions provide businesses or governments with loan for
emergency purposes or for normal business functions.
All IFI’s admit only sovereign countries as its owner members, but are all
characterized by a broad country membership, including both borrowing developing
countries and developed donor countries. Also, All IFI’s have independent legal and
operational status and a high level of cooperation is maintained among them.

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INTERNATIONAL FINANCIAL INSTITUTIONS

1. World Bank and International Monetary Fund- were founded after

World War II. their establishment was mainly because of peace
advocacy after war. It aimed to help the economic stability of the
world. both of them are basically banks, but instead of being
started by individuals like regular banks, they were started by
countries. they were designed to complement each other. IMF
main goal was to help countries which were in trouble. The World
Bank, in comparison revolved around the eradication of poverty
and it funded specific projects that helped them reach thier goals,
especially in poor countries.
• International Bank for Reconstruction and Develoment
(IBRD)
• International Development Association (IDA)
• International Finance Corporation (IFC)
• Multilateral Investment Guarantee Agency (MIGA)
• International Centre for Settlement of Investment
Disputes (ICSID)

2. Multilateral Development Banks

• African Development Bank (AFDB)
• Asian Development Bank (ADB)
• The Inter-American Development Bank
• European Bank

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 MODULE: (SS02) – THE CONTEMPORARY WORLD

GLOBAL CITY

INTRODUCTION

Globalization and technology advancement have made significant impact on various

cities around the world. Global city is a contemporary concept and has
revolutionizing effort on the way economist view. Global City is a concept of the
twentieth century which is an image of a very highly urbanized area but are full
energized and governed by modern state of the art technology and advanced
communication capacity. It is a city know to be an economic super power. It is also
known to be the “brain hubs” and the centers of a “knowledge economy.”

Global cities are cities with

mostly large populations. But size is
not all that matters. One of the most
important quality of global city is its
openness to business, ideas and people
because it allows growth and
development. Global cities drive the
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global economy, they are economic

power houses with head offices of
multinational institutions, business
services, legal and consulting expertise,
exchanges banks and global
corporations on its territory. They also
drive in land, water and air connectivity, where major airports and solid transit
infrastructure that make global cities accessible in all areas, that helps attract
tourist and business ventures. Global cities have top educational institutions,
consulate, think tanks and the venues for international conferences which drive
political engagement and undertakings. Also, they are cultural capitals, Museums,
symphonies, world renowned restaurants, night life and sports are catered in these
cities. And most importantly, global cities are led by people who think globally and
understand the importance of connectivity of local politics to world politics.

Global City as defined by Saskia Sassen (1991) are identified in 4 ways:

1. It is a key location for finance and specialized service

firms which
have replaced manufacturing as the leading economic
services
2. It is a site of production, including the production of
innovations in
leading industries.
3. It is highly concentrated command points in the
organization of the
world economy.
4. It is where products and innovations are produced.
5. Global cities are major nodes in the interconnected
systems of

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information and money, and the wealth that they capture is

intimately related to the specialized businesses that facilitate those
flows.

Attributes of Global City

1. Seats of Economic Power
2. Centers of Authority
3. Centers of Political Influence
4. Centers of Higher Learning and Culture
At Kearney list, developed in conjunction with the Chicago Council on Global
Affairs, Global Cities index uses criteria across five dimensions:

a. Business Activity (Headquarters, service firms, capital market

value, number of international conferences, value of goods through
ports and airports.
b. Human Capital (size of foreign born population, quality of
universities, number of international schools, international student
population number of residents with college degrees).
c. Information Exchange (accessibility to major TV news channels,
internet presence, Number of international news bureaus,
censorship, and broadcast subscribers rate).
d. Cultural Experience (number of sporting events, museums,
performing arts venues, culinary establishments, international
visitors, and sister city relationship).
e. Political Engagement (Number of embassies and consulates, think
tanks international organizations, political conferences.

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CHALLENGES OF GLOBAL CITY

1. Global cities can be sites of great inequality and poverty.

2. Environmental threats due to global climate change.
3. Scarcity of Resources such as Water, Good and Energy due to
increase in demand.
4. Techonological dependence.
5. Challenge of Good Governance because of complexity and require
dedicated of minds. Summary
• Market integration is a process that refers to corporate expansion by
consolidating additional marketing functions and activities within a
single management framework.
• There are three types of market integration namely; vertical, horizontal
and conglomerate systems.
• The Bretton Woods Agreement and system created a collective
international currency exchange and built International Financial
Institutions like the World Bank and International Monetary Fund.
• The Bretton Woods collapsed in the 1970’s but created a lasting
influence in trading and foreign currency exchange.
• The concept Global city drives the global economy, they are economic power
houses with head offices of multinational institutions, business services,
legal and consulting expertise, exchanges banks and global corporations on
its territory.
• Global city has 5 dimensions namely: business activity, human capital,
information exchange, cultural experience and political engagement.

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https://www.youtube.com/watch?v=Q101MNiJ-tk
https://www.youtube.com/watch?v=hyX_FRIPVmk
References:
Claudio, L and Abinales, P. (2018). The Contemporary World.
EDSA, South Triangle. Quezon City: C & E Publishing.

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