The Contemporary World

Unit 2 - The Structures of Globalization

- The Global Economy (Week 3)
Presented by:
JEANNETTE D. ARCEGA, LPT, PhD
BatStateU-CAF Lobo
Prayer
Virtual Meeting Etiquette
Preliminary Activity:

Instructions: Make a list of 5 agricultural goods that the Philipines

import and export. Include the countries where the Philipines does this
economic activities.

Exported Imported
1. example: banana (China) 1.example: cereals (USA)
2. 2.
3. 3.
4. 4.
5. 5.
Learning Objectives:

 define economic globalization

 explain the two major driving forces of global
economy
 differentiate economic globalization from
internationalization
 trace the origin of economic globalization
Definition of Economic Globalization
 increasing interdependence of world economies as a
result of the growing scale of cross-border trade of
commodities and services, flow of international capital
and wide and rapid spread of technologies
 a historical process, the result of human innovation
and technological progress
 movement of people (labor) and knowledge
(technology) across international borders (International
Monetary Fund, n.d)
 a process which makes the world economy an organic
system by extending transnational economic processes
and economic relations among many countries; thus,
deepening the economic interdependencies among them
Major Driving Forces for Economic Globalization

1. rapid growing of information in all types of

productive activities
2. marketization
 restructuring process enabling state enterprises
to operate as market-oriented firms by changing
the legal environment in which they operate and
can be achieved through reduction of state
subsidies, organizational restructuring of
management (corporatization, decentralization,
and privatization)
Corporatization
 transformation of a state-owned asset or
organization into a corporation which typically
has a board of directors, management, and
shareholders; the government is the company's
only shareholder, and the shares in the company
are not publicly traded
 allows the government to retain ownership of the
company while allowing the company to run as
efficiently as its private counterparts
Source:what is corporation? Retrieved from https://www.investopedia.com/terms/c/coporatization.asp.
Accessed on September 5, 2021
Examples of Corporatization:
Water and electricity utilities are common
examples, but the practice extends to a
much wider range of goods and services,
from airports to universities to hospitals.

Source: Corporatization. Retrieved from

https://www.municipalservicesproject.org/corporatization. Accessed on September 5,
2021.
Privatization
 occurs when a government-owned
business, operation, or property becomes
owned by a private, non-government party
 helps governments save money and
increase efficiency, where private
companies can move goods quicker and
more
Source:Privatization. Retrieved from
https://www.investopedia.com/terms/p/privatization.asp. Accessed on September 5, 2021.
Privatized Enterprises in the Philippines
• PLDT
• Petron
• PhlPost
• Philippine Airlines
• MWWS
• National Power Corporation
Decentralization
 transfer of control of an activity or organization
to several local offices or authorities rather than
one single one (Oxfor Dictionary)
 creates an efficient and reliable administration,
intensifies and improves local development,
better ensures the rights of the local population
to have a voice in government, and better
protects minorities
Source: Kalin, W. (n.d.). Decentralization, Why and How? Retreived
fromhttp://www.ciesin.org/decentralization/English/General/SDC_whyhow.html. Accessed
on September 5, 2021.
Dimensions of Economic Globalization
• globalization of trade of goods and services
• globalization of financial and capital markets
• globalization of technology and communication
• globalization of production
Economic Dimension of Globalization
 It explores how the way people have undertaken
economic production has changed.
 The global economic order emerged after World War
II, when the Bretton Woods Conference laid the
foundations for IMF, World Bank, and WTO.
 In 1980s, neoliberalism liberalized financial transactions
which led to the Great Financial Crash, where banks
traded toxic assets without regulation. Transnational
corporations rival nation-states in economic power, and
have had a profound effect on the structure and function
of the global economy.
Source: Steger, M. (2013). Globalization: A Very Short Introduction. 3rd ed. Retrieved
fromhttps://www.veryshortintroductions.com/view/10.1093/actrade/9780199662661.001.0001/actrade-
9780199662661-chapter-3. Accessed on September 5, 2021.
Note: International economic order is a set
of proscribed rules, norms, and procedures
that regulate the cross-border exchange of
goods, services, and capital.

Source:International Economic Order. Retrieved from

https://www.encyclopedia.com/social-sciences/applied-and-social-sciences-
magazines/international-economic-order. Accessed on september 5, 2021.
Economic Globalization vs Internationalization

Economic Globalization
 functional integration between
internationally dispersed activities which
means that it is a qualitative
transformation rather than a quantitative
change
Internationalization
 extension of economic activities between
internationally dispersed activities
To put it simply:
Economic globalization
 connects the economies of the world for free trade and
economic policies to integrate the world into the global
village
Internationalization
 production of goods or delivery of services that have the
capability of entering into the international markets and
have the standards that are globally accepted;
expanding the business and entering into the market of
different countries

Source: Thakur, M. (n.d.). Difference between globalization and internationalization.

Retrieved fromhttps://www.educba.com/globalization-vs-internationalization/. Accessed
on September 5, 2021.
Origin of Economic Globalization
16th century - world system analysts identify the
origin of modernity and globalization through long
distance trade in the 16th century (e.g. Silk Road,
started in western China, reached the boundaries
of the Parthian empire, and continued onwards
towards Rome also connected Asia, Africa, and
Europe)
17th and 18th century - global economy exists
only in trade and exchange rather than production
as the world export to World GDP did not reached
1 to 2 percent
Origin of Economic Globalization
19th century - growth in international exchange of
goods accelerated in the second quarter; global
economy in the 19th and 20th centuries grew by
an average of nearly 4 percent per annum,
roughly twice as high as growth in the national
incomes of the developed economies since the
late 19th century
International Monetary Systems and Gold Standards

International Monetary System (IMS)

 a system that forms rules and standards to
facilitate international trade among nations
 helps reallocate capital and investment from one
nation to another
 global network of the government and financial
institutions that determine the exchange rate of
different currencies for international trade
 a governing body that sets rules and regulations
by which different nations exchange currencies
with each other
Evolution of International Monetary System

1870-1914
• with the help of gold and silver, trade was carried without
any institutional support
• Monetary system during this time was decentralized
while market based and money played a minor role in
international trade in contrast to gold.
Note:
Gold Standard is a system of backing a country’s currency
with its gold reserves. Such currencies are freely
convertible into gold at a fixed price, and the country settles
all its international trade transactions in gold.
After World War I
• use of gold declined due to increased expenditure and
inflation which were caused by war
• Major economic powers were on gold standards but
could not maintain it and failed because of the Great
depression in 1931.

1944
• 730 representatives of 44 nations met at Bretton Woods,
New Hampshire, U.S. to create a new international
monetary system called Bretton Woods system, which
aims to create a stabilized international currency system
and ensure a monetary stability for all the nations
Bretton Woods System
Note:
Since the U.S. held most of the world’s gold, all the nations
would determine the values of their currencies in terms of
dollar.
The central banks of nations were given the task of
maintaining fixed exchange rates with respect to dollar for
each currency.
1971
The Bretton Woods system ended as the trade deficit
and growing inflation undermined the value of dollar in the
whole world.
1973
the floating exchange rate system, also known as flexible
exchange rate system was developed that was market
based
Flexible Exchang Rate System (Floating Exchange
Rate)
 as exchange rates determined by global supply and
demand of currency.
 prices of foreign exchange determined by the market,
that can rapidly change due to supply and demand, and
are not pegged nor controlled by central banks.
 The opposite scenario, where central banks intervene in
the market with purchases and sales of foreign and
domestic currency in order to keep the exchange rate
within limits

Source: Flexible Excange Rate. Retrieved from https://policonomics.com/flexible-exchange-rate/

Accessed on September 5, 2021.
European Monetary Integration
 refers to a 30-year long process that began at
the end of the 1960s as a form of monetary
cooperation intended to reduce the excessive
influence of the US dollar on domestic exchange
rates, and led, through various attempts, to the
creation of a Monetary Union and a common
currency. This Union brings many benefits to
Member States.
European Monetary System (EMS)
• a 1979 arrangement between several European
countries which links their currencies in an attempt to
stabilize the exchange rate.
• succeeded by the European Economic and Monetary
Union (EMU), an institution of the European Union (EU),
which established a common currency called the euro.
• originated in an attempt to stabilize inflation and stop
large exchange rate fluctuations between European
countries.
• In June 1998, the European Central Bank was
established and, in January 1999, a unified currency, the
euro, was born and came to be used by most EU
member countries
European Financial Stability Mechanism (EFSM)
 a permanent fund created by the European Union (EU)
to provide emergency assistance to member states
within the Union
 raises money through the financial markets, and is
guaranteed by the European Commission
 Fund raised through the markets, use the budget of the
European Union as collateral.
European Financial Stability Facility (EFSF)
 created by the European Union to provide assistance to
member states with unstable economies
 a special purpose vehicle (SPV) managed by the
European Investment Bank, a lending institution
 The fund raises money by issuing debt, and distributes
the funds to eurozone countries whose lending
institutions need to be recapitalized who need help
managing their sovereign debt or who need financial
stabilization.
International Trade and Trade Policies
International trade
 exchange of goods, services and capital across national
borders. It is a multi-million dollar activity, central to the
Gross Domestic Product (GDP) of many countries
 In acquiring products where demand is inelastic and
domestic supply is inadequate absent traders,
consumers and suppliers are forced to either develop
substitute goods or devote a large percentage of their
income
 exchange of goods or services along international
borders
 allows for a greater competition and more competitive
pricing in the market
Concepts in the Economics of International Trade

Comparative advantage
• comes in so long as the two countries have different
relative efficiencies, the two countries can benefit from
trade – the country with absolute advantage will still
benefit by directing its resources to those goods where it
is most productive and trading for the others
Specialization
• refers to this process; countries as well as individual
businesses can maximize their welfare by specializing in
the production of those goods where they are most
efficient and enjoy the largest advantages over rivals
Trade policies
• regulations and agreement of foreign countries
• defines standards, goals, rules, and regulations
that pertain to trade relation between countries
• Each country has specific policies formulated by
its officials.
• Taxes imposes on import and export, inspection,
regulations, tariffs and quotas are all part of
country’s trade policy.
Focuses of Trade Policy in International Trade

Tariffs
• taxes or duties paid for a particular class of imports or
exports
• Imposing taxes on imported and exported goods is a
right of every country.
• Heavy tariffs on imported goods are levied by some
nations for the protection of their local industries
• Prices of imported goods in local markets are inflated
due to high imported taxes to ensure demand of local
products.
Trade barriers
• measures that governments or public authorities
introduce to make imported goods or services less
competitive than locally produced goods and services
• state-imposed restrictions on trading a particular product
or with a specific nation
• can be linked to the product, service like technical
requirement and it can also be administrative in nature
such as rules and procedures of transactions
• Tariffs, duties, subsidies, embargoes and quotas are the
most common trade barriers.
Safety
• ensures that imported products in the country
are of high quality
• Inspection regulations laid down by public
officials ensure the safety and quality standards
of imported products.
Types of Trade Policies
1.National Trade Policy
• safeguards the best interest of its trade and citizen.
2. Bilateral Trade Policy
• regulates the trade and business relations between two
nations
• Under the trade agreement the national trade policies of
both the nations and their negotiations are considered
while bilateral trade policy is being formulated.
3. International Trade Policy
• defines the international trade policy under their charter
like the International economic organizations, such as
Organization for Economic Co-operation and
Development (OECD), World Trade Organization (WTO)
and International Monetary Fund (IMF).
The World Trade Organization (WTO)

The World Trade Organization (WTO)

• deals with the global rules of trade between nations with
the main function of ensuring that trade flows smoothly,
predictably and freely
• only global international organization dealing with the
rules of trade between nations with WTO agreements,
negotiated and signed by the bulk of the world’s trading
nations and ratified in their parliaments at its heart
• viewed as the means by which industrialized countries
can gain access to the markets of developing countries
Global Economy Outsourcing
Outsourcing
• finding a partner with which a firm can establish a
bilateral relationship and having the partner undertake
relationship-specific investments to produce goods and
services that fit the firm’s particular needs
• bilateral relationship is governed by a contract, but even
in those cases the legal document does not ensure that
the partners will conduct the promised activities with the
same care that the firm would use itself if it were to
perform the tasks
In short,
Outsourcing is a business practice in which a company
hires a third-party to perform tasks, handle operations or
provide services for the company. It is synonymous to
business expansion.
Companies can outsource entire divisions, such as its
entire IT department, or just parts of a particular
department.

Source:Outsourcing. Retrieved from https://searchcio.techtarget.com/definition/outsourcing. accessed

on September 5, 2021.
Outsourcing in the Philippines is known for
its excellent services in customer support,
technical assistance, and BPO services.

Global business leaders such as Google,

Amazon, Canva, Citi, Wyndham
Destinations, AT&T, and many more
outsource their business processes to the
Philippines
Source:Outsourcing (n.d.)Retrieved from https://www.magellan-solutions.com. Accessed
on September 5, 2021.
Subcontracting
• a central element of the new economy (practice of
assigning part of the obligations and tasks under a
contract to another party known as a subcontractor and
especially prevalent in areas where complex projects are
the norm like construction and information technology)
Outsourcing vs Subcontracting
Outsourcing
• cost-cutting measure where tasks done in-house are
now being completed by individuals or businesses
outside of the firm and not affiliated with it a company's
strategy to reduce labor costs and applies to many areas
within a firm
Subcontracting
• when a company hires another individual/ company to
complete a specialized task that typically cannot be done
internally
• does not involve permanently allocating out entire jobs or
departments within a firm and the job is agreed upon on
a contract basis
Source: Outsourcing and Subcontracting: What’s the Difference? Retrieved from
https://www.investopedia.com/Accessed on September 5, 2021.
Essential Features of a Modern Outsourcing Strategy

 Firms must search for partners with the

expertise that allows them to perform the
particular activities that are required.
 They must convince the potential suppliers to
customize products for their own specific needs.
 They must induce the necessary relationship-
specific investments in an environment with
incomplete contracting.
Determinants of the Location of Outsourcing

 Size of the country can affect the “thickness” of

its markets.
 The technology for search affects the cost and
likelihood of finding a suitable partner.
 The technology for specializing components
determines the willingness of a partner to
undertake the needed investment in a prototype.
 The contracting environments can impinge on a
firm’s ability to induce a partner to invest in the
relationship.
Discussion Guide

Instructions: Answer the following questions

explicitly. Limit your answer to 10 sentences
each only.
1. How do the driving forces of globalization
impact the Philippine economy?
2. In what ways did the Philippines benefit
from being a member of WTO?
3.How does outsourcing affect the Philippine
economy?
Video Materials for Viewing
1. Bretton Woods agreement:
• https://www.youtube.com/watch?v=RtFz9q26t5A
2. Fixed Exchange Rate System:
• https://www.youtube.com/watch?v=qvuuyVSHvLk
3. Eurpoean Monetary Integration
• https://www.youtube.com/watch?v=StZhbA7HMcQ&t=78s
4. Outsourcing:
• https://www.youtube.com/watch?v=xUD5XJfIv-s
5. Trade Policies
• https://www.youtube.com/watch?v=U0rtjkAvnrY
6. World Trade Organization
• https://www.youtube.com/watch?v=JF-L27cka_k
Learning Task