: Globalization of World

Economic
 Economic Globalization

• International Monetary Fund (IMF) regards economic globalization as a

historical process representing the result of human innovation and
technological progress.
• It is characterized by the increasing integration of economies around the
world through the movement of goods, services, and capital across borders.
• These changes are the products of people, organizations, institutions, and
technologies.
 Economic Globalization (cont.)
• How does one define “increasing integration? When is it considered that trade has
increased? Is there a particular threshold?
• Even while the IMF and ordinary people grapple with the difficulty of arriving at
precise definitions of globalization, they usually agree that a drastic economic
change is occurring throughout the globe.
• For example, according to the IMF, the value of trade (goods and services) as a
percentage of world GDP increased from 42.1% in 1981 to 62.1% in 2007.
• Increased trade also means that investments are moving all over the world at faster
speeds.
 Economic Globalization (cont.)
• According to the United Nations Conference on Trade and Development
(UNCTAD), the amount of foreign direct investments flowing across the world
was US$ 57 billion in 1982. By 2015, that number was increased to $1.76 trillion.
These figures represent a dramatic increase in global trade in the span of just a few
decades. It has happened not even after one human lifestyle!
• Apart from sheer magnitude of commerce, we should also note the increased
speed and frequency of trading.
• These days, supercomputers can execute millions of stock purchases and sales
between different cities in a matter of seconds through a process called high-
frequency trading. Even the items being sold and traded are changing drastically.
• Ten years ago, buying books or music indicates acquiring physical items. Today,
however, a “book” can be digitally downloaded to be read with an e-reader and a
music “album” refers to the 15 songs on mp3 format you can purchase and
download from iTunes.
 11 Examples of Foreign Direct Investment
• Foreign Direct Investment is an investment by a firm from one country in a business
that it controls in another country. This can be contrasted with an investment in stocks
by foreign investors whereby the investor doesn’t exert significant control over the
business. The following are illustrative examples of foreign direct investment:
• 1. Mergers & Acquisitions- a large Germany cookie company acquires a small Italian
cookie company for cash. The amount of cash transferred for the acquisition can be
viewed as a foreign direct investment from Germany to Italy.
• 2. Facilities- An American technology company builds and operates a data center in
Canada. This is a foreign direct investment from America to Canada
• 3. Manufacturing-A Canadian sporting goods manufacturer builds a factory in Thailand.
• 4. Retail- A Japanese fashion brand opens a retail location in London.
 FDI (cont)

• 5. Logistics- A Czech furniture company opens a warehouse in Rotterdam.

• 6. Administration- An American electronics manufacturer opens a satellite office in
China to procure parts and manage suppliers.
• 7. Services- An American bank opens a customer service center in India to serve
American customers.
• 8. Horizontal- It occurs when a firm replicates its entire organization in multiple
countries. For example, a Japanese e-commerce company that builds out an
American e-commerce company with administration, sourcing, logistics and data
centers all based in America.
• 9. Joint Venture- A German and Japanese train company form a joint venture to
assemble high speed trains in Japan. The German portion of this investment can be
viewed as foreign direct investment from Germany to Japan.
 FDI (cont)

• Research & Development- A Dutch information technology company

opens a research and development center in India.
 International Trading Systems
• The oldest known international trade route was the Silk Road- a network of
pathways in the ancient world that spanned from China to what is now the Middle
East and to Europe. It was called as such because one of the most profitable
products traded through this network was silk, which was highly prized especially
in the area that is now the Middle East as well as in the West (today’s Europe).
• Traders used the Silk Road regularly from 130 BCE when the Chinese Han Dynasty
opened trade to the West until 1453 BCE when the Ottoman Empire closed it.
• However while the Silk Road is international, it was not truly global because it had
no ocean routes that could reach the American continent.
• So when did full economic globalization begin?
 International Trading System (cont.)
• According to historians Dennis O. Flynn and Arturo Giraldez, the age of
globalization began when “all important populated continents 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.”
• Flynn and Giraldez traced this back to 1571 with the establishment of the
galleon trade that connected Manila in the Philippines and Acapulco in
Mexico. This was the first time that the Americas were directly connected to
Asian Trading routes.
• For Filipinos, it is crucial to note that economic globalization began on the
country’s shores.
 International Trading System (cont.)
• The galleon trade was part of the age of mercantilism. From the 16th century to
the 18th century, countries, primarily in Europe, competed with one another to sell
more goods as a means to boost their country’s income (called monetary reserves
later on).
• To defend their products from competitors who sold goods more cheaply, these
regimes (mainly monarchies) imposed high tariffs, forbade colonies to trade with
other nations, restricted trade routes, and subsidized its exports.
• Mercantilism was thus 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. Broadly, its goal was to
create a common system that would allow for more efficient trade and prevent the
isolationism of the mercantilist era. The countries thus established a common basis
for currency prices and a fixed exchange rate system-all based on the value of gold.
•
 International Trading System (cont.)
• Despite facilitating simpler trade, the gold standard was still a very restrictive system, as it
compelled countries to back their currencies with fixed gold reserves.
• During World War I, when countries depleted their gold reserves to fund their armies, many
were forced to abandon the gold standard. Since European countries had low gold
reserves, they adopted floating currencies that were no longer redeemable in gold.
• Returning to a pure standard became more difficult as the global economic crisis called the
Great Depression started during the 1920s and extended up to the 1930s, further emptying
government coffers.
• This depression was the worst and longest recession ever experienced by the Western
World. 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. If governments could only spend money that was equivalent to gold, its
capacity to print money and increase the money supply was severely curtailed.
 International Trading System (cont.)
• Economic Historian Barry Eichengreen argues that the recovery of the United
States really began when, having abandoned the gold standard, the US
government was able to free up money to spend on reviving the economy. At the
height of World War II, other major industrialized countries followed suit.
• Though more indirect versions of the gold standard were used until as late as the
1970s, the world never returned to the gold standard of the early 20 th century.
• Today, the world economy operates based on what are called fiat currencies-
currencies that are not backed by precious metals and whose values is determined
by their cost relative to other currencies.
• This system allows governments to freely and actively manage their economies by
increasing or decreasing the amount of money in circulation as they see fit.
 The Bretton Woods System
• After the 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 was inaugurated in 1944 during the United Nations Monetary
and Financial Conference to prevent the catastrophes of the early decades of the century
from reoccurring and affecting international ties
• The Bretton Woods System was largely influenced by the ideas of British economist John
Maynard Keynes who believed that economic crisis occur not when a country does not
have enough money, but when money is not being spend and, thereby, not moving.
• When economies slow down, according to Keynes, governments have to reinvigorate
markets with infusions of capital.
• This active role of governments in managing spending served as the anchor for what
would be called a system of global keynesianism
 The Bretton Woods System
• Delegates at Bretton Woods agreed to create two financial institutions.
• The first was the International Bank for Reconstruction and Development (IBRD, or World
Bank) to be responsible for funding postwar reconstruction projects. It was a critical
institution at a time when many of the world’s cities had been destroyed by the war.
• The second institution was the International Monetary Fund (IMF) which was to be the
global lender of last resort to prevent individual countries from spiraling into credit crises.
If economic growth in a country slowed down because there was not enough money to
stimulate the economy, the IMF would step in. To this day, both institutions remain key
players in economic globalization.
• Shortly after Bretton Woods, various countries also committed themselves to further
global economic integration through the General Agreement on Tariffs and Trade (GATT)
in 1947. GATT’s main purpose was to reduce tariffs and other hindrances to free trade.
 NEOLIBERALISM AND ITS DISCONTENTS
• The high point of global Keynesianism came in the mid-1940s to the early
1970s. During this period, governments poured money into their economies,
allowing people to purchase more goods and, in the process, increase
demand for these products.
• As demand increased, so did the prices of these goods.
• Western and some Asian economies like Japan accepted the rise in prices
because it was accompanied by general economic growth and reduced
unemployment.
• The theory went that, as prices increased, companies would earn more, and
would have more money to hire workers. Keynesian economies believed
that all this was a necessary trade-off for economic development.
 NEOLIBERALISM (cont.)
• In the early 1970s, however, the prices of oil rose sharply as a result of the
Organization of Arab Petroleum Exporting Countries’ (OAPEC, the Arab
member-countries of the Organization of Petroleum Exporting Countries or
OPEC) imposition of an embargo in response to the decision of the United
States and other countries to resupply the Israeli military with the needed
arms during the Yom Kippur War.
• Arab countries also used the embargo to stabilize their economies and
growth.
• The “oil embargo” affected the Western economies that were reliant on oil.
To make matters worse, the stock markets crashed in 1973-1974 after the
United States stopped linking the dollar to gold effectively ending the
Bretton Woods System.
 NEOLIBERALISM (cont.)
• The result of a phenomenon that Keynesian economics could not have
predicted- a phenomenon called stagflation, in which a decline in economic
growth and employment (stagnation) takes place alongside a sharp increase
in prices (inflation).
• Around this time, a new form of economic thinking was beginning to
challenge the Keynesian orthodoxy. Economists such as Friedrich Hayek and
Milton Friedman argued that the governments’ practice of pouring money
into their economies had caused inflation by increasing demand for goods
without necessarily increasing supply.
• More profoundly, they argued that government intervention in economies
distort the proper functioning of the market.
 NEOLIBERALISM (cont.)

• Economists like Friedman used the economic turmoil to challenge the

consensus around Keynes’s ideas. What emerged was a new form of
economic thinking that critics labeled neoliberalism.
• From the 1980s onwards, neoliberalism became the codified strategy of the
United States Treasury Department, the World Bank, the IMF, and
eventually the World Trade Organization (WTO)- a new organization
founded in 1995 to continue the tariff reduction under the GATT. The
policies they forwarded came to be called the Washington consensus.
 NEOLIBERALISM (cont.)
• The Washington Consensus dominated global economic policies from the
1980s until the early 2000s. Its advocates pushed for minimal government
spending to reduce government debt . They also called for the privatization
of government-controlled services like water, power, communications, and
transport believing that the free market can produce the best results.
• Finally, they pressured governments, particularly in the developing world, to
reduce tariffs and open up their economies, arguing that it is the quickest
way to progress.
• Advocates of the Washington Consensus conceded, that, along the way,
certain industries would be affected and die, but they considered this “shock
therapy” necessary for long-term economic growth.
 NEOLIBERALISM (cont.)
• Advocates of Neoliberalism like US President Ronald Reagan and British
Prime Minister Margaret Thatcher justified their reduction in government
spending by comparing national economies to households.
• Thatcher in particular, promoted an image of herself as a mother, who
reined in overspending to reduce the national debt.
• The problem with household analogy is that governments are not
households. For one, governments can print money, while households
cannot. Moreover, the constant taxation systems of governments provide
them to pay and refinance debts steadily.
• Despite the initial success of neoliberal politicians like Thatcher and Reagan,
the defects of the Washington Consensus became immediately palpable.
 NEOLIBERALISM (cont.)
• A good early example is that of post-communist Russia. After Communism
had collapsed in the 1990s, the IMF called for the immediate privatization of
all government industries.
• The IMF assumed that such a move would free these industries from corrupt
bureaucrats and pass them on to the more dynamic and independent pivate
investors.
• What happened, however was that only individuals and groups who had
accumulated wealth under the previous communist order had the money to
purchase these industries .
• In some cases, the economic elites relied on easy access to government
funds to take over the industries. This practice has entrenched an oligarchy
that still dominates the Russian economy to this very day.