THE STRUCTURES OF GLOBALIZATION

THE GLOBAL ECONOMY

Economic globalization refers to the 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. It reflects the continuing
expansion and mutual integration of market frontiers, and is an
irreversible trend for the economic development in the whole world at
the turn of the millennium.
According to the International Monetary Fund economic globalization is a historical
process, the result of human innovation and technological progress. It refers to the
increasing integration of economies around the world, particularly through the
movement of goods, services, and capital across borders. It also refers to the
movement of people (labor) and knowledge (technology) across international
borders.

In economic terms, globalization is nothing but 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
Two Major Driving Forces for Economic Globalization
1. The rapid growing of information in all types of productive activities
2. Marketization (A restructuring process that enables 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 such as corporatization, decentralization, and
privatization
Dimensions of Economic Globalization
1. The globalization of trade of goods and services
2. The globalization of financial and capital markets
3. The globalization of technology and communication
4. The globalization of production.
 Difference between Economic Globalization from Internationalization

Economic globalization is a functional integration between

internationally dispersed activities which means that it is a
qualitative transformation rather than a quantitative change while
internationalization is an extension of economic activities between
internationally dispersed activities .
Economic globalization produces its own major players in the form of
transnational corporations (TNCs), the main driving forces of economic
globalization of the last 100 years or roughly two-thirds of world export.
Transnational corporation otherwise known as multi -national corporation is a
corporation that has a home base, but is registered, operates and has assets or
other facilities in at least one other country at one time (24). Examples are the
US-based General Electric (GE), the Coca-Cola Company of Atlanta, Georgia,
US Nike and others.
Origin of Economic Globalization

Economic globalization is a process that creates an organic system

of the world economy. In the 16th century world system analysts
identify the origin of modernity and globalization through long
distance trade in the 16th century This best known example of
archaic globalization is the Silk Road, which started in western
China, reached the boundaries of the Parthian empire, and
continued onwards towards Rome . It also connected Asia, Africa,
and Europe.
In the 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 . In the 19th century the advent of globalization approaching its modern
form is witnessed. A short period before World War I is referred to as golden
age of globalization characterized by relative peace, free trade, financial and
economic stability. Growth in international exchange of goods accelerated in the
second quarter of the 19th century. Global economy in the 19th and 20th
centuries grew by an average of nearly 4 percent per annum, which is roughly
twice as high as growth in the national incomes of the developed economies
since the late 19th century
International Monetary Systems and Gold Standard

International monetary system (IMS) refers to a system that forms rules

and standards for facilitating international trade among the nations. It
helps in reallocating the capital and investment from one nation to
another. It is the global network of the government and financial
institutions that determine the exchange rate of different currencies for
international trade. It is a governing body that sets rules and regulations
by which different nations exchange currencies with each other.
IMS as rules, customs, instruments, facilities, and organizations for effecting international
payments with the main task of facilitating cross-border transactions especially trade and
investment . It also reflects economic power and interests, as money is inherently political, an
integral part of high politics or diplomacy .

Evolution of the International Monetary System

In 1870 to 1914, with the help of gold and silver, trade was carried without any institutional
support. Monetary system during that time was decentralized while market based and money
played a minor role in international trade in contrast to gold. Gold was believed to guarantee a
non-inflationary, stable economic environment, a means for accelerating international trade and
the gold standard functioned as a fixed exchange rate regime, with gold as the only international
reserve.
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, the 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.

In 1944, 730 representatives of 44 nations met at Bretton Woods, New Hampshire, United States
to create a new international monetary system called as the Bretton Woods system, the aim of
which is to create a stabilized international currency system and ensure a monetary stability for all
the nations.
Since the United States 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. The Bretton
Woods system ended in 1971 as the trade deficit and growing inflation
undermined the value of dollar in the whole world. In 1973, the floating
exchange rate system, also known as flexible exchange rate system
was developed that was market based .
To assess whether the gold standard was successful, the
following roles of a properly designed IMS must be considered:
to lend order and stability to foreign exchange markets, to
encourage the elimination of balance-of-payments problems,
and to provide access to international credits in the event of
disruptive shocks . The gold standard has never worked
satisfactorily in controlling inflation or maintaining equilibrium in
international transactions.
European Monetary Integration
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.
However, over the past decade, the build-up of macroeconomic imbalances, and the
imprudent fiscal policies of some Member States, resulted in the continuing double
crisis in banking and sovereign. As a result of this crisis, many individual Member
States face difficult re-adjustment processes, and Members States collectively must
reappraise the governance architecture of Monetary Union and adopt new
mechanisms to detect, prevent, and correct problematic economic trend
The European Monetary System (EMS) on the other hand is a 1979 arrangement
between several European countries which links their currencies in an attempt to
stabilize the exchange rate. This system was succeeded by the European
Economic and Monetary Union (EMU), an institution of the European Union (EU),
which established a common currency called the euro.

The European Monetary System originated in an attempt to stabilize inflation and

stop large exchange rate fluctuations between European countries. Then, 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 .
According to the European Commission in 2008, the first ten years of the EMU were
an evident success for participating countries in terms of increased trade and capital
transactions, more integrated economies, restored macroeconomic stability and the
utilization of Euro as the second most widely used reserve currency. But in 2008 to
2009 the European Union (EU) is presented with dramatic challenges brought by
global financial and economic crisis.
The EU in 2010 in response to the crisis enacted the three- pillar financial rescue
program which includes: the European Financial Stability Mechanism, the European
Financial Stability Facility, the financial assistance of International Monetary Fund
(IMF). Since the three -pillar system is temporary EU in 2013 activated its own
permanent European Stability Mechanism. The future of EMU depends on the
willingness of member states to agree on more fundamental changes in the
governance of Eurozone.
The European Financial Stability Mechanism (EFSM) is a permanent fund created
by the European Union (EU) to provide emergency assistance to member states
within the Union. It 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. The European Financial Stability Facility (EFSF)
on the other hand, is an organization created by the European Union to provide
assistance to member states with unstable economies. The EFSF is 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 is the 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, and it is the only way for
many people in many countries to acquire resources . 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.
International trade is the exchange of goods or services along international borders. This
type of trade allows for a greater competition and more competitive pricing in the market.
The two key concepts in the economics of international trade are specialization and
comparative advantage.
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 while 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.
More affordable products for the consumer is also the result of competition. The economy of
the world is also affected by the exchange of goods as dictated by supply and demand,
making goods and services obtainable which may not be available globally to consumers.
Trading globally gives consumers and countries the opportunity to be exposed to goods and
services not available in their own countries. Almost every kind of products can be found on
the international market aside from services being traded like banking, tourism, etc. Global
trade allows wealthy countries to use their resources such as labor, technology, or capital
more efficiently. Because countries are endowed with different assets and natural resources,
some countries may produce the same good more efficiently and therefore sell it more
cheaply than other countries . Specialization in international trade happens if a country cannot
efficiently produce an item and obtain it by trading with another country that can.
Trade policies on the other hand refer to the regulations
and agreement of foreign countries . It defines standards,
goals, rules, and regulations that pertain to trade relation
between countries (46). Each country has specific
policies formulated by its officials. Boosting the nation’s
international trade is the aim of each country. 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 Trades
Tariffs
These are 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. The prices of imported goods
in local markets are inflated due to high imported taxes to ensure demand of local products.
Trade barriers
Theses are measures that governments or public authorities introduce to make imported
goods or services less competitive than locally produced goods and services (47). They are
state-imposed restrictions on trading a particular product or with a specific nation. It 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

This 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
National Trade Policy

This safeguards the best interest of its trade and citizen.

Bilateral Trade

To regulate the trade and business relations between two nations, this policy is formed. Under
the trade agreement the national trade policies of both the nations and their negotiations are
considered while bilateral trade policy is being formulated.
International Trade Policy

This 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 best interests of
both developed and developing nations are upheld by the policies.

Trade Policy and International Economy

In most developed countries where open market economy prevails, the international economic
organizations support free trade policies. In the case of developing nations partially-shielded
trade practices are preferred to protect their local trade industries. The following are dependent
on globalization: sound trade policies for market changes, establishment of free and fair trade
practices and expansion of possibilities for booming international trade
Global Economy Outsourcing

Outsourcing is an activity that requires search for a partner and relation-specific

investments that are governed by incomplete contracts and the extent of
international outsourcing depends on the thickness of the domestic and foreign
market for input suppliers, the relative cost of searching in each market, the
relative cost of customizing inputs and the nature of the contracting environment in
each country . Subcontracting is a central element of the new economy . It is the
practice of assigning part of the obligations and tasks under a contract to another
party known as especially prevalent in areas where complex projects are the norm
like construction and information technology.
Outsourcing is a means of finding a partner with which a firm can
establish a bilateral relationship and having the partner undertake
relationship-specific investments so that it becomes able to produce
goods and services that fit the firm’s particular needs. Often, the
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.
One of the most rapidly growing components of international trade is the outsourcing of intermediate
goods and business services. There are three essential features of a modern outsourcing strategy.

1. Firms must search for partners with the expertise that allows them to
perform the particular activities that are required.
2. They must convince the potential suppliers to customize products for their
own specific needs.
3. They must induce the necessary relationship-specific investments in an
environment with
Possible Determinants of the Location of Outsourcing

1. Size of the country can affect the “thickness” of its markets.

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