MODULE 1:

The Structures of
Globalization
At the end of this Module, the student will be able to analyze the various drivers of globalization,
and describe the emergence of global economic and political systems.

Lesson 2: Globalization of World Economics

At the end of the lesson, students should be able to:
1. Define economic globalization
2. Identify the actors that facilitate economic globalization
3. Narrate a short history of global market integration in the 20th century;
4. Articulate your stance on global market integration.

TERM BANK:

Economic Globalization Economic Integration

Silk road Mercantilism
Gold standard Floating currencies
Great depression Fiat currencies
Bretton woods system World bank
International Monetary Bank
World Trade Organization Neoliberalism
Washington Consensus Keynesianism
Financial Crises Mortgage
Exports Imports
Trade liberalization race to the bottom

Study Guide Questions:

1. What is economic globalization?

2. Briefly trace the history of international trading systems.
a. The silk road
b. The age of mercantilism
c. The gold standard
d. The floating currencies
e. The Great depression
f. The abolition of gold standard
g. The fiat Currencies
3. What is the Bretton wood systems?
a. What is Keynesianism?
b. What is IMF?
c. What is world bank?
d. What is GATT? WTO?
4. What is Neoliberalism?
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a. What went wrong in mid-1940s to early 1970s?
b. What was the solution introduced by Hayek and Friedman?
c. In which policy does the belief on neoliberalism was evident? What is the Washington
consensus?
d. What are the setbacks of neoliberalism?
5. What happened during the 2008-2009 Financial crises?
6. How global economic integration works today?

Reading(s):
1. Chapter 2: The Globalization of World Economics.
Pages 12-25
Abinales & Caludion (2018). The Contemporary World. Quezon City: C & E Publishing, Inc.

Lesson-related Videos:
1. The Silk Road and Ancient Trade: Crash Course World History #9.
Channel: CrashCourse (March 23, 2012).
Link: https://youtu.be/vfe-eNq-Qyg

2. The History of Paper Money – The Gold Standard - #6.

Channel: Extra credits (November 6, 2016).
Link: https://youtu.be/GNo7MDN5-0g.

3. Fiat Money, explained.

Channel: Paddy Hirsch (December 9, 2013).
Link: https://youtu.be/U8Yn5jT8Hyc.

4. The Bretton Woods Monetary System (1944-1971) explained in One Minute.

Channel: One Minute Economics (January 10, 2017).
Link: https://youtu.be/RtFz9q26t5A.

5. Bretton Woods.
Channel: Marginal Revolution University (August 29, 2014).
Link: https://youtu.be/wuOOK7aU1TY.

6. Three Minute Theory: What is Neoliberalism?

Channel: Three Minute Theory
Link: https://youtu.be/dzLv3rfnOVw.

7. Pros and Cons of Neoliberalism

Channel: HarvardX
Link: https://youtu.be/t41rFqVB1I

8. Neoliberalism: The story of a big economic bust up A-Z of ISMs Episode 14 – BBC
Ideas.
Channel: BBC Ideas
Link: https://youtu.be/DLtxUiwY6.

9. The Causes and Effects of the Financial Crises 2008

Channel: Vivien Yeow
Link: https://youu.be/N9YLta5Tr2A.

10. The 2008 Financial Crises: Crash Course Economics # 12.

Channel: CrashCourse (October 22, 2015)
Link: https://youtu.be/GPOv72Awo68.
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The Globalization of World

Economics
This lesson aims to trace how economic globalization came about. It will also
assess this globalization system, and examine who benefits from it and who is left

out. What is economic globalization?

∙ It is defined as a historical process representing the result of human innovation

and technological progress (IMF)
∙ 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.

Keywords: Integration of economies

Brief History of Development of Economic

Integration: International Trading System:

Silk Road
It is the oldest known
‘international
trade route. It is a network of
pathway in the
Ancient world that spanned from
China to
what is now the Middle East and to
Europe.
The silk road was
international, but
was not truly ‘global’ because it had no
ocean routes that could reach the American
Continent.

Age of Globalization:

When did full economic globalization began?

According to historians Dennis O. Flynn and Arturo Giraldez, economic globalization begun
 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.”

Development of economic integration:

1. The Establishment of Galleon Trade

in 1571
and the Age of Mercantilism
a. According to Flynn and Giraldez, the
establishment of the Galleon Trade
was the first
truly global economic connection.
b. It is because it is the first time in recorded For Filipinos, it is crucial to note that economic
history that trade routes have connected Asia globalization began on the country’s shores.
and the American continent.

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c. The galleon trade was part of the Age of Mercantilism.
i. From 16th – 18th century, European superpowers have competed with
one another to sell more gods as means to boost their country’s
income (called monetary reserves later on).
ii. To protect their products who sold more goods cheaply, these regimes:
1. Imposed high tariffs
a. Tariffs – tax imposed on goods coming in or leaving a
country
2. Forbade colonies to trade with other nations
3. Restricted trade routes
4. Subsidized its exports

d. Mercantilism was thus also a system of global trade but with multiple
restrictions.

2. Trial and Error: The early roots of global exchange system

In 1867, a more open trade system emerged following the lead of UK, US, and
other European nations, this new system was the Gold Standard.

The Gold Standard

It is a monetary system in which paper money is freely convertible to gold. In
 other words, gold back up the value of money.

Currency =

The goal was to create a common system that would allow for more
efficient trade and prevent the isolationism of the mercantilist era.

The Gold Standard was still a very restrictive system as it compelled countries to
backed their currencies with fixed gold reserves.

The gold standard system was abolished by many during the WW1, when
countries depleted their gold reserved to fund their armies.

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3. The Great Depression – towards Fiat Currencies.

The Great Depression

This was the worst and longest recession ever experienced by the western world
that lasted for 10 years.
A recession is a business cycle contraction when there is a general decline in
economic activity. It generally occurs when there is a widespread drop in spending.

What’s the possible cause? Some economist argues that it was 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.

Though more indirect versions of gold standard were used until as late as 1970s,
the world never returned to gold standard of the early 20th century.

Fiat Currencies

The world economy operates based on what are called fiat currencies – currencies
that are not backed by precious metals and whose values are determined by their cost
relative to other currencies.
 This system allows governments to freely and actively manage their economies by
increasing and decreasing the amount of money in circulation as they see fit.

Why can’t the government print more money?

1. To avoid inflation. If there are too much money in circulation, prices will rise
causing inflation and the money will eventually be devalued.

4. The Bretton Woods System

Why was the Bretton Woods System created?

To create a global economic system that would ensure a longer lasting global
peace following the two (2) world wars.
Originally, it is designed to prevent another Great Depression and advance the
economic interests of the US.

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When, where and who are involved on the establishment of the system? In was
inaugurated on July 1944 at Bretton Woods, New Hampshire, USA (thus the name)
where forty-three (43) countries took part in the creation of the system.

How did the Bretton Woods System work?

1. Keynesianism – Bretton Woods primary economic thinking.

This economic thinking was formulated by John Maynard Keynes

According to Keynes, economic crises occurs when countries when countries
don’t actively spend money not the lack of money. When economies slow down,
governments have to reinvigorate markets with infusions of capital.
Global Keynesianism – the active role of governments in managing
spending.

2. Global Exchange Rate System

It is the first system used to control the value of money between different
countries. It meant that each country had have to have a monetary policy that
kept the exchange rate of its currency within a fixed value – plus or minus 1% -
in terms of gold.

The Bretton Woods System created two (2) financial institutions:

1. The International Bank for

 Reconstruction and Development (IBRD), later called as
World Bank.
As IBRD, it shall be responsible for funding postwar
reconstruction projects.
As World Bank, its main function is to offer long-term loans and
assistance to developing countries.

2. International Monetary Fund (IMF)

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.

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When did the Bretton Woods System collapsed?
The system dissolved between 1968 and 1973, when US President Richard Nixon
announced the temporary suspension of the dollar’s convertibility to gold, rendering the
dollar a fit currency.

General Agreement on Tariffs and Trade (GATT),

GATT was established in 1947

(shortly after the Bretton Woods
system), where various countries also
committed themselves to further global
economic integration.
Its main purpose was to reduce
tariffs and other hindrances to free
trade.

In1995, the agreement was

later made into an organization called.
World Trade Organization.

5. Neoliberalism and its Discontents

What happened in the mid-1940 to early 1970s?

1. Overspending causing inflation– Government poured money into their
economies (following Keynesianism), allowing people to purchase more
 goods and, in the process,
increase demand for these
products. As demand increase,
so are the prices of these
goods.

2. Yom Kippur War – In the

early 1970s, the process of oil
rose sharply as a result of the
OAPEC (Organization of Arab
Petroleum Exporting Countries
Imposition of an embargo in response to the decision of the US and other
countries to resupply the Israeli military with the need of arms during the
Yom Kippur War. It has affected Western economies that were reliant on oil.

3. Crash of Stock Market – in 1973 – 1974, the stock market crashed after
US stopped linking the dollar to goals, effectively ending the Bretton Woods
System

Following these events, the world experienced severe STAGFLATION (in which
a decline in economic growth and employment (stagnation) takes place alongside a sharp
increase in prices (inflation).

What caused the STAGFLATION according to economists Friedrich Hayek and

Milton Friedman?

They argued:

1. The government’s practice of pouring money into their economies had

caused inflation by increasing demand for goods without necessarily
increasing supply. This challenged the consensus to Keynesianism.
2. The government’s intervention in economies distort the proper functioning of
the market.

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Neoliberalism: A belief in Free Market

Neoliberalism is a belief on free market. Its principles point to reduced

government spending, deregulation, globalization, free trade, and privatization.

The main characteristics of neoliberalism are as follows:

1. Privatization –
Every service could/should be private. Industries such as energy, water,
transportation, hospitals, banks, schools, etc. should be privatized.
2. Deregulation – Free Trade
“Let businesses be free” with little government intervention.
3. Reduced Government Spending

Washington Consensus:
 Neoliberalism became the codified strategy of the US Treasury Department, the
World Bank, the IMF, and the WTO which was called Washington Consensus.
It has dominated global economic policies from the 1980s until the early 2000s.
Its advocates pushed for:
1. Minimal government spending to reduce government debt.
2. Privatization of government-controlled services like water, power
communications, and transport.
3. They pressured developing countries to reduce tariffs and open up their
economies.

6. The Global Financial Crises and the Challenge to Neoliberalism

Neoliberalism came under significant strain during the global financial crises of
2007- 2008.

What’s the story before the financial

crises
occurred?
In 1980s, the US systematically
removed
various banking and investment
restrictions. The
scaling back of regulations continued until
the 2000s
paving the way for a brewing crises.
In their attempt to promote the
free market,
government authorities failed to regulate bad
investments occurring in the US housing market.
Taking advantage of the “cheap housing
loans”, Americans began building houses that were
beyond their financial capacities.

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To mitigate the risk of

these loans, banks that were
lending house owner’s money
pooled these mortgage payments
and sold them as “mortgage
backed securities” (MBSs).
One MBS would be a combination
of multiple mortgages that they
 assumed would pay a steady rate.

Since there was so much surplus

money in
circulating, the demand for MBS increased
as investors
clamored for more investment
opportunities. In their
haste to issue these loans however, the
banks became
less discriminating. They began extending loans to
individuals with dubious credit records – people
who were unlikely to pay their loans back. These high
risk mortgages became known as “sub-prime
mortgages”.

What went wrong?

Financial experts wrongly assumed that:
1. Even if many of the borrowers were individuals and families who would struggle to pay,
majority would not default,
2. Banks thought that since there were so many mortgages in just one MBS, a few failures
would not ruin the entirety of the investment.
3. Banks also assumed that housing prices would continue to increase. Therefore, even if
homeowners could simply reacquire the homes and sell them at a higher price, turning a
profit.

What happened?

In 2007, the home prices stopped The individuals could no longer pay
increasing as supply caught up with off their loans.
demand.

This triggered the rapid reselling of MBSs, as banks and investors tried to get rid
of their bad investments!

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How did it affect the US Economy and the economies of World?
In September 2008, the Lehman Brothers collapsed (US major investment banks) collapsed,
depleting major investments.

These series of interconnections allowed for a global multiplier effect that sent ripples across the
world.

1. Iceland’s banks
depended on foreign
capital, so when the
crises hit them, they
failed to refinance their
loans. As a
result, its top
commercial banks
defaulted. Its debts
increased more than
seven-fold in 2007-2008.

2. Spain and Greece (almost like 3rd

world countries), are heavily indebted,
and debt relief come at a high price.

3. Greece has been forced by Germany and IMF to cut back on its social and public
spending.

4. In Europe, the economic crises have sparked a political upheaval.

Meanwhile, the US relatively recovered thanks to a large Keynesian-style stimulus package

that President Obama implemented.
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ECONOMIC GLOBALIZATION TODAY

The world had

become too
integrated, including
the economies. The
following are the clear
manifestations of the
economic integration of
the world:

Exports
Exports (to send a product to be sold
in another country), not just local selling of
goods and services make national economies
grow at present.

Trend of Global Trade Today: Exports, Markets

Trade liberalization (the WTO-led reduction of

trade barriers) has profoundly altered the
dynamics of the global economy.
Trade in goods exceeded its pre-COVID-19 level
and reached US$9.6 trillion. Trade in services,
however, still falls short of pre-pandemic levels,
despite estimated 16.7 per cent growth in 2021
(based on UNCTADstat, see UNCTAD, 2022b).
 In 2020, developing
economies shipped
most of their exports to
the United States
of America (US$1.4 trillion), China (US$1.1
trillion) and other Asian economies.

In the last twenty years, China has become a

major player in global trade. Its share in world
exports of goods increased from 4 per cent in
2000 to 15 in 2021. To compare, the share of
the United States of America in global exports of
goods amounted to 8 per cent, Germany to 7
per cent, and Japan to 3 per cent in 2021.
Between 2000 and 2021, China’s share of total
imports of goods expanded rapidly from 3.4 per
cent to almost 12 per cent.

However, economic globalization remains an uneven process. With some

countries, corporations, and individuals benefitting a lot more than others.

1. Protectionist policies and trade imbalances

Developed countries such as the US and Japan are often protectionists as they
repeatedly refuse to lift policies that safeguard their primary products that could

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otherwise be overwhelmed by IMPORTS (to bring a product into a country to be
sold) from the DEVELOPING COUNTRIES.

For example:
1. Japan’s determined refusal to allow rice imports into the country to protect
its farming sector, on the rhetoric that rice is sacred and needs to be
protected.
2. US fiercely protects its sugar industry, forcing consumers and sugar
dependent businesses to pay higher prices instead of getting cheaper
sugar from plantations from Central Americas.

Since developed countries are often protectionists, and developing countries are more
open in terms of trade, the latter is most infringed among the two.

2. Race to the bottom

1) TNCs are the primary beneficiaries of global commerce. And, it is a fact that
they are more concerned with profit than with assisting social programs of
the governments hosting them.
2) Host countries, in turn, loosen tax laws, which prevents wages from rising,
while sacrificing social and environmental programs that protect the
underprivileged members of their societies.

Race to the Bottom (n.) – refers to countries’ lowering their labor standards,
including the protection of worker’s interests, to lure in foreign investors seeking high
 profit margins at the lowest cost possible.

The Rana Plaza disaster in Bangladesh in 2013

The Rana Plaza disaster in Bangladesh in 2013 was an

example of the perils of this approach. On the back of low
wages and cheap costs to set up shop, Bangladesh had
become the world's second-biggest garment manufacturing
center. The Rana Plaza building in Dhaka was a garment
factory that violated several building codes of local laws. But
enforcement of those codes was lax, resulting in a collapse
that killed 1,000 workers.

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Conclusion

1. International Economic Integration is a central tenet of globalization.

o It is crucial to the process that many writers and commentators confuse this integration
for the entirety of globalization.
o Again, economics is just one window into the phenomenon of globalization; it is not the
entire thing.

2. Nevertheless, much of globalization

is anchored on changes in the
economy. o For example,
global culture is
facilitated by trade.
Filipinos wouldn’t be
aware of the American or
Korean culture if
not for the trade that
allows locals to watch
American or Korean
movies, music, and
products.

o The globalization of politics is likewise

largely contingent on trade relations.
 These days, many events of foreign affairs
are conducted to cement trading relations
between and among states.

3. How to make this system just?

o In terms of trade, trade must be fair and just.
o Governments should also devise a way of cushioning the most damaging effects of
economic globalization, while ensuring that its benefits accrue to everyone.

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