Republic of the Philippines

Surigao del Sur State University

Rosario, Tandag City, Surigao del Sur 8300
Telefax No. 086-214-4221
Website: www.sdssu.edu.ph
 Chapter 3: MARKET INTEGRATION

 Introduction
 International Financial Institutions
- The Bretton Woods System
- The General Agreement on Tariffs and Trade (GATT)
and the World Trade Organization (WTO)
- The International Monetary Fund (IMF) and the World
Bank
- The Organization for Economic Cooperation and
Development (OECD), the Organization of Petroleum
Exporting Countries (OPEC), and the
European Union (EU)
- North American Free Trade Agreement (NAFTA)
 History of Global Market Integration
- The Agricultural Revolution and the Industrial Revolution
- Capitalism and Socialism
- The Information Revolution
 Global Corporations
This chapter will show the contributions of the different financial and economic
institutions that facilitated the growth of the global economy.

Economy – A social institution that has one of the biggest impacts on society.
- It is the social institution that organizes all production, consumption and
trade of goods in the society.

Economic system vary from one society to another. But in any given economy,
production typically splits into three sectors.

 Primary Sector – extracts raw materials from natural environments. Workers like
farmers or miners fit well in the primary sector.
 Secondary Sector – gains the raw materials and transforms them into
manufactured goods.
Ex. Someone from the primary sector extracts oil from the earth then someone
from the secondary sector refines the petroleum to gasoline.
 Tertiary Sector – involves services rather than goods. It offers services by doing
things rather than making things. Concerned with offering intangible goods
and services to consumers. This includes retail, tourism, banking, entertainment
and I.T. services.
The sectors all work together to create an economic chain of production. Together
these sectors make up the backbone of the modern economy.
Additional Sectors:

Quaternary Sector

The quaternary sector is said to the intellectual aspect of the economy. It

includes education, training, the development of technology, and research and
development. It is the process which enables entrepreneurs to innovate better
manufacturing processes and improve the quality of services offered in the
economy. Without this growth of technology and information, economic
development would be slow or non-existent.

It is also known as the knowledge economy – this is the component of the

economy based on human capital – IT, knowledge, education. It is primarily related
to the service sector, but also is related to the high tech component of
manufacturing.
-
Although many economic models divide the economy into only three sectors,
others divide it into four or even five. These two sectors are closely linked with the
services of the tertiary sector, which is why they can also be grouped into this branch.
The fourth sector of the economy, the quaternary sector, consists of intellectual
activities often associated with technological innovation. It is sometimes called the
knowledge economy.

Activities associated with this sector include government, culture, libraries,

scientific research, education, and information technology. These intellectual
services and activities are what drive technological advancement, which can have
a huge impact on short- and long-term economic growth. Roughly 4.1% of U.S.
workers are employed in the quaternary sector.1

Quinary Sector

The quinary sector is the part of the economy where the top-level decisions
are made. This includes the government which passes legislation. It also comprises
the top decision-makers in industry, commerce and also the education sector.
-
Some economists further narrow the quaternary sector into the quinary sector,
which includes the highest levels of decision-making in a society or economy. This
sector includes top executives or officials in such fields as government, science,
universities, nonprofits, health care, culture, and the media. It may also include police
and fire departments, which are public services as opposed to for-profit enterprises.

Economists sometimes also include domestic activities (duties performed in the

home by a family member or dependent) in the quinary sector. These activities, such
as child care or housekeeping, are typically not measured by monetary amounts but
contribute to the economy by providing services for free that would otherwise be
paid for. An estimated 13.9% of U.S. workers are quinary sector employees.
 INTERNATIONAL FINANCIAL INSTITUTION

 Financial and economic institutions that facilitated the growth of the global
economy.

World economies have been brought closer together by globalization.

“When American economy sneezes, the rest of the world catches a cold.”

 The strength of a more powerful economy brings greater effect on other

countries. In the same manner, crises on weaker economies have less effect
on other countries.

The following are the financial institutions and economic organizations that made
countries even closer together, at least when it comes to trade.

BRETTON WOODS SYSTEM

The major economies in the world had suffered because of World War I, the Great
Depression in the 1930s, and World War II. Because of the fear of the recurrence of
lack of cooperation among nation-states, political instability, and economic turmoil
(especially after the Second World War), reduction of barriers to trade and free flow
of money among nations became the focus to restructure the world economy and
ensure global stability (Ritzer, 2015). These consist the background for the
establishment of the Bretton Woods System.

 To restructure the world economy and ensure global financial stability.

5 Key Elements:
1. Expression of currency in terms of gold or gold value to establish a par value.
2. “The official monetary author in each country (a central bank or its equivalent)
would agree to exchange its own currency for those of other countries at the
established exchange rates, plus or minus one-percent margin.”
3. The establishment of an overseer for these exchange rates; thus the
International Monetary Fund (IMF) was founded.
4. Eliminating restrictions on the currencies of member states in the International
trade.
5. U.S. dollar became the global currency.
 The GENERAL AGREEMENT on TARIFFS and TRADE (GATT)
and the WORLD TRADE ORGANIZATION (WTO)

GATT
- one of the systems born out of Bretton Wood was the GATT that was established in
1947.
- was a forum for the meeting of representatives from 23 member countries.
- it focused on trade goods through multinational trade agreements conducted in
many “rounds” of negotiation.

Seven Rounds of Trade Liberalizing Negotiations

Oct. 30, 1947: The "General Agreement" is signed by 23 countries at Geneva's Palais des Nations after
the first-ever "trade round." It is the first attempt to write a rule book for commerce, and includes tariff
cuts on one-fifth of world trade.

Jan. 1, 1948: The agreement goes into force with a temporary Secretariat to administer it. A new world
body, the International Trade Organization (ITO) is to be formed later.

March 24, 1948: 53 countries agree in Havana to create the ITO, which is to have authority similar to that
of the International Monetary Fund and the World Bank. But the U.S. Congress balks at approving it, and
the temporary GATT becomes in effect a permanent organization.

1949: Annecy Round. The first round of negotiations supervised by GATT is held in the French lakeside city
of Annecy in the Alps south of Geneva. A total of 13 GATT member states, termed "contracting parties,"
agree to 5,000 tariff concessions.

1950: Torquay Round. Between September 1950 and April 1951, 38 GATT members meeting in the
southwest England resort of Torquay exchange 8,700 tariff concessions yielding reductions of about 25
percent from 1948 levels.

1956: Geneva Round. Completed in May by 26 countries, it produces $2.5 billion worth of tariff
reductions.

1960: Dillon Round. Named after U.S. Undersecretary of State Douglas Dillon, who proposed the
negotiations. Involving 26 countries meeting in Geneva, the round focuses largely on harmonizing
concessions within the new European Economic Community. It finishes in July 1962 with about 4,400 tariff
concessions covering $4.9 billion of trade.

1964: Kennedy Round. Named after assassinated U.S. President John F. Kennedy and also held in
Geneva, this round dramatically increases the scope of GATT agreements. Its final act is signed in June
1967 by 62 participating countries representing 75 percent of total world trade. Concessions cover trade
valued at an estimated $40 billion.

1973: Tokyo Round. Launched at the ministerial level in the Japanese capital but centered at GATT
headquarters in Geneva, the round involves 102 countries that negotiate agreements on both tariff and
non-tariff issues. It concludes in November 1979 with tariff reductions and bindings - commitments not to
increase current tariffs - which cover more than $300 billion of trade. Subsidies, government procurement
and trade in dairy products and civil aircraft are brought under GATT's wing.

1986: Uruguay Round. GATT's most ambitious round, bringing trade in services and agriculture into
negotiations for the first time. Although the round is scheduled to end in December 1990, the thorny issue
of farm subsidies, which pits the United States against the EC, delays an accord by three years. The 115
countries involved agree to wrap up talks by Dec. 15.
It was out of the Uruguay Round that an agreement was reached to create the World
Trade Organization (WTO).

WTO

- WTO headquarters is located in Geneva, Switzerland with 152 member states as of

2008.
- Unlike GATT, WTO is an independent multilateral organization that became
responsible for trade in service, non-tariff-related barriers to trade, and other broader
areas of trade liberalization.
- The general idea where the WTO is based was that of Neoliberalism (means that by
reducing or eliminating barriers, all nations will benefit)

Significant Criticisms to WTO

 Trade barriers created by developed countries cannot be countered enough
by WTO, especially in agriculture.
 The decision-making processes were heavily influenced by larger trading
powers, in the so-called Green Room, while excluding smaller powers in
meetings.
 International Non-Government Organizations (INGOs) are not involved,
leading to the staging of “regular protests and demonstrations against the
WTO”.

The INTERNATIONAL MONETARY FUND (IMF) and the World Bank

IMF and the World Bank

 Were founded after the World War II.
 Their establishment was mainly because of peace advocacy after the war.
 These institutions aimed to help the economic stability of the world.
 Both are basically banks, but instead of being started by individuals like
regular banks, they were started by countries.
 Most of the world’s countries were members of the two institutions. But of
course, the richest countries were those who handled most of the financing
and ultimately, those who had the greatest influence.

 Were designed to complement each other.

 IMF’s main goal was to help countries which were in trouble at that time and
who could not obtain money by any means. IMF served as a lender or a last
resort for countries which needed financial assistance.
 World Bank, in comparison, had a more long-term approach. Its main goals
revolved around the eradication of poverty and it funded specific projects
that helped them reach their goals, especially in poor countries. An example
of such is their investment in education since 1962 in developing nations like
Bangladesh, Chad, and Afghanistan.

Unfortunately, the reputation of these institutions has been dwindling, mainly

due to practices such as lending the corrupt governments or even dictators and
imposing ineffective austerity measures to get their money back.
 Organization for Economic Cooperation and Development (OECD),
Organization of Petroleum Exporting Countries (OPEC),
European Union (EU)

Organization for Economic Cooperation and Development (OECD)

 The most encompassing club of the richest countries in the world with 35
member states as of 2016, with Latvia as its latest member.
 It is highly influential, despite the group having the little formal power. This
emanates from the member countries’ resources and economic power.

Organization of Petroleum Exporting Countries (OPEC)

 Was originally comprised of Saudi Arabia, Iraq, Kuwait, Iran, and Venezuela in
1960.
 They are still part of the major exporters of oil in the world today.
 It was formed because member countries wanted to increase the price of oil,
which in the past had a relatively low price and had failed in keeping up with
inflation.
 Today, the United Arab Emirates, Algeria, Libya, Qatar, Nigeria, and Indonesia
are also included as members.

European Union (EU)

 Made up of 28 member state.
 Most members in the Eurozone adopted the euro as basic currency but some
Western European nations like the Great Britain, Sweden, and Denmark did
not.
 The policies of the European Central Bank are considered to be a significant
contributor in these situations.
 North American Free Trade Agreement (NAFTA)

NAFTA
 Is a trade pact between the United States, Mexico, and Canada created on
January 1, 1994 when Mexico joined the two other nations.
 Was 1st created in 1989 with only Canada and the United States as trading
partners.
 NAFTA helps in developing and expanding world trade by broadening
international cooperation.
 It also aims to increase cooperation for improving working conditions in North
America by reducing barriers to trade as it expands the markets of the three
countries.

 Generally, it has its positive and negative consequences.

 Positive: It lowered prices by removing tariffs, opened up new opportunities
for small- and medium sized businesses to establish a name for itself,
quadrupled trade between the three countries, and created five million U.S.
jobs.
 Negative: Excessive pollution, loss of more than 682,000 manufacturing jobs,
exploitation of workers in Mexico, and moving Mexican farmers out of
business.
 HISTORY OF GLOBAL MARKET INTEGRATION

Before the rise of today’s modern economy, people only produced for their
family. Nowadays, economy demands the different sectors to work together in order
to produce, distribute, and exchange products and services.

The Agricultural Revolution and the Industrial Revolution

Agricultural Revolution
 When people learned how to domesticated plants and animals, they
realized that it was much more productive than hunter-gatherer societies.
 Farming helped societies build surpluses, meaning, not everyone had to
spend their time producing food.

Industrial Revolution
 With the rise of industry came new economic tools, like steam engines,
manufacturing, and mass production. Factories popped up and changed
how work functioned.
 Instead of working at home where people worked for their family by
making things from start to finish, they began working as wage laborers
and then becoming more specialized in their skills.
 Overall, productivity went up, standards of living rose, and people had
access to a wider variety of goods due to mass production.

However, every economic revolution comes with economic casualties.

Capitalism and Socialism

 Two competing economic models that sprung up around the time of the
Industrial Revolution, as economic capital became more and more important
to the production of goods

Capitalism
 Is a system in which all natural resources and means of production are
privately owned.
 It emphasizes profit maximization and competition as the main drivers of
efficiency. This means that when one owns a business, he needs to
outperform his competitors. He is incentivized to be more efficient by
improving the quality of one’s product and reducing its prices.
 Consumers will regulate things themselves by selecting goods and
services that provide the best value.
 Monopoly
 In this economic system, there is no competition for costumers. That is why
it can change higher prices without worrying about losing customers.

Socialism
 Government plays an even larger role.
 In a socialist system, the means of production are under collective
ownership. It rejects capitalism’s private property and hands-off
approaches.
 Property is owned by the government and allocated to all citizens, not
only those with the money to afford it.
 It emphasizes collective goals, expecting everyone to work for the
common good and placing a higher value on meeting everyone’s basic
needs than individual profit.

Information Revolution

Ours is the time of the information revolution. Computers and other

technologies are beginning to replace many jobs because of automation or
outsourcing jobs offshore.

What do jobs in a post-industrial society look like? Agricultural jobs, which once
were massive part of the Philippines labor force, have fallen drastically over
the last century. Today, much of the economy is centered on the tertiary
sector or the service industry which includes every job such as:
 administrative assistants,
 nurses, teachers, and lawyers.
 Described mainly by what it produce rather than what kinds of job it
includes.

Types of Jobs (based more on the social status and compensation that come
with them.

 Primary Labor Market - includes jobs that provide many benefits to

workers, like high incomes, job security, health insurance, and
retirement packages. These are the white-collar professions, like
doctors, accountants, and engineers.

 Secondary Labor Market – jobs provide fewer benefits and include

lower-skilled jobs and lower-level service sector jobs. They tend to pay
less, have more unpredictable schedules, and typically do not offer
benefits like health insurance. They also tend to have less job security.
These are the blue-collar workers.
 GLOBAL CORPORATION

Corporations
- a key part of both our economic and political landscape.
- defined as organizations that exist as legal entities and have liabilities that are
separate from its members.

Global Corporation

A global corporation, also known as a global company, is coined from the base term
‘global’, which means all around the world. It makes sense to assume that a global
company is a company that does business all over the world.

To be a global company, you need to introduce not only your products, but also your
company to people who live in another country. You need to conduct significant
research to figure out which country is your best choice for expansion and how to
introduce yourself.

Multinational or Transnational Corporations (MNCs or TNCs)

- Companies that extend beyond the borders of one country.
- Also referred to as global corporations.
- They intentionally surpass national borders and take advantage of
opportunities in different countries to manufacture, distribute, market, and sell
their products.
- They influence the economy and politics by donating money to specific
political campaigns or lobbyists.
- They often locate their factories in countries which can provide the cheapest
labor in order to save up for expenses in the making of a product.

Examples:
The Benefits of a Global Corporation
- Better allocation of resources
- Lower prices for products
- More employment worldwide
- Higher product output

Producers/Business Owners

 You can increase your customer base

When you expand your business into another country, your customer base
expands along with it. The market in the United States could be full of products
just like yours. You may find, however, that this is not the case in another
country. That could present an expansion opportunity for your company.
What's familiar to your consumers in the U.S. could be fresh to consumers in
another country.

 You can reduce your operating costs

If the manufacturing or labor costs are lower in another country, expanding to

that country enables you to save on your operating costs. This can improve
your bottom line. In fact, reducing operating costs are a key reason why many
global companies expand.

 You don’t need to be bogged down by seasonality

If you sell a seasonal product that experiences fluctuating sales at different

times of the year, then you can expand to countries that have seasons
opposite to those in your base country, enabling you to have high sales figures
all year.

 You can boost the growth rate of your company

If your company has been growing rapidly in your locale, chances are that
this growth may eventually stall, because of market saturation. In that
instance, you can expand to another country so you can maintain rapid
growth.

 You can create new jobs

Expanding into another country involves a lot, such as hiring representatives

and employees of your company in the new country, as well as setting up
offices and various facilities, and so on. You’re likely to employ locals and, in
the process, you will create new job opportunities in the country where you
are expanding. This helps boost the local economy and it also gives your
company a good reputation.
Disadvantages
- If the labor laws in one country become too restrictive to the TNCs, they just
move their factory to a new country, leaving widespread unemployment in
their wake.
- When companies outsource their labor to other country (finding people in
other countries willing to work for a lower wage), people in the core country
are losing jobs and having difficulty finding new ones.

Producers/Business Owners

 The gains may not be seen in the short term. It may be many years before they
start reaping the rewards of their efforts.
 They have to hire additional staff to help launch their companies in the global
markets they expand into.
 Companies usually have to modify their products and packaging to suit the
local culture, preferences and language of the new market.
 Travel expenses are sure to increase for the administrative staff, as they will
now be expected to travel all over the world to oversee their business outlets
in other countries.
 Also, companies need to know the regulations and tax laws in foreign
countries, which takes time and money, and they may need to hire
professionals in those countries to help with legal and financial issues.

Consider Coca-Cola, which, in 1886, was struggling to get by. By World War II, Coca-Cola was
50 years old and had proudly maintained its price at 5 cents, so as to enable many people to
afford the beverage. The company would sell its drink to U.S. soldiers stationed all over the
world for 5 cents a bottle, but no more.

Coca-Cola now sells its beverages in more than 200 countries. Not only does the Coca-Cola
company sell its popular fizzy drinks such as Coke, Fanta, and Sprite, it also sells some 3,800
other products, including soy-based beverages that have been enriched with vitamins. The
Coca-Cola company also sells juices, iced teas, bottled water, and a lot more. One of the
reasons why Coca-Cola has seen such monumental success in nearly every country it has
established itself is that it never has a standardized view of all countries. Instead, each country
is considered on an individual basis. The company will make sure it only provides products that
fit with the tastes and culture of the local community. Often, this means that Coca-Cola must
create entirely new products to fit a market's demographics, or it may tweak an existing
product so that it will appeal to residents in a specific locality. You may have noticed this.
Some Coca-Cola products are available in some countries but not in others; this is because
those products were created for that country or were tweaked to suit the preferences of a
specific country.

All contemporary global companies once had been mere startups. Coca-Cola was once a
drugstore in Atlanta, Georgia. Google started out as nothing more than a research project
undertaken by Larry Page and Sergey Brin. You, too, can become a global company.
However, do not rush it. Take it one country at a time.