Perspectives on Globalization

Week 3

From International to Global: Formation of the Global

Economy II
 Formation of the Global Economy
• Before 16th century, there was no world-wide economic system. It
started to change with the “Age of Discoveries”.
• In the 16th century with the Age of Discoveries European economies
started to expand to overseas:
Colonization of the Americas  Integrated Americas into
intercontinental economy  first truly world economy
Colonization of India  1600s by the British East Indian Company
Creation of long distance trade  brought also financial innovation

Geographical Integration
For a detailed account of the colonization of Americas you can read the book by Jared
Diamond. It also presents a detailed account of how germs has changed the course of
human history. This also may be helpful to understand the prospective outcomes of
the coronavirus.
Columbus opened the Cortes has conquered The Spanish
New World for Mexico for Spain and conquistador of Peru.
colonization. He was caused the fall of Led the fall of Inca
looking for gold. Aztec civilization. Empire.
Industrial Revolution (1780s-1840)
Application of New Machinery
New sources of energy  Steam power in Europe enabled integration
of distance geographies through rail roads
Need for new Markets
Need for a central state that organize market economy
Reorganization of Labor  mechanized production  labor force
started to gather in single place (unlike feudalism)  as a result
metropoles emerged  need for mass education to train labor force
(end of labor training through apprentice/master relation)  all these
process gave rise to nationalism (Read Ernest Gellner, Nations and
Nationalism for a detailed account of the relationship between
 Pax-Britannica (1815-1914)
• Period of hundred years peace when the British Empire became
hegemonic power until the First World War.
• Pax Britannica was based on 3 arrangements:
1. Gold Standard (1875-1914): Emerged as a result of the
development of world economy and the rise in the volume of
international exchange, which created the need for a mechanism
for changing one currency for another National currencies are
fixed to gold.
2. Free Trade
3. Balance of Power (Hundred Years Peace)
• Hundred Years Peace  Enabled capital accumulation in European
Countries.
• Accumulated capital created problem of over production and under
consumption. As the rate profit started to fall in the European
economies, they started to colonize the rest of the world.
• Late industrialized countries such as Germany and Italy entered the
game at the end of 19th century.  Competition among European
powers for colonies  Resulted in World War I
 World War I
• End of Pax-Britannica
• End of Gold Standard
• Free Trade Disrupted
• No new world order until 1945
• During Interwar years economic failure  Inflation, Unemployment
• 1930s  Return to Gold Standard for a short period of time  ended in
1931 financial crisis Great Depression
• From 1930s to World War II  Protectionism
• Formation of alternative forms to liberal capitalism  Fascism
The visit is a tragicomic play written by Friedrich Durrenmatt. It is a good source to
understand the social situation and psychology in Germany in the interwar years. In
1964, the play is adapted to a movie starred by Ingrid Bergman and Anthony Quinn.
 Lessons from Interwar Years

1. Financial crisis is risky. There is a need for monetary stability 

Establishment of IMF and World Bank
2. Protectionism is risky, trade should be liberalized  Establishment of
GATT (turned into World Trade Organization)
3. Power of the masses and labor should be contained  Keynesian
policies in the West
4. Security should be based on Great Power Politics  From League of
Nations to United Nations (with its Security Council)
 Lessons from Interwar Years
5. There is a need for hegemon Absence of a hegemonic power in
the interwar years.
European and Japanese economies were devastated
USA lent funds to European countries during the war and became
richer
World War II  USA take the leading role in the new world order
Established the Bretton Woods System
Reconstructed European and Japanese economies through
Marshall Plans  to balance the risk of communism
 Post- World War II Order

• Keynesianism  Based on two dynamics:

a) Mass Production Fordism with its production lines increased the volume of
production
b) Mass Consumption  State, through welfare policies, provided employment,
social services etc. so that population has more to spend
• From Gold Standard to fixed exchange rate  dollar standard
U.S. dollar is fixed to gold and other currencies are fixed to dollar
As time passes, the balance of dollar and gold is distorted  excess of dollar
resulted in overvalued dollar
1971  Nixon ended dollar standard  End of Bretton Woods System
beginning of fluctuating exchange rate that we use today
 Post- World War II Order
• 1950s  Beginning of Decolonization WHY?
No need for political control for economic exploitation
Soviet Impact
Nationalism in the colonies
• New States became member of the UN
Despite political independence colonies did not get their economic independence
In 1970s, they demanded New International Economic Order
Dependency school  capitalism creates development in one place and
underdevelopment in another place, this is why new states are underdeveloped
(because they are underdeveloped by developed states)
• South East Asia (Four Tigers) succeed in economic development  critique
to dependency school  Wallerstein responded to the critique by claiming
that some countries are semi-periphery
 1973-1977 Economic Recession &
Structural Transformation of World Economy
1970s  End of Post-World War II economic growth  WHY?
rate of profit has fallen
no more investment
Productivity decreased
Stagflation
Rising unemployment
Hyper-inflation
Oil Crisis and end of Bretton Woods contributed to the recession
As a result Structural Transformation
From Fordism to Post-Fordism

Mass Production- Mass Consumption -Product Innovation

-Flexible Specialization
-Skilled Labor
-Just-in-time Production
 As a result Structural
Transformation
• From Welfare to Neoliberalism

• Deregulation (no state intervention in to economy)

• Privatization
• Change in Labor Organization

Institutionalized through Washington Consensus (set of economic policies accepted by

Washington-based institutions such as the IMF, World Bank, and U.S. Treasury)
 Washington Consensus
• Removal of tariff barriers for open market (liberalization of trade)
• Nondiscrimination of capital (between domestic and international
capital)
• Financial liberalization
• Multilateralism

Paved the way for the globalization of the economic sphere

• 1980s  Debt Crisis in countries such as Mexico, Argentina, Brazil,
Venezuela
• IMF  Provided funds in return for structural adjustments
• Washington Principles started to be applied through International
Organizations
• Neoliberalism has started to spread to the rest of the world
• Financial and trade liberalizations, reducing the subsidies which
created Bread Riots as it happened in Egypt in 1977
• Uruguay Rounds  GATT failed to reduce protectionism  creation of
World Trade Organization which concentrates more on domestic
institutional transformation
 1997 Asian Financial Crisis
• Crisis as a result of neoliberal transformation
• Those countries are blamed for the failure of their economic system
• Blaming the victim
In 1980s debt crisis Latin American economies were blamed of not being
enough export oriented. So transformation through Washington Consensus.
In 1990s financial crisis, Asian economies were blamed of allowing
corruption. So transformation through Post-Washington Consensus.
• Post Washington Consensus: Washington consensus focused on the
perfection of the market, post Washington consensus shows market
limitations and ways of correcting those limitations through good
governance and transparency.
• Globalization, as the increase in economic, political and cultural
connections between societies has its roots in the Post-World War
period
• The institutional setting of the World Economy is established after
1945, but it is transformed in 1970s
• Transformations within the International Economic structure in the
1970s made neoliberalism as the dominant form of globalization
• With the demise of Soviet Union in 1990s, these form spread to the
whole world.
 Economic Realm of Globalization
• Related with concentration and centralization of capital which created
geographical enlargement and deepening of capitalist relations
(especially after 1970s)
• Emergence of global market, global production  from international to
global economy
• Rise of Transnational Corporations  Organize their production in global
scale, relocating a segment of production in other regions  became
possible with new technology and financial tools
• Increase in Foreign Direct Investment
• New economic interdependencies as a result of international
production and investment
 Political Realms of Globalization
• From International to Global from divided sovereignty to national
sovereignty. Now from national sovereignty to global village? (to be
discussed in the upcoming lectures)
• Rise of new actors  International Organizations, Non-Governmental
Organization, Multinational Corporations
• Nation states  Are they decaying? Are they protecting their role in
the Global World? Are they transforming? (to be discussed in the
upcoming lectures)