Download The Global Economy and Economic Globalization and more Schemes and Mind Maps Mathematical logic in PDF only on Docsity!
SUGGESTED TIME ALLOTMENT: 3 Hours
LEARNING OBJECTIVES
Chapter 2 | The Global Economy
At the end of this lesson, you should be able to:
- define economic globalization;
- identify and discuss the three waves of economic globalization; and
- assess the consequences of global economic integration specifically, on international trade and trade policies.
“Globalization is a complex issue, partly because economic globalization is only
one part of it. Globalization is greater global closeness, and that is cultural,
social, political, as well as economic.” – Amartya Sen
LEARNING ACTIVITY 1
Using the following table, provide at least one ( 1 ) concrete example that you can relate to the benefits and harms of economic globalization. Limit your answers to 100 words or one ( 1 ) paragraph only. Answer concisely. BENEFIT OF ECONOMIC GLOBALIZATION
HARM OF ECONOMIC GLOBALIZATION
Early Wave 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” (Claudio & Abinales, 2018). The famous of which that lasted for 2,000 years, from ancient times into the 16th^ century was known as the Silk Road. The coverage of this trade was so vast connecting by land and sea from Asia to the far end of Europe, Middle East as well as Africa. During this period traded goods were predominantly artisan goods, silk, spices, ceramics, textile, compasses, gun powder from India and China (Fernandez et al., 2018). The Age of Exploration, from early 15th^ to 17th^ century was the pivotal era that “changed the shape of the world and the course of history.” European made an unprecedented levels of exploration because of the growing numbers of professional explorer and navigators. European ships travelled around the world in search for trading routes and new lands to colonize. New age of global commercial capitalism was laid during this period (Fernandez et al., 2018). Flynn and Giraldez (1995) traced 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 (Claudio & Abinales, 2018). 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. The countries thus established a common
basis for currency prices and a fixed exchange rate system – all based on the value of gold (Claudio & Abinales, 2018). Keynesian Liberal Wave During the last phase of the Second World War, delegates from different states assembled in the United States for the Bretton Woods Conference (Quinañola & Fernandez, n.d.). The 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 set up a network of global financial institutions that would promote economic interdependence and prosperity (Claudio & Abinales, 2018). 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 (Claudio & Abinales, 2018). The Bretton Woods system was largely influenced by the ideas of British economist John Maynard Keynes who believed that economic crises occur not when a country does not have enough money, but when money is not being spent and, thereby, not moving. This active role of governments in managing spending served as the anchor for what would be called a system of global Keynesianism (Claudio & Abinales, 2018). Economic setbacks in the inter-war years from 1918-1938 such as the Great Depression in 1929 and 1930s motivated political and financial leaders to set the institutional foundations for the establishment of three international economic organizations (Fernandez et al., 2018). John Maynard Keynes (British Economist)
2018). To this day, both institutions (World Bank and IMF) remain key players in economic globalization (Claudio & Abinales, 2018).
- Shortly after Bretton Woods, various countries also committed themselves to further global economic integration through the General Agreement on Tariffs and Trade (GATT) in
- GATT’s main purpose was to reduce tariffs and other hindrances to free trade (Claudio & Abinales, 2018). The provisional GATT endured for nearly fifty years, until it was replaced by the World Trade Organization (WTO ) in 1995. The WTO opened a new forum within which a broad range of international issues would be negotiated, including not just traditional trade issues on tariff and non-tariff barriers, but also intellectual property rights, trade related investment measures, and food safety standards (Quinañola & Fernandez, n.d.). The Bretton Woods goals and strategies were macroeconomic stability , import substitution , and governance reform (Fernandez et al., 2018).
- Macroeconomic Stability To maintain macroeconomic stability, the US dollar was the only international standard currency of choice peg at $35 per ounce of gold. The IMF was expected to maintain an equilibrium functioning of the gold standard that if a certain country gets short of its balance of payments, financial assistance is provided (Fernandez et al., 2018). Bretton Woods Goals and Strategies Macroeconomic Stability Import Substitution Governance Reform
The monopolization of US dollars led to the over valuation relative to other currencies to the extent that some countries doubted the supply of gold in the United States treasury. As a response, foreign countries converted their US dollars into gold thereby depleting US gold reserves. With the pressure mounting President Nixon of United States announced on August 15, 1971 to abandon the gold-exchange standard (Fernandez et al., 2018).
- Import Substitution Domestic industries were built in the 50s and 60s to replace imported products and promote domestic industrial development and eventually achieve industrialization. This will move people from primary industry into manufacturing and better jobs. Improvement of jobs create substantial demand for goods and services (Fernandez et al., 2018). The availability of financial capital was a defining factor. Countries that adopted a combination of import substitution industrialization and export promotion perform better than those who did not. This was the case of the Asian Tiger neighbors when they aggressively built their local industries and unceasingly promoted exports (Fernandez et al., 2018). The Bretton Woods Conference of 1944 established an international fixed exchange rate system based on the gold standard, in which currencies were pegged to the United States dollar, itself convertible into gold at $35/ounce. A negative balance of payments, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s. On August 15, 1971, US President Richard Nixon unilaterally suspended the convertibility of US dollars into gold. The United States had deliberately offered this convertibility in 1944; it was put into practice by the U.S. Treasury. The suspension made the dollar effectively a fiat currency (“Smithsonian Agreement”, n.d.). Richard Milhous Nixon (37th^ US President) The Four Asian Tigers are the economies of Hong Kong, Singapore, South Korea and Taiwan. Between the early 1960s and 1990s, they underwent rapid industrialization and maintained exceptionally high growth rates of more than 7 percent a year. By the early 21st century, these economies had developed into high-income economies, specializing in areas of competitive advantage. Hong Kong and Singapore have become leading international financial centers, whereas South Korea and Taiwan are leaders in manufacturing electronic components and devices. Their economic success has served as role models for many developing countries, especially the Tiger Cub Economies (i.e. Malaysia, Philippines, Thailand, and Vietnam) of southeast Asia (“Four Asian Tigers”, n.d.).
Arab countries also used the embargo to stabilize their economies and growth. The “ oil embargo ” affected the Western economies that were reliant on oil (Office of the Historian, n.d.). 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 (Bojinov, 2014). The result was 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) (Claudio & Abinales, 2018). 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 onward, neoliberalism became the codified strategy of the United States Treasury Department, the World Bank, the International Monetary Fund (IMF), and eventually the World Trade Organization (WTO). The policies they forwarded came to be called the Washington Consensus (Claudio & Abinales, 2018). The term Washington Consensus was named after the key players in Washington headed by President Ronald Reagan of US and Prime Minister Margaret Thatcher of England (Fernandez et al., 2018). The Washington Consensus required governments to implement the structural adjustments measures in order to qualify for loans (Steger, 2009). It 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, During the 1973 Arab-Israeli War , Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations. Arab OPEC members also extended the embargo to other countries that supported Israel including the Netherlands, Portugal, and South Africa. The embargo both banned petroleum exports to the targeted nations and introduced cuts in oil production. Several years of negotiations between oil-producing nations and oil companies had already destabilized a decades-old pricing system, which exacerbated the embargo’s effects (Office of the Historian, n.d.).
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 (Claudio & Abinales, 2018). The neo-liberal policies adopted by other countries coupled with mandates from international financial institutions however, would not give a guarantee to take effect once it is replicated to another country (Fernandez et al., 2018). Heavy debtor countries rarely made significant improvements from above mentioned requirements, because mandated cut on public spending would decrease social programs such as education, health care, infrastructures, security, environment preservation, and that constitute greater poverty (Steger, 2009). The Global Financial Crisis and the Challenge to Neoliberalism Neoliberalism came under significant strain during global financial crisis of 2007-2008 when the world experienced the greatest economic downturn since the Great Depression. The crisis can be traced back to the 1980s when the United States systematically removed various banking and investment restrictions (Claudio & Abinales, 2018). The scaling back of regulations continued until the 2000s, paving the way for a brewing crisis. In their attempt to promote the free market, government authorities failed to regulate bad investments occurring in the US housing market. Taking advantage of "cheap housing loans,” Americans began building houses that were beyond their financial capacities (Claudio & Abinales, 2018). To mitigate the risk of these loans, banks that were lending house owners' 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 circulating, the demand for MBSs increased as investors clamored for more investment opportunities. In their haste to issue these loans, however, the banks became less discriminating. They
the reduction in government spending has slowed down growth and ensured high levels of unemployment. The United States recovered relatively quickly thanks to a large Keynesian-style stimulus package that President Barack Obama pushed for in his first months in office. The same cannot be said for many other countries (Claudio & Abinales, 2018). The globalization of world economy raises several interesting and important questions: What causes the global economic interconnectedness in the contemporary world? Why is it that despite the decline of the US in the 1970s, the economic institutions it helped establish continued to function? The hegemonic stability theory argues that the preponderance of power and the willingness of the United States to act as a hegemon made possible the establishment of a liberal global economy (Gilpin & Gilpin, 2001). The US emerged as a superpower that was willing to shape the global economy according to its preferences. Today’s economic globalization, the level of global economic interconnectedness, and the presence of many multinational corporations could be traced back to the efforts by the US to put in place a liberal economic order (Quinañola & Fernandez, n.d.). The neo-liberal institutionalist theory explains that international institutions, such as the IMF, World Bank, and the GATT, have an independent impact on the global economy. Governing arrangements called regimes , as Robert Keohane (1984) argued, explain the endurance of international cooperation in
C. PERSPECTIVES ON ECONOMIC GLOBALIZATION
The hegemonic stability theory (HST) indicates that the international system is more likely to remain stable when a single nation-state is the dominant world power, or hegemon. When a hegemon exercises leadership, either through diplomacy, coercion, or persuasion, it is actually deploying its " preponderance of power ." This is called hegemony , which refers to a state's ability to "single-handedly dominate the rules and arrangements of international political and economic relations” (“Hegemonic Stability Theory”, n.d.).
the absence of a hegemon. Neo-liberal institutionalists maintain that regimes create regularity in actors’ behavior and expectations, which is why the three institutions persisted as the hegemon (referring to United States) experienced economic and political decline (Quinañola & Fernandez, n.d.). Exports, not just the local selling of goods and services, make national economies grow at present. In the past, those that benefited the most from free trade were the advanced nations that were producing and selling industrial and agricultural goods. When more countries opened up their economies to take advantage of increased free trade, the shares of the percentage began to change. The WTO-led reduction of trade barriers, known as trade liberalization, has profoundly altered the dynamics of the global economy (Claudio & Abinales, 2018). In the recent decades, partly as a result of these increased exports, economic globalization has ushered in an unprecedented spike in global growth rates. According to the IMF, the global per capita GDP rose over five-fold in the second half of the 20th^ century. It was this growth that created the large Asian economies like Japan , China , Korea , Hong Kong , and Singapore (International Monetary Fund, 2008). Economic globalization remains an uneven process , with some countries, corporations, and individuals benefitting a lot more than others. The series of trade talks under the WTO have led to unprecedented reductions in tariffs and other trade barriers, but these processes have often been unfair (Claudio & Abinales, 2018).
- First, developed countries are often protectionists, as they repeatedly refuse to lift policies that safeguard their primary products that could otherwise be overwhelmed by imports from the developing world. The best example of this double standard is Japan’s determined refusal to allow rice imports into the country to protect its farming sector. Faced with these blatantly protectionist measures from powerful countries and blocs, poorer countries can do very little to make economic globalization more just. Trade imbalances , therefore, characterize economic relations between developed and developing countries (Claudio & Abinales, 2018).
D. THE ECONOMIC GLOBALIZATION TODAY
QUIZ
______ 1. It is characterized by the increasing integration of economies around the world through the movement of goods, services, and capital across borders. A. Market Globalism C. Market Integration B. High Frequency Trading D. Economic Globalization ______ 2. During this period traded goods were predominantly artisan goods, silk, spices, ceramics, textile, compasses, and gun powder. A. Early Wave C. Neo-liberal Wave B. Keynesian Liberal Wave D. Bretton Woods System ______ 3. It was established to prevent the catastrophes of the early decades of the century from reoccurring and affecting international ties. A. Early Wave C. Neo-liberal Wave B. Keynesian Liberal Wave D. Bretton Woods System ______ 4. It was crafted to reconstruct cities, industries and infrastructure heavily damaged during the war and remove trade barriers between European neighbors and foster commerce with United States. A. World Bank C. International Monetary Fund B. World Trade Organization D. Marshall Plan ______ 5. This institution serves as a global lender of last resort to prevent individual countries from spiraling into credit crises. A. World Bank C. International Monetary Fund B. World Trade Organization D. Marshall Plan ______ 6. This institution does not just to resolve traditional trade issues on tariff and non-tariff barriers, but also on intellectual property rights, trade related investment measures, and food safety standards. A. World Bank C. International Monetary Fund B. World Trade Organization D. Marshall Plan This quiz intends to assess what you have learned from the lesson. Read and analyze each question carefully. Write your answer on the space provided before the number. Exercise honesty and integrity in answering the test.
______ 7. One of the strategies of the Bretton Woods system is to extend loans to poor countries which often comes with conditions from the IMF. A. Macroeconomic Stability C. Import Substitution B. Governance Reform D. Stagflation ______ 8. It is a decline in economic growth and employment which takes place alongside a sharp increase in prices. A. Macroeconomic Stability C. Import Substitution B. Governance Reform D. Stagflation ______ 9. The Arab members of OPEC imposed a ban on petroleum exports against United States in retaliation for the U.S. decision to re-supply the Israeli military during the Yom Kippur War. A. Oil Embargo C. Global Financial Crisis B. Stock Market Crash D. Asian Financial Crisis ______ 10. This theory indicates that the international system is more likely to remain stable when a single nation-state holds the dominant world power. A. Washington Consensus C. Hegemonic Stability Theory B. Keynesian Economics D. Neo-liberal Institutionalist Theory
REFERENCES
“Four Asian Tigers”. (n.d.). https://en.wikipedia.org/wiki/Four_Asian_Tigers “Hegemonic Stability Theory”. (n.d.). Retrieved from https://en.wikipedia.org /wiki/Hegemonic_stability_theory “Smithsonian Agreement”. (n.d.). Retrieved from https://en.wikipedia.org /wiki/Smithsonian_Agreement “Yom Kippur War”. (n.d.). Retrieved from https://en.wikipedia.org /wiki/Yom_Kippur_War Bojinov, S. (2014). Illustrated History of Every S & P 500 Bear Market. Retrieved from http://traderhq.com/illustrated-history-every-s-p- 500 - bear- market Claudio, L. E. & Abinales, P. N. (2018). The Contemporary World. Quezon City: C & E Publishing, Inc.
