ÜSSON

The Globalization
of World Economics
Learning Outcomes
At the end Of this lesson. you should able to]
I. define economic glob arration;
2 identify the Actors that facilitate economic #balization;
3. narrate a of global market integration in the twentieth
and
& articulate Fur on economic integration.
The International Monetary Fund (IMF) regards "economic
globalization" as a historical process representing the result of
human innovation and technological progress. 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.' As with all other processes Of
globalization, there is a qualitative and subjective element to this
definition. How does one define "increasing integration"? When
is it considered that trade has increased? Is there a particular
Even while the IMF and ordinary people grapple with the
difficulty of arriving at precise definitions of globalization,
they usually agree that a drastic economic change is occurring
throughout the world. According to the IMF, the value of trade
(goods and services) as a percentage of world GDP increased
from 42.1 percent in 1980 to 62.1 percent in 2007.8 Increased
trade also means that investments are moving all over the world
at faster speeds. According to the United Nations Conference on
The Globalization of World Economics I 13
Trade and Development (UNCTAD), the amount of foreign direct
investments flowing across the world was US$ 57 billion in 1982.
By 2015, that number was $1.76 trillion. These figures represent a
dramatic increase in global trade in the span of just a few decades.
It has happened not even after one human lifespan!
Apart from the sheer magnitude of commerce, we should
also note the increased speed and frequency of trading. These
days, supercomputers can execute millions of stock purchases
and sales between different cities in a matter of seconds through
a process called high-frequency trading. Even the items being sold
and traded are changing drastically. Ten years ago, buying books
or music indicates acquiring physical items. Today, however, a
"book" can be digitally downloaded to be read with an e-reader,
and a music "album" refers to the 15 songs on mp3 format you can
purchase and download from iTunes.
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.
International Trading Systems
International trading systems are not new. The oldest known
international trade route was the Silk Road-a network of
pathways in the ancient world that spanned from China to what is
now the Middle East and to Europe. It was called as such because
one of the most profitable products traded through this network
was silk, which was highly prized especially in the area that is now
the Middle East as well as in the West (today's Europe). Traders
used the Silk Road regularly from 130 BCE when the Chinese
Han dynasty opened trade to the West until 1453 BCE when the
Ottoman Empire closed it.
However, while the Silk Road was international, it was not
truly "global" because it had no ocean routes that could reach the
American continent. So when did full economic globalization
14
14 | The Structures of Globalization
begin? 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." Flynn and Giraldez trace this 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.
The galleon trade was part of the age of mercantilism. From
the 16th century to the 18th century, countries, primarily in
Europe, competed with one another to sell more goods as a means
to boost their country's income (called monetary reserves later on).
To defend their products from competitors who sold goods more
cheaply, these regimes (mainly monarchies) imposed high tariffs,
forbade colonies to trade with other nations, restricted trade
routes, and subsidized its exports. Mercantilism was thus also a
system of global trade with multiple restrictions.
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. Broadly, its goal was to create a
common system that would allow for more efficient trade and
prevent the isolationism of the mercantilist era. The countries
thus established a common basis for currency prices and a fixed
exchange rate system-all based on the value of gold.
Despite facilitating simpler trade, the gold standard was
still a very restrictive system, as it compelled countries to back
their currencies with fixed gold reserves. During World War I,
when countries depleted their gold
reserves to fund their armies,
many were forced to abandon the gold standard. Since European
countries had low gold reserves, they adopted floating currencies
that were no longer redeemable in gold.

The Globalization of World Economics I 15

of the Tre
The gold standard, though once common, has proven to be a very restrictive form of
globalizing trade
Returning to a pure standard became more difficult as
the global economic crisis called the Great Depression started
during the 1920s and extended up to the 1930s, further emptying
government coffers. This depression was the worst and longest
recession ever experienced by the Western world. Some economists
argued that it was largely 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.
Economic historian Barry Eichengreen argues that the
recovery of the United States really began when, having abandoned
the gold standard, the US government was able to free up money to
spend on reviving the economy. At the height of World War II.
other major industrialized countries followed suit.
Though more indirect versions of the gold standard were used
until as late as the 1970s, the world never returned to the gold
standard of the early 20th century. Today, the world economy
operates based on what are called fiat currencies-currencies that
are not backed by precious metals and whose value is determined
by their cost relative to other currencies. This system allows
governments to freely and actively manage their economies by
increasing or decreasing the amount of money in circulation as
they see fit.
16 l The Structures of Globalization
The Bretton Woods System
After the two world wars, 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
to set up a network of global financial institutions that would
promote economic interdependence and prosperity. 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.
The scenic Bretton Woods where policymakers established the contours
of modern global economics
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. When economies slow down, according to Keynes,
governments have to reinvigorate markets with infusions of
capital. This active role of governments in managing spending
served as the anchor for what would be called a system of global
Keynesianism.
Delegates at Bretton Woods agreed to create two financial
institutions. The first was the International Bank for
Reconstruction and Development (IBRD, or World Bank) to be
responsible for funding postwar reconstruction projects. It was

The Globalization of World Economics 17

a critical institution at a time when many of the world's cities
had been destroyed by the war. The second institution was the
International Monetary Fund (IMF), which was to be 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.
Shortly after Bretton Woods, various countries also committed
themselves to further global economic integration through the
General Agreement on Tariffs and Trade (GATT) in 1947. GATT'S
main purpose was to reduce tariffs and other hindrances to free
trade.
Neoliberalism and Its Discontents
The high point of global Keynesianism came in the mid-
1940s to the early 1970s. During this period, governments poured
money into their economies, allowing people to purchase more
goods and, in the process, increase demand for these products.
As demand increased, so did the prices of these goods. Western
and some Asian economies like Japan accepted this rise in prices
because it was accompanied by general economic growth and
reduced unemployment. The theory went that, as prices increased,
companies would earn more, and would have more money to
hire workers. Keynesian economists believed that all this was a
necessary trade-off for economic development
In the early 1970s, however, the prices of oil rose sharply
as a result of the Organization of Arab Petroleum Exporting
Countries' (OAPEC, the Arab member-countries of the
Oganization of Petroleum Exporting Countries or OPEC)
imposition of an embargo in response to the decision
of the United States and other countries to resupply the
Israeli military with the needed arms during the Yom
Kippur War. Arab countries also used the embargo to
stabilize their economies and growth. The "oil embargo"s

18 The Structures Of Globalization

affected the western economies that were reliant on oil."
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."
was a phenomenon that Keynesian economics could not have
predicted—a phenomenon called stagflation, which a decline
in economic growth and employment (stagnation) takes place
alongside a sharp increase in prices (inflation).
Around this time. a new form of economic thinking was
beginning to challenge the Keynesian orthodoxy. Economists
such as Friedrich Hayek and Milton Friedman argued that the
governments' practice of pouring money into their economies
had caused inflation by increasing demand for goods without
necessarily increasing supply. More profoundly, they argued
that government intervention in economies distort the proper
functioning of the market.
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 IMF, and eventually the World Trade Organization
new organization founded in 1995 to continue the tariff
reduction under the GATT. The policies they forwarded came to
be called the Washington Consensus.
The Washington Consensus dominated global economic
policies from the 1980s until the early 2000s. Its 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,
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 thi
quickest way to progress. Advocates Of the Washington Consensu
conceded that. along the way, certain industries would be affecte•
and die, but they considered this "shock therapy" necessary fo
long-term economic growth.

The Globalization Of World Econorn'cs I

The appeal Of neoliberalism Was in its simplicity Its advocates
like US President Ronald Reagan and British Prime Minister
Margaret Thatcher justified their reduction in government
spending by comparing national economies to households.
Thatcher, in particular, promoted an image Of herself as a mother.
who reined in overspending to reduce the national debt.
The problem with the household analogy is that governments
are not households. For one, governments can print money, while
households cannot. Moreover, the constant taxation systems of
governments provide them a steady flow of income that allows
them to pay and refinance debts steadily.
Despite the initial success Of neoliberal politicians like
Thatcher and Reagan, the defects of the Washington Consensus
became immediately palpable. A good early example is that of
post-communist Russia. After Communism had collapsed in
the 1990s. the IMF called for the immediate privatization Of all
government industries. The IMF assumed that such a move would
free these industries from corrupt bureaucrats and pass them on
to the more dynamic and independent private investors. What
happened, however, was that only individuals and groups who had
accumulated wealth under the previous communist order had the
money to purchase these industries. In some cases, the economic
elites relied on easy access to government funds to take over the
industries. This practice has entrenched an oligarchy that still
dominates the Russian economy to this very day.
The Global Financial Crisis and the Challenge
to Neoliberalism
Russia's case was just one example of how the "shock therapy"
of neoliberalism did not lead to the ideal outcomes predicted by
economists who believed in perfectly free markets. The greatest
recent repudiation of this thinking was the recent global financial
crisis of 2008-2009.
 20 1 The Structures of Globalization
Neoliberalism came under significant strain during the
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,
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.
To mitigate the risk of these loans. banks that were lending
houseowners' 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 began
extending loans to families and individuals with dubious credit
records—people who were unlikely to pay their loans back. These
high-risk mortgages became known as sub-prime mortgages.
Financial experts wrongly assumed that. even if many of the
borrowers were individuals and families who would struggle to
pay, a majority would not default. Moreover. banks thought that
since there were so many mortgages in just one MBS, a few failures
would not ruin the entirety of the investment.
Banks also assumed that housing prices would continue to
increase. Therefore. even if homeowners defaulted on their loans,
these banks could simply reacquire the homes and sell them at a
higher price. turning a profit.
Sometime in 2007, however. home prices stopped increasing
as supply caught up with demand. Moreover, it slowly became

The Globalization Of Wotld Economics I

apparent that families could not pay off their loans. This
realization triggered the rapid reselling of MBSs, as banks and
investors tried to get rid of their bad investments. This dangerous
cycle reached a tipping point in September 2008, when major
investment banks like Lehman Brothers collapsed. thereby
depleting major investments.
The crisis spread beyond the United States since many
investors were foreign governments, corporations. and individuals.
The loss of their money spread like wildfire back to their countries.
These series of interconnections allowed for a global multiplier
effect that sent ripples across the world. For example, Iceland's
banks heavily depended on foreign capital, so when the crisis hit
them, they failed to refinance their loans. As a result of this credit
crunch, three of Iceland's top commercial banks defaulted. From
2007 to 2008, Iceland's debt increased more than seven •fold.
Until now, countries like Spain and Greece are heavily
indebted (almost like Third World countries), and debt relief
has come at a high price. Greece, in particular, has been forced
by Germany and the IMF to cut back On its social and public
spending. Affecting services like pensions, health care, and various
forms of social security, these cuts have been felt most acutely by
the poor. Moreover, 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. In Europe, the continuing
economic crisis has sparked a political upheaval. Recently, far-
right parties like Marine Le pen's Front National in France have
risen to prominence by unfairly blaming immigrants for their
woes, claiming that they Steal jobs and leech off welfare. These
movements blend popular resentment with utter hatred and
racism. We will discuss their rise further in the final lesson.

21

I The Structures of Globalization

Economic Globalization Today
The global financial crisis will take decades to resolve. The
solutions proposed by certain nationalist and leftist groups of
closing national economies to world trade. however, will no longer
work. The world has become too integrated. Whatever one's
opinion about the Washington Consensus is. it is undeniable that
some form of international trade remains essential for countries to
develop in the contemporary World.
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. The United States. Japan, and the member-countries Of
the European Union were responsible for 65 percent of global
exports, while the developing countries only accounted for
29 percent. When more countries opened up their economies
to take advantage of increased free trade, the shares of the
percentage began to change. By 2011, developing countries like the
Philippines. India, China. Argentina, and Brazil accounted for 51
percent of global exports while the share of advanced nations—
including the United States—had gone down to 45 percent."
The W To-led reduction of trade barriers, known as trade
liberalization. has profoundly altered the dynamics of the global
economy.
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"
And yet. economic globalization remains an uneven process,
with some countries. corporations, and individuals benefiting a lot
more than others. The series of trade talks under the WTO have
22

ot Econornic•. 1 23
led to unprecedented reductions in tariffs and other trade barriers,
but these processes have often been unfair.
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. Japan's justification is that rice is
"sacred." Ultimately, it is its economic muscle as the third largest
economy that allows it to resist pressures to open its agricultural
sector.
The United States likewise fiercely protects its sugar industry.
forcing consumers and sugar-dependent businesses to pay higher
prices instead of getting cheaper sugar from plantations of Central
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.
The beneficiaries of global commerce have been mainly
transnational corporations (TNCs) and not governments.
And like any other business, these TNCs are concerned more
with profits than with assisting the social programs of the
governments hosting them. 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. The term "race to the bottom" refers,
to countries' lowering their labor standards. including the
protection of workers' interests. to lure in foreign investors seeking
high profit margins at the lowest cost possible, Governments
weaken environmental laws to attract investors, creating fatal
consequences on their ecological balance and depleting them of
their finite resources (like oil, coal, and minerals).
23

24 The of Globalization
Localizing the Material
Many Phi"ppine industries wee devastated by unfair trade
deals under the GATT and eventually the One sector that
was affected was Philippine agriculture. According
Walden and a team cf researchers at Focus on the Global
South. the US used its pov.•er under the GATT system to prevent
Philippine importers from purchasing Philippine poultry and
potk—even as sold meat to the Phlippines.
Although the Philippires expected to make up losses in
secto's like meat with gahs in areas such as coconut products
no significant char,9e was realized. In 1993, coconut
amounted to "9 billon. and after a slight increase to 52.3 billfon
in 1997. itreturned to fig billon in 2000
strikingly Bello and company noted that the Philippines
became a food importer •order the GATT. In 1993. the country
had an *gricultural trade surplus of 5292 million. It had a deficit
1997 and 994 million in
. Waldn Hert*R Marissa de Guzrr.an. and Mary
Zed
Conclusion
International economic integration is a central tenet Of
globalization. In fact. it is so crucial to the process that many
writers and confuse this integration for the entirety
reminder. economics is one window into
the phenomenon ofglobalization
; it is not the entire thing.
Nevertheless. much of globalization is anchored on changes
in the economy_ Global culture, for example. facilitated by
trade. Filipinos Would not be
not for the trade that allows locals to watch American movies•
listen to American music. and consume American pÆts. Th'
relations. These days, many events o
ise largely contingent on trade
to cement trading relations between f foreign affairs are conducted
24

the o' 1 25
Given the stakes involved in economic globalization, it is
perennially important to ask how this system can be made more
'ust. Although some elements of global free trade can bc scaled
back, policies cannot do away with it as a whole. International
policymakers. therefore. should strive to think of ways to make
trading deals fairer. Governments must also continue to devise
ways of cushioning the most damaging effects of economic
globalization, while ensuring that its benefits accrue for everyone.
25