Global Economy

GUIDE QUESTIONS:

• What are the characteristics of a global economy?

• What are the advantages/disadvantages of the
globalizing economy?
• What are our country’s competitive edge in this global
economy? or do we have competitive advantages?
• How can our country compete in this global economy?
 The Global Economy

• The Bretton Woods Institutions/members

• Economic Organizations
• Multi-National Corporations
Economic Globalization
• Refers to the increasing interdependence of world economies as
a result of the growing scale of cross-border trade of
commodities and services, flow of international capital and
widespread use of technologies.
• A historical process representing the result of human
innovation and technological progress – IMF
Characterized by:
• Increasing integration of economies around the world
• Increased speed and frequency of trading
• Movements of goods, services, and capitals across borders
The Global Economic System:
Then Now

Transportation Steam ships, Cargo ships,

railroads airplanes

Communication Telegraphs Internet

Capital Dependent on large-scale flows

of capital
 The Global Economic System:
Then and Now
• In both periods, poor nations were and are
subjugated by the operations of the global In other words,
economy. the global
• Not all parts of the world gained/gain equally economy was
from the growth of the global economy. not equally
• Certain industries and social classes lose out good for
in the process. everyone and
• The poor nations tend to suffer most when they was bad for
are forced to repay their debts to developed many.
nations.
The Global Economic System

How Economies Interact Today

Global economic specialization among the
nations of the world was encouraged
- “law” of comparative advantage: that is, that
nations should concentrate on what they do
best e.g. Philippine’s BPO
- A nation should concentrate on what it does
best in comparison to the other things it
does not in comparison to what other nations
do
Competing with China's labour rates
Global Economy in the 20th Century
• Before World War II
Economic collapse in countries involved in
WW I, the Great Depression, and later the
WW II.
 All of these events had negative
effects on almost all major
economies.
 Autarky (turn inward of a nation-state in
order to become as economically self-
sufficient as possible).
After World War II
There was a plan for a more open international economy
due to the following:
 A great fear was the recurrence of the Depression
 Difficulties of societies in absorbing the massive
manpower created by the demilitarization
 Fear of a resurrection of barriers to trade (autarky/
protectionism) and the free flow of money that had become
common place prior to WW II.
 The focus of the (Allied Powers/ reconstruction) planners was on
reducing trade barriers and on creating conditions necessary for
the free flow of money and investment.
 Bretton Woods Institutions
 A landmark system for monetary and
exchange rate management
established in 1944.
 The conference was held in Bretton
Woods, New Hampshire.
 730 delegates from 44 countries came
up with an agreement for an
international monetary system.
 the principal goals: creating an efficient foreign
exchange system, preventing competitive
devaluations of currencies, and promoting
international economic growth
 Bretton Woods Agreements:
5 Key Elements

1) Each participating state would establish a “par

value" for its currency expressed in terms of
gold or (equivalently) in terms of the gold value
of the US dollar as of July 1944.
- gold was the basis for the U.S. dollar and other
currencies were pegged to the U.S. dollar’s value.
e.g. the US pegged its currency at $35/ounce of gold
while Nicaragua was 175 Cordobas per ounce.
Thus, the exchange rate between these 2
countries was 5 Cordobas = $1.
 Bretton Woods Agreements:
5 Key Elements

2) The official monetary authority (central

bank) in each country would agree to
exchange its own currency for those
of other countries at the established
exchange rates, plus or minus a one -
percent margin ”
 makes international trade possible at or near
the exchange rate for the currencies of the
countries involved without the need for any
outside intervention.
 Bretton Woods Agreements:
5 Key Elements
3) The International Monetary Fund (IMF) was created
to establish, stabilize, and oversee exchange rates.
 Forty states became IMF members in
1946 and were required to deposit some
of their gold reserves with the IMF.
 The IMF was empowered to approve the
par values of currencies and member
states could not change that value by
more than 10 percent.
 If a currency was destabilized, the IMF
was prepared to lend member states the
money needed to stabilize their currency.
 Bretton Woods Agreements:
5 Key Elements
4) The member states agreed to
“eliminate,“ all restrictions on the
use of its currency for international
trade.”
 Bretton Woods Agreements:
5 Key Elements

5) The entire system was based on the US dollar

 The US agreed to make the dollar convertible into other
currencies or gold at the fixed par value.
 the dollar became a global currency.
KEY TAKEAWAYS OF THE BRETTON WOODS
AGREEMENT
• The Bretton Woods Agreement and System created a collective
international currency exchange regime that lasted from the
mid-1940s to the early 1970s.
• The Bretton Woods System required a currency peg to the U.S.
dollar which was in turn pegged to the price of gold.
• The Bretton Woods System collapsed in the 1970s but created a
lasting influence on international currency exchange and trade
through its development of the IMF and World Bank.
• It came to an end in the early 1970s when President Richard M. Nixon
announced that the U.S. would no longer exchange gold for U.S.
currency.
Effects of the Bretton
Woods Agreements
The most powerful effects of the Bretton
Woods
global trade
the global monetary order
global investment
Effects of the Bretton
Woods Agreements
Global Trade
Restrictions on international trade were reduced over the
years through various rounds of meetings under the
guidance of GATT and later the WTO.
Effects of the Bretton
Woods Agreements
The global monetary order: the IMF
The goal was to provide security and flexibility to the
monetary order.
What emerged between 1958 and 1971 was a system in
which the US could not change the value of its dollar,
while all other countries could.
Made exchange rates stable enough to encourage
international trade and investment which otherwise would
have been discouraged by dramatic fluctuations in rates
Effects of the Bretton
Woods Agreements
Global Investments: World Bank
A key development in terms of investment involved MNCs,
especially American-based firms
the industries involved required very large, often global,
organizations in order to function effectively.
this kind of investment made it possible to get around
trade barriers by opening plants within the countries with
such barriers.
Economic Organizations Spawned Directly or
indirectly by the Bretton Woods Agreement

■ General Agreement on Tariffs and Trade

(GATT)
■ World Trade Organization (WTO)
■ International Monetary Fund (IMF)
■ World Bank
 General Agreement on Tariffs and Trade (GATT)

• Its focus is on the trade of goods

• Trade-Related International Property
Rights (TRIPS)
• e.g. intangible ideas, knowledge, movies, music etc.
• Trade-Related Investment Measures
(TRIMs)
• trade agreement on trade measures government can
impose on foreign firms.
• Was superseded by WTO in 1995
■ World Trade Organization (WTO)
• With 152 members nations
• Goal is for all nations to benefit from free and
open trade, and it is dedicated to reducing, and
eventually eliminating barriers to such trade.
• The belief that all nations benefit from free
and open trade.
• Strains/Issues:
• “Green Room” meeting of larger trading
powers while small powers are excluded
• No mechanism for involvement of INGOs in
decision-making
■ Jobs of the World Trade Organization

• Lower trade barrier

• Fair competition
• Encourage developing countries
• Settle dispute between countries
■ International Monetary Fund (IMF)
• Goal is macro-economic stability for both
member nations and more generally the
global economy.
• IMF deals with exchange rates, balances
of payments, international capital flows,
and monitoring members states and their
macro-economic policies.
• Issues:
• Governance structure is dominated by the US
• Developed nations control more than 50
percent of the votes
■ Major Functions of the IMF:
• Surveillance
• Giving member nations advice on how to
improve their financial systems
• Technical assistance
• They are source of financial/currency related
info/data
• Lending money to countries
• Especially those in need
• But this comes with conditions set by them
■ World Bank (WB)
• Established in 1944 during the Bretton
Woods Agreement
• Has 184 nations as members
• Provides funds to government-sponsored
programs in mostly middle-income or credit-
worthy poorer nations.
• Development of productive facilities and resources in less
developed countries
• Funding for productive purposes
• Encourage international investments in order to promote
international trade and development
• Helping member countries improve their productivity,
standard of living and labor conditions.
■ Importance of the World Bank (WB)
• Serves as a forum of nations to discuss
development and development financing
• Source of funds for developing countries
• Source of info on development and provides
valuable advice and support to the nations
• Criticisms of the World Bank:
• It is dominated by rich/developed nations
• A country’s number of votes varies depending on its size and
importance in the world economy
• The president of the WB is appointed by the US president.
• The bank serves interest and this affects other nations especially
the poor and less developed ones.
Other Important Economic Organizations
1. Organization for
Economic
Cooperation and
Development
(OECD)
• 30 developed
nations as
members
• The most
encompassing
‘club’ of the world’s
rich countries.
2. The European Union (EU)
• 27 member states adopted Euro as
their currency

3. The North American Free Trade

Agreement (NAFTA)
• US, Canada and Mexico as
members
4. MERCOSUR; Southern Common
Market
• common market in South America
5. The Organization of Petroleum
Exporting Countries (OPEC)
• major oil exporters (Iran, Iraq, Kuwait,
Saudi Arabia etc.)
6. APEC (Asia-Pacific Economic
Cooperation)
• APEC membership: 21 countries
• established in 1989, has become the pre-eminent economic
forum in the Asia-Pacific region. Its primary purpose is to
promote sustainable economic growth, trade and
investment, and prosperity in the Asia-Pacific region.
 Multinational Corporations:
Drivers of Global Economy
 Trans-national Corporations =
Multinational Corporations?
 TNCs involve operations in more
than one country
 MNCs operate in more than two
countries.
 MNC has grown more powerful than
the nation-state as it has the power to
coordinate and control operations in
more than 2 countries even if it does
not own them.
Multinational Corporations:
Drivers of Global Economy
companies rather than states will be the leading actors in
the world economy. ”
there are about 61,000 MNCs in the world today carrying out
production through over 900,000 affiliates.
They account a tenth of the world‘s GNP and about a third of
total world exports.
Vast majority or 96 of the top 100 are in the developed world
However, as we will see, MNCs from developing countries are
increasing in number and importance.
Multinational Corporations:
Drivers of Global Economy
MNC activity is usually measured by foreign direct
investment (FDI).
involves investments by one firm in another firm that
exists abroad in a different nation-state, with the
intention of gaining control over the latter’s operations.
It can also involve setting up a branch (subsidiary)
operation in another country.
FDI has grown substantially in recent years and this is a
major indication of the growth of MNCs. More than two -
thirds of the world’s FDI is directed toward developed not
less developed countries.
Multinational Corporations:
Drivers of Global Economy

Portfolio Investment (another MNC activity)

- involves the purchase of equity in companies in other
countries, but the motivation is financial gain and not to
obtain control over those companies.
How companies become multi-national?
Geographic unevenness of markets
- A company may reach a saturation point in its domestic
market; identify new markets that require its direct presence;
- when markets are restricted because of political regulations
(e.g. import tariffs);
- there are strong cultural and political incentives for it to be
present in other countries.
 In order to access natural and human resources
Benefits of MNCs:
 Investments create jobs to people in host
countries
 Encourage development of infrastructures
e.g. roads
 Brings technologies
to host countries
 They create access
to world market
Negative impacts of MNCs:

They de-capitalize other countries

- They take profit, money, resources from the country
They create inequality around the world
They exploit the poor workers/communities/nations
They make the countries dependent of their presence
 They create competitions to the local companies as
they tend to dominate the local market.
Economic Globalization Today

Global per capita GDP rose over five-fold in the second half
of the 20 th century
Created large Asian economies like Japan, China, Korea, Hong
Kong, and Singapore
Economic globalization remains an uneven process
First world countries are often protectionists
Beneficiaries of global commerce have been mainly
transnational corporations and not governments
The Global Trade
Trade Surplus – when a country exports more than it
imports
Trade Deficits– a country has more imports than exports.

Supply Chain – the sequence of processes involved in

the production and distribution of a commodity.
- a general label for value-adding activities in the
production process.
e.g. cotton into thread T-shirt Market
The Global Trade

International Production Networks – the networks of

producers involved in the process of producing a
finished product.
e.g. production chain of jeans

The material is harvested in Kazakhstan before being

manufactured into yarn in Turkey. Then it is shipped to
Taiwan for coloring, before it is weaved in Poland. France
delivers material like buttons and rivets. All components
are shipped to the Philippines for sewing. Final processing
is taking place in Greece, before it is sold in the market.
Global Commodity Chains – a network of labor and
production processes whose end result is a finished
commodity e.g. Nike

Global Value Chains – includes all of the people and

activities involved in the production of a good or service
and its global level supply, distribution and post sales
activities.
Example #1: GVC

9 Dragons Paper:
1) Mountains of waste paper are collected in the US
2) These are then shipped to China for re-cycling into
container boxes
3) Boxes are used to ship goods to various places around
the world
4) After its use, they are turned again into scrap and the
process continues….
Example #2: GVC

T-Shirts:
1) Cottons grown in the US
2) These are then shipped to China for manufacturing
3) The T-shirts are then delivered back in the US market
4) The American consumers buy the shirts and eventually
dispose them
5) Used shirts are then shipped and then sold in Africa.
Impact of Global Trade:
“Race to the Bottom”
- Countries involved in a downward spiral of
competitiveness.
- For countries to compete in the global economy, they
must undercut the competition in many ways e.g.
offering low wages, poorer working conditions etc.
Impact of Global Trade:
“Industrial Upgrading”
- Nation-states, firms and even workers move from low
value to relatively high-value production
- e.g. Case of China as they have begin to move up
towards producing high-value products
Impact of Global Trade:
“Outsourcing”
- Transfer of activities once performed by an entity to a
business in exchange for money
e.g. Marketing: A company outsources the support of social media
channels to an external service provider (e.g. an agency).

“Offshore Outsourcing”
- Transfer of activities to entities in other countries
- e.g. call-center industry
Impact of Global Trade:
Consumption
- The expediting of global flows of consumer goods and
services of all types and of financial processes and
instruments that expedite those flows
- e.g. Visa and Master cards are increasingly accepted
and used throughout the world. This, however, leads to:
Hyper-consumption (buying more than one can afford)
Hyper-debt (owing more than one will be able to repay).

- This consumption habit of the Americans influences the whole

world.
Conclusion

International Economic Integration is a central tenet of

globalization
Much of globalization is anchored on changes in the
economy (i.e. global culture)
Important to ask: How this system can be made more just?