LESSON

2
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THE GLOBALIZATION OF WORLD ECONOMICS

I. INTRODUCTION
In this time of pandemic, every affected country is threatened by the effect of this
situation on their economy. This economic problem might take years to resolve. As a
result, every country is doing their best effort to counteract the dilemma brought by this
pandemic.
In this lesson, we will view economics as one of the windows into the phenomenon
of globalization. Also, we will trace how economic globalization came about and how global
market and trade becomes a means of globalization.

II. OBJECTIVES
 Define economic globalization.
 Identify significant events that ruled economic globalization.
 Narrate a short history of global market integration.

III. LEARNING ACTIVITIES

Watch the news about the debts of the Philippines due to loans amid pandemic.
Here’s the link: [Link]

As we experience the COVID-19 pandemic, our country’s debt breaks to ₱9T in June
2020 as our government borrows more from local and foreign sources for pandemic
response. Also, our country drops into recession as businesses close and develop
increased unemployment. If this will continue, what do you think will happen to our
economy? Will our country survive until the pandemic ends? Will our government be able
to pay the debts we have now?
 Economic globalization is the increasing of economies around the world through
the movement of goods, services, and capital across borders.

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. The most profitable products traded through this network
were silk, which was highly prized. The Silk Road was used from 130 BCE until 1453 BCE.
However, Silk Road was not truly “global” because it had no ocean routes that could reach the
American continent.
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 trade 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 Americans were directly connected to Asian trading routes.

Galleon trade route and a picture of the

galleon used.

The Silk Road

The galleon trade was part of the age of mercantilism. Mercantilism was an economic
system of trade that spanned from the 16th century to the 18th century. Mercantilism is based
on the principle that the world's wealth was static, and many European nations attempted to
accumulate the largest possible share of that wealth by maximizing their exports and by limiting
their imports via tariffs. Mercantilism was also a system of global trade with multiple restrictions.
A more open trade system emerged in 1867 following the lead of United Kingdom, United
States, and other European nations adopted the gold standard at an international monetary
conference in Paris. Its goal was to create a common basis for currency prices and fixed exchange
rate system on the value of gold. The gold standard was still a very restrictive system, as it
compelled countries to back their currencies with fixed gold reserves. During the World War 1,
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.
 Then the Great Depression started during the 1920’s and extended up to the 1930’s,
further emptying government funds. This depression was the worst and longest recession ever
experienced by the Western world. Some economist argued that this was caused by the gold
standard, since it limited the amount of circulating money and therefore, reduced demand and
consumption. Economic historian, Barry Eichengreen argues that the recovery of the United States
really began when they abandoned the gold standard. The US government was able to free up
money to spend on reviving the economy.
Today, the world economy operates based on what are called fiat currencies ---
currencies that are not backed by precious metals and whose values 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 it fit.

Gold Standard Fiat Currencies

The Bretton Woods System and Neoliberalism

The Bretton Woods System was inaugurated in 1944 during the United Nations Monetary
and Financial Conference to avoid the disasters of the early decades of the century from recurring
and affecting international ties. It was largely influenced by the ideas of the 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. Global
Keynesianism is the active role of the government in managing spending to reinvigorate
markets with infusions of capital when economies slow down.
Delegates at Bretton Woods created two financial institutions:
1. International Bank for Reconstruction and Development (IBRD or World Bank)
was responsible for funding postwar reconstruction projects.
2. International Monetary Fund (IMF) was to be the global lender of last resort to
prevent individual countries from increasing into credit crisis. If economic growth in a
country slowed down because there was not enough money to stimulate the economy,
the IMF would step in.

Shortly after the Bretton Woods, various countries also committed themselves to further
global economic integration through the General Agreement on Tariffs and Trade (GATT)
in 1947, whose main purpose was to reduce tariffs and other hindrances to free trade.
The high point of Global Keynesianism came in the mid-1940s to the early 1970’s.
Governments poured money into their economies, allowing people to purchase more goods and
increase demands for these products. As demand increased, so did the prices of these goods.
Western and Asian economies accepted this because of economic growth and reduced
unemployment.
 However in 1970, the prices of oil rose sharply as a result of the Organization of Arab
Petroleum Exporting Countries’ (OAPEC) 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. The “oil embargo” 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. The result
was a phenomenon called stagflation, in which a decline in economic growth and employment
(stagnation) takes place alongside a sharp increase in prices (inflation).
Economists 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. Then neoliberalism emerged. Neoliberalism is the
transfer control of economic factors from public sector to private sector. It became the codified
strategy of the US Treasury Department, World Bank, IMF, and World Trade Organization (WTO)
--- a new organization founded to continue the tariff reduction under the GATT.

Washington Consensus dominated the global economies from 1980s until early 2000s.
The advocates of the policies pushed for:
1. Minimal government spending to reduce government debt.
2. Privatization of government-controlled services like water, power, communications, and
transport, believing that free market can produce the best results.
3. Pressured governments to reduce tariffs and open up their economies, arguing that it is
the best way to progress.

Neoliberalism advocates US President Ronald Reagan and British Prime Minister Margaret
Thatcher justified it by comparing national economies to households. The problem with household
analogy is that governments are not households. Governments can print money while households
cannot. Also, governments’ taxation systems provide them easy flow of income that allows them
to pay and refinance debts steadily.

The Global Financial Crisis

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.
It can be traced back to the 1980s when the United States systematically removed various
banking and investment restrictions. 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 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.
They began extending loans to families and individual 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’
individuals and families who would struggle to pay, majority would not fail to pay. 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.
However in 2007, home prices stopped increasing. It slowly became apparent that families could
not pay off their loans. This triggered the rapid reselling of MBSs as banks and investors tried to
get rid of bad 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. 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, three of Iceland’s top commercial
banks defaulted. From 2007-2008, 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 which affected services like pensions, health care, and various
forms of social security, these cuts have been felt most acutely by the poor.

The global financial crisis will take decades to resolve. The world has become too integrated.
Whatever one’s opinion about the Washington Consensus is, it’s 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 US, Japan and the member
countries of the European Union were responsible for 65% of global exports, while the developing
countries only accounted for 29%. By 2011, developing countries like the Philippines, India, China,
Argentina, and Brazil accounted 51% of global exports while the share of the advanced nations
– including the United States – had gone down to 45%. The WTO-led reduction of trade barriers,
known as trade liberalization, has profoundly altered the dynamics of the global economy.
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
led to unprecedented reductions in tariffs and other trade barriers, but these processes have been
often unfair.
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 is Japan’s determined refusal to allow rice imports
into the country to protect its farming sector. Faced with this 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 government. 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
prevent wages from rising, while sacrificing social and environmental programs that protect the
underprivileged members of their societies. The term “race to 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).
 Answer the following.

1. What is economic globalization and how it facilitate the deepening of globalization?

2. Trace the history of the different global trading systems and construct a timeline citing
specific milestones.