ECONOMIC GLOBALIZATION Chapter II.

Unit 1

___________________________________________________________________________
_

Chapter II. Unit 1

GLOBAL ECONOMY
Objectives
___________________________________________________________________________
__
1. To define economic globalization
2. To identify the actors that facilitate economic globalization
3. To explain the role of international financial institutions in the
creation of a global economy
___________________________________________________________________________
_

UNIT 1: Global Economy

The intensification of economic integration of nation-states marks

the creation of world economy. As emphasized by globalists, market is
one of the major driving forces of globalization. Thus, one of the
identified processes of the said phenomenon is economic globalization.

I. Definition of economic globalization

The following are definition of economic globalization by renowned
scholars and entities:

• It is a historical process, the result of human innovation and

technological progress. It refers to the increasing integration of
economies around the world, particularly through the movement of
goods, services, and capital across borders. The term sometimes
also refers to the movement of people (labor) and knowledge
(technology) across international borders (International Monetary
Fund, 2008).
• It is a functional integration between internationally dispersed
activities (Dicken, 2004).
• In economic terms, globalization is nothing but a process making
the world economy an organic system by extending transnational
economic processes and economic relations to more and more
countries and by deepening the economic interdependencies
among them (Szentes, 2003).
• It is an increase in the extensity, intensity and velocity of
intercontinental exchanges with a clear and direct economic impact
(David Held, Anthony Mcgrew, D. Goldblatt and J. Perraton, 1999).

THE CONTEMPORARY WORLD Page 1 of

ECONOMIC GLOBALIZATION Chapter II. Unit 1

II. Dimensions of economic globalization (Istvan Benczes, 2014)

1. globalization of trade of goods and services

2. globalization of financial and capital markets
3. globalization of technology and communication
4. globalization of production

III. History of economic globalization

The beginning of globalization is still debatable among scholars.

Historians and non-historians hold varying views as to when globalization
really started. These varying thoughts are individually discussed by Peer
Vries in his study, “A brief history of economic globalization since
Columbus”.

Here are some of the renowned scholars and their individual

insights regarding the early beginnings of economic globalization:

1. Andre Gunder Frank and Barry Gills. They contend that the
connected world stretches back at least 5,000 years. According
to them capital accumulation, centre-periphery relations, the
alternation between hegemony and rivalry and economic cycles
with alternating ascending and descending phases, are not fairly
recent phenomena but go back for thousands of years in world
history. Frank even claims that there was a single global world
economy with a worldwide division of labour and multilateral
trade from 1500 onward (Frank 1998, cited by O’Rourke and
Williamson 2002).
2. John Hobson. According to him, globalization existed as early
as the 6th century “as significant flows of goods, resources,
currencies, capital, institutions, ideas, technologies and peoples,
flowed across regions to such an extent that they impacted
upon, and led to the transformation of societies across much the
globe”.
3. Samuel Adshead. For him, a continuous world history began
with the creation of the largest contiguous land empire in
history, the Mongolian Empire that existed during the 13th and
14th centuries.
4. Peter Frankopan. In his popular book on the silk roads, he
claimed that there already was a connected world during what
Westerners use to call the Middle Ages and that its centre was
in Central Asia.
5. Janet Abu-Lughod. She assumed the existence of a network of
globally interconnected trade before the early modern age
(1450s-1850s). She, however admits that compared to the
contemporary epoch, 13th century international trade and the
production associated with it was neither large nor

THE CONTEMPORARY WORLD Page 2 of

ECONOMIC GLOBALIZATION Chapter II. Unit 1

technologically advanced and that its exchanges were

minuscule.
6. Adam Smith. He considered the discovery of America, and that
of a passage to the East Indies by the Cape of Good Hope, as the
two greatest and most important events recorded in the history
of mankind.
7. Karl Marx. According to him, world trade and world market
date from the 16th century, and from then on, the modern
history of capital starts to unfold.
8. Dennis Flynn and Arturo Giraldez. They claim that
globalization began in 1571, when Manila became a Spanish
stronghold connecting the Atlantic and the Pacific. They focus
strongly on global trade flows, in particular of bullion.
9. Pierre and Huguette Chaunu. They suggest that between
1500 and 1650 the Carrera de las Indias, the sea routes over the
Atlantic Ocean that connected the different parts of the Spanish
Empire, established the first outline, however rough, of a world
economy (Vries 2017).

IV. World Economy: The Concept of Divergence and Divergence

Aside from tracing the origins of economic globalization, the ideas

of Wallerstein, Frank and O’Rourke and Williamson introduced the
concept of a fully integrated world economy which consequently
established the roots of divergence and convergence.

1. Immanuel Wallerstein. According to him a European capitalist

world-economy, “the modern world system”, came into existence during
the late 15th and early 16th century. This world economy was distinctly
modern and capitalist, which means it thrived on ceaseless accumulation
of capital. It is a world-system not because it encompasses the whole
world but because it is larger than any juridically-defined political unit
and a ‘system’ because it is largely self-contained and the dynamics of its
development are largely internal. He calls it a ‘world-economy’ because
the basic linkage between the parts of the system is economic.

This modern world system according to him has three constituent

parts. They are as follows:

• Core - the part of the system where free, often

skilled labour produces goods with high added value in
strong states.
• Periphery - that part of the system where production is
primarily of lower- ranking goods that have less added
value but are essential for daily use in the core and that are
produced predominantly by unfree, unskilled, less well
remunerated labour. The polities (states/governments) in

THE CONTEMPORARY WORLD Page 3 of

ECONOMIC GLOBALIZATION Chapter II. Unit 1

the periphery tend to be weak and have a strong export

orientation.
• Semi-periphery - that part of the system that is in
between the core and the periphery on a series of
dimensions.

Wallerstein considered Western Europe as the core of the

European world economy. In the 16th and 17th century, the core
included parts of Central and Eastern Europe, parts of the Americas and
the West Indies, parts of Africa and some parts of Asia. He and his
followers believe that with the division of labour in the modern world
system, the core regions developed at the cost of the periphery. This view
introduced the idea of the Great Divergence (Vries 2017). This pertains
to structural patterns of unequal change as reflected in social division of
labor and global inequalities.

2. Andre Gunder Frank. Frank on the other hand believed that a

global economy encompassing the entire globe and functioning as a fully
integrated, autonomous system, with a logic of its own, predated the
early modern era (1450s-1850s). He analyzed this autonomous system by
focusing on trade, particularly on the flows of precious metals. In his
analysis, he concluded that at the time Asia, particularly China, was the
global economy’s centre since it functioned as the big depository of
precious metals. In contrast to Wallerstein’s view, Frank claims that
Europe’s role in the global economy was marginal. He further
emphasized that Asia was the big global silver sink during the early
modern era (Vries 2017).

3. Kevin H. O’Rourke and Jeffrey G. Williamson. Both

economists define globalization as the integration of international
commodity markets. They believe that the absence of transport costs and
trade barriers, international commodity markets would be perfectly
integrated: prices would be the same at home and abroad. In their
analysis of the factors affecting the flow of international commodity
markets, they concluded that the only irrefutable evidence that
globalization is taking place is a decline in the international dispersion of
commodity prices or what might be called commodity price convergence
(O’Rourke and Williamson, 2002).

V. three distinct eras of commodity exchange and specialization

(O’Rourke and Williamson)
Period Description Price convergence

THE CONTEMPORARY WORLD Page 4 of

ECONOMIC GLOBALIZATION Chapter II. Unit 1

Pre-18th Century Long distance trade Since their presence Causes:

in this period is to or absence in Europe high transportation
non-competing goods had impact only on costs
* non-competing the living standards economic
goods - goods which of the very rich and nationalism of the
are not or hardly little on domestic 17th and 18th
found in the production, price centuries
respective territories convergence is not monopolized trade
of Asia and Europe possible in this era

Early 19th Century beginning of the of price commodity Causes:

trade in ‘basic’ convergence is Decline in
competing goods evident in this era transportation costs
Gradual fall of trade
barriers worldwide

Present Era trade in both basic High price Cause:

and highly commodity Free trade
differentiated convergence
manufactured
commodities

VI. International Monetary Systems

As transnational transactions intensified in the 19th century, there

was also a need to set norms to ease trade processes among nation-
states. This propelled the promulgation of international monetary system
or regime (IMS). IMS refers to the rules, customs, instruments, facilities,
and organizations effecting international payments (Salvatore, 2007).
Benczes (2014) emphasized in his publication that the main task of IMS
is to facilitate cross-border transaction, especially trade and investment.

1. The Gold Standard

The early 19th century is not only the ‘big bang of globalization’ as
claimed by O’Rourke and Williamson but also the beginning of the first
modern-day international monetary system/regime. This century also
witnessed the dominance of the British government and the worldwide
advance of British companies. Since United Kingdom was the
predominant global economy of the time, it adopted gold mono-metallism
in 1821. Although ancient societies such as Mesopotamia and Egypt
already used gold as means of economic exchange, United Kingdom’s
adoption of the gold standard facilitated transnational transactions
around the globe. Gradually, the gold standard was adopted by more and
nations after the International Monetary Conference in Paris in 1867.
Before the outbreak of World War I, roughly 70% of the nations
participated in the gold standard (Meissner, 2005). In following gold
standard as the new regime for cross-border transactions, nations
believed that ‘gold would guarantee a non-inflationary, stable economic

THE CONTEMPORARY WORLD Page 5 of

ECONOMIC GLOBALIZATION Chapter II. Unit 1

environment, as means for accelerating international trade’ (Einaudi,

2001).

‘In practice, the gold standard functioned as a fixed rate regime,

with gold as the only International reserve. Participating countries
determined the gold content of national currencies, which in turn defined
fixed exchange rates (or mint parities) as well’ (Benczes, 2014). Although
the new regime created stability in foreign exchange markets and
provided nations an almost unlimited access to world finance, it came to
an end at the outbreak of World War I. ‘Participating nations gave up
convertibility and abandoned gold export in order to stop the depletion of
their national gold reserves’ (Benzces, 2014).

2. The Bretton Woods System

The results of World War I coupled with consequences of universal

suffrage (laborers managed to influence domestic politics) made
governments reluctant to defend a pegging system at any cost (Benzces,
2014). This, however, did not last long after July 1944 when the United
Nations Monetary and Financial Conference took place in Bretton Woods,
New Hampshire. In here, allied nations started to negotiate on the new
international monetary regime. In this conference, delegates of 44
countries managed to agree on the following:

• adopting an adjustable peg system, the gold exchange standard

(which was based on US dollar since it is the only convertible
currency of the time); and the
• establishment of two international institutions: a) the
International Banks for Reconstruction and Development (IBRD)
which is responsible for post-war reconstruction; and b) the
International Monetary Fund which has the mandate to promote
international financial cooperation and buttress International
trade (Benczes 2014).

Despite a fixed exchange rate based on the US dollar, the Bretton

Woods Agreement ran into challenges in the early 1970s. The US trade
balance had turned to a deficit as Americans were importing more than
they were exporting. Gradually, countries loss faith on the ability of the
US government to convert all dollars in global circulation to gold.
Eventually, nations began demanding gold in exchange of their dollars.
This resulted to a huge global sell-off of the US dollar (International
Business, v.1.0). This prompted United States to abandon the gold-
exchange standard in 1971.

Despite efforts to return to a controlled exchange rate mechanism

under the Smithsonian Agreement which devalued the US currency,
industrialized countries failed to stabilize world finances. ‘By 1973, the
idea of fixed exchange rates was over (International Business, v.1.0).

THE CONTEMPORARY WORLD Page 6 of

ECONOMIC GLOBALIZATION Chapter II. Unit 1

In response to the fall of Bretton Woods Agreement,’industrialized

countries decided to float their currencies in early 1973. Longer-term
prices of currencies were determined by demand and supply forces
exclusively (Benczes, 2014). ‘In 1976, countries met to formalize a
floating exchange rate system as the new international monetary system’
(International Business, v.1.0). This came to be known as the Jamaica
Accords/Agreement.

‘Managed floating, however, did not perform any better. In 1987,

the Louvre Accord was drawn up in order to defend the dollar from
further devaluation on the markets’ (Benczes, 2014). Although United
States might have benefited from the Louvre Accord, others became
losers from these coordinated actions, one of which was Japan.

The 1990s however, showed a different situation. The triumph of

the neo-liberals through the Washington Consensus impelled countries to
liberalize their markets. The free market ideology of the Washington
Consensus resulted to unregulated and free flow of capital. Despite its
introduction in the late 1980s and early 1990s, no new formal system has
replaced the Bretton Woods.

REFERENCES:

Benczes, I. (2014). The globalization of economic relations. SAGE

Publications Ltd.

Discken, P. (2004). Global shift. Reshaping the global economic map in

the 21st century. London: SAGE

Einaudi, L. (2001). Money and politics: European monetary unification

and the international monetary gold standard, 1865-1973.
Oxford: Oxford University Press.

Held, D., McGrew A., Goldblatt, D. et. al. (1999). Global transformations:
Politics, economics, and culture. Stanford, CA: Stanford
University Press.

Meissner CM (2005). A new world order: Explaining the international

diffusion of the gold standard. Journal of International
Economics.

O’Rourke, K. and Williamson, J. (2002). When did globalization begin?

European Review of Economic History. Cambridge: Cambridge
University Press.

THE CONTEMPORARY WORLD Page 7 of

ECONOMIC GLOBALIZATION Chapter II. Unit 1

Salvatore, D. (2007). International economics. Hoboke: John Wiley & Son.

Szentes, T. (2003). World economics 2. Budapest Akademiai Kiado.

Triffin, R. (1964). The evolution of the International Monetary System:

Historical reppraisal and future perspectives. International
Finance Section. Princeton: Princeton University.

Vries, P. (2017). A brief History of Economic Globalization since

Columbus. International Institute of Social History.
Available at [Link]

([Link]
international-monetary- [Link]). (accessed 08
December 2018).

Effects of Technological Developments on Globalization Process.

Available at http:// [Link].(accessed 05
January 2019).

Following the Money: U.S. Finance in the World Economy (1995). The
National Academics of Sciences, engineering and Medicine.
Available at [Link] (accessed 05 January 2019).

Islam, R. (2015). Globalization of Production, Work and Human

Development: Is a Race to the Bottom Inevitable?.United
Nations Development Programme: Human Development Reports.
Available at [Link] 05 January 2019).

LEARNING ACTIVITY

CONVERGENCE VS. DIVERGENCE

Instructions:
The class will be divided into groups (each group must be
composed of five members). The students will have to:

1. Roam around the building and pick some objects that are usually
seen in the market, and do the following:

• Classify the objects as a. locally-produced-and-traded; b. Locally-

produced-and internationally-traded; or c. Internationally-
produced and traded.

THE CONTEMPORARY WORLD Page 8 of

ECONOMIC GLOBALIZATION Chapter II. Unit 1

• For the locally and internationally produced and traded products,

they have to research from the internet whether their prices vary
from one country to another.
• Using the same objects (the ones mentioned in the previous
item), they have to determine whether they are competing or
non-competing products.

2. Make a summary of the initial tasks in the form of a matrix.

3. Discuss the output in the class.

Rubric for the Learning Activity

Integration of lessons/concept discussed in 15

class

Additional research related to the topic 10

Clarity of points 5
Total 30

ASSESSMENT

LONG QUIZ

THE CONTEMPORARY WORLD Page 9 of

ECONOMIC GLOBALIZATION Chapter II. Unit 1

THE CONTEMPORARY WORLD Page 10 of