Lesson 3 Global Market Integration PDF

MODULE 1: The Structures of Globalization At the end of this Module, the student will be able to analyze the various drivers of globalization, and describe the emergence of...

MODULE 1: The Structures of Globalization At the end of this Module, the student will be able to analyze the various drivers of globalization, and describe the emergence of global economic and political systems. Lesson 3: Global Market Integration At the end of the lesson, students should be able to: 1. Define economic globalization 2. Identify the actors that facilitate economic globalization 3. Narrate a short history of global market integration in the 20th century; 4. Articulate your stance on global market integration Global Market Integration 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. What is economic globalization? It is defined as a historical process representing the result of human innovation and technological progress (IMF) 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. Keywords: Integration of economies 1|Page Rhizza Mae Lumiares Asoy  Brief History of Development of Economic Integration: International Trading System: Silk Road It is the oldest known ‘international trade route. It is a network of pathway in the Ancient world that spanned from China to what is now the Middle East and to Europe. The silk road was international, but was not truly ‘global’ because it had no ocean routes that could reach the American Continent. Age of Globalization: When did full economic globalization began? According to historians Dennis O. Flynn and Arturo Giraldez, economic globalization begun 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.” Development of economic integration: 1. The Establishment of Galleon Trade in 1571 and the Age of Mercantilism a. According to Flynn and Giraldez, the establishment of the Galleon Trade was the first truly global economic connection. b. It is because it is the first time in recorded For Filipinos, it is crucial to note that economic history that trade routes have connected Asia globalization began on the country’s shores. and the American continent. c. The galleon trade was part of the Age of Mercantilism. i. From 16th – 18th century, European superpowers have competed with one another to sell more gods as means to boost their country’s income (called monetary reserves later on). ii. To protect their products who sold more goods cheaply, these regimes: 1. Imposed high tariffs a. Tariffs – tax imposed on goods coming in or leaving a country 2. Forbade colonies to trade with other nations 3. Restricted trade routes 4. Subsidized its exports 2|Page Rhizza Mae Lumiares Asoy  d. Mercantilism was thus also a system of global trade but with multiple restrictions. 2. Trial and Error: The early roots of global exchange system In 1867, a more open trade system emerged following the lead of UK, US, and other European nations, this new system was the Gold Standard. The Gold Standard It is a monetary system in which paper money is freely convertible to gold. In other words, gold back up the value of money. Currency = The goal was to create a common system that would allow for more efficient trade and prevent the isolationism of the mercantilist era. The Gold Standard was still a very restrictive system as it compelled countries to backed their currencies with fixed gold reserves. The gold standard system was abolished by many during the WW1, when countries depleted their gold reserved to fund their armies. 3. The Great Depression – towards Fiat Currencies. The Great Depression 3|Page Rhizza Mae Lumiares Asoy  This was the worst and longest recession ever experienced by the western world that lasted for 10 years. A recession is a business cycle contraction when there is a general decline in economic activity. It generally occurs when there is a widespread drop in spending. What’s the possible cause? Some economist argues that it was 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. Though more indirect versions of gold standard were used until as late as 1970s, the world never returned to gold standard of the early 20th century. Fiat Currencies The world economy operates based on what are called fiat currencies – currencies that are not backed by precious metals and whose values are determined by their cost relative to other currencies. This system allows governments to freely and actively manage their economies by increasing and decreasing the amount of money in circulation as they see fit. Why can’t the government print more money? 1. To avoid inflation. If there are too much money in circulation, prices will rise causing inflation and the money will eventually be devalued. 4. The Bretton Woods System Why was the Bretton Woods System created? To create a global economic system that would ensure a longer lasting global peace following the two (2) world wars. Originally, it is designed to prevent another Great Depression and advance the economic interests of the US. When, where and who are involved on the establishment of the system? In was inaugurated on July 1944 at Bretton Woods, New Hampshire, USA (thus the name) where forty-three (43) countries took part in the creation of the system. How did the Bretton Woods System work? 1. Keynesianism – Bretton Woods primary economic thinking. This economic thinking was formulated by John Maynard Keynes According to Keynes, economic crises occurs when countries when countries don’t actively spend money not the lack of money. When economies slow down, governments have to reinvigorate markets with infusions of capital. 4|Page Rhizza Mae Lumiares Asoy  Global Keynesianism – the active role of governments in managing spending. 2. Global Exchange Rate System It is the first system used to control the value of money between different countries. It meant that each country had have to have a monetary policy that kept the exchange rate of its currency within a fixed value – plus or minus 1% - in terms of gold. The Bretton Woods System created two (2) financial institutions: 1. The International Bank for Reconstruction and Development (IBRD), later called as World Bank. As IBRD, it shall be responsible for funding postwar reconstruction projects. As World Bank, its main function is to offer long-term loans and assistance to developing countries. 2. International Monetary Fund (IMF) 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. When did the Bretton Woods System collapsed? The system dissolved between 1968 and 1973, when US President Richard Nixon announced the temporary suspension of the dollar’s convertibility to gold, rendering the dollar a fit currency. General Agreement on Tariffs and Trade (GATT), 5|Page Rhizza Mae Lumiares Asoy  GATT was established in 1947 (shortly after the Bretton Woods system), where various countries also committed themselves to further global economic integration. Its main purpose was to reduce tariffs and other hindrances to free trade. In1995, the agreement was later made into an organization called. World Trade Organization. 5. Neoliberalism and its Discontents What happened in the mid-1940 to early 1970s? 1. Overspending causing inflation– Government poured money into their economies (following Keynesianism), allowing people to purchase more goods and, in the process, increase demand for these products. As demand increase, so are the prices of these goods. 2. Yom Kippur War – In the early 1970s, the process of oil rose sharply as a result of the OAPEC (Organization of Arab Petroleum Exporting Countries Imposition of an embargo in response to the decision of the US and other countries to resupply the Israeli military with the need of arms during the Yom Kippur War. It has affected Western economies that were reliant on oil. 3. Crash of Stock Market – in 1973 – 1974, the stock market crashed after US stopped linking the dollar to goals, effectively ending the Bretton Woods System Following these events, the world experienced severe STAGFLATION (in which a decline in economic growth and employment (stagnation) takes place alongside a sharp increase in prices (inflation). What caused the STAGFLATION according to economists Friedrich Hayek and Milton Friedman? They argued: 1. The government’s practice of pouring money into their economies had caused inflation by increasing demand for goods without necessarily increasing supply. This challenged the consensus to Keynesianism. 2. The government’s intervention in economies distort the proper functioning of the market. Neoliberalism: A belief in Free Market Neoliberalism is a belief on free market. Its principles point to reduced government spending, deregulation, globalization, free trade, and privatization. The main characteristics of neoliberalism are as follows: 6|Page Rhizza Mae Lumiares Asoy  1. Privatization – Every service could/should be private. Industries such as energy, water, transportation, hospitals, banks, schools, etc. should be privatized. 2. Deregulation – Free Trade “Let businesses be free” with little government intervention. 3. Reduced Government Spending Washington Consensus: Neoliberalism became the codified strategy of the US Treasury Department, the World Bank, the IMF, and the WTO which was called Washington Consensus. It has dominated global economic policies from the 1980s until the early 2000s. Its advocates pushed for: 1. Minimal government spending to reduce government debt. 2. Privatization of government-controlled services like water, power communications, and transport. 3. They pressured developing countries to reduce tariffs and open up their economies. 6. The Global Financial Crises and the Challenge to Neoliberalism Neoliberalism came under significant strain during the global financial crises of 2007- 2008. What’s the story before the financial crises occurred? In 1980s, the US systematically removed various banking and investment restrictions. The scaling back of regulations continued until the 2000s paving the way for a brewing crises. In their attempt to promote the free market, government authorities failed to regulate bad investments occurring in the US housing market. Taking advantage of the “cheap housing loans”, Americans began building houses that were beyond their financial capacities. 7|Page Rhizza Mae Lumiares Asoy  To mitigate the risk of these loans, banks that were lending house owner’s 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 in circulating, the demand for MBS 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 individuals with dubious credit records – people who were unlikely to pay their loans back. These high- risk mortgages became known as “sub-prime mortgages”. What went wrong? Financial experts wrongly assumed that: 1. Even if many of the borrowers were individuals and families who would struggle to pay, majority would not default, 2. Banks thought that since there were so many mortgages in just one MBS, a few failures would not ruin the entirety of the investment. 3. Banks also assumed that housing prices would continue to increase. Therefore, even if homeowners could simply reacquire the homes and sell them at a higher price, turning a profit. What happened? In 2007, the home prices stopped The individuals could no longer pay off increasing as supply caught up with their loans. demand. This triggered the rapid reselling of MBSs, as banks and investors tried to get rid of their bad investments! 8|Page Rhizza Mae Lumiares Asoy How did it affect the US Economy and the economies of World? In September 2008, the Lehman Brothers collapsed (US major investment banks) collapsed, depleting major investments. These series of interconnections allowed for a global multiplier effect that sent ripples across the world. 1. Iceland’s banks depended on foreign capital, so when the crises hit them, they failed to refinance their loans. As a result, its top commercial banks defaulted. Its debts increased more than seven-fold in 2007-2008. 2. Spain and Greece (almost like 3rd world countries), are heavily indebted, and debt relief come at a high price. 3. Greece has been forced by Germany and IMF to cut back on its social and public spending. 4. In Europe, the economic crises have sparked a political upheaval. Meanwhile, the US relatively recovered thanks to a large Keynesian-style stimulus package that President Obama implemented. 9|Page Rhizza Mae Lumiares Asoy  ECONOMIC GLOBALIZATION TODAY The world had become too integrated, including the economies. The following are the clear manifestations of the economic integration of the world: Exports Exports (to send a product to be sold in another country), not just local selling of goods and services make national economies grow at present. Trend of Global Trade Today: Exports, Markets Trade liberalization (the WTO-led reduction of trade barriers) has profoundly altered the dynamics of the global economy. Trade in goods exceeded its pre-COVID-19 level and reached US$9.6 trillion. Trade in services, however, still falls short of pre-pandemic levels, despite estimated 16.7 per cent growth in 2021 (based on UNCTADstat, see UNCTAD, 2022b). In 2020, developing economies shipped most of their exports to the United States of America (US$1.4 trillion), China (US$1.1 trillion) and other Asian economies. In the last twenty years, China has become a major player in global trade. Its share in world exports of goods increased from 4 per cent in 2000 to 15 in 2021. To compare, the share of the United States of America in global exports of goods amounted to 8 per cent, Germany to 7 per cent, and Japan to 3 per cent in 2021. Between 2000 and 2021, China’s share of total imports of goods expanded rapidly from 3.4 per cent to almost 12 per cent. However, economic globalization remains an uneven process. With some countries, corporations, and individuals benefitting a lot more than others. 1. Protectionist policies and trade imbalances Developed countries such as the US and Japan are often protectionists as they repeatedly refuse to lift policies that safeguard their primary products that could 10 | P a g e Rhizza Mae Lumiares Asoy  otherwise be overwhelmed by IMPORTS (to bring a product into a country to be sold) from the DEVELOPING COUNTRIES. For example: 1. Japan’s determined refusal to allow rice imports into the country to protect its farming sector, on the rhetoric that rice is sacred and needs to be protected. 2. US fiercely protects its sugar industry, forcing consumers and sugar- dependent businesses to pay higher prices instead of getting cheaper sugar from plantations from Central Americas. Since developed countries are often protectionists, and developing countries are more open in terms of trade, the latter is most infringed among the two. 2. Race to the bottom 1) TNCs are the primary beneficiaries of global commerce. And, it is a fact that they are more concerned with profit than with assisting social programs of the governments hosting them. 2) 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. Race to the Bottom (n.) – refers to countries’ lowering their labor standards, including the protection of worker’s interests, to lure in foreign investors seeking high profit margins at the lowest cost possible. The Rana Plaza disaster in Bangladesh in 2013 The Rana Plaza disaster in Bangladesh in 2013 was an example of the perils of this approach. On the back of low wages and cheap costs to set up shop, Bangladesh had become the world's second-biggest garment manufacturing center. The Rana Plaza building in Dhaka was a garment factory that violated several building codes of local laws. But enforcement of those codes was lax, resulting in a collapse that killed 1,000 workers. 11 | P a g e Rhizza Mae Lumiares Asoy  Conclusion 1. International Economic Integration is a central tenet of globalization. o It is crucial to the process that many writers and commentators confuse this integration for the entirety of globalization. o Again, economics is just one window into the phenomenon of globalization; it is not the entire thing. 2. Nevertheless, much of globalization is anchored on changes in the economy. o For example, global culture is facilitated by trade. Filipinos wouldn’t be aware of the American or Korean culture if not for the trade that allows locals to watch American or Korean movies, music, and products. o The globalization of politics is likewise largely contingent on trade relations. These days, many events of foreign affairs are conducted to cement trading relations between and among states. 3. How to make this system just? o In terms of trade, trade must be fair and just. o Governments should also devise a way of cushioning the most damaging effects of economic globalization, while ensuring that its benefits accrue to everyone. 12 | P a g e Rhizza Mae Lumiares Asoy