2 Globalization of World Economics.pdf

II. Globalization z of World Economics Joshua Cedric Aquino Gundayao, MA, MOHRE z ECONOMIC GLOBALIZATION § The International Monetary Fund (IMF) regards "economic globalization" as a historical process representing the result of human innovation and techn...

II. Globalization z of World Economics Joshua Cedric Aquino Gundayao, MA, MOHRE z ECONOMIC GLOBALIZATION § The International Monetary Fund (IMF) regards "economic globalization" as a historical process representing the result of human innovation and technological progress. z ECONOMIC GLOBALIZATION § It is characterized by the increasing integration of economies around the world through the movement of goods, services, and capital across borders. § 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. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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). z INTERNATIONAL TRADING SYSTEM § 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. § While the Silk Road was international, it was not truly "global" because it had no ocean routes that could reach the American continent. z INTERNATIONAL TRADING SYSTEM § 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." z INTERNATIONAL TRADING SYSTEM § 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." z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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). z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § The stock markets crashed in 1973- 1974 after the United States stopped linking the dollar to gold, effectively ending the Bretton Woods system.' z INTERNATIONAL TRADING SYSTEM § The result was a phenomenon that Keynesian economics could not have predicted—a phenomenon called stagflation, in which a decline in economic growth and employment (stagnation) takes place alongside a sharp increase in prices (inflation). z INTERNATIONAL TRADING SYSTEM § Around this time, a new form of economic thinking was beginning to challenge the Keynesian orthodoxy. Economists such as Friedrich Hayek & 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. z INTERNATIONAL TRADING SYSTEM § What emerged was a new form of economic thinking that critics labeled neoliberalism. z INTERNATIONAL TRADING SYSTEM § 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 (WTO) —a new organization founded in 1995 to continue the tariff reduction under the GATT. z INTERNATIONAL TRADING SYSTEM § The policies they forwarded came to be called the Washington Consensus. Its advocates pushed for minimal government spending to reduce government debt. z INTERNATIONAL TRADING SYSTEM § 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. z INTERNATIONAL TRADING SYSTEM § Finally, they pressured governments, particularly in the developing world, to reduce tariffs and open up their economies, arguing that it is the quickest way to progress. z INTERNATIONAL TRADING SYSTEM § 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 with a steady flow of income that allows them to pay and refinance debts steadily. z The Global Financial Crisis and the Challenge to Neoliberalism § 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. z The Global Financial Crisis and the Challenge to Neoliberalism § The crisis can be traced back to the 1980s when the United States systematically removed various banking and investment restrictions. z The Global Financial Crisis and the Challenge to Neoliberalism § 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). z The Global Financial Crisis and the Challenge to Neoliberalism § One MBS would be a combination of multiple mortgages that they assumed would pay a steady rate. z The Global Financial Crisis and the Challenge to Neoliberalism § 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. z The Global Financial Crisis and the Challenge to Neoliberalism § 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. z 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. z Economic Globalization Today § 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. z Economic Globalization Today § Exports, not just the local selling of goods and services, make national economies grow at present. In the past, those who benefited the most from free trade were the advanced nations that were producing and selling industrial and agricultural goods. z Economic Globalization Today § 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. z Economic Globalization Today § 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 WTO-led reduction of trade barriers, known as trade liberalization, has profoundly altered the dynamics of the global economy. z Economic Globalization Today § In the recent decades, partly as a result of these increased exports, economic globalization has ushered in an unprecedented spike in global growth rates. z Economic Globalization Today § 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. z Economic Globalization Today § The series of trade talks under the WTO have led to unprecedented reductions in tariffs and other trade barriers, but these processes have often been unfair. z Economic Globalization Today § 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. z Economic Globalization Today § 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. z In a nutshell, § International economic integration is a central tenet of globalization. In fact, it is so crucial to the process that many writers and commentators confuse this integration for the entirety of globalization. As a reminder, economics is just one window into the phenomenon of globalization; it is not the entire thing. z In a nutshell, § Nevertheless, much of globalization is anchored on changes in the economy. Global culture, for example, is facilitated by trade. Filipinos would not be as aware of American culture if not for the trade that allows locals to watch American movies, listen to American music, and consume American products. z In a nutshell, § 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. z In a nutshell, § Given the stakes involved in economic globalization, it is perennially important to ask how this system can be made more just. Although some elements of global free trade can be scaled back, policies cannot do away with it as a whole. z In a nutshell, § 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.