Globalization of World Economics PDF

The Globalization of World Economics At the end of this lesson, you should be able to:  Define economic globalization;  Identify actors that facilitate economic globalization;  Narrate a short history of global market integration in the twentieth century What is ECONOMIC GLOBALIZAT...

The Globalization of World Economics At the end of this lesson, you should be able to:  Define economic globalization;  Identify actors that facilitate economic globalization;  Narrate a short history of global market integration in the twentieth century What is ECONOMIC GLOBALIZATION?  According to International Monetary Fund, “economic globalization” is a historical process representing the result of human innovation and technological progress. What is ECONOMIC GLOBALIZATION?  Itis characterized by the increasing INTEGRATION OF ECONOMIES around the world through the MOVEMENT OF GOODS, SERVICES, and CAPITAL ACROSS BORDERS. Drastic Economic Change  WorldGDP increased from 42.1% in 1980 to 62.1% in 2007.  Theamount of foreign direct investments flowing across the world was US$ 57 billion in 1982. By 2015, that number was US$ 1.76 trillion. Drastic Economic Change  Increased trade means that investments are now moving all over the world at faster speeds.  These figures represent a dramatic increase in global trade in the span of just a decade. Drastic Economic Change  These days, supercomputer can execute millions of stock purchases and sales between different cities in a matter of seconds through a process called high-frequency trading.  Ten years ago, buying books or music indicates acquiring physical items. Today, books and music albums can be downloaded using mobile phones. Think about this…..  How economic globalization came about?  Who benefits from it and who is left out? International Trading System The oldest known international trade route was the SILK ROAD. SILK ROAD is a network of pathways in the ancient world that spanned from China to what is now the Middle East and to Europe. International Trading System Traders used the Silk Why named it as “SILK” Road regularly from 130 road? It was called as BCE when the Chinese such because one of the Han Dynasty opened most profitable products trade to the West until traded through this 1453 BCE when the network was silk. Ottoman Empire closed it. International not global The Silk Road was international, however, it was not truly global because IT HAD NO OCEAN ROUTE that could reach the American continent. SO, WHEN DID FULL ECONOMIC GLOBALIZATION BEGIN? Beginning of Economic Globalization  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.”  When this happened? Galleon Trade as first instance of ECONOMIC GLOBALIZATION This was the first Galleon trade time that the connected Manila Americans were in the Philippines directly connected and Acapulco in to Asian trading Mexico. routes. Age of Mercantilism In the 16th century to 18th century, countries, primarily in Europe, competed with one another to sell more goods as a means to boost their country’s income (monetary reserves). To defend their products from competitors who sold goods more cheaply, these regimes imposed HIGH TARIFFS, FORBADE COLONIES TO TRADE WITH OTHER NATIONS, RESTRICTED TRADE ROUTE, and SUBSIDIZED ITS EXPORTS.  Mercantilism was Age of thus also a system Mercantilis of global trade with m multiple restrictions. Gold Standard In 1867, the United Kingdom, the United States, and other European nations adopted the gold standard at an international monetary conference. Its goal was to create a common system that would allow for more efficient trade and prevent the isolationism of the mercantilist era. Gold Standard Despite facilitating The countries thus simpler trade, the gold established a common standard was still A VERY basis for currency prices RESTRICTIVE SYSTEM, as and a fixed exchange it compelled countries to rate system- ALL BASED BACK THEIR CURRENCIES ON THE VALUE OF GOLD. WITH FIXED GOLD RESERVES. Gold Standard The Great Depression During World War I, when started in 1920s and countries depleted their extended up to 1930s, gold reserves to fund their emptied the government armies, many were forced coffers. It was the worst to abandon the gold and longest recession standard. experienced by the Western World. Gold Standard  Some economists argued that the Great Depression was largely 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. Fiat Currencies  Today, the world economy operates based on what are called the FIAT CURRENCIES- currencies that are not backed by precious metal and whose value is determined by their cost relative to other currencies. Fiat Currencies  Thissystem allows governments to freely and actively manage their economies by increasing or decreasing the amount of money in circulation as they see fit Bretton Wood System  After the two world wars, world leaders sought to create a GLOBAL ECONOMIC SYSTEM that would ensure a longer-lasting GLOBAL PEACE.  They believe that one of the ways to achieve this goal was to set up a NETWORK OF GLOBAL FINANCIAL INSTITUTION that would promote ECONOMIC INTERDEPENDENCE and PROSPERITY. Bretton Wood System  Itwas inaugurated in 1944 during the United Nations Monetary and Financial Conference to PREVENT THE CATASTROPHE of the early decades of the century from reoccurring Bretton Wood System  Itwas largely influenced by the ideas of British economist JOHN MAYNARD KEYNES.  He 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. Bretton Wood System According to Keynes, when economies slow down, GOVERNMENTS HAVE TO REINVIGORATE MARKETS with INFUSION CAPITAL. This active role of governments in MANAGING SPENDING served as the anchor for what would be called a system of GLOBAL KEYNESIANISM. Bretton Wood System  Delegates at Bretton Woods agreed to create TWO FINANCIAL INSTITUTIONS.  The first was the INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD, or WORLD BANK) to be RESPONSIBLE FOR FUNDING POSTWAR RECONSTRUCTION PROJECTS. Bretton Wood System  The second institution was the INTERNATIONAL MONETARY FUND (IMF), which was to be the GLOBAL LENDER of LAST RESORT to PREVENT INDIVIDUAL COUNTRIES from SPIRALING into GATT Shortly after the Bretton Woods, various countries also committed themselves to further global economic integration through GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) in 1947. GATT’s main purpose was to REDUCE TARIFFS and OTHER HINDRANCES to FREE TRADE. Global Keynesianism  Thehigh point of Global Keynesianism came in the mid-1940s to the early 1970s.  During this period, governments poured money into their economies, allowing people to purchase more goods, and in the process, increase demand for these products. Global Keynesianism  As demand increased, so did the prices of these goods.  Western and some Asian economies like Japan accepted this rise in prices because it was accompanied by general economic growth and Global Keynesianism The theory went that, as Keynesian economists prices increased, believed that all this companies would earn more, and would have was a necessary more money to hire trade-off for economic workers. development. The end of Global Keynesianism  In the early 1970s, however, the prices of oil rose sharply as a result of the OAPEC’s (ORGANIZATION OF ARAB PETROLEUM EXPORTING COUNTRIES) imposition of an embargo in response to the decision of the United States and other countries to resupply Israeli military with the needed arms during the Yom Kippur War. The end of Global Keynesianism Arab countries also used the embargo to stabilize their economies and growth. The “oil embargo” affected the Western economies that were reliant on oil. The end of Global Keynesianism  To make matters worse, the stock market 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 sharp increase in prices (inflation). Neoliberalism and its discontent  Economists such as Friedrich Hayek and Milton Friedman argued that governments’ practice of pouring money into their economies had caused inflation by increasing demand for goods without necessarily increasing supply.  They argued that government intervention in economies distort the proper functioning of the market. Neoliberalism and its discontent What emerged was a new form of economic thinking that critics labeled NEOLIBERALISM. 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 GATT. Neoliberalism and its discontent The policies they forwarded came to be called the WASHINGTON CONSENSUS. The Washington Consensus dominated global economic policies from the 1980s until the early 2000s. Neoliberalism and its discontent Its advocates pushed for They also called for the PRIVATIZATION OF GOVERNMENT- MINIMAL GOVERNMENT CONTROLLED SERVICES like water, SPENDING TO REDUCE power, communications, and transport, believing that the FREE GOVERNMENT DEBT. MARKET can produce the BEST RESULTS. Neoliberalism and its discontent They pressured governments, particularly in DEVELOPING WORLD, to REDUCE TARIFFS and OPEN UP THEIR ECONOMIES, arguing that it is the quickest way to PROGRESS. Advocates of the Washington Consensus conceded that, along the way, certain industries would be affected and die, but they considered this “shock therapy” necessary for long-term economic growth. The Appeal of Neoliberalism  Neoliberalism advocates like US President Ronald Reagan and British Prime Minister Margaret Thatcher justified their reduction in government spending by comparing national economies to households.  Thatcher, in particular, promoted an image of The Appeal of Neoliberalism The problem with the household analogy is that governments are not households. Governments can print money, while households cannot. Moreover, the constant taxation system of governments provide them a steady flow of income that allows them to pay and refinance debts steadily.  Is neoliberalism a success? The Russian Case.  After communism had collapsed in the 1990s, the IMF called for the immediate privatization of all government industries in Russia.  The IMF assumed that such a move would free these industries from corrupt bureaucrats and pass them on independent private investors.  Only individuals and groups who had accumulated wealth under the previous communist order had the money to purchase these industries. The Global Financial Crisis and the Challenge to Neoliberalism Neoliberalism came under significant strain The crisis can be traced back to the 1980s during the global financial crisis of 2007- when the United States systematically 2008 when the world experienced the removed various BANKING AND GREATEST ECONOMIC DOWNTURN since the INVESTMENTS RESTRICTIONS. Great Depression. The Global Financial Crisis and the Challenge to Neoliberalism In their attempt to promote FREE MARKET, government authorities FAILED TO REGULATE BAD INVESTMENTS occurring in the US HOUSING MARKET. Americans began building houses that were BEYOND THEIR FINANCIAL CAPACITIES. The Global Financial Crisis and the Challenge to Neoliberalism They began extending LOANS to families and individuals with DUBIOUS CREDIT RECORD. Financial experts wrong assumed that, even if many of the borrowers were individuals and families who would struggle to pay, a majority would not default. The Global Financial Crisis and the Challenge to Neoliberalism Banks also assumed that housing prices would continue to increase. Therefore, even if homeowners defaulted on their loans, these banks could simply reacquire the homes and sell them at a higher price, turning a profit. Sometime in 2007, however, home prices stopped increasing as supply caught up with the demand. The Global Financial Crisis and the Challenge to Neoliberalism 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. The Global Financial Crisis and the Challenge to Neoliberalism  The reduction in government spending has slowed down growth and ensured high levels of unemployment.  The United States recovered relatively quickly thanks to a large Keynesian-style stimulus package that then-President Barack Obama pushed for in his first months in office. The Economic Globalization Today  Theglobal financial crisis will take decades to resolve.  Thesolutions proposed by certain nationalist and leftist groups of CLOSING NATIONAL ECONOMIES to world trade, however, WILL NO LONGER WORK. The Economic Globalization Today  It is undeniable that some form of INTERNATIONAL TRADE remains essential for countries to develop in the contemporary world.  When MORE COUNTRIES OPENED UP THEIR ECONOMIES to take advantage of the FREE TRADE, the share of GLOBAL EXPORT PERCENTAGE began to change. The Economic Globalization Today  The WTO-led reduction of trade barriers, known as TRADE LIBERALIZATION, has profoundly altered the dynamics of the global economy.  According to 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. The Economic Globalization Today  Economic globalization REMAINS an UNEVEN PROCESS, with some countries, corporations, and individuals benefitting 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 often been unfair. The Economic Globalization Today  Developed countries are OFTEN PROTECTIONIST, as they repeatedly refuse to lift policies that safeguard their primary products that could otherwise be overwhelmed by imports from the developing world (e.g Japan’s sacred rice, US Sugar Industry)  Faced with these blatantly protectionist measures from powerful countries and blocs, POORER COUNTRIES can do very little to make economic globalization more just. The Economic Globalization Today  Trade imbalances, therefore, characterize economic relations between developed and developing countries.  The BENEFICIARIES of GLOBAL COMMERCE have been mainly TRANSNATIONAL CORPORATIONS (TNCs) and not governments.  The TNCs are concerned more with profits than with assisting the social programs of the governments hosting them. The Economic Globalization Today  Host countries loosen tax laws, which prevents wages from rising, while sacrificing social and environmental programs that protect the underprivileged members of their societies. The Economic Globalization Today Race to the Bottom- refers to countries’ lowering their labor standards, including the protection of workers’ interests, to lure in foreign investors seeking high profit at the lowest cost possible. Governments weaken environmental laws to attract foreign investors, creating fatal consequences on their ecological balance and depleting them of their finite resources (oil, coal, and minerals) CONCLUSION Economics is just International one window into economic the phenomenon integration is a of globalization; it central tenet of is not the entire globalization. thing. CONCLUSION Much of globalization is anchored on change in the economy. Many events of foreign affairs are conducted to cement trading relations between and among states. CONCLUSION Given the stakes involved in the economic globalization, it is perennially important to ask how this system can be made more just. International policymakers 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. QUIZ#2 Compare and contrast the assumptions of the original Bretton Woods system with those of the Washington Consensus. LEARNING ACTIVITY  Choose an INTERNATIONAL COMPANY (e.g Honda, McDonald’s).  Accomplish these tasks:  Research the origin and history of the institution  Map the international connection it has created  Identify the major country-leaders of this institution  Locate the Philippines in this map of interconnections  Then answer these questions:  How does this institution influence global economic activity?  How does it affect economics in the Philippines?