LESSON 4: THE GLOBAL ECONOMY

Learning Competency:
❖ Determine the results of the waves of economic globalization: Early Wave, the Keynesian
Liberal Wave, and Neo-Liberal Wave.

Activate Prior Knowledge

Direction: The global economy is like a puzzle. Explain why?

Globalization explores the opportunities and challenges of our

international economic system. Patrice Franko and Stephen Stamos clearly
trace how the ways we produce, finance, and trade goods and services are
profoundly shaped by technologies of communication, transportation, and
trade. Globalization encourages hyper-specialization—lavishly rewarding
those with the skill sets to serve the global marketplace and punishing those
poorly positioned to compete. Globalized systems have created great
prosperity—along with instability, vulnerability, and backlash.
 Acquire New Knowledge

WAVES OF ECONOMIC GLOBALIZATION

Early Wave

Due to the problem of scarcity of resources man since time immemorial had resorted to
engage trade for survival. Boudreaux (2008) aptly described the primary reason people engage in
trade so that “each party expects to be made better off by that trade. “Through trade, the exchange
is not limited merely to goods and services. There is also more important and that ideas and
knowledge. This trade did not only transpire from its close neighbors but encompasses for
thousands of miles. Famous of which that lasted for 2,000 years, from ancient times into the 16 th
century was known as The Silk Road. The coverage of this trade was so vast connecting by land and
sea from Asia to the far end of Europe, Middle East as well as Africa. During this period traded
goods were predominantly artisan goods, silk, spices, ceramics, textile, compasses, gun powder
from India and China.

By Middle Ages trade increased and expanded due to more treaties signed by nations for a
safe passage and secure trade. However, this growing trade was hampered because the feudal
economic system was self-sustaining. Manorial structure promoted economic self-sustenance by
producing their own needs thereby negating any chances for outside the manor. When feudal
system weakened and capitalism increased, this gave an impetus to spur economic globalization.

The Age of Exploration, from early 15th to 17th century was the pivotal era that “changed
the shape of the world and the course of history.” European made an unprecedented levels of
exploration because of the growing number of professional explorer and navigators. European
ships travelled around the world in search for trading routes and new lands to colonize. New age of
global commercial capitalism was laid during this period.

The Keynesian Liberal Wave (Shaping the Global Economic Order)

In anticipation of the inevitable end of the Second World War, 44 countries headed by the
United States of America and Great Britain gathered in Bretton Woods, New England to frame new
International economic policies that will regulate trade and financial agreement. Economic setbacks
in the inter-war years from 1918-1938 such as The Great Depression in 1929 and 1930s motivated
and political and financial leaders to set the institutional foundations for the establishment of three
international economic organizations. The International Monetary Fund (IMF) was established to
administer responsibility to coordinate and regulate international monetary transaction as well as
to promote global economic prosperity and political stability. Unfair trade practices that might
harm worldwide stability are discouraged. The International Bank for Reconstruction and
Development (IBRD) became known as World Bank, primarily designed for Marchall Plan to extend
financial loans to reconstruct the devastate economies in Europe. By 1950s loans were expanded to
developing countries in the world to provide funds to finance various industrial projects,

The General Agreement on Tariffs and Trade (GATT) was establish in 1947 charged in
crafting and policing multilateral trade agreements. Then it became World Trade Organization in
1995. Since the 1990s WTO became the subject of great controversy over the policies imposed that
have made more developing countries worse off. The Bretton Woods goals and strategies were
macroeconomic stability, import substitution, and governance reform. The main architects of this
Bretton Woods agreement were John Maynard Keynes and Harry White.

The Neo-Liberal Wave

After the dissolution of the Bretton Woods a new set of policies were introduced:
Neoliberalism and Washington Consensus. Neoliberalism economic policies were grounded under
the laissez-faire principle that market is the fundamental dominant decision maker. Joseph Stiglitz
aptly describe neo-liberal doctrine is more on freedom from the government in terms of taxation,
freedom from regulation, free flow of capital, freedom of tariffs and quotas-the more prosperity
there will be, and prosperity will trickle down from elite to lower classes. The term Washington
Consensus was named after the key players in Washington headed by President Ronald Reagan of
US and Prime Minister Margaret Thatcher of England. This set of policies unleashed for the
developing countries with large unpaid debts from the 1970s and 80s.

Washington Consensus as defined by John Williamson, president of World Bank in the

1970s, required governments to implement the following structural adjustments in order to qualify
for loans (Steger, 2009):

1. A guarantee of fiscal discipline, and a curb to budget deficits;

2. A reduction of public expenditures, particularly in the military and public administration;
3. Tax reform, aiming at the creation of a system with a broad base and with effective
enforcement;
4. Financial liberalization, with interest rates determined by the market;
5. Competitive exchange rates, to assist export-led growth;
6. Trade liberalization, coupled with the abolition of import licensing and a reduction of
tariffs;
7. Promotion of foreign direct investments;
8. Privatization of state enterprises, leading to efficient management and improve
performance;
9. Deregulation of the economy; and
10. Protection of property rights.

Heavily debtor countries rarely made significant improvements, because mandated cut on
public spending would decrease social programs such as education, health care, infrastructures,
security, environment preservation, and that constitute greater poverty (Steger, 2009, p55).
 Assessment
Direction: Answer the following questions with not less than 250 words each.

1. In anticipation of the inevitable end of the Second World War, spearheaded by United States
and Great Britain, 44 countries formed an International economic policies that will regulate
trade and financial agreement. In what period does this wave belong? How do they differ
from the other two?

Ever since Adam Smith extolled the virtues of the division of labor and David Ricardo
explained the comparative advantage of trading with other nations, the modern world has
become increasingly more economically integrated. International trade has expanded, and
trade agreements have increased in complexity. While the trend over the last few hundred
years has been toward greater openness and liberalized trade, the path has not always been
straight. Since the inauguration of the General Agreement on Tariffs and Trade (GATT),
there has been a dual trend of increasing multilateral trade agreements, those between
three or more nations, as well as more local, regional trade arrangements. The whole
doctrine of mercantilism would come under attack through the writings of both Adam
Smith and David Ricardo, both of whom stressed the desirability of imports and stated that
exports were just the necessary cost of acquiring them. Their theories gained increasing
influence and helped to ignite a trend towards more liberalized trade — a trend that would
be led by Great Britain.
2. As a student what will you do to help yourself and your country face the present global
economic order? 25 points

To continue with essential containment measures and support for health systems. Some say
there is a trade-off between saving lives and saving livelihoods. I say it is a false dilemma.
Given this is a pandemic crisis, defeating the virus and defending people’s health are
necessary for economic recovery. So the message is clear: prioritize health spending for
testing and medical equipment; pay doctors and nurses; make sure hospitals and makeshift
clinics can function. For many countries—particularly in the emerging and developing
world—this means carefully reallocating limited public resources. It also means increasing
the flow of resources to these countries. That includes the flow of vital goods: we must
minimize disruptions to supply chains and, with immediate effect, refrain from export
controls on medical supplies and food.

Note: Same Rubrics Applied