Lesson 2: Globalization of World

Economy
Economic Globalization – The International Monetary Fund (IMF) regards
“economic globalization” as a historical process representing the result of human
innovation and technological process. 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 product of people, organizations, institutions
and technologies.
According to IMF, the value of trade (goods and services) as a percentage of
world GDP increased from 42.1% in 1980 to 62.1% in 2007.
According to United Nations Conference on Trade and Development
(UNCTAD), the amount of foreign direct investments flowing across the world was
US$57 billion in 1982. By 2015, that number was US$1.76trillion.
History
International Trading Systems
The Oldest known international trade route was the Silk Road (130 BCE to
1453BCE). However, while the Silk Road was international, it was not truly “global”
because it had no ocean routes that could reach the American continent.
According to historians Dennis O. Flynn and Arturo Giraldez, the age of
globalization began when “all important populated continents began to continuously
trade to each other and had a great impact to all countries concern. 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. This was the first time that the
Americas were directly connected to Asian trading routes.
The galleon trade was part of the age or MERCANTILISM. From 16th century to
the 18th century, countries, primarily in Europe, competed with one another to sell more
goods as means to boost their country’s income (called monetary reserves later on). 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 a global trading
system with a lot of restrictions.
 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. The countries thus
established a common basis for currency prices and a fixed exchange rate system—all
based on the value of gold.
Gold standard is still a very restrictive 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 what were no longer redeemable in gold.
Returning to a pure standard became more difficult as the global economic crisis
called the GREAT DEPRESSION started during 1920s and extended up to the 1930s,
further emptying government funding. This was the worst and longest recession ever
experienced by the Western world. Economist say that it was due to the gold standard
since it limited the expenditure of countries.
Economic Historian Barry Eichengreen argues that the recovery of the United
States really began when they abandoned the gold standard. The US government was
able to free up money to spend on reviving the economy.
Though more indirect versions of the gold standard were used until late 1970s,
the world never returned to the gold standard. 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. 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.

The Bretton Woods System

After the two WORLD WARS, world leaders sought to create a global economic
system that would ensure a longer-lasting global peace. They believed 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. The Bretton Woods System
was inaugurated in 1944 during United Nations Monetary and Financial Conference to
prevent the catastrophes of the early decades of the century from reoccurring and
affecting international ties.
The Bretton Woods system was largely influenced by the ideas of British
economist John Maynard Keynes who 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. When economies slow down, according to Keynes, governments have to
reinvigorate markets with infusions of capital. This active role of governments in
managing spending served as the anchor for what would be called a system of Global
Keynesianism.
 Delegates at Bretton Woods agreed to create two financial institutions.
1) International Bank for Reconstruction and Development (IBRD, or World
Bank) to be responsible for funding postwar reconstruction projects.
2) International Monetary Fund (IMF) which was to be the global lender of last
resort to prevent individual countries from spiraling into credit crises.
(To this day these institutions still remain key players in economic globalization.)
Shortly after the Bretton Woods, various countries also committed themselves to
further global economic integrations through the General Agreement on Tariffs and
Trade (GATT) in 1947. GATT’s main purpose was to reduce tariffs and other hindrances
to free trade.

Neoliberalism and Its Discontents

The high point of global Keynesianism came in the mid-1940s to the early 1970s.
Governments poured money into their economies, allowing people to purchase more
goods and, in the process, increase demand for these products. Western and other
Asian economies like Japan accepted this rise in prices because it was accompanied by
general economic growth and reduced unemployment. The Theory went that as prices
increased, companies would earn more, and would have more money to hire workers.
Keynesian economist believed that all this was a necessary trade-off for economic
development.
In the early 1970’s, however, the prices of oil rose sharply as a result of the
Organization of Arab Petroleum Exporting Countries’ (OAPEC, the Arab member-
counties of the Organization of Petroleum Exporting Countries or OPEC) imposition of
an embargo in response to the decision of the United States and other countries to
resupply the Israeli military with the needed arms during the Yom Kippur War. Arab
countries also used the embargo to stabilize their economies and growth. The “oil
Embargo” affected the Western economies that were reliant on oil. To make matter
worse, the stock markets 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 that Keynesian economists could not have predicted. A phenomenon
called “stagflation”, in which a decline in economic growth and unemployment
(stagnation) takes place alongside a sharp increase in prices (inflation).
Around this time, a new form of economic thinking was beginning to challenge
the Keynesian orthodoxy. Economists such as Friedrich Hayek and Milton Friedman
argued that the governments’ practice of pouring money into their economies had
caused inflation by increasing the demand for goods without necessarily increasing
supply. More profoundly, they argued that government intervention in economies distort
the proper functioning in the market.
 Economists like Friedman used the economic turmoil to challenge the consensus
around Keynes’ ideas. 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 the GATT. 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. Its advocate pushed for minimal government spending to reduce
government debt. 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. Finally, they pressured governments, particularly in
developing countries/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 was in its simplicity. Its 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 herself as a mother, who reined in overspending to
reduce the national debt.
The problem with the household analogy is the governments are not households.
for one, governments can print money. Moreover, the constant taxation systems of
government provide them steady flow of income that allows them to pay and refinance
debts steadily.
Despite the initial success of neoliberalism, the defects of the Washington
Consensus became immediately palpable. A good early example is that of post-
communist Russia. After Communism had collapsed in the 1990s, the IMF called for the
immediate privatization for all government industries. IMF assumed that it will free the
industries from corrupt bureaucrats and pass them on to more dynamic and
independent private investors. ***The result we will discuss in class***

The Global Financial Crisis and the Challenge to Neoliberalism

Neoliberalism came under significant strain during the Global Financial crisis of
2008-2009 when the world experienced the greatest economic downturn since the
Great Depression. The crisis can be traced back to the 1980’s when the United States
systematically removed various banking and investments restrictions.
The scaling back of regulations continued until the 2000s, in their attempt to
promote the free market, government authorities failed to regulate bad investments
occurring in the US housing market. Taking advantage of “cheap housing loans,”
Americans began building houses that were beyond their financial capacities.
To mitigate the risk of these loans, banks were lending houseowners’ money
pooled these mortgage payments and sold them as “mortgage-backed securities”
(MBS). One MBS would be a combination of multiple mortgages that they assumed
would pay a steady rate.
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 those loans, the banks became less discriminating. They began extending loans
to everyone including individuals with bad credit records. These mortgages became
known as Sub-prime Mortgages.
Financial experts wrongly assumed even if many of the borrowers were
individuals and families who would struggle to pay, a majority would not default.
Moreover, banks thought that since there were so many mortgages in just one MBS, a
few failures would not ruin the entirety of the investment.
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, home prices stopped increasing as supply caught up with
demand. Moreover, it slowly became apparent that families could not pay off their loans.
This realization triggered the rapid reselling of MBSs as banks and investors tried to get
rid of their bad investments. This dangerous cycle reached a tipping point in September
2008, when major investments banks like Lehman Brothers collapsed, thereby depleting
major investments.
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.
These series of interconnection allowed for a global multiplier effect that sent
ripples across the world. For example, Iceland’s banks heavily depended on foreign
capital, so when the crisis hit them, they failed to refinance their loans. As a result, three
of Iceland’s top commercial banks defaulted. From 2007 to 2008 their debts increased
seven-fold.
Until now, countries like Spain and Greece are heavily indebted and debt relief
has come at a high price. Greece, in particular, has been forced by Germany and IMF to
cut back on its social and public spending. Affecting services like pensions, health care,
and various forms of social security, these cuts have been felt most acutely by the poor.
Moreover, 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 President Barack Obama pushed for in his first month in office.
The same cannot be said for many other countries. In Europe, the continuing economic
crisis has sparked a political upheaval. Recently, far-right parties like Marine Le Pen’s
Front National in France have risen to prominence by unfairly blaming immigrants for
their despairs, claiming that they steal jobs and leech off welfare. These movements
blend popular resentment with utter hatred and racism.

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 the world trade will
no longer work. 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.
Exports, not just the local selling of goods and services, make national
economies grow at present. In the past, those that benefited the most from free trade
were the advanced nations that were producing and selling industrial and agricultural
goods. The United States, Japan, and the member-countries of the European Union
were responsible for 65% of global exports, while the developing countries opened only
accounted for 29%. When more countries opened up their economies to take advantage
of the free trade, th share of the percentage began to change, by 2011, developing
countries like the Philippines, India, China, Argentina and Brazil accounted for 51% of
global exports while the share of advanced nations (including the United States) had
gone down to 45%. The WTO-led reduction of trade barriers, known as trade
liberalization, has profoundly altered the dynamics of the global economy.
In the recent decades, partly as a result of these increased exports, economic
globalization has ushered in an unprecedented spike in global growth rates. And yet
economic globalization remains an uneven process, with some countries, corporations,
and individuals benefiting a lot more than others. The series of trade talks under the
WTO have led to unprecedented reductions in tariff and other trade barriers, but these
processes have often have often been unfair.
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. 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”. Japan is the world’s 3 rd largest
economy, that allows them to resist pressure to open its agricultural sector.
 The United States likewise fiercely protects its sugar industry, forcing consumers
and sugar-dependent business to pay higher prices instead of getting cheaper sugar
from plantations of Central America.
Faced with these protectionist measures from powerful countries, poorer
countries can do very little to make economic globalization more just. 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. These TNCs are concerned more with
profits than with assisting the social programs of the governments hosting them. 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. The term “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 margins at the lowest cost possible. Governments weaken
environmental laws to attract investors, creating fatal consequences on their ecological
balance and depleting them of their finite resources (like oil, coal and minerals).