Lesson 2

The International Monetary Fund (IMF) regards "economic globalization" as a historical process
representing the result of human innovation and technological progress. 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. As with all other processes of globalization, there is a qualitative and subjective element to
this definition. How does one define "increasing integration"! When is it considered that trade has
increased? Is there a particular threshold?

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.
According to the IMF, the value of trade (goods and services) as a percentage of world GDP increased
from 42.1 percent in 1980 to 62.1 percent in 2007. Increased trade also means that investments are
moving all over the world at faster speeds. According to the 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 $1.76 trillion. These figures represent a dramatic increase in
global trade in the span of just a few decades. It has happened not even after one human lifespan!

Apart from the sheer magnitude of commerce, we should also note the increased speed and frequency
of trading. These days, supercomputers can execute millions of stock purchases and sales between
different cities in a matter of seconds through a process called high-frequency trading. Even the items
being sold and traded are changing drastically. Ten years ago, buying books or music indicates acquiring
physical items. Today, however, a "book" can be digitally downloaded to be read with an e-reader. and a
music "album" refers to the 15 songs on mp3 format you can purchase and download from iTunes.

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.

International Trading Systems

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. 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). 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.
However, while the Silk Road was international, it was not truly "global" because it had no ocean routes
that could reach the American continent. So when did full economic globalization begin? 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." 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. For Filipinos, it is crucial to note that economic
globalization began on the country's shores.

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). 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.

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. 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.

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. During World War 1 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.

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.
Some economists argued that it was largely caused by the gold standard, since it limited the amount of
circulating money and, therefore, reduced Idemand 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.

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 11, other major industrialized countries followed
suit.
Though more indirect versions of the gold standard were used until as late as the 1970s, the world never
returned to the gold standard of the early 20th century. 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. affected the Western economies that were reliant on oil." To make matters 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 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).

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 demand for goods without
necessarily increasing supply. More profoundly, they argued that government intervention in economies
distort the proper functioning of the market.

Economists like Friedman used the economic turmoil to challenge the consensus around Keynes's 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
advocates 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 the 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 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 that governments are not households. For one, governments
can print money, while households cannot. Moreover, the constant taxation systems of governments
provide them a steady flow of income that allows them to pay and refinance debts steadily.

Despite the initial success of neoliberal politicians like Thatcher and Reagan, 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 of
all government industries. The IMF assumed that such a move would free these industries from corrupt
bureaucrats and p pass them on to the more dynamic and independent private investors. What
happened, however, was that only individuals and groups who had accumulated wealth under the
previous communist order had the money to purchase these industries. In some cases, the economic
elites relied on easy access to government funds to take over the industries. This practice has
entrenched an oligarchy that still dominates the Russian economy to this very day.

The Global Financial Crisis and the Challenge to Neoliberalism

Russia's case was just one example of how the "shock therapy" of neoliberalism did not lead to the ideal
outcomes predicted by economists who believed in perfectly free markets. The greatest cent
repudiation of this thinking was the recent global financial crisis of 2008-2009

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. The crisis can be traced
back to the 1980s when the United States systematically removed various banking and investment
restrictions.

The scaling back of regulations continued until the 2000s, paving the way for a brewing crisis. 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 that 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 these loans, however, the
banks became less discriminating. 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.

Financial experts wrongly assumed that, 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, however, 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 investment 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 interconnections 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 of this credit crunch, three of Iceland's top commercial banks
defaulted. From 2007 to 2008, Iceland's debt increased more than seven-fold.

Until now, countries like Spain and Greece are heavily indebted (almost like Third World countries), and
debt relief has come at a high price. Greece, in particular, has been forced by Germany and the 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 dowed 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 months 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 woes, claiming that they steal jobs and leech off welfare. These movements blend
popular resentment with utter hatred and racism. We will discuss their rise further in the final lesson.

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. 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 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. 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.

In the recent decades, partly as a result of these increased exports, economic globalization has ushered
in an unprecedented spike in global growth rates. 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"

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 tariffs and other trade barriers, but these processes 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." Ultimately, it is its
economic muscle as the third largest economy that allows it to resist pressures to open its agricultural

sector
The United States likewise fiercely protects its sugar industry. forcing consumers and sugar-dependent
businesses to pay higher prices instead of getting cheaper sugar from plantations of Central America

Faced with these blatantly protectionist measures from powerful countries and blocs, 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 (TNC) and not
governments. And like any other business, 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).

Localizing the Material

Many Philippine industries were devastated by unfair trade deals under the GATT and eventually the
WTO. One sector that was particularly affected was Philippine agriculture. According to Walden Bello
and a team of researchers at Focus on the Global South, the US used its power under the GATT system
to prevent Philippine importers from purchasing Philippine poultry and pork--even as it sold meat to the
Philippines.

Although the Philippines expected to make up losses in sectors like meat with gains in areas such as
coconut products. no significant change was realized. In 1993, coconut exports amounted to $19 billion,
and after a slight increase to $2.3 billion in 1997, it returned to $1.9 billion in 2000

Most strikingly Bello and company noted that the Philippines became a net food importer under the
GATT in 1993, the country had an agricultural trade surplus of 5292 million it had a deficit of $764
million in 1997 and 5794 million in 2002
Bella Walden Hebert Docena, Marsa de Guzman and Mary Lou Mal The And Development State The
Putical Economy of Permanent On in the Philippines London and New York Zed Books, 2006, 143-142