THE GLOBAL ECONOMY

AND MARKET INTEGRATION

ALEXIE VERA P. MAGAWAY
THE GLOBALIZATION OF WORLD ECONOMICS

• 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.

• WHILE IT IS DIFFICULT TO ARRIVE AT A PRECISE DEFINITION OF

GLOBALIZATION, IT IS UNIVERSALLY AGREED THAT A DRASTIC
ECONOMIC CHANGE IS OCCURRING THROUGHOUT THE WORLD.

• ACCORDING TO THE IMF, THE VALUE OF TRADE AS A PERCENTAGE

OF WORLD GDP INCREASED FROM 42.1% IN 1980 TO 62.1% 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 AND BY 2015 THAT NUMBER INCREASED TO $1.76 TRILLION.
• 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.
INTERNATIONAL TRADING SYSTEMS

• INTERNATIONAL TRADING SYSTEMS ARE NOT NEW AND THE OLDEST

EXAMPLE WAS THE INTERNATIONAL TRADE ROUTE, THE SILK ROAD.

• WHILE THE SILK ROAD WAS INTERNATIONAL, IT WASN’T TRULY

GLOBAL BECAUSE IT HAD NO OCEAN ROUTES THAT COULD REACH
THE AMERICAS.
SO WHEN DID FULL ECONOMIC GLOBALIZATION
BEGIN?

• HISTORIANS, DENNIS O. FLYNN AND ARTURO GIRALDEZ, AGREED THAT IT

BEGAN WHEN ALL IMPORTANT AND POPULATED CONTINENTS BEGAN TO
EXCHANGE PRODUCTS CONTINUOUSLY-- WITH EACH OTHER DIRECTLY
AND INDIRECTLY VIA OTHER CONTINENTS– AND IN VALUES SUFFICIENT TO
GENERATE CRUCIAL IMPACTS ON ALL TRADING PARTNERS.
• THIS WAS TRACED BACK TO 1571 WITH THE ESTABLISHMENT OF THE
GALLEON TRADE THAT CONNECTED MANILA, PHILIPPINES, TO
ACAPULCO, MEXICO.
MERCANTILISM
• THE GALLEON TRADE WAS PART OF THE AGE OF MERCANTILISM.
FROM THE 16TH CENTURY TO THE 18TH CENTURY, EUROPEAN
COUNTRIES COMPETED WITH ONE ANOTHER TO SELL MORE GOODS
AS A MEANS TO BOOST THEIR COUNTRY’S INCOME (MONETARY
RESERVES)
• AS A COUNTERMEASURE FOR COMPETITORS WHO SOLD THEIR
GOODS CHEAPLY, THEY IMPOSED HIGH TARIFFS, FORBADE
COLONIES TO TRADE WITH OTHER NATIONS, RESTRICTED TRADE
ROUTES AND SUBSIDIZED ITS EXPORTS.
• A MORE OPEN TRADE EMERGED IN 1867, WHEN THE US AND
OTHER EUROPEAN NATIONS TOOK AFTER THE FOOTSTEPS OF UK.
• THEY ADOPTED THE GOLD STANDARD AT AN INTERNATIONAL
MONETARY CONFERENCE IN PARIS.
• THE GOAL WAS TO CREATE A COMMON SYSTEM THAT WOULD
ALLOW MORE EFFICIENT TRADE AND PREVENT ISOLATION OF THE
MERCANTILIST ERA.
• THE COUNTRIES DEVELOPED 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 VERY RESTRICTIVE.

• WHEN WORLD WAR I ERUPTED, GOLD RESERVES WERE DEPLETED TO

FUND THEIR ARMIES. THUS, THEY WERE FORCED TO ABANDON THE
GOLD STANDARD.
• RETURNING TO A PURE STANDARD BECAME MORE DIFFICULT AS THE
ECONOMIC CRISIS CALLED THE GREAT DEPRESSION STARTED
DURING THE 1920S AND AND EXTENDED UP TO THE 1930S.

• THIS DEPRESSION WAS THE WORST AND LONGEST RECESSION EVER

EXPERIENCED BY THE WESTERN WORLD.
• ECONOMIC HISTORIAN, BARRY EICHENGREEN, ARGUES THAT THE US
ONLY BEGAN TO RECOVER WHEN, AFTER ABANDONING THE GOLD
STANDARD, THEY WERE ABLE TO FREE UP MONEY TO SPEND ON
REVIVING THE ECONOMY.
• THOUGH OTHER INDIRECT VERSIONS OF THE GOLD STANDARD WERE
USED UP TO THE LATE 1970S, THE WORLD NEVER RETURNED TO THE
GOLD STANDARD OF THE EARLY 20TH CENTURY.
• THE WORLD ECONOMY NOW OPERATES ON WHAT ARE CALLED
FIAT CURRENCIES.

• THIS SYSTEM ALLOWS GOVERNMENTS TO ACTIVELY MANAGE THEIR

ECONOMIES BY INCREASING OR DECREASING THE AMOUNT OF
MONEY IN CIRCULATION.
THE BRETTON WOODS SYSTEM

• AFTER THE TWO WORLD WARS, WORLD LEADERS SOUGHT TO

CREATE A GLOBAL ECONOMIC SYSTEM THAT WOULD ENSURE
LONG-LASTING GLOBAL PEACE.

• TO ACHIEVE THIS, THEY WANTED TO SET UP A NETWORK OF GLOBAL

FINANCIAL INSTITUTIONS THAT WOULD PROMOTE ECONOMIC
INTERDEPENDENCE AND PROSPERITY.
• THE BRETTON WOODS SYSTEM WAS INAUGURATED IN 1944 DURING
THE UNITED NATIONS MONETARY AND FINANCIAL CONFERENCE TO
PREVENT THE CATASTROPHES OF THE EARLY DECADES FROM
REOCCURRING AND AFFECTING INTERNATIONAL TIES.

• THE BRETTON WOODS SYSTEM WAS LARGELY INFLUENCED BY 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.
• WHEN ECONOMIES SLOW DOWN, GOVERNMENTS HAVE TO
REINVIGORATE MARKETS WITH INFUSIONS OF CAPITAL.
• THIS ACTIVE ROLE OF GOVERNMENTS IN MANAGING SPENDING
SERVED AS THE ANCHOR FOR WHAT WE CALL A SYSTEM OF GLOBAL
KEYNESIANISM.
• DELEGATES AT BRETTON WOODS AGREED TO CREATE TWO
FINANCIAL INSTITUTIONS.
• THE INTERNATIONAL BANK FOR RECONSTRUCTION AND
DEVELOPMENT (IBRD, OR WORLD BANK)

• THE INTERNATIONAL MONETARY FUND (IMF)

• SHORTLY AFTER BRETTON WOODS, VARIOUS COUNTRIES ALSO
COMMITTED THEMSELVES TO FURTHER GLOBAL ECONOMIC
INTEGRATION THROUGH THE GENERAL AGREEMENT ON TARIFFS AND
TRADE (GATT) IN 1947.
NEOLIBERALISM AND ITS DISCONTENTS

• FROM 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.
• AS DEMAND INCREASED, SO DID THE PRICES OF THESE GOODS.
• KEYNESIAN ECONOMISTS BELIEVED THIS WAS A NECESSARY TRADE-
OFF FOR ECONOMIC DEVELOPMENT.
• IN THE EARLY 1970S HOWEVER, THE PRICES OF OIL ROSE SHARPLY
BECAUSE OF THE OAPEC’S IMPOSITION OF AN EMBARGO IN
RESPONSE TO THE USA AND OTHER COUNTRIES’ DECISION TO
RESUPPLY THE ISRAELI MILITARY WITH FIREARMS DURING THE YOM
KIPPUR WAR.

• THE RESULT WAS UNEXPECTED AND IT WAS CALLED STAGFLATION.

• ECONOMISTS SUCH AS FRIEDRICH HAYEK AND MILTON FRIEDMAN
ARGUED THAT THE GOVERNMENT’S PRACTICE OF POURING MONEY
INTO THEIR ECONOMIES HAD CAUSED INFLATION BY INCREASING
DEMAND FOR GOODS WITHOUT NECESSARILY INCREASING SUPPLY.
• THE ECONOMIC TURMOIL BECAME THE FOUNDATION TO
CHALLENGE KEYNE’S IDEAS. WHAT EMERGED WAS A NEW FOR OF
ECONOMIC THINKING CALLED NEOLIBERALISM.
 WASHINGTON CONSENSUS
• IT DOMINATED GLOBAL ECONOMIC POLICIES FROM THE 1980S UNTIL EARLY
2000S.
• IT PUSHED FOR MINIMAL GOVERNMENT SPENDING TO REDUCE GOVERNMENT DEBT;
PRIVATIZATION OF GOVERNMENT-CONTROLLED SERVICES LIKE WATER, POWER,
COMMUNICATIONS AND TRANSPORT, BELIEVING THAT A FREE MARKET CAN
PRODUCE BEST RESULTS.
• THEY PRESSURED DEVELOPING WORLD GOVERNMENTS TO REDUCE TARIFFS AND
OPEN UP ECONOMIES.
• JUST LIKE OTHER SYSTEMS, CERTAIN INDUSTRIES WOULD BE AFFECTED AND DIE BUT
THEY CONSIDERED THIS AS “SHOCK THERAPY” NECESSARY FOR LONG-TERM
ECONOMIC GROWTH.
• ADVOCATES OF NEOLIBERALISM LIKE US PRESIDENT RONALD
REAGAN AND BRITISH PRIME MINISTER MARGARET THATCHER
JUSTIFIED THEIR REDUCTION IN GOVERNMENT SPENDING AND
COMPARED NATIONAL ECONOMIES TO HOUSEHOLDS.
• THE DEFECTS OF THE WASHINGTON CONSENSUS BECAME
NOTICEABLE. ONE EXAMPLE IS POST-COMMUNIST RUSSIA.
• ECONOMIC ELITES WHO HAD EASY ACCESS TO GOVERNMENT
FUNDS TOOK OVER THE INDUSTRIES AND THUS THIS PRACTICE
RESULTED TO OLIGARCHY AND CONTINUES EVEN UP TO THIS DAY
NOT ONLY IN RUSSIA BUT ALSO THE PHILIPPINES.