Market Integration

Introduction
What is a social institution?
Economy as a social institution – it has one of the biggest impacts on human society.
Why?
What comes in your mind when you heard the term economy?
An economy is composed of people.
It is a social institution that organizes all production, consumption, and trade of goods in
the society.
 Market Integration
There are many ways in which products can be made, exchanged, and used. Think
about capitalism or socialism.
Three Basic Economic Questions:
What to produce?
For whom the product to be produced?
How much the product to be produced? Quantity
 Market Integration

Economic Features of Capitalism Economic Features of Socialism

Three Basic Economic Questions Three Basic Economic Questions

 Private ownership  State owned all factors of productions
 Profit oriented  Produced products are intended for all
 Non-government intervention  There is an absence of competition
 The presence of competition
 Market Integration
In any given economy, production typically splits into three sectors.
The primary sector – extracts raw materials from natural environments.
The secondary sector – gains the raw materials and transforms them into manufactured
goods.
Note: Primary and Secondary Sectors are connecter towards one goal – production of
goods.
The tertiary sector – involves services rather than goods. It offers services by doing things
rather than making things.
 International Financial Institutions
World economies have been brought closer together by globalization.
It is reflected in the phrase “when the American economy sneezes, the rest of the world
catches a cold.”.
Although countries are heavily affected by the gains and crises on the world economy,
the organizations that they consist also contribute to these events.
The following are the financial institutions and economic organizations that made
countries even closer together, at least, when it comes to trade.
The Bretton Woods System
Background for the establishment of the Bretton Woods system:
 World War I,
 The Great Depression in the 1930s, and
 The World War II.

Reduction of barriers to trade and free flow of money among nations became the focus
of restructure the world economy and ensure global financial stability.
Five key elements of Bretton Wood System:
 First element is the expression of currency in terms of gold. For instance, a 35 U.S
dollar is equivalent to ounce of gold is the same as 175 Nicaraguan cordobas per
ounce of gold. What is the dollar and Nicaraguan cordobas exchange rate?
Five Key Elements of Bretton Wood System:
 Another element is that “the official monetary authority in each country (a central
bank or its equivalent) would agree to exchange its own currency for those of other
countries at the established exchange rates, plus or minus a one-percent margin.”
 The third element is the establishment of an overseer for these exchange rates; thus,
the International Monetary Fund was founded.
 The fourth element is eliminating restriction on the currencies of member states in
the international trade.
 The final element is that the U.S. dollar became the global currency .
 General Agreement on Tariffs and Trade

Global trade and finance was greatly affected by the Bretton Woods system. According to
Peet (2003).
One of the systems born out of Bretton Woods was the General Agreement on Tariffs and
Trade (GATT) that was established in 1947. GATT was a forum for the meeting of
representatives from 23 member countries. It focused on trade goods through multinational
trade agreements conducted in many “rounds” of negotiation.
It was out of the Uruguay
Round that an agreement
was reached to create the
World Trade Organization
(WTO).
 Word Trade Organization

The WTO headquarters is located in Geneva Switzerland with 152 members

states as of 2008. Unlike GATT, WTO is an independent multilateral
organization that became responsible for trade and services, non-tariff-related
barriers to trade, and other broad areas of trade liberalization. The general idea
where the WTO is based was that neoliberalism. This means that by reducing or
eliminating barriers, all nations will benefit.
Significant criticisms to WTO
Barriers created by developed countries cannot be countered enough by WTO,
especially in agriculture.
Decision-making processes were heavily influenced by larger trading powers, in the so-
called Green Room, while excluding smaller powers in meetings.
Lastly, the International Non-Government Organizations INGO are not involved, leading
to the staging of regular protests and demonstrations against the WTO.
 International Monetary Fund and the World Bank
IMF and the World Bank were founded after the World War II. These institutions aimed
to help the economic stability of the world. Both of them are basically banks, but instead
of being started by individuals like regular banks, they were started by countries. Most of
the world’s countries were members of the two institutions. But, of course, the richest
countries were those who handled most of the financing and ultimately, those who had
the greatest influence.
 International Monetary Fund and World Bank
IMF and the World Bank were designed to complement each other.
IMF’s main goal: help countries which were in trouble at the time and could not obtain
money by and means.
The World Bank: it had a more long-term approach. Its main goal revolved around the
eradication of poverty and it funded specific projects the help them reach their goals
 The Organization for Economic Cooperation and Development (OECD)

The most encompassing club of the richest countries in the world is the OECD. It is highly
influential, despite the group having little formal power. This emanates from the member
countries’ resources and economic power.
 The Organization of Petroleum Exporting Countries (OPEC)
In 1960, the Organization of Petroleum Exporting Countries was originally comprised
of Saudi Arabia, Iraq, Kuwait, and Venezuela. They are still part of the major exporter
of oil in the world today. OPEC was formed because member countries wanted to
increase the price of oil, which in the past had a relatively low price and had failed in
keeping up with inflation. Today, UAE, Algeria, Libya, Qatar, Nigeria, and Indonesia
are also included as members.
The Organization of Petroleum Exporting Countries (OPEC)
 The European Union (EU)

The European Union is made up of 28 member states. Most members in the Eurozone
adopted the euro as basic currency but some Western European nations like Great Britain,
Sweden, and Denmark did not.
The European Union (EU)
 North American Free Trade Agreement (NAFTA)
North American Free Trade Agreement is a trade pact between the United States,
Mexico, and Canada created on January 1, 1994 when Mexico joined the two other
nations. It was first created in 1989 only Canada and United States as trading
partners. NAFTA helps in developing and expanding world trade by broadening
international cooperation. It also aims to increase cooperation for improving working
conditions in North America by reducing barriers to trade as it expands the markets of
the three countries.
 North American Free Trade Agreement (NAFTA)
The creation of NAFTA has caused manufacturing jobs from developed nations
(Canada and U.S) to transfer to less developed nations (Mexico) in order to reduce
the cost of their products.
Outsourcing: Cheap wage labor, Cheap raw materials, Less government regulations
NAFTA has its positive and negative consequences. It lowered prices by removing
tariffs, opened up new opportunities for small-and medium sized business to establish
a name for itself, quadrupled trade between the three countries, and created five
million jobs. Some of the negative effects, however, include excessive pollution, loss
of more than 682,000 manufacturing jobs, exploitation of workers in Mexico, and
moving Mexican farmers out of business.
 History of Global Market Integration

The Agricultural Revolution

The first big economic change was the agricultural revolution. When people learned how to
domesticate plants and animals, they realized that it was much more productive than hunter-
gatherer societies. This became the new agricultural economy. Farming helped societies
build surpluses, meaning, not everyone had to spend their time producing food. This, in turn,
led to major developments like permanent settlements, trade networks, and population
growth.
Industrial Revolution

The second economic revolution is the industrial revolution of the 1800s. With the rise of industry
came new economic tools, like steam engines, manufacturing, and mass production. Factories
popped up and changed how work functioned. Instead of working at home where people worked
for their family by making things from start to finish, they began to working as wage laborers and
then becoming more specialized in their skills. Overall, productivity went up, standards of living
rose, and people had access to a wider variety of goods due to mass production.
Economic revolution comes with economic casualties.

The workers in the factories – who were mainly poor women and children – worked in
dangerous conditions for low wages.

Nineteenth-century industrialists were known as robber barons – with more productivity came
greater wealth, but also greater economic inequality.

In the late nineteenth century, labor unions began to form.

These organizations of workers sought to improve wages and working conditions through
collective action, strikes, and negotiations. Inspired by Marxist principles labor unions gave
way for minimum wage laws, reasonable working hours, and regulations to protect the safety
of workers.
Capitalism and Socialism

There were two competing economic models that sprung up around the time of Industrial
Revolution. These were capitalism and socialism. Capitalism is a system in which all natural
resources and means of production are privately owned. It emphasizes profit maximization
and competition as the main drivers of efficiency. This means that when one owns a
business, he needs to outperformed his competitors if he is going to succeed.
 Capitalism and Socialism

Government plays an even larger role in

socialism.

In a socialist system, property is owned by the

government and allocated to all citizens.

Socialism emphasizes collective goals,

expecting everyone to work for the common
good and placing a higher value on meeting
everyone’s basic needs than on individual
profit.
Capitalism and Socialism
When Karl Marx first wrote about socialism, he viewed it as stepping stone toward
communism, a political and economic system in which all members of a society are
socially equal. In practice, this has not played out in the countries that have modeled
their economies of socialism, like Cuba, North Korea, China and USSR. Why? Marx
hoped that as economic differences vanished in communist society, the government
would simply wither away and disappear, but that never happened. Rather than freeing
the workers – in Marxist terms, the proletariat – from inequality, the massive power of the
government in these states gave enormous wealth power and privilege to political elites.
The result is the retrenchment of inequalities along political – rather that strictly
economic – lines.
Capitalism and Socialism

Capitalist countries economically outperformed their socialist counterparts contributing to the

unrest that eventually led to the downfall of the USSR. But there are downsides to capitalism
too, namely: greater income inequality. A study of European capitalist countries and socialist
countries in the 1970s found that the income ratio between the top 5% and the bottom 5% in
capitalist countries was about 10 to 1; whereas, in socialist countries, it was 5 to 1.
The Information Revolution

We are living in the time of information revolution. Technology has reduced the role of human
labor and shifted it from a manufacturing-based economy to one that is based on service work
and the production of ideas rather than goods. Computers and other technologies are
beginning to replace many jobs because of automation or outsourcing jobs offshore. We also
see the decline in union membership. Nowadays, most unions are for public sectors jobs, like
teachers.

In other countries such as the United States, manufacturing jobs which were the lifeblood of
their economy for much of the twentieth century, have declined in the last 30 years. The U.S.
economy began with their many workers serving in either the primary or secondary economic
sectors. But today, much of their economy is centered on the tertiary sector or the service
industry.
Tertiary Sector
The service includes every job such as administrative assistants, nurses, teachers,
and lawyers. Sociologists have a way of distinguishing between types of jobs,
which is based more on the social status and compensation that come with them.
These are the primary labor market and secondary labor market.

The primary labor market includes jobs that provide many benefits to workers, like
high incomes, job security, health insurance, and retirement package. These are
white-collar professions, like doctors, accountants, and engineers.

Secondary labor market jobs provide fewer benefits and include lower-skilled jobs
and lower-level service sectors jobs. They tend to pay less, have more
unpredictable schedules, and typically do not offer benefits like health insurance.
They also tend to have less job security.
Global Corporations
Corporations are defined as organizations that exist as legal entities and have liabilities that
are separate from its members. More and more these days, corporations are operating across
national boundaries.
Global Corporation

The increase in international trade had both created and been supported by international
regulatory groups, like WTO, and transnational trade agreements, like NAFTA. There is not a
single country that is completely independent. All are dependent to some degree on
international trade for their own prosperity. Without international trade, there would be no
need for international trade at the current massive scale would be impractical. The trade
regulatory groups and agreements regulate the flow of goods and services between
countries. They reduce tariffs, which are taxes on imports, and make customs procedures
easier. This makes trading across national borders much more feasible.
Global Corporation

These companies that extend beyond the borders of one country are called multinational or
transnational corporations (MNCs or TNCs). They intentionally surpass national borders and
take advantage for opportunities in different countries to manufacture, distribute, like
McDonald’s or Coca-Cola, and yet, they still market themselves as American companies.
Others can be surprising like General Electric, which is based in the United States but has
more than half of its business and employees working in other countries. Another example is
Ford Motor Company, the classic American car company, headquartered in Michigan that
manufacturers cars worldwide.

Transnational corporations have a significant role in the global economy. Some have greater
production advantages than an entire nation. They influence the economy and politics by
donating money to specific political campaigns or lobbyists.
Global Corporations
Usually operate in the countries with:
 cheapest labor
 In effect the working population suffer from:
exploitation
prohibited from organizing a labor union
work with long working hours
substandard wages
poor working conditions
Note: Once the government strictly enforce labor laws, the TNCs just simply move to
other countries leaving a widespread unemployment.
Global Corporations
Negative effects of globalization from TNCs:
 It promote the personal agendas of the TNCs and give them autonomy
 TCNs influence politics of the host countries and allow the workers to be exploited
Positive effects of TNCs operations worldwide:
 Better allocation of resources
 Lower prices for products
 More employment worldwide
 Higher product output
 Cultural practices and expression are also passed between nations, spreading from
group to group. – diffusion.