C.

GLOBAL ECONOMY

Learning Objectives

At the end of this lesson, you should be able to:

1. define economic globalization;

2. define modern world system; and,
3. identify the actors that facilitate economic
globalization.
Economic Globalization

Economic globalization is a historical process, the

result of human innovation and technological
progress.

It refers to the increasing integration of economies

around the world, particularly through the movement
of goods, services, and capital across borders.

The term sometimes also refers to the movement of

people (labor) and knowledge (technology) across
international borders (IMF, 2008).
Several interconnected dimensions of economic
globalization are:

1. globalization of trade of goods and services;

2. globalization of financial and capital market;
3. globalization of technology and communication;
and,
4. globalization of production.
What is a global economy?

The global economy refers to the interconnected

worldwide economic activities that take place
between multiple countries.

Can have either:

❑ positive impact on the countries involved
❑ negative impact on the countries involved
Characteristics of Global Economy:

1. Globalization: Globalization describes a process by

which national and regional economies, societies,
and cultures have become integrated through the
global network of trade, communication,
immigration, and transportation.
Due to the global economy/globalization, domestic
economies have become cohesive, leading to an
improvement in their performances.
2. International trade: International trade is
considered to be an impact of globalization.

It refers to the exchange of goods and services

between different countries, and it has also helped
countries to specialize in products which they have
a comparative advantage in.

This is an economic theory that refers to an

economy's ability to produce goods and services at
a lower opportunity cost than its trade partners.
3. International finance: Money can be transferred at
a faster rate between countries compared to
goods, services, and people; making international
finance one of the primary features of a global
economy. International finance consists of topics
like currency exchange rates and monetary policy.
4. Global investment: This refers to an investment
strategy that is not constrained by geographical
boundaries.

Global investment mainly takes place via foreign

direct investment (FDI).
International Monetary Systems

According to Istvan Benczes (2014) a regime can be

thought of as all the:

❑ implicit and explicit principles, norms, rules

❑ decision-making procedures around which actors’

expectations converge
International Monetary Systems

International Monetary System or regime (IMS) refers

to the rules, customs, instruments, facilities, and
organizations for effecting international payments
(Salvatore, 2007:764).

International Monetary System facilitates trade and

investment transactions of countries.
In 1821, the United Kingdom had its gold mono-
mentalism as its form of currency.

❑ monetary unit is expressed in terms of gold

❑ standard coins possess a fixed weight and
fineness of gold
❑ only one metal is used as standard money
❑ market value is fixed in terms of a given quantity
and quality of the metal
The Bretton Woods System

❑ United Nations Monetary and Financial

Conference was held in Bretton Woods, New
Hampshire, United States in July 1944

❑ (Even before the formal establishment of the UN

in 1945, countries had been planning and
negotiating on matters of importance to the
world, using the name “United Nations”).
The Bretton Woods System

Delegates of 44 countries participated and agreed to

have a new regime –

❑ gold exchange standard the US dollar was the

only convertible currency

❑ US was committed to sell and buy gold without

restrictions at US$ 35 dollar an ounce
Alongside the new regime were the establishment of two
international institutions:

1. The International Bank for Reconstruction and

Development (IBRD).
o for assistance for reconstruction of countries
that were damaged by war

2. The International Monetary Fund (IMF).

o promote Internal financial cooperation
o strengthen international trade
o to oversee efficient operation of the gold-
exchange
o providing assistance to countries having
balance of payments problem
European Monetary Integration

❑ In 1953, the Rome Treaty established the

European Economic Community (EEC)

❑ Its aim was the creation of a common market so

that goods, services, capital, and labor could
move freely

❑ Founding members were Germany, France, Italy,

Netherlands, Belgium, and Luxembourg
European Monetary Integration

Because of the collapse of the Bretton Woods System,

the European Monetary System (EMS) was negotiated in
1979.
❑ not the dollar or gold that could be used in
stabilization processes of exchange rate
❑ it was a systematic adjustable peg arrangement
❑ European Exchange Rate Mechanism was created
(Gros and Thygesen, 1998)
(European Monetary Integration)

❑ eventually, the European Economic and Monetary

Union (EMU) was established in 1999

❑ states delegated monetary policy to the European

Central Bank (ECB)

o primary goal was to maintain price stability

Multilateralism

Countries that were committed to lower tariffs had

negotiated the General Agreement on Tariffs and
Trade (GATT) which took effect on January 1, 1948.

The first five rounds of negotiations were solely on

lowering tariffs.

They went on to the other agenda, like:

❑ tariffs and anti-dumping measures,
Multilateralism

❑ tariffs, non-tariff barriers framework

agreements

❑ rules, services, intellectual property

❑ dispute settlement

❑ textiles, agriculture

❑ creation of the World Trade Organization

(WTO).
International trade includes the exchange of a
variety of products between countries.

Benefits:

❑ Providing a foundation for worldwide economic

growth, with the international economy set to
grow by 4% in 2019 (source: World Trade
Organisation)

❑ Encouraging competitiveness between countries

in various markets
❑ Raising productivity and efficiency across
countries

❑ Helping in the development of underdeveloped

countries by allowing them to import capital
goods (machinery and industrial raw materials)
and export primary goods (natural resources and
raw materials)
Developing Countries (DC) and International
Trade

❑ Developing countries did not participate

actively in multilateral trade negotiations

❑ As a result, they were not able to

successfully integrate into the world
market
Developing Countries (DC) and International
Trade

❑ However, they DC continued to import

substitute products

❑ Correspondingly, developed countries did

not open for textile and agricultural
products (which are developing countries’
comparative advantage)
The United Nations Conference on trade and
development (UNCTAD) established in 1964 with the
joint effort of the developing world improved the
latter’s standing in international trade.

❑ Its primary aim was to promote trade and

cooperation between developing/developed
nations.
❑ With the Uruguay Round (founding of the WTO),
it was agreed upon that:

o the developed countries have to open their

markets to agriculture and textile products

o developing countries agreed of new

regulations on intellectual property rights
and services

• and opened up their service markets

Modern World System

The modern world-system has a multi-state political

structure (the interstate system) and therefore its
division of labor is international division of labor.

In the modern world-system, the division of labor

consists of three zones according to the prevalence of
profitable industries or activities:

❑ Core

❑ semi periphery

❑ periphery
Modern World System

Countries tend to fall into one or another of these

interdependent zones core countries.

Resources are redistributed from the underdeveloped,

typically raw materials-exporting, poor part of the
world (the periphery) to developed, industrialized core.
The modern world system is essentially capitalist in
nature, followed the crisis of the feudal system and
helps explain the rise of Western Europe to world
supremacy between 1450 and 1670.

This theory makes possible a comprehensive

understanding of the external and internal
manifestations of the modernization process during
this period and makes possible analytically sound
comparisons between different parts of the world.
(Benczes, 2014).
 ACTIVITY
• Global free trade has done more harm than good?
Yes or No.
• Do not forget to indicate first your answer whether
it is a No or a Yes, then justify your answer in not
more than 100-word.
• Send your answer to the email address given to you
by your teacher, with “FREE TRADE” as your
subject.
• Corresponding deduction will be imposed for
delayed submission.