CHED FACULTY TRAINING FOR THE TEACHING OF THE NEW GENERAL EDUCATION(GE)

CORE COURSES: SECOND GENERATION TRAINING

I. Title: THE GLOBALIZATION OF ECONOMIC RELATIONS

II. Learning Objectives:

At the end of the chapter/lesson, the students should be able to:
define Economic Globalization and Internationalization;
describe the evolution of the International Monetary Systems(IMS);
compare and contrast Most Favored Nation(MFN) principle from
Protectionism; and
synthesize the results of globalization and internalization.

III. Introduction:
It is a plain exaggeration to limit globalization to simply a form of purely
economic undertaking because it also concerns political, technical and cultural
integration across nation state borders. Thus, anyone who once dreamed of a
seamless network of efforts and opportunities can assert that globalization
realized such dream. Yet, it cannot be denied that the most influential dimension
of globalization is one with economic perspective.
This chapter is dedicated to the discussion of global economic integration
focused specifically on the origin and consequences of economic globalization,
the major role of International Monetary Systems (IMS) in facilitating international
transactions and the determination of trade policies of nation states that are open
or reluctant of economic globalization.

IV. Content:
Economic Globalization.
Economic Globalization refers to the increasing integration of economies
around the world, particularly through the movement of goods, services and
capital across borders. It can also refer to the movement of people(labor) and
knowledge(technology) across international borders (IMF,2008).
From the above definition, there are different interconnected dimensions
of globalization such as: (a) trading of goods and services; (b) financial and
capital markets; (c) technology and communication; and (d) production.
Economic globalization can be differentiated from internationalization in
terms of extension of services wherein the latter is only an extension of
economic activities of nation states across borders, while the former is a

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CORE COURSES: SECOND GENERATION TRAINING

functional integration between internationally dispersed activities. Thus, while

globalization aims at reducing trade barriers across borders, internationalization
can hardly invoke the same initiative due to the absence of integration of
economic activities across borders.
If one is to consider the origin of economic globalization, he may find it
difficult to identify with particularity since there is no consensus yet on that
matter. If economic globalization is accepted as a process that creates an
organic system of world economy, we can go back in history not just beyond 30
years but maybe even to the time Homo Sapiens started migrating from Africa to
the rest of the world.

International Monetary Systems.

The International Monetary System (IMS) refers to the rules, customs,
instruments, facilities, and organizations for effecting international payments
(Salvatore, 2007:764).
The main function of IMS is to facilitate cross-border transactions,
especially trade and investment. But, an IMS is not just about money or
currencies, it also reflects the economic power and interests because money is
inherently political (Cohen, 2000:91).
Together with the origin of the IMS was the creation of the Gold Standard
which was first adopted by UK in 1821. Afterwards, in 1867 the United States
shifted to the gold standard. Gold came to be known to guarantee a non-
inflationary, stable economic environment.
The gold standard functioned as a fixed exchange rate regime, with gold
as the only international reserve. Thus, participating countries in international
exchanges determined the gold content of national currencies which in turn
defined exchange rates (or mint parities). In other words, the common adherence
to gold convertibility created a global linkage through fixed exchange rates
(Bordo and Rockoff, 1996:3).
The 1930s was considered the darkest period of the modern economic
era. Competitive devaluations which culminated in the devastating drop of
international transactions. As a result, the original gold standard was later
abandoned together with its pegging system which only allows deflationary
policies.
In July of 1944, the Allied Nations initiated a new international monetary
regime in the framework of the United Nations Monetary and Financial
Conference in Bretton Woods, New Hampshire (US). With 44 countries acting as
delegates in such gathering, the majority agreed to adopt an adjustable peg
system, the gold-exchange standard. The US dollar was the only convertible
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CORE COURSES: SECOND GENERATION TRAINING

currency of the time so that it was committed to sell and purchase gold without
restrictions at US$35 dollar an ounce. All other participating but non-convertible
currencies were fixed to the US dollar. In effect, the standard of exchanges in the
international market was only the US dollar.
Delegates also agreed to establish two international institutions such as:
the International Banks for Reconstruction and Development (IBRD) intended for
post-war reconstructions; and the International Monetary Fund (IMF) whose
existence was intended to promote international financial cooperation and
buttress international trade.
The IMF was expected to safeguard the smooth functioning of the gold-
exchange standard by providing short-term financial assistance in case of
temporary balance of payments difficulties.
Only during the first few years of the new regime, the US was able to
manage and maintain a surplus on its balance of payments. In the subsequent
years, the US dollar became overvalued in face of its major currency
counterparts which caused their countries to deplete US gold reserves. Later on,
huge balance of payments and trade deficits along with inflationary pressures
forced the US to abandon the gold-exchange standard on August 15, 1971. The
Smithsonian agreement was reached by a group of 10 countries (G10) in 1971 to
reestablish an international system of fixed exchange rates without the backing of
silver or gold and allowed the devaluation of the US dollar. This was the first time
in which currency exchange rates were negotiated
(http://www.investopedia.com/terms/s/smithsonian-agreement.asp)

In Western Europe, the European Economic Community (EEC) was

established in 1957 which was the result of the signing of the Rome Treaty and
was considered the first major step towards an ever close union. The six original
founding members were Germany, France, Italy, Netherlands, Belgium and
Luxembourg whose aim was the creation of a common market, where goods,
services, capital and labor can move freely. Originally, the European Six did not
plan any direct cooperation in the field of finance or exchange rate policies, but
the collapse of the Bretton Woods System decisively prompted the creation of
the European Monetary System (EMS) in 1979.
The EMS was unique because neither the US dollar nor gold can play the
role of the stabilization process of exchange rates. Instead, a systematic
adjustable peg arrangement, the European Exchange Rate Mechanism, was
created (Gros and Thygesen, 1998). The success of the EMS and the total
abolishment of capital controls by the end of the 1980 paved the way for the
foundation of the new European Economic and Monetary Union (EMU) through
the signing of the Maastricht Treaty in 1992. By 1999, the member states of the
EMU abandoned their national currencies and delegated monetary policy onto a

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CORE COURSES: SECOND GENERATION TRAINING

supranational level administered by the European Central Bank (ECB), whose

primary goal has been the maintenance of price stability. The first ten years of the
EMU were successful for participating countries as their trade and capital
transactions increased, economies were integrated; macroeconomic stability was
restored and the euro became the second most widely used reserve currency
(European Commission, 2008).
The global financial and economic crisis of 2008-2009 became the most
devastating challenge to the European Union (EU). The euro-era design flaws
were so serious that it cannot allow the European Central Bank (ECB) to act as a
lender of last resort nor can it bail out countries which have lost their monetary
authority (that is, it cannot authorize that they devaluate their currency nor reduce
domestic interest rates in case of troubles). As a response, the EU enacted a
three-pillar financial rescue program in 2010 consisting of the following: (1) the
European Financial Stability Mechanism; (2) the European Financial Stability
Facility; and (3) the financial assistance of the IMF. Since this three-pillar system
is only for the short-term, EU decided to activate its own permanent rescue
facility, the European Stability Mechanism from 2013 onwards.
International Trade and Trade Policies.
David Ricardo introduced the comparative advantage theory wherein he
said that a country such as England could benefit from voluntary trade even if its
trading partner was more effective in producing both wine and clothing. England
can specialize in the production of the good with less disadvantage and let the
trading partner produce the other product (Samuelson, 1995).
But trade is not possible without politics. Thus, voluntary trade can bring
about uneven distribution of benefits and can hinder the long-term development
prospects of the country producing lower value added products like from the
agricultural economies. Thus, a temporary avoidance of international trading can
effective for less effective underdeveloped nations.
Radical theorists like Emmanuel (1972) or Amin (1976) argued that
unequal exchange is a fundamental and systemic distinguishing characteristic of
the modern world economy. The social division of labor helps in the economic
development of core and hinders the development of the periphery. In
international trade, the core nations have the tendency also to amass political
power and influence over the periphery. Thus, the coalitions of potential losers of
trade provide a permanent basis for the advocacy of protectionism.
A unilateral trade order has emerged as a result of European international
trading practices built upon the theory of the Most Favored Nation (MFN) which
stated that any negotiated reciprocal tariff reductions between two parties should
be extended to all other trading partners without conditions. The fact was, the

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CORE COURSES: SECOND GENERATION TRAINING

economies of Europe have adopted protectionism by imposing tariffs and import

duties on foreign goods.
The US, on the other hand, became so stiff with its tariff trade restrictions
until the Great Depression of 1930s. The Reciprocal Trade Agreements Act in
1934 put a stop to any further decline in international trade. The same Act
allowed the determination of trade policies that are more consistent with the
principle of MNF.
Afterwards, a shift to multilateralism of trading occurred with International
Trade Organization (ITO), which was one of the three pillars of the Bretton
Woods System (the other two being the IMF and IBRD). The ITOs main concern
was an ultimate free trading agreement across borders. With the coordination of
other nations committed to a world of lowered tariffs the General Agreement on
Tariffs and Trade (GATT) resulted from such nations.
Almost after 50 years, the Uruguay Round created the World Trade
Organization (WTO). WTO was launched on January 01, 1995 and became the
official forum for trade negotiations. Unlike the GATT, it is a formally constituted
organization with legal personality. However, huge resistance from different
sectors of NGOs and anti-globalization movements who protesting in favor of the
interests of the disadvantaged and less-developed countries. Besides, they noted
the dominance of the US economy and the selfish interests of large multinational
corporations and assumed discriminatory practices of the WTO.

V. Activity/ Assessment:
Directions: Read each item below and answer the question in a separate
sheet of paper. Each item has a unique rating relative to the degree of
relevance to the learning objectives.
1. What is the main function of the IMF in international trading and finance? (5
points)
2. What are the possible reasons for the collapse of the Bretton Woods system?
(10 points).
3. What are the usual mechanisms used by the Western Economies in adopting
the principle of protectionism? (5 points)

VI. References:

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CHED FACULTY TRAINING FOR THE TEACHING OF THE NEW GENERAL EDUCATION(GE)
CORE COURSES: SECOND GENERATION TRAINING

Cohen, B. (2000) Money and Power in World Politics. New York: Ashgate
Publishing.
Gros, D & Thygesen, N. (1998). European Monetary Integration. London:
Longman.
IMF (2008). Globalization: A Brief Overview. Washington, DC.
Salvatore, D. (2007). International Economics. Hoboken John Wiley &
Sons.
Samuelson, PA (1995). The Past and the Future of International Trade
Theory. University of Michigan Press.
http://www.investopedia.com/terms/s/smithsonian-agreement.asp