The GLOBAL

ECONOMY
◤
◤

WHAT IS
GLOBAL
ECONOMY?
 ◤

▪ Economic globalization is a historical

process
▪ The result of human innovation and
integration
 ◤
ECONOMIC
GLOBALIZATION

Globalization of Globalization of
trade of goods and technology and
services communication

Globalization of
Globalization of production
financial and
capital markets
 ◤

▪ Economic globalization
is distinct from
internationalization
 ◤

▪ Economic globalization is
a ‘ Functional integration
between internationally
dispersed activities’
▪ – Dicken (2004)
▪ “ORGANIC SYSTEM” by extending
◤

Transnational economic processes

and economic relations to more and
more countries and by deepening the
economic interdependencies among
them.
▪ - Szentes 2003
 ▪Globalization transforms the
◤

national economy into a global

one - Reich, 1991

▪ Global commodity chains

- Gereffi (1999)
On a more balanced account
◤

Globalization is redefining the

role of the nation state as an
effective manager of the
national economy’ - Boyer and
Drache 1996
◤

ECONOMIC
globalization
PHENOMENON
 ◤

▪ GLOBALIZATION creates “ORGANIC

ORGANIZATION” of world economy.
 ◤
FRANK AND GILLS

“The existence of
SAME WORLD
SYSTEM in which we
live stretches from
5000 years”

Archaic Globalization
: SILK ROAD
 18th
◤ and 17th
CENTURY

▪ Trade and
exchange rather
than production
countries are self
sufficient and
autarkic
 19th CENTURY
◤

▪ Increase in World
Trade caused by
TRANSPORT
REVOLUTION
CONVERGENCE VERSUS
DIVERGENCE
● “Non-globalizer countries failed to reduce absolute and
relative poverty in the last few decades. On the other
hand, countries that have embraced globalization (proxied
by trade openness) have benefited from openness
considerably” (Dollar and Kraay)

● “The industrialisation of the former led to the de-

industrialisation of the latter” (Bairoch )
Colonialism and Imperialism
- Caused the underdevelopment (persistent lack of
economic growth and development) (Rostow)
- ‘conscious policy’ adopted by leading capitalist nations
◤
(Hobson)
- Product of the world capitalist system which has
perpetuated unequal exchange (Wallerstein)
World systems analysis claims
that capitalism under
globalization
◤
reinforces the
structural patterns of unequal
change.
Modern capitalist system
The periphery is not just dependent on the core:
the latter’s development is also conditioned on the
former.
◤
-Trade and financial
transactions
-Businessmen
THROUGH -Merchants
-Financial entrepreneurs
-State bureaucrats
Globalization, a product of the
capitalist development.
◤
 INTERNATIONAL
MONETARY
SYSTEMS/REGIME (IMS)
◤

RULES, CUSTOMS, INSTRUMENTS,

-

FACILITIES, AND ORGANIZATIONS FOR

EFFECTING INTERNATIONAL PAYMENTS
◤
MAIN TASK OF IMS:
▪ Facilitate cross-border
transactions

⮚Money is inherently political, an

integral part of “high politics” of
diplomacy
 THE GOLD STANDARD
◤

▪ Origin of the first modern-day IMS: early 19th century – UK

adopted gold mono-metallism in 1821.

▪ International Monetary Conference in Paris in 1867-

European nations and the US shifted to gold.

▪ Gold was believed to be guarantee a non-inflationary,

stable economic environment, a means for accelerating
trade (Einaudi, 2001). 🡪 Gold standard = international
monetary regime in 1880
▪ The gold standard
◤ functioned as fixed exchange rate regime, with gold
as the only international reserve. 🡪 common adherence to gold
convertibility linked the world together through fixed exchange rates

STRENGTH OF THE SYSTEM:

-had the tendency for trade balance to be in equilibrium 🡪 ensured by
the automatic price-specie flow mechanism
-Was able to create stability
-helped nations to restore balance in their current accounts
-provided almost unlimited access to world finance
▪ However, as ◤nation’s gold reserves diminished, general price level started to decline as well
🡪 restored competitiveness on international markets

▪ End of gold standard = outbreak of World War I

▪ 1930s – Darkest period of modern economic history

⮚ Competitive devaluations DROP OF

INTERNATIONAL
⮚ Tough capital controls
TRANSACTIONS
⮚ Imposition of tariffs

▪ After World War 1, laborers became more successful in preventing incumbents from adapting
welfare-reducing austerity measures.
EUROPEAN
MONETARY
◤
INTEGRATION
 POST WORLD WAR II ERA

Marshall Plan Rome Treaty

(1957) Established the

01 03
Post-war European Economic
reconstruction Community
program

04
European Coal
02
Morgenthau
Intended to downsize
Plan and Steel
the German economy Community
(1951) Miraculous
performance of
Western Europe
 Germany
Netherlan
EUROPEA ds
N
Luxembou
rg
SIX France

Italy Belgiu
m
 1992 1979
Maastricht Treaty -
European Economic European Collapse of Bretton
Wood System
and Monetary Union Monetary System

1999 2008-9 2010

member states of the Global financial and EU enacted a three-
EMU abandoned their economic crisis pillar financial
national currencies rescue program
INTERNATIONAL
◤
TRADE AND
TRADE POLICIES
◤

Comparative Advantage Theory

by
David Ricardo

"Every single nation must have a comparative advantage in

something irrespective of its initial conditions."
 ◤

- Voluntary trade can have very

different distributional effects.

- Can hinder long term prospects

of the country producing the
lower value added products.
 ◤
Infant Industry Argument
By List

▪ Trade patterns should not be

considered as static.
▪ Restricting free flow of goods = national
industry can be established = fostering
long - term economic growth and
political power
 ◤
▪ Reformist and radical theorists such as
Emmanuel (1972) or Amin (1976) argued that
unequal exchange is a fundamental and
systemic distinguishing characteristic of
modern world economy.

▪ Social division of labour contributes to the

economic development of the core and
hinders development at the periphery
 ◤ Underdeveloped
Core Economies Countries

▪ Consumers of ▪ Consumers of
primary commodities manufacturers

▪ Producers of ▪ Producers of raw

manufactured materials
articles
 ◤

▪ If the world economy is such that it

benefits core countries at the
expense of the periphery, the latter
should adopt protectionism in its
form of de-linking
 ◤
International trade can trigger tensions

▪ Gains from trade within a country will affect the

relative well-beung of its citizenz who will
therefore either support of oppose trade.
▪ Stolper-Samuelson Theorem.
 Unilateral
◤
Trade Order
 ◤
What is a Unilateral Trade Order

Unilateral free trade simply means that one

country reduces its import restrictions without
any formal agreement for reciprocation from
its trade partners
▪ Definition:

- happens when a country imposes a trade restriction,

such as a tariff, on all imports. It also applies to a state
that lifts a tariff on its partner's imports even that's not
reciprocated. A large country might do that to help out a
small one. A unilateral agreement is one type of
free trade agreement.
 ◤

▪ In the 17th to 18th Century, Europe

international trade was basically a means to
accumulate surplus (gold reserves) in the
balance of payments by stimulating export
and restricting import.
▪ This served the monarchs to fund the wars
Arrival of the Industrial Revolution
◤

▪ This brought about a surge of international trade.

▪ Led to the Industrialization of Britain

▪ Bilateral Trade Agreements (agreements across 2 countries)

Happened all around Europe to balance trading power.

▪ TARIFFS REDUCED - tax

▪ This systems of Bilateral Trade Agreements across the

countries around Europe gave way for the “First Common
Market” – a multilateral trade order
 ◤
Catching up with Industrialization
▪ However, this did cause many conflicts and interruptions on free
trade.

▪ US adopted a highly protective import substitution

industrialization with tariffs on manufacturing goods. – more
expensive import = self proficiency

▪ They were catching up on Industrialization

▪ Usually, countries will try to catch up by also adopting

protectionism to balance their advantage
 ◤
Before World War 1

▪ Afterwards, 1860’s onwards, European countries

soon had a few protectionist measures as a response
to the inflow of cheap products from catching up
countries like Germany and US.

▪ The Unilateral Trade Regime or Dominant position of

the UK and Britain was not threatened.
 ◤
WORLD WAR 1
▪ Dramatic Blow to Free Trade

▪ Protectionism became Detrimental to development,

peace and stability

▪ 2 World Economic Conferences failed to deliver tariff

reductions and exchange rate stabilizations because
US did not want to take Great Britain’s Role as
Hegemon – leading power

▪ US did not want to have restrictions-free trade

because of the Great Depression of 1929 - 1933
 ◤
WORLD WAR 1
▪ The Smoot-Hawley Act of 1930 increased tariffs to
RECORD HIGH LEVELS in the US

▪ Other countries soon had to retaliate in response, and

international trade dropped by one to two thirds as a
consequence.

▪ The US Reciprocal Trade Agreements Act in 1934

eventually put a stop to any further decline in international
trade – allowed the President to determine trade policies,
and provided a solid base for trade in WWII
 Multilateralism : From the
◤
General Agreement on
Tariffs and Trade(GATT) to
the World Trade
Organization(WTO)
\
◤

MULTILATERALISM
▪ at least three/multiple governments
participate in a particular issue or to
try to solve a problem.
Multilateralism is an example of
cooperation among world
governments and used in contrast
with unilateralism.
 ◤
▪ Advantages of Multilateralism:

▪ fair treatment for all

▪ greater global prosperity

▪ cheaper goods more widely available

▪ increased ability to secure the supply of

essential products (eg. food) when local
production fails
▪ Disadvantages
◤ of Multilateralism:
▪ taking years of negotiation

▪ increased global trade may lead to

countries being increasingly reliant on
imports for important goods
▪ may reduce the diversity of activity in local
economies and the loss of industries and
jobs to competing countries
After the Second World War (1945 onwards)
◤
▪ 1945, United Nations was created with active participation of US and the Soviet Union

▪ Post-war years saw the development of organizations such as GATT, World Bank and International Monetary Fund and
others

▪ dollar became a world currency, backed by two-thirds of the world’s gold reserve in 1950 (Green, 1999 )

▪ United States was the largest aid donor, mostly in the form of the Marshall Plan **

▪ GATT exerted influence via a series of multilateral trade negotiations (or rounds). It aimed at initiating an international trade,
by liberalizing policies and removing tariffs.

▪ The most famous multilateral trade negotia-tions were carried out under the Uruguay Round between 1986 and 1994.

▪ After almost 50 years of rules-based trade negotiations, the Uruguay Round gave birth to a ‘real’ international trade
institution, the World Trade Organization.

▪ WTO has more powers and augmented functions in dealing with the international economic affairs.

▪ An international organization, that came into existence to oversee and liberalize trade between countries.

▪ WTO includes services and aspects of intellectual property along with the goods
 ◤ DEVELOPING COUNTRIES AND
INTERNATIONAL TRADE

▪ The first major change in this state of affairs happened in 1964, when the
United Nations Conference on Trade and Development (UNCTAD) was
established with the joint effort of the developing world.

▪ What is the aim of UNCTAD?

▪ The change in the behaviour of developing countries arrived with the

Uruguay Round.

▪ Originally, the round was meant to be a grand bargain between developed

and developing economies (Ostry, 2002).

▪ While developing countries have opened up their service markets, their

export of agricultural products is still blocked by advanced nations.
▪ Developing countries, however, might have easily found themselves on the losers’
◤
side at least in the short term.

▪ Hertel et al. (1998) have also acknowledged that Africa is a potential loser of the
Uruguay Round.

▪ Khor (1995) thus views the WTO as the means by which industrialized countries
can gain access to the markets of developing countries.

▪ DiCaprio and Amsden (2004) regard the WTO as a logical consequence of the
Washington Consensus approach to development, which considers domestic
interventions highly distortive and ineffective.

▪ Stiglitz (2002) argues that today’s advanced economies applied such ‘distortions’
widely at the onset of their own development. It is hypocritical, therefore, to
enforce developing countries to fully liberalize their trade and financial sector.