Economic Globalization

One of the most obvious signs of globalization in our lives is the vast array of products that are available to us from all over the world. Vast trade networks provide access to goods and services from all corners of the globe. We look at the foundational ideas and individuals behind economic globalization to examine how these vast networks developed and how they operate in contemporary society.

Japan: The Ukita family of Kodaira CityFood expenditure for one week: 37,699 Yen or $317.25

Italy: The Manzo family of SicilyFood expenditure for one week: 214.36 Euros or $260.1

Germany: The Melander family of BargteheideFood expenditure for one week: 375.39 Euros or $500.07

United States: The Revis family of North Carolina Food expenditure for one week: $341.98

Mexico: The Casales family of CuernavacaFood expenditure for one week: 1,862.78 Mexican Pesos or $189.09

Poland: The Sobczynscy family of Konstancin-JeziornaFood expenditure for one week: 582.48 Zlotys or $151.27

Egypt: The Ahmed family of CairoFood expenditure for one week: 387.85 Egyptian Pounds or $68.53

Ecuador: The Ayme family of TingoFood expenditure for one week: $31.55

Bhutan: The Namgay family of Shingkhey VillageFood expenditure for one week: 224.93 ngultrum or $5.03

Chad: The Aboubakar family of Breidjing Camp Food expenditure for one week: 685 CFA Francs or $1.23

Guiding Questions: How did economic globalization develop?  Which economic ideas have most

influenced the development of contemporary economic globalization?

How did free trade emerge as the dominant economic policy of most governments?

 

What is Economic Globalization? Integration of the world’s economies and the

freer flow of goods.

Is economic globalization a new phenomenon? Some world historians attach globalization ‘big bang’

significance to 1492 and 1498 (exploration of the “New World”). Such scholars are on the side of Adam Smith who believed that these were the two most important events in recorded history.

Other world historians insist that economic globalization stretches back even earlier.

There is a third view which argues that the world economy was fragmented and completely de-globalized before the early nineteenth century.

Modern Economic Globalization

Historical and economicglobalization are not new phenomenon's. How? Remember the Silk Road, mercantilism, capitalism, and the Industrial Revolution? This is the evolution of both historical and economic globalization.

In this unit, we will examine modern economic globalization.

How might government intervention limit economic freedom?

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John Maynard Keynes

Friedrich Hayek

Governments should play a significant role in managing economyGovernment intervention in economy is needed to increase spending and prevent or end recession.“decadent” capitalism is not intelligent, is not just and does not work.

Less government involvement in economy means greater economic freedom and prosperityControlling the economy = controlling every sector of human life.

Foundations of Economic Globalization During the 1930s, many of the world’s major economies

had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain

developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade.

There was also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War.

During World War II

Democratic allied countries, led by the US became concerned about what the global economy after the war would look like.

1944, 44 allied countries met in New Hampshire, US at Bretton Woods to discuss post war-economic order.

UN Monetary and Financial Conference. Bretton Woods, New Hampshire, U.S. 1 July 1944.

http://www.un.org/issues/gallery/history/earlypix5.htm

Bretton Woods Agreement  The delegates at Bretton Woods reached an agreement known as

the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. This international monetary system was to be a global network of institutions to promote international trade and the regulation of currency ($$) among Western countries.

To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act.

Bretton Woods continued Common monetary system: each country would maintain a

fixed exchange rate for its currency. A fixed exchange rate, the value of a country’s currency is set by the government.

Each of the countries agreed that the fixed exchange rate for its currency would be based on the gold standard. This means that all printed money, such as paper money, would be convertible to gold and could be cashed in at any time for that gold.

What is the problem with this? Countries are limited to printing money up to the value of their gold reserves? Billion dollars worth of gold = billion dollar’s worth of currency.

Hmmmm….. However, in times of crisis such as war, famine or

the need to build infrastructure such as highways and dams, a country may need to borrow $$. How do they borrow money? As individuals, we rely on our credit cards like VISA or MASTERCARD. However, for governments and people, a debt is a debt and it needs to be paid. Well, often governments will print more money in order to pay for the things they need. What happens when governments print more money?

= debt and when it has too much debt, the value of the country’s currency drops = inflation.

Floating Exchange Rates 1960’s USA - high inflation as a result of the

Vietnam War and massive new social programs. Prez Nixon closed the “gold window”. This meant

that the US dollar was no longer redeemable for gold by the US gov’t. A lot of countries followed suit.

1976, most world currencies had floating exchange rates = country’s currency was no longer fixed by the government. Found its own value on the foreign exchange market. Currency’s value was decided by supply and demand. = the number of people looking to buy and sell it in the foreign exchange market.

The Value of Money What is the value of our Canadian dollar? How is it

determined? Why is it sitting at over one dollar in the US the last number of weeks ? Why are people buying cars and shopping to the South?

The answer: the real value of the dollar lies in the wealth of the country and in what the dollar can buy here and in other parts of the world. Canada has a strong economy presently and so our dollar is valued more here and in other parts of the world, like the US.

Bretton Woods creates the World Bank and the IMF

World Bank theoretically, is an agent for the United

Nations, but in practice, is independent and controlled by its 184 countries.

provides loans to less developed countries that are in financial difficulty. To get loans, countries are usually required to meet certain political and economic conditions. (ex. Reducing corruption, reduce spending on social programs like health care)

International Monetary Fund Work together with the World Bank to bring stability to

international monetary affairs and to help expand world trade.

IMF is in charge of monitoring exchange rates and providing short term financial assistance.

Agency of the United Nations. Funded primarily through quotas that member countries pay.

A country’s quota is based on its relative size. USA contributes most to the IMF because it is the largest economy in the world. See page 211 Fast Facts and Figure 10-5 on page 212.

Annual expenses of running the IMF are met mainly by interest payments on loans and deposits.

The Expansion of the Free Market Economy

The Cold War: 1946 – 1989 between the US and the former Soviet Union. It was a war between Communism/centrally planned economies vs capitalist free market democracies.

With the end of this cold war, many former communist countries began to embrace capitalist free markets. Ex. Poland, Russia, East Germany.

China has recently opened its doors to capitalism and has become trading partners with many other super world powers like USA and Japan. India has also become a world leader (outsourcing)

The whole world is now part of the global economy.You can invest anywhere in the world because we have access to computers where we can invest in companies and governments all over the world. You can buy stocks and bonds and make a profit!

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Contemporary Economic Globalization

When most people think of economic globalization, they think of free trade.

To a large extent, this is accurate. The economies of the world have become more integrated over the past 20 years.

How did free trade emerge as the dominant economic policy of most governments?

 

Regulation of Free Trade After WWII, United Nations was created

made up of 50 countries. The General Agreement of Tariffs and Trade

(GATT) was established in 1947 as an agency of the UN.

It began with a membership of 23 countries Operated under 4 principles:

GATT Conducting trade in a non-discriminatory manner. Treating imported goods from a member country in

the same manner as similar domestic goods. Protecting domestic industries through tariffs (a tariff

is a tax imposed on imports to increase their price and thus reduce competition with domestic products)

Requiring any country that applied for membership to present a list of tariffs and other trade restrictions imposed on member countries.

GATT Between 1946 and 1995, GATT members agreed to

substantial reductions in trade barriers. 1995- membership of 131 countries, accounting for

more than 90% of international trade. GATT was transformed into the World Trade

Organization in 1995. How do the 4 principles of GATT, now WTO

contribute to and further economic globalization?

Free Trade between Canada, USA and Mexico

Reasons for why each wanted to sign the agreement. Read page 218 and complete the following chart.

Canada United States

Mexico

What is being implied here?

The following cartoon is from Australia but it reflects many of the views that Canadians hold about freer trade with the United States. What point of view is being communicated by this cartoon? Do you share this view? Why or why not?

Case Study: Canada and the Wine Industry

How has freer trade affected Canadian industry?

Read the case study on page 221-222 and answer the following question in your notes:

1. What did the Canadian wine industry do to adapt to the Free Trade Agreement? Were these measures successful? Why?