Module 3: Economic Globalization

What is economic globalization? We have a working definition of globalization as the expansion and intensification of social relations and consciousness across world-time and world-space. Economics has to do with the production of goods, the provision of services, the system of their exchange, and consumption. Putting the two together, economic globalization refers to these processes having a global frame; that economics is being organized on a global scale. This leads to the next question: how has economics been globalized? What form has it taken and why? What are the implications of this particular form of economic globalization? These are fundamental questions to human welfare. This module will look at the liberal ideas that have informed contemporary economic globalization. It will then look at the institutions that have shaped it, the problems that have been generated, and then ask you to think about why economic globalization has taken this form and whether this is appropriate.

In the latter half of the 19^th century, the global economy was highly influenced by liberal economics: an emphasis on the free market and a laissez-faire policy of minimal government intrusion into the economic affairs of individuals and society. It was rooted in the belief that a free individual had the requisite rationality to make the best decision for themselves. As each individual maximized their own individual welfare, society as a whole would benefit. That didn’t not mean that the government did not have a role to play; rather, the government should restrict its activities to enforcing contracts and the maintenance of order. In terms of international economics, there was a preference for free trade as the market, absent political interference, was argued to be self-correcting. If a country ran a deficit in trade/services, there would be a net outflow of gold. This would result in a devaluation of their currency and would subsequently make exports less expensive. Cheaper exports would lead to increased competitiveness and restoring equilibrium in the balance of trade. This very liberal international economic order had been supported by the dominance of the British in the international economic order. However, the unification of Germany in 1871 challenged this economic order with the adoption of mercantilist policies. Further, as tension rose between the European states, nationalism and protectionist policies took hold. The global economy was increasingly seen as another realm of national conflict. Both World Wars, and the Great Depression during the inter-war years, were characterized by illiberal policies.

However, as American and British policy makers began the serious work of planning for the post-war world, they confronted two principle issues. First, Europe was devastated and would need to be rebuilt but European states lacked the resources to do so. Second, they needed to construct a global monetary and trade system that would avoid the instability and economic nationalism witnessed during the inter-war years. In 1944, at Bretton Woods, it was proposed to create three international institutions to manage a new global economic order.

The third institution was the General Agreement on Tariffs and Trade (GATT), which would become the World Trade Organization in 1995. The GATT, and later the WTO, was tasked with fostering trade liberalization by reducing barriers to trade and constructing rules for trade. This would include, under the WTO, a binding trade dispute settlement mechanism. Together, these institutions would support the Bretton Woods System: a negotiated monetary order whereby signatories agreed to maintain their exchange rate within plus or minus 1% by pegging their currency to gold. The US dollar would act as a reserve currency and guarantee convertibility to gold. The three institutions would support states in this goal.

The two key Architects Assistant Secretary, U.S. Treasury, Harry Dexter White (left) and John Maynard Keynes, honorary advisor to the U.K. This system lasted until 1971 and was called embedded liberalism. Embedded liberalism attempts to reconcile the tension between an open trade system and the welfare state with close to full employment. It was argued that the two were incompatible given the volatile nature of international capital which had a tendency to move quickly to wherever it can find the most profit. This economic system was ‘liberal’ in the sense that it aimed to establish and maintain an open system of international trade and services. But it was also ‘embedded’ in a political and social framework that allowed controls to be placed on capital and therefore provide room for expanding social welfare However, this came to an end in 1971 when Nixon ended the convertibility of the US dollar to gold.

The US was facing serious economic problems. There was a surplus of dollars in circulation. The printing press had been utilized to cover foreign aid, military spending in places like Vietnam, and expensive domestic policies. Money was leaving the country via foreign investment. The US did not have enough gold to cover the currency in global circulation, meaning the dollar was overvalued, resulting in foreign exchange runs on the dollar. Without the convertibility of the US dollar to gold, it would not be able to anchor the monetary systems and essentially ended the Bretton Woods system and embedded liberalism.

The global economy in the 1970s was subsequently characterized by uncertainty. The western developed economies entered into a recession due to the oil crises of 1973 and 1979 and the increased competition of Newly Industrialized Countries or NICs. The first oil crisis of the period came via an embargo imposed by the Organization of Petroleum Exporting States, or OPEC, on those states that supported Israel during the Yom Kippur War in 1973. The price of oil quadrupled within a year, badly damaging industry and consumer spending.

Figure 3-8: Source: http://en.academic.ru/dic.nsf/enwiki/152956 Permission: This material has been reproduced in accordance
with the University of Saskatchewan interpretation of Sec.30.04 of the Copyright Act.

The second oil crisis would occur in 1979 following the Iranian Revolution. While oil supply only decreased by 4% this time, the memory of 1973 sent shockwaves through the western developed economies. The Iran-Iraq War of 1980 further reduced the supply of oil and exacerbated economic challenges in the West.

The disruption caused by the two oil shocks were compounded by the rise of the NICs, primarily the four Asian Tigers – Hong Kong, Singapore, South Korea, and Taiwan. These four states were able to generate strong growth, especially in the manufacturing of steel which challenged the viability of core industrial centers in the US and Europe.

One of the major outcomes of this was stagflation, particularly in the US. Up until the 1970s, average inflation rates were 2.5% per year. In the 1970s, they were 7.06% with a high of 13.29% in 1979. At the same time, the economy was slowing and unemployment was high. A stagnating economy plus inflation equals stagnation, a situation which greatly restricts the government’s policy options. Policy to address the stagnating economy will further increase inflation and vice versa. embed  

At the same time as the western developed economies were struggling, a second problem was brewing in the form of a Latin American debt crisis. Latin American states had been growing rapidly in the 1960s and 70s and states like Brazil, Argentina, and Mexico took out loans for infrastructure programs. They were seen as low risk borrowers while, at the same time, demand from developed western states for loans was in decline due to the financial recession. Finally, the international banks had a surplus of dollars from the OPEC states derived from the oil crisis, motivating them to provide these loans to states in the Global South. However, when the Bretton Woods system ended and interest rates shot up, these states were increasingly unable to service their loans. This was exacerbated by their own economic downturn driven by lower commodity prices and the fact that the loans were denominated in US dollars while their own currencies were depreciating in value. By 1983, the cumulative debt of the region equaled 50% of its GDP. As it became apparent these states may default on their loans, the public and private lenders in the developed western states began to fear economic contagion: that a default in Latin America could threaten the stability of the global economic system. States would default forcing banks into insolvency, leading to a breakdown of the system.

It was in the economic climate of both the stagflation in the developed world and debt crisis in the developing world that a new economic order emerged: neoliberalism, also known as the Washington Consensus. he basic tenets of neo-liberalism are:

• Privatize public enterprises
• Deregulate the economy
• Liberalize trade and industry
• Cut taxes
• Control inflation through the supply of money
• Control, often through legislation, organized labour
• Reduce public expenditures, particularly social spending
• Cut government bureaucracy
• Expand international markets
• Liberalize global financial flows

These policies were implemented both in the developed world, first in the US and the UK, as well as in the developing world. They were implemented at home to arguably boost competitiveness in the global market. Some states in the Global South followed neoliberal prescriptions willingly, Chile for example. But the rest were coerced into the neoliberal economic order via the debt crisis and the policies of the IMF and World Bank. The IMF had reinvented itself after the collapse of the Bretton Woods system in 1971; it became the lender of last resort. If no one else was willing to loan a state money, the IMF would step in but with conditions. Similarly, the World Bank would provide loans for development projects but with conditions. During crisis, states turn to these institutions for loans. The conditions attached to these loans were called Structural Adjustment Programs. Essentially, the loans were given as long the states followed the tenets of neoliberalism. It was known this would cause social dislocation in the short- to medium-term, but it was argued these conditions would bring the states back into liquidity. This program would grow exponentially with the fall of the Soviet Union in 1989, including during the 1997 Asian financial crisis. These policies would create great economic and political instability, first in the global south through the 1980s and 90s and later in the Global North following the 2008 financial crisis. An important outcome of neoliberal policy has been increased inequality both within states and between states. And inequality has played a big role in creating the conditions for the political and economic crises mentioned above. In the next section we will look at the three main developments of economic globalization in an era of neoliberalism that have led to these outcomes.

Steger identifies three developments in contemporary economic globalization as being most pertinent: internationalization of trade and finance, increased power of Transnational Corporations (TNCs) or Multinational Corporations (MNCs), and the enhanced role of the IMF, World Bank, and WTO also collectively known as the International Financial Institutions (IFIs).

The most immediately perceived facet of economic globalization is the sharp rise of trade. In 1947 there was 57 billion dollars in world trade. In 2016 there was 16.05 trillion dollars’ worth of trade. In 1960, there was 414 billion dollars in the export of services. In 2016, there was 4.93 trillion dollars’ worth of trade.

Beyond these numbers, we see the impact of trade in what we wear, what we eat, what we drive, what entertains us, and on what devices. Most products are constituted by resources from one place, manufactured wholly or partially in another place, and shipped to the store where you bought it (or your computer screen if bought online). Behind this process, the product was conceived by someone perhaps in another place altogether, marketed, contracted, insured, and coordinated by more people. The headquarters of the company may be in a different country than where it does its manufacturing, while its financial operation may be in another place altogether. If you had a problem with the product, you may have spoken to a call center located in still yet another country. In all, the products you use every day may have directly or indirectly passed through the hands and minds of numerous people in numerous places. This is economic globalization in trade and services. Companies can seek the cheapest means to acquire resources, manufacture products, pay taxes, and develop markets. Pro-trade advocates argue the benefits of this system accrue to consumers who have more choice and cheaper goods as well as to foreign workers who have the opportunity to raise their standard of living. There is some data to support this argument. For example, the percentage of people living under extreme poverty has been halved between 1990 and 2015. Moreover, a quick look at your grocery store will demonstrate the choice of goods available at a relatively low cost.  Those who are critical of the free trade argument point to different statistics. They argue that according to the Human Development Report half of the world’s population still lives on less than 2.50$ a day, or moderate poverty, and 80% lives on less than 10$ a day; that global inequality has reached the point where eight men own the same wealth as the poorest 3.6 billion people. The Internationalization of trade has been less visibly joined by the internationalization of finance through the deregulation of interest rates, removal of capital controls, the privatization of banks/financial institutions, and the growth of investment banking. If we compare international financial assets to global trade the difference is quite stark. In 2014, global trade hit its highest point, 19.17 trillion dollars’ worth of goods. However, international financial assets, which includes stocks, bonds, and all the securities available to invest in, was about 294 trillion dollars in 2014.Now these numbers do include domestic financial assets as well. But with the deregulation of international finance, capital can flow to wherever profit can be made. This is an important point. For the most part, this is not capital being utilized to finance manufacturing, the creation of stuff to be traded and sold. This is speculative finance, where the trading of an economic asset is undertaken in the hope to make substantial gains while acknowledging a degree of risk. Traders are looking for trends and shifts in commodity prices or exchange rates, betting on their future performance. It is highly volatile and highly competitive. And it is prone to bubbles, where trading can expand the value of a good far beyond its actual market value. Which is a problem, as we will see when discussing the Global Financial Crisis of 2008.

The second key development has been the increased power of TNCs. Transnational corporations are businesses that have a parent company and subsidiary units in more than one country. In 1970 there were 7,000 TNCs and in 2015 there were 100,000. The top 200 TNCs maintain headquarters in North America, Europe, China, Japan, South Korea, and Mexico. The top TNCs are able to challenge the most privileged political actor in the world – states.

Apple has more reserve cash, 215 billion US dollars, than two-thirds of the world’s states. The top 10 biggest banks control nearly 50% of global assets under management. TNCs were able to become so plentiful and powerful because of the deregulation of labour, resources, and production conditions, particularly in the global south. TNCs use foreign direct investment (FDI) to set up facilities in other countries. In 2016, global net inflows of FDI were 1.757 trillion US dollars. The sheer size of companies like Wal Mart, Apple, Samsung, Royal Dutch Shell, or Volkswagen generates their own economic gravity. They are able to coerce states, shape trade routes, and lobby international institutions. Some even argue that TNCs are so large, they have their own foreign policy. 147 TNCs, which Steger calls super connected TNCs, control 40% of the shares of world’s large blue chip and manufacturing firms. In 2016, the Forbes list of the 2000 largest TNCs had combined revenues of 39 trillion US dollars, profits of 3 trillion US dollars, and assets worth 162 trillion dollars. Of the top 100 top global economies in 2015, 69 were companies and 31 were states. Walmart takes the 10^th spot right after Canada.

This raises a host of questions. If there are more businesses on the top 100 economies than states, who is making the rules? Who is ensuring these TNCs are socially responsible? Sustainable? These are the questions that are increasingly being asked following the 2008 Global Financial Crisis.

The third key development has been the increasingly visible and muscular role played by the IFIs. As mentioned earlier, the IMF had originally been set up to help states in a balance of payment crises. This was to ensure that states remain committed to the exchange rate system set up in 1944 and not manipulate the value of their currency for economic advantages. This role came to an end in 1971 when the US cancelled the convertibility of the US dollar to gold, the linchpin of the Bretton Woods system. The IBRD had been set up to finance post-war reconstruction and development projects in Europe. In the 1950s, the mandate of the World Bank was expanded to include providing loans to developing states in the global south, most often recently decolonized states. In order to understand some of the subsequent shifts of the IFIs, it is pertinent to look at how decision making happens. In both the IMF and World Bank, voting rights are weighted to quota subscriptions that reflect the relative size of their economies. This ensures that western developed economies hold the majority of the votes, 57% to be exact. The US holds 17% of the vote by itself while the poorest 165 states have only 29% of the vote. One tangible result of weighted voting is that the head of the World Bank has always been an American and the head of the IMF has always been a European. This is important when the turbulent 1970s hit the developed western economies. The IMF took on the role of lender of last resort. When a state had nowhere else to go, they could turn to the IMF for help. But this help came with conditions called Structural Adjustment Programs (SAPs). This achieved two goals. First, it was very important to the western developed economies that the sovereign loans held by states in the global south not default. They feared a contagion effect: if one state were to default, this would take down the banks that are owed money which would start a chain reaction of other indebted states and highly leveraged financial institutions. Second, the SAPs forced open the states in the global south to FDI from the global north, to goods from the global north, and to better terms for the global north to access resources. The World Bank would come to pay a similar role, by adding their own conditions to loans that complemented those of the IMF. While contagion was averted, many economies in the global south have remained heavily indebted and have undergone boom and bust cycles repeatedly. For example, in 2010, developing states paid out 184 billion US dollars in debt servicing but only received 134 billion US dollars in foreign aid. By the 2000s, the IFIs had adjusted their language. Instead of SAPs the IFIs now speak of Poverty Reduction Strategy Papers, country ownership, and good governance. And these are important steps towards a more equitable development model. But as we saw in the 1997 Asian Financial Crisis and the 2009 Greek Debt Crisis, the IFIs are still at best the domain of classical liberal economists. And if all you have is a hammer, everything looks like a nail. For the IFIs if you see a flailing state, it is going to look like a problem of an inefficient economy.

There are many important contemporary issues in economic globalization. We are going to look at three: The Global Financial Crisis in 2008, the rise of inequality, and the question of who economic globalization serves? Most economists argue the 2008 Global Financial Crisis was the most severe economic shock since the Great Depression. By some measures, it was worse than the Great Depression. For example, housing prices fell by 31.8%, worse than the Great Depression. The roots of the crisis can be found in the 1980s and 90s. Under the dominant ideology of neo-liberalism, consecutive US presidents had promoted the deregulation of the financial services industry. What emerged over time, were huge financial services conglomerates. These conglomerates eagerly adopted computer modeling as applied to risk management that opened the door to new financial instruments like financial futures, derivatives, credit default swaps, et cetera. The funds for these new ventures came less from savings and more from other conglomerates, as they sold loans to each other as securities. An important and ill-fated field was the billions invested in residential mortgage-backed securities. Unfortunately, what was created was a housing bubble. As previously mentioned, a bubble is when the price of an asset does not correlate to its fundamental value. Due to things like subprime lending, easy credit, predatory lending, tax incentives et cetera, housing prices in the US had increased by 130% between 1990 and 2007. The global part of the crisis came via global investment in the US residential mortgage backed securities. But, as bubbles are wont to do, the housing bubble burst. The housing market in the US became super-saturated, leading to a decline in demand. The decrease in demand was exacerbated by the increase of interest rates from 1% to 5.25% between 2004 to 2006. People who arguably should not have been approved for loans had been given short term adjustable mortgages. This rise in interest rates led to more defaults and even more downward pressure on housing demand and prices. The houses that were taken by the banks in default were no longer worth money that had been lent, creating a sub-prime mortgage crisis. But the crisis was not restricted to the housing market because of all those new financial instruments, and specifically residential mortgage-backed securities, had spread out the risk, had commoditized the risk.

The buyers of these securities included pension funds, insurance companies, and foreign investors. For example Fannie Mae and Freddie Mac, or by their proper names the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), owed 5 trillion US dollars to investors in mortgage obligations. When the crisis grew and began to spread, large companies like Lehman Brothers used short term securities, called commercial paper, to cover debts. When these began to default, the market spooked and everybody sold anything that might have exposure to residential mortgage-backed securities. This became a systemic crisis as trust was gone, lending dried up, and even solid companies that needed access to credit were punished.

Government stepped in with stimulus spending to avoid further contagion because financial institutions had become too large to fail – because of deregulation. The consequences? There was a global recession with high unemployment and contagion to other markets like the Eurozone debt crisis in Portugal, Ireland, Spain, Cyprus, and most importantly Greece.

The second contemporary issue of economic globalization is the rise of inequality but at the same time a decrease in poverty. By definition, absolute poverty means you do not have the resources to meet the basic needs of life. Things like food and shelter. An important measurement here is the 1.90$/day benchmark of extreme poverty. Inequality on the other hand is the unequal distribution of assets, wealth, and income either within the state or between states. Extreme poverty, has declined. As previously mentioned, extreme poverty has been halved between 1990 and 2015; almost 1 billion people have been lifted out of poverty and it is possible extreme poverty could be eradicated by 2030. However, inequality is growing and is at its highest point in the last three decades. Oxfam has pointed out the in 2016, 8 men own the same wealth as the bottom 3.6 million people in the world. In the developed world, wages are stagnating or even falling while executive compensation is growing. 7 out of 10 people live in a country where income inequality is growing. Other metrics of inequality include gender, health, education, and wellbeing. In OECD countries, women still earn 16% less than men and top female earners earn 21% less. Women are underrepresented in legislatures and top management positions in business. They are also more than one and half times likely to live in poverty. There are inequalities in access to health, by sex, age, geography, and finance. Canada is a good example, access to health care is very differentiated by northern/southern communities, and rural/urban communities for example. Inequality in education leads to lower wages and shorter life expectancies. Overall, inequality has demonstrable impact on both the wellbeing of the individual and of society as a whole. There are no definite answers as to why inequality is growing but the timeline suggests that the shift to the neoliberal economic order has something to do with it. Neoliberalism sought to release the market, constrain labour and state spending. It has created cycles of boom and bust economies. All of which facilitate the aggregation of wealth by the few to the detriment of the many.

The final contemporary issue is the question of who economic globalization serves. Many debate the advantages of global trade and finance, whether benefits trickle down, and how poverty can be alleviated. But are these the right questions? If we see repeated financial crisis and growing inequality, shouldn’t we ask who economic globalization benefits? That is the goal of the last learning activity.

Economic globalization is how the production of goods, the provision of services, the system of their exchange, and consumption is now operating in a global frame. This module looked at the liberal and neo-liberal ideas that have shaped contemporary economic globalization. It examined the institutions that have supported this international liberal economic order and the impact of the turn to neoliberalism. Importantly, the domestic struggle with stagflation in the 1970s and the international threat of the Latin American debt crisis in the 1980s, are used to explain this turn. The dominant trends of contemporary globalization were explored, specifically the internationalization of trade and finance, the increase of TNCs, and the increased role of the IFIs. Finally, we address the contemporary issues of the Global Financial Crisis, rising inequality, and the question of whom economic globalization serves. That leaves us ready to tackle the next question in Module 4 – political globalization.

The liberal international economic order has generated growth and this has halved global poverty between 1990 and 2015. But at the same time, inequality has increased. So proponents of trade argue that the system works while those who question the liberal trade regime point out inequality and say it is flawed. There is no direct causation between the two measurements but both are linked to the liberal economic order. The pressing question is can we reduce poverty without incurring greater inequality.

 The IFIs are the collective name for the International Monetary Fund, the World Bank, and the World Trade Organization. They were formed under the Bretton Woods agreement in 1944. Initially, they supported the monetary regime at the heart of the embedded liberalism that existed between 1944 and 1971. After the fall of the Bretton Woods regime, they supported the tenets of neoliberalism through the imposition of SAPs

The global economic system and the associated international political orientation as they existed from the end of World War II to the 1970s. The system was set up to support a combination of free trade with the freedom for states to enhance their provision of welfare and to regulate their economies to reduce unemployment. 

A policy model that transfers control of economic factors from the public sector to the private sector. It takes from the basic principles of neoclassical economics, suggesting that governments must limit subsidies, make reforms to tax law in order to expand the tax base, reduce deficit spending, limit protectionism, and open markets up to trade. It also seeks to abolish fixed exchange rates, back deregulation, permit private property, and privatize businesses run by the state.

The sheer size of companies like Walmart, Apple, Samsung, Royal Dutch Shell, or Volkswagen generates their own economic gravity. They are able to coerce states, shape trade routes, and lobby international institutions. Some even argue that TNCs are so large, they have their own foreign policy. 147 TNCs, which Steger calls super connected TNCs, control 40% of the shares of world’s large blue chip and manufacturing firms. In 2016, the Forbes list of the 2000 largest TNCs had combined revenues of 39 trillion US dollars, profits of 3 trillion US dollars, and assets worth 162 trillion dollars. Of the top 100 top global economies in 2015, 69 were companies and 31 were states.