THE GLOBALIZATION OF

ECONOMIC RELATIONS

Istvan Benczes
 GLOBALIZATION

• It is a widening, deepening and speeding up

of worldwide interconnectedness in all
aspects of contemporary social life (Held et
al., 1999).
• However, approaching globalization only
from an economic perspective is “a
categorical mistake’
• It is a multidimensional phenomenon
 ECONOMIC GLOBALIZATION

• 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 (IMF, 2008).
 ECONOMIC GLOBALIZATION

• The globalization of trade of goods

and services;
• The globalization of financial and
capital markets;
• The globalization of technology
and communication; and
• The globalization of production
 ECONOMIC GLOBALIZATION

• A process making the world economy an “organic system” by extending

transnational economic processes and economic relations to more and
more countries and by deepening the economic interdependencies
among them
• It refuses the assumption that the nation is the only unit of analysis and
that current trends in the world economy are simply the redesign of the
external relations of interacting nations.
• Globalization is redefining the role of the nation state as an effective
manager of the national economy; it does not leave it as irrelevant
IS ECONOMIC GLOBALIZATION
A NEW PHENOMENON?

• Globalization processes have been ongoing ever

since Homo sapiens began migrating from the
African continent
• The Silk Road
• British Industrial Revolution
• Economic nationalism during the 17th and 18th
century
• Transport Revolution (1913)
• ‘Golden Age’ of Globalization (1870 – 1913)
 ECONOMIC GLOBALIZATION

• Countries in support of economic globalization are able to foster universal

economic growth and development.
• However, globalization can indeed reduce poverty but does not benefit all
nations (World Bank, 2002).
• Globalization is said to be a product of the long process of capitalist
development.
 INTERNATIONAL MONETARY
SYSTEM

• International Monetary System or regime (IMS) – refers to the rules,

customs, instruments, facilities, and organizations for effecting
international payments (Salvatore, 2007:964)
• is a set of internationally agreed rules, conventions and supporting
institutions that facilitate international trade, cross border investment
and generally the reallocation of capital between nation states.
(Wikipedia.org)
• Main task of IMS – facilitate cross-border transactions, especially trade
and investment
 THE GOLD STANDARD

• Gold standard – is a monetary system where a

country’s currency or paper money has a value
directly linked to gold
• is a monetary system in which the standard
economic unit of account is based on a fixed
quantity of gold.
• The gold standard functioned as a fixed exchange
rate regime, with gold as the only international
reserve. Participating countries determine the gold
content of national currencies, which in turned
defined fixed exchange rates
THE GOLD STANDARD

• The origins of the modern-day IMS dates back to the early nineteenth
century when UK adopted gold mono-metallism in 1821.
1867 – The European nations, as well as the United States, propagated
a deliberate shift to gold at the International Monetary Conference in
Paris.
• Gold was believed to guarantee a non-inflationary, stable economic
environment, a means for accelerating international trade.
1880 – The gold standard became the international monetary regime.
Germany joined in 1872, France in 1878, and the United Stated in
1879, Italy in 1894 and Russia in 1897.
• Before the World War I, 70% of the nations participated in gold standard.
 The Main Strengths of the Gold Standard

• It has the tendency for the trade balance to be in equilibrium.

• (Trade balance - is the difference between the value of a country's
imports and exports for a given period.)
• Balanced positions were ensured by the automatic price-specie flow
mechanism, which assumed a passive change in money supply and a full
flexibility in internal prices.

THE GOLD STANDARD

Assessing whether the Gold Standard was successful

• Eichengreen (1996:1) offered a reference point to assess the gold

standard. He claims that the role of a properly designed International
Monetary Systems are
• Lend order and stability to foreign exchange markets
• Encourage the elimination of balance-of-payments problems
• Provide access to international credits in the event of disruptive shocks
• (This creates stability, restore equilibrium in their current accounts and
provided an almost unlimited access to world finance)

THE GOLD STANDARD

The End of the Gold Standard

• The outbreak of World War I brought an end to the classical gold

standard.
- Participating nations gave up convertibility and abandoned gold
export in order to stop the depletion of their national gold
reserves.
• In 1925, UK attempt a return to the gold standard but did not succeed.
The overvalued pound sterling and the emergence of new rivals
reduced the competitiveness of UK. In 1931, UK abandon the gold
standard because it could not finance its current account deficit by
capital inflow anymore.

THE GOLD STANDARD

 THE BRETTON WOODS SYSTEM
AND ITS DISSOLUTION

• A new international monetary regime

in the framework of the United
Nations Monetary and Financial
Conference in Bretton Woods, New
Hemisphere (US) has started in July
1944.
• 44 countries agreed on adopting an
adjustable peg system, the gold-
exchange standard. The United States
committed itself to sell and purchase
gold without restrictions at US$35
dollar an ounce.
 THE BRETTON WOODS SYSTEM
AND ITS DISSOLUTION

• Delegates also agreed on the establishment of two

international institutions
International Banks for Reconstruction and
Development (IBRD) – responsible for post-
war reconstruction.
International Monetary Fund (IMF) –
promote international financial cooperation
and buttress international trade.
 THE BRETTON WOODS SYSTEM
AND ITS DISSOLUTION

• Reforms, however, were not supplemented by strengthened supervision or

monitoring and additionally, these currencies were pegged to the US Dollar.
• During the 1990s, US Dollar appreciate substantially and cause a loss in the
price competitiveness of emerging markets.
• The unregulated and free flow of capital, the huge current account deficits
and the soft pegging regimes made these economies vulnerable, resulting in a
financial crisis.
 EUROPEAN MONEY INTEGRATION

• The EMS was a unique system since neither the US Dollar nor gold could
play a role in the stabilization process of exchange rates. Instead, a
symmetric adjustable peg arrangement, the European Exchange Rate
Mechanism was created.
• In 1957, the signing of the Rome Treaty occurred which established the
European Economic Community (EEC).
• The six members of the EEC aimed at the creation of a common market,
where goods, services, capital and labour moved freely. Originally, they did
not plan any direct cooperation in the field of finance or exchange rates
policy.
EUROPEAN MONEY INTEGRATION

• However, the global financial and economic crisis of 2008-9, posted dramatic
challenges for the European Union (EU). As a response to the crisis, the EU
enacted a three-pillar financial rescue program in 2010, comprising the
following:
The European Financial Stability Mechanism
The European Financial Stability Facility
The financial assistance of the IMF.
• Since the three-pillar system was designed for a temporary period only, the
European Union decided to activate its own permanent rescue facility, the
European Stability Mechanism, from 2013 onwards.
 INTERNATIONAL TRADE AND
TRADE POLICIES

• David Ricardo’s comparative advantage theory

• The appeal of the theory is that every single nation must have a
comparative advantage in something irrespective of its initial conditions
• Voluntary trade can have a very different distributional effects and it can
also hinder the long-term development prospects of the country
producing the lower value added products.
• Trade patterns should not be considered as static.
• Instead, by temporarily restricting the free flow of goods, a national
industry can be established, thereby fostering long-term economic
growth and political power.
 INTERNATIONAL TRADE AND
TRADE POLICIES

• However, the unequal exchange is a fundamental and systemic distinguishing

characteristic of modem world economy.
Protectionism – a total breaking up of ties between the subordinated
developing economies and the core.
• International trade can trigger tensions not just between nations, but also
within a particular country.
• Owners of the locally abundant factor of production increase their political
power and influence as well
• In some cases, the coalition of potential losers of trade provide permanent
source of protectionism from the least developed countries to the most
advanced economies.
 UNILATERAL TRADE ORDER

• Europe international trade:

Accumulate surplus (gold reserves) in the balance of payments by
stimulating export and restricting import.
The mercantilist era of the time was best characterized as a zero-sum
game on the global level.
• Trade and trade policies:
Catches the interest of monarchs from Portugal to England,
• Surge of International Trade
arrived only with Europe’s industrial revolution
consequent repeal of the British Corn Laws in 1846
 UNILATERAL TRADE ORDER

• Cobden-Chevalier treaty of 1860

allowed the UK and France to specialize in commodities based on
their respective comparative advantages and to achieve further
advances in industrialization
- Voluntary trade also helped to avoid the eruption of an
abrupt war between the two countries. (Dunham, 1930)
• Most-Favoured Nation (MFN) principle
negotiated reciprocal tariff reductions between two parties should be
extended to all other trading partners without conditions.
 UNILATERAL TRADE ORDER

• Europe
multilateral system of bilateral agreements, giving birth to the ‘first
common market’ in the second half of the nineteenth century (Marsh, 1999)
• World War I
dramatic blow to free trade.
Protectionism, in turn, was detrimental to development, peace and
stability (Ruggie, 1982).
• US Reciprocal Trade Agreements Act in 1934:
put a stop to any further decline in international trade.
Act was a return to the principle of MFN
 MULTILATERALISM:
FROM THE GATT TO THE WTO

• Dollar
World currency, backed by two-thirds of the world’s gold reserve in
1950 (Green, 1999).
The United States was the largest aid donor, mostly in the form of the
Marshall Plan.
• New Trade Regime
more or less a liberal,multilateral rules-based system backed by
a solid legal approach to trade relations (Winham, 2008).
 MULTILATERALISM:
FROM THE GATT TO THE WTO
• Three pillars of the Bretton Woods system
International Trade Organization (ITO)
International Monetary Fund (IMF)
International Bank for Reconstruction and Development (IBRD)
• In place of Unique Trade Organization
lowered tariffs
General Agreement on Tariffs and Trade (GATT).
• European Economic Community in 1957
United States
Trade Expansion Act of 1962 or Kennedy Round
The result was an across-the-board cutting and reduction of non-tariff
barriers, especially that of anti-dumping measures (Evans, 1971).
 MULTILATERALISM:
FROM THE GATT TO THE WTO

• Multi- or transnational corporations (MTCs)

tried to optimize their operations worldwide by allocating based on
principles other than comparative advantage.
intra-industry or even inter-company trade has become the
determining feature of the international division of labour
(Dunning, 1990.)
• Influence of TNCs
change in the politics of trade.
According to Held and McGrew (2001: 325), ‘it is global corporate capital,
rather than states, which exercises decisive influence over the
organization, location and distribution of economic power and resources’ in
the contemporary world economy.
 MULTILATERALISM:
FROM THE GATT TO THE WTO

• Outcomes of the Trade Negotiations

agreements on trade-related investment measures (TRIMs),
trade in services (GATS)
trade related aspects of intellectual property rights (TRIPs).
• World Trade Organization
launched on 1 January 1995
official forum for trade negotiations.
 DEVELOPING COUNTRIES AND
INTERNATIONAL TRADE

• Most of the developing countries did not manage to integrate into the
post-World War II trading system successfully.
• They followed an inward-looking, import-substitution
industrialization strategy, which did not favour trade openness (Findlay
and O’Rourke, 2007).
• Advanced economies were also reluctant to open their markets to
commodities such as textile or agriculture products in which developing
countries had a natural comparative advantage.
 DEVELOPING COUNTRIES AND
INTERNATIONAL TRADE

• United Nations Conference on Trade and

Development (UNCTAD)
First major change in the state affairs
Established with the joint effort of the developing
world
• Developing countries have opened up their service markets;
their export of agricultural products is still blocked by
advanced nations.
• Without the liberalization of agriculture, it is simply
impossible for developing nations to fully integrate into the
global economy
 DEVELOPING COUNTRIES AND
INTERNATIONAL TRADE

• WTO
means by which industrialized countries can gain access
to the markets of developing countries. (Khor, 1995)
a logical consequence of the Washington Consensus
approach to development, which considers domestic
interventions highly distortive and ineffective.(
DiCarpio and Amsden, 2004)
today’s advanced economies applied such ‘distortions’
widely at the onset of their own development.(Stiglitz,
2002)
• WTO is heavily criticized for ‘a striking asymmetry’ – this
asymmetry … lies at the heart of inequality in the rules of the
game for globalization’ (Nayyar, 2002: 158).
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