Lesson 3 Global Economy

The Global Economy
GE TCW
[ The Contemporary World ]
Introduction
• Economic globalization – a prominent feature of the
contemporary world
– Roots in contemporary global economy: Bretton Woods

Conference
– Institutions established facilitated globalization

Learning Outcomes
• At the end of this lesson, learners are expected to:
1. Discuss the historical background of contemporary global

economy;
2. Elaborate the role of multilateral institutions;
3. Explain the emergence of multinational firms; and
4. Evaluate the competing views on economic globalization
Historical Background
• Toward the end of World War II, Bretton Woods Conference
was held:
– To set up a stable monetary system

– To promote world trade
– To support economic recovery from war
• It led to the creation of three multilateral institutions:

– IMF, GATT, and World Bank
1. International Monetary Fund (IMF)
– to supervise the fixed exchange rate system and help address
countries’ balance of payment problems
– Facilitates monetary system
2. World Bank
– To rehabilitate states devastated by war and address poverty
– Promotes development
3. General Agreement on Tariffs and Trade (GATT)
– To promote free trade
– Facilitates trade system
• On the international monetary or financial system:
– Because of the Cold War with the Soviet Union, the US took an
active role to manage global economy
– It supported the Bretton Woods System – the postwar

international monetary system that depended on the US dollar
– Bretton Woods System – first fully negotiated international

monetary system
– It sought to achieve two goals: (1) a stable international monetary

system; (2) domestic autonomy in pursuing economic policies
– How did the Bretton Woods System work?
1. If a state is suffering temporary balance of payment

disequilibria, the IMF would provide medium-term loan to
that state; and
2. if a state is suffering fundamental balance of payment

problems, the system would permit that state to change its
exchange rate
– Key to the system: US dollar – States pegged their currencies to

the dollar
– The system facilitated world trade and investment
– The system depended on the liquidity and international

confidence created by the US economy
• On the international trade system:
– GATT – an interim agreement to lower trade barriers among

countries
– The provisions of the GATT endured for nearly fifty years, until the
creation of World Trade Organization in 1994
Global Economy in Decline
• Starting the 1960s, the US economy was in decline, while European
and East Asian economies were catching up
• In the 1970s, the global economy slowed down, primarily because of

the Oil Crisis
• In the trading system, while at first states adopted free trade policies,
they eventually pursued protectionist policies, such as subsidies,
export restraints
Liberal vs. Protectionist Policies
Liberal Policies Protectionist Policies

• Liberalization • Tariff and non-tariff barrier
imposition
• Deregulation
• Tight state regulation
• Privatization • Subsidies
• Import quotas
• Health and environmental
standardization
• Import substitution
Case Study 1.
Contemporary International Trade
Post-World War II international
organizations and agreements
helped facilitate opening up of
markets. International trade has
increased dramatically due to
elimination and/or reduction of
restrictions such as tariffs.
• The GATT was unable to:
– Keep countries from adopting protectionist policies, particularly

on agriculture and textile industry – the main source of exports
from developing countries
– Settle trade disputes
• This led developing countries to advocate for New

International Economic Order
• Reasons for lack of success
– General Assembly in which it was launched could not implement
– Unsympathetic ideologies in US, UK and Western Germany
– Shift in US policy in the 80s

End of Cold War
• Challenge: integrating transitional economies (socialist
states that were formerly part of the Soviet bloc)
– IMF became deeply involved

End of Cold War
• The World Bank continues to promote development
– The Bank partnered with governments and non-governmental

organizations
• Apart from these two institutions, the World Trade

Organization now began its operations
End of Cold War
• The WTO also seeks to promote free trade
– Unlike GATT which covers only trade in goods, WTO applies also to
trade in services, investment measures, property rights
– WTO has faster and more automatic dispute settlement

mechanism less prone to blockages compared to the old GATT
system
Multinational Corporations
• Their presence is another feature of contemporary global
economy
– We consume goods and services produced by MNCs
• MNCs - organizations that own or control overseas companies or

production or service facilities in one or more countries other than
the home country; also called transnational companies (TNCs)
• MNC investments:
– Foreign direct investment - entry into a business enterprise in one

country by an entity based in another country
– Portfolio investment - passive investment on securities (as stocks

and bonds) in a host country.
• Reasons for corporate investments:
1. Market seeking
2. Resource seeking
3. Strategic asset seeking
4. Efficiency seeking
• MNCs can be vital for developing countries – they increase

income of host states, provide jobs, among others
MNCs are common to find in the
country. The first and second images
show international fast food chains
that have penetrated the Philippine
market. They are common to find in
metropolitan and populated areas.
The third image shows a locally
owned fast food chain now
continuously entering different
markets abroad.
Perspectives on Economic Globalization
1. Hegemonic stability theory
– Today’s economic globalization could be traced back to US

postwar efforts
– Based on the idea that powerful states shape international

economic order
Perspectives on Economic Globalization
2. Neo-liberal institutionalism
– International institutions, such as the IMF, World Bank, and

the GATT, have an impact on the global economy
– Governing arrangements called regimes create regularity in

actors’ behavior and expectations

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The Global Economy

– Roots in contemporary global economy: Bretton Woods

– Institutions established facilitated globalization

1. Discuss the historical background of contemporary global

– To set up a stable monetary system

• It led to the creation of three multilateral institutions:

– It supported the Bretton Woods System – the postwar

– Bretton Woods System – first fully negotiated international

– It sought to achieve two goals: (1) a stable international monetary

– How did the Bretton Woods System work?

1. If a state is suffering temporary balance of payment

2. if a state is suffering fundamental balance of payment

– Key to the system: US dollar – States pegged their currencies to

– The system facilitated world trade and investment

– The system depended on the liquidity and international

– GATT – an interim agreement to lower trade barriers among

• In the 1970s, the global economy slowed down, primarily because of

Liberal Policies Protectionist Policies

– Keep countries from adopting protectionist policies, particularly

– Settle trade disputes

• This led developing countries to advocate for New

– General Assembly in which it was launched could not implement

– Unsympathetic ideologies in US, UK and Western Germany

– Shift in US policy in the 80s

– IMF became deeply involved

– The Bank partnered with governments and non-governmental

• Apart from these two institutions, the World Trade

– WTO has faster and more automatic dispute settlement

• MNCs - organizations that own or control overseas companies or

– Foreign direct investment - entry into a business enterprise in one

– Portfolio investment - passive investment on securities (as stocks

• MNCs can be vital for developing countries – they increase

– Today’s economic globalization could be traced back to US

– Based on the idea that powerful states shape international

– International institutions, such as the IMF, World Bank, and

– Governing arrangements called regimes create regularity in

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