THE GLOBALIZATION OF ECONOMIC RELATIONS
‘functional integration between internationally
BY ISTVAN BENCZES
In the past 30 years, the term ‘globalization’ has
earned considerable credit in the social sciences
and has also gone into common use in public
debates.
Held et al. (1999) offer a convenient starting
point for any discussion on globalization by
claiming that it ‘may be thought of initially as the
widening, deepening and speeding up if
worldwide interconnectedness in all aspects of
contemporary social life’ (1999:2).
‘Aspects’ can refer to ‘political, technical and
cultural, as well as economic’ features (Giddens,
1999:10), implying that globalization is best
thought of as a multidimensional phenomenon.
What is Economic Globalization?
According to the one of the most often cited
definitions, “Economic globalization is a
historical process, the result of human
innovation and technological progress. It refers
to the increasing integration of economies round
the world, particularly through the movement of
goods, services, and capital across borders. The
term sometimes also refers to the movement of
people (labor) and knowledge (technology)
across international borders. (IMF, 2008)”
The phenomenon can thus have several
interconnected dimensions:
1. The globalization of trade of goods and
services;
2. The globalization of financial and capital
markets;
3. The globalization of technology and
communication;
4. The globalization of production
What makes economic globalization distinct
from internationalization is that while the latter
is about the extension of economic activities of
nation-states across borders, the former is
dispersed activities’ Dicken (2004:12).
If, however, globalization is indeed a ‘complex,
indeterminate set of processes operating very
unevenly in both time and space’ (ibid., p. xv), a
more substantive definition for economic
globalization is required than the one offered by
the IMF (2008).
‘In economic terms, globalization is nothing but
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’ Szentes
(2003:69).
The main advantage of the above definition is
that although it does not deny the relevance of
the ‘international’, ‘regional’ or ‘national’ levels.
For hyperglobalists such as Ohmae (1995), states
ceased to exist as primary economic
organization units in the wake of a global market.
Globalization transforms the national economy
into a global one where ‘there will be no national
products or technologies, no national
corporations, no national industries’ (Reich,
1991:3)
Boyer and Drache admit that ‘globalization is
redefining the role of the nation-state as an
effective manager of the national economy
(1996:1), but refuses the hypothesis of uniform
state policies and conceive the state as the main
shelter from the perverse effects of the free
market economy.
It is, therefore, misleading to assume that
globalization has relegated the nation-state and
its policies to an obsolete or irrelevant state;
governments instead ‘are acting as the midwives
of globalization’ (Brodie, 1996: 386).
What is important to note is that TNCs are
constantly evolving: as economic integration is
becoming more intensive, production
disintegrates as a result of the outsourcing
activity of multinationals (Feenstra, 1998).
This move induced Gereffi (1999) to develop the
concept of global commodity chains, an idea that
reflects upon the increasing importance of global
buyers in a world of dispersed production.
Is Economic Globalization a New Phenomenon?
Gills and Thompson (2006:1) very wittily suggest
that globalization process ‘have been ongoing
ever since Homo sapiens began migrating from
the African continent ultimately to populate the
rest of the world.
Frank and Gills (1993:3) also call for a broader
outlook, and located the origin of globalization in
the (very) distant past: ‘the existence of the
same world system in which we live stretches
back at least 5,000 years.
When Adam Smith wrote his magnum opus, an
inquiry into the nature and causes of the wealth
of nations (1776), he considered the discovery of
America by Christopher Columbus in 1429 and
the discovery of the direct sea route to India by
Vasco de Gama in 1498 as the two greatest
achievements in human history.
The relatively short period before World War I
(that is, 1870 to 1913) is often referred to as the
‘golden age’ of globalization, characterized by
relative peace, free trade and financial and
economic stability (O’Rourke and Williamson,
1999).
By the second half of the nineteenth century, the
division of labor entwined modern world
economy.
Skeptics of globalization, such as Hirst and
Thompson (2002), recognize the origin of
globalization in this particular era and argue that
in respects (especially with regard to labor
mobility), nineteenth-century world economy
was even more integrated than the present.
Convergence Versus Divergence
Contemporary globalization is, however,
considered to be a myth (Bairoch, 1993) not just
because it is not without precedents.
Dollar and Kraay (2002) argue that only non-
globalizer countries failed to reduce absolute
and relative poverty in the last few decades.
The World Bank (2002) claims that globalization
can indeed reduce poverty but it definitely does
not benefit all nations.
Bairoch (1993) argues that while in the
developed part of the world, the industrial
revolution and intensified international relations
reinforced growth and development on an
unprecedented scale (as compared to the
previous era), the rest of the world did not
manage to capitalize on these processes.
Bairoch claimed that ‘the industrialization of the
former led to the industrialization of the latter’
(1998:11).
The structural deficiencies of the world economy
are heavily emphasized by the so-called
structuralists.
Structuralism – is a ‘cluster of theories which
emerged in the 1950s, 1960s, and 1970s … [and]
share the idea that North and South are in a
structure that determines the pattern of
relationships that emerges’ (Brown, 2001:197).
The best known critical approach to the
prevailing social division of labor and global
inequalities is offered by ‘world-systems
analysis, which claims that capitalism under
globalization reinforces the structural patterns
of unequal change.
According to Wallerstein, capitalism, ‘a historical
social system’ (1983:13), created the
dramatically diverging historical level of wages in
the economic arena of the world system.
Accordingly, underdevelopment is not the initial
stage of a historical and evolutionary unilinear
development process, but a consequence of
colonialism and imperialism.
The link between these groups is provided via
trade and financial transactions and is organized
by a dense web of businessmen, merchants,
financial entrepreneurs and state bureaucrats.
Globalization, the product of long process of
capitalist development, is, therefore, nothing
new for world-system analysts; it is simply the
relabeling of old ideas and concepts’ (Arrighi,
2005).
International Monetary Systems
According to Krasner (1983:2), regimes can be
thought of as all the ‘implicit and explicit
principles, norms, rules and decision-making
procedures around which actors’ expectations
converge’.
International Monetary System or regime (IMS)
– ‘refers to the rules, customs, instruments,
facilities, and organizations for effecting
international payments’ (Salvatore, 2007:764).
Main task of IMS is to facilitate cross-border
transactions, especially trade and investment.
IMS – reflects economic power and interests, as
‘money is inherently political, an integral part of
“high politics” of diplomacy’ (Cohen, 2000:91).
The Gold Standard
Gold was believed to guarantee a non-
inflationary, stable economic environment, a
means for accelerating international trade
(Einaudi, 2001).
In practice, the gold standard functioned as a
fixed exchange rate regime, with gold as the only
international reserve.
Consequently, ‘common adherence to gold
convertibility … linked the world together
through fixed exchange rates’ (Bordo and
Rockoff, 1996:3).
David Hume (1752) was the first to elaborate on
this mechanism by developing his quantitative
theory of money.
Accordingly, as a deficit nation’s gold reserves
diminished, its general price level started to
decline as well, which restored its
competitiveness on international markets.
The price that such countries had to pay for the
automatic adjustment mechanism was the loss
of autonomy in monetary policy.
The regime was indeed able to create stability; it
also helped nations to restore equilibrium in
their current accounts and provided an almost
unlimited access to world finance.
The Bretton Woods System and Its Dissolution
The dramatic consequences of the beggar-thy-
neighbor policies of the inter-war period and the
wish to return to peace and prosperity impelled
the allied nations to start negotiations about a
new international monetary regime in the
framework of the United Nations Monetary Fund
and Financial Conference in Bretton Woods,
New Hampshire (US), in July 1994.
The US dollar was the only convertible currency
of the time, so the United States committed
itself to sell and purchase gold without
restrictions at US$35 dollar an ounce.
John Maynard Keynes, the British economist,
proposed ambitious reforms for the post-war era
and recommended the creation of an
international clearing union, a kind of global
bank, along with the introduction of a new unit
of account, the ‘bancor’ (Keynes, 1942/1969).
Two International Institutions
 1. The International Banks for
Reconstruction and Development (IBRD)
– responsible for post-war
reconstruction.
2. International Monetary Fund (IMF) – to
promote international cooperation and
buttress international trade.
As soon as Europe regained its pre-World War II
economic power, the external position of the
United States turned into a persistent deficit as a
natural consequence of becoming an
international reserve currency.
Destabilizing speculations, fed by the huge
balance of payments and trade deficit, along
with inflationary pressures, forced the United
States to abandon the gold-exchange standard
on 15 August 1971.
In early 1973, industrialized countries decided to
float their currencies and intervene in financial
markets only in case of drastic short-term
fluctuations.
This shift in exchange rate policy was
acknowledge by the Jamaica Accords in 1976.
In 1987, the Louvre Accord was drawn up in
order to defend the dollar from further
devaluation on the markets.
The appreciation of the yen proved to be
disastrous for the Japanese economy, which
faced a decade-long struggle in the 1990s as a
partial consequence of the ‘dollar politics’
(Destler and Henning, 1989).
The 1990s saw the triumph of the neoliberal,
pro-market Washington Consensus.
The Washington Consensus and its free-market
ideology has been criticized by many rights from
its conception.
Stiglitz (2002) blamed the IMF and its rigid
conditionalities for the failed development
performance of the periphery.
Wallerstein (2005) commented the change of
economic thinking of the late 1980s and early
1990s by arguing that ‘development was
suddenly out. Globalization arrive in its wake …
Now, the way to move forward was not to
import-substitute but to export-orient
productive activities. Down not only with
nationalized industries but with capital transfer
controls; up with transparent, unhindered flows
of capital’ (2005:1265).
European Monetary Integration
In the post-World War II era, the United Stated
originally wanted to implement the Morgenthau
Plan, which intended to downsize the German
economy into a pastoral and agricultural one.
The United States activated its post-war
reconstruction programme, the Marshall Plan, in
1948, which was administered by the
Organization for European Economic
Cooperation, the predecessor of the
Organization for Economic Cooperation and
Development (OECD).
The miraculous growth performance of Western
Europe prompted a closer cooperation on a
regional level, resulting finally in the European
Coal and Steel Community in 1951.
This was followed by the signing of the Rome
Treaty in 1957, which established the European
Economic Community (EEC), and was the first
major step towards an ‘ever closer union’.
The Original Six Founding Members
1. Germany
2. France
3. Italy
4. Netherlands
5. Belgium
6. Luxembourg
They aimed at the creation of a common market,
where goods, services, capital and labor moved
freely.
The collapse of the Bretton Woods system,
however, placed the EEC under pressure, and
member countries, eventually agreed on setting
up a regional monetary regime, the European
Monetary System (EMS) in 1979.
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 (Gros and Thygesen, 1998).
The global financial and economic crisis of 2008,
however, posed dramatic challenges for the
European Union (EU).
Three-Pillar Financial Rescue Programme in 2010
1. The European Financial Stability
Mechanism
2. The European Financial Stability Facility
3. The financial assistance of the IMF
Since the three-pillar system was designed for a
temporary period only, the EU has decided to
activate its own permanent rescue facility, the
European Stability Mechanism, from 2013
onwards.
The critics of the Eurozone have always
underlined the fact that EMU would never be
able to qualify for a well-functioning and stable
monetary zone without a common budget of the
size of federal countries such as the United
States (Feldstein, 1997).
International Trade and Trade Policies
Paul Samuelson, the late Nobel-laureate
economist, was once asked if he could name on
proposition which he considered as both valid
and non-trivial in the social sciences.
According to Ricardo (1817), a country such as
England could benefit from voluntary trade even
if its trading partner was more effective in
producing both wine and clothing.
The appeal of the theory is that every single
nation must have a comparative (that is, relative)
advantage in something irrespective of its initial
conditions.
Alexander Hamilton and Friedrich List
recognized quite early on that voluntary trade
can have very different distributional effects and
it can also hinder the long-term development
prospects of the country producing the lower
value added products.
List (1841/1928) did not oppose the Ricardian
comparative advantage theory; but he did warn
that trade patterns should not be considered as
static.
Reformist and radical (new left and neo-
Marxian) theorists, such as Emmanuel (1972) or
Amin (1976), argued, however, that unequal
exchange is a fundamental and systematic of the
modern world economy.
According to Amin (1993), if the world economy
is such that it benefits core countries at the
expense of the periphery, the latter should
adopt protectionism in its extreme form of
delinking.
Unilateral Trade Order
The surge of international trade arrived only with
Europe’s industrial revolution and the
consequent repeal of the British Corn Laws in
1846 in particular.
The so-called 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.
Several other bilateral trade agreements
followed suit across Europe, each built upon the
so-called most-favored-nation (MFN) principle,
which stated that any negotiated reciprocal tariff
reductions between two parties should be
extended to all other trading partners without
conditions.
Europe witnessed the emergence of a sort of
multilateral system of bilateral agreements,
giving birth t the ‘first common market’ in the
second half of the nineteenth century (Marsh,
1999).
Britain remained powerful enough both in
economic and military terms; it could also rely on
the vast reserves of its colonies, especially India
(Arrighi and Silver, 2003).
World War I, however, was a dramatic blow to
free trade.
Protectionism, in turn, was detrimental to
development, peace and stability (Ruggie, 1982).
Domestic politics in the United States evidently
turned against restrictions-free trade as a
consequence of the Great Depression of 1929.
The Hawley Act of 1930 increased tariffs to
record-high levels in the United States.
Retaliation was the rational response from
trading partners and international trade
dropped by one to two-thirds as a consequence.
The enactment of the US Reciprocal Trade
Agreements Act in 1934 eventually put a stop to
any further decline in international trade.
Multilateralism: From the GATT to the WTO
The dollar became a 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 Marshall Plan.
As opposed to the pre-World War I regime of
non-institutionalized unilateralism, the new
trade regime was more or less a liberal,
multilateral rules-based system backed by a solid
legal approach to trade relations (Winham,
2008).
According to Ruggie (1982), it was a compromise
between the extreme liberal international
regime of the long nineteenth century and the
economic nationalism of the inter-war period.
Originally, the new international trade regime
should have been steered by the International
Trade Organization (ITO), which was originally
conceived as one of the three pillars of the
Bretton Woods system.
In place of a unique trade organization, nations
committed to a world of lowered tariffs decided
to coordinate their actions under the auspices of
the General Agreement on Tariffs and Trade
(GATT).
The creation of the European Economic
Community in 1957 enforced the United States
to adopt the Trade Expansion Act of 1962 and to
call for a new round, the so-called Kennedy
Round.
In the 1970s, the Tokyo Round proceeded with
the same extended mandate, and, besides tariff
cuts, it also adopted a series of codes of conduct,
such as the subsidies code or the government
procurement code (Deardoff and Stem, 1983).
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.
The Uruguay Round extended multilateral rules
to new issues and sectors, such as agriculture
(which culminated in a better dispute between
the United States and the EU).
The Uruguay Round gave birth to a ‘real’
international trade institution, the World Trade
Organization.
WTO was launched on 1 January 1995 and has
become an official forum for trade negotiations.
As opposed to the GATT, it is a formally developing economies had been practically
constituted organization with legal personality. kicked away.

The statement between the two major camps,
however, pushed developing countries to unite
and strengthen their positions within the WTO
by forming a pressure group called the Group of
20.
DiCarpio 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.

Developing Countries and International Trade Stiglitz (2002) argues that today’s advanced
economies applied such ‘distortions’ widely at
They followed an inward-looking, import-
the onset of their own development.
substitution industrialization strategy, which did
not favor trade openness (Findlay and O’Rourke, It is hypocritical, therefore, to enforce
2007). developing countries to fully liberalize their
trade and financial sector.
The first major change in this state of affairs
happened in 1964 when the United Nations All in all, the current trade regime and especially
Conference on Trade and Development its main propagator, the WTO, is heavily
(UNCTAD) was established with the joint effort criticized for ‘a striking asymmetry. National
of the developing nations. boundaries should not matter for trade flows
and capital flows but should be clearly
The change in behavior of developing countries
demarcated for technology flows and labor flows
arrived with the Uruguay Round. Originally, the
… This asymmetry … lies at the heart of
round was meant to be a grand bargain between
inequality in the rules of the game for
developed and developing economies (Ostry,
globalization’ (Nayyar, 2002:158).
2002).

By quantifying the gains from the round,

Harrison et al. (1997) argued that the aggregate
welfare gains were between US$100 (in the
short run) and US$170 billion (in the long run)
annually.

Developing countries, however, might have

easily found themselves on the losers’ side, at
least in the short term.

Khor (1995) thus views the WTO as the means by

which industrialized countries can gain access to
the markets of developing countries.

A number of criticisms have been voiced with

regard to the current trade regime.

Wade (2003) has condemned the three major

agreements for constraining the available set of
industrial policies for development to such an
extent that the development ladder of