LESSON 2: THE GLOBAL ECONOMY

Economic Globalization

What is Economic Globalization

1. The widespread of international movement of groups, capital, services, technology, and
information that increase the interdependence of world economies.
2. Economic globalization refers to the intensification and expansion of mutual economic
interactions on the world scale. Economically, three dimensions of globalization—trade,
financial, or financial and globalization of production—draw attention.
3. The global integration of economies through trade and investment flows as well as the
internationalization of the production of goods and service.
4. Refers to the mobility of people, capital, technology, goods and services internationally.
5. It is also about how integrated countries are in the global economy.
6. It refers to how interdependent different countries and regions have become across the world.
7. is 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. The term sometimes also refers to the movement of
people (labor) and knowledge (technology) across international borders. (IMF, 2008)
8. 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.’

Is Economic Globalization a New Phenomenon? (Benczes: 2016)

Just as there is no single definition of globalization, there is no consensus on its origin,
either. Yet, if we accept that economic globalization is a process that creates an ‘organic system’
of the world economy, it seems reasonable to look beyond the last 30 years or so. The question
necessarily arises how far we should look back. Gills and Thompson (2006: 1) very wittily suggest
that globalization processes ‘have been ongoing ever since Homo sapiens began migrating from
the African continent ultimately to populate the rest of the world. Minimally, they have been
ongoing since the sixteen-century’s connection of the Americas to Afro-Eurasia’.
Frank and Gills (1993: 3) also call for a broader outlook and located the origin of glo-
balization in the (very) distant past: ‘the existence of the same world system in which we live
stretches back at least 5,000 years. The best-known example of archaic globalization is the Silk
Road, which connected Asia, Africa and Europe. Adopting Fernand Braudel’s innovative concept
of ‘long duration’, i.e. a slow-moving, ‘almost imperceptible’ (1973: 22) framework for historical
analysis, world-systems analysts identify the origins of modernity and globalization with the birth
of sixteenth century long-distance trade.
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
1492 and the discovery of the direct sea route to India by Vasco de Gama in 1498 as the two
greatest achievements in human history. In the course of a couple of decades these remarkable
achievements were overshadowed by the breathtaking technological advances and organization
methods of the British Industrial Revolution. From the early 1800s, following the Napoleonic
wars, the industrial revolution spread to Continental Europe and North America, too.
The economic nationalism of the seventeenth and eighteenth centuries, coupled with
monopolized trade (such as the first multinational corporations, the British and the Dutch East
India Companies, established in 1600 and 1602, respectively) did not favor, however,
international economic integration. The total number of ships sailing to Asia from major
European countries rose remarkably between 1500 and 1800 (in numbers: 770 in the sixteenth,
3,161 in the seventeenth and 6,661 in the eighteenth century; Maddison, 2001), but world export
to world GDP did not reach more than 1 to 2 per cent in that period (Held et al., 1999). If global
economy did exist in this period, then it was only in the sense of ‘trade and exchange, rather than
production’ (Gereffi, 2005: 161). Countries were mostly self-sufficient and autarkic, the UK and
the Netherlands being the only exceptions (though long-distance trade concentrated mostly on
luxury goods).
The real break-through came only in the nineteenth century. The annual average com-
pound growth rate of world trade saw a dramatic increase of 4.2 per cent between 1820 and
1870, and was still relatively high, at 3.4 per cent between 1870 and 1913 (Maddison, 2001). By
1913, trade equaled to 16–17 per cent of world income, thanks to the transport revolution:
steamships and railroads reduced transaction costs and bolstered both internal and international
exchange (Held et al., 1999). 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).
The structural transformation of the Western world was, therefore, both a cause and an
effect of intensified economic integration. By the second half of the nineteenth century, the
division of labor entwined modern world economy. Consequently, sceptics of globalization, such
as Hirst and Thompson (2002), recognize the origin of globalization in this era and argue that in
some respects (especially about labor mobility), nineteenth century world economy was even
more integrated than the present.

Does globalization bring more inequality?

As the world has become more economically globalized, so has the income and wealth
inequality within countries. Some people believe globalization is the cause – this has so far been
difficult to prove.
They argue that if companies have access to the whole world market, and most of those
companies are in a few countries – the US, EU and Japan – they will suck money out of the
whole world in much greater quantities than if they sold just within their own markets.
The counter-argument is that globalization brings well-paid jobs (compared to local pay rates)
to emerging economies. A Ford factory worker in Mexico earns more and has better workplace
conditions than he would as a farm laborer.
When looking at inequality between nations, however, globalization has coincided with
more equality between the advanced and emerging economies. The rich countries today
represent a smaller percentage of global GDP compared to twenty or thirty years ago.
Wealth inequality is not only a problem within emerging and low-income nations – it is also
increasing in the advanced economies.
 Janet Yellen, who heads the Federal Reserve System of the United States (America’s
central bank), said in a speech at the Conference on Economic Opportunity and Inequality at the
Federal Reserve Bank of Boston in October 2013 that wealth inequality in the US has widened
since 1990.

REASONS FOR INEQUALITY

World Systems Theory (Carlos A. Martínez Vela – ESD.83 – Fall 2001)

For Wallerstein, "a world-system is a social system, one that has boundaries, structures,
member groups, rules of legitimation, and coherence. Its life is made up of the conflicting forces
which hold it together by tension and tear it apart as each group seeks eternally to remold it to
its advantage. It has the characteristics of an organism, in that is has a life-span over which its
characteristics change in some respects and remain stable in others...Life within it is largely self-
contained, and the dynamics of its development are largely internal" (Wallerstein, p. 347). A
world-system is what Wallerstein terms a "world-economy", integrated through the market
rather than a political center, in which two or more regions are interdependent with respect to
necessities like food, fuel, and protection, and two or more polities compete for domination
without the emergence of one single center forever (Goldfrank, 2000).
In his own first definition, Wallerstein (1974) said that a world-system is a "multicultural
territorial division of labor in which the production and exchange of basic goods and raw
materials is necessary for the everyday life of its inhabitants." This division of labor refers to the
forces and relations of production of the world economy and it leads to the existence of two
interdependent regions: core and periphery. These are geographically and culturally different,
one focusing on labor-intensive, and the other on capital-intensive production. (Goldfrank, 2000).
The core-periphery relationship is structural. Semi-peripheral states act as a buffer zone between
core and periphery and has a mix of the kinds of activities and institutions that exist on them
(Skocpol, 1977).
Among the most important structures of the current world-system is a power hierarchy
between core and periphery, in which powerful and wealthy "core" societies dominate and
exploit weak and poor peripheral societies. Technology is a central factor in the positioning of a
region in the core or the periphery. Advanced or developed countries are the core, and the less
developed are in the periphery. Peripheral countries are structurally constrained to experience a
kind of development that reproduces their subordinate status (Chase-Dunn and Grimes, (1995).
The differential strength of the multiple states within the system is crucial to maintain the system,
because strong states reinforce and increase the differential flow of surplus to the core zone
(Skocpol, 1977). This is what Wallerstein called unequal exchange, the systematic transfer of
surplus from semi-proletarian sectors in the periphery to the high-technology, industrialized core
(Goldfrank, 2000). This leads to a process of capital accumulation at a global scale, and necessarily
involves the appropriation and transformation of peripheral surplus.
On the political side of the world-system a few concepts deem highlighting. For
Wallerstein, nation-states are variables, elements within the system. States are used by class
forces to pursue their interest, in the case of core countries. Imperialism refers to the domination
of weak peripheral regions by strong core states. Hegemony refers to the existence of one core
state temporarily outstripping the rest. Hegemonic powers maintain a stable balance of power
and enforce free trade if it is to their advantage. However, hegemony is temporary due to class
struggles and the diffusion of technical advantages. Finally, there is a global class struggle.
The current world-economy is characterized by regular cyclical rhythms, which provide
the basis of Wallerstein's periodization of modern history (Goldfrank, 2000). After our current
stage, Wallerstein envisions the emergence of a socialist world-government, which is the only-
alternative world-system that could maintain a high level of productivity and change the
distribution, by integrating the levels of political and economic decision-making.

Dependency theory (Vincent Ferraro, "Dependency Theory: An Introduction," in The

Development Economics Reader, ed. Giorgio Secondi (London: Routledge, 2008), pp. 58-64)
How Can One Define Dependency Theory?
The debates among the liberal reformers (Prebisch), the Marxists (Andre Gunder Frank), and the
world systems theorists (Wallerstein) was vigorous and intellectually quite challenging. There are
still points of serious disagreements among the various strains of dependency theorists and it is
a mistake to think that there is only one unified theory of dependency. Nonetheless, there are
some core propositions which seem to underlie the analyses of most dependency theorists.
Dependency can be defined as an explanation of the economic development of a state in
terms of the external influences--political, economic, and cultural--on national development
policies (Osvaldo Sunkel, "National Development Policy and External Dependence in Latin
America," The Journal of Development Studies, Vol. 6, no. 1, October 1969, p. 23). Theotonio Dos
Santos emphasizes the historical dimension of the dependency relationships in his definition:

[Dependency is]...an historical condition which shapes a certain structure of the world
economy such that it favors some countries to the detriment of others and limits the development
possibilities of the subordinate economics...a situation in which the economy of a certain group
of countries is conditioned by the development and expansion of another economy, to which their
own is subjected.
(Theotonio Dos Santos, "The Structure of Dependence," in K.T. Fann and Donald C. Hodges, eds.,
Readings in U.S. Imperialism. Boston: Porter Sargent, 1971, p. 226)

There are three common features to these definitions which most dependency theorists
share.
First, dependency characterizes the international system as comprised of two sets of
states, variously described as dominant/dependent, center/periphery or metropolitan/satellite.
The dominant states are the advanced industiral nations in the Organization of Economic Co-
operation and Development (OECD). The dependent states are those states of Latin America,
Asia, and Africa which have low per capita GNPs, and which rely heavily on the export of a single
commodity for foreign exchange earnings.
Second, both definitions have in common the assumption that external forces are of
singular importance to the economic activities within the dependent states. These external forces
include multinational corporations, international commodity markets, foreign assistance,
communications, and any other means by which the advanced industrialized countries can
represent their economic interests abroad.
 Third, the definitions of dependency all indicate that the relations between dominant and
dependent states are dynamic because the interactions between the two sets of states tend to
not only reinforce but also intensify the unequal patterns. Moreover, dependency is a very deep-
seated historical process, rooted in the internationalization of capitalism. Dependency is an
ongoing process:
Latin America is today, and has been since the sixteenth century, part of an international
system dominated by the now-developed nations.... Latin underdevelopment is the outcome of a
series of relationships to the international system.
Susanne Bodenheimer, "Dependency and Imperialism: The Roots of Latin American
Underdevelopment," in Fann and Hodges, Readings, op. cit., p. 157.

In short, dependency theory attempts to explain the present underdeveloped state of

many nations in the world by examining the patterns of interactions among nations and by
arguing that inequality among nations is an intrinsic part of those interactions.

The Structural Context of Dependency: Is it Capitalism or is it Power?

Most dependency theorists regard international capitalism as the motive force behind
dependency relationships. Andre Gunder Frank, one of the earliest dependency theorists, is quite
clear on this point:
...historical research demonstrates that contemporary underdevelopment is in large part
the historical product of past and continuing economic and other relations between the satellite
underdeveloped and the now developed metropolitan countries. Furthermore, these relations are
an essential part of the capitalist system on a world scale as a whole.
Andre Gunder Frank, "The Development of Underdevelopment," in James D. Cockcroft, Andre
Gunder Frank, and Dale Johnson, eds., Dependence and Underdevelopment. Garden City, New
York: Anchor Books, 1972, p. 3.

According to this view, the capitalist system has enforced a rigid international division of
labor which is responsible for the underdevelopment of many areas of the world. The dependent
states supply cheap minerals, agricultural commodities, and cheap labor, and serve as the
repositories of surplus capital, obsolescent technologies, and manufactured goods. These
functions orient the economies of the dependent states toward the outside: money, goods, and
services do flow into dependent states, but the allocation of these resources is determined by
the economic interests of the dominant states, and not by the economic interests of the
dependent state. This division of labor is ultimately the explanation for poverty and there is little
question, but that capitalism regards the division of labor as a necessary condition for the
efficient allocation of resources. The most explicit manifestation of this characteristic is in the
doctrine of comparative advantage.
Moreover, to a large extent the dependency models rest upon the assumption that
economic and political power are heavily concentrated and centralized in the industrialized
countries, an assumption shared with Marxist theories of imperialism. If this assumption is valid,
then any distinction between economic and political power is spurious: governments will take
whatever steps are necessary to protect private economic interests, such as those held by
multinational corporations.
 Not all dependency theorists, however, are Marxist and one should clearly distinguish
between dependency and a theory of imperialism. The Marxist theory of imperialism explains
dominant state expansion while the dependency theory explains underdevelopment. Stated
another way, Marxist theories explain the reasons why imperialism occurs, while dependency
theories explain the consequences of imperialism. The difference is significant. In many respects,
imperialism is, for a Marxist, part of the process by which the world is transformed and is
therefore a process which accelerates the communist revolution. Marx spoke approvingly of
British colonialism in India:
“England must fulfil a double mission in India: one destructive, the other regenerating--
the annihilation of old Asiatic society, and the laying of the material foundations of Western
society in Asia.”
Karl Marx, "The Future Results of the British Rule in India," New York Daily Tribune, No. 3840,
August 8, 1853.

For the dependency theorists, underdevelopment is a wholly negative condition which

offers no possibility of sustained and autonomous economic activity in a dependent state.
Additionally, the Marxist theory of imperialism is self-liquidating, while the dependent
relationship is self-perpetuating. The end of imperialism in the Leninist framework comes about
as the dominant powers go to war over a rapidly shrinking number of exploitable opportunities.
World War I was, for Lenin, the classic proof of this proposition. After the war was over, Britain
and France took over the former German colonies. A dependency theorist rejects this
proposition. A dependent relationship exists irrespective of the specific identity of the dominant
state. That the dominant states may fight over the disposition of dependent territories is not in
and of itself a pertinent bit of information (except that periods of fighting among dominant states
affords opportunities for the dependent states to break their dependent relationships). To a
dependency theorist, the central characteristic of the global economy is the persistence of
poverty throughout the entire modern period in virtually the same areas of the world, regardless
of what state was in control.
Finally, there are some dependency theorists who do not identify capitalism as the motor
force behind a dependent relationship. The relationship is maintained by a system of power first
and it does not seem as if power is only supported by capitalism. For example, the relationship
between the former dependent states in the socialist bloc (the Eastern European states and
Cuba, for example) closely paralleled the relationships between poor states and the advanced
capitalist states. The possibility that dependency is more closely linked to disparities of power
rather than to the characteristics of a given economic system is intriguing and consistent with
the more traditional analyses of international relations, such as realism.

The Central Propositions of Dependency Theory

There are several propositions, all of which are contestable, which form the core of
dependency theory. These propositions include:
1. Underdevelopment is a condition fundamentally different from undevelopment. The
latter term simply refers to a condition in which resources are not being used. For example, the
European colonists viewed the North American continent as an undeveloped area: the land was
not actively cultivated on a scale consistent with its potential. Underdevelopment refers to a
situation in which resources are being actively used but used in a way which benefits dominant
states and not the poorer states in which the resources are found.
2. The distinction between underdevelopment and undevelopment places the poorer
countries of the world is a profoundly different historical context. These countries are not
"behind" or "catching up" to the richer countries of the world. They are not poor because they
lagged the scientific transformations or the Enlightenment values of the European states. They
are poor because they were coercively integrated into the European economic system only as
producers of raw materials or to serve as repositories of cheap labor and were denied the
opportunity to market their resources in any way that competed with dominant states.
3. Dependency theory suggests that alternative uses of resources are preferable to the
resource usage patterns imposed by dominant states. There is no clear definition of what these
preferred patterns might be, but some criteria are invoked. For example, one of the dominant
state practices most often criticized by dependency theorists is export agriculture. The criticism
is that many poor economies experience rather high rates of malnutrition even though they
produce great amounts of food for export. Many dependency theorists would argue that those
agricultural lands should be used for domestic food production in order to reduce the rates of
malnutrition.
4. The preceding proposition can be amplified: dependency theorists rely upon a belief
that there exists a clear "national" economic interest which can and should be articulated for
each country. In this respect, dependency theory shares a similar theoretical concern with
realism. What distinguishes the dependency perspective is that its proponents believe that this
national interest can only be satisfied by addressing the needs of the poor within a society, rather
than through the satisfaction of corporate or governmental needs. Trying to determine what is
"best" for the poor is a difficult analytical problem over the long run. Dependency theorists have
not yet articulated an operational definition of the national economic interest.
5. The diversion of resources over time (and one must remember that dependent
relationships have persisted since the European expansion beginning in the fifteenth century) is
maintained not only by the power of dominant states, but also through the power of elites in the
dependent states. Dependency theorists argue that these elites maintain a dependent
relationship because their own private interests coincide with the interests of the dominant
states. These elites are typically trained in the dominant states and share similar values and
culture with the elites in dominant states. Thus, in a very real sense, a dependency relationship
is a "voluntary" relationship. One need not argue that the elites in a dependent state are
consciously betraying the interests of their poor; the elites sincerely believe that the key to
economic development lies in following the prescriptions of liberal economic doctrine.

The Policy Implications of Dependency Analysis

If one accepts the analysis of dependency theory, then the questions of how poor
economies develop become quite different from the traditional questions concerning
comparative advantage, capital accumulation, and import/export strategies. Some of the most
important new issues include:
1. The success of the advanced industrial economies does not serve as a model for the
currently developing economies. When economic development became a focused area of study,
the analytical strategy (and ideological preference) was quite clear: all nations need to emulate
the patterns used by the rich countries. Indeed, in the 1950s and 1960s there was a paradigmatic
consensus that growth strategies were universally applicable, a consensus best articulated by
Walt Rostow in his book, The Stages of Economic Growth. Dependency theory suggests that the
success of the richer countries was a highly contingent and specific episode in global economic
history, one dominated by the highly exploitative colonial relationships of the European powers.
A repeat of those relationships is not now highly likely for the poor countries of the world.
2. Dependency theory repudiates the central distributive mechanism of the neoclassical
model, what is usually called "trickle-down" economics. The neoclassical model of economic
growth pays relatively little attention to the question of distribution of wealth. Its primary
concern is on efficient production and assumes that the market will allocate the rewards of
efficient production in a rational and unbiased manner. This assumption may be valid for a well-
integrated, economically fluid economy where people can quickly adjust to economic changes
and where consumption patterns are not distorted by non-economic forces such as racial, ethnic,
or gender bias. These conditions are not pervasive in the developing economies, and dependency
theorists argue that economic activity is not easily disseminated in poor economies. For these
structural reasons, dependency theorists argue that the market alone is not an enough
distributive mechanism.
3. Since the market only rewards productivity, dependency theorists discount aggregate
measures of economic growth such as the GDP or trade indices. Dependency theorists do not
deny that economic activity occurs within a dependent state. They do make a very important
distinction, however, between economic growth and economic development. For example, there
is a greater concern within the dependency framework for whether the economic activity is
benefitting the nation. Therefore, far greater attention is paid to indices such as life expectancy,
literacy, infant mortality, education, and the like. Dependency theorists clearly emphasize social
indicators far more than economic indicators.
4. Dependent states, therefore, should attempt to pursue policies of self-reliance.
Contrary to the neo-classical models endorsed by the International Monetary Fund and the
World Bank, greater integration into the global economy is not necessarily a good choice for poor
countries. Often this policy perspective is viewed as an endorsement of a policy of autarky, and
there have been some experiments with such a policy such as China's Great Leap Forward or
Tanzania's policy of Ujamaa. The failures of these policies are clear, and the failures suggest that
autarky is not a good choice. Rather a policy of self-reliance should be interpreted as endorsing
a policy of controlled interactions with the world economy: poor countries should only endorse
interactions on terms that promise to improve the social and economic welfare of the larger
citizenry.

Colonialism (Henslin: 2015)

Stresses that the countries that industrialized first got the jump on the rest of the world.
Beginning in Great Britain about 1750, industrialization spread throughout western Europe.
Plowing some of their profits into powerful armaments and fast ships, these countries invaded
weaker nations, making colonies out of them (Harrison 1993). After subduing these weaker
nations, the more powerful countries left behind a controlling force in order to exploit the
nations’ labor and natural resources. At one point, there was even a free-for-all among the
industrialized European countries as they rushed to divide up an entire continent. As they sliced
Africa into pieces, even tiny Belgium got into the act and acquired the Congo, which was seventy-
five times larger than itself.
The purpose of colonialism was to establish economic colonies—to exploit the nation’s
people and resources for the benefit of the “mother” country. The more powerful European
countries would plant their national flags in a colony and send their representatives to run the
government, but the United States usually chose to plant corporate flags in a colony and let these
corporations dominate the territory’s government. Central and South America are prime
examples. There were exceptions, such as the U.S. army’s conquest of the Philippines, which
President McKinley said was motivated by the desire “to educate the Filipinos, and uplift and
civilize and Christianize them” (Krugman 2002).
Colonialism, then, shaped many of the Least Industrialized Nations. In some instances,
the Most Industrialized Nations were so powerful that when dividing their spoils, they drew lines
across a map, creating new states without regard for tribal or cultural considerations (Kifner
1999). Britain and France did just this as they divided up North Africa and parts of the Middle
East—which is why the national boundaries of Libya, Saudi Arabia, Kuwait, and other countries
are so straight. This legacy of European conquests is a background factor in much of today’s
racial–ethnic and tribal violence: By the stroke of a pen, groups with no history of national
identity were incorporated within the same political boundaries.

Culture of Poverty (Henslin: 2015)

Economist John Kenneth Galbraith (1979) claimed that the cultures of the Least
Industrialized Nations hold them back. Building on the ideas of anthropologist Oscar Lewis
(1966a, 1966b), Galbraith argued that some nations are crippled by a culture of poverty, a way
of life that perpetuates poverty from one generation to the next. He explained it this way: Most
of the world’s poor people are farmers who live on little plots of land. They barely produce
enough food to survive. Living on the edge of starvation, they have little room for risk—so they
stick to tried-and-true, traditional ways. To experiment with new farming techniques is to court
disaster, since failure would lead to hunger and death.
Their religion also encourages them to accept their situation. It teaches fatalism, the
belief that an individual’s position in life is God’s will. For example, in India, the Dalits are taught
that they must have done very bad things in a previous life to suffer so. They are supposed to
submit to their situation, which they deserve—and in the next life, maybe they’ll come back in a
more desirable state.

GLOBALIZATION OF THE ECONOMY (https://www.globalpolicy.org/globalization/globalization-

of-the-economy-2-1.html)
Advances in communication and transportation technology, combined with free-market
ideology, have given goods, services, and capital unprecedented mobility. Northern countries
want to open world markets to their goods and take advantage of abundant, cheap labor in the
South, policies often supported by Southern elites. They use international financial institutions
and regional trade agreements to compel poor countries to "integrate" by reducing tariffs,
privatizing state enterprises, and relaxing environmental and labor standards. The results have
enlarged profits for investors but offered pittances to laborers, provoking a strong backlash from
civil society.
 With international trade, financial transfers, and foreign direct investment, the economy
is increasingly internationally interconnected.

International Trade and Development

Capitalist economic theory holds that a completely liberalized global market is the most
efficient way to foster growth, because each country specializes in producing the goods and
services in which it has a comparative advantage. Yet, in practice, cutting trade barriers and
opening markets do not necessarily generate development. Rich countries and large corporations
dominate the global marketplace and create very unequal relations of power and information.
As a result, trade is inherently unequal and poor countries seldom experience rising well-being
but increasing unemployment, poverty, and income inequality.
An additional problem is that free trade is not equally free. Agricultural subsidies and
other trade barriers in the US and the EU prevent poor countries from gaining access to the most
important markets. Meanwhile, poor countries open their own markets to US and EU exports.
Critics of free trade point out that many of the world's richest countries sheltered their
economies by protection when they were at the start of their own growth. Further, trade is so
dominated by transnational corporations that new trade rules mainly benefit those companies.
Several NGOs have started to promote "fair trade," arguing that trade can promote development
if it is environmentally sustainable and includes respect for human and labor rights.

International Trade Agreements

Neoliberal ideology claims that international trade is an important factor for the
development of poor countries and their integration into the global economy. Rich governments'
promotion of these ideals has led them to develop an array of new trade agreements such as the
FTAA and CAFTA. These bilateral, multilateral, and regional accords strongly affect people at all
levels of the economy--from growers and workers, to processors and consumers --by regulating
pricing, tariffs, export levels, and methods of production. Though supporters claim that trade
agreements bring sustainable development and economic integration, this is not the case. Rich
countries maintain protections of their own exports, while their competitors in poor countries
agree to open their markets. Beneficial norms, such as human rights or environmental standards,
are set aside. This leads to a "race to the bottom," in which the only priority is cost effective
production, at the expense of workers, resources, and sustainability. Due to these failings, the
agreements tend to harm development and pull poor countries deeper into poverty.

Multilateral Agreement on Investment

In May 1995, the OECD began negotiations on a Multilateral Agreement on Investment
(MAI). The US, eager to avoid interference from poor countries, considered the OECD Council a
"safe" body since only rich countries are members of the organization. Secret negotiations took
place from 1995 until 1997 when an OECD source leaked a copy of the draft agreement to a
Canadian citizen group. The leak revealed that the MAI sought to establish a new body of
universal investment laws that would guarantee corporations unconditional rights to buy, sell
and do financial operations all over the world, without any regard for national laws and citizens'
rights. The draft gave corporations a right to sue governments if national health, labor or
environment legislation threatened their interests. However, the negotiations failed in 1998
when first France, and then other countries, successively withdrew after pressure from a global
movement of NGOs, citizens groups and governments of poor countries. MAI opponents saw the
agreement as a threat to national sovereignty and democracy and argued that it would lead to a
"race to the bottom" in environmental and labor standards. The failure of the MAI negotiations
proved a success for the global movement against the MAI. However, rich governments continue
to push for similar investment provisions in regional trade agreements and the World Trade
Organization (WTO). At the WTO Ministerial in Cancun in September 2003, the richer WTO
members tried to introduce a Multilateral Investment Agreement (MIA) through the "Singapore"
issues. These efforts failed again, however, as a group of more than twenty poor countries united
in demanding a fairer trade deal. This page follows the MAI and other related initiatives on
international investment.

Transnational Corporations
Transnational Corporations exert a great deal of power in the globalized world economy.
Many corporations are richer and more powerful than the states that seek to regulate them.
Through mergers and acquisitions corporations have been growing very rapidly and some of the
largest TNCs now have annual profits exceeding the GDPs of many low- and medium-income
countries. This page explores how TNCs dominate the global economy and exert their influence
over global policymaking.

Foreign Direct Investment

Foreign direct investment (FDI) has increased tenfold over the last 20 years. This kind of
investment brings private overseas funds into a country for investments in manufacturing or
services (for example, General Motors building an auto factory in the Philippines). FDI can bring
impressive growth, as in China's coastal provinces, but also instability and economic distress, as
during the 1997-98 Asian financial crisis. Governments of many poor countries see foreign capital
as a means of economic growth, and they have taken steps to attract it. These steps often include
minimizing business regulation and weakening codes for labor, health, and the environment.
Such governments may also try to improve the investment climate by using violence to silence
opposition parties and movements. Rich countries, for their part, have sought legal protection
for investors, and have used the World Bank and the IMF to impose new arrangements in this
field. Bilateral and multilateral agreements, such as the North American Free Trade Area, protect
investments at the expense of environmental and health regulations. The proposed Multilateral
Investment Agreement (MIA), under negotiation at the WTO, would replicate this imbalance at
the global level.

The World Trade Organization

The World Trade Organization was founded in 1995 to replace the General Agreement on
Tariffs and Trade (GATT). This multilateral organization aims to lower tariffs and non-tariff
barriers to increase international trade. The 146 member states meet in ministerial sessions at
least once every two years. NGOs and poor countries fear that further liberalization of trade will
only benefit rich countries. WTO negotiations favor the interests of corporate investors and
neglect agricultural protectionism and trade subsidies by rich countries. Critics often charge that
the WTO functions undemocratically and that it has opaque negotiation procedures that harm
the interest of the poor. In the summer of 2006, five years of Doha Round negotiations ended
without any agreement, leading many observers to question whether the WTO continues to be
relevant in the absence of rich country trade concessions.

The World Bank

The World Bank, based in Washington, is a multilateral institution that lends money to
governments and government agencies for development projects. For more than twenty years,
the Bank has imposed stringent conditions, known as "Structural Adjustment Programs," on
recipient countries, forcing them to adopt reforms such as deregulation of capital markets,
privatization of state companies, and downsizing of public programs for social welfare.
Privatization of water supplies, fees for public schools and hospitals, and privatization of public
pensions are among the most controversial Bank reforms. While the Bank insists that "fighting
poverty" is its priority, many critics believe instead that it is responsible for rising poverty. Many
also criticize its cozy relationship with Wall Street and the United States Treasury Department.
The stormy resignation of World Bank Vice President and Chief Economist Joseph Stiglitz in late
1999, and his subsequent public comments, suggest that the Bank is not as benign as it claims to
be.

The International Monetary Fund

The International Monetary Fund is a multilateral institution based in Washington that
lends money to governments to stabilize currencies and maintain order in international financial
markets. For many decades, the Fund has imposed stringent loan conditions that often lead to
worsening conditions for many citizens in the affected countries. Even more than its partner, the
World Bank, the Fund is known for its rigid orthodoxy and its high-handed approach to poor
countries. Its performance in the Asian Crisis and in Latin America has led to widespread criticism
and charges that its "medicine was worse than the disease."

Global Taxes
Global taxes can address serious global problems while at the same time raising revenue
for development. A tax on carbon emissions could help slow global climate change, while a tax
on currency trading could dampen dangerous instability in the foreign exchange markets. The
revenue from these taxes could support major programs to reduce poverty and hunger, ensure
primary schooling for all children, and reverse the spread of HIV/AIDS, malaria and other major
diseases. Unreliable donations from rich countries will not fill this need, estimated by the UN to
cost tens of billions per year. A global system of revenue-raising must be put in place to fund
genuinely international initiatives.
While proposals for global taxes have met fierce opposition from the US government,
more and more politicians, scholars, international organizations and NGOs support the idea. In
2004, the presidents of Brazil, France and Chile launched an initiative to promote international
taxes to finance development. Since then, the leaders of Spain, Germany, Algeria and South Africa
have joined the process. This and other recent proposals have focused on the revenue side of
global taxes, disregarding their role as policy shaping instruments. By 2005, the group had
narrowed down its tax proposals to a "solidarity contribution" (tax) on plane tickets to finance a
global health fund. This page explores the different ways global taxes can be implemented, the
need for democratic oversight and control, the policy shaping and distributive effects, and the
possible use of such taxes to fund development and the UN, and its Specialized Agencies,
Programmes and Funds.

Dollarization
Traditionally, each independent nation had its own currency as a symbol of sovereignty,
but in a globalizing world national currencies have been weakening or even disappearing. The US
dollar has been taking over as the world's currency of account. Neo-liberal open markets and
rapid currency conversion have reinforced the dollar's role since the mid-1970s. Much trade is
now dollar-based, countries prefer to hold their central bank reserves in US dollars, and private
companies as well as wealthy citizens often hold dollars or dollar-denominated assets. The United
States derives great economic and political power from this dollar hegemony.
During the 1990s, dollarization accelerated. Several countries pegged their currencies to the
dollar or even adopted the dollar outright as their national currency, hoping that this would solve
inflation problems. Dollar-denominated notes, especially $100 bills, grew in popularity with
individuals as well as criminal networks, becoming the US's largest export. But huge US trade
imbalances and federal budget deficits undermined the dollar and eventually knocked down its
value in international currency markets. Further erosion of the dollar could undermine and
reverse decades of dollarization, but a globalizing world still needs a strong common currency. If
the dollar weakens further, alternatives might emerge. But for the moment, the (weaker) dollar
still is King.

Bretton Woods System and 1944 Agreement (https://www.thebalance.com/bretton-woods-system-and-

1944-agreement-3306133)

How Bretton Woods Introduced a New World Order?

The 1944 Bretton Woods agreement established a new global monetary system. It replaced
the gold standard with the U.S. dollar as the global currency. By so doing, it established America as the
dominant power in the world economy. After the agreement was signed, America was the only country
with the ability to print dollars.
The agreement created the World Bank and the International Monetary Fund. These U.S.-backed
organizations would monitor the new system.

The Bretton Woods Agreement

The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied
nations. It took place in Bretton Woods, New Hampshire.
Under the agreement, countries promised that their central banks would maintain fixed exchange
rates between their currencies and the dollar. How exactly would they do this? If a country's currency
value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange
markets. That would lower the currency's supply and raise its price. If its currency became too high, the
bank would print more. That would increase the supply and lower its price.
Members of the Bretton Woods system agreed to avoid trade wars.1 For example, they wouldn't
lower their currencies strictly to increase trade. But they could regulate their currencies under certain
conditions. For example, they could take action if foreign direct investment began to destabilize their
economies. They could also adjust their currency values to rebuild after a war.
How It Replaced the Gold Standard
Before Bretton Woods, most countries followed the gold standard. That meant each
country guaranteed that it would redeem its currency for its value in gold. After Bretton Woods,
each member agreed to redeem its currency for U.S. dollars, not gold. Why dollars? The United
States held three-fourths of the world's supply of gold. No other currency had enough gold to
back it as a replacement. The dollar's value was 1/35 of an ounce of gold. Bretton Woods allowed
the world to slowly transition from a gold standard to a U.S. dollar standard.
The dollar had now become a substitute for gold. As a result, the value of the dollar began
to increase relative to other currencies. There was more demand for it, even though its worth in
gold remained the same. This discrepancy in value planted the seed for the collapse of the
Bretton Woods system three decades later.

Why It Was Needed

Until World War I, most countries were on the gold standard. But they went off so they
could print the currency needed to pay for their war costs. It caused hyperinflation, as the supply
of money overwhelmed the demand. The value of money fell so dramatically that, in some cases,
people needed wheelbarrows full of cash just to buy a loaf of bread. After the war, countries
returned to the safety of the gold standard.
All went well until the Great Depression. After the 1929 stock market crash, investors
switched to forex trading and commodities. It drove up the price of gold, resulting in people
redeeming their dollars for gold. The Federal Reserve made things worse by defending the
nation's gold reserve by raising interest rates. It's no wonder that countries were ready to
abandon a pure gold standard.
The Bretton Woods system gave nations more flexibility than a strict adherence to the
gold standard. It also provided less volatility than a currency system with no standard at all. A
member country still retained the ability to alter its currency's value if needed to correct a
"fundamental disequilibrium" in its current account balance.

Role of the IMF and World Bank

The Bretton Woods system could not have worked without the IMF. Member countries
needed it to bail them out if their currency values got too low. They'd need a kind of global central
bank they could borrow from in case they needed to adjust their currency's value and didn't have
the funds themselves. Otherwise, they would just slap on trade barriers or raise interest rates.
The Bretton Woods countries decided against giving the IMF the power of a global central
bank. This power involved printing money as needed. Instead, they agreed to contribute to a
fixed pool of national currencies and gold to be held by the IMF. Each member of the Bretton
Woods system was then entitled to borrow what it needed, within the limits of its contributions.
The IMF was also responsible for enforcing the Bretton Woods agreement.
The World Bank, despite its name, was not the world's central bank. At the time of the
Bretton Woods agreement, the World Bank was set up to lend to the European countries
devastated by World War II. Now the purpose of the World Bank is to loan money to economic
development projects in emerging market countries.
The Collapse of the Bretton Woods System
In 1971, the United States was suffering from massive stagflation. That's a deadly
combination of inflation and recession. It was partly a result of the dollar's role as a global
currency. In response, President Nixon started to deflate the dollar's value in gold. Nixon
revalued the dollar to 1/38 of an ounce of gold, then 1/42 of an ounce.
But the plan backfired. It created a run on the U.S. gold reserves at Fort Knox as people
redeemed their quickly devaluing dollars for gold. In 1973, Nixon unhooked the value of the dollar
from gold altogether. Without price controls, gold quickly shot up to $120 per ounce in the free
market. The Bretton Woods system was over.

The Bottom Line

The Bretton Woods System was established as the new international monetary system in
1944. It was a shift from the gold standard. The U.S. dollar became the new international measure
for currency valuation.

Its creation resulted in:

Countries pegging their currencies to the U.S. dollar. In turn, the dollar was pegged to the
price of gold.
U.S. dominance in the world economy. It was the only nation that could print the global
currency.
More currency flexibility for countries than that provided by the old gold standard.
The establishment of the IMF and the World Bank.

The Bretton Woods System ended in the 1970s, when President Nixon dissolved the U.S.
gold standard.
References:
https://web.mit.edu/esd.83/www/notebook/WorldSystem.pdf
https://www.economicsonline.co.uk/Global_economics/Dependency_theory.html
https://www.mtholyoke.edu/acad/intrel/depend.html
Henslin, James M. Essentials of Sociology: A Down-to-Earth Approach, 11th ed. Boston:
Pearson, 2014.
https://www.globalpolicy.org/globalization/globalization-of-the-economy-2-1.html

https://www.thebalance.com/bretton-woods-system-and-1944-agreement-3306133