Globalization is not a 20th century phenomenon. It is, however, more pronounced today, than a century ago. Barbara Stallings (2007) defined globalization as “the increasing integration of the world through transnational flows of goods, capital, ideas and norms.”
Fundamentally, the purpose of globalization remains unchanging — to provide a platform for international trade and finance. But the growth of democratic ideals coupled with continuously evolving technology and institutionalized formal structures such as the General Agreement on Tariffs and Trade (later on succeeded by the World Trade Organization) and the International Monetary Fund, has made globalization more complex and intrinsic to economic activities today.
The only difference of globalization then and now is the level of integration of the international market. There is greater capital mobility nowadays with innovations and improvements in communication and technology. In a matter of seconds capital can be wired from one country to another. This presents greater risks than in the past because it also implies that the system can collapse in a matter of minutes or hours if speculations are magnified to cause panic and/or fear.
I. Level of Integration
Although globalization is inevitable in the capitalist order, it is also a result of the industrializing nations’ conscious effort to advance their political and economic interests in the global market. This has been evident in the foreign trade policies of the economic powers like the US, the Great Britain and Germany. As early as the nineteenth century, States either reverted back to protectionism whenever they felt the risks of global integration outweighed any likely benefit or they pushed for bilateral agreements instead.
The nineteenth century, according to Frieden (n.d.), has demonstrated a general openness to international trade and remarkable economic growth. He referred to several instances in history which indicated the period’s inclination toward more economic integration such as the signing of the first bilateral trade agreements and the creation of the Gold Standard. On the one hand, it showed how local economies benefited from globalization but on the other it also exposed how vulnerable domestic markets were to unprecedented global crises.
During this period, free trade advocates like trade unions and European and American companies campaigned for deregulation and for the opening of local markets to foreign competitors. However, an obvious challenge that confronted nations then was the lack of adequate social safety nets that could buffer against the influx of cheap goods from abroad. People lost their jobs.
This scenario, however, is not unique to the nineteenth century since the only way to ensure jobs in developed countries nowadays is through the creation of new industries that will require high – skill labor since multinationals are transferring their manufacturing operations to developing nations that offer cheap labor.
Take for instance, the case of the United States (US), which, after falling into recession in 2008, has been seeking measures to arrest rising unemployment. The US manufacturing sector has been stagnating for many years. Although the world power has always been strong in the information – communication technology sector, jobs in this industry require advanced education. Sadly, a university degree in the US carries a hefty price tag that most young people cannot afford (Rattner 2011).
In an effort to convince companies to bring jobs back to the US, President Barack Obama gave US companies incentives such as tax breaks (Thomas 2012). The problem is, even if labor cost in China, for example, will become expensive, jobs will most likely head toward Vietnam or toward any other location where there is cheap labor. This definitely does not include the US.
a. Gold Standard and Bretton Woods
Present day globalization is also marked by more complex financial integration. Globalization always sought a certain level of predictability, first with the Gold Standard, then with Bretton Woods agreement.
Lenders must be assured of the credit worthiness of a country otherwise the money needed to build infrastructures intended to increase the export capacity of domestic markets will not be achieved.
The Gold Standard provided a sense of stability for international trade and finance. Any country that was part of the system agreed to a “pre-established currency rate” against the price of gold (Frieden n.d.).
However, the Gold Standard was used before the flourishing of democracy, where people were not allowed to contest the policy choices of the government. Austerity measures were seen then as the only way to stay on the gold which meant good credit rating for countries that participated in world trade. Today, severe reduction in government spending, job losses, higher interest rates which are all part of austerity actions spell chaos.
Post – World War I saw a series of social reforms and the birth of civilian-led governments in Europe. Frieden noted that this was one of the two lasting effects of the war. The other was the replacement of the world hegemon, Great Britain/Europe by the United States.
The form of government was more or less representative of the peoples’ concerns. The people now had an opportunity to lobby policies that benefit them. At the same time, labor unions also organized more workers as multinationals grew and expanded. In a way, the people had been given some form of leverage in policy negotiations.
This led to governments and financial creditors defaulting from their obligations, resulting to the Great Depression of the 1930s. This had severely limited most governments’ capacity to stay on the Gold Standard which offered no way out but through austerity measures. In 1933, the US left the Gold Standard, following UK, France and Germany, among others. US generally withdrew from international cooperation from 1920’s until late 1930s. Frieden pointed that the results of the crisis were autarky, trade protection, capital controls and inconvertible currency.
Nonetheless, recognizing the need for mutual cooperation and a more “reliable” way of doing global trade without sacrificing national interests, the US and the Great Britain pushed for the adoption of another international trade agreement after the World War II (1939 – 1945), now focused on the dollar – the Bretton Woods System. Frieden notes that Bretton Woods “provided stability that lacked in the interwar era and flexibility that lacked in the classical era.”
Thanks to the Bretton Woods system, international government bodies now ensure that global cooperation is sustained despite and throughout any crisis. For example, the International Monetary Fund (IMF) helps mitigate the effect of any financial crisis in so much as preventing countries and banks from defaulting from their obligations. Bordo, Eichengreen, and Irwin (1999) similarly said that the World Trade Organization and the IMF, while far from being perfect, serve their purpose by providing global governance to trade, in so much as pushing countries to adopt free trade friendly policies, and in ensuring that States faithfully attend to their financial duties.
Bordo, Eichengreen, and Irwin (1999) also explained that better auditing and accounting systems today also support the expansion and further integration of global trade. Moreover, they added that part of the tools of globalization and liberal trade policies is contingent protection which according to them “sustains a critical mass of political support for open markets.” The difficulty in assuming obligation for bad investments of banks is that rescue funds needed for such bail outs usually hurt the ordinary citizens the hardest. The cost once a government or a big bank fails to meet its financial commitments nowadays is usually catastrophic. The 2008 US Financial Crisis cost the taxpayers trillions of dollars.
Another example is the current European crisis which involves debt straddled nations like Greece cannot emphasize more the level of financial integration of the world today. Bad investments of European banks have placed the Euro, the currency used by the 27-European Union member countries at risk.
Lastly, the rise of regional production networks also show how inevitably linked global production is at present compared to the 19th century. Disruption in the chain can cause problems for all members of the network located in different parts of the world.
b. Technology and Information
Prior to the industrial revolution and to the establishment of the Gold Standard, trade was limited to colonizers and their colonies. But as technology increasingly made it possible for people and markets to connect in ways never imagined in the Mercantilist era, barriers to trade were slowly relaxed.
Transportation and communication costs were greatly reduced thanks to advances in land and sea travel and to the invention of the telegraph (Frieden n.d.). For example wheat in Chicago was 60% more expensive than in Liverpool in 1870. Come 1912, the price difference was only 15% (Bordo, Eichengreen and Irwin 1999). O’Rouke and Williamson (1999) even argued that global integration post – 1860 was due to technological development more than on liberal trade policies.
Globalization, fundamentally, is still the same today as it was yesterday, only more aggressive and determined. The consequences are bigger and more serious because of the level of integration that it has achieved throughout the years. One can look at Europe and how it struggles to stabilize its union, the Asian Crisis in 1997/98 or the US Housing Crisis in 2008 for reference.
Globalization should push for innovation and creativity in production of goods and services but at the same time it should also foster synchronized and complementing activities between and among nations without sacrificing national interests and sovereignty. This, however, is idealistic.
The only way to protect one’s self is to build the local economy. If the domestic market is not ready to compete globally, it may lose more than gain anything in the process. However, it also has to be noted that globalization today has made business strategies like offshoring possible. Moreover, capitalist system’s the price mechanism will always ensure that buyers will have myriad of options. Thus, while, globalization will push some industries/groups out of business, it will and can similarly enable new ones to emerge. For instance, globalization has killed the shoe industry in the Philippines, but has similarly created jobs in the Business Process Outsourcing (BPO) industry in the recent years.
Unfortunately, globalization is always about tradeoffs. States expose themselves to the volatility of the international market once they open up their economies. This has been the case in the 19th century, and is still true now.
Excesses in the capital system that leads to devastating economic outcomes is reflective of greed, and globalization is no exception.
States must be equipped to respond to possible financial crises in the future because these will not go away. As the Institute for Labor Studies of the Department of Labor and Employment in the Philippines put it, the best social protection that any government can provide to its citizens at the minimum will always be decent and stable jobs. Unfortunately, this is one of the many things that globalization affects.
Al Jazeera. News / Europe. May 09, 2012. http://www.aljazeera.com/news/europe/2012/05/20125919544731172.html (accessed July 15, 2012).
Bordo, Michael D., Barry Eichengreen, and Douglas Irwin. “Is Globalization Today Really Different Than Globalization a Hundred Years Ago?” Brookings Trade Policy Forum on “Governing in a Global Economy”. Washington D.C., 1999. 16.
Frieden, Jeffry. “The Modern Capitalist World Economy.”
Rattner, Steven. “Let’s Admit It: Globalization Has Losers.” The New York Times Sunday Review. October 15, 2011.
Thomas, Ken. Yahoo News. June 26, 2012. http://news.yahoo.com/obama-pledges-bring-jobs-back-us-175752802.html (accessed July 15, 2012).