Market Integration

MODULE 3
Introduction

The social institution that has one of the biggest impacts on society is the economy.
While we often think of the economy in terms of number – number of unemployed, gross
domestic product (GDP), or whatever the stock market is doing today, the economy is
composed of people.
Economy is the social institution that organizes all production, consumption, and trade of
goods in the society. There are many ways in which products can be made, exchanged, and
used. Think about capitalism or socialism. These economic systems – and the economic
revolutions that created them – shape the way people live their lives.
Introduction
Economic systems vary from one society to another. But in any given economy, production
typically splits into three sectors:
(1) Primary sector extracts raw materials from natural environments. Workers like
farmers on miners fit well in the primary sector.
(2) Secondary sector gains the raw materials and transforms them into manufactured
goods. This means, for example, that someone from the primary sector extracts oil from the
earth then someone from the secondary sector refines the petroleum to gasoline.
(3) Tertiary sector involves services rather than goods. It offers services by doing things
rather than making things. Thus, economic system is more complicated or at least, more
sophisticated than the way things used to be for much of human history.
This module presents the contributions of the different financial and economic institutions
that facilitated the growth of the global economy.
International Financial Institutions
1. The Bretton Woods System
The Bretton Woods System – established after World War II to restructure the world
economy and ensure global financial stability. It has five key elements: (1) the expression
of currency in terms of gold or gold value to establish a par value. For example, a 35 US
dollar pegged by the United States per ounce of gold is the same as 175 Nicaraguan
cordobas per ounce of gold. The exchange rate therefore would be 5 cordobas for 1 dollar;
(2) the official monetary authority in each country (a central bank or its equivalent) would
agree to exchange its own currency for those of other countries at the established exchange
rates, plus or minus a one-percent margin; (3) the establishment of an overseer for these
exchange rates; thus, the International Monetary Fund (IMF) was founded; (4) eliminating
restrictions on the currencies of member states in the international trade; and (5) the US
dollar became the global currency.
International Financial Institutions
2. The General Agreement on Tariffs and Trade (GATT) and the World Trade
Organization (WTO)
The General Agreement on Tariffs and Trade (GATT) and the World Trade
Organization (WTO) – established due to the effects brought about by the Bretton Woods
System in 1947. GATT was forum for the meeting of representatives from 23 member
countries. It focused on trade goods through multinational trade agreements conducted in
many “rounds” of negotiation. However, “it was out of the Uruguay Round (1986 – 1993)
that an agreement was reached to create the World Trade Organization (WTO).
The WTO headquarters is located in Geneva, Switzerland with 152 member states as of
2008. Unlike GATT, WTO is an independent multilateral organization that became
responsible for trade in services, non-tariff-related barriers to trade, and other broader areas
of trade liberalization. The general idea where the WTO is based was that of neoliberalism.
This means that by reducing or eliminating barriers, all nations will benefit.
International Financial Institutions
3. The International Monetary Fund (IMF) and the World Bank (WB)
The International Monetary Fund (IMF) and the World Bank (WB) – both were
founded after the World War II. Their establishment was mainly because of peace
advocacy after the war. These institutions aimed to help the economic stability of the
world. Both of them are basically banks, but instead of being started by individuals like
regular banks, they were started by countries. Most of the world’s countries were members
of the two institutions. But, of course, the richest countries were those who handled most of
the financing and ultimately, those who had the greatest influence.
IMF and the WB were designated to complement each other. The IMF’s main goal was to
help countries which were in trouble at the time and who could not obtain money by any
means. Perhaps, their economy collapsed or their currency was threatened. IMF, in this
case, served as a lender or a last resort for countries which needed financial assistance.
International Financial Institutions
Continuation…
3. The International Monetary Fund (IMF) and the World Bank (WB)
Yemen loaned 93 million dollars from IMF on April 5, 2012 to address its struggle with
terrorism. The World Bank, in comparison, had a more long-term approach. Its main goals
revolved around the eradication of poverty and it funded specific projects that helped them
reach their goals, especially in poor countries. An example of such is their investment in
education since 1962 in developing nations like Bangladesh, Chad, and Afghanistan.
Unfortunately, the reputation of these institutions has been dwindling, mainly due to
practices such as lending the corrupt governments or even dictators and imposing
ineffective austerity measures to get their money back.
International Financial Institutions
4. The Organization for Economic Cooperation and Development (OECD), the
Organization of Petroleum Exporting Countries (OPEC), and the European Union
(EU)
The most encompassing club of the richest countries in the world is the Organization for
Economic Cooperation and Development (OECD) with 35 member states as of 2016, with
Latvia as its latest member. It is highly influential, despite the group having little formal
power. This emanates from the member countries’ resources and economic power.
In 1960, the Organization of Petroleum Exporting Countries (OPEC) was originally
comprised of Saudi Arabia, Iraq, Kuwait, Iran, and Venezuela. They are still part of the
major exporters of oil in the world today. OPEC was formed because member countries
wanted to increase the price of oil, which in the past had a relatively low price and had
failed in keeping up with inflation. Today, the United Arab Emirates, Algeria, Libya, Qatar,
Nigeria, and Indonesia are also included as members.
International Financial Institutions
4. The Organization for Economic Cooperation and Development (OECD), the
Organization of Petroleum Exporting Countries (OPEC), and the European Union
(EU)
The European Union (EU) is made up of 28 member states. Most members in the
Eurozone adopted the euro as basic currency but some Western Europena nations like the
Great Britain, Sweden, and Denmark did not.
International Financial Institutions
5. North American Free Trade Agreement (NAFTA)
It is a trade pact between the United States, Mexico, and Canada created on January 1,
1994 when Mexico joined the two other nations. It was first created in 1989 with Canada
and the United States as trading partners. NAFTA helps in developing and expanding
world trade by broadening international cooperation.
Positive consequences:
1. lowered prices by removing tariffs;
2. opened up new opportunities for small-and medium-sized business to
establish a name for itself;
3. quadrupled trade between the three countries;
4. created 5 million U.S. jobs.
International Financial Institutions
5. North American Free Trade Agreement (NAFTA)

Negative consequences
1. excessive pollution;
2. loss of more than 682,000 manufacturing jobs;
3. exploitation of workers in Mexico;
4. moving Mexican farmers out of business.
History of Global Market Integration

1. The Agricultural Revolution and the Industrial Revolution

Agricultural Revolution is the first big economic change (Pomeranz, 2000). Farming
helped societies build surpluses, meaning, not everyone had to spend their time producing
food. This in turn led to major developments like permanent settlements, trade networks,
and population growth.
Industrial Revolution of the 1800s is the second major economic revolution. It is the rise
of industry and new economic tools, like steam engines, manufacturing, and mass
production. Factories popped up and changed how work functioned. Overall, productivity
went up, standards of living rose, and people had access to a wider variety of goods due to
mass production.
History of Global Market Integration

The economic casualties of every economic revolution are:

The workers in the factories – who were mainly poor women and children - worked in
dangerous conditions for low wages. As a result, nineteenth-century industrialists were
known as robber barons – with more productivity came greater wealth, but also greater
economic inequality. In the late 19th century, labor unions began to form. These
organizations of workers sought to improve wages and working conditions through
collective actions, strikes, and negotiations. Inspired by Marxist principles, labor unions
gave way for minimum wage laws, reasonable working hours, and regulations to protect
the safety of workers.
Capitalism

A system in which all natural resources and means

of production are privately owned;
Emphasizes profit maximization and competition
as the main drivers of efficiency. (Competition
means when one own owns a business, he needs to
outperform his competitors if he is going to
succeed)
Capitalism

A capitalist (under the condition of competition) is

incentivized to be more efficient by improving the
quality of one’s product and reducing its prices.
Adam Smith called it “invisible hand” of the
market in the 1770s.
Capitalism

“Invisible hand” is the idea that if one leaves a

capitalist economy alone, consumers will regulate
things themselves by selecting goods and services
that provide the best value.
Capitalism (Challenges and Drawbacks)
Economy does not work well if it is left completely
on autopilot;
Market failures – where an unregulated market
ends up allocating goods and services inefficiently.
Monopoly is a kind of market failure. When
there is no competition, it can charge higher prices
without worrying about losing customers.
Capitalism (Challenges & Drawbacks)
As allocations go, monopoly becomes inefficient at
least on the consumer end. Government might step
in and force the company to break up into smaller
companies to increase competition.
Market failures like these are the reasons most
countries are not purely capitalist societies.
Like, US’ federal state governments own and
operate a number of business, like schools, the
postal services, and the military.
Capitalism (Challenges & Drawbacks)
Governments also set minimum wages, create
workplace safety laws, and provide social support
programs like unemployment benefits and food
stamps.
Socialism
Government plays an even larger role in socialism
In socialist system, the means of production are
under collective ownership, and rejects
capitalism’s private property and hands-off
approaches.
In socialism, property is owned by the government
and allocated to all citizens, not only those with the
money to afford it.
Socialism
Socialism emphasizes collective goals, expecting
everyone to work for the common good and
placing a higher value on meeting everyone’s one
basic needs than on individual profit.
Karl Marx first used about socialism as a stepping
stone toward communism – a political and
economic system in which all members of a society
are socially equal.
Socialism (Challenges and Drawbacks)
Socialism/Communism has not played out in the
countries that have modeled their economies on
socialism, like Cuba, North Korea, China and the
USSR.
Marx hoped that as economic differences vanished
in communist society, the government would
simply wither away and disappear, but that never
happened.
Socialism (Challenges and Drawbacks)
The opposite happened instead. Rather than freeing
the workers (in Marxist terms, the proletariat) from
inequality, the massive power of the government in
these states gave enormous wealth power and
privilege to political elites resulting to
retrenchment of inequalities along political (rather
than economic) line.
Capitalism and Socialism Compared
Capitalist countries economically outperformed
their socialist counterparts contributing to the
unrest that eventually led to the downfall of the
USSR.
Before the fall of USSR, average output in
capitalist countries was about $13,000 dollars per
person, which was almost three times than in the
Soviet countries.
 Capitalism and Socialism Compared
Capitalism posted greater income inequality.
According to study involving some European capitalist
countries and socialist countries in the 1970s, found out
that the income ratio between the top 5% and the bottom
5% in capitalist countries was about 10 to 1; whereas, in
socialist countries, it was 5 to 1. Those 2 models are not
the end of the story because we are living in the middle
of the economic revolution that followed the Industrial
Revolution.
The Information Revolution
Facts about Information Revolution Today

Ours is the time of the information revolution

Technology has reduced the role of human labor
and shifted it from a manufacturing-based
economy to one that is based on service work and
the production of ideas rather than goods which has
had a lot of residual effects on our economy.
Facts about Information Revolution Today

Computers and other technologies are beginning to

replace many jobs because of automation or
outsourcing jobs offshore.
Decline in union membership. Nowadays, most of
unions are for public sector jobs, like teachers.
Facts about Information Revolution Today

Industrial revolution is a post-industrial society;

In the Philippines, agricultural jobs have fallen
drastically over the last century;
In other countries like the US, manufacturing jobs
(which where the lifeblood of their economy) have
declined in the last 30 years.
Much of their economy is centered on the tertiary
sector o the service industry.
What is service industry?

Administrative assistants, nurses, teachers, and

lawyers;
This is a big and diverse groups. Defined mainly
by what it produces rather than what kinds of jobs
it includes.
Sociologists define jobs based more on the social
status and compensation that come with them.
What is service industry?

Before service industry, there is primary labor

market which includes jobs that provide benefits to
workers, like high incomes, job security, health
insurance, and retirement packages. These are the
white-collar professions, like doctors, accountants,
and engineers.
What is service industry?

Before service industry, there are also secondary

labor market jobs that provide fewer benefits and
include lower-skilled jobs and lower-level service
sector jobs. They tend to pay less, have more
unpredictable schedules, and typically do not offer
benefits like health insurance. They also tend to
have less job security.
What is next for capitalism and socialism?

No one knows what is the next economic

revolution is going to look like;
Key part of both our economic and political
landscape is corporations;
Corporations are defined as organizations that exist
as legal entities and have liabilities that are
separate from its members.
What is next for capitalism and socialism?

Corporations, they are their own thing;

These days, more and more corporations are
operating across national boundaries which means
that the future of the Philippine economy – and
most countries’ economies – will play out on a
global scale.
Global Corporations
Global corporations

The increase in international trade has both created

and been supported by international regulatory
groups, like WTO, and transnational trade
agreements, like NAFTA;
There is not a single country that is completely
independent. All are dependent to some degree on
international trade for their own prosperity;
Global corporations
Without international trade, there would be no need
for international regulatory groups;
Without the international regulatory groups,
international trade at the current massive scale
would be impractical;
Trade regulatory groups and agreements regulate
the flow of goods and services between countries;
Global corporations
Regulatory groups reduce tariffs, which are taxes
on imports, and make customs procedures easier
making trading across national borders much more
feasible.
International trade agreements often benefit private
industries the most;
Global corporations
Companies can produce their goods and services
across many different countries. For instance, you
can have a backpack that was designed in the US
but the materials came from China, and it was put
together in Mexico before it was shipped back to
the US to be sold.
Global corporations
Companies that extend beyond the borders of one
country are called multinational or transnational
corporations (MNCs or TNCs) or also referred to
as global corporations.
MNCs/TNCs or global corporations intentionally
surpass national borders and take advantage of
opportunities in different countries to manufacture,
distribute, market, and sell their products.
Global corporations
Some global corporations are ubiquitous (existing
or being everywhere, or in all places, at the same
time). Examples: McDonald’s or Coca-Cola, and
yet, they still market themselves as American
companies.
General Electric: US based but has more than half
of its business and employees working in other
countries.
Global corporations
Ford Motor Company: classic US company
manufactures cars worldwide.
TNCs role in the global economy
Some have greater production advantages than an
entire nation;
They influence the economy and politics by
donating money to specific political campaigns or
lobbyists;
They can even influence the global trade laws of
the international regulatory groups.
TNCs role in the global economy
Global corporations often locate their factories in
countries which can provide the cheapest labor in
order to save up for expenses in the making of a
product. As a result, developing nations will
provide incentives, like tax-free trade zones or
cheap labor. The companies will set up shop in
their country in hopes of bringing jobs and industry
to beleaguered areas.
TNCs role in the global economy
This promotes more rapid advances in the
developing nation because of the idea and
innovations brought over from the industrialized
nations. It also makes nations around the world
more interdependent, which minimizes the
potential for conflict.
The bad side
Incentives often hurt the working population of the
developing nation. The upper classes may benefit
from business of these corporations but the people
working in the factories are exploited as (1) their
wages are cut; (2) they often prohibited from
unionizing; (3) sweatshop conditions with long
working hours; (4) substandard wages; and (5)
poor working conditions.
The bad side
If the labor laws in one country become too
restrictive to TNCs, they can move their factory to
a new country, leaving widespread unemployment
in their wake.
Setting up factories in these developing nations
may also hurt the core country where TNC is based
because many potential jobs are being sent abroad.
The bad side
The same thing happens when companies
outsource their labor to other countries.
Outsourcing has been enabled by technological
advances, allowing immediate communication
across the world and the ease of transporting
people, goods, and information.
The bad side
When companies find people in other countries
willing to work for a lower wage, they will often
employ them, which is good for the company
because they save money, and it is good for the
people in other countries because they now have a
job.
It also means that the people in the core country are
losing jobs and having difficulty finding new one.
Further negative effects of globalization from
TNCs

Trade does promote the self-interested agendas of

corporations and give them autonomy;
Global corporations also influence politics and
allow workers to be exploited;
Positive effects of globalization from TNCs

Better allocation of resources;

Lower prices for products;
More employment worldwide;
Higher product output.
The changes a country experiences from
international trade are not only economic. Many of
the cultural changes are as important and
sometimes, even more obvious than the economic
changes the nation can experience.
As international trade becomes easier and more
widespread, more than just goods and services are
exchanged.
Cultural practices and expressions are also passed
between nations, spreading from group to group,
called diffusion.
Ideas and practices spread from where they are
well known and frequently apparent to places
where they are new and not often observed. (like
Michael Jordan, Kobe Bryant and LeBron James
effect)
Technology has potentially increased the speed of
diffusion unlike then when exploration, military
conquests, missionary work, and tourism are the
only means of trading ideas.
Mass media and the internet allows the transfer of
ideas more instantaneously.
Transmission of scientific knowledge and the
spreading of the North American culture which
dominates the internet is an evidence to it.
International trade and global corporations, along
with the internet and more global processes,
contribute to globalization because people and
corporations bring their own beliefs, their
traditions, and their money with them when they
interact with other countries.
These ideas and capital can then be incorporated in
other countries, and thus, change the cultures and
economies of these foreign nations.