MARKET INTEGRATION

Lesson Objectives:
a. Recognize and critically analyze the role of international financial institutions in the
creation of
global economy.
b. Explain the history of the Global Market in the 20th Century.
c. Identify and describe the attributes of Global Corporations.
d. Rationalize the Crises of Global Capitalism.

What would the world be like without money? An economy can operate
without money. In fact, most economies have operated without it at some point in
history. But we would not want to try this for long, as it would become quite
frustrating. This lesson presents an overview of what money is, the benefits that come
with using it, including its functions in the economy.

The Benefits of Money

As you can see, money offers consumers and businesses some very basic and
practical benefits. Money was invented as an alternative to bartering. The major
benefit of money is that it increases the efficiency of an economy by reducing
transactions costs. When people can use money instead of bartering, this leads to
more specialization and better division of labor within the economy (Mishkin, 2007).

Three Types of Money

Economists recognize three types of money: commodity money,
representative money, and fiat money. Money that is in the form of a commodity with
intrinsic value is considered commodity money. 'Intrinsic value' means it has value
outside of its use as money. Representative money is not money itself, but
something that represents money. It is exchangeable for a commodity. The third type
of money is most common— it is called fiat money. Fiat money is money with
absolutely no intrinsic value that is just used as money. Fiat money only has value
because the government says it's valuable. A fiat is simply an order or decree given by
a government.

Functions of Money
Money Is a Unit of Account
Money is a unit of account because everything in the economy is quoted in terms of it
(Bernstein, 2008).
Money Is a Medium of Exchange
Money is a medium of exchange because it can be used to satisfy unlimited needs and
wants (Greco, 2001).
Money Is a Store of Value
Money is a store of value because a person can exchange his lawn services for money
one day and then use it to purchase goods and services at a later date (Mises, 1981).
Money Is a Standard of Deferred Payment
Finally, money is a standard of deferred payment because it is sometimes used to buy
something today and pay for it over time (Mises, 1981).

Indeed, money is essential in economic transactions especially when there is exchange

of goods and services (Mankiw, 2007).
What are Financial Institution
Financial institutions are organizations that process monetary transactions,
including business and private loans, customer deposits, and investments (Wright &
Quadrini, 2012). Nearly everyone in the society deals with financial institutions on a
regular basis — from depositing money to taking out loans and exchanging
currencies. Let us take a look at the three main types of financial institutions:
depository, non- depository, and investment (Siklos, 2001).

Depository institutions allow customers to deposit money in an

account.Examples of depository institutions include commercial banks and credit
unions. Commercial banks are for profit entities that provide a number of services to
their account holders. These types of financial institutions usually operate at the local,
regional or national level, have large advertising budgets, and charge higher fees than
a credit union. Credit unions are non-profit entities owned by accountholders, also
called members.
Non-depository institutions do not allow customers to deposit money.
However, they are considered financial institutions because they transfer funds from
savers to borrowers by investing the funds they receive.
Investment banks are also financial institutions in that they play a role in the
financial intermediation process by channeling funds from savers to borrowers.
Unlike commercial banks, they usually do not provide services to the public. Areas of
focus include initial public offerings (IPOs), mergers, share offerings, and
underwriting. Investment banks may also function as brokers, provide financial advice
to corporations, or serve as the middlemen between investors and securities issuers.

FINANCIAL INSTITUTION AND TRADE AGREEMENTS

International commerce, a key part of globalization, requires extensive
support. The World Bank (WB), International Monetary Fund (or IMF), and
World Trade Organization (or WTO) are the three international financial and trade
institutions that establish the boundaries by which international commerce is
transacted.
World Bank is a specialized agency of the United Nations. Composed of the
International Bank for Reconstruction and Development (or IBRD) and the
International Development Association (or IDA), it is the world's largest source of
development assistance. It has over 180 member countries around the world that
determine where its money comes from and how it spends its money, whether that's
on low-interest loans, free-interest credit to developing countries, and so on.
WORLD BANK GOALS
World Bank has outlined eight specific goals they call their Millennium
Development Goals, which are multi-faceted, international development goals
developed during the UN Millennium Summit in 2000. The eight goals are: to
eradicate extreme poverty and hunger; achieve universal primary education; promote
gender equality and empower women; reduce child mortality; improve maternal
health; combat HIV/ AIDS, malaria, and other deadly diseases; ensure environmental
stability; and develop a global partnership for development.
INTERNATIONAL MONETARY FUND
International stability requires economic stability. Another actor that make
global economy possible is the International Monetary Fund, which helps establish
economic stability. Also referred to as the 'sister' organization to the World Bank,
the institution's purpose is to encourage currency exchange with member countries in
order for them to orchestrate global trade. It also provides loans to governments and
debt relief. This institution has helped developing nations grow so that companies will
be interested in establishing businesses there due to customer potential.
The International Monetary Fund was legally established in 1945 with 29
members for starters. More members joined as time passed, but because of Cold War
potential membership growth was prevented, as the Soviet Union, many of its allies
and its client states did not join. In the 1970s, the IMF started to assist poor countries
with concessional financing, offering financing terms more favorable than what the
private market offers.
The IMF's overall goal is to help encourage economic growth and stability on
a global basis. It does this through three primary activities namely: surveillance,
technical assistance and lending.
SURVEILLANCE
The IMF also engages in surveillance at the regional and global level. In
conducting regional surveillance, the IMF examines polices of regional currency
unions. Global monitoring is based on three reports: 1) the World Economic Outlook
reports, 2) Global Financial Stability Reports, and 3) the Fiscal Monitor reports.
TECHNICAL ASSISTANCE
The IMF also provides technical assistance to middle-and low-income
countries, which involves help with macroeconomic policies. Macroeconomic policies
are concerned with the big economic picture of an economy, such as a state's
unemployment, growth rate, GDP and inflation. Technical assistance is also provided
to help create and implement programs to reduce poverty, manage and reduce debt
and spur economic growth.
LENDING
The IMF also serves as a lender to its members. Members go to the IMF for
loans when they cannot find favorable loan terms through other avenues. Two general
types of financing are available to John’ country. The IMF provides loans to help
restore stability to countries with struggling economies. The funds may be used to
rebuild a country's cash reserves, stabilizing an erratic currency or pay for imports.
WORLD TRADE ORGANIZATION
The World Trade Organization (WTO) is a global organization that helps
countries and producers of goods deal fairly and smoothly with conducting their
business across international borders. It mainly does this through WTO agreements,
which are negotiated and signed by a large majority of the trading
nations in the world. These documents act as contracts that provide the legal
framework for conducting business among nations. The WTO was officially created
in January of 1995 and essentially replaced the General Agreement on Tariffs and
Trade (GATT).
WTO is a complex international organization with many moving parts.
Simply stated, its main purpose is to help trade flow smoothly for all member nations
so that they may increase the well-being of their countries and standards of living for
their citizens. It works to educate and inform companies and governments on the
acceptable rules that govern trade (i.e., imports and exports).
WTO does many things. Here are just a few of its main focuses:
  Cut living costs and raise living standards through more economic trade
and competition among countries
  Settle disputes and reduce trade tensions
  Stimulate economic growth and create jobs
  Give smaller countries a voice
  Contribute to peace and stability

As of 2017, there are 164 member countries that are part of the WTO.
Countries such as the United States, Canada, China, Honduras, Japan, Mexico,
Pakistan, Singapore, the Russian Federation, Australia, and South Africa are just a
few, with Afghanistan as the 164th country to join.

SHORT HISTORY OF GLOBAL MARKET INTEGRATION IN THE 20TH

CENTURY
There have been substantial advancements in international market integration
in the 19th century, which led to the creation of a true world economy. Of course,
technological advances played a major role in this. From the 1830s, the world
transport has been revolutionized as vast improvements in the railroad locomotive and
the marine steam engine took place. Steamships connected the world's ports to each
and from the said ports, the railroads ran inland, creating
a new and faster world transport network.
Closely related to these changes in the transport system was the electric
telegraph, whose lines often ran along the new railroad networks. Telegraph systems
were established in most countries, including the major market of British India, until
1854. Beginning with the first transatlantic cable, which was laid by steamship in
1866, these existing domestic telegraph systems were linked
together by marine cables. The resulting international information network was
crucial in communicating details of prices and price movements, reducing the cost of
making deals and transactions.
A major significant change in the infrastructure came in 1869 with the opening
of the Suez Canal, which linked the Mediterranean Sea by way of Egypt to
the Red Sea. With this opening, ships sailing from Europe to Asia could take the new
shortcut rather than sail all the way around Africa.
As a result, Asia was immediately some 4,000 miles closer to Europe in
transport terms, and freight costs fell. Yet, the low efficiency of early steamships
meant that many bulk cargoes such as rice were still carried to Europe from Asia by
sail around the Cape of Good Hope. Technological change in the shape of
steel hulls and steel masts made sailing ships larger and more efficient, and they
continued to be active until the more efficient triple-expansion engine finally drove
the sailing ships from the oceans during the last quarter of the nineteenth century.