Globalization and Economic Integration:A Historical Perspective

Key changes in the Global economy after 1945

Globalisation and its mark on the world economy did not start in 1945 but can be traced all the way to the creation of the printing press in 1440. However, the major milestones in the world economy have been witnessed after the Second World War. Immediately after WWII, or thereabout, the Bretton Woods system was established and as a result the International Monetary Fund and the Wold Bank were born. These two bodies would later play a major role in the world economy. Further, the US dollar was adopted as the international reserve currency. Unlike during WWII when Germany and Italy were Axis powers while France and the UK were Allied powers, the period after 1945 marked a paradigm shift in international relations between European countries. After the collapse of the Berlin Wall in 1990, East and West Germany became one and the journey towards globalisation took shape.

In 1957, six countries including Belgium, Italy, France, Luxembourg, Netherlands and West Germany signed the Treaty of Rome that established the European Economic Community. The main purpose of EEC was to create a common market among its member states by elimination of trade barriers and development of common trade policies. This was a major step towards globalisation. Although EEC was effective in many aspects towards economic integration, it had a number of deficiencies like limited policies. As a result of these challenges the Maastricht Treaty of 1992 founded the European Union which marked the ultimate unification of Europe. The new organization had 28 members’ states and had wider policies and objectives including the promotion of peace, unification of economic and monetary system, fighting discrimination and eradication of trade barriers among others.

Most importantly, EU established its own currency called the euro that gave the euro area a more significant role in the global economy. Therefore EU countries became one regional village where one could move from one country to the next without the need to exchange money. Trade barriers were eliminated and to date the EU remains the largest international single market.

Further, the region has free trade agreement to some extent with some member states which has made trading much easier in the block. As a single regional market EU has encouraged greater competition between business in terms of products and services to the advantage of the consumer. In the same vein, there are other trading blocs that have since mushroomed around the world in response to the globalisation trend. These trading bloc have taken the form of Preferential Trade Areas, Common markets, custom union and Free Trade Area. In pursuit of multilateral trading other blocs were formed including ECOWAS, NAFTA, APEC BRICS, CIS, ASEAN, and COMESA among others. The establishment of the World Trade Organization (WTO) in 1995 as a successor to General Agreement on Tariffs and Trade (GATT) marked a key milestone towards trade liberalisation around the world. Since its inception, WTO has hosted negotiations that have led to the lowering of trade barriers which are the foundations global trade.

The emergence of the United States as the single largest economy thus accounting for almost a quarter of global GDP has had an impact on the global economy. It follows that US monetary policy and economic growth definitely affects that of the global economy. The development of US financial market has had global implications and this is evidenced by the Alibaba listing in NYSE. However, the period between 2008- 2018 has witnessed the rise of China as leading power in geopolitics. China being the world’s leading exporter has had massive effect on the global economy and this has been felt in almost all the continents of the world. China’s Belt and Road initiative is an ambitious plan that seeks to connect the word through infrastructure an international trade. As a result the trade wars between the largest economy and the most populous country is bound to affect the performance of the global economy. Additionally, technological advancements and Multinational Corporations have also shaped the world economy through ease of communication and networking which makes the world resemble one small village.

Adam Smith's conception of economics

Adam Smith is widely recognised as the father of economics. However, this is not to mean that he was the originator of the concept, rather he modified existing concepts into desirable principles that people could easily associate with. He contributed vastly to the development of social and economic understanding of the market economy and the importance of economic liberty. In his book, The Theory of Moral Sentiments (1759), he explained that man has a moral sense that guides and dictates his conduct in his own life and his interaction with others. He suggested that every man has ethical sense that is based on the moral principles and values of the society where he lives or is raised. Adam Smith believed that nature of man is such that he acts in a perceived self-interest but this selfishness is restrained by the moral sense which guides his conduct of his life and against others. In essence, he argued that although man is generally a selfish creature that is constantly in pursuit of self-interest, this attribute is controlled by the moral sense that will guide a person how behave towards himself and others.

In his second book, The Wealth of Nations (1776), Adam Smith argued that people should live a life of natural liberty. Natural liberty meant that people should be left live howsoever they wished and the government should have limited interference with that freedom. He argued that man did not need the government to constantly intervene in his own affairs because man is already guided by his own goals and purposes. Therefore the only role the government should play in natural liberty concept is provision of public goods, national defence and domestic law enforcement. The two books should not be considered in isolation of the other. While the first book explains a moral system that proposes a general framework for the economic domain, the second builds upon that to discuss directly economic matters. Therefore there is compatibility between the two books since one explores the ordering of moral behaviour and the maximisation of virtue and the other discusses economic behaviour and the maximisation of wealth as the ultimate goal.

In view of the above it is clear that Adam Smith favoured the application of natural law in economic affairs. His philosophy of free and independent action was premised on the proposition that if people were left to carry out their activities in the manner they wanted then they would maximise their output to the best of their ability. To increase the wealth and progress of the society, individuals must be granted freedom of action which motivates people to deliver their best. He advocated for the laisses faire principle of economics where the government was an unwelcome guest in industry and commerce. Adam Smith posited that the law of states was subordinate to natural law and argued that human made law was imperfect and not beneficial to the society. Instead, he advocated for law of nature which he believed to be just and moral and is favourable to the economic progress of the society at large.

In respect of the laissez-faire policy, Adam Smith believed that the concept of freedom would encourage increased and unhindered production, more income and as much savings as possible. He talked of an invisible hand that controlled the market in industry and commerce instead of the government. This invisible hand refers to the forces of competition propelled by self-interest. He further explained the concept of division of labour and its role in economic progress and even considered the role of technology in improved productivity. He also believed that farmers, businessmen and producers were the key agents of growth and if they were allowed free trade, the marketplace would expand and make economic development interrelated. In essence, political economy of Adam Smith was instrumental in the industrial revolution, the rise of capitalism and globalisation. He found a way to explain the rationale free markets without restrictions from governments and this proposition is still the driving force of the global economy to date. All over the world, there are trade blocs eliminating trade barriers and opening their borders for trade. More importantly, the financial markets are no longer regulated by states but dictated by market forces. Be that as it may, Adam’s theory has been fiercely criticised by other commentators like Cliffe Leslie in 1870, who disagreed with the notion that political economy is a body of natural laws.

Role of the market in the neo-liberal and economic nationalist approaches to global political economy

Adam Smith is credited for the reinvention of the economic liberalism approach to global political economy. The ultimate goal of economic liberalism or otherwise referred to as neoliberalism is to have free markets on the basis that they do work best. According to proponents of liberalism, free markets can regulate themselves hence there is no need for government intervention. They argue that government interference in the market will introduce selfish interests and will seek to redistribute economic gains by punishing economy winners. This school of thought advocates for the reduction in taxes, minimal regulation and privatisation of government businesses. Economic liberalism champions for the separation of politics and economics and proposed that gains can only be achieved in such a market through specialisation. The market is the big boss in economic liberalism because it allocates resources instead of state allocation of resources. The argument revolves around the proposition that free enterprise fosters competition which in turn increases product quality availed to consumers.

On the other hand mercantilism or economic nationalisation advocated for the building of a wealthy and powerful state. Theorists under this umbrella believed that all resources belonged to the state hence it had the sole mandate of allocation of resources. It allowed countries to become powerful by controlling and regulating the market. For instance, the Navigation Act of 1651 enacted by England allowed it to prohibit foreign ships from engaging in trade in England as protections approach towards its industries and trade. This protectionist approach was used during the Great Depression of the 1930s when countries would intentionally devalue their currencies against those of their trading partners thus leading to sluggish global trade. This theory supports the idea that countries can wield their political power to interfere with the market for their own gain.

While liberalism has remained popular around the world it has in many occasions been challenged and weakened by world events like the Great Depression of 2008. Although governments are powerful and have a monopoly of the instruments of regulation, liberalism opines that the global economy is run by market forces which includes the role of big banks and Multinational Corporations. Under this theory countries should specialise in products and services that they are able to manufacture efficiently so that they are competitive in international trade. However, this theory presents a challenge considering that a free market is very volatile for lack of regulations. This means that market will always be shaken by major world events. For example the election of Donald Trump as the US president had an effect on the financial markets and the Brexit vote in 2016 also had resounding effect on financial markets and international trade. The major assumption in this theory that the market will always do the balancing act, however, climate change is an example of a market failure. It has failed to adequately address the issue thus commentators have called for state regulation.

Take a deeper dive into Financial Signals and Market Efficiency with our additional resources.

Economic nationalism seeks to control the behaviour of the market and protect the state at the expense of global economy. The United States has for a long time been considered a model for economic liberalisation where the market forces controlled global trade, however, the election of Donal Trump has seen it shift to nationalism. It is now more inclined towards the America First principle which advocates for levying of trade tariffs on imported goods from other countries like China and control of MNC operations. For nationalism theorists, the market is a tool to drive the agenda of the state and incorporate social interests. The market can be manipulated to protect local businesses by imposing tariffs on imports and giving subsidies to the local industries. Countries like China have activist governments that have subsidised their industrial producers and despite joining WTO, the government still manages its exchange rates to maintain manufacturer’s profitability. In the end the liberal model has allowed the market to run amok causing inequalities and financial crises while the nationalist model has model has been manipulated by Asian countries to manage their currencies, subsidise producers and protect their home markets