MARKET INTEGRATION

“New products, new markets, new investors, and new ways of doing things are the
lifeblood of growth. And while each innovation carries potential risk, businesses that don’t
innovate will eventually diminish.”

Adena Friedman

LEARNING OBJECTIVES

At the end of this topic, students will be able to:

1. define market integration;

2. identify the features of the Bretton Woods System;
3. determine the role of the international institutions in the creation of global economy; and
4. give importance of integrated market and;
5. share insights about the award winning documentary film The Corporation.

ACTIVATING PRIOR LEARNING

 What can you see in these pictures? Did you experience these? How can these
people in the pictures contribute to the world economy?

PRESENTATION OF CONTENT

Did you experience going to the market? What did you notice? What is the situation of
market in the larger urban areas? What about in the rural areas?

DEFINITION OF MARKET INTEGRATION

Market integration is a term that is used to identify a phenomenon in which markets of

goods and services that are somehow related to one another being to experience similar
patterns of increase or decrease in terms of the prices of those products. The term can also
refer to a situation in which the prices of related goods and services sold in a defined
geographical location also begin to move in some sort of similar pattern to one another.

Market integration allows price signals to be transmitted from one market to another. It is
the fusing of many markets into one. In one market a commodity has a single price such as
the price of banana would be the same in East Germany and West Germany if these areas
were part of the same market.

If the price of banana in West Germany was higher, sellers of banana would move from
the east to the west and prices would equalize. The price of banana in Germany and in
Portugal might be different, though, and high transport costs and other kinds of expenses
might mean that it would be uneconomical for Portuguese sellers to move their stocks to
France if prices were higher there. In distinct markets the price of the same good can be
different for long periods of time.

THE BRETTON WOODS SYSTEM

 After World War II, the Bretton Woods system was established. In fact, the agreement to
create a new international monetary system was negotiated among the allied powers even
before the end of WW2, leading to the Bretton Woods Agreement in 1944. Bretton Woods
is the name of a small tourist spot in the mountains of New Hampshire, USA. There, the
delegates gathered to design a new global economic system. Their most important goal was
to prevent each country from pursuing selfish policies, such as competitive devaluation,
protectionism and forming trade blocks, which damaged the world economy in the 1930s.

The British delegation was headed by John M. Keynes, the famous economist, while Harry
D. White of the US Treasury Department represented the American side. As a dominant
military and economic power, the US took the leadership away from Britain. Because the
United States at the time accounted for over half of the world's manufacturing capacity and
held most of the world's gold, the leaders decided to tie world currencies to the dollar, which,
in turn, they agreed should be convertible into gold at $35 per ounce.

Under the Bretton Woods system, central banks of countries other than the United States
were given the task of maintaining fixed exchange rates between their currencies and the
dollar. They did this by intervening in foreign exchange markets. If a country's currency was
too high relative to the dollar, its central bank would sell its currency in exchange for dollars,
driving down the value of its currency. Conversely, if the value of a country's money was too
low, the country would buy its own currency, thereby driving up the price.

The Bretton Woods Agreement established the World Bank (International Bank for
Reconstruction and Development). The IMF and the World Bank were called the Bretton
Woods sister organizations. One more organization (International Trade Organization) was
also planned but not created at that time.

Instead, the General Agreement on Tariffs and Trade (GATT), a non-organizational entity,
played the role of promoting free trade for four decades. GATT became institutionalized as
WTO in 1995. So we now have three sisters.

FEATURES OF THE BRETTON WOODS SYSTEM

 The features of the Bretton Woods system are as
follows:

First, it was a US dollar-based system. Officially, the Bretton Woods system was a
gold-based system which treated all countries symmetrically, and the IMF was charged
with the responsibility to manage this system.

In reality, however, it was a US-dominated system with the US dollar playing the
role of the key currency (the dollar's dominance still continues today). The relationship
between the US and other countries was highly asymmetric. The US, as the center country,
provided domestic price stability which other countries could "import," but did not itself
engage in currency intervention (this is called benign neglect; i.e., the US did not care about
exchange rates, which was desirable).

By contrast, all other countries had the obligation to intervene in the currency
market to fix their exchange rates against the US dollar.

Second, it was an adjustable peg system. This means that exchange rates were
normally fixed but permitted to be adjusted infrequently under certain conditions. As a
consequence, exchange rates were supposed to move in a stepwise fashion. This was an
arrangement to combine exchange rate stability and flexibility, while avoiding mutually
destructive devaluation. Member countries were allowed to adjust "parities" (exchange
rates) when "fundamental disequilibrium" existed. However, "fundamental disequilibrium"
was not clearly defined anywhere.
 In reality, exchange rate adjustments were implemented far less often than the
builders of the Bretton Woods system imagined. Germany revalued twice, the UK devalued
once, and France devalued twice. Japan and Italy did not revise their parities.

Third, capital control was tight. This was a big difference from the Classical Gold
Standard of 1879-1914, when there was free capital mobility. Although the US and
Germany had relatively less capital-account regulations, other countries imposed severe
exchange controls.

Fourth, macroeconomic performance was good. In particular, global price stability

and high growth were simultaneously achieved under deepening trade liberalization.

Stability in tradable prices (wholesale prices or WPI) from the mid 1950s to the late
1960s was almost perfect and globally common. This macroeconomic achievement was
historically unprecedented.

THE ROLES of the INTERNATIONAL INSTITUTIONS in the CREATION

of GLOBAL ECONOMY

The World Trade Organization (WTO)

The WTO is a multilateral organization headquartered in Geneva, Switzerland with

152 member nations as of 2008 (Krueger 2000; Trachtman 2007:1308-15). Its focus on
trade places it at the heart of economic globalization and has made it a magnet for those
opposed either to the broader process of trade liberalization and promotion or to some
specific aspect of WTO operations.
The World Trade Organization (WTO) is the only global international organization
dealing with the rules of trade between nations. At its heart are the WTO agreements,
negotiated and signed by the bulk of the world’s trading nations and ratified in their
parliaments. The goal is to ensure that trade flows as smoothly, predictably and freely as
possible.
The WTO has many roles: It operates a global system of trade rules, acts as a forum
for negotiating trade agreements, settles trade disputes between its members and it supports
the needs of developing countries.

The WTO comes to focus more on non-tariff related barriers to trade. One example
is the differences between nations in relation to regulations on such items as manufactured
goods or food. A given nation can be taken to task for such regulations if they are deemed
to be an unfair restraint on the trade in such items.

The WTO continues to be concerned with tariff barriers, as well as restrictions on

trade in services. The WTO also deals with other types of protectionism.
 Overall, WTO operations are premised on the neoliberal idea that all nations benefit
from free trade and open trade and it is dedicated to reducing and ultimately eliminating
barriers to such trade.

The International Monetary Fund (IMF)

The International Monetary Fund (IMF) was created on 1945 which is based in
Washington, D.C. It is governed by and accountable to the 189 countries that make up its
near-global membership.

With its near-global membership of 189 countries, the IMF is uniquely placed to
help member governments take advantage of the opportunities and manage the challenges
posed by globalization and economic development more generally.

The IMF tracks global economic trends and performance, alerts its member
countries when it sees problems on the horizon, provides a forum for policy dialogue, and
passes on know-how to governments on how to tackle economic difficulties. The IMF
focuses on the functioning of the international monetary system, and on promoting sound
macroeconomic policies as a precondition for sustained economic growth.

The IMF provides policy advice and financing to members in economic difficulties
and also works with developing nations to help them achieve macroeconomic stability and
reduce poverty. The IMF could give adjustment loans to nations in disequilibrium so that
they are able to meet their international obligations. The fund was created on the basis of
quotas for member nations.

Marked by massive movements of capital and abrupt shifts in comparative

advantage, globalization affects countries' policy choices in many areas, including labor,
trade, and tax policies. An important task for the IMF is helping a country to benefit from
globalization while avoiding potential downsides. The global economic crisis has
highlighted just how interconnected countries have become in today’s world economy.

The World Bank (WB)

The World Bank, officially the International Bank for Reconstruction and
Development (BRD) is the most important element of the World Bank Group (WBG)
(Gilbert and Vines 2000; Bradlow 2007:1262-7).

The Bank was set up in 1944 as the International Bank for Reconstruction and
Development to act as facilitator of post-World War II reconstruction and development.
The number of member countries increased sharply in the 1950s and 1960s, when many
countries became independent nations. It was created to help restore and sustain the
benefits of global integration, by promoting international economic cooperation.
All support to a borrowing country is guided by a single strategy (called the 'Country
Assistance Strategy') that the country itself designs with help from the World Bank and
many other donors, aid groups, and civil society organizations.

The goal of the World Bank is to reduce poverty and to improve the living standards
of the people in low and middle-income countries.

The World Bank is one of the world’s largest sources of funding and knowledge to
support governments of member countries in their efforts to invest in schools and health
centers, provide water and electricity, fight disease and protect the environment. This
support is provided through project or policy-based loans and grants, as well as technical
assistance like advice and studies.

The World Bank is not a ‘bank’ in the common sense. The World Bank is an
international organization owned by the 184 countries ¾ both developed and developing
¾ that are its members.

Globalization implies changes through political, social and economic reforms by

offering many incentives in developing countries. World Bank, IMF and WTO have played
important role in promoting the globalization minded agenda and developed countries
particularly USA and Japan determine the rules of the game. As a result state power has
been drastically reduced and developed countries shape political, social and economic
decisions for their own benefits. In this sense, developed countries enjoy more benefits
than developing countries.
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REFERENCES

 Aldama,PK.R., (2018). The Contemporary World (pp.36-59). 84-86 P. Florentino St.,

Mesa Heights, Quezon City: Rex Printing Company Inc.
 Claudio, L.E., Abinales, P.N. (2018). The Contemporary World (pp. 12-25). 839
EDSA, South Triangle, Quezon City: C & E Publishing, Inc.
 https://www.wisegeek.com/what-is-market-integration.htm
 http://www.grips.ac.jp/teacher/oono/hp/lecture_F/lec02.htm
 https://www.wto.org/English/thewto_e/thewto_e.htm
 https://www.imf.org/en/About
 http://web.worldbank.org/archive/website01016/WEB/0__CO-85.HTM
 https://www.thoughtco.com/the-bretton-woods-system-overview-1147446