14. Postwar Growth Rebuilding the World Economy Flashcards Preview

Economic History > 14. Postwar Growth Rebuilding the World Economy > Flashcards

Flashcards in 14. Postwar Growth Rebuilding the World Economy Deck (30)
Loading flashcards...
1

Post-war economic situation

  • After WW2, the costs were taken on by the biggest winning power of the war, the US, through the Marshall Plan
  • The thirty years’ end with the first oil shock, inaugurating a decade of low growth and high inflation: stagflation
  • Britain needed American financial support to win the war and thus adhered to these free-trade principles => post-war economic climate was set by the Americans
    • pre-war, Britain already imported more than it exported and paid for difference with earnings on foreign inv => post-war when foreign inv are liquidated for war finance meant bleak prospects for growth
  • West European's GDP growth 2.1% per annum which contrasted with Eastern Europe 
  • All European countries adopted exchange controls - currencies not convertible into others unless license is issued from monetary authorities => bilateral balancing of commodity trade => reduced volume + shortages of all kinds of products can only be found abroad, bought with dollars 
  • US, Canada, Commonwealth nations and Latin American emerged from the war due to high wartime demand

2

2 types of growth post-war

  • Catch up: rapid growth achieved by reversing the loss of output and destruction capacity caused by WWII
  • Convergence: additional growth achieved by closing the efficiency gap that had opened up vis-a-vis the US 

3

Western Europe vs US

  • Western European's growth surpassed US despite output per capita were less than 2/3 of US' level
  • If measured by GDP per capita, final quarter of 20th cent Europe was still only 72% of US' level
  • However, measured in terms of GDP per hour worked, EU stabilised in the range of 90-95% of US' level
  • Italy: shifting from agriculture to industry
  • Golden Age fastest in Germany, Austria and Italy

4

Why was US the lead in GDP per capita growth?

 

  • harnessing endowments of land and resources 
  • pioneer mass-production methods
    • adoption of assembly line methods 
    • commercialisation of technologies
  • create an internal unified market by ensuring the integrated producers had reliable raw materials and economical access to dispersed local markets 
  • => multi-divisional corporation capable of exploiting economies of scale
  • mass production in Europe had limited scope for growth due 3 decades of low inv
  • failure to negotiate tariff truce in 1920s + difficulty reconstructing intl' trade
  • however, it's precisely why they have large scope for growth in terms of productitvity and tech

5

Drivers for European economic growth

  • trade integration (much later) removed market size as constraint on adoption of technologies owing to European Economic Cooperation (EEC), General Agreement on Trade and Tariffs (GATT) and Common Market 
  • technical progress in science => written down of generic knowledge => new communications technologies increased speed of diffusion of info
  • internationalisation of business deepened commercial contacts. e.g. Ford operated production facilities in multiple European areas 
  • sharing of production techniques through Marshall Plan
  • European system of technology transfer centralises around education and training => established a fit between knowledge to be transferred as it was designed to assimilate existing techniques 
  • labor reallocation from agri to service and industry sector increased elasticity of labor supply which in turn minimised sharply rising wage that could fend off profitability and inv.
  • cyclical stability => high inv rates - credit to Keynesian revolution as fiscal actions imposed allowed automatic stabilisers to work 
  • interactive role of gov - nationalised some basic industries, draw up econ plans and provided social services => mixed economies where gov assumed task of providing overall stability and main task of producing goods and services desired by pop to priv enterprises 

6

Why was Eastern Europe behind Western?

  • strict regimentation of Soviet bloc
  • heavy hand of central planning
  • GDP growth was slowest in region with highest levels of output per person (Czech and USSR) and vice versa (Bulgaria, Romania, Yugoslavia)
  • For Western, due to war disruptions, could grow fast by expanding employment and rebuilding capital stocks
    • inv depressed by depression => gap between capital stock and capital-labor ratio (higher ratio meant higher aggregate output to drive up stock) => scope for rapid growth as E can push ratio up
    • unemployment rate: 5-10% => rapid scope
    • gross fixed inv as share of GDP rose 
  • migration of workers from Eastern to Western due to availability of economic opportunities 
  • However, note:
    • early 1947, economic disorganisation still prevailed (Germany). By end of 1948, monetary reform completed along with lifted price controls.
    • capital stocks did not fall significantly from prewar levels 

7

Snake in the tunnel

The snake in the tunnel was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies. It was an attempt at creating a single currency band for the European Economic Community (EEC), essentially pegging all the EEC currencies to one another.

8

General institutional responses

International Relations:

  • League of Nations with Treaty of Versailles
  • ILO - investigates and makes recs on working and living conditions of workers
  • OEEC
  • UN

Role of government:

  • most adopted some form of economic planning => mixed economies in Western Europe
  • expenditures skyrocketed

Forms of enterprise:

  • Joint stock limited liability beginning of 20th century only established for large scale, capital-intensive industries => began to spread corporate form to other spheres
  • Development of corporate conglomerate - forward and backward integration with retailers and direct producers; facilitated by the use of holding companies whose only job was to own and manage other corporations 

Organised Labour

  • Britain and Germany: pioneer in recognising organised labour and collective bargaining => growth in union membership in indsutrial nations 
  • US: union membership only grew exponentially whe New Deal is inaugurated 
  • European trade unions are ore closely identified with political parties

9

Form of key responses

  1. nationalisation of key sectors in the economy (transportation, power production, parts of banking system)
  2. extension of social security and social services (retirement pensions, family allowances, free subsidised medical care and improved educational opp)
  3. greater government intervention/play a bigger role in maintaining economic performance 

10

Planning for post-war economy 

  • BW and IMF - responsibility for managing the structure of exch rates among various currencies and financing short term imbalances of payments among countries
  • International Bank for Reconstruction and Development (IBRD) - known as World Bank was to grant long term loans for reconstruction of war-devastated economies and for development of poorer natins 
  • Both did not become operational as of 1946
  • General Agreement on Tariffs and Trade (GATT) formed following the vision of creating International Trade Org (ITO) and he BW conference (1947) - much more limited than ITO but essentially, signatories pledge to:
    • not discriminate in trade with each other
    • seek to reduce tariffs
    • not resort to quantitative restrictions (quotas) 
    • consult mutually before making policy changes
  • grew from 23 in 1947 to >82 in 1957
  • => 1994: became the WTO

11

Keynes' barter system

  • a competitive market based on a barter system where, with all its disadvantages, had the advantage of always being in equilibrium. 
  • Many disadvantages of barter may now be overcome with inventions such as money and credit, decoupling countries and trade and making trade multilateral
  • With the introduction of credit, time will no longer be an issue with trade

12

Cons of introduction of credit

 

lead to imbalance in the system leading to debtors and creditor

existent today with surplus and deficit countries

 

13

The Bretton Woods agreement: the International Clearing Union

– based on a capital control system, meaning the lack of financial markets in the modern sense, no portfolio investments, no stocks and bonds (no need for short- term capital movements) 

–  Money would only pay for goods and services

–  An international bank providing overdraft facilities, allowing countries to hold negative balances within specified limits

–  finance the balance of trade over the years with higher elasticity through the introduction of an international currency (bancor), a currency functioning in the same way debit cards work, with any old currency, even gold, being able to be converted into bancor, with no return. 

–  creates a credit line with an interest rate of about 2%. 

–  Equilibrium defined in terms of zero balances

–  No need for deposits, reserves, or capital as countries won’t need to withdraw cas

–  Burden of disequilibrium symmetrically distributed between debtors and creditors

–  Exchange rate regime of adjustable pegs to convince the united states, a creditor country

 

14

The Bretton Woods agreement: the IMF

  •  the landmark system for monetary and exchange rate management established in 1944
  • developed at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire, from July 1 to July 22, 1944
  • idea:
    • to reinforce free trade, need an international monetary system capable of providing 
    • avoid building up of mobile imbalances, destablising imbalances to temporary status - settlemet of balance of trade
  • set up an international deposit bank: operate on the basis of endowments 
  • fails to introduce an international currency while being an international monetary system 
  • currencies were pegged to the price of gold, and the U.S. dollar was seen as a reserve currency linked to the price of gold
    • subscribed member states pay quota in 1/4 in gold and 3/4 in their own national currency
  • quotas of individual countries determined on the basis of a complicated formula that has been unchanged and political implications - trade volumes are difficult to calculate 
  • arrangement of IMF: can finance deficit not through loans but through repurchasing your own currency with foreign currency that you can earn through exports OR purchase international currency with national one 
  • exchange rate may be adjusted in occurence of fundamental disequilibrium - does not say when and why precisely => generally regarded as a fixed exchange rate regime 

15

Trilemma

also called the Mundell-Fleming trilemma

  1. Autonomous monetary policy
  2. Fixed exchange rates
  3. Free capital flows 

According to the trilemma model, a country has three options. It can

  1. set a fixed exchange rate between its currency and another while allowing capital to flow freely across its borders (GS)
  2. allow capital to flow freely and set its own monetary policy
  3. set its own monetary policy and maintain a fixed exchange rate (Bretton Woods)

important to note that participating countries did not want to give up autonomous monetary policies.



 

16

Asymmetrical distribution of BW agreements

Asymmetrical distribution of the burden of disequilibrium (provisions of the “scarce currency clause” sanction strength of creditors) 

  1. IMF provided recommendations to surplus countries to halt the process of doing so
  2. IMF can always borrow/purchase a currency for which it has run scarce 
  3. If situation of imbalance persists, the deficit country can retaliate by introducing tariffs - result to protectionism and trade barriers 

 

17

Lack of free capital flows of BW agreement

  • Insufficient capitalisation 
  • Capital controls will be bypassed 
  • system of fixed exch rate ended on august 15 1971 

18

BW unit of account

  • Did eventually introduce international unit of currency 
  • Express exchange rate through IMF Article 4
  • The par value of the currency of each member shall be expressed in terms of gold as a Common denominator
  • Pegged to gold 
  • Considered to be a GS that work more smoothly due to the presence of an international organisation that provides flexibility and eliminate rigidation through providing regulations and issuing loans/debts 

  • A symmetric system 

  • Small addition to the agreement that had huge implications and initially regarded as irrelevant: The par value of the currency of each member can be expressed in terms of the United States dollar of the weight and fineness in effect on July 1, 1944 as well. 

  • The parity was 35$ for 1.oz OR 1$ = 1/35 oz. - legal basis for the US dollar to acquire its status of being an international currency  

19

Post-war imbalance: the dollar gap

  • Europe was in dire need of imports 
  • Disruption of economic and financial balances => impossibility to finance those imports 
    • EU = net debtor after the war to the US; transformed from net creditor
    • Loss of supply markets in Eastern Europe
    • Loss of colonies
    • Passage from warfare to welfare - high expenditures not only during the war but after the war - civil, social and economic rights to be renovated 
    • inflationary pressures
    • nationalistic temptations in the form of protectionism and bilateral trade agreements 
  • This results in low competitiveness vis-a-vis US
  • For US, lifted the country out of depression and returned economy to full employment

20

Implications of the dollar gap

  • Gold and foreign exch. reserves rapidly depleted 
  • IMF and IBRD (International Bank of Reconstructed Development - World Bank today) focused on long-term funding but were both undercapitalised to carry out the task effectively => cannot bridge the gap
  • US aid was insufficient since they financed the WWII through lending supplies (battleships, weapons,...etc.) to their allies. Supposed to be repaid but war was detrimental => could not pay back => US reluctant to further lend => post-war depression - a new kind of war
  • Marshall plan: "double-duty dollars" -  European Recovery Program, ERP -  an American initiative to aid Western Europe, in which the United States gave over $12 billion (nearly $100 billion in 2016 US dollars) in economic assistance to help rebuild Western European economies after the end of World War II.
    • double duty: not the only way for US to help Europe but also restore trade relationships among themselves - to buy European goods 
    • however, fails to restore intra-European trade
  • Bilateral trade agreements (nationalistic implications): unnecessary limitations and distortion that exerted harmful influences on the Marshall plan 
  • European Payments Union: multilateral and intertemporal compensation which improved the intra-trade situation

21

The principle of multilateral clearing

Assume there are 3 countries: A, B, C

A offers B box

B offers C laptop

C offers A consultancy 

Continuous dependency on an external source of funding 

Multilateral: can repay debts by selling its goods/services to the third party (C) and C can sell it back to A 

 

22

European Payments Union

  • Inaugurated in June 1950 when OEEC with assistance of $500 mil grant from US => free multilateral trade
  • Intra-European Trade liberalisation (56% liberalised initially and skyrocketed to 89% liberalised after EPU)
  • Trade liberalisation with the Dollar Area intra-European trade (11% to 72%)
  • more than double in just 8 years
  • involves centralised planning
  • Nations with deficits overall were debited on central accounts, and if deficit large => pay a portion of payment in gold/dollars 
  • Creditors received on central accounts, if credit large => receive portion in gold/dollars => import more from dollar zone 
    • => provided incentives to OEEC countries increase exports to one another and lessen dependence on US and overseas suppliers 

23

Definition of parities

  • 1958
  • Full effect of BW system:
    • “The United States was the only country to peg its currency to gold; most other currencies were pegged to the U.S. dollar” 
  • => First step towards the non-system: development of the eurodollar market 

24

How the gold-dollar standard works?

  • from 1 January 1951 to 31 December 1960, the deficit of the balance of payments of the United States had attained a total of $18.1 billion.
  • One could have expected that during this period the gold reserve would have declined by the same amount.  
  • Reason: During this period the banks of issue of the creditor countries
    1. acquired dollars through the settlement of the American deficits 
    2. created the national currency they remitted to the holders of claims on the United States, had reinvested about two-thirds of these same dollars in the American market. 
  • => did not have to settle that part of their balance-of- payments deficit with other countries. Everything took place on the monetary plane just as if the deficit had not existed. 
  • => allowed the countries in possession of a currency benefiting from international prestige to give without taking, to lend without borrowing, and to acquire without paying 

25

OPEC

  • 1960: OPEC founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela
  • 1967: Six days war and foundation of OAPEC
  • 1973: Kippur war and embargo against USA and Western Europe > First “oil shock”
  • 1979: Islamic revolution in Iran and War with Iraq > Second “oil shock” 

26

The Marshall Plan 

  • Origin: general shortage of dollar in European countries needed for economic re-construction. In particular, France and Italy (1947) => 16 nations met in Paris on July 12 1947
  • Soviet initially in Marshall Plan but then regarded it as imperalist plot + hoped for bilateral aid => left + no eastern European countries represented 
  • 1948: Congress passed Foreign Assitance Act => created European Recovery Program (ERP) to be administered by Economic Cooperation Administration (ECA) => Organisation for European Economic Cooperation (OEEC) responsible for allocation of American aid
  • Decision established not to create permanent division of German territory but rather for temporary convenience => France allowed by Britain and US to occupy parts of Germany immediately adjacent to its territory
  • Disagreements between Russia and Western Allies led the latter to have greater autonomy to the Germans in their occupation zone => Soviet authorities responded similarly => German Federal Republic (FRG: West) and German Democratic Republic (GDR: East)

27

Council for Mutual Economic Assistance (COMECON)

  • Created by Soviet Union in January 1949 following the success of ERP
  • Aimed to mold the economies of the satellites (Eastern European and East Germany) into a more cohesive union
  • Attempt to promote a more efficient division of labour
  • Was actually used by Soviet to make satellites more economically dependent on it
    • system of trade was largely bilateral rather than multilateral 
    • => Following Stalin's death in 1953, when Yugoslavia broke away from Soviet bloc, remaining communist still, many other satellites wanted to follow footstep 
  • Mongolia joined in 1962, Cuba in 1972

28

Economics of decolonization

  • Growing strength of nativve independence movements = deathblow to European imperalism
  • August 15 1947: India and Pakistan independence
  • 1948: Ceylon later renamed as Sri Lanka in 1972 + Burma from Britain
  • 1949: Indonesia from Dutch
  • 1954: Laos, Cambodia and Vietnam from French 
  • 1971: east Pakistan revolted and became Bangladesh
  • Common characteristics: low rates of literacy and high rates of pop growth => difficulties with economic planning for most + exploited resources 
  • tried to imitate the successes of Latin American in establishing economics and political independence from colonial masters 

29

Origins of EU

  1. prior to WWII, nationalism = supereme authority since it yields economics and political benefits 
  2. economic benefit being larger markets = promote greater specialisation, increased competition => higher productivity and standards of living 
  3. and economic power = basis of political and military power => economic unification = preliminary step towards political unification
  4. Benelux Customs Unions: free movement of goods within Belgium, Netherlands and Luxembourg for a common external tariff as this brings about benefits of mass production
  5. OEEC from American initiative - provided only cooperation not full integration
  6. European Coal and Steel Community (1951) provided elimination of tariffs and quotas trade in iron, coal, coke and steel + common external tariff on imports from other nations
  7. Council of Nubusters created to supervise this operation + safeguard interests of member states
  8. Common Assembly with adviosry authority 
  9. Court of Justice to to settle disputes
  10. NATO (1949) aided integration with treaty for Europeam defense community
  11. European Atomic Energy Community (EURATOM) formed in 1957 for dev of peaceful uses of atomic energy
  12. EEC same year or Common Market (orginal 6) provided gradual elimination of import duties and quantitative restrictions + permit free movement of persons/capital
  13. These 2 treaties created high commissions to oversee operations and merged other supernational bodies (councils of ministers, court of high justice, common assemblies) with those of ECSC
  14. July 1 1968: all tariffs between member states are eradicated
  15. EFTA (European Free Trade Association) only provided elimination of tariffs on industrial products among Britain, Scandinavia, Switzerland, Austria and Portugal - weaker than Common Market

30

Difficulties in EU formation

  • Due to the end of BW in 1971, plans made in 1970 to create a common currency among the original 6 members (France, Germany, Belgium, Netherlands, Italy and Lux) were disrupted 
  • 1973: first oil shock (after Britain, Ireland and Denmark joined EEC) rupted economic plans of all members since it was based on continued supplies of cheap oil from Middle East