14. Postwar Growth Rebuilding the World Economy Flashcards
1
Q
Post-war economic situation
A
- 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
Q
2 types of growth post-war
A
- 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
Q
Western Europe vs US
A
- 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
Q
Why was US the lead in GDP per capita growth?
A
- 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
Q
Drivers for European economic growth
A
- 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
Q
Why was Eastern Europe behind Western?
A
- 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
Q
Snake in the tunnel
A
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
Q
General institutional responses
A
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
Q
Form of key responses
A
- nationalisation of key sectors in the economy (transportation, power production, parts of banking system)
- extension of social security and social services (retirement pensions, family allowances, free subsidised medical care and improved educational opp)
- greater government intervention/play a bigger role in maintaining economic performance
10
Q
Planning for post-war economy
A
- 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
Q
Keynes’ barter system
A
- 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
Q
Cons of introduction of credit
A
lead to imbalance in the system leading to debtors and creditor
existent today with surplus and deficit countries
13
Q
The Bretton Woods agreement: the International Clearing Union
A
– 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
Q
The Bretton Woods agreement: the IMF
A
- 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
Q
Trilemma
A
also called the Mundell-Fleming trilemma
- Autonomous monetary policy
- Fixed exchange rates
- Free capital flows
According to the trilemma model, a country has three options. It can
- set a fixed exchange rate between its currency and another while allowing capital to flow freely across its borders (GS)
- allow capital to flow freely and set its own monetary policy
- 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.
