Crisis decades Flashcards
What were the 4 major crises in from 1970-1990
A. End of the BWS 1971 (Decline of US)
B. Oil Crisis of 1973 and 1979
C. Rise of protectionism in the 1970s (Result of decline of US)
D. Third world debt crisis of the 1980s (Partially result of Oil Crisis)
Reasons for the US decline in the 1970s
Twin deficits:
Fiscal deficit due to spending on Vietnam War; up to $25 billion a year (Cold War Factor)
BOP deficit due to tolerance of Japan & WE protectionism whilst simultaneously opening their own markets to them ($10.6 Billion deficit)
-> Oversupply of US currency overseas (+military commitments)
Led to US overseas > gold in US bank and hence the collapse of the BWS
Effects of US decline
A. Volatile ER system (Unpredictable investments and trade patterns)
B. Led to subscription to Protectionism (Link to other factor)
C. Devaluation of US value led to reductions of income (Partially led to Oil Crisis)
D. Raised interest rates to control inflation in US (Led to debt crisis in 80s)
Reasons for Oil crisis (1973)
Reliance on cheap oil to fuel industrialisation (oil consumption increased 5% annually, PED<1)
Formation of OPEC (Common front for negotiation and to control market)
PARTIALLY due to devaluation of US dollar and reduction of ME incomes
MAIN: Due to US intervention in the Yom Kippur War (Partially Cold War interest), Arab states used oil as retaliation
Effects of Oil shock (1973 and 1979) on 3rd WORLD
(1973) In one year oil prices went from $2 a barrel to $12 a barrel
(1979) From $16 a barrel to $40 a barrel
Industrial cost of production shot up, as PED<1 in the short run; industrialisation pace remained
LDCS - most of them heavy oil importers and all struggling with ISI, led to difficulties paying for imports: 1973 led to $30 billion on the import bill, second oil shock added another $50 billion, total debt rose from $100 to $600 billion
Effects of Oil Shocks on 1st World
Initially steepest recession, industrial output dropped 10% and unemployment was around 12-14% everywhere
However 1st world COULD implement short term energy saving tactics (ban on Sunday driving, street lighting halved in UK) and led to change in energy usage attitudes
Furthermore, LT development of more energy aware production; Japan decreased oil consumption by 5%, formation of the IEA, greater development of renewable energy sources
Reverse Oil Shock of 1985: oil fell back to less than $10 a barrel
Reasons for Rise of Protectionism (70s and 80s)
A. Increased GE developments ;ie Oil Crises, Nixon Shock, rise of other economies
B. Increased competition between DCs ( USA vs Japan and USA vs EEC + NIEs)
C. Weakened US leadership (by 1972 US Had $10 billion trade deficit)
- adopted protectionist measures; 1974 Trade Act, 1981 car VER on Japan, 1988 Omnibus Trade Act
- decline of the GYATT, lack of GATT round convening
Impact of Protectionism on Global Economy
Impact on trade growth; led to slowest trade volume growth of 0.73% in 1980-1982 and actually fell by 2% in 1982
50% of all VERs were placed against LDCs, leading to increasing trade deficits and added to foreign debt (Debt crisis factor)
HOWEVER
1. Economy still did continue to grow despite slower rate
2. in ST helped US economy to recover and regain leadership of GE and liberalisation (Uruguay)
3. Protectionism harder to implement directly due to previous GATT and WTO agreements
Problems of the 3rd world leading to the debt crisis
A. Protectionist measures of First World led to tariffs and worsened BOP deficits for LDCs
B. Oil Shocks added about $30 billion and $50 billion to debt bill due to reliance on it
C. Stringent conditions for loans from IMF and World Bank led to hesitance and search for alts
What sparked the Debt Crisis
A. Growing and Drying of Petrodollars (extra revenue from Oil shocks of oil countries led to depositing it into financial markets -> Banks quickly relent them to LDCs to gain interest (Lending frenzy and initial decreasing interest rates)
However when reverse oil shock hit, OPEC went from lenders to borrowers and Petrodollars dried up
B. Furthermore USA cutting of IR led to increasing COB and led to INCREASE in debts (Latin america interest payments rose 360%)
C. Reduced earnings of LDCs due to GE slow down
D. Mismanagement of Loans; wasted money on inflated oil prices and corrupted leaders, little into actual infrastructure
Effects of Debt Crisis (1st world)
Mexico and rest of Latin America declared bankrupt and unable to pay loans:
1st world: Value of several major banks fell, CitiCorp worlds biggest bank register $2.5 billion loss
Followed by other banks and most banks increased loan loss reserves by 25-30%
Bankers stopped loaning to debtor nations further slowing down economy.
Effects of Debt Crisis (3rd world)
Production levels dropped, unemployment rose
Govt investments in infrastructure drastically reduced
Decline in average growth from 6% - 1.7%
Austerity drives due to IMF loans, wages fell by 30% and inflation 1000%
Led to mad political and social instability (deterring investments)
