Tema 7: The Golden Age of Economic Growth PDF

Tema 7 ; The golden age of economic growth. I. Consequences of WWII. World War II used new technologies that caused a lot of damage such as bombs, gas attacks etc. It is important to know that more than half of Great Britain and URSS’s GDP are consacred to war expenses. It must also be said that wa...

Tema 7 ; The golden age of economic growth. I. Consequences of WWII. World War II used new technologies that caused a lot of damage such as bombs, gas attacks etc. It is important to know that more than half of Great Britain and URSS’s GDP are consacred to war expenses. It must also be said that war production can be good for increasing the GDP (especially for the United States as they furnished the main part of the war production because they were the only ones who could do it), the real problem here is when the war is over. World War II had a greater impact than WWI and demanded a huge effort (30% of the world’s GDP). But it also introduced an unprecedented ideological struggle. The consequences are numerous, it has destroyed lives, physical assets and infrastructures. Territories were not really modified and the war repartitions and debt were modest and financed with orthodoxy. Anyway, it has improved technological innovations, increased social cohesion and extended the social democracy and socialism system in a lot of places. II. Economic recovery. The economic recovery was relatively quick especially between 1945 and 1950, the so-called “transition period”. We assisted a mixed-economy system where capitalism was regulated and where the State intervened (direct applications of Keynes’ theories). The key to recovery is that the State has to help and intervene, but it also must contract with workers and unions (social contract between workers, unions and government). The help from the United States was necessary. In fact, in 1945, European recovery was very hard. In the post-war conditions, Europe suffered from dollar shortages and insufficient aid. This is in this context that the US will launch the Marshall plan. A. Marshall plan (1948). The Marshall plan consisted in loaning and granting dollars to Western Europe. First it was mostly to help with first necessities, food supplies and consumer goods then it helped with the building and furnishing the industry back (raw materials, energy and machinery). It of course allowed for the reconstruction of cities that were bombarded during the war. In exchanges, countries that received the help have to import american goods (e.g ; jeans, chewing-gum). Countries that received the plan ; West Germany  Austria Belgium Danmark France Kingdom of Greece Ireland Iceland Italy Luxembourg Norway Portugal Netherlands Sweden United Kingdom Switzerland Turkey The Marshall plan had political and economic goals such as the European recovery, avoiding the U.S recession (they can’t do trade alone, they need partners) and not the least, stop the soviet orbit and its expansion. Making Europe a partner for trade and an ally against communism stopped isolationism and reinforced the American leadership. Back at the time the United States was the main economic and influential power in all the world. Their only problem was the soviet bloc and the emergence of the Cold War. B. Institutions after the war. One of the main goals after WWII was to not repeat the error that led to the great depression. It means to reconstruct the international economic order and to ensure great cooperation between the States so it would allow economic growth. 1. Political sphere ; the Atlantic Charter and the United Nations. Atlantic Charter United Nations United Nations (1941) declaration (1942) (1945) Atlantic Charter ;   Countries should not seek territorial aggrandizement. They desire to not see territorial change except if it’s freely expressed. Right to all people to choose the form of government under which they will live (referring to colonization). They will endeavor, with due respect for these existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, access on equal terms to the trade and the raw materials of the world which are needed for economic prosperity. Collaboration between all nations in the economic field with the object of securing for all, improved labor standards, economic advancement and social security. Safety within their own boundaries. Such peace should enable all men to traverse the high seas and oceans without boundaries. Abandonment of the use of force in order to maintain peace between nations. Nations shouldn’t have land, sea or air armament. 2. Economic sphere ; the Bretton Woods agreements (1945). The Bretton Wood conference established the framework for the post-war international monetary system. It was shaped by negotiations between two economists ; White (US) and Keynes (UK). These negotiations reflected the interests and different priorities of the two leading powers. John Maynard Keynes (UK) Harry Dexter White (US)  He represented his nation, a nation focused on In 1945, and in the post WWI context, the US post-war recovery. Keynes sought a system that was the world’s largest economy and exporter. would have allowed flexibility and support for For White it would be logical that the system weaker economies. would prioritize the reinforcement of the US’ dominance. Key objectives ; Key objectives ; A greater flexibility of the exchange rate to The US dollar would become the reserve help countries adapt better to economic currency, convertible into gold at a fixed fluctuations. rate of 35$/ounce. Establish a financial body with larger Promote free movement of capital capabilities to support the reconstruction. encouraging international trade and investments. Share of responsibility for external imbalances, where both creditors and Ensure monetary discipline, limiting debtors nations would work together to inflationary policies in other nations. resolve deficits (without burdening deficit countries). Create new institutions like the International Monetary Fund and World Oppose unrestricted capital flows that Bank to oversee monetary stability and could destabilize smaller or recovering provide limited financing to countries in economies need. The monetary and financial conference of the United Nations in July 1944 (conference of Bretton Woods), resulted in three main pillars ; The first one being the creation of an international monetary system called the International Monetary Fund (IMF) that is in charge of ; - Coordinating the system overseeing the smooth functioning of the global exchange rate regime and monitoring economic policies to ensure compliance with the rules of the Bretton Woods system. - Grant short-term loans to countries in difficulty in order to balance their respective balance of payments. Loans will help stabilize the economy and prevent a devaluation crisis. It has some characteristics such as ; - The Gold Exchange Standard at the core of the system, the US dollar was pegged at 35$/ounce. All other currencies were also pegged on the dollar making the dollar the primary reserve currency. It was allow for countries to convert their dollar into gold (but this was generally reserved for central banks) - Fixed exchange rates with permission of a little fluctuation margin of + or - 1% around the parity value. Adjustments to the exchange rate (devaluation or revaluation) were  allowed in case of “fundamental disequilibrium” to ensure flexibility within a fixed-rate system. The financial system with the International Bank for Reconstruction and Development (later World Bank). - It granted long-term loans to countries in difficulties but had a small relevance in reconstruction as this function was assured by the Marshall Plan. Creation of the GATT (General Agreement on Tariffs and Trade) in 1947 in order to favorise international trade - The main goal of the GATT is to fight all forms of protectionism but to create and accept together a “mutually acceptable protectionism”. It’ll allow the liberalization of international trade. Until 1958 Bretton Woods had difficulties to apply. After a while, socialist systems decided to counterbalance Bretton Woods creating their own economic organization ; the COMECON (Council for Mutual Economic Assistance)(composed of URSS, Eastern European countries, Vietnam and Cuba but with a lot of observator State). III. The golden age of capitalism ; demand side factors and supply side factors. A. Decolonization ; success or failure ? Decolonized nations have general characteristics ; 1. Low income per capita The average income per capita in former colonies was approximately ⅙ of that in democratic capitalist countries. The economic disparity reflected a legacy of colonial exploitation and underdevelopment. 2. Explosive population growth Rapid population growth placed pressure on resources, infrastructure and social systems. 3. Low level of development Economies were heavily reliant on agriculture and raw materials exports. Those countries have limited industrial bases and weak institutional framework that makes modernization hard.  4. Heterogeneity of situations Newly independent nations varied greatly in terms of resource dotations, infrastructure, and governance capacity. There’s of course, some success (e.g ; India’s mixed economy and industrialization efforts) but they are contrasted with failure in politically unstable States. There’s an importance for decolonization as it marks the end of imperial dominance, and nations now can pursue their own development path. It politically reshaped international relations as nations from former colonies created alliances (e.g ; African Union). New independent countries also have challenges related to growth, in fact their growth rate of capital income is now averaged at 2,7%, a significant improvement from colonial times. However, this was insufficient to close the gap with developed nations. While GDP grew significantly, much of the gain was offset by high population growth, limiting per capita improvements. We can observe a divergence within and between the countries, in fact urban areas are industrializing faster than rural regions ; that’s what we call “domestic divergence”. Furthermore, there’s also “international divergence”, the income and development gap with capitalist democracies grew, exacerbating global inequality. There’s also some structural changes. In fact former colonies took industrial initiatives and many nations chose to prioritize industrialization as a path for economic development and growth. These countries will invest in infrastructure, education and healthcare so they could build human and physical capital. However, the limited amount of financial resources and dependency on exports of primary supplies posed a persistent challenge. It exists different strategies for development ; Strategy 1 Import Substitution Industrialization (ISI) ; The growth is very slow because you’re actually trying to become good at something you don’t have any experience in. Other countries will prefer to buy from a country that has been doing it for a long time. (E.g : Latin America) Strategy 2 (best one) Export-led industrialization ; Strong growth in the newly industrialized countries. We picked one or two industries where we are good at and we focus on it. (E.g South Korea)  Strategy 3 Primary products exporters ; Limited success unless the petroleum exporting countries. Strategy 4 Socialist model ; Imbalances. To put it in a nutshell, new countries extracted from colonialism face trouble with their demography boom, agrarian problems and trouble joining the international economy. They attempt solutions such as structural changes in their trade structure or seeking the foreign aid to development. Study case ; understand the low development in sub-saharan Africa. It is no surprise that Africa is the continent that struggles the most economically speaking. Is it bad luck or bad choices ? both ? We know that economic growth is influenced by several factors such as geography, history, politics and social conditions. 1. Geography. No part of Africa is really rich, but South and North Africa are richer than the rest of the continent. They are richer because they have easier access to the big trade market (North Africa with the European one). But even in North and South Africa no country has achieved consistent high-income status (some exceptions like South Africa and Botswana that are approaching middle income status). As we said before, North Africa has access to the European market and is historically connected to Mediterranean trade networks. Of course countries like Egypt and Morocco benefit from geographical strategic locations such as the strait of Gibraltar and the Suez Canal. Southern Africa benefits from international shipping routes around the Cap of Good Hope and rich natural resources (diamonds, gold etc.) 2. Africa overtime and opportunities. Africa knew a whole growth back from 1950 to 1980, but it fell back right after. In fact the agricultural expansion where the growth was driven by an increased land under cultivation rather than improvements in productivity or technology allowed economic growth. Though approach led to environmental degradation and is limited long-term sustainability. But this growth is also thanks to the primary commodity exports. In fact, many African countries rely on exporting primary products like minerals, oil, and agricultural goods, and Some countries benefited from favorable terms of trade as commodity prices rose (e.g., Nigeria with oil, Zambia with copper). There are some structural changes such as the industrialization and the diversification, but it remains limited and not sufficient. African countries over-relied on primary goods and this has made the economy vulnerable to price fluctuations in global markets. In theory, Africa had more potential to catch up as anywhere else, because it actually started from further behind. We can totally wonder why Asia is growing richer and Africa poorer. Asia’s growth strategies ; ○ Export-led industrialization. (exporting manufactured goods ; electronics, textiles). governments supported investments and industries. ○ Agricultural productivity gains ; the green revolution (freeing labor for industry). ○ Institutional development ○ Integration with global market ○ Population dynamics. Asia’s population growth slowed earlier than Africa's, allowing for a demographic dividend: a larger proportion of the population in the workforce. 3. Unlucky endowments. It is true that most of the continent is arid and ill-suited to agriculture ; low and erratic rainfalls, and no alluvial plains, so the rain disappears quickly. But the situation is the same for Australia. Australia decided to just ignore the middle of its country and to focus on the coast. But why doesn't Africa focus on its coast ? Because of Malaria ! African mosquitoes are a different species to elsewhere, they are better at transmitting diseases such as malaria. Of course malaria can be beaten, but it is more difficult in Africa than elsewhere. In sub-saharan Africa, malaria kills 1 to 3 million people each year. African coastal areas are generally less attractive because they are home for the development of mosquitoes and therefore of malaria, Africans will prefer the inland. Populations living in the inland are usually dispersed, as a result, the information and knowledge are transmitted more slowly and trade is more expensive. 4. Poor social capital. Social capital reduces the cost of engaging in a local economic activity. Investors will ask themselves several questions ; Are there markets ? → dispersed Can you communicate with others ? Can you borrow at reasonable rates ? → not really Will the government expropriate you ? In Africa, and in generally all countries of the continent, one country is composed of heterogeneous ethnicities and diverse languages. It is a result of the colonial era where the actual boundaries were poorly drawn by Europeans. This lack of European knowledge about African ethnicities has actual consequences in the continent. In fact we saw the question “can you communicate with others”, with several ethnicities and languages within one country, it is harder to trade properly. Furthermore, some of these ethnic groups are in conflict with other ethnic groups. During the 1990s, seven of the SSA countries had a civil war (12% of SSA population) and in 1975 over 60% of SSA countries had a dictator. 5. Poor governments. Few dictatorial governments around the world have been good for their country, especially governments from minority groups. Most headstates were clientist ; politics is cutting the pie in your favour, not increasing the pie. Clientelism, corruption, dictatorship and political instability made investors run away from the continent. 6. Agricultural taxes. Most post-colonial governments relied heavily on taxing agricultural exports to generate revenue, often through state-owned monopsonist exporters that paid farmers artificially low prices. This system, designed to fund state projects and redistribute wealth, was frequently undermined by corruption and inefficiency. Export agriculture became particularly vulnerable to exploitation, as seen in Ghana between 1957 and 1983, where the farm cocoa price after taxes and corruption fell by 93%. This drastic decline in incentives for farmers led to a 73% drop in cocoa output, highlighting the unsustainable nature of such policies and their damaging impact on agricultural productivity.