Lesson 6: New World Order And Economic Growth PDF

Universitat Autònoma de Barcelona World Economic History LESSON 6: NEW WORLD ORDER AND ECONOMIC GROWTH Anna Solé Contents • The Bretton Woods agreement and the new international relations. • The Golden Age of capitalism. • Central planning economies. • Decolonisation and the Third World. The Br...

Universitat Autònoma de Barcelona World Economic History LESSON 6: NEW WORLD ORDER AND ECONOMIC GROWTH Anna Solé Contents • The Bretton Woods agreement and the new international relations. • The Golden Age of capitalism. • Central planning economies. • Decolonisation and the Third World. The Bretton Woods agreement and the new international relations • Rules of the international monetary system that would be in force between 1944 and 1971. • Bretton Woods agreement had the aim of institutionalizing open economic relations. • Basic principles: • US dollar was the only currency convertible to gold (the unique international currency). • Fixed exchange rates: each currency had a fixed exchange rate to the US dollar. • Mechanisms of monetary cooperation. The Bretton Woods agreement: the dollar-gold standard system • Innovations that addressed the main concerns of policymakers: • Fixed exchange rates became adjustable. • Controls to limit international capital flows. • IMF created to monitor national economic policies. • Commitment to full employment and economic growth inhibited the use of policies to reduce expenditure in order to defend the exchange rate. • Changes in the exchange rates were only possible in the case of “fundamental disequilibrium”. • No real mechanism of adjustment. The Bretton Woods agreement: the dollar-gold standard system • European countries, when experiencing problems in their balances of payments, could not adjust increasing interest rates (social unrest) or changing the exchange rate (only in case of fundamental disequilibrium): the only resource was to implement exchange and capital controls. • But: • This was against the ongoing process of liberalization. • Controls could not guarantee the restoration of equilibrium. They had to be supplemented with monetary and fiscal action. The Bretton Woods agreement: the dollar-gold standard system • This system was not symmetrical: The USA could run deficits in its balance of payments because foreign governments and central banks were willing to accumulate dollars: • American monetary policy conditioned the monetary policy of the rest of the countries. • The system depended on the dollar for its liquidity needs. • Hoarding dollar reserves was attractive only if its convertibility into gold was unquestioned. The Bretton Woods agreement: New monetary and credit institutions • International Monetary Fund (IMF): • Aim: Stable exchange rates and proper functioning of the international payments system. • World Bank: • Aim: foster development in poor countries. • GATT: • It was not an institution, but a set of agreements on international trade with the objective of liberalizing trade. The Golden Age of capitalism • Fast increase in GDP pc. • GDP pc growth rates were higher in the countries with the lower GDP pc. • Catching-up: countries got closer to the income level of the leader country (USA). • Economic convergence (partial process, limited to OECD countries). • Spread of industrialization to poor countries and regions: Mediterranean countries, Eastern Europe and Eastern Asia. The Golden Age of capitalism. Factors of growth: supply • Increase in productivity: technological improvements. • Technological transfer and catching up. • Availability of cheap raw materials and energy sources. • Increase in agrarian productivity. • Increase in international trade. • Institutions that favoured economic growth. The Golden Age of capitalism. Factors of growth: demand • Full employment policies. • Increase in wages and women’s occupation. • Social security (social benefits). • Public demand. • Increase in international trade. Central planning economies: Stalinist model of industrialization • Objective: industrial revolution leaded by the State. • 5-year plans: elimination of the market as the mechanism of allocation of resources and central planning. • Priority to heavy industry. • Under-financing of agriculture and consumption industries. • Extensive model of growth based on mobilization of resources. Problems of central planning • Basic contradictions of the Stalinist model of central planning: • Lack of information: all decisions centralized in the planning committee (only could obtain information from the subordinates through a difficult, long and costly process). • Lack of incentives: the companies’ directors had the objective of “meeting the plan” and avoid reprisals, even if they had to sacrifice efficiency or rationality. • Lack of innovation: vicious circle of companies without efficient incentives and planning offices without suitable information. Conservative decisions that tended to reproduce the past and project it to the future. State planning commitee (Gosplan) Informed of: stocks, productivity, etc. companies approved: 5-year plans decided: •Quantitative objectives of production •Production factors used by companies •Prices of products and production factors •Penalties for not fulfilling the plan Dysfunctions of central planning • The central planning committee (Gosplan) based decisions on non accurate estimations when allocating resources and establishing the goals of the 5year plans. • Information provided by companies was wrong or incomplete, since the directors tried to prevent future penalties by hiding the stocks and requesting more factors than really needed. • Waste of resources. • Inefficiency: the centralization of the investment decisions was able to achieve a fast increase of production but not of productivity. • The decisions of investment just for the sake of investment sacrificed consumption and postponed the satisfaction of many needs. Dysfunctions of the central planning Planning using conservative criteria and irreal goals • No markets or democracy to correct all these dysfunctions Waste of energy and materials = large environmental impact Insufficient information for the planners Hiding of stocks and excessive demand of production factors by companies Los productivity and low quality of the products Consumer dissatisfaction in a “market of sellers” Supply did not adapt to structural changes in demand From fast industrialization to stagnation • During the first stages of industrializations, planning deficiencies or consumers’ dissatisfaction were not that relevant (in capitalist countries, these sectors had also been planned). • Once the basic goals had been achieved, it became evident that the Stalinist model had eliminated two key elements for an efficient allocation: • Existence of markets to provide appropriate information and incentives. • Existence of democratic mechanisms to solve what markets were unable to provide (public goods, equity, environmental sustainability). Decolonisation • Decolonisation: process by which colonies become independent of the colonizing country. • After WWII, the United Nations favoured the process of decolonization. This process affected one third of World population. • The appearance of nationalist movements and international support favoured the process. • In come cases they were pacific processes, but in others the metropolis resisted to the loss of the colony. • Main regions: • Africa. • Asia. • Middle East. Decolonization after WWII 18 Factors that led to decolonisation • After WWII, European countries lacked the resources and political support to supress far-away revolts. • They could not oppose the new superpowers’ (USA and USSR) stands against colonialism. • Strong independence movements in colonies. The Third World • The term “Third Word” arose during the Cold War to define countries that remained non-aligned with either NATO or the Warsaw Pact. • Countries with colonial pasts in Africa, Latin America, Oceania and Asia were frequently included in the concept Third World. • Having gained independence, many of these countries were faced with the challenges of nation and institution building on their own for the first time. Due to this common background, many of these nations were “developing” in economic terms for most of the 20th century. 21