World Economic History Lesson 7 PDF

Universitat Autònoma de Barcelona World Economic History LESSON 7: STRUCTURAL CHANGE AND SECOND GLOBALIZATION Anna Solé Contents • The 1973-84 crisis and the reactions. • The actors of the new economic growth model. • The third technological revolution, globalization and unbalances. The exhaust...

Universitat Autònoma de Barcelona World Economic History LESSON 7: STRUCTURAL CHANGE AND SECOND GLOBALIZATION Anna Solé Contents • The 1973-84 crisis and the reactions. • The actors of the new economic growth model. • The third technological revolution, globalization and unbalances. The exhaustion of economic growth • Productivity slowdown: exhaustion of the Second industrial revolution technologies. • Some markets started being saturated. • End of the virtuous circle of fast increase in supply and demand without relevant inflationary tensions. Diffusion of technologies Diffusion of technologies The collapse of the Bretton Woods system: causes of instability • Strengthen of the trade balances of European countries (the dollar was not the scarce currency any more). • In 1948 the United States had held more than two-thirds of global monetary reserves; within a decade its share had fallen to one-half. • Growing needs for credit in the system: • Reluctance to adjust pegs. • Reluctance to increase interest rates and taxes. • Progressive relaxation of capital controls required credit to offset speculative flows. • Tensions between countries with trade deficit and countries with trade surplus. The collapse of the Bretton Woods system: causes of instability • The United States could run payments deficits in the amount of foreign governments’ and central banks’ desired acquisition of dollars. • The system depended on the dollar for its liquidity needs. • Charles De Gaulle criticized America’s “exorbitant privilege” and threatened to liquidate the French government’s dollar balances. • As Robert Triffin predicted, the situation of the dollar threatened the stability of the system. • The United States, to defend the dollar, would have been forced to rein in its deficits, solving both the Triffin and de Gaulle problems. Given U.S. military commitments and the pressure to increase spending on social programs, expenditure-reducing policies were not available. The collapse of the Bretton Woods system: the crisis of the dollar • The problem of the dollar became unsustainable: The Kennedy and Johnson administration introduced restrictions and controls to deal with the consequences of the crisis of the dollar, but not the causes. • International cooperation: London Gold Pool (1961) (Countries agreed on refraining from converting their dollars into gold and sold gold). • German concerns about inflation (supporting the value of the dollar using marks to purchase dollars would have generated inflationary tensions in Germany) • Growing inflation and budget deficit in the USA (Vietnam war). • 1971: massive flows from the dollar to the German mark. Germany, to prevent inflation, allowed the mark to float. Few European currencies revaluated. • August 1971: Nixon suspended convertibility. • 1973: New speculative attacks against the dollar: European currencies decide to float. • End of Bretton Woods. The oil crisis: causes • Oil shock. • Yom Kippur war. • Iran-Iraq war • Oil demand is very inelastic and, therefore, the increase in oil prices was transmitted to the rest of the economy. Stagflation: oil prices, raw materials and wages • Stagflation: stagnation + inflation. • Exhaustion of the factors of growth and saturated markets. • Increase in oil prices which resulted in a general increase in prices. • Increase in wages were larger than the increase in productivity. • Inflationary tensions due to the collapse of Bretton Woods. Wage evolution and labor productivity in OEEC countries, 1955-1978 Change in macroeconomic policies: the Monetarist Revolution • Governments must restrict their functions just to guaranteeing a stable institutional framework: Demand policies have no effect in the long term; their effects are limited to the short term. Monetary authorities should follow a fixed rule: increase in money supply at a constant rate (price stability). • Existence of a crowing-out effect of government spending. • Summing up: Monetary discipline and budget equilibrium. Change in macroeconomic policies: the Monetarist Revolution • 1979: Paul Volcker abandoned expansionary economic policies: increase in interest rates. • New orthodoxy of the deficit 0. • Privatizations. • Reductions in taxes. • Deregulation. • Labour market flexibility. Foreign debt crises: Latin American countries and the lost decade • Many Latin American countries implemented ISI policies to promote industrialization. • Fast increase in the levels of debt (low interest rates and availability of credit due to the petrodollars). • With the increase in the interest rates (change in the FED monetary policies) and the appreciation of the dollar, the levels of debt became unsustainable. • Restrictive monetary policies and institutional reforms (privatizations). USSR: Attempts of reform and collapse of communism • Stagnation during the long Brezhnev era. • Increase of debt in Eastern Europe. • Mikhail Gorbachev and the Perestroika. • Collapse of Communism and economic crisis. Stagnation during the long Brezhnev era • Khrushchev tried to introduce some reforms. Coup d’état of the most orthodox sectors forced him to resign. • Leonid Brezhnev took power. Beginning of an era characterized by ideological immobility, political repression and economic stagnation. • Repression of dissidence in Eastern Europe. For example, when Alexander Dubčec and the majority of the Czechoslovakian communist party proposed a new model of “Socialism with a human face”, Brezhnev ordered the invasion of Czechoslovakia and Dubčec’s dismissal. Increase of debt in Eastern Europe • Intensification of the trade relations of the Eastern block economies with the capitalist countries. • Increase of debt during the period of credit availability and low interest rates. • Strategy of growth based on debt. • Debt service became unsustainable. Gorbachev and the Perestroika • • • • Attempt of reform from above. Glasnost: transparency and political freedom. Uskorenie: economic acceleration. Failure of the Perestroika: • The suspension of the imperative planning generated chaos instead of creating new markets and economic efficiency “spontaneously”. • Boycott of the reform by the old Nomenklatura and the mafias. • The growing dissatisfaction tended to be directed against the Perestroika through the new channels opened by the Glasnost. • End of the threat of a Soviet occupation in Eastern Europe. • Beginning of the Eastern Europe revolutions. • Fall of the Berlin Wall and fast re-unification of Germany. Collapse of Communism and economic crisis • Reduction of GDP, increase of unemployment and deterioration of the living conditions. • Process of privatization: emergency of the mafias (heirs of the old bureaucracy). • The process of transition to capitalism was traumatic and led to one of the worst crisis of history (worst than the Great Depression). The actors of the new economic growth model: The four Asian Tigers • Policies directed to increase exports and reduce imports. • Government intervention and control of foreign investment. • Government support to private companies: subsidies, protectionist policies, social control. The actors of the new economic growth model: China • Period of planning (1949-1978). • Period of reforms (1978-…). • Socialist market economy (1992-…). China: Period of planning (1949-1978) • Civil war between the Kuomintang (Chinese Nationalist Party) and the Chinese Communist Party (Mao Zedong). • October 1949: Proclamation of the People's Republic of China. • Chiang Kai-shek took shelter in the island of Taiwan. • Agrarian collectivization. • Nationalization of industry. • Central planning. • Development strategy based on the expansion of heavy industry. • High saving and investment rate. China: Period of planning (1949-1978) • Great Leap Forward (1958-1960): • Objective: transform the traditional Chinese economy through a fast industrialization. • Agrarian collectivization (agrarian communes). • Incorporation industrial activities in the agrarian communes (self-sufficient communes). Backyard furnaces (steel production). • Intensive use of labour. • Manipulation of the official figures and non realistic goals. • Great Famine. • Cultural Revolution (1967-1969): • Campaign against political dissidence. The main victims were the intellectual and leading classes of the country. • Control of education. • Personality cult. China: Period of reforms (1978-…) • Deng Xiaoping took power after Mao’s death. • Agrarian reforms: • Increase of the agrarian prices. • Collectivization was replaced by the system of domestic responsibility: division of the agrarian units in small units that were entrusted to families. Obligation of delivering part of the production but possibility of keeping the remaining profits. • Previous technological improvements in agriculture that made it possible to increase productivity (and profits). • Industrial reforms: • Promotion of the “municipal companies” to solve the problem of the scarcity of consumption goods. • Production sold through the market. • Fast increase of the industrial employment. China: Socialist market economy (1992-…) • 14th National Congress of the Communist Party of China: Adoption of a Socialist market economy. • Elimination of the “material balance” planning. • Creation of the financial system: replace the centralized allocation of investment. • Transformation and reform of the State owned companies. • Active intervention of the State but less formal implication. China: Debate on the causes of the Chinese economic growth • Frequently, the Chinese economic growth is attributed to the reforms implemented. • But, Chinese institutions are not better than those of other poor countries. If China was not growing, the dictatorship, the lack of property rights, the legal system… would be blamed. • Robert Allen: • The question is not why mediocre market institutions have worked better than the planning, but why a so mediocre market institutions have worked so well. • Importance of the legacy of the period of planning: low mortality and low fertility, technological and R&D capacity, expansion of education, increase in life expectancy. The third technological revolution • New technological revolution: communication and information technologies. • New revolution in communications. • Main changes: • Technological uncertainty (reduction of the life cycle of technologies and products). • Fragmentation of markets and demand. • Flexible production. Globalization and unbalances • After WWII, there was a progressive liberalization of international trade and international movements of factors. • During the 1980 and 1990, there was an acceleration in the process of liberalization and more countries integrated into the global economy. • Liberalization of the movements of capitals. • The Second Globalization, like the First, has generated important tensions. • Anti-globalization movements from different ideological stances. • Return to the 19th century? • Turning point in the process of globalization? (anti-immigration policies, protectionism, tariff war). Speculative bubbles and financial crises • Important crashes in the most important World stock markets in 1987, 1997 and 2001 • Stiglitz, The Roaring Nineteens: During the 1990s, wages did not increase as fast as we should expect in a recovery. Lower wages, faster economic growth and increase in productivity mean more profits. Together with low interest rates, this led to raising stock markets. However, financial bubbles are not unavoidable. • Financial crisis of 2008. • Eurozone crisis (sovereign debt crises). The financial crisis of 2008 • Easy credit (low interest rates and credit from Asia). • Deregulation and new financial instruments (derivatives). • Raghuram G. Rajan, “Has financial development made the World riskier?”. Font: Raghuram G. Rajan, “Has financial development made the World riskier?” The crisis of the Eurozone • Was there a contagion effect of the international crisis? Not enough to explain the deep crisis of the Southern European economies. • Structural problems: • • • • Unemployment. Low productivity. Differential of inflation. Crisis of debt. The crisis of the Eurozone • What is the EMU? • • • • System of permanently fixed exchange rates: single currency. Single monetary policy: European Central Bank. Binding rules on State’s budget deficits. Single (commodity and financial) market. The EMU: Benefits • Reduces exchange rate uncertainty and reduces risks in transactions. • Lower transactions cost (fosters trade). • Transparent prices (easier to compare prices across the euro area: more competition). • Price stability: countries with poor inflation records, like Italy or Spain, had important reputation gains (delegation of monetary policy). The EMU: costs • Loss of instruments of monetary instruments: • Monetary policy: interest rates set by the ECB. • Exchange rate policies: countries gave up the possibility of moving the exchange rate. • Fiscal policy: It is still in the hands of the EU countries. But: • Growth and Stability Pact: Member States agreed to continue observing the Maastricht criteria (limit to public deficit and debt). Enforcement of fiscal discipline. • The fiscal policy is constrained by the countries borrowing capacity. The crisis of the Eurozone: How to get out there? • Problem: All countries have the same currency but prices have increased more in some countries (loss of competitiveness) and debt crisis: • No possibility of using monetary policy. • No possibility of a devaluation. • Only fiscal policy, but with the restrictions of the Growth and Stability Pact and provided that there is borrowing capacity. The crisis of the Eurozone: How to get out there? • There is a consensus among economists: • Improve productivity. • Improve exporting capacity. • Eliminate attitudes of “new rich people”: excess in spending and borrowing. • Paul Krugman (referring to Spain): • Increase productivity somehow a 30%. • … either devaluating a 30%. • … or lowering prices and wages a 30%. • Debate: Was Europe ready for a common currency? • Paul Krugman: No! This is the origin of the problem. The way out is advancing towards political union. • Eichengreen: But the end of the Euro would cause “the mother of all financial crisis”. Is the Eurozone an optimal currency area? • R. Mundell (1961): In order to be successful, a monetary union must behave as an Optimal Currency Area. • In an Optimal Currency Area, the involved economies should be in similar business cycles and have similar structures. • If a country/region suffers an asymmetrical shock the responses should be: • Mobility of labour. • Flexibility of prices and wages. • Automatic transfers of fiscal resources. Prices index,1999-2017 (1999=100) Source: Eurostat Balance of payments. Current account transactions, net balance (million of euro), 1999-2017 Source: Eurostat Competitiveness •Source: Norris, Floyd, Euro Benefits Germany More Than Others in Zone, New York Times, April 22nd, , 2011.