Week 3

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Week 3

• The end of Bretton Woods
• 1971 - 1980

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The collapse of Bretton Woods and its consequences

• Two successive US administrations Lyndon
  Johnson (1963-1969) and Richard Nixon (1969-1974)
  carry out expansionist, inflationary economic
  policies. Johnson funds generous social
  programmes as well as increasing US involvement
  in the Vietnam war.
• Under Nixon the Federal Reserve keeps interest
  rates low, encouraging more public expenditure
  and investment. The comparative higher inflation
  rates in the US meant that the real value of the
  dollar was declining. This would have required a
  deflationary policy to bring US prices down.
  Nixon did not choose to follow that route.

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The collapse of Bretton Woods and its consequences

• On August 15 1971, the dollar is devalued and
  de-linked from gold. i.e. the dollar-gold peg,
  which was the key of the Bretton Woods system, is
  terminated. In addition the US administration
  imposed a 10 tax on imports so as to put
  pressure on its partners and prevent their easy
  access to the US market.
• December 1971, the Smithsonian agreement. Major
  economic commercial powers accept a revaluation
  of their currencies in return for the end of US
  extraordinary tax measures.
• From 1976 (Jamaica accords) the non-system of
  flexible exchange rates, and convertible
  currencies is officially in force.

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Stagflation in the 1970s.

• Oil crisis(1973). Opec enforces an oil embargo,
  which produces a sharp rise in prices.
• Stagnation Inflation. Western economies slump,
  experiencing recession, and a fall in demand. At
  the same time inflation picks up strongly because
  of sudden rise of costs and prices.
• The stagflation scenario come as a shock to
  economists who had worked on the assumption that
  there was a positive trade-off between inflation,
  and employment, i.e. growth of the economy
  (Philipps curve).
• Different economic strategies. The US follows an
  economic strategy directed at domestic output
  recovery West European countries are more
  concerned with fighting inflation Japan seeks to
  maximize its exports, by penetrating foreign
  markets (especially the US).

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Western Europe faces the crisis of the 1970s.

• 1950s- The Europe of the Six. The first treaties
  ECSC and EEC.
• 1960s- The creation of a Customs Union and the
  CAP The UK applies for membership and faces a
  veto.
• 1970s- The EEC from 6 to 9. Economic fluctuations
  undermine plans for a single currency.
• The Franco-German axis and the creation of the
  European Monetary System (1978).

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Neo-protectionism in the 1970s.

• Neo protectionism by industrialised countries.
• Invisible barriers also known as non-tariff
  barriers hamper world trade.
• - Voluntary Export Restraints (VERs) as an
  answer the Japanese challenge. Agreement to limit
  sales on the US market. Leads to higher prices
  and cartel-like profit sharing.
• -1974 Trade Act Section 301, authorizes
  actions against commercial partners, deemed to
  carry out unfair trade practices.
• -1973 Multifibre agreement sets limits to
  imports of textiles and clothing from developing
  countries
• Anti-dumping actions by the Commission of the
  European Community.

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New economic doctrines monetarism and supply
side economics

• The end of the keynesian consensus.
• Monetarism. This is a theory based on the
  quantity of money. The states function is
  primarily to regulate the money supply in the
  economy. It is supposed to keep out of economic
  matters especially cut back on financing social
  expenditure. To prevent inflation the Government
  has to keep a balanced budget and run a tight
  monetary policy (via high interest rates).
• Monetarists do not believe a healthy economic
  policy should aim at full employment. They speak
  of a natural unemployment rate for each economy
  (NRU), or, in more sophisticated economic terms,
  NAIRU (Non-Accelerating Inflation Rate of
  Unemployment).

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New economic doctrines monetarism and supply
side economics

• Supply side economics advocates micro-economic
  reforms such as flexibility in labour, capital
  markets, deregulation, privatization to enhance
  productivity and thereby encourage economic
  growth.
• Who were the monetarists? The Chicago School
  (Milton Friedman) was the leading element.
  Margaret Thatcher endorsed monetarism when she
  became UK Prime Minister in 1979 So did Ronald
  Reagan, US President from 1981 to 1989.
  Monetarist theories spread in most countries, and
  some version of monetarism is embodied in
  economic policies throughout the West.

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The ISI Model in crisis

• ISI achieved industrialization in many countries.
• Dual economies, with modern sectors and poor
  rural and shanty town populations. Income
  distribution unequal. Growth rates unable to
  match the I. Countries.
• Growing balance of payments problems. Import
  needs rose, but exports were not competitive on
  world markets. Devaluation became chronic.
• Foreign loans in the 1970s generated large
  interest payments.
• Huge subsidies generated budget deficits, which
  in turn caused inflation, which led to more
  devaluation and/or recession as a cure for
  inflation. Often military dictatorships took
  power. See Brazil (1964), but also Chile (1973),
  Argentina and many other countries

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The export oriented industrializers.

• Asian Tigers follow a different path. They
  protect their industries but strongly promote
  exports.
• In 1974 South Korea exported 41 of its
  manufactured goods.
• Low wages, undervalued currencies. Little state
  social spending. Highly competitive export
  oriented sectors avoid balance of payments
  problems.
• Low inflation.

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The crisis of the Communist bloc after 1970

• Reforms of the system in the 1960s are
  discontinued in the 1970s due to political
  pressure from the Communist parties. Revolt and
  repression (Poland, Czechoslovakia)
• Failure to increase productivity, quality
  production. New technologies require flexibility
  which the system resisted. Only the military
  compete with the West. The civilian sector falls
  behind.
• Growth rates low. Exports uncompetitive. Eastern
  countries take up loans like the ISI countries.
  They also increase their imports from the West to
  keep up their living standards.
• The USSR imports grain from the USA a
  declaration of failure.
• The only successful exports to the West are oil,
  gas and other raw materials.

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The Western world and the second oil shock

• The US takes on inflation Paul Volcker as
  Chairman of the Board of Governors of the Federal
  Reserve in 1979 raised short term interest rates
  to above 20. This generated a domestic recession
  but eventually beats inflation.
• High interest rate policies are adopted by other
  European countries. Germany acts as pace-setter
  in Europe.

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Developing countries, the debt crisis, and the
new economic environment of the 1980s

• US and other countries commercial banks extended
  large loans to developing countries and to the
  countries of Eastern Europe in the 1970s. The
  loans were designed to fund state-led
  industrialization and other government
  programmes.
• 1979- Paul Volcker, chairman of the Fed, enacted
  a monetary squeeze to fight US domestic
  inflation. Debtor countries are confronted with a
  huge hike in interest rate repayments.
• To remain solvent they had to negotiate new loans
  with the IMF and reverse their domestic economic
  policies, embracing market-reforms and
  cost-cutting, deflationary economic packages.
• This painful development leads many countries to
  default on their debts. A few countries managed
  the transition to economic self-sustained growth.

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The age of globalization

• Deindustrialization and the growth of the service
  economy
• Technological innovation the information era and
  the telecommunication revolution.
• From the State to the market privatization and
  liberalization in the West the end of state
  socialism the emergence of Asian economies
  the New economy of the 1990s.

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Trends in the global economy since the 1980s

• De-industrialisation and the emergence of the
  service economy
• From the State to the market
• privatisations and reform in Western Europe
• the fall of Communism
• the rise of the South Asian economy a global
  shift
• the American miracle of the 1990s and the New
  Economy

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The INFRASTRUCTURE of GLOBALISATION

• Technological change in the new era proceeds at
  an increased rate over a wide number of fields,
  biotechnology, microelectronics,
  telecommunications, new materials.
• Broad application of new technologies. Newer
  technologies, especially in computer and
  electronics, are relevant to a broad array of
  economic processes and other activities.
• Shortened process and product life cycle.

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THE TELECOMMUNICATIONS NETWORK AND THE COMPUTER
AGE

• The space industry and satellites
• Telecommunications from the Telephone to the
  global highways
• ELECTRONICS from the wireless telegraph, to the
  computer, to the modern information age.
• The rise of Internet and its impact on the economy

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Week 3

• Explain the origins of the Marshall Plan.
• Characterize ISI and its effects in Latin America
  between 1945 and the 1970s.
• Was the Communist bloc (USSR and Eastern Europe)
  an economic success or a failute?
• Compare the Bretton Woods system with the Gold
  Standard.

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Week 3/4

• Industrialized countries
• Key factors that brought about the collapse of
  Bretton Woodss system, during the 1960s.
• The effects of the oil shock on industrialized
  world, and the economic policies of the West up
  to and beyond the 1979 interest rate hike.
• Developing countries
• Why and to what effect developing countries
  became large debtors in the 1970s, and suffered
  as a result in the 1980s?
• Socialist countries
• Why did socialist economies enter into a crisis
  in the 1960 and 1970s?
• Key economic factors behind the collapse of
  communism in the 1980s.

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Questions on trade and multinationals

• Issues surrounding the origins and nature of the
  WTO.
• Describe the progress and collapse of the Doha
  round negotiations (2000-2007). Who is to blame?
• Arguments for and against FDI in developing
  countries.