1. GROWTH and DEVELOPMENT of a GLOBAL ECONOMY SINCE 1945

a) Background

Europe after WW2 got relief in 2 ways:

1. Allied armies distribute rations, medical supplies, to civilians and liberated enemies
2. United Nations Relief and Rehabilitation Administration (UNRRA) – US$1b in cash and US$20 m in food, supplies
a. US contributed 2/3
b. After war, continued by WHO, etc
c. US the strongest after the war

Planning for an international economic system began by 1941:
Aug 1941 - aboard a battleship in the North Atlantic, Roosevelt and Churchill signed the Atlantic Charter to build a multilateral trading culture to replace bilateralism.

By 1944, an international conference at Bretton Woods, where the US (and Britain) delegates played the leading role, there was a discussion on financial flows etc.
2 major organizations were created.
1. International Monetary Fund (IMF) – managing structure of exchange rates and financing short term balance of payments.
2. International Bank for Reconstruction and Development (IBRD) or World Bank – granting loans etc.

These did not come into operation until 1946, and was only successful later on but it started a rebuilding of the world’s economy.

Rebuilding continues: 5 June, 1947, General George C. Marshall gave a commencement address at Harvard University (had been named Secretary of State)

Under the programme (known as the Marshall Plan), many of the Western European States began their post WW2 recovery.

Germany (West) – Allies wanted a strong Germany to allow them to help promote Economic growth in Europe.
Also began coordinating the economies of all the Germanys. By 1948, the allies introduced a new currency. Soviets protested because it was a violation of Potsdam’s agreements. (Do you know what happened next?)

Economic miracle:
25 years after end of WW2, longest period of uninterrupted economic growth.
US, Japan, GDP per capita increased by about 4.5% annually
However, development was till slower than continental Europe.

US aid was crucial and Bretton Woods helped to regulate monetary flows and provide stability, especially at a time where there was enormous hardship.
The leading states (also known as the Bretton-Woods nations believed that there needed to be free trade, at that this would facilitate growth.)

b) History of Economic Integration

Globalisation is not a recent phenomenon

- Rise of economic system, 1400 – 1600
- Economic integration between Asia and Europe, 1600 – 1800
- Increased integration of Asia, 1800 – 1950
- New global economy, post WW2

In history there have been 3 economic systems:
1. Bretton-Woods from WW2 until 1971
2. Interdependence from 1971 until 1989
3. Globalisation from 1989 to present.

1. Bretton-Woods, named after the New Hampshire town, where the original states had met.
a. Created IMF, World Bank and General Agreement on Tariffs and Trade (GATT)

b. During early years, there were many protectionist measures as economies recovered.

c. International investments were about raw materials and retailing, not manufacturing.

d. The BW system, centered on 3 foundations
i. Power centered in a few states
1. Old colonies still dependent
2. African and Asian economies had to be directed
3. Japan was seen to be out side: especially since it was (or had been) the enemy. Only joined IMF/World Bank in 1952 and GATT 1954
ii. There had to be a willing leader
1. Needed a dominant leader
2. Economically and Militarily strong
3. Europeans and Japanese encouraged US leadership
4. Needed their assistance
5. They did not fear US leadership but feared US isolationism
6. USA acted as central banker, major initiatives in trade negotiations
7. Dominated international investment
iii. And these states had a common interest
1. Believed in free trade with limited barriers. Why?
2. The belief that the Great Depression had been because of price control and barriers
3. Belief that free trade could help bring peace, as barriers meant conflict (former Sec of State, Cordell Hull)

e. Bretton-Woods allowed a stable arena for economic growth
i. Open trade, stable money flow
ii. Created bodies to monitor these flows
iii. Allowed for states to increase trade and economic growth through free trade and the reduction of barriers.


2. Interdependence
a. A change in the economic order, due to a change in the main players
b. BW led to increased trade and interaction, but also meant greater connections in problems
c. Interdependence – 2 reactions
i. To increase barriers
1. possibly, to have regional grouping like EEC
ii. idea of limited management of economic cooperation
1. 1980s – Led to Uruguay Round; more ambitious multilateral trade.
2. Less Developed Countries sought greater say
a. 1950s and 60s had increase number of countries
b. These countries tried to protect themselves by setting up barriers to protect domestic products
c. Their development was the priority
d. 70s and 80s, Eastern Europe and SU sought limited participation in the international economy
e. Gorbachev’s perestroika moved into a market like direction
f. Possibly led to break up of SU
g. In China, these changes led to rapid growth
3. New areas.
a. Europe
i. EEC began to rival the US.
ii. Formed the EU
b. Japan
i. By 1980s, was a major competitor to the USA
c. China
4. In 1970s and 1980s USA suffered a weakened dollar and Balance of Trade (BOT) deficit.
a. Twin deficits of government spending and Balance of Payments (BOP).
iii. Europe and Japan began to lose the impetus for US leadership
1. Détente and coop meant they did not require the US for leadership
2. US were also unwilling to bear the costs
3. But no new leader emerged.
a. Europe did not have the political power, even if it had the economic clout
b. West Germany and Japan, could not manage the economy themselves and still had memories of WW2 to deal with.

3. Globalisation
a. However, the impact of Globalisation was uneven
b. Countries that could not attract investment were left behind
c. Especially in Africa
d. States also began to become more vulnerable to the vagaries of the international system
i. 2 possible solutions
1. limits: on economic globalization; as it only served the rich and not the poor
a. BW states were rich and not concerned
2. Increase interaction: adapt to the system to help
e. US once again dominant with the advent of Globalisation
i. Information Technology and US businesses
ii. US dollar continued to be the standard and its capitalist model and market were the lynchpin of the system
iii. But not unequal totally, as there were other blocs
iv. Like EU, Far East, Brazil
v. Regionalisation







c) Regionalisation and integration

The movement in Europe

The motives for some kind of integration were both political and economic.
Political: The belief that there needed to be some kind of supranational organization so as to stop the possibility of war.
Economic: Means that the larger market will allow for greater specialization and a greater possibility of a market

But there were initial concerns about sovereignty.

i) Early moves: - Benelux (Belgium, Netherlands and Luxemburg) Customs Union, had external tariffs.

ii) In 1948 - Organisation for European Economic Co-operation (OEEC), led by Frenchman Robert Marjolin, to help administer the Marshall Plan for the reconstruction of Europe after World War II. Later its membership was extended to non-European states, and in 1961 it was reformed into the Organisation for Economic Co-operation and Development – US initiative. But provided for only cooperation and not full integration.

iii) 1950 – French Foreign Minister Robert Schumann proposed the integration of French and German coal and steel industries.
Motives – Coal and steel were the heart of all industries. (Economic reasons) but also political as these were main part of military and so could keep an eye on German military.
Other countries like (with the exception of Britain, which had nationalized its industries) rushed to join as they did not want to be left out and so the European Coal and Steel Community was created. (ECSC)

1951 – No tariffs on coal and steel. And there were external tariffs.
To supervise, a High Authority was set up, as was a Council of Ministers

In addition, there was also European Atomic Energy Commission (EURATOM) and European Economic Community (EEC) or Common Market.

iv) Common Market Treaty (1 Jan 1958) called for the gradual reduction of barriers and tariffs.

By July 1968, in a shorter timeframe than people had foreseen, all tariffs were gone.

It also had a Council of Ministers.

1961, Britain, signaled its intent to join (still had problems about sovereignty). Initially it and some of the Scandinavian countries were out. Charles de Gaulle also vetoed Britain’s entry.

However, by Jan 1 1973, de Gaulle had resigned and the French became more moderate.
Britain, Eire and Denmark joined France, West Germany, Italy, Benelux states. Later, Greece in 1981, Spain and Portugal in 1986 joined.
All these took months and years of negotiations.

There was already talk of a European Union, more than just a common market.

But had many problems
1. During 1960s, growth was reducing
2. Problems over the issue of a single currency
3. Also had to deal with 3rd World, especially former colonies.
- 1963 – Convention in Yaounde, Cameroon offering technical assistance
1975 - Lome, Togo, 46 Caribbean, Asian and African countries
1979 – Lome renewed now with 58 ACP countries.

v) Towards Unity
However, after 30 years, the dream of a united Europe still had not been realized
Monetary union was far from complete.
Admittance of less developed Mediterranean states, Greece, Spain, and Portugal introduced new problems like in agriculture.
2 partisan groups – “Eurocrats” (European Commission) wanted unity. While Governments wanted autonomy (Council of Ministers or European Council)

Therefore, there was a slight reduction in the interest in forming a European Community.

The impetus came back in 1985, European Council declared a Single European Act (SEA) which amended treaties – to remove barriers, physical and fiscal. (Feb 1986)

Hoped to be completed by Dec 31, 1992 – also wanted to have a Euro flag, and passports.

Movement for unity gathered even more, with France and Britain agreeing on a Channel tunnel (Chunnel)

1993 –creation of European Economic Area (EEA), -merger between EC and European Free Trade Association (Austria, Finland, Iceland, Norway, Sweden, Switzerland, Liechtenstein) to create world’s largest free trade area. (380 million consumers, 48% of world trade)

But – European Monetary System (EMS) still had problems (Britain did not join). However, under John Major, they went in, and progress was made to get a single currency by 1999.




Eastern Europe – isolation to integration

i) Problems

In 1940s – EE was isolated. E.g. 1938 10% of exports went to USSR, 68% to West Europe but by 1953, 64% went to USSR and EE, 1% to USA
Controlled by USSR, told them what to do and what to produce
By 1980, despite advances in the 1960s, USSR agriculture production was about 20% of US.
Growth rates declined steadily in 1980s
Productivity in 1975-80 was 1.9%, then from 1981-85 went down to 0.9%
Lines for food increased in cities with production actually falling in 1983-85
No consumer goods and increased dissatisfaction

The USSR, was a net importer of grain
Central planning reduced innovation, productivity
Quantitative results, not qualitative

ii) Mikhail Gorbachev comes to power by mid-1980s
- Glasnost
- PERESTROIKA
 Restructured economic policy
 Decentralized decision making
 Law on State Enterprise in 1987 to phase out centralised planning by 1991
 Became more autonomous with managers having more power – e.g. could hire and fire
 Trade dimension
• 1986, ended the policy of monopoly of foreign trade by Ministry of Foreign Trade
• asked for observer status in GATT
• Economic and technical cooperation with USA
• Ostpolitik (Eastern Policy) – increased trade with WG
 However – perestroika failing
• Prices in many cases still were controlled
• Led to economic crisis
• Ministries could not guarantee inputs because o more compulsory quotas, had to bribe officials etc
• Real GNP declined 4% in 1990, 19% in 1991
• 1988, workers given the right to strike, so wages went up and so did costs

iii) Boris Yeltsin comes to power (1990)
 Facing large debt and failing currency, he turned to IMF
 Developed countries set up a European Bank for Reconstruction and Development (EBRD) in 1990
 G-7 leaders invited Yeltsin to a meeting in London in summer 1991 – landmark
 However, some still suspicious about whether Yeltsin would continue economic reforms
 Most money came form Germany, hoping to speed up SU troops withdrawal from East Germany
 G-7 assistance included $34 b in financial flow, $13b from IMF, $1.5b in loans from World Bank
 Also suffered from debt crisis

iv) Improving situation?
 But by 1999 and 2000, oil and gas prices in the world went up to help the soviet economy
 Decline in ruble value, helped increase exports
 Also privatization was almost completed
 Member of (now) G-8, IMF and World Bank, but not yet WTO
 Most of EE, also suffered similar problems
 By 1990s, many of these states also tried to get into EU
 Depended on European Council in Copenhagen criteria
1) dependence on democracy
2) existence of market economy
3) adherence to political and monetary union rules


Conclusion

1. After WW2 there was a move towards integration of the world’s economy, mostly spurred on by post war development

2. The US played an important role

3. Numerous institutions were set up to aid and monitor states’ monetary and fiscal policies.

4. We must now look at the development of the economy in the latter part of the second half of the 20th century.