Questions on the Problems of the Global Economy:

Question: Which was a more significant reason for the decline of the global economy: the weakening of the US or the debt crisis?

Intro:

· Side 1:

§ The weakening of the US could be most obviously marked from 1973 with the first oil crisis; but cracks within US had already started from the 1960s when the intense and heavy involvement of US with the post war reconstruction of Europe and Japan started to take a toil on US economy

§ Debt crisis began in the 1970s as a response to the oil crises but culminated in the 1980s where external debts arisen from US$636billion in 1980 to US$1017 billion by late 1980s

§ Comparison between the role of US and the debt crisis to assess which was a more significant problem

§ Side 1 would be US weakening more significant than debt

§ Defining the perimeters of criteria for problem:

a. Scale it affected (i.e. how many regions, countries are involved)

b. Long term or short term impact (i.e. duration of problems)

· Side 2:

§ Debt crisis more significant than the weakening of US

· Thesis:

§ The comparison between the weakening of US and debt crisis revealed that US posed more significant problems in terms of scale of nations affected as well as the nature and management of the conflict

§ Though the debt crisis seemed to have created more long term repercussions for the global economy due to the light it shed on the global institutions, the US could not absolve itself from being involved as well

Body:

I Support: US weakening created more significant problems than the debt crisis

GA: US weakening impacted a larger and broader scale of countries as compared with the debt crisis

ELA: US being the main driving force of the global economy after WWII possessed immense financial powers and also a wide sphere of influence. With their weakening, it would mean that countries and organizations that depended on US would be adversely affected.

EVI: The abandonment of the Gold Standard in 1971 to allow the dollar to ‘float’ against other currencies clearly shows the weakening of the dollar and the weakened positioning of the US as the dominating control. This is because control over other nation’s currencies would cease to be the exclusive privilege of US. With this change, countries had lost the pillar of stability and confidence in the dollar, resulting in a wave of instability over trading currencies and what will be the new trend to develop.

EVA: Compared with the debt crisis which saw increased borrowing by developing countries, but still limited to mainly developing countries such as Latin America the pervasiveness of the Gold Standard was definitely larger as the debt crisis did not spread beyond its borders and adversely affected other countries as not many countries were depended on them to begin with.

GA: Rectifications and solutions for the weakening of US were not as readily available as compared with the debt crisis

ELA: Both weakening of US and debt crises had generate responses from the global community, however, it was much simpler to manage the debt crisis as compared with the issues of US due to difficulties in influencing the political and economic decisions of US. Moreover US share many relations and existing treaties and agreements with nations that cannot be easily dissolved or altered, hindering possible help that could be rendered and even internal reforms that could be initiated by US itself. On the other hand, indebted developing countries had fewer constraints and welcomed more help and aid.

EVI: US had tied themselves to the development of Europe and Japan due to the Cold War rivalry with USSR as a need to establish bases. The economic ties especially between US and Japan had saw US enduring protectionist measures against themselves in a bid to strengthen Japan to act as an effective buffer against threat of USSR and communism. The relations between US and Japan saw deterioration of US export markets which was a main cause of US weakening. However, trade ties between them could not be carelessly ceased though US was suffering trade deficit against Japan as it would destabilize the US bloc of power in Asia and globally since now Japan contributes substantially to the global economy.

EVA: Debt crisis on the other hand, was more manageable as countries could turn to international institutions for loans and they too were willing to bail them countries facing debt problems. Even though international institutions had conditional lending towards the borrower, it did indeed alleviate aspects of the debt crisis as both parties were willing to participate. Therefore, comparing the nature of the two as well as the measures taken to resolve them, debt crisis seemed the more manageable of the two.

GA: The weakening of the US indirectly caused the debt crisis

ELA: A large part of the debt crisis was due to the negative consequences of the oil crisis which was in part due to the role played by US in terms of its negative relation with the oil exporting countries in the Middle East. Moreover it was the inability to handle the oil crisis that indirectly resulted in the debt crisis

EVI: US could not response adequately to the oil crisis when it happened as US was already experiencing trade deficit. Thus when the oil crisis hit, even US, once a major exporter of petroleum had to import 1/3 of its oil as domestic consumption increased—from1960-1970, the US import of oil increased from 371 to 483 million barrels and most of the oil came from the OPEC countries. With the price of oil soaring, oil rich countries were being flushed with capital from sale of oil known as petrodollars. They thus invested their petrodollars in commercial banks in US and Europe which with the influx of monies were eager to lend out to developing countries. The offering of cash at low interest rates attracted many borrowers especially from the developing countries as they wanted funds to implement economic strategies such as import substitution so as to escape dependence on bigger nations.

EVA: The proliferation of petrodollar was something a weakened US could not effective have the means to deal with which indirectly caused the debt crisis. This is because, coupled with the two oil crises in the 1970s that result in high oil prices and increasing cost of imports, developing countries realized that they could not repay the loans they borrowed. Therefore, the oil crises could be said to account for a large part of why the debt crisis occurred on two fronts; the recycling of petrodollars as well as the inflationary pressure created. Thus, the weakening of the US actually in the long run aggravated the debt conditions of developing countries which emphasized on the significant role of the US on the decline of the global economy.

II Challenge: Debt crises created more significant problems than the weakening of US

GA: However the debt crisis highlighted and imprinted more long term repercussions as compared with the weakening of the US

ELA: Even though the scale of the weakening of US was more significant with regards to countries directly affected, the debt crisis resulted in awareness of criticism of the global institutions that carried negative impacts of the credibility of structures such as UN and IMF—which caused a dip in confidences of international instruments that help stabilize the world systems.

EVI: The debt problem of the crisis required necessary long term borrowing and long term changes before it can be resolved. As they borrow from global institutions, such as IMF, with conditional lending regulations, countries had to undergo structural adjustment programs (SAP) that meant changes to the countries internally; such as to devalue their currencies and privatize state assets to external adjustments of focusing economic output on direct export and to reduce barriers to trade; these processes spanned across long period of time before a country can rid itself of the debt and the influence of the global institutions.

EVA: But in reality these SAP had not helped but instead put countries at greater debt, highlighted the ineffectiveness of the global institutions which carried long term repercussions—especially on confidence and credibility. One example would by Kenya where though changes were implemented to allow easier currency movement compared with previous central lending, foreign investment was still meager and did not help Kenya much and they were in fact deeper in debt. Though the debt crisis adversely impacted the view of global institutions, it is also important to note that US play a key role in these global institutions. This can be seen in the weighted voting that is determined by quotas in IMF and WB, US thus managed to still be the influential force in these institutions as US would have a say in the types and forms of policies being implement as they carry the most votes as the main financial contributor, for example US having 16.38% of votes in WB as compared with 7.86% of Japan and 4.3% of UK. Therefore while debt crisis presents the impression that global institutions are flawed and failed to aid the developing countries, at a deeper analysis, it also revealed that US had a part to play in these global institutions. Hence, the weakening of US still had a much more encompassing impact—within global institutions and developing nations.

GA: Debt crisis highlighted more internal problems than the weakening of US

ELA: There was mismanagement of the economy by the developing countries which resulted in the debt crisis. They had implemented poor economic policies that not only did not benefit their countries but caused them to be deeper in debt

EVI: The Mexico crisis—how the currency suddenly devalued and it went through protectionist measures that worsen trade relations and their deficits

EVA: In comparison, though the US did not go through sudden devaluation of its currency and hog the spotlight on its economic policies and changes, it remained important to note that there was also significant mismanagement of the US economy. The US had to undergo the great stagflation of the 1970s which highlighted their inaptness at dealing with the changes of the global economy or their stubbornness at maintenance of their global stature rather than consideration of their domestic needs. Thus, when evaluating the internal problems of the debt ridden developing countries and US—on the surface, it seemed that the debt ridden developing countries posed greater problems for the global economy but in reality the problems are less long lasting and impactful than the US due to the global influence of US.

Conclusion:

· Reiterate main arguments:

· Stand

§ The weakening of the US was a more significant reason for the decline of the global economy.

Introduction:

It is evident that the Golden Age of Capitalism was disrupted by the 1970s. The global growth rate of 4% per annum was derailed by two factors: the oil shocks with the massive increases in oil prices (up to US$ 39.50 from US$3) and the decline of the US dominance in the world economy. In this essay, a comparison of both factors will determine which created greater problems in weakening global economic growth. These problems include protectionism, trade imbalances, instability and debt. Taking into account the geographical scope and timeframe of the impacts, the essay will propose that the decline of the US economy was more detrimental for global economic growth.

Body:

GA1: The decline of the US economy led to extensive trade imbalances between the developed countries. This led to an outflow of other problems.

ü Partly from the low productivity of American producers and foreign aid, the US had imported more than it exported and therefore had trade deficits. A confluence of these factors led the US to abandon the Bretton Woods fixed exchange rate system for which the US was propping up with its financial muscle from 1945-1971.

ü The aftermath of the floating exchange rate system led to the need to cooperative management of exchange rates between the developed nations. This however did not solve the imbalances. For instance, Japanese trade surplus against the US reached US$7 billion in 1976 and peaked to nearly US$70 billion in 1994.

ü In addition, efforts to decrease the financial strain on the US through the Plaza Accord in 1985 actually led to Japan’s decade long recession during the 1990s with GDP growing at 0.6%. The Accord had increased the value of the Japanese Yen and created a bubble economy that exploded.

ü The oil crises did not create such long term problems as though its impact was drastic in the 1970s with almost quadrupling of cost and restriction in demands, it was also resolved by the 1980s, limiting the depth of impact as oppose to the decline of US that carried forward its issues all the way upon other states and all the way till 1990s

GA2: In the issue of worldwide debt, both factors seem equally responsible.

ü The breakdown of the earlier mentioned Bretton Woods system also caused the Nixon Shock. Many countries especially the developing ones pegged their currencies to the US dollar, since the dollar was allow to fall in value, this weakened their currency values. Over the short run, this meant many countries suffered instant increases in their debt and decreased purchasing power.

ü Further, it was US policies that caused the Latin American Debt Crisis in the 1980s. To revive its weakened economy, it raised interest rates above 10%. This was imitated by various commercial banks which had earlier recycled the petrodollars into the developing countries. Mexico then defaulted on its loans as repayments became overwhelming and this sparked the pull out of loans from the region. Growth then went into negative territory (up to minus 2% for Mexico). Many developing nations became saddled with debt from US$ 636 billion (1980) to US$1.6 trillion (1993).

ü However, the underlying reasons for the crisis were the conditions created by the excessive lending and borrowing from the petrodollars. Therefore, they were equally responsible.

GA3: High inflation was more a byproduct of the oil crises.

ü Oil had overtaken coal as the chief source of energy by the 1960s. Due to the exponential increases in prices, from US$ 3 (1973) to US$ 39.50 (late 1970s), the cost of production rose greatly. The US imported one third of its petroleum needs.

ü Developing countries thus found it more expensive to import various products including machinery which was needed to promote economic development over the long term. Revenue also fell due to increased prices worldwide.

ü The US however cannot escape blame. Domestic inflation was prompted partially by the printing of money during the Johnson and the Nixon administrations. This also contributed to the inflationary trends of the 1970s.

GA4: Nonetheless, increased protectionism was more a product of the declining US economy than the oil crises.

ü To reduce imports into America and decrease trade deficits, the US set up various protectionist measures such as 10% taxes, blacklisting and pressure (1974 Trade Act, Section 301). This gave rise to retaliation from other trading blocs including those from the developed countries. This compounded the economic slowdown brought about by the oil crises. Trade had already fallen due to increased energy costs (like transport since people were less willing to buy) from the oil crises; because of the US tariffs, Japanese exports fell by 12%. Thus, the US actions restricted growth even further.

ü Likewise, as the US triggered the Debt Crisis, Mexico also resorted to protectionist tariff to protect local producers. This led to a further fall in global economic growth. Countries dependent on exports suffered. Singapore’s growth for example fell to minus 1.5% in 1985.

ü On the other hand, the oil crises did not engender great protectionism. In fact, it helped to grow the financial markets as the developing countries particularly Latin America sustained their growth with continued borrowing.

Conclusion:

§Reiterate main arguments

§Reaffirm Stand

Question: Did the Oil Crisis or the Debt Crisis contribute more to the decline of the global economy?

Intro:

· Interpretation of Question:

· Side 1: Oil Crisis

§ Significant impact of the GE considering the drastic rise in price and the large scope of dependence upon it as raw material and part of processed item

· Side 2: Debt Crisis

§ The question is asking to compare between the two Crises to see which contributed more to the decline of the global economy which can be characterized at the downturn right after the Golden Age of Capitalism which can be said to have started around 1973 with the first Oil Crisis as a response to the Yom Kippur War, soon after the breakdown of the Bretton Woods System. The Debt Crisis also started around the 1970s as a response to the Oil Crisis but it is widely believed to have culminated in the 1980s when external debts rose from US$636 billion in 1980 to US$1017 billion by the late 1980s.

· Thesis:

§ Thus, this essay will ascertain which had a larger role in bringing about and perpetuating the decline of the global economy based on the scope of impact of the Crises as well as the depth of impact.

§ Both oil and debt crisis resulted in decline of the GE in many ways and affect different parties, however, it was oil crisis that contribute more as the impact was more intensely felt and affected wider scope of nations.

Body:

I Side 1: Oil Crisis contributed more to the decline of the global economy.

GA1: The Oil Crisis increased the price of oil so much that it created problems in the world economy that contributed to the decline of the global economy.

El/Ex: The oil embargo had a great impact because there was a large dependency on oil to run the world’s economies. With an increase in prices, an imposed embargo on selected countries and a progressive reduction in production of oil by the OPEC countries during the 1973 Oil Crisis brought about larger problems to the world economy.

Evi: The price of oil was raised by about 70% along with a reduction in production by about 35% in November 1973. All this dramatically increased the price of crude oil to about US$11.65 from US$3 per barrel

Eval: The increase in crude oil price brought about higher production costs in both developed and developing countries which brought about inflationary pressures as oil, an important raw material in the cost of transportation and in many aspects of the modern industrial economy inevitably impacted on the prices of goods and commodities around the world. As a result of increased prices, the withdrawal of purchasing power from the world economy to spend on oil purchases brought about deflationary pressures which plunged the world into a recession for much of the 1970s. The fact that a large part of the world was affected by the oil crisis shows that the Oil Crisis contributed largely to the decline of the global economy.

GA2: The Oil Crisis also brought about the proliferation of petrodollars which contributed to the development of the debt crisis worsening the global economy.

El/Ex: The proliferation of petrodollars that was caused by the Oil Crisis caused many countries especially the developing countries to get embroiled in the depths of huge amounts of borrowing from the commercial banks which caused the debt crisis.

Evi: When the oil crisis hit, even US, once a major exporter of petroleum had to import 1/3 of its oil as domestic consumption increased. From 1960 – 1970, the US import of oil increased from 371 to 483 million barrels and most of the oil came from OPEC countries. With the price of oil soaring, oil rich countries were financed by this oil capital called petrodollars which were then invested into commercial banks in the US and Europe. Banks were keen to capitalize on this boost of petrodollar investment by offering money lending services to developing countries at low interest rates that attracted many developing countries as borrowers as they needed funds to implement economic strategies such as Import Substitution Industrialisation to avoid a dependence on bigger nations.

Eval: In addition to the inflationary pressures that were already created by the Oil Crises due to the high prices of oil and the increase in cost of imports, the petrodollar recycling phenomenon also led to the Debt Crisis which created a huge problem for the global economy when developing nations defaulted on loan repayments because they simply cannot afford to repay the loans. Thus, the Oil Crisis truly had a deep impact with regards to causing future problems that contributed to the decline of the global economy.

II Side 2 – The Debt Crisis more important

GA3: The Debt Crisis created more long term repercussions that have plagued the decline of the global economy.

El/Ex: The Debt Crisis destroyed the world’s confidence in international instruments such as the IMF and the UN that were supposed to help stabilize the global economy. The credibility of these structures suffered a huge blow which then made it difficult for them to offer any possible remedies to the developing nations so as to rectify the situation.

Evi: After borrowing huge amounts of money from the commercial banks, developing countries in debt had to adopt the necessary long term borrowing and long term changes that were prescribed by the global institutions, such as IMF, to resolve the situation. As they borrow from these institutions with conditional lending regulations, countries had to undergo structural adjustment programs (SAP) that meant changes to the countries internally, such as to devalue their currencies and privatize state assets to external adjustments of focusing economic output on direct export and to reduce barriers to trade; these processes spanned across long period time before a country could rid itself of the debt. However, in reality, the solutions actually put the countries in greater debt. Latin American debtor countries were actually making massive net outward transfer of resources. Therefore, many debtor countries suspended debt payments and fell out of compliance with, or refused to adopt, IMF adjustment programs.

Eval: This meant that the problems of the debt crisis were so large that the global institutions were unable to solve them and even fell out of favour with the very nations that they were trying to help, leading to a perpetuation of the Debt Crisis which brought about reduced growth as these debtor countries became highly protectionist in nature.

CA: However, it must not be ignored that the reason why the developing countries were able to borrow so much money that put them in the situation that they were in was because of the petrodollars that allowed easy borrowing. Therefore, the root cause of all these problems that were caused by the Debt Crisis could originally be pinned to the Oil Crisis that created these petrodollars in the first place.

GA4: The Debt Crisis created a series of shocks and crises around the world which contributed to the decline of the global economy.

El/Ex: The effects of the Debt Crisis were not completely eradicated by the global institutions remedies as it still continued to trigger another major crisis, more than a decade later, in a region away from Latin America where it first erupted.

Evi: The Asian Financial Crisis in 1997 started in Thailand and affected currencies, stock markets and other asset prices of several Asian countries, many part of the East Asian Tiger economies like Malaysia, Hong Kong and South Korea. This happened when Western investors lost confidence in securities in East Asia and began to pull money out, creating a snowball effect. The Asian practices of overspending, protective industries such as monopolies and lax controls culminated in large current account deficits when investors pulled out their money. This resulted in a series of bank failures and corporate bankruptcies in 1997 which sent Asian currency markets tumbling, sparking a sudden flight of foreign capital and sent these Asian economies into a free fall.

Eval: As it can be seen, the Asian Financial Crisis was largely a spin off from the Debt Crisis which only attests to the huge problems that it gave rise to. The effects of the Debt Crisis were far reaching in scope and was definitely detrimental to the global economy as it affected investors’ confidence level and the flow of money in markets, thereby making it responsible to the decline of the global economy.

CA: Once again, though the effects might have been far reaching, the areas affected at any point in time by the Debt Crisis were relatively limited in size as can be seen in only mainly the developing countries being affected by it and in 1997, mostly only the region of Asia. [Note the scope PLUS the time lag in the impact whereas the Oil had more immediate repercussion] The Oil Crises on the other hand affected the whole world when it erupted as oil was a precious commodity needed not only in the developing countries but the developed countries as well as was seen by how much the US suffered from it thereby granting the Oil Crises to contribute more to the decline of the global economy than the Debt Crisis.

Conclusion:

· Reiterate main arguments:

o Though both the crises had a major role to contribute to the decline of the global economy, it was truly the Oil Crises that had far more outreaching effects and deeper triggers that led to further global economic problems.

· Stand:

o Thus, Oil Crises contributed more to the decline of the global economy than the Debt Crisis.

Question: How far can we blame the developing countries for their rising debt problem in the 1980s?

Intro:

· Comment on the term ‘developing countries’ e.g. those in Asia, ME, Latin America

· Interpretation of Qn (Assumption): Comment on their indebtedness / debt problem

o Huge borrowings were made since the 1970s

o Resulted in huge amount of external debts (e.g. from US$636 billion in 1980 to US$1,017 billion by 1980s)

o Evaluate the phrase ‘blame the developing countries’

§ Suggests that developing countries had been disadvantaged by their own act - policies, planning and implementation

· Challenging the assumption: However, there are several other factors that were against the developing countries, so it would be unfair to place the blame squarely on them. These factors include the role of the developed countries, the institutions that they controlled and some of the protectionist policies they started, which produced a highly unfavourable climate for growth among the developing states.

· Thesis: Examine the causes of the debt crisis among developing countries and evaluate to what extent the developing countries themselves could be blamed for this problem.

· While external factors play a role in the rising debt problem, it could be only said that they functioned more as catalyst and as elements that aggravated pre-existing unfavorable conditions for economic developments. Thus, it would be developing countries who should shoulder most of the blame.

BODY

I Agree: The debt crisis is attributed to the developing countries

· Developing countries did not have a strong economic base

o Averse impact of colonial rule

§ Length period of colonial rule created a lop sided economy

§ Newly independent countries that were fraught with political instability and civil strife

§ E.g. Indonesia, Burma etc.

§ Weak economic base deprived country of resources, resulting in tough economic measures and large government spending

· Developing countries failed to implement growth strategies

o Some states subscribed to Import Substitution Industrialisation (ISI) strategies

§ Wanted to create an independent and self-sufficient economy

§ Feared being shackled by the West, in the form of neo-colonialism i.e. the west exerting colonial rule by having an undue influence over the local economy. Note that many of the developing countries only obtained independence in the 1950s and 1960s after a hard fought struggle with their former colonial masters.

§ Excessive state intervention through the nationalization of industries and the exclusion of foreign participation breeds inefficiencies and corruption, thereby reducing income and generating debt.

§ Note that ISI is an example of protectionism in practice.

§ E.g. 1950s-70s, Latin American countries adopted ISI practices, such was Mexico which enjoyed an economic boom from 1930-1970 (dubbed as the ‘Mexican Miracle’) spurred by ISI.

§ But resulted in debt accumulation.

· Developing countries incurred debts by failing to implement sound fiscal and monetary policies

o Inefficiencies and waste were created due to overspending, overprotection of industries (monopolies/conglomerates) and lax in control (e.g. liberal lending policies).

o E.g. Many Latin American countries borrowed huge sums for industralisation in the 1960s and 1970s

o E.g. In the 1990s, Asian countries overspent in areas of commercial and residential property, infrastructure and industrial assets resulting in large current account deficits. This triggered off the Asian Financial Crisis.

· Developing countries had difficulty to negotiate more favourable terms with the developed countries

o Formation of G-77 in 1974; pushed for NIEO which called for a Program for Action – one of the points called for a renegotiation of debts incurred by developing countries

o Series of demands were not heeded by developed countries

II Challenge: The debt crisis is attributed to other causes

· External conditions contributed to indebtedness

o The oil crisis of 1970s

§ Steep increase in oil prices; resulted in higher production costs, which added both inflationary pressures on the economy

§ Affected the developing countries more than the developed countries as they lacked the resources to cushion the crisis; had to rely heavily on external borrowings e.g. oil rich ME countries that were flushed with dollars (petrodollar) and international institutions like the World Bank

· Actions by developed countries also contributed to the indebtedness

o The role of the US

§ US experienced economic decline in the 1970s

§ Abandoned the fixed exchange rates (Gold Standard); created greater financial instability

§ Currencies were floated; US dollar appreciated, US recovery in the early 1980s and federal deficits increased demand in the US for foreign capital and drove up interest rates; developing countries that borrowed in US dollars incurred great cost of borrowing

§ Rise of protectionism

· The protectionist attitude of developed countries

§ Economic slowdown of developed countries in the 1970s

§ Use of various protective measures, including new protectionist measures

§ Creation of regional blocs

§ Free Trade Area, regional groupings of EU, NAFTA

· International institutions failed to alleviate the debt problem of developing countries

§ GATT provided a useful forum to establish a code of conduct for trade. Dealt with industrial tariffs, manufactured goods and to increase trade through the principle of non-discrimination (MFN) E.g. Kennedy (Trade Barriers) and Tokyo (Non Trade Barriers) Round.

§ But GATT was dubbed the ‘Rich Man’s Club’; developed countries tend to violate or sideline free trade policies to protect their own national interest resulting in trade tensions

§ Even WTO, which replaced GATT was fraught with difficulties

§ E.g. The Escape Clause in GATT; IMF provision of capital controls; abuse of terms such as the anti-dumping law

o These institutions impose stiff conditions on debtor countries

§ Provided conditional lending E.g. Structural adjustment loans/Structural adjustment programs

§ Demanded countries to adopt neo-liberal model of open markets and privatisation (stemmed from the Washington Consensus)

o Note that tough measures was instituted because in the first place, developing countries defaulted the loans

Conclusion:

· Reiterate main arguments: Who is more to blame: the inefficient, complacent and corrupt developing countries or the unsuccessful economic institutions and the developed countries? In the first place, did the failure of economic institutions and the self-interested developed countries cause the inefficiency, and corruption in the Third World?

· Stand.