Global Capitalism by Jeffry A. Frieden HUMHIS20 Chapter 1 – Global Capitalism Triumphant Key words: capitalistic success, specialization and growth
In America, the price of wheat had been stable around 1 dollar for decades but now the price had fallen to barely 60 cents a bushel. The Great Depression (1873-1896) ended with the Republicans winning. The gold standard was reaffirmed and gained support because it was a symbol of stability. It required governments to adjust their economic policies to fit the global economic pressures and could not do whatever they pleased at any given time. If a nation imported more than it exported (ran a trade deficit - spent more gold then it was earning from foreign sales) the gold standard would correct it. If gold left the country then the domestic money supply would decline. The reduced demand made it hard to sell products so producers would cut prices and force wages down. The economy economy would then hopefully recover and as local wages and prices dropped foreigners would buy more goods at the same time as the nationals would import less. Imports dropped and exports rose. Gold standard correction mechanism: Any country that spent more than it earned would be forced by the gold standard to reverse its course by reducing wages and spending more; eventually leading to a equilibrium. Britain was leading the world with investments, world’s banking, trading systems, and shipping. Germany was running the industry with steel, chemicals, and heavy equipment. Argentina, South Africa, and Australia were focusing on the farming. This was a major change compared to earlier eras when countries had tried to be self-sufficient compared to now when they were exporting what they did best and importing the rest. It was globalization that made specialization possible. This specialization increased production and the production fed the economic growth. Adam Smith argued that restricting market size would retard economic growth. Division of labor depends on the size of the market and the global market allowed for this specialization and thereby growth to happen. However, as many countries were whirl-winding forward there were also many traditional societies that stagnated or fell apart as the economic integration put enormous pressures on those whose goods were not able to compete on the world market. Chapter 2
Defenders of the Global economy
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Standards to join the global economic system: a commitment to global openness, to the protection of property across borders, to the gold standard, and to limited government intervention in the marcoeconomy. marc oeconomy.
Intellectual support for the golden age
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Foreign economic commitment prioritized over domestic matters like unemployment, business cycle and poverty. State intervention was believed to disrupt the natural operation of gold standard. The government did control the nation’s currency (to a certain extent), trade and international financial relations. They enforced property rights at home and abroad and secured the benefits of global market to their citizens. David Richardo: o Classical theorist of international trade, London banker o Comparative advantage: each country should open up to free trade to be able to focus on making what it could make the best/most efficiently/cheaply. Countries should not compare this to other countries but other products of their own country and focus on what they make better. o Nations gain the most by exporting products products that they make most efficiently in order to pay for imports of the best products of other countries. o Trade protection raises the price of imports and lowers the efficiency of domestic production Classical economic theories didn’t have a great effect on the how the free trade o was applied
Nathan Mayer Rothschild (1840-1915) •
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House of Rothschild founded in the late 1700s by Jewish businessman Amschel Mayer Rothschild. Sent his sons to European capitals to make connections. 4 generations down – Nathan Rothschild was a major financial figure in London, his power established by this father and grandfather. Used his position to reinforce: international finance, the gold standard and free trade. Him and August Belmont were major figures in convincing countries to go on gold and financially support them to do so Became involved in the gold business during the gold rush due to the Great Depression. With Cecil Rhodes (the region’s wealthiest mining magnate) he controlled the business under De Beers Mining Company. Eventually led into disputes with the Afrikaner population ! Boer War in 1899 ! British colony
The free traders •
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Bankers and foreign investors wanted their country to be open to imports, to enable their debtors to earn money to repay their debts. Producers of exports in favor: export famers: cheap imported equipment, Bomachinery, fertilizers etc. export manufacturers: raw materials Free trades were those groups whose economic activity was closest to country’s comparative advantage. Effects of free trade positive for the collective, but distributional effect divided wealth by helping the more efficient and hurting less competitive. Protectionists: farmers in developed, esp. European countries and manufacturer of countries in early stages of development
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Outside Europe protectionism was widespread (e.g. Brazil, Mexico, Russia and recent European settlement esp. USA). Tariffs increased over the decades before 1914. Small industrial nations avoided protectionism. Colonies forced to free trade.
Supporters of the golden pillars •
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International financial community relied on the gold standard to safeguard contracts and property abroad. Export manufacturers: flourishing market for their goods Borrowers and their bankers: keep funds flowing Pressures to go off gold: bank panics, mass unemployment, social unrest – unable to devalue the currency
Global networks for global economy • • •
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Economic, political and social ties between global economy supporters In trade policy, one country’s imports had a clear relationship with another’s exports Great Britain was the center of the global network and the gold standard was the center to its smooth functioning In times of serious difficulty (e.g. the Panic in 1907) the monetary authorities of the greatest powers worked together to avoid serious dislocation of the system. International bankers went for missions to their developing clients to provide advice on how to manage the debtors’ economy – often by going on gold.
The international migration of capital and people •
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Countries sending capital and people and the countries receiving them ha little interest in restricting such movements. High return in overseas investment: Rate of return on British investment abroad was 50-75% higher than home. Concerns: Countries from which capital was flowing thought that it would restrict the supply of funds to domestic businesses. Immigration flows: from countries with low wages (abundance in workers, would release economic and social pressure on overcrowded lands) to countries with high wages (scarcity in workers) Immigrant labor entered lowest levels of labor market (undesirable, unskilled jobs with low pay) and created direct competition and lowered the wages. Created conflict between groups: unskilled workers wanted to keep new immigrants out while the employers wanted to access them. Immigrants benefited from open borders: were able to visit their home country and transfer funds. Immigrants helped establish industries that would’ve otherwise starved from labor scarcity.
Chapter 3 – Success Stories of the Golden Age
Key Words: the golden age, Britain overtaken, new technology
During the Paris International Exposition 1900 it was clear that economies had integrated and that modern manufacturing had spread. The exposition also made it clear that industrial leadership was slipping away from Britain. In1870 Britain, Belgium, France produced 50% of world industrial output. In 1913 they were producing barely 20%. Japan had a new reformist imperial government aimed at economic modernization. Their growth showed when they defeated China in 1895, took Taiwan, and gained influence in Korea. They had become a full member of gentleman’s club. During the same time period textile, clothing and footwear were replaced by steam, chemicals and electricity machines. Both mass production and mass consumption rose. In America, women were much more likely to work than in Europe. This in turn developed an industry for household gadgets that would make chores faster and more efficient. Henry Ford revolutionized this when he released Model T in 1910. The first car that the average American worker could buy within six months. Brand name recognition became important for the new expensive consumer durables. Reputation was important so a few firms like, Siemens, Ford, Singer, and General Electric dominated the market. The second wave of industrializers beat Britain at their own game. Even Sweden, who had been one of Europe’s poorest countries in 1970 was saved by the timber boom that allowed Sweden to build new industry aimed at the foreign market. Freidrich List, German political economist, regarded free trade as the ultimate goal. He also said that it needed temporary trade protection to start-up. To defend this theory there is no country that industrialized without protective barriers (Britain only removed their mercantilist attitude and barriers after receiving industrial superiority). When European countries were not able to export to a foreign market, for example the Russian one, they would simply set up shop inside the country itself. This increased foreign ownership greatly. - In the 1970’s Uruguay’s live stock and grain began growing and exporting heavily to Europe. The countries newfound wealth and increased standard of living so much that Uruguay is often considered one of the first modern welfare states. - Further South, Brazil secured a coffee market. Chile - copper, Cuba - sugar, Peru - cotton, Amazon - rubber. The necessary infrastructure was provided by foreign loans and investments. The country was beginning to industrialize. - There were also very important colonies that sometimes even quadrupled their export between the antebellum era of WWI. Heckster and Ohlin tried to make sense of the exceptional growth of pre-1914. They determined that the countries properties (rich in land, abundant labor etc.) would determine countries comparative advantage. The comparative advantage would then in turn determine what a country produced and exported. According to the Heckster-Ohlin theory; a country will export goods that make the most intensive use of the resources they have in abundance. Chapter 4
Failures of development King Leopold and the Congo
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The tyrannical reign of King Leopold in the free state of Congo (1885-1908) was an extreme case of underdevelopment. He had purely economic interests: he forced the indigenous population to extract rubber as taxes, not paying them back in goods. Murdered villages of people to enforce obedience. Consequences: destruction of social structure, no benefits of natural resources for the natives, nothing useful for the global economy, no development.
Colonialism and underdevelopment •
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Some colonial authorities: had no long-term interest in the region; extracted whatever resources they could; imposed forced labor; no wealth, training or technology were left behind. Economic development by settler colonialism was almost always a failure. Economic benefits were reserved for the settlers, and excluded natives. They didn’t want development but resources and cheap labor. They opposed the assimilation of the natives into the economic, social and political system ! prevented broad-base international economic integration and general economic development. Forced trade connections with mother countries, preventing full access to good in the global market. Colonial rulers did little/nothing to allow access to global market: the colony could have been obtained for non-economic reasons (e.g. garrison troops, fuel ships), backwardness of the colonial power (Portuguese and Spanish colonies), sometimes the colonial power relied on local rulers who themselves feared the effects of open trade on their social control.
Misrule and underdevelopment • •
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Economic policies of the rulers were the main key to economic development Growth required: investment, easy contact with domestic and overseas customers, local skill acquisition, access to foreign capital and technology, secured property rights. Misrule kept the farmers and miners from taking their goods to the wolrd market. Signs of misrule: scarcity of banks, insufficient transportation and communication, mistrust in national money, and absence of clear government commitment to dependable economic environment (global economy). Stagnation in Asia Most striking failures to develop were China, the Ottoman empire and India, that all had log histories of complex social organization. They were able to keep agriculture and handicraft industries in balance in order to sustain the population but not produce surplus. The ruling class was afraid for fundamental social changes as a result of economic growth. For example in China no railways were built by the government until the last years of the 19th century (and only for purpose of transporting military troops), because they feared foreign influence. In these countries the economies stayed traditional, not industrialized, to secure the government control.
Stagnation on plantation •
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Rulers who needed labor for plantations or mines could lose the basis of their privilege if workers could move to higher income jobs. Those who depended on captive workers had little interest in facilitating the transition of masses to a new economic order. Country with crops and raw materials as comparative advantage ! economic structure based on mines, plantation or family farms ! lasting effect on social organization. The four principal tropical export crops: sugar, coffee, cotton and rice had all different impact on the social structures of the countries. Sugar and cotton were “reactionary” crops o Plantation crops, economies of scale Gang labor with no reward for individual motivation or initiative o o Small farms couldn’t compete with the large ones Economic and political structure favored the rich landowners and merchants o who then had little interest in improving the social conditions. o Created the world’s most inequitable and inactive societies The history of slavery on plantations and the competition from the newly o settled Europeans created inequality and bitterness within these societies (Latin America). o Small group of elite relying on low-wage labor Coffee and rice were “progressive” crops o Small-farm products Gang labor was impractical because picking required close attention o o Small farms dominated the large ones Provided opportunities for extensive economic growth o
Chapter 5 Key words: free trade/fair trade, winners/losers, gold
The demand for free trade was growing. The demand called for a revision of British Foreign Policy and in the 1906 election the protectionists lost; Britain took a turn towards free trade. Even though Britain’s economy was increasing steadily it was Germany and America that were the new manufacturing dynamos. Britain was being beaten out of the export market. Germany and America of course also had the advantage of lateness, being able to set up new industries with the recent technologies and advancements already included. As mentioned earlier, the Heckster-Ohlin theory predicts the countries rich in resource x will export resource x. To demonstrate who is helped and hurt by trade, Wolfgang Stopler and Paul Samuelson theorized that owners of an abundant resource will gain from trade while those with scarce resources will lose. Example: oil Rich in oil, oil is cheap, trade good for oilmen, sell to foreigners, export Poor in oil, oil expensive, opening trade bad, imports push domestic prices down Protection helps owners of a nationally scarce resource Trade helps owners of a nationally abundant resource As long as the economy was growing and there was a strive toward integrated economy and there were enough benefits of free trade. Protectionist’s interests are more visible during
times of recession. The labor movement was growing and as the workers came to outnumber the farmers in the United Kingdom there was a development of labor organizations. The working class became more politically involved which in turn led to the rise of Socialist parties. The flexibility of wages was a problem as it was essential to maintain the classical government nonintervention in markets and insurance to return to equilibrium. The aim of the working class was, however, to make sure that the workers were not the main victim of the smooth functioning of the international economic market.
Chapter 6
“All that is solid melts into air…”
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During the WWI and the inter-war period: 30 years of crisis, allies turned into enemies, polarization at home fed antagonism abroad and international conflict fed domestic extremism. Resulted in economic nationalism, militarism and deepened international economic distress.
Economic consequences of the Great War •
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Reasons to wage war is still debated: economic reasons, conflicts over colonial interests, trade disputes, strivings for economic and political independence, nationalistic sentiments. WWI forced the European belligerents to depend on the American capital, markets and technology, and look to it for political leadership ! USA from passive observes to an active leader. The former major global economic actors, UK, France and Belgium, now had to import both capital and manufactured goods – position reversed. First the US withheld European loans, but as their wartime need grew Woodrow Wilson changed the policy in order to maintain American prosperity. As the belligerents were out of the economic game, the field was clear for the US to establish its leadership. E.g. it obtained a financial, industrial and commercial dominance in Latin America to which it didn’t have access before. Controversies about paying back the debts: Firstly, there were accusations that the loans were to rescue American bankers, symbolizing their willingness to fuel the war in order to make profit. Secondly, some thought that the debt was paid back full, in blood. Wilsonian view was to remove the economic barriers to establish an equality of trade conditions. Shifted the US of peripheral borrower with strong protectionist and antigold leanings to a leading economic power.
Europe rebuilds •
Central and eastern Europe was in the most severe conditions. Autria-Hungary Hapsburg and Russia’s Romanov dynasties disintegrated and had a dozen new successor states.
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Only way for them to pay back was to print money ! inflation that destroyed the value of currencies, disrupted economies and in extreme cases threatened the social fabric of nations Hyperinflation ! inflation spiraled out of control, prices, wages and currency values could not keep up. Austere fiscal policies together with foreign support ended the inflation and hyperinflation. Governments reduced their need to print money by raising taxes and cutting spending. Germany: The collapse of Germany had an effect on the rest of the world, e.g. couldn’t o pay back to the French. o Wealthy could protect themselves by taking their fortune abroad and investing in real assets, but the middle-class had no resources for this and lost their savings in a very little time. o Disorganization seemed to demonstrate that the elite was unfit to rule. o Economic failures of the early post-war period contributed to the rise of the New Right. In the mid-1920s fascist-style movement gained favor throughout southern and eastern Europe ! German people were embittered and ripe for Hitler. Russia: Democratic revolution in 1917 ! later the year a seizure of power by the o extreme antiwar Bolshevik faction of the Russian socialist movement took place. Early revolutionary enthusiasm soon faded and Russia focused on resuming o the country’s economy. The western Allies quickly resumed their economies. Protectionism became widespread again.
The twenties roar •
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1925-1929 the world’s industrial production grew more than one-fifth, the gold standard was back in place and the world economy seemed to be restored. Rise of mass production and consumption, women’s emancipation movement, and labor movements and Socialist parties gained more influence.
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The USA had gained economic dominance but it politically isolated itself from the rest of the world. Policies were protectionist even thought it expected its debtors to pay back – it was the core of reparations in Europe, the main financial issue. American Congress and presidents refused renegotiations over the debts and in fact responded in further protectionism. Role of creditors fell onto private American citizens.
A world restored?
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Keyes’ analysis on changing postwar political economy: he predicted in the early 1920s the flexibility of prices and wages was no longer there due to companies’ and labor unions’ ability to exercise control over these. The wages and prices might not decline in order to sustain or restore the balance in economy. However in 1925 Churchill decided on gold and the pound was restored to its prewar parity ! stagnations, high unemployment in UK until the Great Depression that made them even worse.
Chapter 7 – The World of Tomorrow Key words: new industry, new cooperation, multinational, no more farm
The assembly line reduced labor, increased repetitive tasks, turned up the speed of the assembly and were able to turn manufacturing into mass production. In 1922 an average worker could by a Model T Ford after ten weeks work. The same worker could afford a similar Citrën 5 CV but after a year of working. This is where the economies of scale became extra visible. Family-owned companies declined in favor of large companies owed by anonymous shareholders and run by professional managers. Large, diversified, vertically integrated companies became the behemoths of industry and dominated in the antebellum era of WWII. The automobile was the perfect example of this type of industry. This automobile age and complete mechanization of American farming brought the American farming sector to an end. WWI and the Great Depression brought a wave of labor movements and left governments. To summarize, it was the triumph of the big business that brought forth powerful labor movements. The farming, agriculture and small business were crushed as the nations continued to industrialize and modernize. Chapter 8
The established order collapses •
Economic collapse 1929-1934
End of the boom •
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The decline started gradually outside of the US in the late 1920s. The American investors were not enthusiastic about investment and lending money to these declining economies especially in Europe and Latin America and therefore there was cutoffs make with the flow of American dollar. This drove these economies even deeper. The Federal Reserve raised the interest of the stocks on Wall Street causing it for firms and people more difficult to borrow money ! companies had to lay off people, reduce production and lower the prices. Especially the nations producing commodities were hit hard. As the prices and wages continued to fall the governments of the industrial countries decided to use the wisdom learned from the pre-WWI period and do nothing. They believed that when the wages got low enough companies would hire back more labor and the purchasing power would grow. Also when the prices would be low enough, the consumers would start buying again. Eventually the equilibrium of the economy would be gained.
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However nothing changed and the wages and prices continued falling and unemployment rising. In 1933 when there had been no recovery the governments started realizing that the “natural” economic cycle seemed to be broken. As economist Keynes had predicted in the early 1920s the flexibility of prices and wages was no longer there due to companies’ and labor unions’ ability to exercise control over these. It was clear that the sectors of industry that were still at the pre-1914 state, such as agriculture, were suffering the biggest losses because their wages and prices were dictated by the market. Where as large manufacturing companies had enough power to keep the prices high while cutting down the production. The US adopted austere policies of liquidation that was aimed to force down prices and wages so that excess stocks of labor, food and goods would be liquidated ! had no positive effect. Germany: Hardest hit by the crises ! in the elections of 1930 the Nazis and Communists gained great support. In 1930s the US followed by other countries started raising their trade barriers. Consumer credit lent for the consumers to enable them to buy durable good could not be paid back ! reduced consumption ! further decline in prices. The labor unions working at the manufacturing sectors were keeping the wages high, thus preventing the hiring of new workers. The changes in the flexibility of prices and wages did not allow the economic situation to correct itself anymore.
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Panics swept around the world: bankruptcies of bank scared people off and they started pulling out of their money. Heavily indebted people cut down on their purchases and investments ! vicious debtdeflation cycle Attempts of deflation of currencies were blocked by the gold standard Banks tried to raise interest so that people would not easily pull off their money. Banks tied to industry or foreign money were hit the hardest. In 1931 the German government closed its banks and suspended the convertibility of its currency into gold and foreign exchange ! it was impossible to convert German currency in anything else except German goods. By the end of 1932 only two groups of countries were left on gold: the USA and the French-centered bloc (France, Belgium, NL, Italy and Switzerland). In 1933 Roosevelt finally took USA off gold.
From the darkness •
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George Warren believed that when the price of gold in dollar went up (when dollar was less valuable), the farm prices went up. He turned out to be right (even if for the wrong reasons), and as the dollar was devalued, the farm prices started to rise. The US government was able to expand the money supply, raise prices and put the economy back on track ! with more money in circulations, prices rose continually, and reversal of deflation was able to pull the economy out of the Depression.
Chapter 9 – The Turn to Autarky Key words: self-sufficiency, Schacht, Europe goes right, socialism is one
Before 1914: global markets for capital and goods, the gold standard, minimal government involvement in the economy. During the 1930’s: international markets collapsed, governments were forced to intervene to save national economies, replacement for failed traditionalism – alternative: autarky, economic self-sufficiency, or even autarkic fascism. Latin America (and other independent developing countries) converged on autarkic developmentalism, while semi-industrial countries embraces the new economic nationalism, such as Romania, Mexico, Argentina, Japan, Italy, and Russia. They all rejected the gold standard, imposed prohibitive trade protection, tightly controlled foreign investment, denounced foreign bankers and the debts they were owed, and force-marched modern industrial growth. The countries that reached for autarky were usually international debtors, such as fascist states in Europe, the Soviet Union, developmentalist governments in Latin America and Asia. Every creditor country remained democratic and committed to international economic integration. The ruling classes of the debtor countries depended upon the international economy. But the debtors’ economic growth created new social groups that weren’t so happy with global economy. Industrialist producing for the domestic market wanted protection from foreign companies; urban workers resented making sacrifices to support a gold standard from which they got little benefit. The autarkies promoted national production for national use, especially industrial growth. Industrial modernization was pursued by the time-tested means for making industrial investment more profitable, raising the prices industry received and lowering the costs it paid. Both mercantilism and neomercantilist protectionism turned the terms of trade in favor of industry. Substitution: the replacement of previously imported goods with local products. Foreign companies were prohibited from sending profits home, forced to hire more local citizens, and assessed higher taxes. Governments imposed stringent controls on capital movements as well as currency trading, in order to force domestic investors to keep their money at home to provide capital to industry. With economies effectively closed to competitors, overvalued currencies made it cheap for manufacturers to import raw materials. Governments gave loans, subsidies and tax treatments and used government spending directly and indirectly to spur demand for manufactured goods. The message was ‘throw all available resources into industry’. Fascist’s changes in economy: 1. To engineer recovery. The new dictatorships used reflation, deficit finance, new taxes and spending simultaneously to reward their mass followers in city and countryside and jump-start stagnant economies. The fascists also stimulated economic recovery by signaling to the community that its troubles were over.
2. Long-term goals: unquestioned political control accelerated industrial development, autarky, military expansion. Nazi labor fronts, fascist “corporations” (industry guilds). 1928-1933 – Five year plan: substantial expansion of state control of the economy and for enormous new investments industry. Forced march to industrialization. Forced peasants into collective farms under quasi-governmental control. Setting prices and production targets. Planners defined their goals in terms of the material output of factories, power plants and farms. Events such export collapsed, currency depreciation (currencies off gold) and debt default threw the developing regions back on their own economic devices. The developing regions experienced a natural process of import substitution as domestic production replaced goods previously imported. The large currency depreciations made imports more expensive, while emergency trade barriers raised import prices yet further. Nationalization. Local production for local consumption –mainly local manufacturing– increased. The agro-exporting oligarchy of Latin America made room for new urban groups whose interests were domestic, not international: manufacturers, the middle classes, the labor movement. The new watchwords were developmentalism and nationalism, emphasis on producing for the national market, with profits going to national firms. Developmentalism: mobilization of urban middle and working classes. Chapter 10 – Building a Social Democracy Key words: Swedish & American road, Keynes, int. cooperation, from the ashes
The democracies after the Great Depression enacted more interventionist economic policies, expanded social programs, and increased government spending. The new governments rebuilt cooperative economic ties among the democratic states. The new alternative was social democracy. Social democratic governments attempted to reduce the amplitude and frequency of cyclical downturns in general, to maintain full employment. They used monetary policy to keep prices from falling or rising too much and fiscal policy (government spending and taxation) to sustain economic activity. Farmer-labor alliance. Keynes: fiscal policy, deficit spending is essential to reactivate stagnant economies. Governments should borrow and spend heavily. This would stimulate demand and change expectations, capitalists would see the new conditions and would increase investment, employment and output. Central state provision of social insurance was an economic and social necessity. Countries with powerful labor movements and powerful Socialist parties turned most quickly to social democracy. A singular feature of the 1930s was the prominence of corporate backers of the macroeconomic, social, and labor reforms associated with social democracy. Support for social insurance was strongest in industries where the quality of labor was particularly important, and where wages were a relatively small component of total costs, also applies to labor unions. Capitalists in more technologically advanced industries, with more capitalintensive production, organized in new corporate forms for which workforce quality and stability were key, had reasons to support social insurance, labor rights, and other social democratic measures. The industrial world also attempted to rebuild more open and cooperative international economic relations. First, labor and socialist movements in many advanced countries had long been free traders, in part to ensure cheap good and other consumptions products to urban
workers. Second, most of the business supporters of social democracy were in technologically advanced, internationally competitive industries, for which protectionism was horrible. Third, it became more obvious that the western democracies would need to work together against the fascist autarkies. Chapter 11 - Reconstruction East and West Key words - US takes charge, war-torn countries re-build, soviet bloc is developing
The Western Allies had begun to plan and design the post-war order before WWII was even over. The countries were in agreement that this peacetime settlement could not in any way have the same disastrous repercussions as the WWI settlement did. The United States was spearheading the new order: “as America goes, so goes the world”. One of the main points that America pushed for was freer trade. They no longer wanted unfair economic competition like trade barriers, tariffs, and economic nationalism as they firmly believed that this lead to war. Of course America also had a vested interest in free trade as their industries had become very dependent on exports and foreign investors during the previous decade. Britain had entered an era of imperial preference and protectionism, hurting many markets, including the Americans. Britain’s need for war supplies and the American’s need for free trade lead to the development of a lend-lease agreement that Churchill and Roosevelt introduced as the Atlantic Charter. This gave both countries what they waned as it opened up the British markets toward America and Britain was able to loan war supplies that they would not have to return, or pay for. The Great Depression had made it clear that traditional mechanisms of waiting for the market to go back to equilibrium or the use of monetary policies were no longer working which therefore created the need for a new functioning monetary system. In addition to a new general monetary system other international institutions like the International Monetary Fund (IMF) and World Bank were created to ensure the stability and the flexibility of the economic market while excluding the price rigidity that the gold standard had imposed. After WWII, Britain lost certain free trade areas, London as the word’s financial center, most of their navy; and thereby their position as the world leader. The United States had taken over this role from Britain. They were experiencing an export boom and being very prosperous. The IMF and the gold standard provided new stability and trust in the economic market. The war left a divide between the East and the West that grew stronger each day. The Truman Doctrine was launched by the US as a way to publicize their stance against the Soviet East. This was followed by the Marshall Plan, which conveniently tied all Western allies to the US as they now became financially dependent on the US. Along with these two doctrines NATO, along with the IMF and World Bank were also set up for the same purpose. The communist Soviet bloc began emerging as a counter-force to the capitalistic West. For the first time there was another option for countries to turn to. A country could either turn to capitalism or central planning; both claiming they would bring growth and equity.
Chapter 12 - The Bretton Woods System in Action Key words: acceleration of postwar growth, John Monnet and US of Europe, Bretton Woods
The acceleration of postwar growth was extreme. Countries around the world were trying to compromise on a middle ground and cooperate wherever they could. The US was the first country to enter this age of prosperity and growth, but the UK quickly followed suite. With the increase in prosperity, growth, exports, and consumer durables, large corporations and investors (mainly Americans) were eager to invest in Europe and Japan. America had experienced a change in policy after WWII and went from being very protectionist to being very pro-free-trade, importing and exporting to the rest of the world. Monnet believed that the future lay in an economically integrated Europe, with help from America. From this idea sprung the Schuman Plan, an independent institution that pooled resources of many nations and thereby creating a new market with no barriers. With the rise in growth countries saw the benefits of working together as collectives and with the prosperity wave investors were not afraid to lend financial support. As more countries saw the benefits of working together the globalization of trade grew and barriers and discrimination decreased; paving way for the United States of Europe more commonly known as the European Union. Bretton Woods Keynes and White had developed the system with the aim to stabilize the monetary system; to reach a compromise between the negative aspects (rigidity) of the gold standard and the negative aspect (uncertainty) of the inter-war period when nations withdrew from the gold standard. Another aim had been to try and control short-term investments. Investors wanted to take their money from a country with low interest-rates and move it to a country with high-interest rates. This form of speculation had to come to an end to increase the financial stability and security and pave way for more cooperation. International investment and trade were growing increasingly after WWII. These were the reasons: economic growth, monetary stability, reduction in trade tariffs, and more government support. These all in turn spurred mass production and mass consumption, which then fueled the economy even further in a cycle of positive feedback. Another important aim was the increased spending in the public sector. Most countries increased spending on health, insurance, poor relief, family allowances, mandatory schooling. These were all possible due to the increase in rapid growth. There were so many changes and increases in consumer durables that the introduction of a few more policies and programs had little opposition. The post-WWII Bretton Woods system resulted in economic openness (barriers removed, no discrimination), controls on short-term investment (no speculation), protection for agriculture, preferential trading arrangements (European Market). The government began holding an increasingly influential role in the economy, the social safety spending went from barely anything to extensive, and powerful labor movements arose. The system managed to blend all opposites into a compromised middle ground that for the first time in a long time gave way to economic stability and growth.
Chapter 13 – Decolonizing and Development Key words: import-substituting, independence, ICI, Nehru & India. Industry spreads
Import-substituting industrialization (ISI): Due to the collapse of the international economy the countries that previously organized around producing coffee, cattle or copper for export, have no market for their principal goods. New industries grew to satisfy local demand, and the export farming and mining sectors shrank. Urban classes and masses expanded to fill the economic, social and political vacuum left by the disintegration of the traditional open economies. Latin America was transformed from a bastion of open-economy traditionalism to a stronghold of economic nationalism, developmentalism and populism. Nationalist manufacturers, small businessmen, professionals, labor unions and intellectuals shared the goal of industrialization, and foreign competition threatened this goal. In the 1950s Latin America moved from an emergency response to the collapse of world markets to a conscious effort to restrict foreign trade. It aimed to substitute domestic industrial production for goods that had previously been imported; the principal method was to make domestic manufacturing more profitable. Components of ISI: 1. High barriers to trade: these barriers made many manufactured imports prohibitively expensive. Not all industrial products were kept out, for the manufacturing industries needed machinery, spare parts and other inputs. 2. Governments also provided subsidies and incentives to industry: they gave industrial investors tax breaks and cheap credit from governments banks and gave local industrialists preferential access to imported capital goods, parts and raw materials. Governments manipulated the currency to provide cheap dollars to manufacturers so they could buy foreign equipment and inputs. Public-sector expansion. Industrialization was largely financed at the expense of the primary exporting sectors. Famers and miners paid much more for the manufactured goods they consumed, but sold their own products at world market prices, and their taxes subsidized favored industries. In the colonies (most of Africa, the Near East and Asia) isolation from the world economy stimulated urbanization and industrialization, which strengthened local business and middleclass interests, weakening the export economy. It undermined the supporters of colonial rule and reinforced the influence of those wary of or hostile to colonialism. The developing world outside Latin America circa 1945 was a colonial world and appeared likely to remain so. Collapse of colonial rule (around the 1970s): 1. Economic and political evolution of colonial societies. The rise of urban and industrial centers, dissatisfaction with primary production for export and the desire for diversification and industrialization. 2. Global problems that isolated the colonies from the world economy impeded the export economy, stimulated urbanization and industrialization and built up local business and middle-class interests. 3. Colonialists attempted to meet local demands, which highlighted the irrelevance of colonial rule for many colonial leaders. 4. Economically the importance of the colonies diminished continually after the war. Europeans traded and invested more and more with their neighbors and with the U.S., which made colonies largely irrelevant to the new industries that had gained in importance: automobiles, consumer durables, aircraft, computers. Manufacturing
multinationals had little need for colonialism and often profited handsomely from the high tariffs newly independent nations had imposed. 5. American insistence: with so much of the world under European colonial control, it was hard for the U.S. to make a case for the evils of Soviet domination. American anti-colonialism brought Europe’s colonialists up especially short during the Suez crisis. ECLA: Economic Commission for Latin America
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Extended arguments for the infant industry protection and subsidization of industry. The new infant industries had to be nurtured until they reached the scale necessary to be able to compete internationally. Industrialization had positive effects on society that were not reducible to industrial output. There were externalities or spillovers, benefits that other members of society realized simply from the expansion of industry. The benefits included social cohesion as cities and factories developed, a more highly skilled labor force, higher levels of political knowledge and involvement.
Chapter 14 – Socialism in Many Countries Key words: socialist world expands – then divides, the Chinese road, socialist future?
Within five years of the end of WWII, socialism stretched from the center of Europe to the Pacific. The Cold War led to a rapid imposition of the Soviet model in Central and Eastern Europe. Council for Mutual Economic Assistance (CMEA): socialist equivalent of the Bretton Woods order. Three new socialist countries in Asia: China, North-Vietnam and North-Korea. The Asian path to socialism they took was more agrarian and began more modestly. They carried out extensive land reforms, expropriating most of the land held by wealthy landlords and distributing it to poor and landless peasants. The Asian Communist regimes also embarked on ambitious state-led industrialization programs, with Soviet advice and money, along centrally planned lines. Soviet-style central planning: government ownership of industry, infrastructure, trade, and much of agriculture. An emphasis on industry over agriculture. Tight controls on markets. High or prohibitive barriers to foreign trade and investment. Sources of tension in the USSR, Central and Eastern Europe: 1. Popular dissatisfaction: While there were antisocialist and anti-Soviet components to the uprisings, substantial portions of the working class and of the local Communist parties actively or passively supported change. 2. Poor quality of life of the average citizen: the bias toward basic industry meant that there were serious shortages of consumer goods, including housing, and the neglect of agriculture meant that the supply and quality of food were poor. Solution of the governments was to shift resources into consumer goods industries, housing construction, and other services and to raise wages. Government neglect of farming: stagnation of supply of food. Farm prices were set so low that farmers had little incentive to produce. Khrushchev poured money into
agriculture. Government raised agricultural prices, and the merge of collective farms made them more efficient. While the Communist Party and the central planners remained in control, economic and political constraints were not so heavy-handed as they had been before 1953. Rapid industrialization had relied on extreme centralization. Two structural economic problems: 1. Over-centralization: ministries were centrally organized by industry, with iron and steel, for example, completely separated from chemicals; ministry planners safeguarded their own empires and were loath to cooperate with other ministries. 2. Lack of incentives: the Soviets had never relied entirely on exhortation and ideological ardor to motivate workers and managers, but they had not used economic rewards very extensively. The Soviet economy had to undertake “intensive” economic growth, but without stronger incentives, managers and workers were unlikely to take risks to increase productivity. The Soviets also began to rethink their international economic ties. They increased foreign trade dramatically and foreign investment was more welcome than before. While the rest of the socialist camp reformed, moderated and revised Stalinist principles, the Chinese expanded them in search of rapid industrialization and agrarian transformation. They created enormous farm communes to accelerate progress from capitalism to communism, politicized all aspects of economic policy and curtailed ties with the rest of the world. Difficult dimensions in the Chinese Communist party: 1. Long-standing urban-rural divide: the Communists had support in the countryside and understood the need to keep their peasant base in a country that was almost entirely rural. The Communist party also had support from the urban working class and shared with the rest of the Third World the desire to industrialize rapidly. But pro-industrial policies typically implied anti-agricultural measures, so that urban and rural interests were likely to clash. 2. The world’s most populous country had long been beset by disorder bordering on anarchy and the prime goal was to hold the nation together. But the Communists also wanted thoroughgoing economic and social change, where they might had to choose between order and change. 3. Tension between Communists’ nation building and China’s participation in the worldwide Communist movement – between nationalism and internationalism. There was a lack of resources for rapid economic change. Mao began a big push for collectivization; each new collective farm was generally organized to coincide with one traditional village, with about a hundred households. Later larger collectives brought the peasants together in even more effective campaigns. Problem: consumption went up while production went down. The government returned to more modest forms of agricultural organization. The average commune was divided into three and reduced largely to an administrative unit. The ups and downs were result of fundamental tensions in Chinese society. Attempts to spur economic growth increased inequalities among regions, groups and classes, which clashed with the Communists’ goals.
Communism ruled one-third of the planet, such as Cuba, China etc. Chapter 15 – The End of Bretton Woods Key words: compromises, challenge of trade, import substitution crisis, socialism stagnates, end of an era
The end of Bretton Woods: after nearly thirty years the balancing act between national economic concerns and international economic integration had failed. Bretton Woods compromises had spurred international trade, investment and finance. Two trends, both of them results of the success of Bretton Woods, undermined the system: 1. The restoration of international finance. This was important because the dormancy of international financial flows had been one-reason governments remained able to manage their own monetary policies. Now short-term investors – speculators – could move money in response to differences in national monetary conditions and could threaten the independence of national macroeconomic policy. 2. Pressure on the American dollar. The gold standard was based on gold; the Bretton Woods system was based on a gold-backed dollar, and the U.S. government was finding it hard to maintain the value of the dollar. In 1959/60 American payments deficit led to a loss of confidence in the dollar. The Fed raised interest rates in order to increase foreign demand for dollars, which drove the U.S. into a recession (in order to defend the dollar). As the 1960s continued, the problem was made more pressing by the two wars the country was fighting: the Vietnam War and the War on Poverty (which increased social spending). The result was a “real appreciation” of the dollar; the dollar’s exchange rate – its price in terms of other moneys – was being held contact, while American prices rose. This meant that foreigners could buy less with their dollars. Americans could buy more foreign goods with the strong dollar, make foreign investments more cheaply and travel more cheaply. Although the dollar was worth much less than one thirty-fifth of an ounce of gold, Bretton Woods required foreigners to take these dollars. The major financial powers worked together to try to protect the dollar, selling gold and buying up dollars to raise the currency’s price. The U.S. imposed capital controls, taxes on American foreign investments, to diminish the outflow of dollars. As long as the people around the world lost confidence in the dollar and sold dollars for gold, stopgap measures would not suffice. The only lasting solution was to impose austerity on the U.S. economy to restore the purchasing power of the dollar. This would bring American prices down and raise the dollar’s true worth toward its official value. The U.S. was simply unwilling to trim its economy to fit its currency commitments under the Bretton Woods system and chose instead to bring the system to an end. As more European and Japanese steel, textiles, footwear and clothing came into the U.S., American producers fought for protection. GATT members had agreed not to raise nonagricultural tariffs, so those who wanted shelter from foreign competition found other means, accusing the foreign seller of dumping, selling the product below its cost of production in order to corner a market. Dumping was against the rules of GATT, and countries could impose special taxes on goods that were found to be dumped. Another way to keep imports out was to convince producers to restrict their own sales, as the U.S. did in 1968 by getting Japanese and European steelmakers to limit exports to the American market. The
Voluntary Export Restraints (VERs) created a cartel between American and foreign producers to keep American prices higher than world market prices. These new nontariff barriers (NTBs) – antidumping suits, VERs and other devices lead to a new form of protectionism. The liberalism of the postwar trading order had originated with American pressure, and an American turn toward protection seemed likely to reverse the course of global trade integration. Local competitors complained about the foreign giants that dominated local markets. In developing countries, large foreign corporations could have a powerful and unwelcome import on local politics. Many countries began restricting multinational corporations in the 1960s. One reason for the increase in labor-capital conflict was that for twenty years had lagged behind growth in productivity and in economic activity. More immediately, inflation was heating up in Europe as it had in the U.S., and while unions and management in Europe had typically collaborated to sustain wage increases and job creation, the rapid rise in prices undermined many of the agreements. Workers demanded protection against inflation, but unions were often bound by commitments to management. ISI problems: 1. Balance of trade: import substitution was supposed to reduce reliance on world trade, but every nation needed to import something not available locally – raw materials, machinery, spare parts. But countries needed to export to earn money to buy imports, which ISI did not allow. Trade protection and overvalued exchange rates raised domestic prices and made exports less competitive, and export taxes discourages foreign sales. 2. Balance of payments: the faster the economy grew, the more it needed imports; but exports could not keep up with imports, and so the country ran out of foreign currency. The government restricted imports to essentials and raised interest rates to bring money into the country. The result was usually a deep recession. Companies under pressure cut wages and laid off workers. 3. Substantial budget deficits and inflation: governments subsidized industrial investment, gave tax breaks to industrial investors, and targeted spending at politically import groups. These budget deficits were usually covered by printing more money, where the resulting inflation made domestic goods more expensive, reducing exports still further. 4. Poverty and income distribution: industrial bias against agriculture worsened rural poverty in rural societies. As a result, farmers migrated to cities where they could not find work since the government was subsidizing investment, which meant that industrialists needed capital instead of labor. Reoccurring pattern: payments crises, inflation, social unrest, military coup, repression, and austerity. Difficulties in the socialist world: 1. Economic reforms slowed or stopped; decentralization would inevitably reduce the influence of the central authorities, while market-oriented changed would draw resources away from enterprises and poorly-managed regions. 2. Societies had entrenched firms and industries that relied on government support and protection.
3. Socialist countries were falling behind technologically, apparently as a result of systemic flaws in the centrally planned order. Experimenting with new technology was not possible due to central planning. Economic integration challenged national demand management, ISI led to periodic crises and greater inequality, socialist central planning slowed economic growth. Chapter 16 - Crisis and Change Key words: oil, the Volcker counter-shock, global vs. National
In the early 1970’s the tensions of the postwar era came to a boiling point. Growth had slowed, unemployment increased and so did inflation. This turmoil in turn led to the rise of labour unions with antibusiness stances. Furthermore dictatorships were turning into democracies and democracies were collapsing. In short, the world was changing. The gold standard had made it hard for governments to lower interest rates and increase spending but with the collapse of Bretton Woods they were now free to simulate their own economies. A main shock of this time period was the oil. The world oil price had not been keeping up with inflation and in 1960 the major developing oil countries came together to form OPEC (Organization of Petroleum Exporting Countries). They in turn broke off all ties with the oil companies and doubled the price of oil. As there were no readily available substitutes for oil the consumption did not decrease (most industrial countries relied heavily on oil). This became really clear when the 1970’s recession hit. It was the steepest since the 1930’s. The OPEC shock was a main contributor but of greater significance was the uncertainty that the oil prices brought along. As a response to the recession, the government decided to create millions of jobs in the public sector and pump money into the economy. This lead to massive budget deficits and was not a permanent solution. The foreign borrowing allowed developing countries to continue investing in industry and build up higher debts than could have been possible before. The developing countries were getting more and more debt. The developing oil-importing nations borrowed money to pay for OPEC oil. OPEC then deposited their earnings in international banks and the bank in turn lent money to the same developing countries that needed to buy oil. This triangular cycle is not sustainable as two arrows point towards the same country. The goal of the countries was to be able to sustain their industrial development. Investors had no interest in the poorest developing counties. The difficult period of the 1970’s was distinguished by slowing growth, rising prices, recessions, and unemployment. Countries threw money at the problem by printing or borrowing but this was not sustainable. This is one of the reasons why the European Monetary System was founded. Paul Volcker was head of the Federal Reserve in the US. He had a high interest rate and low inflation policy that pushed the country into two successive recessions. The lost decade resulted in a wave of democratization and a increase in import-substituting industrialization (A strategy for economic development which encourages industrial growth within a nation in order to reduce imports of manufactures and reduce dependency). Countries turned towards capitalism and away from central planning. China was booking while the USSR was stagnating. Reagan and Bush accumulated the largest peacetime accumulation of debt ever. Tax
reductions and increase military spending. 1970 - high and rising inflation 1980 - defeated inflation but at the expense of enormous budget deficits 1990 - reduced the deficits Eventually there was a fully unified European market. By 1993 Europe was more integrated than the United States. NAFTA sprung up (integrated everything between the USA and Mexico except immigration). Shortly followed by Mercosur. Trade, money and finance was freewheeling with speed and size unprecedented. As this was happening the markets got more susceptible to international forces. When the countries were tied together (like when all European countries were tied to the deutsche mark) if something happened to that then it would shove all countries into a recession. This resulted in the nations de-linking from the German currency when it was de-railing. It was easy for investors to speculate. Unprecedented size and efficiency of market. Goods and money moved around the world faster than ever before (greater quantities). Made it easy to make worldwide investments but also made it very easy for investors to pull out of countries. Chapter 17 - Globalizers Victorious Key words: new technologies, Soros, trade unblocked
Global integration had many benefits like international division of labour, comparative advantage, economies of scale and the rapid spread of innovations. In the 1980’s there was a new view that attacked government involvement in the economy. The old view favored public programs and government regulation. The new one urged governments to privatize and deregulate portions of the economy. Economy had to change as politics did. There was an increase in size and cohesion of firms and they wanted governments to change their involvement in the economy. There was also growing support programs for high unemployment. Slow growth and inflations that let people stay open to new policies. Markets need governments to stabilize them. Only a global market could support research, develop, market and manufacture in different pars of the world but for the same company. Capital mobility made it easier to borrow and shift funds and added to the accessibility. Wester Europe turned the EU into a single market where goods, services, and people moved freely. Larger markets meant larger economies of scale and bigger companies. Traditional industries began declining. The integration strengthened Europe’s large business. Investment plans could be made on a EU wide scale instead of on a national one. Chapter 18 - Countries Catch Up Key words: global production, national specialization, export-led growth, East Europe joins West
South Korea used to be one of the worlds poorest countries but then went from being developing to developed in a staggering amount of time. Many countries went through an extraordinary phase of catch-up. Production became global and companies outsourced (ex. American Barbie Doll). International finance, investment and technology only sped up the process. There were profitable niches for the developing countries to occupy (ex. Chilean salmon production). These countries flooded the world with cheap products which were great for manufacturers but bad for traditional agriculture. Countries like Spain and Portugal also began accelerating their economic opening when their dictatorships were gone. National firms were freed from the constraints of home markets. Cheap loans, tax breaks and weak currency made goods artificially cheap. The government supported this as it emphasized export production. Developing countries went from toys to computers. It was attractive for these
developing countries to integrate with the american economy as they received foreign capital, exported manufactured good and some feared Communist insurgencies. These fears were halted with the joining of the international economy. China and Vietnam were two exceptions that did turn toward communism and isolated their economies. When China did experience its growth explosion it was linked to the integration in world economy. Chile was one of the richest countries in Latin American at one point (higher living standard than western europe) because its ability to specialize in unusual niches. By joining NAFTA, Mexico went from a self-contained, import substituting country to a freewheeling free trading country. Brazil was in turmoil. Inflation was over 2000 %, production had dropped and trade was stagnant. This was when Fernando Cardaso introduced the Real Plan. This means that he pegged the currency to the dollar (inflation came down). As president, he reduced trade barriers and committed to the Mercosur which resulted in Brazil attracting foreign investors and the economy finally began to grow. This also displayed the rivalry on the international markets that were driven by competitive skills. Countries had to focus on what they did best - this was the only way they would gain the best economies of scale and have their economy grow the fastest.
Chapter 19 - Countries Fall Behind Key words: failings of reform and transition, African catastrophe, plague
There were many benefits of global integration but there were also billions of people falling behind the rich. They were actually becoming worse of. There is no simple solution to development but it seems that the path to growth inevitably lay through globalization. Countries were turning in protectionism and planning for free trade and markets. Russia was one of the countries where inequality grew, the death rate increased and other social/health conditions deteriorated. Estonia reformed completely and experienced growth. Uzbekistan did nothing and experienced growth. The nations who went through an incomplete economic and political change stumbled and fell further behind the West. Africa was one of the countries getting poorer. More time and energy was spent on political conflict and military unrest than on the economy which eventually lead to the breakdown of the existing order but with no replacement. Kenneth Kuanda was in charge of Zambia. He saw tightened government control as an essential part of the country’s social progress. He nationalized the copper mines; leading to a massive inflow of money. After independence when copper prices rose there was a stagnation in copper prices which lead to a stagnation in government funds. They were not competitive so they could not sell abroad. In Africa, it was also common for rulers to favor industrialization over agriculture. Problem was the the output was unmarketable. These types of worthless projects sprouted all over Africa. They impoverished farmers to supply cheap food to the urban population but with no industrial development. Then there was the AIDS epidemic. Humanitarian aids did not reach its intended beneficiaries. If anything, governments decided to reduce its governments efforts to improve as they now had foreign donors. In hindsight, the cost assisting would have been a lot less costly than the cost of cleaning up. The anti-western sentiments fed the development of violent movements and there was a rejection of Western economic and cultural integration. Chapter 20 - Global Capitalism Troubled Key words: fragile finance, holy trinity, disputed global markets
The Battle of Seattle in 1999 represented a challenge to the world economic order. During the protests the activists targeted international institutions like the WTO, the World Bank, the IMF and the Group Seven. There was a dilemma of having a financially open country. The country had to chose between having its own national monetary system and having a stable currency. The unholy trinity (two out of three) capital mobility, stable exchange, or monetary independence. The developing crisis in economic policy was a result of a mismatch between the international financial markets and the national regulation and control. Financiers directed billions to favored countries and those who fell out of favor received nothing. “The China Price” factor wages were very low. Trade reduced wage difference between the rich and poor countries. Anti-globalizes wanted to avoid this competition. It was also super easy for investors to reallocate if something in the country would change. Northern activists wanted to raise labour, health and environmental standards in poor countries. The developing countries accused the countries of using this as an excuse to keep their products out of those countries. The activists were tools of their governments and the Clinton White House controlled the steel protest and the rioters. Free trade was autocratic because it was controlled by EU, N.America and Japan who re-wrote and changed in the international economic game without consulting anyone. They were also hypocritical as they were open to free trade but then set obstacles towards the Southern countries exports. They also protected and subsidized their own farmers and then continued to let them dump the surplus on the international market. Globalizers argued governance and anti-globalizers argued accountability. Anti-globalizers wanted to limit and control international markets. Globalizers thought the problem required worldwide political institutions. The support for international economic integration depended on prosperity.
