The Making of the Modern World Economy, Coursework Example

How did post war insulation facilitate growth in the Global North and Global South?

In their text “Economic Growth in Europe since 1945,” Crafts and Toniolo (1996) note that, “the quarter century that ended around 1973 was for Western Europe a Golden Age of economic growth” (Crafts and Toniolo, 1996). They attribute this to the fact that Real GDP had a substantial rise, almost twice as rapidly years prior. The authors also note that much of the growth that happened in the Global South and the Global North can be attributed to the significant financial gaps that occurred in the United States and Europe due to the depression of the prewar era, which allowed significant room for growth following 1945. They further note however that, “per-capita GDP differentials show that ‘catch-up’ and ‘spring-back’ explain only part of the postwar acceleration: purged of their effects, growth from 1950 to 1973 was still more than 50 percent faster than it became subsequently” (Crafts and Toniolo, 1996). They state that in addition to the natural progression of “spring back” or “catchup” expected to occur following The Great Depression, the growth in the Global North and Global South also occurred due to net investments, pointing out that net investments increased in Europe by twice as much between 1950 and 1960, which resulted in an increase of the gross investment share of GDP by 20-30 percent overall, which made the GDP growth increase by 2%. Finally, two other contributing factors which facilitated the growth in the Global North and the Global South had to do with export growth and wage moderation. As Kindeberger (1986) notes, “in some instances the Marshall Plan, maintaining that stability and growth could be reestablished in Europe right after the war if countries would “halt the inflation and adjust the exchange rate” (Kindleberger, 1986). Through manipulating export growth and moderating wages, maintaining stability and growth was possible for Europe due to the fact that foreign investments increased from the process because it made foreign investments in Europe more profitable. This enabled Europe to take advantage of comparative differences the European countries had in resources and exchange rates throughout the globe, The authors note that, “the openness of European economies and the growth of their exports, whose volume expanded in the 1950s and 1960s by more than 8 percent a year, allowed investment to be allocated to the sectors where its contribution to productivity growth was greatest” (Crafts and Toniolo, 1996). This is primarily the source of the growth that occurred in these regions. It is further noted to support this growth, European governments established institutions that encouraged profitable investments and productivity in manufacturing and innovation. Post war growth largely benefited from these institutions as they created an environment for the expansion of international trade, disseminated information, and established ample support for reconstruction. The authors do note that government institutions did note all equally adapt to the post war environment across the board, pointing out that Ireland and UK did not establish significant domestic institutions and while Italy and France established domestic institutions it only happened after significant delay. All regions of Europe established institutions that promoted increased international trade and foreign investment.

Describe the political bargain reached in postwar Europe. How did strategies to maintain this bargain succeed and fail?

The political bargains that occurred during 1945 would represent the financial policies established for postwar Europe, and they happened at the Yalta conference, when FDR, Churchill, and Stalin met in the Crimea. Despite the fact that the victory in Europe was nearly certain at the time, allies had not yet agreed on the terms of post-war Europe’s political economic future. Stalin was upset that Britain and American forces had not crossed the English Channel earlier to assist Russian troops which resulted in substantial losses for the Russians.  Roosevelt considered Stalin’s complaints but even prior to the conflict, he made preparations for a Soviet Sphere of Influence which became an integral part of the agreement within the Yalta arrangement where Moscow signed a Declaration of Liberated Europe where it was allowed to have puppet governments all over Europe.  Following the inflations of the First World War, when exchange rates were either restored or adjusted, it was considered urgent to fix exchange rates with levels of equilibrium. Countries focused on the problem during post war bargaining by calculating exchange rates, but accounting for structural changes. Italy based their exchange rate on the prestige of their country, while France and Britain had overseas assets that they waited to return due to the exchange rate instability.  As Kindleberger (1986) notes, “the resulting pattern of rates put stress on the system. Then came the depression and the response of many countries on the periphery, cut off from borrowing and facing sharply declining export prices and values, to depreciate their currencies. A certain amount of competitive exchange depreciation took place” (Kindleberger, 1986). He further points out that while Britain was not concerned with the decline of the pound the government still established the Exchange Equalization Account to prevent the exchange rate from increasing. The author notes that Bretton Woods in 1944 represented the response of monetary authorities to exchange rate volatility in the 1930s where European economic authorities adopted fixed rates. This represented the most significant bargain reached during the post war period that impacted the global economic climate. When currencies came under stress due to countries pursuing independent macroeconomic policies, countries came out in favor of floating. Authors note that, “it was originally thought by many, and is still widely maintained by monetarists, that freely flexible exchange rates provide insulation from world conditions of instability for a given country. Experience both in the 1930s and in the 1970s, however, seems to indicate otherwise. In a world of deflation, as in the 1930s, flexible exchange rates with overshooting are deflationary” (Kindleberger, 1986). Depreciation has the effect of leaving domestic prices unchanged and reducing costs in countries that have appreciated exchange rates. This is very different from what happens during inflation. For example in the 1970s, depreciation raised domestic prices but appreciation left foreign prices unchanged. The authors note that while economists have yet to completely agree on the best way to achieve the optimal exchange rates the United States dominated the Bretton Woods institutions up until the 1970s.

How did the US’s refusal to choose between its international and domestic priorities lead to financial instability that brought down the Bretton Woods System?

In Eichengreen (2004), article on the Global imbalances and the Lessons learned from the Bretton Woods regulations, the author points out that during the 1960s, “the core was the United States and the periphery was Europe and Japan, many developing countries not yet having been fully integrated into the international system. Now, with the spread of globalization, there is a new periphery, the emerging markets of Asia and Latin America, but the same old core, the United States, with the same tendency to live beyond its means” (Eichengreen, 2004). This period in time represented the prime period of the Btretton Wood and the author attributes this tendency of the United States to live beyond its means as the core cause for the failure of the Bretton Woods agreement. In the 1970s, which marked the near end of the Bretton Woods  system there were several changes that spawned out of a continued trend of the U.S. living beyond its means, specifically as the author notes,  “first, the United States became less supportive of economic liberalism as its economic dominance declined; for example, U.S. protectionism increased after its balance of trade shifted to a deficit position in 1971. Europe and Japan also began to question U.S. leadership, and frictions among DCs increased with the decline of the Cold War” (Eichengreen, 2004). All of these factors were what resulted in the failure of the Bretton Woods system, but they are representative of a much deeper problem exemplified by the U.S. in regards to their international economic policies.

One major point Eichengreen (2004) makes is that the US’s refusal to choose between its international and domestic priorities which lead to financial instability that brought down the Bretton Woods System started long before the Bretton Wood System was first established. Kindleberger, (1986). The world in depression, 1929-1939, credits much of the problem to the Great depression noting that its impact was so widespread that the impact lasted all the way to up into the 70’s due to the U.S. and it’s unwillingness to make some needed changes to its international and domestic policies. The author points out that, “the international economic system was rendered unstable by British inability and U.S. unwillingness to assume responsibility for stabilizing it by discharging five functions” (Kinleberger, 1986). These were five key functions which the author identifies to be, “(1) maintaining a relatively open market for distress goods; (2) providing countercyclical, or at least stable, long-term lending; (3) policing a relatively stable system of exchange rates; (4) ensuring the coordination of macroeconomic policies; (5) acting as a lender of last resort by discounting or otherwise providing liquidity in financial crisis” (Kindleberger, 1986). It should be noted that the primary cause he identifies is the United States’ inability to police its exchange rates, and acting as a lender of final resort which did not work as an effective policy for providing liquidity. All of these faulty international fiscal policies were aspects of the U.S. and its behavior towards international financial concerns which ultimately resulted in the failure of the Bretton Woods System in the 1970s.

References

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