05 - Economic Development (Crisis Decades) Part II

Hwa Chong Institution (College): History Paper 1 Theme II: Understanding the Global Economy Growth and Problems of the Global Economy 1 Why did the Golden Age of Capitalism come to an end? Objectives: Students would be able to: ● Analyze the casual relationships that ended the golden age of capitalism ● Evaluate the relative significance of the various crisis that afflicted the global economy Challenge 3: Rise of protectionism from 1970s Reasons for the rise of protectionism Economic slowdown in developed countries was brought about by several reasons: ● The dollar glut early 1970s–end of Bretton Woods, fluctuating exchange rates ● The 1970s oil crises ● Challenges/competition from the Third World ● Weakening of US economy ● World Debt crisis 1982 Weakening US economy In the 1970s, 80s there was a surge in protectionist sentiment. This had been due to several reasons: • The decline of American hegemony that followed from the resurgence in economic strength of Western Europe and Japan was one of the reasons. • Also, with the economic preeminence being challenged, US interest in advancing the open trade regime was diminishing. Furthermore, there were the worsened economic circumstances that the developed countries were contending with during the 70s and 80s. Most significant was the deterioration of the levels of economic activity; for the first time since WWII, these countries simultaneously experienced a serious recession in 1974-75 and their recovery was marred by slow economic growth, higher levels of unemployment and rising inflation. After OPEC's second oil price increase in 1979, monetary authorities sharply restricted the money supply as a counter-inflationary measure. In 1981-82, the world economy slid into severe post-war recessions with the debt crisis. These conditions bred protectionist demands by businesses facing contracting markets at home and by workers fearing the spread of unemployment. Hwa Chong Institution (College): History Paper 1 Theme II: Understanding the Global Economy Growth and Problems of the Global Economy 2 Impact of oil crises In the 1970s, major price increases, particularly for energy, created a strong fear of inflation—increases in the overall level of prices. As a result, government leaders came to concentrate more on controlling inflation than on combating recession by limiting spending, resisting tax cuts, and reining in growth in the money supply. Budget and trade deficits i) Stagflation Since the stagflation of the 1970's, the U.S. economy has been characterized by somewhat slower growth. In 1985, the U.S. began its growing trade deficit with China. The US was experiencing a recession and the overvaluation of the dollar not only increased demand for protectionism generated by recession but also impaired the performance of exports. • Richard Nixon took the United States off the Bretton Woods system, and further government attempts to revive the economy failed. When the Bretton Woods mone