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 monetary system collapsed in 1973, it was replaced by the unfamiliar arrangement of fluctuating exchange rates. • For countries exporting and importing goods from competitive industries, they experienced severe price competition because of exchange rate changes. i.e. The US dollar rose strongly against other currencies in the first half of the 1980s, its value against the yen increased by at least 60% between 1981 and 85. This gave added force to domestic producers' demands for relief through some measure of protectionism. While it was believed that this arrangement would ease external balance-of-payments adjustments, it was not foreseen that exchange rates would become the subject of wide swings over several years. ii) Rise in protectionism due to trade deficits Since 1971, the USA has continually run trade deficits which rose steadily to $15 billion in 1981. It skyrocketed to $152 billion in 1987 as a result of the Reagan White House policies. It declined to $62 billion in 1991 and rose to $260 billion in 1998. In comparison, the EU's growth rate is comparable to that of the USA. Until its stock and real estate market bubble burst in 1990, Japan's economy grew twice as fast as the US and its GNP was poised to surpass that of USA.

Hwa Chong Institution (College): History Paper 1 Theme II: Understanding the Global Economy Growth and Problems of the Global Economy 3 However, from 1990 to 2000, Japan’s growth lagged behind the US as Clinton’s sound policies revitalized the nation’s economy into its best performance since the 1960s. The US and EU continued to suffer vast trade deficits with Japan and have become increasingly protectionist, restricting about 45% and 60% of manufactured imports. Meanwhile, as a result of foreign pressure, Japan began relaxing their import restrictions. As fair trade rather than free trade gained popularity in the 1990s, the battle between the three economic powers became increasingly bitter and frequent. iii) US Foreign Debt USA's foreign debt is greater than that of the entire Third World, casting a negative effect on developing countries. As there is only a finite amount of global finance, the more the USA borrows, the less there is available for the Third World. This is because commercial bankers would rather lend to a creditworthy country than to a poor country with existing debt that is often rescheduled. US demand for international finances also raises interest rates which meant more Third World income is transferred to global bankers. iv) Increased Competition Among Developed Countries The ideological shift away from the post-war free trade consensus as countries struggled with the loss of dynamism in economic growth and with structural weaknesses. The rising protection lay in the reluctance of governments to expose industries to the market forces that would bring about adaptation to changing conditions. This was so to Western Europe where market rigidities traced to social legislation associated with the welfare state, especially rigidities in the labour market, were seen as generating resistance to adaptation. THIS SHOWS CHANGE & CONTINUTY OVER TIME AS THE US ECONOMY DID UNDERGO A REVIVAL IN THE 90S. Hwa Chong Institution (College): History Paper 1 Theme II: Understanding the Global Economy Growth and Problems of the Global Economy 4 Japan’s Economic Miracle Japan’s competitive strength was initially in textiles and clothing, which moved on to the steel, shipbuilding and cars industry. Japan also competed with the developed countries in consumer electronics and semiconductors, this in turned challenged such countries with their ability to adapt. This triggered off reactions from the governments of these developed countries placing focus on the industries most affected by these changes/competitions. Of the three major economic powers, Japan restricts foreign investments more than anyone else. Until recently, Tokyo sharply limited the amount and type of foreign investments within Japan. The government screened all foreign investments and allowed entry only if the MNC's products did not compete with those of Japanese firms targeted by the government for development. Even then, it they were limited to 49% share of investment, with Japanese investors holding the other 51%. Profits from most foreign investments could not be repatriated. In further screening the process, 100% foreign ownership was not allowed until passage of the 1980 Foreign Exchange and Foreign Trade Control Law. The law allowed the government the right to impede any foreign investment that violates national security. Despite these legal changes, Tokyo has continued to screen foreign investments, inhibits those which are competitive with Japanese industry and has specific industry laws that empower it to impede foreign investments. Foreign MNCs face numerous unofficial obstacles to investing in Japan, restrictions on advertising, buying or renting land, business cartels that will not