Economy

SUMMARY OF EVENTS

For much of the nineteenth century Britain led the rest of the world in industrial production and trade. In the last quarter of the century, Germany and the USA began to catch up, and by 1914 the USA was the world’s leading industrial nation. The First and Second World Wars caused important changes in the world economy. The USA gained most, economically, from both wars, and it was the USA which became economically dominant as the world’s richest nation. Meanwhile, Britain’s economy slowly declined, and it was not improved by the fact that Britain stayed outside the European Community until 1973.

In spite of slumps and depressions, the general trend was for the relatively wealthy industrialized countries to get wealthier, while the poorer nations of Africa and Asia (known as the Third World), most of which were once colonies of the European states, became even poorer. However, some Third World countries began to industrialize and become richer, and this caused a split in the Third World bloc. During the last quarter of the twentieth century, new developments came to the forefront. Industrial production and some service industries began to move from the western nations into countries such as China and India, where labour was much cheaper. Western economic systems showed signs of faltering, and there was controversy about which was the most successful type of economy – the US model or the European model. Global warming, caused by the emission of gases such as carbon dioxide, produced problematic climate changes which threatened to do most harm to the poorer countries, which were least able to cope. During the first decade of the twenty-first century, beginning in the USA in 2008, the world suffered an unprecedented financial crisis in which, for a time, the entire capitalist system teetered on the edge of collapse. The US and various European governments saved the banking system with massive bailouts, but could not prevent the world from plunging into recession.

27.1  CHANGES IN THE WORLD ECONOMY SINCE 1900

In one sense, in 1900 there was already a single world economy. A few highly industrialized countries, mainly the USA, Britain and Germany, provided the world’s manufactured goods, while the rest of the world provided raw materials and food (known as ‘primary products’). The USA treated Latin America (especially Mexico) as an area of ‘influence’, in the same way that the European states treated their colonies in Africa and elsewhere. European nations usually decided what should be produced in their colonies: the British made sure that Uganda and the Sudan grew cotton for their textile industry; the Portuguese did the same in Mozambique. They fixed the prices at which colonial products were sold as low as possible, and also fixed the prices of manufactured goods exported to the colonies as high as possible. In other words, as historian Basil Davidson (see Further Reading for Chapters 24 and 25) puts it: ‘the Africans had to sell cheap and buy dear’. The twentieth century brought some important changes:

(a)  The USA became the dominant industrial power and the rest of the world became more dependent on the USA

In 1880 Britain produced roughly twice as much coal and pig iron as the USA, but by 1900 the roles had been reversed: the USA produced more coal than Britain and about twice as much pig iron and steel. This growing domination continued right through the century: in 1945, for example, incomes in the USA were twice as high as in Britain and seven times higher than in the USSR; during the next 30 years, American production almost doubled again. What were the causes of the American success?

1  The First World War and after

The First World War and its aftermath gave a big boost to the American economy (see Section 22.3). Many countries which had bought goods from Europe during the war (such as China and the states of Latin America) were unable to get hold of supplies because the war had disrupted trade. This forced them to buy goods from the USA (and also Japan) instead, and after the war they continued to do so. The USA was the economic winner of the First World War and became even richer thanks to the interest on the war loans it had made to Britain and her allies (see Section 4.5). Only the USA was rich enough to provide loans to encourage German recovery during the 1920s, but this had the unfortunate effect of linking Europe too closely with the USA financially and economically. When the USA suffered its great slump (1929–35) (see Section 22.6), Europe and the rest of the world were also thrown into depression. In 1933, in the depth of the depression, about 25 million people were out of work in the USA and as many as 50 million in the world as a whole.

2  The Second World War

The Second World War left the USA the world’s greatest industrial (and military) power. The Americans entered the war relatively late and their industry did well out of supplying war materials for Britain and her allies. At the end of the war, with Europe almost at a standstill economically, the USA was producing 43 per cent of the world’s iron ore, 45 per cent of its crude steel, 60 per cent of its railway locomotives and 74 per cent of its motor vehicles (see also Section 22.7(e)). When the war was over, the industrial boom continued as industry switched to producing consumer goods, which had been in short supply during the war. Once again, only the USA was rich enough to help western Europe, which it did with Marshall Aid (see Section 7.2(e)). It was not simply that the Americans wanted to be kind to Europe: they had at least two other ulterior motives:

• a prosperous western Europe would be able to buy American goods and thus keep the great American wartime boom going;
• a prosperous western Europe would be less likely to go communist.

(b)  After 1945 the world split into capitalist and communist blocs

• The capitalist bloc consisted of the highly developed industrial nations – the USA, Canada, western Europe, Japan, Australia and New Zealand. They believed in private enterprise and private ownership of wealth, with profit as the great motivating influence, and ideally, a minimum of state interference.
• The communist bloc consisted of the USSR, its satellite states in eastern Europe, and later, China, North Korea, Cuba and North Vietnam. They believed in state-controlled, centrally planned economies, which, they argued, would eliminate the worst aspects of capitalism – slumps, unemployment and the unequal distribution of wealth.

The next forty or so years seemed like a contest to find out which economic system was best. The collapse of communism in eastern Europe at the end of the 1980s (see Sections 10.6 and 18.3) enabled the supporters of capitalism to claim the final victory; however, communism still continued in China, North Korea, Vietnam and Cuba. This big contest between the two rival economic and political systems was known as the Cold War; it had important economic consequences. It meant that both blocs spent enormous amounts of cash on building nuclear weapons and other armaments (see Section 7.4), and on even more expensive space programmes. Many people argued that much of this money could have been better spent helping to solve the problems of the world’s poorer nations.

(c)  The 1970s and 1980s: serious economic problems in the USA

After many years of continual economic success, the US began to experience problems.

• Defence costs and the war in Vietnam (1961–75) (see Section 8.3) were a constant drain on the economy and the treasury.
• There was a budget deficit every year in the late 1960s. This means that the government was spending more money than it was collecting in taxes, and the difference had to be covered by selling gold reserves. By 1971 the dollar, which was once considered to be as good as gold, was weakening in value.
• President Nixon was forced to devalue the dollar by about 12 per cent and to put a 10 per cent duty on most imports (1971).
• Rising oil prices worsened America’s balance-of-payments deficit, and led to the development of more nuclear power.
• President Reagan (1981–9) refused to cut defence spending and tried new economic policies recommended by the American economist Milton Friedman. He argued that governments should abandon all attempts to plan their economies and concentrate on monetarism: this meant exercising a tight control on the money supply by keeping interest rates high. His theory was that this would force businesses to be more efficient. These were policies which Margaret Thatcher was already trying in Britain. At first the new ideas seemed to be working – in the mid-1980s unemployment fell and America was prosperous again. But the basic problem of the US economy – the huge budget deficit – refused to go away, mainly because of high defence spending. The Americans were even reduced to borrowing from Japan, whose economy was extremely successful at that time. The drain on American gold reserves weakened the dollar, and also weakened confidence in the economy. There was a sudden and dramatic fall in share prices (1987), which was followed by similar falls all over the world. In the late 1980s much of the world was suffering from a trade recession.

(d)  Japan’s success

Japan became economically one of the world’s most successful states. At the end of the Second World War Japan was defeated and her economy was in ruins. She soon began to recover, and during the 1970s and 1980s, Japanese economic expansion was dramatic, as Table 27.1 shows. (For full details see Section 15.2.)

27.2  THE THIRD WORLD AND THE NORTH–SOUTH DIVIDE

During the 1950s the term Third World began to be used to describe countries which were not part of the First World (the industrialized capitalist nations) or the Second World (the industrialized communist states). The Third World states grew rapidly in number during the 1950s and 1960s as the European empires broke up and newly independent countries emerged. By 1970 the Third World consisted of Africa, Asia (except the USSR and China), India, Pakistan, Bangladesh, Latin America and the Middle East. They were almost all once colonies or mandates of European powers, and were left in an undeveloped or under-developed state when they achieved independence.

(a)  The Third World and non-alignment

The Third World states were in favour of non-alignment, which means that they did not want to be too closely associated with either the capitalist or the communist bloc, and they were very suspicious of the motives of both. Prime Minister Nehru of India (1947–64) saw himself as a sort of unofficial leader of the Third World, which he thought could be a powerful force for world peace. Third World countries deeply resented the fact that both blocs continued to interfere in their internal affairs (neo-colonialism). The USA, for example, interfered unashamedly in the affairs of Central and South America, helping to overthrow governments which they did not approve of; this happened in Guatemala (1954), the Dominican Republic (1965) and Chile (1973). Britain, France and the USSR interfered in the Middle East. Frequent meetings of Third World leaders were held, and in 1979, 92 nations were represented at a ‘non-aligned’ conference in Havana (Cuba). By this time the Third World contained roughly 70 per cent of the world’s population.

(b)  Third World poverty and the Brandt Report (1980)

Economically the Third World was extremely poor. For example, although they contained 70 per cent of the world’s population, Third World countries only consumed 30 per cent of the world’s food, while the USA, with perhaps 8 per cent of the world’s population, ate 40 per cent of the world’s food. Third World people were often short of proteins and vitamins, and this caused poor health and a high death-rate. In 1980 an international group of politicians under the chairmanship of Willi Brandt (who had been chancellor of West Germany from 1967 until 1974), and including Edward Heath (prime minister of Britain 1970–4), produced a report (the Brandt Report) on the problems of the Third World. It said that the world could be roughly divided into two parts (see Map 27.1).

The report came to the conclusion that the North was getting richer and the South was getting poorer. This gap between the North and South is well illustrated by the statistics of calorie intake (Fig. 27.1) and by the comparison of Gross National Products (GNP) of some typical North and South countries, or ‘developed’ and ‘low and middle’ economies (Table 27.2).

GNP is calculated by taking the total money value of a country’s total output from all units of production, wherever production is situated; and it includes interest, profits and dividends received from abroad. This total value is divided by the population figure, and this gives the amount of wealth produced per head of the population. In 1989–90 the GNP of the North averaged over 24 times that of the South. In 1992 a highly developed and efficient country like Japan could boast a GNP of over $28 000 per head of the population, and Norway $25 800. On the other hand, among poor African countries, Ethiopia could manage only $110 per head, the second lowest GNP in the world.

(c)  Why is the South so poor?

• The South was and still is economically dependent on the North because of neocolonialism (see Sections 24.4 and 24.7). The North expected the South to continue providing food and raw materials for them, and expected them to buy manufactured goods from the North. They did not encourage the South to develop their own industries.
• Many states found it difficult to break away from the one-product economies left behind from colonial days, because governments lacked the cash needed to diversify. Ghana (cocoa) and Zambia (copper) found themselves facing this problem. In states like Ghana, which depended for its income on exporting crops, it meant that too little food would be left for the population. Governments then had to spend their scarce money on importing expensive food. A fall in the world price of their main product would be a major disaster. In the 1970s there was a dramatic fall in the world price of such products as cocoa, copper, coffee and cotton. Table 27.3 shows the disastrous effects on the incomes, and therefore the buying power of countries such as Ghana and Cameroon (cocoa), Zambia, Chile and Peru (copper), Mozambique, Egypt and the Sudan (cotton), and Ivory Coast, Zaire and Ethiopia (coffee).
• At the same time, prices of manufactured goods continued to rise. The South had to import from the North. In spite of the efforts of the United Nations Conference on Trade and Development (UNCTAD), which tried to negotiate fairer prices for the Third World, no real improvement was achieved.
• Although a great deal of financial aid was given by the North to the South, much of it was on a business basis – the countries of the South had to pay interest. Sometimes a condition of the deal was that countries of the South had to spend aid on goods from the country which was making the loan. Some countries borrowed directly from banks in the USA and western Europe, so that by 1980 Third World countries owed the equivalent of $500 billion; even the annual interest payable was about $50 billion. Some states were forced to borrow more cash just to pay the interest on the original loan.
• Another problem for Third World countries was that their populations were increasing much faster than those in the North. In 1975 the total world population stood at about 4000 million, and it was expected to reach 6000 million by 1997. Since the population of the South was growing so much faster, a larger proportion of the world’s population than ever before would be poor (see Chapter 28).
• Many Third World countries had suffered long and crippling wars and civil wars, which ravaged crops and ruined economies. Some of the worst wars were in Ethiopia, Nicaragua, Guatemala, Lebanon, the Congo/Zaire, Sudan, Somalia, Liberia, Sierra Leone, Mozambique and Angola.
• Drought was sometimes a serious problem in Africa. Niger in West Africa was badly affected: in 1974 it produced only half the food crops grown in 1970 (mainly millet and sorghum), and about 40 per cent of the cattle died. As global warming gathered pace towards the end of the century, droughts became more frequent and many countries were dependent on overseas aid to feed their people.

(d)  The Brandt Report (1980) was full of good ideas

For example, it pointed out that it was in the North’s interests to help the South to become more prosperous, because that would enable the South to buy more goods from the North. This would help to avoid unemployment and recession in the North. If just a fraction of the North’s spending on armaments was switched to helping the South, vast improvements could be made. For example, for the price of one jet fighter (about $20 million), 40 000 village pharmacies could be set up. The Report went on to make some important recommendations which, if carried out, would at least eliminate hunger from the world:

• the rich nations of the North should aim to be giving 0.7 per cent of their national income to poorer countries by 1985 and 1.0 per cent by the year 2000;
• a new World Development Fund should be set up in which decision-making would be more evenly shared between lenders and borrowers (not like the International Monetary Fund and the World Bank, which were dominated by the USA);
• an international energy plan should be drawn up;
• there should be a campaign to improve agricultural techniques in the South, and an international food programme should be drawn up.

Did the Brandt Report change anything? Sadly, there was no immediate improvement in the general economic situation of the South. By 1985 very few countries had reached the suggested 0.7 per cent giving target. Those that did were Norway, Sweden, Denmark, the Netherlands and France; however, the USA gave only 0.24 per cent and Britain 0.11 per cent. There was a terrible famine in Africa, especially in Ethiopia and the Sudan in the mid-1980s, and the crisis in the poorer parts of the Third World seemed to be worsening. Throughout the 1990s the US economy boomed under the Clinton administration, whereas the plight of the Third World became even more serious. At the end of 2003 the UN reported that 21 Third World states, 17 of them in Africa, were in crisis because of a combination of natural disasters, AIDS, global warming and civil wars (see Section 25.15). Yet the richest 1 per cent of the world’s population (around 60 million) received as much income as the poorest 57 per cent. Norway was top of the UN’s league table for human development: Norwegians had a life expectancy of 78.7 years, there was a literacy rate of virtually 100 per cent, and annual income was just under $30 000. In Sierra Leone life expectancy was about 35, the literacy rate was 35 per cent and annual income averaged $470. The USA seemed to attract the most hostility and resentment on account of this imbalance of wealth; it was widely believed that the growth of terrorism – especially the 11 September attacks on the USA – was a desperate response to the failure of peaceful attempts to bring about a fairer world economic system (see Sections 12.1 and 12.2).

UN economic advisers were clear about what needed to be done. It was up to the West to remove trade barriers, dismantle its over-generous system of subsidies, provide greater debt relief, and double the amount of aid from $50 billion to $100 billion a year. This would enable poor countries to invest in clean water systems, rural roads, education and proper healthcare.