THE GOLDEN YEARS OF THE MIXED ECONOMY

1949 TO 1971

BACKGROUND
SPEED, STRENGTH OF (FIRST WORLD) ECONOMIC RECOVERY POST WW 11, AND ITS SUSTAINED MOMENTUM TILL 1970s, BASED ON THREE PILLARS:

Three Pillars
1. US role as Superpower: assumes responsibility for global balance
of power, and economic and military support of allies (Europe,
Japan/SK/T, TIP);

2. Institutional arrangements to underpin economic management:

Financial Institutions (BWI) with designated responsibilities,
common framework of economic policies, and strong international
co-operation all as outcome of lessons learnt from the Great
Depression;

3. The rise of Social Market economies the Mixed Economyvalidated Keynesian economic thesis: high investment and high
production with low inflation and low unemployment possible when
State (fiscal) intervention balances market forces.

 STAGFLATION IN THE LATE 70s

UPSET THE KEYNESIAN CONSENCUS:
THEREAFTER, THE WASHINGTON
CONCENSUS EMERGED, BASED ON
MONETARISM WITH DIMINISHED
ROLE FOR STATE

SIGNIFICANCE OF US ROLE AS
SUPERPOWER
Balance against Soviet Russia: WWII left Soviet Russia as leading European
military power. Russia needed Eastern European land buffer; Western
Europe security needed US military integration. US wary of Russia post
Korean war, rise of Communist China.
United Nations Headquartered in NY: US had not been member of
predecessor League of Nations; US made aggressive use of its role as
Permanent Security Council member;
Initiated BWIs; European reconstruction/refugee rehabilitation; Marshall
Plan and NATO: Contributed to European economic recovery, and to
European security; reduced level of Euro Defence expenditure;
Economic hegemon: at end of WWII, US generated 60% of global industrial
production; huge lead in science and technology, developed during
military research, poured into civilian industry.
But self-interest played a great role in how US assistance was structured:
Marshall Plan spurred by strength of Communist parties in France, Italy,
and Greece; tied to purchases from the US and Canada; free Trade suited
US most, as possessed largest export capacity.

2. INSTITUTIONAL ARRANGEMENTS FOR GLOBAL ECONOMIC

MANAGEMENT AND EUROPEAN RECOVERY:

BACKGROUND
POST WWII POLICY MAKERS SOUGHT TO
AVOID RECURRENCE OF ECONOMIC POLICIES
THAT LED TO THE GREAT DEPRESSION -THROUGH SETTING UP INSTITUTIONAL
ARRANGEMENTS, UNDER AEGIS OF THE
UNITED NATIONS, ENSURING INTERNATIONAL
ECONOMIC COOPERATION TO ENCOURAGE
INTERNATIONAL TRADE; INTEGRATE
MONETARY POLICY PRINCIPLES; AND
STABILISE EXCHANGE RATES.

Economic Management
TWO ASSOCIATED ARRANGEMENTS WERE:
GATT (LATER WTO): PROCESS OF SUCCESSIVE MEETINGS (
ROUNDS) TO PROGRESSIVELY RUN DOWN TARRIF AND
PREFEFERENCE RELATED TRADE BARRIERS BETWEEN
COUNTRIES:HAS BEEN SUCCESFUL IN SUBSTANTIALLY
REDUCING TRADE BARRIERS AND IMPROVING MARKET
ACCESS, BUT STILL POLITICAL IN ITS WORKINGS;
GOLD STANDARD REPLACED WITH EXCHANGE RATES TIED
TO US$, WHICH CONVERTIBLE INTO GOLD AT $35 PER OZ;
SCRAPPED IN 1971, WHEN OVERSEAS $ LIABILITESOF US
AMOUNTED TO 5 TIMES US GOLD STOCK (VS GOLD STOCK
7 TIMES GREATER AT INCEPTION IN 1949).

The Bretton Wood

Institutions
I

IMF: to ensure stability in international exchange rates

through harmony in monetary policies of IMF members; to
provide funds for short-term Balance of Payments deficits,
under Structural Adjustment Programmes(SAFs, imposed
various conditions);
IMF originally envisaged as global Central Bank, creating
global currency (Bancors), but US objected and US $
hegemony prevailed
Lesson from Great Depression: to prevent deflationary
adjustment to BOP deficits, as required under strict Gold
standard.
NOTE: US held 33% of IMF quota, so could prevent any
change to rules.

Bretton Woods
Institutions.
IBRD: to provide finance post-war reconstruction
and infrastructural projects
Lesson from Great Depression: to increase access to
capital for important national projects with long-term
payback.

Subsequently, BWIs were enlarged to include
International Finance Corporation (IFC) and
International Development agency (IDA).
IFC finances private sector projects: IDA finances the
lowest-income countries.

Other Post WWII arrangements for

economic revival; Marshall Plan

$ 13 bn made available, by US, to Europe for reconstruction;

largest recipient UK, then France and Italy.
While most of funds were in grant form (80%), local currency
counterpart funds existed till 1971.
MP disbursements were conditional on countries making
currency convertible; opening to free trade; and maintaining
fiscal balance these factors were also beneficial to US
businesses.
US aim was to ensure European economies tied into private
sector led growth, with Government intervention largely as
development agent and as provider of Social Safety net.

NATO

Post Korean War, Communist victory in China,

and Russian domination of Communist states
in eastern Europe, US formed NATO along
with Western European partners.
Purely in economic terms, NATO beneficial to
Western Europe in 50s and 60s; amount
equal to 1% of GDP spent on NATO within
Europe, benefitting local economies; further
European countries reduced their own
defence expenditures.

THE GOLDEN YEARS OF THE MIXED ECONOMY STATE

BETWEEN 1949 AND 1960, EUROPE SAW THE FASTEST
ECONOMIC GROWTH IN ITS HISTORY.
USING 1914 AS A BASE, GERMANY GDP WAS 40% HIGHER;
FRANCE 70%; ITALY 100%...THAN IF GDP HAD GROWN AT THE
PRE-1914 TREND, I.E. EUROPE MOVED ON TO A QUANTULY
HIGHER GROWTH PATH IN SPITE OF TWO WORLD WARS.
WHAT WERE THE PRINCIPAL FORCES BEHIND THIS
ESCALATION IN GROWTH;
WHAT SUSTAINED THE YEARS OF HIGH GROWTH, HIGH
EMPLOYMENT, HIGH DEMAND WITHOUT OVERHEATING;
AND WHAT WERE THE FACTORS RESPONSIBLE FOR THE
DECLINE OF KEYNESIAN ECONOMIC PRINCIPLES, AS
STAGFLATION TOOK HOLD IN THE 1907S?

ACCELERATION OF EUROPEAN GROWTH

Three factors primarily responsible for accelerating growth:
1. Free trade:
Political principle: integrate Europe through trade, to avoid
future wars. European openness to trade i.e. X+I/GDP rose on
average from 20% to 55% by 1960.
2. Improved technology;
Partly from knowledge developed from Military production;
partly catching up with US technology that had continued to
grow; establishment of European J/Vs, collaborative research
and development;
3. Capacity to run Budget and Current Account deficits:
Marshall Aid helped Capital inflows; moderate inflation but low
interest rates exchange rate stable to strengthening, because
of rapid increase in export volumes and capabilities.

).
What sustained high growth/ high employment/high demand without overheating?

1. Europe was successful mixed economy.

2. High welfare expenditure, and Govt ownership of utilities/some
heavy industry (Aeronautical; specialized steel and chemicals;
Mining), with encouragement of private sector across all other
sectors.
3. Resource allocation left to market at market prices (i.e. no
Licensing/FX allocations/permits).
4. Highly trained and productive labour force; immigration
encouraged, stopped excessive wage increases;
5. Voluntary restraint on timing of wage increases (adjusted
against past inflation; manufacturers kept profit margins
moderate; Income distribution favoured rapid growth of
sizeable middle class, with rising appetite for consumption;

High growth.
6. High levels of investment in the
economy, rising from around 20% to
35% of GDP; domestic savings
supplemented by FDI.
7. Internal reconstruction demand
helped rapid expansion of steel,
engineering and construction
companies, in early phases.

WHAT BROUGHT AN END TO KEYNESIAN MODEL

Smithsonian agreement (1973) ended $ convertibility into
Gold: henceforth floating exchange rates. $/Gold
convertibility had kept countries keen to maintain fixed
exchange rate against $, period of stable exchange rates
ended.
Oil price hikes in 1973, again in 1979, accelerated inflation,
running between 12% and 20% mid to late 70s. Huge
currency fluctuations, instability;
Labour broke tradition of ex-poste wage increases, now
sought to be preemptively indexed against inflation:
manufacturing costs rose, demand fell, and unemployment
increased. Several rounds of Income and Wages policies
failed.

End to Keynesian model..

Keynesian expectation that you could not have high inflation
and high unemployment, collapsed: Stagflation took hold,
rising prices with falling employment.
Enter the Monetarists; Milton Friedman had argued that
controlling money supply would choke off inflation, at NAIRU.
Central Banks given job of managing money supply via
interest rates; $ rates went up to 20%, to recue demand.
Reagan/Thatcher supply-side revolution commenced;
Globalisation accelerateda new world order for economic
Policy Management.