You are on page 1of 42

Reasons for the growth of the global economy IMPACT OF WORLD WAR 2 1.

The war effort of many countries stimulated specific industries a. WW2 had the benefits of stimulating specific industries that thrived after the war, which ameliorated the war damage done to the infrastructure of many countries. b. [Boost in certain industries] For example, engineering was boosted due to its links to armoured vehicles and weapons that were required by the state during war. The UK, France, Italy and Germany emerged with a larger stock of machine tools. In Italy, engineering firms situated in the North, and out of reach of the heaviest fighting, did rather well as their wartime output and investment compensated for any harm they suffered. Even in Eastern Europe, Slovakia and parts of Hungary saw accelerated industrialization during the war years. c. [Technological improvements] Moreover, the war also massively stimulated technological innovations initially used for military purposes, which benefitted the civilian economy. The US shipbuilding industry is a prime example, as between 1939 and 1945, the hundred merchant shipyards overseen by the government created 5,800 ships, at the cost of about $13billion. The war effort facilitated the development of mass production by choosing to build many standardized vessels like the Liberty ship, in the process adapting well-known manufacturing techniques that could be transferred to civilian use, such as in the aerospace industry. d. Analysis: Hence, in many regards the war acted as a stimulus for development of technologies and industries geared towards the military, but had extensive benefits too when applied to the civilian economy. 2. The war effort stimulated USAs economy a. WW2 also had the benefit of stimulating the economies of two superpowers, the USA and the USSR, which allowed them to lead the economic development of their respective blocs. b. American economy was positively stimulated by the war, as the wartime economic boom caused GNP to increase from $88 billion in 1939, while the Depression was ongoing, to $135 billion in 1944.This had several positive knock-on effects. Firstly, economic expansion ensured high levels of employment, as the unemployment rate dipped to 1.2%, a record low in American history. Secondly, there was rapid increase in Americans personal incomes, with manufacturing workers enjoying a quarter more real income in 1945 than in 1940. c. [Post-war policies] Moreover, USAs GI Bill was designed to stave off post-war economic depression by granting economic benefits to returning servicemen so that they could become consumers. Servicemen obtained benefits such as guaranteed mortgages and small-business loans, transforming them into a vast and advantaged class of citizens who demanded suburban housing and private cars that were unattainable during the war. Hence, to some extent, these returning servicemen helped drive the economy in the immediate post-war years. d. Analysis: Unscathed by damage at home, Americas wartime economic boom and industrial expansion placed the US at an absolute and relative advantage over both its allies and enemies. The advantage which the war accorded the USA allowed it to assert its dominance and lead economic development of the West. 3. War effort stimulated USSRs economy a. Similar as but to a lesser degree than the USA, the war also stimulated the Soviet economy and those of East Europe. More importantly, its effects made Soviet leaders rectify certain flaws in the command economy. b. [Soviet economy] During the war, Eastern Europe went under Soviet domination and it was the USSR that kick started the industrialization of Eastern Europe, which had previously been largely agrarian. Massive industrialization occurred in Bulgaria and Romania under Soviet styled planning as peasants were directed into labour-intensive mining and industrial manufacture. Output of coal and iron-ore increased, and the

Sam & Eewei | Updated Oct 11

Communists dogmatic emphasis on raw material extraction and primary goods production generated rapid initial growth. c. [Goulash Communism] However after the war, the emphasis on heavy industry and raw material extraction caused much discontent as there was a shortage of food and consumer goods, while agriculture was neglected. This prompted a general move by the USSR towards Goulash Communism, which aimed to improve the quality of life by shifting resources into consumer goods industries, housing construction and increased wages. There was a similar reorganization in agriculture as well, as government raised agricultural prices and collective farm earnings went up by one-third in a few years. d. Analysis: The result of these far-reaching changes was a 45% increase in real wages in Eastern Europe from 1953 and 1957, which allowed people to buy consumer goods beyond bare necessities and live in decent housing. What WW2 did was to incorporate Eastern Europe into USSR, which stimulated their economies and transformed their citizens into an active consumer group which contributed to the growth of the global economy. 4. CP:The damage done by WW2 was detrimental to the economy a. WWII caused enormous physical and economic damage. The most obvious economic impact of the war was on housing stock. In London, three and a half million homes in the metropolitan area were destroyed as were ninety percent of all homes in Warsaw. In transport, merchant fleets, railway lines, rolling stock, bridges, roads, canals and tramways were destroyed; hence while mines and factories could produce necessary goods, they would not move them. Many European coal mines were working again by December 1945 but Vienna was still without coal. In almost every European country, the national economy stagnated or shrunk when compared even with the mediocre performance of the inter-war years. Hence this would be seen as a drag on economic growth rather than a cause. However, there was a marked acceleration of growth after the war.

Sam & Eewei | Updated Oct 11

IMPACTS OF ECONOMIC CONSENSUS (PLANNING) 1. Economic consensus at the end of WW2 learnt from past mistakes a. There was a consensus amongst the Western nations by the end of WW2 in terms of the correct economic approach to follow and this was derived from a general commitment to learn the lessons of the past, in order to avoid the economic recession that followed WW1. b. [Protectionism] The planning for the new economic world order was premised on the recognition that ferocious protectionism had contributed mightily to the global slump and the political problems that came with it, which resulted in WW2. Hence, the idea now was to prevent protectionism at all costs, by building on reciprocal trade agreements on a multilateral scale, meaning that many countries would simultaneously accede to reductions in trade barriers. The new system was to be embodied in the International Trade Organization (ITO), which was meant to provide both the framework for multilateral trade negotiations and the mechanisms to design and implement the required rules. c. [Monetary stability] Another lesson derived from past experience was the need for international monetary stability, as it was agreed that the major reason for the Great Depression was the lack of regulation of the value of currencies in major economies. As a result, the planners at the Bretton Woods Conference established the IMF, the World Bank and a set of systems to regulate the international monetary system. These systems included the pegged currency regime to prevent the erratic fluctuations in currency values, and a ban on discriminatory currency practises. d. Analysis: Hence, the economic consensus reached at the end of the war prevented the global economy from slipping into recession once again through the careful reconstruction of the economic order to avoid the economic pitfalls experienced after WW1 and putting in place regulatory systems to ensure smooth growth. 2. Economic consensus recognized the importance of state planning a. Another consensus reached was the recognition that the free market could not be allowed to operate in an unrestricted fashion, and that it had to be supplemented with government planning and intervention. At Bretton Woods, governments were committed to economic management with the aim of achieving full employment. b. [Planning in Europe] In Europe, the methods of government planning and intervention took different paths. The Labour Party in Britain placed less focus on planning but nationalized mines, railways, good transportations and utilities, while seeking to provide medical services for the citizenry. In contrast, the West German economy remained mainly in private hands. However, government planning came in the form of detailed, publicly approved arrangements for factory management employer-employee relations and conditions of employment. In The Netherlands, planning entailed a mix of predictive and prescriptive edicts for the use of private enterprise. c. Analysis: While the extent and methods of government planning were different, they managed to achieve a positive result in these European economies. Post-war Western economies became one of managed capitalism, as governments tried to achieve high growth by active intervention. Policies such as tax and interest rate reductions not only encouraged consumer spending, but also stimulated both domestic and foreign investments. It was the state-planned economic modernization that led to the 10-fold increase in trade in industrial products and manufactured goods after 1953. Hence, the new economic ideology of state planning provided a firm foundation for the managed-capitalist systems that drove Europes growth after the war.

Sam & Eewei | Updated Oct 11

EFFECTS OF THE COLD WAR AND MARSHALL PLAN 1. Cold War conflicts benefitted certain economies a. The Cold War provided the stimulus for growth in some economies as the massive American spending in Cold War conflicts benefitted its allies. Moreover, it strengthened American commitment to rollback communism with its military, necessitating increased expenditures on arms that aided economic growth. b. [Japan] The Korean War was a prime example of a Cold War conflict from which Japan received massive benefits; overnight there was a new market for Japanese industrial production filling orders for American forces. The Korean War was lauded as divine aid as between 1949-53, the doubling of Japanese manufacturing output was funded by America. It established the basis for Japans economic success that made it possible to benefit from the Vietnam War, as 1966-1970 were the years of peak Japanese growth, averaging no less than 14.6% per annum. c. [NSC-68] The NSC-68 was implemented due to the Korean War, and it was an engine of growth for the American economy in its own right. The military buildup and spending that followed the Korean War was an economic policy in which the USA devoted large amounts of military spending in order to increase economic growth. On the demand side, the increased military demand for goods and services was generated directly by government spending, which would result in increased consumer spending. d. Analysis: Hence, the Cold War conflicts directly stimulated the Japanese and South Korean economies, allowing them to rise from relative obscurity to become leading economies in the world. Back in the USA, it necessitated increased defence spending, which was an injection for economic growth. 2. Cold War produced technological spinoffs a. Technologically, the Cold War was also a boost to the global economy as it provided technological advances used by the military, which generated direct spinoffs for civilian use. During the Cold War, much funding was channeled into technological developments for the military, which contributed to several key inventions. b. [Computers] For example, the Korean War gave an important boost to the development of computers and the whole industry of transistors and semiconductors. It influenced IBMs decision to venture into market for commercial computers, even though the first digital computer was created to run a simulation of the hydrogen bomb ignition. Moreover, the development of transistors was only made possible by heavy subsidies from the Army Signal Corps as by 1953, the Army Signal corps was funding approximately 50% of transistor developments. c. [Internet] Most notably, the development of the Internet involved the transformation of a computer network initially established in the late 1960s by the Defense Department. In 1972, the Defense Department awarded a contract to a high-technology firm to demonstrate the viability of packet switching technologies, which resulted in a successful demonstration of the commercial viability of the Internet. d. Analysis: Hence, the Cold War made possible many high technological inventions by the USA, which benefitted the rest of the world as computers became commercialized and commonplace. Technological developments from the Cold War allowed for modernization and more efficient production of better quality goods at lower costs. Put together, this resulted in increased living standards and rising global output. 3. The Cold War made it harder to liberalize the world economy a. However, the liberalization of trade and economic growth was made harder by the Cold War because of the establishment of blocs that were hostile to one another, and Americas commitment that Eastern European countries would not be integrated globally. Technology transfer was another example of Americas restriction of free trade, as America did not want the Soviet Union to obtain technology. This economic containment ran directly against Bretton Woods aims of non-protectionism and multilateralism. b. [Absence of peace dividend] Moreover, excessive military spending during the Cold War also removed the peace dividend enjoyed in times of peace. The high levels of military spending in both USA and USSR diverted

Sam & Eewei | Updated Oct 11

c.

resources away from the economy. For example, the USSRs military spending reached 15% of GDP at its peak, which took money away from the much needed infrastructural developments at home. the end of the Cold War did bring about a stimulus to the US economy. From the late 1980s to the 1990s, defense spending was substantially reduced. The peace dividend that ensued should be considered the major economic achievement of the 20th century. Firstly, economic activity was temporarily disrupted during wartime by the use of resources for destructive purposes and by the opportunity costs of not investing in goods and services for the future. When substantial reductions in defense spending were made by the Clinton Administration, capital formation expanded and there were large increases productivity, capital gains, and tax revenues.

4. Marshall Plan supported European economic recovery a. Marshall Aid was considered a critical margin of support for West Europes economic recovery as the funds stabilized European economies by securing its necessities, and was a significant supplement for the West European governments to rebuild their economies. b. [Financing essential imports] Fundamentally, the plan helped European states to finance essential imports for economic rehabilitation and to contain demand-pull inflation. Approximately 12b in Marshall Plan aid had been expended by the middle of 1951, much of which helped member states to finance essential imports of fuel, food, fertilizers and machines. American funding of these imports was an economic stabilizer, as it prevented the shortage of these necessities. Inflation had been contained in most of the participating countries by 1950. c. [Supplementing government efforts] Moreover, Marshall Plan supplemented the European governments efforts at recovery through counterpart funds. In Britain, counterpart funds were used to liquidate the bank of Englands short-term public debt. In the Netherlands they helped to contain inflation and provide low-cost housing for industrial workers. In France, they supported the Monnet Plan for industrial modernization and re-equipment. d. Analysis: Hence, not only was Marshall Aid important in financing essential imports, it was a financial cushion that made governments more confident about undertaking necessary economic reforms. It helped to ease production bottlenecks, encourage higher rates of capital formation; all of which led to gains in productivity and to improvements in trade. 5. Marshall Plan led to other positive economic effects besides its contribution of funds a. Besides the contribution of funds to support West Europes economic recovery, the Marshall Plan was significant in the growth of these economies due to the structure of the plan that laid the grounds for European economic integration and increased the speed of technological developments and productivity in Europe. b. [European economic cooperation] The Marshall Plan laid the basis for European integration through the creation of a European economic community. In line with the goal of European self-reliance, the USA stated that it would only provide aid if West Europe agreed to rebuild their economies on a cooperative basis. Hence, the Organization for European Economic Cooperation (OEEC) was established. It grew to provide a large free trade area in which member states would enjoy stable currency, increased production and increasing prosperity. Integration channeled the revitalized strength of West Germany by keeping coordinated with the rest of Europe. c. [Technology] The Plan also included an elaborate technical assistance program with a goal of promoting industrial efficiency in Europe. A series of technical assistance projects, engineering schemes, and productivity surveys launched in Europe with the aid of American experts were examples of such technological assistance programs. In addition, the USA also planned to expand electric power facilities in Greece and improve public administration works In Italy. In addition, technical assistance funds were used to conduct seminars for European managers, to sponsor training programs for European engineers.

Sam & Eewei | Updated Oct 11

d. Analysis: Hence, the facilitation of European integration promoted freer trade within West Europe, and it increased the flow of capital and goods across border. As a result, intra-European trade more than doubled from 1948 to 1954. Technological programmes also contributed substantially to the high rate of European productivity that persisted through the 1950s. 6. Marshall Plans contributions did not amount to much a. It could also be argued that the Marshall Plan was not very significant to the European economic recovery as the quantum of aid given had not amounted to much. Between 1948 to 1952, a mere 1.7 billion programme of grants and loans to European nations to buy US products, which exceeded at no time 5% of the recipient nations GNP. b. [No correlation between amount of aid and performance] More importantly, the recovery record of Marshall Plan recipients demonstrates little evidence that would prove a steady correlation between the amounts of aid received and economic performance. Britain, for example, received more aid than any other European country, but experienced the slowest economic growth. In the cases of the French and British, MP money largely subsidized expenditures to retain British and French colonial empires. Thus, the plan only made it easier for the recipients to live beyond their means and to postpone much needed belt-tightening. c. [Marshall Plan contradicted Bretton Woods] Moreover, the Marshall Plan also contradicted and marginalized the IMF, which had been created at Bretton Woods. This was because the Marshall Plan was seen as a substitute to short-term borrowing from the IMF. More importantly, IMFs idea was that the Western world would move in the same economic paths, but Americas willingness to grant wide latitude to West Europe sidelined the IMFs objectives, which undermined the IMF for a long time.

Sam & Eewei | Updated Oct 11

REASONS FOR GERMANYS RECOVERY


1. German fundamental economic strengths a. There was a determination to keep Germany weak, preventing German economic recovery in the 1920s and that in turn had disastrous economic and political consequences to Europe. However, the Marshall Plan simply could not work without the recovery of Germany, which was the centre of Europe. For example, without German recovery French planning would come to nought: France was to use Marshall Counterpart funds to build huge new steel mills in Lorraine, but without German coal these would be useless. The British economy would never recover while the country was spending unprecedented sums averaging $300 million a year just to sustain the helpless population of its zone of occupation in Germany. Moreover, without Germany to buy their produce, the trading economy of Denmark was moribund. b. [Post-war economic disruption] There was a post-war miracle in Germany. Germany at the end of the war was destroyed by Allied bombers. Many German towns were left to waste by American and British forces. 20% of all housing throughout Germany was destroyed and transport was at a virtual standstill. Industrial production was down to about 10% of pre-war levels. c. [German wartime investment in industry] Wartime investment led to industrial expansion. One-third of German industrial equipment was less than 5 years old in 1945. Moreover, the industries in which wartime Germany had invested most heavily- optics, chemicals, light engineering and vehicles- were precisely those which would lay the foundations of its recovery. For example, at the Volkswagen works 91% of machinery survived wartime bombings. Once the workers houses had been rebuilt and transport networks put back in place, the factory was well equipped to produce and deliver one in every two cars made in Western Germany. d. [Continuity of past economic performance] There is also a case to be made that Germanys recovery after the war represented continuity with its pre-war economic progress. The investments of the Nazis in communications, armaments and vehicle manufacture were undertaken by an economy geared to war, but their real payoff came twenty years later. Many of the young managers and planners who went on to high positions in post-war German businesses and governments had their head start under Hitler; they brought to these committees policies and practices favored by Nazi bureaucrats. e. *Germanys fundamental strengths+ The economic miracle was an expected development given Germanys fundamental economic strength. Even in its truncated state, West Germany possessed the most developed infrastructure in Europe, contained large internal resources such as coal and machine-tool plants and had a highly educated population especially strong in managers, engineers and scientists which was swollen by the emigration of talent from the East. 2. Contributions of USA EXTERNAL a. Marshall Aid was not very important to the recovery of Germany because the amount it was given was rather ineffectual, as compared to other European countries. Germany only received about one-tenths of the total $12 billion that went to the 16 European countries. b. The decision to deindustrialize Germany was abandoned, which was a vital decision made by America. This gave confidence to Germany and provided basic confidence of Germany security, which was partly the confidence provided by a military presence. This led to the creation of NATO and the later rearmament of Germany. This provided a direct stimulus in terms of economic activity linked to the military. Germany did not have to spend money on defence, and this made economic recovery easier. HOWEVER, although Germany did not have to maintain an army due to the presence of US troops, it had to pay for occupation costs. f. America undertook a currency reform in 1948, which solved the problem of post-war hyperinflation. Up to that time, the heavily inflated Reichsmark had impeded economic exchange and encouraged a black market on which cigarettes rather than money served as the generally accepted currency. Under the currency reform, the new Deutschemark was set at one-tenth the value of the old. The currency reform had the desired effect of bringing food and consumer goods back to shops, for which the destitute masses provided high demand for.
7

Sam & Eewei | Updated Oct 11

2. Contribution of German individuals & German workforce (Separate points) INTERNAL a. [Contribution of German individuals] One of the most important would be Konrad Adenauer. His approach for the economy is the social market economy. Adenauer and his economics minister, Ludwig Erhard, belonged to an economic group that called itself the Ordoliberals. The Ordoliberals were committed to free markets, and believed that the disaster of Nazism was the culmination of cartelization and state control over the economy. The governments responsibility would be then to create and maintain a framework that promoted competition and prevented cartels. They believed also in a strong state and a strong social morality, as they believed that a pure free market could not float freely but needed to be maintained by a strong social values such as the protection of the weak, the cutting down of excesses and limiting the powerful. b. *Erhards policies+ Edhard had announced the currency reform. He abolished price controls and went on to cut tax rates. In May 1948, directive followed directive removing price, allocation and rationing regulations on food and consumer goods. Ceiling prices of many other goods were raised substantially, and many remaining controls were no longer enforced. Along with a currency reform and decontrol of prices, the government also cut tax rates. The corporate income tax rate, which had ranged from 35% to 65%, was made a flat 50%. Shops began to be filled with food and consumer goods again as shopkeepers realized that the new money they sold them for would be far more than the old money. Absenteeism plummeted. By October 1948, average absenteeism was down to 4.2 hours per week. By 1958, industrial production was over four times its average annual rate for the 6 months in 1948 preceding currency reform. c. [Availability of a workforce] The German workforce had certain advantages, especially its low-cost nature. It was cheap because of the influx of East Germans. People from Greece, Turkey, Yugoslavia, Italy flooded in and were grateful for steady, hard-currency wages and employment. They were grateful and compliant. It was recognized by trade unions, that higher wages had to result from higher profits hence the trade unions were fairly compliant. They are portrayed as the partners as the government. One reason why trade unions refrained from pressing unrealistic wage demands was the fear of inflation, a legacy of the bitter experience of 1923. Strikes was also rarely resorted to union leaders believed that it produced a bad atmosphere. d. The docility of the German works was also because of their fear of the past in the 1920s, and the consequences of being involved in aggressive nationalism. Internationally condemned after Hitlers fall for blindly obeying immoral orders, Germans thus turned the defect of their industrious obedience into a national virtue. The shattering impact of their countrys defeat and subsequent occupation made West Germans amenable to the imposition of democracy in a way that few could have imagined a decade earlier. In place of a devotion for its rulers, Germans in the 1950s attracted international respect for their similarly wholehearted devotion to efficiency, detail, and qua;ity in the manufacture of finished products. 3. Conclusion a. West Germans legendary economic success owed more to good management than to good luck; above all, it was due to the peoples resolve to make use of a favorable situation. The significance of the German boom was that it was export-led, which was only possible because domestic consumption was kept down. Moreover, the Germans were willing to forgo present consumption for investments sake, as even before the war a feature of the German economy had been the high percentage of the gross national product spent on capital formation, which the tax system was designed to favour. The German workforce was also willing to receive a lower pay, as wages and salaries took about 47% of the GNP compared with the British figure of 58%. Lastly, the Germans were also willing to save. That, combined with low wages and domestic spending helped to peg prices.

Sam & Eewei | Updated Oct 11

INCREASE IN THE EUROPEAN POPULATION AND RISE OF THE CONSUMER 1. Post-war baby-boom was a stimulus to the global economy a. The post-war baby boom in Europe that lasted from 1950 to 1970 was a stimulus to the global economy as it created a demand for baby products, which subsequently led to the creation of a teenage consumer market. b. [Post-war baby boom] Between 1950 and 1970, the population of the UK rose by 13%, West Germany by 28% and France by 30%, which translated into a large increase in the proportion of children in the population. This trend was driven by a general post-war optimism, which saw eager demobilized soldiers taking the first opportunity to marry and start a family as Europe became more stable after the war. As a result, the baby boom led to a rise in consumption of baby products, then a rise in government and private spending on education. c. [Teenage consumerism] Subsequently, this resulted in the creation of the teenagers as a consumer group, as rising real wages in the family meant that teenagers could increasingly retain their earnings and savings, and consume in their own rights. In France, by 1965, 62% of all 16 to 24 year-olds still living with their parents were retaining all their own earnings to spend as they wished, and this was a stimulus to the economy. The most significant impact was on the music industry, as the turnover from record sales rose from $277 million in 1955 to $600 million 4 years later. This trend was galvanized by technological innovations such as the transistor radio. d. Analysis: Hence, the post-war baby boom created a new class of consumers, the teenage group, which for the first time in history had a spending power that was separate from the family. The European economies received a boost as never before in history had so much money been spent on the adolescent. 2. Rise of European consumerism a. As a result of higher real wages and the increasing European population, a trend towards consumerism emerged as consumers became more willing to purchase non-essential products, a stark contrast to the prewar period. b. [Rise in real wages] In the pre-war period, the average European household did not have much money left over after they spent on essentials. However, this all changed in the next generation as in the two decades after 1954, real wages almost tripled in West Germany and the Benelux countries, while purchasing power doubled in Britain. As a result, food and clothing absorbed just 30% of consumer spending in Britain. This meant that people had extra money for discretionary spending. This was seen in West Germany, when retailers sold just 900,000 pair of ladies nylon stockings, the emblematic luxury item of the immediate post war years. In 1953, they sold 85m pairs. c. [Supermarket] The rise of consumerism was also made possible by the creation of supermarkets in the 1960s. The rationale for supermarkets was that shoppers would spend more in any one shopping trip if most of what they wanted was conveniently available in one place. Hence, the increase in supermarkets in Europe spurred the growth of the global economy; in The Netherlands, the number of supermarkets increased from 7 in 1961, to 520 in 1971. In the same decade, the number of supermarkets in Belgium rose from 19 to 456. d. Analysis: Supermarkets, combined with the rising real wages, made it more convenient for shoppers to buy non-essential items as many varieties of the same basic goods were made available at a single location. The scale at which these goods were being sold was massively increased by the advent of supermarkets, and made possible by rising real wages. 3. Rise of European consumerism attributed to innovations in the consumer sector a. The rise of European consumerism can also be attributed to innovations in the consumer sector which increased the consumers capabilities to purchase, and the producers ability to produce more cheaply. b. [Fridge] The introduction of the refrigerator meant that items could be kept longer, and consumers could spend more on consumables because they could be preserved longer. By 1974, the absence of a fridge in most places would have been remarked upon: in Belgium and the UK, 82% of households had one, in France, 88%. Most remarkable of all, 94% of Italian households now owned a fridge.
9

Sam & Eewei | Updated Oct 11

c.

[Economies of scale] On the other hand, the technological development which allowed producers of big ticket items to produce more and with less costs was the development of economies of scale, bringing about mass production. Washing machines and fridges were becoming cheaper as they were being made on a far larger scale than ever before, as investment at one end and sustained high demand at the other brought prices down: even in France, where mass production always lagged a little behind, turnover in the toy industry increased 350% in the early baby-boom years 1948-1955. The car was another luxury good which was more commonly owned by the 60s. By the early 1950s, most of these car manufacturers had designed and developed new factories and production lines in ever-increasing numbers. As a result, car ownership rose throughout Europe in the 1960s; for example, from 2.2 million vehicles in 1950, British car ownership rose to 8 million by 1964. d. Analysis: Hence, consumers were more willing to buy consumables due to their newfound ability to preserve them for longer. On the other hand, goods were being mass-produced cheaper than before, which spurred a surge in demand.

10

Sam & Eewei | Updated Oct 11

TECHNOLOGICAL DEVELOPMENTS 1. Technology and science became more applied to life a. Technology and science were central to economic growth in a way that was not present before. Previously, scientific achievements did not translate into actual change for peoples lives. In the post-war era, there was a greater degree of immediate practical application of scientific discoveries as compared to the pre-war period. For example, transistors emerged as a by-product research in solid-state physics and lasers as a product of research on molecules in electric fields. More importantly, in India and Indonesia, state of the art genetics made it possible for them to produce enough food for their exploding populations. b. [Idiot-proof] The translation from esoteric science into everyday practical use made it necessary for many products to be produced in an idiot-proof fashion, which required very little technological understanding by the end-user despite their highly complex nature. This had the benefit of making technologies which were previously obscure and difficult to understand more widely available to the masses. c. Analysis: As such, these technological developments increased the productive capacities of economies all over the world. Moreover, the simplification of technology made possible the creation of many everyday products which were rapidly bought up. 2. Technologys application to agriculture a. Another significant impact of the advancement of technology was its impact on agriculture, which predominantly occurred in America but later was replicated by Europe. b. [Farming methods] Technological change in terms of farming methods brought about one of the most dynamic periods in American agriculture. Between 1948 and 1998, agricultural labor productivity increased more than eightfold. Technological developments allow computers, satellites, and microchips to give farmers better information and make machinery smarter to get the most out of every input. For example, new tractors developed in the 1990s were easier to use; these tractors had better visibility, including improved lighting systems for night time work and sophisticated finger controls. c. [Genetics] Technology was also applied to crop genetics. The development of specialized seeds and breeding stock gave farmers and ranchers increased profits through improved control over their production. Crops in the 1990s became more drought resistant, while fruits and vegetables were developed with improved immunity to killing frost. With regards to livestock, genes were also developed to protect poultry and cattle from specific diseases, and dairy farmers could boost milk production by injecting cows with a particular growth hormone. d. Analysis: The successful application of technology to agriculture in the West was seen in the European phenomenon of wine lakes and Butter Mountains. These successes translated into the Green Revolution, which had a significant impact in crop-producing countries. By 1990, 70% of the wheat and rice planted in developing countries such as Thailand and India were high-yield crops, and grain production more than doubled in Asia between 1970 and 1990. 3. Technological spinoffs from military purposes (Refer to above on Cold War and WW2) a. Technological spinoffs from the military research conducted during both the Cold War and World War 2 had stimulating impacts on the economy when applied to civilian usage.

4. Technological developments made possible the rise of consumerism (refer to above on fridge and economies of scale)

11

Sam & Eewei | Updated Oct 11

PRODUCTIVITY & PRODUCTION 1. European productivity growth was driven by the growth of the labour force a. The key reason for higher productivity was an increased labour force. Europes need for labour was met with two predominant types of migration. b. [Internal migration] The first was internal migration. In the next thirty years, due to the shift to industrialization, many moved from the countryside to the cities and towns. In Spain by 1970, 1.6 million Andalucian born Spaniards lived outside their native region. In Sweden, a million Swedes from the rural centre and north of their country who moved to the cities in the decade after 1945. This helped to shift labour away from the less profitable agricultural sector to rising sectors such as manufacturing. c. [European migration] A second route involved moving from one European country to another. There was large-scale migration from poorer European countries to richer ones. Cross-border labour movement begun after the end of the war. The Bonn government signed a series of accords with Spain, Greece and Portugal, encouraging the temporal migration of workers into Germany. This filled in demands for labour in labourintensive industries. d. Analysis: As a whole, migration was very significant to European recovery and economic boom in the 1960s as it provided an abundant and cheap source of labour to industries. Moreover, other government and employer incurred costs such as pensions and social security did not apply to migrant workers from other countries, which made them cheaper labour compared to local workers. Moreover, migrant workers tended to be more docile, and were not represented in workers union, which lessened their ability to challenge their employers. 2. Application of technology in mass production improved productivity a. Another reason for the dramatic increase in productivity would be the use of technology in production methods. Specifically, the development of economies of scale allowed producers of big ticket items to produce more and with less costs with mass-production. b. [Improvement in productivity] Washing machines and fridges were becoming cheaper and yet more sophisticated as they were being made on a far larger scale than ever before. Even in France, where mass production always lagged a little behind, turnover in the toy industry increased 350% in the early baby-boom years 1948-1955. The car was another luxury good which was more commonly owned by the 60s. This was because European car manufacturers such as Porsche started to think of a new kind of family car which was reliable, easily mass-produced and affordable. By the early 1950s, most of these car manufacturers had designed and developed new factories and production lines. As a result, car ownership rose throughout Europe in the 1960s; for example, from 2.2 million vehicles in 1950, British car ownership rose to 8 million by 1964. c. Analysis: The phenomenon of mass-production made possible massive increases in productivity, as goods were being produced at a far larger scale and at lower costs than ever before. With the introduction of mass production, labour productivity in West Europe rose by 3 times the rate of the previous 80 years. 3. Outsourcing of labour and rise in offshore finance improved productivity a. In the last quarter of the 20th century, production was revolutionized with the introduction of outsourcing of labour and the rise of offshore finance, which resulted in improved productivity as firms now tapped on cheap labour overseas and at the same time, invested in developing economies. b. [Tapping on cheap labour] The phenomenon of outsourcing labour needs made it possible for firms to tap on the comparative advantage of cheap labour in developing countries, by relocating their production lines there. For example, in 1975, there was almost no steel production in the developing world but by 2000, steelmakers in developing countries produced more raw steel than West Europe and America combined. In order to tap on cheap foreign labour, multinational firms invested in developing countries by creating production plants there. For example, Volkswagen set up plants in Argentina, Egypt, Peru and South Africa for that purpose.
12

Sam & Eewei | Updated Oct 11

c.

Analysis: Put together, the outsourcing of labour and increased investments in developing countries freed up labour in the low-end manufacturing industries in developed nations, as manufacturing employment in Europe fell from 27% in 1970, to 18% in 1990. This caused a structural shift in focus to high-tech, capital intensive sectors and increased productivity in these sectors. For the developing nations, increased foreign direct investments boosted these economies productive capacities as the Third Worlds share of global industrial exports rose from 5% to 10% from 1970 to 1980. Hence, the phenomenon of outsourcing and offshore finance allowed developed countries to create a new niche in capital intensive goods, while tapped on the comparative advantage of cheap labour in developing nations, helping to boost their productivity.

13

Sam & Eewei | Updated Oct 11

EMERGENCE OF OIL 1. Oil emerged as the dominant and low-cost fuel a. [Dominance of oil] Oil prices remained low and stable, which was important in facilitating economic growth. The energy usage increased during this period. In 1950, 2.5b people consumed 2.5b tons of coal-equivalent energy. Population increased rapidly during the next quarter-century, but energy use increased almost twice as fast. By 1979 the worlds 4.4 billion people were consuming 8.7 billion tons of coal-equivalent energy. Inexpensive imported oil became the primary energy source supporting the dramatic increases in economic output. It replaced the dominant fuel, coal, because coal was more expensive because of labour costs as it came from the European countries, and it was a filthy fuel which needed high costs to fall in line with safety and environmental concerns. b. [Low prices of oil] With an ever increasing demand for oil, the supply had to be constant and at sustainably low prices. From 1950-70 Western Europe increased its dependence on oil for total energy needs from 14.3% to 55.6% while Japans oil dependence increased from 5% to 68.8%. By 1970, demand for oil had outstripped coal as an energy source from 44.5% to 31.2%. Oil averaged less than $2 a barrel and was vital in persevering and maintaining the momentum of recovering and developing countries.

2. Oil prices were stable as it was sold in an oligopolistic market which wanted to maintain its profits a. [Oligopolistic nature of the market and maintaining demand] There were seven oil companies in charge of oil production and threw a stranglehold over Middle Eastern oil as early as the late 1930s. Till 1972 these seven sisters were still producing Middle Eastern oil. These seven sisters cooperated with each other to restrict supply and restrict price competition from independent oil companies and prevented the oil prices from dropping too low. They wanted to preserve their profit margins. They also placed an unofficial price ceiling on the oil because of the potential negative consequences on the economy. This demand and prices survived periodic recessions and proceeded at a steady rate. b. [Profitability of oil] Oil producers only wanted steady or steadily increasing demand that guaranteed a reasonable profit. In 1947, Saudi oil cost 19c a barrel plus 21c royalty, and Bahrain oil cost 10c a barrel plus 15c royalty. Consumers were paying $1.80 a barrel and more for that same crude oil. Even when development costs of the oilfields were figured into the selling price, the oil companies were making a great profit. In fact, profit margins increased enormously in the 1950s and 60s while production costs decreased. The volume of oil shipped increased, and the advent of supertankers decreased shipping costs while selling prices were increased. In the late 1960s, Middle Eastern oil that was delivered to Europe and the United States at $2 and more a barrel had cost less than 40c to produce and ship. 3. American pricing power over oil a. America also possessed some pricing power due to its oil reserves and thus it was to some extent due to Americas efforts that oil prices were as low as they were. b. As late as 1952, crude oil production in the USA still accounted for more than half of the world total and excess American oil was released into the market to counter the price pressures induced by the Suez Crisis of 1956 and the Six Day War of 1967. c. However, by 1971, US energy independence came to an end as America became a net oil importer; the locus of pricing power shifted to the producers in the Middle East.

14

Sam & Eewei | Updated Oct 11

TO WHAT EXTENT WAS AMERICAN DOMINANCE /USA THE MOST IMPORTANT FACTOR IN THE GROWTH OF GE? 1. USAs Marshall Plan in Western Europe helped revitalize European economy 2. USAs role in Japan led to Japanese economic recovery 3. USA played a stabilizing role in the international monetary systems created after war a. Key role of USD b. Strong US support for free trade 4. Counterpoint: Not important because Marshall Plan was not all that useful 5. Counterpoint: USA brought an end to the Bretton Woods system a. Because of the Vietnam War in the late 1960s (US$30bil a year) and LBJs Great Society Programme, the USA faced rapid inflation and thus had to abandon the fixed exchange rate system for fear of even greater BOP deficits it was unilateral American interests which caused the world to ditch this BWS agreement. b. Nixon announced in 1972 that the USA would abandon the fixed exchange rate system, causing the BWS to collapse overnight since the USD was no longer convertible to gold. This would introduce an unparalleled degree of uncertainty in international monetary relations as it ushered in the floating exchange rate system, removing the stability of all currencies because of this shock, speculators and investors dumped their USD, causing it to fall in value by 1973, the worlds major currencies were all floating

15

Sam & Eewei | Updated Oct 11

Reasons for Japanese Growth Role of America 1. Japanese deriving inspiration and technology from America a. The Japanese derived inspiration and technology from America as their economic miracle was a miracle of aspiration. The technological supremacy of America stimulated Japan into emulating America. b. The Japanese copied, adapted and improved on industrial methods. They copied by reverse engineering, taking Western models apart and making them better. They also sent missions to Western lands and learnt by watching and asking. Japanese technology was largely borrowed or licensed from America. Sony made cheap copies of tape recorders American occupiers brought to Japan. Companies like Honda and Toyota carefully imitated American production techniques of automobiles to supply to the Japanese market. c. Analysis: While America was a genuine inspiration to Japan in terms of its industrial methods and technological improvements, much of the success also depended on Japans ability to innovate and adapt new techniques from their American counterparts. Sony turned out the worlds second transistor radio in 1955 and invented a miniaturized pocket radio in two years, improving on the American model. They also adapted the supermarket model to become just-in-time, kanban, delivery, The Japanese learnt appropriately and adapt foreign ideas to particular circumstances. 2. Rebuilding postwar economy with the help of America a. Japan was dependent on American policy and aid in the postwar period in order to rebuild its shattered economy. America not only did not impose its plan to devastate Japan by forcing it to pay reparations, it provided Japan with the necessary aid and resources to rebuild its economy. b. Aid to Japan more than doubled: from January to December 1947 it amounted to $404m, compared with less than $200m for all of the previous year and a half. In 1949 it peaked at $534m, and the total amount of more than $1.5b provided a helpful economic boost. America also helped to keep the price of oil low ($2 a barrel) and shared technology with Japan, such as the mammoth tanker, which significantly reduced transportation costs. These developments worked to the advantage of the poorly resource-endowed Japanese economy. The demilitarization of Japan meant its military budget could be put to economically productive use. The JapanUS Treaty of Mutual Security, signed in 1952, provided a security umbrella for Japan and allowed Japan to save on military expenses, freeing up money for productive allocation and investment. c. Analysis: Therefore, the most important role of America could be said to have been played during the postwar period, as Japan had not built up its own national infrastructure, and was also subject to the policies decided by the victors of the war, namely America. To this end, America provided support and help, thereby paving the way for Japanese economic growth. However, when the US advantage was eroded, Japans ability to import more of its needed resources increased, again displaying the dependence of Japan on the US. 3. Transformation of the Japanese society and economy during the American Occupation a. Another point of major influence was the policies enacted by the Americans during the American occupation in the Japanese domestic economy, which helped Japan to consolidate its economy. b. [Land reform policy] Land reform was carried out in the belief that agrarian unrest had contributed to extreme forms of nationalism, hence to Japanese aggression. The Americans sold these lands to the peasants, creating a class of peasant proprietors. The reform made Japan a country of peasant proprietors. Their natural conservatism was to be a key factor in sustaining stable right-wing governments, while their improved economic status helped to create wider domestic market, which was crucial to industrial growth. c. [Compliancy of the labour force] Initially, America introduced the Trade Union Act and Labour Relations Act, which gave Japanese workers the right to organize themselves into trade unions. They reversed this policy because trade unions were the basis of communist power. In July 1948 the constraint was codified as a prohibition of strikes in public enterprise. This ensured the compliancy of the Japanese labour force, preventing possible strikes which would cause instability, thereby laying a foundation for economic growth.
16

Sam & Eewei | Updated Oct 11

d. Analysis: The Occupation could have said to facilitate the postwar development and growth in Japan. However, the transformation of Japan should not be viewed as entirely American intervention. The failure of the bid for empire and the national collapse forced Japan to move in the directions it took under the occupation. Role of the Japanese government 1. Assisted and pursued export-oriented industrialization a. The Japanese economic miracle was a product of an effective combination of its favourable trade relations, as well as the export-oriented policies that the Japanese government pursued. b. The Japaense government devised a broad range of export incentives: export price subsidies, formation of the Japan External Trade Organization; generous export-financing facilities; and encouragement of industry export associations. The Ministry of Trade and Industry provided continual advice and local interventions through local offices and tried to ensure that excessive domestic competition did not erode the strength that Japanese firms needed in order to complete overseas. It also facilitated the 1980s reduction in relative importance of labour-intensive industries like textiles, which could not compete with lower wage scales in the modernizing economies of Korea, Taiwan, and Hong Kong. c. Analysis: Therefore, the Japanese government definitely sought to make Japan a conducive economic environment in which export-oriented industries were supported; they also ensured Japanese competitiveness in the world market. However, a large part of Japanese economic success was due more to favourable international conditions, such as the relatively low value of the yen. (360Y to the US dollar) 2. Development and protection of domestic industries a. The Japanese government also encouraged domestic industrial growth in general through encouraging the establishment and development of big business (keiretsu). It saw the success of the Japanese economy as heavily dependent on these big businesses. b. To maximize the use of resources, MITI preferred to have competition limited to a small number of large corporations, sponsoreingthe formation of conglomerates. Mitsubishi and Mitsui, whose trading companies had been dissolved in the first phase of the occupation, were back in large-scale operation by 1955. In 1953, the Diet amended the Anti-Monopoly Law to relax restrictions on cartels, interlocking directorates, and mergers. Six Japanese firms joined forces, forming a market stabilization group in 1956 to control the domestic price of televisions. The Japanese government spurred the development of the television industry through preferential credit allocation and lax antitrust enforcement. c. Analysis: These big businesses maintained a high price level in the domestic market, and benefitted from the government tariff policy that kept the market closed to foreign producers. With high profit margins and an ensured market at home, the industry turned to exports. Through below-cost exports to the US market, Japanese firms were able to drive most of their US competitors out of business. However, in some instances, MITIs role was modest at best. The consumer-electrics business developed with little government support three Japanese companies succeeded in transforming a fifty-thousand-dollar VCR, which only television stations could afford, into a five-hundred-dollar consumer item. 3. Direction of capital and loans towards industry a. To aid the development of industry, the government sought to direct capital in the form of bank loans towards the industries, such that they would not be subservient to shareholders and their desire to profit. b. The Bank of Japan stood behind commercial banks and their loans. The Ministry of Finance signalled commercial banks which industrial sectors were of special interest. Lending to favoured industries was implicitly a low-risk proposition; capital was made available to the banks for such lending and loan losses would be covered by the central bank. Therefore, the government directed capital in order to finance certain companies. The historic Japanese pattern of thrift, which led to more funds for loans and investment, was further encouraged by tax incentives, large lump-sum year-end bonus payments,
17

Sam & Eewei | Updated Oct 11

minimal retirement programmes and expensive housing. In 1987, Japans net household savings as a percentage of disposable household income was 16.8%, five times the US rate of 3.3%. c. Instead of building a welfare state, the government encouraged the Japanese to become a welfare society through total employment. The money the Japanese state saved from public spending was invested in the economy in the form of liberal bank loans from the Bank of Japan to the citibanks and other regional banks that boosted competition and technological innovations. d. Analysis: Hence, the measures adopted towards the commercial banks and to the welfare society effectively allowed the government to direct capital towards the development of such industries. Role of WWII 1. Impacts of WWII led to the need to rebuild infrastructure and mindset a. WWII led to the need to rebuild infrastructure and mindset. Japans industrial infrastructure had to be rebuilt from scratch, meaning that the Japanese industries could choose to use the most advanced technology. This led to it being able to rebuild its economy with the best materials. b. Also, Japans defeat led to a general consensus that she should turn away from aggressive nationalism, focusing purely on economic goals. The war made Japan open to change and receptive to those forced upon them in the later American Occupation. Japan also learnt specific economic lessons. Pre-war Japan had been convinced that control of raw materials was a necessary prerequisite for power and wealth and hence gone to war to secure this control. However, after the war, they found out that raw materials could be delivered on competitive terms anywhere in the world. Japans militaristic policy had also invited precautions and reprisals; they now learnt that there was more to gain by buying than grabbing. c. Analysis: Therefore, WWII allowed Japan to rebuild its infrastructure and mindset, such that they were able to build up solid foundations for their economy. 2. WWII accelerated aspects of industry and industrial development a. The needs of war also served to accelerate certain aspects of industry and industrial development. It raised the level of technology and production capacity in heavy industry, notably in iron and steel, machinery, and chemicals, while leaving in place a network of financial controls, devised to give priority to munitions, which were available to governments as instruments of reconstruction. b. [Rapid development] Between 1937 and 1945, during the war years, Japanese economy received rapid development. Production indices showed increases of 24% in manufacturing, 46% in steel, 70% in nonferrous metals, and 252% in machinery. Much of the increasingly militarized economy was diverse and sophisticated in ways that facilitated conversation to peacetime activity. c. [Automobile industry] On the automobile industry, for instance, of the 11 major auto manufacturers in postwar Japan, ten came out of the war years: only Honda is a pure product of the postwar period. Three prospered as the primary producers of trucks for the military after legislation passed in 1936 had driven Ford and General Motors out of the Japanese market. d. [Electronics industry] Other corporate giants on the postwar scene, such as Normura Securities and Hitachi, gained comparable competitive advantage during the war years. Hitachi was established in 1910 but emerged as a comprehensive vertically integrated producer of electric machinery in the 1930s as part of the Ayukawa conglomerate that also included Nissan. Similarly, Toshiba dated back to 1904 but only became a comprehensive manufacturer of electric goods following a merger carried out in 1939 under the military campaign to consolidate and rationalize production. 3. Link to American Occupation a. (Take from American Occupation, rebuilding postwar economy and transformation above)

18

Sam & Eewei | Updated Oct 11

Role of cultural factors and social changes: 1. National character and historical legacy a. The national character and historical legacy of the Japanese positively impacted the economy. b. [Economic success] Basic Japanese values were invaluable for economic success: honesty, frugality, and an orientation towards collective goals. The shape and spirit of Japanese capitalism also were acceptance of the deep sense of obligation, respect for hierarchy, and belief in long-term, binding business commitments. This uniquely distinctive culture helped overcome the major obstacles to economic resurgence. Japan also protected its producers at the expense of Japanese consumers, believing in a decent, moral society over one powered by self interest. c. [Reinforced by corporations and schools] The corporations themselves reinforced this. Firms like Toyota swallowed their employees; they had their own calendar, independent of national holidays and weekends. Most engaged in company-sponsored activities on at least one holiday a month. In school, Japanese children were indoctrinated from a young age to be part of a team: the very special Japanese race, and to place the will of the collective over personal growth. d. Analysis: Therefore, the national character of the Japanese was vital in their economic success. They produced a different strain of Western capitalism, one that emphasized the group over the self, and were able to accept delayed self-gratification in order to achieve more overarching goals. 2. Stability of labour-management relations a. Japan had a developed consensus between workers and management because employers and employees saw mutual advantage in one approach. b. [Decision-making process] Within the company, the Japanese had a system of careful and extensive consultation before arriving at a decision by consensus. Instead of an individual decision, the Japanese conducted wide informal discussions, involving subordinates. Seeking the opinions of the employees reinforced the sense of common identity and loyalty that the worker had to the corporation. c. [Collective bargaining] Collective bargaining in Japan and over wages and other monetary conditions were unique in the 1950s. Groups of unions would lodge their wage demands; if these were not met, they would simultaneously stage repeated, short industrial actions. This led to a system of industry and national level coordination of enterprise wages. Such a coordinated system was important as enterprises where strike action was taking place would not lose market share to their competitors and, as industrial action was short, it would not threaten the viability of the company. d. Analysis: Therefore, the stability of relations between labour and management made it such that work was carried out efficiently and productivity, with wage demands taking into consideration the economic conditions in the country, and strikes having a smaller effect in hampering the companys progress. 3. Japans unique employment and wage system a. Japans unique lifetime employment and a seniority wage system ensured loyalty to the company, and opportunities for companies to invest heavily into their labour, increasing productivity. b. [Lifetime employment] In return for his job security, the employee made a lifelong commitment to the firm. This strengthened their motivation to work harder for the firm. Furthermore, knowing that their core workers were likely to stay on, employers were more willing to invest substantially in training. Workers were rotated from one position to another such that they gained skill and experience in a range of tasks. This process, known as multi-skilling, made the workforce better able to adapt to technological change and allowed companies to be flexible in responding to market changes. c. [Wage system] The hold on this labour was made more secure by a neiko or seniority, wage system, in which monetary rewards were deferred by basing wages on length of service. Young workers were recruited at low wages and were retained by a promise of job security and a wage system which reinforced seniority. There were also much smaller gaps in rewards between those who held high and low positions, making it easier to
19

Sam & Eewei | Updated Oct 11

get rid of the divide between the workers and management. In the 1990s, the average pay difference between the president and his shop floor workers in Japan was eighteen times; in the USA it was 119 times. d. Analysis: Therefore, the wage and employment system closely linked ensured that each Japanese citizen had a productive role in the economy for most of his lifetime. He was able to contribute substantially to the company without engaging in pointless competition with his peers and juniors. However, lifetime employment was only practiced by the biggest companies such as Toyota and Toshiba, who were able to withstand economic downturns. 4. Educating a skilled workforce a. A skilled workforce was one of Japans strengths, which complemented their employment system well. b. [Skilled workforce] The high quality of the Japanese workforce was groomed in an intensely competitive public education system and trained by the companies themselves. Japan produced many more engineers than any other western country (about 50% than the US) and had nearly 700,000 R&D workers, which was more than Britain, France and West Germany combined. The meritocratic Japanese system made the Japanese spend longer hours in school. The habit of supplementing public education with private tutoring was well-established in South Korea and Japan; in Japan in the 1950s, 70% of teenagers received tutoring. The meritocratic education system provided the best incentive for people to work hard. c. [Role of women] Japan educated girls to a high level and kept them out of the workforce. A study for the World Bank concluded that instruction at home by mothers had a strong positive correlation with the high test scores that East Asian children achieved. d. Analysis: The role of woman in supplementing a meritocratic education system made clear the positive impacts of such an arrangement. The ability of workers to contribute productively to their countries was in part due to the high standard of education they had received.

20

Sam & Eewei | Updated Oct 11

Role of the Cold War 1. Korean and Vietnam War: beneficial effects to the Japanese economy a. Thanks to superpowers needing technology and manufactured goods, Japan saw a rise in demand for their exports, which also occurred during the Korean and Vietnam War, two events in the Cold War. b. [Industrialization and export] The United Nations used Japan as a base during the war, which resulted in a large quantity of goods and services ordered from Japanese enterprises. This was financed by Special Procurements which allowed MacArthur to purchase army supplies in Japan without going through the complex purchasing system of the Pentagon, subsequently pumping in $3.5b worth of funds into Japan. Japans manufacturing output leapt by 50% between 1950-1 and standards of living returned to prewar levels. Similarly, in the Vietnam War, Japan served as an industrial base for the USA. Shipyards took on triple shifts to meet the USAs demand of cargo ships. c. [Investment and technology] Most importantly, the boom contributed to a growth of investment. During the Dodge recession, firms had not been able to commit themselves to massive investment. The Korean War encouraged them to make such investment with the prospect of strong demand. The early 1950s saw the introduction of a wide range of innovations. Innovations in the steel industry, , particularly in rolling technology, succeeded in reducing the cost of steel products by 40% between 1951-4. Substantial external economies created rapid expansion of machinery industries in the late 1950s and 60s. d. Analysis: Hence, the Korean War was largely beneficial to the Japanese economy as a whole, encouraging investment and export demand, raising the national income of the economy. 2. The Reverse Course during the American Occupation a. During the American Occupation, some policy reforms were influenced by the Cold War which helped Japan rebuild its economy instead of imposing devastating reparations. b. [Reparations] The initial plan of America was to weaken Japanese economy and impoverish its people. If the plan to impose devastating reparations on Japan had been carried through, Japans economic recovery would have been impossible. This policy was reversed as Cold War concerns required a strong ally in Japan. This plan to punish Japan was never implemented and this paved the way for growth. c. [Policy towards the zaibatsu] Zaibatsu were widely considered to be beneficial to the Japanese economy and government. It allowed for great capital concentrations that could be used to pioneer new fields, permitting a high rate of reinvestment and growth. As the zaibatsu was associated with wartime militarism, America sought to minimize their power through anti-monopolistic measures. However, complete dissolution of the zaibatsu was never achieved by Allied reformers because in an effort to reindustrialize Japan as a bulwark against Communism, the US government rescinded the SCAP orders to deconcentrate Japans large companies. This facilitated recovery by preserving historical continuity. d. [Compliancy of the labour force] Initially, America introduced the Trade Union Act and Labour Relations Act, which gave Japanese workers the right to organize themselves into trade unions. They reversed this policy because trade unions were the basis of communist power. In July 1948 the constraint was codified as a prohibition of strikes in public enterprise. This ensured the compliancy of the Japanese labour force, preventing possible strikes which would cause instability, thereby laying a foundation for economic growth. e. Analysis: In sum, these different policies dramatically changed Japanese economic foundation and therefore increased its economic progress in the postwar years.

21

Sam & Eewei | Updated Oct 11

Role of Japanese corporate strategies and production practice 1. Innovation and technology for efficient production a. One of the Japaneses greatest traits was their ability to look beyond existing or inexistent equipment, and design and adapt technology to suit their needs, enhancing their production process. b. After the war, the Japanese needed new equipment, which gave them the opportunity to combine ingenious machines. The key change took the Japanese from single-purpose to multipurpose machines, which required a workforce trained to deal with a range of jobs. The Japanese adapted the equipment so that by the 1970s, they could change dies in stamping presses in five minutes, compared to eight to twenty-four hours in an American plant. Improvements on the production line placed Japanese factories in a class by themselves in managing complex assembly operations. On average, the Japanese had the fastest turnaround times. c. [Emphasis on low-cost] There was an also emphasis on improving production techniques to reduce cost. The P200 message of the Hitachi factory stood for the 200% productivity improvement the plant hoped to achieve that year. Japanese industrialists applied brain and brawn to making products in the most efficient manner possible, resulting in an evolutionary process in which Japan displaced the US as the leading innovator in assembly line methods. d. Analysis: The constantly expanding production base allowed Japanese companies to move quickly down the learning curve of production costs, as they mastered all of the tricks of streamlining costs and time involved in the production process. 2. Focused and flexible manufacturing a. The Japanese adopted two manufacturing techniques, focused and flexible manufacturing, both which aimed to quicken and enhance the production process. b. [Focused manufacturing] To complete effectively in foreign markets, Japanese companies focused production on a limited number of models of product variations. By maximizing production in a narrow product line where market demand was strongest, production costs could be brought below those of full-line producers. By the early 1970s, Toyota could sell a forklift truck in Western Europe at prices just slightly above the costs of materials to a larger Western manufacturer of this equipment. c. [Flexible manufacturing] In Japan, within the scope of their narrow focus, they also diversified their products. They catered to special interests and switched models as demand dictated. These quick-change techniques made it possible for Japan to gain first-mover advantage; to copy quickly the successes and drop the mistakes of other makers. Another aspect of flexible manufacturing was just-in-time delivery (kanban), copied from supermarkets. Scheduling deliveries of parts and components from subcontractors on the day they were to be assembled into the final product increased efficiency in many parts of the production process. d. Analysis: Hence, both methods of manufacturing allowed the Japanese to produce efficiently while maintaining the quality and variety of their products. 3. Emphasis on quality and quality control a. Japan previously had a reputation of shoddy goods from interwar years. However, they realized that manufacturing high quality goods were beneficial. High grades from consumers for dependability and longevity increased sales and permitted higher prices. Hence, the aim of almost all Japanese companies was zero defects and they tailored assembly lines processes to that aim. b. The Japanese discovered that production line efforts to prevent defects and avoid repairing a finished product after it had been assembled or even sold to a customer reduced costs in the long term. They worked to exclude error and aimed at zero defects. They caught the mistake when it happened, stopping the line if necessary. With management support, worker groups concentrated on identifying problems within their individual sections. Japanese manufacturers exerted greater efforts than their foreign counterparts to integrate research and development with product design and production. c. [Western reaction] This was successful Japanese compacts took a growing share of the American market. When trade measures set bounds on the number of cars the Japanese could ship, they just moved upscale,
22

Sam & Eewei | Updated Oct 11

first to midrange vehicles, then to the best. This was a way to build customer loyalty, bringing them up as their income rose. When the Japanese announced they planned to compete with German luxury cars, it seemed a joke. A year or two later, the Japanese had swept aside their higher-priced success symbols.

23

Sam & Eewei | Updated Oct 11

Japans trade policy and strategy From the 1950s through the 1980s, Japans trade strategy was straightforward: build a strong, export-oriented industrial sector and limit imports of any manufactured goods that could be produced reasonably efficiently in Japan. Note: This can be linked to government strategies and vice versa. 1. Japans export strategies a. One of the reasons for Japanese growth was its enthusiastic, almost desperate way in which Japan exported its goods to other countries. Short-term profits in overseas markets were subordinated to the longer-term goal of increased export shipments and market shares. b. [Export strategies] A corporation began with a well-defined product with high-volume sales potential at the cheaper end of a product line. Since such products typically had low profit margins, they seldom were a focus of marketing efforts by US producers. Once a beachhead was secured, the exporting company sought to increase market share for its product, looking to move up to the middle and upper ranges of the product line, while maintaining customer satisfaction through low prices and high quality. Some Japanese companies also engaged in dumping on a calculated basis to build a sales base for the future. c. *Japans export growth+ In 1950 the country exported less than one-twelfth compared to the United States. By 1973 Japanese exports were more than half those of the United States, and growing quickly. While in the 1950s Japanese exports were mostly such labour-intensive goods as clothing and toys, by the late 1960s Japan was a force in the world market for sophisticated manufactured products. d. Analysis: Such relentless export techniques helped Japan take first-place in export markets. Japanese steel, machinery and automobile producers were major players in foreign markets, especially in North America. The demand generated for these exports pumped the economy and raised national income. 2. Japans import strategy a. Besides its export strategy, the Japanese government also pursued a restrictive import policy as part of the industrial strategy first of recovery and later of fostering the growth industries of the future. This policy helped to grow domestic industries to become larger players the foreign market. a. In addition to a comprehensive system of arithmetic quotas, Japans domestic market was protected by an intricate tariff system, with low duties on primary products and many capital goods and high rates on most finished and consumer goods. Small suppliers to the Japanese market not only faced stringent safety rules different from those in their home country, but also had to pay for lengthy inspections of each individual car to make sure that it met the highly particular rules and regulations of the Japanese market, all of this adding expensive cost and time to selling to Japan. Despite this, Japan enjoyed continuing prosperity without the benefit of the discipline of vigorous import competition. However, this sometimes led to retaliation. The Japanese tried to exclude French skis on the pretext that Japanese snow was different. The French responded by threatening to exclude Japanese motorcycles on the ground that French roads were different. b. [Difficult Japanese customers] From the 1950s onwards, the Japanese had also been notoriously difficult customers, which was a problem for Western exporters. Even the abolition of such protectionist measures was unlikely to persuade Japans consumers to buy foreign, other than raw materials and basic foodstuffs; the high quality and familiarity of Japanese products, a strong cultural pride, and the complex structure of domestic distribution and sales ensured that. c. Analysis: Therefore, imports to Japan were both prevented by the government but also due to the strong cultural pride of the people. This lack of foreign competition caused domestic industries to be able to build up their market share in the country, such that they may fund competition overseas.

Japan and the Global Economy


24

Sam & Eewei | Updated Oct 11

To what extent was Japanese growth critical to the growth of the global economy? 1. Japans investment in Asia a. Japan was allowed to prosper by America mainly because it was to serve as an economic catalyst and a bulwark against communism in Southeast Asia. Therefore, it contributed to the growth of the SEA economy. b. [SEA] The Japanese government, which endorsed President Johnsons plan for SEA development in April 1965, decided as a member of the Western alliance to share the economic burden, thereby pouring huge capital into the region, and initiating regional development plans and projects. The Japanese invested heavily into SEA by way of creating an economically advanced region, so as to prevent the spread of Communism, which was seen as the ideology of poverty. Of the $5.6b total, some $4b was invested in South Vietnam since 1973. Japan was the leader of the international consortium supplying annual aid to Indonesia and this encouraged substantial investment. At the end of 1977, Japanese investments in Indonesia had reached $3.1b. c. [Asia] Japan also acted as a model and inspiration to the Newly Industrializing Economies of East Asia. This was described as the flying geese formation Japan was the worlds largest financial centre and the most innovative high-tech nation. Behind followed the four East Asian tigers, Singapore, Hong Kong, Taiwan and South Korea, which enjoyed export-led growth. Because of this staggered level of development, what Japan produced in one decade low-priced toys, kitchenware and electrical goods would be imitated by the next wave in the decade following. For four decades East Asia observed the success of a non-Western neighbour, based upon its educational and technical skills, long-term state-guided targeting of industries and markets, and determination to compete on world markets. d. Analysis: Therefore, Japan served as both an investor and role model for the Asian countries, helping them to achieve economic success as well. 2. Japans negative attitude towards trade a. Japanese growth was not important to the growth of the global economy because Japan felt no reason to contribute to the liberalization of the new economic world order, and hence pursued a selfish trade policy. b. [Negative attitude towards trade] Japan remained susceptible to intense feelings of defensiveness toward international trade because she was less industrialized than the Western countries and also the only nonwhite industrial country. Most Japanese in the immediate postwar period viewed the international trading system as a means of national survival and saw no need to contribute to general global economic growth. Japans relentless export policy and dumping tactics challenged the market share of foreign manufacturers in their own country. The NIEs shared the anger of the USA and Europe with regard to the difficulty of access to the Japanese market and the perception that Japan was an unfair trader. In 1980, a Singapore trade official remarked that in 1980, the export price of refrigerators from Singapore was only 46% of the price that was retailing for in Tokyo, but they were not able to sell a single refrigerator to Japan. They were unable to build up market share in Japan with their export-oriented growth. c. [International trade] The more prosperous Japan became, the greater were the expectations of the developing world that Japan would make an increasingly substantial contribution in terms of aid. There was considerable anger when these expectations were not met. Many 3rd world nations insisted that even though Japans foreign aid is the third largest in the world, it only made up 0.29% of GNP in 1986. Furthermore, the geographic distribution of Japans bilateral aid correlated to Japans trading interests. 44% of government-togovernment aid in 1986 was directed to China and Philippines and only 11% went to Africa. Foreign aid seemed only a method to sweeten export financing rather than providing grants for development. d. Analysis: For Japan, the primary question was how the international aid and trading system could asset internal objectives, namely, the rebuilding of the economy, economic growth, and international commercial competitiveness. It was not a wholehearted commitment to the global economy and therefore made little contribution to it.

25

Sam & Eewei | Updated Oct 11

Problems and Weaknesses of the Japanese economy

Problems of an export-oriented economy Structural weaknesses in the economy Nature of Japanese society Bursting of the bubble

The main problem for Japan was that by the 1970s it was a mature economy, having already tapped into the dynamism of the domestic and overseas new frontiers. Growth rates were bound to slow. Its problems lay in its failure to adapt its approach to its own changing circumstances. There were external developments (oil crisis and new competitors) which made life more difficult for Japan, but the very strengths that contributed to its early success became handicaps and weaknesses in these changed circumstances contributed to and helped cause the faltering of Japans later performance. Note #1: Should prepare for a question such as: To what extent did the strengths of the Japanese economy eventually turn around to become reasons for its failure and collapse? For this question, you should remember the reasons for Japanese economic growth and then match it with these. The rough outline would be: (a) (b) (c) (d) (e) Japans export strategies & restrictive import policies | Problems of an export-oriented economy Wage and employment system | Seniority wage system and lifetime employment Availability of capital because of saving | Low level of consumption Corporate culture of conformity and loyalty | Inability to innovate Keiretsu, big businesses and the stock market | Rigidity in the businesses

Problems of an export-oriented economy


1. Reliance on imported raw materials a. Japans reliance on imported raw materials rendered her vulnerable to external pressures. This was due to the expansion of heavy industries and the development of new industrial estates along the coastal fringe of Japan which made Japans resource-poor economy more dependent on the imports of raw materials, such as iron ore, bauxite, and crude oil. Japan was dependent on imported oil for 75% of its energy supply, and suffered when the 1973 price hike raised the cost of oil by 450% to Japan. This produced double-digit inflation: the price index went from 100 in 1970 to 180 in 1976. b. However, high oil prices only lowered Japans growth by 0.2% a year during 1973-84. This was due to Japans flexibility in adapting to the oil crisis. Japan realized that its oil extensive industries were very vulnerable to external pressures, hence precipitating a refocusing on high tech industries which were less oil-dependent and therefore less vulnerable. Japanese automakers started producing small, more fuel efficient models. 2. Suffered under the rapid appreciation of the yen a. The appreciation of the yen made Japanese exports relatively more expensive and foreign imports cheaper. With a rise in import expenditure and a fall in export expenditure, Japans balance of trade suffered immensely and it lost its export competitive advantage. Being actively involved in international trade, Japan was very much dependent on the undervalued yen. Following US measures to devalue the dollar in 1971, the Japanese government agreed to a new and fixed exchange rate at 308Y per US$1. However, these were difficult to maintain in the face of supply and demand pressures in the forex market. In early 1973, despite intervention by the Japanese government, market pressures caused the yen to climb in value, peaking at an average of 271Y (per US dollar) in 1973. b. In 1985, the Plaza Accord was signed, affirming that the dollar was overvalued and the yen undervalued. This agreement led to a rapid rise in the value of the yen. From its average of 239Y per US dollar in 1985, the yen rose to a peak of Y128 in 1988, doubling its value relative to the dollar. In April 1995, the yen hit a peak of under 80Y per dollar. 3. Competition of regional rivals (Taiwan, Korea, Singapore)
26

Sam & Eewei | Updated Oct 11

a. Another problem arose from the new emerging economies of Asia, which posed as great economic rivals to Japan in terms of export competitiveness. Korea in particular became a significant rival in heavy industry, ship-building, automobiles and electronics. The rising yen in the late 1980s and 90s helped Korea as it products became significantly cheaper as compared to Japan. With such an advantage, South Koreas shipbuilding industry surpassed Japans in 1993 to become the worlds largest in terms of orders received. Korean auto exports soared 40% in 1993, to 640,000 vehicles. 4. Sustained protectionism a. The system that had propelled Japan to economic success in the 1950s and 60s had soured, especially in protectionist regulations and policies. These policies had been relevant for Japans catch-up phase as many infant industries that had the potential to be world-class competitors needed protectionist measures to overcome initial hurdles. However, in the mature economy of the 1970s, the government should have loosened these developmentalist policies but instead intensified them. b. [Protecting inefficient industries] When the oil crises of 1973 and 1979 hurt basic industries, protectionist measures increased. Such policies became a cocoon protecting inefficient but politically connected industries from domestic and foreign competition. The Japanese government shifted from industrial policies aimed at encouraging success in promising sectors to protecting sunset industries and postponing restructuring needed to protect sunk costs in capital-intensive sectors, prevent unemployment and maintain wage equality. This increased the inefficiency of the Japanese economy, hence worsening its economic slowdown. c. [Retaliation] The continued protectionism also produced friction with other economic powers and irked Japans trading partners. This led to counter-protectionist measures. It harmed some of the more successful sectors of the economy that depended on Japanese-made inputs, and forced domestic producers of exports to rely on relatively expensive domestic inputs.

Structural problems with the corporate culture


5. Seniority wage system and lifetime employment a. The seniority wage and lifelong employment system backfired as the labour force became increasingly older. b. [Increase in wages] By the late 1980s and 1990s, firms were top heavy with these more expensive workers just as the nation plunged into prolonged recession. Workers were collecting on their loyalty just as firms faced difficulties in keeping up their end of the bargain. The problems were particularly felt with structural changes in the industry and the arrival of automation, which progressively increased the need for labour mobility between industries. The lifetime employment system gave the workers a strong psychological attachment to the firm, leading to low labour mobility between industries. c. When eventual attempts were made to restructure the employment system, it led to considerable damage to company cohesiveness. The media in the late 1990s carried many stories about firms bullying senior employees into retirement by threatening to reduce pension and severance payments, assigning them menial task and denying them perquisites. This led to a sense of betrayal among workers. d. Analysis: The social contract between employers and employees based on security and loyalty was one of the worst casualties of aggressive restructuring, and widened rifts when Japan needed unity in their workforce. 6. Rigidity of the old system and businesses a. The rigidity of the old system and business meant that Japan continued to adhere to obsolete policies, and delayed its economic transformation, slowing down the economy. b. [Rigid corporate culture] The values of slavish conformity, personal sacrifice and unquestioning loyalty were now seen as a cause of decline and an impediment to recovery due to the lack of innovation and talent required for the Japanese economy to move forward. c. [Hard for new elements to break in] The restrictions on competition generated by recession cartels and protectionism that prevented foreign participation had a negative effect on productivity. The corporate setup, dominated by collusive oligopolies and cartels, made it difficult for new companies to break into the club due
27

Sam & Eewei | Updated Oct 11

to the high barriers of entry. The old boys club, reinforced by the bank-dominated financial system, made it difficult for would-be challengers to get financing. Instead of new companies starting new industries, large companies in mature industries used their retained earnings to diversify into new fields in which they were illequipped, such as Nippon Steel venturing into amusement parks and Komatsu Construction into computers. d. Analysis: Therefore, the corporate culture that had been highlighted as a strength in the Japanese economy instead became a weakness, for new elements were not able to break in to revitalize the economy.

Nature of Japanese society


7. Problems with the labour force a. The disappearance in labour surplus and the ageing workforce slowed down Japanese economic growth because Japan could no longer rely on its low-cost labour to fuel its export-oriented industries. b. [Shortage of labour] By 1970, the annual increase in population of working age had fallen to under half of the mid-1950s. This led to an increase in wages, and the increased production costs raised the prices of labour intensive goods, worsening inflation. c. [Ageing workforce] There was also the problem of an aging workforce the percentage of employees older than 45 jumped from 34.8% in 1976 to 48% in 1997. Japanese women increasingly delayed marriage until late in their 20s and were reluctant to have more than one child. This saddled Japanese firms with a rising proportion of well-paid, less productive senior employees, swelling wage outlays. d. Analysis: The change in nature of the workforce hence negatively impacted Japanese society. There was also a growing shortage of unskilled and semiskilled labour; many bankruptcies of smaller firms came about because of their inability to recruit such workers. 8. High savings rate a. The high saving rates that led to the availability of capital proved to be a severe drag on Japanese domestic consumption. The Japanese were savers, not spenders, and no industrial economy could progress beyond a certain point without becoming a mass consumption economy. Japan was caught in a vicious cycle; excess savings had led Japan to rely on expanding trade surpluses to fuel growth, such as more exports, fewer imports. Yet protection led to high prices in inefficient sectors at home. b. These high prices in turn stifled consumer demand and ended up exacerbating the problem of excess savings. To create an economy led by consumer demand, Japan needed more import-led price destruction in the protected and cartelized domestic sectors, which was what the Maekawa report of 1986 suggested. Rather than reform the economy, Japans leaders chose to gun the money supply and drive down interest rates, thereby inadvertently creating the infamous bubble of the late 1980s.

The Bubble
1. The bursting of the bubble and its consequences a. The bursting of the bubble in 1989 was one of the most serious problems for the Japanese economy as it became mired in recession for most of the 1990s. b. [Causes of the bubble] The bubble was formed due to government interest rate policy, the lack of checks and balances of banks and governments and the unconditional lending of the keiretsu banks. Companies were starting to use the stock market to raise money. When stock prices started an upward movement, equity financing became easier at attractive cost. The lavish spending, speculation, over-investment and an absence of risk assessment was a volatile combination. The government popped the bubble by raising interest rates five times in 1989 as a way of trying to prevent asset inflation from spilling over into the rest of the economy. c. [Effects on companies and individuals] A recession struck immediately. As of 1997, industrial production was barely higher than in 1990. One million manufacturing jobs disappeared between 1992-6, a result of the 10,000 companies forced into bankruptcy, owing $60m in debt. The construction and real estate sectors

28

Sam & Eewei | Updated Oct 11

failed to make a profit and quickly became unable to repay their debts. Land that had served as the collateral of almost all of bank loans for individuals was worth less than the original loans, and hence they lost their land. d. Analysis: With the Japanese equity markets in deep trouble, fund raising was difficult, discouraging planning of vigorous capital expenditures for the near future. Small firms suddenly found it difficult and expensive to borrow and business downturns made it more difficult to service outstanding loans. This hence dampened growth and the economy lacked the necessary demand to bring it back on an upward spiral. In 1999, the number of suicides hit an all-time high of 33,000 and 20% of those deaths were attributed to debts of job loss. 2. Failed attempts at solution a. The bursting of the bubble was also a serious problem because of the failed or lack of attempts at its solution, meaning that its effects stayed on throughout the most of the 1990s. b. [Useless expansionary fiscal and monetary policy] The economy was put on a life-support system consisting of massive supplemental public works spending and low interest rates (dokken kokka approach). This did not address what ailed the economy many Japanese questioned whether more bridges, dams and roads to nowhere were the answer. Also, the Bank of Japan lowered interest rates to almost nothing (0.5%) to shore up the banks yet this decimated regulated insurance companies who could no longer earn enough interest to pay off their pension obligations. As a result, Nissan Life went bankrupt in 1997 people counting on insurance annuities for their retirement lost much of their life savings. c. Analysis: Bureaucrats and politicians were resorting to practices of the past, and criticized for displaying a troubling bankruptcy of ideas that discredited them and the system they represented. The Finance Ministry was discredited but no new respected institutions, leaders, or clear visions rose to take their place. However, reforms were put in place, and should not be entirely discredited: the government moved to ban activities of the sokaiya, (corporate extortionists connected with the yakuza) who demanded large sums of money in exchange for not raising embarrassing questions at shareholder meetings. In the corporate world, formerly passive shareholders started to lobby for better performance and high dividends as they faced pressure to make their capital work more efficiently. These were attempts at reform but nevertheless relatively small ones.

29

Sam & Eewei | Updated Oct 11

History A Levels Syllabus: 5. Reasons for rise of Chinas economy Deng played a pivotal role in Chinas economic success due to the various policies he implemented in the economic, industrial and agricultural sector through the 4 Modernizations, these reforms increased yields and boosted investments which attributed largely to Chinas phenomenal growth. ROLE OF INDUSTRIAL REFORMS 1. Encouraging private enterprise a. Industrial reforms served to benefit Chinas economic rise by encouraging private enterprise. Deng encouraged private enterprise with the aim of diversifying the economy and making it more efficient. b. [Township-village enterprises] This was achieved through the permanent development of individual private enterprises known as township-village enterprises (TVEs) in 1978. TVEs were given autonomy to operate outside the planned economy, becoming the most dynamic sector of Chinas rural economy due to its competitive and profit-maximizing nature. It experienced growth rates of 20-30% per annum. State industries formed close relationships with TVEs, due to their low costs and broad product range, subcontracting production to them. c. However, after the initial growth spurt, many TVEs became too large and financially problematic. The uncontrolled development of TVEs resulted in shortage of raw materials, and production of lackluster goods. d. [Analysis] Yet it was still one of the driving forces of the Chinese economy, spurring growth. In 1996, TVEs accounted for 35% of total industrial output. It maintained an annual growth rate of more than 20% over two decades before that. By the end of 1996, more than 20 million rural industries employed 135 million people, 29% of Chinas total rural labour force. It also raised the income levels in the countryside over 30% of rural workforce in the eastern half of China had moved away from crop cultivation. 2. Reforming state-owned enterprises a. Industrial reforms were also implemented on state-owned enterprises, which were still the most important component of command economy even in the late 1990s, thus helping spur Chinas economic growth. Out of the 360,000 state firms which produced 60% of state firm output, 40% ran at a loss. This was due to extreme socialism workers could not be fired for low performance. Therefore, the major aim of the reform program was to apply the principle of more pay for more work, less pay for less work, and no pay for no work. b. [Corporationism] An element of this reform, corporationism, involved the delegation of greater authority to individual enterprises to make economic units independent entities. Starting in 1979, the government implemented a series of directives and regulations that gave enterprises authority to plan and market their products, right to full profit retention that accrued after they paid their taxes, and to suffer consequences of any losses. By 1980, the program involved major enterprises accounting for 60% of gross value of output and 70% of profits of all state-owned enterprises. c. [Reduction of state-owned enterprises] Moreover, Dengs reduction of state-owned enterprises from 78% the economy in 1978 to 42% in 1996 also stimulated the Chinese economy, as it removed many inefficient and unmotivated enterprises. In addition, he abolished the fixed wage rate and guaranteed employment systems which were breeding complacency amongst the workers. d. [Analysis] Thus, Dengs industrial reforms injected a dose of competition and elements of the free-market into the Chinese economy, helping it become more dynamic, cost-competitive and efficient.

30

Sam & Eewei | Updated Oct 11

ROLE OF AGRICULTURAL REFORMS 1. Granting peasant autonomy over production a. Dengs agricultural reforms saw a shift to market-oriented economy that increased landownership of the peasants and led to a rise in productivity and efficiency. It resolved the lack of producer incentive under Maos collectivization programme. b. [Household responsibility and contract purchase system] In 1980, communes were abolished and the Household Responsibility System gave long term leases of commune lands to individual farming families. The contract purchase system, implemented in 1985, it limited the percentage of crops sold to the state and allowed surplus to be sold in free markets for profit. Prices for agricultural procurement were also raised by 17% in 1979. Campaigns were also introduced to promote the slogan that to get rich is glorious. This hence encouraged peasants to maximize their gains by increasing production. c. [Result] As a result, China moved from an importer to a net exporter of grains and soybeans. Further, annual growth in agriculture value rose from 1.4% per annum (1957-1978) to 30% per annum from 1984-1988. The boost in production levels contributed to a doubling of general incomes and a rise in the standard of living, leading to Chinas prosperity and growth. 2. Limitations of reforms a. Being based on small farms and labour-intensive methods, agricultural output soon reached its limit and began to stagnant by the mid-1980s. Also, there was a distortion of the market mechanism as producers overproduced cash crops and under-produced essential foodstuff, given that essential foodstuffs were disallowed to be traded on the open market, whereas cash crops were available to be marketed for profit motive. b. Prices were decontrolled in 1985 in order to address the the increase in the states subsidy bill due to it offering higher prices for above-quota deliveries. However, this decontrol of prices for all commodities except grain and cotton meant that grain returns declined it became financially more rewarding for peasants to grow crops other than grain. Grain output fell by 7% in 1985 after peaking at 407 million tons the previous year. c. Also, the abolishment of communes meant that less attention was paid to public works, especially in the field of irrigation and flood control. The reversion to household farming weakened ability of the collective to maintain and improve irrigation and drainage facilities. The commune originally took care of many welfare concerns education, health, childcare yet with abolishment of communes, welfare was again an issue.

31

Sam & Eewei | Updated Oct 11

ROLE OF EDUCATIONAL REFORMS 3. Deng Xiaopings educational reforms a. Deng Xiaoping also introduced educational reforms which transformed the economic landscape of China as it widened the pool of skillful labour significantly, hence increasing Chinas productive capacity by a huge margin. b. [Literacy and schooling] Previously, under the Communist regime, only 20% of the population was literate. By the end of the 1980s, over 75% were literate. The Chinese governments aim of training one million technical students to become the administration of the new economy led to a focus on scientific education and business management techniques, instead of literary studies. There was also the establishment of sparetime schools that had work/study programmes were set up for those who could not attend school full time. c. Moreover, China inaugurated its own minban (non-state owned) higher education institution in Beijing in 1982. The decade after saw the proliferation of many minban schools, which had the effect of bringing foreign teachers into China to provide Chinese students and staff with opportunities for foreign learning. China also sent many of its students overseas in order to gain scientific, technological and managerial skills. In 1988-9, there were more than ninety thousand foreign students studying abroad in order to learn skills from the West. d. Analysis: The success of these educational reforms could be seen through increases in enrolment. By 1994, the number of students in full-time university education exceeded 2.5 million, up from the 1 million in 1980. Due to education, the people acquired skills and knowledge needed for economic growth which prepared China for a shift towards a more capital-intensive economy. INTERNAL FACTORS AFFECTING CHINAS ECONOMIC GROWTH 1. Chinas vast resources a. China has also been endowed with the requisite natural resources and a strong manpower base needed for economic development, which facilitated rapid economic growth and allowed for reforms to be effective. b. With regards to natural resources, China possessed a wealth of the chief natural resources needed for industrialization, such as iron and coal. Moreover, due to its huge and growing population, China had an abundance of low wage laborers who could produce labour-intensive products for exports. As a result, Chinese exporters benefitted from low costs of production which allowed them to undercut their foreign competitors. c. Analysis: The advantage of Chinas low-wage manpower base with some technical skills due to the increasing level of education enabled her to move away from exporting primary products that face high protectionism, to focus on more manufactured exports like textiles and electric machinery, in which China had a comparative advantage and achieved huge export growth. 2. Maoist legacy a. Maos legacy upon China also set in place the necessary framework for reforms to be effective. This included political stability, self-reliance and foundational infrastructure. b. [Political stability] The Maoist era provided China with the legacy of a strong party state, with a concentration of power in the Communist party. After 1978, political stability enabled China to adopt the strategy of reform from above. Even though they faced many serious developmental problems in the mid1970s, the Chinese state was not under the threat of foreign invasion, economic bankruptcy, or rebellion. As such, the party-state still had autonomy and capacity to implement various structural reforms with the freedom to correct its mistakes. c. [Self-reliance] The Maoist legacy of self-reliance also resulted in a debt-free economy for pre-reform China. Instead of relying on external support, Mao focused on a self-reliance model of development, stressing national autonomy, mass mobilisation, local development and labour-intensive industries. As a result, China
32

Sam & Eewei | Updated Oct 11

incurred almost no foreign debt when the state started its economic reforms in 1978. China did not need to devote huge resources to servicing foreign debt, or crushing bailout packages by IMF to shore up its economy. d. [Rural infrastructure and local institutions] Maoist legacy also provided the much-needed rural infrastructure and local institutions to carry out the economic reforms. Under Mao, reservoirs were constructed, irrigation and drainage systems strengthened. The Maoist commune model and its decentralisation policy provided the medium to tap local resources, train local leaders and arouse local initiatives. With these resources and institutional foundations built in the Maoist era, agricultural productivity increased rapidly in the early 1980s. e. [Death of Mao] The death of Mao in 1976 was followed by rise of new coalition of political leaders who were leaning towards or receptive to some form of economic institutional change. Their return was accompanied by a national rehabilitation of lower-level party-state functionaries. Most of these functionaries had prior experience in formulating and implementing economic policies. 3. Gradualism a. One of the strategies used by the leadership was the concept of gradualism, which advocated a gradual transformation of the economy from central planning to one in which market mechanism played an important role. There was no rapid leap to free prices, currency convertibility, cutting of state subsidies; nor was there massive privatisation or quick selling of state enterprises. Gradual reform was intended to allow the Party to survive as an instrument of economic development without resulting in instability. b. [Intermediate mechanisms] It was a gradual, adaptive process and used intermediate mechanisms to enable the transition from one economic system to another to be as smooth as possible. This included establishing open economic zones to introduce foreign capital and technology to the country; using a contract responsibility system in both the agricultural and industrial sectors to encourage economic agents to behave in a market-oriented fashion, and authorising some local governments to enact and experiment with marketoriented legislation. c. [Sequence of reforms] The sequence of reforms was also part of the process of gradualism. By first carrying out reforms that were likely to be successful, the leadership was thus able to build up political support for further reform. Rural reforms were much less complicated than urban reforms and hence were carried out first in the increase of procurement prices of agricultural products. Similarly, economic reforms were placed before democratic reforms, as Deng showed tolerance for dissent but rejected any major democratic reform. d. This process generally had the effect of making changes in the country more palatable to the people, and prevented them from the destabilizing effects of shock therapy, thereby resulting in more effective results.

33

Sam & Eewei | Updated Oct 11

EXTERNAL FACTORS AFFECTING CHINAS ECONOMIC GROWTH

1. Taking advantage of international economic trends a. China took advantage of its unique comparative advantage in labour-intensive industries as most development countries had moved into service and knowledge based sectors. Chinas leadership recognized that it was an opportune time for Chinas industries to increase production output given their cheaper but qualified labour and technological capabilities. Moreover, it pursued economic policies that would allow them to capitalize on the slowing economic growth of its neighboring countries. b. For example, countries like Japan, Taiwan and Hong Kong had become highly industrialized which raised the cost of production of low-end manufacturing goods in these East Asian economies. China then grew to fill the void for these problems due to its low labour costs and tax incentives found in the five SEZs in 1979. This made it an attractive destination for foreign investment and export. c. [Instability of global economy] In addition, given the economic instability such as the Oct 1987 stock market crash, China recognized it could catch up with industrialized countries by introducing Coastal Development strategy in 1988 to compete in the world market. Moreover, China also made use of the IMF and WB grants for 3rd world countries to bring the Multilateral Investments Guarantee Agency into China, which was in reaction to falling investor confidence caused by the 1982 World Debt Crisis. d. Analysis: The unstable climate of the international economy provided China with prime opportunities to develop as investors gradually lost confidence in other Asian countries but was more attracted to China for its low labour costs and tax incentives, hence generating immense growth for the economy. 2. Betterment of bilateral and international relations 3. Special Economic Zones

34

Sam & Eewei | Updated Oct 11

OPENING UP OF CHINA: Improving relations with the outside world was the second of two important shifts outlined in Deng's programme of reform termed Gaige Kaifang. 1. Betterment of bilateral and international relations a. Dengs open-door policy and Zhou Enlais role in improving Chinas diplomatic contracts improved Chinas capacity for trade, thus also facilitating the transfer of technology and increasing foreign loans for China, effectively improving its competitiveness. b. Under Deng, China normalized relations with the USA and Japan with the objectives of developing trade relations, attracting foreign capital and purchasing technology. These and programmes such as providing bonuses as material incentives for production stimulated economic growth and modernization. In their drive to close the technology gap, Chinese leaders welcomed foreign visitors, especially scientists, technicians and industrialists and began sending large numbers of Chinese students abroad, especially for the study of science and technology. e. In 1972, Deng invited USA table-tennis players to play with China in an episode that became known as ping pong diplomacy. US-China trade relations were cemented in July 1979 when the two signed a trade agreement that granted China the Most-Favoured Nation (MFN) trading status. In 1980, Chinas improved bilateral relations with the West ensured its admission into the International Monetary Fund and the World Bank, which allowed for more loans and developmental aid. Between 1980 and 1996, it committed US$25 billion to 175 development projects in China. c. Analysis: As a result of Chinas increased links with the West, Chinas exports enjoyed lower tariffs in US markets, and US-Sino trade rose from $1.1b in 1978 to $4.5b in 1983. The share of industrial products in Chinese exports rose steadily to 20% of the total in 1970, reflecting the countrys growing industrialisation. Moreover, Chinas re-integration into the global economy can be seen from the flow of FDI into China, which increased from $1.7b in 1983 to $11.4b in 1991. 2. Special Economic Zones a. Deng implemented Special Economic Zones and which made Chinas economy more open to external investments and commerce being windows to the West for technology, management, knowledge and foreign policy. These attracted foreign capital and boosted export growth. b. [Special Economic Zones] The Special Economic Zones (SZEs) were established in 1980, which turned Shenzhen, Shantou, Zhuhai, Xiamen and Hainan into free trade areas. In these places, tax and financial incentives, flexible wage systems and special infrastructural facilities were given to foreign firms to encourage investments. The close working relationship with the open coastal zones and the open economy zones led to rapid improvements in Chinas trade sector. In particular, the Shenzhen Development Corporation facilitated the procurement of foreign capital and in 1984 alone it established ties with 186 overseas consortia and financial groups. By 1986 there were more than 6,200 foreign-funded businesses in China, including thousands of joint ventures with Chinese companies. In 1996 China gained nearly $40 billion in capital from abroad, the highest amount of foreign investment in any developing nation. By the start of 1997, joint ventures accounted for 38& of China's economy. c. Analysis: These had many positive effects on Chinas economy as Chinese exports grew from $16b in the 1970s to over $100b in 1991. In 1999, the GDP of the Pudong New Zone came to 80 billion yuan, and the total industrial output value, 145 billion yuan. Moreover, as the SEZs served as the focal point for technological transfers into China, the influx of foreign technology boosted the productive capacity of Chinas economy, enabling longer-term economic growth. However, problems of these technological and commercial reforms included widening income disparity and also massive rural-urban migration, which led to overcrowding and poor living conditions in some cities. Also, the exposure to richer countries led to a general discontent with Communism, which was believed to be hindering the growth and progress of China.

35

Sam & Eewei | Updated Oct 11

3. Foreign investment a. Foreign investment was important as it brought in technology, know-how, business methods, management techniques and markets that would otherwise be unavailable in China. The warming of relations with the West saw the number of foreign-invested enterprises grow. In 1981, the export volume of foreign-invested enterprises made up 0.1 percent of China's total export volume. By 1999, the export volume of foreigninvested enterprises made up 45.5 percent of China's total, and the import volume, 51.8 percent. All these developments contributed a injection of investment that generated a demand for Chinese made goods, but also provided it with the necessary fluidity to expand at the pace it did. In this sense, the warming of relations with the West brought about the conducive investment conditions that allowed Chinese economy to flourish since 1978. (Note: This is to be used for a question about Western friendliness, dont use for opening of China)

36

Sam & Eewei | Updated Oct 11

History A Levels Syllabus: 1. Reasons for the dominant role of the USA in the global economy

WILLINGNESS FOR THE USA TO DOMINATE


1. America was willing and able to take leadership of the post war economic order a. America was willing and had the ability to take leadership of the post-war economic order, and the World War 2 changed its perspectives of its role in the global economy as it emerged as a economic and political superpower. b. [Economic might] Americas GNP had doubled over the war, and its considerable output of goods and services accounted for half of the worlds production at the end of the war. Thus America began to sail to an unassailable technological and economic lead over the rest of the world, being physically unscathed by the war and strengthened by wartime economic expansion. Due to its unrivalled economic might, the US government was convinced that it was the lack of firm US leadership of the international community that led to the economic and political disasters of WW2. c. [Political reach] Moreover, America had also emerged from WW2 with an increased political reach. During the war, America was heavily involved in a large number of countries. For example, in 1945 it had 69 divisions in Europe, 26 in Asia and the Pacific. Moreover, American forces remained in the many countries which it held campaigns in, such as Japan, Germany, Italy and North Africa. Informal American influence hardened into something more formal and more entangling it became increasingly difficult for America to withdraw from these countries. Thus, the stage was set for America to assume natural leadership of the post-war political order. d. Analysis: As a result, America saw its newfound political and economic might after the war as a natural sign for them to assume leadership in crafting the new world economic order. 2. America saw many self-interests in recreating the global economic order a. [Economic interests] America was also willing to take up its dominant role in the global economy because it saw much self-interest in recreating the global economic order. Throughout the Roosevelt presidency, Cordell Hull and other officials consistently held the conviction that an open international trading system was central to American economic and security interests. Moreover, they were of the widespread view that bilateralism and economic blocs of the 1930s were the root cause of world political instability and the onset of war. Even before the war, the State Department had championed tariff reduction agreements, such as the 1934 Reciprocal Trade Agreement Act in a bid to promote liberal trade. It was from these pre-war perspectives that American officials articulated a common post-war strategy for America to systematically open markets and integrate regions so as to ensure the pervasion of American goods and influence into regional economies. b. [Political interests] On the political front, the pervasion of economic influence would cement her political participation all over the world as well. The Americans recognized that they could not remain isolated it would need to forge strategic relationships and balance regional powers so that no other single state gained hegemony in Asia or Europe. Political interests thus coincided with and could be served Americas economic post-war strategy to open up markets to their influence. c. Hence, by taking up leadership to craft the post-war economic order, America could make sure that both its economic and political interests were served. 3. Key role of the dollar in the international monetary system a. The role of the dollar in the international monetary system was a significant factor which contributed to its dominance of the global economy. In the post-war discussions for global economic reconstruction, America offered to maintain a fixed exchange rate by valuing its currency at $35 to an ounce of gold and constantly intervening in the currency market to stabilize the values of all currencies, while allowing other countries to peg their currencies to the greenback. This was because it wanted to avoid the instability caused by devaluations of the 1930s.
37

Sam & Eewei | Updated Oct 11

b. [Effect on USA] Yet the key role which the dollar played in the international monetary system had many benefits for the USA. It held the America alliance system and the world economy together, and the international role of the dollar as both a reserve and transaction currency actually became a cornerstone of Americas global economic and political position. Because Americas allies and economic partners were willing to hold dollars for political as well as for economic reasons, the international role of the dollar conferred on the United States many privileges associated with being the provider of currency for the international economy, because America could print dollars to fight foreign wars, buy up the businesses of other states and go deeply into national debt with no fear for the consequences. c. Analysis: This brought about unprecedented hegemonic stability in the financial order and confidence in the international monetary system because of US hegemony countries believed currencies, because of the USD, were stable enough for trade 4. America was willing to promote the economic development of its allies due to the Cold War OR The Cold War Environment led the US to use economic resources to contain the spread of communism a. As a result of the rise of the Soviet Union as a rampant ideological threat, the USA was more willing to provide economic aid to its allies in the democratic bloc so as to foster strong economies as a bulwark against Communism. b. [Marshall Plan] Hence, the economic dimension of the USAs policy of containment was put in place by the Marshall Plan, which sought to hasten the economic recovery of Europe by injecting $13 billion in aid. This aid was the critical margin of support for West Europes economic recovery as it prevented inflation by providing the funds to secure essential imports of fuel, food and fertilizers. Moreover, the Marshall Plan had supplemented the European governments policies through the use of counterpart funds. Most importantly, Marshall Plan had allowed for greater European integration, which was Americas condition for granting aid in the first place. c. [Reciprocation] Therefore, Americas heavy involvement in the integration of the European market also allowed it to demand an economic quid pro quo from the West Europeans that would become of considerable importance in defining the long-term economic relationship between the United States and Western Europe. Western Europeans agreed to treat American multinational corporations as if they were European corporations and to avoid discriminating against them in their policies. Thus, Americas involvement in Europe, where the immediate concern was the Cold War, paved the way for America to penetrate a lucrative European market, protect American economic interests and establish dominance over European markets in the long run. 5. Americas willingness to incur short-term costs from protectionism for growth of its allies a. Another reason for Americas dominant role in the global economy was its willingness short-term costs for the growth of its European and Japanese allies, for the sake of entrenching its long-term dominance in their economies. b. [Japan] Moreover, the USA also tolerated the limited protectionism practiced by both its allies, while keeping its markets open for their goods. The USA allowed Japans domestic market to be protected by an intricate tariff system, with low duties on primary products and many capital goods and high rates on most finished and consumer goods. Although such a system limited the penetration of US consumer goods, they helped build up a strong domestic Japanese economy. c. [Europe] At the same time, the USA condoned the European Payments Union, which was a multilateral European group that promoted intra-Europe trade at the expense of trade with the US. Further, the USA was agreeable to the UKs Imperial Preferences, which was a series of reciprocally leveled tariffs and free trade agreements between the different dominions and colonies within the British Commonwealth. At its own expense, the USA encouraged deficits in its own balance of payments as a way of providing international liquidity in the form of dollars.

38

Sam & Eewei | Updated Oct 11

d. Analysis: US willingness to sustain short term costs was a far-sighted strategy, as these growing economies provided widening markets for American exports. At the same time, the US benefitted as the economic strengthening of these economies not only entrenched its political influence, but also served as a bulwark against communism, as the poverty in which communism thrives in is eradicated. Thus the USAs willingness to tolerate short-term asymmetrical benefits led to its dominant role in the global economy.

USAS DOMINANCE AS A RESULT OF DOMINANCE IN INTERNATIONAL ECONOMIC ORGANIZATIONS


1. America ensured its dominance in these organizations a. American dominance in the global economy was ensured by its influence over international economic organizations. During the creation of the Bretton Woods Institutions, America deliberately crafted a system which made it easy for them to exert their influence on these institutions. b. [IMF weighted voting] For example, the IMF was itself an American dominated institution as it was originally bankrolled by the USA and was located in Washington. Moreover, America was crucially empowered by its voting methods which it helped craft- formal power on the IMFs boards is distributed by quotas, determined by the size of a countrys contributions to the Fund. The USA then, held the most significant portion of the total voting power. c. [World Bank] Moreover, the location of the World Bank was also an issue in which America ensured its dominance over the institution. Americas insistence that the bank would be in Washington rather than New York was an indication of her determination that the Bank was to be answerable to the US government rather than just be another financial institution. d. [WTO] Most of all, American interests were best served by the WTO, as from its founding days in 1995, America had sought to take advantage of the circumstances to entrench its economic dominance and impose more effectively its free market principles on the world. The WTO was often hand-in glove with major TransNational Corporations (TNCs), and acted in their interests. As these TNCs held very close links with the American government, influence from the US government would inevitably permeate upon the legislations of the WTO. Also, the WTOs proceedings were certainly in line with USAs bullying tactics as well, such as their practice of maintaining a blacklist of unhelpful developing country trade negotiators and using diplomatic pressure to have them removed from their positions. 2. Americas initiatives for free trade through international organizations a. Americas initiatives for free trade through international organizations also helped to entrench its dominance in GEs growth. it negotiated major tariff reduction through GATT 73% reduction of all non-agricultural tariffs, making access to the American market easier, so the USA (with its purchasing power) was able to absorb imports in return for more American capital crucial to world trade growing 8.5% annually in the 1950s and 1960s. b. In the 1990s, USA continued to advocate free trade.The World Trade Organization replaced GATT in 1995, on Clintons initiative, and it pushed for the enforcement of trade agreements, liberalizing the economies of nations worldwide such that American goods and services had new markets, while subsidies locally ensured informal barriers to counter the protectionism of Europe and Japan 3. America s willingness to take the lead in these organizations a. Americas willingness to take the lead in these organizations was the primary reason why America could establish dominance of them. The extent of American influence could be evinced due to their failures when America took a backseat in these organizations. b. [Kennedy Round of GATT] The USAs leadership in GATT was most clearly seen in the Kennedy Round of 1963, which saw a new dynamism on the part of the USA in leading the movement for tariff reduction. Kennedy himself stressed that US had to take the lead in world trade, declaring that the US did not rise to greatness by waiting for others to lead. This lead was made possible by the Trade Expansion Act by which Congress
39

Sam & Eewei | Updated Oct 11

gave the president the power to authorize reductions of up to 50% on most items in the US tariff schedule on a reciprocal basis. The fact that GATTs activities proceeded mainly due to American leadership can be seen through the counterexample of the Tokyo Round of 1973. Although Japan took over as the main initiator of the Tokyo Round, Americas participation was still crucial for the Rounds success. The Tokyo Round stalled for the first 4 years mainly due to advantageous exchange rate movements that gave the US no incentive to push forward trade reform. The resumption of progress in the Round only occurred due to the opposite movement of exchange rates that forced the USA to participate in GATT. c. [Start and failure of ITO] Similarly, the ITO was born precisely because of American leadership, and collapsed due to the lack of it as well. As the USA saw it in her interests to engage economically with the rest of the world, it began to propose the opening of international negotiations to finalize multilateral on ITO. This led to the creation of the ITO Charter in Havana in 1947. However, it is worth noting that the ITO failed primarily due to Americas dominance as well, because Congress refused to approve of it in America. Domestic politicians feared that Americas sovereignty was to be sacrificed for internationalism, and did not want USA to be bound by an international agency which might escape US control in future. d. Analysis: Hence, Americas willingness to take up leadership in these organizations entrenched their dominance in the global economy. It also made these organizations so dependent on her, such that their success and failure hinged upon American decision-making. 4. Key role of the American dollar accorded by the Bretton Woods System

40

Sam & Eewei | Updated Oct 11

History A Levels Syllabus: 1.2 Impacts of the USAs dominant role on the global economy (supplementary)

POSITIVE IMPACTS
1. Patronage of Western Europe and Japan boosted these economies a. 1 paragraph on Marshall Plan for Europe b. 1 paragraph on Cold War aid to Japan c. 1 paragraph on incurring short-term costs for allies 2. USA created healthy trade networks in the 1990s which boosted GE growth a. In the Globalism period of 1991 to 2000, USA actively created many trade networks and promoted free trade, which contributed to global economic growth. b. [WTO] It formed the World Trade Organization (WTO) in 1995 which served the purposes of providing loans and mediating trade disputes. The WTO also had a stronger enforcement mechanism for trade than its predecessor, GATT, which thus led to greater stability in the development of the international economy. WTO was an organization with member states and a complete formalized structure/procedure of how to negotiate international trade issues and even a dispute resolution mechanism contained within to help settle trade disputes between members. c. [NAFTA] Moreover, America set up the North American Free Trade Agreement (NAFTA) as a means to promote free trade between countries in and around the Caribbean. As North American businesses perceived regional integration as an aid to their competitive position, Canada and Mexico joined the American endeavor in 1994, and NAFTA came to effect. Gradually, NAFTA removed virtually all trade barriers over the next ten years, and a single North American market began to take shape. d. Analysis: Thus, the USA helped liberalize the economies of WTO and NAFTA member states, which caused an expansion of multilateral trade in the global economy that benefited many states .

NEGATIVE IMPACTS
1. Nixons devaluation of the USD in 1971 a. US president Nixons devaluation of the USD in 1971 was inimical to global economic growth as it removed the stable, fixed exchange rate system which was instrumental to investor confidence and growth. b. In 1971, President Nixon devaluated the USD by 10% against other currencies in the Smithsonian Agreement, as part of drastic measures to reverse USAs bulging trade deficit of $2b. Moreover, USA placed a 10% surcharge on dutiable imports from Japan and West Germany, limiting their access to the US markets in order to force the appreciation of the Yen and Deutschemark. As a result, many speculators and investors dumped their holdings of USD in the wake of this shock. Combined with the Oil Crisis of 1973, the Nixon devaluation led to a global recession amidst high inflation rates, causing the phenomenon of stagflation in many Western economies. c. Analysis: Furthermore, following the collapse of the BWS in 1973, USA adopted a floating exchange rate system that was more unpredictable and uncertain. The previously stabilizing effect of the USD was then reversed, as the depreciating USD tied down the global economy by hampering international trade. The effects of the Nixon devaluation had its global proportions precisely because of the USAs dominant role in the global economy and the key role which the dollar had played in the international monetary system. 2. Reaganomics as a detriment to the global economy a. Another way in which the USAs dominant role was detrimental to the global economy was with the rise of Reaganomics. Reaganomics served to drive a wedge further between USA and its trade partners as it was seen as a self-preservation policy that chipped away at the ailing global economies, causing them to experience further decline.
41

Sam & Eewei | Updated Oct 11

b. In the 1980s, US president Reagan imposed Reaganomics, which was a policy of tight monetary control through increasing interest rates in order to curb inflation. Such a policy drove domestic interest rates to an unprecedented high, which attracted large amounts of capital inflows leaving Japan and West Germany for the USA. Hence, this policy made both countries see Reaganomics as a unilateral attempt for the USA to regain control over the global economy. As a result, West Germany and Japan retaliated with increasing their own interest rates as well to prevent capital outflow, inciting political tensions in the process. c. Analysis: Reaganomics was proved to have disastrous local and international consequences. Internationally, high US interest rates had severe repercussions on the Latin American nations as exports declined and debt which they had to service increased drastically, hence contributing to the 1980s debt crisis. Locally, a strong USD caused by Reaganomics only served to weaken US exports and widen massive deficit. If we are required to compare which is the most influential driving force for the global economy, or discuss other rivals to USAs economic hegemony, talk about Western Europe and Japan. 1. Western Europes economic rise a. The rise of WE as a result of USAs economic aid in the post-war era heralded an extremely strong WE economy that paved the way for its ascension to become a strong economic union and vital trading partner in the world economy from 1973-2000. b. The European Economic Community (EEC) rose to prominence after WW2 with the development of the Common Market, which contributed significantly to the expansion of world trade, with the total trade of the EEC countries growing from 24.5% in 1960 (of total world trade) to 41.5% in 1990. Coupled with the decline of the US economy in the Crisis Years in the 1970s, the WE economy found new space to rise as a nascent economic superpower. Furthermore, the EEC members adopted the Maastricht Treaty in 1991, which set up a monetary union with the Euro as the common currency, forming the EU. The European Union was a concept of a European market unified by a single currency, whose members would have common trade policies and economic regulations. c. Analysis: As a result, the EU crystallized the formal cooperation between WE economies and saw the breakdown of intra-European trade barriers. This prompted an expansion of intra-European trade coupled with increased labour flow and technological transfers, strengthening the WE economy as a whole and benefitting the global economy as a result. 2. Japans economic rise as a stimulus to GE a. Japan was also instrumental in moulding the global economy as its open markets and state of the art technology was essential to the growth of the global economy from 1973-2000. b. omg dear can you do this part pls I love you

[EVI] In the 1970s, competition from Japan intensified due to its rapid technological advancements. This, coupled with competition from NICs, significantly increased number of mfg exporters. Japan also combined modern-tech with low wages, producing goods that were far more competitive than that of the USA, hence posing a direct threat to the economic dominance. By 1970s, Jap exports numbered more then half of that of the US and were still experiencing rapid growth. By 1985, 1/3 of USAs $150b trade deficit was with Japan. Also, Japans trade increased from 3% of worlds GNP to 15% in 1992. As compared to US share which decreased from 26.1% in 1950 to 14.1% in 1994.

[EV] Japan was thus an essential force in the world economy as it pioneered changes in technology, and was seen as an essential springboard into the rising Asian market.
42