Tomas Evan - Chapters of European Economic History-Karolinum Press (2014)

tomÁŠ cHaPters oF
evan euroPean
economic
KAROLINUM History
Chapters of European Economic History
Tomáš Evan
Rewiewed by:
Doc. Ing. Tomáš Ježek, CSc.
Doc. PhDr. et JUDr. Jakub Rákosník, Ph.D.
Published by Charles University in Prague, Karolinum Press

Proofread by Peter Kirk Jensen
Layout by Jan Šerých
Typeset by DTP Karolinum
First edition
Front cover: Jan Claesz. Rietschoof, A Calm (Ships in the Harbor by Calm Weather),
between 1675 and 1719
© Charles University in Prague, 2014

Text © Tomáš Evan, 2014
ISBN 978-80-246-2814-1
ISBN 978-80-246-2829-5 (online : pdf)
Univerzita Karlova v Praze
Nakladatelství Karolinum 2014
http://www.cupress.cuni.cz
CONTENTS
1. The world before the rise of the Global economy . . . . . . . . . . . . . . . . . . 10

1.1 Local and Regional Markets, and Specialization . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.2 The Establishment of Capitalist Society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.3 From Mercantilism to Liberalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.4 European Colonialism in the Early Modern Period . . . . . . . . . . . . . . . . . . . . . . 33
1.5 The Industrial and Agricultural Revolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
The Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2. The Nature and Emergence of the Global Economy . . . . . . . . . . . . . . . . 46

2.1 The World After the Napoleonic Wars and the Pax Britannica . . . . . . . . . . . . 46
2.2 Globalization – the Origin and Nature of the Phenomenon . . . . . . . . . . . . . . 50
2.3 The First Wave of Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2.4 The First World War and End of the First Wave of Globalization . . . . . . . . . 57
3. The Post-War Development of the World Economy . . . . . . . . . . . . . . . . 68

3.1 Recovery of the World Economy In 1945 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
3.2 The Origin of World Financial Institutions – the Bretton Woods System . . . . 71
3.3 The Pax Americana and the Second Wave of Globalisation . . . . . . . . . . . . . . 81
3.4 D ecolonisation and its Impact on the World Economy . . . . . . . . . . . . . . . . . . 83
3.5 E uropean Economic Integration in the 1950S and 60s . . . . . . . . . . . . . . . . . . . 86
3.6 The World Economy before and After the Oil Crises in the 70s . . . . . . . . . . . 93
3.7 The Origin of International Capital Mobility – From Banks
to Multinational Corporations and FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
4. The End of the Bipolar World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

4.1 Eastern Bloc Countries before the Fall of Communism . . . . . . . . . . . . . . . . . . 105
4.2 The Transformation of Central and Eastern Europe . . . . . . . . . . . . . . . . . . . . 113
4.3 The Financial Crises in the 90s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
4.4 The European Union and Transition Economies . . . . . . . . . . . . . . . . . . . . . . . . 123
5. Major Centres of the World Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

5.1 The European Centre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
5.1.1 Economic Development of the European Centre . . . . . . . . . . . . . . . . . . 130
5.1.2 The Economic and Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
5.1.3 The European Union and the WTO – an Example
of the Common Agricultural Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
5.2 The United States of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
5.2.1 The Economic Development of the USA . . . . . . . . . . . . . . . . . . . . . . . . 140
5.2.2 The USA and NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
5.3 Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
5.3.1 Economic Development of Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
5.3.2 Japan and APEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
5.4 The People’s Republic of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
5.4.1 Economic Development of the PRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
5.4.2 K ey Economic Indicators and Development
in the Last Three Decades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
5.4.3 China in International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
5.4.4 China in Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Name Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
Geographical Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Subject Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

Introduction
This book originated with my lectures on world economy, comparative eco-

nomic studies and introduction to European economic history. As my writ-
ten notes for Czech and later American students were positively accepted,
I have endeavoured to put together a more detailed and comprehensive text.
The name ‘chapters’ in the title is, however, used advisedly. Standard texts
on the topic are two-volume books of thousand or very rarely below five hun-
dred pages. In parts, using my original research, I strive to condense the most
important events and key figures as well as to address some of the interesting
issues economic history offers. As the total list of literature would expand
the book unjustifiably well beyond the planned maximum of pages, I limited
myself to quoted or otherwise essential literature. I tried to limit the literature
not available in English to acceptable minimum. It is suggested to have histor-
ical atlas at the reader disposal.
Proceeding chronologically, in the first chapter I pay attention to the first
states, the creation of local and regional markets, a unified Mediterranean
under the Greeks and Romans and the causes of the fall of the Roman Empire.
Then the shift from Mediterranean to Atlantic trade is described with accom-
panying impacts on economy and society of the continent and the fact that
Introduction – 7 –
the Portuguese and Spanish, both in their own way creators of large empires,
were replaced by the French, British and Dutch. In the second chapter I con-
tinue with the impact of agricultural and industrial revolution on world trade
as well as the balance of power in the 18th and 19th centuries respectively.
Focus is also given to colonies, particularly in North America in the
18th century. The colonial War of Jenkins’ Ear between Britain and Spain soon
expanded to Europe, the War of Austrian Succession and ultimately the fight-
ing of the Seven Years’ War. This war changed North America completely with
the French colonies, once half of the continent, now limiting itself to a few
islands. While this turn of events massively increased British holding in Amer-
ica, it also directly led to the rebellion of its Thirteen colonies.
I continue with Europe of the 19th century with its great birth rates and
rapidly decreasing mortality making 40% of the world population. Within one
century its population has doubled and it has become a continent of emigra-
tion to the areas of so called European settlement – North and South America,
South Africa, Australia, New Zealand and Siberia – which benefited from this
population explosion. With people came trade, land was settled, cities estab-
lished and the structure of society became western.
I try to explore life with a vast majority of the world landmass under the
power of European countries, a fact that led to the first wave of globaliza-
tion in around 1830 under the auspices of Pax Britannica. Great Britain, the
strongest of all European powers, profited most from this liberal globalization.
Others (particularly unified Germany and the United States) were catching up
mainly in productivity and newly developed industries.
After ‘The war to end all wars’ had ended, three of the five European pow-
ers ceased to exist and the remaining two were financially ruined. Europe
descended into economic misery and social radicalism. The disaster of WWI
brought the end to liberal globalization. The Great Depression of the 1930s
cost the United States one third of its GDP but European economies were
also hit very hard. With totalitarism reaching new height in the person of
Joseph Stalin, Europe also got the extreme right in Hitler’s Germany, marking
the road to the new world war. I look at similarities and differences in the
economic planning of both totalitarian regimes and continue with a focus on
the similarities in the economic order established after WWII (which under
the name ‘the Bretton Woods system’ gave foundation to the new era – Pax
Americana) with the British system of the 19th century.
The impact of two oil shocks on the European economy in the 1970s is
debated at the end of the third chapter, and the origins and present state of
European economic integration and the inevitability of the fall of the Com-
munist regime in Central and Eastern Europe in the fourth. The text ends by
describing the contemporary centres of the world economy – the European
Union, the United States, Japan and China.
I am much obliged to all who read various versions of this monograph and
commented on the text extensively, first of all to Prof. Martin Kovář, Head of
– 8 –
the Institute of World History, Faculty of Arts, Charles University in Prague
and Deputy Chairman of the Department of Economic History, University of
Economics in Prague. It is my pleasure to also give thanks to Kevin Kapuder,
Chairman of Business Administration Department at University of New York
in Prague for valuable comments. I thank the reviewers for their thorough
review and highly appreciate the comments and suggestions.
I am very grateful to the CIEE for helping to finance the publication of
the text, mainly to Jana Čemusová, Resident Director of CIEE Study Centre in
Prague. Also, I would like to thank Daniel Němec who helped with the English
translation, and to my friends Andre Rabe and Clive Everill who were first to
edit the translated text.
Finally, I would like to thank my wife Jitka, who assisted in innumera-
ble ways: in commenting upon the various parts of the text, in eliminating
many spelling and stylistic mistakes, in compiling the references and writing
interesting texts I could use as a source of information. To her this book is
dedicated.
Introduction – 9 –
/1/
The world before the rise
of the Global economy
1.1 LOCAL AND REGIONAL MARKETS,

AND SPECIALIZATION
Markets appear whenever there is something to exchange. Exchange is possi-
ble only if products vary, i.e. if people become specialized. As soon as people
are able to eat their fill, they can produce things for barter. This specialization
enables the establishment of local markets. In order for local markets to grow
in variety and scale, means of transport are necessary to connect them. That
is one of the reasons the first states appeared along great rivers such as the
Nile, the Euphrates, and the Tigris, not only to provide conditions for up to
three crops a year, but also to allow transport and trade among individual
local markets and to tax and protect such relations. Thus a regional market
can be established.
However, this process was quite slow and very fragile. Those villages
which did not provide enough food for specialists, such as blacksmiths or
millers, had difficulty in participating in trade. Despite that, many ancient
European civilizations were capable of widespread long-distance trade, espe-
cially between deposits of vital commodities. Let us take for instance, the
– 10 –
Greek city-states and their Atlantic tin trade, or the Amber Road between the
Baltics and the Black Sea. We can see the vulnerability of trade during the
Greek-Punic wars, when the Carthaginians occupied the Greek colonies in the
western Mediterranean and shut off the Strait of Gibraltar: the Greeks had to
look for new routes. This contributed to the development of Massilia (today’s
Marseille), a Greek settlement at the end of a lengthy land road across France,
to acquire tin deposits (an essential component of bronze) from Britain.
The Greeks were also the first to write about the topic of trade and special-
isation in a systematic manner. Xenophon, the 4th century B.C. author, made
the following observation: ‘In large cities, because many make demands on
each trade, one alone is enough to support a man, and often less than one: for
instance, one man makes shoes for men, another for women, there are places
even where one man earns a living just by mending shoes, another by cutting
them out, another just by sewing the uppers together, while there is another
who performs none of these operations but assembles the parts. Of necessity
he who pursues a very specialized task will do its best.’ (Finley 1970:3) As we
know, quality is a function of price, so we can clearly state that Europeans
have been (for 2,400 years), well aware that specialization increases quality
and/or decreases in prices. Why specialize, however, if there is no market in
which to sell your product? The necessity of a free market was seen clearly by
Aristotle, probably the greatest Greek philosopher. He was a stout opponent
of monopoly, and also claimed that everyone should have that which is his
own, including property and justice, guaranteed. However, he, and the whole
of Christian Europe well into the 16th century with him, claimed that money
is here to allow trade and exchange and not just to profit from trade or inter-
est-taking. He loathed bankers and petty usurers living on small consumer
loans.
A major increase in trade was enabled by the so-called ‘Pax Romana’. By
paving roads and building ports, Rome facilitated an unprecedented heyday of
trade within its constantly growing Empire. The increasing scale of commerce
contributed to a deepening specialization in return. Whole regions specialized
in one or two types of production. Wine from the eastern and southern Iberi-
an Peninsula or metals from inland were exchanged for Anatolian marble or
Egyptian grain and delivered to Rome from the opposite shore of the Medi-
terranean Sea. The origin of many commodities familiar today can be traced
back to ancient Rome where European specialization started. We may recall,
for example, collocations like Lebanese cedar, Indian incense or Balkan silver.
It was possible to travel to Rome from today’s Cádiz in nine days, from
Caesarea in Palestine it took twenty, a few days more than the voyage from
Egyptian Alexandria. Crude iron production is a chapter on its own. The
Romans mastered it to such an extent that its quality and scale would not
be superseded until the Industrial Revolution 1500 years later. The Romans
had created a huge, single market covering the entire Mediterranean, and an
Atlantic trade reaching as far as present-day Belgium and Britain. In addition,
The world before the rise of the Global economy – 11 –

middlemen enabled them to trade with Scandinavia, with today’s Russia, and
across the Red Sea as they made their way to as far away as India. Indisput-
able evidence of extensive Roman business activities and an almost global
market in what was then the known world is Roman coins, which have been
found in all of these territories. As Rome’s neighbours were embracing Roman
technology – their military tactics in particular – and were gradually creating
improved technology of their own, Rome had to face growing competition in
commerce at the same time as the Empire’s defence expenditures were esca-
lating. The disproportion between Roman treasury income and expenditures
forced the rulers to mint fewer and fewer valuable coins of lower weight,
which in turn caused an increase in prices, weakened the economy, and finally
resulted in the economic collapse of commerce and crafts. This was a situa-
tion in which great power necessitated the change of informal power into
formal power to protect their (usually economic) interests abroad, and in
which all accompanying military expenses had dragged them into insoluble
economic problems; this has become the standard scenario for the demise of
civilisations. I t has also been experienced by civilizations preceding Ancient
Rome, and has been repeating itself with regularity ever since. Whenever
a state is unable to pay its bills or find a solution to interference with trade
and work specialization, which together comprise the key components of eco-
nomic growth, it disintegrates and vanishes. A relatively high standard of liv-
ing and the unity of civilization naturally start to dwindle. In Rome trade was
vital, being facilitated by the general system of weights and measures. Rome
was the natural business centre. When, however, in a surprisingly up-to-date
context, the provinces started producing cheap articles while the prices of
homemade products were increasing, the commercial life of Rome relented. In
trying to deal with the decline of trade by means of set prices and government
subsidies, the state did actual harm to commerce; harbours and shippers, to
cite just one example, were even forced to carry state cargoes almost free of
charge. Taxes were increased and prices were fixed by law. During the Late
Roman Empire, the countryside became the focal point of economic life in the
Empire; the city administration was deteriorating both structurally and insti-
tutionally. Citizens felt insecure as foreign tribes were inducing unrest along
the borders of the Empire. At the end of this period, when Germanic nations
had penetrated into Gallia and Hispania, the citizens started to show con-
tempt for their citizenship and preferred to live among the barbarians, thus
being exempted from taxes and liabilities, rather than staying in Romanised
urban regions as taxpayers of the Empire (Ubierto, 1995). The overall econom-
ic decay of Rome had a milder impact on agriculture, which satisfied the most
basic needs. Therefore, the most significant feature of the late Roman Empire
was the development of the rural way of life, i.e. ruralisation. The breakdown
of Roman commerce and craft production corresponded with the decay of
a class that could be called bourgeoisie, and which had been sustaining the
very life of the Roman Empire. The devaluation of the currency turned the
– 12 –
Roman economy into a barter system of agricultural products and a primitive
type of economy.
Troops were recruited from city inhabitants at first. However, in order to
reinforce numerous contingents guarding the borders of the Empire, it was
inevitable that peasants be recruited. Soon, the Roman army was comprised
nearly exclusively of peasants, and thus represented the uneducated and
unskilled lower classes of the Empire’s society. Nevertheless, it gained almost
absolute power and could depose or appoint emperors at will.
In the middle of the 5th century, provincialisation and the collapse of trade,
perpetual civil wars, as well as barbarians settling down in more and more
Roman provinces and comprising an ever larger part of its military force as
foederati (allies), led to the doom of Roman civilization. Britain, for instance,
had ceased to be Roman in any sense by the year 425 AD. Cities and rural
villas had been abandoned, all ceramics were home-made, trade had become
local, the barter system had replaced money, and the specialists, who were
the essential bearers of culture, could not be sustained; for example, the fres-
co and mosaic workshops had closed down.
Christian Europe would have to wait for the next trade connections, though
regional, for six centuries – with one notable exception. History has known
this nation mainly as bloody raiders, however, their advanced technologies
and significant long-distance trade routes, as well as their input into almost
every region of Europe they had arrived makes it worthwhile mentioning
them in this text. The Vikings, originally from Scandinavia, undertook a great
number of raids between the years 900 and 1100, usually followed by the
establishment of small agricultural settlements and trading posts scattered
all over Europe. Norsemen reached the Orkney Islands as well as Greenland
and Newfoundland in Canada via Iceland; the Danes terrorized eastern Eng-
land and the northern coast of present-day France (Normandy – the land of
the northmen) where they gradually settled. Their descendants, the Nor-
mans, temporarily conquered various cities on the Iberian Peninsula and in
North Africa; they took Sicily from Muslim hands and founded the Kingdom
of Naples on the Italian Peninsula. The Swedes set out primarily northward
and eastward, colonizing present-day Finland. Rurik, the legendary Viking,
became the ruler of Novgorod, while Oleg, probably his son-in-law, founded
the first Russian state – Kievan Rus. In spite of all of the violence, the often tiny
minority of Vikings must have brought significant economic benefits to the
population in order to maintain power. In most cases, economic advantages
increased the standard of living for the predominant part of the population.
Quite often, the key element of such economic advantages was participation
in either regional or better long-distance trade. This example is most remarka-
ble in Russia. The system of lakes near Novgorod, and rivers such as the Volga,
the Don or the Dnieper enabled a connection of the Baltics with the Black
Sea, which resulted in an unprecedented growth of trade and specialization
within craft production. The Viking sailing ships interconnected the Baltics

and the North Sea with the Atlantic, using oars for short-distance voyages,
and heralded a vast growth of Baltic maritime trade in the centuries to come.
The conquest of England at the Battle of Hastings in 1066, along with
the participation of Normans from Sicily and southern Italy in the Crusades,
marks the climax of the Norman age. Normans brought their new organization
to England, along with new technologies in virtually in all aspects of life, and
commercial contacts, tightly binding the British Isles with Continental affairs
for several centuries. Thanks to their vital participation in the Crusades,
Naples and Palermo became important trading posts in these large-scale expe-
ditions, which has affected the history of three continents. According to some
authors, leadership, organization and logistics skills tested in undertaking
the Crusades made later voyages in the Age of Exploration possible. Even if
the connection between the exploration voyages and the military campaigns
in the Holy Land had not been strong, the wealth of distant lands stirred the
European imagination for centuries on. While the Crusades themselves were
a political and economic failure (with the Crusader states lasting for about
a hundred years – never reaching long term sustainability), the technologi-
cal exchange and the establishment of a trade network, though complicated,
were vital to Europe in many aspects. Many noblemen vastly indebted them-
selves purchasing all the necessities (horses, supplies, armour), some of them
finding a solution in pogroms against their Jewish creditors. After a stressful
and very expensive journey to the Holy Land, either over land or by sea, they
pined for new conquests in order to acquire land and the means to sustain
themselves in the new country. That was in sharp contrast with the already
settled nobility, who needed peace and stability to continue their mutually
beneficial commerce with neighbouring Muslims; Antioch, Acre or shortly
occupied Damietta were ports where Chinese silk and Indian spices boarded
Pisan, Genoese, and Venetian ships, which were to carry these increasingly
demanded cargoes to Europe.
While they included reciprocal massacres of devout Muslims and Chris-
tians, causing a hatred which echoes to the present day, the Crusades also
defined a trade network, which would last (at least in the case of Venice) for
hundreds of years. Should we speak of the first glimpses of a global trade
network in that period, then Genoa (and particularly Venice) played an indis-
pensable role.
One of these trade routes came out of eastern China, then continued by
several routes westward across the united Mongol Empire as far as Europe.
The northern route of the Silk Road ended in the Crimea, in the Genoese trade
stops of Caffa (Theodosia) and Tana (Tanais). Then the cargo was carried by
Genoese ships through Constantinople (present-day Istanbul) and Sicily to
Genoa. In addition to these trading posts (so-called factorias), the Genoese
controlled more on the coasts of the Black and Aegean Seas. It was through
the Silk Road that the Black Death, arguably the greatest pandemic in human
history, reached Europe. Originating probably in China around 1320 and
– 14 –
reaching Genoan trade stations in Crimea by 1347, it was transported by fleas
on rats on board Genoan ships to Sicily and Pisa, and from there to virtually
all of Europe. Once transmitted to humans, the plague spread with incredi-
ble speed. The disease peaked in 1352, killing one-third of the European pop-
ulation with many more recurrences well in the 18th century. The impact
on European economy was profound, causing a decrease in the price of land
while increasing real wages despite dramatic inflation.
Venetians managed to hold on to some of the eastern Mediterranean mar-
kets even after the fall of the crusader states, e.g. in Antioch, one of the des-
tinations of the southern route of the Silk Road. First of all, Venetians had
a virtual monopoly on the supply of spices. A variety of spices such as pep-
per, ginger, aloe, nutmeg, cinnamon, etc. were carried by Arab middlemen
from India along the ancient maritime route, already known to Alexander the
Great, from the Indian Ocean to the Red Sea and then across land by car-
avan trains to Alexandria. There, the long-distance road, connecting three
continents, continued by loading the cargo onto Venetian galleys. Besides
a great arsenal and being able to build one galley a day, the Venetians dis-
posed of large storehouses, allowing them to control the prices of both goods
in stock and sold. From Venice the goods were either transferred along the
Alpine trails to North Europe, or kept in Italy, in one of the wealthy urban com-
munes. The Italian merchants’ range was much broader, however. In all the
Mediterranean and Black Sea regions, the factorias were often transformed
into larger colonies. They were buying slaves, grain, tropical fruit, expensive
cloths, silk, carpets, drugs and medicine, or perfumes, along with other orien-
tal goods. Trade also facilitated the transfer of valuable technology as well as
the exchange of material culture with the Orient. Europeans predominantly
owe Italian merchants for knowledge of more advanced methods of produc-
tion of glass, paper, and gunpowder, as well as information from fields such
as the textile industry and metalworking, among other techniques. Italians
also exported goods to Asia (Venetian cut mirrors and perfumes, Genoese silk
fabrics, Milanese arms, embroidered silk and brocades from Lucca, or famous
colourful Florentine cloths), nevertheless they fell behind the Asians in trad-
ing. The deficit in the balance of trade had to be offset with precious metals,
in which they were lacking as much as the rest of Europe.
The whole of Europe was absolutely shocked by the rise of the Turks. After
the Battle of Manzikert (1071), where they put a larger Byzantine army to rout
(the defeat launched the Crusades, which were in fact military assistance to
eastern Christendom), they succeeded in fighting their way through to Anato-
lia, and Byzantine rule in modern-day Turkey came to an end. When the Otto-
man Turks landed in the Balkans 100 years later and defeated the Serbs at
the Battle of Kosovo polje (1389), they joined Thrace, Macedonia, and today’s
southern Bulgaria and southern Serbia (including Kosovo & Metochia) to their
rule. The days of the Roman Empire, which had lasted for almost two thousand
years, were numbered. The fall of Constantinople in 1453 not only caused

a psychological shock to all of Christendom, but it also meant a major shift
in economic relations. Genoa lost all of its colonies on the Black and Aegean
Seas and started to focus primarily on Western Mediterranean trade. Later, its
close economic ties to today’s Spain put Genoa in the position of the monar-
chy’s banker. Also, Venice had difficulties coping with the loss of commercial
positions in the Byzantine Empire. Venetians were made to withdraw from
one position after another. After giving up their colonies on the Aegean Sea
and bases on the Peloponnese, they lost Crete and Cyprus, along with several
colonies on the Dalmatian coast. Their former dependencies fell to the Turks.
Perhaps the worst of all was the Venetian financial crisis in the 1460s caused
by the Ottomans shutting off Venetians from Serbian and Bosnian silver mines
after they conquered both countries in 1459 and 1451, respectively. For several
years, commerce between Venice and the East nearly stopped. This financial
crisis subsided very slowly as new silver mines were being opened in Bohemia
and several minor German states of the Holy Roman Empire. No later than at
the time of the Vikings, trade in northern Europe had started taking place on
both the North and Baltic Seas. In the 15th century, the dominant position was
gained by the so-called Hanse, a league of predominantly northern German
towns which included up to 200 port cities at its heyday. The Hanse was cre-
ated to secure the trade network, acquire and keep privileges, and facilitate
operations overseas. The northern German port of Lübeck had become its
main centre of commerce. The Hanse traded not only in Russian wax and furs,
Polish timber, Baltic amber, Danish meat and horses, German silver and salt,
English wool, Scandinavian herring and dried fish, but also grain, wine and
pig iron. The key trade route connected Novgorod in today’s north-western
Russia with Riga, Danzig (present-day Gdansk), Stettin (Szczecin), Lübeck,
Hamburg, Bremen, and London. As this route demonstrates, the Hanse played
a political role, enabling individual free imperial cities, as well as large mer-
chant republics (Novgorod controlling a major part of Russia), or such towns
as Visby and Malmö, to protect their interests from the powerful feudal states
surrounding them. The number of members of the Hansean League and the
scale of trade gradually decreased between the 15th and 17th centuries, when
this regional commercial organisation finally ceased to exist.
So far, we have been discussing the development of economic relations,
crafts and commerce in Europe and regions geographically related. From
a retrospective point of view, this makes very good sense. Although the Chi-
nese Empire, the rulers of India, or the Arab countries had been equally more
developed in many respects, both in sea-going trade, and in today’s economic
indicators (GDP per capita, volume of export, etc.), it was in the 15th and 16th
centuries when fortunes began to change, and it was Europe and its great
colonial powers that lay the foundations of the first truly global economy. The
reasons for this have been the subject of research by many economists and
historians. The main reason seems to be economic unity in combination with
political disintegration. Europe, with its geographical complexity, allowed for
– 16 –
the existence of various political units which associated loosely, if necessary,
to protect their independence (e.g. the Hanse); but most of all, they competed
against each other. This competition was the primary cause of rapid develop-
ment in the area of new technologies, including warfare. A great number of
competing political entities existed. Most of these states possessed or were
able to buy military means to ensure their own independence, but none of
them could achieve autonomous rule of the Continent. To cite one instance for
all, in 1494 Italy was invaded by the French army equipped with new bronze
cannons, causing dire effects never heard of before. In no time, all the inven-
tors and scholars, including brilliant Leonardo, were urged to devise some
defence against those cannons. Eventually, the Italian states freed themselves
from French influence with the help of Spanish intervention. And, as we will
see later, the Spaniards were the ones who would attempt to unite the Con-
tinent, saving no effort or fortune in numerous wars. Their failure in 1648
sent a clear message that Europe would continue to be comprised of national
states and any attempt to unite Europe would be short-lived or even cause
millions of people to die.
This fierce competition obviously penetrated maritime trade and economic
activities, so it is no surprise that it was the imperial Portuguese and Spanish,
later joined by the Dutch, the French, and most of all the British, who estab-
lished trading networks interconnecting individual economic regions and set
up the economic relations as we know them today. There is no doubt that
foreign trade was the ultimate bond uniting national economies into a single
global one, until the expansion of foreign investments in the last quarter of
the 20th century.
At the end of the 15th century, the conditions for exploring new trading
routes and opportunities were favourable. The negative impulse undoubtedly
being Far-East commerce interruption, i.e. the Turkish occupation of the Bos-
porus and Dardanelles along with most of the Balkans. A military altercation
with the Turks arose, both on the seas and ground, and Christians, namely
the Venetians, were losing. After the Turks had controlled today’s Egypt, the
clinch became perfect, both the northern route across the Black Sea, and the
southern route across Persia or the Red Sea were cut off. Even later, when
Venice had succeeded in restoring trade, the price of spices was too high and
the scale of trade relatively small. Besides, naval warfare between the Chris-
tian North and the Muslim South was carried out all over the Mediterranean
Sea. Barbary pirates (from the present-day cities of Algiers, Tunis, Oran, and
others) launched their fleets, which assaulted maritime operations, capturing
Christian slaves and interfering with mercantile activity from Gibraltar to as
far away as Ragusa. Even in the 19th century, these pirates were still laying
their hands on ships not only in the Mediterranean, but also in the Atlantic,
sending raiding parties, e.g. to the East Coast of the United States. They were
faced with Christian fleets belonging to the Order of Malta, Spain, France,
and later the Italian states. The mercantile activity and the importance of the

Mediterranean Sea for European commerce gradually subsided, while mari-
time trade and economic activity were shifting to the Atlantic coast.
The first nation to take full advantage of qualitative changes in shipbuild-
ing, as well as improved technical and navigation equipment (compasses,
astronomical tables, more accurate maps), was the Portuguese. Waging war
against North African Islamic states, they managed to conquer Ceuta in 1415
(a present-day Spanish enclave on the north coast of Morocco), which encour-
aged their efforts towards further invasions in that direction. The failed attack
on Tangier, however, stopped their endeavour in this direction. The Portu-
guese captains then started sailing along the North African coastline in their
efforts to circumnavigate and bypass Arabian trade rather than let them take
their share in it. Prince Henry the Navigator (1394–1460), who built an obser-
vatory and a nautical school in Sagres, personally sponsored voyages and
shielded them with his name. Ensuring profitability was a major issue; acqui-
sition of long-term investments was quite complicated in poor feudal coun-
tries. Only when the Portuguese set up a company to trade with the Canary
Islands in 1441 and landed in the Bay of Arguin (of present-day’s Mauritania)
two years later, did they enjoy some success.
Being the third son of the Portuguese king John I (1358–1433), Prince Hen-
ry had little chance of gaining the throne; therefore, he devoted his whole
life to maritime and colonial enterprises. He founded a colonial mercantile
company in the port city of Lagos in the south of Portugal in 1444, which lat-
er acquired monopoly rights to trade in West Africa. That encouraged more
exploration to the south, and the slave trade soon became the most profitable
sector of colonial commerce; although trade in pepper, gold, ivory, and other
African products started gradually developing, too. The Portuguese founded
several trading posts in the Gulf of Guinea in 1471; in 1487 they sailed past
the Cape of Storms (later renamed for the more pleasant the Cape of Good
Hope); and, in 1498 they finally reached Indian Calcutta, one of the biggest
entrepôt for Asian spices. This exploratory voyage of Vasco de Gama was soon
followed by others; the Portuguese established trading posts in the town of
Goa and enlarged their commercial sphere of influence through the conquest
of Socotra and Aden, including the vital Strait of Hormuz at the mouth of the
Persian Gulf, where the Red Sea extends into the Indian Ocean. In addition
to that, they controlled a major part of the newly christened African Congo,
and also had significant footholds in the East African coast. At the beginning
of the 16th century, the Portuguese’s African trading empire displaced the
Arabs, becoming the middlemen and suppliers of Asian spices to Europe. In
the year 1511, the Portuguese conquered Malaysian Malacca and made a trea-
ty with the rulers of Ayutthaya (Siam) to secure the free operation of mission-
aries and to establish trading posts in exchange for supplies of harquebuses
and gunpowder. Then in 1512, they discovered the Indonesian Moluccas, ‘the
fabled Spice Islands’ archipelago, and in 1513 they landed at Canton in south-
ern China.
– 18 –
While the Portuguese were developing commerce, namely the slave and
spice trade, the Spanish completed the reconquista (the re-conquest of all the
Muslim territories on the Iberian Peninsula) through the occupation of Grana-
da by the Catholic Majesties Isabella I of Castile (1451–1504) and Ferdinand II
of Aragon (1452–1516) in 1492. Isabella supported a Genoese navigator, despite
the justified scepticism of her advisers at court, in an expedition to the west
in the same year. Christopher Columbus (1450 or 1451–1506) set sail on three
ships to the west in August of that year, advancing the reach of the new con-
tinent in October. Columbus undertook four voyages, discovering the Small
and Greater Antilles and parts of the South American mainland, neverthe-
less, he believed, until his death in 1506, that he had reached Asia. It would
take others to profit from his discovery. Vasco de Balboa (1472–1519) crossed
the Isthmus of Panama in 1513, discovering the Pacific Ocean on the one
hand, and proving the existence of a new continent on the other. Hernando
Cortéz (1485–1521) conquered the Aztec Empire in 1521, while Ferdinand
Magellan (1480–1521) met his death in the Moluccas in the same year, lead-
ing an expedition that would circumnavigate the Earth, and finally, Francisco
Pizarro (147?–1541) began the conquest of the Inca Empire in 1532. All of these
expeditions enabled the Spaniards to achieve all three points of the motto
which they had proclaimed as they were leaving for America: for God, and king,
and fortune. Tonnes of Mexican, Peruvian, and Bolivian gold and silver started
pouring into Spain, while crowds of settlers and missionaries were pouring
in the opposite direction to establish a Catholic Latin America. For the forma-
tion of a world economy, a rapid increase in the amount of exchanged goods
was essential, and created the conditions for the emergence of international
markets. As trade relations among remote areas intensified, a global division
of labour and global trade began to develop. In addition to precious metals,
Europe mainly imported spices, tea, coffee, cocoa, tropical fruits, cane sugar,
luxury fabrics, and various finished products; as well as, previously unknown
produce such as jute, cotton, and tobacco. European agriculture was also
enriched by some species of plants and animals, such as potatoes, corn, toma-
toes, beans, rubber, and turkeys. America, among other producers, took over
grain, horses and cattle from Europe and became a market for its products.
After the Spanish conquest of the Philippines and unification with Portugal
in a personal union (1580), Spain had indeed become an empire ‘on which the
sun never set’. As for the world economy, it was the first instance of global
economic ties being kept within a single state. Let us consider an example.
Three galleons set sail within the Spanish Empire at the same time. A galleon
with Mexican silver sets out from Acapulco on the Pacific coast westward to
Manila in the Philippines. The silver was used to pay for Asian spices, which
were loaded and dispatched on another galleon sailing in the opposite direc-
tion, i.e. from Manila to Acapulco. In Acapulco, the spices were then loaded
onto a caravan which crossed the Mexican isthmus from Acapulco to Verac-
ruz, where a third galleon was waiting to take them to Cádiz, Spain. The profit

made on this global economic exchange reached into the hundreds of a per-
cent. The scale of commerce in Lisbon, Seville, and especially in Antwerp (or
other ports in the Spanish Netherlands), was growing rapidly. It was this trade
with colonies which was shifting the economic centre of the continent from
the cities around the Mediterranean Sea to the ones on the Atlantic coast.
A more and more significant role was being played by Antwerp, and later on
by Amsterdam and London. Although long-distance trade had become the
essence of rapid economic growth, Italian cities, perhaps except Genoa, Ven-
ice and Florence, were losing their exclusive position. Nevertheless, the Portu-
guese and Spanish did not always make the best use of their newly acquired
wealth. The Spanish Habsburgs, who ruled Spain, Portugal, the hereditary
lands of the Habsburg Monarchy, Hungary, the Czech lands, Naples, Sicily,
and what is present-day Belgium, the Netherlands and Luxembourg, were
financially exhausted, primarily by endeavours to establish a politically united
Europe (Europa Universalis).
The vast profits and opportunities yielded by the Spanish Empire were
more than offset by the huge costs and risks which the Spaniards had to face.
One example of the ambiguity of the large influx of Spanish gold was the
so-called price revolution. A shortage of precious metals, the effects of which
are illustrated by the example of 15th century Venice, had completely van-
ished in the second half of the 16th century. Compared to Europe, American
gold and silver were mined at minimal cost. Flooding the European market
with an abundance of these metals caused its relative decrease in value to
agricultural and craft products. Hand in hand with depopulation, particularly
in southern Spain and caused by the inhabitants leaving for easier livelihood
in the colonies, resulted in a high rate of inflation. Failure to control the influx
of gold, and therefore the price fluctuations of gold and silver from the Amer-
ican mines, together with the high costs of war adventures, had escalated
into three bankruptcies of the Spanish Crown by the end of the 16th century.
There is still another, remarkable reason why the Netherlands and Eng-
land used their wealth significantly better than the Catholic states such as
Spain and Portugal. The reason was the religious reformation and the creation
of early capitalist relations. Like the agricultural and industrial revolutions
150 years later, these two phenomena had an important impact on the world
economy, so we ought to mention them briefly, although by their nature they
are not economic, but rather theological or social.
1.2 THE ESTABLISHMENT OF CAPITALIST SOCIETY

After the fall of Constantinople as Orthodox Greeks fled from the city, the
more educated ones among them brought Classical books and thought to
European courts with them. This thinking of Aristotle, Plato, and others was
fascinating and far more advanced than the European schools at that time;
– 20 –
however, it was pagan. European Catholic scholars therefore faced the ques-
tion of whether the truth could be measured, for example, by Aristotelian log-
ic, or if they should hold on to a measure of truth which had been tested over
centuries, i.e. the Bible. Scholars in the south of Europe took the Bible as their
basis and tried to Christianize Aristotle. Thinkers north of the Alps, where the
ideas of the Greek philosophers arrived later, measured the biblical truths by
the tools provided by Classical philosophy. When Martin Luther (1483–1546)
posted his ‘Ninety-five Theses on the Power and Efficacy of Indulgences’ on
the door of the Castle Church of Wittenberg in 1517, in order to continue the
primeval tradition of religious dissent, he found much more sympathy for
his ideas than his predecessors. Northern Germany, Scandinavia, the Baltic
States, and many other parts of Europe gradually became Lutheran. The unity
of the Christian world disintegrated. For economic thinking, however, John
Calvin (1509–1564), who worked in Geneva where many Protestants had fled
to from northern Italy (see the box), was far more inspirational. Calvin rein-
terpreted the Bible with little regard for the teaching of the Church fathers or
Christianized Greek philosophers, thereby allowing the use of interest rates,
and thus the middle-class population started accumulating capital. In Geneva,
the city council, for the first time in modern history, officially announced an
interest rate of 5% and listed the basic laws relating to interest according to
the biblical Golden Rule. Thus, Calvin helped to establish modern banking. At
the same time, he inspired laws, which we regard as business laws today, and
recommended signing written contracts for all business transactions. Finally,
as remarked by the 19th century German sociologist Max Weber (1864–1920),
he became the chief proponent of the so-called protestant ethic, which partly
emerged from his doctrine of predestination. This provided the Protestants
with motivation, as well as institutional security for their newly emerging
capitalist enterprise.
John Calvin: Having fled from Paris, after a brief stop in Strasbourg, he arrived in Gene-
va. The church ministers in Geneva persuaded him to replace his academic seclusion for
a share of responsibility in the development of the newly reformed city. His radical views
on many theological questions often put Calvin in a minority position; he did not become
a citizen of the town until 1555, a full nineteen years after his arrival. He never held any
office in Geneva, and once he was even expelled from the city. However, his keen intel-
lect, excellent knowledge of the Bible, and great authority, which was even international,
meant that he was invited back to Geneva, later becoming the de facto ruler of the city in
his declining years. Calvin’s views strongly influenced the legislation of the city. Overall, he
dealt with topics like the role of money, interest and income distribution, both theoretically
and practically, for over twenty years (1541–1564). His writings are not economic, but
theological, based on his pastoral work in practical matters (Evan 2001).
At the insistence of the moneychangers (the first bankers and moneylenders) from the
town of Lucca in Tuscany, who had fled from re-catholization in Italy and found refuge in

Geneva, Calvin addressed the question of usury. As a result of his interpretation, based
on biblical exegesis, usury ceased to be illegal, and in addition to the principles below, he
contented himself with regulation based on the biblical Golden Rule (as Jesus says in the
Gospel of Luke, ‘And as you would that men should do to you, do you also to them like-
wise.’ – Luke 6:31)
Based on the biblical text and rational analysis, he set just seven rules:
1. Interest shall not be taken from the poor, who need a loan for their basic needs.
2. No one shall be driven by profit from interest so much that he would despise the needs
of the poor.
3. No one may go beyond the justice interpreted by the Golden Rule.
4. The borrower must profit from his loan at least as much as the lender.
5. The Laws of God, not worldly insights, govern money lending.
6. Loans also serve the public welfare.
7. The laws of the county determine the interest rate.
Another law said that no one was allowed to make his living only by lending money. The
idea of bankers was unthinkable for Calvin, since they would profit merely from other peo-
ple’s work. To the reformer’s mind, that was in contradiction to God’s commandment to
work. ‘It is strange and outrageous that while all others gain the means for their livelihood
by strenuous toil – administrators being exhausted by their daily job, craftsmen serving the
community with the sweat of their brow, merchants exposing themselves to many dangers
and discomfort in addition to their work – that the money traders would be allowed to sit
in their comfort, accepting taxes from other people’s work without doing anything’ (Calvin:
1949). So Calvin made interest ‘lawful’ only for private owners with free capital and trad-
ers, who worked with borrowed money (Evan: 2001).
Calvinist ideas, along with his version of Protestantism, expanded from

Geneva into the German market towns and especially to the Netherlands,
Scotland, and along with the defeat of the Huguenots (French Calvinists) and
the Puritans (English religious dissenters, predominantly Calvinists), to the
frontier of the North American colonies. There they had taken refuge from
religious persecution at home and were allowed to live according to their
moral standards. Everywhere they went, Calvinists facilitated the transition
from late medieval to early modern forms of management.
The first region to form early capitalist relations in the 16th century was
the historical Netherlands (17 provinces under the jurisdiction of the Spanish
King). This happened in the midst of an intense struggle, which was funda-
mentally a religious war. However, it was also a clash between feudalism and
early capitalism, and it was mainly here where the efforts of Spanish hegem-
ony over Europe, the dreaded Españolizar Europa, were met with decisive
and ultimately victorious opposition. The Calvinists, with their hard work,
and great desire for success resulting from them being chosen by God, or
predestination, met with renewed Catholicism, which was full of religious
fervour after the Council of Trent (1545–1563), and also, after the temperate
– 22 –
Renaissance era, had a completely new weapon at its disposal: the Baroque,
an artistic style as well as a way of life. ‘In the year 1556 the whole of Europe
was astonished by some incredible news. The most powerful Christian king,
Charles V, the master of two worlds, gave up the Crown and renounced all of
his estates in order to devote the remaining days of his life to worship and
sacred meditation… it was not just a whim of a capricious old man, or the
governance of a weary, exhausted monarch, as it might seem superficially.
This act was a clear sign of publicly announcing the birth of a unique spiritual
flare, which was ignited in the quiet seclusion of the Spanish Carmelite mon-
asteries. It was a sign that this zeal was spreading to the secular realm, and it
slowly began to interfere powerfully with the thinking and actions of various
people throughout Europe. It ushered in the Baroque, as this Spanification of
Europe would later be called’ (Vopěnka 2004:23). Not surprisingly, Dutch Cal-
vinists won their struggle only after eighty years (1568–1648) of fierce fight-
ing, with the military help of many Protestant countries, and soon their fight
had become part of one of the bloodiest European conflicts in history, the Thir-
ty Years’ War (1618–1648). The resulting compromise granted independence
to only 7 provinces of the historical Netherlands (affiliated with the Union of
Utrecht in 1579), while the remaining 10 provinces stayed under Spanish rule,
and Protestants there were faced with gradual re-catholisation. The seven
independent provinces, later called the United Provinces of the Netherlands,
almost reached superpower stature, and expanded their colonies on five con-
tinents, allowing us to demonstrate a new type of global trade and the forma-
tion of the world economy. ‘The political success of the Dutch rested on the
phenomenal commercial prosperity of the Netherlands. The moral and ethical
bases of that commercial wealth were thrift, frugality and religious tolerance.
John Calvin had written, “From where do the merchant’s profits come except
from his own diligence and industry?” This attitude encouraged a sturdy peo-
ple who had waged a centuries-old struggle against the sea’ (McKay 2008:550).
The Spanish and Portuguese colonial dominions were formed and worked
on similar principles until the 19th century. The main income of the perma-
nently growing territory was comprised of the imports of precious metals,
and crops which were not cultivated elsewhere. Goods such as sugar, cof-
fee, tobacco, cocoa, as well as gold and silver were non-competitive goods.
One of the most important crops was sugarcane. It required the second most
important commodity of the time, slaves, to harvest it. Until sufficiently large
territories to grow sugar were conquered by Englishmen (such as in Jamaica,
Antigua, Barbados, Bahamas, and Trinidad), the French (Western Hispanola,
Guadeloupe, and Martinique), or the Dutch (Curaçao, Suriname, and St. Mar-
tin), the Spaniards and Portuguese controlled the price and quantity of sugar
imported to Europe. Slavery was closely linked to the Caribbean plantations
as well as virtually all colonies in Latin America. The reason why sugar planta-
tions developed this loathsome trade was that they required up to three times
as much slave labour as any other plantations.

Sugar cane, slaves and Triangular trade: Sugarcane, originally came from Southeast
Asia, and was first used in India for religious and medical purposes more than 2,000 years
ago. In the 10th century, the Arabs brought it to the Levant. Since then, cane has been
grown in the Jordan Valley, in the Nile Delta and elsewhere in Syria, Palestine, and North
Africa. To Europeans, sugar was a rare commodity and the Venetians and other Southern
Europeans tried to spread its cultivation all over the Mediterranean and the Atlantic Ocean,
indeed wherever it was possible, thus resuming the earlier Arab produce on Cyprus,
Crete, Sicily and Malta. While the Arabs had managed to grow cane requiring moisture
and warmth in the arid regions of the Middle East, the relatively cold Mediterranean climate
reduced the sugar content in plants harvested in this area. That is why Europeans first expe-
rienced large returns only when the Portuguese began to grow sugarcane in the Atlantic
Azores, and Madeira, and then the Spanish started plantations on the Canary Islands. Half
of all deliveries of sugar to Europe in the 15th century came from Madeira. ‘Columbus, on
his second voyage to the New World in 1493, picked up some cane plants in the Canary
Islands and planted them on the island, he called Hispaniola. It was an instant success, as
sugar cane there found heat, humidity and rainfall much like its indigenous New Guinea.
By 1516, the first commercial sugar shipments were on their way to Europe. Production
costs in the Caribbean were low compared to the Levant and the Mediterranean’ (Chan-
dler 2012:42). Sugar cane then quickly spread to the Spanish islands of Cuba, Puerto Rico,
Jamaica, Barbados and other places. Likewise, the Portuguese from Madeira expanded cane
growing to the coast of Brazil. The success of sugarcane in these areas lay in the fact that it
wasn’t necessary to water the plants, and the nearby forests were sufficient for the wood
needed for processing and refining. All that was missing was the workforce, as local Native
American tribes had been massively decimated by Spanish persecution and the diseases
carried over by them. Whereas in Europe and the Middle East, plantations were worked
by slaves who were mostly prisoners of war and which were supplied to Genoans and
Venetians by Crimean Tatars, in the Caribbean the African slaves who had been imported
in order to work in the mines were forced to toil on sugar plantations. By 1530, Santo
Domingo had 34 sugar refineries and 200 plantations. Similar success was achieved by
the Portuguese as in 1710 there were 528 plantations in Brazil (Chandler 2012:42); but it
took France and England to build the most sophisticated system of plantations in the New
World. In the 18th century, France conquered from the Spaniards plantations on western
Hispanola (today’s Haiti), together with half a million black slaves, two thirds of whom had
been born in Africa. At the same time, 660,000 slaves were held on British Jamaica. The
continued demand for new slaves, whether on the Spanish, Portuguese, or later the French
and British plantations, gave rise to a phenomenon called ‘triangular trade’. In the 18th and
19th centuries, European traders imported a constantly increasing volume of European
goods and weapons to African rulers, who exchanged them for members of neighbouring
tribes captured in tribal warfare as slaves. Ships laden with these slaves sailed in particular
to the sugar plantations in the Caribbean, on the other side of the triangle. Finally, the
traders sold the slaves on the sugar plantations and bought sugar, molasses, rum, and other
crops for the return voyage to Europe. As the people moved to cities and worked long
hours in factories, stimulant beverages (i.e. tea and coffee), containing caffeine, became
– 24 –
popular. So did chocolate, originally a bitter beverage, which later was sweetened by the
imported sugar and gained vast popularity. Sugar also began to be used in desserts, how-
ever, more and more people’s taste for the sweet began to grow bitter, as the news about
the treatment of slaves in the Caribbean was leaking, not to mention the fact that the sugar
plantations now were employing ten times more slaves than any other. The turning point
occurred in France in 1801, when the French had been cut off from their sugar cane plan-
tations in the Caribbean by a British blockade; but they still managed to refine sugar from
sugar beets. This new invention was quickly adopted, since it allowed even states without
any colonies to supply their population with sugar. In 1830, the sugar beet ‘supplied more
than half of the continental market. By 1880 it had overtaken cane in world trade… Britain
abolished slavery in 1834, Cuba and the United States did so in 1865’ (Chandler 2012:43).
The Dutch way of trading differed from the Spanish and Portuguese signif-
icantly. It was not just that the Dutch traders were well aware of the correla-
tion between profit and risk and were thereby able to trade with the enemy
during war if the gain would outweigh the risk, but also that they had a larger
stock of capital accumulated by the middle class, as well as the Commodity
Exchange, relocated from Antwerp to Amsterdam. Above all, as the Nether-
lands lacked any relevant natural resources, it had been forced to specialize
in competitive goods, i.e. the production of those goods that are not depend-
ent on a particular climate, or deposits, and can be produced anywhere in
the world. The Dutch had to be better in every way, whether in agriculture
or crafts, in order to be competitive both in Europe and globally. A compari-
son with the mighty Spain, whose economy has been fuelled by the influx of
precious metals from the colonies, could not be more contrasting. With some
exaggeration, we might use a contemporary analogy that gold was born in
America, grew up in Spain and was buried in the Netherlands.
The absolutist Spain did not give their dealers nearly as much space and
opportunities as the early capitalist Netherlands. The latter had a fast grow-
ing agriculture, and dominated Continental trade and seafaring; the Dutch
quickly mastered not only the trade in Northern Europe (the Baltic and North
Sea), mainly at the expense of the Hanse, but they were also recognized in
trade with the Spaniards, Portuguese, and Italians. Among other reasons, they
managed to benefit from the results of great overseas discoveries. Already,
at the turn of the 16th and 17th centuries, they began to build an extensive
overseas empire (initially, mainly at the expense of the Portuguese). In the
second half of the 16th century, Dutch cities became the most important
centres of Continental trade and banking. In Amsterdam, trade in precious
metals and gemstone processing was established; it was here that the securi-
ties exchange trading technique evolved. The port of Rotterdam developed in
Europe’s largest port, a position it holds to the present day.
The Dutch also excelled in the processing of raw materials, which were
entirely absent on their territories. For example, it is remarkable that it was

the Dutch craftsmen who were at that time called to Sweden to assist in devel-
oping metallurgical and armament factories, using Swedish iron ore. Although
the Dutch in the mid-17th century concentrated mainly on trade in competitive
goods (Scandinavian wood, resources for shipbuilding, iron, copper, Russian
furs, wheat and rye, North Sea fish, and English wool), it does not mean that
their commerce had not become global even before gaining independence.
Already in 1602, the Dutch regents (the Netherlands was a so-called crowned
republic, the main position was held by the ‘Federal Parliament’ and its rep-
resentatives, the Stadtholders) founded the Dutch East India Company. It was
a feat soon followed by other powers. Each investor in this company received
a percentage of the profits, according to the amount of invested capital. This
company proved to be a very effective management tool for their commercial
and colonial affairs, and the Dutch soon occupied Cape Town, gained Ceylon
and Malacca from the Portuguese, and established trading posts there. ‘In
the 1630s the Dutch East India Company was paying its investors about a 35
percent annual return on their investments. The Dutch West India Company,
founded in 1621, traded extensively with Latin America and Africa. Trade and
commerce brought the Dutch prodigious wealth. In the seventeenth century
the Dutch enjoyed the highest standard of living in Europe, perhaps in the
world. Amsterdam and Rotterdam built massive granaries where the surplus
of one year could be stored against possible shortages the next. Thus, except
in the 1650s, when bad harvests reduced supplies, food prices fluctuated very
little’ (McKay 2008:553).
Overseas trade development also provided the Dutch with the largest naval
fleet in the world. Indeed, it was the Dutch naval mastery which had played
a significant role in the struggle for independence from Spain, since it was
possible to arm the large merchant fleet with cannons and thus transform
it into a war fleet. The reverse of this equation also held true. Their grow-
ing maritime power allowed them to patrol on ever larger trade routes, and
to operate a growing colonial empire. After the initial successes in fighting
the Portuguese, the Dutch started to gain ground themselves. They took con-
trol of vast territories in Southeast Asia (Sumatra, Java, Malay Peninsula, the
southern part of Borneo, the islands of the Moluccas and West New Guinea).
They were also the first to build a settlement on the Australian continent,
but it was subsequently abandoned because it had not yielded any economic
benefits. The focus on profit also led the Dutch to exchange New Amsterdam
(present-day New York) with the English for a currently insignificant island in
Molucca’s archipelago, which yielded a large amount of spices.
As the Dutch colonial dominion was expanding, the number of specific
non-competitive goods the Dutch traded was also growing. They were namely
sugar and tobacco from the Caribbean, tea, pepper, camphor, various kinds of
spices, sandalwood and teak wood from Southeast Asia, cinnamon and cloves
from Ceylon, and Chinese and Japanese porcelain and silk. Their economic
impact should also be credited to the proverbial Dutch religious tolerance. Not
– 26 –
only did the Netherlands become the country of immigration for people of var-
ious forms of Protestant confessions for decades, which brought significant
economic benefits, but the Dutch were for that time unique in their tolerance
in terms of the acceptance and assimilation of the Jews. A very good exam-
ple could be Benedict (Baruch) Spinoza (1632–1677), a descendant of Spanish
Jews, who fled the Inquisition, and who wrote his important philosophical
work while performing a daily job as a lens grinder. A similarly significant
impact on the other side of the world was had by the Dutch willingness to sup-
ply Japanese warring clans with harquebuses and muskets during the ongoing
clan war (the Sengoku jidai, or Warring States Period from the m id-15th cen-
tury to 1605). In this way, the Dutch totally knocked out the Portuguese com-
petition which had conditioned the supply of arms on allowing the Jesuit mis-
sionaries freedom to operate in Japan.
The area of the Netherlands and the size of its population ultimately
destined it in the long-term to the role of a second-order power. Indeed, it
was thanks to their very specific conditions that the Dutch were temporar-
ily brought to the top in the 17th century. It was the island neighbouring to
the north, which took over as the largest centre of commerce and gradual-
ly the most important colonial power, having started with analogous politi-
cal (constitutional monarchy) and religious conditions (due to far-reaching
reforms of the church and state, as well as the establishment of the Protes-
tant Church of England). Despite its excellent insularity, England was orig-
inally the least qualified candidate for this role. The Hundred Year’s War
(1337–1453) between England and France, which ended in the same year
as Constantinople fell to the Turks, left England without any dependencies
on the European continent (except Calais). England, moreover, was then
exposed to another conflict, known as the War of the Roses (1455–1485), in
which the high aristocracy massacred each other, and trade was devastat-
ed. The new Tudor dynasty then succeeded to the throne, whose reign was
marked by bloody religious clashes – Mary Tudor (1516–1558) was even nick-
named Bloody Mary, – as the state religion was alternating between Catho-
lic and Protestant. In the first half of the 17th century, the confrontation
between king and Parliament escalated into a civil war and the execution
of King Charles I (1600–1649). Oliver Cromwell (1599–1658) and his govern-
ment left a significant legacy that would not be disturbed by the restoration
of Charles II (1630–1685, son of the executed Charles I) back to the English
throne. England turned into a parliamentary monarchy where the ultimate
power shifted from the Crown to Parliament, which consisted more and
more of the leaders of the emerging bourgeoisie, that is, the entrepreneur-
ial, commercial and financial sections of society. Regardless of the difficult
internal political situation, further economic growth occurred (royal monop-
olies and guild restrictions on manufacture were abolished, manufacture
production expanded, along with domestic and overseas trade, not to men-
tion financial and stock market activity), all of which bound the country in

a conflict with the United Provinces. At the turn of the 17th and 18th cen-
turies, the rise of England (Great Britain since 1707) culminated. After the
so-called Glorious Revolution in the years 1688–1689, the island nation not
only engaged in wars against the France of Louis XIV (1638–1715), but also
completed its transfer from the Middle Ages. The establishment of the Royal
Exchange in London (1571), the Bank of England (1694), the colonization of
Ireland, and an intensive trade and colonization activities overseas, gave rise
to the Whigs’ government (commercial oligarchy) and the foundation of the
British Empire.
Agriculture was economically the most active sphere, and the foreign trade
balance was mainly secured by exporting wool. The export, which was already
significant during the time of the Hanse, was successfully developing through
so-called enclosures. During this long-term process, the landowners sought to
displace small farmers in order to turn the land over to sheep farming, which
had two effects. The financial strengthening of the Crown and the country’s
exports on the one hand, and the population growth of cities (especially Lon-
don) where these peasants moved, on the other. This allowed the development
of manufacturing in the long run, and later contributed to the early industrial
revolution. Though significant – we may recall for example, the Company of
Merchant Adventures of London, which was originally a guild, later exporting
English wool and supplying cloth, or the establishment of the East India Com-
pany in 1600 – British overseas trade was not connected to any significant
colonial dependencies of its own until the mid-17th century. Englishmen (as
well as the Dutch and French) parasited the Spaniards in this sphere, attack-
ing their colonies and trade routes in the Caribbean and elsewhere.
Comparison between Europe, the Americas, and Asia respectively, is also
very interesting. We can use relative prices as an indicator of price conver-
gence. There is a significant body of literature on the topic (O’Rourke and Wil-
liamson, de Vreis, i.a.), though not always conclusive. It can be said that the
colonies in America had a much bigger impact on Europe if for nothing else
than for the much larger volumes of goods traded. In the Americas, Europeans
were decisive players, owning land and producing the goods demanded by the
European market. While trade with both the Americas and Asia was mainly
influenced by the cost of shipping, monopolies, international conflict, piracy,
or government restrictions in this mercantilist era (see following chapter), in
Asia European traders had to take into account the quantitatively superior
Asian civilizations. Indeed, until the 18th century when Europeans were start-
ing to take land in Asia and relieve themselves from the mercantilist policies
of local rulers, the Asian trade of Europeans was not only weaker than trade
with America but also of other players within Asia. Europeans wanted more
Asian goods (silk, porcelain, cotton textiles, spices, coffee, and many other
commodities) than they could provide (woollens, linens, arms) so European
ships sailing to Asia were loaded with silver to pay for the deficit. The amount
of Asian trade remained rather limited when even still in the 18th century
– 28 –
Europeans could enjoy on average only half a kilogram of Asian goods each
year. Many Europeans also used their ships to engage in intra-Asian trade to
complement the existing trade connections between Europe and Asia. As for
the price convergence, O’Rourke and Williamson (2002) convince us that each
century of trading brought different changes in prices. Relative prices fell in
the 16th century as a result of China’s economic isolation, which started in
1433 and was confirmed in 1553. The countries of South and South-East Asia
offered their goods to newly arrived Europeans at a discount price as their
major marked dried up. From 1600 onwards, there is evidence of a rise in
population increasing the rents, a major source of income of rich land-owners.
They in turn were increasing the imports of expensive Asian and American
goods causing something of a trade boom. Prices rose until 1750, according to
O’Rourke and Williamson. A chain of wars all the way to Napoleonic defeat at
Waterloo in 1815 reduced those imports afterwards, and with them the prices
of various commodities.
Table 1.1: GDP per capita in selected European countries, in 1990 Int. GK$.1
Year Netherlands Belgium France Germany Italy UK Portugal Spain

1500 761 875 727 688 1 100 714 606 661
1600 1 381 976 841 791 1 100 974 740 853
1700 2 130 1 144 910 910 1 100 1 250 819 853
1820 1 838 1 319 1 135 1 077 1 117 1 706 923 1 008
Source: Maddison Historical GDP per capita Dataset
The above mentioned processes are well described by Maddison (2010)

in his useful book detailing historical statistics. Table 1.1 provides an excerpt
from his monumental work which serves our purposes well. The compari-
son of GDP per capita starts in circa 1500 when Italian city states were the
richest in Europe thanks to the heritage of the Roman Empire and, to a much
larger extent, to the virtual monopoly of the imports of various goods from
the Orient through the great merchant republics of Venice and Genoa. The
situation began to change after voyages of discovery, where the main trade
hubs and the focus of the entire continental economy moved to the Atlantic
coast and its harbours. Italy’s GDP per capita remained constant for three
centuries on. The Portuguese monopoly was too short and not followed by an
increase in productivity in crafts and services to make a lasting change. The
Spanish increase in GDP per capita was radical within the first hundred years
of Columbus’ discovery, yet there were other major benefactors of this shift
1 Int. GK$ is the Geary–Khamis dollar, or the international dollar, a hypothetical unit of curren-
cy that has the same purchasing power parity that the USD had in the United States at a given
point in time. The year 1990 is used by Angus Maddison most of the time as the benchmark
year for comparisons that run through time.

towards the Atlantic coast. Firstly, the Spanish Netherlands (roughly today’s
Belgium) and its main ports of Antwerp and Bruges were becoming rich while
serving the ever increasing Spanish Empire. However, with the United Prov-
inces of the Netherlands freeing themselves from Spanish rule and becoming
the first truly capitalistic society in Europe, they leaped forward around 1600.
For two centuries the Dutch cut out their competitors in Antwerp by closing
the Scheldt River estuary, making their ports of Amsterdam, Rotterdam and
others, the biggest source of income until the 19th century. It can be seen in
the table that between 1700 and 1820 the GDP per capita of the Netherlands
actually decreased as a result of domestic instability and a loss of markets to
Great Britain. As Britain is a significantly larger nation than the Netherlands,
she would not only become richer as a nation but also richer per capita only
around the mid-19th century. British naval mastery and skilful use of the for
ces of the first wave of globalisation are described in Chapter 2.
1.3 FROM MERCANTILISM TO LIBERALISM

All trade wars in the 17th and 18th century have the fact that they were ini-
tiated by something which came to be called mercantilism in common. Clas-
sical works devoted to the commerce and trade monopoly of the British East
India Company, made two Englishmen, Josiah Child (1630–1699) and Thom-
as Mun (1571–1641), are particularly famous. The former advocated govern-
ment-controlled interest rates and restrictions on all commerce, except the
trade between Britain and its colonies. The latter was a proponent of general
government intervention in order to increase exports over imports, which was
to help accumulate precious metals in Britain. Above all else, however, mer-
cantilism is mostly associated with the general inspector of finance of Louis
XIV (1638–1715), the Frenchman Jean-Baptiste Colbert (1619–1683). Being the
son of a wealthy citizen and financier from Reims, he ensured that France
was able to build armies and wage wars, during the entire reign of the ‘Sun
King’. Colbert did not invent mercantilism, although he has been associated
with it because he effectively enforced it in France at that time. The system
is based on the claim that natural resources are limited, and the power of the
nation depends on what portion of the world’s resources cake it acquires. As
this system spread in the 17th and 18th centuries, the economies of European
powers remained controlled by a collection of governmental policies regulat-
ing nearly all economic activity. Colbert banned the export of raw materials,
and high tariffs made it impossible to import finished products, especially
luxury products; he promoted the development of manufacturing in main-
land France to increase employment and ensure the export of French goods,
thereby strengthening the French balance of payments. Above all, he banned
the export of precious metals and tried to obtain all precious metals for the
royal treasury.
– 30 –
This system had been used with some variations by several European
countries before Colbert. Portugal and Spain monopolized their trade for two
centuries; they commonly used high duties and supported domestic traders
and manufacturers, both in their home countries and in the colonies. The
highlight of this effort on the Spanish side was called Casa del Contratac-
ión, which prevented the free trade of Spanish colonies, and whose licence
was theoretically necessary for any trade or navigation of any subject of the
King of Spain. Charles III (1716–1788) limited the role of Casa, and his son
Charles IV (1748–1819), totally abolished it in 1790. England joined in no later
than the time of Oliver Cromwell, although the textile and wool export monop-
olies will be described below. The English so-called Navigation Acts passed
in 1651, forbidding the shipment of goods to England on vessels other than
those owned by Englishmen or those of the country of origin of the manufac-
turers, were designed to support the key sector for the British Isles’ defence,
i.e. shipbuilding. The Navigation Acts gradually spread into a variety of laws
that were enforced and defended by individual factions of business and polit-
ical circles. Not surprisingly, with the way the mercantile policy was adopt-
ed in other European countries, such as Denmark, Sweden, Russia, Austria
(proponents of mercantilism were called Cameralists there), and the German
states, etc., European foreign trade did not develop as much as it could have,
because nobody wanted to export raw materials and import finished products
in return.
The answer since the 17th century was the establishment and occupation
of further colonies. Whereas the English, French and Dutch, had just been
trying to harm Spain, by far the largest colonial power aspiring to Europe-
an hegemony, the seizure of colonies became their economic priority from
that time. In retrospect, it seems somewhat inappropriate when discussing
with colleagues from developing countries to insist that Europe colonized
the world as a result of a specific economic doctrine, and then decolonized
it about three centuries later due to another economic and political doctrine.
But the fact remains that the adoption and expansion of mercantilism in
Europe went hand in hand with the increased efforts of all European colonial
powers. Granting monopolies to the English, Dutch and other East or West
India companies heralded this mercantilistic trend.
If trade competition and the struggle for maritime superiority and colonies
directly followed from these mercantilist policies among the countries on the
Continent, then equally hard lobbying took place within the states among
various factions supporting one or another law or colonial area. Let us look
at some examples from early 18th century Britain as recorded by Kovář in
his book (2004). At that time, the success of the British Isles’ foreign trade as
a whole was still measured by the volume of woollen goods exports. By far the
strongest was the wool traders lobby in Whitehall and Westminster (the seat
of the British government and Parliament, respectively), which promoted the
universal register and recording of all movement of wool, from sheep shearing

to its final processing, in order to prevent illegal exports. They boycotted all
price reductions and even re-initiated proposals for a government monopoly
on the sale of wool. Similarly, the ‘wool and silk traders’ led a major campaign
against textile printing, claiming that this technique would take employment
from thousands of people in the silk and wool industry. As a result, the gov-
ernment banned the wearing of garments made of printed cloth. Lobbies in
other fields also celebrated their achievements. When the Great Northern
War in the years 1720–1721 caused instability in pig iron and bar steel imports
from Sweden and Russia, the government tried to encourage the production
of iron in the colonies through the Naval Store Bills (concerning maritime
warehouses). The steel lobby, representing the second most important indus-
try in Britain, however, was resolutely against it, and so this law, inspired by
mercantilism, was cancelled because of this group.
As we have said, mercantilism assumed that the colonies would be a mar-
ket for industrial products made in the metropolis, and a source of key raw
materials for their production. All of the British colonies in that period more
or less reflected this idea, except for the North American one. There was a list
of materials that were essential for production in the metropolis, and there-
fore might only be exported to Great Britain. Of course, the colonial lobby
tried to keep the list as short as possible, allowing colonies to trade freely,
for instance, with the French or Spanish sugar islands in the Caribbean. If
sugar was on that list, it would have to be exported from that area to Britain,
purchased, and imported back into the North American colonies. The impli-
cations of this practise on the delivery cost and time for the British colonists
in America are obvious. The Navigation Acts presented an even greater prob-
lem for actual production in the American colonies. The colonists didn’t only
have to buy all of their goods via London, but they had to export some goods
(furs, wood, metals, tobacco, etc.) on English ships, too. This kind of British
mercantilist practice had been, by its nature, causing economic disputes since
the 1760s, which eventually led to a successful revolt of the Thirteen colonies,
and the establishment of the USA, as we shall see in the next chapter.
The loss of the 13 American colonies, considered to be a temporary matter
by the British, became permanent after the war of 1812–1814, thus revealing
the limits of mercantilism in relationship toward the country’s colonies which
had already reached a certain level of development in terms of their structure
of population, size, and economic significance. This loss was a harbinger of
a shift in the economic thinking of Great Britain. Slowly but steadily, econom-
ic liberalism was preparing its way to dominate the thinking and policies of
key countries. The idea of free enterprise in foreign trade had been devel-
oped by Adam Smith (1723–1790), a professor of ethics from Edinburgh, Scot-
land. Smith, whose Inquiry into the Nature and Causes of Wealth of Nations,
in 1776, laid the foundations of modern economics, and was very critical of
18th century mercantilism. According to him, mercantilism was nothing but
a combination of inflexible government regulation and unfair privileges for
– 32 –
state-approved monopolies and government favourites. Far better was the
free competition that would protect consumers from price extortion and give
all citizens a fair and equal right to do what they could do best. In a system
where every citizen should have the greatest possible room to find his or her
self-interest in a competitive market, Smith left just three roles to the state.
The state should secure safety from foreign attacks, maintain public order,
including the judicial system and the police, and finance certain essential
public works and institutions that could never operate on the basis of private
investments. Although he never used the phrase ‘the invisible hand of the
market’ like John Calvin, he believed that people contribute by their work to
one another for the common good. Then Smith added that this system did
not require any action by the government, and was itself stable. To promote
the ideas of a free market, however, the advocates of Adam Smith had to wait
more than fifty years after his death.
First, two processes had to be completed which would show the key polit-
ical and economic actors in Britain that the country was competitive enough
for its products and services to be demanded worldwide. In other words,
that liberalism would bring more economic dominance to Britain than mer-
cantilism. Generally speaking, even at a time of extreme mercantilism and
trade wars, Britain was a freer country for business than its main competitor,
France, in many areas. For example, most local taxes were abolished in the
15th century, and therefore a merchant within Britain could freely move goods
on a large national market, which France did not manage until the French
Revolution. State finances were controlled by Parliament, and the sovereign’s
personal property and debts were separated from the national debt. Prior to
the establishment of the Bank of England, English finances enjoyed much
more market confidence than the French, despite a mere one-third of the pop-
ulation and a smaller volume of production. The establishment of the Bank of
England helped to develop the market for state and private securities so that
England possessed a much larger volume of loans for investment in agricul-
ture, commerce and industry.
1.4 EUROPEAN COLONIALISM

IN THE EARLY MODERN PERIOD
In the early modern period, European colonial powers expanded in diverse
areas. Russia, the largest of the European powers at the time of Peter the
Great’s accession (1689, lived between 1672 and 1725), had a very thinly
spread population, especially north of its new capital, St. Petersburg, in the
southern area of the so-called Wild Plains, and in the former Muslim khan-
ates, where Russians were obviously a minority. The Tsars tried to populate
the land or make the nomadic peoples, particularly in the south, settle down
in order to reduce them to serfdom. This led to several Cossack revolts during

the 17th and 18th centuries. The Romanov Tsars, after severe economic dev-
astation during the Time of Troubles, managed to complete the conquest of
Siberia, a virtual Russian colony, at the end of 17th century. Huge profits from
Siberian natural resources, in particular fur, allowed the otherwise underde-
veloped country to pay for imported goods and experts, to reform both the
army and bureaucracy, and also to fund wars against the enemies of Russia.
Both of them were defeated; Poland in the Thirteen Years War (1654–1667),
and Sweden in the Great Northern War (1700–1721), thereby forfeiting their
power status while Russia became one of the five great powers in Europe.
Whereas the Russians managed to conquer and eventually settle much of
Siberia, the rest of Asia was still independent from direct European influence.
Portuguese, and later Dutch and British naval and trade superiority, did not
change much about the fact that by far the strongest power in Asia was still
the Manchu dynasty in China. The Chinese were strong enough to confine the
European presence after 1757 to one harbour in Canton. The Portuguese, and
later the Dutch, traded extensively in arms with various Japanese clans during
the Sengoku jidai. However, after the unification of Japan under the Tokugawa
shogunate (1603), the country completely sealed itself off to foreigners for two
centuries. Also, the largest kingdom in Indo-China, Siam (today’s Thailand),
remained largely independent from Western colonial powers. The Dutch sov-
ereignty over Ceylon, later replaced by the British, as well as their conquest of
present-day Indonesia, was limited. The Netherlands exercised its power over
the region through semi-dependent sultanates controlling its various islands.
Actually, the only encroachment by the Europeans was achieved in India.
There were several British footholds acquired in India in the 17th century.
The British tried to avoid conflicts with local rulers and to gain privileges from
the constantly warring maharajas instead. Among the key areas, the British
held Bombay, Calcutta, and Madras. The French did not start to acquire land
and access the markets until the general controller of finances, Colbert, estab-
lished the French East India Company. They gained territories, particularly in
the south and southeast, around Pondichéry, Yanam and Karaikal; and in addi-
tion to that, they also gained possession of several isolated fortified points
in the west of the peninsula, and in the Bay of Bengal. The French forfeited
nearly all of their possessions during the Seven Years War, and the remaining
few were constantly threatened with the decay of commercial importance.
Pondichéry and Yanam were retrieved from Britain in subsequent wars, only
to become a part of India after it declared its independence from British rule.
The American continent was the most open for European colonization by
far and therefore no single native state, culture or language has remained
to this day. Spain left behind the most visible and lasting legacy. In the
17th century, the Spanish Habsburgs were set for a long-lasting decline in
the whole of their empire, ‘on which the sun never set’. The glorious days
of the Treaty of Tordesillas, by which the Spanish and Portuguese had divided
the world between themselves, were long forgotten. After the Reformation,
– 34 –
the influence of the Pope as a guarantor of such a treaty was slowly vanish-
ing: while Protestant countries openly ignored it, the Catholic ones would no
longer be threatened with excommunication if they did. Spain was not able
to catch and punish either smugglers or pirates operating in their colonial
waters. Moreover, they had to tolerate the French, British, and Dutch colo-
nies, not only on the North American east coast, which they considered less
profitable, but also on peripheral or non-settled Caribbean islands, or even
the Spanish Main.
The English occupied Saint Kitts in 1639, Jamaica in 1655, and other nations
followed, fighting not only the Spanish but also each other in the colonies. The
Spanish treasure fleet, which set sail yearly with a cargo of American gold and
silver to Europe, also became the object of successful privateer assaults twice.
First it was the Dutch Admiral, Piet Heyn (also Piet Pieterszoon, 1577–1629),
in 1628, who managed to transport the entire cargo of the fleet to the United
Provinces. In the year 1657, the fleet was destroyed by the English Admiral
Robert Blake (1599–1657). The Spaniards, however, managed to save most of
the cargo, while Blake captured just one galleon. These and similar attacks
often had a devastating impact on the Spanish economy. For example, the
result of Heyn’s attack was the bankruptcy of the Spanish crown.
The commercial relations of the English with the Spanish colonies were
long-lasting and extensive, virtually from the beginning until their declaration
of independence from Spain. As Spanish power was declining, the role of the
Casa del Contratación, which prevented the free trade of Spanish colonies and
whose licence was theoretically necessary for any trade or navigation by any
subject of the King of Spain, also declined.
Another problem for the Spanish crown was the decreasing share of pre-
cious metals on the ships coming from American colonies. Some of the gold
and silver mines (such as Potosi) had run out of ore, and the newly opened
ones (such as Oruro and Pasco) could not compensate for the loss.
The reign of the last Spanish Habsburg, the inbred Charles II, hit a new low
for the Spanish Empire. After he had died without an heir, the conflict known
as the War of the Spanish Succession (1701–1714) started. Yet another coali-
tion war in Europe, caused by the conflicting claims of the Austrian Habsburgs
and the French Bourbons to the Spanish throne (it lasted thirteen long years)
as a union of such great value and which Spain and its colonies were, would
dramatically shift the European balance of power to either the French or the
Austrian side. Finally, a peace treaty was signed in Utrecht on the brink of the
military and financial exhaustion of France, Spain, and Austria alike. It result-
ed in the split of Spanish possessions in Europe: Austria, being the prime
benefactor, attained Milan, the Kingdom of Naples, the Southern Netherlands
(approximately today’s Belgium) and the Spanish enclaves on the Tuscany
coast. The French Bourbons acquired the Spanish throne and the colonial
possessions, on the express condition that the thrones of France and Spain
would never unite. France had to give up all of the territories on the right

bank of the river Rhine, and some cities in Flanders; Britain regained the area
around Hudson Bay, the Island of Saint Kitts, and took Acadia (Nova Scotia)
and Newfoundland from France. Duke Victor Amadeus II of Savoy (1666–1732)
obtained Sicily, which he later exchanged for Sardinia, and became the king of
Sardinia-Piedmont. This was the state which would unite Italy between 1859
and 1870.
England (Great Britain since 1707) had been victorious in the above-men-
tioned conflict. She obtained two strategic points in the Mediterranean:
Menorca and Gibraltar, along with the vast profits from Asiento – and the
right to supply slaves to the Spanish colonies. The British were also allowed
to send one ship to the colonial city of Porto Bello once a year to trade with the
Spanish. Great Britain strengthened her position, both as a naval power and
in international trade, basing her power on small yet prosperous and well-run
colonies, putting an end to the continental supremacy of France, and estab-
lishing herself in a favourable position for future colonial expansion.
The reforms that the new dynasty on the Spanish throne, the Bourbons,
would launch became the most important event in the Latin American econ-
omy. A more solid currency, based on the increased production of American
mines and the professionalization of the colonial administration, was at its
core. Shortly after accession, inspectors from the metropolis were sent to the
colonies to find out the true state of affairs. Simultaneously, in reaction to the
impotence of the Spanish military, reforms of the military and the navy were
also under way.
However, reforms were repeatedly slowed down by wars. First, the renewed
and vigorous mercantilism on the part of the Spanish colonial administration,
led to the War of Jenkins’ Ear between Britain and Spain (see the box).
The War of Jenkins’ Ear – Robert Jenkins was the captain of a British merchant ship,
which was most likely involved in the smuggling of British goods to the Spanish colonies in
Latin America. According to Jenkins’ testimony in front of the parliamentary committee,
the Spanish Coast Guard had forcibly boarded his ship, which he proved by presenting his
ear preserved in alcohol, allegedly cut off by the Spaniards during his torture. Although Sir
Robert Walpole (1676–1745), Britain’s prime minister at that time did not want another
war with Spain, he was forced into it by public opinion, which had been encouraged by the
publicity that came with Jenkins’ case. This war was a major boon to the British commercial
and colonial circles, seeking to achieve further gains and concessions at the expense of
the weakening Spanish empire. The main promoter of the war with Spain in the admiralty
was Vice-Admiral Edward Vernon (1684–1757), who had been entrusted with the initial
attack on the Spanish port of Porto Bello (in today’s Panama). This attack was a part of
the British strategy, based on the weaknesses of the Spanish convoy system: all the exports
from the extensive Spanish colonies in the Caribbean, came from three mainland ports of
Vera Cruz (now in Mexico), Porto Bello and Cartagena (now in Panama and Colombia,
respectively), and merged in Havana, the largest port in the Spanish colonies, and then
– 36 –
sailed in a convoy to Cadiz. After the success at Porto Bello, the English decided to attack
the much better fortified port of Cartagena. The attack failed, although the English had
probably up to six-fold superiority and claimed eighteen thousand causalities among British
soldiers and sailors. This heavy loss among ship crews ranks as one of the greatest in British
history. Despite this success, the Spaniards kept losing their positions in America until the
occupation of Spain itself by Napoleon, when all of the colonies in that region, except for
Cuba and Puerto Rico, declared their independence.
The colonial War of Jenkins’ Ear between Britain and Spain soon encom-
passed all of Europe, merged into the War of Austrian Succession (1740–1748).
After the death of the Austrian ruler, Charles VI in 1740 (born in 1685), his
twenty-three year old daughter Maria Theresa (1717–1780), inherited the
throne. An edict called the Pragmatic Sanction, which allowed women to
inherit the Habsburg hereditary possessions, had been recognized by all of
the major powers while Charles was still alive. However, after his death, the
ambitious ruler of neighbouring Prussia, Frederick (1712–1786), launched an
invasion of the rich and predominantly German-speaking Habsburg province,
Silesia. Since help from her British ally did not materialize, and other powers
(namely Bavaria supported by France) had joined the attack on her lands,
Maria Theresa lost almost all of Silesia during this eight-year-long conflict.
The immediate impact of the defeat of English forces in the colonies was the
incapability of the British to carry out military operations in Europe and to
provide military and diplomatic assurances to Austria, where Maria Therese
was desperately trying, and ultimately failing to defend Silesia against the
Prussian invasion. As Silesia was part of the lands of the Bohemian crown, it
can be said that the naval Battle of Cartagena in the Caribbean cost Bohemia
a third of its territory.
None of the powers participating in the War of Austrian Succession was
satisfied with its outcome. Austria had wanted to regain Silesia, as it was
considered vital for Austrian economic development. Prussia, having doubled
its population to six million with the acquisition of Silesia, had been equal-
ly determined to defend the land which guaranteed its great power status.
France had wanted to weaken Austria, the stronger of the two rivals, in order
to regain its continental supremacy, while Britain had wished to expand her
trade and colonial possessions, thus preventing the continental primacy of
any great power at the same time. Maritime warfare and competition between
Britain and France, to establish a colonial empire, thus escalated into another
great conflict in 1756. The difficulties between Britain and her allies, stemmed
from the fact that Britain had viewed France as the greatest adversary and
demanded her ‘continental shield’, i.e. Austria, to transfer her armies to the
Austrian Netherlands in order to fight the French and block access to British
Hanover; whereas Austria considered Prussia her mortal enemy, and expected
British support and subsidies in her fight for Silesia. London therefore turned

to Berlin for her ‘continental shield’, while Vienna, which was quite naturally
resentful, forged an alliance in Paris. During the Seven Years’ War (1756–1763),
the aim of the French-led coalition was to conquer Prussia and divide up its
territory. Frederick (now called the Great) led his army courageously and cun-
ningly, against all odds. His brilliant victories saved him from destruction,
while a surprising chain of events brought him unexpectedly to ultimate vic-
tory. First, the Russian Tsar Peter III (1728–1762), his great admirer, ascend-
ed to the throne in 1762 and recalled his army from the war. The smaller or
regional powers (Sweden, Bavaria, Cologne, Württemberg), being exhausted
by the war, followed suit. By then, the colonial wars had almost been decid-
ed in favour of the British, so that they could get fully involved in Europe.
Therefore, a peace treaty was signed in Paris, in February 1763. At that stage,
the French colonial possessions in America had almost ceased to exist. She
regained only the Islands of Martinique and Guadeloupe in the Caribbean, and
the small islands of St. Pierre and Miquelon, near Newfoundland. As we have
mentioned above, France remained in possession of only five settlements in
India, which were prohibited from being fortified. France had certainly lost
its primacy in European affairs, a fact that she would only shortly dispute
during the Napoleonic wars (1803–1815). Prussia, which had kept her posses-
sion of Silesia and grown more powerful, would eventually unite the German
speaking lands, except for Austria, in 1871. Britain had been tremendously
successful yet again. After the Seven Years’ War, Britain enjoyed naval mas-
tery, her colonial empire eventually grew to be larger than that of Spain, and
soon would become yet more profitable for the metropolis. While this turn of
events massively enlarged the British dependencies, it also directly led to the
rebellion of its Thirteen colonies in America.
In the 1760s, the litigation (often economic in nature) between the English
settlements in the New World and their mother country, increased in inten-
sity. In 1763, a royal decree forbade the American settlers from moving west
of the riverheads flowing into the Atlantic, or the Appalachians. The Lon-
don Government claimed this would prevent clashes with the native popu-
lations there; however, more likely objective was to maximize profits for the
Crown from the official sales of land in the west. Another attempt to harm the
‘American interests’, as it appeared to the colonists, was the prohibition on
paying debts to the mother country with paper money (1764). The ultimate
discontent arose because of the Stamp Act (1765). It directed ‘British stamps’
to be glued on all printed materials (newspapers, legal documents, etc.) issued
within U.S. settlements.
These economic regulations were designed to pass a part of the economic
burden that had caused the Seven Years’ War onto the 13 North American
colonies. Great Britain had defeated France and its allies in this conflict, but
nevertheless, the conquest of all the French colonies in America had a sig-
nificant impact on the security of her colonies, as it eliminated the French
threat. American colonists did not sense the need for any military protection
– 38 –
and railed against the increase of their obligations to the Crown, rather
expecting a so-called ‘peace dividend’ after the end of the war. The American
boycott of British goods, the setting up of purely ‘American’ organizations,
which strove to unify widely different colonies, and their effective action
against the British, were the consequence of their different view of the situ-
ation. Further tariff increases in 1767, related to tea, dyes, paper, and glass,
were followed by boycotts and ushered in the incident known as the Boston
Tea Party in 1773. The subsequent British repression united the resistance
movement, which had insisted on negotiations on the abolition of all the
mercantilist measures so far, to stop excluding any armed activities. There
were further clashes, and two continental congresses later revealed that the
majority of the elite was inclined to an open rebellion against the mother
country. An armed militia was formed, and so on July 4, 1776, the Declaration
of Independence and the Union was approved, which gave birth to the United
States on paper.
A war followed, in which the colonists were joined by a French expedition-
ary corps, under the command of the Marquis de Lafayette (1757–1834). The
Frenchmen, who sympathized with the rebels and provided them with weap-
ons and gunpowder, longed for some satisfaction in return for the humiliating
defeat in the Seven Years’ War. The French government offered the colonists
an official alliance in 1778. A year later, war was declared on Britain by the
Spaniards and in 1780 by the Dutch. The Russian empress, Catherine the Great
(1729–1796), helped to organize a League of Armed Neutrality, in order to pro-
tect the rights of neutral countries to trade on the high seas. Britain refused to
recognize this organization and also its supplies to the belligerents. The war
was decided by the surrender of British forces at Yorktown in 1781, whose
supply had failed due to a temporary, but very effective, blockade of the ports
by the French fleet. Given that Britain had waged war with half of Europe
and had temporarily lost dominance over the world’s seas, she decided to
offer some extensive concessions. In September 1783, the Peace Treaty of Ver-
sailles recognized the independence of the United States, including all of the
territories as far as the Mississippi River. The Spaniards regained Florida and
the Mediterranean Menorca; the French got the Caribbean island of Tobago,
and Saint Pierre and African Senegal. Although Great Britain’s power kept
growing, and the end of her leadership in the world would not come about
until the First World War, this surprising defeat created an independent state
that would gradually reach the size of a continent and which would become
Britain’s toughest competitor. The Americans almost immediately applied the
mercantilist principles of high tariffs to develop their own industrial sector,
and to switch from raw materials to industrial production exports and the
gradual industrialization of the country. With some exaggeration, one could
say that although the introduction of higher tariffs and taxes was the reason
for their struggle for independence, Americans have never had such low taxes
and duties as they did during the reign of Great Britain.

The establishment of the United States of America had an enormous indi-
rect economic and political impact on European affairs. The publicity of the
Declaration of Independence in Europe, in which its author Thomas Jefferson
and later President (1743–1826), had de facto proclaimed the traditional rights
of Englishmen to be universal, i.e., valid for people of all nations, instantly
became a huge source of inspiration for Europeans living in absolute monar-
chies. The rights to life, liberty and the pursuit one’s own path to happiness
were an entirely new concept for many in Europe. Ironically, it was particu-
larly allied with France, where these ideas reflected very strongly. The costs
of military expeditions in America had led, along with other factors, to the
bankruptcy of the French crown, so with a little exaggeration it could be said
that in return for his aid to the American colonies, King Louis XVI (1754–1793)
received insoluble financial problems and a populace demanding the downfall
of his regime. Although it would be interesting to follow the historical events
in France at the time of breakthrough during the French Revolution, the Direc-
tory and the Napoleonic wars, we will only focus on their implications for
the world economy. Those implications remained significant for the so-called
continental blockade and the peace settlement ending the Napoleonic wars
achieved by the Congress of Vienna. However, for a whole quarter of a centu-
ry, when Europe was immersed in the Napoleonic wars, she had a negligible
impact on the world economy. The only, yet major, exception was Great Brit-
ain. Therefore, as we describe the establishment of the world economy in the
19th century, we are going to monitor what was happening in Great Britain
in particular; as much as in any description of the world in the 20th century,
an economist must focus primarily on the U.S., Europe, and Japan, along with
China in the 21st century.
1.5 THE INDUSTRIAL AND AGRICULTURAL

REVOLUTIONS
The first of these two key processes was the ‘Agricultural Revolution’. His-
torians disagree on the exact timing, but it is safe to say this process began
as early as the mid-17th century, and its first phase ended in the late 18th
century, with the second phase continuing throughout the 19th centu-
ry. Abandoning both two-field and three-field crop rotation brought about
a significant increase in cultivated areas, as the feared depletion of the soil
was prevented by the rotation of grain with crops that store nitrogen. These
crops included peas and beans, root crops such as potatoes and turnips, or
grasses and clover. The latter two were also used to feed the growing num-
bers of cattle, which meant a greater amount of fertilizer for the cultivated
land, as well as higher yields, and consequently higher stocking rates. The
introduction of improved agricultural tools, together with a careful selection
of seeds, and animal breeding, also significantly reduced the laboriousness
– 40 –
while yields in crops and animal production increased. In addition, there was
a new way to obtain arable land instead of the traditional grubbing, namely
draining swamps and wetlands with drainage systems. The last contribution
to the ‘agricultural revolution’ was the significantly increased use of hors-
es (instead of oxen) for work in the fields, which allowed up to double the
efficiency of ploughing, even before the introduction of the steam engine to
agriculture.
During the second phase of the ‘agricultural revolution’, industrial innova-
tions (harvesting and threshing machines, the modern use of steam power,
and the use of chemical fertilizers) were introduced, which led to a further
increase in agricultural production. Although it was a relatively long process,
the impact of the ‘agricultural revolution’ in the UK was very significant. Grain
production in the period from 1760–1820 increased by 60%, and by a further
50% from 1830 to 1860; meat production increased in the same period by
35% and 25% respectively. The situation with other agricultural products was
similar. In spite of that, the total figures still argued against this sector in
comparison to industry or commerce. While in 1760, British agriculture con-
tributed approximately 45% to the national income, by 1840 the percentage
had dropped to 23%; the share of industry and commerce (and transport),
however, had increased from 24% to 34%, and from 13% to 17% respectively
(Stellner 2006:39). Great Britain had thus become the first industrial-agrarian
country in Europe. As we can see, the reason for that proportional change was
not a decline in agricultural production, but rather the phenomenal growth of
industrial production.
One of the direct impacts of the ‘agricultural revolution’ and, later, the
industrial revolution was the growth of the European population. For exam-
ple, the Italian states were able to feed 11.5 million inhabitants in 1700, then
in 1800 the number was near 17 million (excluding the Austrian lands). The
population of England and Ireland grew from 8 to nearly 17 million, and the
population of France from 19 to almost 25 million. Though approximately in
1775 France was overtaken by the unprecedented growth of the Russian pop-
ulation, where even minor improvements in agricultural production caused
an increase of 13 to more than 30 million inhabitants. Interestingly, we may
also note how significant the loss of almost three million Silesians was to
Austria, along with its large deposits of coal, while at that time about the
same population was living in Bohemia and Moravia. Conversely, Prussia had
almost doubled its population to 6,000,000 by a successful war of conquest.
The comparison below gives a picture of the increase in population. While
some countries population increased by 50 percent, in others it more than tri-
pled. Please note that the lands of former Czechoslovakia and Hungary were
united with Austria in the Habsburg monarchy. The enormous increase of
European population throughout the 19th century and reached its peak in the
years around World War I, when about 40 percent of all the world population
lived on the Continent.

Table 1.2: Population growth comparison in selected European countries (in thousands)
F. Czecho- F.
Year Austria slovakia Hungary Italy France Germany UK Ireland USSR
1 500 1 000 300 8 000 5 000 3 000 800 N/A 3 900
1000 700 1 250 500 5 000 6 500 3 500 2 000 N/A 7 100
1500 2 000 3 000 1 250 10 500 15 000 12 000 3 942 800 16 950
1600 2 500 4 500 1 250 13 100 18 500 16 000 6 170 1 000 20 700
1700 2 500 4 500 1 500 13 300 21 471 15 000 8 565 1 925 26 550
1820 3 369 7 657 4 146 20 176 31 250 24 905 21 239 7 101 54 765
Source: Maddison Historical Population Dataset
The employment of an increasing number of people living in villages was

partly solved by the ‘putting-out system’. In this system, a businessman lent
raw material to village workers for home processing, and later he would
return for the finished products at the appointed time. Workers were paid
by the number of pieces produced. There were all sorts of variations of this
relationship, whether it was the type of production, the risks and costs born,
or the independence and specialization of the above workers. In the Czech
lands, the putting-out system was applied mainly in spinning flax and cotton,
which gradually employed as many as 600,000 inhabitants.
Similarly, another major change was gradual urbanization, or relocating
for work into regions with a higher volume or intensity of manufacture pro-
duction. Growth in both rural and urban small-scale production and the man-
ufacturing industry gradually began to divide Europe into areas with a high-
er or lower population density. In Britain, the most densely populated areas
surrounded London, Birmingham, Bristol, and Norwich, including the strip
ranging from the Midlands and along the west coast to the Scottish border
in the north. In Ireland, the east was much more densely populated than the
island’s northwest section. In France, apart from the regions surrounding Bor-
deaux, Lyon, and the Rhone estuary, the north of the country was far more
densely populated, stretching from Brittany to Paris and its environs, as far as
to the border of present-day Belgium. By European standards, the whole of the
Netherlands, with the exception of Frisia, had traditionally been densely pop-
ulated. This was also the case in northern Italy: as for its present-day major
centres, historians do not concede a larger population, except to Turin and its
surroundings. In the German lands, the traditionally populous states were not
only along the Rhine, the Danube, but also around Augsburg. The region in
Central Europe where the population density was as high as in the West, was
southern Silesia with northern Moravia.
All of those regions, except for the surroundings of Bordeaux and Augs-
burg, or perhaps the Rhine, were engaged in textile production. And this gave
– 42 –
birth to the Industrial Revolution, particularly in Great Britain, which was rich
in quality wool. There were many more causes and necessary conditions for
the long and complicated process of the mass introduction of machines into
production, together with the associated far-reaching economic and social
change, however. Stellner et al. include among those conditions primarily the
political stability of the country, sufficient capital accumulation (preferably
rising economies from manufacturing enterprises, trade, and agriculture), or
banks willing to provide loans with low interest rates. According to several
authors another essential factor was the existence and variety of innovative
production processes, which had a profound influence on the development
of industrial production, and continued to allow the division of labour. An
advantageous geographical location, ample labour, devotion to the idea of
laissez-faire and free trade, and the existence of a sufficiently large market
were also important factors. As we can see, the conditions for an industrial
revolution were manifold. Nevertheless, it took place successively in all of the
countries of Western and Central Europe, though over a long period of time
comprising the second half of the 18th and virtually the entire 19th century.
It was the industrial revolution that was the second crucial process in
enabling the promotion of liberalism. Like many other phenomena, it first
occurred in the British Isles, particularly in some parts of England and Scot-
land. The developed textile industry boomed and, with the invention of a cot-
ton-spinning machine (called Spinning Jenny), Cartwright’s mechanical loom,
and Whitney’s cotton gin, enabled the unprecedented expansion of mass man-
ufacture, gradually transforming into industrial plants. Above all, the steam
engine by James Watt (1736–1819), and its myriad applications (Stephenson’s
locomotive), together with ever-expanding ideas of liberalism and an entre-
preneurial spirit, determined that Britain would gain competitive advantages
in several industries for almost one hundred years. But it was clearly the tex-
tile industry where the pressure to increase production, which would be able
to supply the ever-growing markets, marked the first ultimate breakthrough
of the industrial revolution, i.e. the creation of the first large factories. It was
the cotton industry, which was the first in Britain to be completely trans-
formed from its humble beginnings before 1780 to magnificent large-scale
production plants after 1830.
Iron processing and iron goods production was the second industrial
area which could not be operated in the putting-out system, but was clearly
a product of the industrial revolution. In the mid-18th century, iron processing
was significant in Birmingham and Sheffield, which were also surrounded by
important coal mining regions at that time. There was extensive coal mining
around Newcastle, too. Iron ore was mined mainly in eastern Wales and the
South West of England. Steam power brought about tremendous changes in
all industries from mining equipment to steam-powered spinning machines.
Perhaps the greatest impact can be traced to iron ore and steel production, as
well as transport. Steam-powered blast furnaces helped iron manufacturers

to switch from charcoal to the much more calorific coke, enabling the produc-
tion of a significantly higher quality iron, which could be cast and moulded
into various shapes and forms. British manufacturer Henry Cort (1740–1800)
introduced further improvements in the processing of pig iron (the ‘puddling
furnace’) in 1780. The economic implications of these technical innovations
meant an extensive development of the British iron industry. In 1740, the
annual production of iron reached only 17,000 tonnes. With the expansion of
smelting, using coke and Cort’s inventions, production rose to 68,000 tonnes
in 1788, 125,000 tonnes in 1796, and 260,000 tonnes in 1806. Britain, in 1844,
produced 3,000,000 tons of iron (McKay 2008). That was a grand develop-
ment, indeed. Iron, once rare and expensive, had become a cheap, basic and
essential building block of the economy.
Sufficient amounts of iron and its relative decline in price led to another
important factor, the increase in the industrial revolution by the development
of the railway. Since the invention of steam locomotives, the number of operat-
ing railway lines began to rise dramatically. These lines did not only intercon-
nect commercial centres and major ports, but also the recently opened hard
coal mines. Hence, the first locomotive of George Stephenson (1781–1848) was
set onto track in 1814, and the first regular rail service between Stockton and
Darlington was launched in 1825; whereas in 1840, Britain had 2,390 km of
railway lines, in 1870 it had 21,558 km. Other modes of transport were equally
important. The expansion of the road network and in particular the applica-
tion of the steam engine in shipping (Fulton’s steamer in 1807) encouraged the
widespread building of canals and extension of navigable rivers.
THE CHAPTER SUMMARY

Food sufficiency and specialization allowed the local and regional markets,
and ultimately the world economy, to be established. The first markets were
formed along large rivers that ensured a good harvest and served as impor-
tant transportation routes. A large increase in trade occurred during the Pax
Romana, world domination by the Romans, who built roads and ports in their
expanding territory. The Romans created a single market in the Mediterrane-
an, an extensive Atlantic trade, trading with Scandinavia, present-day Russia,
and as far as India. We can speak of a ‘global market’ in the then known world.
After the collapse of the Roman Empire it was the Vikings who, during
their raids, founded agricultural settlements and trading posts in large parts
of Europe, to engage in regional and long-distance trade. Further expansion
occurred during the Crusades, when new long-distance trade routes were
established to operate for several hundreds of years. An irreplaceable role
therein was played by Genoa and Venice. There was not only an exchange
of goods, but also scientific and technical knowledge which came to Europe
from the more developed East. A change in economic relations was brought
– 44 –
about by the conquest of Constantinople by the Ottoman Turks in 1453. The
Genoese lost their position in their trade with the East, and reoriented to the
Western Mediterranean. In northern Europe, a significant position was held
by the Hanse, a trade association of up to 200 port cities.
The foundations of a truly global economy were laid by the European colo-
nial powers, whose mutual competition were among the conditions for the
development of new technologies, and affected maritime trade and economic
activities. The Portuguese, Spanish, Dutch, French, and English (or British)
took several centuries to create a world economy through extensive foreign
trade, which included the newly discovered continent of America.
The world economy was also radically influenced by religious reforma-
tion. John Calvin’s reinterpretation of the Bible enabled the use of, until then,
an illegal interest, and thus capital accumulation among the middle classes.
Hence, he laid the foundation for modern banking. ‘Protestant ethics’ also
formed the early capitalist enterprise which was first established in the Unit-
ed Provinces of the Netherlands.
In the 17th and 18th centuries, trade wars took place among the colonial
powers, initiated by mercantilism, which undercut free trade by government
regulation of economic activity. The result was an increased effort by all colo-
nial European powers to seek deposits of raw materials and new markets for
their products. The mercantilist policy of Great Britain was one of the causes
of the American War of Independence, whose outcome would result in the
emergence of Britain’s biggest competitor in the following century.
The loss of the American colonies was one of the reasons for the change in
economic thinking in Great Britain, where Adam Smith’s liberalism, empha-
sising free enterprise and free competition, was eventually promoted, along
with a significant reduction in state intervention in the economy. Before that,
however, Great Britain had to go through the agricultural and industrial rev-
olutions in order to ensure competitiveness.

/2/
The Nature and Emergence
of the Global Economy
2.1 THE WORLD AFTER THE NAPOLEONIC WARS

AND THE PAX BRITANNICA
Some of the most dramatic economic changes in Britain took place during
the war with France, led by Napoleon I. (born as Napoleone Buonaparte in
Ajaccio, Corsica in 1769, died on St. Helena Island in 1821), from 1799. Great
Britain had to find a huge investment for that development to simultaneously
finance the world’s largest fleet, which had a wide range of duties in virtually
all of the world’s oceans, not to mention financing its own army, and still be
the banker of the anti-Napoleonic coalition. The task was all the more diffi-
cult in that Napoleon, when his hopes for an invasion of the British Isles had
faded after the battle of Trafalgar (see below), tried to fight Britain primarily
through economic means. In 1806, he introduced the ‘Continental System’
by the Berlin Decree trying to seal-off Europe from the British trade. Let us
therefore take a general look at some of the basic circumstances of that time,
and which would still have a significant impact on the world economy a long
time after the Napoleonic wars.
– 46 –
Though the financial crisis of Louis XVI’s state caused the fall of his regime,
it also provided a revolutionary regime, and thus later Napoleon, with the
second largest fleet on the Continent along with a well-organized and well-
armed military, which had long been difficult to defeat. Napoleon’s military
genius meant that his armies dominated most of Europe for more than a dec-
ade. At sea, the situation was more balanced. The British fleet was not able
to prevail always and everywhere, especially against the combined French
and Spanish fleet, whose continued existence made the invasion of the Brit-
ish Isles a possible, and, at a certain point, even likely enterprise. Therefore,
the British were trying to provoke the enemy fleet to fight, which was even-
tually achieved at Trafalgar in October 1805 by the fleet of Admiral Nelson
(1758–1805). Although the combined Franco-Spanish fleet outnumbered him,
Nelson’s tactical genius achieved their almost complete destruction and rid
Britain of the danger of a French invasion. So, if we are talking about political
stability as the most important condition of the industrial revolution, then it
was achieved by this victory.
Among the most important events of that time with important econom-
ic connotations, we can include Napoleon’s dissolution of the Holy Roman
Empire in 1806, which weakened the Habsburg Dynasty and created a pow-
er vacuum in the German lands. This power vacuum was later to be taken
up by Prussia at the time of unification (1866 and 1871), and the German
Empire, which was thus allowed to gradually become the largest Continental
economy, respectively. Also, after Napoleon’s defeat, the Congress of Vienna
(1814–1815) brought about the redrafting of boundaries that remained essen-
tially unchanged throughout the 19th century, but which were so significant
in some cases that they had economic implications. For example, Prussia
acquired the coal-rich and developed Ruhr area, the Kingdom of the Neth-
erlands was strengthened by gaining the Austrian Netherlands, and Russia
gained the ‘Kongresówka’, thus holding nearly all of the former Kingdom of
Poland. And finally, Napoleon’s occupation of Spain and the tough guerril-
la war that consumed essentially the entire Iberian Peninsula facilitated the
decomposition of the Spanish overseas empire. This empire, which had been
determining economic activity in its controlled countries for centuries, now
split into two dozen politically and economically competing state entities. The
complete end of the Spanish empire came about in a war against the United
States in 1898, when the Spaniards lost the Philippines and the Pacific Islands,
along with Cuba and Puerto Rico in the Caribbean. The empire over which
the sun had not set since the 15th century, and that had been shaping trade
and production throughout the Americas, was left with only a few African
enclaves.
A major economic impact, both on the European continent and the British
Isles, was undoubtedly caused by the aforementioned continental blockade. It
was mainly about new industrial products which had to be found on the Con-
tinent as a replacement for the missing British goods – although smuggling
The Nature and Emergence of the Global Economy – 47 –

was so widespread and regular that some insurance companies had decided
to insure against the losses caused by the crackdowns of security forces. Even
so, new industries were created (extensive use of linen instead of cotton, beet
sugar instead of cane, etc.) to replace the missing colonial wares. Similarly,
new industrial centres developed; for example, Austrians tried to compensate
for the previously lost Silesia by developing Bohemian coal mines (Ostrava,
Kladno) and their plentiful navigable rivers. At this time in Bohemia, sugar
beets began to be grown extensively, allowing the expansion of Czech engi-
neering, whose considerable part focused on the very production of the pro-
cessing equipment for this commodity.
In terms of world economy, it was essential how Great Britain coped with
the loss of the European market during the period it was fighting Napoleon
all alone. Needless to say, it was very difficult for Britain, particularly in 1808
and from 1811 to 1812, although a breach in the continental blockade would
always be found. Firstly, the revolution in Spain allowed British goods to be
sold in Europe via the Iberian Peninsula, and later Sweden allowed supplies
of timber for ship repairs and procured British industrial goods in the Baltic.
Eventually, the Russian-French hostility allowed the British to trade with Rus-
sia after 1812. The Russian failure of the blockade, which had been agreed
at the emperors’ meeting at Tilsit in East Prussia, was one of the major rea-
sons for La Grande Armée (the Great French Army) to invade Russia. How-
ever, its defeat in the winter of 1812 marked the beginning of Napoleon’s
end. The aforementioned smuggling was a huge relief both for the Continent,
being denied colonial goods, and for Britain. Trade crossed ideological bar-
riers when the British Navigation Acts had essentially been suspended, and
the general need for mutual trade was so great that even the French them-
selves rebelled against the system. The English Channel was no barrier to
trade agreements, so sugar and coffee were exchanged for brandy and wine.
Exports of farm production, so popular with Napoleon, were interfering with
the prohibition of trade with Britain. Even some of the shoes and uniforms
for La Grande Armée were ordered in England! The need for mutual trade
and the absurdity of the continental blockade, along with the mercantilist
principles of the time, may be demonstrated by the fact that American mer-
cantile ships were selling British goods to the French with some help from
the British and Canadians. This means that the British must have sold goods
to the Americans, being at war with them (War of 1812 lasting from 1812 to
1815), knowing that the final destination was France, which was also their
enemy, and so lifted the blockade of the United States. Then the French must
have let the British goods pass through their continental blockade. It is hard
to find any better evidence of the need for liberal trade and its resilience in
all of history.
Although the blockade was devastating the French and continental econo-
mies as much as the British, eventually it was the British who prevailed in the
conflict, despite being more dependent on trade than the French. They owed
– 48 –
it to a dramatic increase in Atlantic trade, which was gradually replacing the
earlier exports to the European continent. ‘Trade with the British West Indies
rose from £6.9 million in 1793 to £14.7 million in 1814; with the foreign West
Indies and Latin America, both newly opened during the war, rising from vir-
tually nothing to £10.5 million. Asia, Africa and the British North America
were also growing in importance. The enormous expansion of the London
dockyard system – where the West India, Brunswick, London, East India, and
Commercial Docks were opened between 1802 and 1813 – was a reflection of
this development in Britain’s overseas, and particularly her entrepôt, trade’
(Kennedy 2001:144). The fact that the total volume of English trade in this
reporting period was growing relatively rapidly (see Table 2.1) proves the
ability of the British to redirect to the quick establishment of new markets
virtually worldwide.
Tab. 2.1: Computed or declared values of Great Britain’s overseas trade

(millions of pounds)
Year Import Export Re-export

1796 39.6 30.1 8.5
1800 62.3 37.7 14.7
1810 88.5 48.4 12.5
1812 56 41.7 9.1
1814 80.8 45.5 24.8
Source: Kennedy 2001:145.
The industrial revolution that had taken place in Britain before it did in
other countries, allowed it to become ‘the factory of the world’, instead of
being ‘the nation of grocers’. While other states came out with a shattered
economy (the Dutch and Spaniards had been occupied by the French during
the Napoleonic Wars, so their metropolitan economy was subordinated to the
interests of the French war) and their colonial empires were reduced by wars
of independence or captured by the English, the British economy, naval power
and colonial empire grew. Between 1815 and 1859 we may talk about the Pax
Britannica, because to contemporaries there seemed to be only one available
comparison, which was with the ‘Pax Romana’. Due to its technological and
commercial superiority and the ability to motivate a large part of the world
with its commercial interests, this dominance and ability to shape or liter-
ally create the world economy cost relatively little. Britain ruled informally
through its befriended states, and on the basis of shared economic interest. As
stated by Kennedy (2001:150), it did not have to spend more than one pound
per capita on defence annually, i.e. 2–3% of the national income.
With a guaranteed economic dominance after the defeat of Napoleon, the
dream of all English liberals could be finally fulfilled: to remove the barriers
to free trade, which would bring about prosperity for all and reduce the threat

of trade wars. Nothing had indicated that outcome at the beginning, however.
With the introduction of the Importation Act in 1815, Parliament passed a law
allowing duty-free imports of grain from abroad only if the domestic price of
corn had reached 80 shillings per quarter (i.e. 290 litres). The fight for the
revocation of these laws (called the Corn Laws) has become synonymous with
the fight against mercantilism in favour of free trade. It was championed by
Richard Cobden (1804–1865) a factory owner and politician from Manchester.
After a seven-year campaign and lobbying among the MPs, he and his propo-
nents from Anti-Corn Law League managed to repeal these laws in 1846, when
new law kept only the minimum rate of one shilling per quarter. The British
government fell, the dominant Conservative party split over the issue and new
Liberal party emerged.
From the mercantilists’ point of view, the revocation of the Navigation Acts,
along with all the other tools which enabled Britain to monetize the centu-
ry-long trade wars and conflicts in the colonies at the very moment when its
virtual monopoly on dozens of products could be exerted, seemed to be incred-
ibly stupid. To Adam Smith’s successors however, such as to mercantilists
from other countries, this move made perfect sense. Not only could deliveries
of first-class products at unbeatable prices earn more, but they also prevented
the world (Europe in particular) from quickly building an extensive industry
out of the need enforced by trade barriers (Cain and Hopkins 1980:466), and
which would have challenged British leadership. ‘As a German economist put
it in 1840: “It is a very common clever device when anyone has attained the
summit of greatness [i.e. industrialization], he kicks away the ladder.” To them,
free trade was simply a measure to preserve Britain’s economic dominance’
(Kennedy 2001:152). The British really made sure that free trade, which would
secure their superiority, would be gradually adopted not only by European
countries, but the entire world. China opened up to world trade out of almost
complete isolation in 1842, and Korea did so at roughly the same time. Siam
dramatically reduced duties in 1855. Japan opened up to the world in 1858,
and India and Indonesia followed with a condemnation of their mercantilist
policies after 1860, mostly as a result of being forced by their colonial powers
or gunboat diplomacy.
2.2 GLOBALIZATION – THE ORIGIN

AND NATURE OF THE PHENOMENON
All of the above-mentioned changes in the economic structure of European
and overseas countries, allow us to talk about a truly global or world econo-
my for the first time in history. The starting point of the world economy lies
with the processes related to international trade. Due to the development
of international trade relations, individual national economies were becom-
ing increasingly interdependent, mutually contingent, and complementary,
– 50 –
so they gradually established a global economy. The world’s economy is not
just the sum of the economies of individual states or other units. The basic
features of a world economy include interconnection among these entities.
As for the definition of ‘global economy’, it is essential that this connection
is shared by all populated areas of the world. Although expert opinions differ
on the timing, most of them agree that such a situation occurred in the middle
of the 19th century. Cihelková (2001:2) states two conditions for the emer-
gence and existence of the global economy: ‘First, the breakdown of human
society into relatively closed manufacturing and economically independent
social units tied to particular territories.’ By these units, of course, we mean
states as they were formed on a national basis. The second condition is ‘the
transformation of the social division of labour into an international and later
a global division of labour’. As we have presented so far, the industrial revo-
lution enabled the deepening international division of labour, while the geo-
graphical distribution of production was particularly determined by, besides
climate or the level of technology, the European colonial powers and the eco-
nomic needs of their metropolitan areas. ‘Thus the world economy was being
formed simultaneously with the colonial system. It was established as a single
market economy based on unequal relations between developed metropolises
and colonies lagging behind. So, it was not only uniform but also significantly
differentiated in its core’ (Cihelková et al. 2001:3).
As we stated at the beginning of the first chapter, when people are able
to feed themselves, they begin to produce things for exchange and start to
specialize. Trade and markets emerge. The fewer people that are needed for
agricultural production, the deeper the specialization that occurs, and thus
the trade ties may be more complex. Long-distance trade, which allowed the
emergence of a single market, had played a major role in linking national econ-
omies. Remote areas do not become globalized, however, only by a change in
their demand for imports or the growth of their exports. Commercial expan-
sion may be the ‘result of population growth, the colonization of empty lands,
capital accumulation, technological change, and a variety of other factors…
the only irrefutable evidence that globalization is taking place… is a decline
in the international dispersion of commodity prices or what we will call com-
modity price convergence’ (O’Rourke and Williamson 2000:4). In other words,
if the volume of mutual trade among remote areas of the world is so distinc-
tive that it can influence prices on local markets, then it not only connects
these economies into a single global one, but it substantially transforms them,
through unified prices, at the same time. This unification of world market
prices is called globalization.
First, trade must affect the prices of goods on the domestic market. Then,
as a result of price changes it will redirect resources to increase (or decrease)
production and redistribute the income in societies affected by globaliza-
tion. These facts are also reflected in the political sphere, as the possibility
of rent-seeking reduces and the pressure imposed by lobbies grows. And if

we look beyond the realm of international economic relations, we can freely
proceed with terms like ‘global village’ with respect to changes in fashion and
lifestyle. Now, the point since the worldwide convergence of commodity pric-
es, i.e. globalization, can be traced is the matter at hand. O’Rourke and Wil-
liamson claim, based on the research of prices in the world’s most important
business centres, that a restriction of rent-seeking through ‘high transport
costs, monopolies, mercantilist intervention, or international conflicts’ had
not occurred until 1820 (O’Rourke and Williamson 2000).
But globalization is not the world economy and the world economy does
not necessarily need globalization for its existence. Globalization can be seen
as a vehicle that takes us faster to the world of extensive labour speciali-
zation, adored by the liberals, where everyone does what they do best on
a worldwide scale. The interdependency of national economies into one glob-
al economy is efficient and fast. This vehicle may crash quite easily, as will
be shown below, but first, let us mention two instances which illustrate the
difference between the concepts of globalization and world economy. As we
have said, the Dutch were the first to trade goods and raw materials which
could be produced and exploited by anyone. It was not until the British were
enabled, by the Industrial Revolution and the fall in transport costs, to pro-
ceed from luxury or generally uncompetitive products (utilizing the regional
uniqueness of production, transported in small quantities), to systematically
trade competitive products that could be produced by anyone. Non-compet-
itive products, by their definition, cannot be competed against by anyone in
the country of their import (spices, sugar cane, etc. imported to Europe). This
creates a completely new market, where the only things that affect the price
are mercantilist tools, i.e. monopolized markets, embargoes, quotas, or the
military power of the importer. On the contrary, competitive goods (industrial
products, wood, grain, etc.) transported in large quantities, unify prices, and
have a dramatic impact on the distribution of income and the economies of
countries where they are imported. Both cases reinforce the ties among the
economies of nation states, but only the trade in competitive goods unites the
prices thereof, and thus represents globalization.
Another example might be a conflict of war. While the mercantilist envi-
ronment can deal with a commercial or military conflict, and the world econ-
omy is only affected locally and may prosper as a whole, in the case of liberal
trade and globalization, an extensive military conflict is fatal. Such a conflict
nearly always brings about higher customs duties, embargoes, and other mer-
cantilist tools, which differentiate prices and thus work against globalization.
2.3 THE FIRST WAVE OF GLOBALIZATION

From the 19th century on, banks, businesses, and individuals followed their
business interests throughout the British Empire, which gradually occupied
– 52 –
as much as one-sixth of the world land mass. Britain produced about two-
thirds of the world’s coal, about half of the iron, five-sevenths of its steel,
two-fifths of the finished products, and about half of the cotton fabrics. After
1815, British non-European trade grew dramatically. Latin America, the
Levant, Africa, the Far East, Australia and the Pacific region, were drawn into
the world economy, which clearly had its centre in London, and which had
already established business connections with North America, India and the
West Indies. International trade was flourishing, especially between 1840 and
1870. Foreign investment followed this business. Britain attained the position
of the leading investor, banker, insurer, and even the forwarder, rather than
the producer of goods. ‘The spread of industrialization to Europe and North
America, and the opening up of new markets and sources of raw materials
in the tropics, were in the main financed from London. Britain’s return on
overseas investment of £10.5 million in 1847 had risen to £80 million by 1887;
by 1875 she had £1,000 million invested abroad, with the interest therefrom
being continually re-pumped into old or new areas of investment. Her lead in
shipping was enormous, for she had fully replaced the Dutch as the carriers
of the world, gaining yet another important source of earning. After shaking
off an American challenge in the first half of the century by switching from
sail to steam – one further advantage of her early industrialization – she had
by 1890 more r egistered tonnage than the rest of the world put together’
(Kennedy 2001:151).
British companies primarily built power plants, ports, and railways.
Along with capital, waves of migration increased the population. This
development did not stop until the First World War, and was followed by
the crisis of the thirties and especially World War II, as we shall see in the
next chapter. By then, the United States, a former British colony which had
gained independence in 1776, had already attained experience with foreign
investments connected to their political influence in Latin America. By the
First World War, the United States of America had become the largest indus-
trial power. That was in stark contrast to the role of raw materials exporter
attributed to the colony by Great Britain. Crafts and Venables (2001) use the
example of the USA to suggest that their development cannot be explained
merely by their involvement in the liberal world trade promoted by the Brit-
ish. They point out that in such a case, the USA could never have become
a net exporter of manufactured goods. The authors have created a model
to simulate the economies of the USA and Argentina, a country that has
retained a strong agricultural sector. They show that in order for the USA
to industrialize and attract millions of migrants, mainly from Europe in this
environment, they must have introduced very illiberal mercantilist policies,
such as high protective tariffs. In conclusion, the authors did not forbear to
note that no sooner had the United States been populated and industrialized
than they started to apply an economic policy which was exactly opposite to
their contemporary recommendations to the poorer countries, i.e. blocking

immigration and trade liberalization. In this situation, it is no paradox that
the USA regarded the British system of liberal trade, which involved most of
the world economy, to be the greatest danger to their ever increasing indus-
trial production. Fortunately for them, even in 1913, when they had already
become the major industrial manufacturer, the influx of immigrants was
continuing, though allowing the enormous domestic market to stay unsatu-
rated, and there were still enough states willing to pay for the export of U.S.
manufactured goods.
During this first wave of globalization another phenomenon unseen before
occurred. The free trade brought along a strong convergence in per capita
incomes for European countries and their offshoots. Those countries experi-
enced stable and strong convergence before 1914 and weaker convergence
from 1914–1950 (Pritchett 1997). However, the majority of countries of the
rest of the world experienced enormous variability in both their GDP growth
rates and incomes. ‘The growth rates for developed economies show conver-
gence but the growth rates between developed and developing economies
show considerable divergence. The growth rates of developed countries are
bunched in a narrow group while the growth rates of the less developed coun-
tries are all over with some explosive growth and other in implosive decline’
(Pritchett 1997:14).
Towards the end of the 19th century, the British began to have problems
even closer to home, in addition to American competition. It was mainly Ger-
man, and to some extent French competition. Creating huge conglomerates
of companies with a ‘natural monopoly’ in a certain field, as the Germans and
the Americans did, was difficult for the British economy, as in most areas its
structure was based on medium- and small-sized companies. Similarly, their
satisfaction with the amount of profits and their effort to keep what worked
well lulled the British into relative stagnation in the late 19th century. Last,
but not least, the British economy was slower to develop in new fields. This
was mainly the chemical and electronics industries, which the newly indus-
trialized countries – the united Germany (after the wars with Austria in 1866
and France between 1870 and 1871) and the United States – were able to apply
and develop in new areas.
Although Great Britain was the largest naval and commercial power in
the world, its relative strength continued to decrease up to the First World
War. ‘In 1870, Britain comprised 31.8% of the world industrial production,
the USA 23.2%, Germany 13.2%, and in 1913 the USA participated with 31.8%,
Germany 14% and Britain 13%. The British share of pig iron production from
1870 to 1913 had dropped from 46% to 13.9% and steel from 35.9% to 10.3%
in the same period’ (Stellner 2006:43). Likewise, its share of world trade was
declining (see Table 2.2), in particular reflecting the fact that Britain had not
only failed to compete in the new industries, but had also neglected the old
ones. So, Britain was gradually refocusing its exports on traditional industries
(textiles, coal and iron) and less competitive markets.
– 54 –
Table 2.2: Percentage of world trade
Country 1860 1870 1880 1889 1898 (1911–13)

Britain 25.1 24.9 23.2 18.1 17.1 14.1
Germany 8.8 9.7 9.7 10.4 11.8 –
France 11.2 10.4 11.2 9.3 8.4 –
USA 9.1 7.5 10.1 9 10.3 –
Source: Kennedy 2001:190
Let us make a side note about the countries with which Britain competed.
In addition to the United States and Germany, they were particularly France,
Russia, and partly Austria (Austria-Hungary after the settlement in 1867).2
‘France was entering the last third of the 19th century in a very difficult
position. After the defeat in the war with Prussia (1870–1871) it had to cede
the economically developed region of Alsace and Lorraine to the united Ger-
many and pay heavy war reparations – five billion gold francs. A more dynamic
economic rise occurred at the turn of the 19th and 20th century, especially in
the light industry (light engineering, textile industry, food industry and oth-
er sectors), and the armaments industry. Small-lot production of fashion and
luxury products (fancy goods, perfumes) was prospering’ (Stellner 2006:43).
Since most companies continued to be concentrated on small-scale businesses
or even homes, and agriculture played a significant role, the difference in the
efficiency of the U.S. and German economies on the one hand and the French
economy on the other, was significant though. France did not see its colonies
in terms of economy so much as a matter of national prestige, and therefore
the overall contribution of the contemporary French colonial empire (North
and West Africa, Madagascar, Indochina) may have been negative. France also
continued in the centuries-old tradition of a strong centralist state, maintain-
ing protectionist or, more generally, mercantilist measures, which did not
result long-term in the necessary competitiveness. This deficiency was signif-
icantly enhanced by a very moderately increasing French population.
Since Napoleon’s defeat in 1815, Russia had become the primary geopolit-
ical rival of Britain. Yet its vast area, and dramatically increasing population
colonizing new regions to ensure Russia’s great power status (from this point
of view, the whole vast territory of the Russian Urals must be considered de
facto as a Russian colony). Two wars, the Crimean (1853–1856) and the Rus-
so-Japanese (1904–1905), however, showed its enormous political and eco-
nomic or military backwardness. As a result of the Crimean War, a series of
uprisings broke out, which launched a slow pace of reforms, including the
abolition of serfdom in 1861. Nevertheless, this change took shape very slowly
2 The development of today’s major economic powers, which were playing a relatively minor
role in the world economy at that time, though none of them significantly influenced the glob-
al economy in the 19th century. In the case of Japan, this was changed by the Russo-Japanese
War in 1904-1905; the importance of China did not change until the 1990s.

indeed, as the news about their personal freedom arrived to the serfs in many
parts of Russia over a delay of many years. Therefore, the transformation from
a feudal to a capitalist system proceeded little by little. For us to comprehend
Russian backwardness even better, let us look at the fact featured by Kennedy
(2001:289): in 1914, foreigners owned nearly 100% of all petroleum fields, 90%
of mines, 50% of chemicals, and 40% of metallurgical industries. With such
a scope of foreign investment, it is only natural that Russian foreign debt was
the largest in the world. This situation is illustrated by the fact that while for-
eigners were operating most of the industry, agricultural products accounted
for 63% of Russian exports, and timber for another 11%. This export of low
value-added goods, however, was vitally important to Russia, because it com-
pensated for U.S. loans and German machine tool imports.
Table 2.3: Industrial production between 1800 and 1888 (in millions of British Pounds)
Year Great France Germany Austria Russia USA world

Britain (1871) (Hungary)
1800 230 190 60 50 15 25 650
1820 290 220 85 80 20 55 865
1840 387 264 150 142 40 96 1 314
1860 577 380 310 200 155 392 2 404
1888 820 485 583 253 363 1 443 4 618
Source: Stellner 2006:47
To complete the picture of industrial maturity, please refer to the chart

depicting industrial production development in the 19th century. This picture
would be enhanced, if these data were extended to 1914, until the beginning
of World War I. For that purpose, Table 2.4 shows the relative shares of world
industrial production until the dawn of World War II in 1938.
Tab. 2.4: Relative shares of world industrial production, 1880–1913, in percentages
Country 1880 1900 1913 1928 1938

Britain 22.9 18.5 13.6 9.9 10.7
United States 14.7 23.6 32.0 39.3 31.4
Germany 8.5 13.2 14.8 11.6 12.7
France 7.8 6.8 6.1 6.0 4.4
Russia 7.6 8.8 8.2 5.3 9.0
Austria-Hungary 4.4 4.7 4.4 0.0 0.0
Italy 2.5 2.5 2.4 2.7 2.8
– 56 –
2.4 THE FIRST WORLD WAR AND END
OF THE FIRST WAVE OF GLOBALIZATION
Several wars in previous centuries could already be designated world wars.
The Seven Years’ War was fought not only in Europe, but also in the America,
Asia and most of the seas; and there were also the Napoleonic wars, which
affected all of the inhabited continents. In the extent of killing and the devas-
tation of property, however, the Great or First World War not only surpassed
all previous wars, but also all of the expectations of its contemporaries. It is
sometimes called the ‘war to end all wars’, and therefore, it is somewhat par-
adoxical that the consequences of this war caused the birth of another world
war twenty years later. It was also the first war where the economy and the
lives of residents in all belligerent countries were almost completely subordi-
nate to the conduct of war, i.e. it was a so-called ‘total war’. There is no room
for us to describe the military (mobilization tables, Army and Navy doctrines,
military plans, etc.), diplomatic (isolation of France, the Entente Cordiale, the
formation of the Triple Alliance, etc.), or political (the Austro-Russian rival-
ry in the Balkans, the distribution of ‘uncivilized’ countries among European
colonial powers, etc.) reasons for this war, or the modes of its campaigns. We
shall focus only on the economic reasons that led to the war, and consequent-
ly its impact on the world economy.
The industrial base of each country determined its power at sea and in the
field. With the rise of political conflicts in the region, more and more European
countries addressed armament companies in order to ensure their sovereign-
ty and independence in international politics. ‘During the period 1908–1913,
military expenditures in Austria-Hungary increased by 13%, in Great Britain
by 30%, in Russia by 53%, in Italy by 61%, in Germany by 69%, and in France by
as much as 86%. On average, the Triple Entente yearly invested into the army
83 million pounds more than the countries of the Triple Alliance’ (Stellner
2006:49). Particularly significant was the arms race at sea, especially between
Britain and Germany. That was an area where Britain could draw its wealth
from the colonies on five continents, and being dependent on supplies from
those colonies, it could not allow any compromise. The advantage of early
industrialization and the consequent replacement of earlier sailing ships with
ones propelled by steam and later by diesel turbines, had been exhausted at
the turn of the 19th and 20th century. All states with aspirations to world
power politics, were building extensive fleets based on modern battleships,
although the costs of those ships were dramatically rising (see Table 2.5). To
Great Britain, it meant that the safety of the metropolitan area and the colo-
nies depended on the military field, where not only had the costs grown dra-
matically, from £11 million in 1883 up to £40.4 million in 1910, but also main-
taining the upper hand was becoming increasingly difficult. In its need for
naval superiority, Britain subsequently addressed its incapacity to maintain
it by coming out of its ‘Splendid Isolation’ and binding itself with treaties of

alliance, first with Japan in 1902, and then in 1904 with the ‘understanding with
France’ (Entente Cordiale), which was the basis of the future Triple Entente.
Table 2.5: Costs of British battleships
Battleship Approximate time Average

Class of launching price
Majestic 1893–5 £1 million
Duncan 1899 £1 million
Lord Nelson 1904–5 £1.5 million
Dreadnought 1905–6 £1.79 million
King George 1910–11 £1.95 million
Queen Elizabeth 1912–13 £2.5 million
Contemporaries still firmly believed that the war could not occur. First-
ly, because of two opposing massive Allied units (the Triple Entente and the
Triple Alliance) and their deterrent military capability made any war a dead-
ly business; and furthermore, because of the interdependence of economies,
whose disruption would lead to a collapse of the financial sector, world trade,
and the dependent economies. And finally, Europe, until then the leader of the
rest of the world, would lose much of its influence. Eventually, none of these
reasons had enough weight, although the consequences of the war surpassed
all expectations. Causalities on the side of the Entente alone (Great Britain,
France, and Russia) reached 4,900,000 men, and Germany and Austria-Hun-
gary lost 3,100,000 men. Italy, originally a member of the Triple Alliance, after
some initial manoeuvring, eventually joined the war on the side of the Triple
Entente. This is not to mention nearly double the number of often severe-
ly injured men, i.e. so that the afflicted would bear the consequences, e.g.
amputation, for the rest of their lives. The financial system actually collapsed
because it was not able to bear the cost of about $280 billion that the warring
parties had incurred. Due to the blockades and interruptions of the supply of
goods, and its replacement by implements of war, people were dying, and the
whole system of the pre-war world economy was disrupted. The first wave
of globalization operating under the Pax Britannica, as we defined it in the
previous sections, had ended. The centre of gravity of world power had truly
moved outside Europe, namely to the United States of America.
One of the most enduring negative impacts of the First World War was the
build-up in the executive branch in each of the warring countries. Since that
time (with the exception of the transition countries of Central and Eastern
Europe after 1989) there has been a constant increase in the share of gov-
ernment in the economic activities of each country. The states of the Triple
Alliance were the pioneers of this subordination of the economy and society
to the war effort. Ministries of Supply were established, and in 1915, even in
– 58 –
the as yet relatively liberal Britain, a Ministry for Armaments was created.
These ministries had the right to interfere with private enterprises, control
profits, redistribute labour, and decide on wage levels, etc. By the time David
Lloyd George (1863–1945), the Minister for Armaments, had become British
Prime Minister in December 1916, the entire British economy was regulated
and largely planned by the state. Similar dramatic effects can be traced in the
social field, too. Domestic economies lacked millions of men who were fighting
on the front lines. Countries accustomed to a high percentage of unemploy-
ment until then, were suddenly able to employ anyone. Women were required
to work, even in heavy industry. Women themselves started to consider that
situation normal. They were more visible within the society and contributing
to the war effort of their respective countries. It caused a higher female labour
force participation in post-war industry and services, and the growing eman-
cipation of women at the same time (in most European countries, they were
given the right to vote after the war). As this situation was also repeated in
World War II, the self-confidence and independence of women was growing.
That also implied serious socio-pathological consequences. There was a grad-
ual increase in divorce and abortion rates, as the number of women taking
part in the workforce outside their homes increased.
Clearly the most significant impact of the period of First World War for
Europe as a whole was a gradual decline in birth rates for married women.
‘Between 1890 and 1920, marital fertility began to decline in most Europe-
an provinces, with a median decline of about 40% from 1870 to 1930’ (Lee
2003:173). This trend continued between the wars and after World War II
with fertility falling in virtually all developed countries. European countries
Chart 3.1: The declining birth rates and increasing number

of working married women in the United States, 1952–1979
27.5 50
Percentage of married working women
25.0 45
Birthrate
Birth (per thousand)
22.5 40
20.0 35
17.5 30
15.0 Married working women 25
1952 1955 1960 1965 1970 1975 1979

Note: Data for married working women includes
only women with husbands present.
Source: McKay 2008:22

went below the reproduction level of 2.1 births per woman in the 1970s. If the
decrease in mortality and subsequent decrease in fertility in the 19th century
is called the first fertility transition, then European countries are now under-
going so called second fertility transition.
Particularly in European and East Asian countries, the ever decreasing
birth rates within this second fertility transition seem to disprove an earlier
optimism that there is a natural lower bound for fertility. Physical strength,
endurance or speed is no longer a vital employee characteristic. This fact
reduces the productivity differential between male and female labour and
therefore increases the cost of children. Various governments have tried var-
ious incentive schemes under different pro-family and pro-fertility policies
(Mlčoch 2014), which mostly met with failure as in current democratic society
there is no possibility to limit female employment to a level allowing for sim-
ple reproduction. These efforts have clattered the countries statistical com-
parisons, and the large body of existing literature is not conclusive regarding
the best practises to improve fertility. Moreover, the policies of some govern-
ments, including those of the European Commission, even contain efforts to
maximize female participation in the labour force out of misinterpreted human
rights or ever expanding equality of sexes concepts. Apart from the indisputa-
ble time series causality between declining birth rates and increased number
of working women, there is also a convincing argument linking fertility to the
generosity of the general state pension system. Already, the Chancellor Bis-
marck’s Pension Scheme introduced in the German Empire in 1889 seems to
decrease fertility by 5–10% (Fenge and Scheubel 2010); an effect that became
widespread as general pension schemes were being implemented through-
out the developed world. Together with liberal abortion laws, the evolution
of alternative lifestyles causes European states to face the consequences of
depopulation. Germany lost 196,000 inhabitants, Italy lost 78,700 inhabitants,
and Romania lost 54,400 inhabitants as a result of a natural population change
in 2012 alone, with worsening prospects for the future (Eurostat 2013). Such
a rapid depopulation has negative effects on entire societies, reaching from
financial (demands on state pension funds, healthcare and social services
budgets), economic (extend and productivity of workforce, real estate markets,
increase in specific services, transformation and diminishing of existing mar-
kets), military (size and capability of manpower), to educational, R&D fields
and many others. If at all possible, no historical analogy to change this trend
exists; the current institutions, policies, and indeed culture, need to undergo
a radical change towards sustainable fertility. Alternatively, the bearers of
more sustainable albeit hostile cultures would fill the vacuum and replace
the existing one. There are multiple historical examples for this development,
making falling fertility arguably the most dangerous legacy of two World Wars.
During the First World War, the home front of the belligerents was just
as important if not more important than the actual military operations. The
decline of agricultural production due to a shortage of labour, confiscation of
– 60 –
horses, not to mention the enemy’s military actions, led to a shortage of basic
foodstuffs. Vastly increasing debts led most countries to abandon the gold
standard and to apply the solution to inflation to an otherwise intractable
debt situation. Along with revolutionary changes in the social field, a radi-
calization of the population was inevitable in nearly all of the warring states,
most of all in Russia. There first of all, the Tsarist regime was removed in Feb-
ruary 1917, which brought an interim government to power. This government,
led by Alexander Kerensky (1881–1970) in May 1917, continued the war effort
of the Allies. From the beginning, the government had to share power with
the soviets or councils, comprised of 2–3000 representatives of the workers
and soldiers. Being unable to carry out the necessary economic reforms, the
government also failed to ensure supplies, and moreover, did not address oth-
er important political and national issues. At that time, the German General
Staff allowed V.I. Uljanov (1870–1924), a socialist radical who became a major
figure in the November takeover by radical Marxists, to return (under the
name Lenin) from his exile in Switzerland. The result was peace at any price.
Russia ceded to Germany and Austria-Hungary under the treaty of Brest-Li-
tovsk (1918) approximately one-third of its European territory, a third of the
total population, and collapsed into a civil war.
Around this time, however, the German and Austrian home fronts nearly
collapsed too. The German General Staff decided to use troops freed from
the eastern front for the last great offensive in the west in the spring of 1918.
But there they were faced with thousands of fresh American troops sent to
Europe after the United States had entered the war in April of 1917 in order
to protest against an unrestricted submarine war declared by Germany. Even
this last offensive failed. The peace treaties, signed at a conference in Paris in
1919, marked the most significant change to Europe’s borders in more than
a hundred years.
As for the world economy, it is important that large state entities fell apart
(Austria-Hungary, the Ottoman Empire, Russia), and many of the successor
states were flooded by high tariffs and non-tariff measures. New currencies
of varying quality were created, the gold standard was abandoned, and Ger-
many acceded to inflation as the answer to the reparations levied by the
Treaty of Versailles. The revolutionary Russia completely fell out of the world
economy and sealed itself up in isolation, which would not be disturbed until
the need to fight together with others arose during the Second World War.
The British, and especially the French, had lost millions of pounds of foreign
investments in this country. During the interwar period, nationalist disputes
were strengthened, the state intervention of the ‘temporary’ war economy
was reduced only slowly and foreign trade stagnated. A systematic recovery
of the world economy did not take place because the United States – political-
ly and economically the most powerful state essentially unencumbered with
war hardships and the lender to virtually all of the Allied powers – sought to
isolate itself.

The question of war debts and reparations was acquiring a more and more
radical position as the total industrial production in Europe, along with its
wealth, declined during the whole war period. Very few countries (perhaps
with the exception of the USA, Great Britain and partly France) had tried to
finance a part of the war expenditures by increasing taxes. Most states relied
on international loans, and considered that the defeated enemy would be
forced to compensate their war debts in the form of reparations (like France
in 1871). Therefore, practically throughout the entire interwar period, France,
the major debtor (together with Britain, they were heavily indebted to the
United States), was determined to raise money in the form of reparations
from defeated Germany. This effort limited possible mutual economic and
political cooperation. Despite some successful negotiations (the Dawes Plan
of 1924), compelled by social unrest in various European countries (e.g. the
consequences of the German hyperinflation of 1923), this issue contributed to
antagonism among virtually all parties involved. ‘Americans demanded their
money back, France, Italy and other countries refused to pay their debts until
they got the German reparations, and the Germans claimed that they were
unable to pay the specified amount’ (Kennedy 1996:334), and continued amor-
tization of their debt through hyperinflation, which eventually derailed their
economy. Thus war debts had engaged all of the countries which had partic-
ipated in the First World War, until the Great Depression in 1929, when most
of the debts were forgiven out of necessity.
Although London wanted to keep its position as the most important finan-
cial centre, and Britain tried to restore the Pax Britannica, its relatively weak
economy and high debt meant that the world financial centre and econom-
ic activity in general moved to the United States. As they, however, tended
towards isolationism, the inter-war world economy was quite different from
the rapidly growing economy, based on liberalism and free trade in the 19th
century, as described above. Moreover, the structure of the U.S. economy did
not depend on foreign trade, and it was not so open and tended towards pro-
tectionism, especially in agricultural production. Virtually all European coun-
tries were encumbering further debts with the United States, now the world’s
largest creditor. But those were not like the British loans known from the
19th century, i.e. long-term to develop infrastructure (ports, railways) or to
make use of immediate profit opportunities in the mining and manufacturing
industries. The U.S. short-term loans had high interest rates, and they were
often used by the recipients to offset deficits in the balance of payments or to
invest in agriculture.
This unwise use of short-term loans in a long-term sector, i.e. agriculture,
was the result of a phenomenon new in its entirety and potentially very
destructive, which was the policy of self-sufficiency. Based on the bitter expe-
rience of the First World War, when governments were unable to provide for
the basic needs of their populations, different ruling regimes ceased to rely on
international trade, as it had failed in their view. Long before the Great Crash
– 62 –
of 1929, liberalism with its pursuit of efficiency and profitability through the
global division of labour had been replaced with neo-mercantilism, which was
an effort to strengthen their own power with little regard to economic results.
Strengthening the so-called strategic areas went hand in hand with further
increases of government intervention in the economy. Structural shortcom-
ings of the European economies were hidden beneath the surface in the late
1920s as governments enjoyed a massive influx of U.S. dollars in short-term
loans. Meanwhile, the interest rates of these debts grew alarmingly, and since
they could not be paid off by exports, they were redeemed with further loans.
The whole system began to collapse in the summer of 1928, when a boom in
the USA and the subsequent increase in interest rates by the Federal Reserve
authority had strongly decreased capital outflows. The ‘Wall Street Crash’ in
October 1929, which had terminated this boom and the subsequent cuts
in U.S. loans, provoked a spontaneous chain reaction.
A sudden lack of cheap loans decreased both investment and consumption,
which in turn drastically limited market demand in industrialized countries.
Afflicted food producers and raw material suppliers tried to compensate fall-
ing incomes with a desperate increase of supply. This was followed by an
almost complete collapse in prices, which in turn prevented the purchase
of consumer goods. International trade restrictions spread from the United
States (the strongly protectionist Smoot and Hawley’s Customs Tariff) to
Europe, resulting in a virtual stop in international trade which had not yet
reached the level of before the First World War. Having ‘completed’ these
measures with a failure to pay debts, currencies of practically all European
countries left the gold standard and experienced a significant devaluation.
The financial crisis, which had originated in the United States, had moved
into the real economy and become the Great Depression. Between 1929 and
1933, the world production of goods decreased by about 38%. The United
States alone lost approximately one-third of its GDP in those years. The crisis
gradually seized more and more states and sectors, grew into a depression
and became long-term. Probably its worst social consequence was increasing
unemployment (see Table 2.6), which affected over a quarter of the working
population for a long time.
Table 2.6: Unemployment, percentage of active population
Year USA Germany Great Britain France

1926 2.8 10.0 12.5 3.0
1929 4.7 8.5 10.4 1.0
1932 34.0 29.9 22.1 15.4
1933 35.3 25.9 19.9 14.1
1936 23.9 7.4 13.1 10.4
1938 26.4 1.9 12.9 7.8

Economists do not always agree about the causes of the crisis. The domi-
nant view offered by monetarists suggests failure on the part of the Federal
Reserve. The Bank policy caused a significant shrinking of the money supply,
a policy shared by central banks of other countries notably France (Irwin,
2010:8). This made loans and production very expensive and businesses fail.
Other schools offer different explanations. Keynesians argue that the reces-
sion was caused by a lack of consumption and/or over-investment. Some econ-
omists hold a so-called uncertainty hypothesis claiming consumers were tem-
porarily uncertain about their future after the Great Crash limiting consumer
spending on durable goods (Rommer 1990:598) bringing a collapse of pric-
es and the Great Depression about. Views on the solutions applied are even
more diverse. In March 1933, President Franklin Delano Roosevelt (1882–1945)
introduced the illiberal program called the New Deal in the United States. This
program cancelled the traditional liberal strategy of deflationary austerity
policies, and focused on the provision of temporary work for the unemployed
through large state projects to overcome the crisis. In banking, the Federal
Reserve authorities were ordered to provide money to banks with low stocks
of assets and enable credit expansion. The pillar of the ‘first New Deal’ also
introduced ‘self-regulation’. That was represented in particular by the Nation-
al Industrial Recovery Act – NIRA. This Act created the National Recovery
Administration – NRA, which was intended to limit competition through nego-
tiations between employers, unions and the government. The NRA determined
wages and hours of work – ‘the codes of fair competition’. In addition, there
were a number of regulatory agencies which continued to curtail the U.S. lib-
eral business environment, such as the Agricultural Adjustment Act & Admin-
istration – AAA, the Federal Emergency Relief Administration – FERA, the Ten-
nessee Valley Authority – TVA, the Work Project Administration – WPA, etc.
Between 1935 and 1936, President Roosevelt initiated a series of other
measures, which are usually called the second New Deal. The aim was to bet-
ter utilize existing resources in the economy and redistribute wealth through
the WPA towards farmers, old and poor people, and those in organized trade
unions. Within a few years, the United States reached a much higher level of
redistribution through the state budget, a technique which European gov-
ernments had been implementing since the 1880s. As for the solutions of the
Great Depression itself, the results of all these measures which dramatically
changed society were never proven successes or failures as the United States
did not stop facing economic difficulties until the launch of massive arma-
ments for warfare. In other words, the Great Depression in the United States
was ended by their entry into World War II in 1941.
Economic recovery in the Great Britain proceeded somewhat differently
than in the United States. For the first time, Britain focused mainly on domes-
tic demand and the good old pro-export fields, such as coal and textiles, which
experienced a slow decline in their share of GDP. A slow retreat of the cri-
sis was thus ensured by new jobs in the automobile and electrical industry.
– 64 –
Britain reached financial stability, although it never restored the financial
and export primacy of the times of Pax Britannica, because this position was
maintained by the USA thanks to the scale of their production and economy,
in spite of all the current problems. Britain came out of the economic crisis
relatively quickly, doing the best of all the industrialized countries and using
purely liberal principles, with the big exception of high tariff barriers that
would still plague the world long after World War II.
Because France was less industrialized than Britain, the USA and Germany,
the Great Depression hit it later. Their economic recovery, however, was all
the longer. Short-term recovery would never last long. Unemployment never
fell to the pre-war level, and the volume of production also never returned to
the pre-war level. The tragedy of the First World War, along with the economic
depression, also caused political instability. Society polarized, giving birth to
a large number of fascist organizations, and a growing number of socialist and
communist deputies in the parliament were represented in the Popular Front
after the elections in 1936. Frequent changes of governments did not allow
a meaningful economic policy.
There were severe consequences of the Great Depression in Germany.
‘After Black Friday, the U.S. banks withdrew short-term loans to retain their
own liquidity. To German borrowers that meant considerable problems, since
no other economically important country could rival the dependence of Ger-
man economy on foreign capital. The financial and banking crisis, marked
by the industrial depression, resulted from the structural weakness of the
German banking sector. The post-war hyperinflation had buried the popula-
tion’s ability and desire to save money. The unemployment in 1929 was reach-
ing 2 million people’ (Stellner 2006:75). All we have said about the political
instability of France applies twice as much to Germany. Communist states,
emulating the Soviet model, such as the Bavarian Soviet Republic, were estab-
lished in its territory. In 1933, the National Socialist regime came to power
after the Weimar Republic collapsed under the onslaught of economic dif-
ficulties following the Wall Street collapse in 1929. The Chancellor and Der
Führer (the leader) of Germany Adolf Hitler (1889–1945) and his government
abolished unions, halted the growth of wages and deprived the citizens of
extensive rights. Surprising similarities can be made with the regime of Soviet
Communists regarding Four-year plan (Five-year plan in the USSR), the use of
terror for economic ends, controlled prices, the decrease of consumption and
increase of government investment, or the control of production (Temin 1991).
Unlike the Communists, the Nazis did not confiscate private property or abol-
ish all of the institutions of the liberal state. Instead, the Nazi regime basically
redirected straight to a policy of preparing for war, and helped to increase
arms production. Covertly at first (due to its own weakness and the conditions
of the Versailles peace treaty), it built the Navy and Air Force. Unemployment
was successfully reduced by the introduction of conscription. The regime
also built dams, highways, railways, housing, and encouraged the growth of

industries needed for warfare (automobiles, chemicals, and heavy machinery
industries). Though preparing for war the production of military equipment
is always unsustainable, since it draws investment funds from productive sec-
tors, it helped Nazi Germany in the short-term to overcome the effects of the
Great Depression. The unemployment rate in Germany in 1938 was less than
2%, and its share of the world industrial production had increased again, after
an extended period of time (see Table 2.7).
Tab. 2.7: Share of world industrial production, 1929–1938, in percentages
Country 1929 1932 1937 1938

United States 43.3 31.8 35.1 28.7
USSR 5 11.5 14.1 17.6
Germany 11.1 10.6 11.4 13.2
Great Britain 9.4 10.9 9.4 9.2
France 6.6 6.9 4.5 4.5
Japan 2.5 3.5 3.5 3.8
Italy 3.3 3.1 2.7 2.9
The Great Depression had affected the whole world and caused an unprec-
edented economic downturn. Prices on the world market declined by 60%
in 1929–1932, and the volume of world trade fell by more than 50%. Profits
and income, as well as tax revenues, declined in an, until then, unimaginable
way. Unemployment affected as much as a quarter of the working population
in many countries (in the U.S. it was over 35%). It was only after the Second
World War, in 1949, that global trade regained the level of 1929. The crisis also
relatively strengthened existing Communist dictatorship and helped the rise
of Nazi dictatorship, which unleashed the Second World War.
THE CHAPTER SUMMARY

European economic relations in the early 19th century were strongly influ-
enced by the Napoleonic wars. France first introduced the continental block-
ade, a measure to prevent imports from Britain and its colonies to the Euro-
pean continent. Many countries, however, circumvented it for economic
reasons. No matter how unpleasant the blockade was for Britain, it led to an
increase in trade with the British colonies on the Asian, African, and Ameri-
can continents.
Furthermore, in 1806 the Holy Roman Empire was dissolved, the Vien-
na Congress significantly amended the European borders, and the Spanish
overseas empire crumbled. Since 1815, after the defeat of Napoleon at Water-
loo, international economic relations were shaped by the hegemony of Great
– 66 –
Britain, which kept its privileged position, albeit with certain problems, until
the First World War in 1914. The barriers of free trade were removed, which
brought prosperity for all and reduced the threat of earlier trade wars. The
path to Liberalism was not easy though. The effort to repeal the Corn Laws
in Britain, which finally occurred in 1846, became synonymous with the fight
against mercantilism. Thanks to the many competitive advantages, free trade
maintained British supremacy.
Linking national economies, stimulated by liberalism, resulted in the cre-
ation of the world economy in the last third of the 19th century, which was
associated with globalization, i.e. the convergence of commodity prices on
world markets. Many authors speak of the first wave of globalization in this
case, which was characterized by liberal long-distance trade and subsequent
foreign investments, mainly from Britain. British companies built mainly
power plants, ports, and railways; waves of population came along with their
capital. This first wave of globalization lasted until the First World War. The
relative decline of Britain, however, had begun earlier with increasing compe-
tition from the USA, Germany and France, and partly as a result of the slower
development of new branches in the UK alone.
The First World War, whose outbreak seemed to contemporaries extremely
unlikely, had an enormous impact on the world economy. It left behind mil-
lions of dead and those disabled for life, the centre of the world economy shift-
ed to the USA, and there was an increase in the number of state apparatuses
that started to interfere remarkably with economic activities. In addition, the
financial system collapsed, high indebtedness led to the abandonment of the
gold standard and high inflation, due to the collapse of large state units, bor-
ders in Europe changed significantly, new currencies were created, foreign
trade stagnated, and industrial production and fertility in Europe decreased.
Moreover, the solution to many problems of the post-war economy was
complicated by American isolationism and protectionism. U.S. short-term
loans with high interest rates were unwisely used to equalize the balance of
payments deficits and for investments in agriculture, which were based on the
new policy of self-sufficiency. Liberalism was replaced with neo-mercantilism.
Another blow to the world economy was struck by the crisis that began
on ‘Black Friday’ on Wall Street in late 1929, which gradually spread to oth-
er states and grew into a long-term depression. Each country tried to cope
with it on its own. The United States was trying to deal with it by means of
illiberal intervention in the economy within the so-called New Deal program
of President Roosevelt. Economic recovery, however, did not occur until the
U.S. entered into World War II in 1941, after the start of a massive armament.
Great Britain by contrast, followed liberal principles when dealing with the
crisis, except for high tariffs, and came out of the crisis relatively quickly. The
depression affected Germany most of all, yet it also had managed to overcome
it relatively quickly, with the advent of the Nazi regime and a redirection of
the economy to the war effort.

/3/
The Post-War Development
of the World Economy
3.1 RECOVERY OF THE WORLD ECONOMY IN 1945

There is no space to describe the events of the Second World War here. How-
ever, it is important to note that economic factors were just as, if not more,
important as military and political issues throughout the whole of this ter-
rible chapter in human history. To describe the overwhelming power of the
United States, the world’s largest economy, we would do best to quote British
Prime Minister Winston Churchill (1874–1965), who upon learning of the U.S.
entry into the war (as a response to the Japanese attack on Pearl Harbour)
said, ‘So we have won after all! England will live, Britain will live, the Com-
monwealth, and the Empire will live… We will not be erased from the map.
Our history is not over. Maybe we will not even have to die as individuals.
Hitler’s fate was sealed. MussolinI’s fate was sealed. And as for the Japanese,
they will be crushed to dust. Everything else is just a matter of the correct
use of overwhelming force… Because I was full and saturated with emotions
and feelings; I went to bed and slept the sleep of the rescued and grateful’
(Churchill 1993:598–599). As that was the year 1941 and the war was to last
for another four long years, Hitler was standing just outside of Moscow, and
– 68 –
the Japanese expansion in Southeast Asia (which would threaten Australia
in a few months), had yet to begin, these words may seem a mere outcry of
emotions. However, the economic power of the allies, their human potential,
gradually supported by technological superiority, which ultimately resulted in
the completion of the atomic bomb, justified this optimism indeed.
The increase in the war production of all nations involved in this second
full-scale war was enormous. Given the vast resources, the increase was
significantly greater among the allies. From 2% of GDP in 1939, war produc-
tion in the USA had reached 40% by 1943, which comprised 40% of all of the
world’s armament production. Similarly, the GDP of 88.6 billion USD in 1939
had increased to 135 billion USD in 1944 (Stellner 2006:84). Thus the Unit-
ed States’ production in 1944 was not only greater than Germany, Italy, and
Japan, but also than that of the rest of the world combined. Unemployment
had almost disappeared; as 12 million men had been summoned to arms, they
had to be replaced, much as they were during the First World War with wom-
en. The proportion of women employed outside their homes increased from
26% in 1939 to 32% in 1944.
The increasing stockpiles of the United States were more and more mani-
fested on the battlefields too. Prior to its entry into the war, the USA firstly had
supported Britain, and later the Soviet Union with deliveries under the Lend-
Lease Act. These deliveries were crucial for both warring countries for most
of the war. For example, almost all trucks, the majority of railway locomotives,
and large quantities of war material at the Soviet front line were of American
origin. In 1943, the allied production of tanks was almost sevenfold compared
to the Axis countries; the situation for aircraft was similar (see Table 3.1).
Tab. 3.1: Armament Production in 1943
Country Overall Number of Number of Number of

billion USD aircraft tanks artillery pieces
Germany 13.8 25 220 10700 (12100) 109 300
Japan 4.9 16 700 800 29 400
Great Britain 11.1 26 200 7 500 132 100
USSR 13.9 34 900 24 100 178 700
USA 37.5 85 900 38 500 278 900
If the British had the upper hand when it came to both crew and material
when landing in Sicily (Operation Husky) in 1943, then during the landing
in Normandy (Operation Overlord) in June 1944, it was the Americans who
had the upper hand. This superiority was constantly growing. Along with
purely military material, Western Europe was also supplied with civil mate-
rial including goods, in order to prevent fundamental shortages of supply in
The Post-War Development of the World Economy – 69 –

liberated territories. After the German troops surrendered on 8 May 1945 and
the Japanese empire capitulated on 2 September 1945, the victorious powers
were forced to supply Europe and Japan with basic food, clothing, etc. for a rel-
atively long period of time. Economic factors also significantly influenced the
post-war division of the world. For example, Winston Churchill was reluctant
to shift the Polish borders to the west, stating that there was a settled German
population, traditionally producing grain and food for the rest of the then
occupied German territories, and thus their expulsion and occupation of the
land would have meant that the British would have had to provide for millions
more refugees during a time of their own food shortage.
The economies and the societies in Europe and East Asia were completely
disorganised (including Japan, ravaged by the devastating fire raids on Tokyo
and other centres). ‘During the Second World War 110 million people were
called to arms, and 27 million soldiers lost their lives, out of which the S
oviet
Union lost 13.6 million, China 6.4 million, Germany 4 million and Japan 1.2 mil-
lion soldiers. The loss of civilian population had also surpassed all previous
military conflicts. As a result of the raids, guerrilla fighting, mass murder,
inhumane treatment in labour and concentration camps, deportation and
expulsion, 25 million civilians had died (of which 7 million were Russians,
5.4 million Chinese, 4.2 million Poles, and 3.8 million Germans). Poland had
lost a full 17% of her population during the war! The Soviet Union had paid
a severe toll for victory: 710 towns, 70,000 villages, 32,000 industrial enter-
prises, 65,000 km of railways, and 1,870 bridges had been destroyed on its
territory. In Germany, 40% of the total housing stock had been destroyed or
heavily damaged, in Japan every fourth house was completely destroyed,
so almost two million people had been left without a shelter’ (Stellner
2006:85).
Therefore, the United States was the main source of material for civilians in
regard to both the allies and the rest of Europe in the post-war period. Those
basic needs changed into a demand for civilian goods, allowing the growing
U.S. economy, and particularly companies focused on armed forces supply, to
redirect to peacetime production. So, American world dominance continued
after the war. The United States, despite the huge increase in national debt
during the war years, did not become poorer, but rather richer. After the war
had ended, they owned nearly two-thirds of the world’s reserves of gold, con-
trolled half of the world’s coal production, more than half of electricity pro-
duction; and, by means of their multinational companies, owned two-thirds of
petroleum production, dominated most major industries, and became the larg-
est exporter of goods, accounting for one-third of the world’s exports. Their
position was just slightly weaker than that of Britain after the Napoleonic
Wars. Like Britain, they often informally dominated political decision-making
in the world, while all their potential economic rivals were requesting deliv-
eries of basic goods and services for their war-torn economies.
– 70 –
3.2 THE ORIGIN OF WORLD
FINANCIAL INSTITUTIONS –
THE BRETTON WOODS SYSTEM
The Allies, the Americans in particular, responded to this situation in two
ways. First of all, they established the United Nations (UN) at a conference
from April to June 1945 in San Francisco. The UN was the administrator of
humanitarian aid to the war-torn countries. Through the UNRRA (United
Nations Relief and Rehabilitation Administration) the United States supplied
Europe with food, clothing, medicines, and other essential needs worth four
billion dollars, and the other affected countries were provided with another
three billion dollars for recovery. After UNRRA had finished, it was followed
up by other UN specialised agencies.
In 1944, Prime Minister Churchill and President Roosevelt were already
corresponding on the post-war reconstruction of Europe and the world. In
particular, the USA was determined to not allow the same mistakes made after
the First World War when the individual European states had been forced to
pay war debts, or reparations, leaving them with no means for reconstruction
and development, which had radicalised the population and led to the col-
lapse of democratic regimes. As Churchill put it, this terrible war should bring
at least fifty years of peace.
The U.S. Government had therefore decided to help rebuild Europe not
only through loans, but also by financial support. In June 1947, the Minister
of Foreign Affairs G. C. Marshall (1880–1959) released the European Recovery
Program, or ERP. In July 1947, representatives of sixteen European countries
which were interested in U.S. help, met in Paris and set up the Committee for
European Economic Co-operation, CEEC; all democratic countries of Western
Europe became members thereof. Czechoslovakia and Finland also sought to
participate in the committee, but after intervention by the Soviet Union, they
withdrew their requests. In the spring of 1948, the U.S. Congress approved
the ERP law, which was to be managed by the Economic Co-operation Admin-
istration (ECA). Meanwhile, CEEC was transformed into the Organisation for
European Economic Co-operation and Development, OECD, whose task was
to distribute U.S. assistance in coordination with the ECA. Between the years
1948 and 1952, the USA provided sixteen mainly Western European states
with assistance worth $12.8 billion. The Marshall Plan as it came to be popu-
larly known meant the economic recovery of Europe.
In addition to direct economic aid, British Prime Minister Churchill and
U.S. President Roosevelt drew up the Atlantic Charter, establishing a ‘special’
relationship between the United States and Great Britain, and in particular
with the United Nations as the means to maintain international peace and
security. The UN can take action on a wide range of issues and has multi-
tude of specialized agencies. Three of those remain important for the world

economy, two of which were the direct result of the conference in the Atlantic
Bretton Woods resort.
Table 3.2: Distribution of Marshall Plan aid

(percentage of the total amount of 12.8 billion USD)
Great Britain 24.9

France 21.2
Italy 11.8
Germany (FRG) 10.8
Netherlands 7.7
Greece 5.5
Austria 5.3
Belgium 5.3
other 7.5
The first of these was the World Bank (International Bank for Reconstruction
and Development – IBRD) which is based in Washington D.C. and whose official
purpose is to promote economic and social development in developing coun-
tries. This investment bank is owned by the governments of member states
with their shares, and who guarantee the repayment of the funds obtained by
issuing bonds on the capital market. IBRD loans cannot be granted to individ-
uals or rich countries. Poorer countries can obtain loans on more favourable
terms. Most loans must be repaid in 12–15 years.
The World Bank is a member of the World Bank Group – WBG. The WBG
includes many other important institutions. The first of these is the Inter-
national Development Agency, which seeks to reduce poverty through inter-
est-free loans provided to the poorest countries of the world. (Its funding
comes from contributions from wealthy member states.) The second is the
International Financial Corporation which was established in 1956 to provide
technical assistance and advisory services to governments and businesses in
developing countries with the overall aim of supporting commerce in those
states. Another institution is the Multilateral Investment Guarantee Agency
which promotes direct foreign investment in developing countries, particular-
ly through guarantees, thus reducing the uncertainty arising from non-trading
risks. The final one we will mention is the International Centre for Settlement
of Investment Disputes which is the arbiter of investment disputes between
foreign investors and host countries.
In its sixty-plus year history, the World Bank has itself been criticised from
two sides. On the one hand, for loans to developing countries with medium
levels of income that would have been able to finance their development
– 72 –
projects on the international financial market (as critics argue, although these
loans are repayable and well spent, they do not go to the neediest countries on
the planet); and on the other hand for loans to the poorest countries, arguing
that those monies have in fact been donations to the authoritarian regimes
in mostly undemocratic states. Not only are these monies not used for the
original type of planned investment, but they are also often spent to purchase
weapons or other kinds of support for the non-democratic regime, and more-
over, they are not usually paid back, with the excuse that the country is insol-
vent and its economy is not able to support debt repayment.
Another body established in Bretton Woods was the International Mone-
tary Fund – IMF, which now has 188 members, up from its original 30 mem-
bers. Its key task is to reduce the degree of payment imbalances and improve
the economies of member states. The IMF also functions to guarantee the new
international financial system.
Before the First World War, there was the gold standard, guaranteed by
Great Britain. It allowed the exchange of national currencies for gold as a uni-
versal currency, which helped to stabilise (or fix) the currency in a predeter-
mined ratio. To examine more closely how this system worked, the following
example might help. Let us say that the British pound begins to appreciate
over the long accepted value of five dollars a pound. ‘If an American importer
of £100 English tweed tries to pay for the tweed with dollars, it costs more
than the $500 it cost before. Nevertheless, the importer has another option
involving the purchase of gold that can reduce the cost of the tweed. Instead
of using dollars to pay for the tweed, the American importer can exchange the
$500 for gold, ship the gold to Britain, and convert it into £100. The shipment
of gold to Britain is cheaper as long as the British pound is above the $5 par
value (plus a small amount to pay for the cost of shipping the gold)’ (Mishkin
2006:469). Imports of gold to Britain contribute to the increase of English
gold reserves, while the U.S. reserves are reduced. Larger amounts of gold in
the UK de facto mean more gold for less produced goods. The prices (in gold,
the amount of which is growing) will increase and the pound firmly bound
to the gold will stop appreciating. The value of the British pound will return to
the level of $5 a pound.
The First World War created huge barriers in world trade. States were no
longer able to exchange goods for gold and the gold standard collapsed. For
reasons explained in the previous chapter, the gold standard could not be
fully applied even in 1929, much less during the Great Depression. A standard
requires a steady moderate increase in gold production, which is something
that cannot be guaranteed. When this condition is fulfilled, the gold standard
results in long-term price stability and reduces government borrowing, which
becomes very expensive. Thus the advantage of the gold standard is usually
the responsible monetary policies of governments.
After 1944, the Allies discussed a moderate version of the gold standard
in Bretton Woods. As the USA was in the totally unique economic position

described above, the U.S. dollar was the only currency freely convertible into
gold, available exclusively to foreign governments and central banks at a price
of $35 per ounce of gold. All other currencies were fixed to the U.S. dollar in
the fixed exchange rate system. The U.S. dollar also served as the reserve cur-
rency, which means that U.S. dollars were kept in the central banks of other
countries as foreign currency reserves.
This system obliged the central banks of participating countries to main-
tain the value of their currencies at a predetermined level against the U.S.
dollar. As soon as, e.g. the British pound appreciated above the arranged level,
the Bank of England was obliged to sell pounds from its inventory. If the value
of the British pound fell, it was the duty of the Bank to purchase pounds in
order to reduce the amount on the market so that pounds became scarcer, and
therefore their value would increase. The role of the IMF was to keep the sys-
tem operating by lending loose funds, provided by member countries, and to
maintain a system of fixed exchange rates in the states where the buying and
selling of their national currencies by their central banks had not managed
to maintain a solid fixed rate. Long-term downward pressure on a national
currency always comes from a payments imbalance. If states fail to sell prod-
ucts to foreign markets, it means they do not have sufficient means to pay for
their imports, causing a payments imbalance and downward pressure on the
domestic currency. Since the devaluation of a domestic currency in the system
of fixed exchange rates is not possible, the central banks of such countries need
long-term foreign currency loans, until structural reforms of the economy take
place (employee salary cuts, decrease in prices of exported goods, increased
efficiency through technology, or a redirection to the export of different goods
or to another foreign market). These loans were provided by the IMF on the
basis of a reform plan, submitted by the government applying for a loan.
During the 50s and 60s the system worked well as even if the share of
world gold held by Americans was constantly decreasing. By 1970, however,
the economies destroyed during WWII, notably Germany and Japan, recovered
and with it American economic superiority weakened. This together with the
costs of newly established social programs of the so called ‘Great Society’
(political slogan of U.S. President Lyndon B. Johnson first mentioned in Janu-
ary 1965) and of the Vietnam War (1954–1975) caused a deficit in the balance
of payments, and public debt. The USD become overvalued and Bretton Woods
System partners were de facto pressured to appreciate their currencies, thus
hurting their export capabilities just to keep the system stable. West Germany
was the first to leave the system in May 1971 with others asking for exchange
of their currencies into gold. In this situation, American President Richard
Nixon (1913–1994) decided to suspend convertibility of the USD into gold aban-
doning a key instrument of the Bretton Woods System. This decision came to
be known as Nixon Shock and was followed by the Smithsonian Agreement in
December 1971, which tried to find and renegotiate an exchange rate regime
functioning within new conditions (Breton Woods II).
– 74 –
Ultimately, this proved to be impossible and by 1973 all developed coun-
tries decided to abandon the system of fixed exchange rates and switch to
a system that is described by some authors as a hybrid. This means that most
states have freely floating exchange rates, which the central banks do not
interfere with, or only very little. Some states support a controlled floating
system, where a range is set in which the currency may fluctuate without any
intervention purchases aiming to change the rate. Then many smaller states
have their currencies pegged to the currencies of major world economies, par-
ticularly the U.S. dollar, and still others have created a mutual monetary union
such as the countries of the European Monetary Union. The common element
after 1971, however, has been the reduced role of gold in international finan-
cial transactions. ‘Not only has the United States suspended the convertibility
of dollars into gold for foreign central banks, but since 1970 the IMF has been
issuing a paper substitute for gold, called Special Drawing Rights (SDRs). Like
gold in the Bretton Woods system, SDRs function as international reserves.
Unlike gold, whose quantity is determined by gold discoveries and the rate of
production, SDRs can be created by the IMF whenever it decides that there
is a need for additional international reserves to promote world trade and
economic growth’ (Mishkin 2006: 474). In other words, while there was a real
or at least a theoretical dependence of the world’s debt on something physi-
cal – gold – in the inter-war period and then until 1971, from 1971 on creating
another loan has been a political decision simply taken by the central banks,
or the IMF.
The last large institution whose foundations were laid in Bretton Woods,
but which was created first as an international treaty in 1947, was the General
Agreement on Tariffs and Trade – GATT, which later became the World Trade
Organisation – WTO. GATT was created in 1947 as a stopgap, which lacked an
institutional basis. It was basically a set of rules that applied only to trade in
goods. It was not efficient enough to settle mutual disputes, and every coun-
try could block its provisions. GATT was a conference for negotiation rather
than an administrative institution, yet it had a small secretariat in Geneva and
achieved fairly significant success.
Table 3.3: Volume of world trade 1850–1971 (1913 = 100)
1850 10.1 1938 103.0

1896–1900 57.0 1948 103.0
1913 100.0 1953 142.0
1921–1925 82.0 1963 269.0
1930 113.0 1968 407.0
1931–1935 93.0 1971 520.0

GATT came into existence on 1 January 1948 when the agreement was
signed by 23 states. They were committed to reducing the control of more than
45,000 tariffs that had been plaguing international trade. Although the U.S.
Congress refused to ratify the already planned institution, i.e. the Internation-
al Trade Organisation – ITO in 1950, the progress of tariff reduction in the next
forty years has been the most positive institutional change in this regard. GATT,
as well as the later WTO, was governed by principles, two of which Cihelková
(2001:61) identifies as the most important. The first one being the principle of
non-discrimination, which is applied through the unconditional most favoured
nation status. In the text of the original General Agreement of 1947 it was
worded as follows: All agreements, advantages, privilege or immunity granted
by any contracting party to any product originating in any country, or where
specified, shall be accorded immediately and unconditionally to the same
product originating in the territories of all other contracting parties, or there
designated. This clause is irrevocable. The second principle compares foreign
to domestic economy, which is applied through the ‘parity clause’. This is a con-
tractual clause to ensure the equal treatment of imported goods and domestic
goods. The same treatment applies particularly to internal regulations and
taxes, and regulations related to the distribution, purchase and sale of goods.
Agreements within GATT were achieved through ‘negotiating rounds’,
which could be held in several states and take several years to complete (see
Table 3.4).
Table 3.4: Rounds of GATT negotiations
Year Location / Name Topics States

1947 Geneva Tariffs 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960–1961 Geneva / Dillon’s round Tariffs 26
1964–1967 Geneva / Kennedy’s round Tariffs and anti-dumping measures 62
1973–1979 Geneva / Tokyo Round Tariffs, non-tariff measures, 102
‘framework’ agreements
1986–1994 Geneva / Uruguay Round Tariffs, non-tariff measures, rules, 123
services, intellectual property,
dispute settlement, textiles,
agriculture, creation of the WTO,
etc.
Source: WTO
As the number of members of the organisation has been growing (in

March 2013 it was at 159 members and 18 observers of the organization),
– 76 –
so has its importance, along with the difficulties of negotiating various tariff
and non-tariff adjustments. Among the various multilateral negotiations of
the GATT contracting countries, it is worth particularly noting the Uruguay
Round. It began in 1986 and formally ended in April 1994, while the concluded
agreements took effect from 1 January 1995. This round extended the oper-
ation of GATT with new rules and principles in new areas, such as trade in
services, protection of intellectual property rights, and other aspects of invest-
ment activities, etc. This round, however, mainly achieved the transformation
of GATT into the WTO, some 45 years after this idea was originally presented.
The difference between GATT and the WTO is quite significant. ‘The WTO is
a permanent institution with far greater powers. Commitments in the WTO
are full and permanent. It has a system for rapid settlement of disputes, which
prevents the blocking of decisions’ (Cihelková et al. 2001:61). It also has a larg-
er area of competence, which was provided during the Uruguay Round.
The WTO has a number of critics too, often showing their opposition
through radical measures. Indeed, almost every meeting of the WTO repre-
sentatives is accompanied by ‘anti-globalists’ riots’, but it is also quite clear-
ly condemned by some professionals and academics. In this context, there-
fore, we shall take a few lines to define the concepts which are subject to
significant misunderstandings. The WTO is an organisation that promotes
the reduction of barriers to world trade. It is therefore a liberal organisation
in principle, which aims to create a supportive environment to maximise
the global division of labour through trade and investment. This allows an
increase in wealth for everyone, although each one to a different degree. As
we have seen earlier in the example of Great Britain and its gunboat diplo-
macy in the 19th century (see Chapter 2), a mercantile criticism of this effort
claims that major economies may use their momentary authority to enforce
liberal principles that allow them to maintain the status quo. In other words,
for instance, the WTO promoting a reduction in tariff barriers to trade for new
industries in a developing country that is not yet able to compete, may result
in the liquidation of the particular industry.
Even assuming the validity of this criticism, the alternatives advocated by
mercantilists can hardly be described as more efficient or equitable. From the
definition of mercantilism we know (see Chapter 1) that it seeks to strengthen
the power of its own country. Since World War II, this tradition has mainly
consisted of ‘comprehensive government handling of the movement of goods,
services, and capital in foreign relations, as well as domestic production sup-
port, in order to maintain a positive balance of payments and to control as
much of the world capital, precious metals, and international trade as possi-
ble. The starting point is the basic concept of power, which is immutable, and
a country either gains or loses its share of the world power. The government
should aim to continue its growth, even if it meant an economic slump for all
involved. With regard to the Japanese economic system and the trade policy
of China, some speak of neo-mercantilism’ (Evan 2010:32).

The most tragic consequences of liberal market rejection can be seen in the
‘strategy of self-sufficiency’ (autarky). A good example of self-sufficiency in the
Cold War period was China in the 1950s and 60s. Its isolation was the result of
an economic embargo imposed by the United States and its allies after China
had parted, even with the Soviet Union, during the Cultural Revolution. In
their absurd attempt to increase self-sufficiency in steel production, for exam-
ple, the Chinese communists constructed thousands of small blast furnaces
‘in every village’. This mission led to huge waste and produced desperately
poor quality steel. This instance perfectly documents that specialisation and
the global division of labour yield economies of scale, superior technology,
and efficiency. Self-sufficiency in turn leads to low quality, inefficiency and
poor technology. Self-reliance is also mentioned as a fundamental objective
of the common EU agricultural policy. Even against some stiff competition
this is the worst economic policy of the EU that yearly costs almost half of
the joint budget, even after forty years of reforms. It blocks a significant part
of the European workforce and economic resources within a sector which,
when compared to the rest of the world, has been uncompetitive for nearly
a century. Self-sufficiency almost always leads to economic primitivism and/or
a huge waste of resources belonging to the state where applied. Historical
examples are numerous. Ever since China left its isolation and abandoned
the idea of self-sufficiency in the 80s, it has experienced a massive increase
in trade, which, together with pro-market oriented reforms, has led to three
decades of double-digit economic growth. Its ideological companion, North
Korea, has not left the idea of self-sufficiency even after the end of the Cold
War, which has been one of the causes of repeated famines. The inadequacy
of the self-sufficiency policy and its disastrous economic results can only be
tolerated in times of war, when few other options are available. This is one of
the reasons why countries applying this policy often give the impression of
constantly being threatened by war or calamities of similar extent.
Only a very few countries rely on self-sufficiency. Many countries, howev-
er, want to adapt international trade to their terms and conditions, and use
various strategies of manipulation, in order to encourage domestic production
and protect it from the pressure of world markets. This policy is called pro-
tectionism. In principle, all protectionist policies are opposed to liberalism,
whose primary objective is to eliminate these protectionist practices from
world trade. The most cited reason is the protection of a new industry. An
example might be the development of the automobile industry in South Korea,
where the government encouraged consumers to buy domestic cars. In many
present-day developing countries it is the textile industry which the govern-
ments protect, because they consider low capital intensity best for the future
development of their country. Another motive may be protection in times of
crisis. During the oil crisis, the U.S. government protected the U.S. automobile
industry from Japanese competition by import quotas and loan guarantees,
until the crisis had passed. By then, American manufacturers were able to
– 78 –
offer efficient small cars, which were the market segment the Japanese indus-
try had dominated before. Similarly, ‘scrappage’, appropriating a part of the
cost of a new car to the consumers who have their old vehicle scrapped, was
designed in times of the financial crisis of 2007–2009, not only to help the
German economy, but also the automobile industry.
Another reason to protect an industry is its claim to be of vital importance
to national security. ‘In the 80s, U.S. officials sought to protect U.S. electron-
ics and computer industries against being driven out of business by Japanese
competitors, because those industries were considered crucial to military
production. A government-sponsored consortium of U.S. computer chip com-
panies called Sematech was formed to promote the U.S. capability to produce
chip cheaply (ordinarily the government would discourage such a consorti-
um as an antitrust violation)’ (Goldstein 2006:314). Generally, millennia old
reasons are named for self-reliance or protectionism in the name of national
security such as to be self-sufficient in production of vital items (food, cloth-
ing, energy, weapons). Leaving aside the fact it is not possible to any but most
primitive countries to achieve this state of affairs, it is also reducing mutual
trust and reliance achieved only through foreign trade and investment thus
making war, which is trying to prevent by claiming its readiness to it, more
likely. While good shape of country military and warehouses full of provisions
are reasonable precautions, it is liberal view of national security proven by
centuries of human history that free trade decreases likelihood of war while
protectionism increases it.
One reason for protectionism may also be the use of protectionist policies
by a competitor on the world market. One of those policies could be ‘predatory
pricing’, where one of the competitors, possessing good capital stock, which
is often supported by governmental or quasi-governmental finances, tries to
obtain a large portion of the world market, or even a monopoly, by a dramatic
price decrease so as to benefit from its attained position after the prices have
been raised again. This policy is usually combined with the method of ‘dump-
ing’, i.e. reducing prices below the cost of production. The obvious problem
with the determination of dumping is the difficulty of determining production
costs, since all that is available is the manufacturer’s data. In other words, it
is basically impossible to say whether the price of imported goods is dumping,
seeking to flood the local market, or whether it is only a case of effective pro-
duction and healthy competition. Generally, the complaint of dumping is often
abused. The anti-dumping measures of the European Union could serve as
an example. Any manufacturer, who feels aggrieved by cheaper imports from
countries outside the EU, may file a complaint with the European Commission
to initiate anti-dumping proceedings. According to some sources, as much as
25% of all submitted applications are deemed eligible. The EC responds with
an anti-dumping duty up to the difference between the prices on the domestic
and the importer’s markets. In a similar manner, the European Commission
uses anti-subsidy measures to combat states that subsidise their production

or exports. If the affected party appeals, this conflict is often resolved within
the WTO.
The standard protectionist measures are: quotas, customs duties, and
more recently, non-tariff barriers. Probably the worst of these for world trade
have always been quotas. They are harmful in virtually any sector of society;
nevertheless, their negative impact on the economy and international trade
in particular, has been proven many times. The quota acts as a limit on the
maximum amount of goods that a country can export to other countries. After
its exhaustion, it is no longer possible to import any goods unless prohibitive
duties start, e.g. a 100% customs duty. Despite their harmfulness, quotas have
been and still are used by many states. The United States government used
them against Japanese vehicles in the 80s, when the U.S. automobile industry
was dramatically losing in competition with those cars. Likewise, the Czech
Republic was given quotas on steel and other products before entering the EU.
In both cases, the quotas had been negotiated, i.e. declared as voluntary, after
the Japanese and Czechs had accepted for various (political) reasons the fact
that their export to the target countries would be limited.
The simplest trade policy is the tariff. On the basis of the price or another
technical specification, difficulty to change (e.g. engine capacity), a unit fee
is determined which must be paid before the goods are sold on the import
market. Tariffs may not only reduce imports and thus balance the payments
of the country where applied, but they can also become an important source
of income. This is the case of the EU, for instance, which has been a real labo-
ratory for protectionist measures. As for the European Commission, customs
duties on the import of industrial products from third-party countries belong
to the ‘exclusive’ or ‘independent’ sources that automatically flow into the EC
budget. The application of duties is therefore independent from the decisions
of national governments. Member states just levy the duties on behalf of the
EC, and they actually keep 10% to finance their customs administration. This
sheds light on why a further reduction in tariffs in the EU may run into strong
resistance from the EC.
The third important group of protectionist measures are subsidised state
loans, or guarantees for such loans, for exported goods or balanced invest-
ment units. Loans can sometimes take the form of non-refundable grants or
tax relief if the company or industry faces strong competition from abroad.
Both the EU and the USA have used these methods, namely to support their
agricultural products. Also, in the Czech Republic there is the Export Guaran-
tee and Insurance Corporation (EGAP), which is a national instrument for the
promotion of exports.
Recently, since the GATT / WTO finally allowed a reduction in customs
duties, mainly on industrial products after decades of intensive negotiations,
many countries, determined to apply protectionist policies at almost any cost,
resorted to ‘non-tariff barriers’. These states apply various restrictions and
controls which make it difficult to get the goods onto the market and to the
– 80 –
consumers, although they have been legally imported. Bureaucratic barriers,
under various pretexts, lengthen delivery periods or disable getting parts of
the manufacturing process to a specified location at a specified time. Environ-
mental protection and labour market regulations are often cited or otherwise
the goods fall short of health and safety regulations. These disputes again
come before the WTO. The objective of the defendant (i.e. protectionist) state,
however, is often to hinder particular products from accessing a certain mar-
ket at a specified time. This goal is often achieved, though after several years
of negotiations the WTO will eventually decide against the protectionist state.
Finally, one’s opposition to free trade can be expressed purely on a volun-
tary basis. It is called economic nationalism, where citizens are encouraged
to buy goods of domestic origin by various groups. Particularly well-known
examples have been mentioned in the world press. The famous boycott of
Israeli goods during the fights in Gaza or the rejection of French goods by
American citizens (the so-called ‘freedom fries’ instead of French fries) at the
time of the American occupation of Iraq. Even in peacetime, millions of people
believe that buying domestic goods is to their advantage. These trends are
further strengthened in times of economic crises, as governments help busi-
nesses with a low proportion of foreign capital.
Basically, all protectionist measures may help the domestic industry in the
short term, and are always harmful to consumers (though they join the protec-
tionist measures voluntarily). In the long term, the protection becomes addic-
tive for the domestic industry by not forcing it to restructure or carry out oth-
er necessary changes. In addition, the arbitrary decisions of the government
thereon are always at the mercy of a multitude of interest and lobby groups.
3.3 THE PAX AMERICANA AND

THE SECOND WAVE OF GLOBALISATION
The previous subsection outlined the institutional basis of the post-war devel-
opment of the world economy. This development was largely different from
previous developments because the world was now being formed by two new
superpowers – the major victors of the war – the United States and the Soviet
Union. While the Soviet Union did not play a major role in the economic coop-
eration of the free world (on the development of the economy of the Eastern
bloc and its collapse, see Chapter 4), the United States became its most impor-
tant centre. Therefore, this chapter and some of the next ones will especially
observe its method of development and the ‘Pax Americana’.
The weakening of Western European economies, together with the occu-
pation of Japan after WWII enabled the U.S. multinational companies to aim
in these directions too. The nature of those investments, however, was com-
pletely different from the practice of the nineteenth century (see Table 3.5).
Americans invested directly. No displacement of the population took place,

only the management tips moved; for multinational companies, the objective
of investment was to gain control over entire areas of the economy in a for-
eign country. ‘These direct investors in foreign countries were more akin to
companies of the mercantilist era than the free traders and financiers, who
dominated Britain in the nineteenth century’ (Gilpin 1975:11).
Table 3.5: Summary of foreign investment in the 19th and 20th centuries
Investment British foreign investment U.S. foreign investment

typology in the nineteenth century in the twentieth century
Investors banks, individuals, corporations
the bond market
kind of investment portfolio, loans direct
branch mining, agriculture, transport industry, mining
(particularly petroleum), trade
main motivation local opportunity global corporation strategy
for immediate profit
investment Europe, United States, land Europe, Latin America, Canada,
location resettlement (Australia, Canada) Middle East (petroleum)
migration supported mass migration corporations management
Source: Gilpin (1975)
The disintegration of the global economic system after the Second World
War was almost complete. Some authors even speak of two independent
waves of globalisation; albeit their timing is not agreed upon, (refer to Fig-
ure 3.2 describing the timing of Jones). As for the first one, which was based
on acquiring resources and building infrastructure due to the war effort and
post-war nationalisation, not much has been left of it. Huge economies, such
as China after the Communist victory over nationalists of Chiang Kai-shek
(1887–1975), and to a large extent, India after the Indians had gained inde-
pendence from Great Britain in 1947, insulated themselves from the global
economy after the war. Thus they followed the economy of Soviet Russia
which had been isolated from the world economy in 1917, and after World
War II preferred separate economic relations with its new satellites in East-
ern Europe within the COMECON (Council for Mutual Economic Assistance)
which was formed on 8 January 1949 as a counterweight to the Marshall
Plan. All of these economies, often inaccessible at that time, were striving
for self-sufficiency and enclosed with high tariff barriers and which the lead-
ing countries of the first wave of globalisation (especially Great Britain and
France, but also the USA) had formerly made significant investments in, were
now destroyed by war or nationalised. At the same time, barriers to the entry
of new foreign investors had grown in many countries after the Second World
War. All of that had an obvious negative impact on the scale of integration of
the world economy.
– 82 –
First global economy Disintegration New global economy
(1880–1929) (1930–1980) (1979–...)
Beginning of
new global economy
(1950–1979)
MNEs and cross-border integration
1880 1914 1929 1950 1979 2005
Source: Jones (2005)
‘The first Asian tigers, such as Japan and South Korea, whose followers are
huge recipients of foreign investments today, or for example, even the post-
war Germany, had never been aware of the concept of foreign direct invest-
ments. They achieved their success mainly thanks to credits and accumula-
tion of capital based on a strong reduction of consumption’ (Evan 2008:22).3
The development of the post-war German economy has been repeatedly
described as Germany’s economic miracle. ‘In 1945, Germany was divided into
four occupation zones. Americans were opposed to the continuation of the
war economy principles and, fearing Soviet expansion, supported the estab-
lishment of the Federal Republic of Germany along with the liberalisation pro-
gram of the Federal Minister of the Economy and later Chancellor, Ludwig
Erhard (1897–1977). Firstly, a monetary reform took place in 1948, and then
Erhard launched the economic reform’ (Stellner 2006:91). Ample finance for
the reform in Germany was secured by the Marshall Plan, so investment could
flow to virtually all aspects of the economy.
3.4 DECOLONISATION AND ITS IMPACT

ON THE WORLD ECONOMY
The Great Britain, seeking to maintain its superpower status after the war,
found itself in the ‘austerity years’. There was no way to finance the huge Brit-
ish war costs, combined with its extensive international commitments after
the loss of India. Also, the war debt of the British government to the United
3 For post-war development in Japan, refer to Chapter 5.

States was enormous. Apart from the financial difficulties, the colonies were
now viewed very differently by the British, as well as other European colonial
powers, compared to the times prior to World War II, or even before 1914.
European empires were based on quid pro quo, or possibly misbalanced mutu-
al benefit between the metropolis and the local elites. In times of difficulties,
however, the metropolis had to be self-confident and self-righteous, believing
that their superiority was not only technical and military, but also spiritual
or at least moral. This belief allowed them to act toughly in times of trouble.
However, the horrors of World War II had not only destroyed the complacent
arrogance but also the willpower to keep empires.
The final end to the British power position came with the Suez crisis. The
proclamation of the State of Israel in 1948 and the defeat of Arab intervention
gave birth to a nationalist response in Egypt, where a young army officer,
Gamal Abdel Nasser (1918–1970), came to power in 1952. The British, who
until not long before had possessed a significant influence in Egypt through
the pro-Western king, suddenly lost all their positions. This was manifest-
ed in 1956 when Nasser, without any prior consultation or compensation,
nationalised the Suez Canal Company, which had not only been an important
symbol of Western supremacy in the developing world, but which had also
had a substantial economic influence on Egypt. Together with the French and
Israelis, the British invaded Egypt. To the great surprise of the three powers,
the Americans sided with the Soviet government and forced them to evacuate
Egypt. Besides the great humiliation of the British and French, it had addition-
al political and economic consequences.
Since 1957, the whole British Empire has been gradually decolonised
with varying degrees of independence within the British Commonwealth
of Nations. The failure of the Egyptian campaign also meant the collapse
of French power in Africa. French President Charles de Gaulle (1890–1970)
offered independence to many countries of black Africa, on condition of their
participation in a French version of the Commonwealth. The reward for not
breaking all ties with France would be French economic assistance. Although
in many countries, decolonisation took place without violence, French Algeria
was a very important exception. Algeria had been declared an integral part of
France where three million French settlers were living. The war for independ-
ence in this petroleum-rich country brought about unimaginable brutality and
excesses on both sides, lasting practically from 1956 to 1962. To resolve the
conflict in Algeria, which was threatening to escalate into an entire national
tragedy, the French elite recalled the first post-war French President General
de Gaulle, after twelve years of seclusion. He held a referendum on strength-
ening presidential powers in autumn 1958. A significant change in the con-
stitution thus ended the fourth French Republic and marked the beginning
of the presidential system of the Fifth Republic. As a hero of the First World
War, and the founder of the Free French, saving the honour of France during
difficult times of defeat and occupation while the majority of the nation was
– 84 –
collaborating with the Germans during the Second World War, de Gaulle had
sufficient credit to allow him to order a withdrawal from Algeria. The Gen-
eral calmed the domestic situation and strengthened the international posi-
tion of France; however, he complicated the international political situation
of France by departing from a friendly relationship with the USA. Efforts to
strengthen the confidence and restore the superpower status of France were
not realistic and to some extent threatened the European integration process
(see the next section).
Besides India (1947), an overwhelming majority of other states on the Asian
continent won their independence. ‘In 1946 the Philippines declared inde-
pendence from the United States, in 1948 Burma acquired sovereignty from
Britain, in 1949 Indonesia from the Netherlands, and in 1954 Laos, Cambodia,
and Vietnam from France. Except for Singapore, which exited the Malaysian
federation in 1965, all of the states of Indochina were characterised by high
levels of illiteracy, an agrarian economy (although, for example, Indonesia’s
economy was also based on rich petroleum deposits), poverty, high population
growth, political and economic instability, manifested by recurrent religious
and ideological clashes and bloody dictatorships, often of communist origin.
The strong influence of communist ideology in the region caused not only
a strong engagement of the Soviet Union, but also an attempt to face this
threat by the United States; the U.S. attack on Vietnam has become one of
the most famous symbols of the Cold War’ (Stellner 2006:113). At one point,
Americans had 550,000 troops in Vietnam; however, their inability to destroy
the armed forces of North Vietnam, even by the most devastating air strikes,
led to their withdrawal and eventual defeat in 1972. The American-backed
quasi-democratic South Vietnam was then annexed by communist North Viet-
nam, which became a trauma that the USA was recovering from until the end
of the Cold War.
Similar to Asia, ‘strong men’ brought victory in their nations’ struggles for
independence in Africa. That often led to decades of brutal dictatorships or
civil wars (e.g. the Second Congo War where by 2008, in the war and its after-
math, 5.4 million people had been killed mostly from disease and starvation).
Such an environment is completely inappropriate for economic development.
The tyranny, incompetence, and ignorance on the part of many African lead-
ers allowed, or to some extent reinforced, the dominant role of the former
colonial powers in various states. Most African countries soon accumulat-
ed huge foreign debts which prevented them from achieving any significant
economic development. Economically, most countries failed to participate in
the international division of labour and their development stagnated; in sig-
nificant number of cases, citizens of those new independent states had worse
standards of living than under colonial rule. Within approximately thirty years
after World War II, the map of the world had completely changed. The new
countries became known – by the term of the French demographer Alfred
Sauvy (1898–1990) – as ‘the third world’.

3.5 EUROPEAN ECONOMIC INTEGRATION
IN THE 1950S AND 60s
The discord among the Allies (the USA and Great Britain on the one side,
and the Soviet Union on the other) was already quite obvious during the
conferences in Tehran and Yalta, in 1943 and 1944 respectively. The relative
weakness of Great Britain and thus its war contribution to the Allies’ cause
meant that Winston Churchill’s ideas were ignored by the US Administration
on quite a few occasions, including his efforts to invade Mussolini’s occupied
Balkan states in order to prevent Stalin’s domination of Central Europe, or not
to put any conquered territories of Germany under Russia’s charge. Needless
concessions were therefore offered to the Soviets who eagerly seized them
on every occasion. The threat of Nazi Germany was gone, and yet another
war started. Churchill’s famous speech to an American audience at Fulton
University in March 1946 truthfully described what had become fairly visi-
ble. The Cold War had divided Europe into two blocks, separated by an Iron
Curtain.
European economic conditions were the worst that they had been in gen-
erations; its massive centuries-built empires were crumbling at an unprece-
dented pace. Europe was weak, not only having lost many of its old historical
cities behind the Iron Curtain, but the Continent had also been divided in
many aspects. The thriving social movement and labour unions (Churchill’s
Conservative Party lost the elections to the Labour Party while he was attend-
ing the Potsdam international conference in 1945) combined with the popular
Communist parties in West Europe, namely France and Italy. For long months
it seemed Communists would win the civil war in Greece (1946–1949). Several
countries were littered with immigrants, driven from their homes. In Germany
alone, more than 13 million refugees from the East were forced to resettle in
a split and significantly reduced country, occupied by the Soviet Union, Great
Britain, the USA and France. Therefore the fast economic recovery in Europe
in 1945–1968 is rightfully considered a miracle, or called the European eco-
nomic renaissance.
The great help of UNRRA to Europe, the Marshall Plan, and the member-
ship of European countries in economic institutions, described above, were
crucial in the first phase of the European reconstruction. But it was Winston
Churchill again, in his speech in Zurich in September 1946, who contributed
a strong impulse to the idea of the unification of western countries under
what he called the United States of Europe. Coming from the realistic school
of thought in international relations, he suggested a Franco-German part-
nership as its core. However, he did not envisage the participation of Great
Britain in this project, which – as he was hoping – was still able to sustain its
Empire and remain a great power in her own right. Such an idea would remain
potent in Britain for the following two decades, making any early participa-
tion of Britain in European integration almost impossible.
– 86 –
The first truly European organisation was born out of the post-war efforts
of non-governmental organisations, among which the Union of European Fed-
eralists was probably the most influential one. At its congress, the organi-
sation agreed upon a document which institutionalised the cooperation of
European states in political, cultural, and economic fields. This resolution was
presented to European governments in 1948 and in May 1949 it was signed by
ten member states, including the UK, to establish the Status of the Council of
Europe. All security and military issues were explicitly dropped from the doc-
ument, so as not to cast doubt on the exclusivity of the North Atlantic Alliance
(NATO), which came into being in April 1949. The Council of Europe consist-
ed of two rather diametrically opposed bodies. The Committee of Ministers
became dominant with the right to veto any proposal from the other advisory
body which was called the Parliamentary Assembly. This development was
a result of a sceptical British standpoint in European integration, which had
been based on supranational institutions. The UK’s influence was still strong
enough to block any loss of national sovereignty, but it also naturally pre-
vented any deeper integration whatsoever. Despite the fact that the Council
has become a rather large organisation, currently consisting of 47 member
states, its tasks were gradually limited to cultural, social, and legal issues.
These include the European Convention on Human Rights (since September
1953) and the European Court for Human Rights (since 1959) to support the
Convention.
As the Council of Europe had become a ‘dead end’ for the federalists and
the true integration of Europe, other avenues needed to be explored. On 1 July
1948, the Netherlands, Belgium and Luxembourg created a tariff union. How-
ever, though culturally and economically very close and already intertwined,
these three states experienced some difficulties as large numbers of non-tariff
barriers still existed and border controls had to continue operating. In Scan-
dinavia, the Joint Nordic Committee for Cooperation was created with similar
tasks in February 1948, i.e. to decrease tariffs and to create an external com-
mon customs tariff. However, the Committee’s proposals were not accept-
ed due to general fears of the Swedish economy’s domination, as it was the
most robust in Scandinavia. A handful of other initiatives for various degrees
of political and economic integration were considered, as it was the general
consensus of politicians, NGOs, and citizens that integration was a possible
solution to prevent future military conflicts.
The worst consequences of the war had been overcome within five years of
its end. Thanks particularly to the Marshall Plan, European economies were
growing, the communists had lost most of their political power in western par-
liaments, as well as the civil war in Greece, and social conflicts had been sig-
nificantly reduced. The decrease of tariffs under GATT had also yielded some
initial successes. It took time, however, before the American administration
started to lose its accommodating attitude towards the Soviet Union – a lega-
cy of the late President Roosevelt’s term in office – as President Harry Truman

(1884–1972) and the Secretary of State, Dean Acheson (1893–1971), sought
to limit Moscow’s sphere of influence. The Truman Doctrine of containment
to stop the spread of communism put American foreign policy in line with
Churchill’s speech in Fulton. The Cold War had truly begun as international
tension grew steadily, particularly in Asia, where the People’s Republic of Chi-
na was created in September 1949, and on the Korean Peninsula the Cold War
escalated into a regional hot war (1950–1953). These events, together with
a European squabble over the distribution of the Marshall Plan, threatened to
cause the American administration to redirect its attention outside of Europe
before any real economic cooperation had even begun.
It was under such circumstances that several French high officials came
to the conclusion that a generally acceptable French initiative was needed;
otherwise the momentum would be lost completely, and thus the French
sphere of influence over European relations would diminish. France, as one
of the four Allies – albeit the weakest – was in a very good position for such
a step, being able to offer up a partnership to Germany, whereas Britain was
unwilling to do so for reasons described above. Jean Monnet (the head of the
French Planning Commissariat, born in 1888 and died in 1979), the author of
the proposed plan, focused on coal and steel. These two commodities and the
German area of production, the Rhineland, or rather the French dependence
on imports from this area, had been a French nightmare ever since the mid-
19th century. It could be said that the means of German militarism had come
from this area, such as the heavy weapons produced there, which had been
used against France in three wars over a span of 75 years. The French were
naturally worried by German heavy industry and wanted to gain as much
control as possible; ideally, to get permanent access to German coal from
that area. Monnet introduced his plan for a European Coal and Steel Com-
munity (ECSC), effectively putting together both the German and the French
sources of the two commodities, to French Minister of Foreign Affairs, Robert
Schuman (1886–1963). He fully supported it to such an extent that the plan,
which effectively started European integration, is now called the Schuman
Plan. The German reaction was positive, as it perfectly matched the policies
of government of German Chancellor Konrad Adenauer (1876–1967). Apart
from the obvious aim to reunify their divided country, the Germans wanted
something that a less than generous mind would describe as a reintroduc-
tion to the human race after the atrocities they had committed during the
war. Therefore, they were willing to take part in almost any sustainable inte-
gration project, particularly if it would transform their relations with their
long-standing enemies, such as France. As soon as the American Adminis-
tration was positively inclined to the peaceful integration of European coun-
tries, the last German condition had been fulfilled, and Germany agreed to
the plan. Britain and Scandinavia refused to participate. The UK’s traditional
objections had combined with its unwillingness to share control of the still
important coal industry. Four other countries applied for membership, each
– 88 –
following its own national interests. The three countries of the Benelux had
learned over the course of history that a good German-Franco relationship
was vital to their well-being. The motives of Italy were similar to those of
Germany, as it tried to shake off its fascist past and military defeats. The
Treaty of the European Coal and Steel Community was signed in Paris in
April 1951.
The ECSC was the first real European economic integration project, but
it also offered an experiment as to which political arrangements are and are
not possible among European countries. Its economic impact was, however,
rather modest due to the fact that while the mutual trade of coal and steel
increased significantly, several countries, most notably France, successfully
blocked the free trade in these commodities well into the 1960s. In 1959, the
surplus of coal in Europe combined with the ECSC unwillingness to respond
to it almost led to the collapse of the organization, which lost much of its
prestige. Generally, the road to free trade in Europe proved to be more difficult
and time consuming than expected, and supranationalism was not taken up
smoothly by the governments and citizens of Europe.
Nevertheless, the ECSC must be considered a success, since quite a few
integration projects had failed. We do not have the space to describe them in
full; but let us name just some of them. In 1950, the French Minister of Foreign
Affairs René Pleven (1901–1993) proposed a plan for the European Defence
Community (EDC) as a reaction to the American demand for rearming West
Germany in order to strengthen European defences during the Korean War.
After vigorous disputes and many compromises, the EDC treaty was signed
in Paris in 1952 by Belgium, France, Italy, Luxembourg, the Netherlands, and
West Germany. However, the Treaty never came into effect, because in 1954
the French Parliament did not ratify it due to their fear of German military per-
sonnel domination within the proposed European army (most of the French
army being posted in Indochina at that time). To strengthen the common for-
eign affairs of member states, the European Political Community (EPC) was
to encapsulate the ECSC and EDC. Due to the problems with the ratification
of the EDC treaty, this initiative likewise did not materialise. Similarly unsuc-
cessful was the project for Western European Union (WEU) which aimed to
integrate West Germany and Italy into a western defence mechanism, but it
succeeded in doing just that. The German and Italian armies became part of
the WEU, which in turn became part of NATO. Thus, the high hopes for Euro-
pean integration in the fields of foreign and defence policies did not material-
ise; the only functional defence project remained the transatlantic initiative,
namely NATO. Finally we must not forget to mention an ultimately unsuccess-
ful effort by Britain to create an alternative to the ECSC (and the European
Economic Community – EEC, as described later) in the form of an organisation
which would establish a free trade zone. In 1960, seven countries (Great Brit-
ain, Sweden, Norway, Denmark, Switzerland, Portugal, and Austria) unwilling
to join the EEC with its political and social integration, created the European

Free Trade Association (EFTA). Though successful in increasing the volume of
trade among its members, the organisation could not compete with the much
larger and more influential EEC. Once Great Britain had decided to join the
EEC, the development of EFTA virtually ceased.
The second half of the 1950s brought some relief to Europe. The fact that
the Soviet Union had become a third nuclear power in 1949 (after the USA and
UK) did not lead to a nuclear war for the time being. The Korean War was over,
one of the worst dictators in human history, Joseph Stalin, was dead, and thus
nuclear war seemed even less likely. Also, a peace treaty signed with Austria
in 1955 meant the country remained democratic without Soviet influence. On
the other hand, Great Britain and France realised after the Suez Crisis that
their empires were gone and both countries were therefore more focused
towards European affairs. France struggled in Algeria (see chapter 3.4), pain-
fully realising the loss of its great power status and trying to make up for it by
becoming a nuclear power.
Despite the many failures in integration efforts, the tireless Jean Monnet
came up with a new idea before his tenure as the head of the ECSC came
to an end. Trying to extend the integration in the coal and steel industries
to other sectors, he ultimately chose the dynamically growing industry of
nuclear energy. When consulting with the Benelux countries, he suggested
aiming even higher to form a complex European economic union. When Euro-
pean governments were presented with both sector integration in the field
of nuclear energy and economic integration, including a customs free zone
and single market, their reaction could already be anticipated. From the very
beginning to this day, France has wanted more protectionism; being sceptical
of free trade and well aware of its industries’ lack the competitiveness com-
pared to its partners and therefore staunchly defended its national industries,
particularly in agriculture. The Dutch would defend rather the opposite ideas
of free trade, equal treatment of all and fiscal responsibility. (West) Germany
would take part and finance any integration project where it could be seen as
a solid and respectful partner, focusing on practical issues and sustainability.
The same concerns, aims, and a narrow self-interest may be observed even
today.
The outcome of the ministers of foreign affairs’ meeting in Messina, Italy,
in June 1955, however, was positive. The ministers agreed to establish a Euro-
pean organisation for the peaceful use of nuclear energy and the European
Investment Fund, which would provide assistance to less developed Euro-
pean regions and to introduce a common market, and Britain was invited
to join. On the other hand, the unification of social policies and a common
agricultural policy, originally agreed upon in theory, would become a prime
source of future discord. France was particularly interested in the European
Atomic Energy Community (EURATOM) in order to control Germany’s nuclear
ambitions, while its aims to become a nuclear power itself would have stayed
unchecked. The French did not care at all about the common market, whose
– 90 –
main proponents were the Dutch leaders, but tying these two issues togeth-
er facilitated their mutual agreement. Despite fierce opposition, France also
managed to connect its overseas territories to the common market and thus
make them eligible for development funds, financed by all six future members.
In that way, it managed to secure political influence over its former colonies.
After ten months of intensive work and negotiations the founding treaties for
both the European Economic Community and EURATOM were signed in Rome
on 25 March 1957. Britain did not join.
While the first problems of the British Empire were already revealed dur-
ing its heyday of Queen Victoria’s reign (lived between 1819 and 1901) and
became obvious after World War I, the heroic fight and unity of Britain and her
colonies during World War II muddled the picture for a few short years. The
independence of the ‘Jewel in the Crown’ in 1947, and ultimately the Suez
Crisis in 1956, finally made everyone realise that Britain was in Europe and
the British Commonwealth was no replacement for the British Empire. How-
ever, the British government still needed to grasp the necessity of integra-
tion, which was brought about by the American administration of Presidents
Dwight David Eisenhower (1890–1969), and later on John Fitzgerald Kenne-
dy (1917–1963). Negotiations started in October 1969, but were blocked by
France under Charles de Gaulle twice. France rightfully concluded that the
negotiations with Britain and other ‘free trade’ countries over various policies
would shift against French interests. De Gaulle publicly announced that Brit-
ain would join the EEC only over his dead body. And so it happened. The UK,
together with Denmark and Ireland, became members of the EEC at the begin-
ning of 1973, two years after the General’s death. De Gaulle, a romantic nation-
alist at heart, was destructive for European integration in several ways. He
vetoed a majority rule within the common market and blocked any hopes of
further supra-nationality. He also developed France’s own nuclear weapons
and withdrew from NATO’s integrated military and leadership structures,
which he considered dominated by Americans. Thus, throughout the 1960s,
the EEC thrived economically, but integration in political or social affairs was
very limited.
There has been one outstanding issue until this day, important both eco-
nomically and politically to Europe, as well as the countries it traded with –
the Common Agricultural Policy (CAP, see also chapter 5.1.3.). The policy was
deliberately framed in a very general manner in the Treaty of Rome, as an
agreement on anything meaningful was impossible, given the short time avail-
able before the Treaty was signed. France was the main proponent of protect-
ing agriculture, since it is sometimes hostage to its farmers lobby. More than
20% of its total workforce was employed in agriculture in the 1960s; a rather
complex system of state subsidies of agricultural products along with exports
of agricultural goods was in place as well as direct payments to farmers. All
of that, together with the presence of French agricultural products all over
the world, resulted in relatively high prices for consumers. The situation was

different in Germany, which had historically lower yields due to its climate,
and was less efficient, since German farmers had significantly smaller farms
on average. Imports of much cheaper products were monopolised in order to
keep prices high and protect domestic production. Britain, to name just three
countries with three different models, allowed prices to drop to the level of
world prices, while subsidising domestic producers en mass. When discus-
sions over the practicalities of common agricultural policy started in 1958,
great disagreements ensued. Participants, however, agreed that an internal
market had to be protected from outside competition and they would strive
for autarky (for the negative impacts of autarky see chapter 3.2). Both regu-
lated prices and the artificial organisation of an agricultural market were to
be used as tools. It took four years before negotiators came up with the first
workable set of tools. As compromise usually suits no-one, the compromise
in common agricultural policy meant an amalgamation of the policies of all of
the member states, creating sets of rules which have been subject to constant
reform up until today. Even the proponents of the CAP cannot deny that it is
immensely wasteful, while Euro-sceptics compare its effects to a local nuclear
war, as this single policy even cost 87% of the EEC budget at one point.
At the beginning of the 1960s, despite all of the above discussed prob-
lems, six EEC member states reached a certain level of institutional integra-
tion among three functional organisations, namely the ECSC, the EEC, and
EURATOM. The member states were willing to create one larger European
Commission and the nucleus of a future European government. A treaty to
merge those three organisations was signed in April 1965 in Brussels. The
European Communities, the new name of the organisation, was given a Coun-
cil of Ministers, a European Parliament, and a European Court of Justice. The
newly created European Commission had 14 ministers. These were, never-
theless, still nominated by individual governments. This development was
perceived as one leading to supra-nationality governed by France. France saw
a danger in both the European Parliament, which wished for more compe-
tences, and the European Commission, which required its own inalienable
source of income. Typically, there was discord over the sources of financing
CAP. France decided to block all important decisions of the EEC by non-par-
ticipation for many months until January 1966, when a compromise was final-
ly reached in Luxembourg. The European Commission was not to claim the
powers of a government but to consult and inform national governments, and
the European Parliament’s competences were not increased and a majority
vote was not allowed. Negotiations over the CAP could continue. Therefore,
despite eventual enlargement, European identity did not overcome nation-
al rivalries during the 1970s and the first half of the 1980s. A new wind of
change blew into European affairs with the Single European Act in 1986 when
the movement of labour, capital, and services strengthened existing free trade
in goods, thus establishing a true single market and rechristening the EC the
European Union (EU) through the Maastricht Treaty in 1993. It needed new
– 92 –
minds in the persons of the German Chancellor Helmut Kohl (born 1930) and
the French President François Mitterrand (1916–1996), to take the lead in
pushing for monetary union and beyond.
3.6 THE WORLD ECONOMY BEFORE

AND AFTER THE OIL CRISES IN THE 70s
With decreasing tariffs and the major role of multinational corporations, the
importance of international trade and particularly the movement of capital
gradually increased, although, according to some authors, in 1979 the total
volume of international investment was still lower than in 1914. It was due
to the vanished costly capital investment of the pre-war period in mining or,
more generally, the acquisition of raw materials. Another significant reason
was the two oil crises (1973 and 1979), whose impact on the international
financial system is described in the section of this chapter on the IMF. Now let
us focus on the causes and consequences of this development for the world
economy in general.
Ever since British warships exchanged coal for petroleum as their fuel,
along with most industries which did the same before or soon after the First
World War, the importance of the Middle East for the world economy and pol-
itics began to grow. To secure the supply of Middle East petroleum, the Brit-
ish created protectorates in the petroleum producing areas, or alternatively
they either installed or maintained positively inclined rulers on their thrones.
Though the Americans did not go that way due to their anti-imperial ethos,
their multi-national companies played a very similar role. These corporations
invested huge amounts into the development of newly discovered petrole-
um resources, which were yielding enormous profits for them from the 20s
up to the 70s. A western petroleum company cartel (the Seven Sisters) was
maintaining petroleum prices, and payments to local rulers were very low by
today’s standards. While the British had given up their territories and protec-
torates (typical for the first wave of globalisation) after the Second World War
as a part of decolonisation, western and especially North American petroleum
companies maintained low petroleum prices until 1973 (typical for the second
wave of globalisation).
In October 1973, Egypt and Syria launched a joint surprise attack on Israel
(the fourth Arab-Israeli War, called the Yom Kippur War). Arab petroleum-ex-
porting countries decided to punish the United States, which supported Isra-
el, with a petroleum embargo. At the same time these countries associated
in OPEC (Organization of the Petroleum Exporting Countries established in
1960) limited their total exports. The price of petroleum thus quadrupled
within weeks. The states of OPEC decided to maintain that for them, the
favourable developments even after the Yom Kippur War had finished, and
the Western world would be forced to pay many times more for petroleum.

The actual embargo was lifted in March 1974 as a result of the ‘oil summit’ in
Washington. OPEC countries use quotas to define their share of the exports of
the entire cartel, a practice which has been applied until today.
The oil shock of 1973 had a huge impact on the world economy. In addition
to the abolition of the Bretton Woods system, as it had been defined in 1944,
and the transition from gold to the IMF special drawing rights, it has had
a major impact on the industry of the Western world. In virtually all countries,
there was so-called stagflation, i.e. a reduction or decline in GDP alongside
a dramatic simultaneous increase in inflation. Since petroleum, which was
an essential input for all transportation and most industries, had now become
much more expensive, companies raised the prices of their products to share
part of their costs with consumers (inflation), while laying off and decreasing
production which was beyond what they could afford (unemployment and
a decline in GDP). The only solution was a gradual restructuring of the indus-
try and the introduction of new materials and technologies that reduce petro-
leum consumption. That was quite a long and painful process.
After 1976, the greatest impact of the crisis seemed to have been over-
come. However, the overthrow of the Shah during the Iranian revolution
in 1979 caused a collapse of supplies from this major petroleum exporting
country, resulting in a further increase in petroleum prices on world markets.
Although the second petroleum shock was not as dramatic as the first one,
unemployment and inflation stayed dramatically high until a further recovery
in 1982.
At the end of the 70s, there were still 19 million unemployed in Europe
alone, therefore some authors refer to this period as the lost decade. At
the same time, they point out that the Arab states had successfully placed
a wedge between the United States on the one hand, which had diversified
its sources and relied on the Middle East for less than 20% of its petroleum
needs, and the European Union with Japan on the other hand, which were
still dependent on Middle East petroleum. This wedge was reflected particu-
larly in relation to Israel where Europeans were forced to hold a more or less
neutral or pro-Arab stance, while the Americans stayed unquestionable Israeli
allies until the presidency of Barack Hussein Obama (born 1961). Western
economies, however, have benefited from their forced restructuring after the
oil crisis. Namely, the automobile industry has redirected to lighter vehicles,
with consumption being one of the basic indicators. The economy as a whole
has become ‘lighter’, having redirected from heavy to electrical and other light
consumer industries and services. General use of composite materials, special
plastics, a faster application of ‘space knowledge’, i.e. the materials and tech-
niques developed for the aerospace industry, has been beneficial to western
economies. The opening of new deposits of petroleum and the expansion of
current ones outside the Middle East (the North Sea, Alaska, Angola, Russia,
and others) has led to still less dependence on Middle East petroleum since
the 1980s, mainly, though not exclusively, for the United States.
– 94 –
3.7 THE ORIGIN OF INTERNATIONAL
CAPITAL MOBILITY – FROM BANKS
TO MULTINATIONAL CORPORATIONS AND FDI
Although the importance of multinational corporations (MNCs) has been
demonstrated several times in specific historical situations, within the Pax
Americana it has been a key phenomenon in the world economy and it is
therefore necessary to define the nature and origin thereof systematically.
A multinational corporation means any manufacturing or trading com-
pany in which the ownership, management, production, and marketing
overlap with multiple states. It can be seen from above how the developed
market economies (DME) governments, influenced by a mercantilist econo-
my approach, may effectively redirect the activities of these companies. The
following is a more comprehensive description, part of which was first men-
tioned in Evan (2010b) of the relationship between governments and multina-
tional companies which aims to find the essence of MNCs’ existence.
Hymer was the first to note (1976) that the existence of MNCs was not
self-evident, and therefore they must have specific advantages over domestic
firms to be able to cover the costs associated with conducting business in for-
eign countries. Along with Kindleberger (1969), he pointed out that the exist-
ence of MNCs was inherently incompatible with the market environment.
They argued that domestic firms would have otherwise gained a competitive
advantage over MNCs in the long term, due to the additional costs those oper-
ations in several states demand. They concluded that if that was not done and
multinational companies were developing well in the long run, it had to be
a case of ‘market failure’.
The sufficiently long-lasting existence of MNCs’ benefits over domestic
firms in the host country has been accepted by economic theory. Many sci-
entific papers deal with the substance therein. Vernon (1972) came up with
the theory of product life cycle, arguing that the decision to invest abroad fol-
lows immediately after market occupation through exports and needs to take
advantage of the MNC’s technological and organisational superiority before it
is lost with the gradual expansion of new technologies and procedures. This
theory was followed by the ‘the ageing contract theory’.
The product life-cycle theory was further extended, for example, to the
case of capital specific to a particular industrial sector (Caves 1982), but in
all it has been criticised (it cannot anticipate when the product will enter the
next phase of its life cycle and only explains investment that replaces export,
etc.).
This theory was later replaced by an eclectic model of international pro-
duction (Dunning 1996). Dunning sees the advantages of multinational corpo-
rations in two areas. Firstly, the benefit of ‘net ownership’ that is easily trans-
ferable and internal to the company. This advantage (trademarks, patents,
technological processes, etc.) is greater than the additional cost of investment

and operation in different countries. It remains important that the company
had full control over this advantage and vice versa, local market competition
could not apply a similar advantage.
The advantage of net ownership is crucial for MNCs and provides the com-
pany with an opportunity to carry out commerce with higher yields and lower
costs when compared to domestic firms. ‘It is undeniable that much of the
foreign direct investment of U.S. multinational corporations use corporate
benefits to achieve extraordinary gains based on patents, technical know-
how, trademarks, etc., which could not be fully exploited through domestic
production and subsequent export or licensing, or by other means’ (Feldstein
1994:5). If an MNC lost this benefit, or if its income was sufficiently reduced,
then it would no longer be able to operate simultaneously in multiple states.
While some of the net ownership benefits are of a purely arbitrary nature (for
example, the conditions of brand registration, patent length, etc.), or based
on the MNC’s monopoly over a given resource (protected or directly provided
by the government of a state) or service, it is also clear that another part of
the benefits (technology, organisational practices and marketing strategies)
becomes obsolete as they become known to a larger sphere of manufacturers.
For some investment methods that happens more quickly than for others. For
instance, reducing the inflow of U.S. foreign direct investment (FDI) to devel-
oping countries in 2003 and MNCs’ simultaneous contracting with local pro-
ducers in those countries was labelled as dangerous for the U.S. economy. US
analysts expressed concern precisely over the fact that the US MNCs might
thus lose their competitiveness if firms from developing countries acquire
their technology. Generally, it can be said that the benefits of net ownership
is associated with an often arbitrary political decision.
This is even truer for another advantage which is the advantage of alloca-
tion. That depends on the nature of the host country, which is external to the
company, and therefore not transferable. The attractiveness of regions can
vary significantly over time and the host state may, to some extent, ‘provide’
the MNC with a favourable environment for investment through incentives,
whether it is providing infrastructure, tax benefits, financial or even regulato-
ry incentives, or weakening the protection of workers and the environment,
etc.
Multinational corporations make decisions about FDIs and its location
once they find an investment opportunity that maximises both types of bene-
fits. Still, for FDI to occur, the profit from these benefits must be greater than
the costs of operations in several countries. An MNC has a range of options
which can be used to penetrate a foreign market. Export is one of the least
binding and has the lowest initial cost, followed by licensing, and franchising.
A joint-venture is more expensive; nevertheless, it offers a higher level of con-
trol, which is even truer of the MNC’s subsidiaries or branches.
Within the Pax Americana, the means of expansion of multinational
corporations is FDI. Foreign investment generally refers to any investment
– 96 –
made by a private company or an individual in a foreign country. The foreign
capital used for the investment may enter into the economy either directly
through input into existing companies, developing new greenfield projects or
joint-ventures, or indirectly in the form of loans or purchases of shares with-
out primary efforts to influence businesses.
An indirect or portfolio foreign investment (FPI) is usually short-term by
its nature; it uses the current market situation and is primarily intended to
provide a financial return. Typically, indirect investment attempts to maxim-
ise short-term profits, avoiding risk by buying small quantities (often well
below ten percent) of the securities of one company, and to have substantial
geographic diversification.
A FDI is more permanent in nature, and aims to ensure control over the
resources, income or supplies of foreign economies. It creates both an eco-
nomic and political relationship between the investor and the government of
the host country.
In terms of the state which the investor enters (a developing economy, but
also a developed market economy), long-term investment is always preferable
because it replaces the missing domestic savings and enables financing of the
restructuring of the economy. If it takes on the form of FDI, it can also imply
other non-financial benefits.
Long-term investment also has a limited destabilising impact on mone-
tary development and the current account deficit. Some authors perceive FDI
inflows directly as a stabilising element that prevents attacks on the currency.
Frankel and Rose (1996) use data from more than one hundred developing
countries to show that a currency crashes4 ‘tend to occur when FDI inflows
dry up, when reserves are low, when domestic credit growth is high, when
northern interest rates rise, and when the real exchange rate shows over-val-
uation’ (Frankel-Rose 1996:21).
For stability of the economy, it is desirable to minimise the proportion of
short-term capital. It uses the difference in interest rates and exchange rates
and may cause a financial crisis by its sudden departure. It is economically
unproductive and increases inflation.
From the MNC’s (investor’s) point of view, what matters is the optimal use
of its advantages for an investment to achieve the greatest possible profit,
which could not be achieved otherwise by different forms of cooperation (e.g.
an agreement with domestic companies, licensing, etc.), or export. Substantial
benefits are based on factors featured by the host country (market size, cheap
labour, free natural resources, etc.). The strategic reasons for investing (new
markets, new product development, etc.) are important, too.
4 The authors define a currency crash as a nominal depreciation of the currency by at least
25 percent combined with at least a ten percent decline in the value of the currency per year.
Concurrently, a currency crash is counted only once in three years in order to avoid repeated
counting of the massive decline within one currency crisis.

The above-mentioned principles imply the complementary positions of
both players. It is obvious that if a multinational corporation decided merely
on the basis of the aforementioned natural factors, and the host country’s gov-
ernment was able to ensure the safety of the invested capital (as well as other
factors, as indicated below), there would be a continuous slow and mainly
uniform circulation of resources around the world – i.e. the absolute antith-
esis of the Marxist system of the advanced core and a dependent periphery
of less developed countries. The reality is different though. The liberal tradi-
tion in FDI remains unfulfilled because 70 percent of FDI is realized between
the European Union (EU), USA and Japan (UNCTAD 1998). It is necessary to
include the position of the investor’s home country in our thinking, i.e. the
developed market economies (DME).
DME countries respond to the existence of multinational corporations in
full accordance with the mercantilist tradition in two different ways. Firstly,
in pursuing their national interest they will not allow world investments to
be allocated by the market, as they would relocate into new areas too dra-
matically. ‘It quickly became clear that the overwhelming proportion of direct
investment occurs among the similar, high-income developed countries, not
between dissimilar countries. “North-north” investment dominates “north-
south” investment even after correcting for income levels and other determi-
nants’ (Markusen-Maskus 1999:3).
To ensure that the investments are diverted, there are systems of incen-
tives for investors, i.e. programs of subsidies for multinational corporations
investing in various countries. These programs have begun to be introduced
even by countries which are still liberal in this regard, as a means of self-de-
fence. The more advanced a state the ‘better’, meaning a larger program for
investors. It is therefore not surprising that the countries of Western Europe
are more active in the use of incentives than other European countries. ‘A sig-
nificant number of governments of developed and developing countries fell
into competition with the others through incentives in order to obtain MNCs’
investments. These investment incentives tend to divert FDI flows in favour of
developed countries, due to their ability to offer essential financial incentives’
(Kumar 2001:16). The advent of investments in some developing countries in
the 80s coincided with the expansion of incentives and privatisation in these
countries.
Secondly, developed countries support the existence and further develop-
ment of their national multinational corporations. This has two effects. The
MNC support by parent states5 results, along with the willingness (or necessi-
ty) to establish extensive subsidy programmes in an increased tax burden, and
thus strengthens the government’s role in the economy; at the same time it
excessively strengthens the MNCs at the expense of other types of companies.
5 For example, the United States allows its multinational corporations to deduct the tax paid to
the government of the place of investment from taxes paid in the USA.
– 98 –
Multinational corporations invest in enhancing their competitive advan-
tages, namely technology, and strengthening their position in the global mar-
ket. That leads to intensified competition and the application of offensive and
defensive MNC strategies. Another effect is the redirection of FDI which flows
from their natural directions back to the developed market economies.
Tab 3.6: Fifteen largest MNCs according to turnover in billions of USD
1971 1996 2005

MNC turnover MNC turnover MNC turnover
General General
1. Motors 28.3 Motors 158.0 Exxon-Mobil 359.0
Wal-Mart
2. Exxon 18.7 Ford 147.0 Stores 312.4
Royal Dutch Royal Dutch
3. Ford 16.4 / Shell 128.3 / Shell 306.7
Royal Dutch British
4. / Shell 12.7 Mitsubishi 127.4 Petroleum 253.6
General Chevron
5. Electric 9.4 Exxon 117.0 Corp 193.6
General
6. IBM 8.3 Toyota 109.3 Motors 192.6
Mobil Mobil Daimler
7. Oil 8.2 Corp. 80.4 Chrysler 186.5
General
8. Chrysler 8.0 Electric 79.2 Toyota 186.1
Conoco
9. Texaco 7.5 IBM 75.9 Phillips 179.4
10. Unilever 7.5 Daimler-Benz 70.6 Total 178.3
11. ITT 7.3 Volkswagen 64.4 Ford Motor 177.0
Mitsubishi
12. Gulf Oil 5.9 Siemens 62.6 Corp. 168.7
British Nissan General
13. Petroleum 5.2 Motor 53.8 Electric 149.7
14. Philips 5.2 Unilever 52.2 Volkswagen 118.6
15. Standard Oil 5.1 FIAT 51.3 Altria Group 97.9
Source: UNCTAD (1998), UNCTAD (2007)
Eventually, the vicious circle of underdevelopment in affected developing

economies expands, as they remain under-capitalised. Venables (2000) in
his recently constituted theory of new economic geography deals with the

optimal allocation of capital proposed that out of the three factors of produc-
tion, only capital is internationally mobile. He concludes that under these
conditions, capital moves fairly close to the original economic centre (DME
countries). Thus, only a group of close-by developing countries, which are
already among the richest ones, can benefit from it, albeit more intensively.
Conversely, the outermost states, usually with relatively lower income, remain
unaided.
As a result, there is high-quality, continuously improved technology avail-
able to MNCs, but also an illiberal system, where the capital and investments
circulate quickly, but unevenly, and almost exclusively among the developed
market economies.
In the 70s and 80s, foreign investments were dominated by banks and
foreign portfolio investment. The most exclusive among them were Ameri-
can international banks that lent money to countries with medium levels of
income. Unlike FDI, which would gradually replace it, FPI is very sensitive
to some overall macro-economic indicators. To avoid a major outflow of FPI
from the target country, the host country must constantly meet the following
conditions:
1. economic growth
2. favourable interest rates
3. stability of the relevant exchange rate
4. portfolio liquidity
5. convenient capital transfer
6. transfer of profits abroad at low cost
4. stable banking system and reserves
5. accounting standards and auditing quality
9. a good regulation of the securities market
The two oil crises, however, did not create a situation which would satisfy
the above-mentioned conditions. Thus capital was rapidly being transferred
from the mainly developing countries that were most affected, which conse-
quently worsened the crises due to a lack of capital. While the influx of FPI in
developing countries was declining, the share of the developed countries in
the total amount of foreign investment was increasing.
The FDI boom over the 80s and 90s had been caused by several factors. The
decreasing costs of technology, telecommunications and computer technolo-
gy in particular helped businesses to invest and operate in several countries
simultaneously. Some areas of the world, such as South East Asia, experienced
massive economic growth, opened up to world investment flows, and began
to subsidise export-oriented manufacturers significantly. The collapse of the
Soviet bloc opened up more opportunities in countries hungry for Western
goods and investment. In the 90s especially, developing countries opened up
to international capital and implemented a relatively extensive privatisation
– 100 –
of state assets. Since then, the long-term average share of FDI in developing
countries has been very slowly, but steadily growing. Furthermore, during
the 90s more states than ever before became, at least formally, democratic
and carried out full or partial economic reforms towards a market economy.
Hence, the world had become a single market to MNCs. These changes have
been enhanced by so called economic neoliberalism approach urging gov-
ernments to reduce deficit spending while decreasing tax burden, open up
markets to trade by limiting protectionism, privatize state-run businesses and
generally deregulate.
In 1997, the flows of world FDI exceeded $400 billion (UNCTAD 1998).
Coherence between trade and investment has increased, as the decision on
the allocation of trade and services has also become a decision on the allo-
cation of investment. The total assets of 450 000 branches of multinational
corporations has reached 13 trillion dollars. Sales of these foreign branches
are growing faster than world exports of goods and services. Branches of mul-
tinational corporations have also participated in one-third (9.5 billion dollars)
of world trade. This can be seen as the share of the public market internalised
by MNCs. The movement of world FDI in the global gross domestic product
(GDP) in 1997 was 21 percent, while the share of world trade to world GDP has
ranged between 40 and 45 percent in the long run (UNCTAD 1998). ‘Global
growth in foreign investment is twice outrunning the growth of international
trade, which has hitherto been considered the major mechanism for linking
national economies. Between 1986 and 1999, FDI grew by as much as 17.7 per-
cent a year, while world trade grew by 5.6 and world GDP only by two and
a half percent a year’ (Evan 2008:23).
The sources of 84.8 percent of FDI flows in 1997 were the developed coun-
tries of Western Europe (46.2 percent), the United States (27 percent), Japan
(6.1 percent), and others. Also, nearly 60 percent of all FDI regressed to these
countries. Adding South-east Asian countries (20.6 percent) to this, we find
that the rest of Asia, Africa, Eastern Europe and Latin America comprised
about 20 percent of FDI flows in 1997 (UNCTAD 1998). Even more unevenly
distributed are the FDI reserves in the world, where the share of developed
countries, together with South East Asia, amounts to approximately 83.3 per-
cent of the total reserves. If we hold on to the liberal tradition, this situation
cannot be reasonably explained.
The fall in FDI in 2001 has been explained in various ways ranging from
radical phenomena, such as the terrorist attacks in New York and the sub-
sequent uncertainty in global markets, to structural problems of FDI, whose
sharp increase had mainly been due to mergers and acquisitions (M&A).
Meanwhile, the M&A level decreased the most, even in the following years.
The overall level of long-term FDI growth has thus attained a less dramat-
ic and probably more sustainable growth curve. Nevertheless, FDI and their
MNC bearers in particular, have been facing an increasing barrage of criticism
from various fronts.

However, the actions of individual governments towards these giants have
been condemned even more than the MNCs’ operation itself. ‘Eyes have par-
ticularly turned to subsidies paid to MNCs, and international contracts with
MNC parent states, often interpreted as a loss of the host state’s sovereignty.
Therefore, unfortunately, globalisation is often rightfully viewed by the cit-
izens of individual countries instead of being a process in which everyone
gains (liberalism), as a process in which one state gains at the expense of
another (mercantilism) or one social group over another (Marxism).’ (Evan
2008:24)
Despite the efforts to reach international agreement, neo-mercantilist state
intervention has taken place. Foreign investment is experiencing growth,
which is motivated at least partly, by the results of government incentives for
investors.
The current economic policy of various countries causes investment to
become a substitute for trade, rather than its complement. We see the replace-
ment of relatively free trade with relatively subsidized investment flows. If
government intervention is not limited, it will unleash a global political debate
similar to the one recorded by historians in various European countries in
the 19th century, during the transition to free trade. Although some authors
have pointed out that MNCs do have ‘competitive natural’ goals even today,
(Markusen 1997) others suggest that as for investment, we are still in the
mercantilist phase, which has lasted well over three centuries (1500–1820)
in the case of trade.
THE CHAPTER SUMMARY

World War II dramatically affected the world’s economy. The United States
became by far the most powerful nation, and launched the era of Pax Amer-
icana. Already in 1944, they were producing more than the rest of the world
combined, and their support was crucial to the Allied victory and their post-
war reconstruction. After the war, the large demand for civilian goods, mainly
in Europe, enabled the U.S. economy to transition to peaceful production and
continue its dominance. The U.S. position resembled the position of Great Brit-
ain after the Napoleonic wars.
In contrast to the situation after the First World War, the United States
did not isolate itself from the rest of the world, but it realised the need for
active aid to the war-torn economies. Humanitarian Assistance to Europe
and other countries came from the USA through UNRRA which was estab-
lished at the newly founded United Nations. In addition, the United States
announced the Marshall Plan, i.e. a program of economic recovery in Europe
in 1947. The distribution of American aid, which had reached 12.8 billion USD
between 1948 and 1952, was entrusted to the newly established OECD, togeth-
er with the Office for Economic Cooperation. This aid was crucial in the first
– 102 –
phase of European economic recovery that is sometimes called a European
economic renaissance due to its speed and effectiveness. The USSR and its
satellites refused the aid and preferred to cooperate within COMECON that
was created in 1949.
The world economy has also been significantly influenced over the long-
term by the emergence of some international institutions. These include the
World Bank, as the investment bank intermediary lending support to eco-
nomic and social development in developing countries. Another institution
is the IMF, which was to become the guarantor of a new international finan-
cial system. The last significant institution was the GATT, called WTO since
1995, whose task is to liberalise world trade by reducing tariffs and non-tariff
barriers.
Multinational corporations, that is companies with ownership, manage-
ment, production, and marketing overlapping with multiple states, have
enjoyed grand importance in world economy within the Pax Americana. They
have expanded through foreign direct investment, a long-term investment
with the aim to control resources, income or supplies of foreign economies.
As such, they have a close relationship with the governments of the host
countries and gain advantage from investment incentives that distort liberal
market and trade, and thus return the world economy to a mercantilist tra-
dition. Decreasing costs of technology, massive economic growth in certain
areas in the world, and the collapse of the Soviet bloc are some of the reasons
for a boom in FDI in the 1980s and 1990s. However, most of the FDI has been
realized between the EU, USA and Japan.
De-colonization also had profound impacts on the world economy. The for-
mer colonies of European states in Africa and Asia gained independence in
the 1950s-1970s and most of them were characterized by high levels of illiter-
acy, the agrarian economy, poverty, high population growth, and political and
economic instability. Some of them, such as Algeria and Congo, experienced
long and bloody civil wars, others, such as Vietnam, became Cold War battle-
fields between democratic and communist states. These countries were soon
to be known as ‘the third world’, failing to participate in the international
division of labour and their development stagnating.
European states saw a few attempts for closer cooperation after the war.
The first organization – the Council of Europe – came into existence in 1949.
However, its tasks were soon limited to cultural, social and legal issues. The
first real European economic integration project came with a French initiative
that led to the European Coal and Steel Community. The Treaty was signed
by Italy, France, Germany and the Benelux states in 1951 and integrated the
coal and steel industries of the member states. In 1957, the same countries
signed founding treaties for both the European Economic Community and
EURATOM that extended and deepened their integration. In April 1965, the
three organizations merged into the European Communities. All of the trea-
ties were a result of hard negotiations and compromises and did not overcome

national rivalries during the 1970s and 1980s. A new wind of change came
in 1986 with the Single European Act that established a true single market,
and in 1993 through the Maastricht Treaty that rechristened the EC to the
European Union.
The world economy was heavily influenced by two oil crises in 1973 and
1979. The oil shock of 1973 lead to the abolition of the Bretton Woods system,
increased unemployment, inflation, and a decline in GDP. However, the West-
ern economies have in the long-run benefited from their forced restructuring.
– 104 –
/4/
The End of the Bipolar World
4.1 EASTERN BLOC COUNTRIES

BEFORE THE FALL OF COMMUNISM
The violent seizure of power by the Bolsheviks in Russia in November 1917
gave rise to the first communist dictatorship in a country with which Ger-
man philosopher and revolutionary Karl Heinrich Marx (1818–1883) certain-
ly did not reckon. This vast country was predominantly agrarian, so Marx’s
teachings, which foresaw a revolution in the most industrialised countries of
the world, had to be changed. The ideology of the new state thus would be
Marxism-Leninism, which already ceased to suppose that revolutions would
occur in industrialised countries, where – in Marx’s words – the exploitation
of labour by capital was the greatest. The Civil War (1918–1921), accompa-
nied by a collapse of the economy, and namely the increasing resistance of
workers and peasants against the totalitarian methods of the so-called War of
Communism, led to a partial release. Lenin introduced a new Economic Policy
(NEP) in the economic sphere. In part, market economy was restored with
relatively free internal trade and guaranteed personal property, small indus-
trial businesses and land could be rented, wages paid in cash, and receiving
The End of the Bipolar World – 105 –

foreign investment was allowed. As market-oriented measures usually do any-
where, these soon brought a recovery both in agriculture and industry, and
contributed significantly to the victory of the Bolsheviks and strengthening
of the regime.
This quasi-market environment (80% of the industry and services were
held by the government), however, collapsed relatively soon because the
fixed purchase prices of agricultural crops were falling as the new leadership,
headed by Joseph Stalin (Ioseb Vissarionovich Dzhugashvili, born 1879 and
died 1953), was trying to raise funds for the industrialisation of the country.
‘The peasants responded in a “market” fashion: instead of supplying the pre-
scribed quotas on the market for state-fixed prices, they preferred the more
favourable sales of grain to Nepmen [the new entrepreneurial class named
after the NEP – ed. T.E.] on the free market, feeding cattle with it, or growing
industrial crops for the state’ (Stellner 2006:57). After nationalisation in 1917,
Stalin could no longer borrow money from abroad for the industrialisation
of the country. Therefore, he abolished the NEP in 1928 and forcibly collec-
tivised agriculture. The consequences were disastrous. In a desperate effort
to prevent expropriation, farmers slaughtered their cattle and vandalised
their property. Anyone who resisted the collectivisation was dispossessed,
displaced, and eventually deported to labour camps (Gulags). Thus the regime
had unleashed mass terror even before the Second World War, which makes
it probably the worst regime in human history, at least in terms of the amount
of people who were tortured and killed. The collectivisation campaign itself
caused a famine that ‘mainly broke out in the Volga region and in Ukraine in
the years 1932–1933. The starvation caused deaths, especially among chil-
dren, who moreover often became victims of cannibalism. A minimum of eight
million people fell victims to the famine and subsequent epidemics’ (Stellner
2006:58). It took seven years before collectivisation was completed in 1936.
Stalinist repression did not end there, however. The terror pervaded the
whole of society. Perhaps the most important issue in light of the coming war,
was the purges in the ‘Red’ army in 1937. They claimed three out of five mar-
shals, ‘13 out of 15 army commanders, 50 out of 57 corps commanders, 154 out
of 186 division commanders, and 401 out of 456 colonels. In total, the cleans-
ing had claimed 25,000 officers [some sources say 27,000 people], including
six out of every seven colonels and generals. If a bloodbath of such volume
had stricken one of the most professional armed forces today, it would hardly
have “left enough people to operate a newspaper stand”, as it was captured
by a seasoned general’ (Bellamy 2011:32).6 So the Stalinist terror in the Soviet
Union claimed millions of victims, even in times of peace. ‘The 1926 census
6 In this context, the execution of Polish officers by the NKVD in the Katyn Forest (1940) comes
as no surprise. There is also no reason to disbelieve Winston Churchill when he says that at
the Teheran conference (1943) Stalin stated that in order to break the German militarism, it
was necessary to kill 50,000 German officers. Only Churchill’s fierce resistance and leaving
the room meant that Stalin then turned the entire suggestion into a joke.
– 106 –
recorded 148.8 million inhabitants. The country ravaged by the [Civil, ed. note
T.E.] War had reached a certain degree of stability by then. Demographers
say that the average annual increase was 2.3%. According to the most con-
servative estimates, which only add 2.3% every year, without increasing the
growth rate, the population in 1937 should have been 186.4 million. Had the
growth rate been increasing, it should have been 191 million. In fact, a mere
156 million were counted, i.e. 30.4 million less than the expected lower esti-
mate, which means only slightly over a seven million increase in eleven years.
It is practically impossible to determine what percentage of these dead or
uncounted people had died in prisons and camps, and how many were claimed
by the famine’ (Bellamy 2011:25).
Industrialisation, heavily paid for by the decline in the farmers’ standard
of living and their very lives, continued. The development of heavy industry,
metallurgy, coal and ferrous or non-ferrous ore mining and electricity produc-
tion were the top priorities within the five-year development plans. ‘Between
1928 and 1937, coal production had increased from 35.4 million to 128 million
tonnes while steel production increased from 4 million to 17.7 million tonnes.
Electricity production had increased sevenfold, the amount of machine tool
production had multiplied more than twenty times, and almost forty times
as many tractors were produced. In the late 1930s of the 20th century, Soviet
industrial manufacturing overtook the French, Japanese, and Italian produc-
tion in terms of volume. On the other hand, for example, the communication
system remained on a primitive level, despite new investment in the rail net-
work, whose length had increased by 48% during the years 1913–1940. At
the beginning of the planning period, the organisation of the Soviet economy
was aimed exclusively at remaining independent as largely as possible from
foreign countries. However, key industrial equipment, along with technical
knowledge, had to be imported from advanced capitalist countries. Foreign
technical experts and consultants, mainly from the USA and Germany, there-
fore retained great importance in the first five-year period; during the Great
Depression they were glad to be hired’ (Stellner 2006:59–60).
The industrialisation method of the 30s was well described by an American
researcher, an employee of the American Embassy who had been evacuated
from Moscow ahead of the advancing German troops in the winter of 1941 to
the ‘substitute’ capital city of Kuibyshev. The diplomat describes that in a city
of about half a million there were only four paved roads, ‘a nice new clubhouse
of the NKVD’ (the predecessor of the Russian KGB security service), two little
hotels, and one bus line, apart from a minimum of cars and trucks, being sup-
plementary to horses and camels as a means of transport. ‘Just a short trip out
of the city, a few miles beyond the suburbs of Kuibyshev, there was another
city – almost as big as the former – but consisting entirely of factories. It was
a Nameless city [Bezymianny], a city of smokestacks, where large factories
neighboured one another as houses. Several factories produced aircraft com-
ponents and assembled aircraft – it was actually a kind of huge conveyor belt,

although not machines, but factories… As a matter of fact, this sleepy resi-
dential city served only as a gigantic shelter for tens of thousands of workers
who set out on foot or by a wheezy trolleybus to the factories in the Nameless
City every day’ (Bellamy 2011:300).
All the negative aspects of the Soviet totalitarian regime were enhanced
after absolute war had been launched by the Germans on 22 June 1941
(Operation Barbarossa). Nazi Germany and the Communist Soviet Union
had been allies until that day, having divided Poland within the framework
of the Molotov-Ribbentrop Pact (Nonaggression Pact signed on 23 August
1939, the Germans gained 190,000 square km while the Russians attained
a 200,000 square km area). The Soviet-annexed parts of Poland were renamed
as Western Belarus in the north and western Ukraine in the south. Moreo-
ver, Stalin was granted a free hand in the Baltic region by Hitler, where he
annexed the three Baltic republics, thus becoming the new soviet republics –
a part of the USSR. Then, using threats, he forced Romania to secede from
Bessarabia because the Romanians – like the Baltic States – could neither
rely upon the help of Germany since the signing of the Pact, nor upon the UK,
due to their location. The Winter War (1939–1940) between the USSR and
Finland was also a result of the pact since the Finns could no longer rely on
any assistance from any of the great powers. Only Finnish valour, causing ter-
rible causalities to the Russians in winter conditions, and Stalin’s fears of the
Great Britain choosing to defend democratic Finland in the case of his further
progression, prevented annexation of the whole country.
With his attack on the USSR, Hitler unleashed the last of his aggressive
wars and caused the Soviet Union to become an invaded ally of democratic
states. Despite terrible losses, (during the first month of the war it amounted
to almost the entire army in peacetime, i.e. 4,000,000 men, and a loss of more
than a third of its European area without the annexed territories), the USSR
was able to win in this all-out war at the cost of further enormous losses. Con-
cerning the total loss of life and material damage of the Second World War,
see chapter 3. Very important deliveries under the Lend-Lease Act came to
the Soviet Union in convoys from the USA via the UK by the northern Arctic
sea route through the port of Murmansk, and after a temporary joint Brit-
ish-Russian annexation of Iran, also by the longer southern journey through
this country.
Unimaginable atrocities of the war, including torture and mutilation, exe-
cutions without trial or even cause, scorched earth policy, the use of civilians
as human shields, etc. were committed on both sides. Both sides also pos-
sessed the security or retaining units, SS or NKVD respectively, which aimed
to ensure the security of the military supply front. As the lines of battle repeat-
edly shifted to and fro, very few people passed the screening of those units
and thus managed to survive passing through the front-lines. As a result,
large areas of eastern Poland and Ukraine remained entirely without inhabit-
ants, as it was difficult to maintain undivided loyalty to both the Nazi and the
– 108 –
Communist regimes. ‘The stories about old people, women and children used
as “ambassadors”, are reflected in Zhukov’s message: “Germans who tried to
cross the Neva, were herding locals as human shields”. His comment is telling:
“Our mortar and artillery fire must be particularly accurate against the enemy,
which is farther away, so as not to hit our people”’ (Bellamy 2011:355). As we
can see, a lack of interest in his own life, as well as others’, was the basic char-
acteristics of a capable general, as is illustrated in the example of the Soviet
Marshal, Georgy Konstantinovich Zhukov (1896–1974).
The above-mentioned example serves as proof that after the defeat of Nazi
Germany, the Russians regarded the annexation of the whole of Central and
Eastern Europe and the Balkans as their right. A reward for the horrors suf-
fered during the war, not unlike the logic of the Molotov-Ribbentrop Pact, was
being a buffer zone against anything that may come from the west. Nothing
testifies to that better than Stalin’s own words, in reply to congratulations on
the success of the Red Army’s Berlin operation from American Ambassador
William Averell Harriman (1891–1986) at the Potsdam Conference in July 1945:
‘“Alexander I made it to Paris”, Stalin replied laconically; meaning the occupa-
tion of Paris by Russian soldiers in 1814’ (Bellamy 2011:20). While Stalin was
trying to get to Paris, Churchill spoke of the territory that the free world had
lost behind the Iron Curtain in his famous speech to American audiences in
March 1946. The Cold War had begun.
In this new war, Stalin rejected the Marshall Plan, forcing Soviet satellites
to reject this means of a major revival of West European countries. Under the
new slogan ‘war against fascism ends war against capitalism begins’, regard-
less of the suffering of the population, the equipment of the armed forces with
the latest weapons was continually expanded. Both huge investments and
industrial espionage soon yielded their fruit as the Soviets had possessed the
atomic bomb since 1949, and four years later, the hydrogen bomb too. ‘The
main burden of recovery, however, lay on Soviet population, which was forced
into higher performance in an atmosphere of renewed police terror and the
party surveillance apparatus (the number of ministries for industry and con-
struction rose from 21 to 33). Extra shifts at weekends, massive promotion of
‘socialist competition’ to increase productivity, and various ‘innovative move-
ments’ led eventually to surpassing pre-war production in heavy industry in
the beginning of 1948, and in the consumer industry a year later. The mone-
tary reform of 1947 eliminated the excess purchasing power that arose during
the war, led to restrictions on the black market and restrained the higher
profits of kolkhozes’ (Stellner 2006:101). Although electricity production and
the supply of agricultural machinery increased, neither agricultural yields nor
the overall standard of living of the population did.
Stalin’s primary objective was to export the political and economic sys-
tem into the Central European and Balkan satellites. By 1948, all of these
satellites had one-party rule and followed the USSR in assaults on religion,
civil liberties, and ideological indoctrination, empowered by the help of the

Red Army and the NKVD. From an economic perspective, it is important that
the entire industry had been nationalised and the emphasis was unambig-
uously placed on heavy industry, whose centres were being established or
expanded. Forced collectivisation, according to the Soviet model, encroached
upon agriculture in all of these countries. Besides the German occupation
zone (later to become East Germany) and Czechoslovakia, none of these agri-
cultural or agro-industrial countries had enough specialists; therefore they
opted for the so-called Taylorism, where a person is simply a complement to
the machine.
Table 4.1: Uprisings against communism
Date Country Event

(and centres of uprising)
June 1, 1953 Czechoslovakia-Plzeň (Pilsen) strikes, unrest
June 17, 1953 East Germany-East Berlin strikes, uprising
June 28, 1956 Poland-Poznan strikes, uprising
October-November 1956 Hungary-Budapest revolution, crushed by
Soviet army intervention
spring and summer 1968 Czechoslovakia democratization of the
regime, crushed by Warsaw
Pact army intervention
1970 – 1971 Poland-Gdańsk, Gdynia strikes, uprising
June 1976 Poland-Płock, Radom demonstrations, looting
1977 Czechoslovakia Charter 77 (Charta 77),
movement
1980 – 1981 Poland-Gdańsk Independent Trade Union
Solidarity (Solidarność),
strikes, social movement
Source: Author
The only supposed satellite that was de facto free of USSR influence was
Yugoslavia. There communist partisan leader and President, Josip Broz Tito
(1892–1980) had been building the illusion of a whole Yugoslavia, having been
liberated separately, which implied his enormous popularity. This enabled him
to face Stalin, who was eventually forced to reject ‘Tito, the mad dog’, impos-
ing an economic blockade on Yugoslavia. Yugoslavia quickly found the USA
to be a new business partner, and it teetered between the two blocks with its
policy of non-aligned states until Tito’s death. For Yugoslavia, the break-up
with Stalin in 1948 meant establishing a form of central planning, intended
to ensure greater self-reliance. The Yugoslav system of workers’ control over
enterprises was also unique. A switch-over from central planning towards
– 110 –
markets was taking place between 1952 and 1974, establishing a system later
called market socialism, the so-called third way between central planning and
market capitalism (Estrin, 1991). The communists’ aversion to private own-
ership, no matter how collectivist it was, along with some negatives – like
increasing unemployment, the growing differences in wages, and business
cycles, made them assert a political oversight over the self-managed enter-
prises. The reforms of 1974 and all the reforms during the 1980s redirected
Yugoslavia back, closer to central planning.
In the Soviet Union itself, after the death of Stalin, the ‘liberal’ or ‘reform-
ist’ wing of the Communist party prevailed in the struggle for power. The
power of the secret police became somehow limited, and even some of the
labour camps were gradually closed down. Stalin’s aggressive foreign poli-
cy had antagonised many and led to a strong system of western alliances,
implicitly isolating the USSR. This was supposed to change through ‘liberal-
isation’ and so-called ‘peaceful coexistence’, terms coined by the new Soviet
leader, Nikita Sergeyevich Khrushchev (1894–1971). The liberalisation meant,
first of all, de-Stalinisation after Khrushchev’s famous ‘secret speech’ at the
20th Party Congress in 1956. Forced glorification of the former dictator was
abandoned, and more cultural freedoms were given to artists, including the
writer Alexandr Isayevich Solzhenitsyn (1918–2008), who in 1962 published
his immensely influential book ‘One Day in the Life of Ivan Denisovic’, describ-
ing life in the Gulags. From an economic point of view, despite positive chang-
es, such as a transfer of resources from heavy industry and the military to
the production of consumer goods and agriculture, it became obvious that
reforming a system based on central planning was impossible. It was not only
economists who understood that the double digit growth in industrial pro-
duction during the 1920’s and 1930’s had been motivated and maintained by
terror, causing widespread fear. With de-Stalinisation and curbing of the, until
then, unchecked police state, this negative motivation started fading away,
along with economic productivity. Until its disintegration, the USSR would
begin every new decade with a larger productivity gap behind the Western
countries. Productivity was followed by all relevant social-economic indices,
until it had reached a point where this ‘lagging behind’ became widely known
among all of the Central and Eastern European population.
In 1964, the conservative circles, alarmed by some of Khrushchev’s poli-
cies, sprang into action and the leader fell in what is arguably the first Rus-
sian bloodless palace revolution. A new, more conservative leader, Leonid
Ilich Brezhnev (1906–1982), oversaw a long period of political and economic
stagnation. Stability was guaranteed by a massive build-up of military forces
which allowed the Soviets to crush any reform in Central and Eastern Europe,
namely the Prague Spring of 1968. Shortly after the invasion into Czechoslova-
kia, Brezhnev proclaimed the so-called Brezhnev doctrine, which allowed the
USSR and its allies within the Warsaw Pact (1955–1991, established as a reac-
tion to admission of West Germany into NATO) to intervene in any country in

the Soviet sphere of influence where socialism could be endangered by the
‘counter-revolution’. Relative military strength was not backed up by the fail-
ing economy, as the state administration and military expenses required an
ever growing share of GDP.
Table 4.2: GDP per capita in selected counties between 1960 and 1990 in Int. GK$.
Ger- Czecho- Hun- United

Year many Italy UK slovakia gary Poland USSR States Japan
1960 7 705 5 916 8 645 5 108 3 649 3 215 3 945 11 328 3 986
1961 7 952 6 373 8 857 5 263 3 816 3 426 4 098 11 402 4 426
1962 8 222 6 827 8 865 5 304 3 962 3 341 4 140 11 905 4 777
1963 8 386 7 262 9 149 5 170 4 168 3 502 3 985 12 242 5 129
1964 8 822 7 487 9 568 5 372 4 388 3 622 4 439 12 773 5 668
1965 9 186 7 598 9 752 5 533 4 410 3 787 4 634 13 419 5 934
1966 9 388 7 942 9 885 5 741 4 646 3 991 4 804 14 134 6 506
1967 9 397 8 454 10 049 5 964 4 894 4 103 4 963 14 330 7 152
1968 9 864 9 105 10 410 6 223 4 934 4 317 5 202 14 863 7 983
1969 10 440 9 566 10 552 6 354 5 062 4 241 5 225 15 179 8 874
1970 10 839 9 719 10 767 6 466 5 028 4 428 5 575 15 030 9 714
1971 11 077 9 839 10 941 6 658 5 238 4 707 5 667 15 304 10 040
1972 11 481 10 060 11 294 6 858 5 336 5 010 5 643 15 944 10 734
1973 11 966 10 634 12 025 7 041 5 596 5 340 6 059 16 689 11 434
1974 12 063 11 046 11 859 7 243 5 716 5 601 6 176 16 491 11 145
1975 12 041 10 742 11 847 7 399 5 805 5 808 6 135 16 284 11 344
1976 12 684 11 385 12 115 7 461 5 791 5 895 6 363 16 975 11 669
1977 13 072 11 668 12 384 7 744 6 126 5 949 6 454 17 567 12 064
1978 13 455 12 064 12 828 7 786 6 253 6 111 6 559 18 373 12 585
1979 13 993 12 720 13 167 7 804 6 251 5 942 6 472 18 789 13 163
1980 14 114 13 149 12 931 7 982 6 306 5 740 6 427 18 577 13 428
1981 14 149 13 200 12 747 7 912 6 351 5 385 6 433 18 856 13 754
1982 14 040 13 252 12 955 8 045 6 583 5 288 6 536 18 325 14 078
1983 14 329 13 391 13 404 8 147 6 525 5 498 6 687 18 920 14 307
1984 14 783 13 719 13 720 8 319 6 710 5 650 6 709 20 123 14 773
1985 15 140 14 096 14 165 8 367 6 557 5 660 6 708 20 717 15 331
1986 15 469 14 496 14 742 8 507 6 699 5 797 6 923 21 236 15 679
1987 15 701 14 946 15 393 8 534 6 814 5 683 6 952 21 788 16 251
1988 16 160 15 523 16 110 8 709 7 031 5 789 7 043 22 499 17 185
1989 16 558 15 969 16 414 8 768 6 903 5 684 7 112 23 059 17 943
1990 15 929 16 313 16 430 8 513 6 459 5 113 6 894 23 201 18 789
Source: Maddison Historical population Dataset
– 112 –
Table 4.2 demonstrates how the USSR and the countries of the Soviet
bloc were slipping behind in GDP per capita during the last 30 years of com-
munism. Particularly, the comparison between Czechoslovakia and Italy is
telling despite the possible inconsistencies caused by the different statistics
used. Roughly on par in the 60s, even after 15 years of communist rule in
Czechoslovakia, the country regressed to one half of GDP per capita in 1990
in relation to Italy. Even more portentous might be a comparison between the
USSR and Japan. On par in 1960, Japan became three times richer by 1990.
The status quo was maintained by strong Russian patriotism, underlining
their heroism during World War II, which had saved Central and Eastern Europe
from the Nazi regime. Also, a certain level of re-Stalinisation now mingled with
a collective – rather than personal – dictatorship and the privileges of the Com-
munist Party members helped to prevent large dissent among ordinary Rus-
sians, being the main victims of the so-called shortage economy. Brezhnev’s
era ended with his death in 1982, followed by an interim period, marked only
by two state funerals of elderly supreme leaders. A major change finally came
in the person of the relatively young Mikhail Sergeyevich Gorbachev (born in
1931) in 1985. Gorbachev ventured on the impossible mission to reform the
Soviet system. The economy was to be subject to a true perestroika or restruc-
turing, while glasnost – or openness – would be the new public discourse.
Naturally, any open discussion, democratic practices or true representation
collided with the Communist Party’s monopoly of power. The nationalist
demands within the USSR itself, regardless of speaking about Central Europe
or the Balkan satellites, soon escalated in national independence movements.
With Gorbachev stating openly those local puppet leaders could no longer
count on the Soviet Army backing, events took a quick turn. Communism
collapsed in Central and Eastern Europe in the revolutionary year of 1989.
4.2 THE TRANSFORMATION

OF CENTRAL AND EASTERN EUROPE
The world economy was greatly influenced by the events which took place in
Central and Eastern Europe in the late 1980s and during the 90s. All Central
European communist countries (Czechoslovakia, Hungary, Poland, and East
Germany) as well as Southeast Europe (Yugoslavia, Albania, Romania, and
Bulgaria), along with most of the republics of the soon to be dissolved Sovi-
et Union (Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyr-
gyzstan, Latvia, Lithuania, Moldova, the Russian Federation, Tajikistan, Turk-
menistan, Ukraine, and Uzbekistan) underwent revolutions which opened the
way to radical political and economic change. Although the most profound
subsequent changes took place in Central Europe, they must have originated
in the Soviet Union as all the communist countries in Europe had been mere
satellites of Moscow.

Therein Gorbachev had started the process, predominantly dedicated to
economic changes. The political changes were accepted only to the extent in
which they were deemed necessary, in order to motivate people and increase
productivity. The economic changes within perestroika were not going well, so
Gorbachev gradually decided to sacrifice more and more of the rigid political
system to increase the chances for success. However, with perestroika being
nicknamed katastroika (i.e. rather than re-construction, achieving a catastro-
phe) the legitimacy of the entire political and economic system was under-
mined, and the country was maintained by force until 1991.
The disintegration of the soviet system was naturally limiting the country’s
ability to rule over its satellites in Europe well before its final dissolution into
the above mentioned 15 independent republics. Already in 1988, Gorbachev
had announced a decision to withdraw the Soviet army positioned in Central
European countries. About 240,000 troops, along with most equipment, were
going to abandon these satellites by the end of 1990. The local communist
parties were left to their own devices.
In Poland, the last revolt against the communist establishment in 1981
was still in living memory. Therefore, the impact of the changes in the
USSR was instant. The Solidarity movement (Solidarność) started its activi-
ties, such as protesting price increases or strikes, in the latter part of the 80s.
In February 1989, the government, in trying to avoid a destabilisation of the
country, entered Round Table negotiations. The Communist Party’s monopoly
of power or ‘the leading role of the Communist Party’ was dismissed, and in
1989 Solidarity became a fully legalised party represented in parliament. The
process was one of evolution rather than revolution, helped along by the great
stabilising role of Pope John Paul II (1920–2005). Thus, the economic and polit-
ical reforms had already started in 1989, while communist general and Pres-
ident Wojciech Witold Jaruzelski (1923–2014) did not leave his position until
1991.
In Hungary, the changes were already emerging during the 80s when the
communists, led by Jánosz Kádár (1912–1989), strived to limit oppression and
increase the standard of living. In May 1988, Kádár was replaced by Káro-
ly Grósz (1930–1996), who introduced more market oriented reforms and
allowed a limited discussion with opposition groups. By the beginning of 1989,
the communists had reached a point of no return when the national televi-
sion broadcast a statement which called the Hungarian Revolution of 1956,
crushed by the invasion of the Soviet armed forces, a ‘popular uprising’, rather
than a ‘contra-revolution’. Round Table meetings with the opposition followed
shortly thereafter, and the border with Austria was opened. The dominant
role of the Communist party was abandoned, whereas free elections were
organised, thus having completed a peaceful transformation just before the
dawn of the new decade.
The purges within the Communist Party of Czechoslovakia after the Prague
Spring of 1968, which was forcefully interrupted by the armed troops of the
– 114 –
Warsaw Pact, had caused the party and the country’s leadership to be very
conservative even two decades later. Indeed, it was a blend of pragmatism
and conservatism, often void of any ideological fervour. There were very few
believers in communism, and even less hoped for its successful reform. Being
aware of the system’s limits, the communist representation was impassive to
any calls for reforms from Moscow whatsoever. In January 1989, the so-called
‘Palach’s Week’ in Prague was cracked down on relentlessly. During that week,
various dissident groups honoured Jan Palach (1948–1969) a student, who had
burned himself to death in protest against the Soviet invasion of 1968. The
situation was similar in the far more religious Slovakia, where quiet prayers
were an integral part of the protests. It took almost all of 1989 and several
more demonstrations, including the students’ protest on 17 November, which
was brutally dispersed, leaving many injured and rumours of a dead student,
to finally mobilise virtually all Czechoslovak citizens against the discredited
regime. The chain of events of the so-called ‘Velvet Revolution’ escalated when
despite being comprised of communists, the parliament elected opposition
leader Václav Havel (1936–2011) to become the President on 29 December
1989; soon thereafter, free parliamentary elections followed.
Arguably, the most conservative communist leadership was to be found in
the German Democratic Republic, or East Germany. The most long-standing
fear among the communist leadership, undermining stability and any sem-
blance of the regime’s legitimacy, was making any comparisons with neigh-
bouring West Germany. To avoid that, travelling to Western Europe, particu-
larly to the Federal Republic of Germany (FRG), was strictly limited. After the
Austro-Hungarian border had been opened in May 1989, crowds of East Ger-
mans tried to reach West Germany, via Czechoslovakia, Hungary and Austria;
whereas, others arrived in Prague or Warsaw and climbed over the fence of
the West German embassy, which all resulted in further restrictions in East
Germany. Throughout the following months, while the issue of free travel
was on the table, it became clear that it was directly connected to the fall of
the regime and the reunion of East and West Germany. The dreaded Berlin
Wall, a massive symbol of the Iron Curtain, was to fall unceremoniously on
9 November 1989. The party speaker, Günter Schabowski (born 1929), appar-
ently had not given much thought to his statement, as it could be interpreted
that East German citizens were now allowed to travel abroad. Vast masses
started gathering at the border crossings in Berlin, and as there was no one
else to confirm or refute the statement, the guards let people enter West Ber-
lin. Having been protected by thousands of nuclear warheads and millions of
soldiers, the communist regime in Europe ceased to exist in a blink of an eye
without a single shot.
However, there was one particular exception: Romania. Independent, both
from Moscow and from most communist ideology, the Romanian dictator
Nicolae Andruţă Ceauşescu (1918–1989) underpinned his power by the omni-
present secret police (Securitate) and a clientelistic system. Any dissent was

harshly punished and the country was embracing the cult of personality of the
long ruling dictator and his family. The first protests appeared in Timișoara,
having been sparked by the forceful removal of a popular priest. To strengthen
his position, Ceauşescu called for an official demonstration of support, which
went badly wrong, as hundreds of thousands of people shouted anti-commu-
nist slogans. This bravado was soon followed by others in cities all around
Romania. One crucial factor caused the Securitate to lose control; the army
withheld its support from the regime. Ceauşescu and his wife were arrested,
charged with genocide, and shot dead on Christmas Eve 1989. Various groups
in the society formed the National Salvation Front.
Although conditions were not as hard as in Romania, opposition forces in
Bulgaria were weak and disorganised. Thus, the change had to be gradual and
directed from within the Communist Party. The long-time communist leader,
Todor Khristov Zhivkov (1911–1998), was deemed to have lost touch with real-
ity as he was not willing to acknowledge economic problems or to deal with
public protests. He was ousted by senior party officials and replaced by his
rival, Petar Toshev Mladenov (1936–2000) on 10 November 1989. From that
point on, communist rule in Bulgaria was virtually over as the leading role of
the Communist Party was abolished in the beginning of 1990, enabling a polit-
ical and economic reform.
Albania was by far the most isolated of all the communist countries in
Europe with arguably the most brutal regime under Enver Hoxha (1908–1985).
A genuine opposition did not exist, thus gradual reforms taking place during
the 1990s were directed by former communists. The first step was taken at
the end of 1990 when groups of students protested power cuts and poor dor-
mitory conditions in Tirana. These protests were used by Sali Ram Berisha
(born 1944), a former physician of Hoxha’s and by now an alleged leader of the
supposedly anti-communist Democratic Party of Albania to legalise non-com-
munist political parties in December 1990. Free elections were held in March
1991, with the former communist party renamed as the Socialist Party of Alba-
nia taking a large majority of seats.
A relatively high standard of living, a pluralistic political system and mar-
ket socialism put former Yugoslavia aside from the rest of European commu-
nist countries. Within the federation, individual countries had an autonomous
position, and many important decisions were being made locally. After market
socialism had reached its limits and the leadership of the republics decided to
solve the problem of the mounting external debt, the differences in incomes,
along with the culture and style of living, created unfortunate ethnic over-
tones. A transformation from the communist or quasi-communist past into
a free society and market economy became intermingled with escalating
violence, ultimately leading to a brutal civil war, ethnic cleansing, and the
breakup of the country. Only Slovenia in the north escaped war as the military
forces loyal to Yugoslavia were no longer able to wage a military campaign
against it after Slovenia had seceded the Federation. The civil war lasted from
– 116 –
1991 to 1995 in Croatia and between 1992 and 1995 in Bosnia and Herzegovi-
na, resulting in the independence of both countries.
In each of the transforming countries, the political changes were soon fol-
lowed by economic ones. The aim was to redirect the centrally planned econ-
omies (CPEs) to free market ones. The main problem of CPEs had been their
structure, which was deformed and centred on the heavy industry. Secondly,
they were almost autarkic, trading only with each other, i.e. in markets where
supply never matched demand (shortage economy), and therefore the quality
was left to plummet. Finally, CPEs did not participate in the international divi-
sion of labour with production determined by political decisions, commonly on
strategic terms, and thus uncompetitive in free market conditions. The goal of
the transformation process was therefore to create a competitive free market
economy in the countries where it had not been operating for fifty to seventy
years. This process had no historical parallels. A transformation includes sys-
temic, institutional, and structural changes. There were two transformation
methods used; a gradual one and so-called ‘shock therapy’. While the propo-
nents of either method usually became bitter political rivals, a combination of
both was usually used in practise. The gradual method involves a creation
of legal and institutional framework first, followed by the gradual involvement
of market forces advancing past the stage of state-control (de-étatisation),
price deregulation and privatisation, as well as the liberalisation of external
relations. The so-called shock therapy involves a rapid de-étatisation, and
price deregulation accompanied with mass privatisation, usually through
the voucher method, thereby postponing the creation of a legal institutional
framework, such as a tax or social security reform, and the establishment of
control mechanisms and institutions for proper market functioning.
Table 4.1 illustrates how difficult the transformation process was. All of
the transition countries experienced a rapid decrease of GDP during the first
years of the transformation as old structures, markets and institutions had
disappeared while new ones were not yet in place. The average inflation
increased as much as the level of poverty. As the table suggests, even ten
years later, the transition countries still had not reached their GDP level pri-
or to the transformation. Although there were three exceptions to that rule:
Poland, Slovenia, and Slovakia. The Czech Republic and Hungary had almost
reached the 1989 levels. Generally speaking, the process was difficult, tem-
pered with failures, and yet the results varied in each of the observed regions
with Central Europe achieving the best results, while the former Soviet repub-
lics, particularly in Central Asia, did the worst (Tajikistan: the real output
1999/1989 ration of 0.29).7
7 For obvious reasons, this text does not include the five transition economies of East Asia,
namely Cambodia, China, Lao P.D.R., Mongolia, and Vietnam. As envisioned before, for our
purposes only China is relevant and will be dealt with in Chapter 5.

Table 4.1: Selected characteristics of transition countries
Transition Beginning Stabilisation Real Average PPP GDP

country/group of programme output inflation per capita
transition since ratio 1989–99 1999
1999/1989
EU accession 1991 Mar-91 0.95 35.5 10,009
countries (excl.
the Baltics)
Bulgaria 1991 Feb-91 0.67 68.4 4,812
Czech Republic 1991 Jan-91 0.94 7.8 13,408
Hungary 1990 Mar-90 0.99 19.7 11,273
Poland 1990 Jan-90 1.28 49.2 8,832
Romania 1991 Jan-93 0.74 76.1 5,798
Slovak Republic 1991 Jan-91 1.01 14.3 10,255
Slovenia 1990 Feb-92 1.05 12.9 15,685
Baltic states 1992 Jun-92 0.68 33.5 6,850
Estonia 1992 Jun-92 0.78 24.3 7,909
Latvia 1992 Jun-92 0.56 35.1 5,893
Lithuania 1992 Jun-92 0.70 41.0 6,750
Other 1991 Jun-93 0.77 3,331.8 3,651
South-east
European
countries
Albania 1990 Aug-92 0.93 33.4 2,897
Bosnia and … … 0.93 13,118.0 1,014
Herzegovina
Croatia 1990 Oct-93 0.80 100.0 6,793
Macedonia, FYR 1990 Jan-94 0.59 75.6 3,903
Commonwealth 1992 Aug-94 0.53 149.1 3,337
of Independent
States
Armenia 1992 Dec-94 0.48 106.5 2,469
Azerbaijan 1992 Jan-95 0.47 233.2 2,404
Belarus 1992 Nov-94 0.81 162.4 6,485
Georgia 1992 Sept-94 0.31 17.9 3,950
Kazakhstan 1992 Jan-94 0.61 77.3 4,351
Kyrgyzstan 1992 May-93 0.61 22.3 2,419
Moldova 1992 Sept-93 0.31 16.5 1,847
Mongolia 1990 … 0.93 46.5 1,573
Russia 1992 Apr-95 0.55 88.0 6,815
Tajikistan 1992 Feb-95 0.29 688.5 1,045
Turkmenistan 1992 … 0.61 4.9 4,589
Ukraine 1992 Nov-94 0.35 169.4 3,276
Uzbekistan 1992 Nov-94 0.97 304.5 2,157
Source: IMF World Economic Outlook, October 2000, p.89
– 118 –
The massive economic downturn of the first years of transformation was
particularly painful for the countries of the former USSR which lost almost 50%
of their output, whereas in Central Europe it averaged only 15%. The failure of
social systems, endemic corruption, and clientelism, caused socio-pathologi-
cal phenomena. In several countries, life expectancy has dropped to 68.4 years
on average, and illiteracy has become a problem, with 9.3% illiterate people
above 15 years of age in the former Southeast European communist countries,
and 7% within the former Soviet republics, respectively. By 1998, poverty in
the transition countries had risen from 2% to 21% on average, with the Tajik-
istan having 70% of its citizens living in absolute poverty.
This grim picture should not overshadow the fact that most of the tran-
sition countries reached the new millennium with far better institutions
and prospects than they had had at the dusk of the communist era. Some
version of democratic institutions and policies had been put in most places.
A new structure of economies was offering perspectives for economic growth,
particularly in the soon to be EU members, the shift from non-competitive
COMECON markets to competitive world markets had mostly been complet-
ed, and trade deficits had been replaced by increased export capabilities.
Another decade later, we see some of the new EU members reaching the GDP
per capita levels of the poorest original EU members. Given the lower levels
of public debt, large investments into their aged infrastructure, and the fact
that the newly set-up private enterprises use altogether new technologies, it
suggests that the productivity and income gap between Western Europe and
the former communist countries of Central Europe might diminish.
4.3 THE FINANCIAL CRISES IN THE 90s

In the three years preceding the Mexican peso (or financial) crisis the coun-
try economy had successfully developed, decreasing the inflation rate as the
state budget had been in minor surplus. In January 1994, the North Ameri-
can Free Trade Agreement (NAFTA) came into force and in May Mexico was
the first emerging economy to become an OECD member, boosting investors’
confidence further. Yet, enduring political instability (including the assassina-
tion of a popular presidential candidate), a renewed budget deficit, and espe-
cially a high deficit in the current account balance which had been credited
to importing new technologies, were increasing uncertainty throughout the
election year of 1994. The current account deficit was not considered a prob-
lem because capital inflows exceeded the deficit, so the overall balance of pay-
ments was in surplus. Capital inflow was comprised mostly of portfolio invest-
ments, short-term capital, and loans in foreign currencies, which increased
gross foreign debt.
In February 1994, interest rates in Mexico decreased as a result of fall-
ing inflation and as U.S. interest rates had risen, the interest rate differential

had narrowed, causing first investors to leave. To reduce the current account
deficit, the IMF recommended a 15% devaluation of the Mexican peso which
the central bank conducted in December 1994. The result was a massive out-
flow of capital, a 120% devaluation of the Mexican peso, and the transition to
a freely floating currency exchange rate.
The outflow of capital caused a financial crisis and a subsequent economic
depression. The USA provided Mexico with 50 billion USD as a stabilisation
loan to be administered by the IMF. The loan was subject to a number of con-
ditions; among them were the liberalisation of the economy, and improvement
of conditions for the inflow of FDI. Within a year, the confidence of investors
had been restored, there was a significant increase in FDI, and Mexico could
begin to repay the US stabilisation loan.
In July 1997, the largest currency crisis in the 90s broke out – the Asian
currency crisis. It broke out in South-east Asia (Thailand, Malaysia, Indo-
nesia, the Philippines, and South Korea), in an area which belonged to the
most economically dynamic regions in the world. Significant achievements
were especially reported for South Korea’s economy, which had become an
OECD member at the end of 1996. Rapid economic development in this area
had been financed by foreign capital, which had been attracted to the region
by high interest rates. The currencies of the above mentioned countries had
a stable exchange rate. As a result, the depreciation expectations were very
low. Foreign capital flowed into those countries through local banks. Thanks
to a state bank guarantee in the event of difficulties, investors could expect
the governments to not let their banks fail. The state guarantee encouraged
banks to accept higher risk loans. This in turn led to large business debt,
strong personal ties between the managements and the banks added a high
proportion of bad debts to the loan portfolio of banks and a weak banking
sector. Increasing gross debt due to the many loans from abroad left sever-
al countries exposed to any necessitated devaluation. Thailand, the country
where the crisis started, had acquired a crippling foreign debt even before the
collapse of its currency. It was, however, the growing current account deficit
of the balance of payments in some countries of the region that started the
actual crisis.
When the deficit of Malaysia and Thailand reached 8%, the IMF described
this phenomenon as the result of a rapidly rising domestic demand and
demanded its reduction by creating a surplus in the state budget. This meas-
ure was taken but the current account deficit did not decline. The IMF rec-
ommended a 15% devaluation of the currency and began to criticise the state
of the economies in Southeast Asia. Investors started to lose their confidence
and the first attacks on the Thai baht and the other currencies in the region
occurred. In July 1997, a devaluation of the Thai baht by the required 15% took
place, but instead of calming down a number of currency speculations arose.
After a deep depreciation of their currencies, the governments of Indonesia,
Thailand, South Korea, Malaysia, and the Philippines had to abandon fixed
– 120 –
rates and turn to the freely floating rates. Foreign investors lost their confi-
dence in all Asian assets and began selling them and transferring their capital
from Asian currencies to USD. This affected not only those directly involved
due to a balance of payments deficit but also Hong Kong, Laos, and indirectly
involved countries such as China, Taiwan, Singapore, Brunei, and Vietnam,
as they suffered from a loss of demand and investors’ confidence. After the
outflow of foreign capital and a reduction in asset prices, interest rates steep-
ly increased, consequently resulting in an economic depression. The foreign
investors’ confidence was not retained though and several countries dramat-
ically increased their foreign debt to GDP ratio. The affected countries were
offered stabilisation loans and recovery measures by the IMF which were
based on a liberalisation of the economy and easing access to FDI. The two
countries affected worst, Thailand and Malaysia, had first rejected the IMF’s
recommendation as being too harsh. Nevertheless, given the continued weak-
ening of their currencies, they were forced to adopt the recommendations
which in turn stabilised exchange rates. A similar development occurred even
in South Korea. The Indonesian Rupiah had undergone the worst devolution
of all, having depreciated by 600% in six months, compelling the resignation
of President Suharto from his position in 1966.
Unlike the Mexican crisis, the Asian crisis was not caused by an excessive-
ly expansionary fiscal policy, the public budgets of most Asian countries were
balanced or even in surplus during the outbreak of the crisis. The sources of
instability were rather the private sector’s behaviour: an excessive accumula-
tion of foreign and domestic debt, and an inefficient allocation of foreign and
domestic savings. As always in such situations the error was not only on the
part of Asian countries. Wrong decisions had been made by the lending insti-
tutions in the developed countries that underestimated the risk of lending in
the situation of a country with central bank guarantees.
In 1994, a monetary reform (Plano Real) had been carried out in Brazil in
order to eliminate hyperinflation which subdued most of the economic growth
in the 80s and 90s. The anti-inflationary policy of the central bank included
a fixed exchange rate of the Brazilian Real. A stable exchange rate using crawl-
ing peg to USD and interest rates around 30 percent managed to ensure the
inflation in Brazil had decreased from 3,000% to single digit level. Also, the
anti-inflationary policy caused an appreciation of the Real during the tran-
sition phase. Stable finances led to a large influx of foreign capital and eco-
nomic growth. Government spending in excess of budgetary income, however,
proved to be the problem of the Brazilian economy. The state budget deficit
and the debt in foreign currencies, namely the USD, was growing rapidly.
When the Russian economic crisis of August 1998 caused investors to
abandon risky markets Brazil became one of the affected regions. The high
exchange rate of the Real became a burden as it sapped competitiveness and
export ability. Brazil had current account deficits the maintenance of which,
via capital account surpluses, had became problematic. Since 1996, the Brazil

central bank has been using foreign exchange reserves to prevent the curren-
cy from depreciating. After the central government approved a fiscal adjust-
ment programme, the IMF provided a 41,5 billion USD loan in November 1998
to prevent a further weakening of the Real. However, in January 1999 the
Brazilian Federation state Minais Gerais announced its inability to pay for
its debt to the central government. As it was one of the most economical-
ly important Brazilian states, this caused panic among foreign investors and
resulted in an outflow of capital. The central bank decided to devalue the Real
by 8% in January 1999. Within the same month the Real depreciated by 66%
against the USD. Moderate economic downturn ensued with unemployment
reaching 14 percent. It was not until 2000 when a worldwide decline in raw
material prices stopped and prices of this crucial part of Brazil exports started
to grow again, the situation stabilised. Another key factor was a tight fiscal
and monetary policy, even with a floating currency guaranteed by the admin-
istration of new left-wing President Luis Inácio Lula da Silva (born 1945). Both
factors helped Brazil to secure the confidence of investors and ensure an eco-
nomic growth of 4.4 percent in 2000. The above-mentioned crises need to be
briefly supplemented by the financial crisis in Argentina in the beginning of
the 21st century. Argentina has had a ‘history of chronic economic, monetary
and political problems’, but the financial crisis of 2001–2002, the beginning of
which can be traced back to 1998, was exceptional in terms of its enormous
consequences (Saxton 2003:1). In the period between 1998 and 2002, GDP
fell by 28%, the Argentine peso, linked to the USD at a 1:1 ratio, devaluated
to almost 4:1, unemployment rose from 12.4% to 23.6%, the number of people
living below the poverty line soared from almost 26% to 57.5%, and inflation
reached 41% in 2002 (Saxton 2003:1).
In 1989, President Carlos Saúl Menem (born 1930) ascended to office and
he carried out important reforms during his five-year mandate. Privatisation
took place, along with deregulation and the reduction of certain taxes, and the
state administration also underwent a partial reform. In 1991, the Convertibil-
ity Law was adopted which linked the Argentinian currency to the U.S. dollar,
ended hyperinflation (in 1990 it was 1,344%; whereas, in 1991 it decreased to
84%, and in 1995 to 1.6%), and ensured monetary stability. All of that attracted
foreign investors into the country.
In 1998, however, the Argentinian economy was negatively affected by
the crisis in Russia and Brazil, which in addition to Uruguay and Paraguay,
belong among the major trading partners of Argentina. The devaluation of
the Brazilian currency during the crisis had a negative impact on Argentinian
exports and the economy entered a recession. Financial problems led the gov-
ernment to weaken bank balance sheets and to increase the budget deficit,
which could not be financed by foreign loans (Mishkin 2006:195). In 2000 and
2001, the government raised taxes three times and ‘coerced the banks into
absorbing large amounts of government debt’ (Mishkin 2006:195). A strong
dollar in 2001 meant the reduction of Argentinian exports, so the government
– 122 –
proposed a change of rates bound to the USD, i.e. a factual devaluation of the
currency. Investors lost their confidence in the ability to repay debt and its
price increased when the government was forced to partially refinance it at
a higher interest rate. The IMF approved a loan of up to 22 billion USD. How-
ever, due to a failure to comply with the agreed terms, they were suspended in
December 2001. At the same time, the government froze bank deposits after
large withdrawals, and the economy found itself in a depression. A month
later, the Law of Public Emergency and Reform of the Exchange Rate Regime
was adopted, which among other things, devalued the Argentinian peso (over
70%), introduced a floating exchange rate, froze deposits, and approved the
so-called ‘pesofication’, i.e. converted USD bank deposits and loans to pesos at
a 1:1 ratio, even though the market exchange rate was 2:1. The loss to US cur-
rency holders amounted to 23 billion USD. This step was ultimately declared
unconstitutional by the Supreme Court in 2003. The government measures led
to the insolvency of many companies, the growth of inflation and interest, an
inability to repay (which in turn further negatively affected the beleaguered
banking sector), and a reduction of GDP growth, along with unemployment
and poverty. A slow economic restoration began in the middle of 2002.
4.4 THE EUROPEAN UNION

AND TRANSITION ECONOMIES
The collapse of the Soviet bloc with its COMECON organisation was an excel-
lent opportunity for the countries of Western Europe, mainly those neigh-
bouring countries from the EU. As Central and Eastern European economies
were opening up, new markets and new places for investment could be found.
Central European countries especially possessed educated labour, a decent,
though aged infrastructure, geographic proximity, as well as a history of a large
strong manufacturing sector, and adequate agriculture from the times before
the communist takeover after World War II. The populations of East Germany,
Czechoslovakia, Poland, and Hungary resented imposed Soviet central plan-
ning, knowing quite well how inefficient a system it was, and were eager to
join Western European structures, be it of an economic or political nature.
East Germany presented a special case, since the transition came through
the union with the FRG. German unification meant a transplantation of West
Germany’s legal, administrative, and economic infrastructure to five new fed-
eral states. Thus, East Germany became almost instantly a part of the EU
with access to its large market. The cost of this transformation was paid for
by the fiscal framework of the FRG. East German industry could not survive
this sudden exposure to competition, both within Germany and the EU. Many
companies were closed down or taken over by West German businesses. The
federal budget was thus forced to cope with rising unemployment, as well as
to pay for infrastructure and other projects to bring East Germany on a par

with the West. The result was a great decline in GDP (up to 35% between 1989
and 1991). The transition was very costly too, prompting the federal govern-
ment to introduce a new so-called tax of solidarity.
Czechoslovakia, and Poland to a large extent, were proponents of the shock
therapy in the economic sphere. Their transformation, however, was naturally
spread over six to eight years. In 1993, Czechoslovakia was split up along the
borders of the former federation’s republics. The division was peaceful, with
all the assets of the former federal republic being divided in a two to one ratio
in favour of the Czech Republic, roughly in line with the population figures. All
Central European countries became NATO members (1999), OECD members
(the Czech Republic in 1995, Poland and Hungary in 1996, Slovakia in 2000)
and they formed the so-called Visegrád Group to facilitate a quicker admis-
sion to the EU. Ultimately, the Visegrád Group had to wait for the ‘big bang’
when the EU expanded by 10 countries all at once in 2004. They were Estonia,
Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary, Slovenia,
Malta, and Cyprus. This rather substantial enlargement from 15 to 25 coun-
tries had its own implications in the structure of EU institutions. We ought
to describe the policy and institutional changes that facilitated not only this
enlargement, but also include those which happened after the admission of
Romania and Bulgaria in 2007, and Croatia in 2013.
As the integration process continues there is an ever increasing tension in
Europe, caused by the admission of poorer countries as measured by GDP per
capita. New countries also bring with them their political and cultural specif-
ics, nurtured by hundreds of years of independent or autonomous existence.
There are as many as seven more countries in various states of the admission
process (Iceland, Albania, Bosnia and Herzegovina, Serbia, Montenegro, Mac-
edonia, and Turkey), as well as one non-state entity, the Serbian secessionist
province of Kosovo and Metohija which is recognised by a majority of the EU
countries as the Republic of Kosovo.
Not surprisingly, the countries hoping for a deeper integration within the
existing EU are not keen on expanding the Union borders. On the other hand,
the countries resisting integration, especially the transfer of their sovereignty
towards the EU capital of Brussels, hope that the Union will enlarge and thus
set the integration process to become harder and lengthier, or even impos-
sible. The Single European Act of 1986 was arguably the last major piece of
legislation which a majority of countries from both above-mentioned ‘groups’
gladly agreed upon. This Act allowed the free movement of people, goods and
services, as well as capital throughout the EC.
After the revolutionary year of 1989, it was clear that for many of the
new democracies of Central and Eastern Europe, membership in the EC
was the priority of their policies. Governments, as well as people, equated
EC membership to recognition of their long and painful transition process to
become stable market oriented democracies. The EC was already confronted
with a possible ‘eastern’ enlargement in 1990 during discussions about the
– 124 –
unification of the FRG and GDR. The prospect of East Germany’s accession
provoked proposals for a deeper cooperation of the then twelve EC member
states that were not only supported by such countries as Germany or France,
but also by Jacques Lucien Jean Delors (born 1925), the President of the Euro-
pean Commission. The plans for ‘more union’ or ‘more Europe’ included the
strengthening of cooperation in economic, monetary and political spheres,
and a commitment to create a common foreign and security policy. Already
in December 1990, Rome hosted intergovernmental conferences of the EC
members on monetary and political union.
The debates on European monetary union (EMU) stemmed from the Euro-
pean Commission’s proposal of 1989 and were strongly influenced by, at least
in the beginning, a sceptical Germany. The EMU was to be introduced in three
phases, culminating in the creation of an independent European Central Bank
and a common currency. Due to the German attitude, the states that wanted
to adopt the Euro had to fulfil five rather strict so-called convergence criteria.
Three of them are monetary. The first, price stability criterion, means that
the average inflation rate (a 12-month average of yearly rates) of a member
state shall not exceed the inflation rate of the three most stable countries
with the lowest inflation rates by more than 1.5 percentage points. Inflation
is measured by the Harmonised Index of Consumer Prices (HICP). The second
criterion on long-term interest rates means that the average nominal long-
term interest rate during one year prior to examination is no more than 2 per-
centage points higher than the three best performing member states with the
lowest interest rates. The third criterion on exchange rate stability and par-
ticipation in the Exchange Rate Mechanism (ERM II) means that the national
currency has fluctuated for at least two consecutive years before the exami-
nation in the margins set in the exchange-rate mechanism within the range
of +/– 15% from the central rate. The two additional criteria are fiscal. First,
the criterion on the government budgetary position implies that a planned or
actual government deficit does not exceed 3% of GDP at market prices, with
two exceptions – the deficit ratio has declined substantially and continuously
and is close to the 3% level, and if there is deficit in excess of 3% it is exception-
al and temporary. Second, the criterion on government debt implies that the
government debt ratio relative to GDP at market prices must not exceed 60%
with the exception of when the value is approaching the reference value at
a satisfactory pace. The objective of the criteria was to establish a stable envi-
ronment favourable for investment and to support the financial discipline of
the less responsible member states. However, the criteria did not prevent the
admission of states that had not met them and/or manipulated their indices,
such as Greece. Great Britain and Denmark have been granted an exception
and may keep their national currencies. The other member states, including
the new ones, must at some point accept the Euro.
It was again the Germans who conditioned the realisation of the EMU upon
the agreement of a political union. Luxembourg, the smallest member state,

suggested during its presidency of the EC to build the future EU on three pil-
lars – the Rome Treaty, the Common Foreign and Security Policy, and coopera-
tion in justice and home affairs. A Dutch counterproposal to establish a closer
union did not receive much support and the concept of three pillars became
a backbone of the Maastricht Treaty signed in February 1992 and thus estab-
lishing the European Union. In every instance when the term EU was used in
this text prior to 1992, it was done so from this point of the future.
The first pillar fundamentally revised the Rome Treaty, its aim being to
enhance the legitimacy of common institutions and to simplify the deci-
sion-making process. The European Parliament (EP) received more powers,
such as the competence to influence the appointment and work of the mem-
bers of the Commission, or the right to ‘cooperate’ with the Council on key
issues like infrastructure, social fund or the development aid. However, the
EP was not to have any influence over issues connected to the Common Agri-
cultural Policy. In case of mutually contradicting opinions between the Parlia-
ment and the Council, the Council decides unanimously. The Parliament can
also co-decide in the legislative process, and can therefore submit amend-
ments or refuse the Council’s draft proposals. Nevertheless, the process is
very complicated and applies only to issues specified in the Treaty. The Treaty
introduced the principle of subsidiarity with a vision to further simplify the
decision-making process and bring it closer to the citizens. From now on, the
EU may act only if it is more effective than a decision and action on nation-
al, regional or local levels. In this regard, the Maastricht Treaty established
a Committee of the Regions. The principle of subsidiarity and the Committee’s
role were strengthened by the Treaty of Lisbon in 2009. It now has 353 mem-
bers (regional representatives, mayors, or elected representatives of regions
and cities) and has to be consulted during the legislative process in the EP and
the Council in various areas, such as economic and social cohesion, health,
education, employment, transport, trans-European networks, or social policy.
The Treaty also established the Cohesion Fund within the first pillar, from
which the EU funds environmental and transport projects in member states
whose Gross National Income per capita is lower than 90% of the EU average.
The EMU also became an important part of the first pillar.
The second pillar involved Common Foreign and Security Policy (CFSP). Its
objective is, according to the Treaty, to ‘safeguard the common values, fun-
damental interests and independence of the EU’, to strengthen the security
of the EU, to preserve peace and strengthen international security, to pro-
mote international cooperation and develop democracy. The member states
should consult and coordinate their policies within the Council and ‘speak
as one voice’. However, it needs to be said that the ambitious CFSP has been
hard to accomplish, as the civil war in former Yugoslavia and the second
Gulf War have shown. The CFSP is more or less a continuation of Europe-
an Political Cooperation (EPC) already established in 1970, only under a new
name.
– 126 –
The third pillar aimed to enhance free movement of citizens within the EU,
as a necessary condition of a single market. It involved a number of regula-
tions regarding immigration, asylum policy, and cooperation in affairs of jus-
tice, customs, and the like. The Schengen Agreement that created the Schen-
gen Area without border checks became a part of this pillar in the Amsterdam
Treaty in 1999. Only Ireland and Great Britain negotiated opt-outs from the
Schengen Area, whereas Cyprus, Romania, Bulgaria and Croatia are bound
to join.
The ratification process was quite difficult. Denmark negotiated opt-outs
in common currency and common security policies after its citizens refused
to accept the Treaty in the 1992 referendum. The referendum was repeated
the following year with almost 57% of voters in favour of the Treaty. French
President Mitterrand decided to hold a referendum after the Danish failure,
despite the fact that the Treaty had been already endorsed by the French
Parliament. The tight result (51.05% in favour of the Treaty to 48.95% against)
showed French anxiety about German unification and the situation in the
Balkans, which the EU had not been able to deal with. British Prime Minister
John Major had to join the vote on the Treaty with a vote of confidence, while
the Germans had to wait for the Federal Constitutional Court’s decision on the
constitutionality of the Treaty which was made in October 1993. The Maas-
tricht Treaty entered into force a month later.
Efforts for deeper integration continued. The first major amendment to the
Maastricht Treaty came into force in 1999 and is known as the Amsterdam
Treaty. It absorbed the Schengen Agreement, created the High Representative
for Common Foreign and Security Policy, extended the powers of Europol, and
expanded the areas of Qualified Majority Voting (QMV) in the Council. It also
introduced the idea of enhanced cooperation. Under this procedure a mini-
mum of nine member states can decide to cooperate more closely without
the involvement of other members. However, it did not arrange for a possi-
ble ‘eastern’ enlargement. This was dealt with in the Nice Treaty which was
signed in 2001 and came into force in 2003 after a repeated referendum in
Ireland, just a year before enlargement. It came with significant institutional
changes with regard to enlargement – it limited the size and the composition
of the Commission, further extended the QMV in the Council and gave more
weight to the largest states, allocated the number of seats in the Parliament
in a way that enhanced the influence of small and middle-sized countries, and
revised some of the common policies, such as CFSP, where it was possible to
opt for enhanced cooperation.
The disputes between countries asking for more integration and those now
quite openly opposing it or even trying to reverse it grow bitter with every
new piece of relevant legislation. The attempts for an EU constitution were
stalled in 2005 after rejection by the French and Dutch citizens in referenda.
However, the constitutional provisions and efforts to further reform the trea-
ties have continued, and a draft of a new treaty was signed in Lisbon in 2007.

The Lisbon Treaty came into force in December 2009, again after a repeated
referendum in Ireland after some changes were made, and after Czech Pres-
ident Václav Klaus (born 1941) finally signed it in November 2009. The Lis-
bon Treaty came up with yet another significant change in voting – more of
the QMV provided that the decision has been approved by a ‘double-majority’
(55% of EU member states, i.e. 15 states, representing at least 65% of the EU’s
population), more of majority voting, and a reduction in the right to veto. It
created two new positions, the Permanent President of the European Council
and the High Representative of the Union for Foreign Affairs and Security
Policy, by merging the positions of the external relations commissioner and
the high representative for foreign affairs. The EU also gained a legal person-
ality. The Treaty enhanced the powers of the Parliament, extended the are-
as of activity of the European Court of Justice, abolished the pillar structure,
defined the distribution of competences between the EU and member states,
and introduced EU exit clause for the first time.
THE CHAPTER SUMMARY

Russia, later the Soviet Union, already saw the first communist dictator-
ship after the Bolshevik revolution in 1917. Nationalization of industry was
followed by a forcible collectivization of agriculture with disastrous conse-
quences. Opponents of the new regime were deported to work camps – the
Gulags – and the society lived in fear. Hitler’s attack on the Soviet Union in
1941 brought the country into a temporal alliance with democratic states that
ended soon after the war. The Soviet Union endured great losses during the
war and saw the annexation of Central and Eastern Europe as its right. By
1948, all European satellites had a one-party system and followed (with the
exception of Yugoslavia) the USSR.
Some liberalization came after Stalin’s death with de-Stalinization under
the new leader Nikita Khrushchev. However, from an economic point of view
it soon became evident that a system based on central planning was impos-
sible to reform and that the USSR lagged behind the Western countries more
and more with every new decade. Conservatives took power again in the mid-
1960s under the leadership of Leonid Brezhnev who focused on a military
build-up to be able to ‘protect’ socialism in the Soviet sphere of influence.
A major change came in 1985 with Mikhail Gorbachev. He primarily focused
on economic changes that were, however, not going well and ultimately lead
to the fall of communism not only in the USSR but all of its satellites. Poland,
Hungary, Czechoslovakia, and East Germany underwent relatively peaceful
transitions, whereas Romania, Bulgaria, Albania and especially Yugoslavia,
experienced a more or less violent change of the political system.
The political changes in those countries were soon followed by economic
ones. The aim was to redirect the centrally planned economy towards a free
– 128 –
market one. Having no historical parallels, the process was hard for several
reasons. The economies were deformed with their focus on heavy industry,
they were almost autarkic in trading with each other and they did not partic-
ipate in the international division of labour. Two transformation methods –
a shock therapy and a gradual one – were usually combined in practise. All
countries experienced a rapid decrease of GDP, an increase in average infla-
tion, and level of poverty during the first years of transformation. However,
by the new millennium most of the transition countries had far better institu-
tions and prospects than under communist rule.
The collapse of communism entailed profound changes for EC/EU coun-
tries. Membership in the EC/EU was declared a priority for many transforming
countries. Czech Republic, Slovakia, Poland and Hungary formed the so-called
Visegrad Group to facilitate a quicker admission to EU. They had to wait for
another 10 countries to join the EU in 2004; Romania and Bulgaria joined in
2007, and Croatia in 2013. Others are in various states of the admission pro-
cess. However, it was not only enlargement that occupied the governments
of EU states. It was also a deepening of integration that lead to a common
currency in some of the member states, and the Lisbon Treaty in which the
EU gained a legal personality, further enhancing the powers of the European
Parliament, or strengthening its common foreign policy in the person of High
Representative of the Union for Foreign Affairs and Security Policy.
The last decade of the 20th century also witnessed serious financial crises
in various parts of the world – starting in Mexico in 1994, and followed by the
Asian currency crisis in 1997, hitting Brazil in 1999 and Argentina in 2001 and
2002.

/5/
Major Centres
of the World Economy
5.1 THE EUROPEAN CENTRE

The economic and institutional development of the European Union is
addressed in some detail previously (see Chapters 3 and 4). We will therefore
focus only on the main economic indicators and development over the last
twenty years or so, relevant to the world economy which includes the Euro-
pean Economic and Monetary Union. The example of the common agricultural
policy will help us to describe the action of the EU in the WTO.
5.1.1 ECONOMIC DEVELOPMENT OF THE EUROPEAN CENTRE
Cihelková et al. describes the economic development of the 1990s

(2001:135–143) which was marked by a recession in the first half, whereas
the second half of the decade witnessed a renewed growth. Alongside other
experts, she ranks the following among the underlying causes of the reces-
sion: an economic decline in all other economic centres of the world, as it had
a negative impact on European exports; a high growth in Western European
– 130 –
countries in the late 80s; and, the restrictive monetary policy of the EEC after
the unification of Germany. ‘The economic recession had the greatest impact
on the trends in employment. The average unemployment rate in the EU in
1993 reached almost 11%. In 1993, the EU saw an overall decline in economic
growth of 0.4% which was reflected in the growth of public budget deficits of
many countries (Denmark, Germany, Spain, Greece, France, Portugal, and the
Great Britain). There was an increase in internal debt, too’ (Cihelková et al.
2001: 136).
Table 5.1: Unemployment rate in %

Country
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
EU 27 8.7 8.5 8.9 9 9.1 9 8.2 7.2 7.1 9 9.7 9.7
Eurozone 8.5 8.1 8.4 8.8 9 9.1 8.5 7.6 7.6 9.6 10.1 10.2
Belgium 6.9 6.6 7.5 8.2 8.4 8.5 8.3 7.5 7 7.9 8.3 7.2
Bulgaria 16.4 19.5 18.2 13.7 12.1 10.1 9 6.9 5.6 6.8 10.2 11.2
Czech. Rep. 8.7 8 7.3 7.8 8.3 7.9 7.2 5.3 4.4 6.7 7.3 6.7
Denmark 4.3 4.5 4.6 5.4 5.5 4.8 3.9 3.8 3.3 6 7.4 7.6
Germany 7.5 7.6 8.4 9.3 9.8 11.2 10.3 8.7 7.5 7.8 7.1 5.9
Estonia 13.6 12.6 10.3 10 9.7 7.9 5.9 4.7 5.5 13.8 16.9 12.5
Ireland 4.2 3.9 4.5 4.6 4.5 4.4 4.5 4.6 6.3 11.9 13.7 14.4
Greece 11.2 10.7 10.3 9.7 10.5 9.9 8.9 8.3 7.7 9.5 12.6 17.7
Spain 11.1 10.3 11.1 11.1 10.6 9.2 8.5 8.3 11.3 18 20.1 21.7
France 9 8.3 8.6 9 9.3 9.3 9.2 8.4 7.8 9.5 9.7 9.7
Italy 10.1 9.1 8.6 8.4 8 7.7 6.8 6.1 6.7 7.8 8.4 8.4
Cyprus 4.9 3.8 3.6 4.1 4.7 5.3 4.6 4 3.6 5.3 6.5 7.8
Latvia 13.7 12.9 12.2 10.5 10.4 8.9 6.8 6 7.5 17.1 18.7 15.4
Lithuania 16.4 16.5 13.5 12.5 11.4 8.3 5.6 4.3 5.8 13.7 17.8 15.4
Luxembourg 2.2 1.9 2.6 3.8 5 4.6 4.6 4.2 4.9 5.1 4.5 4.8
Hungary 6.4 5.7 5.8 5.9 6.1 7.2 7.5 7.4 7.8 10 11.2 10.9
Malta 6.7 7.6 7.5 7.6 7.4 7.2 7.1 6.4 5.9 7 6.8 6.5
Netherlands 3.1 2.5 3.1 4.2 5.1 5.3 4.4 3.6 3.1 3.7 4.5 4.4
Austria 3.6 3.6 4.2 4.3 4.9 5.2 4.8 4.4 3.8 4.8 4.4 4.2
Poland 16.1 18.3 20 19.7 19 17.8 13.9 9.6 7.1 8.2 9.6 9.7
Portugal 4 4.1 5.1 6.4 6.7 7.7 7.8 8.1 7.7 9.6 11 12.9
Romania 7.3 6.8 8.6 7 8.1 7.2 7.3 6.4 5.8 6.9 7.3 7.4
Slovenia 6.7 6.2 6.3 6.7 6.3 6.5 6 4.9 4.4 5.9 7.3 8.2
Slovakia 18.8 19.3 18.7 17.6 18.2 16.3 13.4 11.1 9.5 12 14.4 13.5
Finland 9.8 9.1 9.1 9 8.8 8.4 7.7 6.9 6.4 8.2 8.4 7.8
Sweden 5.6 5.8 6 6.6 7.4 7.7 7.1 6.1 6.2 8.3 8.4 7.5
UK 5.4 5 5.1 5 4.7 4.8 5.4 5.3 5.6 7.6 7.8 8
Source: Eurostat
Major Centres of the World Economy – 131 –

Table 5.2: Inflation (consumer price index) in %
Country
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
EU 27 1.9 2.2 2.1 2 2 2.2 2.2 2.3 3.7 1 2.1
Eurozone 2.1 2.3 2.2 2.1 2.1 2.2 2.2 2.1 3.3 0.3 1.6
Belgium 2.7 2.4 1.6 1.5 1.9 2.5 2.3 1.8 4.5 0 2.3
Bulgaria 10.3 7.4 5.8 2.3 6.1 6 7.4 7.6 12 2.5 3
Czech. Rep. 3.9 4.5 1.4 –0.1 2.6 1.6 2.1 3 6.3 0.6 1.2
Denmark 2.7 2.3 2.4 2 0.9 1.7 1.9 1.7 3.6 1.1 2.2
Germany 1.4 1.9 1.4 1 1.8 1.9 1.8 2.3 2.8 0.2 1.2
Estonia 3.9 5.6 3.6 1.4 3 4.1 4.4 6.7 10.6 0.2 2.7
Ireland 5.3 4 4.7 4 2.3 2.2 2.7 2.9 3.1 –1.7 –1.6
Greece 2.9 3.7 3.9 3.4 3 3.5 3.3 3 4.2 1.3 4.7
Spain 3.5 2.8 3.6 3.1 3.1 3.4 3.6 2.8 4.1 –0.2 2
France 1.8 1.8 1.9 2.2 2.3 1.9 1.9 1.6 3.2 0.1 1.7
Italy 2.6 2.3 2.6 2.8 2.3 2.2 2.2 2 3.5 0.8 1.6
Cyprus 4.9 2 2.8 4 1.9 2 2.2 2.2 4.4 0.2 2.6
Latvia 2.6 2.5 2 2.9 6.2 6.9 6.6 10.1 15.3 3.3 –1.2
Lithuania 1.1 1.6 0.3 –1.1 1.2 2.7 3.8 5.8 11.1 4.2 1.2
Luxembourg 3.8 2.4 2.1 2.5 3.2 3.8 3 2.7 4.1 0 2.8
Hungary 10 9.1 5.2 4.7 6.8 3.5 4 7.9 6 4 4.7
Malta 3 2.5 2.6 1.9 2.7 2.5 2.6 0.7 4.7 1.8 2
Netherlands 2.3 5.1 3.9 2.2 1.4 1.5 1.7 1.6 2.2 1 0.9
Austria 2 2.3 1.7 1.3 2 2.1 1.7 2.2 3.2 0.4 1.7
Poland 10.1 5.3 1.9 0.7 3.6 2.2 1.3 2.6 4.2 4 2.7
Portugal 2.8 4.4 3.7 3.3 2.5 2.1 3 2.4 2.7 –0.9 1.4
Romania 45.7 34.5 22.5 15.3 11.9 9.1 6.6 4.9 7.9 5.6 6.1
Slovenia 8.9 8.6 7.5 5.7 3.7 2.5 2.5 3.8 5.5 0.9 2.1
Slovakia 12.2 7.2 3.5 8.4 7.5 2.8 4.3 1.9 3.9 0.9 0.7
Finland 2.9 2.7 2 1.3 0.1 0.8 1.3 1.6 3.9 1.6 1.7
Sweden 1.3 2.7 1.9 2.3 1 0.8 1.5 1.7 3.3 1.9 1.9
UK 0.8 1.2 1.3 1.4 1.3 2.1 2.3 2.3 3.6 2.2 3.3
Source: Eurostat
– 132 –
EEC/EU countries had been facing high unemployment rates since the 70s,
mainly due to the oil crisis, increased competition from Asia (the so-called
Asian Tigers), and the increasing economic activity of women. Currently,
high unemployment (from 2000 to 2011 it averaged 8.7% for the EU-27) is
also considered one of the major economic problems of the European Union,
although – as in many other cases – considerable differences can be found
among countries and regions. The unemployment rate in 2011 ranged from
21.7% in Spain to 4.2% in Austria (see Table 5.1). The difference amounts to
17.5%, while in 1999 it was ‘only’ 13%.
Developments in the late 90s influenced the establishment of the Econom-
ic and Monetary Union (see the next section). With the convergence crite-
ria adopted, it was necessary to reduce budget deficits, debt, inflation and
interest, along with the stabilisation of exchange rates. All this provided the
conditions for economic growth. The average GDP growth rose from 1.5% in
the years 1992–1995 to 2.35% in 1996–1999. The average rate of inflation (GDP
deflator) in the same period fell from 3.4% to less than 2%. Only the unem-
ployment rate decreased very slightly, from 10.3% to 9.8% (Cihelková et al.
2001:137, 139).
In 2004, the largest ever single expansion of the European Union by ten
countries occurred, namely from the former communist bloc – the Czech
Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Slovakia, Malta, Slo-
venia, and Poland. Three years later, the accession of Romania and Bulgaria
took place. The European Union had thus been added over one million square
kilometres (to the original 3.2 million sq. km) and more than 100 million peo-
ple (the ‘original Fifteen’ used to have about 397 million). The composition of
the population in terms of age structure in 2009 was estimated at 15.5% of
pre-productive age (0–14), 67.2% of working age (15–64), and 17.3% of post-pro-
ductive age (over 65), with a total EU population growth of 0.2%. This growth,
however, has increasingly been dependent on a positive net migration.
The differences among member states grew bigger at that stage. Luxem-
bourg has long had the largest GDP per capita. In 2011, according to the World
Bank data it amounted to USD 115,038, while Bulgaria had to settle for the
current USD 7,158 and Romania for USD 8,405. Huge regional differences are
shown in the following table. They are NUTS-2 regions. Of a total of 271 in
2009, 39 of these regions exceeded 125% of GDP per capita. Eight of them were
in Germany, five in the Netherlands, four were both in Italy and Austria, three
in Belgium, Spain and the UK each, two in Finland, and one in each of the fol-
lowing: the Czech Republic, Denmark, Ireland, France, Slovakia, Sweden and
Luxembourg. Sixty-five regions fell under the 75% threshold. Fifteen of those
were in Poland, seven were both in the Czech Republic and Romania, six in
Hungary, five in Bulgaria, four in Greece, France (overseas territory) and Italy
each, three in Portugal and Slovakia, two in the UK, and one in each of the
following: Spain, Slovenia, Estonia, Lithuania and Latvia (see Eurostat).

Table 5.3: Regional GDP per capita, EU27, 2009 (in PPS, EU27 = 100)
20 regions with the highest GDP 20 regions with the lowest GDP
1 Inner London (UK) 332 1 Severozapaden (Bulgaria) 27
2 Luxembourg 266 2 Severen tsentralen (Bulgaria) 29
3 Brussels (Belgium) 223 3 Nord-Est (Romania) 29
4 Hamburg (Germany) 188 4 Yuzhen tsentralen (Bulgaria) 31
5 Bratislava region (Slovakia) 178 5 Severoiztochen (Bulgaria) 36
6 Ile de France (France) 177 6 Sud-Vest Oltenia (Romania) 36
7 Praha (Czech Republic) 175 7 Yugoiztochen (Bulgaria) 36
8 Stockholm (Sweden) 172 8 Sud-Est (Romania) 38
9 Groningen (Netherlands) 170 9 Észak-Magyarország (Hungary) 40
10 Åland (Finland) 166 10 Sud-Muntenia (Romania) 40
11 Vienna (Austria) 161 11 Lublin (Poland) 41
12 Oberbayern (Germany) 160 12 Podkarpackie (Poland) 42
13 Bremen (Germany) 160 13 Észak-Alföld (Hungary) 42
14 North East Scotland (UK) 158 14 Dél-Alföld (Hungary) 43
15 Darmstadt (Germany) 158 15 Nord-Vest (Romania) 43
16 Utrecht (Netherlands) 157 16 Dél-Dunántúl (Hungary) 45
17 Noord-Holland (Netherlands) 151 17 Podlaskie (Poland) 45
18 Hovedstaden (Denmark) 149 18 Warmia-Mazurskie (Poland) 45
19 Bolzano (Italy) 148 19 Centru (Romania) 46
20 Bekrshire, Buckinghamshire 142 20 Swietokrzyskie (Poland) 47
and Oxfordshire (UK)
Source: Eurostat
The composition of gross domestic product also varies. For the European
Union as a whole, it was estimated that agriculture accounted for 1.8%, indus-
try for 25.2%, and services for 72.8% of GDP in 2013. Well beyond this average
was Romania, where the share of agriculture accounted for almost 8%, and
services accounted for almost 60% of GDP.
Like the vast majority of countries around the world, the EU countries
were affected by the global recession between 2007 and 2009, which, among
other things, was manifested by a reduction of economic growth in all coun-
tries except Poland (see Table 5.4).
– 134 –
Table 5.4: Growth of GDP in %
Country
Average
2001–10
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
EU 27 2 1.2 1.3 2.5 2 3.3 3 0.5 –4.3 1.8 1.3
Eurozone 1.9 0.9 0.8 2.2 1.7 3.1 2.8 0.4 –4.2 1.8 1.1
Belgium 0.8 1.4 0.8 3.2 1.7 2.7 2.9 1 –2.8 2.2 1.4
Bulgaria 4.2 4.7 5.5 6.7 6.4 6.5 6.4 6.2 –5.5 0.2 4.1
Czech. Rep. 2.5 1.9 3.6 4.5 6.3 6.8 6.1 2.5 2.5 2.3 3.2
Denmark 0.7 0.5 0.4 2.3 2.4 3.4 1.6 –1.1 –5.2 1.7 0.7
Germany 1.2 0 –0.2 1.2 0.8 3.4 2.7 1 –4.7 3.6 0.9
Estonia 7.5 7.9 7.6 7.2 9.4 10.6 6.9 –5.1 –13.9 3.1 4.1
Ireland 4.8 5.9 4.2 4.5 5.3 5.3 5.2 –3 –7 –0.4 2.5
Greece 4.2 3.4 5.9 4.4 2.3 5.2 4.3 1 –2 –4.5 2.4
Spain 3.6 2.7 3.1 3.3 3.6 4 3.6 0.9 –3.7 –0.1 2.1
France 1.8 0.9 0.9 2.5 1.8 2.5 2.3 –0.1 –2.7 1.5 1.1
Italy 1.8 0.5 0 1.5 0.7 2 1.5 –1.3 –5.2 1.3 0.3
Cyprus 4 2.1 1.9 4.2 3.9 4.1 5.1 3.6 –1.7 1 2.8
Latvia 8 6.5 7.2 8.7 10.6 12.2 10 –4.2 –18 –0.3 4.1
Lithuania 6.7 6.9 10.2 7.4 7.8 7.8 9.8 2.9 –14.7 1.3 4.6
Luxembourg 2.5 4.1 1.5 4.4 5.4 5 6.6 1.4 1.4 3.5 3.1
Hungary 3.8 4.1 4 4.5 3.2 3.6 0.8 0.8 –6.7 1.2 1.9
Malta –1.6 2.6 –0.3 1.8 4.2 1.9 4.6 5.4 –3.3 3.2 1.9
Netherlands 1.9 0.1 0.3 2.2 2 3.4 3.9 1.9 1.9 1.8 1.4
Austria 0.5 1.6 0.8 2.5 2.5 3.6 3.7 2.2 1.9 2.1 1.6
Poland 1.2 1.4 3.9 5.3 3.6 6.2 6.8 5.1 1.6 3.8 3.9
Portugal 2 0.7 –0.9 1.6 0.8 1.4 2.4 0 –2.5 1.3 0.7
Romania 5.7 5.1 5.2 8.5 4.2 7.9 6.3 7.3 –7,1 –1.3 4.2
Slovenia 2.9 3.8 2.9 4.4 4 5.8 6.8 3.7 –8,1 1.2 2.7
Slovakia 3.5 4.6 4.8 5.1 6.7 8.5 10.5 5.8 –4.8 4 4.9
Finland 2.3 1.8 2 4.1 2.9 4.4 5.3 1 –8.2 3.6 1.9
Sweden 1.3 2.5 2.3 4.2 3.2 4.2 3.3 –0.6 –5.3 5.7 2.1
UK 2.5 2.1 2.8 3 2.2 2.8 2.7 –0.1 –4.9 1.4 1.5
Source: Eurostat
With the exception of Greece, Ireland, Spain, Lithuania and Romania, most
economies already witnessed more or less economic growth a year later. How-
ever, further serious problems were not long in coming. In 2011, the Debt

Crisis in the euro area intensified, having been caused mainly by the banking
crisis and the irresponsible fiscal policies of some governments. The Debt
crisis first erupted in Greece, which asked the European Union and the IMF
for funding in April 2010. A few months later it was joined by Ireland and
Portugal in 2011, and Spain in June 2012. Already in May 2010, the Eurozone
countries, the European Commission and the IMF agreed to create the Euro-
pean Financial Stability Facility (EFSF), i.e. a euro rescue fund, which provides
loans and guarantees to the governments of countries affected by the crisis.
The fund currently has EUR 750 billion at its disposal (440 billion provided by
the euro area member states, 250 billion was guaranteed by the IMF, and the
remaining 60 billion was provided by the EU’s emergency fund). Less than
a year later, a decision was made to establish a permanent mechanism to
provide financial assistance to states whose high debt would threaten the sta-
bility of the euro area. The European Stability Mechanism replaced the EFSF
in 2013. Among other extremely indebted countries being Italy, Belgium, and
France (see Table 5.5).
Table 5.5: The indebtedness of euro area countries, 2011
State Budget deficit (–) / Government deficit

surplus (+) as % of GDP as % of GDP
Belgium –3.7 98
Germany –1 81.2
Estonia 1 6
Ireland –13.1 108.2
Greece –9.1 165.3
Spain –8.5 68.5
France –5.2 85.8
Italy 1.9 120.1
Cyprus –6.3 71.6
Luxembourg –0.6 18.2
Malta –2.7 72
Netherlands –4.7 65.2
Austria –2.6 72.2
Portugal –4.2 107.8
Slovenia –6.4 47.6
Slovakia –4.8 43.3
Finland –0.5 48.6
Source: Eurostat
Despite all measures, the euro area has been unable to cope with the debt
crisis, even if we leave aside the negative long-term consequences of the
– 136 –
actions taken. Due to a lack of political will, the Greek government has hither-
to not been able to implement the reforms agreed upon by the EC and the IMF.
It seems that the Nobel laureate in economics Milton Friedman (1912–2006)
was right when he considered the common currency in the EU disadvanta-
geous, as the fiscal policies of individual member states were very different
(see further in the section on EMU).
According to WTO data in 2010, the European Union as a whole contrib-
uted to 15% of the world exports (compared to 8.38% by the USA, 5.05% by
Japan, and 10.34% by China). The major export partners have been the Unit-
ed States, China, Switzerland (within the European Economic Area), Russia
and Turkey. Industrial products represent over 80% of exports, 8.2% involve
fuels and mining products, and 7.2% consist of agricultural products. The main
import partners are China, the USA, Russia, Switzerland, and Norway. The
largest shares of imports comprise 60% of industrial products, and 30.2% of
fuel (WTO Trade Statistics).
5.1.2 THE ECONOMIC AND MONETARY UNION
The aim to establish an economic and monetary union in the EEC had been
adopted in the early 70s. In 1978 the agreement on the European Monetary
System (EMS) was signed in order to stabilise exchange rates, and thus con-
tribute to the development of trade between the countries of the European
Community. A monetary unit of account ECU – European Currency Unit – was
introduced, which was still being considered as a future common currency at
the turn of the 80s and 90s. Following discussions and proposals on the form
of EMU during the 80s, its final form was adopted by the Maastricht Treaty.
A prerequisite for achieving this ambitious goal was to approximate member
states’ economies and meet the convergence criteria (see chapter 4.4). The
creation of the EMU was carried out in three stages. During the first stage,
which took place from 1st June 1990 to 31st December 1993, member states
narrowed the national currency fluctuation bands and consolidated the coop-
eration among their national banks. The next stage took place from 1st Janu-
ary 1994 to 31st December 1998. During that period, the European Monetary
Institute (EMI), which directed the European Monetary System, was promot-
ing the convergence of member states’ monetary policies and preparing pro-
cedures for the future European Central Bank, which replaced the EMI in
1999. At this stage the convergence criteria should have been fulfilled. Also
in 1998, a decision was made on the common euro currency.8 The third phase
8 Just as a historical curiosity, I present the official explanation of the choice of the new Europe-
an currency symbol, as quoted by Cihelková (2001: 163): namely that the euro symbol – a hori-
zontally double crossed Greek epsilon – has several symbolic meanings. Firstly, it refers to
Greece as the cradle of European civilisation, secondly, it is the first letter of the word Europe,
and thirdly, it is crossed by two parallel lines to certify the stability and strength of the euro.

took place from 1st January 1999 to 1st March 2002, when all the EMU mem-
ber countries introduced a common currency. At the beginning, the 11 coun-
tries that had met the convergence criteria entered the EMU. Only the Great
Britain, Denmark, Sweden and Greece stayed out (the latter sought the mem-
bership in the EMU, but qualified only in 2001. As it is known today, it was
on the basis of falsified data). The European Central Bank was established,
which was the forefront of the European System of Central Banks (ESCB), and
took over responsibility for the EU monetary policy. Other countries that have
adopted the euro, were Slovenia in 2007, Cyprus and Malta in 2008, Slovakia
in 2009, and last came Estonia in 2011.
Among the benefits of the EMU, economists regard the creation of a sin-
gle economy, similar to the United States in its scope, the long-term reduc-
tion of inflation and interest rates decline, the transaction costs reduction, or
the unification of rules for all market participants. In the light of the current
euro zone debt crisis it is clear, however, that some earlier concerns arising
from excessive differences among the twelve (seventeen in 2011) participat-
ing economies, deprived of choice to respond to any problems with adequate
monetary instruments, have been confirmed.
5.1.3 THE EUROPEAN UNION AND THE WTO – AN EXAMPLE

OF THE COMMON AGRICULTURAL POLICY
The Common Agricultural Policy (CAP) has been a part of European integra-
tion since its inception in the 50s. Its cost climbed up to 87% of the joint budget
in the 70s, and it still cuts off almost half of it, even after several reforms.
It is currently funded from two sources, namely the European Agricultural
Guarantee Fund (EAGF), which provides direct payments to farmers and the
finances market measures etc., and the European Agricultural Fund for Rural
Development (EAFRD), which – as the name suggests – provides means to sup-
port rural development. Given that the European Union as a whole is the larg-
est producer of certain agricultural commodities (such as milk, wheat, olive,
rapeseed oil) and the second or third largest producer of other commodities
(such as beef and pork, eggs or potatoes), its agricultural policy significantly
affects other countries, especially those dependent on agriculture (see WTO
2011:101).
‘In the past, domestic prices [i.e. within the EU] of many commodities were
kept well above world market prices by export subsidies and intervention
purchases with relatively high tariffs. When the export subsidies and inter-
vention had been limited, the gap between international and domestic prices
decreased. Despite that, the CAP reforms have not reduced the tariffs under
the most favoured clause which remain relatively high’ (WTO 2011:105). In
2011, there were 1,998 different EU tariffs on agricultural products, whose
average level was 15.2%, a decrease of more than 3% percent since 2006. The
– 138 –
picture becomes less optimistic, however, when it is compared to the average
non-agricultural products tariff which was 4.1%. Beside customs duties, the
European Union uses other import quotas, has introduced a system of special
agricultural standards and guarantees, and export subsidies. According to
the WTO, the use of export subsidies may destabilise prices of agricultural
products on world markets and ‘change the terms of trade to the detriment of
the other exporters’ (WTO 2011:111).
In the period between 1999 and 2009 taxpayers and consumers ‘paid’,
because of the common agricultural policy, nearly one billion euros to Euro-
pean farmers. According to the WTO analyses this amount ‘represents a high
level of support and maintains production and exports on a higher level and
imports on a lower level than would be the case without it… The Common
Agricultural Policy, despite the reforms over the last twenty years, still has
a negative impact outside and inside the EU’ (WTO 2011:115).
It is therefore not surprising that most of the litigation in the WTO which
the EU participates in relates to its agricultural policy, although not exclu-
sively to it. The very reason is the many trade barriers protecting European
agriculture from cheaper competition from other countries. By 2006, 27 of the
46 disputes against the EU had been related to the agricultural policy.
The agricultural policy had already come under sharp criticism for viola-
tion of GATT rules in 1961 during the Uruguay Round. The outcome of the dis-
pute was not clear though. The CAP was not in direct conflict with GATT rules;
however, it was not compatible either. One of the more important and long-
term disputes related to the use of growth hormones in beef cattle. In 1980,
some consumer protection groups highlighting the harmful effects of these
hormones in humans and demanded their ban. That happened five years later
in Germany, Belgium and Italy, who subsequently pushed to enforce this pro-
hibition in European legislation. They soon succeeded, mainly due to domes-
tic overproduction and an attempt to limit imports of beef. In December 1985,
a regulation prohibiting both the use of hormones in the EEC and the import
of products containing them was adopted, despite scientific studies that had
not proven any harmful effects on human health. The lack of scientific justifi-
cation meant a violation of GATT rules according to the United States and oth-
er countries. The ‘beef war’ fully erupted in 1989 when the EC banned imports
of U.S. beef. In turn, the latter imposed sanctions on EEC worth $100 mil-
lion. The controversy continued when the EU refused to withdraw its ban.
The United States, therefore, along with Australia, New Zealand, Chile and
Argentina filed a complaint with the WTO in 1996 and it was recognised as
legitimate. Nevertheless, the EU did not fulfil its obligations, which had been
enacted during the procedure, and the WTO approved the U.S. sanctions up
to $116.8 million. ‘The EU has continued its legal defence of the policy in the
WTO. After passing legislation in 2003 that changed the EU ban to… a provi-
sional ban, subject to further scientific study, the EU notified the WTO that it
was now in compliance with the WTO ruling’ (Davis 2007:20). It also initiated

a dispute in the WTO against the USA and Canada which had refused to end
the sanctions.
Another protracted conflict was, for instance, the ‘banana war’ between
the EU on the one side and the USA and several Latin American countries on
the other (Ecuador, Guatemala, Honduras, Panama, Mexico) which concerned
the reduction of tariffs on banana imports from these countries. The cause
had been significantly lower tariffs on imports from twelve former colonies
(e.g. Cameroon, Ivory Coast and Belize) within the development aid frame-
work; or, e.g. the sugar dispute, in which the EU protects its producers against
cheaper imports with high tariffs, a support of its own producers, and subsi-
dies of exports. A complaint against a violation of the WTO rules has been
lodged by Brazil, Australia and Thailand.
Settling commercial disputes in the WTO has been common practice, with
many countries of the world participating therein.9 According to some econo-
mists and researchers, it is evident that ‘the EU ranks among the least cooper-
ative trading entities’ (Davis 2007:2). Between the years 1960–1994 it changed
its behaviour in 44% of cases of dispute. Over the same period, Japan did so in
88% and the USA in 76% of cases. The change often occurs only after a delay,
decision blocking, or the introduction of sanctions against the EU.
5.2 THE UNITED STATES OF AMERICA

The United States remains (despite many problems) the largest economy in
the world. According to the World Economic Outlook, published yearly by the
IMF, in 2011 it accounted for 19.1% of world GDP (the share of China as the
second largest economy was 14.3%).
5.2.1 THE ECONOMIC DEVELOPMENT OF THE USA
The U.S. economy in the early 90s was in a recession, which was characterised
by economic stagnation and chronic unemployment. In 1991, GDP dropped
by 0.9% and the unemployment rate reached nearly 7%. Although the George
Herbert Walker Bush (born 1924) administration had started the necessary
reforms, the situation failed to resolve or improve remarkably during his pres-
idency. Thus, Democrats led by William (Bill) Jefferson Clinton (born 1946)
took their chance in the 1992 elections, focusing on promoting economic
growth and employment in their programme; in the coming years they also
benefited from the upswing in the economic cycle.
9 All the disputes can be found in chronological order on the WTO website: <http://www.wto
.org/english/tratop_e/dispu_e/dispu_status_e.htm>, 27.8.2012
– 140 –
Table 5.6: Selected Economic Indicators, 1992–1999
Year GDP growth Export of FDI (net Inflation, Unemployment

in %, goods and inflows, BoP, consumer (% of total
constant services current price workforce)
2000 U.S. (% of GDP) U.S. dollar, index in %
dollar in millions)
1992 3.4 10 19,810 3 7.5
1993 2.9 10 51,380 3 6.9
1994 4.1 10 46,130 2.6 6.1
1995 2.5 11 57,800 2.8 5.6
1996 3.8 11 86,520 2.9 5.4
1997 4.5 12 105,590 2.3 4.9
1998 4.4 11 179,030 1.6 4.5
1999 4.9 11 289,443 2.2 4.2
Source: World Bank Date Series
‘The long-term goal of Clinton’s economic programme were major changes

on the supply side of the economy, namely infrastructure and “human capital”
development. In this area, Clinton’s programme focused on long-term support
for research and development, redevelopment of education and retraining
system in order to attain a higher mobility of the workforce during periods of
high unemployment. Budgetary policy became the basic tool of economic pol-
icy. The revenue side of the budget was activated, which implied an increase
of taxes’ (Cihelková et al. 2001:94). Unemployment was declining from 1993,
which is considered by experts as the end of the recession and the beginning
of the boom, to 2000 (see Table 5.6). Economic growth was supported by the
low level of short-term and long-term interest rates during most of both Clin-
ton’s election periods (1993–2000), which ultimately became a major contri-
bution to the recent mortgage crisis in the USA.
In the late 90s economic development was negatively affected by Asian
(1997) Russian, and Latin American (1998) crises, resulting in a fall in U.S.
exports and a growth of the current account deficit in the balance of pay-
ments. The latter climbed to 233.45 billion dollars in 1998, surpassing its 1987
maximum when it had reached 168 billion dollars. As a second reason for
this deficit, the literature cites the consumer behaviour of Americans who
were spending beyond their income and getting into debt, so that the annual
rate of personal savings in the U.S. was close to zero. Despite that, owing to
the previous economic boom, for the first time in 29 years the USA ended up
with a budget surplus of $69.2 billion USD, i.e. 0.8% of GDP, in the 1997–1998
fiscal year. The United States enjoyed budget surpluses until 2001, when the
surplus was more than $128 billion dollars. So far, the highest budget deficit

in the U.S. post-war history was recorded in 2009, in the context of the global
crisis, which peaked at $1.4 billion, or 13% of GDP. The highest budget deficits
belong to the periods of the First World War (16% of GDP in 1919) and the Sec-
ond World War (24% of GDP in 1945). During the Great Depression, the budget
deficit reached 5% of GDP. With a few rare exceptions, the U.S. governments
have depended on budget deficits since the 1960s.
Table 5.7: Population of the United States, 1992–1999
Year Total Population Fertility Population Population Urban

Population growth rate ages 0–14 ages 15–64 population
in % (children (% of total) (% of total) in %
per
1 woman)
1992 256,514,000 1.4 2 22 66 –
1993 259,919,000 1.3 2 22 66 –
1994 263,126,000 1.2 2 22 65 –
1995 266,278,000 1.2 2 22 65 77
1996 269,394,000 1.2 2 22 66 –
1997 272,657,000 1.2 2 22 66 –
1998 275,854,000 1.2 2 22 66 –
1999 279,040,000 1.1 2 22 66 –
Source: World Bank Data Series
Table 5.8: Selected Economic Indicators, 2000–2011
Year GDP growth Goods and FDI (net Inflation, Unemployment

in %, services inflows, BoP, consumer (% of total
constant exports current price labour force
2000 U.S. (% of GDP) U.S. dollar, index
dollar in millions) (in %)
2000 4.2 11 321,274 3.4 4
2001 1.1 10 167,020 2.8 4.7
2002 1.6 9 84,370 1.6 5.8
2003 2.6 9 63,750 2.3 6
2004 3.5 10 145,966 2.7 5.5
2005 3.1 10 112,638 3.4 5.1
2006 2.7 11 243,151 3.2 4.6
2007 1.9 12 221,166 2.9 4.6
2008 –0.4 13 310,093 3.8 5.8
2009 –3.5 11 158,581 –0.4 9.3
2010 3 13 236,226 1.6 9.6
2011 1.7 – 227,865 3.2 –
– 142 –
Table 5.9: Central government debt (% of GDP)
2001 32.4 2006 46.4

2002 43.5 2007 46.7
2003 46.2 2008 55.2
2004 47.0 2009 67.0
2005 47.3 2010 76.1
January 2001 marked the beginning of the presidency of George Walker

Bush (born 1946), who in the next two years pushed through tax cuts for all
taxpayers. This step had both many supporters and critics. According to the
former, this measure was to encourage further economic growth and thereby
increase revenue to the budget. To the contrary, critics point out that tax cuts
reduce budget revenues and thus adversely affect not only government fund-
ing of health care (Medicare) and Social Security, but also lead to an increase
in budget deficits. Their claim is supported by the fact that the budget deficit
had reached as much as $162 billion USD during Bush’s second term of office in
2007. However, it is important to realise that in the years following 9/11 2001
the U.S. spending on defence and national security increased significantly.
Just the wars in Iraq and Afghanistan are estimated to have cost $3 billion.
Table 5.10: Population of the United States, 2000–2011
Year Population Population Fertility Population Population Urban

total growth rate ages 0–14 ages 15–64 population
in % (children (% of (% of total) in %
per 1 total)
woman)
2000 282,162,411 1.1 2.1 21 66 79
2001 284,968,955 1 2 21 66 –
2002 287,625,193 0.9 2 21 67 –
2003 290,107,933 0.9 2 21 67 –
2004 292,805,298 0.9 2 21 67 –
2005 295,516,599 0.9 2.1 21 67 81
2006 298,379,912 1 2.1 20 67 –
2007 301231207 1 2.1 20 67 –
2008 304,093,966 0.9 2.1 20 67 –
2009 306,771,529 0.9 2 20 67 –
2010 309,349,689 0.8 2.1 20 67 82
2011 311,591,917 0.7 – 20 67 –

The Bush administration was also faced with the mortgage crisis. In 2001,
the U.S. central bank (FED) reduced the base rate from 6.5% to 1.75%, aiming
to help bankrupt companies, investors, and households, which had invested
in overvalued technology stocks in the previous years (the heyday of the Inter-
net and other new technologies). Although this step helped some companies
and promoted economic growth, cheap consumer loans allowed American
families to continue to spend beyond their means, i.e. to become increasingly
indebted. Households spent mainly on consumer goods and real estate, using
particularly adjustable-rate mortgages, which had no guaranteed amount of
monthly payments in the years that follow signing the contract. Also, no-one
checked the creditworthiness, i.e. the ability of borrowers to refinance these
loans. The prices increased along with the number of purchased properties. In
2004, the FED increased the extremely low base rate (1%) to 2.25%, in Decem-
ber 2005 to 4.25%, and in 2006 to 5.25%. This increase was reflected in higher
mortgage interest rates, which became less popular, along with a reduced
demand for real estate, the price of which began to decline. In response to
this trend, building companies reduced the number of newly built homes, thus
reducing the offer, which means dealing with the crisis based on the market
with no interference by the state. Many households, however, began to expe-
rience financial difficulties and the problems escalated in 2007 when fuel pric-
es also witnessed a dramatic increase. According to some estimates, 20% of
households had trouble paying the subprime mortgages worth about $140 bil-
lion, which in turn meant a liquidity crisis, the bankruptcy of some banks or
their takeover by stronger banks. That first occurred in March 2008, when
the fifth-largest investment bank Bear Stearns was taken over by JP Morgan
Chase with the support of the FED. The U.S. Government also took over Fannie
Mae and Freddie Mac to help refinance subprime mortgages, pumping tens of
billions of dollars into them. It also provided assistance to large financial insti-
tutions. In September 2008, the government refused to help the fourth-largest
investment bank Lehman Brothers, which went bankrupt, triggering panic in
the financial markets. In order to stabilise these markets, Congress adopted
the Troubled Asset Relief Program (TARP) in October 2008, a bailout of up
to $700 billion that provided the U.S. government with funds to temporarily
purchase assets and equity of financial institutions. In the mid-2008, the U.S.
economy fell into recession, which due to interconnected financial markets
spread nearly all over the world. After the acute crisis was over in 2011, it
had become apparent that the total funds made available by FED for vari-
ous types of bail-out schemes including Central Banks Liquidity Swaps, direct
assistance to fourteen so called Too Big to Fail institutions or asset purchases
was around $29.6 trillion USD (Felkerson 2011).
GDP composition by sector in 2011 was about 1.2% agriculture, 19.2% indus-
try and 74.6% services. The United States accounted for more than 8% of the
world exports; the major export commodities included engineering products
(aircraft, automobiles and their components, computers, etc.), fuel, mining
– 144 –
products, and food. The USA is a net exporter of food. According to the WTO,
its major export partners are Canada, the European Union, Mexico, China, and
Japan. As for global imports the USA accounted for more than 12% thereof,
mostly importing from China, the EU, Canada, Mexico, and Japan.
5.2.2 THE USA AND NAFTA
The North American Free Trade Agreement (NAFTA) among the USA, Canada,
and Mexico entered into force in 1994, but efforts to reduce trade barriers
in this area were much older. The United States sought duty-free trade with
Canada since the mid-19th century. This effort resulted in several agreements
that reduced or completely eliminated tariffs on selected products in the sec-
ond half of the 19th and the first half of the 20th century. In 1942, the USA
became Canada’s largest trading partner. A specific proposal put forward by
the United States in 1948 was refused on the Canadian side, thus agreements
only in some sectors such as the automotive industry were made in subse-
quent years. Negotiations on the free trade agreement were restored in 1986.
Trade between the two countries is the largest trade in goods and services
between individual countries in the world. A year later the Canada-US Free
Trade Agreement (CUSFTA) was signed, which entered into force in 1989.
In the years 1985–1989, the United States signed three trade agreements
with Mexico, which helped to double trade between the two countries in this
period. At the same time, the ongoing negotiations between Canada and Mex-
ico led to the signing of ten agreements that encouraged the until then quite
superficial relationships in 1990. Cihelková lists several reasons that ulti-
mately led to the signing of NAFTA. Regional integration would enhance the
competitiveness of the three countries to world markets, and consequently
take advantage of the opportunities and outcomes of GATT negotiations. The
second reason stated was the intensification of European integration in the
80s and early 90s, as the establishment of an internal single market inspired
the North American states. Thirdly, the results of CUSFTA fell short of the
initial expectations.
This is historically the first reciprocal free trade pact between a substan-
tial developing country and developed economies and the second largest free
trade zone in the world after the European Union. Despite the fact that by
no means is NAFTA a case of integration similar to the European Union, it is
more than just eliminating tariff and non-tariff barriers to trade among those
countries. The agreement also comprises of investment rules, transport and
financial services, intellectual property, government purchases, and dispute
settlement procedures (Romalis 2004:2). Upon their entry into force, there
was a gradual reduction and elimination of tariff and non-tariff barriers, which
ultimately resulted in the creation of a free trade zone in 2008. It is necessary
to emphasise the rule of origin, which determines that only products made

in the signatory countries may benefit thereof, or those that at least contain
a specified percentage of ‘North American content’.
There has been an increase in the volume of trade in the region, which
grew faster than world trade, as well as an increase in FDI; NAFTA also part-
ly contributed to economic growth particularly in Mexico and Canada while
increasing in trade, both inter-regional and international, slightly reducing
unemployment in the USA, and increasing Canadian wages in some sectors.
Of the three states, developing Mexico has experienced the largest growth in
trade; it was the second largest trading partner of the United States in 2001.
In 1993, it had accounted for 9% of U.S. exports and for 6.9% of its imports.
In 2001 it already comprised 13.9% of U.S. exports and 11.5% of imports. This
increase, however, does not owe merely to NAFTA, but also unilateral trade
liberalisation by Mexico, which began in 1986, as well as the devaluation of
the Mexican peso in 1994–1995, which directly affected the growth of exports.
NAFTA has, however, also contributed to a price increase, especially in the
‘highly protected sectors by driving out imports for non-member countries’
(Romalis 2004:26).
5.3 JAPAN
5.3.1 ECONOMIC DEVELOPMENT OF JAPAN
Japan is currently the third largest economy in the world, after the USA and
the PRC (note: the EU economy as a whole would be the second largest, mov-
ing Japan to the fourth position). Japan has experienced a long-term decline in
its relative position, as it had been the second largest economy in the world
over four decades, starting from the late sixties, when the Japanese post-war
economic miracle was culminating.
Japan was the first industrialised country in Asia, which occurred during
the Meiji period (1868–1912). In 1871, the feudal system was abolished and
a unified state was created. The new ruling class ‘created a free, competitive,
government-stimulated economy. Japan began to build railroads and modern
factories’, which the government sold to entrepreneurs at a cheap price, along
with new shipyards (McKay 2008:871). They eventually became family con-
glomerates, called zaibacu, controlling most of the Japanese economy (over
30% of Japanese mining and chemical industry, almost 50% of engineering
industry, and 60% of the stock exchange market, which was closely connected
to Japanese politics. The four largest companies in existence at the beginning
of the Second World War were Mitsubishi, Mitsui, Sumitomo, and Yasuda.
The Japanese quickly adopted and adapted modern technologies and West-
ern scientific knowledge, especially in their industry, health care and educa-
tion. They also focused on building a strong navy, and reorganised the army
according to the European model. In the late 19th century, Japan began its
– 146 –
conquest policy. It beat China in the 1894 war for Korea, took over Taiwan
a year later, fought European powers over Manchuria, invaded Russia (Port
Arthur) in 1904, and became one of the major imperial powers in 1910 (McKay
2008:872). Later, it sought to create a ‘self-sufficient Asian economic zone’,
however, due to the dependence on imported petroleum and metals from the
Dutch East India and USA, it failed (McKay 2008:970). That was one of the
main reasons for Japanese involvement in the Second World War on the side
of Nazi Germany and Fascist Italy, after they merged in the so-called Axis of
Berlin-Rome-Tokyo in 1936.
After its unconditional surrender in September 1945, Japan was adminis-
tered by the United States, which introduced a parliamentary system with
the emperor as a mere symbolic head of state. The Americans disbanded
nine traditional zaibacu, controlling heavy industry and banking, and had
them divided into 85 separate units. Some of them were later converted to
the keiretsu, i.e. groups of interconnected companies with common shares.
Their influence is still strong, especially in the automobile industry. Industrial
production in 1946 reached a mere one fifth of the 1939–1944 average. The
Korean War in 1951 resulted in the end of the U.S. occupation. Thanks to the
UN troops fighting in the Korean War, which built their supply points in Japan,
foreign exchange flowed into the country, which was so crucial in supporting
the recovering Japanese industry. Thus, GDP had already attained its pre-war
level in 1954. Massive investment in heavy industry was followed by a redirec-
tion of the economy towards ‘electronics, know-how export, technology, and
the provision of foreign loans… The Japanese achieved primacy for example
in manufacturing cine-cameras, cameras, motorcycles, electrical and other
products’ (Stellner 2006:90).
Table 5.11: Selected Economic Indicators of Japanese economy, 1992–1999

in %, constant services inflows, BoP, consumer (% of total
2000 U.S. exports current U.S. price index labour force)
dollar (% of dollar, in (in %)
GDP) millions)
1992 0.8 10 2,759 1.7 2.2
1993 0.2 9 119 1.3 2.5
1994 0.9 9 912 0.7 2.9
1995 1.9 9 39 –0.1 3.2
1996 2.6 10 208 0.1 3.4
1997 1.6 11 3,200 1.8 3.4
1998 –2 11 3,268 0.7 4.1
1999 –0.2 10 12,308 –0.3 4.7
Source: The World Bank Data Series

According to many economists, the emergence of the Ministry of Interna-
tional Trade and Industry in 1949, which formalised the cooperation between
private companies and the government, had an irreplaceable impact on the
so-called economic miracle after the Second World War. Next to it, they cite
U.S. assistance (which ensured a stable currency and prices), private capital
inflows, a population explosion (83 million in 1950 and almost 128 million in
2011 but decreasing), traditional Japanese thrift, which meant high savings
and low-cost loans for investment in industry, and finally low defence spend-
ing (the army was dissolved after World War II). The state encouraged the pri-
vate sector to invest in infrastructure, education and science, while expendi-
tures on social policy remained minimal. Key factors were a strong emphasis
on achieving the highest product quality, the introduction of management
techniques and production methods from the West, and their improvement.
The Japanese economy grew on average by 10% a year in the 60s, by 5% in the
70s, and by 4% in the 80s.
A significant slowdown in the Japanese economy occurred during the 90s
(an average annual GDP growth of only 1.7%), they are therefore referred to
as ‘the lost decade’. It differed from other recessions in developed countries in
at least two respects. The government managed to keep a low unemployment
rate (about 2%) and a relatively slow growth in prices. In 1996, the new Prime
Minister Ryūtarō Hashimoto (1937–2006) adopted a structural reform of the
Japanese economy which was to revive the sluggish economy. Nevertheless, it
failed for two main reasons. In the first place, the state’s ‘past debts’ are cited,
i.e. losses of the banking sector of the so-called bubble economy in the late 80s
when real estate prices soared speculatively and bank loans were provided
with the expectation of their further growth. But prices dropped quickly and
significantly, the result being an extraordinary increase in bankruptcies that
also affected a number of financial institutions. It has been estimated that Jap-
anese banks’ bad loans had reached 30% of the country’s GDP. As the second
reason, it is stated as being the excise tax increase from 3% to 5% in April 1997,
which was one of the main causes of the decline in domestic demand, leading
to an increase in other taxes.
Therefore a year later, the so-called Big Bang was adopted, a program
of reforms aimed to deregulate the financial sector. It was to solve the big
problems of Japanese banks’ bad loans, foreign exchange streamline opera-
tions, to reduce the tax burden, and to favour trade in financial assets. None
of these reforms achieved the expected results and the Japanese economy
caved in during the deepest post-war recession. There were several caus-
es – low domestic demand, the decline in exports (Southeast Asian crisis),
and Japanese bank lending restrictions. Such a deep recession has had two
serious consequences, rising unemployment and the bankruptcy of many
enterprises.
– 148 –
Table 5.12: Selected Economic Indicators of Japanese economy 2000–2011

in %, constant services inflows, BoP, consumer (% of total
2000 U.S. exports current price labour force)
dollar (% of GDP) U.S. dollar, index
in millions) (in %)
2000 2.3 11 8,227 –0.7 4.8
2001 0.4 10 6,191 –0.8 5
2002 0.3 11 9,087 –0.9 5.4
2003 1.7 12 6,238 –0.2 5.2
2004 2.4 13 7,807 0 4.7
2005 1.3 14 3,214 –0.3 4.4
2006 1.7 16 –6,784 0.2 4.1
2007 2.2 18 22,180 0.1 3.9
2008 –1 18 24,552 1.4 4
2009 –5.5 13 11,834 –1.3 5
2010 4.4 15 –1,359 –0.7 5
2011 –0.7 – –1,702 –0.3 –
Table 5.13: Japanese population in 1992–1999

per
1 woman)
1992 124,229,000 0.2 1.5 17 70 –
1993 124,536,000 0.2 1.5 17 70 –
1994 124,961,000 0.3 1.5 16 70 –
1995 125,439,000 0.4 1.4 16 70 65
1996 125,761,000 0.3 1.4 16 69 –
1997 126,091,000 0.3 1.4 15 69 –
1998 126,410,000 0.3 1.4 15 69 –
1999 126,650,000 0.2 1.3 15 69 –

In the late 90s the Japanese economy began to experience a deflation,
a steep decline in prices and non-utilisation of production capacity as a result
of the bank crisis and inadequate domestic demand. The proverbial Japanese
thrift, which had been the engine of the Japanese post-war economic miracle,
became one of the main reasons for the deflation. After a partial recovery,
the recession deepened again in 2008 due to a decline in investment and the
demand for Japanese exports caused by the global crisis. After another revival
two years later, the Japanese economy was hit hard again. The tsunami and
subsequent earthquakes in 2011 led to a decline in GDP of about 0.5%, where-
as the total direct damage was estimated at $235–310 billion dollars.
Table 5.14: Japanese population in the years 2000–2011

per
1 woman)
2000 126,870,000 0.2 1.4 15 68 65
2001 127,149,000 0.2 1.3 14 68 –
2002 127,445,000 0.2 1.3 14 67 –
2003 127,718,000 0.2 1.3 14 67 –
2004 127,761,000 0 1.3 14 67 –
2005 127,773,000 0 1.3 14 66 66
2006 127,756,000 0 1.3 14 66 –
2007 127,770,750 0 1.3 14 65 –
2008 127,704,040 –0.1 1.4 14 65 –
2009 127,557,958 –0.1 1.4 13 65 –
2010 127,450,459 –0.1 1.4 13 64 67
Japanese industry remains dependent on imported raw materials and fuel.

Agriculture is subsidised and protected, and although the crop ranges among
the largest in the world, Japan is still dependent on food imports in this case,
namely from the EU and the USA as only 15% of the land is used for agricultur-
al production. On the other hand, Japan may boast at having one of the largest
fishing fleets in the world, accounting for about 15% of the world’s catch.
The GDP structure (1.2% agriculture, 27.3% industry and 71.6% services), and
employment by sector (3.9% in agriculture, 26.2% in industry, 69.8% in servic-
es) corresponds to an advanced economy.
In 1980, the export of goods and services accounted for 13% of GDP, in the
mid-90’s the share fell to 8%, and in 2010, thanks to a recovery, it landed at
15% of GDP. Japan’s main export partners are currently the People’s Republic
– 150 –
of China, the United States, the European Union, South Korea, Hong Kong,
and Taiwan. The main export commodities include means of transport, cars,
electronics, computers, and chemical products. The most important import
commodities are fuel, minerals, foodstuffs, machinery, and textiles. The major
import partners are China, the USA, the EU, Australia, Saudi Arabia, the Unit-
ed Arab Emirates, South Korea, and Indonesia (see WTO Trade Statistics).
In addition to the deflation and dependence on exports, Japan faces an
aging population and depopulation. The current total fertility rate is only
1.4 children and almost a quarter of the population is older than 65 years
(see Tables 5.13 and 5.14). Forecasts even predict that in 2050, the proportion
of the population of working age to post-productive age will be 1:1. Another
serious problem is a high public debt, which is currently over 200% of GDP.
5.3.2 JAPAN AND APEC
Japan is an important member of the World Trade Organization (WTO), the

Asia-Pacific Economic Cooperation (APEC), G-8 and G-20. Japan reflected
long-term interest in integration in the Asia-Pacific region, but the conditions
immediately after the Second World War were not favourable. It took the eco-
nomic growth and the related empowerment in East Asia for the Japanese to
apply a more active policy. In 1977, they adopted the so-called Fukuda doc-
trine, according to which Japan will never become a military force and will
seek peaceful cooperation in the region and the world, and in 1980 Japan ini-
tiated the Pacific Development Cooperation which was an important impetus
to the actual creation of APEC in November 1989.
APEC has 21 members – Australia, Brunei, Canada, Chile, China, Hong
Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua
New Guinea, Peru, the Philippines, Russia, Singapore, Taiwan, the USA, and
Vietnam. The original membership (12 countries) was extended in the years
1991, 1993, 1994, and 1998.
At the inception of APEC, three basic objectives of cooperation were formu-
lated: developing and strengthening the multilateral trading system, strength-
ening interdependence and prosperity of member economies, and encourag-
ing sustainable economic development. Originally, an informal discussion
forum was replaced in 1993 with regular meetings of member countries’ lead-
ing economists and government officials, and at their meeting in Indonesia in
1994, a fundamental objective of creating a free trade area was adopted – by
2010 among the advanced economies, and by 2020 including the develop-
ing economies in the region. At subsequent meetings, specific measures to
achieve this objective were taken. These include the Manila Action Plan for
APEC of 1996, the Shanghai Agreement of 2001, and the Hanoi Plan of Action
of 2006. Trade barriers should be reduced while the free movement of goods,
services and capital should be promoted. ‘The average tariffs in the region fell

from 17% in 1989, when APEC was established, to 6.1% in 2009. Also non-tariff
barriers to trade in the member states significantly reduced. Most of them
comply with the WTO rules’ (APEC 2012:3).
APEC activities focus on three key areas, namely trade and investment lib-
eralisation, trade and commerce support, and economic and technical coop-
eration. Yet at the beginning of the millennium, this cooperation began to
expand to other areas. Member states committed to fight against terrorist
groups on their territories, or against the SARS disease in 2003; in 2007 they
adopted the Declaration on climate change, energy security and sustainable
development; and in 2010 they first discussed food security. The common
denominator of all these and many other activities is an expanding and deep-
ening cooperation with an emphasis on the liberalisation of trade and invest-
ment. Today, APEC represents a regional bloc which is characterised by vast
economic power despite its internal geographic, economic, social, political,
cultural, and other heterogeneity. Already by 1997, APEC contributed 33% to
the overall area of the world, 40% to the world’s population, 56% to global
GDP, and 46% to world trade. The figures have remained similar until today.
Japan has been a very active member of APEC. Its main initiatives include
the Osaka Action Programme, adopted at the APEC meeting in 1995 in Osaka,
Japan, which provides general guidance to the liberalisation process of the
member states. They also include conduct in compliance with WTO rules,
the equality of all member states, transparency, and of flexibility based on the
level of development of individual countries. APEC countries are very impor-
tant for Japanese commerce. In 2008, APEC countries comprised 75% of Japa-
nese exports and 60% of Japanese imports, while almost 54% of Japanese FDI
flowed therein (see Ministry of Foreign Affairs-Ministry of Economy, Trade and
Industry 2010:8).
5.4 THE PEOPLE’S REPUBLIC OF CHINA

5.4.1 ECONOMIC DEVELOPMENT OF THE PRC
The People’s Republic of China is the most populous country in the world,
about a fifth of the world’s population (about 1.3 billion people) lives there,
and in terms of land area, after Russia, Canada and the United States; it is the
fourth largest state.
In the first decades after World War II, its huge economic potential was not
only wasted, but even razed to the ground. ‘The Great Leap policy (1958–1962)
and The Cultural Revolution, which took place in the country between the
years 1966 and 1969, aimed at annihilating capitalism and “modernisation”
of the society, brought death to millions due to famine and to hundreds of
thousands of people at the hands of fanatical Red Guards, as well as wrecked
the country’s economy. The consequences were strongly felt during the 70s,
– 152 –
when China tried to use its limited resources to develop the devastated coun-
try, including its military capabilities. It voluntarily became isolated from the
rest of the world, promoting a self-sufficient economy’ (Evanová 2012:59).
A change occurred after Mao Zedong’s death in 1976 (born 1893), with the
dawn of the new Communist government, led by Deng Xiaoping (1904–1997),
when China ‘began to seek peaceful coexistence with the West. Thus, it was,
besides other things, able to reduce defence spending and devote itself fully
to economic development, which assumed a greater openness to the world,
including the growing cooperation in international organisations and regimes.
The open-door policy and gradual economic reforms were introduced by Deng
Xiaoping at the December congress of the Communist Party of China in 1978.
In his opinion, ideology was not important any more. “It does not matter if the
cat is black or white. As long as it catches mice, it is a good cat”, he said, and
continued: ‘It is wonderful to be rich. Revolutionary slogans of international
class struggle, which was declared as being over, were replaced with slogans
of peace and development. Self-sufficiency was replaced with involvement in
world trade’ (Evanová 2012:60). In addition to the open-door policy, the ‘four
modernisations’ programme was adopted, relating to agriculture, industry,
science and technology, and military, to become the basis of a new economic
order in the country, the so-called socialist market economy.
The massive economic development in the following decades has risen,
and still leads to, concerns in many countries around the world. ‘The policy of
a peaceful rise’ was publicly announced in 2003, although this concept had
already appeared in the security strategies of the nineties. A year later, the
term ‘peaceful development policy’ pushed through, as the word ‘rise’ had
triggered a series of negative reactions. The Chinese government aimed to
demonstrate, especially to Asian countries and the United States, that China’s
development did not threaten international peace and stability; on the con-
trary it was beneficial for many states. Thus, China has strived to be viewed
as a responsible great power on the rise. The following lines deal with its
economic developments over the last thirty years.
5.4.2 KEY ECONOMIC INDICATORS AND DEVELOPMENT

IN THE LAST THREE DECADES
It should be emphasised that the economic and social development of China

in the 90s, and all of the reforms have been carried out under the leadership
of the Communist Party of China, and thus were not associated with the pro-
cess of democratisation. China remains a communist dictatorship, harshly
suppressing any attempt to change the political regime. In 1989, relations
with the West reached their lowest ebb after the Chinese army had brutally
suppressed the protests on Tiananmen Square in Beijing. The impetus for the
settlement was Chinese support (albeit limited) for military intervention in

the Persian Gulf after Iraq’s invasion of Kuwait in 1990; e.g. diplomatic rela-
tions with the USA at the highest level or World Bank loans were restored,
both of which had been stopped after the bloody action against the protest-
ers. On the other hand, it must be said that economic development and the
associated growth in living standards has been the most important goal of
the ruling Communist government due to the absence of substantial political
reforms. Its significant slowdown, associated with stagnation or a decline in
living standards, could lead to undesirable political instability. The growth
of Chinese economic power means that the country has faced less and less
criticism for human rights violations.
Thanks to its reform efforts, China has seen tremendous economic growth
since the late 70s, reaching a yearly average of 9.7% or even roughly 11% over
the period 2003–2007. In 2010, China became the second largest economy in
the world next to the United States (or the third, if we take the EU as a whole),
and the largest exporter at the same time, therefore, it must not be omitted in
our overview of world economic centres. According to the World Bank, China
currently ranks among the countries with medium income, its gross national
income per capita amounts to $4,260 USD (2010). However, it must be empha-
sised that it still remains a developing country with vast differences between
urban and rural populations, facing many serious problems (see below).
The reform programme of the four modernisations began with the de-col-
lectivisation of agriculture, i.e. the abolition of the People’s Communes.
Farmers were allowed to rent farm land and begin managing it separately.
Although the number of people employed in the agricultural sector dropped,
its performance was steadily increasing and managed to provide food for one-
fifth of the world’s population.
The subsequent industry reforms comprised of the use of excess produc-
tion capacity for commercial production after the state plan had been met;
five-year plans are approved similar to the former practise in this country
(concerning the last five-year plan, see below). This step was followed by the
‘conversion of [some] state-owned enterprises into joint-stock companies’ and
their gradual separation from the state. Besides that, ‘urban and rural busi-
nesses’, jointly owned by the cities and municipalities, were created along
with privately owned companies. An important step was the admission of
foreign companies to specially created special economic zones with favour-
able tax and customs duties, which were very attractive to investors thanks
also to cheap labour. The first four zones were opened in 1980 in cities of
Shenzhen, Zhuhai, Shantou, and Xiamen; a special (and the largest) economic
zone was declared, the entire island of Hai Nan in 1988. In 1984, 14 port cities
(e.g. Shanghai) became open to foreign investment, and since 1992 China has
further opened up all the major cities of its inland provinces and autonomous
regions. Being open to foreign investment relates to the influx of new technol-
ogies and know-how which is the essence of the science and technology mod-
ernisation. Finally, there has been a reform of the People’s Army, which, despite
– 154 –
a significant reduction in the number of active men under arms, is the largest
army in the world. While there were more than 4,000,000 active soldiers in
1985, twenty years later, the figure dropped by nearly a half to 2.3 million.
On the other hand, spending on defence is steadily increasing, i.e. modernis-
ing military equipment or ‘logistics and information systems’. PRC’s defence
spending is not published, but according to estimates by the Swedish SIPRI
(Stockholm International Peace Research Institute), it rose from $16 billion
USD in 1989 to $114 billion USD in 2010. Researchers add that the actual cost
may be even higher. For comparison, U.S. spending, which is the highest in the
world, increased in the same period from $526 billion USD to $687 billion USD.
The results of the reforms are impressive. According to the World Bank,
China has carried out two important transformations. Firstly, there has been
the transition from an agrarian society to an industrial society. Even in the
mid-90s, out of the working age population there were 54% working in agri-
culture, 33% in industry, and only 13% in services. In 2008, the share of peo-
ple employed in agriculture fell to under 37%, industry to almost 29%, and
the services sector recorded an increase to almost 35%. This, of course, has
also changed the structure of GDP. In the mid-90’s, industry contributed 49%,
agriculture 20%, and services 31% to GDP. In 2011, industry accounted for less
than 47%, agriculture for 10%, and services for 43%. One can therefore speak
of a late form of industrial revolution which China experienced in the 90s.
Another, equally substantial change has been the transition from a centrally
planned economy to a market economy, although with some specific features
and the continued practise of approved five-year plans.
Table 5.15: Selected Economic Indicators of China, 1992–1999
Year GDP Goods FDI (net External Inflation, Unemploy- Value

growth and inflows, debt consumer ment added
in %, services BoP, (DOD, price (% of total in agri-
constant exports current current index labour culture
2000 (% of U.S. U.S. (in %) force) (% of
U.S. GDP) dollar, in dollar, in GDP)
dollar millions) billions)
1992 14.2 19 11,156 72 6.3 2.3 –
1993 14 20 27,515 86 14.6 2.6 –
1994 13.1 21 33,787 100 24.2 2.8 –
1995 10.9 20 35,849 118 16.9 2.9 –
1996 10 20 40,180 129 8.3 3 –
1997 9.3 22 44,237 147 2.8 – 18
1998 7.8 20 43,751 144 –0.8 – 18
1999 7.6 20 38,753 148 –1.4 – 16

Almost since the very beginning of the reforms, rapid, though uneven, eco-
nomic growth and development has occurred in all 31 mainland provinces.
In the publication, ‘China 2030: Building a Modern, Harmonious, and Crea-
tive High-Income Society from 2012’, the World Bank shows some examples
of Chinese development. Two of the ten largest banks in the world are Chi-
nese, China has the second largest network of highways in the world, six of
the ten largest shipping container ports are located in China and owing to the
increase in wealth and living standards, the number of people living below
the poverty line has significantly decreased, etc.
In its reforms China has applied a strategy which became known for the
term ‘crossing the river by feeling the stones’. It was a gradual change, intro-
ducing market-oriented reforms by the ‘trial and error’ method, according
to the needs of a particular region. Despite rapid growth, social and macro-
economic stability were successfully maintained. During the reforms, infla-
tion was low most of the time, with the exception of the late 80s and in the
early 90s when it reached more than 24% in 1994 (see Tables 5.15 and 5.16).
This was especially in the case of the excessive demand driven by consump-
tion of the population caused by rapid wage growth, exceeding productivi-
ty growth. Competition among regions was encouraged and barriers to the
movement of goods, labour and capital were removed, causing the creation
of a unified national market which was accompanied by massive investments
in infrastructure.
Table 5.16: Selected Economic Indicators of China, 2000–2011

Year GDP Goods FDI (net External Inflation, Unemploy- Value
growth and inflows, debt consumer ment (% added in
in %, services BoP, (DOD, price of total agri-
constant exports current current index labour culture
2000 (% of U.S. U.S. (in %) force) (% of
U.S. GDP) dollar, in dollar, in GDP)
dollar millions) billions)
2000 8.4 23 38,399 145 0.3 – 15
2001 8.3 23 44,241 184 0.7 – 14
2002 9.1 25 49,308 185 –0.8 4 14
2003 10 30 47,078 206 1.2 4.3 13
2004 10.1 34 54,936 246 3.9 4.2 13
2005 11.3 37 117,208 283 1.8 4.2 12
2006 12.7 39 124,082 323 1.5 4.1 11
2007 14.2 38 160,052 373 4.8 4 11
2008 9.6 35 175,148 380 5.9 – 11
2009 9.2 27 114,215 432 –0.7 4.3 10
2010 10.4 30 185,081 549 3.3 – 10
2011 9.1 29 – – 5.4 – 9
– 156 –
However, it is also necessary to mention the friendly external conditions
that have supported the growth of the Chinese economy. The World Bank
states a relatively liberal trade, steady growth in world economic markets,
reducing transport costs, and the expansion of FDI, or expansion of informa-
tion technology (The World Bank 2012:6).
Despite the apparent success, China faces many acute problems and thus
a steady decline in the growth rate of GDP may be expected. For the period
2011–15, the World Bank expects an average GDP growth of 8.5%, and in the
long run for 2026–30 about 5%.
One of the major problems, which is also a result of the genocidal pop-
ulation policies (the so-called one-child policy), is the aging of the Chinese
population. Though a developing country, China is the fastest aging nation
in the world and the aging population may dampen the economy as much as
overpopulation, which the Chinese have so long feared. Social instability may
then occur due to the lack of women; it is estimated that in 2020 there will
be 30 million more men than women in China. In addition, the cost of cheap
labour is expected to grow, as it becomes more skilled thanks to improving
education.
Table 5.17: The Chinese population in 1992–1999

population growth rate ages 0–14 ages 15–64 population
(million) in % (children (% of total) (% of total) in %
per
1 woman)
1992 1,165 1.2 2.1 28 66 –
1993 1,178 1.1 2 28 66 –
1994 1,192 1.1 1.9 27 66 –
1995 1,205 1.1 1.9 27 66 31
1996 1,218 1 1.8 27 66 –
1997 1,230 1 1.8 27 67 –
1998 1,242 1 1.8 26 67 –
1999 1,253 0.9 1.8 26 67| –
Other less serious problems include reducing exports (mainly due to the
current state of the global economy), and low domestic consumption, the con-
tinuing big differences between urban and rural areas, economic crime and
corruption, or the rapidly deteriorating environment, leading, for example, to
the loss of fertile soil.

Table 5.18: The Chinese population in the years 2000–2011

per
1 woman)
2000 1,263 0.8 1.7 25 68 36
2001 1,272 0.7 1.7 25 68 –
2002 1,280 0.7 1.7 24 69 –
2003 1,288 0.6 1.7 23 69 –
2004 1,296 0.6 1.7 23 70 –
2005 1,304 0.6 1.7 22 71 40
2006 1,311 0.6 1.7 21 71 –
2007 1,318 0.5 1.6 21 71 –
2008 1,325 0.5 1.6 20 72 –
2009 1,331 0.5 1.6 20 72 –
2010 1,338 0.5 1.6 19 72 45
2011 1,344 0.5 – 19 73 –
In March 2011, the ruling Communist Party adopted the Twelfth Five-Year
Plan (2011–2015) at its congress, reflecting an effort to address the problems
mentioned above. It has five basic objectives: 1. Maintain stable economic
growth and prices, and to create new jobs; 2. to support further urbanisation
and to reduce the disparities between urban and rural areas; 3. to ensure the
growth of income, reduce poverty, and raise the living standards of the pop-
ulation; 4. to broaden access to public services, to improve education, and to
create a functioning legal system; 5. to deepen reforms in key areas, such as
taxation and to promote further integration into the world economy. These
objectives are based primarily on efforts to stimulate domestic consumption
and to strengthen the services sector, which partly reflects the current state
of the global economy (The World Bank 2012).
Many organisations and researchers warn China against the dangers of
a so-called ‘middle-income trap’, which has caught many fast-growing coun-
tries, especially in Latin America and the Middle East. In 1960, there were
101 countries in the middle-income group, whereas only 13 of them belonged
to the high-income group in 2008. These included, for example, Japan, Greece,
– 158 –
Ireland or Israel. Countries stay caught in this trap due to rising labour costs,
thereby losing their competitiveness on world markets to countries still with
low staff costs, still not being able to produce quality products with high add-
ed value as an advanced economy.
5.4.3 CHINA IN INTERNATIONAL TRADE
China’s integration into international trade is closely linked with the open
door policy adopted in 1978 which marked the opening of the country to for-
eign investment and developing the (socialist) market economy.
In 1978, less than 5% of GDP was exported, in the late 90s the percentage
was already about 20%, and in 2011 it was 29%. The main export commodi-
ties include machinery and transport equipment (47% in 2007), rubber, textile
and metallurgical products (18% in 2007), chemical products (5%), food (3%),
minerals and fuels (2%). The most important export partners are the United
States, Hong Kong, Japan, South Korea, and Germany. The most important
import commodities are electrical components and machinery, petroleum and
fuels, optical and medical equipment, iron ore, plastics and organic chemi-
cals. China imports mostly from Japan, South Korea, the USA, Germany, and
Australia.
An important milestone was the entry of the PRC into the World
Trade Organisation (WTO) in 2001, after fifteen long years of difficult nego-
tiations, during which China had to reduce or cancel more than 7,000 trade
barriers.
In spite of the many problems, China’s entry into WTO may be regarded
as advantageous, not only for itself, but also for other countries. During its
membership, China has become the largest exporter in the world (in 2001,
it accounted for 4.3% of the world exports, in 2010 it was 10.6%) and the
second largest importer. However, it is increasingly criticised for failing to
comply with WTO rules (for example, for ignoring intellectual property), or
slow implementation of the agreed upon changes and measures. The first dis-
pute which the WTO had to resolve was held in 2004 when the United States
complained about the value added tax which the Chinese had imposed on
imported integrated circuits. Since then, it has been subject to increasingly
frequent complaints, mainly by developed countries, while becoming tougher
in defending its interests on the grounds of the organisation. Currently, for
example, Chinese restrictions on exports of rare minerals that are important
for many industries in the USA, EU and Japan, are being disputed. Among
other things, there is concern in these countries that this measure, unless
cancelled, may force multinational corporations to build more factories in
China.

Table 5.19: The course of proceedings on the PRC’s entry into the GATT/WTO
Year Events
1986 China applies to join the General Agreement on Tariffs and Trade
1989 Negotiations on accession to the GATT interrupted after the bloody suppression
of protests in Beijing
1994 China intensifies efforts to join the GATT; accused of protectionism
1995 China announces a trade liberalisation programme in order to gain the support
of the USA
1997 China reduces some import duties, the reduction does not apply to such
products as automobiles
1998 China promises a further reduction of import duties, but the USA and other
developed countries demand more openness to the import of foreign products
and services
1999 The USA and China announce an agreement on the WTO
2000 Negotiations with the EU continue with calls for greater liberalisation of China’s
inter-bank sector, due to the balance of payments deficit with China (more than
20 billion EUR per year) and for resolving contentious issues on 150 kinds of
products and services, including insufficient market opening for European cars
2001 The USA and China came to an agreement on the contentious subsidies of
agricultural products. That means that after accession to the WTO, China will
be able to subsidise the production of its 700 million peasants (7–8% of the final
value of the products); [PRC enters the WTO – ed. T. E.]
Source: Cihelková et al. 2001:242
5.4.4 CHINA IN AFRICA
We should also mention China’s activities in Africa, a continent with vast

untapped mineral wealth, labour, fertile farmland, and a huge potential mar-
ket, where China takes over the position of former colonial powers. ‘The short-
age of [some] of raw materials leads China to seek long-term resources, and
Africa is becoming a natural target of this effort, thanks to its natural wealth.
China invests heavily in many African countries, regardless of the regime in
each state, unlike the EU or the USA. President Hu Jintao stressed China’s
commitment at the UN General Assembly to increase aid to Africa, reduce or
cancel debts of the heavily indebted poor and least developed countries, and
the growth of trade, investment and technological support’ (Evanová 2012:84).
In 2009, China became the largest trading partner of Africa, pushing the Unit-
ed States into second place.
In 2000, the Forum on Chino-Africa Cooperation organised its first confer-
ence in Beijing, which was attended by more than 80 ministers from China
and 44 African countries, and representatives of 17 international and region-
al organisations. The results were the Declaration of Cooperation, and the
– 160 –
Programme for China-Africa Cooperation in Economic and Social Develop-
ment. The last, fifth conference was held again in Beijing this year. There,
China agreed to provide a three-year loan of $20 billion (twice as much as
promised at the fourth conference three years earlier). During the conference,
agreements on mutual cooperation worth $341 million were signed, while
signing further contracts worth up to $2 billion is expected in the near future.
China has confirmed its position as Africa’s largest trading partner.
China invests massively, namely in infrastructure, even in war-torn coun-
tries with rich mineral resources (e.g. Sudan/South Sudan – petroleum, Con-
go – copper, cobalt, Liberia – wood). However, PRC trades, invests or provides
assistance not only to mineral rich countries but to all countries which have
no diplomatic relations with Taiwan.
The partnership is not without problems though. For example, South Afri-
can Prime Minister, Jacob Gedleyihlekisa Zuma (born 1942), warned that the
current trade between African countries and China, which is in some cases
accompanied by a reduction or forgiveness of debt, are unsustainable in the
long run. According to him, it is impossible, for example, for Africa to supply
China with raw materials and to import expensive finished products in return.
Moreover events on the ground seem to prove local Chinese difficulty. Dur-
ing this year’s protests of miners in Zambia, who were demanding a salary
increase to the newly adopted minimum level, one of the Chinese managers
of the company was killed.
THE CHAPTER SUMMARY

The centres of the world economy include the European Union, the United
States, Japan, and also China.
Economic development of the European centre in the first half of the 90s
was marked with recession which had a particularly negative impact on the
development of employment, growth of general government deficits, and
internal debt. Economic growth was restored in the late 90s, besides other
things, through the establishment of the Economic and Monetary Union and
the adoption of the convergence criteria. The differences among the states,
however, remained great after the enlargements of 2004 and 2007, mostly
through the accession of former Soviet bloc economies. EU countries were
hit by a global recession between 2008 and 2009, and most of them resumed
their growth a year later. In 2011, however, the debt crisis in the Eurozone
intensified. Greece, Ireland, Portugal, and Spain successively asked the EU
and the IMF for funding. Therefore, the euro rescue fund was established, to
help the governments of those countries. The debt crisis has not been man-
aged successfully, as yet, and according to some international organisations,
it threatens the entire world with another possible global recession. Some
scholars and economists have previously pointed out the inappropriateness

of the common currency because of the different economies of individual
countries. This objective, however, was already adopted in the early 70s and
specified by the Maastricht Treaty in 1992. The actual creation of a monetary
union took place in three stages and was completed by the introduction of the
common currency in 2002. The EU, like all other centres of the world econo-
my, is an important member of the WTO, which often becomes the grounds
for disputes about its Common Agricultural Policy. According to many, the lat-
ter negatively affects not just EU consumers, but the entire world, especially
countries dependent on agriculture.
The United States continues to be the largest economy in the world,
despite many problems. After the recession in the early 90s, it experienced
a boom during Bill Clinton’s presidency that lasted until 2000, except for the
years 1997 and 1998. However, economic growth was, among other things,
supported by low interest rates, which contributed to the recent mortgage
crisis which erupted during the presidency of George W. Bush. In order to help
businesses and households that invested in overvalued technology stocks in
the 90s, the U.S. central bank decreased the basic interest rate in 2001. Cheap
interest meant cheap mortgages that allowed households to purchase the
property beyond their capabilities. Once the interest rates rose again, many
households were unable to repay. Their incapability meant a bank liquidity
crisis and the bankruptcy of some banks. Therefore, the crisis resulted in the
financial crisis of 2008, when the government refused to help Lehman Broth-
ers, the fourth-largest investment bank. The bankruptcy triggered panic in
financial markets and the subsequent global recession.
The USA, along with Mexico and Canada, comprise the North American
Free Trade Agreement (NAFTA), which is the second largest in the world after
the EU. The agreement came into force in 1995, followed by a gradual reduc-
tion of tariffs and non-tariff barriers, and the zone was created in 2008. During
that period, trade among the three countries multiplied.
Japan was the first industrialised country in Asia. It experienced strong
economic growth after the Second World War when we talk about the Jap-
anese economic miracle. The 90s, however, are already referred to as the
lost decade, because Japan fell into a long-term recession withstanding the
attempts to find a solution by the alternating governments. The main rea-
sons include the bubble economy in the late 80s, the subsequent loss of the
banking sector, an increased bankruptcy rate, a decline in domestic demand,
and a decline in exports. One of the consequences of the recession at the end
of the 90s was a deflation, i.e. a decrease in prices and the non-utilisation of
production capacity. A partial recovery was ended by the 2008 global crisis
and then by a tsunami and subsequent earthquakes in 2011. Its dependence
on imports of fuel and raw materials and on exports contributes to the vul-
nerability of the Japanese economy. A serious problem is the aging population
and extinction. Japan is a member of many international organisations. For
its regional economic cooperation, the most important is its membership in
– 162 –
APEC whose principal aim is to create a free trade zone between all 21 mem-
ber states.
China began to open up to the world at the end of the 70s after Mao
Zedong’s death in 1978 when it adopted the open-door policy and economic
reforms and joined the world trade. The new socialist market economy was
based on a programme of four modernisations, concerning agriculture, indus-
try, science and technology, and the military. A period of economic growth
began, which peaked in 2003–2007 when it reached an average of 11%. The
PRC became the second largest economy in the world after the USA in 2010,
although it is still included among the developing countries with large inter-
nal differences. Over 30 years it has managed to transform from an agrarian to
an industrial society and from a directly controlled economy to a market econ-
omy, albeit under the leadership of the Communist Party within the approved
five-year plans. The last five-year plan adopted for 2011–2015 tries to solve
some of the major problems of the Chinese economy. These include the aging
population, a decline in exports, the differences between urban and rural are-
as, and the worsening environment.
An important milestone for both the Chinese and world economy was its
entry into the WTO in 2001. During its membership it became the world’s
largest exporter and the second largest importer. The accession negotiations
lasted for 15 years and the PRC had to reduce or abolish over 7,000 trade bar-
riers. China is also trying to secure raw materials and strengthen its position
as the largest investor in Africa.

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References – 167 –
Name Index
Acheson, Dean 88 Cobden, Richard 49

Adenauer, Konrad 88 Colbert, Jean-Baptiste 30–31, 34
Alexander the Great 15 Columbus, Christopher 19, 24, 29
Aristotle 11, 20–21 Cort, Henry 44
Cortéz, Hernando 19
Balboa, Vasco de 19 Cromwell, Oliver 27, 31
Berisha, Sali Ram 116
Blake, Robert 35 Delors, Jacques Lucien Jean 125
Brezhnev, Leonid Ilich 111, 113, 128 Dzhugashvili, Joseph Vissarionovich
Bush, George Herbert Walker 140 (see Stalin)
Bush, George Walker 143, 162
Eisenhower, Dwigt David 91
Calvin, John 21–23, 33, 45 Ferdinand of Aragon 19
Catherine the Great 39
Ceauşescu, Nicolae Andruţă 115–116 Friedman, Milton 137
Clinton, William (Bill) Jefferson 140–141,
162 Gama, Vasco de 18
– 168 –
Gaulle, Charles de 84, 91 Magellan, Ferdinand 19
Gorbachev, Mikhail Sergeyevich 113–114, Maria Theresa 37
128 Marshall, George Catlett 71–72, 82–83,
Grósz, Károly 114 86–87, 102, 109
Marx, Karl Heinrich 105
Harrimann, William Averell 109 Mary Tudor 27
Hashimoto, Ryūtarō 148 Mitterand, François 93, 127
Havel, Václav 115 Mladenov, Petar Toshev 116
Henry (Prince) 18 Monnet, Jean 88, 90
Heyn, Piet 35 Mun, Thomas 30
Hitler, Adolf 8, 65, 68, 108, 128
Hoxha, Enver 116 Napoleon Buonaparte 37, 46–49, 66
Nelson, Horatio 47
Charles I 27 Nixon, Richard 74
Charles II 27, 35
Charles III 31 Obama, Barack Hussein 94
Charles IV 31
Charles V 23 Palach, Jan 115
Charles VI 37 Peter III 38
Child, Josiah 30 Peter the Great 33
Churchill, Winston 68, 70–71, 86, 88, Pizarro, Francisco 19
106, 109 Plato 20
Pleven, René 89
Isabella of Castile 19
Roosevelt, Franklin Delano 64, 67, 71, 87
Jaruzelski, Wojciech Witold 114
Jefferson, Thomas 40, 140 Sauvy, Alfred 85
Jenkins, Robert 36–37 Schabowski, Günter 115
John I 18 Schuman, Robert 88
John Paul II 114 Smith, Adam 32–33, 45, 50
Solzhenitsyn, Alexander Isayevich 111
Kádár, Jánosz 114 Spinoza, Benedict (Baruch) 27
Kai-shek, Chiang 82 Stalin, Joseph Vissarionovich 8, 86, 90,
Kennedy, John Fitzgerald 91 106, 108–111, 113, 128
Kerensky, Alexander 61 Stephenson, George 44
Khrushchev, Nikita Sergeyevich 111, 128
Klaus, Václav 128 Tito, Josip Broz 110
Kohl, Helmut 93 Truman, Harry 88–89
Lafayette, Marquis de 39 Uljanov, Vladimir Ilich (see Lenin)

Lenin, Vladimir Ilich 61, 105
Louis XIV 28, 30 Vernon, Edward 36
Louis XVI 40, 47 Victor Amadeus II of Savoy 36
Luther, Martin 21 Victoria (Queen) 91
Name Index – 169 –

Sir Walpole, Robert 36 Zedong, Mao 153, 163
Watt, James 43 Zhivkov, Todor Khristov 116
Weber, Max 21 Zhukov, Georgy Konstantonovich 109
Zuma, Jacob Gedleyihlekisa 161
Xenophon 11
Xiaoping, Deng 153
– 170 –
Geographical Index
Acadia 36 Antwerp 20, 25, 30

Acapulco 19 Appalachians 38
Acre 14 Argentina 53, 122, 129, 139
Aden 18 Armenia 113, 118
Aegean Sea 14, 16 Asia 15, 19, 24, 26, 28–29, 34, 49, 57, 85,
Africa 24, 26, 49, 53, 84–85, 101, 103, 88, 101, 103, 117, 133, 146, 162
160–161, 163–164 Asiento 36
Alaska 94 Atlantic coast 18, 20, 29
Albania 113, 116, 118, 124, 128 Augsburg 42
Alexandria 11, 15 Australia 8, 26, 53, 69, 82, 139–140, 151,
Algeria 84–85, 90, 103 159
Algiers 17 Austria 31, 35, 37–38, 41–42, 54–58, 61,
American mines 20, 36 72, 89–90, 114–115, 131–136
Amsterdam 20, 25–26, 30, 127 Austria-Hungary 55–58, 61
Anatolia 11, 15 Austrian Netherlands 37, 47
Angola 94 Ayutthaya 18
Antigua 23 Azerbaijan 113, 118
Antioch 14–15 Azores 24
Geographical Index – 171 –

Bahamas 23 Canary Islands 18, 24
Balkans 15, 17, 57, 109, 127 Canton 18, 34
Baltic states 21, 108, 118 Cape of Good Hope 18
Barbados 23–24 Cape of Storms 18
Bay of Arguin 18 Cape Town 26
Bay of Bengal 34 Caribbean 23–26, 28, 32, 35–39, 47
Belarus 108, 113, 118 Cartagena 36–37
Belgium 11, 20, 29–30, 35, 42, 72, 87, 89, Ceuta 18
131–133, 135–136, 139 Ceylon 26, 34
Benelux 89–90, 103 Chile 139, 151
Bessarabia 108 China 8, 14, 18, 34, 40, 50, 55, 70, 77–78,
Birmingham 42–43 82, 88, 117, 121, 137, 140, 145, 147,
Black Sea 11, 13, 15, 17 151–161
Bohemia 16, 37, 41, 48 Congo 18, 85, 103, 161
Bombay 34 Constantinople 14–15, 20, 27, 45
Bordeaux 42 Crete 16, 24
Borneo 26 Crimea 14–15, 24, 55
Bosnia and Herzegovina 117–118, 124 Croatia 117–118, 124, 127, 129
Bosporus and Dardanelles 17 Cuba 25
Brazil 24, 121–122, 129, 140 Cuba Puerto Rico 24, 37, 47
Bremen 16, 134 Curaçao 23
Bretton Woods 8, 71–75, 94, 104 Cyprus 16, 24, 124, 127, 131–133, 135–136,
Bristol 42 138
Britain 8, 11, 13, 25, 30–34, 36–50, 53–59, Czech Republic 80, 117–118, 124, 129,
62–73, 77, 82–83, 85–86, 88–92 133–134
British Hanover 37 Czechoslovakia 42, 71, 110–111, 113–115,
British North America 49 123–124, 128
British West Indies 49
Brittany 42 Damietta 14
Bruges 30 Danube 42
Brunei 121, 151 Danzig 16
Brussels 92, 124, 134 Denmark 31, 89, 91, 125, 127, 131–135,
Bulgaria 15, 113, 116, 118, 124, 127–128, 138
131–135 Dutch East India 26, 147
Burma 85
East African coast 18
Cadiz 11, 19 East Germany 110, 113, 115, 123, 125,
Cádiz 37 128
Caesarea 11 East Prussia 48
Caffa (Theodosia) 14 Eastern Wales 43
Calais 27 Ecuador 140
Calcutta 18, 34 England 13–14, 20, 24, 27–28, 31, 33, 36,
Cambodia 85, 117 41, 43, 48, 68, 74
Canada 13, 82, 140, 145–146, 151–152, 162 English Channel 48
– 172 –
Estonia 113, 118, 124, 131–133, 135–136, Hai Nan 154
138 Haiti 24
Euphrates 10 Hamburg 16, 134
Europe 8, 11, 13–26, 28–29, 31, 34–35, Havana 36
37–48, 50, 52–53, 57–59, 61–63, 67, Hispania 12
69–71, 82, 86–91, 94, 98, 101–103, Hispaniola 24
109, 111, 113–117, 119, 123–125, Honduras 140
128, 138 Hong Kong 121, 151, 159
Hudson Bay 36
Far East 53 Hungary 20, 41–42, 55–58, 61, 110,
Federal Republic of Germany (West 112–115, 117–118, 123–124, 128–129,
Germany) 74, 83, 89–90, 111, 115 131–135
Finland 13, 71, 108, 131–136
Flanders 36 Iberian Peninsula 11, 13, 19, 47–48
Florence 20 Iceland 13, 124
Florida 39 India 12, 15–16, 24, 26, 28, 30–31, 34, 38,
France 11, 13, 17, 24–25, 27–30, 33, 35–38, 44, 49–50, 53, 82–83, 85, 147
40–42, 46, 48, 54–58, 62–63, 65–67, 72, Indian Ocean 15, 18
82, 84–86, 88–92, 103, 125, 131–136 Indochina 55, 85, 89
Frisia 42 Indonesia 34, 50, 85, 120, 151
Iran 108, 116
Gallia 12 Ireland 28, 41–42, 91, 127–128, 131–133,
Geneva 21–22, 75–76 135–136, 159, 161
Genoa 14–16, 20, 24, 29, 44 Israel 84, 93–94, 159
Georgia 113, 118 Istanbul 14
German Democratic Republic (East Isthmus of Panama 19
Germany) 110, 113, 115, 123, 128 Italy 14–15, 17, 21, 29, 36, 42, 56–58, 60,
Germany 86, 29, 42, 54–58, 60–63, 65–67, 62, 66, 69, 72, 86, 89–90, 103, 112–113,
69–70, 72, 74, 83, 86, 88–90, 92, 103, 131–136, 139, 147
107–113, 115, 123, 125, 128, 131–136,
139, 147, 159 Jamaica 23–24, 35
Gibraltar 11, 17, 36 Japan 8, 27, 34, 40, 50, 55, 58, 66, 69–70,
Granada 19 74, 81, 83, 94, 98, 101, 103, 112–113, 137,
Great Britain 8, 28, 30, 32, 36, 38–41, 43, 140, 145–147, 150–152, 159, 161–162
45–46, 48, 53–54, 56–58, 62–64, 66–67, Java 26
69, 71–73, 77, 82–83, 86, 89–90, 102, Jordan Valley 24
108, 125, 127, 131, 138
Greater Antilles 19 Karaikal 34
Greece 72, 86–87, 125, 131–133, 135–136, Kazakhstan 113, 118
138, 159, 161 Kingdom of Naples 13, 35
Greenland 13 Kladno 48
Guadeloupe 23, 38 Korea 50, 78, 83, 88–90, 120–121, 147,
Guatemala 140 151, 159
Gulf of Guinea 18 Kosovo and Metohija 124

Kuibyshev 107 Moravia 41–42
Kyrgyzstan 113, 118 Moscow 68, 88, 107, 113, 115
Murmansk 108
Laos 85, 121
Latin America 19, 23, 26, 36, 49, 53, 82, Naples 13–14, 20, 35
101, 140–141, 158 Netherlands 20, 22–23, 25–27, 29–30,
Latvia 113, 118, 124, 131–133, 135 34–35, 37, 42, 45, 47, 72, 85, 87, 89,
Levant 24, 53 131–136
Liberia 161 New Amsterdam 26
Lithuania 113, 118, 124, 131–133, 135–136 New Guinea 24, 26, 151
London 16, 20, 28, 32, 37–38, 42, 49, 53, New York 9, 26, 101
62, 134 New Zealand 8, 139, 151
Lübeck 16 Newcastle 43
Lucca 15, 21 Newfoundland 13, 36, 38
Luxembourg 20, 87, 89, 92, 125, 131–136 Nile 10, 24, 99
Lyon 42 Nile Delta 24
North Africa 13, 18, 24
Macedonia 15, 118, 124 North Korea 78
Madagascar 55 North Sea 14, 25–26, 94
Madeira 24 North Vietnam 85
Madras 34 Northern Germany 21
Malacca 18, 26 Northern Italy 21, 42
Malay Peninsula 26 Norway 89, 137
Malaysia 120–121, 151 Norwich 42
Malaysian 18, 85 Nova Scotia 36
Malmö 16 Novgorod 13, 16
Malta 17, 24, 124, 131–133, 135–136, 138
Manchuria 147 Oran 17
Manila 19, 151 Orkney Islands 13
Martinique 23, 38 Oruro 35
Massilia 11 Ostrava 48
Mediterranean 7, 11, 15–17, 20, 24, 36, 39,
44–45 Pacific 19, 53, 151
Menorca 36, 39 Pacific Islands 47
Mexico 36, 119–120, 129, 140, 145–146, Palermo 14
151, 162 Palestine 11, 24
Middle East 24, 82, 93–94, 158 Panama 19, 36, 140
Midlands 42 Papua New Guinea 151
Milan 35 Paraguay 122
Miquelon 38 Paris 21, 38, 42, 61, 71, 89, 109
Mississippi River 39 Pasco 35
Moldova 113, 118 Pearl Harbour 68
Moluccas 18–19, 26 Persia 17, 154
Montenegro 124 Persian Gulf 18
– 174 –
Peru 151 Sicily 13–14, 20, 24, 36, 69
Philippines 19, 47, 85, 120, 151 Silesia 37–38, 41–42, 48
Pisa 15 Singapore 85, 121, 151
Poland 34, 47, 70, 108, 110, 112–114, Slovakia 115, 117, 124, 129, 131–136, 138
117–118, 123–124, 128–129, 131–136 Slovenia 116–118, 124, 131–133, 135–136
Pondichéry 34 Small Antilles 19
Port Arthur 147 Socotra 18
Porto Bello 36 South Korea 78, 83, 120–121, 151, 159
Portugal 18–20, 29, 31, 89, 131–133, South Sudan 161
135–136, 161 South Vietnam 85
Potosi 35 South West of England 43
Prague 111, 114–115 Southeast Asia 24, 26, 69, 120, 148
PRC 146, 152, 155, 159–161, 163 Southern Netherlands 35
Prussia 37–38, 41, 47–48, 55 Southern Silesia 42
Puerto Rico 24, 37, 47 Soviet Union (USSR) 42, 65–66, 69–71,
78, 81, 85–87, 90, 103, 106, 108–111,
Red Sea 12, 15, 17–18 113–114, 128
Rhine 36, 42 Spain 8, 16–17, 19–20, 25–26, 29, 31,
Rhineland 88 34–38, 47–48, 131–136, 161
Rhone estuary 42 St. Martin 23
Riga 16 St. Petersburg 33
Romania 60, 108, 113, 115–116, 118, 124, St. Pierre 38
127–128, 131–136 Stettin 16
Rome 11–12, 91, 125–126, 147 Strait of Gibraltar 11
Rotterdam 25–26, 30 Strait of Hormuz 18
Russia 12–13, 16, 31–34, 44, 47–48, 55–58, Strasbourg 21
61, 82, 94, 105, 118, 122, 128, 137, 147, Sudan 161
151–152 Sumatra 26
Russian Federation 113 Suriname 23
Sweden 26, 31–32, 34, 38, 48, 89,
Sagres 18 131–133, 135, 138
Saint Kitts 35–36 Switzerland 61, 89, 137
Santo Domingo 24 Syria 24, 93
Sardinia 36
Saudi Arabia 151 Taiwan 121, 147, 151, 161
Scandinavia 12–13, 16, 21, 26, 44, 87–88 Tajikistan 113, 117–118
Scotland 22, 32, 43, 134 Tana (Tanais) 14
Senegal 39 Thailand 34, 120–121, 140
Serbia 15–16, 124 Thrace 15
Shanghai 151, 154 Tigris 10
Sheffield 43 Tilsit 48
Scheldt River estuary 30 Timișoara 116
Siam 18, 34, 50 Tirana 116
Siberia 8, 34 Tobago 39

Trinidad 23 Venice 14–17, 20, 29, 44
Tunis 17 Vera Cruz 36
Turin 42 Veracruz 19
Turkey 15, 124, 137 Vienna 38, 40, 47, 66, 134
Turkmenistan 113, 117 Vietnam 74, 85, 103, 117, 121, 151
Tuscany 21, 35 Visby 16
Ukraine 106, 108, 113, 118 Warsaw 110–111, 115

United Arab Emirates 151 Washington D.C. 72, 94
United States 8, 17, 25, 29, 39, 47–48, West Afrika 18, 55
53–56, 58–59, 61–64, 66–71, 75, 78, West New Guinea 26
80–82, 85–86, 93–94, 98, 101–102, Western Belarus 108
112, 137–140, 142–147, 151–154, Western Hispanola 23–24
159–162 Western Ukraine 108
Urals 55 Wittenberg 21
Uruguay 76–77, 122, 139
USA 32, 53–56, 62–63, 65, 67, 69, 71, 73, Yanam 34
80, 82, 85–86, 90, 98, 102–103, 107– Yorktown 39
108, 110, 120, 137, 140–141, 145–147, Yugoslavia 110–111, 113, 116, 126, 128
150–151, 154, 159–160, 162–163
Utrecht 23, 35, 134 Zambia 161
Uzbekistan 113, 118 Zurich 86
– 176 –
Subject Index
advantage of net ownership 96 battle of Trafalgar 46

Alpine trails 15 Bible 21, 45
American War of Independence 45 Boston Tea Party 39
Amsterdam Treaty 127 Bretton Woods System 8, 71, 74–75, 94
Anti-Corn Law League 49 Brezhnev doctrine 111
Asia-Pacific Economic Cooperation British East India Company 30
(APEC) 151
Atlantic Charter 71 Canada-US Free Trade Agreement 145
autarky (also self-sufficiency) 62, 67, 78, Casa del Contratación 31, 35
82, 92, 117, 129, 153 Church of England 27
Axis Berlin-Rome-Tokyo 147 Committee for European Economic
Co-operation (COMECON) 71, 82, 103,
balance of payments 30, 62, 67, 74, 77, 119, 123
119–121, 141 Commodity Exchange 25
Bank of England 28, 33, 74 Common Agricultural Policy 90–92, 126,
battle of Kosovo polje 15 130, 138–139, 162
battle of Hastings 14 Company of Merchant Adventures of
battle of Manzikert 15 London 28
Subject Index – 177 –

Congress of Vienna 40, 47 European Coal and Steel Community
continental blockade 40, 46–48, 66 88–90, 92, 103
Continental congress (1st and 2nd) 39 European Commission 60, 79, 80, 92,
convergence in incomes 54, 67 125, 136
convergence in prices 28–29, 51–52 European Convention on Human Rights
cotton gin 43 87
Council of Europe 87, 103 European Court for Human Rights 87
Council of Ministers 92 European Court of Justice 92, 128
Council of Trent 22 European Defence Community 89
crawling peg 121 European Economic and Monetary
Crusader states 14, 15 Union 130
crusades 14–15, 44 European Economic Community (EEC)
Crimean Tatars 24 89, 90–92, 103, 131, 133, 137, 139
Crimean War 55 European Financial Stability Facility
Cultural Revolution 78, 152 136
European Investment Fund 90
Dawes Plan 62 European Monetary Institute 137
Declaration of Independence and the European Monetary System 137
Union 39 European Monetary Union (EMU) 75,
de-collectivisation 154 93, 125–126, 130, 133, 137–138, 161,
decolonisation 83–84, 93 162
de-étatisation 117 European Parliament 92, 126, 129
democratisation (in China) 153 European Recovery Program 71
depopulation 20, 60, 151 European Stability Mechanism 136
de-Stalinisation 111 European Union (EU) 8, 79, 92, 94, 98,
division of labour 19, 43, 51, 63, 77–78, 104, 119, 123–124, 126–140, 145–146,
85, 103, 117, 129 151, 154, 159–162
Dutch East India Company 26 Exchange Rate Mechanism 125
Dutch West India Company 26
factory of the world 49
eclectic model of international fall of Constantinople 15, 20,
production 95 Federal Emergency Relief
enclosures 28 Administration 64
Entente Cordiale 57, 58 Federal Reserve 63, 64
EU constitution 127 first fertility transition 60
Europa Universalis (also Españolizar first wave of globalization 8, 52, 54,
Europa) 20, 22 57–58, 67
European Agricultural Fund for Rural First World War 39, 41, 53–54, 56–60,
Development 138 62–63, 65, 67, 69, 71, 73, 84, 91, 93,
European Agricultural Guarantee Fund 102, 142
138 five-year development plans 107
European Atomic Energy Community Five-Year Plan 65, 154–155, 158, 163
90–92, 103 fixed exchange rate 74–75, 120–121
European Central Bank 125, 137, 138 floating exchange rate 75, 120, 122
– 178 –
foreign direct investment (FDI) 83, 95, International Development Agency 72
96–101, 103, 120–121, 141, 146, 152, International Financial Corporation 72
155–157 International Monetary Fund (IMF)
four modernisations programme 153 73–75, 93–94, 103, 120–123, 136–137,
fourth Arab-Israeli War 93 140, 161
Free Trade Association 90 invasion to Czechoslovakia 111
French East India Company 34 Iranian revolution 94
French Revolution 33, 40 Iron Curtain 86, 109, 115
Fukuda doctrine 151
Fulton’s steamer 44 Joint Nordic Committee for Cooperation
87
General Agreement on Tariffs and Trade
(GATT) 75–77, 80, 87, 103, 139, 145, 160 keiretsu 147
German hyperinflation 62 Korean War 89, 90, 147
glasnost 113
division of labour 19, 51, 63, 77–78 laissez-faire 43
global economy (also world economy) League of Armed Neutrality 39
7–8,10, 16, 19–20, 23, 40, 44–46, 48–55, Lend-Lease Act 69, 108
81–83, 93–95, 103–104, 113, 130, 158, liberalisation 83, 111, 117, 120–121, 146,
161–163 152, 160
globalization 8, 50–52, 54, 57–58, 67 liberalism 30, 32–33, 43, 45, 62–63, 67,
Glorious Revolution 28 78, 102
gold standard 61, 63, 67, 73 long-distance trade 10, 13, 20, 44, 51,
gradual method 117 67
Great Crash 62, 64
Great Depression 8, 62–66, 73, 107, 142 Maastricht Treaty 92, 104, 126–127, 137,
Great Leap Policy 152 162
Great Northern War 32, 34 market economy 51, 97, 101, 105,
Great Society 74 116–117, 153, 155, 159, 163
Greek-Punic wars 11 market socialism 111, 116
gunboat diplomacy 50, 77 Marshall Plan 71–72, 82–83, 86–88, 102,
109
Hanse 16, 17, 25, 28, 45 Marxism 102, 105
High Representative of the Union for Marxism-Leninism 105
Foreign Affairs and Security Policy mass privatisation 117
128–129 Meiji 146
Holy Land 14 mercantilism 30–33, 36, 45, 49, 67, 77, 98,
102, 103
Importation Act (also Corn Laws) 49, 67 mercantilist measures (also mercantilist
industrial revolution 8, 11, 20, 28, 41, policies) 28, 31, 39, 50, 53, 55
43–45, 47, 49, 50–53, 57, 155 middle-income trap 158
interdependence 52, 58, 151 Molotov-Ribbentrop Pact 108–109
International Centre for Settlement of monopoly 11, 15, 18, 27–32, 50, 51–52, 54,
Investment Disputes 72 79, 96

Multilateral Investment Guarantee protectionism 62, 67, 78–79, 90, 101, 160
Agency 72 putting-out system 42–43
multinational corporations (MNCs) 70,
81–82, 93, 95–102, 103, 159 quotas 52, 78, 80, 94, 106, 139
Napoleonic wars 38, 40, 46, 49, 57, 66, reconquista 19

70, 102 rent-seeking 51, 52
nation of grocers 49
National Recovery Administration 64 Schengen Agreement 127
nationalisation 82, 106 Schuman Plan 88
naval power 26, 30, 36, 38, 49, 57 scorched earth policy 108
Naval Store Bills 32 second fertility transition 60
Navigation Acts 31, 32, 48, 50 Second World War 53, 56, 59, 61, 64,
neo-mercantilism 63, 67, 77, 102 65–68, 70, 77, 82, 84–85, 91, 93, 102,
New Deal 64, 67 106, 108, 113, 123, 142, 146–148,
new economic geography 99 151–152, 162
New Economic Policy 105, 106 Sengoku Jidai 27, 34
Nice Treaty 127 Seven Years War 8, 34, 38, 39, 57
North American Free Trade Agreement shock therapy 117, 124, 129
(NAFTA) 119, 145, 162 shortage economy 113, 117
North Atlantic Alliance (NATO) 87, 124 Silk Road 14–15, 17
single market (also Single European Act)
OECD 71, 102, 119, 120, 124 11, 44, 51, 90, 92, 101, 104, 124, 127, 145
oil crises 8, 78, 93, 94, 100, 104, 133 Smithsonian Agreement 74
one-child policy 156 Smoot and Hawley’s Customs Tariff 63
open-door policy 153, 163 Solidarity (Solidarność) 110, 114
Organization of the Petroleum Exporting Special Drawing Rights 75, 94
Countries (OPEC) 93 Splendid Isolation 57
Osaka Action Programme 152 Stamp Act 38
steam engine 41, 43–44
Pacific Development Cooperation 151 Stephenson’s locomotive 43
Parliamentary Assembly 87 Suez Crisis 84, 90, 91
Pax Americana 8, 81, 95–96, 102, 103
Pax Britannica 8, 46, 49, 58, 62, 65 tariffs 30, 39, 53, 61, 67, 75–76, 80, 87, 93,
Pax Romana 11, 44, 49 103, 138–140, 145, 151, 160, 162
perestroika 113, 114 tax of solidarity 124
Permanent President of the European Taylorism 110
Council 128 Tennessee Valley Authority 64
Potsdam international Conference 86, the Treaty of Tordesillas 34
109 the Tsars 33
Pragmatic Sanction 37 theory of product life cycle 95
Prague Spring 111, 114 Thirteen colonies 8, 32, 38
price revolution 20 Thirteen Years War 34
privatisation 98, 100, 117, 122 Thirty Years’ War 23
– 180 –
three-field crop rotation 40 Wall Street Crash 63
Time of Troubles 34 War of Communism 105
Tokugawa shogunate 34 War of the Spanish Succession 35
transformation 51, 56, 60, 77, 113–114, wars in Iraq 143
116–117, 119, 123–124, 129, 155 Warsaw Pact 110–111, 115
Treaty of Lisbon 126, 128–129 Western European Union 89
Treaty of Rome 91, 126 Winter War 108
Treaty of Versailles 39, 65 Work Project Administration 64
Triangular trade 24 World Bank 72, 103, 133, 154–156
Triple Alliance 57, 58 World Bank Group 72
Triple Entente 57, 58 world trade 8, 25, 50, 53–55, 58,
66, 73, 75, 77–78, 80, 101, 103, 146,
Union of European Federalists 87 152–153, 159, 163
Union of Utrecht 23 World Trade Organization (WTO) 75,
United Nations 71, 102 76–78, 80–81, 103, 130, 137–140, 145,
UNRRA 71, 86, 102 151–152, 159–160, 162, 163
Uruguay Round 76–77, 139 World War I (see First World War)
World War II (see Second World War)
Vietnam War 74
Vikings 13, 16, 44 zaibacu 146, 147
voucher method 117

Tomas Evan - Chapters of European Economic History-Karolinum Press (2014)

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Tomas Evan - Chapters of European Economic History-Karolinum Press (2014)

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tomÁŠ cHaPters oF

Published by Charles University in Prague, Karolinum Press

© Charles University in Prague, 2014

1. The world before the rise of the Global economy . . . . . . . . . . . . . . . . . . 10

2. The Nature and Emergence of the Global Economy . . . . . . . . . . . . . . . . 46

3. The Post-War Development of the World Economy . . . . . . . . . . . . . . . . 68

4. The End of the Bipolar World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

5. Major Centres of the World Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

Name Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

Geographical Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Subject Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

This book originated with my lectures on world economy, comparative eco-

1.1 LOCAL AND REGIONAL MARKETS,

The world before the rise of the Global economy – 11 –

The world before the rise of the Global economy – 13 –

The world before the rise of the Global economy – 15 –

The world before the rise of the Global economy – 17 –

The world before the rise of the Global economy – 19 –

1.2 THE ESTABLISHMENT OF CAPITALIST SOCIETY

The world before the rise of the Global economy – 21 –

Calvinist ideas, along with his version of Protestantism, expanded from

The world before the rise of the Global economy – 23 –

The world before the rise of the Global economy – 25 –

The world before the rise of the Global economy – 27 –

Year Netherlands Belgium France Germany Italy UK Portugal Spain

Source: Maddison Historical GDP per capita Dataset

The above mentioned processes are well described by Maddison (2010)

The world before the rise of the Global economy – 29 –

1.3 FROM MERCANTILISM TO LIBERALISM

The world before the rise of the Global economy – 31 –

1.4 EUROPEAN COLONIALISM

The world before the rise of the Global economy – 33 –

The world before the rise of the Global economy – 35 –

The world before the rise of the Global economy – 37 –

The world before the rise of the Global economy – 39 –

1.5 THE INDUSTRIAL AND AGRICULTURAL

The world before the rise of the Global economy – 41 –

Source: Maddison Historical Population Dataset

The employment of an increasing number of people living in villages was

The world before the rise of the Global economy – 43 –

THE CHAPTER SUMMARY

The world before the rise of the Global economy – 45 –

2.1 THE WORLD AFTER THE NAPOLEONIC WARS

The Nature and Emergence of the Global Economy – 47 –

Tab. 2.1: Computed or declared values of Great Britain’s overseas trade

Year Import Export Re-export

Source: Kennedy 2001:145.

The Nature and Emergence of the Global Economy – 49 –

2.2 GLOBALIZATION – THE ORIGIN

The Nature and Emergence of the Global Economy – 51 –

2.3 THE FIRST WAVE OF GLOBALIZATION

The Nature and Emergence of the Global Economy – 53 –

Country 1860 1870 1880 1889 1898 (1911–13)

Source: Kennedy 2001:190

The Nature and Emergence of the Global Economy – 55 –

Year Great France Germany Austria Russia USA world

Source: Stellner 2006:47

To complete the picture of industrial maturity, please refer to the chart

Tab. 2.4: Relative shares of world industrial production, 1880–1913, in percentages

Country 1880 1900 1913 1928 1938

Source: Kennedy 2001:251

The Nature and Emergence of the Global Economy – 57 –

Battleship Approximate time Average

Source: Kennedy 2001:193

1.1 LOCAL AND REGIONAL MARKETS,

The world before the rise of the Global economy – 11 –

The world before the rise of the Global economy – 13 –

The world before the rise of the Global economy – 15 –

The world before the rise of the Global economy – 17 –

The world before the rise of the Global economy – 19 –

The world before the rise of the Global economy – 21 –

The world before the rise of the Global economy – 23 –

The world before the rise of the Global economy – 25 –

The world before the rise of the Global economy – 27 –

The world before the rise of the Global economy – 29 –

The world before the rise of the Global economy – 31 –

1.4 EUROPEAN COLONIALISM

The world before the rise of the Global economy – 33 –

The world before the rise of the Global economy – 35 –

The world before the rise of the Global economy – 37 –

The world before the rise of the Global economy – 39 –

1.5 THE INDUSTRIAL AND AGRICULTURAL

The world before the rise of the Global economy – 41 –

The world before the rise of the Global economy – 43 –

The world before the rise of the Global economy – 45 –

2.1 THE WORLD AFTER THE NAPOLEONIC WARS

The Nature and Emergence of the Global Economy – 47 –

The Nature and Emergence of the Global Economy – 49 –

2.2 GLOBALIZATION – THE ORIGIN

The Nature and Emergence of the Global Economy – 51 –

The Nature and Emergence of the Global Economy – 53 –

The Nature and Emergence of the Global Economy – 55 –

The Nature and Emergence of the Global Economy – 57 –

The Nature and Emergence of the Global Economy – 59 –

The Nature and Emergence of the Global Economy – 61 –

The Nature and Emergence of the Global Economy – 63 –

The Nature and Emergence of the Global Economy – 65 –

The Nature and Emergence of the Global Economy – 67 –

The Post-War Development of the World Economy – 69 –

The Post-War Development of the World Economy – 71 –

The Post-War Development of the World Economy – 73 –

The Post-War Development of the World Economy – 75 –

The Post-War Development of the World Economy – 77 –

The Post-War Development of the World Economy – 79 –

3.3 THE PAX AMERICANA AND

The Post-War Development of the World Economy – 81 –

3.4 DECOLONISATION AND ITS IMPACT

The Post-War Development of the World Economy – 83 –

The Post-War Development of the World Economy – 85 –

The Post-War Development of the World Economy – 87 –

The Post-War Development of the World Economy – 89 –

The Post-War Development of the World Economy – 91 –

3.6 THE WORLD ECONOMY BEFORE

The Post-War Development of the World Economy – 93 –

The Post-War Development of the World Economy – 95 –

The Post-War Development of the World Economy – 97 –

The Post-War Development of the World Economy – 99 –

The Post-War Development of the World Economy – 101 –

The Post-War Development of the World Economy – 103 –

4.1 EASTERN BLOC COUNTRIES

4.2 THE TRANSFORMATION