A History of the World Economy_ch14

A History of the - 29 A H/Sfog> ’or(z’ Economy 0.4 1 j Him“ ll‘zo<11 theories and product cycle we l’osncr t'l‘lhll Vernon ceve o

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Unformatted text preview: 29% A H/Sfog> ’or/(z’ Economy 0 _ --\ .4 1 ,, _.. j Him“ ll‘zo' <11 theories and product cycle. we l’osncr t'l‘lhll: Vernon ceve o nnr" ‘9 l 2 . my“: be; .«(t 0% rade tll\‘e‘2.\ttlll etlcct ot a customs union. see Rohson 7, I“ ' i9 2 /> «5" / . . , , . é; 1 altiine output at prices "‘L'L‘Ht’tl lty tarmers and at . and expressing the excess as a percentage ol the t(%,»\ H] lWl l s elasticities oi supply and demand likelt are \altie, .ii. \‘t‘tf liroun ll‘lthl ..on can he I'L‘;‘vt'C.\<.‘ll§‘Ctl ht the expression II Hll (7 l ,cre e ; et’t’ecthe rate. a w nominal rate on the linal good. HI A nominal rate on the input iood. i2: coeliiicient ol‘ material input. \ W proportion of final output accounted .or by value added. Suppose the nominal dirt) on steel was Ztl percent. and steel was til per cent ol the tnanulaeturing cost ol cars. on which there \HtS ltl per cent duty. "l‘hen n : til. m m til. i i HA. r 7" do (int; e W 333 percent on cars. ’l‘he. liormula assumes peilect suhstitutahilit} heiuetrn imports and domestic products. that all goods are traded at fixed world prices and that lltt‘te are no changes in the inputwmtpnt coetticients, ll. The surtey ht Stein concludes that the relationship hetxwen export instahilit} and growth could he in either dircction depending on particular national circumstances. although the relationship is a “calm one in either case. c. it the econom} were perfectly eompetitixe at tl had constant returns to scale. then the share oi wages in national product uoiild measure the elasticity ol output to the lahour input. this type ol measurement this popularised l‘} Denison tl‘lhll. l3. ()ne ol the most puhlished exponents ol this we“ was li, .l. Mishan (sec Mishain. l‘l77l. [A Wt “the rattan earls system a: and as transtarmatnn international monetar} liher zlisation complemented the new liberal trading order. Roth supported the great post-war hoom, But aholition of controls did not proceed at anything lll\C the pace Much the Bretton \r‘voods architects planned. The regime t'ormally ditl'ered irom the earlier (old exchange standard mainly by alloninu the possibility ol changing exchanie harities. Actual international monetary practice. men when the lk’il“ hegan operating as 'ntended from the niid—l‘litts. <.leviate<.l suhstantially trom the rules ot‘ the system. Fixed exchange rates among the major trading powers lasted a remarkahly shor time by historical standards. Yet a distinctixe characteristic ot‘ the system — consul ation hetween the 1’ tr“ t largest economies that recognised their interdependence al owed change and llcxihilit} in response to the crisis ol' the 1970s. ireventing a repetition ot‘ the l931 internatiornii collapse. ‘l'his cit—operation continued throughout he period. despite alterations in the rclathe strengths of the natiois involvee During the l‘liitls and l‘ltills. the greates policy etiliorts in international economic lt‘l;i.tii\tt\ here directed to enhanciig \vorld iquitity. This chapter theretore tirst explains the pressures to raise in ernatirmal 'yes and liquidity. the necessity for these increases and the. means 1v which trey were. implemented. While the \adiustahle peg exchange rate system lasted. greater liquidity was not intended to remove the need tor nations eventually to adjust tieir economies to lialance ot‘ payments tliseauilihria. The pattern of such adjustment under the Bretton ‘o’oods system is discussed next. The end of the Bretton Woods exchange rate sy stein came in the early l‘thls. hut the transition to loating rates described tird section was soon overshadowed by i re disruptions ot the oil shocks of N73, lhc recession that hcgan that year was tie severes that the international economy had experienced since NZ“). A comparison between the two slumps. atteinhtet next, illuminates \vhv nevertheless He later recession was not as deep as the earlier, increasing unification ol~ world capital mar 'ets contributed to the environment in nhich the old monetary system was no longer viable. Hence the ltc‘\\ institutions and torms of short» and longterm private investment. and their consettttem'es. are considered in the lilth section. Private capital flows to the less ilmeloped countries were suhstantiallv supplemented hy official tioyvs. raising 223433; A H/story of the War/d Economy different questionst discussed in the tollomne 'tion. l‘llliilijxi the prohleins created hi] the accumulation ol' lioreicn deht . descrihed and :tnah sed. the gmwth at internatitmai res-era : and lit in m {E halance oi paintents surplus and with little As a creditor nation uith a dependence on ioreign trade. the i'nited f‘statts at ili'etton \‘voods had heen little concerned with international reserves instead it focused on the necessio to ensure the rapid adiustineut ol def to keep them \xithin their incomes. Keinest representing the l‘nited Kingdom a deiicit nation: in tavour ot' a more liheral reseries ad argued strongl} hut had heen merridden. As descrihed in t'hapter ID. the funeritiau stance was soon modified in the lace ol' Europe‘s plight and the (“old War. With the change in the [’8 halanee ol‘ paiinents. the .»\nierican \it,‘\\ on international rescues during the :itliustnient po, l‘tolls hegan to converge \xith the British poaition. lieserxe and credit laeilities were enlarged and a new torin ol internationai rescues special drauine rtehts (SDRsi was eventt it created. it t ta \ At the end of )th western liut'opean eter- dollars on eurren account as required hi the 7 » the world to hold {58 dollars as a re“ : es lmeame hill} eomertihle into , , «s, ol the rest oi value and medium ot' exchange. meant not then a prohlein tor the t'nitetl Stat iiahilities in WES were only {kill per cent of t“ From the viewpoint oi the rest ol‘ the marine houever. prohlem m the shortage oi l’L’sCl'\c"s and credits Sudt ~ \valx‘e oi' the Suez crisis towards the end ot WW» depleted the l‘und‘s holdings ol l'f‘i dollars hi nearly one~third (fétiai ‘ was tound l‘jx selling; Mil: gold to the, i' ’ lite tear was not that a lack ot‘ liquidit} would ohliee the i’und to suspend operationst hut titati without a n ;\n eineieene} solution continuous injection ol' dollars a f‘t‘tl‘e‘lill econot ic recession might ensue. 'l‘he prohlem was to decide \\ hat determined the size oi the uiieetion oi dollar reserws needed to avoid a Slump. or \ihat dc wrniinetl the demand tor reserxes. The demand for interrmt/ona/ react/Was: ed tz‘om the need or he demand h} emerninents tor reset“ ll‘i'tkst “‘ ’v- i :s ’l dt ire ot‘ governments tor reserwsv lite awu‘a es all'ected emerii ments' policies hr changing the perceived relative oi responding to halance ot’ payments distttt'hanee nnst adjustment oi halance oti pti)'ltic‘ttls disequil, the objective, was to avoid unemploymente as it an increase in the growth oi liquidit} was required The Bretton Woods system and its transformation 295 dellatine demand to reduce imports. It the ohjective was to restrain demand and inflation. as it \xas troin the mid~l97tls. a contraction of the rate of growth of liquiditi was called tor. hut the result of this contraction might instead be increased resort to devaluations or import restrictions. The demand for reser\ es has necessarily more unstath than a national demand lor monei hceause there \\ ere only H3 members of the lMF hv W78. and the two largest reserve hoiders alone accounted tor about 35 per cent of world reserves. Consequently there it as suhstantial variahility in the relationship between pit}lllt’lll imhalanees and the level oi uorld trade Nevertheless. a reasonably stahle demand relationship tor gross reserves (unadjusted for foreign liabilities) did seem to exist hoth tor the tixed exchange rate years and for the floating exchange rate period l‘rom l‘l73. in which demand depended on the average propensiti oi an eeonom} to import. the size of the country‘s imports and the \ariahiliti oi imports (Heller and Khan. W78).1 The more open the economy. the greater the demand tor rescues because the more susceptible was the country to i‘oreign disturhanees ’l‘he costs ot holding reserves generally did not affect demand sieniticantli. Higher imports required more reserves. Greater variability in the halance o‘i payments created more uncertainty and increased the demand tor rescues With precise measurements of the influence ot‘ these variables it was possihle to \a} What demand would he, for different variath values Shifts in the composit/O/i of reserves 'l‘he composition ot l‘L‘NCl'VCM changed with the differing elasticities of supply of reseries as the demand expanded, 'l‘ahle lil clearly shows that the American insistence on maintaining a lixed dollar price ot‘ gold throughout the l9505‘ and Wolls reduced the role oi gold in international monetary relationsi 'l‘he artificially loii price reduced production and stimulated commercial use. while the United States‘ eurrene} heeanie the international medium of exchange. Had the price of gold heen determined in the tree markets. or had the lMF provided a suitable suhstitute reserve asset in the appropriate volume. the dollar would not have been the dominant rescue current‘} lot so long. lwloweveiz the United States obtained it at (it it‘ Foreign Reserves Special exchange in IMF drawing rights “9% Til? 4.1 i :9th Sit) (5.7 — N‘tt 48.2 8.3 3 3 NT? (lost 41 < R 29%;» A History of the Wor/r/ Economy substantial henelits troin the. reserve currency role ot the dollar. and therefore resisted any change that might supersede it. Nevertheless. like sterling in the years before WM. the reserve Currency role ol’ the dollar contained the seeds of its own destruction. Foreign confidence in the exchange value ot. the currency declined.3 The failure ol‘ conlidcnce stemmed limit the large and persistent lJS balance of payments delicit. which raised the ratio of 178 dollar liabilities to gold reserves as other countries held more dollar reserv .i\n attempt hy l‘orcigners to convert all their dollars into gold by lilo? when external ['8 liabilities were three times gold reserves. and when ot'licial l8 liabilities were l5 times gold reserves. would have required a devaluation ot tlte dollar against gold. A more suitable reserve asset in which there was more international conlidence might have allowed the Bretton Woods system to survive longer .»\s it was. the value oi ,r\l‘thI"lCtlH gold reserves was held down by the lixed gold price. while dollar liahilities rose. l‘lolding $35 an ounce proved increasingly ditli gold price in the London market kept within th the dollar price liked in WM. Upward pressure on the price oti gold was countered in 1961 bv the formation of the London (iold l’ool. The his. the Common Market and Switzerland agreed to provide halt the gold necessary to maintain a market price oli $35 per ounce. and the l‘nited States agreed to provide the other hall (Horsel‘ield. lilti‘l. vol. 1. pp. 4M5: Strait l‘l7o. pp. 774)). This arrangement was ended in lilohl alter the longvawaited devaluation of sterling cult. lietweeti WM and l‘loll the e limits prescrihed hy the liund. shifted speculative pressure to the dollar as the next most likely currency to change its exchange rate. Speculation took the torm ol selling dollars lor gold and driving the gold price ot‘ dollars upwards. lite l.t‘tlltltttl gold market was liorced to close, temporarily in March llltih‘ to stop the drain on tllllt‘lttl monetary reserves tde \lries. lWh. pp. wllljvall. l'nahle to maintain the (iold l’ool. the central hanks instead establishet themselves at “£35 per ounce. hut trading elsewhere :it the l'ieednarket rate. l a two~tier pricc system with gold exchanging between lrlencel'iorth. speculation could only be against the exchange rate oi the dollar with other currencies. and foreign central hanks could he expected to hear the cost ot countering such speculation. \ ‘ There were savings for the world as a whole hour the increasing use ot a hat money. such as the dollar. which cost little to produce. rather than a commodity money. such as gold. which cost a great deal. The resource cost ot a gold standard has been estimated at $275 hillion tor the l‘ltills (Williamson. W73). 'l‘he seignorage hcnetits to the United States arising trom other nations' willingness to hold dollars solely because ol‘ their iiseliiiliittss as international media oli exchange have been variously calculated at Sdltl million in l‘lt’ifi. and fills hillion in ll'llll hy dill‘crent authors and methods. The reserve currency use ol‘ sterling in the mods mav have earned the United Kingdom £ltltlolo5 million. Whereas the internation- al use of the dollar rarely constrained .~’\merican economic policy. British policy was severelv restricted by sterling balances (non-British holdings ol' sterling). and by speculation ahout the sterling exchange rate caused hy these halanccs. The Bretton Woods system and its transformation 29? Although there were real resource savings from fiat reserve currency. they accrued to the reserve currency countries as seignorage. By contrast. a revalua1 tion ol‘ gold would have conferred henetits on the gold producers. of which the largest were South {\l'rica and the and on gold hoarders. especially lirance. which was determined to reduce the international role of the dollar. W37 (ieneral de (.iaulle converted all French dollar reserves into gold with severe repercussions on the world told market. An additional benefit to the United States. but not to the rest o‘ the world. from the reserve currency role of the dollar was that the linited States did not need to bother about its own balance of payments. instead Angierica could require the rest of the world to adjust their halances ol' paymentsf lirom the inid»l‘)nlls until the end of the fixed-rate system in the early ll97tls. this enabled America to pursue expansionary economic policies. and thcrchy to export inllation to some countries through higher import and export prices and low interest rates. ,A c... r Measures to increase internationa/ reserves During the earlier period ol‘ the Bretton Woods system. it was probable that the (\lllL‘llCllll deficit was mainly demand determined: the rest ol‘ the worlds demand tor a larger supply oti reserves required them to hold dollars in view of the lack of a suitahle alternative. Although the IMF quotas were increased in l959. this enhancement oli international liquidity quickly proved inadequate for an adjust- ahle peg regime in a world ol‘ increasing capital mobility. This regime provided those who had to make large and tirequent international payments. or who merely wanted to make. or avoid losing. money from foreign exchange transactions. with a onc»way het. liither a government would fulfil its obligation to maintain its exchange rate. or it would he unable to resist pressures fora change. which in any period would always he in one direction." The Basle Agreement. the General .:\rrangements to Borrow. and the. introduction of special drawing rights were all w ays oi trying to provide suitable supplementary reserves to dollars in order to resist speculative pressures to change exchange rates. In the late l‘lSlls and early I‘lotls it was obvious that the growing relative strength ot' the {iernian economy was increasing the probability of a revaluation ot’ the mark. Speculators the ‘clore hought marks knowing that they could not lose and might well gain. and thereby created more pressure for a revaluation. The revaluation ol the mark in March 1%] shifted speculative pressure to sterling. At liasle in NM the central hanks ol the richest industrial countries had agreed to provide automatic shortwterm support for any currency whose exchange rate was threatened by loreign exchange market pressures (Horsefield. 1969. vol. 1. pp. 48374; Strange. W76. pp. 834)). ‘l‘hey would do this either by accumulating sterling til that was the threatened currency) and holding it for at least three months. or in recycling the hot money inllows. depositing in the central bank of the country zit origin an equivalent sum in the refugee currency. Under this 2&8 A History 07' the War/d Economy agreement Slltlll million was, supplied to the i'nited Kingdom between March and .lul}'- but the lfls still needed to dran Sifitttl million trom the l.\ll9 in flueust. This: drawing practi \ sell $500 million of its gold holdings. The Group of Ten industrial nations (independently ol the l.\ll‘l in December lilol made public their agreement. the (ienera Arrangements to Borrow. to if (iroup from October l‘lol calh exhausted the l‘und‘s resources and obliged the l;\ll5 to create a fund of So billion for inenilicrs i (Horsetield. toot. \‘ol. l. pp. Q‘ll'rlfil. 'l he t’ieneial x\ttttttt:c’ltl‘ettl8 to Borrow. first used in Not by the l? s. were thought inadequate to the growing demands for liquidity. at least by the linited States. and this led to the creation of special drawing rights. a new rcserye asset. ln WW :1 billion issue was agreed for the first year and $3 billion for each of two subscducnt years l/Xitly. Wat. p. 55). The IMF had concluded that rescue. needs w ere Mr? billion on the basis of reserves imports and rcseryes'imbalancc ratios, and that other reseiie growth would amount to Sl .5- billion. in contrast to a reserve currency. the Siltlxi vignotagc accrued to the SDR participants. not to the issuer of the reser\c currency. litterest initially at l5 per cent was paid by holders of SDRs. ‘v‘y'hcn a participant decided to use SDRs to finance a balance of payments delicit. the l.\lli designated another participant who would accept these SDRs and provide foreign exchange in return. .r\. participant who had used some of its 817R allocation continued to pay charges at l5 per cent on its original allocation. but received interest on its depleted holdings. Conversely. the SDR recipient receocd interest on its now larger holdings of SDRs and paid charges only on its original allocation. the acquisition of SDRs had no initial impact on the money supply. appearing as a balance sheet adiustment ot the national monetary ltlllllttl'lilcs. although SDRs may hate allowed the creation of domestic money. In the event of crises in the gold and toreign ewhanec ntarhets. national goyernments and central banks reacted promptly. whereas when faced with the need to adapt international institutions. such as the introduction of the SDR. change was much slower tde \"ries. l‘l7o. p. lh’i‘l: Strange. ttt‘c. p. :55). 'l'lic creation of SDRs took place only because of the policy reyersal of the lTnited States in response to its balance of payments position. and because of the persistence of negotiating officials who thought that. in ways not then clear. SDRs would alleviate the frequent monetary crises. ’l‘he slow pace of reform has, also attributable to the changing political and economic cnyironinent ot the period ot negotiations. and to the technicalities inyohed. As it turned out. by the time the SDR reforms were implemented they were unnecessary. for balance of payments disetpiilibria were endogenously generating onary “.mcrican monetary policy in the increases in reseryes; in particular. eypzm late lilotls and early thts. by worsening the balance of payments. increased world reserves by more than was desirable. Apart from the special position of the United States. the growth ot’ international capital markets allowed other countries also to increase reseiwcs. A. price increase tor an mtportant traded commodity. The Bretton Woods system and its rransformat/on 293 tame it}. Growth in world reser\ es and world trade. lfilitli7h (no part.“ Resery cs Exports 3. l (x: lo (3,] 37 so 3.5 9.8 1‘? 7 his a “(tray :37 '\‘v=ttltl lc‘\‘e’l’\\’.\ less, those ol (ll’l‘K‘. \ourcc' ( rocked t l*?'7\). altering current account llows. may have led the surplus country to place newly acquired icseiycs as short~terni deposits in a Eurobank (which accepted deposits denominated in toreign currencies). rather than changing the exchange rate. These deposits counted as an increase in reserves. If the deficit country did not wish to see a de line in its rcseryes. it could borrow the funds deposited by the surpl is countries These borrowings were not counted as offsets to reserves. Gold and SDRs could not be increased. but national currencies were substitutes for them. llcncc the lNll" could not control the supply of international liquidity as shown by the erratic relationship between reserves and export growth. especially the explosion ot rescue growth in the primary commodity boom period of 1970—3 t'lahle l—lll. L Balance 9% payments adiustment under Bretth Woods tinder the tixed exchange rate Bretton Woods system. economies were forced to adjust eyentuall} to balance of payments disetptilibria whatever the availability of rescues, linbalances occurred because of differing income elasticities of demand for imports and export growth. because of shifts in the terms of trade or recessions. or because of monetary expansion different from that of the rest of the world. unwarranted by differential productivity growth. The cost and availability oi reserves and the cost of adjusting determined the optimum pace of adjustment back to a balance of payments equilibrium. Either output needed to increase or domestic expenditure. had to be reduced so that more goods were made available to foreigners. iixpenditure—reducing policies consisted primarily of monetary and tiscal policy l{xpcnditurerswitching policies were designed to divert foreign expenditure to domestic goods. and domestic expenditure from foreign goods. the}. entailed altering the price of domestic relative to foreign output. by devaluation. tarith imposition or multiple exchange rates. Where there were unemployed resources. expcnditurevsw’itching measures might have been ade— quate. but not in conditions of full employment. BQQ A History of [/78 War/d Economy The monetary approach saw the adjustments as coming: about through an elimination of the excess supply ot money, wt. contraction of the supply of money (which includes foreign exchange reserves). or an increase in the demand for money. was required to eliminate a balance of payments delicit. ,er deviluation raised domestic prices. increased the demand for moire}. and thereby iinprmcd the balance of payments; .-\ stud} of eighteen intlej‘iendei‘it dcvaluations by less developed couttrics. small open economies unable to inlluence world prices. between We“) and WW showed that dcvaluations were quite successful in improving thei' payments position. although the effects were reduced by the usually simultaneous trade liberalisation (Connolly and 'liaylor. l‘l7b). .-\ moder— ate decline in tic rate of growth of credit was sufficient to ensure the success of the dcvaluations. Until the mit»l‘)titls. ii. M. Bernstein. a former ltcscarch ltiicctor ol the [Ml-fl thought that the adjustment process had been uorltinu \iell. “When an effort had been made to restore the balance of payments either through a change in parity or through domes ic policies. it had been successtul (Bernstein. l‘)73). lirancc in WSRL). ltalv in liltflwl and (iernian; in l‘lt’i5ti all achieved prompt tui'nabouts from payments deficits to surpluses. the t nitetl States irianagcd a remarkable increase in its t'ade balance between l‘ltitl an l l‘lovl. althouin this was offset by the enormous rise in liS foreign investment. failure ol the adjustment process was a development of the later l‘lblls. seen in the large and persistent deficits of the United States. in the payments difficulties of lirance. in the enormous surplus of Germany and .lapan on the goods and services account. and in the recurrent exchange crises. This was also the period when the dollar began to dominate internationa reserves. these reserves began to grow rapidly. and international inflation started to rise. The. 1%? devaluation of sterlingi was one of the most important balance of payments atjustments under the Bretton Woods system. and the way the process worked is vi al to an assessment of t ie li\etl rate regime. in the year following the devaluation. British import prices in sterling; increased almost prtiportionately to the change it the exchange rate. by it} per cent against the dollar (Artus. 1975). The case for a devaluation rests to a large extent on the hypothesis that hourly labour earnings in money terms will be adjusted l amount of tie change in the exchange rate. This will improve the international it significantly less than the full competitiveness of domestic firms. in the British ease. the rise in hourly labour earnings caused by the devaluation \\ as slow to appear. and was significantly smaller than the increase in the price of forci n cxclianne. Primarily this was because foot. rent and public service componen s of the cost of living index were not sharply i icreased by the deya nation. The incomes policy introduced in March lQhS also de ayed adjustment of labour earnings to the cost of living. The increases in hourly earnings in manufacturing. adjusted for overtime. were abnormally ow in 1968/9 considering the rise in retail prices and the level of employment. In 1970 real earnings more than caught up with the rate of increase in output per titan—hour. when the period of wage restraint ended and the (F3 The Bretton Woods system and its transformation 39% devaluation elfch took place. lieedbaclts of the WM" devaluation on export prices of British manufactures were large. By 197l they accounted for an increase in export prices of British semi~linished and finished manufactures of 6.5 and 9 per cent. respectively l’rices of British finished manufactures competingT with imports rose by only about l per cent because of devaluation. and by 5.9 per cent because of higher labour earnings by l‘l7l. llieh price elasticities of demand make it more likely that a devaluation will succeed. because the large initial switch in demand away from foreign traded goods and semiccs and away from traded goods and services will start the adjustment process on the right path. The British long—run import price elasticity for finished manufactures was r—rl and for semi-finished manufactures W34 according to :\rtus tl‘l . liven for food and beverages. the Cambridge Growth Project found an elasticity of 41.3, For British exports of semi—finished and finished manulactures respectively. Artus estimated long-run price demand elasticities of ~35 and 771.4. Previous work that had found trade flows unrespon» site to relative price changes was marred by biases in aggregating different commodities with different price changes and elasticities. The impact of the demluation on the current balance of payments is shown in Table 14.3. l'hc improvement in the full employment current balance by l97l was almos £l3llll million. Such calculations assume that a sufficient resource transfer into the balance of payments can take place without additional inflation because rea. domestic absorption is cut by the improvement in the current balance plus the terms of trade effects: about 3 percent of GNP in l97l. .lust before devaluation the government expanded rather than contracte‘ demand. When added to the Kl curve effect‘ (the initial tendency of the balance to deteriorate because of the immediate impact of higher import prices and the delayed impact of lower export prices). the trade balance worsened so much tha there it as another speculative attack on sterling. Thereafter domestic demand was reduced nearly to a standstill until mid—l97l. when an actual surplus on current balance of £l .tt‘JR million was obtained. compared with a deficit of £3l6 million ir Nb? Successful adjustment then required domestic policies which raised unemploy— ment. :\s it happened. much of this adjustment was vitiated by the internationa 'l‘ahlc it} lhe eltect of the 1%? devaluation on the British balance of payments (£m) lt’bts‘ Wot} W70 W71 Final effect A-————* -————~ at the scale I ll' l ll of flows in 197] fratle balance l3w‘ lutll 35-1 533 726 940 .709 (‘nrrcnt balance tincludes sciyices plus other yarial‘les) '77 3oll 592 795 1.036 l.27l 996 Source Atrtns t FPS). 3&2 A History of the Wor/o’ Economy monetary charges ol' lWl. when the pound was repcuced at a higher paritv with i the dollar. ln .l me the next year. sterling was forced to float (lew. N78. p. 3”). The IMF and nationa/ adjustment po/rc/es llV'il‘~ surveillance policies were usually responsible lor ensuring that appropriate domestic policies were pursued. that credit growth was restrained. that trade was liberaliscd. and often that devaluation took place. 'l'he l‘und ltltlh over many ot’ the functions of the nineteentli-»r‘cntur‘y gold standard in enl'orcing international monetary discipline. and incurred much opprobrium thcrcbv iii a number ol countries, Sonic accused the lMl" ol' deliberately h'nstiatinc the verv type ol linancial discipline and production adiustmcnts that were most badlv needed in less developed countries. by maintaining these countries openness to’internation— a money. The Brazilian slide l'rom democracy to military dictatorship in the early Wtrlls has been attributed to the insidious: influence ol‘ the l‘und tl’aver. it‘ll. p. 3 ll. ch. 7). in 1958 a $300 million loan l‘rom the l'nitcd .‘tates to lira/.il was made contingent on an agreement with the l.\tt-’ on stabilisation measures. ’lhc l"esident ol the Bank of l3ra7il rel'used to acquiesce in a credit squeeze that tlreatened to depress the private sector. t‘ot'lee growers protested when the coffee purchase programme was cut back. and radical nationalists accused the B‘azilian President, ls’ubitschelv’. of selling the country to the United States am the lMF. Negotiations were broken oil and linance was instead obtained from high—cost private foreign sources. the repayment problem being left to the next B‘azilian President. Quadros. Quadros immediately came to terms with the lMl‘i. reformed the exchange system, abolished exchange auctions and substituted instead a dual exchange rate which cl’t’ectively devalued the currency bv ill per cent for the rate at which ‘necessaries‘ were imported, the other exchange rate was left to the tree market. (Yredits were obtained. but inflation continued and Quadros resigned alter only eight months. tinder his more left-wing successor. Goulart. economic growth levelled oil in l‘loi. the last serious attempt at stabilisation under the democratic system was made in tum. designed with the hope of securing IMF approval. so that the t'oreign debt burden would not talte 45 per cent ol Brazil's export earnings. as: it threatenct to do. An agreement lor 553985 million was signed with the l'nitctl States. conditional upon Brazil pursuing an agreed stabilisation programme, 'l‘he contemplation of a 70 per cent pay rise {or civilian and military government emplovccs signalled the departure from this programme. and aid was suspended, lnllation reached ltltl per cent. and the laws about the remittance ol protits by multinationals were made more restrictive. in early l9o~l negotiations with the lMli and liuropcan creditors were again begun. but Goulart also announced that in response to peasant agitation large tracts of private land would be cxpropriated and rcdistrilutted. and that all nrivate _. The Bretton Woods system and [1‘s transformation 3&3; oil relinerics would be nationalised The military deposed Goulart and formed their own government. which quickly obtained new lMF credits. the rescheduling ot lorcign debts and large stuns oi American aid » $1.6 billion between 1964 and blots. in return. the military abolished import subsidies on wheat and petrol. lndustrial production tell by 7 per cent in NM. and living costs increased 454M per cent. The right to strike was virtually abolished. trade union leaders were imprisoned and the income dist‘ibution became more unequal. Nev'erthe» lcss. even it Brazil had been a closed economy quite independent of the IMF or the lTnited States. the same political pressures and their manifestation in the form ol‘ high rates ol~ inflation would a most certainly still have been present. lntcrnational institutions and foreign powers merely provided a convenient scapegoat lior domestic difficulties, \‘v’hcn the pegged exchange rate sys cm was abandoned and OPEC seemed to enhance the power or poorer countries. the lMl’ conceded them some privileges. .~\lthough the share or less dcvelopct countries in world trade tell during tie lUVtts. their share in l, ll" quotas was raised. Under the original Bretton Woods torinula. i.l)(‘s would have had a We per cent share. whereas they achieved roughly hall as much again (Willett. 979. pp. 38mm. In addition. the so-called \‘v'ittvccn tacilities ol~ l‘, mainly benelited the LDCs (Erb. 1979. pp. 3984)). \‘v'ithout the t'acilitv. l.\ll~' resources were considered inadequate to cope with the verv large iml'ialitnces associated with the oil crisis and the depression. A number ol governments therelore agreed to establish a special Sill billion supplementary linancing tiacilitv. .\'ot only less developed countries objected to IMF loan conditions. Frances drawings ol Wis were conditional. whereas those of the UK in l957 and l958 new not. encouraging beliels that the Fund was run primarily for the benefit of the l'lx" and Americii (Strange, 10%. p. 54). Latin American countries were typically subject to a much more detailed list of conditions. in ensuring that these conditions were met. the Fund was increasingly concerned from 1959 not to give overt ot'l‘ence to debtor governments. while keeping its power as a creditor. The use ot' obiectiv‘e performance criteria. such as domestic credit expansion by members with standby arrangements. were one means of achieving this end. lhese standbys provided the right to draw on the Fund for an agreed amount over an agreed period. subject to the pursuit of agreed policies. The conciliatory stance t. oi the l.\ l7 in the blobs made it easier for the United Kingdom among others to seek such conditional assistance, 'li'he Chancellor of the Exchequer wrote Letters ot‘ lntent spccilying the policies he intended to pursue in 1964 and l965. when the ills, drew hi billion and Sit billion. m ac/[ustment in addition to livll: surveillance and the constraint imposed upon national economic policies. the liretton \R’oods system was criticised for forcing deflation and devaluation onto reserve—losing countries. without nrovidincY a corresoonding 304 A History of the War/rt Economy incentive to revalue and reflate for resetsegainmg countries. .»\ delay in devaluing leads to a rapid loss of competitive strength. but a postponement of revaluation benefits export industries which often have the eat of governments. so it was argued (see. for example. Yeager. 10%. n. ltt-l‘r. Most parity changes by litind members were by ll)t‘s which resisted the l decision to devalue iecause of the political impact of higher import prices. opting instead for overvalued exchange rates and exchange controls. Hence a devalua» tion bias can best be sought among industrial countries. Between Woo and mid-1971 there were among the industrial countries four decisions to dc\alue (Canada in 1%2. the UK and Denmark in 1%? and lirance in WW) and five to revalue (Germany and the Netherlands in Not. Germany in into. and Austria and Switzerland in 1971). In addition. the (fanadiart authorities in 1‘17tt and the German and Dutch governments in May l‘l7l allowed their currencies to float upwards. The devaluations ranged between a and 14 per cent and the revaluations between 5 and 9 per cent. This experience car be summarised by weighting the parity change by the share of exports of the intustrial countries supplied by the country whose parity was revaluations by this method. there was a near-bit a tee between devaluations and revaluations: the ne weighted change to niid»l“l7l. exciuding the floats from 1970. was 701.35 per cent (Kan. 1‘). ). This negative sum was reduced by the inclusion of the pos ~lll7tl floats and increased by the inclusion of the French devaluations of 1957 ts. 'l‘he near—balance it exchange rate decisions between devaluation and apprecitr tion contradicts the t evaluation bias hypothesis. .A\n explanation may be found in the increased access to official credits available to deficit countries during the lgolls. The continuing use of such finance nevertheless proved a costly strategy. by which governmen policies were tightly constrained as a condition of access to funds. The British decision to devalue in 1%7. after borrowing for three years to resist the change. was taken partly for fear of the conditions that might be attached to further loans. The Fund could exercise much less influence mer surplus countries. Revalua— tion undoubtedly reflected a desire to avoid imported inflation. especially by Germany. whose currency had already been destroyed twice by inflation in the altered. Largely because of the hem) weight given to the two German 1 twentieth century. .lapan reacted differently. hower. being more concerned with export competitiveness. For much of the Bretton Woods period. from l‘titl to illnl. and again from 1970. Canada was distinguished from other developed countries by operating a floatin r instead of a fixed exchange rate regime. and thereby being spared some of the ad_'ustment problems of other countries. (fanada needed such a regime. the government stated. because of its close connections with the massive American economy and the need to maintain some independence of economic policy. Later Trudeau. the Canadian Prime Minister. compared Canada‘s problem to sharing a bed with an elephant: however good relations were. e\ en a slight movement of U" The Bretton Woods system and its transformation 305 the partner could cause a disaster (Drouin and Malmgren. 1981). (Xmada could adopt floating rates and yet remain a member of the IMF because of its special political relation with the United States (Strange. 1976. pp. 4543). The regime was very successful. When subiected to temporary disturbances. short—term private capital flows played a role analogous to citating in foreign exchange reserves. but the (‘anadian government did not have to hold these funds or male judgements abotit the equilibrium exchange rate (Helliw‘ell. 1975). The floating rate. in fact operated much like a fixed rate. with a depreciation of the exchange rate causing a net capital inflow. thereby tending to stimulate an offsetting movement of the rate. ( The end of the fixed exchange rate regime Despite. or perhaps because of. the variety of measures undertaken to enhance international liquidity. the international monetary system partly broke down in 1071. The proportion of reserves held as foreign exchange and the level of these i'eseryes both increased greatly from the rnidsl‘mtls. The United States balance of payments deficits showed the symptoms expected from financing the Vietnam War and the Great Society social programmes substantially by monetary growth. The second half of the l‘lolls was also the period when the balance of payments adjustment process ceased to work well. and inflation began to rise. An obvious inference was that the supply of reserves was excessive. but only Germany at the time adopted this position. The creation of SDRs was probably in a form calculated to raise inflation rather than to enhance liquidity. because the interest rate payable on SDR holdings was less than on dollars. offering an incentive to sell these reserves rather than to hold them (Johnson. 1973). Johnson asserts that the low interest rates on SURs were fixed specifically to prevent these assets becoming a substitute for dollars and thereby reducing American seignorage. The IMF view was that the SDRs were unlikely to increase significantly the imbalances of countries in deficit. and that stabilisation measures in these countries might otherwise be frustrated by the defensive measures of other countries if no SDRS were created (dc \r'rics’. 197d p. 231). The failure of the United States to take measures to adjust to its deficit in the spring of W71 caused a flow of dollars to Germany. and the Germans allowed the mark to float upwards (Strange. 197(i. pp. 334—44; de Vries. 1976. pp. 520. 531731. The .lapanese. however. resisted the speculative pressure to apprectate the ven against the dollar to avoid reducing the competitiveness of Japanese exports. In a bid to force the rest of the world to revalue. and thereby reduce the American deficit. President Nixon announced in August the closing of the Official gold window and the levying of a it) per cent import surcharge. Immediately an atmosphere of crisis pervaded monetary relations. Ultimately the United States needed to adjust to its deficit and. as an indication of a willingness to do this. Nixon also imposed price and wage controls. A History of {/78 World Economy The Sittithsonian :~\greentent of December WMl settled new exchange rates and a lll per cent deialuation ol' the gold price of the dollar. an ollicial gold price of $38 per ounce. ’l‘hesc changes did not solie the basic problems of the fixed rate regime. partly because the basic lei delicit remained. Early in W73 higher [IS inllation with the reinoial of the price and wage controls caused a new run on the dollar and then a ll! per cent tlL‘HlltltllltHl against gold (international .\'lonetary l‘und. W7} pp. lot. 'lhe three maior currencies that were already lloating ~ the pound sterling. the ‘anadiau dollar and the Swiss franc A continued to do so and were iorncd by the yen and the lira. Horn 3 to l0 .I'vlarch the main liuropean central haiilss and the Bank ol .lapan closed their rs oflicial foreign exchange markets in the lace ol the dollar glut, 'l'he lil:(‘ decided to lloat jointly against the dollar. limiting the liiictuations between their currencies to 3.35 per cert. Currencies in the, lturopean narrow margins arrangement. or closely associated with those currencies. appreciated against the [78 dollar by 9-"er per cent from early May to mid-.ltily W73 (International \lonctary l'und. W74. p. lit). The Dece tiber oil price rises, led to a rapid appreciation ol the dollar under the influence o ' expectations that most of the surplus oil money would be invested in the United States. Removal ol capital controls and reevaluation ot‘ the oil lanuary and May of Wit, ‘lihc funds position pulled down the dollar between effectiic excha tgc rate for the dollar in June l‘t W73 before the oil shock. lililiectiic rates tor sterl' yen showed dc ireciation. and for the mark. appreciation. Large. countries whose economies w ere more diyerse and w hose dependence on (‘oriieiselv smaller ‘ tranc. tlte lira and th foreign trade was less were most inclined to lloatii‘i countries usual’y opted to peg their currencies. lilei en cuirencies. accounting lor ittib per cent o i the trade ol‘ third members in t‘ti’fi. were iloating independently. out of l3: tlnternational Monetary lurid. W . p. -3}. Seven currencies. the liuropean groups. accounting tor c}: per cent of trade. tloated iointly. All lloating currencies were subject to some ollicral interyention between W73 and W75. and for this reason among others the l.\ll* guidelines on lloating of W73. were necessary to define and amid competitive exchange alteration. 'l’he legal problem was that. under the liretton Moods ,-'\greement. countries were obliged to maintain par exchange rates. The W7o .lamaiea Agreement. by removing this obligation. acknowledged ol'licially the demise of the adjustable peg system. Exchange rates were very volatile from W73 because of the new uncertainties of the economic environment. in .lnne and .luly W *3 sortie liiu'opean currencies, appreciated against the llS dollar by 4 per cent a day. and by ill per cent itt little more than a week. (hanges in the current balance were, noritially small in relation to potential changes in capital tlows. which consequently exercised the most inlluencc on exchange rate movements in the short run. Because, of delays in the adjustment of trade llows. alterations in the current balance did not provide much rcfstance to exchange rate changes resulting trout capital inmertients. Relative yields on assets held in diflicreii countries. and esr‘icctations about future t exchange rate moyemenis. largely determined ipiial llows. ct Movements in the effective rates of the in dollar and the mark were generally The fireman Woods system and its transformation 39? in the same direction as alterations in their market rates against each other. but the amplitude of their swings was only about half as great (international Monetary l7und. W73. pp. lerr-Rll). This reflected each country trading substantial» ly with other countries whose currencies wer r linked to their own or that followed an independent course. A greater stability of effective than market rates was also characteristic of other currencies. whose market rates generally changed less than the dollar marl; rate. was the rate oi price inllation in different economics. Between W73 and W75. halt. the [is and infant e\perienced price increases faster than the average for industrial countries. tierinany managed a markedly lower rate. and tie United States. liranee and (‘anada were clustered more closely about the average (Figure ill). 'lihese dillciential price movements were associated with ctanges in exchange rates. 'l‘he two countries with the fastest inflation. Japan and Italy. experienced a substantial depreciation of their exchange rates which ned more than stillicient to compensate for price trends. Despite its earlier opposition to floating rates. the IMF concluded optimistically front the VHS-5 experience that exchange rate flexibility appearec to have enabled the world economy to surmount a succession of disturbing ever ts. and to accommodate divergent trends in national costs and prices with less disruption of trade and payments than a system of par values would have been able 0 do. On the other hand. rate fluctuations had been in some cases much greater tian could basis of changes in underlying economic condit'ons. For example. the Swisvl inited States exchange rate between W73 and W79 overshot the longertcrm equilibrium rate in response to a monetary change by a factor of about two. taking two to three years to settle at the purchasing power parity rate llll‘lshlll. l‘tNl l. l>eieloping countries experienced icy problems arising from pegging to one currency. but these uncertainties were probably no greater than those that would 'l‘lie most important systematic factor in the longer-run trends in exchange rates l he iirstiried on the have been iniolved under a par value system. 'l‘raders between developed countries at least could protect themselves against the exchange risk of any particular transaction by rising the forward exchange markets. But forward rates were subiect to much the same volatility as spot rates. and therefore such use did not reduce the \ariability of a lirni‘s receipts. Hence there must have been some discrinragernent ol' trade. l-lowexer. since uncertainty was part of the economic ernironinent. iised rates arguably would have led to more international trade than was ideal, libere is no reason why foreign trade should have been subsidised by goier'rirnents leading the costs of holding exchange reserves when domestic trade was not similarly subsidised. The crash at @323 Floating exchange rates eased the great adjustment that economics needed to “tall c . . tit. 1.,c“. ... :11‘Al . iii :4 1‘ m 3&8 A History of the World Econoer 1 Oil price increase Oil price increase i Floating exchange ‘ rates become 1 ~ Japan Consumer price r Germany . general Dollar France C) O indices ttoated I ~44 United Kingdom terling devalued 5) "I United States i0 "‘ 1 dot/alt:s up 25W ’9 1980 I 19 1975 1973 1970 1965 O {3 Ci Figure 14c] Price lcyels ttlltlL‘i the iirctton Woods system and a The Bretton Woods system and Its transformation and only other occasion in the post-war period when both western Europe and the lfnitcd States \yere sinuiltaneously depressed was in 1958. and for much of western Europe this recession meant a decline in growth rates rather than a fall in their real national incomes. Fixed exchange rates v hedng with controls — were thcret‘orc not much ot. a handicap then. in explaining this pattern of fluctuations it is important to distinguish the role ot‘ general economic conditions from the ettccts ot' Keynesian demand management policies before 1974. The greater instability ot. the t'nitcd States in the 1950s is suggestive; military expenditures especially were responsible tor cyclical reversals (Lundberg. 1968. pp, 26. 128. 1334yt,” 13y contrast. in other countries. especially the UK. Japan. the Nether lands. Denmark and ltaly. policy changes can to a large cxent be explained by balance ol‘ payments problems. In the UK. where restrictive actions were directed mainly at eoy‘ernment expenditure. fixed investment and durable good purchases. this policy may have restrained supply growth. as well as demand growth. Denmark experienced problems similar to the LlK‘s until 1957. but thereafter. with a rapid rise ot' industrial exports. Danish economic performance improved. Similarly the better pertormance ot' the Dutch economy. compared with the British economy may be attributable to rapidly and continuously expanding Dutch exports. in lirance. until 1958' persistent foreign exchange problems were dealt with not by restricting domestic demand as in the UK. Denmark and the Netherlands. but by import restrictions and devaluations. 'l‘hcy therefore did not constrain demand and supply in the same way as those in the United Kingdom. the balance ot payments dit‘ticultics themselves should be regarded not as exogenous intluences on policy. but rather as a consequence of the pursuit of policies which generated an inflation that was kept in check only because of the need periodically to balance foreign payments When floating exchange rates i'enioycd these constraints. irritation could and did accelerate initially. 'I‘liercat'ter the depression ot 197475 (med much to the simultaneous and severe contraction- ary‘ policies pursued by the eoyernments of the industrial world to bring inflation down again. iiyen more was this true of the depression following the 1979 oil price rise Although the depression oi 1074 was the worst since the one that began in 102‘). it was shorter and much less severe A major difference between the two depressions in the key country. the United States. was the course of prices. which rose between W73 and 1975 but tell between 1929 and 1931 (Table 14.4). The real money stock declined in the later depression. but rose in the earlier one. Stock prices tell greatly in both depressions. as did residential construction (Temin. tumor. The instability ot‘ foreign exchange markets. the difficulties associated with large capital moyenicnts. and the problems of countries experiencing sharp changes in tic terms of trade. were all important in the 1930s and present in the 107th. lint the tloating exchange rate regime seemed less vulnerable than the fixed rate cold exchange standard. and the strength of autonomous consumers expenditure steadied the economy in the 197(ls so that GNP then fell by much less than in the 203m. 'l‘he collapse of consumer expenditure in the first period may 3%.} A H/srory 0f the War/d Economy Tahtc E44 Percentage changes for the l nitcd f‘ilalcs economy in \tttt’ie niaeriteconointt’ yariahles. lllllliftl and 19734:. {o seal consumption expenditures. ., - {cal (EXP. W53 prices ' E“ \ l l Source: 'l'entrn t’ ltl'tttwi. m 1 haye heen attrihutahle to the stock market crash. which. reduced household i dun assets. in l‘t-t inllation rapidly wealth and raised the ra to t‘ their dehts to t l t reduced the real \alne ol deht. The hank tailnres t.“ the l‘Utts were not repeated l l hecttuse a lesson or the “shits had hcen learned. “he liederal Deposit insurance Corporation was ahle to contain the tailures ol‘ the l‘ntted States National Bank oi San Diego in it)? and the liranklin National liank ol New \ioi'k in NH. Balance ot~ payments adinstmcnt to the oil price increases. to the economic recession and to the partial reemery worked rather slowly heeause ol‘ the enormous volume. of tinancing twailahle through tie pi'iyate markets. l‘rorri W74 to 1970 l'oi‘eign horrow‘ing undertaken h} (llit'l‘t deficit countries and nonvoil deyeloping countries amounted to met Sl é l‘tllttlll tt )lxt lit. l‘tmqt. Prixate hanks recycled almost Sllltl hillion oi this sum to tletieit countries. ln any case the (Hill) area‘s oil import hill rose in t‘lit h}: {\tifi “Flt hillion. hut the deterioration in the current hzilanee w as little more than halt this amount heeausc ot’ increased OPEC imports and the widening detictt ot the nonroil rest ol the world. The recession oi WT? reduced tllit‘l) imports and. conthined with hig increases in again with the exports to ()Plft‘. the deficit nearly disappeared. only to reappear heginning oi recmcry in two "The most, advanced industrial countries had little to tear irom the halance or payments el‘l‘ects ol' the oil price increases, hecrtuse their highly de\eloped financial institutions ensured that they would receixe most ot the unspent oil money hack in the town ot‘ sayings. (ll the W74 Ul’liC tinaneial surplus. Ztl per cent was inyested directly in the l'nited States. another l3 per cent in the L‘nitcd Kingdom and oyer 40 per cent in liurocui'ienc} markets, Direct ()Hit‘ investments in the tflx' exceeded additional oil payments. and British foreign exchange reserves rose marginally in Ell?! t',=\rgy. ltlh‘l. pp. I‘lFrs-QW‘). Most inaior countries horrowed on international capital markets to ease their halance ol payments, So also did non<oil ill/(s which supi'tlenicnted these lands with to rowing. The external deht I. l/ ' 4 to l8 per cent in 10773.. additional aid. commercial credit and some ollicial ol‘ these countries rose from l3 per cent ot tiXl’ in l Another hoost to toreign indehtedness occurred when the Iranian crisis helped increase oil prices h) a lurther Stl per cent in NW. Between NH and W78, the OPEC current account surplus tell lrom stilt lithium in :ilmizi sin twittttm its at wort: The iii/error) Woods system and its transformat/on 3”” ol it ill per cent tail in their terms ol trade. the growth of OPEC imports. and the decline in oil imports trotn )l’lft‘ h). the industrial countries that came with the detelopincnt ol nonstlldit‘ oil su; plies in the North Sea. Mexico and Alaska, l‘irorn 107 the slump was worldwide. The principal factor in the collapse of economic actixity was the sharp decline in the rate of growth of real money halances (monetary growth less the inllation rate), Anti‘inllation policy slowed monetary growth particularly seyerely in Australia. .lapan and the UK. The lagged clteet on intlatiort ot earlier monetary trowth. together with oil prices pushing up the price leycl. reduced the growth o ‘ real money halances relatiyc to nominal monetary growth. The oil price increase also directly cut hack demand by a sig iticant amount in all countries. except Australia and Canada, Total expenditure was switched than home demand to imports to pay tor the oil. and increased demand tor domestic goods for export to OPEC countries did not e-zintpensate l‘iscal policy. unlike monetary policy. contrihutcd little to the downturn. except in the l‘nited ls'ingdom, In Australia. Canada. France. Germany and .lapan the downturn was accompanied hy more expansionary fiscal policies as Keynes might haye prescrihed (Bell. 1973. pp. 842). Because monetary policy did not accommodate the rise in wages to cover the higher pric _ . unemployment grew as the real value ot‘ wages was pushed up faster hair productiyity. x‘onong the OliC‘l) countries. only the United States and r,» l Sweden were tree of this \\:lgC’Pl‘tltlthll\'ll}' gap in 1975. Although unemployment was higher than at any other time in the post—HMS period. there was no attempt to reduce it with fiscal policy. and monetary policy was switched towards the announcement ot‘ monetary targets which gave. little room for any significant reduction in unemployment, the main lear had heeonie inflation, internatéanat canttat ntttttili r lt 7 The international niohility ol priyate capital proved a twosedged sword for the Bretton \‘t'oods system. it helped destroy the adjustahle peg exchange rate regime. hut also assisted the adjustment of the modified system to the events of W73 to W719 DarinY the ltlfitls and l9otls hanks extended their international operations in paral e with the largest companies of the industrial world. In so doing they eontrihtited to the emergence of the liurodollar market (a market in dollar deposits held in hanks outside the United States). which was among the most etticicnt tehicles nt greater capital mohility. The origins of the market can he traced to the attempt «it the British government of 1957 to restrict the use of sterling to linance toreign third—party trade. The British hanks therefore began to use dollars instead tltell. W73. p. 54kt There were advantages from not repatriating these dollars stemming l'roni an interest rate differential hetween the lfnited States and western litirope. Federal Reserve Regulation Q. designed to pi‘e\eitt stock market st'tecttlttllt‘vtl like that ot‘ WEE). limited interest payable on deposits in nieniher hanks ol‘ the liederal Reserve system below what could .._,' usualh he earned in linrope. 312 A History of the Wor/r/ Economy The liurticurrency system expanded in response tti x‘tiiitirican capital controls til the early lW’ills. especialh the littetest littuttlisatitin lax til 1%.l (a tarill on new securities). which in turn were an attempt to stop the, tinned States balance of payments delicit enhancing ttorlt. l ' continued into the l‘l7lls hel governments to hold dollars \\l l liquidity lie rapid growth ol this market ped by the desire of the Soviet and OPEC iere the} would not be confiscated or measured American and foreign borrowers demanded more litirtidollars as a result til restrictions on the transfer til funds by Americans to litiromarlt‘ets. 1n Mod and 1969. when United States financial conditions became tight. American banks borrowed heavily lrom their ltireign branches operating in the ltttrtidtillar market. and thereby partly neutralised the ctititractitinary monetary policy (Bell. 1973. pp. (sf-13). The capacity til the liut'tidtillar lllilth‘l ttit creating liquidity was very limited. unlike a domestic banking system. because the proceeds til loans by liurtibanlt‘s were rarely redeposited in another laurtibanlt (Arc). 1W1. ch. 71. 'l‘hc existence til the liut‘titltillai‘ marlt'et lacilitatetl the financing til deficits and so. ellectivelv. increased the tt\ttllétl71l11} of reserves. 1'his probably more than offset the ellects on the balance of payments til an} increase iii capital mobility allowed by the market. but it reduced the ellcctivettess of monetary policy by limiting.i control over domestic interest rates as a policy instrument: sterilisation became less feasible, It was the mobility til ltingacrm American capital that stimulated Hench concern about the United States balance til payments alter ltttitl, as much as the belief that the burden til adjustment was ltircetl on the rest til the world. 'lilie balance til American private ltiiiuaertn capital was niasstvely negative. a little over billion in l‘ltill. $4.: billion ten years later. and alter the depression til 10715. $85 billion in WT? (012(1). 1117111, \1tist til the sttielt‘ til .-\merican foreiin direct investment (73.7 percent in lililtil was in developed countries. and per cent in two). The lirench were worried that i in particular in Europe (V1117 r American multinationals were coniinci to tltint nate all the advanced technology sectors til littrtipean industry (see especialh SCHtiltrsclll’CllWL’l'. Moll). Because til their enormous home marltet. these lirms achieved economies til scale. and iii addition received the benelit til the large research and tle\eltipment outlays til the United States government on armaments and aerospace. '1'lie si/e til the firm was 1 1' thought crucial to the ability to innovate and he ei'ore to grow. This was the '.¢»\merican (Thallenge‘. With the licnelit tit hindsight. the growth til large tirms bore no relation to lirni si/e during the l‘ltills (although the variability of growth did) (Rowthorne. 1971). l'lL‘llCL’. on this account. there was no reason to expect American capital to take over littropc. and American multinational investment in western Europe indeed turned out to have been no greater in the llttitls than European investment in the linitctl States. For the OIZCD countries as a whole. the capital balance with the test til tlte world in l‘ltitl was small ( to nitlittiti) by contrast with the capital export and import til the 011(1) countries. Most loreien 111‘»CS11‘:1£111 was directed to The Bretton Woods system and /IS transformation EMS developed countries. as w ell as originating in them. For small. open developet economies. forciin investment could comprise a considerable proportion of tota capital ltirmation. Between 194‘) and 1964 the flow of overseas capital tt Australia. 011 per cent of which was direct investment. amounted to about 10 pe cent ol total savings (Dunning. 1071). p. 35). Foreign—owned enterprises i' Norway in the 19(ills accounted ltir one-third of all corporations. and in Canada capital imports linanced 15 per cent til total imports between 1955 and 1960. The po/it/ca/ /'mpact lion ever. it was in less developed countries that hosting foreign direct investmer. was most controversial. As in the nineteenth century. foreign investmer; combined with a belief by the investing country that important national sccurit issues were at stake could prove a dangerous mixture for host countries. Thos who felt that foreign direct investment jeopardised national objectives wer vindicated by the role til the United Fruit Company in Guatemala in the earl Wills, 'l‘he United Fruit (‘ompanv was the largest landowner in the country an objected to President Arbenzs expropriation of the company‘s uncultivated lan as part til at land reform j’irogramme. By playing on fears about Soviet threats t free enterprise in (Guatemala. the company persuaded the United States t intervene and overthrow Arbenz in 1954 (Schlesinger and Kinzer. 1982). Th 11151 nationalisation til the Angloolranian Oil Company’s (later renamed BF) 0 interests in lran also ultimately precipitated a coup assisted by the America (Ventral lntelligence Agency (Cl/3t) in 1953. Matters were complicated by civ unrest. assassination and economic warfare The coup returned the Shah to powr and removed a chance that Soviet power was about to be extended. it had bee just ltc‘ltll't.’ in eastern littrtipe (Yergin. 1991. ch. 23; Sampson. 1975. ch. 6). The political activities of 1T1” in Chile. although apparently less successful tha those til linitel Fruit in influencing the American government. appeared to b equally ellcctive. ill b} the 1%(1s employed b.1101) people in its Chilca telephone company with assets valued (by ITT) at $150 million (Sampson. 1973 hi 197(1. 111 plotted to stop the election of the Marxist Allende to the Chilea presidency on the grounds that the election would jeopardise the safety of i‘ assets; the company had oflercd to contribute a dollar sum of up to seven figure to the White House. to stop Allende.7 Allende nevertheless became President i 197d 'l‘herealter lTT regularly dealt with the CIA to try to create economic char in (’hile and to encourage a military coup. In September 1973 this was achiever and Al entle was killed. Nothing directly connected the coup with the ClA ( 1T1. but the circumstantial evidence was compelling. A ong~term ecu/i0 mic effects ln addition to political interlerence. potential LDC recipients of foreign capit: were tearful of some economic effects. such as finding insufficient foreig 33%;; A HfoO/“y of the War/d Eeorioriii/ exchange to pay the interest and dividends on the cripiiiii. foreign investment in exploiting natural resources for export was sometimes thought to be less beneficial than foreign investment in manufacturing because the resources new not renewable. in other investment projects the loreign entrepreneurial input was greatest during the early stages. Subsequently. the payment of profits abroad tended to rise. \vhile the necessitv for foreign entrepreneurial talents diminished. For this reason many LDCs preferred to aim for a minimum foreign. equity stake in a project consistent with obtaining the benefits of a multinationals technology. Donor countries also were hardly favourably inclined to foreign investment. After l‘Jotl. United States balance of payments difficulties forced a rcapi‘u‘aisal of the former policy of active encouragement of overseas investment. Similarly. the tinted Kingdom controlled overseas investment. for 4t of the post—utir period. although the extent of control varied with the balance of payments position. There was also a longervterni concern that. ev en if the private margina return on overseas investment was. higher than at home. the loss of tav revenues. the possible deterioration in the terms of tit." and the retardation of growth at home because of the diversion of capital overseas might outweigh the benefits of higher profits (Casson. NW}. The Reddaua} Report of l‘lti/ concluded that. for the UK. there vvas no evidence of any great resource misaflocation from investment overseas. and that the expected gains from estending the international division of labour vvere therefore being obtained iRcddavvtiy wt (1/.. NM). The distinctive post—\var pattern of foreign direct investment lf‘Dli provides cities as to why it occurred. it also offers suggestions as to the iongvterm economic impact. Most liDl took place betvveen developed Cttltitillfitlltltltliifll countries. Such investment therefore could not be interpreted as a process of edtialising factor returns in the same way as labour migration. which llovvcd to relatively labour—scarce countries. Furthermore. l-‘Dl could be undertaken without any international transfer of capital. if the multinational took over an indigenous firm with capital raised in the host country's capital market. or othervvise borrowed in the host country using the siibsidiai'ys assets as collateral. the possibility of nationalisation of the multinationals assets gave an added incentive for firms to hedge in this fashion. If a change of regime brought expropriation. the head office of the company could tell the host country creditors to collect their repayments from their ovvn nationalising government. in Chapter 13 it was suggested that l‘lil transferred technology. and the concentration of FDI in manufacturing industry where new technology vvoulti be. most important confirms this view: in Brazil foreign firms. controlled :3 per cent of manufacturing output in W73. but only per cent of primary output and 2 per cent of the service sector ('(Tasson. WW). pp. Owl l i. liven so. the question remains as to why multinational firms did not more often license foreign firms to use their technology for an appropriate payment. and avoid the problems of learning to compete in a different economic. legal and cultural environment. (hie answer is the difficulty of agreeing a price for the teel'inology. if the buyer knovvs the market value of the technology. and thcret’orc know» the fair purchase price. the ., e. __.A 7/770 Bretton Woods system and Ms transformer/on 315 chances that ll viill also knovv what the technology is. and therefore will not have to buy it. lhe seller. on the other hand. knows the value of the technology and vvill be unwilling to lovver the sale price to the level acceptable to (ignorant) buyer. .Xnother ansvvcr is that the existence, of national boundaries with different tax and tariff regimes confers an advantage on a firm which can straddle the frontiers. Such a company can transfer intermediate goods between subsidiaries at national transfer prices’ which minimise the firm‘s tax burden. f‘interprises exporting to other firms at market prices across the same frontier pay higher taxes or tariffs. and are therefore less competitive than the multinational ’l‘liese tvv‘o answers have different implications for the dispensability of FDI. The first suggests that l“l)l vias probably the most efficient means of transferring technology. \vhercas the second implies that FD! was primarily a device for tax avoidance international ut‘ficéal capital flows .\s noted in Chapter 12 the early l‘lfitls effectively saw the rise of a new component of international capital flows. official aid. Although a small proportion of total flows in the ensuing two decades. for the less developed countries. receipts of foreign official development assistance in l97ti amounted to one-third of total net investment receipts. Because official aid was ultimately supplied by political. rather than business. organisations. the motives and impacts were likely to differ from commercial flows. .»\n early rationale for aid was that the structure of LDCs made foreign aid particularly valuable in raising their growth rates. The two—gap theory attempts to give an account of grovvth constrained by the availability of foreign capital. and in particular official aid tt‘lienery and Strout. lt)(i(i).“i i»\ceording to this theory. there is a minimum necessary additional amount of imports required to support a given increase in national output. ixports are. not related to internal factors. but are determined by external demand. which increases at some given rate. For some proiccted future level of national output. imports may exceed exports. and this gap must be financed by foreign aid if the proiected level of output is to be attained. .»\t this level of output. the amount that people would be prepared to save may exceed the amount required to finance the investment needed to sustain the protected rate of growth. after subtracting the contribution of foreign aid to this financing. llcttee aid is required not as a supplement to domestic savings. but as a supplement to foreign exchange earnings. The ‘trade gap‘ (the excess of imports over csporrsi dominates: the savings gap (the of savings over investment). Increased savings will not increase investment because they will not raise exports and permit more imports to be bought. a prerequisite of higher output. .»-\ cut in aid. therefore. reduces output by a multiple of its value. l'lic theory implicitly assumes inflexible domestic policies: that there should or can be no \tll"_\‘tiilllitlf‘. or domestic for imported goods. or of exports for domestic are A History of the War/d ECO/lu/liy supplies. to eliminate the current account dclicrt tt’irilliu. lll7lllf’ it can therefore be a rationalisation and support for the postwar policies pursued bv a maioritv of LDCs. which in many cases have had unfortunate consequences. lot this reason. and others. some have doubted that aid flows tirade any positite contribution to LDC development in the l‘)5l)s and ltlotls. ‘l'hese other reasons: include the possibility that aid llows acted merely as a supplement to consumption, liven thougi often tied to investmctit projects. foreign aid may have released funds that would otherwise have been allocated to investment. 'l‘hesc liberated funds may then have permitted higher gowrnment 'consuiiiption‘ in prestige activities such as state airlines. liven if the consumption benefits did filter through to the mass of the population. there would have been a highly undesirable consequence if it had encouraged permanent international dependency. ll aid did supplement invest~ merit. the results may still not have been worth \thile: donors typically required large and visible proiects. like the .~\s\\ an Dam in lieypt. to minimise administra— tive costs and maximise prestige. Such motivation is likely to have reduced the productivity of investment by its emphasis on providing infrastructure. lf domestic savings were also reduced. because the satings were now being made by forei triers. then together with reduced productivity of capital. the overall bene icial impact of the aid could have been estrenieh small. The effect of foreign capital itilltms in less developed countries cannot he settled by a priori arguments of this nature. it is possib cases where aid probably did reduce domestic sa\ int and in lndia and Pakistan. The supply oi ltuited States surplus agricultural >lt)Cl\.\ probably encouraged the neglect or domestic agriculture tltapanelt. W73). But overall. statistical evidence suggests that aid was an important beneficial influence. During the Wills and lilolls. countries \\illl higher investment. private foreign. official tid and domestic savings. experienced sittnilicantly higher growth rates. A l per cent higher ratio of aid to national income between countries was ,A .gr - to identify particular . in Korea in the lllltlAlilf‘lls. l on average associated with a lld‘) per cent higher grovxth rate. There was no evidence of reverse causation. of higher growth rates encouraging donors. in these results. The strongest impact of aid flows \tas found in the Asian and lvleditcrranean countries. The pattern of OfflC/a/ cap/tail flows Aid was distributed inequitably. Moderately prosperous developing countries received twenty to a hundred times as much aid per head in thl as a number ol other extremely poor countries. Small countries tended to be, given more aid per head than large ones: (OECD. won. Hence the desire to redistribute world income more fairly does not apparently explain aid. More consistent with the evidence is that donors expected to get something in return. such as political support or markets and sources of supply. which depended in part upon the sch of the original flow of foreign aid to the recipient (Dudley and .‘vlontniaiouette. W76). Auxiliary variables in a plausible model include political ties. defined as The Bretton Woods system and [2‘5 transformar/on 317 futile l—lfs l'lic niain recipients of British aid. 1074. (lountiv Gross, aid Population National UK exports disbursements (in) income to aid in 1974 per head recipients: tic (coon) (E) (Em) 7l.oi “ill llfw . €74.33 Fl) No.81 Malzosia lilti Ill) suigaport. Lot) o‘lll lndoncsta £24.60 40 Nigeria 59b] 70 Botswana “.05 lllll Kema ll-lé‘i is’t) \litllnvl 4.7a so Zambia lost 170 lan‘uuca 1.98 37o Sources: limits/i glut" Slur/stat N71 74 tllhlSO): [)Ul'(’[()[)lll(’lll Cooperation 1974Rcview (013(13): .lmiirux’ t\l.’tt:’( Hlt H] w" t )rceztciii I‘rizrt'c of the [iii/red Kingdom for {lie )‘t’tll‘ [974. \ol. 4 (HMSO). former colonial status. exports from donor to recipient. and a bandwagon effect whereby the donor residents evaluate the impact of this aid more highly the greater the aid given by the rest of the world to the recipient in question. listiniation of this model suggested that the degree of distortion due to the division oi the worlds poor into countries of different size population was small twith the exception of lireiich aid). The negative correlations of aid per head with country population \vas the consequence of the negative correlation between population on the one hand. and exports. aid from the rest of the world and political links on the other. Political and economic links were very important determinants. hut bandwagon effects were less sign'ficant. inspection of the largest recipients of British aic in 1974 confirms the role of political and economic links in a more 'lll‘lprSSlt.)lll$l'C fashion (Table 14.5). Ten of the eleven recipients were (Tommonwealth countries. which. as expected from the sphere of influence analysis. had the strongest nonroil trade and investment links with Britain of all l..l)(‘s. The inclusion of lndo esia in the group might be explained as an attempt to secure reliable oil supplies. Official bilateral development assistance as a proportion of GNP of all industrial countries declined from H53 in Not) to l .34 in l97ll. In an attempt to i'exerse this trend the Pearson commission. set up by World Bank President Robert McNamara. in l‘lb‘) called for a commitment to a 0.7 per cent aid/GNP ratio from the developed countries. but to no avai (Prout. 1976). Similarly. the Brandt commission talso first proposed by :V’IcNamara. in 1977) repeated the need to reach this target by lllh’i and to reach per cent by the end of the century. but it received an identical reaction. By 1980 the ratio achieved was 0an HRS per cent. falling to 0.35 per cent the following year (Independent ('omniission on international Development Issues. WW). 3M8 A H/story 0f {/78 War/d Economy Ih'lultilateral aid through the World littrllx' did little to wiseet the distortion ot hilateral oihcial capital ilons « and in any merit contril‘viited little more than til percent ot othcral flows. In none ot‘ the toga ten :eeittietrts or \X'orld Bank loans per head ot' population was the total population an large a Asher: l9??? it. l‘lh’}. So tor ithateter r _\ 3 million tr’ylason and countries recein son. the poor oft less of hoth types of ad than the poor or small countries r Accepting World Bank loans could haw: politit‘al eonsetinences similar to loreign irritate direet intestinentt tor the tlanltl pere nion or the deieloiunent process influenced the conditions ot‘ its loam and tame o! the aid consortia rgoyernment to direct eeonomie controls in the inid-lllotls in order to get t‘ot‘eign aid (Rt ainhi. lllfslll 'l‘he llanles recognition l \ organised by the lianlt. ‘l’he llanlx ma ehange sortie halanee ot' payments polieies :ii ol the importance ot agriculture. shown it the irieiease in the proportion of World Bank lending for agriculture trout ‘2) per eent in lllhtl to la tier cent in l‘l7l. also hegan to aet as a partial antidote in some raises to indigenous policies ol irnport~suhstituting industrialisation The liurottean (‘omnrui’iity ol'liered more in l; eet support _ to selected poorer economies. the lortyssix associated states in Anita the turn an and the l‘aeitie. 'l‘he SlABl‘iX nteehanism ol the W75 lonte tiomenioii has a Sll'lhlllfi l institutiona irrnoyation, 'l’he ltlL’Clliltll‘sl‘tt was intended to sitihilisc the product earnings ot tuelye niaior primary ‘prodtiet exports «it the assoerated states hy proyiding interest-tree loans lilil‘stflll‘vllllfit l‘lmf. n his. tntarnatinnal dent Eli s l institutions ohliged to raise money in commercial Altetm the con rner'eial mania and the World Bank. needed to monitor closely [in ahilitt ol t teir elients to tl l repay. the ristnT hurden ol deht caused iuer Between NSF an l 1‘th the external deht oi ll>< :: in the tttitl-l95lls deth ser\ice ayeraued it her emit ot :.’\§‘H!'l «1 per cent ten years later. tittzihle to ~«er\i»’:t‘ casing prolilerns in tis respect, A r \se at l5 rier eent per annuin .rgs. rising to 13 toreign dehtt Argentina ta tesr‘tit-drilerl three times in the toieten liorromng ol ‘he \yorld reeession or lililtmf mane “ gt“ L‘l‘lil‘r‘l'e‘lli ’l l DE demands oti deyeloinnent tinanee the less important \‘xas the duadrupli-i}: ot oil prices and the ststern protided the greater part ot the deht hirildaiir or t it default increased with deht aeeurnulation in W75 to LDCs (Brittairr VFW. ’llireequarters oi' the world‘s deliriits l the hanks (Sampson. ltlh‘l p. 209). ‘t‘ulilxe the li‘xtix tlt‘} eould not impose eonditions on horroyying country goyerntnents to ensure they \xeie repaid. ‘liliese goyernments‘ polieies and prospects \yere talten as gr'xen in assessing the risk ot charged on loans. and in “ii men: linaneed hr 7/78 Bretton Woods system and its transformation 37:. lending in the lust iilaee, {Touritry risk assessment \y as ditticultt and hence a herd r instinct could predominate, three a eountry horrotyed suhstantial stuns from international éiaiiixs or iristrtntionx the haulxs eould he l'or'eed to lend more in order to amid a default. So anxious were hanks and ollieials to a\oid a default as the \olume of deht acennrulattxl that rescheduling hecante increasingly common as a means of deht reliet tsee li" l-rlll. Betneen W75 and the end ot ltlhltl there were ollicial del'it ingotiations tor fS‘l hilliotr \\hereas in the preyious eighteen years 3 ‘en thirty tor dehts oli $7 hillion (ii/re liranomist l‘lh‘l). The most \ehednhng. as \yell as the largest. was ot' Poland‘s 3—H) hillion deht in surprising r l‘lhl, \Vestern capital. instead ot driying a wedge hetween Poland and its Soyiet master, pulling Poland towards the market economies. gave the trade union Solidarity a taste tor lireedont that almost brought down the tottering economy. Maintaining deht payments joined the interests oi western hanks with Polands martial lan adininistrators. f‘yeyertlreless the iiertorrnanee ot' the n‘iy‘ate hanlx's through the market seemed increased. the amount oi lending declinec. Bra/it 'l'aiytan. lndouesia and others undertook tt‘rfc‘t'ttttl adiustntent programmes because they tound it increasingly eostly and alillisgnlt to linanee their external deficits (lirh 1079‘ p. 393), l‘nrthermore. the \arrety ot' alternatiye sources ot iinanee gave countries more to he eonsistent nith etticient lending hehayiour. As the cost ot' borrowing l treetiotn to manoeuyie titan it they were reliant solely on the IMF. “it! and eatteiusiua 'liht international monetary system alter W45 clearly diitered from all preceding s} stems in the nineh greater eontrihution oi goyernments to forming. modifying and operating it. t he o‘xerriding goals (it the great majority of these goyernments new: to iriiniinise unemployment and hoost living standards Greater governmen» tal participation also droye up the international price leyel as well as encouraging \. sterling—hased gold exchange exchange heeame hased on the y‘tnatogotisly to the mainly hetore l‘lir-tr international d to he eonyertihle with gold at a fixed price from [968‘ The . :nee hetneen these two systems was that the nineteenth wrat Littt’ttltlt‘s ol the inflamed budget had heen abandoned The world enhance uorht reseryes and international liquidity took place throughout the lttotls‘ despite rising priees, the ‘t‘nited States ruled out an increase in the price of gold as a means ot inereasing reseryes (a decrease in the gold price of the dollart lit part this may he explain , hy the henet‘its that America ohtained from the increasing international role oti the dollar. As the _ " ‘t eontinuetl the international trading community lost some of ‘ in the purchasing pow er oi the dollar: and in the Viability of 320 A History of the War/d Economy 'irll .\‘\ in] f f, 'lotal .1. ‘k I’Lcmmmrrt. . ltmt 83 l [MW 1 i‘igjure 14,2 international debts reschedulec. The Bretz‘on Woods system and fts transformat/on 32? many fixed exchange rates. Speculative crises dominated the last few vears of the fixed rate system. which may be said to have ended at some time between l97l and W73. 'l'he floating rate regime for the major industrial countries that followed was remarkabl} successful in dealing with the oil price rise of W73 and the consequent redistribution of international income and saving. Recognising their interdepend- ence. economics eschcwed competitive exchange rate depreciation to export their unempltn'ment. 'l’he depression of l‘)73—~4 was in any case less severe than the collapse of lttl‘léil because, despite a stock exchange crash of a similar order of magnitude. the American economy remained relativelv’ buovant, tinder the fixed rate regime. emerging balance offpayinents deficits required adiustmcnts of the econonii (eXcept for the United States) to remove them. Adjustment might be amided if disequilibria were temporary and sufficient international reserves were mailabfe to finance them. Inadequate international r‘csci‘\es could force countries to deflate unnecessarily. spreading their unemploy— ment worldwide throuih a reduction in their demand for foreign goods. A devaluation of the esciangc rate could also have this effect by reducing the demand for imports and increasing the competitiveness of exports. For this reason Ml? surieillance of exchan re rate policies was introduced in the Bretton Woods I}Sit‘m. .-\s a lender of inter rational reserves. the lMF could exercise considerable tower in er government policies when a nation was in deficit and needed to 'worrow. Surplus or i’cserxc currenc} economics were exempted from this discipline, the lhrfi: often incurred opprobrium for imposing restrictive policies. but these policies were cffcctixe in correcting deficits. albeit at a cost. The 'elatneh low rates of inflation. so long as the fixed exchange rate regime iersisted among the industrialised countries. suggest that the discipline worked. (in the other hand. the causal chain could operate in the opposite direction. as noted in earlier chapters: fixed rates may have worked only as long as countries 1. ._.tr .V / .. r u‘cfcrred relatoel} low rates of inflation. (apital mobilit} played an important role in the breakdown of the fixed rate ‘eginie. The adjustable peg system of the l9ofls was less capable of generating stabilising speculation than the fixed rates of the l9ilfls. once capital restrictions were removed. ('apital mobiliti also reduced the control that national monetary authorities could exercise over their own economies. The greatest capital movements arose from the massive transfer of income. from oil consumers to oil producers from 1973. Unable to spend all their newly acquired income some of the richest oil producers lent their ‘petrodollars‘ to the financial centres of thc industrial world. For most of the West. this short-term investment largch offset the detrimental effects of higher oil prices on the balance of pionienis. for poor oil«iinporting countries. there was no such compensation and their balance of payments deteriorated under the combined influence of the recession and the cost of oil imports. Their foreign debt increased as they borrowed to axoid deflating. An increasing proportion of their debt was held by private banks which did not and could not exercise the same surveillance over these debtors to ensure repayment as the IMF or the World Bank. Rescheduling ...
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A History of the - 29 A H/Sfog> ’or(z’ Economy 0.4 1 j Him“ ll‘zo<11 theories and product cycle we l’osncr t'l‘lhll Vernon ceve o

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