Transcript Collapse and Recovery of the Global Economy: The 1970s and 80s

Collapse and
Recovery of the
Global
Economy: The
1970s and 80s
Section 24.121
Introduction
• Global economy
makes each country
vulnerable to events
in far off places
• Oil embargo that
arose out of ArabIsraeli war in
autumn of ’73
precipitated roaring
post war economy to
drop (1974)
OPEC
• Oil replaced coal as major energy
source
• Vast reserves of Middle East were
easily and cheaply transported under
US companies’ control
• 1960 14 oil exporting nations formed
the Organization of Petroleum
Exporting Countries (OPEC)
• Wanted to control prices
• Arab states used oil as a political
weapon against any nation that
supported Israel
• Embargoed oil from these nations, cut
back production, and quadrupled
prices
• Entire global industrial complex now
vulnerable
Dependence on Oil
• Periodic wars in ’79, 80s interrupted
flow of oil
• But OPEC proved less powerful than
originally thought
• GB and Norway became oil exporters
with the discovery of oil in the North
Sea
• France turned to nuclear energy
• Others turned to natural gas
• Oil prices fell (T
HIS BOOK IS
NOW DATED) but continues to play
critical role in international affairs
The Recession: Stagnation and Inflation
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Began in 1974 and most severe since Great Depression
Strangely accompanied by inflation
Rose as high as 27% in GB ’75
Economic growth slowed or stopped
32 million people were out of work in free market
nations
• 10.2% in US (1982)
• Unemployment benefits cushioned the blow for Western
nations
• Structural Unemployment
– Some industries automated or became less important
‘smoke stack industries’
– Coal mining, shipbuilding
– IE. Jobs would not return
Stagflation
• Combo of stagnation and inflation shook
governments
• Keynesian economic theory called for
government deficit spending to finance
slow times
• Inflation made this questionable
– IE inflation is usually combated with a
tight money (high interest rate) policy
– Unemployment is usually combated
with a loose money (low interest rate)
policy to encourage business to
expand, hire, produce
• Most nations decided to combat inflation
with tight policies
– Unemployment remained high
Back to the
future?
Faith in Keynes Shaken
• Keynesian precepts were
openly challenged
• Margaret Thatcher
– GB prime minister
(1979) campaigned
against the welfare state
– “Costly, wasteful,
paternalistic,
bureaucratic, and
squashed individual
initiative”
Supply Side Economics
• New conservative governments (Reagan,
Thatcher) continued to spend on
military but curbed spending of social
programs
• Offered tax reductions, deregulation,
restraints on unions
• Supply side economic emphasized
increased production rather than
increased consumer demand for
economic growth
• “trickle down” effect would help the rich
first and then middle and lower classes
• Conservative economic theories of free
market began to overtake idea of
planned economies
Economic and Political Change in Western
Europe
• GB suffered highest rate of inflation, high
unemployment, a devalue of the pound
• Propped itself up with foreign loans
• Strikes in coal and transportation
weakened the nation (despite pleas from
the Labour party not to strike)
• Radical Labours pushed for
nonalignment in Cold War and
nationalization of industries
• Nation was exasperated with Labour and
voted Conservative in 1979
Margaret Thatcher
• First female prime minister of any
Western nation
• Cut government spending, reduced
imports, resisted union demands
• Shifted focus on investment,
productivity, economic growth
• Inflation decreased,
unemployment rose
• 1982 economic woes were put aside
for Falklands (Islas Malvinas) War
with Argentina
•War ensured Conservative victory in
elections
•New term saw union power curbed,
33% of nationalized industries
privatized, easy credit for business and
home buyers
•Economy grew rapidly (especially in
South) but unemployment remained
high (Wales, Scotland)
UK became leading creditor nation
•Thatcher served eleven years, longer
than any postwar statesperson in the
English-speaking world, and had a
great working relationship with
Reagan
“New” Labour
• 1990s economic growth slowed
• Thatcher’s new fiscal measures
led to her fall
• John Major challenged with
weakening pound,
unemployment, and recession
• Moderate “New Labour” party
said that Thatcher era favored
the rich and caused greater
economic disparity
• Tony Blair and Labour part
own in 1997
Mitterand and “Changer la vie”
• France turned Left politically in the
1980s as public viewed De Gaulle’s
conservative successors as unfeeling
• Francois Mitterand and the Socialist
party came to power in 1981
• Had a checkered past including
associating with right wing causes in the
early 30s and service to the Vichy before
joining the Resistance
• A moderate socialist and got party to
drop class struggle rhetoric
• Said he would “change life for
everyone” in his campaign slogan as he
and the socialists gained a majority in
the National Assembly
Mitterrand’s Reforms
• Labor reforms included:
– Reducing workweek from 40 to 39 hours
– Adding 5th week of paid vacation
– Nationalization of large banks and
industries
– Held to Keynesian theory that reform
would increase purchasing power and
offset welfare programs
– But results were:
• Trade deficits, loss of investment, loss
of competitiveness, inflation,
unemployment, weakening franc
• Mitt Abruptly changed course
– Cut off subsidies to decaying industries
and shifted govt. support to technology
– But unemployment remained high
“Cohabitation”
• Socialist lost parliamentary majority in 1986
and Mitterrand had to govern with a
Conservative prime minister
• Cohabitation of a popularly elected president of
one party working with prime minister of other
party
• Showed resilience of 5th Republic
• Gaullist tradition of president dealing with
foreign affairs and defense continued
• Unemployment, scandal led to return of
conservative majority in 1993 under
conservative Gaullist Jacques Chirac
• Became president in 1995
• Socialist prime minister Lionel Jospin reduced
workweek from 39 to 35 hours to create new
jobs
• Strongly resisted by employers
West European Socialists
• Now championed modernization,
market economies
• Moderate and pragmatic
• Helmut Schmidt, Social Democratic
chancellor of W. Germany (1974-1982)
• Controlled inflation via fiscal
conservatism but unemployment rose to
8%
• Stopped open door policy for guest
workers
• W. Germany remained strongest
economy in Europe but was burdened
by high labor costs from high wages
and generous social benefits
The Financial World
• NYSE is world largest stock exchange and financial
market
• Deregulation of 80s resulted in mergers
• New ways to trade attracted smaller investors and
speculation (as opposed to investment) returned
• 10/1987 Market crashed
• Lost 25% of its value
• Felt around the world
• But soon recovered and soared
• Group of Seven (US, GB, France, W. Germany, Italy,
Canada, Japan) largest economies realized that their
economies depended on each other and began to meet
periodically
• OECD (Organization for Economic Cooperation and
Development)
• Organization of 24 leading industrial nations of world
meet to watch economy
The Enlarged European Community:
Problems and Opportunities
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In ’73 GB, Denmark, Ireland were admitted into the EC
Greece, Spain, Portugal were admitted in the 80s
Austria, Finland, Sweden came in the 90s
Enlargement brought new problems
GB (a food importer) objected to the “common agricultural
policy” of ’68
Large nations like France and Italy got subsidies for their farmers
to keep prices higher
GB said it paid more than it got out of EC
New less industrialized nations brought regional differences
Free trade still not complete
France kept Italian wine out
Idea of a United States of Europe have dimmed
Toward a “Single Europe”: The European
Union
• World entered Third Industrial Revolution
in the 1970s
• Automation, computers, advanced
technology and the things that make them
became new mark of progress rather than
coal or steel
• 1977 1st personal computer was produced
to public
• Service sector grew rapidly
• Global economy began to erode boundaries
of the nation state
• Corporations could set up shop anywhere
• The World is Flat
The Single European Act (1987)
• 12 members of the EC agreed to
establish common production standards,
removed barriers of capital flow, seek
uniform tax rates, recognize each others
licensing, honor labor rights
• Called a “Europe without borders”
• Hoped for uniform currency in future
(Euro) and common foreign policy and
defense
• Treaty of European Union signed at
Maastricht in the Netherlands (1991)
was ratified in ’92
• EU
• A domestic market of 345 million people
and largest trading bloc
• Accounts for 40% of international trade