Transcript EC120 week 23 - University of Essex

EC120: The World Economy in Historical Perspective
Topics Week 22: Europe’s Golden Age of Economic Growth (1950-1973)
and Its Disintegration.
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1. Foundations of the Golden Age: More Than Trade.
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2. Waning of the Golden Age: Was Its End Inevitable?
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3. Early Attempts to Restore intra-European Exchange Rate Stability in
the Wake of the Collapse of Bretton Woods: The “Snake” (197379) and the European Monetary System, Phase 1 (1979-87).
Paris, c. 1965
Frankfurt a. Main, c. 1965
EC120 2015 Week 22, topic 17, slide 0
EC120: The World Economy in Historical Perspective
1a. Foundations of the Golden Age (see Maddison (2001) for
evidence): Unusual Technological Opportunity
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Technological advances (particularly in factory electrification) made in
the period 1914-1939, while widely known, had not been
extensively deployed before 1939, especially (but not exclusively)
in Europe and Japan.
Remarkably, some R&D expenditure, in some places, increased even in
the depressed 1930s.
Alexandra Palace
Marconi television set
EC120 2015 Week 22, topic 17, slide 1
EC120: The World Economy in Historical Perspective
1a. Foundations of the Golden Age: Unusual Technological Opportunity
[Con’t.]
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The pressures of war brought forth more technological gains potentially
useful in peacetime, not least advances in communications,
electronics (radar and computers), and the use of specialized
equipment and machine tools for mass production.
Large-scale reconstruction offered an unusually good opportunity to
deploy widely modern plant and equipment embodying new technologies.
Together these factors created an unusual backlog of technological
opportunity (especially in Europe and Japan) capable of fuelling
atypically rapid growth, during which ‘learning-by-doing’ created
further opportunities for productivity advance.
Turing’s “bombe”
Bletchley Park,
England
c. 1944
Me 262, first operational jet fighter, c.1944
EC120 2015 week 22, topic 17, slide 2
EC120: The World Economy in Historical Perspective
1b. Foundations of the Golden Age: Recovery in Europe from the
Traumatic Disequilibrium of 1945
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Much war damage to infrastructure, plant, and equipment could be
repaired quickly, producing rapid gains in output.
Reconstruction (as mentioned above) also created a favorable
environment for technological advance as new facilities were
built.
Much labour was concentrated in the agricultural sector due to pre-war
protectionism, war-time autarchy, and refugee displacement. This
labour could be drawn on to man factories without putting great
upward pressure on wages.
Emigration from Eastern Europe, the British Commonwealth, North
Africa, and Turkey provided another source of cheap, often
skilled, labour for western European economies.
Mercedes 190SL
assembly line, c. 1955
EC120 2015 Week 22, topic 17, slide 3
Turkish Gastarbeiters
Ruhrgebiet, c. 1955
EC120: The World Economy in Historical Perspective
1c. Foundations of the Golden Age: The “Post-War Settlement”
and Systematic Policy Bias towards High Demand Pressure
• The “post-war settlement” secured high levels of capital formation.
• Reaction to perceived policy errors of the inter-war years (especially
high unemployment), reinforced by the ‘output miracle’ of the
war.
• Widespread extension of welfare benefits, especially in housing, public
utilities (including transportation), health, and education.
• Political pressure to raise real incomes, contributing to high levels of
investment encouraged by public policy (notably tax incentives
and subsidies, but also centralized wage and investment
bargaining).
• Together, these factors combined led to persistently high levels of
demand.
Golden Lane Council
Estate, London, built
c. 1955
EC120 2015 Week 22, topic 17, slide 4
EC120: The World Economy in Historical Perspective
1d. A Flexible, Effective International Monetary Regime
• Systematic encouragement of international, especially intra-European,
trade (ERP and EPU, followed by the ECSC and EEC), facilitated
more efficient resource allocation through more effective
competition and gains from specialization.
• International trade, by widening markets, also facilitated the profitable
deployment of scale-dependent mass-production techniques.
- A notable example: Japanese innovation in transistor radios in the early 1960s and the
development of a strong semiconductor industry on the basis of the export of
consumer electronics.
The Treaty of Rome
25 March 1957, creating the
European Economic Community
EC120 2015 Week 22, topic 17, slide 5
EC120: The World Economy in Historical Perspective
2a. Waning of the Golden Age: Exhaustion of the Technological
Backlog
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It was much easier to emulate and extend existing technologies than to
invent new ones. Hence slowing growth was almost inevitable.
By the 1960s there was a widespread slowdown of productivity
growth, with attendant pressure on profitability (see Marglin &
Schor (1990), Figs. 2.1, 2.2, and 2.4).
Real input costs began rising in the 1960s.
Tighter labour markets, made worse in Europe by the fading of surplus
labour in the agricultural sector, combined with reduced
immigration, served to increase real wages, putting pressure on
profitability and weakening incentives to invest. See Eichengreen
(2007), Fig. 7.3.
Intensified competition, especially in international trade.
Policy implications: could technological progress have been
accelerated? Could growth have been sustained by other
(possibly inflationary) means?
EC120 2015 Week 22, topic 17, slide 6
EC120: The World Economy in Historical Perspective
2b. Waning of the Golden Age: The Elimination of Extreme
Disequilibrium
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Much war damage was indeed quickly repaired, especially
infrastructure and industrial facilities, resulting in a one-off spurt
in output.
As workers moved to (often back to) renovated urban areas, the
surplus labour remaining in the agricultural sector grew old and
faded away.
– Moreover, as recovery proceeded, demand grew particularly rapidly for
skilled labour, whereas much rural and immigrant labour was unskilled.
– Upward pressure on wages and reduced profitability, making capital
formation both less attractive and harder to finance.
West Berlin, c. 1965, some 20 years
after the end of the Second World
War
EC120 2015 Week 22, topic 17, slide 7
EC120: The World Economy in Historical Perspective
2c. Waning of the Golden Age: Disillusionment with Systematic
High-Demand Pressure
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By the 1960s, as productivity gains waned, high levels of demand
came to produce more inflation and less real growth.
Accelerating inflation. See Barsky & Kilian (2003), Figs. 6 & 9.
Distributional conflicts increased, especially in Europe, over the
incidence of taxation and the direction of government spending
as growth slowed.
Widespread social discontent manifested in strikes and political
confrontation.
Policy implications: have the costs of inflation been exaggerated?
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Boulevard St. Michel
Paris, May 1968
Laying the groundwork for
devaluation (August, 1969)
EC120 2015 Week 22, topic 17, slide 8
EC 120: The World Economy in Historical Perspective
2d. Waning of the Golden Age: Decline and Collapse of the Bretton
Woods System
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Increased inflation as the global money supply increased, especially in
the 1960s.
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Review in Extras for Week 22 Bordo (1993), Figs. 1.10 (Monetary gold and dollar holdings)
and 1.15 (International reserves).
The increasing threat of exchange rate volatility made trade riskier.
Deutsche Bundesbank
Hauptverwaltung,
Frankfurt
EC120 2015 Week 22, topic 17, slide 9
EC120: The World Economy in Historical Perspective
3a. The European Response to the End of the “Golden Age”: The
First Step on the Long Road to the Euro – the “Snake”
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The end of Bretton Woods marked the end of the attempt to recreate
a global system of fixed exchange rates, but not the end of
attempts to peg exchange rates among close trading partners in
Europe.
The “Snake” a first, ultimately unsuccessful, attempt to create
monetary stability in Europe in the context of the abandonment
of fixed exchange rates globally. (See Eichengreen (2008), Table
5.1)
Pierre Werner, Prime Minister
of Luxembourg, whose report
on European monetary union
was delivered in October, 1970
EC120 2015 Week 22, topic 17, slide 10
EC120: The World Economy in Historical Perspective
3b. Europe’s Second Attempt to Cope with Exchange Rate
Instability: the European Monetary System (EMS).
• The experience with the “Snake” suggested that more systematic co-operation
was needed.
• Thus the European Monetary System (EMS) was created to provide more
extensive mutual support among European Community central banks and
joint management of exchange rate realignments. Before the removal of
intra-European exchange controls in 1987, which fundamentally altered
the dynamics of exchange rate adjustments in the System, the EMS went
through two phases: (1) 1979-1983; and (2) 1984-1987.
Valéry Giscard d’Estaing (left)
with Helmut Schmidt, c. 1979
EC120 2014 Week 22, topic 17, slide 11