THE EUROPEAN ECONOMY AT THE END OF THE 20th CENTURY

Europe’s long post-war boom had its counterpart in other parts of the world economy, especially in Japan. The Japanese boom was longer and stronger from the late 1940s until the early 1970s, when the growth rate of GNP was more than 10% annually. Reasons for this stunning performance were the technological catch-up because in the 1930s and 1940s Japan had been isolated, and now many technological innovations could be borrowed at minimal cost. The high level of human capital contributed to the success and after catching up it became a leader in introducing new technology, especially in electronics and robotics. Japan could draw on high levels of savings and investment of the Japanese people and a sophistication of Japanese management with high payoffs of industrial research and innovation and the collective and cooperative spirit of the Japanese people. Also South Korea and Taiwan had very high growth rates for similar reasons with the special position of Singapore and Hong Kong, which was until 1997 under British rule. The Pacific Basin area together with Australia and New Zealand became a major actor in world economy, too.

During the late 19^th century and the beginning of the 20^th century Latin America was an important participant in the international division of labour with a comparative advantage in primary products. In the middle of the 20^th century the countries of the “southern cone”, Argentina, Uruguay and Chile, enjoyed per capita incomes comparable to Western Europe. Then they started programmes on import substitution and industrialisation, all of which failed due to the fact that domestic markets were too small and there was a lack of international cooperation in the region and a lack of human capital to adopt and develop the new technology. So the increase of per capita income was below that of the rest of the world and the region’s share of total world trade declined. Unfavourable trade balances, especially in Argentina, Brazil and Mexico, resulted in alarming levels of international indebtedness in the 1980s. The economic conditions in Africa were even more deplorable. The new nations lacked natural and human resources and political circumstances hindered economic development, further exacerbated by ethnic enmities. Several African nations actually endured negative rates of growth of income.

The Middle East has acquired economic importance in the 20^th century because of its oil resources, which were discovered in the first decade of 20^th century in Persia and then in several Arab states. Until the 1950s the region accounted for as little as 15% of the world production; in comparison the USA accounted for 50% at that time. In 1960 the OPEC (Organisation of Petroleum Exporting Countries) was formed and by 1970 the OPEC comprised 1/3 of the world crude oil production. In 1973, time of 4^th Arab-Israeli war, they acted in cartel fashion to increase sharply the price of crude petroleum; an action they repeated a decade later with the result that the world price rose 10 times. High dependency on petroleum at that time had a devastating effect on the highly industrialised and developing economies. Developing countries suddenly faced much larger deficits in their balance of payments, which forced them more deeply into debt. Industrial nations faced “stagflation”, meaning a stagnation of output and employment together with inflationary price rises. The situation persisted from the 1970s to the 1990s and produced the highest levels of unemployment since the 1930s. Meanwhile political and religious changes in the region altered the balance of power. In 1979 an Islamic republic was established in Iran and Iraq’s dictator Saddam Hussein invaded the country in order to annex oil-producing regions. Nine years of war with millions of casualties followed. After a truce Saddam invaded Kuwait, which resulted in the Gulf War of 1990.

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THE THIRTY GOLDEN YEARS IN EUROPE

The “Thirty Glorious Years” after World War II were an exceptional phase in European history. For the USA, which dominated the world economy after World War II, the era was not all that revolutionary; it merely continued the expansion of the war years. The USA had suffered no damage, had increased its GNP by two thirds and ended the war with almost two thirds of the world’s industrial production. Because of the size and advance of the US economy its performance during the “Golden Years” was not as impressive as the growth rates of other countries which started from a much smaller base. Its economy grew more slowly than in any other industrial country except Britain. The gap in productivity per man-hour between the USA and other industrial countries diminished; also in respect to national wealth in terms of GDP the other countries were fast catching up. For the European countries and Japan the overwhelming priority after 1945 was recovering from the war. For non-communist states this also meant putting the fear of social revolution and communist advance, the heritage of war and resistance, behind them. Most countries were back to their pre-war levels by 1950. The material benefits of growth took some time to make themselves felt, even in a so spectacularly prosperous region as Italy’s Emilia-Romagna. The benefits of an affluent society did not become general until the 1960s in Europe; also full employment did not become general until the 1960s, when the average of Western Europe unemployment stood at 1.5%. By then observers began to assume that somehow everything in the economy would go onwards and upwards forever. In the 1950s the economic upsurge seemed quite world-wideand independent of economic regimes. The growth rate in the USSR in the 1950s was even higher than in Western Europe, but in the 1960s it became clear that capitalism was forging ahead. Nevertheless the “Golden Age” was a world-wide phenomenon, even though general affluence never came within sight of the majority of the world’s population.

In the 1970s the disparities between different parts of the poor world had grown tremendously. In the 1980s the poor world’s food production per capita did not grow at all outside South East Asia, in some regions it even continued to fall. Meanwhile the problem of the developed world was that it produced so much surplus food that in the 1980s the European Economic Community decided to grow substantially less or to dump its butter mountains and milk lakes below cost, thus undercutting producers in the poor countries. It became cheaper to buy Dutch cheese on Caribbean islands than in the Netherlands. The growing divergence between the rich and the poor world became increasingly evident in the 1960s. The industrial world was of course expanding everywhere. Dramatic examples of industrial revolution were Spain and Finland and even purely agrarian countries like Bulgaria and Romania acquired massive industrial sectors. The world economy was growing at an explosive rate, e.g. world trade grew tenfold between the early 1950s and the early 1970s. One by-product of this extraordinary explosion was pollution and ecological deterioration, which attracted little attention in the Golden Years. The dominant ideology of progress took it for granted that the growing domination of nature by man was the very measure of human advance. Industrialisation in the socialist countries was for this reason especially blind to the ecological consequences of its massive construction of a rather archaic industrial system based on iron and smoke. Even in the West the old 19^th century businessman’s motto, “Where there is muck, there is brass” (pollution means money), was still convincing, especially for road-builders and real-estate developers.  The impact of human activities on nature increased steeply from the middle of the century, largely due to the enormous increase in the use of fossil fuels. The total energy consumption tripled in the USA between 1950 and 1973. One of the reasons why the Golden Age was golden was that a barrel of Saudi oil cost less than 2$ on average in the entire period of 1950-1973, thus making energy ridiculously cheap. Ironically, it was only after 1973, when the oil-producers’ cartel finally decided to charge what the traffic would bear, that ecology-watchers took serious note of the consequences of the explosion of petrol-driven traffic. The rich Western countries naturally generated the lion’s share of this pollution, though the unusually filthy industrialisation of the USSR produced almost as much carbon dioxide as the USA. To some extent this astonishing economic explosion was a gigantic version of the continuing globalisation of the state of the pre-war USA, taking that country as the model of a capitalist industrial society. For instance the age of the automobile had long arrived in the USA, but after the war it came to Europe, e.g. Italy’s private cars counted in 1938 469 000 and in 1975 15 million. Cheap fuel made the truck and the bus the major means of transport over most of the globe’s land-mass. Much of the great world boom was thus a catching up, or in the USA a continuation of old trends. The model of Henry Ford’s mass production spread across the oceans to new auto industries. In the USA the Fordist principle was extended to new kinds of production, from house-building to junk food, e.g. McDonald’s was a post-war success story. Goods and services previously confined to minorities were now produced for a mass market, as in the field of mass travel to sunny beaches. Before the war never had more than 150,000 North Americans travelled to Central America or the Caribbean in any year, but between 1950 and 1970 their numbers grew to 7 million. The European figures were even more spectacular; Spain which had virtually no mass tourism before the late 1950s welcomed 54 million foreign visitors per year in the 1980s and Italy 55 million. What had once been a luxury became the expected standard of comfort in Western countries: the refrigerator, the washing machine, the telephone. It was now possible for the average citizen to live as only the wealthy had lived in their parents’ days, except of course that mechanisation had now replaced personal servants.

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THE ECONOMIC ASPECTS OF WORLD WAR II & REBUILDING OF THE EUROPEAN ECONOMY

It was by far the most destructive of all wars, often showing an intensification of features manifested in World War I, such as an increasing reliance on science as the basis of military technology, an extraordinary degree of regimentation and planning of the economy and society, a refined and sophisticated use of propaganda at home and abroad. But in other aspects World War II differed from all previous wars. It was a truly global war and directly or indirectly involved the population of almost every country in the world. World War I had primarily been a war of position; World War II was a war of movement on land, at sea and in the air, such as air warfare and naval operations, especially carrier-based aircraft. Science-based technology accounted for many of the special new weapons like the atomic bomb. Economic and industrial capacities of belligerents became decisive, as mere numbers of soldiers counted less than ever: the production line became as important as the firing line. The ultimate secret weapon of the victors was the enormous productive capacity of the American economy. The pecuniary costs involved the direct military expenditure of 1 trillion US$ contemporary purchasing power. This does not include the value of property damage which was certainly much larger, interest on war-induced national debt, pensions and so on. The war related deaths are estimated at approximately 15 million in Western Europe – 6 million military, 8 million civilian, around 6 million Jews murdered in the Holocaust. Russia accounted for 15 million deaths, half of them civilians, China for 2 million military and untold millions of civilian deaths, Japan for 1.5 million military and again untold millions of civilian deaths.

The property damage was far more extensive than in World War I. The US Airforce prided itself on strategic bombing of military and industrial targets, but the post-war strategic bombing survey showed that only 10 % of industrial plants had been permanently destroyed, but 40% of civilian dwellings. Some cities were virtually levelled by German and Allied bombers leaving unknown numbers of casualties, for example Hamburg, Dresden, Coventry, Rotterdam, Leningrad and many more. Transportation facilities were special targets; at the end of the war every bridge over the Loire was destroyed and all but one over the Rhine (Remagen bridgehead). All combatants resorted to economic warfare. Great Britain imposed a blockade like during the Napoleonic wars and World War I and Germany retaliated by unrestricted submarine warfare. Germany introduced so-called “ersatz commodities” such as gasoline from coal and took command over resources of occupied territories. In 1943 Germany extracted more than 36% of French national income and in 1944 30% of German industrial labour was non-German slave labour.

At the end of the war the economic outlook in Europe was extremely bleak; the industrial and agricultural outlook was half that of 1938, millions of people were uprooted, there was the danger of starvation and the institutional framework of the economy was severely damaged. Before the war Europe had imported more than it exported in foodstuffs and raw materials. It paid for the difference with the earnings of its foreign investments and shipping and financial services. After the war Europe’s merchant marines were destroyed, foreign investments liquidated and financial markets in disarray. Europe’s overseas markets had been captured by Americans, Canadians and firms in formerly underdeveloped countries. Europe faced the threat of starvation, disease, lack of clothing and shelter, victors and vanquished alike. There was urgent need for emergency relief and reconstruction. Two main channels of relief came from the US. As the Allied armies advanced across Western Europe in 1944/45 they distributed emergency rations and medical supplies to the population, enemy as well as liberated. The distribution of emergency rations for the defeated German population continued after the end of the war. Furthermore UNRRA (United Nations Relief and Rehabilitation Administration) distributed food, clothing, medical supplies, whereby the US bore 2/3 of the costs. The US made available about 4 billion $ to Europe and 3 billion $ to the rest of the world for relief.

In contrast to Europe the USA emerged from the war stronger than before, to a lesser extent Canada, the other Commonwealth nations and some Latin American countries. They were spared from direct damage and profited from the high wartime demand which permitted full use of capacity, technological modernisation and expansion. Many economists feared a depression after the war in the USA, but when wartime rationing and price controls, which held prices at artificially low levels, were removed, consumer demand for war-scarce commodities created a post-war inflation and kept the wheels of the US industry turning, which enabled the US to extend needed economic aid to Europe.

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ECONOMIC DEVELOPMENT IN EUROPE IN THE 19th CENTURY

The 19^th century was characterised by the triumph of industrialism, especially in western Europe. Modern industry spread from Great Britain to Belgium, France, Germany and to the USA and later to other areas of the world. It greatly transformed the conditions of life and work, differently in different regions.

Population, Resources and Technology

In 1800 the European population counted around 200 million, the world’s around 900 million. In the 19^th century growth accelerated to around 400 million in Europe in 1900; 1.6 billion in the world. Such high rates of growth were unprecedented. The two most industrial nations in Europe in the 19^th century, Great Britain and Germany,  had growth rates in excess of 1% per year, which would result in a doubling of the population within 70 years. The least industrialised nation, Russia, even boasted 2% population growth, which shows that there is not necessarily an intrinsic correlation between population growth and industrialisation.

The agricultural production increased enormously: First, because the amount of land under cultivation was extended, fallow was abolished and former waste land was cultivated. Second, new and more scientific techniques, fertiliser, natural and later artificial, were introduced and more efficient tools and instruments could be used because of the price reduction of iron. Later in the century steam-driven threshers and mechanical reapers were invented.

Cheap transportation facilitated internal and international migration: 60 million left Europe in the 19^th century; 35 million to the USA, 5 million to Canada, 12-15 million to Latin America, Australia, New Zealand and South Africa. The British Isles sent the largest number of emigrants, namely 18 million, then Germany and Scandinavia. After 1890 most emigrants left Italy, Austro-Hungary and Russia including Poland. Also substantial migration within Europe took place; sometimes only temporary. A majority of people moved in response to economic pressure at home and hopefully better opportunities elsewhere. After the Great Famine of 1845 1.2 million Irish left for the USA and many more for Great Britain. A steady stream of European immigrants to nearly empty areas overseas characterised the 19^th century.

The growth of the urban population in Europe was extraordinary. Historically the chief limitation on the growth of cities had been economic, namely it was impossible to supply large urban populations. Technological innovations and transport improvements relaxed these limitations. The factory system furthermore made the concentration of the work force necessary. Some of the largest centres arose near the sites of coal, for instance the Black Country of England, the Ruhr area in Germany and the region around Lille in France.

The importance of resources was enormous in modern economic growth. Resources, which were formerly unknown or of little value, acquired enormous importance, especially coal. Plentiful coal deposits became primary sites of heavy industry, the others had to import it. In the late 19^th century hydroelectricity was introduced, a new source of energy, which created an advantage for regions with lots of water power. Europe was relatively well endowed with conventional mineral resources, some of which had been exploited since antiquity, but modern industry intensified pressure. The search for new sources, better exploitation, and the search for raw materials in the colonies led the Europeans to extend political control over poorly organised areas of Africa and Asia.

Development and diffusion of technology: Until 1870 many continental industrialists, often supported by their governments, were devoted to acquiring and naturalising the technological gains of the British industry. The pace of technological change accelerated and new technologies spread to many industries not previously affected by science-influenced technology. New industries were created as a result of scientific discoveries. In the first phase of industrialisation on the continent many English and Scottish experts and workers were encouraged to come over and apply their skills and knowledge to the newly established industries; they were often even encouraged by continental governments.

The institutional framework:Some legal and social environment was more conducive to economic growth than others. The institutional setting for economic activity that produced the first industrial societies gave wide scope to individual initiative and enterprise, freedom of occupational choice, geographical and social mobility and relied on private property and the rule of law. It further emphasised the use of rationality and science. Some of these elements were wholly new in the 19^th century and included in the European Law systems. In Great Britain the common law prevailed since the time of the Norman Conquest in 1066. It relied on custom and precedent as written down in legal decisions and was of an evolutionary character. The protection of private property and interest had priority, but also public interest was protected and it incorporated the customs of merchants. The common law was spread to the British colonies and forms the basis of the US and many other legal systems.

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THE DAWN OF MODERN INDUSTRY IN EUROPE

Proto-industrial Economies

At the beginning of the 18^th century several regions in western Europe had acquired sizable concentrations of rural industry, especially textile industry, e.g. the linen industry in Flanders: rural, cottage-based, organised by entrepreneurs in Ghent and other market towns which exported their output. The workers – family units – usually cultivated small plots of ground and bought additional supplies. The entrepreneurs supplied the workers with raw material and disposed of their output: similar to the putting-out system, but the difference were the distant markets.

Other large-scale, highly capitalised industries producing capital or even consumer goods were the French royal manufactures: large factory-like structures, where skilled artisans worked under supervision but without mechanical power. Similar proto-factories were built by noble landowner-entrepreneurs in the Austrian Empire; they were also involved in the coal and mining industry. Iron works, lead, copper and glass works, shipyards often had large-scale organisations with hundreds or thousands of workers, e.g. the state-owned Arsenale of Venice. During the 18^th century new forms of industrial enterprise developed.

Characteristics of Modern Industry

The difference between pre-industrial and modern industrial societies is the greatly diminished relative role of agriculture. The greatly improved productivity of modern agriculture was able to feed large non-agricultural populations. During the period of industrialisation, starting in the 18^th century in Great Britain till the first half of the 20^th century, the characteristic feature of transformation was the rise of the secondary sector (today the tertiary and quaternary sector) – mining, manufacturing and construction – according to the proportion of labour force employed and output.

Great Britain was the first industrial nation. But the term “Industrial Revolution” is misleading, as it was a gradual transformation characteristic of economic processes. The term overlooks the essential fact of continuity; also changes were not merely industrial, but social and intellectual, too. Capitalism had its origins long before 1760 and fully developed long after 1830 (end of the first phase of industrialisation).

Certain characteristics distinguish modern from pre-modern industry:

• Extensive use of mechanically powered machinery
• Introduction of new sources of power for energy production, especially fossil fuels
• Widespread use of materials that do not normally occur in nature
• Larger scale of enterprise in most industries

The most significant improvements were the use of machinery and mechanical power for tasks formerly done much more slowly and laboriously by humans or animals or were not done at all. Developments in the application of energy were the substitution of coal for wood and charcoal as fuel and the introduction of the steam engine for mining, manufacturing and transportation. The use of coal and coke in the smelting process reduced the cost of metals and multiplied their uses. The application of chemical science created a large amount of new artificial or synthetic materials.

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