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 19th century and the beginning of the 20th 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 20th 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 20th century because of its oil resources, which were discovered in the first decade of 20th 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 4th 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.
The Crisis Decades
The history of the two decades after the oil crises 1973/1979 is that of a world which lost its bearings and slid into instability. Yet, until the 1980s it was not clear how irretrievably the foundations of the “Golden Age” had crumbled. Until one part of the bi-polar world, the USSR and the Eastern Europe of “Real Socialism”, had collapsed entirely, the global nature of the crisis was not recognised in the Western non-communist regions. The European economy did not break down as in 1929, although the “Golden Age” ended with a very classical cyclical slump between 1973 and 1975, which reduced the industrial production in developed economies by 10% in one year and international trade by 13%. Economic growth continued in the developed capitalist countries, though at a distinctly slower pace, except for some of the mainly Asian “Newly Industrialised Countries” (NIC), whose industrial revolutions had begun in the 1960s. The growth of the collective GDP of the advanced economies until the 1990s was barely interrupted by short periods of stagnation in the recession years 1973-1975 and 1981-1983. International trade in the products of industry continues and in the boom years of the later 1980s even accelerated. At the end of the 20th century the Western developed countries were far richer and more productive than in the early 1970s and the global economy of which they still formed the central part was far more dynamic. On the other hand, the situation in particular regions of the world was considerably less promising. In Africa, Western Asia and Latin America the GDP growth per capita ceased and most people became actually poorer in the 1980s and output fell for many years in this decade. For these parts of the world the Crisis Decades were an era of severe depression. The economies of Eastern European “Real Socialism” collapsed utterly after 1989. Their industrial production in the mid-1990s was between half and 2/3 that of 1989. This was not the case in Eastern Asia. Nothing was more striking than the contrast between the disintegration of the economies of the Soviet region and the spectacular growth of the Chinese economy in the same period. In that country, as in much of South-Eastern and Eastern Asia, which emerged in the 1970s as the most dynamic economic region of the world economy, the term depression had no meaning, except in Japan in the 1990s.
During the Crisis Decades mass unemployment reappeared, even in the EU it was 11% in 1993 with high youth unemployment. Poverty returned to the richest countries together with a reappearance of homelessness and a striking growth of social and economic inequality. By world standards the rich developed market economies were not particularly unfair in the distribution of their income. In the most inegalitarian among them, such as the USA and Switzerland, 20% of the households enjoyed an income which was 8-10 times that of the bottom fifth of the population. The top 10% took home between 20-25% of their country’s total income. This was nothing compared to the inequalities of countries like the Philippines or Malaysia. Nevertheless, inequality increased in the developed market economies and the almost automatic rise in real income, to which the working classes had become used, to came to an end. The extremes of poverty and wealth both grew, as did the range of income distribution in between. Since the rich capitalist countries were far richer than ever before and their inhabitants were cushioned by welfare and social security systems, there was less social unrest than could have been expected, but governments’ finances found themselves burdened by enormous social welfare payments, which climbed faster than state revenues in economies which were growing ever more slowly.
The key issue of the Crisis Decades was not that capitalism no longer worked as well as in the Golden age, but that its operations had become uncontrollable. Nobody possessed instruments to manage the vagaries of the world economy. The major instrument of the Golden age, Keynesian economic policies and government intervention, nationally and internationally coordinated, no longer worked. That was the era when the national state lost its economic powers.
Even before the crisis the ultra-liberal believers in the unrestricted free market had begun their attack on the domination of the Keynesian economists and their model of the managed mixed economy and full employment. The ideological zeal of the old champions of individualism was now reinforced by the apparent impotence and failure of the conventional economic policies after 1973. The newly created Nobel Prize for Economics in 1969 backed this neo-liberal economic trend by awarding the prize to Friedrich von Hayek in 1974 and to Milton Friedman in 1976, both advocates of economic neo-liberalism. The free marketers were on the offensive and came to dominate politics in the 1980s. The neo-liberals had little trouble attacking the rigidities, inefficiencies and economic wastages so often sheltering under Golden Age government policies. There was considerable scope for applying the neo-liberal cleansing agent to the mixed economy with beneficial results. Even British Labour eventually admitted that some of the ruthless shocks imposed on the British economy by Margaret Thatcher had probably been necessary. There were good grounds for some of the disillusionment with state-managed industries and public administration, which became common in the 1980s. Nevertheless, the mere belief that “business was good and government was bad” was not an alternative economic policy. The US president Ronald Reagan state that “government was not the solution, but the problem”. Yet even in Reagan’s USA central government expenditure amounted to a quarter of the GNP and in the developed economies of Europe it was over 40%. Such enormous parts of the economy could be managed in a business-like manner, which was not always the case, but they could not operate as markets, even when neo-liberalists pretended to. In any case, most neo-liberal governments were obliged to manage and steer their economies, while claiming they were only encouraging market forces. Ronald Reagan’s government was officially devoted to fiscal conservatism of balanced budgets and to Milton Friedman’s “Monetarism”, but in fact used Keynesian methods to spend its way out of the depression of 1979-1982 by running a gigantic deficit and engaging in a huge armaments build-up. Furthermore after 1984 the government returned to deliberate management of the US dollar through diplomatic pressure instead of leaving the value of the dollar entirely to the market forces. The regimes which were most deeply committed to laissez-faire economics were sometimes profoundly nationalist and distrustful of the outside world, such as the governments of Margaret Thatcher in Great Britain and Ronald Reagan in the USA.
As the transnational economy tightened its grip over the world, it undermined a major and since 1945 virtually universal institution, the territorial nation state, since such a state could no longer control more than a diminishing part of its affairs. Organisations whose fields of action were bounded by the frontiers of its territory, like parliaments, trade unions and national media lost out. Organisations which were not so bounded like multinational corporations, international financial institutions, globalised media and communication gained. Even the most irreplaceable function of nation states, the redistribution of income among their populations through transfer payments of welfare, educational and health services could no longer be territorially self-contained in theory, though it had to remain so in practice. At the height of neo-liberalist economic policies many activities which were so far conducted by public bodies, such as energy and water supply, public transport and all sorts of utilities, were dismantled and left to the free market.
The weakening of the nation state went hand in hand with the cutting up of old territorial nation states into smaller new ones, mostly based on the demand of some group to ethnic-linguistic monopoly. To begin with, the rise of such autonomist and separatist movements after 1970 was primarily a Western phenomenon, for example in Great Britain, Spain, Belgium and Canada. The crisis of communism spread it to the East, where more new nation states were formed after 1991 than at any other time in the 20th century. It was obvious that the new small nation states suffered from exactly the same drawbacks as the older ones, only being smaller, more so. Yet, the only available state model was that of the territorial nation state with its own autonomous institutions created around 1800 and moreover, since 1918 all regimes had been committed to the principle of “national self-determination”, which had been increasingly defined in ethnic-linguistic terms. The new separatist nationalism was a combination of three phenomena: First, the resistance of existing nation states against their demotion, visible in the resistance against European standardisation in Great Britain and Norway; Second, a collective egoism of wealth which reflected the growing economic disparities within countries and regions, such as the reluctance of rich areas to subsidise poor ones. This phenomenon was visible in the breaking up of Yugoslavia and Czechoslovakia, where the richer parts separated from the poorer areas. In a similar way the separation movements in Spain and Italy tried to gain independence for the richer regions, such as Catalonia or Lombardy. Finally the separatist movements can be seen as a response to the cultural internationalisation of the second half of the 20th century and the dissolution of traditional social and cultural norms and values, which left local inhabitants bereft.
Of course this kind of nationalism was in no way an effective programme for dealing with the problems of the Crisis Decades, but rather an emotional reaction to these problems. The nation state was no longer capable of dealing with them. The sheer need for international coordination multiplied international organisations faster than ever. Global action on problems such as conservation and the environment was increasingly recognised as urgent. Two ways of securing international action were available: one was the voluntary abdication of national power to supra-national authorities like the EU and the other was the authority of international organisations set up at the end of World War II like the IMF or the World Bank. Backed by the major capitalist countries under the label of the “Group of 7” (France, Germany, Italy, USA, Great Britain, Canada, Japan), these institutions gained considerable authority. The triumph of neo-liberalism translated into policies of systematic privatisation and free market capitalism which were imposed even on governments too bankrupt to resist, whether they were relevant to their economic problems or not.
The Collapse of the Soviet Bloc
In 1989 unexpected series of mostly peaceful overthrows of communist regimes in Eastern Europe took place. Poland and Hungary led the way, but few expected the others to follow, but they did; namely Czechoslovakia, Eastern Germany, Bulgaria, Romania and finally Albania. A mixture of political and economic motives were responsible for the revolts. Regimes had been imposed by the Soviets without the consent of the people, which did not keep their promises of improved material conditions and a higher standard of living. On the contrary, living and working conditions of the masses steadily deteriorated in contrast to the lavish lifestyle of the communist elites and the TV broadcasts from the West. Against former revolts the USSR had used its armed forces, but it did not do so now.
The roots of discontent were deep. In 1980 Polish workers led by Lech Walesa formed an independent labour federation, called “Solidarity” and in 1981 the government proclaimed martial law and imprisoned Solidarity leader. But the unrest continued and in 1989 the government legalised Solidarity to defuse the unrest and allowed partially free elections, whereby a portion of the seats were reserved for communists. Solidarity won most of the other seats. When the communist president resigned, Walesa was elected president of a free Poland in 1990, until 1995. After the rebellion in Hungary in 1956 the government installed by the USSR stuck to the Soviet line in foreign policy and for exchange got some freedom in domestic affairs. In 1968 “New Economic Mechanism”, a compromise between strict central planning and a free market system, was introduced. Hungary developed closer relationships to Western Europe and allowed the formation of opposition political parties, which in 1989 negotiated a peaceful transition. In 1990 free elections followed. Now students and workers in Czechoslovakia also stepped up their protests and the government responded with violent repression, when hundreds were killed and injured, but it finally agreed to negotiations. In 1989 Alexander Dubcek, the leader of the Prague Spring of 1968, was elected chairman of the new parliament and Vaclav Havel became president. In 1992 Slovak and Czech republics separated.
After celebrating its 40th anniversary in 1989 Eastern Germany’s Central Committee disposed of Erich Honecker and accused him of various crimes. Eastern Germans began to flee to Hungary because they had no direct access to the west, hoping to reach Austria and the West. The new Hungarian government opened the borders to Austria. One of the most symbolic events of 1989 was the destruction of the Berlin wall, erected in 1961 to prevent escapes to the West, in the night from the 9 –10 November by demonstrators from East and West Berlin. Both Western and Eastern German authorities were caught by surprise. In July 1990 an economic and monetary union was created and on 3 October Eastern Germany was incorporated with the German Federal Republic. In Bulgaria Todor Zhivkov resigned the day after the Berlin wall came down and the way for free elections in 1990 was paved. In Romania Nicolae Ceausescu vowed not to give in to popular protest, but the army sided with the demonstrators and executed Ceausescu and his wife on 25 December 1989. But democratic opposition forces in Bulgaria and Romania were not well organised, so the former communist parties changed their names and slogans and continued to rule with much the same personnel. In 1991 the government of Albania finally agreed to free elections. In 1991 the constituent republics of Slovenia and Croatia declared their independence from Yugoslavia and the republics of Macedonia and Bosnia-Herzegovina were moving in the same direction. The republic of Serbia, the largest and strongest member of the federation, tried to prevent this move with its armed forces. Following civil war, ethnic cleansing, several nominal truces and UN peacekeeping forces, finally the NATO intervened.
The events of 1989 in Eastern Europe were a milestone in history, disposing of the old communist regimes, but what was put in their place? In some countries fragile democratic governments, which were staffed with the old personnel, replaced the communist regimes. The basic reason for the collapse was dissatisfaction with the economic performance of the regimes. It was generally agreed that the old system of state ownership and management had to be replaced, but no consensus was found on how to replace it. Private ownership of the means of production and a market system of organisation was the alternative, but who would be the owners? Who would organise the markets? Throughout the 1990s the new governments tried to tackle these problems and many hoped for closer relationships to the West, private investments and joint ventures and for membership in the EU. Also the nature of international economic relationships was problematic as the COMECON had never been really successful and was dissolved in 1991.
Why did the USSR not use its armed forces to quell the rebellions as it had done before and as the Chinese government did? The reason was probably the economic debility of the country itself. In 1964 the communist party disposed of Khrushchev. Under Brezhnev the economy stagnated, inefficiency and corruption flourished, the entrenched bureaucracy expanded by 60% between 1966 and 1977 and the economic growth rate and productivity declined. When Mikhail Gorbachev came to power in 1985 the economy was in a state of crisis. He realised that the USSR was no longer in the position to enforce its will on its satellites. Its greatest need was to reform itself via “perestroika” (restructuring) and “glasnost” (openness). Partly as a consequence of glasnost, the Baltic republics Latvia, Lithuania and Estonia declared independence, which was confirmed in 1991, while others moved in the same direction, even the huge Russian republic under Boris Yeltsin. Justification for glasnost was to unleash enthusiasm in the population for perestroika, but Gorbachev had no concrete programme of the nature of the restructuring process, he seemed to favour some kind of return to Lenin’s NEP, in which the state would retain control, but allow limited private enterprise. Some limited reforms were effected, private handicraft production, petty trading. Cooperatives to produce consumer goods could be formed and individuals could lease land for agricultural production; even some foreign capital was allowed to enter. In 1991 a coup d’état failed, but power relationships had dramatically changed. Yeltsin, president of the Russian republic had defied the coup leaders and had greatly increased in power. Most of the constituent republics declared independence. In December 1991 the elected presidents of the remaining republics created a Commonwealth of Independent States (CIS) and Gorbachev resigned as president. The USSR had ceased to exist. Private enterprise and markets increased and the CIS acted as a kind of free trade area.
The Evolution of the European Union
Movement to integrate Europe gained force in the 1980s after the time of stagnation during the oil shocks. Jacques Delors became president of the EC commission in 1985, a strong proponent of European unity. In 1986 the Single European Act was signed, which adopt more than 300 measures to remove physical, technical and physical barriers in order to complete the internal market by 1992. Within the EMS (European Monetary System) with its exchange rate mechanism (ERM), established in 1979, the coordination of monetary policies and the creation of a single currency were the greatest hurdles. The exchange rate crisis in 1992 forced Great Britain and Italy out of the ERM. In 1994 the creation of a central bank with headquarters in Frankfurt was executed. The Maastricht Treaty of 1991 took effect in 1993, and changed the name from European Community to European Union. It increased the power of the European Parliament and called for joint action in foreign and defence policy. It furterhmore introduced the principle of “subsidiarity”, meaning policy making power would devolve to the lowest possible level of government, and it provided for an intergovernmental conference in 1996 to review the progress on the treaty. In 1993 the creation of the European Economic Area (EEA) took place by a merger of the EC with most members of EFTA, excluding Switzerland.It took effect in 1994 and in 1995 Austria, Finland and Sweden joined the EU. In 1994 the North American Free Trade Area (NAFTA) was created, including the US, Canada and Mexico, with a 15-year transition period when other nations in the western hemisphere could become members.
In 1972 a US research team predicted the end of growth within the next 100 years, voicing five major concerns: accelerating industrialisation, rapid population growth, widespread malnutrition, depletion of non-renewable resources and deteriorating environment. This study caused a lot of discussion. Throughout history the pressure of population on resources condemned a majority of people to live at a bare subsistence level. Thomas Malthus explained why this would always be so. Nevertheless rapid technological change soon overthrew his theories. The following years witnessed a rise of living standard in many parts of the world. But the population problem at the end of the 20th century was without historical precedent, also the volume of resources to support the world’s population was very high. Demographic transition in affluent nations from high birth and death rates to much lower ones and therefore a reduction in population growth could also reach poorer nations as their level of material well-being increases. The affluent part of the world utilised resources at historically unprecedented rates, which gave rise to fears of a total exhaustion of resources. In history temporary shortages always gave rise to substitutes, for example charcoal replaced timber, then coal, then oil. The inequality in the distribution of resourcesamong individuals, social groups and nations was at the heart of the problem of economic development in that period.
Cameron, Rondo, & Neal, Larry, A Concise Economic History of the World, Oxford University Press 2002
Hobsbawn, Eric, Age of Extremes. The Short History of the 20th Century, Abacus 1997