Theme II 1b Challenges in the Global Economy

Theme II 1b: Challenges in the Global Economy 1 The threat is nearly invisible in ordinary ways. It is a crisis of confidence, It is a crisis that strikes at the very heart and soil and spirit of our national will Jimmy Carter, Crisis of Confidence, 1979 1 Gas guzzled: OPEC’s 1973 oil embargo threw America into crisis and underlined the political power of energy. David Falconer/Wikimedia Commons

Criteria for Significance 1. Instability of Financial and Monetary System a. Unstable currency values and high debts 2. Illiberal trading order a. Decline in free trade and rise of new protectionism 3. Declining rates of economic growth and uneven development across the global economy Ai. Structural Issues and Consequences of the Golden Age of Capitalism 1. US-enabled growth eventually led to increasing convergence in developed economies as they endeavoured into similar industries and advanced to similar levels of industrial sophistication, increasing rivalry between developed countries a. From 1970s to 1986, US and Germany’s labour costs were twice of Japans but equalised. Similarly, US’s productivity decreased by thrice compared to Germany and 50 times compared to Japan. Increasingly similar factors of production led to less differences in factor endowments. To reap comparative advantages, the basis of trade decreased b. Trigger Price Mechanism was enacted in 1977 to impose tariffs on Japanese steel exports should they be sold lower than the trigger price. This was due to an advanced Japanese steel industry which outperformed the inefficient American one. US prioritised its own steel industry as both countries competed for steel dominance in the market. 2. Undud changes in the global economic structure that growth had depended on due to America’s unsustainable unilateral management removed the benchmark for currency values, destabilising the FMS and de-liberalising trade a. Maintaining the adjustable peg exchange rate depleted US gold supply. (1948-1959: 24 billion USD to 19.5 billion) . In 1971 Aii. US Abandonment of the Bretton-Woods System (1971) 1. Closing the gold window meant that the US dollar would be allowed to float against other currencies without a quality benchmark. A easily vacillating US currency increases volatility for other currencies pegged to it as well, thus inviting speculation and inflation, destabilising the FMS. a. MNCs, international banks and private investors, realising the profit to be made in the money market trade, indulged in extensive currency trading. Chiefly in the Euromarkets only, currency trade increased from less than 25 billion a day spiked to over 100 billion in 1973. Consequently, currency fluctuates at a faster rate, destabilising the FMS b. 1970s currency wars saw countries engaged in competitive devaluation to ensure that the prices of their goods, determined by transportation and exchange rates costs stay competitive. Not knowing the value of the currency pr