EC104 Topic 9

amarjotsidhu's version from 2015-06-05 03:23

Section 1

Question Answer
'Golden Age of European Growth' - date1950 to 1973
What happened in the Golden Age?Europe surged; catch up growth; countries farthest behind grew fastest; particularly impressive growth in France and West Germany; marks the start of 2nd period of globalisation; integration of markets as barriers to trade and capital flows are significantly reduced; driven by reductions in transport and communication costs and liberalisation policies; low inflation and low unemployment till the late 1960s; trade grew much faster than GDP; low real interest rates (interest rates < growth) = cheap to invest
Globalisation pattern since 1850advance->retreat->recovery (golden age)-> surge (1970s-present)
Some of the growth rates in the Golden AgeJapan (8%) ; Germany (5%) ; USA (2.4%) ; UK (2.5%); Spain (5.8%)
Characteristics of 1930sdeflation, slump and financial crises; trade wars, collapse of gold standard, exchange controls, sovereign default; de-globalisation; absence of international policy co-ordination = world without Bretton Woods institutions
3 Bretton Woods institutionsIMF, World Bank, GATT/WTO
Initial purpose of Bretton Woods institutionsdesigned to promote international trade in post gold-standard world; fixed (but adjustable) exchange rates, multilateral tariff reductions (from around 20% to 4%), capital controls; correction of market failures (prisoners' dilemma and protectionism, eliminate bank runs, improve allocation of capital (public goods)
Rules of Bretton Woods in 1945peg exchange rate in terms of gold via US$; long run exchange rate adjustable (IMF to monitor); lender of last resort (use reserves and IMF credits to deal with short term BP problems); capital controls to stop currency speculation; national macroeconomic autonomy
Germany in Bretton WoodsDeutsche Mark pegged to US Dollar and then the Dollar to Gold; it took 2 rules of trilemma - fixed exchange rates and independent monetary policy; sacrifices capital controls (private capital immobile) till 1958
Characteristics of Bretton Woodsfixed exchange rate, Keynesian policies, immobile capital ; small current account positions; dependent central banks
Characteristics of today's economyfloating rates, inflation targeting, mobile capital, large current account positions (China vs. US), independent central banks
Aims of the IMFpromote international monetary cooperation; facilitate the growth of international trade; promote exchange stability; shorten the duration and lessen the disequilibrium in members' BOP; establish a multilateral system of payments
IMF role in Bretton Woodsenforce the par value system; credibility through threat to deny access to borrowing - no persistent long-term deficits; spread the costs of adjustment to BP problems through scarce currency clause; supply international reserves (liquidity) but no power of credit creation
US in the Bretton Woods System (1950-70)remain passive in foreign exchanges; keep US capital markets open; limit fiscal deficits; choose monetary policy and anchor price level
Key aspects of international monetary system (1950-71)few devaluations; slow growth of reserves; fixed parities undermined by catch up growth (countries like Germany able to sell goods and services at very cheap prices due to low exchange rates); unequal burdens of adjustment; capital mobility gradually increasing; governments care about internal balance
Current account deficit/surplus vs. GDP (%) (between 1947-1973)2% to 1.3%
Consequences of Bretton Woods in economies (1950-71)microeconomic efficiency sacrificed for macroeconomic stability and dealing with government debt; controls eliminated financial crises and improved fiscal arithmetic but raised the cost of capital to private sector; greater trade openness was compensated by more social insurance; welfare state expanded rapidly financed by taxes on immobile factors such as savings
How did Bretton Woods system breakdown?its 4 pillars (par value system, policing of fixed exchange rates, lender of last resort, maintenance of capital controls) all encountered problems
Problems with maintaining par value systemUS runs deficit (to pay for military expansion) = more dollars in system = US runs out of gold
Problems with policing fixed exchange rateslimited adjustments made when many needed
Problems with lender of last resortproves ueless
Problems with maintenance of capital controlsEnds in 1958 = hot money moved from US to European countries as a result of disequilibrium of international exchange rates as countries had not made adjustment over time when they were needed = currencies like the French Franc and German Deutsche Mark substantially undervalued by the end of the 1960s as both economies had growth substantially
Growth of trade vs. reserves (%)Reserves grow 2.5% (1965/9) but trade grows by 9.8% in same period = amount of money portrayed in system increasing but relative to that, the actual amount of money is decreasing
Triffin Problemshort run/long run trade off - short run pegs = unsustainable in long term = US had to run current account deficits
Events leading to end of Bretton Woodshuge capital flows (1971-3) = Bundesbank has to purchase foreign exchange equivalent of 71 bn DM = DM floated in April 973
IMF after Bretton Woodsprovider of adjustment to weak and of information
Failures of IMFIneffectiveness, inability to drive reform or stabilise system exposed in early 1970s

Section 2

Question Answer
Theories explaining golden age growth raetsdisequilibria (Catch uo); social capital and technological congruence; advantages of backwardness; marshall plan
Janossy Hypothesis (disequilbria)Europe was reconstructing and return to normal levels after WWII (BUT, dismissed by crafts)
Disequilibria in postwar Europeshort run disequilibria -> reconstruction (massive rebuilding; long run disequilbria -> misallocated resources ; variable long run disequilibria -> differing initial conditions across European countries (conditions in Europe converging - conditions in countries coming together; golden age growth fast due to first 2
Advantages of backwardnesseasier to adopt technology when you can imitate; rapid gains should be possible; no need to start from beginning (no learning costs; implications = easier to Europe to grow quickly as they were behind the US
Social capitalsocial capability = ability of a society to adopt best practice for technologies; provides a broad perspective on what matters for growth; social capability is reflected by various characteristics of a society: education of the labour force (e.g. Germany well educated in terms of engineering, etc. = can adopt German technology quickly), income distribution, property rights, networks and social capital
Technological congruencecost effectiveness of one country's technology in other countries ; diffusion of technology not as easy as early models predicted - some conditions apply - advanced communication and transportation technology
Early 20th century conditions in terms of technological congruenceEurope didn't have the conditions to adopt uS technology; post WWII conditions changed -> much greater integration of markets, factors available internationally (GATT/WTO help as well as organisations such as European Coal and Steel Community); knowledge became codified; increased globalisation ; increased spending on R&D and education in Europe; spread of US multinationals
Consequences of increased social capability and technological congruence in Europehigh TFP growth. Improvements in European labour markets -> capital accumulation increased -> investment boom -> Europe adopted a corporatist model
Corporatisma strong, directed state (non totalitarian); organisation of society in terms of societal units that are regulated rather than controlled by the state; the state attempts to bring interest groups into the state system; interest groups take advantage of their inclusion with benefits for members; overall goal = eliminate conflict with collective organisations
Consequences of corporatism in Europe workers agreed to lower wages; firms agreed to increase investment; increased investment generates increased output; increased output is paid back into workers and firms, etc.
European institutions and corporatism European integration e.g. EEC common market (1957), union representative board and centralised wage bargaining
Technological congruence in postwar EuropeEuropean corporatism helped technological congruence. Europe had good policies to adopt US technology post WWI e.g. market competition was low, education was now much higher in Europe + Europe was also aided by being quite far from the technological frontier
Marshall PlanUS grant aid of $13bn during 1948-51; US political goal was to bolster Europe in order to prevent the psread of communism; economic goal = rebuild infrastructure, remove trade barriers, modernise industry and increase output
Evaluation of Marshall PlanEurope did well but not necessarily due to Marshall Plan; Marshall plan = only 2% of GDP; long run success is mainly through promoting European integration; had indirect effects through post-war settlements and liberalisation pf payments and trade
Variance in growth ratesNot all countries performed as well as France and Western Germany in European Golden Age; not all countries optimised catch up potential e.g. Ireland should have outperformed West Germany based on initial conditions BUT West Germany more committed to corporatism, education. Ireland went though final of demographic transition very late (in the 60s)
Impact of GATT/WTOMain impact of GATT on OECD manufactures (which drove Golden Age growth); negotiation rules helped governments undo trade restrictions; equal expansion of exports and imports good; increase in Smithian specialisation; ruled based system, GATT offered contractual solution to PD problem; non-discrimination, reciprocity, tariffication of trade barriers (most efficient supplier will still be able to trade), violations deterred by credible retalation threat
Export growth between 1913-50 vs. 1950-19731913-1950 = 0.9% export growth vs. 7.9% in 1950-1973 = higher GDP growth
Consequences of GATTIncrease in European specialisation; Europe can use US technology factors; finds particular advantages in international trade and exploits them e.g. Germans in machine tools; under-pricing of currencies due to a lack of adjustment in the Bretton woods system helps promote European goods (fixed peg system not updated after WWII)