The Transformation of the World Economy

The world has undergone dramatic changes since the end of the 1970s. This book uses a broad brush to trace the economic transformation, in its political context, that has occurred in the three areas into which the globe is often divided for economic purposes: industrial countries, former centrally-planned economies now in transition, and developing countries. Actually, one of the significant changes has been a blurring of those very distinctions.

History is a continuum, but it contains nodal points — periods of outstanding and lasting significance. The years 1979–81 brought political changes that were to have substantial impacts on economic policies and developments in many countries and would begin to transform the world economy. This narrative therefore starts with the opening of a new decade — the 1980s — one that was to contrast starkly with the 1970s. In this chapter a wide-angled snapshot view is presented of how the three segments of the world economy looked in 1980.

The 1980s began with an external shock to most economies as the world price of oil rose by about 150 per cent. The years around 1980 also witnessed numerous changes in political leadership, as was noted in the previous chapter. Many, though not all, of the political shifts brought fundamental policy modifications. In some cases — Thatcher and Reagan especially — the new leaders were hedgehogs rather than foxes and acted to impose a new ideology that was closer to orthodoxy than what it replaced. In other cases the alteration in policies — also toward greater orthodoxy — came about through the force of circumstances and under the leadership of foxes like Mitterrand in France and Gonzalez in Spain. These are four selected examples from among the industrial countries. As our story unfolds we shall encounter other instances of striking shifts away from interventionist policies based on changes in economic philosophy — sometimes carried out by ideological hedgehogs and sometimes by pragmatic foxes.

This chapter and the following one trace developments — both macroeconomic and structural — in a number of major industrial countries from 1980 on. Chapter 6 will be devoted to the interactions among these economies. The purpose is not to review history comprehensively but to bring out major changes and to take note of the more lasting impacts — the legacies — of Margaret Thatcher, Ronald Reagan, François Mitterrand, and other national leaders. The initial focus is on the United States since it is the largest economy with the greatest impact on other countries.

Each in its own way, France, Germany and Japan have had to make substantial adjustments in economic policy and political orientation in the years since 1980. France shifted away from Mitterrand’s socialist electoral programme of 1981 towards the policies of Thatcher and Reagan. Germany had to adjust to the economic shock of unification and absorption of the former East Germany. Japan became a major capital exporter but in the late 1980s went on a speculative spree at home that gave way in the 1990s to its most severe recession since before the Second World War.

The 1980s and early 1990s saw a continuation of the trend toward growing international economic interdependence that has been evident since the end of the Second World War. One manifestation of this trend is the increase in world trade relative to world output. Even more striking was the augmentation of financial interdependence — a more recent phenomenon than the growth of trade. In the 1970s and especially in the 1980s international capital flows among industrial countries increased by large amounts. In the 1990s, such flows went also to developing countries and countries in transition — emerging markets.

At the end of the Second World War, the Soviet Union’s Red Army occupied the countries of Eastern and Central Europe (henceforth referred to as Eastern Europe). Stalinist regimes, both political and economic, were established in Albania, Bulgaria, Hungary, Poland and Romania, as well as in East Germany. In 1948 Czechoslovakia came under full Communist control but in the same year Yugoslavia, under Josip Broz Tito, broke with the Soviet Union and followed its own socialist road; in later years this included ‘self-management’ of enterprises and much less central planning than elsewhere in the region.

China’s experience with economic reform has been very different from that of the countries in transition. In fact, the IMF classifies China as a developing country, not one in transition. Politically China has not yet moved towards democracy. It remains a Communist one-party state. Its late ‘paramount leader’, Deng Xiaoping, spoke of his death as going to an appointment with Karl Marx. But his successor, Jiang Zemin, has used the term ‘socialist democracy’ and personal freedom appears to have increased somewhat.

The economic dynamism so evident in China was a feature of Hong Kong, South Korea, Singapore and Taiwan for many years. These four countries have been called ‘the four little dragons’ in Asia — China being the large dragon — and ‘the four tigers’ in the west. The dragon is a symbol of serene and prestigious power in Asia. The tiger, while also powerful, is regarded as less majestic and self-confident.

This chapter is concerned with a vast area running from the oil-rich Arabian peninsula with its sparse population through Egypt and its North African neighbours and on to the diverse but relatively underdeveloped countries of Sub-Saharan Africa. The term ‘Middle East’ does not denote a clearly defined geographical area. It sometimes refers to the entire region from Afghanistan to Mauritania, including Turkey. Other designations separate the so-called Maghreb countries: Algeria, Morocco, Tunisia and Libya; with Mauritania, they are also referred to as North Africa as distinct from the Middle East. Whatever the grouping, these countries are mostly Islamic and, except for Iran and Turkey, make up a large part of the Arab world.

The 1980s became known as ‘the lost decade’ in Latin America. For the region as a whole, GDP grew little more than 1 per cent per year compared with 6 per cent in the previous decade. As a result, per capita GDP fell by more than 10 per cent in the 1980s. There were few exceptions — Chile and Colombia among them — to this declining trend in real income. The recession of 1981–2 in the industrial countries and the debt crisis that erupted in the summer of 1982 had much to do with the sharp turnaround in the economic well-being of Latin America in the 1980s. But the 1990s saw substantial improvement as economic reforms were adopted, some debt relief was obtained and capital inflows increased greatly. The Mexican crisis of 1994–5 had a ‘tequila effect’ on a number of countries in the hemisphere. In 1997 and 1998, some nations in Latin America felt the effects of the ‘Asian flu’ — the financial and economic crisis in the East Asian countries — as capital inflows slackened. They tightened their monetary policies, thereby slowing their economies somewhat. Nevertheless, 1997 and the first half of 1998 saw the most favourable combination of relatively high growth and low inflation in many years.

To assert that the world looked very different in 1998 from what it was in 1980 is an understatement. Who would have predicted in 1980 that the Soviet Union would cease to exist, that Russia would be a democracy that has privatised many of its state-owned enterprises or that Eastern Europe would be liberated to pursue democracy and free markets? Or that regions of China would become thriving market economies growing at a breathtaking pace? Or that the two Germanies would be unified and the process would create serious economic problems for western Germany? Or that François Mitterrand, after winning the presidency on a socialist platform would later in the 1980s be presiding over an economy hardly more socialist than its neighbours and having a strong currency and at times a lower inflation rate than Germany? Or that Mexico would abandon its import substitution policies, open its economy to the rest of the world and have shares in some of its privatised companies traded on the New York Stock Exchange along with those of many other ‘emerging markets’? Or that India would rid itself of many of its tight controls over its industries and, despite memories of the East India Company, open itself to foreign investors? Or that Korea, already a ‘newly industrialised country’ in 1980, would achieve such a high level of real wages that some of its firms would migrate to China and Vietnam, attracted by lower wages?