Rebuilding a World Economy: The Post-war Era

•Axis powers (mainly Nazi Germany, Japan and Italy)

•The Allies (Britain, France, the Soviet Union and the US).
•It was a war waged for six years on many fronts, in many places,
over land, on sea, in the air.
•At least 60 million people, or about 3 per cent of the world’s
1939 population, are believed to have been killed, directly or
indirectly, as a result of the war. Millions more were injured.
•Unlike in earlier wars, most of these deaths took place outside the
battlefields. Many more civilians than soldiers died from war-
related causes. Vast parts of Europe and Asia were devastated, and
several cities were destroyed by aerial bombardment or relentless
artillery attacks.
Two crucial 1) US’s emergence as the dominant economic,
political and military power in the Western world.
influences
shaped post-
war
reconstructio
2) the dominance of the Soviet Union. It had made
n. huge sacrifices to defeat Nazi Germany and
transformed itself from a backward agricultural
country into a world power during the very years
when the capitalist world was trapped in the Great
Depression.
 Economists and politicians drew two key
lessons from inter-war economic experiences.
• 1) An industrial society based on mass production
cannot be sustained without mass consumption. But
to ensure mass consumption, there was a need for
high and stable incomes. Incomes could not be
stable if employment was unstable. Thus, stable
incomes also required steady, full employment. But
markets alone could not guarantee full employment.
Therefore, governments would have to step in to
minimise fluctuations of price, output and
employment. Economic stability could be ensured
only through the intervention of the government.
• The second lesson related to a country’s
economic links with the outside world. The
goal of full employment could only be
achieved if governments had power to
control flows of goods, capital and labour.
 The main aim of the post-war international economic system
was to preserve economic stability and full employment in the
industrial world.

Bretton Its framework was agreed upon at the United Nations Monetary
and Financial Conference held in July 1944 at Bretton Woods in
Wood New Hampshire, USA.
System The Bretton Woods conference established the International
Monetary Fund (IMF) to deal with external surpluses and
deficits of its member nations.

The International Bank for Reconstruction and Development

(popularly known as the World Bank) was set up to finance
postwar reconstruction.
 The IMF and the World Bank are referred to as the Bretton Woods
institutions or sometimes the Bretton Woods twins. The post-war
international economic system is also often described as the
Bretton Woods system.

The IMF and the World Bank started financial operations in 1947.
Decision-making in these institutions is controlled by the Western
industrial powers. The US has an effective right of veto over key
IMF and the IMF and World Bank decisions.

World Bank The international monetary system is the system linking national
currencies and monetary system. The Bretton Woods system was
based on fixed exchange rates.

In this system, national currencies, for example the Indian rupee,

were pegged to the dollar at a fixed exchange rate. The dollar
itself was anchored to gold at a fixed price of $35 per ounce of
gold.
 The Bretton Woods system inaugurated an era of unprecedented
growth of trade and incomes for the Western industrial nations
and Japan.

World trade grew annually at over 8 per cent between 1950 and
The Early 1970 and incomes at nearly 5 per cent. The growth was also
mostly stable, without large fluctuations.
Post-war
Years For much of this period the unemployment rate, for example,
averaged less than 5 per cent in most industrial countries.

These decades also saw the worldwide spread of technology and

enterprise.
Decolonization and Independence

The decolonised countries were overburdened by poverty and a lack

of resources, and their economies and societies were handicapped by
long periods of colonial rule.

The IMF and the World Bank were designed to meet the financial
needs of the industrial countries. They were not equipped to cope
with the challenge of poverty and lack of development in the
former colonies.

•But as Europe and Japan rapidly rebuilt their economies, they

grew less dependent on the IMF and the World Bank. Thus from
the late 1950s the Bretton Woods institutions began to shift their
attention more towards developing countries.
 Newly independent countries facing urgent pressures to
lift their populations out of poverty, they came under the
guidance of international agencies dominated by the
former colonial powers.

Control over Even after many years of decolonisation, the former

decolonised colonial powers still controlled vital resources such as
minerals and land in many of their former colonies.
countries
Large corporations of other powerful countries, for
example the US, also often managed to secure rights to
exploit developing countries’ natural resources very
cheaply.
New International Economic Order (NIEO)
• Most developing countries did not benefit from the fast growth
the Western economies experienced in the 1950s and 1960s.
• They organised themselves as a group – the Group of 77 (or G-
77) – to demand a new international economic order (NIEO).
• The Group of 77 (G-77) was established on 15 June 1964 by 77
developing countries signatories of the “Joint Declaration of the
Seventy-Seven Developing Countries” issued at the end of the
first session of the United Nations Conference on Trade and
Development (UNCTAD) in Geneva.
• By the NIEO they meant a system that would give them real
control over their natural resources, more development
assistance, fairer prices for raw materials, and better access for
their manufactured goods in developed countries’ markets.
 From the 1960s the rising costs of its overseas
involvements weakened the US’s finances and
competitive strength.

The US dollar now no longer commanded

confidence as the world’s principal currency. It
could not maintain its value in relation to gold.

End of This eventually led to the collapse of the system

Bretton of fixed exchange rates and the introduction of a
system of floating exchange rates.
Woods
Define the following
• Exchange rates – They link national currencies for
purposes of international trade. There are broadly
two kinds of exchange rates: fixed exchange rate and
floating exchange rate.
• Fixed exchange rates – When exchange rates are
fixed, and governments intervene to prevent
movements in them.
• Flexible or floating exchange rates – These rates
fluctuate depending on demand and supply of
currencies in foreign exchange markets, in principle
without interference by governments.
 From the mid-1970s the international financial system also
changed in important ways. Earlier, developing countries could
turn to international institutions for loans and development
assistance.

Beginning of But now they were forced to borrow from Western commercial
banks and private lending institutions. This led to periodic debt
Globalisation crises in the developing world, and lower incomes and increased
poverty, especially in Africa and Latin America.

The industrial world was also hit by unemployment that began

rising from the mid-1970s and remained high until the early
1990s. From the late 1970s MNCs also began to shift production
operations to low-wage Asian countries.
Globalisation
• China had been cut off from the post-war world
economy since its revolution in 1949. But new economic
policies in China and the collapse of the Soviet Union
and Soviet-style communism in Eastern Europe brought
many countries back into the fold of the world economy.
• •Wages were relatively low in countries like China.
Thus, they became attractive destinations for investment
by foreign MNCs competing to capture world markets.
• In the last two decades the world’s economic geography
has been transformed as countries such as India, China
and Brazil have undergone rapid economic
transformation.
Questions
2. Briefly explain the two
4. Explain the role of
1. List out the members of key lessons which 3. What were the two
Bretton Woods institutions
two power blocs in economists and politicians crucial influences shaped
in post- Second World
Second World War. drew out from interwar post- war reconstruction?
War settlement.
economic experience.

8. China became an
5. Why did most 7. Describe the factors
attractive destination for
developing countries 6. Define Fixed exchange that led to the end of
investment by foreign
organise themselves into rate and floating exchange Bretton Woods system and
MNCs in the 19th and
the Group of 77 during rate. the beginning of
20th centuries`. Justify the
1960s. globalisation.
statement.