2. Economic policy in the modern time
2.1. Economic trends aft er 1945
ECONOMIC POLICY IN THE MODERN TIME
2.1. Economic trends after 1945
In the history of both North American and European developed economies 1945–
1971 was among the most prosperous periods1 (Table 2.1). It made history as the Golden Age of Capitalism [Marglin & Schor 1990]. Th e world economy of that time was strongly infl uenced by American global leadership, politics and inno-vativeness. As a result of the then favorable objective conditions of supply and demand (post-war reconstruction, progress in organization and technology, high supply of qualifi ed labor force, etc.), and the stability of the Bretton Woods sys-tem, the American and European economies were growing at a fast and relative-ly stable rate (Table 2.1). Th e period was furthermore characterized by relatively low infl ation. Countries largely fi nanced private investments and public sector borrowing requirements from domestic savings; there were relatively minor in-ternational capital fl ows.2 Th is era symbolically ended fi rst with the temporary suspension of the dollar’s peg to gold (August 1971) and then with the systemic departure of developed countries from the fi xed exchange rate system (March 1973) [Eichengreen 2007, p. 30].
Th e seventies and early eighties of the twentieth century were characterized by supply shocks and demand disruptions which completely changed the mac-ro- and microeconomic environment of designing and implementing economic policy. Th e growth rate signifi cantly decreased and its volatility increased (Ta-ble 2.1). Also, the level and volatility of infl ation rose rapidly. High infl ation was followed by growing unemployment. Th is situation gave rise to reassessment in the theory of economic policy and changes in the area of systemic solutions, in-cluding both qualitative policy and quantitative policy.3
1 In this Chapter I draw on and develop my earlier work: [Kowalski 2001, 2009a, 2012].
2 In this period most countries imposed constraints on capital fl ow.
3 Quantitative economic policy involves introducing changes to numerical values of fi scal or monetary policy instruments in given institutional conditions. Qualitative economic policy denotes designing and implementing changes in institutional conditions, such as liberalisation
Th e 1980s were characterized by diversifi ed global economic conditions. In the case of the USA and Europe these included still low GDP growth rates but with a reduced infl ation rate (Table 2.1). Th e situation was particularly diffi cult in Europe; the 1980s came to be called as the time of eurosclerosis [Olson 1996].
Since the 1970s Europe 15 continued to have a declining and lower than the US GDP growth rate. Moreover, except for the 2009–2011 sub-period, it used to have a higher or similar relative growth rate volatility as measured by its standard de-viation (Table 2.1). During the last twenty years the European average infl ation rate (except for 1992–2000) was less volatile and lower (except for 2009–2011) than the US (Table 2.1).
Th e mid 1980s witnessed the beginning of a new turbulent stage of globaliza-tion (see Chapter 1). It was also the time of a decrease in the potential and actual growth rates of Central and East European Countries. Apparently, they were un-able, within their economic governance and limited international links, to cope with global economy challenges and, as well, unable to meet their consumers’
aspirations (see Chapter 4).
Th e 1960–1990s in the global economy was distinguished by the growing im-portance of trade exposure (Figure 2.1). Aft er 1972, with minor breaks, the share
of entry rules, or statutory decisions ensuring political and functional independence of central banks. Th e terms were introduced by J. Tinbergen [cf.: Tinbergen 1955]. See Section 2.2.2.
Table 2.1. Rate of growth and infl ation in the USA and European Union countries in 1951–2011
Average growth rate 3.4 4.2 3.3 3.2 3.8 2.4 1.6 0.4
Standard deviation 2.9 2.0 2.5 2.2 0.7 0.8 2.0 2.8
Infl ation
Average rate 2.1 2.8 7.9 2.6 2.6 2.7 2.4 1.5
Standard deviation 2.3 1.7 3.1 0.5 0.5 0.6 1.1 1.4
European Union countries (EU 15) Real GDP growth
Average growth rate 4.8 4.8 3.0 2.4 2.3 2.1 1.3 –0.3
Standard deviation 1.4 0.9 1.7 1.2 1.2 0.7 2.1 2.9
Infl ation
Average rate 3.6 3.9 10.8 6.7 2.4 2.1 2.1 1.9
Standard deviation 3.0 0.8 2.8 2.9 0.9 0.1 0.6 1.0
Source: [Eichengreen 2007, p. 30] and author’s calculations for 1992–2011.
of exports of goods and services in the world Gross Domestic Product (GDP), displayed an upward trend. Th is trend continued in the 2000s (Figure 2.1). It was however, halted by the global recession; in 2008 export exposure reached the highest point of 29.6% of global GDP and then fell by 4.0 percentage points in 2009 – the highest one-year drop in the post WWII era. In 2012 the share of goods and services exports in the global GDP recovered and reached a level of over 30%. Th e American economy was the fundamental source of global demand, but gradually the signifi cance of other countries and regions increased, including the European Community, particularly Germany, and further afi eld Japan in Asia.
Th e 1990s and the early 2000s were characterized, especially in the USA, by high and relatively stable growth rate.4 Th e fi rst decade of the 21st century featured the longest economic growth phase in history, lasting 120 months (Table 2.2).
Positive economic trends, especially in fi ghting infl ation, occurred in Europe.5
4 As shown in Table 2, in the post-war period in the USA, an average contraction phase lasted 10.8 months, and average expansion lasted over 60 months. It should be emphasised that the amplitude of fl uctuations of the post-war cycles was incomparably lower than before 1945.
5 In the 1990s, aft er the phase of rapid growth in 1960–1980, Japan faced structural bar-riers. In consequence, its economy fell into secular stagnation which lasted until the 2000s.
Figure 2.1. Share of exports of goods and services in global GDP in 1960–2012 (in %) Note:“Exports of goods and services represent the value of all goods and other market services provi-ded to the rest of the world. Th ey include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, fi nancial, information, business, personal, and government services. Th ey exclude compensation of employees and investment income (formerly called factor services) and transfer payments”; WDI Data Base. Th e 2012 trade expo-sure is estimated.
Source: World Development Indicators Database 10
15 20 25 30
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Since the mid-1980s, the processes of economic globalization and region-alization have picked up pace (see Chapter 1). Countries successively followed the liberal reforms introduced in the United Kingdom. An important role in promoting the liberal model of economic and systemic solutions was played by the International Monetary Fund (IMF) [Kowalik 2002, p. 276 et seq.; Findlay
& O’Rourke 2007, p. 496 et seq.]. Th ese parallel trends led to the rise in the im-portance of trade (Figure 2.1) and capital fl ows, and in the regional dimension – deepening of European integration and implementation of the decision to build a single European market [Hitiris 2003, pp. 63–83; Pelkmans 2006, pp. 79–99].
Th e direction and pace of European integration inspired and infl uenced the pro-cesses of regionalization in other parts of the world [Frenkel 1998; Gilpin 2000, p. 193 et seq.; Geyer 2006].
Economic globalization accelerated even further aft er the end of the Cold War in 1989, taking over, with all economic, social, and political implications, the countries of Central and Eastern Europe. Literature on the subject refers to this period as the Second Great Age of Capitalism [see Gilpin 2000, p. 15]. Th e peri-od before mid-2007 was extremely advantageous for the global economy. World GDP in fact grew faster than the world’s population. One of the major structural features of the economy was the increase in capital fl ows and global trade, sig-nifi cantly higher than output growth. Th e development of trade, both world-Th e outbreak of the Asian crisis in 1997 was an important global event [cf.: Kowalski 1999;
Eichengreen 2011]. See Chapter 1.
Table 2.2. Business cycles and length of expansion and contraction phases (in months) in the USA aft er 1945
Business cycle turning points Length (in months)
peak bottom contraction phase expansion phase
1945 (February) 1945 (October) 8 80
1948 (November) 1949 (October) 11 37
1953 (July) 1954 (May) 10 45
1957 (August) 1958 (April) 8 39
1960 (April) 1961 (February) 10 24
1969 (December) 1970 (November) 11 106
1973 (November) 1975 (March) 16 36
1980 (January) 1980 (July) 6 58
1981 (July) 1982 (November) 16 12
1990 (July) 1991 (March) 8 92
2001 (March) 2001 (November) 8 120
2007 (December) 2009 (June) 18 73
Source: own compilation based on US business cycle expansions and contractions, NBER.
wide and within regional integration groupings6, allowed for a better allocation of resources and an increase in production factors productivity. Th e expansion of trade relations was possible due to consecutive rounds of trade liberalization within the General Agreement on Tariff s and Trade (GATT), then the founda-tion of the World Trade Organizafounda-tion (WTO) in 1995, and fi nally admission of the People’s Republic of China to this organization in 2001. China’s full-fl edged entrance to world trade has signifi cantly modifi ed ongoing macroeconomic pro-cesses.7 Th is major structural shift was accompanied by the diminishing capacity of democratic national states to effi ciently infl uence the direction and course of autonomous market adjustments [Sweeney 2005; Castles 2007]. In fact, it forced governments to accept their reduced impact on the course of domestic econo-mies and led to changes in practice of national economic policy making. At the mezzo and micro levels the liberalized context of capital fl ows and goods facili-tated deepening of specialization and fast development of intra-industry trade.
Technological development in IT contributed to reduction of the scope of non-tradable goods and services and paved the way to further fragmentation of sup-ply chains and thus to trade in tasks.