Please enable JavaScript.
Coggle requires JavaScript to display documents.
Econ growth outline of course - Coggle Diagram
Econ growth outline of course
Intro
post WWII period
we start comparing after late 1940s
reasons for 1970s slowdown
1973 crisis
1973 oil price shock
Exogenous political event that put global economy under stress
Breakdown of Bretton woods system
inflation increased
decreased investment rates
floating international monetary system
Stagflation
high inflation low growth
Breakdown of the reasons what caused golden age
catch-up potential slowed down
but USA was still leader due to natural resources and consumer demand
Breakdown of social contract
end of structural change
imposing barriers of trade due to poor economic conditions
Golden Age 1950-1973
Growth rate of GDP per capita is the main view of success
highest number 1950-1973 for Western Europe. 4.1% growth
high growth rates globally but western europe stood out
most enjoyed full employment, low inflation
Trade
Trade grows faster than output
Intra-European trade grows faster than world trade
Capital controls
widespread use of capital controls, countries could block inflow and outflow of capital
TFP almost all countries enjoyed a massive increase in this
What caused the Golden Age?
1. Catch up and social capabilities
countries economically behind have larger scope to grow
to realise the potential you need the social capabilities
region that did best: Western Europe - golden age
what capabilities did they have?
Argument: USA and Europe huge gap
Europe had massive room to grow by adopting their better technology and human capital
Why was USA ahead? Mass production and larger market
Openness
How to compare growth?
TFP (technology), labour force, capital stock
2. Structural change - Temin
Argument: growth is due to shifting labour force from agriculture to industry
rebuttal: how do you bring people from agriculture to industry?
3. Institutions - Olson, Eichengreen
Main theory: Collective action
Eichengreen - social contract
how did European societies maintain high investment rates?
to have high investment, it means high saving so wages cannot increase
Wage restraints
cooperation between workers and employers was crucial
why did the contract break down in late 60s?
growth slowed down so future gains looked increasingly small
Rebuttal: you need catch up potential to encourage the needed cooperation. relies on catch up potential theory
think: the two theories work together and then break down together later on
The International Framework
comparing WWII to WWI
US no more isolationism
Cold war
Support for Europe
Military, foundation of NATO
political and economic
Aim: create global structures and help European integration efforts
create a bloc against soviet union
Argument: Catch-up growth requires supportive international framework
Bretton Woods System: 1944-1973
Aim: re establish fixed exchange rates focused on US dollar
created 3 institutions
IMF
Aim: help fixed exchange rates work and run the system
Avoid unilateral devaulations
How? IMF would make loans with specific conditions. help overcome balance problems
Rebuttal: Macroeconomic trilemma
World Bank
GATT predecessor to WTO
Argument
: Not a system meant to last forever, it did its job at aiding recovery and broke down when it needed to
why did it do well?
lots of economic growth and when this slowed down, then it ran into problems
GATT: recovery of trade
aim: return to a low tariff environment, create a common market
problems: many interested parties
trade negotiations: hope that both countries choose free trade
European Framework
Outline
Why did Britain not join in 1958?
Trade integration
Are the reasons for integration political or economic?
in Britain, the view is that it is economically beneficial but not politically
European Union
example of economic integration
customs union instead of free trade area
trade
free movement of factors of production
common currency - Euro
indicator of exchange rates
aim: regional convergence of living standards
rebuttal: misguided goal and might not be beneficial for some key members
institutions to enforce the law
cons: over-representation of small countries
one country one vote
Euro
after achieving agreed economic conditions, countries had to join
Integration in late 20th century
overlap in economic and political factors
multilateral treaties used to stop trade wars
1950s political reasons
prevent another war, especially including Germany
European community of steel and coal
major components of war effort
everyone benefitted and had their own reasons
italy and germany wanted re integration after WWII
soviet communism
create a bloc against Soviet Union, strength in numbers
spread of democracy and capitalism
why did Britain not join in 1958
British empire
Argument: Belief of keeping the empire
1956 Suez Crisis
common agricultural policy
argument: agriculture had little importance in UK
no desire to export agricultural goods
trade
Argument: little trade with European countries. exports to EU-6 only 23% of GDP
Argument: learning from resistance
Milward: absent political motivations and more driven economically
EU is a commitment mechanism
Economic reasons
multilateral system needed to restore free trade
create a market for importers and exporters
argument
: economic reasons initially were stronger, later on political reasons came through
E.g. increased trade integration led UK and Denmark to want to join
Argument: US wanted intra European trade to establish so they could all grow.
US was too ahead
Trade Integration
regional integration
small number of countries dominate world trade
argument
: this is the most important policy of EU
Result: 1970s: protectionist policy through raising tariffs was prohibited
1987: Single European Act "Britain's finest hour in Europe". Removal of non-tariff barriers; free movement of capital
Britain pushed this the most
1992: completion of common market
Argument
: this worked very well
EU-6 increased intra-trade compared to Denmark and UK
they wanted to join after seeing economic success
Argument: EU would lead to trade diversion. this is bad
rebuttal:
strong trade creating effects overwhelm any trade diversion
Two trade theories: Old trade (Ricardo) and old theory (Krugman)
State Socialist experience 1950-89/91
Q: How successful was the experience?
idea: in 1989, Eastern Europe was going to catch up quickly - convergence
Q:
Is there a wealth and income gap between east and west europe?
yes, it was thought it would disappear but further east, it is more apparent
Argument
: similar starting points before communism
Rebuttal: no, Eastern Europe started off on a lower level in 1945
Rebuttal: Hajnal line - curtains before the iron curtain
big separation between east and west
Q: what factors describe the east vs west diffefrence?
Regions
7 east european countries
4 central european countries
11 south east european countries
Economic performance
argument: Long-run difference in GDP between East and West
Britain and Germany as benchmarks. Argument: periods of convergence and divergence in GDP per capita
Argument: no clear evidence of long-run convergence with western europe
Argument: regional difference must be considered
Argument
Western core Vs east had similar performance in terms of growth rates. 1950s - 1980s
rebuttal: it is easier for poorer countries to have quick growth
western periphery vs CESEE. periphery grew much faster
Convergence Hypothesis
west vs east
similar behaviour but at a lower level
argument: socialism allowed the countries to perform well comparatively with their own pasts but not the west
west - higher growth
What was communism good at?
Coercive nature
structural change
Q: are communist countries better at reallocating labour from agriculture to industry?
communist countries can do it faster with a planner
Argument: structural change did not go far enough
proof: agricultural share of total labour force gap between western periphery and east was larger in 1989.
argument: many grew rich without structural change early 1900s
Rebuttal: countries that do not transform will hit a wall in the long run
enabling fixed capital formation
Argument: crucial for economic growth
a planner will be able to push it more strongly
extensive growth: growth due to higher inputs
communism better at this
Argument: 2 decades after WWII were extensive growth, hence the growth in the east
intensive growth: due to increased technology or TFP
intensive growth sets in when extensive growth diminishes
Q: was communism good at increasing capital?
proof: investment to GDP ratio
initially, yes
collapses later on
argument: issues of legitimacy
2 more items...
Argument: resources went from investment to consumption
1 more item...
political commitment and aims
equality
income inequality
argument: it was a key goal for communist countries
proof: Gini coefficients. other countries started off higher and ended up better off in 1990s
health and human capital formation
argument: we want to look at living standards
life expectancy. soviet union vs southern europe they did badly
proof: similar starting age, 1955, 7 year gap by 1990
income inequality
Keynes and the macro economy
scene: this is the equivalent to socialism but in Western Europe
Think: 50s and 60s as Keynesianism and 80s and 90s as monetarism and 70s as the transition period
background
Main ideas
full employment through state intervention
control inflation through micro-economic policy
free market economy is not certain to eliminate mass unemployment
worked for the government, resigned after WWI
not happy with the reparations forced on germany
The new macroeconomics
Argument: before WWI macroeconomics was not needed as the world was performing well
hard times led to its emergence
concepts introduced: savings, investment & consumption
Unemployment
argument: Keynes used this as proof that classical theory was wrong
the long run does not impact people's current needs
Argument: excess labour leads to decrease in real wages
rebuttal: this did not happen, due to unions preventing falling wages
Argument: Interwar period lead to the first levels of mass unemployment ever seen
UK had poor recovery post WWI in terms of employment and GDP per capita
The problems of capitalism
institutional economics of 1910 and 20s
Keynes was neither capitalist or left wing. he wanted to save capitalism from undermining itself
Keynes aim was to re structure 1920s and 1930s
Post WWII British gov.
50s and 60s targets
full employment
tackled through demand management
economic growth
price and wage stability
income policies to keep them down
modest balance of payments surplus
Keyne's work was liked in US - Samuelson
Argument: Keynes ideas were toor 'radical' and had to be fine tuned to fit the current economic climate
AD management
The Phillip's curve
price increases and changes in unemployment
1860 to 1960 British government was in gold standard
Argument: Lucas' critique - exploiting a trade off causes it to break down. in this case, increasing inflation would have no effect on unemployment
broke down in the 70s
Keynes impact in Europe
Argument: more important for Britain than international scale
Argument: never had a strong golden age. so government intervention was more tempting
Argument: other countries were not impacted as much
rebuttal: policy mix was more eclectic with cherry picking
they had high growth so no need for demand stabilisation
Argument: 1970s is where it took off
oil price shock, rise in unemployment
Argument: expansionary policy was tempting to boost the economy but led to high inflation
Argument: short lived due to 80s where expansionary policies were reigned in
The Decline of Keynesianism
came to an end in the 70s
Britain's scene
70s and 80s were known for strikes and changes to industrial landscape
Argument: structural change was due to the industries no longer being competitive
Q: how does this relate to Keynesianism's fall?
1970s crisis in Britain
Argument: data contradicted Keynesianism. through the breakdown of the Phillips curve
increased inflation to try to boost economic growth
STAGFLATION
Argument: oil price shock undermined Keynesianism as inflation rose
Argument: 1973-76 reckless use of Keynesianism
no longer 'spend your way out of recession'
Conservative party win 1979 election
Friedman and the NAIRU
criticiser of Keynesianism
his views; natural rate of unemployment that with Keynesianism cannot be beaten, theory of quantity of money
Argument: Phillips curve only worked in the short run. in the long run unemployment would not go down
Argument: supply side reforms will bring down unemployment, by making labour market more flexible
Monetarism: control money supply to eliminate inflation
Monetarism in Britain
Aim: weaken trade unions, but how?
limiting secondary picketing - companies indirectly affected by the strike
Thatcher wanted to stop the multiplier effect of this
What did they do?
privatize nationalised industries
Argument: nationalised industries are often less efficient and competitive
cut unemployment benefits and marginal tax rates
MTFS through pre announced monetary targets
What was the impact?
Macroeconomic level
Argument: comparatively, UK actual GDP beat the EU 15 between 1980-2000
Argument: macro-economically, 1979-1991, successful years of economic development
Inflation
Argument: not as impressive as growth and employment
Rebuttal: the main focus was not inflation so performing poorly here was not a failure
comparatively, they did not improve
Argument: there was no other option left but to let go of the manufacturing industry and develop the services sector
Unemployment
Argument: this was the benchmark to rate the government's success
decreased in the late 1980s
Initially, shutting down unproductive companies increased unemployment
Argument: high number of people on disability benefits, the numbers may not be accurate representation
Undermining power of trade unions
argument: the unions went from being the strongest in the world to some of the weakest
Union recognition went down
The Transition Economies since the 1990s
Q: How successful has the transition been?
Argument: more should and could have been achieved
Q: What do we mean by transition?
political - change to liberal democracy
geopolitical - for some, joining the EU and Nato would complete their transition
Economic - command to market economy
Q: why are these states not emerging economies?
They are not called this because they do not share similar characteristics with developing/emerging countries e.g. they are industrialised
Argument: Western half of eastern Europe did considerably better than the other half
Was there convergence or divergence with Western Europe?
Argument: no clear evidence of long-run convergence
Central Europe tends to perform better
More wealthy CESEE countries
3 Baltic countries, Czech republic, Slovenia
Argument: economic geography forces played little role as the peripheral countries entered and exited socialism very strongly
Joined the EU 2004 apart from Czech republic
higher economic complexity
How was political and economic integration during this period?
Trade liberalisation
the losers: old industries e.g. steel production, could not compete in terms of price and quality
Argument: must take into account age brackets and industries to see the winners and losers
Argument: Ukraine did not want to open up as it was still competitive with Russia
Financial opening
investment was concentrated on the Visegrad countries
Argument: the winners were picked and made, some benefitted more than others
Institutional integration
international organisations
half of eastern european countries have joined EU
reluctance to accept some such as Ukraine and Belarus
Movement of people
opposite flow to capital flow
Russia becomes a main destination for migrants
Q: is this beneficial for the emigration country?
remittances for some such as Albania are beneficial
rebuttal: loss of population is a negative effect
Divergence within Eastern Europe
proof: annual GDP growth
Argument: difficult period in 1990s, transitional recession
CIS-4 do not stabilise in the 1990s and only begin to do so after 2000
Integration pathways
commodity-rich countries
economies built around the extraction and export of these commodities
owners of companies have say in political markets
easy market access
Central european countries
visegrad countries
quickly integrated with western countries due to geographical location
radical reformers
Baltic and Estonia
slightly worse market access but compensate by pursuing stronger reforms
provide better economic conditions to make up for weaker market access. e.g. Estonia through I.T. distance matters less
remaining countries
export workforce or labour intensive products
large population decline
remittances play large role in their economy
EU's role
did they pick winners?
endorses potential winners more strongly
closest to west have better starting positions, e.g. Visegrad countries
Members benefitted
they have small populations which played to their benefit as they would have little say
Rebuttal: Belarus was an example that was not a member but still caught up