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Why did the Golden Age happen?

Political Climate of the Cold War that made the US willing to bring about the Golden Age The political climate of the Cold War made the US willing to bring about the Golden Age for the entire world rather than just narrowly focus on its growth. While aggressive expansion was clearly in the minds of American policy makes as soon as the war was over, it was the Cold War that encouraged them to take the longer view by persuading them that helping their future competitors to grow rapidly was possible was politically urgent. e The Cold War was the major engine of the great global boomf (Walker 1993)

(Shows the willingness of the US to lead as well as the willingness of Western Europe and Japan to follow for as long as CW was a factor) Role of the US Economic Strength

Relative strength of the US can be seen though merchant marine figures and productive capability before and after WWII The US controlled a substantial quality of the capital stock between 1950 -1970. Even though percentage of the capital stock controlled by the US stripped from 60% to 50%, the US still controlled half of the stock at the peak of the Golden Age in a 1970 The US produced almost half the worldd s total in 1946, compared with only 32 % in 1936-1938, while containing only 6% of the world population. Her mercantile rose from 17% of the worldd s tonnage in 1939 to 53% in 1947. Eric Hosbawn states that the e global system was stabilized by the hegemony or centrality of USA economy and dollarf Role of International Organizations In the initial stages, the IOs did not play a very significant role as they were inadequate for task. They had insufficient resources to provide for Europed s reconstruction needs. IMF 8.8 billion in reserves were insufficient to deal with huge needs. IMF could only make loans only to current account deficits and not for reconstruction needs. Only 570 million was available in World Bank. US gave financial assistance, $3 billion in relief funds and more importantly, $3.75 billion to Great Bri tain, which was expected to enable Britain to complete its reconstruction and return to pound convertibility. By 1947, the IMF and World Bank admitted that they were unable to manage the world economy. This prove that International Organizations to be ina dequate to the task of rebuilding the world economy in the immediate aftermath of WWII. US have to step in and thus US played a central role. After 1947, it evolved from the limited management by IOs to management by the US Fixed Exchange Rates aka the Bretton Woods System The stability of the BW system was dependent on the role of the US to unilaterally manage the system. The hegemonic position occupied by the US allowed this. The system was dependent on the ability of the US to exchange its dollar directly to gold. Gold reserves rate of exchange US$35 to 1 ounce of gold. In a sense, the recovery of Western Europe undermined the BW system throughout the loss of the US dominance, which the entire system was predicated. This provides stability and which in turn is good for trade and by extension the Global economy.

Low Cost of Raw Materials

Industrialized countries were able to cope well with the oil crisis of 1973 and 1979 -1980. There was a mini boom in 1973 and although real GDP growth of the leading industrialized countries fell from 8% in the first half of 1973 to 3% in the second half, growth is still positive. With oil being cheap, cost of production reduced, enabling developing countries to progress in terms of economic growth especially in the industrial developments. Additionally, reason why oil was cheap was because the Western companies that cooperated were able to negotiate good deals with the newly independent countries who were still dependent on the expertise the companies could offer them. The importance can be seen especially during oil crisis in 1973 when it was seen as one of the reasons for the decline of the GE since the price of crude oil went up 5 folds in dollar terms from an index of 146.3 in 1972 to 752.1 in 1974. Recovery of Western Europe and Japan Europe and Japan had intrinsic advantages too that lead to their reco very and the subsequent Golden Age. The infrastructures suck as roads, bridges or power lines, was still in place. Although badly damaged, they merely require to be repaired. Most importantly, there were skilled and knowledgeable people, workers and techni ians used to industrial and social c discipline, who could be mobilized fairly quickly to start production again. Europe recovered because it has intrinsic advantages while Latin America did not grow phenomenally in the 1960s when supplied with the monetary aid from the US. US help came in the form of machines, raw materials and food from undamaged countries such as the USA and Canada and some of it provided were free or against long term payment. American defense spending on the Korean War and Vietnam war corresponded to the doubling of the Japanese manufacturing output between 1949 -1953 and 1966-1970.

Why did the Global Economy decline?


Oil crisis and debt crisis The OPEC oil price burst onto the scene in 1973 and in 1979 -1980. A cut in output allowed the oil-producing countries to face the price of crude oil up to 5-fold in dollar terms from an index of 146.3 in 1972 to 752.1 in 1974. There was also a 17 fold increase in nine years.

Consequently, $64 billion worth of additional money flowed into the coffers of oil states in the very first year. While the OECD countries balance of payments deteriorated by $37 billion, much of the rest of the burden had to be carried by the Worldd s poorest countries. Total outstanding debt of the developing countries increased inexorably from $636 billion in 1980 to $1017 billion in 1985, to jump further, after a brief halt, to $1601 billion in 1993. Role of the oil crisis was it exacerbated the conditions surrounding the end of the Golden Age rather than playing a fundamental role. Although there is still growth, real GDP growth of the industrialized countries slumped to a rate of 8% in the first half of 1973 to one of 3% in the second half. The oil crisis this marked the end of the Keynesian economics as a governmental tool for managing national economies, a trend that had served the countries for some thirty years since the end of WWII. The US The Golden Age was dependent on the BW system and that in turn was dependent on American capability in maintaining it. US still had a gap over Europe and Japan, although the US lost some ground in the 1950s and the 1960s, when GNP of most European countries grew at 5-6% a year, and that of Japan rose much faster, compared with the 3-4% range of the US. In the 1980s and 1990s growth elsewhere slowed down. The US acted as a locomotive of the global economy, a role which the West Germans and Japanese refused to take over. Japan and West Germany did not spend the surpluses they accumulated and thus did not stimulate the global economy further. US spending could not continue at the rat it did as the US was spending beyond its mean. The Golden Age was dependent largely on US spending. Collapse of the BW System One change was the development of high levels of financial integration. Financial interdependence increased with the Western European currencies and the Japanese Yen achieving convertibility by 1958 and 1961. This in turn increased the size of international financial flows. This was achieved by MNCs. For example, by 1974, 125 banks have branches abroad. Immediate aftermath: The Smithsonian agreement settled the new exchange rates and a 10% devaluation of the gold price of the dollar. The floating band was also adjusted upward from 1% to 2.5%. However, this does not solve the fundamental problem of the US deficits, which led to the collapse of the BW system. The failure of the of the Smithsonian agreement can be seen from another run on the dollar in early 1973 when the removal of price and wage controls led to higher US inflation. The Smithsonian agreement represents the fundamental imbalance in the fixed exchange rate system after 1971. Despite a 10% devaluation of the US dollar and the delinking of the US dollar from gold, this replacement of the BW system lasted only a little longer than a year. This can be seen from the system imploding in March 1973 even before the oil crisis happening in October of the same year. Represents the decline in the US reliable position. While still the worldd s strongest economy in 1971, it no longer occupied the hegemonic position it once enjoyed in the period since 1945. Smithsonian agreement supposed to act as salvation but the US dollar was far too weak. Cold War Climate Dtente- Western Europe and Japan were more critical of US financial policy now that they no longer saw the Soviet threat as dire.

Why did the US dominate the Global economy?


Productive capability The US controlled a substantial quality of the capital stock between 1950-1970. Even though percentage of the capital stock controlled by the US stripped from 60% to 50%, the US still controlled half of the stock at the peak of the Golden Age in a 1970 The US produced almost half the worldd s total in 1946, compared with only 32 % in 1936-1938, while containing only 6% of the world population. Her mercantile rose from 17% of the worldd s tonnage in 1939 to 53% in 1947. Eric Hosbawn states that the e global system was stabilized by the hegemony or centrality of USA economy and dollarf

The political climate of the Cold War made the US willing to bring about the Golden Age for the entire world rather than just narrowly focus on its growth. While aggressive expansion was clearly in the minds of American policy makes as soon as the war was over, it was the Cold War that encouraged them to take the longer view by persuading them that helping their future competitors to grow rapidly was possible was politically urgent. e The Cold War was the major engine of the great global boomf (Walker 1993)

Control of majority of the gold reserves which helped the US maintain control of the BW system The stability of the BW system was dependent on the role of the US to unilaterally manage the system. The hegemonic position occupied by the US allowed this. The system was dependent on the ability of the US to exchange its dollar directly to gold. Gold reserves rate of exchange US$35 to 1 ounce of gold. In a sense, the recovery of Western Europe undermined the BW system throughout the loss of the US dominance, which the entire system was predicated. This provides stability and which in turn is good for trade and by extension the Global economy. Centrality of the US dollar to the Global Economy (related to above point and changes as a results of the fall of the BW system) Replacement of the gold and the pound as the global currency by the US dollar. It allowed the US to dominate the Bretton Woods system up to the point of its collapse. This system was central to the world economy from 1945 -1971 The Smithsonian agreement represents the fundamental imbalance in the fixed exchange rate system after 1971. Despite a 10% devaluation of the US dollar and the delinking of the US dollar from gold, this replacement of the BW system lasted only a little longer than a year. This can be seen from the system imploding in March 1973 even before the oil crisis happening in October of the same year. Represents the decline in the US reliable position. While still the worldd s strongest economy in 1971, it no onger l occupied the hegemonic position it once enjoyed in the period since 1945. Smithsonian agreement supposed to act as salvation but the US dollar was far too weak. Role of American MNCs From an accumulated direct investment of only $11.8 billion in 1950, the book value for American direct investment abroad had risen to approximately $223.4 billion by 1984 This indicates the expansion of the MNCs and by extension, . US indirect control. Certain tools became more important after the collapse of the BW system in 1971,spelling an end to direct control. The nature of control became more indirect after that. By 1969, the American multinationals alone produces approximately $140 billion worth of g oods, more than any national economy except those of the US and the USSR. This indicates the immense wealth the MNCs control and by extension its importance as a tool in the USd s arsenal for controlling the Global Economy. Importance of MNCs as a tool of dominance rises during the 1980s when US experiences a decline in the rate of foreign investments, Control of the International Financial Institutions The US exercises and effective veto in the IMF due to the fact that no decision can take place due to it b eing impossible that more than 85% of the vote can be cast without the approval of the US.(Valid from 1945 -2000). The means of dominance changed over time but the importance of some of these means stayed constant.

Why did Japan stage a phenomenal recovery after 1945?


Japanese governmental organizations such as MITI The Ministry for International Trade and Industry (MITI) played he main role in orchestrating economic growth by channeling low cost loans and extending other benefits to targeted sectors of t economy. When foreign exchange is he strictly controlled, MITI sponsorship had a significant impact. MITI also played a key role in brokering technology licensing deals with US corporations on attractive terms, hence sparring Japanese Industries from heavy R&D costs. MITI and other ministries often exercise control through administrative guidance (gyoseishido). Accumulated institutional expertise which aided Japanese recovery

Japan was able to recover quickly after WWII due to its talented leaders who had proven themselves capable of in running a tight wartime economy during the war. Leaders continued to run Japan, contributed largely to Japand s recovery. Japan has accumulated institutional expertise and this forms part of the intrinsic Japanese advantages that allowed them to excel in the years after WWII. However, this intrinsic advantage could come into play/was only allowed to function as a result of the US decision to preserve the ruling class rather than have them stand trial for war crimes. Thus the US played a pivotal role in allowing this specific Japanese advantage to come into play as Japan was completely occupied by Allied forces at the end of WWII and was in no position to state An external factor allowed an internal factor to come into play fully. Governmental-led Initiatives The income-doubling plan announced by PM Ikeda in 1960 symbolizes the commitment of the government to grow at all costs. This ideology of GNPism became the mobilizing and unifying ideology of the dominant Liberal Democratic Party(LDP). Economic growth becomes part of the national agenda. Socially, Japan could also draw on the knowledge and experience that had accumulated during the Meiji drive for modernization and blue-collar workers who were well educated with good foundation in math and science made it easier for upgrading and the dissemination of info. The 3 Jewels of Japanese employment System: Lifetime employment, Seniority Wages, Enterprise U nions which benefitted workers and employers and thus boosted the Japanese economy. Under Seniority Wage system, young workers are paid relatively little in exchange for the promise that once they reach a certain level of seniority they will be rewarded fo their loyalty with relatively high wages. Enterprise Unions r also helped to ensued a minimum of labour turmoil and this is important for accounting the initial Japanese recovery in the late 1940s and 1950s. The gap between management and workers is much smaller in Japan than in any other industrialized countries in terms of wage differences and treatment of employees. Role of the US Japan was blessed with a relatively benign occupation. Supreme Control Allied Powers (SCAP) played a critical and positive role in creating favorable conditions for growth. US stabilized Japanese government finances and fixed the exchange rate at a low level favorable for exports. 360 Yen to US$1 in the aftermath of the fall of the BW system. Land reforms were introduced and American succeeded in loosening the dominance of the zaibatsu, permitting the emergence of some of Japand s leading companies, such as Sony and Honda. The Korean War saw the rehabilitation of Japan from wartime enemy to cold war ally, which in turn explains the accommodations the US made in terms of trade arrangements, which were in favor of Japan. (US controlled the purchasing decision with regard to war supplies for the KW) The US role in allowing for the Japanese recovery took on greater significance in the wake of the Korean War. Hence, the US role became more important after 1953 with the end of Allied occupational controls over Japan. The war devastation also provided Japan with an opportunity as they had to build the plants from scratch, and hence ir Japanese industrial plants were more modern and had more advanced technology than in the case of the US, where there was no urgency in renovating, or in replacing aging facilities or production lines. The cold war also climate explains the willingness of US to help Japan in a myriad of ways. It allowed Japan to practice protectionism while allowing Japan access to US markets as well as technology, not executing Japanese war criminals which went on running in Japan, protecting Japan under the US nuclear umbrella which freed Japanese resources for economic investment rather than defense. Defence: Defence was capped by the Japanese constitution at 1% of the GDP. Low spending on the GDP is the result of an external factor- the fact that the Japanese rely on the US nuclear umbrella to protect t. Social Security: Inclination to place the burden of social security on the family, tapping into Confucian values of filial piety and great importance of the family unit. It was only in the late 1970s where populations start to age that Japanese initiated extensive social welfare policies. Favourable External Conditions The price of oil remained extremely low until 1973, which is an important consideration for a resource -dependent nation like Japan. The world economy in general experienced relatively robust growth in 1950s and 1960s, creating good markets for Japanese exports.

Japan enjoyed free access to US markets.

Why did Japan decline in the 1980s?


Rise of yen The yen had been pegged at 360 to the US dollar since the occupation and this relatively low value helped to stimulate demand for Japand s export. As a result of US decision, the value of the yen rose to 310 to the dollar in 1971 and since then there has been a n extended rise in the value of the yen. For Japan, the results were mixed- Imported natural resources became cheaper in yen terms, thus helping firms lower production costs and therefore export prices. However, the yend s appreciation dampened foreign dema for nd Japanese products. Mixed impact and so therefore not a major contributor to the decline of the Japanese economy. Governmental Policy Japan was experiencing heightened competition in export markets for heavy industrial products such as steel and shipbuilding and have competitors such as Korea and Taiwan. The protectionist tendencies of the Japanese policy also had effects on the domestic economy as well. The Japanese economy was heavily protected and the Japanese cost of living was high due to heavy protectionist measures imposed on consumer imports.

The govt then sponsored a political solution to this economic problem by switching from a policy of favourable cartels facing recession with subsidies and tax breaks for c sunsetd industries. The Japanese governmental policy of restricting capital from flowing out of Japan created the bubble which was exacerbated by further governmental policy of keeping interest rate low. Lavish spending, speculati n, over-investment o and an absence of risk assessment made for a volatile combination. The government popped the bubble by raising interest rates 5 times in 1989 as a way to prevent asset inflation. This government policy created a bubble that eventually burst as a result of governmental action too. The public lost faith in the government in the wake of the burst bubble in 1989 and all the collusive practices such as the dubious land deals,tobashi,dango and amakudari that emerged after that. This explains w the economy stagnated hy and failed to recover in the 1990s. For example, in 1963, the Japanese government enacted the Small and Medium Enterprises Basic Law to subsidize c mom and popd stores. Furthermore, the scale retail store law of 1973 prevented large retailers from coming into the Japan economy.

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