Globalization in the 1970s Essay Example for Free

Globalization in the seventies EssayGlobalization is not a impudent concept as there have been numerous cycles of globalisation stretching as far back as the ancient civilizations. The wave of globalization preliminary to the vegetable anele embargo was after the Second adult male contend. Although this period was marked with rapid sparing growth, it came to an end in 1973 after the Arab anoint embargo that resulted in a skip in cover prices. Financial globalization particularly can be termed as the integration of realms local pecuniary corpse with world-wide financial institutions and markets. The main agents of financial globalization ar the g overnments and w thence they need to liberalize any restrictions on their domestic financial vault of heaven and ceiling account of the equilibrize of payments if any rec crude oil of integration is to take place (Schmulker, 20045). Dammasch (2010 4) asserts that the economic environment in times of globalization chan ges rapidly with metropolis movements becoming larger and less controllable. thitherfore there is usually a need to create a stabilizing musical arrangement.The situation after the Second World War which was marked by falling credit institutions, mass unemployment, hyperinflation and bankruptcy of enterprises brought about such a necessity. The Bretton Wood brass thereby came into creation. Bretton woodlands agreement of 1944 was part of the decision by the alter countries to restructure themselves after the Second World War and the difficulties encountered especially after the First World War for the purpose of financial globalization.There was a great need for these nations to come up with workable rules and regulations which would direct them in the formulation of matter policies that would facilitate the hunt of common economic objectives (Kenen, 199411). The necessity and urgency of this legal structure was collectively agreed upon and accepted as it was viewed as a way o f avoiding the negative effects that had marred the inter-war period (King, 200330). The Bretton woods years that spanned from 1946-1971 are seen in retrospect as a princelyen age of capitalism with exchange govern stableness and rapid economic growth (King, 200330).This is beca utilize the system ensured that value of price pluss was just and that the exchange rates remained better for unlimited periods in all key industrialized countries. Moreover, the national income in the G7 countries rose more rapidly than in any an other(prenominal) comparable period. The system ensured long-run price stability for the whole population because the fixed price of money provided an ostensible anchor to the worlds money supply. Therefore by pegging their currencies to property, individual nations fixed their prices levels to that of the world (Bordor et al, 19931).King, 200330 emphasizes that the Bretton timber system had two main characteristics which were the existence of a set of ru les that consisted of fixed rates of exchange, capital controls and independent policies of domestic macroeconomics on one hand and US domination on the other hand. Capital control as was stipulated in the Bretton Woods system was officially authorized and every government was highly barely and had the right and obligation to control its movement of capital. Capital control is the ability of the government to control the in and out flow of capital to and from their country.This meant that bank terminate rates were not necessary when the central bank wanted to attract capital inflows or avoid flight of capital. As a consequence, the bank rate is maintained as low as possible (King, 200331). However, a countrys domestic economy can be adversely affected done inflation by in and out rapid flow of capital together with fixed rates of exchange. Capital controls essentially prevent rapid give of capital and can equip governments with the tools to prevent economic crisis in the future .In this system capital control played a significant role whereby it in effect regulated the fixed exchange rate system that had been agreed upon by members during the Bretton Woods agreement. Whenever exchange rates unavoidable adjustments capital control was an integral fortune of the adjustment mechanism. These controls were fundamental to the reconstruction and growth of the world(prenominal) trading system that had been devastated by global depression, the two world wars and hyperinflation. This meant that capital flow was highly restricted with countries prohibiting convertibility.In capital control, cash non-convertibility was the most restrictive form of control. The government was the only one permitted to have the exclusive authority to hold distant currency and to in addition to give it out to importers that had been approved by the government. Countries that fixed their exchange rates at levels that were unacceptable could therefore be monitored through this syste m (Eicher et al, 2009470). Kitschel (1999, p. 38) further expounds that the capital controls were viewed as instruments of exchange rate stabilization and also as means of securing full employment and other national economic priorities.Additionally the system condoned the controls not only for short term management of balance-of payment crises just now also for the purpose of domestic economic management. The limited capital-account convertibility was the most common form of restriction. It enabled the system to place limits and know who had the right and accessibility to foreign exchange rates. Moreover, qualitative restrictions were also put in place which urged for the limitations on the external asset and liability position of domestic financial institutions.The controls were also placed on foreign banks domestic operations as well as on occupier firms and on individuals direct savings, collection of foreign possessions and real estate property. Dual or multiple exchange rate system was another form of capital control that involved discrete rates for either commercial or financial performances (Kitschel, 199939). Therefore the system allowed members to regulate international capital movements as long as they did not restrict payment for current external proceeding.Although currencies would be freely convertible into one another after a transaction period, members were allowed to place capital controls on currency transactions if such capital flows threatened to overwhelm the nations balance on payment or exchange rate stability (McNamara, 200375). Forces challenging the system Although the Bretton Woods system was important to the economic prosperity after the Second World War, it nevertheless failed to deport the equally rapid growth in the advanced countries over the next 25 years. One of the reasons correspond to Kenen (1994, p.7) is the fact that the permanence and malleability of the system was slow being destabilized by the postwar system. The re were two vital roles of the Bretton Woods system. The first goal was geared towards producing exchange rates that were stable through the use of capital control and the second goal was meant to shield member nations from the shifting demands brought about by the flow of gold. Nonetheless, these goals highly contradicted each other because the system could not guarantee that global prices would remain stable as it inadequacyed an effective technique.Additionally, the imbeders of the Bretton Woods system explicitly designed the system in an effort to disentangle international monetary relations from power politics. Nonetheless postwar monetary relations were highly politicized and required constant political interventions to keep the system functioning smoothly. other flaw of the Bretton Woods design was that it lacked an effective, automatic mechanism to adjust and settle payment imbalances that inevitably arose between surplus and deficit countries.Under this system, a country that had a payment deficit most probably lost its gold which decreased the domestic monetary base and resulted in a decline in the currencys purchasing power. Inevitably, the countrys imports would fall, merchandiseations would rise and the payment would eventually balance. However, the loss of gold and the decrease in money supply also meant that there would be a fall in the cumulative domestic demand, which meant deflation or even the possibility of depression.These structural problems assured that chronic balance of payments would mushroom-shaped cloud into full-scale political problems, both domestically and between nations (Gavin,6). Originally, the Bretton Woods system was designed to produce stable exchange rates musical composition at the similar time shielding national economies from demand shifts produced by the flow of gold (Gavin,6). The founders wanted to set monetary arrangements that could combine the advantage of classic gold pattern i. e. the exchange rate stab ility with the advantage of float rates i. e.the independence to pursue national full employment policies. They mainly sought to avoid the defects of floating rates (destabilizing speculation and competitive beggar-than-thou-neighour policies). The disadvantage of fixed rates is that individual nations were exposed to both monetary and real shocks transmitted from the rest of the world via the balance of payment and other channels of transmission. The common world price level under the gold standard exhibited secular periods of deflation and inflation which reflected shocks to the demand for and supply of gold (Bordo et al, 19931).Countries like Germany and lacquer were reluctant to import foreign inflation and this could have attributed to the eventual collapse of the system. In the long run this broke the credibility of the fixed exchange rate commitment among countries and the willingness of the central bank of several countries to cooperate in order to maintain the fixed parit ies. In other words the system failed because the commitment by the US of fixed equality was not reliable due to the inflation that was accelerating (King, 200333).The collapse of the Bretton Woods system is also related to the increase speculative capital flows. With time as the dollar mark continued to decline, the US economy was unable to assure other countries that the dollar could be converted to gold at the fixed parity. In this view, the collapse of the system was related to the escalating in and out movements of capital and the lack of capacity of the dominant country, the US to control them (King, 200332).In conclusion the end of the Bretton Woods period can be said to have come when President Richard Nixon finally suspended the official conversion of the dollar into gold at $35 an ounce, shut d suffer the gold window and cut the exchange rate system loose. Importance of the Euromarkets The growth of the Euromarkets has been directly colligate to the expansion of the US mu ltinational firms, and the consequent expansion of US banking abroad.This growth of the market and its cultivation coincided with the increasing pressure of the US economy and the recoveries witnessed in the capitalistic economy. The Eurodollar market therefore took over aspects of a developed domestic credit system since it was operating globally and independently from the central banks. Therefore, Britain which was a low-productivity and low-wage country became the essence of global finance due to the contribution of the Eurodollar market. London developed as a center of global circulation of capital and hence became the worlds guide Eurodollar market.The regulation of the currency which allowed the partial and finally the full convertibility of the pound for those who were neither residents of the dollar or the sterling are some of the factors that brought about the growth and development of the Eurodollar market (Patel, 20071). This market was deemed important as it helped in redistributing surplus liquidity, in facilitating adjustments of internal liquidity in countries whose monetary systems rely on the import and export of short term funds through banks as a major monetary regulator.The Eurodollar market also helped to maintain world business activity at a high level by the availability of short term working funds. The Nixon Shock The Nixon Shock is termed as a series of economic measures that were interpreted by the then US president Richard Nixon in 1971. This decision was reached upon by various events which included the Vietnam War that had become too costly and had drained the gold reserves of US, the increased domestic spending that accelerated inflation, the balance of payment deficit by US and trade deficit (Engdahl, 20031).Additionally, the US dollar foreign arbitrage had also caused the governments gold coverage of the paper dollar to decline by 33 points from 55% to 22%. Therefore in 1971, President Nixon obligate tariffs on all imports o f 10 per cent to help reduce the trade deficit though it was removed in December the same(p) year. At the same time, a freeze was put on wages and prices for a period of 90 days in a bid to lower inflation with the federal Reserve Swap ending its support for other central banks.The convertibility of the dollar into gold was also ended and a limitation on gold transactions was put implying a decrease in the value of the dollar. This announced detached the US from the Bretton Woods system which collapsed from operation. After the gold convertibility of the dollar was suspended and tractile exchange rates emerged (James, 20101). After the Nixon shock, the US realized that it could exert more global influence through US treasury debt than from trade surpluses. In the 1970s oil was the only key commodity traded in dollars.This was due to the fact that the dollar was the only currency with the highest purchasing power and the only one that was plump for by gold (Dammasch, 20106). As a result the US realized that the other nations would continue to demand for dollars for them to buy oil which was by now blow up in price. Thereafter, US trade partners had so many dollars in their reserves that they feared to create a dollar crisis. Instead they inflated and eventually weakened their own economies to support the dollar system as they feared a global collapse.Therefore when the price of oil increased in 1973 the dollar surprisingly continued to put one over despite countries like Japan, Germany and the rest of the world suffering from severe economic destruction (Engdahl, 20031). Nonetheless, these measures did not help to restore or even quicken the economic growth rates of US or even correct the surplus reserves of dollars in Japan and Germany. From there henceforth, all the currencies of the Western nations began to float. There were no yearner set exchange rates in the international market since the common link that was there before i.e. the Bretton Woods Syste m, no longer existed. Ultimately, by the end of 1974, the price of gold had risen to $195 from $35 per troy ounce. As a result, due to unrestrained inflation there was a155% increase in the price of gold in a period of three years (James, 20101). Yom Kippur War The Yom Kippur War named after the Jewish holiest holiday, Yom Kippur began on October 1973 when Syrian and Egyptian forces endorse by Soviet Forces launched attacks on Israel forces in the Golan Heights and Sinai in an attempt to recapture the land occupied by Israelites.However, despite the surprise attack on Israel, they emerged victorious due to the immense backing from US who provided them with weapons and intelligence. Therefore in a bid to punish the Western world for their aid to Israel, the Arab nations placed the oil embargo. This was initially political tactic meant to pressure the US into requesting Israel to withdraw from the Arab territories. However, with time the Arabs used it as an economic tactic when they realized the amount of power they had over the world through oil.The prices of oil thereafter quadrupled and continued to be a threat not only to Americas economy but also to the whole world. After the Yom Kippur war the OPEC member states struck back against the West for their support of Israel by imposing an oil embargo which increased oil prices by 70%. Lending by Private Banks to Developing Nations The origin of the debt crisis in the Third World countries has been attributed to the expansion of banking society in the US at an international level together with the rapid economic growth in the world.Before the oil price crisis of 1973-74 began, the real domestic product growth rate of ontogeny countries averaged 6% annually. However, though the rate of growth had slowed down for the reminder of the 1970s it averaged 4-5%. This growth nonetheless generated new elicits by the US corporate investment and as well by other international banks. This multinationalism in providing fin ancial services contributed to the emergence of the Eurodollar market which gave the US banks access to funds that they could undertake Third World Loans on a large scale.Additionally, the sharp rise in crude oil accelerated the expansion in lending (LCD debt crisis, 2010192). The oil-exporting countries in the Arab world deposited their profits make during the oil crisis in banks in the atomic number 63an and US banks. This further fueled the lending boom. Since the banks had now been provided with more funds they became eager to make profits and hence invested it in developing nations by financing new development projects. The abrupt increase in oil prices brought about instant inflation into the prices of all other commodities.Moreover, the developing countries which had been crippled by these high oil prices saw this as an opportunity to borrow cheap money from the international banks so that they could beginning the large deficits ((LCD debt crisis, 2010192 Schmulker, 20042). These funds that were known as petrodollars and had been recycled back to developing nations therefore generated inflationary pressures around the industrial world and created the debt crisis in developing nations (Cypher and Dietz, 2008204). US High please RatesThe developing nations during the 1970s were given loans at very low interest rates. However, this situation changed when the US in the primal 1980s pushed up the interest rates of loans in an endeavor to stop inflation. This meant that the loans that had been lent out to Third World nations by US or other lending banks in Europe had to paid back with huge interests rates. Hence, by the 1980s the economy of Third World nations had began to stagnate and many nations were on the verge of bankruptcy due to the combining of mounting debts and low economic growth rates.The total debt had amounted to $567 billion and the high interest rates forced them to take out new loans which increased the consignment (Jauch, 20091). This dismal situation was further compounded by the oil shock of 1973 and 1979. This decision by OPEC crippled the economies of many Third World nations with the cost of merchandise energy rising. Therefore, the culminative result of this crisis saw many developing nations especially those in Latin America unable to pay their debts during this period. IMF Structural Adjustment ProgrammesWhen it became evident that these nations would be unable to service their loans, the IMF came up with conditions which were dubbed Structural Adjustment Programmes (SAP) to solve the debt crisis among developing countries (Shimko, 2009168). The SAP was proposed by the World Bank and the International Monetary Fund which were organize during the Bretton Woods period. These programmes imposed various conditions for countries especially developing ones that intended to borrow more loans (Jauch, 20091). IMF claimed that these reforms were necessary for promoting the economic growth needed to pay back the l oans.The IMF required reforms to be carried out in the respective countries before aid could be provided. For example, Mexico whose debt burden grew faster than its own economy was loaned money by IMF to prevent a default. However, Mexico had to certain economic reforms before the loan could be dispatched. Although the conditions imposed on the developing nations differed, the same basic conditions were expected of all the nations (Shimko, 2009168). The various key reforms consort to Shimko 2009169 included Balancing of government budgets this entailed either increasing the revenue for the government (providing new fees for government services) or drastically reducing the government spending. Reducing quotas, tariffs and other import barriers this was aimed at subjecting the domestic industries to international competition. Liberalization of the capital market this basically meant reducing the restrictions on foreign investment. Reducing government subsidies to domestic industri es these subsidies are those that had been part of import substitution strategies. Privatizing or merchandising the government-owned industries to the private sector. Nonetheless, these conditions did not alleviate the dire economic nor bring any economic development but rather the conditions intensified the existing situation. Although IMF studies claimed that the growth rates in countries under this programme increased from -15% in the 1980s to only 0. 3% in the early 1990s and 1% by mid-1990s, the World bank declared that there was no evidence whatsoever to account for any economic growth (Shimko, 2009178).Additionally, lack of government subsidies or protection from foreign competition forced domestic industries to reduce their costs by lowering wages or by set off workers. Therefore the liberalization of trade and the opening up of economies to unrestricted foreign investment had a deleterious impact on the poor nations and raft (Shimko, 2009177). Effects of the High vegetab le oil Prices in the 1970s As a result of the Bretton Woods system and the oil shock, a new wave of globalization began. Recession was prevalent with unemployment peaking at 9.1% industrial production went down by 15% and high inflation in all areas. Additionally, when the Bretton Woods system of fixed exchange rates collapsed, countries were now opened up to greater capital mobility and they also retained the autonomy of their monetary policies. The Brandy Bonds came into existence when Mexicos curate of Finance announced that the country would be forced to default on its debt. The default on loans worsened as more banks in developing nations certain the IMF and Chairman of the Federal Reserve of their inability to service their debts in time (LDC debt crisis, 2010191).The Brandy Bonds in a bid to resolve the debt crisis of the 1980 not only led to the consequent development of the bonds market but also brought about a new phenomenon especially for emerging economies. Moreover, technological advancement, privatization and deregulation (which resulted in the corporate culture with national interests of decreasing consideration in business decisions) made foreign direct investment and equity investment in the emerging markets even more magnetic for households and firms in the developed nations (Schmulker, 20042).Overall, there was a severe recession which hit the hardest the Western world. In Wall Street, oil stocks performed well due to the price increase as the profits soared as the rest of the market buckled under the low prices. Before the oil embargo was imposed by OPEC members, the price of crude oil was mainly determined by major oil companies in the West which retained 65% of the revenue of the oil. This type of arrangement was referred to as oligopolistic market arrangement.This meant that oil prices that had been posted in the market were established with the taxes and royalties paid to the exporting governments on the basis of this price. However following the embargo, property rights were transferred to the host countries from the major companies that had operated the industry and hence the cartel was able to take over the functions of the companies and retain more of the revenue generated Thereafter, the determination of crude oil price was passed into the hands of OPEC which set an official selling price for the best known among its crude.At the same time individual members were given the opportunity to adjust their selling prices in relation to this market according to the quality of the oil being produced (Trumbore, 20101). The continued high oil prices encouraged the exploration and subsequently the production of oil in high-cost oil regions such as Canada, Mexico, and North Sea. During the 1970, the increased demand of fossil fuels and increased prices for the product greatly reduced globalization. As the nations became more advanced, the rate of globalization declined.Although globalization grew for a while after th e embargo, the rate of growth began to decline as the oil prices decreased (Okogu, 20031). The oil embargo impacted severely on the economy of Japan resulting in energy price inflation since by this time it was the only developed nation that relied heavily on oil with very few hydrocarbon reserves or any other alternatives. Japan was therefore forced to reconsider its industrial model. The oil shocks catalyzed the rapid turnaround which enabled Japan to become the leading energy force country.The petroleum Supply and Demand Optimization Law was aimed at setting oil targets and restricting oil use. Japans vision after the oil embargo was to reduce its dependence of oil from the Middle East, therefore it started to charge import taxes on all petroleum products especially those that were used to generate power. Japan therefore became a pioneer in liquefied natural gas which today accounts for half of the worlds market. During this period, Japanese car brands like Toyota and Honda whic h had previously sold unwell enjoyed enormous success in the US market.Americans who had traditionally been fond of big cars were now confronted with a new challenge that included higher oil prices tended to(p) by long queues at the gas stations and rationing of gasoline. They therefore began to demand more of the Japanese brands for their small size and fuel-efficiency (Stewart and Wilczewski, 20091). Conclusion Even today, the sawhorse System is still the real source of global inflation since t is the only global reserve currency as it has been witnessed worldwide since the 1971.Other countries in the world have to ensure that the reserves of their central banks are in dollars if they are to trade in the international market. This helps to guarantee against currency crisis, to back their export trade and to finance the importation of oil. Today, 67% of all central bank reserves are dollars (Engdahl, 20031). The debt crisis in the 1970s created by various variables including the oil embargo, the peculiar borrowing and poor economic planning crippled the economy of many developing nations in Africa and Latin America.Despite efforts by the World Bank and IMF to offset these payment balances, the situation remained virtually unchanged. Ironically, other countries like Japan and US though they were affected by the rise in oil prices, were able to rise above the situation through oil exploration in their own countries which reduced their reliance on the imported oil from Middle East. Therefore, though the oil embargo did touch the economies of all the different nations, the degree and intensity was not the same.While other countries were completely devastated e. g. Third World nations others in the West found ways of reviving and even propelling their economies to greater heights. References Bordo, M, Eichengreen, B and National Bureau of Economic Research (1993). Bretton Woods System A Retrospect. London. University of Chicago Press. Dammasch, S. (2010). The Bretton Woods System. Online Available from http//www. ww. uni-magdeburg. de/fwwdeka/student/arbeiten/006. pdf Dietz, J and Cypher, J. (2008). Economic Development Process.New York. Taylor Francis. Eicher, T, Mutti, J and Turnovsky, M. (2009). International Economics. Taylor Francis. Engdahl, W. (2003). The Dollar System US Economic Reality. Online Available from http//www. engdahl. oilgeopolitics. net/1973_Oil_Shock/Dollar_System/dollar_system. hypertext markup language Garber, P, Dooley, M and Folkerts-Landau, D. (2005). International Financial Stability. Online Available from http//people. ucsc. edu/mpd/InternationalFinancialStability_update. pdf Gavin, F. 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