Download 6. The post-war reconstruction

IX. The post-war reconstruction
(1945 – 1960)
IX.1 The new beginning
Basic framework (1)
Economic
• War damages
• Great Depression experience
Political
• Superpower position of the USA and the
USSR, Britain definitely lost its
dominance
• Europe: strong influence of socialist
movement
Basic framework (2)
Theoretical
• Keynesian teaching
• Planning
– War experience
– Technology (linear programming, computers)
– Soviet experience
=>
General acceptance of interventionist policies
IX.2 Bretton-Woods System
An urgent priority
• Inefficient gold standard – one of possible explanations
of Great Depression (see LVI)
• After the collapse of gold standard – floating of major
currencies
– Lack of any international coordination
– Competitive devaluations,
– Protectionism
→ beggar-thy-neighbor policies → prolonged recession
• WWII – exceptional situation, no international
coordination, neither in forex, neither in trade
• Since 1944 - Allied forces started to create a new
international monetary system
– John Maynard Keynes and Harry Dexter White
Institutions and intentions
• July 1944 - Bretton Woods conference (New
Hampshire, USA), result: Articles of Agreement
• 3 essential institutions
– International Monetary Fund
– World Bank
– Organization to promote cooperation in international
trading arrangements
• Basic intentions:
– Promote stability of the monetary system
– Provide financing for the reconstruction after the war
and to the developing countries
– Support the free trade
IX.2.1 IMF: Goals and Tools
• Disastrous pre-WWII experience
• After WWII, main economic policy goals: full
employment, price stability, external balance
with free trade
• B-W system based on a believe that gold
exchange standard serves best these goals
• Need for flexibility in case of disequilibria
– Countries’ contributions to the pool of financial
resources to provide funding (lending) to
countries in need
– There could have been a devaluation, in case of
“fundamental disequilibrium”
Articles of Agreement – summary
(1)
• New Permanent Institution, IMF, as consulting
body, executor of the Articles, lender to
countries in case of BoP problems
• Gold exchange standard
– Each country establishes a gold price for its currency
(“par value”), keep it within 1 per cent range in the
short run
– Currency convertibility for the current account,
capital controls for financial account
– Changes of par values (de/revaluations) only with the
Fund’s approval and in case of “fundamental
disequilibrium”
• Unfortunately, never precisely defined
Articles of Agreement – summary
(2)
• Temporary imbalances were to be financed from
domestic forex reserves (difference from pure gold standard,
where those reserves were just monetary gold), in case of more
substantial deficits, Fund was prepared to lend to
individual countries
– Each country contributes to the Fund a certain quota
according its size in the world economy
• Symmetry in treating all the currencies, including USD
– Theoretically: possibility to de/revaluate USD
– Independent domestic monetary policies (provided they did
not undermine other IMF’s rules)
• It was assumed that after transitional period,
currencies will become fully convertible, including the
liberalization on financial account
IX.2.2 International Bank for
Reconstruction and Development
(“World Bank”)
• Helping to finance investment projects for reconstruction and
development
– Long-term loan and technical assistance
• Guaranteeing and participating in loans by private investors
– Borrower need not be a government, but government must guarantee the
loan, that must finance “productive purposes”, be used for original
purposes and the borrower must be able to repay
– Borrower must prove that in the prevailing market conditions, he would be
unable to obtain the loan from private sources
• Individual countries’ subscription of capital → shares on total capital
stock
– 2% paid in gold and USD, 18% in countries’ individual currencies,
remaining 80% subject to call when Bank is required to meet its
obligations
IX.2.3 Missing leg – international
trade
• At Bretton-Woods, a third institution
recommended
– Not created at the conference
– Preparatory discussions scheduled to start
in 1946
– In 1949 – Havana conference: GATT
• Some progress
• The full-fledged organization – WTO, only in 1994
IX.3 The immediate post-war reality
Difficult years: 1945-1947
• The economic situation of European countries worse
than expected
• War damages, lack of resources of any type, adverse
weather (namely winter 1946-7)
• Gold and USD reserves depleted
• Strong BoP deficits, reflecting huge need for imports
and lack of ability to export
– “dollar shortage”
• War financing from USA (like Lend and Lease) or war
relief international help (UNRRA) either terminated or
insufficient
• Political threats from communism and too many very
interventionists politicians in western Europe (F, D,
etc.)
Basic principles
Note: What follows is an easy ex-post description, in the post-war
aftermath very few had such a clear view
• Liberalization of prices, accompanied by anti-inflationary policies
– In the post-war reality: balanced budgets and removal of excess
money, created by war economics
– Extremely difficult given the pressing reconstruction needs
• Balancing budgets
→ BoP improvement → chance to import raw materials and
intermediate inputs, even under “dollar shortage”
→ reduction in public investment → lower growth, unless offset by
private investment
• Need for strong trust in market economy
– No fear of excessive taxation and nationalization
→ vicious political circle, call for actions that has not been
previewed early 1945 and that did not enjoy full support in postwar political reality in Europe
IX.3.1 Marshall Plan
• Official title: European Recovery Program
(ERP)
• June 5, 1947, US Secretary of State, George
Marshall, speech at Harvard University
– Offered aid to any nation, did not specify any
number, any other detail
– In reality: directed towards Europe (originally
including USSR), under the condition that recipient
countries will be able to organize the rebuilding
plan themselves
• Plan rejected by USSR and other countries
under its influence
Logistics
• US side
– Economic Cooperation Administration (ECA)
– US envoy in capital of each country that participated
• European side
– Participating countries: A, B, DK, F, D, GB, GR, ICL, IRL, I, L, NL, N, P, S,
CH, TR
– Coordinating agency: Organization for European Economic
Cooperation (OEEC)
– Acceptance of market economy principles and free trade
• Drawing the money
– Each country allocated the funds (money)
– OEEC (with local governments) allocated the money to particular
projects, ECA arranged for transfer of goods, US supplier was paid in
USD by ERP
– European recipient, including private firms, had to repay back (in local
currencies, with delay, in installments, etc.)
– Crucial: repayments in local currency, deposited by governments in socalled counterpart funds – used for financing of further investment
projects (Germany – KfW)
• Final repayment: only Germany and only about 1 BUSD (1971)
Basic numbers
Period: 1948-1951
Total amount: 12,741 MUSD
Appraisal (1)
• Was it “the most unselfish act in the history”
or “an act of American imperialism”?
– None of those extreme descriptions
• Removal of vicious circle above
– Relaxation of external (dollar) constraint
– Conditioned the aid on agreeing to decontrol prices
and stabilize exchange rates and budgets
– Helped to reduce inflationary pressures
• It contributed to European reconstruction
– Was not a panacea, but provided immediate results
Appraisal (2)
• It helped to oppose communism in Europe
– Proved to people that market economy can work
– Pushed the political equilibrium towards coalition
that respected parliamentary democracy, market
economy and rule of law
• Was very beneficial to US exporters and to US
economy as such
• Important link to International Monetary
System (see next subsection)
• It provided first lessons in European
cooperation
IX.3.2 The “Fixed Rate” Dollar
Standard
• The immediate post-war reality – asymmetry of
international monetary system
– Both Europe and Japan – strong demand for dollars
– Dollar, being the only convertible currency, quickly became a
dominant, both as a reserve and intervention currency
(instead of gold), inflow through Marshall plan
• Shift in the logic of the original B-W system:
– US dollar fixed at 35 USD per oz. of gold, FED committed to
keep and trade gold at this price (no foreign exchange
intervention by the US)
– ExR rates of other member countries fixed to USD (by
implication fixed ExR among all other currencies)
– International reserves of member countries held in USD, USD
as a reserve currency, countries (not US) expected to
intervene to keep the rates fixed
Consequences (1)
For Europe:
• Countries (except US) limited in their monetary
policies (long-term money supply must more or
less follow US inflation)
• Adjustment to disequilibria via intervention with
international reserves (mainly USD) → need for
keeping reasonable level of reserves
– To keep reserves → limits of convertibility and of
capital flows
• Europe: convertibility only in 1958 and on current account
only (regulation of capital flows)
– Limit current account imbalances by adjustment in
fiscal policies
Consequences (2)
US
• USD as reserve currency, main task – keeping
the USD price of gold (35 USD per oz.)
– No way to de/revaluate USD
• Practice free trade with no BoP or exchange
rate target
– Accept BoP deficits, if needed
• No capital controls, keep the US capital
market open
• Compared to the rest of the world, US
monetary policy independent, but provides a
nominal anchor for all
Asymmetry – US as a center country
• US never had to intervene
– If N countries, N-1 fix their currencies → Nth
currency fixed by definition
– Corollary: US did not have to be afraid that in case of
BoP deficit, it will have to sacrifice international
reserves to keep fixed ExR
• US was able to use monetary policy actively
even when exchange rates are internationally
fixed
– Advantage: it can “selfishly” use it as a stabilization
tool (e.g. in a Keynesian sense)
– Disadvantage: US kept responsibility for world price
level
IX.4 Post-war policies
IX.4.1 Lessons from 19451948
• The reform solution, hinted above (IX.3), was made
feasible by
– Marshall plan
– Adjustment of B-W International Monetary Standard (IX.3.2)
– Necessary, but not sufficient conditions for fast recovery
• Immediate needs
– Investment, namely in sectors: food, coal, steel, transportation
– Free trade and larger market (not limited by national
boundaries)
• Need to keep international reserves (USD) enough to cover
eventual deficits – link to adjusted B-W system
– Social stability, keeping the political extremism out of
parliamentary life and execution (governments)
Four main lessons
1. Understanding that Germany must be included into
European economic mainstream
2. The core is reform solution above, namely
–
–
–
Monetary reform (to remove monetary overhang)
Decontrol of prices, abolition of rationing
Fiscal austerity
3. Real wages under control, profits back into
investment
4. Keeping the real exchange rate competitive
Looks very simply, but quite difficult to understand
(and form a policy) and even more difficult to
politically defend
IX.4.2 Policy actions
• Systemic reforms, mainly price decontrols
– Most important example – German monetary reform in
1948
– Ludwig Erhard, economist, politician, statesman, 19481963 Minister of Economy, later, 1963-1966, German
Chancellor, his reform immediately successful
– Other countries – similar actions, albeit with different
speed and different success
• European devaluations in 1949
– Large range (from 8% in Italy up to 53% in Austria),
increase in competitiveness of European exports
Both steps: drastic measures, but triggered the
growth. However, many other accompanying
policies in different countries
IX.4.2.1 Coordinated capitalism
• Neocorporatist structures: negotiating bodies of labor
(workers), management and governments (Tripartite),
main goal:
– keep the real wage growths under control
– reassure workers that profits will be plugged back into
necessary investments
• Institutionalization - different countries various ways:
workers in supervisory boards (D,A), PBO (NL),
“Cooperative Body for Increasing Exports and
Production” (S), production committees (N), etc.
• Economic incentives to reach Tripartite agreement: tax
breaks, social security, unemployment insurance and
benefits
– Trade-off between wage restrain (workers) and social security
provisions (managers, governments)
Regional cooperation (1)
• Unilateral opening of European economies
unfeasible – danger of quick loss of forex
reserves
• Access to large (“multi-country”) market
• Concentration of resources (human, material,
financial) to sectors with highest priority –
again beyond the possibility of a single
country
→ all this led to the creation of several crucial
regional institutions
Regional cooperation (2)
• Marshall Plan coordination: OEEC
– Later, till today, OECD
– The “first school” of European bureaucrats
• European Payments Union (EPU)
– Funded by Marshall Plan, countries had to accept
liberal policies
– Multilateral cancellation of bilateral imbalances
– Credits to finance temporary deficits
– Mechanisms, forcing the countries to accept
corrective policies
– Proved as successful in dealing with Europe’s
reserve crisis in late 1949, via support to BoP of D
and NL
Regional cooperation
(3)
• European Coal and Steel Community
(ECSC)
– 1951: F, D, I, NL, B, L (not UK!)
– Coordinated the development of coal and
steel industries
– The first truly supra-national European
institution, with bodies that resemble
today’s EU
– In 1969 merged into EC
Complementing the market
• Apart of many common policies above,
there was the crucial coordination
question: will market be able to quickly
direct the necessary resources into
most demanding sectors without the
support of the Government?
• Mostly the answer was no and various
countries provided solutions in different
ways
Nationalizations and state
ownership
Nationalizations:
• 1945 - UK (also Czechoslovakia), in 1955 A
• Confiscations and from pre-war period (F)
• By definition (D)
Concentration of production/financial conglomerates either in
state hands or under the control of few private groups
• France: control of banking system and most important
firms to direct credit to particular sectors
• Italy: state-owned holding companies (IRI, ENI) –
preferential credits, if they invest into heavy industries
• Spain: copied the Italian example some years later
• Sweden: Wallenberg family
Indicative planning (1)
• In the situation immediately after the war, it could have
complemented markets
– Setting targets, that markets were not quick to achieve
– Directing the resources to four most important sectors above
• Later, after 1952, it extended the coverage to many areas that
could have been better without state intervention
–
–
–
–
–
To increase employment
To ensure conditions for long-term growth
To improve export performance of the country
To develop the infrastructure
To protect domestic industries and help to create strong national
companies
– To support certain structure of energy resource utilization (e.g.
nuclear vs. coal)
• It had some positive impact in the first years of post-war
reconstruction
Indicative planning (2)
Complements or distorts the markets?
• Competition vs. national monopolies
• Free trade suffers
• Bureaucracy
• Price distortions
• Financing, budget deficits
• Short-term gains vs. long-term losses
The main problem
• Selective, targeted policies: tax relieves,
“cheap” credits, export subsidies, direct
subsidies, structured tariffs, etc.
National diversities
• Institutional differences – different planning agencies:
– F: Commisariat Général du Plan
– NL: Central Planning Bureau
– Japan: Economic Planning Agency (EPA) and Ministry for
International Trade and Industry (MITI)
• Differences in social, political and cultural aspects:
– D: ordoliberalism
– Scandinavian countries: strong feeling of social solidarity from
pre-war years
– NL: scientific and mathematical methods of planning
– Japan: strong discipline, respect of the authorities
– All countries: strong feeling that hard work, saving and
investment is needed → between 1945-1952: common feeling
and common approach among different groups of societies
IX.4.2.2 Personalities
•
•
•
•
•
F: Robert Schuman, Jean Monet
D: Konrad Adenauer, Ludwig Erhard
B: Paul-Henri Spaak
I: Alcide de Gasperi
NL: Jan Tinbergen
IX.5 Conclusions
Note: Full evaluation of the period 1945-1969 will be
provided in one of the later Lectures
• 1945-1952: very difficult, extraordinary period, that
need extraordinary measures
• Core of the solution: market oriented reforms:
monetary reform and price liberalization
• Period of strong state intervention
– Probably justified in this short period
– Seeds of future problems
• Most countries: extremely fast restart of the
economic machine
– See data from LI
Literature to Ch. IX
On Bretton-Woods:
• Krugman, Obstfeld, Chapter 18, pp. 499-500
• Solomon, R., The International Monetary System 19451976. Harper&Row 1977 (excellent survey, based on
personal experience, also useful as to Marshall Plan)
General:
• Eichengreen, B., The European Economy Since 1945.
Princeton University Press, 2007, Chapters 1-4
On different national approaches after WWII:
• Gardner, Stephen H., Comparative Economic Systems.
The Dryden Press, 1988
Marshall Plan:
• Behrman, Greg, The Marshall Plan, Aurum Press Ltd.,
2008