Government and Economies in the Postwar World

Economic Policies and Comparative Performance, 1945-85

Andrew Graham, Anthony Seldon

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134907304
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The chance to begin anew seldom occurs. Yet the nearly complete breakdown of the world economy between 1939 and 1945, together with the dominant position of the United States at the end of the war, provided just this opportunity. A new international economic order was built on the ruins of the old. How this happened - and the role of government in economic performance - is the subject of this important and timely book. Written by political scientists, contemporary historians and economists, it includes ten country studies covering all the major industrialized nations in the West: the USA, USSR, Japan, Germany, the United Kingdom, France, Italy, Spain, Eastern Europe, and Scandinavia. In each chapter readers will find information on the main objectives and instruments of economic policy, the institutional framework, where the country started from at the end of the war, and a summary of what happened thereafter both in terms of policies and outcomes. Each chapter also contains data on the country's economic performance, a list of selected dates of important events, and a guide to further reading. The book begins with an overview of the sytem of international trade and payments since the war, and ends with five commentaries drawing attention to contrasts and similarities between the nations. The commentaries feature David Henderson, Head of the Economics Division of the OECD, on the overall economic performance, Charles Feinstein on the influence of different starting points, David Marquand on the effect of different political and institutional structures, and Sidney Pollard on economic policies and traditions. Learning from other countries' experience as well as understanding how they see their own problems is increasingly important with 1992, glasnost', and the problem of international policy coordination between the USA, Japan, and Germany so high on the agenda. No other book provides such a wide-ranging account of how the industrialized world came to be where it is today.

Chapter one

Introduction

Andrew Graham

There are literally hundreds of books on the principles of economics, rather fewer on particular economies and very few on comparative economic performance. There is one good reason and one bad reason for this relative paucity of comparative material.

The good reason is that it is difficult to establish firm results. This is partly because there are no agreed criteria by which performance should be judged and partly because there is no way of establishing the counterfactual—what would have happened otherwise. Is the performance of Eastern Europe, for example, to be compared with what its performance might have been under capitalism (whatever precisely that may mean) or under ‘economic reforms’, or under more decentralized planning? The mere posing of these questions illustrates that the particular counterfactual chosen is at one and the same time both important and highly arbitrary. Also, even when chosen, it is incredibly difficult to describe—we simply do not have this degree of knowledge of the social world. Economists have models and carry out simulations, but, at best, these are no more than crutches to our thoughts; and, at worst, such simulations contain so many unrealistic assumptions that they hide more than they reveal. An alternative to the counterfactual is to make a comparison either with early periods of history or with other countries for the same period. This approach, which is used extensively in this book, has the advantage of being more straightforward—we know what we are doing—but, inevitably, many factors change at once and, for all its apparent simplicity, this method is ultimately just as arbitrary.

The bad reason for the lack of comparative work is the fallacious argument that because little can be established nothing can be learned. On the contrary, looking at different countries and at similar, if not identical, policies in different contexts can be a stimulus to our imaginations. It would be stupid to suppose that one country can transplant institutions from another—the circumstances are always subtly different—but looking at one country from the perspective of another may suggest possibilities that would not otherwise have been considered.

It is in this spirit that this book has been written. The method chosen was to invite ‘country experts’ to write about particular countries covering the period since the end of the Second World War and to see what differences and similarities emerged. These country chapters (chapters 3 to 12) form the core of the book and first drafts of these were presented at a conference at Nuffield College, Oxford in November 1987 and then revised in the light of the discussion. Contributors were left free to choose which factors to emphasize—there was no attempt to develop a ‘line’—but they were asked to follow a broadly similar format so that for each country the reader will find information on the main objectives and instruments of economic policy, the institutional framework, where the country started from in 1945, and a summary of what happened both in terms of policies and outcomes thereafter.

These country chapters are complemented by two other contributions. First, to set the scene, chapter 2 describes the changing system of international trade and payments during the postwar period. Second, there are a series of commentaries (chapters 13 to 17) which look across the group as a whole. This allows features that would not be obvious at the level of a single country to emerge. For example, David Henderson (chapter 13) draws attention to the very general pattern of growth which has affected all of the countries discussed here. Similarly Charles Feinstein (chapter 14), by looking at the level and change in productivity of individual countries relative to the others, develops a thesis about the extent to which a country’s ability to grow is influenced by the scope that exists for it to catch up with others.

Another feature of economic performance, which was emphasized at the conference at Nuffield, is the extent to which people attribute characteristics to particular countries and use these to explain behaviour. For example, it was alleged that the East Germans work much harder than employees in other countries and that this accounts for much of their economic success. Such arguments are sometimes unsatisfactorily stated since it is easy to confuse levels and rates of change—hard work may produce a lot of output, but it is less obvious that it produces high growth. Nevertheless it is not too difficult to think of links between cultural and institutional factors on the one hand and a willingness to invest and to innovate on the other which could produce higher growth. Moreover, while these factors are extraordinarily difficult to track down (and still more difficult to quantify), there is currently a somewhat greater willingness amongst social scientists to take them seriously. The final three commentaries therefore look at the influence of tradition (Sidney Pollard, 15), at what we know (and don’t know) about the effects of hard work (Michael Rose, 16) and, still more difficult to pin down, at the influence of institutions in terms of the whole way that societies organize themselves (David Marquand, 17).

At one point in the planning of this book the intention was to finish with a chapter of ‘Conclusions’, but conclusions in a book of this kind are not really appropriate. The point of this book is not to find ‘the truth’, but to learn about countries with which one is unfamiliar and, perhaps as a result, to reconsider views about economic policy and performance in those countries which are well known already. This is a task for each reader rather than for the editor. Nevertheless, in the course of producing this book certain points inevitably made an impact.

One general observation is the difference in the perspectives that emerge in the commentaries and in the country chapters. The former seem more concerned with grander themes and larger trends; the latter more with the minutiae of policy. This contrast is to some extent both inevitable and intentional, but it raises the question, touched on especially by Alec Cairncross, in chapter 3 on the UK, of whether much of economic policy is not merely shuffling the chairs—all show and no substance.

One possible implication of this line of thought is that short-run macroeconomic demand management policies do nothing and that policy should concentrate instead on long-term supply management through institutional change. (Admittedly one might go further and conclude that supply-side policies would have no effect either—everything is just in the grip of inexorable laws—but none of the contributors really suggest this.) The former position, namely that supply-side management is what matters, has certainly been highly influential in the 1980s, especially in the US and the UK, but we should be cautious about accepting it uncritically.

One reason for expressing some scepticism is that a further point to emerge from the country chapters is the extent to which economic policy appears to be influenced by the mood of the time. For example, the UK’s interest in planning in the 1960s was a conscious aping of the planning in France a few years earlier and similar moves were occurring at the same time in Italy and even, on some readings, in West Germany. Similarly, in the late 1960s and early 1970s many countries experimented with prices and incomes policies of one sort or another and then in the 1980s we observe deregulation and a renewed emphasis on markets (at least in domestic markets; as chapter 2 shows, at the international level the 1980s is notable for the renewed use of protectionist policies). This last swing in policy occurs on both sides of the Atlantic, both sides of the English Channel, and even both sides of the Iron Curtain. Of course, it is just possible that all of these changes were entirely the result of carefully considered reactions to common circumstances, but, without denying any role for events and rational calculations, the alternative interpretation is that there is an element of fashion to economic policy.

To be more blunt, in correcting for one error (excessive belief in the power of demand management in the 1950s and the 1960s) we must avoid falling into another (that demand is wholly irrelevant). Many years ago Marshall compared demand and supply to a pair of scissors and commented ‘When one blade is held still, and the cutting is affected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not one to be made formally, and defended deliberately’ (Marshall 1890:820). The same message almost certainly applies to policy: demand-side policies need (and help) supplyside policies and vice versa.

There are two further reasons for being sceptical of the view that supply is all that matters. First, it is difficult to read the country chapters without receiving the impression, that, at least in the eyes of many of the contributors to this book, demand management policies did in fact slow down or speed up particular economies quite substantially on a number of occasions. Second, David Henderson’s comment shows very clearly that, leaving inflation aside, the economic performance of the whole OECD block was substantially better during the years 1950 to 1973 than during any earlier period of history or subsequently. Why this happened is still a matter of considerable contention, but in a recent careful study, covering seventeen OECD countries, Boltho concludes that

via both automatic stabilizers and the confidence-enhancing role of the new demand management commitment to avoid cycles and unemployment, private sector behaviour was changed in a way that itself contributed to greater stability. Announced policy changes, far from being impotent, were actually more powerful than had they not been anticipated. (Boltho 1988:21)

This is not to argue that demand management policies were always well chosen, still less to maintain that all countries could or should be attempting to fine-tune their economies at present. The changes in financial markets have substantially reduced the scope for this and, in some countries (especially the US) the institutional structure makes sensible short-run adjustment a near impossibility; there is, however, much to be said for a medium-term adjustment by the US, especially if co-ordinated with Germany and Japan. It is also important to stress that much of the Boltho argument operates through expectations and not primarily through the mechanistic plugging in of a certain quantity of expenditure. (The Keynesian models of the 1950s and 1960s with neatly calculable multipliers were as naive about human behaviour as was the stable velocity assumption of the monetarists who followed.)

A closely related point, and one which suggests much caution about being wildly enthusiastic about any particular policy prescription as some form of panacea in general, is the extent to which the context matters—both the other policies occurring at the time and the general climate of expectations in the particular country. It also matters whether policy is applied at the right moment and with intelligence. For example, the French devaluations of 1957 and 1958 seem especially well chosen and effectively carried out whereas the ‘same’ policy in the UK in 1967 looks noticeably less successful.

Another illustration of the importance of context is the case of Japan. The causes of Japanese growth are much disputed and undoubtedly several were at work at the same time. Nevertheless it is easy to see that if you have an efficient bureaucracy, an energetic private sector with technical skills, and a long way to catch up, then protecting domestic industry and importing foreign technology makes a lot of sense. Moreover it makes even more sense if external protection is combined with internal competition (as Japan, unlike Spain, seems to have achieved). But such an argument in no way proves the general superiority of protection over free trade (anymore than the benefits of free trade to the UK in the earlier part of the nineteenth century prove the converse).

Having so far emphasized the traditional macro-policies (primarily as a counterweight to contemporary concerns with supply) it remains to make two brief points about supply itself. First, many of the items that one would expect to be important on the supply-side—training, new technology, research and development—are precisely those areas in which traditional economic theory would predict market failure. Second, it seems to be a feature of those countries which have handled supply relatively well (Germany and Japan come to mind) that they have tackled these market failures by various forms of institutional coordination—or, as economists would say, they have internalized the externalities. In other words we should not think of policy as consisting just of markets on the one hand and state control on the other, but instead be using our imaginations to devise and create institutions that might solve, or ease, some of the problems of the market.

There is one other undercurrent on markets—an idea that surfaces every so often throughout the book, but most obviously in chapter 2 on the international environment. It is clear that during the last forty years countries have become more closely integrated with one another, at first through the expansion of trade and later through the growth of financial markets. It is also clear that, at least during the last decade, there has, on the whole, been more de-regulation of domestic markets and between countries within already existing customs unions. However, occurring alongside this there has been, first, a greater degree of trade protectionism and, second, the renewal of intervention in foreign exchange markets (and stock markets). One way of thinking about this series of interventions is to regard it as a measure of the extent to which someone somewhere is taking the strain in ways which they find unacceptable. In other words we are not in equilibrium. This is hardly surprising. But the point is that, if, in general, the whole world economy cannot achieve this state then we should not be surprised to find the market being supplanted. The question is not whether it will happen, but where. Equally, one of the roles for policy should be todecide who takes the strain—and there may be an important role here for fiscal policy and monetary policy acting as the shock absorbers.

Finally, to return to the problem of evaluating performance, it is worth emphasizing that, while most of the discussion of this book is in terms of the conventional economic outcomes (especially growth, unemployment, and inflation) none of us are unaware of the importance of other factors, even where these are less quantifiable. Jaroslav Krejcí’s chapter on Eastern Europe, for example, refers to the ‘de-levelling’ of political rights that occurred alongside the levelling of incomes. Similarly, the chapters on France and Italy and, still more so, that on Spain show how their moves towards more rapid growth and industrialization were aided by the extent to which real wages were held down. But how is one to assess the costs and benefits of such policies? Even rejecting the Marxist thesis that all the benefits accrue to the capitalists (which is obviously not true is these countries), it is clear that, in the short-run, the shift in the distribution of income towards profits does temporarily help one group in society more than another, and, even in the long-run, the workers who eventually receive the benefits will almost certainly be different from those who made the initial sacrifice.

At this point it is time for the editorial introduction to cease (before it becomes too long). The chapters should now be left to speak for themselves and the reader left to draw his or her own connections and contrasts from the stories that the countries tell.

References

Boltho, A. (1988) ‘Did Policy Activism Work?’, Applied Economics Discussion Paper No. 60, University of Oxford.

Marshall, A. (1890) Principles of Economics, (ninth (Variorum) edn 1961), Macmillan & Co. Ltd, for the Royal Economic Society.

Part I

Chapter two

The international environment

Kathleen Burk

Introduction

The chance to begin anew seldom occurs. Yet the nearly complete breakdown of the world economy between 1939 and 1945, together with the extraordinarily dominant position of the United States at the end of the war, provided just this opportunity. Policy-makers in the US were determined to convince—and, if necessary, to compel—other nations to join them in building a new economic order on the ruins of the old.

The aim of the US (and to a lesser extent of Britain and Canada) was to establish a new scheme for international payments, which would have as its primary objective the avoidance of the competitive exchange rate depreciations of the 1930s, and, accompanying this, a new set of rules for international trade which would be designed to promote non-discrimination and the free exchange of goods and services. The first part of this twin approach was the Bretton Woods agreement (named after the place where the US plan was finally ratified by the United Nations), which set up the International Monetary Fund (IMF), and the International Bank for Reconstruction and Development (the World Bank). The second part, on which the US had less of its own way, became the General Agreement on Tariffs and Trade (GATT). This joint system, for good or ill and despite periods of non-operation, determined how most of the countries discussed in this book interacted with one another for much of the postwar period. This chapter therefore describes the initial establishment of the system, its evolution since 1945, and the main strains to which it has been subjected.

There are four main themes. First of all, from the late 1940s until the early 1970s, a system of fixed but adjustable exchange rates was in operation. However, as initially designed at Bretton Woods, this was supposed to be accompanied by freedom of capital movements—currencies were to be freely convertible—but this did not occur, even for the majority of the main currencies, until the late 1950s. In short, the Bretton Woods system was not fully operational until long after 1945. In addition, both before and after it was in full operation, it was subject to a series of crises, which were only resolved by a variety of ad hoc arrangements by the IMF and temporary agreements between Central Banks.

Second, despite these problems with international payments, the development of international trade was abnormally successful. The period began in a protectionist mode left over from the 1930s and reinforced by the postwar poverty in Europe, but this gave way under the general aegis of the GATT to a much more liberal regime—a move which almost certainly contributed to the spectacular increase in both output and foreign trade from the early 1950s to the mid-1970s. As Table 2.1 shows, not only did the output of the main industrial countries grow more rapidly than in any previous period of history, but the growth of trade was above that of output for most of the period. Moreover, while both slowed down after 1973, trade continued to grow more rapidly than output (at least up to 1979). But, accompanying the slowdown in output and the higher levels of unemployment that emerged, there was renewed recourse to protectionism, particularly in the form of non-tariff barriers and the greater emphasis on (the already existing) regional customs unions.

Third, when capital movements were liberalized (in a series of moves from the late 1950s onwards), there was an enormous expansion and integration of financial markets. The Eurodollar market, which hardly existed in 1960, grew to hundreds of billions of dollars by the 1980s; the turnover of foreign exchange exploded—it is estimated to have reached $150 billion per day by 1985 (Strange 1986:11); and the growth of share dealing made the international financial ‘global market-place’ a reality by the end of the period.

Fourth, in the mid-1970s these capital flows, especially in combination with divergences in inflation rates from one country to another and with external shocks from oil price rises, made it impossible to sustain the original system of fixed exchange rates, and there was a widespread adoption of floating rates. However, at the very end of the period, the experience with floating rates (especially the large speculative capital flows and the associated swings in exchange rates) led to a renewal of coordinated intervention by central banks. This was not a return to the fixed rates of Bretton Woods, but took the form of attempts to hold some of the major exchange rates within broad ‘zones’ for periods at a time.

Table 2.1 Growth of world GDP and tr...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Acknowledgements
• Figures
• Tables
• Contributors
• Chapter one
• Part I
• PART II