Chapters of European Economic History 9788024628141, 9788024628295

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Chapters of European Economic History
 9788024628141, 9788024628295

Table of contents :
1. The world before the rise of the Global economy
2. The Nature and Emergence of the Global Economy
3. The Post-War Development of the World Economy
4. The End of the Bipolar World
5. Major Centres of the World Economy
Name Index
Geographical Index
Subject Index

Citation preview


cHaPters oF euroPean economic History

Chapters of European Economic History Tomáš Evan

Rewiewed by: Doc. Ing. Tomáš Ježek, CSc. Doc. PhDr. et JUDr. Jakub Rákosník, Ph.D. Published by Charles University in Prague, Karolinum Press Proofread by Peter Kirk Jensen Layout by Jan Šerých Typeset by DTP Karolinum First edition Front cover: Jan Claesz. Rietschoof, A Calm (Ships in the Harbor by Calm Weather), between 1675 and 1719 © Charles University in Prague, 2014 Text © Tomáš Evan, 2014 ISBN 978-80-246-2814-1 ISBN 978-80-246-2829-5 (online : pdf)

Univerzita Karlova v Praze Nakladatelství Karolinum 2014


The world before the rise of the Global economy . . . . . . . . . . . . . . . . . . 1.1 Local and Regional Markets, and Specialization . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 The Establishment of Capitalist Society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 From Mercantilism to Liberalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 European Colonialism in the Early Modern Period . . . . . . . . . . . . . . . . . . . . . . 1.5 The Industrial and Agricultural Revolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . The Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 10 20 30 33 40 44


The Nature and Emergence of the Global Economy . . . . . . . . . . . . . . . . 2.1 The World After the Napoleonic Wars and the Pax Britannica . . . . . . . . . . . . 2.2 Globalization – the Origin and Nature of the Phenomenon . . . . . . . . . . . . . . 2.3 The First Wave of Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 The First World War and End of the First Wave of Globalization . . . . . . . . . The Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46 46 50 52 57 66


68 68 71 81 83 86 93

The Post-War Development of the World Economy . . . . . . . . . . . . . . . . 3.1 Recovery of the World Economy In 1945 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Origin of World Financial Institutions – the Bretton Woods System . . . . 3.3 The Pax Americana and the Second Wave of Globalisation . . . . . . . . . . . . . . 3.4 D  ecolonisation and its Impact on the World Economy . . . . . . . . . . . . . . . . . . 3.5 E uropean Economic Integration in the 1950S and 60s . . . . . . . . . . . . . . . . . . . 3.6 The World Economy before and After the Oil Crises in the 70s . . . . . . . . . . . 3.7 The Origin of International Capital Mobility – From Banks to Multinational Corporations and FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


The End of the Bipolar World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 4.1 Eastern Bloc Countries before the Fall of Communism . . . . . . . . . . . . . . . . . . 105 4.2 The Transformation of Central and Eastern Europe . . . . . . . . . . . . . . . . . . . . 113 4.3 The Financial Crises in the 90s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 4.4 The European Union and Transition Economies . . . . . . . . . . . . . . . . . . . . . . . . 123 The Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

5. Major Centres of the World Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 The European Centre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 Economic Development of the European Centre . . . . . . . . . . . . . . . . . . 5.1.2 The Economic and Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.3 The European Union and the WTO – an Example of the Common Agricultural Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The United States of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

95 102

130 130 130 137 138 140

5.2.1 The Economic Development of the USA . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 The USA and NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Economic Development of Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 Japan and APEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 The People’s Republic of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Economic Development of the PRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 K  ey Economic Indicators and Development in the Last Three Decades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 China in International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.4 China in Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

140 145 146 146 151 152 152 153 159 160 161

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

Name Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

Geographical Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Subject Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177


This book originated with my lectures on world economy, comparative economic studies and introduction to European economic history. As my written notes for Czech and later American students were positively accepted, I have endeavoured to put together a more detailed and comprehensive text. The name ‘chapters’ in the title is, however, used advisedly. Standard texts on the topic are two-volume books of thousand or very rarely below five hundred pages. In parts, using my original research, I strive to condense the most important events and key figures as well as to address some of the interesting issues economic history offers. As the total list of literature would expand the book unjustifiably well beyond the planned maximum of pages, I limited myself to quoted or otherwise essential literature. I tried to limit the literature not available in English to acceptable minimum. It is suggested to have historical atlas at the reader disposal. Proceeding chronologically, in the first chapter I pay attention to the first states, the creation of local and regional markets, a unified Mediterranean under the Greeks and Romans and the causes of the fall of the Roman Empire. Then the shift from Mediterranean to Atlantic trade is described with accompanying impacts on economy and society of the continent and the fact that   Introduction      – 7 –

the Portuguese and Spanish, both in their own way creators of large empires, were replaced by the French, British and Dutch. In the second chapter I continue with the impact of agricultural and industrial revolution on world trade as well as the balance of power in the 18th and 19th centuries respectively. Focus is also given to colonies, particularly in North America in the 18th century. The colonial War of Jenkins’ Ear between Britain and Spain soon expanded to Europe, the War of Austrian Succession and ultimately the fighting of the Seven Years’ War. This war changed North America completely with the French colonies, once half of the continent, now limiting itself to a few islands. While this turn of events massively increased British holding in America, it also directly led to the rebellion of its Thirteen colonies. I continue with Europe of the 19th century with its great birth rates and rapidly decreasing mortality making 40% of the world population. Within one century its population has doubled and it has become a continent of emigration to the areas of so called European settlement – North and South America, South Africa, Australia, New Zealand and Siberia – which benefited from this population explosion. With people came trade, land was settled, cities established and the structure of society became western. I try to explore life with a vast majority of the world landmass under the power of European countries, a fact that led to the first wave of globalization in around 1830 under the auspices of Pax Britannica. Great Britain, the strongest of all European powers, profited most from this liberal globalization. Others (particularly unified Germany and the United States) were catching up mainly in productivity and newly developed industries. After ‘The war to end all wars’ had ended, three of the five European powers ceased to exist and the remaining two were financially ruined. Europe descended into economic misery and social radicalism. The disaster of WWI brought the end to liberal globalization. The Great Depression of the 1930s cost the United States one third of its GDP but European economies were also hit very hard. With totalitarism reaching new height in the person of Joseph Stalin, Europe also got the extreme right in Hitler’s Germany, marking the road to the new world war. I look at similarities and differences in the economic planning of both totalitarian regimes and continue with a focus on the similarities in the economic order established after WWII (which under the name ‘the Bretton Woods system’ gave foundation to the new era – Pax Americana) with the British system of the 19th century. The impact of two oil shocks on the European economy in the 1970s is debated at the end of the third chapter, and the origins and present state of European economic integration and the inevitability of the fall of the Communist regime in Central and Eastern Europe in the fourth. The text ends by describing the contemporary centres of the world economy – the European Union, the United States, Japan and China. I am much obliged to all who read various versions of this monograph and commented on the text extensively, first of all to Prof. Martin Kovář, Head of – 8 –

the Institute of World History, Faculty of Arts, Charles University in Prague and Deputy Chairman of the Department of Economic History, University of Economics in Prague. It is my pleasure to also give thanks to Kevin Kapuder, Chairman of Business Administration Department at University of New York in Prague for valuable comments. I thank the reviewers for their thorough review and highly appreciate the comments and suggestions. I am very grateful to the CIEE for helping to finance the publication of the text, mainly to Jana Čemusová, Resident Director of CIEE Study Centre in Prague. Also, I would like to thank Daniel Němec who helped with the English translation, and to my friends Andre Rabe and Clive Everill who were first to edit the translated text. Finally, I  would like to thank my wife Jitka, who assisted in innumerable ways: in commenting upon the various parts of the text, in eliminating many spelling and stylistic mistakes, in compiling the references and writing interesting texts I could use as a source of information. To her this book is dedicated.

  Introduction      – 9 –


The world before the rise of  the Global economy

1.1 LOCAL AND REGIONAL MARKETS, AND SPECIALIZATION Markets appear whenever there is something to exchange. Exchange is possible only if products vary, i.e. if people become specialized. As soon as people are able to eat their fill, they can produce things for barter. This specialization enables the establishment of local markets. In order for local markets to grow in variety and scale, means of transport are necessary to connect them. That is one of the reasons the first states appeared along great rivers such as the Nile, the Euphrates, and the Tigris, not only to provide conditions for up to three crops a year, but also to allow transport and trade among individual local markets and to tax and protect such relations. Thus a regional market can be established. However, this process was quite slow and very fragile. Those villages which did not provide enough food for specialists, such as blacksmiths or millers, had difficulty in participating in trade. Despite that, many ancient European civilizations were capable of widespread long-distance trade, especially between deposits of vital commodities. Let us take for instance, the – 10 –

Greek city-states and their Atlantic tin trade, or the Amber Road between the Baltics and the Black Sea. We can see the vulnerability of trade during the Greek-Punic wars, when the Carthaginians occupied the Greek colonies in the western Mediterranean and shut off the Strait of Gibraltar: the Greeks had to look for new routes. This contributed to the development of Massilia (today’s Marseille), a Greek settlement at the end of a lengthy land road across France, to acquire tin deposits (an essential component of bronze) from Britain. The Greeks were also the first to write about the topic of trade and specialisation in a systematic manner. Xenophon, the 4th century B.C. author, made the following observation: ‘In large cities, because many make demands on each trade, one alone is enough to support a man, and often less than one: for instance, one man makes shoes for men, another for women, there are places even where one man earns a living just by mending shoes, another by cutting them out, another just by sewing the uppers together, while there is another who performs none of these operations but assembles the parts. Of necessity he who pursues a very specialized task will do its best.’ (Finley 1970:3) As we know, quality is a function of price, so we can clearly state that Europeans have been (for 2,400 years), well aware that specialization increases quality and/or decreases in prices. Why specialize, however, if there is no market in which to sell your product? The necessity of a free market was seen clearly by Aristotle, probably the greatest Greek philosopher. He was a stout opponent of monopoly, and also claimed that everyone should have that which is his own, including property and justice, guaranteed. However, he, and the whole of Christian Europe well into the 16th century with him, claimed that money is here to allow trade and exchange and not just to profit from trade or interest-taking. He loathed bankers and petty usurers living on small consumer loans. A major increase in trade was enabled by the so-called ‘Pax Romana’. By paving roads and building ports, Rome facilitated an unprecedented heyday of trade within its constantly growing Empire. The increasing scale of commerce contributed to a deepening specialization in return. Whole regions specialized in one or two types of production. Wine from the eastern and southern Iberian Peninsula or metals from inland were exchanged for Anatolian marble or Egyptian grain and delivered to Rome from the opposite shore of the Mediterranean Sea. The origin of many commodities familiar today can be traced back to ancient Rome where European specialization started. We may recall, for example, collocations like Lebanese cedar, Indian incense or Balkan silver. It was possible to travel to Rome from today’s Cádiz in nine days, from Caesarea in Palestine it took twenty, a few days more than the voyage from Egyptian Alexandria. Crude iron production is a  chapter on its own. The Romans mastered it to such an extent that its quality and scale would not be superseded until the Industrial Revolution 1500 years later. The Romans had created a huge, single market covering the entire Mediterranean, and an Atlantic trade reaching as far as present-day Belgium and Britain. In addition,   The world before the rise of the Global economy      – 11 –

middlemen enabled them to trade with Scandinavia, with today’s Russia, and across the Red Sea as they made their way to as far away as India. Indisputable evidence of extensive Roman business activities and an almost global market in what was then the known world is Roman coins, which have been found in all of these territories. As Rome’s neighbours were embracing Roman technology – their military tactics in particular – and were gradually creating improved technology of their own, Rome had to face growing competition in commerce at the same time as the Empire’s defence expenditures were escalating. The disproportion between Roman treasury income and expenditures forced the rulers to mint fewer and fewer valuable coins of lower weight, which in turn caused an increase in prices, weakened the economy, and finally resulted in the economic collapse of commerce and crafts. This was a situation in which great power necessitated the change of informal power into formal power to protect their (usually economic) interests abroad, and in which all accompanying military expenses had dragged them into insoluble economic problems; this has become the standard scenario for the demise of civilisations. I t has also been experienced by civilizations preceding Ancient Rome, and has been repeating itself with regularity ever since. Whenever a state is unable to pay its bills or find a solution to interference with trade and work specialization, which together comprise the key components of economic growth, it disintegrates and vanishes. A relatively high standard of living and the unity of civilization naturally start to dwindle. In Rome trade was vital, being facilitated by the general system of weights and measures. Rome was the natural business centre. When, however, in a surprisingly up-to-date context, the provinces started producing cheap articles while the prices of homemade products were increasing, the commercial life of Rome relented. In trying to deal with the decline of trade by means of set prices and government subsidies, the state did actual harm to commerce; harbours and shippers, to cite just one example, were even forced to carry state cargoes almost free of charge. Taxes were increased and prices were fixed by law. During the Late Roman Empire, the countryside became the focal point of economic life in the Empire; the city administration was deteriorating both structurally and institutionally. Citizens felt insecure as foreign tribes were inducing unrest along the borders of the Empire. At the end of this period, when Germanic nations had penetrated into Gallia and Hispania, the citizens started to show contempt for their citizenship and preferred to live among the barbarians, thus being exempted from taxes and liabilities, rather than staying in Romanised urban regions as taxpayers of the Empire (Ubierto, 1995). The overall economic decay of Rome had a milder impact on agriculture, which satisfied the most basic needs. Therefore, the most significant feature of the late Roman Empire was the development of the rural way of life, i.e. ruralisation. The breakdown of Roman commerce and craft production corresponded with the decay of a class that could be called bourgeoisie, and which had been sustaining the very life of the Roman Empire. The devaluation of the currency turned the – 12 –

Roman economy into a barter system of agricultural products and a primitive type of economy. Troops were recruited from city inhabitants at first. However, in order to reinforce numerous contingents guarding the borders of the Empire, it was inevitable that peasants be recruited. Soon, the Roman army was comprised nearly exclusively of peasants, and thus represented the uneducated and unskilled lower classes of the Empire’s society. Nevertheless, it gained almost absolute power and could depose or appoint emperors at will. In the middle of the 5th century, provincialisation and the collapse of trade, perpetual civil wars, as well as barbarians settling down in more and more Roman provinces and comprising an ever larger part of its military force as foederati (allies), led to the doom of Roman civilization. Britain, for instance, had ceased to be Roman in any sense by the year 425 AD. Cities and rural villas had been abandoned, all ceramics were home-made, trade had become local, the barter system had replaced money, and the specialists, who were the essential bearers of culture, could not be sustained; for example, the fresco and mosaic workshops had closed down. Christian Europe would have to wait for the next trade connections, though regional, for six centuries – with one notable exception. History has known this nation mainly as bloody raiders, however, their advanced technologies and significant long-distance trade routes, as well as their input into almost every region of Europe they had arrived makes it worthwhile mentioning them in this text. The Vikings, originally from Scandinavia, undertook a great number of raids between the years 900 and 1100, usually followed by the establishment of small agricultural settlements and trading posts scattered all over Europe. Norsemen reached the Orkney Islands as well as Greenland and Newfoundland in Canada via Iceland; the Danes terrorized eastern England and the northern coast of present-day France (Normandy – the land of the northmen) where they gradually settled. Their descendants, the Normans, temporarily conquered various cities on the Iberian Peninsula and in North Africa; they took Sicily from Muslim hands and founded the Kingdom of Naples on the Italian Peninsula. The Swedes set out primarily northward and eastward, colonizing present-day Finland. Rurik, the legendary Viking, became the ruler of Novgorod, while Oleg, probably his son-in-law, founded the first Russian state – Kievan Rus. In spite of all of the violence, the often tiny minority of Vikings must have brought significant economic benefits to the population in order to maintain power. In most cases, economic advantages increased the standard of living for the predominant part of the population. Quite often, the key element of such economic advantages was participation in either regional or better long-distance trade. This example is most remarkable in Russia. The system of lakes near Novgorod, and rivers such as the Volga, the Don or the Dnieper enabled a connection of the Baltics with the Black Sea, which resulted in an unprecedented growth of trade and specialization within craft production. The Viking sailing ships interconnected the Baltics   The world before the rise of the Global economy      – 13 –

and the North Sea with the Atlantic, using oars for short-distance voyages, and heralded a vast growth of Baltic maritime trade in the centuries to come. The conquest of England at the Battle of Hastings in 1066, along with the participation of Normans from Sicily and southern Italy in the Crusades, marks the climax of the Norman age. Normans brought their new organization to England, along with new technologies in virtually in all aspects of life, and commercial contacts, tightly binding the British Isles with Continental affairs for several centuries. Thanks to their vital participation in the Crusades, Naples and Palermo became important trading posts in these large-scale expeditions, which has affected the history of three continents. According to some authors, leadership, organization and logistics skills tested in undertaking the Crusades made later voyages in the Age of Exploration possible. Even if the connection between the exploration voyages and the military campaigns in the Holy Land had not been strong, the wealth of distant lands stirred the European imagination for centuries on. While the Crusades themselves were a political and economic failure (with the Crusader states lasting for about a hundred years – never reaching long term sustainability), the technological exchange and the establishment of a trade network, though complicated, were vital to Europe in many aspects. Many noblemen vastly indebted themselves purchasing all the necessities (horses, supplies, armour), some of them finding a solution in pogroms against their Jewish creditors. After a stressful and very expensive journey to the Holy Land, either over land or by sea, they pined for new conquests in order to acquire land and the means to sustain themselves in the new country. That was in sharp contrast with the already settled nobility, who needed peace and stability to continue their mutually beneficial commerce with neighbouring Muslims; Antioch, Acre or shortly occupied Damietta were ports where Chinese silk and Indian spices boarded Pisan, Genoese, and Venetian ships, which were to carry these increasingly demanded cargoes to Europe. While they included reciprocal massacres of devout Muslims and Christians, causing a hatred which echoes to the present day, the Crusades also defined a trade network, which would last (at least in the case of Venice) for hundreds of years. Should we speak of the first glimpses of a global trade network in that period, then Genoa (and particularly Venice) played an indispensable role. One of these trade routes came out of eastern China, then continued by several routes westward across the united Mongol Empire as far as Europe. The northern route of the Silk Road ended in the Crimea, in the Genoese trade stops of Caffa (Theodosia) and Tana (Tanais). Then the cargo was carried by Genoese ships through Constantinople (present-day Istanbul) and Sicily to Genoa. In addition to these trading posts (so-called factorias), the Genoese controlled more on the coasts of the Black and Aegean Seas. It was through the Silk Road that the Black Death, arguably the greatest pandemic in human history, reached Europe. Originating probably in China around 1320 and – 14 –

reaching Genoan trade stations in Crimea by 1347, it was transported by fleas on rats on board Genoan ships to Sicily and Pisa, and from there to virtually all of Europe. Once transmitted to humans, the plague spread with incredible speed. The disease peaked in 1352, killing one-third of the European population with many more recurrences well in the 18th century. The impact on European economy was profound, causing a decrease in the price of land while increasing real wages despite dramatic inflation. Venetians managed to hold on to some of the eastern Mediterranean markets even after the fall of the crusader states, e.g. in Antioch, one of the destinations of the southern route of the Silk Road. First of all, Venetians had a virtual monopoly on the supply of spices. A variety of spices such as pepper, ginger, aloe, nutmeg, cinnamon, etc. were carried by Arab middlemen from India along the ancient maritime route, already known to Alexander the Great, from the Indian Ocean to the Red Sea and then across land by caravan trains to Alexandria. There, the long-distance road, connecting three continents, continued by loading the cargo onto Venetian galleys. Besides a great arsenal and being able to build one galley a day, the Venetians disposed of large storehouses, allowing them to control the prices of both goods in stock and sold. From Venice the goods were either transferred along the Alpine trails to North Europe, or kept in Italy, in one of the wealthy urban communes. The Italian merchants’ range was much broader, however. In all the Mediterranean and Black Sea regions, the factorias were often transformed into larger colonies. They were buying slaves, grain, tropical fruit, expensive cloths, silk, carpets, drugs and medicine, or perfumes, along with other oriental goods. Trade also facilitated the transfer of valuable technology as well as the exchange of material culture with the Orient. Europeans predominantly owe Italian merchants for knowledge of more advanced methods of production of glass, paper, and gunpowder, as well as information from fields such as the textile industry and metalworking, among other techniques. Italians also exported goods to Asia (Venetian cut mirrors and perfumes, Genoese silk fabrics, Milanese arms, embroidered silk and brocades from Lucca, or famous colourful Florentine cloths), nevertheless they fell behind the Asians in trading. The deficit in the balance of trade had to be offset with precious metals, in which they were lacking as much as the rest of Europe. The whole of Europe was absolutely shocked by the rise of the Turks. After the Battle of Manzikert (1071), where they put a larger Byzantine army to rout (the defeat launched the Crusades, which were in fact military assistance to eastern Christendom), they succeeded in fighting their way through to Anatolia, and Byzantine rule in modern-day Turkey came to an end. When the Ottoman Turks landed in the Balkans 100 years later and defeated the Serbs at the Battle of Kosovo polje (1389), they joined Thrace, Macedonia, and today’s southern Bulgaria and southern Serbia (including Kosovo & Metochia) to their rule. The days of the Roman Empire, which had lasted for almost two thousand years, were numbered. The fall of Constantinople in 1453 not only caused   The world before the rise of the Global economy      – 15 –

a psychological shock to all of Christendom, but it also meant a major shift in economic relations. Genoa lost all of its colonies on the Black and Aegean Seas and started to focus primarily on Western Mediterranean trade. Later, its close economic ties to today’s Spain put Genoa in the position of the monarchy’s banker. Also, Venice had difficulties coping with the loss of commercial positions in the Byzantine Empire. Venetians were made to withdraw from one position after another. After giving up their colonies on the Aegean Sea and bases on the Peloponnese, they lost Crete and Cyprus, along with several colonies on the Dalmatian coast. Their former dependencies fell to the Turks. Perhaps the worst of all was the Venetian financial crisis in the 1460s caused by the Ottomans shutting off Venetians from Serbian and Bosnian silver mines after they conquered both countries in 1459 and 1451, respectively. For several years, commerce between Venice and the East nearly stopped. This financial crisis subsided very slowly as new silver mines were being opened in Bohemia and several minor German states of the Holy Roman Empire. No later than at the time of the Vikings, trade in northern Europe had started taking place on both the North and Baltic Seas. In the 15th century, the dominant position was gained by the so-called Hanse, a league of predominantly northern German towns which included up to 200 port cities at its heyday. The Hanse was created to secure the trade network, acquire and keep privileges, and facilitate operations overseas. The northern German port of Lübeck had become its main centre of commerce. The Hanse traded not only in Russian wax and furs, Polish timber, Baltic amber, Danish meat and horses, German silver and salt, English wool, Scandinavian herring and dried fish, but also grain, wine and pig iron. The key trade route connected Novgorod in today’s north-western Russia with Riga, Danzig (present-day Gdansk), Stettin (Szczecin), Lübeck, Hamburg, Bremen, and London. As this route demonstrates, the Hanse played a political role, enabling individual free imperial cities, as well as large merchant republics (Novgorod controlling a major part of Russia), or such towns as Visby and Malmö, to protect their interests from the powerful feudal states surrounding them. The number of members of the Hansean League and the scale of trade gradually decreased between the 15th and 17th centuries, when this regional commercial organisation finally ceased to exist. So far, we have been discussing the development of economic relations, crafts and commerce in Europe and regions geographically related. From a retrospective point of view, this makes very good sense. Although the Chinese Empire, the rulers of India, or the Arab countries had been equally more developed in many respects, both in sea-going trade, and in today’s economic indicators (GDP per capita, volume of export, etc.), it was in the 15th and 16th centuries when fortunes began to change, and it was Europe and its great colonial powers that lay the foundations of the first truly global economy. The reasons for this have been the subject of research by many economists and historians. The main reason seems to be economic unity in combination with political disintegration. Europe, with its geographical complexity, allowed for – 16 –

the existence of various political units which associated loosely, if necessary, to protect their independence (e.g. the Hanse); but most of all, they competed against each other. This competition was the primary cause of rapid development in the area of new technologies, including warfare. A great number of competing political entities existed. Most of these states possessed or were able to buy military means to ensure their own independence, but none of them could achieve autonomous rule of the Continent. To cite one instance for all, in 1494 Italy was invaded by the French army equipped with new bronze cannons, causing dire effects never heard of before. In no time, all the inventors and scholars, including brilliant Leonardo, were urged to devise some defence against those cannons. Eventually, the Italian states freed themselves from French influence with the help of Spanish intervention. And, as we will see later, the Spaniards were the ones who would attempt to unite the Continent, saving no effort or fortune in numerous wars. Their failure in 1648 sent a clear message that Europe would continue to be comprised of national states and any attempt to unite Europe would be short-lived or even cause millions of people to die. This fierce competition obviously penetrated maritime trade and economic activities, so it is no surprise that it was the imperial Portuguese and Spanish, later joined by the Dutch, the French, and most of all the British, who established trading networks interconnecting individual economic regions and set up the economic relations as we know them today. There is no doubt that foreign trade was the ultimate bond uniting national economies into a single global one, until the expansion of foreign investments in the last quarter of the 20th century. At the end of the 15th century, the conditions for exploring new trading routes and opportunities were favourable. The negative impulse undoubtedly being Far-East commerce interruption, i.e. the Turkish occupation of the Bosporus and Dardanelles along with most of the Balkans. A military altercation with the Turks arose, both on the seas and ground, and Christians, namely the Venetians, were losing. After the Turks had controlled today’s Egypt, the clinch became perfect, both the northern route across the Black Sea, and the southern route across Persia or the Red Sea were cut off. Even later, when Venice had succeeded in restoring trade, the price of spices was too high and the scale of trade relatively small. Besides, naval warfare between the Christian North and the Muslim South was carried out all over the Mediterranean Sea. Barbary pirates (from the present-day cities of Algiers, Tunis, Oran, and others) launched their fleets, which assaulted maritime operations, capturing Christian slaves and interfering with mercantile activity from Gibraltar to as far away as Ragusa. Even in the 19th century, these pirates were still laying their hands on ships not only in the Mediterranean, but also in the Atlantic, sending raiding parties, e.g. to the East Coast of the United States. They were faced with Christian fleets belonging to the Order of Malta, Spain, France, and later the Italian states. The mercantile activity and the importance of the   The world before the rise of the Global economy      – 17 –

Mediterranean Sea for European commerce gradually subsided, while maritime trade and economic activity were shifting to the Atlantic coast. The first nation to take full advantage of qualitative changes in shipbuilding, as well as improved technical and navigation equipment (compasses, astronomical tables, more accurate maps), was the Portuguese. Waging war against North African Islamic states, they managed to conquer Ceuta in 1415 (a present-day Spanish enclave on the north coast of Morocco), which encouraged their efforts towards further invasions in that direction. The failed attack on Tangier, however, stopped their endeavour in this direction. The Portuguese captains then started sailing along the North African coastline in their efforts to circumnavigate and bypass Arabian trade rather than let them take their share in it. Prince Henry the Navigator (1394–1460), who built an observatory and a nautical school in Sagres, personally sponsored voyages and shielded them with his name. Ensuring profitability was a major issue; acquisition of long-term investments was quite complicated in poor feudal countries. Only when the Portuguese set up a company to trade with the Canary Islands in 1441 and landed in the Bay of Arguin (of present-day’s Mauritania) two years later, did they enjoy some success. Being the third son of the Portuguese king John I (1358–1433), Prince Henry had little chance of gaining the throne; therefore, he devoted his whole life to maritime and colonial enterprises. He founded a colonial mercantile company in the port city of Lagos in the south of Portugal in 1444, which later acquired monopoly rights to trade in West Africa. That encouraged more exploration to the south, and the slave trade soon became the most profitable sector of colonial commerce; although trade in pepper, gold, ivory, and other African products started gradually developing, too. The Portuguese founded several trading posts in the Gulf of Guinea in 1471; in 1487 they sailed past the Cape of Storms (later renamed for the more pleasant the Cape of Good Hope); and, in 1498 they finally reached Indian Calcutta, one of the biggest entrepôt for Asian spices. This exploratory voyage of Vasco de Gama was soon followed by others; the Portuguese established trading posts in the town of Goa and enlarged their commercial sphere of influence through the conquest of Socotra and Aden, including the vital Strait of Hormuz at the mouth of the Persian Gulf, where the Red Sea extends into the Indian Ocean. In addition to that, they controlled a major part of the newly christened African Congo, and also had significant footholds in the East African coast. At the beginning of the 16th century, the Portuguese’s African trading empire displaced the Arabs, becoming the middlemen and suppliers of Asian spices to Europe. In the year 1511, the Portuguese conquered Malaysian Malacca and made a treaty with the rulers of Ayutthaya (Siam) to secure the free operation of missionaries and to establish trading posts in exchange for supplies of harquebuses and gunpowder. Then in 1512, they discovered the Indonesian Moluccas, ‘the fabled Spice Islands’ archipelago, and in 1513 they landed at Canton in southern China. – 18 –

While the Portuguese were developing commerce, namely the slave and spice trade, the Spanish completed the reconquista (the re-conquest of all the Muslim territories on the Iberian Peninsula) through the occupation of Granada by the Catholic Majesties Isabella I of Castile (1451–1504) and Ferdinand II of Aragon (1452–1516) in 1492. Isabella supported a Genoese navigator, despite the justified scepticism of her advisers at court, in an expedition to the west in the same year. Christopher Columbus (1450 or 1451–1506) set sail on three ships to the west in August of that year, advancing the reach of the new continent in October. Columbus undertook four voyages, discovering the Small and Greater Antilles and parts of the South American mainland, nevertheless, he believed, until his death in 1506, that he had reached Asia. It would take others to profit from his discovery. Vasco de Balboa (1472–1519) crossed the Isthmus of Panama in 1513, discovering the Pacific Ocean on the one hand, and proving the existence of a new continent on the other. ­Hernando Cortéz (1485–1521) conquered the Aztec Empire in 1521, while Ferdinand Magellan (1480–1521) met his death in the Moluccas in the same year, leading an expedition that would circumnavigate the Earth, and finally, Francisco Pizarro (147?–1541) began the conquest of the Inca Empire in 1532. All of these expeditions enabled the Spaniards to achieve all three points of the motto which they had proclaimed as they were leaving for America: for God, and king, and fortune. Tonnes of Mexican, Peruvian, and Bolivian gold and silver started pouring into Spain, while crowds of settlers and missionaries were pouring in the opposite direction to establish a Catholic Latin America. For the formation of a world economy, a rapid increase in the amount of exchanged goods was essential, and created the conditions for the emergence of international markets. As trade relations among remote areas intensified, a global division of labour and global trade began to develop. In addition to precious metals, Europe mainly imported spices, tea, coffee, cocoa, tropical fruits, cane sugar, luxury fabrics, and various finished products; as well as, previously unknown produce such as jute, cotton, and tobacco. European agriculture was also enriched by some species of plants and animals, such as potatoes, corn, tomatoes, beans, rubber, and turkeys. America, among other producers, took over grain, horses and cattle from Europe and became a market for its products. After the Spanish conquest of the Philippines and unification with Portugal in a personal union (1580), Spain had indeed become an empire ‘on which the sun never set’. As for the world economy, it was the first instance of global economic ties being kept within a single state. Let us consider an example. Three galleons set sail within the Spanish Empire at the same time. A galleon with Mexican silver sets out from Acapulco on the Pacific coast westward to Manila in the Philippines. The silver was used to pay for Asian spices, which were loaded and dispatched on another galleon sailing in the opposite direction, i.e. from Manila to Acapulco. In Acapulco, the spices were then loaded onto a caravan which crossed the Mexican isthmus from Acapulco to Veracruz, where a third galleon was waiting to take them to Cádiz, Spain. The profit   The world before the rise of the Global economy      – 19 –

made on this global economic exchange reached into the hundreds of a percent. The scale of commerce in Lisbon, Seville, and especially in Antwerp (or other ports in the Spanish Netherlands), was growing rapidly. It was this trade with colonies which was shifting the economic centre of the continent from the cities around the Mediterranean Sea to the ones on the Atlantic coast. A more and more significant role was being played by Antwerp, and later on by Amsterdam and London. Although long-distance trade had become the essence of rapid economic growth, Italian cities, perhaps except Genoa, Venice and Florence, were losing their exclusive position. Nevertheless, the Portuguese and Spanish did not always make the best use of their newly acquired wealth. The Spanish Habsburgs, who ruled Spain, Portugal, the hereditary lands of the Habsburg Monarchy, Hungary, the Czech lands, Naples, Sicily, and what is present-day Belgium, the Netherlands and Luxembourg, were financially exhausted, primarily by endeavours to establish a politically united Europe (Europa Universalis). The vast profits and opportunities yielded by the Spanish Empire were more than offset by the huge costs and risks which the Spaniards had to face. One example of the ambiguity of the large influx of Spanish gold was the so-called price revolution. A shortage of precious metals, the effects of which are illustrated by the example of 15th century Venice, had completely vanished in the second half of the 16th century. Compared to Europe, American gold and silver were mined at minimal cost. Flooding the European market with an abundance of these metals caused its relative decrease in value to agricultural and craft products. Hand in hand with depopulation, particularly in southern Spain and caused by the inhabitants leaving for easier livelihood in the colonies, resulted in a high rate of inflation. Failure to control the influx of gold, and therefore the price fluctuations of gold and silver from the American mines, together with the high costs of war adventures, had escalated into three bankruptcies of the Spanish Crown by the end of the 16th century. There is still another, remarkable reason why the Netherlands and England used their wealth significantly better than the Catholic states such as Spain and Portugal. The reason was the religious reformation and the creation of early capitalist relations. Like the agricultural and industrial revolutions 150 years later, these two phenomena had an important impact on the world economy, so we ought to mention them briefly, although by their nature they are not economic, but rather theological or social.

1.2 THE ESTABLISHMENT OF CAPITALIST SOCIETY After the fall of Constantinople as Orthodox Greeks fled from the city, the more educated ones among them brought Classical books and thought to European courts with them. This thinking of Aristotle, Plato, and others was fascinating and far more advanced than the European schools at that time; – 20 –

however, it was pagan. European Catholic scholars therefore faced the question of whether the truth could be measured, for example, by Aristotelian logic, or if they should hold on to a measure of truth which had been tested over centuries, i.e. the Bible. Scholars in the south of Europe took the Bible as their basis and tried to Christianize Aristotle. Thinkers north of the Alps, where the ideas of the Greek philosophers arrived later, measured the biblical truths by the tools provided by Classical philosophy. When Martin Luther (1483–1546) posted his ‘Ninety-five Theses on the Power and Efficacy of Indulgences’ on the door of the Castle Church of Wittenberg in 1517, in order to continue the primeval tradition of religious dissent, he found much more sympathy for his ideas than his predecessors. Northern Germany, Scandinavia, the Baltic States, and many other parts of Europe gradually became Lutheran. The unity of the Christian world disintegrated. For economic thinking, however, John Calvin (1509–1564), who worked in Geneva where many Protestants had fled to from northern Italy (see the box), was far more inspirational. Calvin reinterpreted the Bible with little regard for the teaching of the Church fathers or Christianized Greek philosophers, thereby allowing the use of interest rates, and thus the middle-class population started accumulating capital. In Geneva, the city council, for the first time in modern history, officially announced an interest rate of 5% and listed the basic laws relating to interest according to the biblical Golden Rule. Thus, Calvin helped to establish modern banking. At the same time, he inspired laws, which we regard as business laws today, and recommended signing written contracts for all business transactions. Finally, as remarked by the 19th century German sociologist Max Weber (1864–1920), he became the chief proponent of the so-called protestant ethic, which partly emerged from his doctrine of predestination. This provided the Protestants with motivation, as well as institutional security for their newly emerging capitalist enterprise. John Calvin: Having fled from Paris, after a brief stop in Strasbourg, he arrived in Geneva. The church ministers in Geneva persuaded him to replace his academic seclusion for a share of responsibility in the development of the newly reformed city. His radical views on many theological questions often put Calvin in a minority position; he did not become a citizen of the town until 1555, a full nineteen years after his arrival. He never held any office in Geneva, and once he was even expelled from the city. However, his keen intellect, excellent knowledge of the Bible, and great authority, which was even international, meant that he was invited back to Geneva, later becoming the de facto ruler of the city in his declining years. Calvin’s views strongly influenced the legislation of the city. Overall, he dealt with topics like the role of money, interest and income distribution, both theoretically and practically, for over twenty years (1541–1564). His writings are not economic, but theological, based on his pastoral work in practical matters (Evan 2001). At the insistence of the moneychangers (the first bankers and moneylenders) from the town of Lucca in Tuscany, who had fled from re-catholization in Italy and found refuge in   The world before the rise of the Global economy      – 21 –

Geneva, Calvin addressed the question of usury. As a result of his interpretation, based on biblical exegesis, usury ceased to be illegal, and in addition to the principles below, he contented himself with regulation based on the biblical Golden Rule (as Jesus says in the Gospel of Luke, ‘And as you would that men should do to you, do you also to them likewise.’ – Luke 6:31) Based on the biblical text and rational analysis, he set just seven rules: 1. Interest shall not be taken from the poor, who need a loan for their basic needs. 2. No one shall be driven by profit from interest so much that he would despise the needs of the poor. 3. No one may go beyond the justice interpreted by the Golden Rule. 4. The borrower must profit from his loan at least as much as the lender. 5. The Laws of God, not worldly insights, govern money lending. 6. Loans also serve the public welfare. 7. The laws of the county determine the interest rate. Another law said that no one was allowed to make his living only by lending money. The idea of bankers was unthinkable for Calvin, since they would profit merely from other people’s work. To the reformer’s mind, that was in contradiction to God’s commandment to work. ‘It is strange and outrageous that while all others gain the means for their livelihood by strenuous toil – administrators being exhausted by their daily job, craftsmen serving the community with the sweat of their brow, merchants exposing themselves to many dangers and discomfort in addition to their work – that the money traders would be allowed to sit in their comfort, accepting taxes from other people’s work without doing anything’ (Calvin: 1949). So Calvin made interest ‘lawful’ only for private owners with free capital and traders, who worked with borrowed money (Evan: 2001). Calvinist ideas, along with his version of Protestantism, expanded from Geneva into the German market towns and especially to the Netherlands, Scotland, and along with the defeat of the Huguenots (French Calvinists) and the Puritans (English religious dissenters, predominantly Calvinists), to the frontier of the North American colonies. There they had taken refuge from religious persecution at home and were allowed to live according to their moral standards. Everywhere they went, Calvinists facilitated the transition from late medieval to early modern forms of management. The first region to form early capitalist relations in the 16th century was the historical Netherlands (17 provinces under the jurisdiction of the Spanish King). This happened in the midst of an intense struggle, which was fundamentally a religious war. However, it was also a clash between feudalism and early capitalism, and it was mainly here where the efforts of Spanish hegemony over Europe, the dreaded Españolizar Europa, were met with decisive and ultimately victorious opposition. The Calvinists, with their hard work, and great desire for success resulting from them being chosen by God, or predestination, met with renewed Catholicism, which was full of religious fervour after the Council of Trent (1545–1563), and also, after the temperate – 22 –

Renaissance era, had a completely new weapon at its disposal: the Baroque, an artistic style as well as a way of life. ‘In the year 1556 the whole of Europe was astonished by some incredible news. The most powerful Christian king, Charles V, the master of two worlds, gave up the Crown and renounced all of his estates in order to devote the remaining days of his life to worship and sacred meditation… it was not just a whim of a capricious old man, or the governance of a weary, exhausted monarch, as it might seem superficially. This act was a clear sign of publicly announcing the birth of a unique spiritual flare, which was ignited in the quiet seclusion of the Spanish Carmelite monasteries. It was a sign that this zeal was spreading to the secular realm, and it slowly began to interfere powerfully with the thinking and actions of various people throughout Europe. It ushered in the Baroque, as this Spanification of Europe would later be called’ (Vopěnka 2004:23). Not surprisingly, Dutch Calvinists won their struggle only after eighty years (1568–1648) of fierce fighting, with the military help of many Protestant countries, and soon their fight had become part of one of the bloodiest European conflicts in history, the Thirty Years’ War (1618–1648). The resulting compromise granted independence to only 7 provinces of the historical Netherlands (affiliated with the Union of Utrecht in 1579), while the remaining 10 provinces stayed under Spanish rule, and Protestants there were faced with gradual re-catholisation. The seven independent provinces, later called the United Provinces of the Netherlands, almost reached superpower stature, and expanded their colonies on five continents, allowing us to demonstrate a new type of global trade and the formation of the world economy. ‘The political success of the Dutch rested on the phenomenal commercial prosperity of the Netherlands. The moral and ethical bases of that commercial wealth were thrift, frugality and religious tolerance. John Calvin had written, “From where do the merchant’s profits come except from his own diligence and industry?” This attitude encouraged a sturdy people who had waged a centuries-old struggle against the sea’ (McKay 2008:550). The Spanish and Portuguese colonial dominions were formed and worked on similar principles until the 19th century. The main income of the permanently growing territory was comprised of the imports of precious metals, and crops which were not cultivated elsewhere. Goods such as sugar, coffee, tobacco, cocoa, as well as gold and silver were non-competitive goods. One of the most important crops was sugarcane. It required the second most important commodity of the time, slaves, to harvest it. Until sufficiently large territories to grow sugar were conquered by Englishmen (such as in Jamaica, Antigua, Barbados, Bahamas, and Trinidad), the French (Western Hispanola, Guadeloupe, and Martinique), or the Dutch (Curaçao, Suriname, and St. Martin), the Spaniards and Portuguese controlled the price and quantity of sugar imported to Europe. Slavery was closely linked to the Caribbean plantations as well as virtually all colonies in Latin America. The reason why sugar plantations developed this loathsome trade was that they required up to three times as much slave labour as any other plantations.   The world before the rise of the Global economy      – 23 –

Sugar cane, slaves and Triangular trade: Sugarcane, originally came from Southeast Asia, and was first used in India for religious and medical purposes more than 2,000 years ago. In the 10th century, the Arabs brought it to the Levant. Since then, cane has been grown in the Jordan Valley, in the Nile Delta and elsewhere in Syria, Palestine, and North Africa. To Europeans, sugar was a rare commodity and the Venetians and other Southern Europeans tried to spread its cultivation all over the Mediterranean and the Atlantic Ocean, indeed wherever it was possible, thus resuming the earlier Arab produce on Cyprus, Crete, Sicily and Malta. While the Arabs had managed to grow cane requiring moisture and warmth in the arid regions of the Middle East, the relatively cold Mediterranean climate reduced the sugar content in plants harvested in this area. That is why Europeans first experienced large returns only when the Portuguese began to grow sugarcane in the Atlantic Azores, and Madeira, and then the Spanish started plantations on the Canary Islands. Half of all deliveries of sugar to Europe in the 15th century came from Madeira. ‘Columbus, on his second voyage to the New World in 1493, picked up some cane plants in the Canary Islands and planted them on the island, he called Hispaniola. It was an instant success, as sugar cane there found heat, humidity and rainfall much like its indigenous New Guinea. By 1516, the first commercial sugar shipments were on their way to Europe. Production costs in the Caribbean were low compared to the Levant and the Mediterranean’ (Chandler 2012:42). Sugar cane then quickly spread to the Spanish islands of Cuba, Puerto Rico, Jamaica, Barbados and other places. Likewise, the Portuguese from Madeira expanded cane growing to the coast of Brazil. The success of sugarcane in these areas lay in the fact that it wasn’t necessary to water the plants, and the nearby forests were sufficient for the wood needed for processing and refining. All that was missing was the workforce, as local Native American tribes had been massively decimated by Spanish persecution and the diseases carried over by them. Whereas in Europe and the Middle East, plantations were worked by slaves who were mostly prisoners of war and which were supplied to Genoans and Venetians by Crimean Tatars, in the Caribbean the African slaves who had been imported in order to work in the mines were forced to toil on sugar plantations. By 1530, Santo Domingo had 34 sugar refineries and 200 plantations. Similar success was achieved by the Portuguese as in 1710 there were 528 plantations in Brazil (Chandler 2012:42); but it took France and England to build the most sophisticated system of plantations in the New World. In the 18th century, France conquered from the Spaniards plantations on western Hispanola (today’s Haiti), together with half a million black slaves, two thirds of whom had been born in Africa. At the same time, 660,000 slaves were held on British Jamaica. The continued demand for new slaves, whether on the Spanish, Portuguese, or later the French and British plantations, gave rise to a phenomenon called ‘triangular trade’. In the 18th and 19th centuries, European traders imported a constantly increasing volume of European goods and weapons to African rulers, who exchanged them for members of neighbouring tribes captured in tribal warfare as slaves. Ships laden with these slaves sailed in particular to the sugar plantations in the Caribbean, on the other side of the triangle. Finally, the traders sold the slaves on the sugar plantations and bought sugar, molasses, rum, and other crops for the return voyage to Europe. As the people moved to cities and worked long hours in factories, stimulant beverages (i.e. tea and coffee), containing caffeine, became

– 24 –

popular. So did chocolate, originally a bitter beverage, which later was sweetened by the imported sugar and gained vast popularity. Sugar also began to be used in desserts, however, more and more people’s taste for the sweet began to grow bitter, as the news about the treatment of slaves in the Caribbean was leaking, not to mention the fact that the sugar plantations now were employing ten times more slaves than any other. The turning point occurred in France in 1801, when the French had been cut off from their sugar cane plantations in the Caribbean by a British blockade; but they still managed to refine sugar from sugar beets. This new invention was quickly adopted, since it allowed even states without any colonies to supply their population with sugar. In 1830, the sugar beet ‘supplied more than half of the continental market. By 1880 it had overtaken cane in world trade… Britain abolished slavery in 1834, Cuba and the United States did so in 1865’ (Chandler 2012:43). The Dutch way of trading differed from the Spanish and Portuguese significantly. It was not just that the Dutch traders were well aware of the correlation between profit and risk and were thereby able to trade with the enemy during war if the gain would outweigh the risk, but also that they had a larger stock of capital accumulated by the middle class, as well as the Commodity Exchange, relocated from Antwerp to Amsterdam. Above all, as the Netherlands lacked any relevant natural resources, it had been forced to specialize in competitive goods, i.e. the production of those goods that are not dependent on a particular climate, or deposits, and can be produced anywhere in the world. The Dutch had to be better in every way, whether in agriculture or crafts, in order to be competitive both in Europe and globally. A comparison with the mighty Spain, whose economy has been fuelled by the influx of precious metals from the colonies, could not be more contrasting. With some exaggeration, we might use a contemporary analogy that gold was born in America, grew up in Spain and was buried in the Netherlands. The absolutist Spain did not give their dealers nearly as much space and opportunities as the early capitalist Netherlands. The latter had a fast growing agriculture, and dominated Continental trade and seafaring; the Dutch quickly mastered not only the trade in Northern Europe (the Baltic and North Sea), mainly at the expense of the Hanse, but they were also recognized in trade with the Spaniards, Portuguese, and Italians. Among other reasons, they managed to benefit from the results of great overseas discoveries. Already, at the turn of the 16th and 17th centuries, they began to build an extensive overseas empire (initially, mainly at the expense of the Portuguese). In the second half of the 16th century, Dutch cities became the most important centres of Continental trade and banking. In Amsterdam, trade in precious metals and gemstone processing was established; it was here that the securities exchange trading technique evolved. The port of Rotterdam developed in Europe’s largest port, a position it holds to the present day. The Dutch also excelled in the processing of raw materials, which were entirely absent on their territories. For example, it is remarkable that it was   The world before the rise of the Global economy      – 25 –

the Dutch craftsmen who were at that time called to Sweden to assist in developing metallurgical and armament factories, using Swedish iron ore. Although the Dutch in the mid-17th century concentrated mainly on trade in competitive goods (Scandinavian wood, resources for shipbuilding, iron, copper, Russian furs, wheat and rye, North Sea fish, and English wool), it does not mean that their commerce had not become global even before gaining independence. Already in 1602, the Dutch regents (the Netherlands was a so-called crowned republic, the main position was held by the ‘Federal Parliament’ and its representatives, the Stadtholders) founded the Dutch East India Company. It was a feat soon followed by other powers. Each investor in this company received a percentage of the profits, according to the amount of invested capital. This company proved to be a very effective management tool for their commercial and colonial affairs, and the Dutch soon occupied Cape Town, gained Ceylon and Malacca from the Portuguese, and established trading posts there. ‘In the 1630s the Dutch East India Company was paying its investors about a 35 percent annual return on their investments. The Dutch West India Company, founded in 1621, traded extensively with Latin America and Africa. Trade and commerce brought the Dutch prodigious wealth. In the seventeenth century the Dutch enjoyed the highest standard of living in Europe, perhaps in the world. Amsterdam and Rotterdam built massive granaries where the surplus of one year could be stored against possible shortages the next. Thus, except in the 1650s, when bad harvests reduced supplies, food prices fluctuated very little’ (McKay 2008:553). Overseas trade development also provided the Dutch with the largest naval fleet in the world. Indeed, it was the Dutch naval mastery which had played a significant role in the struggle for independence from Spain, since it was possible to arm the large merchant fleet with cannons and thus transform it into a war fleet. The reverse of this equation also held true. Their growing maritime power allowed them to patrol on ever larger trade routes, and to operate a growing colonial empire. After the initial successes in fighting the Portuguese, the Dutch started to gain ground themselves. They took control of vast territories in Southeast Asia (Sumatra, Java, Malay Peninsula, the southern part of Borneo, the islands of the Moluccas and West New Guinea). They were also the first to build a settlement on the Australian continent, but it was subsequently abandoned because it had not yielded any economic benefits. The focus on profit also led the Dutch to exchange New Amsterdam (present-day New York) with the English for a currently insignificant island in Molucca’s archipelago, which yielded a large amount of spices. As the Dutch colonial dominion was expanding, the number of specific non-competitive goods the Dutch traded was also growing. They were namely sugar and tobacco from the Caribbean, tea, pepper, camphor, various kinds of spices, sandalwood and teak wood from Southeast Asia, cinnamon and cloves from Ceylon, and Chinese and Japanese porcelain and silk. Their economic impact should also be credited to the proverbial Dutch religious tolerance. Not – 26 –

only did the Netherlands become the country of immigration for people of various forms of Protestant confessions for decades, which brought significant economic benefits, but the Dutch were for that time unique in their tolerance in terms of the acceptance and assimilation of the Jews. A very good example could be Benedict (Baruch) Spinoza (1632–1677), a descendant of Spanish Jews, who fled the Inquisition, and who wrote his important philosophical work while performing a daily job as a lens grinder. A similarly significant impact on the other side of the world was had by the Dutch willingness to supply Japanese warring clans with harquebuses and muskets during the ongoing clan war (the Sengoku jidai, or Warring States Period from the m ­ id-15th century to 1605). In this way, the Dutch totally knocked out the Portuguese competition which had conditioned the supply of arms on allowing the Jesuit missionaries freedom to operate in Japan. The area of the Netherlands and the size of its population ultimately destined it in the long-term to the role of a second-order power. Indeed, it was thanks to their very specific conditions that the Dutch were temporarily brought to the top in the 17th century. It was the island neighbouring to the north, which took over as the largest centre of commerce and gradually the most important colonial power, having started with analogous political (constitutional monarchy) and religious conditions (due to far-reaching reforms of the church and state, as well as the establishment of the Protestant Church of England). Despite its excellent insularity, England was originally the least qualified candidate for this role. The Hundred Year’s War (1337–1453) between England and France, which ended in the same year as Constantinople fell to the Turks, left England without any dependencies on the European continent (except Calais). England, moreover, was then exposed to another conflict, known as the War of the Roses (1455–1485), in which the high aristocracy massacred each other, and trade was devastated. The new Tudor dynasty then succeeded to the throne, whose reign was marked by bloody religious clashes – Mary Tudor (1516–1558) was even nicknamed Bloody Mary, – as the state religion was alternating between Catholic and Protestant. In the first half of the 17th century, the confrontation between king and Parliament escalated into a  civil war and the execution of King Charles I (1600–1649). Oliver Cromwell (1599–1658) and his government left a significant legacy that would not be disturbed by the restoration of Charles II (1630–1685, son of the executed Charles I) back to the English throne. England turned into a parliamentary monarchy where the ultimate power shifted from the Crown to Parliament, which consisted more and more of the leaders of the emerging bourgeoisie, that is, the entrepreneurial, commercial and financial sections of society. Regardless of the difficult internal political situation, further economic growth occurred (royal monopolies and guild restrictions on manufacture were abolished, manufacture production expanded, along with domestic and overseas trade, not to mention financial and stock market activity), all of which bound the country in   The world before the rise of the Global economy      – 27 –

a conflict with the United Provinces. At the turn of the 17th and 18th centuries, the rise of England (Great Britain since 1707) culminated. After the so-called Glorious Revolution in the years 1688–1689, the island nation not only engaged in wars against the France of Louis XIV (1638–1715), but also completed its transfer from the Middle Ages. The establishment of the Royal Exchange in London (1571), the Bank of England (1694), the colonization of Ireland, and an intensive trade and colonization activities overseas, gave rise to the Whigs’ government (commercial oligarchy) and the foundation of the British Empire. Agriculture was economically the most active sphere, and the foreign trade balance was mainly secured by exporting wool. The export, which was already significant during the time of the Hanse, was successfully developing through so-called enclosures. During this long-term process, the landowners sought to displace small farmers in order to turn the land over to sheep farming, which had two effects. The financial strengthening of the Crown and the country’s exports on the one hand, and the population growth of cities (especially London) where these peasants moved, on the other. This allowed the development of manufacturing in the long run, and later contributed to the early industrial revolution. Though significant – we may recall for example, the Company of Merchant Adventures of London, which was originally a guild, later exporting English wool and supplying cloth, or the establishment of the East India Company in 1600 – British overseas trade was not connected to any significant colonial dependencies of its own until the mid-17th century. Englishmen (as well as the Dutch and French) parasited the Spaniards in this sphere, attacking their colonies and trade routes in the Caribbean and elsewhere. Comparison between Europe, the Americas, and Asia respectively, is also very interesting. We can use relative prices as an indicator of price convergence. There is a significant body of literature on the topic (O’Rourke and Williamson, de Vreis, i.a.), though not always conclusive. It can be said that the colonies in America had a much bigger impact on Europe if for nothing else than for the much larger volumes of goods traded. In the Americas, Europeans were decisive players, owning land and producing the goods demanded by the European market. While trade with both the Americas and Asia was mainly influenced by the cost of shipping, monopolies, international conflict, piracy, or government restrictions in this mercantilist era (see following chapter), in Asia European traders had to take into account the quantitatively superior Asian civilizations. Indeed, until the 18th century when Europeans were starting to take land in Asia and relieve themselves from the mercantilist policies of local rulers, the Asian trade of Europeans was not only weaker than trade with America but also of other players within Asia. Europeans wanted more Asian goods (silk, porcelain, cotton textiles, spices, coffee, and many other commodities) than they could provide (woollens, linens, arms) so European ships sailing to Asia were loaded with silver to pay for the deficit. The amount of Asian trade remained rather limited when even still in the 18th century – 28 –

Europeans could enjoy on average only half a kilogram of Asian goods each year. Many Europeans also used their ships to engage in intra-Asian trade to complement the existing trade connections between Europe and Asia. As for the price convergence, O’Rourke and Williamson (2002) convince us that each century of trading brought different changes in prices. Relative prices fell in the 16th century as a result of China’s economic isolation, which started in 1433 and was confirmed in 1553. The countries of South and South-East Asia offered their goods to newly arrived Europeans at a discount price as their major marked dried up. From 1600 onwards, there is evidence of a rise in population increasing the rents, a major source of income of rich land-owners. They in turn were increasing the imports of expensive Asian and American goods causing something of a trade boom. Prices rose until 1750, according to O’Rourke and Williamson. A chain of wars all the way to Napoleonic defeat at Waterloo in 1815 reduced those imports afterwards, and with them the prices of various commodities. Table 1.1: GDP per capita in selected European countries, in 1990 Int. GK$.1 Year












1 100


Portugal Spain 606



1 381




1 100





2 130

1 144



1 100 1 250




1 838

1 319

1 135

1 077

1 117 1 706


1 008

Source: Maddison Historical GDP per capita Dataset

The above mentioned processes are well described by Maddison (2010) in his useful book detailing historical statistics. Table 1.1 provides an excerpt from his monumental work which serves our purposes well. The comparison of GDP per capita starts in circa 1500 when Italian city states were the richest in Europe thanks to the heritage of the Roman Empire and, to a much larger extent, to the virtual monopoly of the imports of various goods from the Orient through the great merchant republics of Venice and Genoa. The situation began to change after voyages of discovery, where the main trade hubs and the focus of the entire continental economy moved to the Atlantic coast and its harbours. Italy’s GDP per capita remained constant for three centuries on. The Portuguese monopoly was too short and not followed by an increase in productivity in crafts and services to make a lasting change. The Spanish increase in GDP per capita was radical within the first hundred years of Columbus’ discovery, yet there were other major benefactors of this shift 1

Int. GK$ is the Geary–Khamis dollar, or the international dollar, a hypothetical unit of currency that has the same purchasing power parity that the USD had in the United States at a given point in time. The year 1990 is used by Angus Maddison most of the time as the benchmark year for comparisons that run through time.   The world before the rise of the Global economy      – 29 –

towards the Atlantic coast. Firstly, the Spanish Netherlands (roughly today’s Belgium) and its main ports of Antwerp and Bruges were becoming rich while serving the ever increasing Spanish Empire. However, with the United Provinces of the Netherlands freeing themselves from Spanish rule and becoming the first truly capitalistic society in Europe, they leaped forward around 1600. For two centuries the Dutch cut out their competitors in Antwerp by closing the Scheldt River estuary, making their ports of Amsterdam, Rotterdam and others, the biggest source of income until the 19th century. It can be seen in the table that between 1700 and 1820 the GDP per capita of the Netherlands actually decreased as a result of domestic instability and a loss of markets to Great Britain. As Britain is a significantly larger nation than the Netherlands, she would not only become richer as a nation but also richer per capita only around the mid-19th century. British naval mastery and skilful use of the for­ ces of the first wave of globalisation are described in Chapter 2.

1.3 FROM MERCANTILISM TO LIBERALISM All trade wars in the 17th and 18th century have the fact that they were initiated by something which came to be called mercantilism in common. Classical works devoted to the commerce and trade monopoly of the British East India Company, made two Englishmen, Josiah Child (1630–1699) and Thomas Mun (1571–1641), are particularly famous. The former advocated government-controlled interest rates and restrictions on all commerce, except the trade between Britain and its colonies. The latter was a proponent of general government intervention in order to increase exports over imports, which was to help accumulate precious metals in Britain. Above all else, however, mercantilism is mostly associated with the general inspector of finance of Louis XIV (1638–1715), the Frenchman Jean-Baptiste Colbert (1619–1683). Being the son of a wealthy citizen and financier from Reims, he ensured that France was able to build armies and wage wars, during the entire reign of the ‘Sun King’. Colbert did not invent mercantilism, although he has been associated with it because he effectively enforced it in France at that time. The system is based on the claim that natural resources are limited, and the power of the nation depends on what portion of the world’s resources cake it acquires. As this system spread in the 17th and 18th centuries, the economies of European powers remained controlled by a collection of governmental policies regulating nearly all economic activity. Colbert banned the export of raw materials, and high tariffs made it impossible to import finished products, especially luxury products; he promoted the development of manufacturing in mainland France to increase employment and ensure the export of French goods, thereby strengthening the French balance of payments. Above all, he banned the export of precious metals and tried to obtain all precious metals for the royal treasury. – 30 –

This system had been used with some variations by several European countries before Colbert. Portugal and Spain monopolized their trade for two centuries; they commonly used high duties and supported domestic traders and manufacturers, both in their home countries and in the colonies. The highlight of this effort on the Spanish side was called Casa del Contratación, which prevented the free trade of Spanish colonies, and whose licence was theoretically necessary for any trade or navigation of any subject of the King of Spain. Charles III (1716–1788) limited the role of Casa, and his son Charles IV (1748–1819), totally abolished it in 1790. England joined in no later than the time of Oliver Cromwell, although the textile and wool export monopolies will be described below. The English so-called Navigation Acts passed in 1651, forbidding the shipment of goods to England on vessels other than those owned by Englishmen or those of the country of origin of the manufacturers, were designed to support the key sector for the British Isles’ defence, i.e. shipbuilding. The Navigation Acts gradually spread into a variety of laws that were enforced and defended by individual factions of business and political circles. Not surprisingly, with the way the mercantile policy was adopted in other European countries, such as Denmark, Sweden, Russia, Austria (proponents of mercantilism were called Cameralists there), and the German states, etc., European foreign trade did not develop as much as it could have, because nobody wanted to export raw materials and import finished products in return. The answer since the 17th century was the establishment and occupation of further colonies. Whereas the English, French and Dutch, had just been trying to harm Spain, by far the largest colonial power aspiring to European hegemony, the seizure of colonies became their economic priority from that time. In retrospect, it seems somewhat inappropriate when discussing with colleagues from developing countries to insist that Europe colonized the world as a result of a specific economic doctrine, and then decolonized it about three centuries later due to another economic and political doctrine. But the fact remains that the adoption and expansion of mercantilism in Europe went hand in hand with the increased efforts of all European colonial powers. Granting monopolies to the English, Dutch and other East or West India companies heralded this mercantilistic trend. If trade competition and the struggle for maritime superiority and colonies directly followed from these mercantilist policies among the countries on the Continent, then equally hard lobbying took place within the states among various factions supporting one or another law or colonial area. Let us look at some examples from early 18th century Britain as recorded by Kovář in his book (2004). At that time, the success of the British Isles’ foreign trade as a whole was still measured by the volume of woollen goods exports. By far the strongest was the wool traders lobby in Whitehall and Westminster (the seat of the British government and Parliament, respectively), which promoted the universal register and recording of all movement of wool, from sheep shearing   The world before the rise of the Global economy      – 31 –

to its final processing, in order to prevent illegal exports. They boycotted all price reductions and even re-initiated proposals for a government monopoly on the sale of wool. Similarly, the ‘wool and silk traders’ led a major campaign against textile printing, claiming that this technique would take employment from thousands of people in the silk and wool industry. As a result, the government banned the wearing of garments made of printed cloth. Lobbies in other fields also celebrated their achievements. When the Great Northern War in the years 1720–1721 caused instability in pig iron and bar steel imports from Sweden and Russia, the government tried to encourage the production of iron in the colonies through the Naval Store Bills (concerning maritime warehouses). The steel lobby, representing the second most important industry in Britain, however, was resolutely against it, and so this law, inspired by mercantilism, was cancelled because of this group. As we have said, mercantilism assumed that the colonies would be a market for industrial products made in the metropolis, and a source of key raw materials for their production. All of the British colonies in that period more or less reflected this idea, except for the North American one. There was a list of materials that were essential for production in the metropolis, and therefore might only be exported to Great Britain. Of course, the colonial lobby tried to keep the list as short as possible, allowing colonies to trade freely, for instance, with the French or Spanish sugar islands in the Caribbean. If sugar was on that list, it would have to be exported from that area to Britain, purchased, and imported back into the North American colonies. The implications of this practise on the delivery cost and time for the British colonists in America are obvious. The Navigation Acts presented an even greater problem for actual production in the American colonies. The colonists didn’t only have to buy all of their goods via London, but they had to export some goods (furs, wood, metals, tobacco, etc.) on English ships, too. This kind of British mercantilist practice had been, by its nature, causing economic disputes since the 1760s, which eventually led to a successful revolt of the Thirteen colonies, and the establishment of the USA, as we shall see in the next chapter. The loss of the 13 American colonies, considered to be a temporary matter by the British, became permanent after the war of 1812–1814, thus revealing the limits of mercantilism in relationship toward the country’s colonies which had already reached a certain level of development in terms of their structure of population, size, and economic significance. This loss was a harbinger of a shift in the economic thinking of Great Britain. Slowly but steadily, economic liberalism was preparing its way to dominate the thinking and policies of key countries. The idea of free enterprise in foreign trade had been developed by Adam Smith (1723–1790), a professor of ethics from Edinburgh, Scotland. Smith, whose Inquiry into the Nature and Causes of Wealth of Nations, in 1776, laid the foundations of modern economics, and was very critical of 18th century mercantilism. According to him, mercantilism was nothing but a combination of inflexible government regulation and unfair privileges for – 32 –

state-approved monopolies and government favourites. Far better was the free competition that would protect consumers from price extortion and give all citizens a fair and equal right to do what they could do best. In a system where every citizen should have the greatest possible room to find his or her self-interest in a competitive market, Smith left just three roles to the state. The state should secure safety from foreign attacks, maintain public order, including the judicial system and the police, and finance certain essential public works and institutions that could never operate on the basis of private investments. Although he never used the phrase ‘the invisible hand of the market’ like John Calvin, he believed that people contribute by their work to one another for the common good. Then Smith added that this system did not require any action by the government, and was itself stable. To promote the ideas of a free market, however, the advocates of Adam Smith had to wait more than fifty years after his death. First, two processes had to be completed which would show the key political and economic actors in Britain that the country was competitive enough for its products and services to be demanded worldwide. In other words, that liberalism would bring more economic dominance to Britain than mercantilism. Generally speaking, even at a time of extreme mercantilism and trade wars, Britain was a freer country for business than its main competitor, France, in many areas. For example, most local taxes were abolished in the 15th century, and therefore a merchant within Britain could freely move goods on a large national market, which France did not manage until the French Revolution. State finances were controlled by Parliament, and the sovereign’s personal property and debts were separated from the national debt. Prior to the establishment of the Bank of England, English finances enjoyed much more market confidence than the French, despite a mere one-third of the population and a smaller volume of production. The establishment of the Bank of England helped to develop the market for state and private securities so that England possessed a much larger volume of loans for investment in agriculture, commerce and industry.

1.4 EUROPEAN COLONIALISM IN THE EARLY MODERN PERIOD In the early modern period, European colonial powers expanded in diverse areas. Russia, the largest of the European powers at the time of Peter the Great’s accession (1689, lived between 1672 and 1725), had a  very thinly spread population, especially north of its new capital, St. Petersburg, in the southern area of the so-called Wild Plains, and in the former Muslim khanates, where Russians were obviously a minority. The Tsars tried to populate the land or make the nomadic peoples, particularly in the south, settle down in order to reduce them to serfdom. This led to several Cossack revolts during   The world before the rise of the Global economy      – 33 –

the 17th and 18th centuries. The Romanov Tsars, after severe economic devastation during the Time of Troubles, managed to complete the conquest of Siberia, a virtual Russian colony, at the end of 17th century. Huge profits from Siberian natural resources, in particular fur, allowed the otherwise underdeveloped country to pay for imported goods and experts, to reform both the army and bureaucracy, and also to fund wars against the enemies of Russia. Both of them were defeated; Poland in the Thirteen Years War (1654–1667), and Sweden in the Great Northern War (1700–1721), thereby forfeiting their power status while Russia became one of the five great powers in Europe. Whereas the Russians managed to conquer and eventually settle much of Siberia, the rest of Asia was still independent from direct European influence. Portuguese, and later Dutch and British naval and trade superiority, did not change much about the fact that by far the strongest power in Asia was still the Manchu dynasty in China. The Chinese were strong enough to confine the European presence after 1757 to one harbour in Canton. The Portuguese, and later the Dutch, traded extensively in arms with various Japanese clans during the Sengoku jidai. However, after the unification of Japan under the Tokugawa shogunate (1603), the country completely sealed itself off to foreigners for two centuries. Also, the largest kingdom in Indo-China, Siam (today’s Thailand), remained largely independent from Western colonial powers. The Dutch sovereignty over Ceylon, later replaced by the British, as well as their conquest of present-day Indonesia, was limited. The Netherlands exercised its power over the region through semi-dependent sultanates controlling its various islands. Actually, the only encroachment by the Europeans was achieved in India. There were several British footholds acquired in India in the 17th century. The British tried to avoid conflicts with local rulers and to gain privileges from the constantly warring maharajas instead. Among the key areas, the British held Bombay, Calcutta, and Madras. The French did not start to acquire land and access the markets until the general controller of finances, Colbert, established the French East India Company. They gained territories, particularly in the south and southeast, around Pondichéry, Yanam and Karaikal; and in addition to that, they also gained possession of several isolated fortified points in the west of the peninsula, and in the Bay of Bengal. The French forfeited nearly all of their possessions during the Seven Years War, and the remaining few were constantly threatened with the decay of commercial importance. Pondichéry and Yanam were retrieved from Britain in subsequent wars, only to become a part of India after it declared its independence from British rule. The American continent was the most open for European colonization by far and therefore no single native state, culture or language has remained to this day. Spain left behind the most visible and lasting legacy. In the 17th century, the Spanish Habsburgs were set for a long-lasting decline in the whole of their empire, ‘on which the sun never set’. The glorious days of the Treaty of Tordesillas, by which the Spanish and Portuguese had divided the world between themselves, were long forgotten. After the Reformation, – 34 –

the influence of the Pope as a guarantor of such a treaty was slowly vanishing: while Protestant countries openly ignored it, the Catholic ones would no longer be threatened with excommunication if they did. Spain was not able to catch and punish either smugglers or pirates operating in their colonial waters. Moreover, they had to tolerate the French, British, and Dutch colonies, not only on the North American east coast, which they considered less profitable, but also on peripheral or non-settled Caribbean islands, or even the Spanish Main. The English occupied Saint Kitts in 1639, Jamaica in 1655, and other nations followed, fighting not only the Spanish but also each other in the colonies. The Spanish treasure fleet, which set sail yearly with a cargo of American gold and silver to Europe, also became the object of successful privateer assaults twice. First it was the Dutch Admiral, Piet Heyn (also Piet Pieterszoon, 1577–1629), in 1628, who managed to transport the entire cargo of the fleet to the United Provinces. In the year 1657, the fleet was destroyed by the English Admiral Robert Blake (1599–1657). The Spaniards, however, managed to save most of the cargo, while Blake captured just one galleon. These and similar attacks often had a devastating impact on the Spanish economy. For example, the result of Heyn’s attack was the bankruptcy of the Spanish crown. The commercial relations of the English with the Spanish colonies were long-lasting and extensive, virtually from the beginning until their declaration of independence from Spain. As Spanish power was declining, the role of the Casa del Contratación, which prevented the free trade of Spanish colonies and whose licence was theoretically necessary for any trade or navigation by any subject of the King of Spain, also declined. Another problem for the Spanish crown was the decreasing share of precious metals on the ships coming from American colonies. Some of the gold and silver mines (such as Potosi) had run out of ore, and the newly opened ones (such as Oruro and Pasco) could not compensate for the loss. The reign of the last Spanish Habsburg, the inbred Charles II, hit a new low for the Spanish Empire. After he had died without an heir, the conflict known as the War of the Spanish Succession (1701–1714) started. Yet another coalition war in Europe, caused by the conflicting claims of the Austrian Habsburgs and the French Bourbons to the Spanish throne (it lasted thirteen long years) as a union of such great value and which Spain and its colonies were, would dramatically shift the European balance of power to either the French or the Austrian side. Finally, a peace treaty was signed in Utrecht on the brink of the military and financial exhaustion of France, Spain, and Austria alike. It resulted in the split of Spanish possessions in Europe: Austria, being the prime benefactor, attained Milan, the Kingdom of Naples, the Southern Netherlands (approximately today’s Belgium) and the Spanish enclaves on the Tuscany coast. The French Bourbons acquired the Spanish throne and the colonial possessions, on the express condition that the thrones of France and Spain would never unite. France had to give up all of the territories on the right   The world before the rise of the Global economy      – 35 –

bank of the river Rhine, and some cities in Flanders; Britain regained the area around Hudson Bay, the Island of Saint Kitts, and took Acadia (Nova Scotia) and Newfoundland from France. Duke Victor Amadeus II of Savoy (1666–1732) obtained Sicily, which he later exchanged for Sardinia, and became the king of Sardinia-Piedmont. This was the state which would unite Italy between 1859 and 1870. England (Great Britain since 1707) had been victorious in the above-mentioned conflict. She obtained two strategic points in the Mediterranean: Menorca and Gibraltar, along with the vast profits from Asiento – and the right to supply slaves to the Spanish colonies. The British were also allowed to send one ship to the colonial city of Porto Bello once a year to trade with the Spanish. Great Britain strengthened her position, both as a naval power and in international trade, basing her power on small yet prosperous and well-run colonies, putting an end to the continental supremacy of France, and establishing herself in a favourable position for future colonial expansion. The reforms that the new dynasty on the Spanish throne, the Bourbons, would launch became the most important event in the Latin American economy. A more solid currency, based on the increased production of American mines and the professionalization of the colonial administration, was at its core. Shortly after accession, inspectors from the metropolis were sent to the colonies to find out the true state of affairs. Simultaneously, in reaction to the impotence of the Spanish military, reforms of the military and the navy were also under way. However, reforms were repeatedly slowed down by wars. First, the renewed and vigorous mercantilism on the part of the Spanish colonial administration, led to the War of Jenkins’ Ear between Britain and Spain (see the box). The War of Jenkins’ Ear – Robert Jenkins was the captain of a British merchant ship, which was most likely involved in the smuggling of British goods to the Spanish colonies in Latin America. According to Jenkins’ testimony in front of the parliamentary committee, the Spanish Coast Guard had forcibly boarded his ship, which he proved by presenting his ear preserved in alcohol, allegedly cut off by the Spaniards during his torture. Although Sir Robert Walpole (1676–1745), Britain’s prime minister at that time did not want another war with Spain, he was forced into it by public opinion, which had been encouraged by the publicity that came with Jenkins’ case. This war was a major boon to the British commercial and colonial circles, seeking to achieve further gains and concessions at the expense of the weakening Spanish empire. The main promoter of the war with Spain in the admiralty was Vice-Admiral Edward Vernon (1684–1757), who had been entrusted with the initial attack on the Spanish port of Porto Bello (in today’s Panama). This attack was a part of the British strategy, based on the weaknesses of the Spanish convoy system: all the exports from the extensive Spanish colonies in the Caribbean, came from three mainland ports of Vera Cruz (now in Mexico), Porto Bello and Cartagena (now in Panama and Colombia, respectively), and merged in Havana, the largest port in the Spanish colonies, and then – 36 –

sailed in a convoy to Cadiz. After the success at Porto Bello, the English decided to attack the much better fortified port of Cartagena. The attack failed, although the English had probably up to six-fold superiority and claimed eighteen thousand causalities among British soldiers and sailors. This heavy loss among ship crews ranks as one of the greatest in British history. Despite this success, the Spaniards kept losing their positions in America until the occupation of Spain itself by Napoleon, when all of the colonies in that region, except for Cuba and Puerto Rico, declared their independence. The colonial War of Jenkins’ Ear between Britain and Spain soon encompassed all of Europe, merged into the War of Austrian Succession (1740–1748). After the death of the Austrian ruler, Charles VI in 1740 (born in 1685), his twenty-three year old daughter Maria Theresa (1717–1780), inherited the throne. An edict called the Pragmatic Sanction, which allowed women to inherit the Habsburg hereditary possessions, had been recognized by all of the major powers while Charles was still alive. However, after his death, the ambitious ruler of neighbouring Prussia, Frederick (1712–1786), launched an invasion of the rich and predominantly German-speaking Habsburg province, Silesia. Since help from her British ally did not materialize, and other powers (namely Bavaria supported by France) had joined the attack on her lands, Maria Theresa lost almost all of Silesia during this eight-year-long conflict. The immediate impact of the defeat of English forces in the colonies was the incapability of the British to carry out military operations in Europe and to provide military and diplomatic assurances to Austria, where Maria Therese was desperately trying, and ultimately failing to defend Silesia against the Prussian invasion. As Silesia was part of the lands of the Bohemian crown, it can be said that the naval Battle of Cartagena in the Caribbean cost Bohemia a third of its territory. None of the powers participating in the War of Austrian Succession was satisfied with its outcome. Austria had wanted to regain Silesia, as it was considered vital for Austrian economic development. Prussia, having doubled its population to six million with the acquisition of Silesia, had been equally determined to defend the land which guaranteed its great power status. France had wanted to weaken Austria, the stronger of the two rivals, in order to regain its continental supremacy, while Britain had wished to expand her trade and colonial possessions, thus preventing the continental primacy of any great power at the same time. Maritime warfare and competition between Britain and France, to establish a colonial empire, thus escalated into another great conflict in 1756. The difficulties between Britain and her allies, stemmed from the fact that Britain had viewed France as the greatest adversary and demanded her ‘continental shield’, i.e. Austria, to transfer her armies to the Austrian Netherlands in order to fight the French and block access to British Hanover; whereas Austria considered Prussia her mortal enemy, and expected British support and subsidies in her fight for Silesia. London therefore turned   The world before the rise of the Global economy      – 37 –

to Berlin for her ‘continental shield’, while Vienna, which was quite naturally resentful, forged an alliance in Paris. During the Seven Years’ War (1756–1763), the aim of the French-led coalition was to conquer Prussia and divide up its territory. Frederick (now called the Great) led his army courageously and cunningly, against all odds. His brilliant victories saved him from destruction, while a surprising chain of events brought him unexpectedly to ultimate victory. First, the Russian Tsar Peter III (1728–1762), his great admirer, ascended to the throne in 1762 and recalled his army from the war. The smaller or regional powers (Sweden, Bavaria, Cologne, Württemberg), being exhausted by the war, followed suit. By then, the colonial wars had almost been decided in favour of the British, so that they could get fully involved in Europe. Therefore, a peace treaty was signed in Paris, in February 1763. At that stage, the French colonial possessions in America had almost ceased to exist. She regained only the Islands of Martinique and Guadeloupe in the Caribbean, and the small islands of St. Pierre and Miquelon, near Newfoundland. As we have mentioned above, France remained in possession of only five settlements in India, which were prohibited from being fortified. France had certainly lost its primacy in European affairs, a fact that she would only shortly dispute during the Napoleonic wars (1803–1815). Prussia, which had kept her possession of Silesia and grown more powerful, would eventually unite the German speaking lands, except for Austria, in 1871. Britain had been tremendously successful yet again. After the Seven Years’ War, Britain enjoyed naval mastery, her colonial empire eventually grew to be larger than that of Spain, and soon would become yet more profitable for the metropolis. While this turn of events massively enlarged the British dependencies, it also directly led to the rebellion of its Thirteen colonies in America. In the 1760s, the litigation (often economic in nature) between the English settlements in the New World and their mother country, increased in intensity. In 1763, a royal decree forbade the American settlers from moving west of the riverheads flowing into the Atlantic, or the Appalachians. The London Government claimed this would prevent clashes with the native populations there; however, more likely objective was to maximize profits for the Crown from the official sales of land in the west. Another attempt to harm the ‘American interests’, as it appeared to the colonists, was the prohibition on paying debts to the mother country with paper money (1764). The ultimate discontent arose because of the Stamp Act (1765). It directed ‘British stamps’ to be glued on all printed materials (newspapers, legal documents, etc.) issued within U.S. settlements. These economic regulations were designed to pass a part of the economic burden that had caused the Seven Years’ War onto the 13 North American colonies. Great Britain had defeated France and its allies in this conflict, but nevertheless, the conquest of all the French colonies in America had a significant impact on the security of her colonies, as it eliminated the French threat. American colonists did not sense the need for any military protection – 38 –

and railed against the increase of their obligations to the Crown, rather expecting a so-called ‘peace dividend’ after the end of the war. The American boycott of British goods, the setting up of purely ‘American’ organizations, which strove to unify widely different colonies, and their effective action against the British, were the consequence of their different view of the situation. Further tariff increases in 1767, related to tea, dyes, paper, and glass, were followed by boycotts and ushered in the incident known as the Boston Tea Party in 1773. The subsequent British repression united the resistance movement, which had insisted on negotiations on the abolition of all the mercantilist measures so far, to stop excluding any armed activities. There were further clashes, and two continental congresses later revealed that the majority of the elite was inclined to an open rebellion against the mother country. An armed militia was formed, and so on July 4, 1776, the Declaration of Independence and the Union was approved, which gave birth to the United States on paper. A war followed, in which the colonists were joined by a French expeditionary corps, under the command of the Marquis de Lafayette (1757–1834). The Frenchmen, who sympathized with the rebels and provided them with weapons and gunpowder, longed for some satisfaction in return for the humiliating defeat in the Seven Years’ War. The French government offered the colonists an official alliance in 1778. A year later, war was declared on Britain by the Spaniards and in 1780 by the Dutch. The Russian empress, Catherine the Great (1729–1796), helped to organize a League of Armed Neutrality, in order to protect the rights of neutral countries to trade on the high seas. Britain refused to recognize this organization and also its supplies to the belligerents. The war was decided by the surrender of British forces at Yorktown in 1781, whose supply had failed due to a temporary, but very effective, blockade of the ports by the French fleet. Given that Britain had waged war with half of Europe and had temporarily lost dominance over the world’s seas, she decided to offer some extensive concessions. In September 1783, the Peace Treaty of Versailles recognized the independence of the United States, including all of the territories as far as the Mississippi River. The Spaniards regained Florida and the Mediterranean Menorca; the French got the Caribbean island of Tobago, and Saint Pierre and African Senegal. Although Great Britain’s power kept growing, and the end of her leadership in the world would not come about until the First World War, this surprising defeat created an independent state that would gradually reach the size of a continent and which would become Britain’s toughest competitor. The Americans almost immediately applied the mercantilist principles of high tariffs to develop their own industrial sector, and to switch from raw materials to industrial production exports and the gradual industrialization of the country. With some exaggeration, one could say that although the introduction of higher tariffs and taxes was the reason for their struggle for independence, Americans have never had such low taxes and duties as they did during the reign of Great Britain.   The world before the rise of the Global economy      – 39 –

The establishment of the United States of America had an enormous indirect economic and political impact on European affairs. The publicity of the Declaration of Independence in Europe, in which its author Thomas Jefferson and later President (1743–1826), had de facto proclaimed the traditional rights of Englishmen to be universal, i.e., valid for people of all nations, instantly became a huge source of inspiration for Europeans living in absolute monarchies. The rights to life, liberty and the pursuit one’s own path to happiness were an entirely new concept for many in Europe. Ironically, it was particularly allied with France, where these ideas reflected very strongly. The costs of military expeditions in America had led, along with other factors, to the bankruptcy of the French crown, so with a little exaggeration it could be said that in return for his aid to the American colonies, King Louis XVI (1754–1793) received insoluble financial problems and a populace demanding the downfall of his regime. Although it would be interesting to follow the historical events in France at the time of breakthrough during the French Revolution, the Directory and the Napoleonic wars, we will only focus on their implications for the world economy. Those implications remained significant for the so-called continental blockade and the peace settlement ending the Napoleonic wars achieved by the Congress of Vienna. However, for a whole quarter of a century, when Europe was immersed in the Napoleonic wars, she had a negligible impact on the world economy. The only, yet major, exception was Great Britain. Therefore, as we describe the establishment of the world economy in the 19th century, we are going to monitor what was happening in Great Britain in particular; as much as in any description of the world in the 20th century, an economist must focus primarily on the U.S., Europe, and Japan, along with China in the 21st century.

1.5 THE INDUSTRIAL AND AGRICULTURAL REVOLUTIONS The first of these two key processes was the ‘Agricultural Revolution’. Historians disagree on the exact timing, but it is safe to say this process began as early as the mid-17th century, and its first phase ended in the late 18th century, with the second phase continuing throughout the 19th century. Abandoning both two-field and three-field crop rotation brought about a significant increase in cultivated areas, as the feared depletion of the soil was prevented by the rotation of grain with crops that store nitrogen. These crops included peas and beans, root crops such as potatoes and turnips, or grasses and clover. The latter two were also used to feed the growing numbers of cattle, which meant a greater amount of fertilizer for the cultivated land, as well as higher yields, and consequently higher stocking rates. The introduction of improved agricultural tools, together with a careful selection of seeds, and animal breeding, also significantly reduced the laboriousness – 40 –

while yields in crops and animal production increased. In addition, there was a new way to obtain arable land instead of the traditional grubbing, namely draining swamps and wetlands with drainage systems. The last contribution to the ‘agricultural revolution’ was the significantly increased use of horses (instead of oxen) for work in the fields, which allowed up to double the efficiency of ploughing, even before the introduction of the steam engine to agriculture. During the second phase of the ‘agricultural revolution’, industrial innovations (harvesting and threshing machines, the modern use of steam power, and the use of chemical fertilizers) were introduced, which led to a further increase in agricultural production. Although it was a relatively long process, the impact of the ‘agricultural revolution’ in the UK was very significant. Grain production in the period from 1760–1820 increased by 60%, and by a further 50% from 1830 to 1860; meat production increased in the same period by 35% and 25% respectively. The situation with other agricultural products was similar. In spite of that, the total figures still argued against this sector in comparison to industry or commerce. While in 1760, British agriculture contributed approximately 45% to the national income, by 1840 the percentage had dropped to 23%; the share of industry and commerce (and transport), however, had increased from 24% to 34%, and from 13% to 17% respectively (Stellner 2006:39). Great Britain had thus become the first industrial-agrarian country in Europe. As we can see, the reason for that proportional change was not a decline in agricultural production, but rather the phenomenal growth of industrial production. One of the direct impacts of the ‘agricultural revolution’ and, later, the industrial revolution was the growth of the European population. For example, the Italian states were able to feed 11.5 million inhabitants in 1700, then in 1800 the number was near 17 million (excluding the Austrian lands). The population of England and Ireland grew from 8 to nearly 17 million, and the population of France from 19 to almost 25 million. Though approximately in 1775 France was overtaken by the unprecedented growth of the Russian population, where even minor improvements in agricultural production caused an increase of 13 to more than 30 million inhabitants. Interestingly, we may also note how significant the loss of almost three million Silesians was to Austria, along with its large deposits of coal, while at that time about the same population was living in Bohemia and Moravia. Conversely, Prussia had almost doubled its population to 6,000,000 by a successful war of conquest. The comparison below gives a picture of the increase in population. While some countries population increased by 50 percent, in others it more than tripled. Please note that the lands of former Czechoslovakia and Hungary were united with Austria in the Habsburg monarchy. The enormous increase of European population throughout the 19th century and reached its peak in the years around World War I, when about 40 percent of all the world population lived on the Continent.   The world before the rise of the Global economy      – 41 –

Table 1.2: Population growth comparison in selected European countries (in thousands) Year Austria

F. Czechoslovakia Hungary


France Germany


F. Ireland USSR



1 000


  8 000   5 000

  3 000



  3 900



1 250


  5 000   6 500

  3 500

  2 000


  7 100


2 000

3 000

1 250

10 500 15 000

12 000

  3 942


16 950


2 500

4 500

1 250

13 100 18 500

16 000

  6 170

1 000

20 700


2 500

4 500

1 500

13 300 21 471

15 000

  8 565

1 925

26 550


3 369

7 657

4 146

20 176 31 250

24 905

21 239

7 101

54 765

Source: Maddison Historical Population Dataset

The employment of an increasing number of people living in villages was partly solved by the ‘putting-out system’. In this system, a businessman lent raw material to village workers for home processing, and later he would return for the finished products at the appointed time. Workers were paid by the number of pieces produced. There were all sorts of variations of this relationship, whether it was the type of production, the risks and costs born, or the independence and specialization of the above workers. In the Czech lands, the putting-out system was applied mainly in spinning flax and cotton, which gradually employed as many as 600,000 inhabitants. Similarly, another major change was gradual urbanization, or relocating for work into regions with a higher volume or intensity of manufacture production. Growth in both rural and urban small-scale production and the manufacturing industry gradually began to divide Europe into areas with a higher or lower population density. In Britain, the most densely populated areas surrounded London, Birmingham, Bristol, and Norwich, including the strip ranging from the Midlands and along the west coast to the Scottish border in the north. In Ireland, the east was much more densely populated than the island’s northwest section. In France, apart from the regions surrounding Bordeaux, Lyon, and the Rhone estuary, the north of the country was far more densely populated, stretching from Brittany to Paris and its environs, as far as to the border of present-day Belgium. By European standards, the whole of the Netherlands, with the exception of Frisia, had traditionally been densely populated. This was also the case in northern Italy: as for its present-day major centres, historians do not concede a larger population, except to Turin and its surroundings. In the German lands, the traditionally populous states were not only along the Rhine, the Danube, but also around Augsburg. The region in Central Europe where the population density was as high as in the West, was southern Silesia with northern Moravia. All of those regions, except for the surroundings of Bordeaux and Augsburg, or perhaps the Rhine, were engaged in textile production. And this gave – 42 –

birth to the Industrial Revolution, particularly in Great Britain, which was rich in quality wool. There were many more causes and necessary conditions for the long and complicated process of the mass introduction of machines into production, together with the associated far-reaching economic and social change, however. Stellner et al. include among those conditions primarily the political stability of the country, sufficient capital accumulation (preferably rising economies from manufacturing enterprises, trade, and agriculture), or banks willing to provide loans with low interest rates. According to several authors another essential factor was the existence and variety of innovative production processes, which had a profound influence on the development of industrial production, and continued to allow the division of labour. An advantageous geographical location, ample labour, devotion to the idea of laissez-faire and free trade, and the existence of a sufficiently large market were also important factors. As we can see, the conditions for an industrial revolution were manifold. Nevertheless, it took place successively in all of the countries of Western and Central Europe, though over a long period of time comprising the second half of the 18th and virtually the entire 19th century. It was the industrial revolution that was the second crucial process in enabling the promotion of liberalism. Like many other phenomena, it first occurred in the British Isles, particularly in some parts of England and Scotland. The developed textile industry boomed and, with the invention of a cotton-spinning machine (called Spinning Jenny), Cartwright’s mechanical loom, and Whitney’s cotton gin, enabled the unprecedented expansion of mass manufacture, gradually transforming into industrial plants. Above all, the steam engine by James Watt (1736–1819), and its myriad applications (Stephenson’s locomotive), together with ever-expanding ideas of liberalism and an entrepreneurial spirit, determined that Britain would gain competitive advantages in several industries for almost one hundred years. But it was clearly the textile industry where the pressure to increase production, which would be able to supply the ever-growing markets, marked the first ultimate breakthrough of the industrial revolution, i.e. the creation of the first large factories. It was the cotton industry, which was the first in Britain to be completely transformed from its humble beginnings before 1780 to magnificent large-scale production plants after 1830. Iron processing and iron goods production was the second industrial area which could not be operated in the putting-out system, but was clearly a product of the industrial revolution. In the mid-18th century, iron processing was significant in Birmingham and Sheffield, which were also surrounded by important coal mining regions at that time. There was extensive coal mining around Newcastle, too. Iron ore was mined mainly in eastern Wales and the South West of England. Steam power brought about tremendous changes in all industries from mining equipment to steam-powered spinning machines. Perhaps the greatest impact can be traced to iron ore and steel production, as well as transport. Steam-powered blast furnaces helped iron manufacturers   The world before the rise of the Global economy      – 43 –

to switch from charcoal to the much more calorific coke, enabling the production of a significantly higher quality iron, which could be cast and moulded into various shapes and forms. British manufacturer Henry Cort (1740–1800) introduced further improvements in the processing of pig iron (the ‘puddling furnace’) in 1780. The economic implications of these technical innovations meant an extensive development of the British iron industry. In 1740, the annual production of iron reached only 17,000 tonnes. With the expansion of smelting, using coke and Cort’s inventions, production rose to 68,000 tonnes in 1788, 125,000 tonnes in 1796, and 260,000 tonnes in 1806. Britain, in 1844, produced 3,000,000 tons of iron (McKay 2008). That was a grand development, indeed. Iron, once rare and expensive, had become a cheap, basic and essential building block of the economy. Sufficient amounts of iron and its relative decline in price led to another important factor, the increase in the industrial revolution by the development of the railway. Since the invention of steam locomotives, the number of operating railway lines began to rise dramatically. These lines did not only interconnect commercial centres and major ports, but also the recently opened hard coal mines. Hence, the first locomotive of George Stephenson (1781–1848) was set onto track in 1814, and the first regular rail service between Stockton and Darlington was launched in 1825; whereas in 1840, Britain had 2,390 km of railway lines, in 1870 it had 21,558 km. Other modes of transport were equally important. The expansion of the road network and in particular the application of the steam engine in shipping (Fulton’s steamer in 1807) encouraged the widespread building of canals and extension of navigable rivers.

THE CHAPTER SUMMARY Food sufficiency and specialization allowed the local and regional markets, and ultimately the world economy, to be established. The first markets were formed along large rivers that ensured a good harvest and served as important transportation routes. A large increase in trade occurred during the Pax Romana, world domination by the Romans, who built roads and ports in their expanding territory. The Romans created a single market in the Mediterranean, an extensive Atlantic trade, trading with Scandinavia, present-day Russia, and as far as India. We can speak of a ‘global market’ in the then known world. After the collapse of the Roman Empire it was the Vikings who, during their raids, founded agricultural settlements and trading posts in large parts of Europe, to engage in regional and long-distance trade. Further expansion occurred during the Crusades, when new long-distance trade routes were established to operate for several hundreds of years. An irreplaceable role therein was played by Genoa and Venice. There was not only an exchange of goods, but also scientific and technical knowledge which came to Europe from the more developed East. A change in economic relations was brought – 44 –

about by the conquest of Constantinople by the Ottoman Turks in 1453. The Genoese lost their position in their trade with the East, and reoriented to the Western Mediterranean. In northern Europe, a significant position was held by the Hanse, a trade association of up to 200 port cities. The foundations of a truly global economy were laid by the European colonial powers, whose mutual competition were among the conditions for the development of new technologies, and affected maritime trade and economic activities. The Portuguese, Spanish, Dutch, French, and English (or British) took several centuries to create a world economy through extensive foreign trade, which included the newly discovered continent of America. The world economy was also radically influenced by religious reformation. John Calvin’s reinterpretation of the Bible enabled the use of, until then, an illegal interest, and thus capital accumulation among the middle classes. Hence, he laid the foundation for modern banking. ‘Protestant ethics’ also formed the early capitalist enterprise which was first established in the United Provinces of the Netherlands. In the 17th and 18th centuries, trade wars took place among the colonial powers, initiated by mercantilism, which undercut free trade by government regulation of economic activity. The result was an increased effort by all colonial European powers to seek deposits of raw materials and new markets for their products. The mercantilist policy of Great Britain was one of the causes of the American War of Independence, whose outcome would result in the emergence of Britain’s biggest competitor in the following century. The loss of the American colonies was one of the reasons for the change in economic thinking in Great Britain, where Adam Smith’s liberalism, emphasising free enterprise and free competition, was eventually promoted, along with a significant reduction in state intervention in the economy. Before that, however, Great Britain had to go through the agricultural and industrial revolutions in order to ensure competitiveness.

  The world before the rise of the Global economy      – 45 –


The Nature and Emergence of  the Global Economy

2.1 THE WORLD AFTER THE NAPOLEONIC WARS AND THE PAX BRITANNICA Some of the most dramatic economic changes in Britain took place during the war with France, led by Napoleon I. (born as Napoleone Buonaparte in Ajaccio, Corsica in 1769, died on St. Helena Island in 1821), from 1799. Great Britain had to find a huge investment for that development to simultaneously finance the world’s largest fleet, which had a wide range of duties in virtually all of the world’s oceans, not to mention financing its own army, and still be the banker of the anti-Napoleonic coalition. The task was all the more difficult in that Napoleon, when his hopes for an invasion of the British Isles had faded after the battle of Trafalgar (see below), tried to fight Britain primarily through economic means. In 1806, he introduced the ‘Continental System’ by the Berlin Decree trying to seal-off Europe from the British trade. Let us therefore take a general look at some of the basic circumstances of that time, and which would still have a significant impact on the world economy a long time after the Napoleonic wars. – 46 –

Though the financial crisis of Louis XVI’s state caused the fall of his regime, it also provided a revolutionary regime, and thus later Napoleon, with the second largest fleet on the Continent along with a well-organized and wellarmed military, which had long been difficult to defeat. Napoleon’s military genius meant that his armies dominated most of Europe for more than a decade. At sea, the situation was more balanced. The British fleet was not able to prevail always and everywhere, especially against the combined French and Spanish fleet, whose continued existence made the invasion of the British Isles a possible, and, at a certain point, even likely enterprise. Therefore, the British were trying to provoke the enemy fleet to fight, which was eventually achieved at Trafalgar in October 1805 by the fleet of Admiral Nelson (1758–1805). Although the combined Franco-Spanish fleet outnumbered him, Nelson’s tactical genius achieved their almost complete destruction and rid Britain of the danger of a French invasion. So, if we are talking about political stability as the most important condition of the industrial revolution, then it was achieved by this victory. Among the most important events of that time with important economic connotations, we can include Napoleon’s dissolution of the Holy Roman Empire in 1806, which weakened the Habsburg Dynasty and created a power vacuum in the German lands. This power vacuum was later to be taken up by Prussia at the time of unification (1866 and 1871), and the German Empire, which was thus allowed to gradually become the largest Continental economy, respectively. Also, after Napoleon’s defeat, the Congress of Vienna (1814–1815) brought about the redrafting of boundaries that remained essentially unchanged throughout the 19th century, but which were so significant in some cases that they had economic implications. For example, Prussia acquired the coal-rich and developed Ruhr area, the Kingdom of the Netherlands was strengthened by gaining the Austrian Netherlands, and Russia gained the ‘Kongresówka’, thus holding nearly all of the former Kingdom of Poland. And finally, Napoleon’s occupation of Spain and the tough guerrilla war that consumed essentially the entire Iberian Peninsula facilitated the decomposition of the Spanish overseas empire. This empire, which had been determining economic activity in its controlled countries for centuries, now split into two dozen politically and economically competing state entities. The complete end of the Spanish empire came about in a war against the United States in 1898, when the Spaniards lost the Philippines and the Pacific Islands, along with Cuba and Puerto Rico in the Caribbean. The empire over which the sun had not set since the 15th century, and that had been shaping trade and production throughout the Americas, was left with only a few African enclaves. A major economic impact, both on the European continent and the British Isles, was undoubtedly caused by the aforementioned continental blockade. It was mainly about new industrial products which had to be found on the Continent as a replacement for the missing British goods – although smuggling   The Nature and Emergence of the Global Economy      – 47 –

was so widespread and regular that some insurance companies had decided to insure against the losses caused by the crackdowns of security forces. Even so, new industries were created (extensive use of linen instead of cotton, beet sugar instead of cane, etc.) to replace the missing colonial wares. Similarly, new industrial centres developed; for example, Austrians tried to compensate for the previously lost Silesia by developing Bohemian coal mines (Ostrava, Kladno) and their plentiful navigable rivers. At this time in Bohemia, sugar beets began to be grown extensively, allowing the expansion of Czech engineering, whose considerable part focused on the very production of the processing equipment for this commodity. In terms of world economy, it was essential how Great Britain coped with the loss of the European market during the period it was fighting Napoleon all alone. Needless to say, it was very difficult for Britain, particularly in 1808 and from 1811 to 1812, although a breach in the continental blockade would always be found. Firstly, the revolution in Spain allowed British goods to be sold in Europe via the Iberian Peninsula, and later Sweden allowed supplies of timber for ship repairs and procured British industrial goods in the Baltic. Eventually, the Russian-French hostility allowed the British to trade with Russia after 1812. The Russian failure of the blockade, which had been agreed at the emperors’ meeting at Tilsit in East Prussia, was one of the major reasons for La Grande Armée (the Great French Army) to invade Russia. However, its defeat in the winter of 1812 marked the beginning of Napoleon’s end. The aforementioned smuggling was a huge relief both for the Continent, being denied colonial goods, and for Britain. Trade crossed ideological barriers when the British Navigation Acts had essentially been suspended, and the general need for mutual trade was so great that even the French themselves rebelled against the system. The English Channel was no barrier to trade agreements, so sugar and coffee were exchanged for brandy and wine. Exports of farm production, so popular with Napoleon, were interfering with the prohibition of trade with Britain. Even some of the shoes and uniforms for La Grande Armée were ordered in England! The need for mutual trade and the absurdity of the continental blockade, along with the mercantilist principles of the time, may be demonstrated by the fact that American mercantile ships were selling British goods to the French with some help from the British and Canadians. This means that the British must have sold goods to the Americans, being at war with them (War of 1812 lasting from 1812 to 1815), knowing that the final destination was France, which was also their enemy, and so lifted the blockade of the United States. Then the French must have let the British goods pass through their continental blockade. It is hard to find any better evidence of the need for liberal trade and its resilience in all of history. Although the blockade was devastating the French and continental economies as much as the British, eventually it was the British who prevailed in the conflict, despite being more dependent on trade than the French. They owed – 48 –

it to a dramatic increase in Atlantic trade, which was gradually replacing the earlier exports to the European continent. ‘Trade with the British West Indies rose from £6.9 million in 1793 to £14.7 million in 1814; with the foreign West Indies and Latin America, both newly opened during the war, rising from virtually nothing to £10.5 million. Asia, Africa and the British North America were also growing in importance. The enormous expansion of the London dockyard system – where the West India, Brunswick, London, East India, and Commercial Docks were opened between 1802 and 1813 – was a reflection of this development in Britain’s overseas, and particularly her entrepôt, trade’ (Kennedy 2001:144). The fact that the total volume of English trade in this reporting period was growing relatively rapidly (see Table 2.1) proves the ability of the British to redirect to the quick establishment of new markets virtually worldwide. Tab. 2.1: Computed or declared values of Great Britain’s overseas trade (millions of pounds) Year
























Source: Kennedy 2001:145.

The industrial revolution that had taken place in Britain before it did in other countries, allowed it to become ‘the factory of the world’, instead of being ‘the nation of grocers’. While other states came out with a shattered economy (the Dutch and Spaniards had been occupied by the French during the Napoleonic Wars, so their metropolitan economy was subordinated to the interests of the French war) and their colonial empires were reduced by wars of independence or captured by the English, the British economy, naval power and colonial empire grew. Between 1815 and 1859 we may talk about the Pax Britannica, because to contemporaries there seemed to be only one available comparison, which was with the ‘Pax Romana’. Due to its technological and commercial superiority and the ability to motivate a large part of the world with its commercial interests, this dominance and ability to shape or literally create the world economy cost relatively little. Britain ruled informally through its befriended states, and on the basis of shared economic interest. As stated by Kennedy (2001:150), it did not have to spend more than one pound per capita on defence annually, i.e. 2–3% of the national income. With a guaranteed economic dominance after the defeat of Napoleon, the dream of all English liberals could be finally fulfilled: to remove the barriers to free trade, which would bring about prosperity for all and reduce the threat   The Nature and Emergence of the Global Economy      – 49 –

of trade wars. Nothing had indicated that outcome at the beginning, however. With the introduction of the Importation Act in 1815, Parliament passed a law allowing duty-free imports of grain from abroad only if the domestic price of corn had reached 80 shillings per quarter (i.e. 290 litres). The fight for the revocation of these laws (called the Corn Laws) has become synonymous with the fight against mercantilism in favour of free trade. It was championed by Richard Cobden (1804–1865) a factory owner and politician from Manchester. After a seven-year campaign and lobbying among the MPs, he and his proponents from Anti-Corn Law League managed to repeal these laws in 1846, when new law kept only the minimum rate of one shilling per quarter. The British government fell, the dominant Conservative party split over the issue and new Liberal party emerged. From the mercantilists’ point of view, the revocation of the Navigation Acts, along with all the other tools which enabled Britain to monetize the century-long trade wars and conflicts in the colonies at the very moment when its virtual monopoly on dozens of products could be exerted, seemed to be incredibly stupid. To Adam Smith’s successors however, such as to mercantilists from other countries, this move made perfect sense. Not only could deliveries of first-class products at unbeatable prices earn more, but they also prevented the world (Europe in particular) from quickly building an extensive industry out of the need enforced by trade barriers (Cain and Hopkins 1980:466), and which would have challenged British leadership. ‘As a German economist put it in 1840: “It is a very common clever device when anyone has attained the summit of greatness [i.e. industrialization], he kicks away the ladder.” To them, free trade was simply a measure to preserve Britain’s economic dominance’ (Kennedy 2001:152). The British really made sure that free trade, which would secure their superiority, would be gradually adopted not only by European countries, but the entire world. China opened up to world trade out of almost complete isolation in 1842, and Korea did so at roughly the same time. Siam dramatically reduced duties in 1855. Japan opened up to the world in 1858, and India and Indonesia followed with a condemnation of their mercantilist policies after 1860, mostly as a result of being forced by their colonial powers or gunboat diplomacy.

2.2 GLOBALIZATION – THE ORIGIN AND NATURE OF THE PHENOMENON All of the above-mentioned changes in the economic structure of European and overseas countries, allow us to talk about a truly global or world economy for the first time in history. The starting point of the world economy lies with the processes related to international trade. Due to the development of international trade relations, individual national economies were becoming increasingly interdependent, mutually contingent, and complementary, – 50 –

so they gradually established a global economy. The world’s economy is not just the sum of the economies of individual states or other units. The basic features of a world economy include interconnection among these entities. As for the definition of ‘global economy’, it is essential that this connection is shared by all populated areas of the world. Although expert opinions differ on the timing, most of them agree that such a situation occurred in the middle of the 19th century. Cihelková (2001:2) states two conditions for the emergence and existence of the global economy: ‘First, the breakdown of human society into relatively closed manufacturing and economically independent social units tied to particular territories.’ By these units, of course, we mean states as they were formed on a national basis. The second condition is ‘the transformation of the social division of labour into an international and later a global division of labour’. As we have presented so far, the industrial revolution enabled the deepening international division of labour, while the geographical distribution of production was particularly determined by, besides climate or the level of technology, the European colonial powers and the economic needs of their metropolitan areas. ‘Thus the world economy was being formed simultaneously with the colonial system. It was established as a single market economy based on unequal relations between developed metropolises and colonies lagging behind. So, it was not only uniform but also significantly differentiated in its core’ (Cihelková et al. 2001:3). As we stated at the beginning of the first chapter, when people are able to feed themselves, they begin to produce things for exchange and start to specialize. Trade and markets emerge. The fewer people that are needed for agricultural production, the deeper the specialization that occurs, and thus the trade ties may be more complex. Long-distance trade, which allowed the emergence of a single market, had played a major role in linking national economies. Remote areas do not become globalized, however, only by a change in their demand for imports or the growth of their exports. Commercial expansion may be the ‘result of population growth, the colonization of empty lands, capital accumulation, technological change, and a variety of other factors… the only irrefutable evidence that globalization is taking place… is a decline in the international dispersion of commodity prices or what we will call commodity price convergence’ (O’Rourke and Williamson 2000:4). In other words, if the volume of mutual trade among remote areas of the world is so distinctive that it can influence prices on local markets, then it not only connects these economies into a single global one, but it substantially transforms them, through unified prices, at the same time. This unification of world market prices is called globalization. First, trade must affect the prices of goods on the domestic market. Then, as a result of price changes it will redirect resources to increase (or decrease) production and redistribute the income in societies affected by globalization. These facts are also reflected in the political sphere, as the possibility of rent-seeking reduces and the pressure imposed by lobbies grows. And if   The Nature and Emergence of the Global Economy      – 51 –

we look beyond the realm of international economic relations, we can freely proceed with terms like ‘global village’ with respect to changes in fashion and lifestyle. Now, the point since the worldwide convergence of commodity prices, i.e. globalization, can be traced is the matter at hand. O’Rourke and Williamson claim, based on the research of prices in the world’s most important business centres, that a restriction of rent-seeking through ‘high transport costs, monopolies, mercantilist intervention, or international conflicts’ had not occurred until 1820 (O’Rourke and Williamson 2000). But globalization is not the world economy and the world economy does not necessarily need globalization for its existence. Globalization can be seen as a vehicle that takes us faster to the world of extensive labour specialization, adored by the liberals, where everyone does what they do best on a worldwide scale. The interdependency of national economies into one global economy is efficient and fast. This vehicle may crash quite easily, as will be shown below, but first, let us mention two instances which illustrate the difference between the concepts of globalization and world economy. As we have said, the Dutch were the first to trade goods and raw materials which could be produced and exploited by anyone. It was not until the British were enabled, by the Industrial Revolution and the fall in transport costs, to proceed from luxury or generally uncompetitive products (utilizing the regional uniqueness of production, transported in small quantities), to systematically trade competitive products that could be produced by anyone. Non-competitive products, by their definition, cannot be competed against by anyone in the country of their import (spices, sugar cane, etc. imported to Europe). This creates a completely new market, where the only things that affect the price are mercantilist tools, i.e. monopolized markets, embargoes, quotas, or the military power of the importer. On the contrary, competitive goods (industrial products, wood, grain, etc.) transported in large quantities, unify prices, and have a dramatic impact on the distribution of income and the economies of countries where they are imported. Both cases reinforce the ties among the economies of nation states, but only the trade in competitive goods unites the prices thereof, and thus represents globalization. Another example might be a conflict of war. While the mercantilist environment can deal with a commercial or military conflict, and the world economy is only affected locally and may prosper as a whole, in the case of liberal trade and globalization, an extensive military conflict is fatal. Such a conflict nearly always brings about higher customs duties, embargoes, and other mercantilist tools, which differentiate prices and thus work against globalization.

2.3 THE FIRST WAVE OF GLOBALIZATION From the 19th century on, banks, businesses, and individuals followed their business interests throughout the British Empire, which gradually occupied – 52 –

as much as one-sixth of the world land mass. Britain produced about twothirds of the world’s coal, about half of the iron, five-sevenths of its steel, ­two-fifths of the finished products, and about half of the cotton fabrics. After 1815, British non-European trade grew dramatically. Latin America, the Levant, Africa, the Far East, Australia and the Pacific region, were drawn into the world economy, which clearly had its centre in London, and which had already established business connections with North America, India and the West Indies. International trade was flourishing, especially between 1840 and 1870. Foreign investment followed this business. Britain attained the position of the leading investor, banker, insurer, and even the forwarder, rather than the producer of goods. ‘The spread of industrialization to Europe and North America, and the opening up of new markets and sources of raw materials in the tropics, were in the main financed from London. Britain’s return on overseas investment of £10.5 million in 1847 had risen to £80 million by 1887; by 1875 she had £1,000 million invested abroad, with the interest therefrom being continually re-pumped into old or new areas of investment. Her lead in shipping was enormous, for she had fully replaced the Dutch as the carriers of the world, gaining yet another important source of earning. After shaking off an American challenge in the first half of the century by switching from sail to steam – one further advantage of her early industrialization – she had by 1890 more r­ egistered tonnage than the rest of the world put together’ (Kennedy 2001:151). British companies primarily built power plants, ports, and railways. Along with capital, waves of migration increased the population. This development did not stop until the First World War, and was followed by the crisis of the thirties and especially World War II, as we shall see in the next chapter. By then, the United States, a former British colony which had gained independence in 1776, had already attained experience with foreign investments connected to their political influence in Latin America. By the First World War, the United States of America had become the largest industrial power. That was in stark contrast to the role of raw materials exporter attributed to the colony by Great Britain. Crafts and Venables (2001) use the example of the USA to suggest that their development cannot be explained merely by their involvement in the liberal world trade promoted by the British. They point out that in such a case, the USA could never have become a  net exporter of manufactured goods. The authors have created a  model to simulate the economies of the USA and Argentina, a  country that has retained a strong agricultural sector. They show that in order for the USA to industrialize and attract millions of migrants, mainly from Europe in this environment, they must have introduced very illiberal mercantilist policies, such as high protective tariffs. In conclusion, the authors did not forbear to note that no sooner had the United States been populated and industrialized than they started to apply an economic policy which was exactly opposite to their contemporary recommendations to the poorer countries, i.e. blocking   The Nature and Emergence of the Global Economy      – 53 –

immigration and trade liberalization. In this situation, it is no paradox that the USA regarded the British system of liberal trade, which involved most of the world economy, to be the greatest danger to their ever increasing industrial production. Fortunately for them, even in 1913, when they had already become the major industrial manufacturer, the influx of immigrants was continuing, though allowing the enormous domestic market to stay unsaturated, and there were still enough states willing to pay for the export of U.S. manufactured goods. During this first wave of globalization another phenomenon unseen before occurred. The free trade brought along a strong convergence in per capita incomes for European countries and their offshoots. Those countries experienced stable and strong convergence before 1914 and weaker convergence from 1914–1950 (Pritchett 1997). However, the majority of countries of the rest of the world experienced enormous variability in both their GDP growth rates and incomes. ‘The growth rates for developed economies show convergence but the growth rates between developed and developing economies show considerable divergence. The growth rates of developed countries are bunched in a narrow group while the growth rates of the less developed countries are all over with some explosive growth and other in implosive decline’ (Pritchett 1997:14). Towards the end of the 19th century, the British began to have problems even closer to home, in addition to American competition. It was mainly German, and to some extent French competition. Creating huge conglomerates of companies with a ‘natural monopoly’ in a certain field, as the Germans and the Americans did, was difficult for the British economy, as in most areas its structure was based on medium- and small-sized companies. Similarly, their satisfaction with the amount of profits and their effort to keep what worked well lulled the British into relative stagnation in the late 19th century. Last, but not least, the British economy was slower to develop in new fields. This was mainly the chemical and electronics industries, which the newly industrialized countries – the united Germany (after the wars with Austria in 1866 and France between 1870 and 1871) and the United States – were able to apply and develop in new areas. Although Great Britain was the largest naval and commercial power in the world, its relative strength continued to decrease up to the First World War. ‘In 1870, Britain comprised 31.8% of the world industrial production, the USA 23.2%, Germany 13.2%, and in 1913 the USA participated with 31.8%, Germany 14% and Britain 13%. The British share of pig iron production from 1870 to 1913 had dropped from 46% to 13.9% and steel from 35.9% to 10.3% in the same period’ (Stellner 2006:43). Likewise, its share of world trade was declining (see Table 2.2), in particular reflecting the fact that Britain had not only failed to compete in the new industries, but had also neglected the old ones. So, Britain was gradually refocusing its exports on traditional industries (textiles, coal and iron) and less competitive markets. – 54 –

Table 2.2: Percentage of world trade Country
































Source: Kennedy 2001:190

Let us make a side note about the countries with which Britain competed. In addition to the United States and Germany, they were particularly France, Russia, and partly Austria (Austria-Hungary after the settlement in 1867).2 ‘France was entering the last third of the 19th century in a very difficult position. After the defeat in the war with Prussia (1870–1871) it had to cede the economically developed region of Alsace and Lorraine to the united Germany and pay heavy war reparations – five billion gold francs. A more dynamic economic rise occurred at the turn of the 19th and 20th century, especially in the light industry (light engineering, textile industry, food industry and other sectors), and the armaments industry. Small-lot production of fashion and luxury products (fancy goods, perfumes) was prospering’ (Stellner 2006:43). Since most companies continued to be concentrated on small-scale businesses or even homes, and agriculture played a significant role, the difference in the efficiency of the U.S. and German economies on the one hand and the French economy on the other, was significant though. France did not see its colonies in terms of economy so much as a matter of national prestige, and therefore the overall contribution of the contemporary French colonial empire (North and West Africa, Madagascar, Indochina) may have been negative. France also continued in the centuries-old tradition of a strong centralist state, maintaining protectionist or, more generally, mercantilist measures, which did not result long-term in the necessary competitiveness. This deficiency was significantly enhanced by a very moderately increasing French population. Since Napoleon’s defeat in 1815, Russia had become the primary geopolitical rival of Britain. Yet its vast area, and dramatically increasing population colonizing new regions to ensure Russia’s great power status (from this point of view, the whole vast territory of the Russian Urals must be considered de facto as a Russian colony). Two wars, the Crimean (1853–1856) and the Russo-Japanese (1904–1905), however, showed its enormous political and economic or military backwardness. As a result of the Crimean War, a series of uprisings broke out, which launched a slow pace of reforms, including the abolition of serfdom in 1861. Nevertheless, this change took shape very slowly 2 The development of today’s major economic powers, which were playing a relatively minor role in the world economy at that time, though none of them significantly influenced the global economy in the 19th century. In the case of Japan, this was changed by the Russo-Japanese War in 1904-1905; the importance of China did not change until the 1990s.   The Nature and Emergence of the Global Economy      – 55 –

indeed, as the news about their personal freedom arrived to the serfs in many parts of Russia over a delay of many years. Therefore, the transformation from a feudal to a capitalist system proceeded little by little. For us to comprehend Russian backwardness even better, let us look at the fact featured by Kennedy (2001:289): in 1914, foreigners owned nearly 100% of all petroleum fields, 90% of mines, 50% of chemicals, and 40% of metallurgical industries. With such a scope of foreign investment, it is only natural that Russian foreign debt was the largest in the world. This situation is illustrated by the fact that while foreigners were operating most of the industry, agricultural products accounted for 63% of Russian exports, and timber for another 11%. This export of low value-added goods, however, was vitally important to Russia, because it compensated for U.S. loans and German machine tool imports. Table 2.3: Industrial production between 1800 and 1888 (in millions of British Pounds) Year

Great Britain


Germany Austria (1871) (Hungary)



























1 314










2 404





1 443

4 618

Source: Stellner 2006:47

To complete the picture of industrial maturity, please refer to the chart depicting industrial production development in the 19th century. This picture would be enhanced, if these data were extended to 1914, until the beginning of World War I. For that purpose, Table 2.4 shows the relative shares of world industrial production until the dawn of World War II in 1938. Tab. 2.4: Relative shares of world industrial production, 1880–1913, in percentages Country












United States




































Source: Kennedy 2001:251 – 56 –

2.4 THE FIRST WORLD WAR AND END OF THE FIRST WAVE OF GLOBALIZATION Several wars in previous centuries could already be designated world wars. The Seven Years’ War was fought not only in Europe, but also in the America, Asia and most of the seas; and there were also the Napoleonic wars, which affected all of the inhabited continents. In the extent of killing and the devastation of property, however, the Great or First World War not only surpassed all previous wars, but also all of the expectations of its contemporaries. It is sometimes called the ‘war to end all wars’, and therefore, it is somewhat paradoxical that the consequences of this war caused the birth of another world war twenty years later. It was also the first war where the economy and the lives of residents in all belligerent countries were almost completely subordinate to the conduct of war, i.e. it was a so-called ‘total war’. There is no room for us to describe the military (mobilization tables, Army and Navy doctrines, military plans, etc.), diplomatic (isolation of France, the Entente Cordiale, the formation of the Triple Alliance, etc.), or political (the Austro-Russian rivalry in the Balkans, the distribution of ‘uncivilized’ countries among European colonial powers, etc.) reasons for this war, or the modes of its campaigns. We shall focus only on the economic reasons that led to the war, and consequently its impact on the world economy. The industrial base of each country determined its power at sea and in the field. With the rise of political conflicts in the region, more and more European countries addressed armament companies in order to ensure their sovereignty and independence in international politics. ‘During the period 1908–1913, military expenditures in Austria-Hungary increased by 13%, in Great Britain by 30%, in Russia by 53%, in Italy by 61%, in Germany by 69%, and in France by as much as 86%. On average, the Triple Entente yearly invested into the army 83 million pounds more than the countries of the Triple Alliance’ (Stellner 2006:49). Particularly significant was the arms race at sea, especially between Britain and Germany. That was an area where Britain could draw its wealth from the colonies on five continents, and being dependent on supplies from those colonies, it could not allow any compromise. The advantage of early industrialization and the consequent replacement of earlier sailing ships with ones propelled by steam and later by diesel turbines, had been exhausted at the turn of the 19th and 20th century. All states with aspirations to world power politics, were building extensive fleets based on modern battleships, although the costs of those ships were dramatically rising (see Table 2.5). To Great Britain, it meant that the safety of the metropolitan area and the colonies depended on the military field, where not only had the costs grown dramatically, from £11 million in 1883 up to £40.4 million in 1910, but also maintaining the upper hand was becoming increasingly difficult. In its need for naval superiority, Britain subsequently addressed its incapacity to maintain it by coming out of its ‘Splendid Isolation’ and binding itself with treaties of   The Nature and Emergence of the Global Economy      – 57 –

alliance, first with Japan in 1902, and then in 1904 with the ‘understanding with France’ (Entente Cordiale), which was the basis of the future Triple Entente. Table 2.5: Costs of British battleships Battleship Class

Approximate time of launching

Average price



£1 million



£1 million

Lord Nelson


£1.5 million



£1.79 million

King George


£1.95 million

Queen Elizabeth


£2.5 million

Source: Kennedy 2001:193

Contemporaries still firmly believed that the war could not occur. Firstly, because of two opposing massive Allied units (the Triple Entente and the Triple Alliance) and their deterrent military capability made any war a deadly business; and furthermore, because of the interdependence of economies, whose disruption would lead to a collapse of the financial sector, world trade, and the dependent economies. And finally, Europe, until then the leader of the rest of the world, would lose much of its influence. Eventually, none of these reasons had enough weight, although the consequences of the war surpassed all expectations. Causalities on the side of the Entente alone (Great Britain, France, and Russia) reached 4,900,000 men, and Germany and Austria-Hungary lost 3,100,000 men. Italy, originally a member of the Triple Alliance, after some initial manoeuvring, eventually joined the war on the side of the Triple Entente. This is not to mention nearly double the number of often severely injured men, i.e. so that the afflicted would bear the consequences, e.g. amputation, for the rest of their lives. The financial system actually collapsed because it was not able to bear the cost of about $280 billion that the warring parties had incurred. Due to the blockades and interruptions of the supply of goods, and its replacement by implements of war, people were dying, and the whole system of the pre-war world economy was disrupted. The first wave of globalization operating under the Pax Britannica, as we defined it in the previous sections, had ended. The centre of gravity of world power had truly moved outside Europe, namely to the United States of America. One of the most enduring negative impacts of the First World War was the build-up in the executive branch in each of the warring countries. Since that time (with the exception of the transition countries of Central and Eastern Europe after 1989) there has been a constant increase in the share of government in the economic activities of each country. The states of the Triple Alliance were the pioneers of this subordination of the economy and society to the war effort. Ministries of Supply were established, and in 1915, even in – 58 –

the as yet relatively liberal Britain, a Ministry for Armaments was created. These ministries had the right to interfere with private enterprises, control profits, redistribute labour, and decide on wage levels, etc. By the time David Lloyd George (1863–1945), the Minister for Armaments, had become British Prime Minister in December 1916, the entire British economy was regulated and largely planned by the state. Similar dramatic effects can be traced in the social field, too. Domestic economies lacked millions of men who were fighting on the front lines. Countries accustomed to a high percentage of unemployment until then, were suddenly able to employ anyone. Women were required to work, even in heavy industry. Women themselves started to consider that situation normal. They were more visible within the society and contributing to the war effort of their respective countries. It caused a higher female labour force participation in post-war industry and services, and the growing emancipation of women at the same time (in most European countries, they were given the right to vote after the war). As this situation was also repeated in World War II, the self-confidence and independence of women was growing. That also implied serious socio-pathological consequences. There was a gradual increase in divorce and abortion rates, as the number of women taking part in the workforce outside their homes increased. Clearly the most significant impact of the period of First World War for Europe as a whole was a gradual decline in birth rates for married women. ‘Between 1890 and 1920, marital fertility began to decline in most European provinces, with a median decline of about 40% from 1870 to 1930’ (Lee 2003:173). This trend continued between the wars and after World War II with fertility falling in virtually all developed countries. European countries



Birth (per thousand)











Married working women

1952 1955





Percentage of married working women

Chart 3.1: The declining birth rates and increasing number of working married women in the United States, 1952–1979

1975 1979

Note: Data for married working women includes only women with husbands present.

Source: McKay 2008:22   The Nature and Emergence of the Global Economy      – 59 –

went below the reproduction level of 2.1 births per woman in the 1970s. If the decrease in mortality and subsequent decrease in fertility in the 19th century is called the first fertility transition, then European countries are now undergoing so called second fertility transition. Particularly in European and East Asian countries, the ever decreasing birth rates within this second fertility transition seem to disprove an earlier optimism that there is a natural lower bound for fertility. Physical strength, endurance or speed is no longer a vital employee characteristic. This fact reduces the productivity differential between male and female labour and therefore increases the cost of children. Various governments have tried various incentive schemes under different pro-family and pro-fertility policies (Mlčoch 2014), which mostly met with failure as in current democratic society there is no possibility to limit female employment to a level allowing for simple reproduction. These efforts have clattered the countries statistical comparisons, and the large body of existing literature is not conclusive regarding the best practises to improve fertility. Moreover, the policies of some governments, including those of the European Commission, even contain efforts to maximize female participation in the labour force out of misinterpreted human rights or ever expanding equality of sexes concepts. Apart from the indisputable time series causality between declining birth rates and increased number of working women, there is also a convincing argument linking fertility to the generosity of the general state pension system. Already, the Chancellor Bismarck’s Pension Scheme introduced in the German Empire in 1889 seems to decrease fertility by 5–10% (Fenge and Scheubel 2010); an effect that became widespread as general pension schemes were being implemented throughout the developed world. Together with liberal abortion laws, the evolution of alternative lifestyles causes European states to face the consequences of depopulation. Germany lost 196,000 inhabitants, Italy lost 78,700 inhabitants, and Romania lost 54,400 inhabitants as a result of a natural population change in 2012 alone, with worsening prospects for the future (Eurostat 2013). Such a rapid depopulation has negative effects on entire societies, reaching from financial (demands on state pension funds, healthcare and social services budgets), economic (extend and productivity of workforce, real estate markets, increase in specific services, transformation and diminishing of existing markets), military (size and capability of manpower), to educational, R&D fields and many others. If at all possible, no historical analogy to change this trend exists; the current institutions, policies, and indeed culture, need to undergo a radical change towards sustainable fertility. Alternatively, the bearers of more sustainable albeit hostile cultures would fill the vacuum and replace the existing one. There are multiple historical examples for this development, making falling fertility arguably the most dangerous legacy of two World Wars. During the First World War, the home front of the belligerents was just as important if not more important than the actual military operations. The decline of agricultural production due to a shortage of labour, confiscation of – 60 –

horses, not to mention the enemy’s military actions, led to a shortage of basic foodstuffs. Vastly increasing debts led most countries to abandon the gold standard and to apply the solution to inflation to an otherwise intractable debt situation. Along with revolutionary changes in the social field, a radicalization of the population was inevitable in nearly all of the warring states, most of all in Russia. There first of all, the Tsarist regime was removed in February 1917, which brought an interim government to power. This government, led by Alexander Kerensky (1881–1970) in May 1917, continued the war effort of the Allies. From the beginning, the government had to share power with the soviets or councils, comprised of 2–3000 representatives of the workers and soldiers. Being unable to carry out the necessary economic reforms, the government also failed to ensure supplies, and moreover, did not address other important political and national issues. At that time, the German General Staff allowed V.I. Uljanov (1870–1924), a socialist radical who became a major figure in the November takeover by radical Marxists, to return (under the name Lenin) from his exile in Switzerland. The result was peace at any price. Russia ceded to Germany and Austria-Hungary under the treaty of Brest-Litovsk (1918) approximately one-third of its European territory, a third of the total population, and collapsed into a civil war. Around this time, however, the German and Austrian home fronts nearly collapsed too. The German General Staff decided to use troops freed from the eastern front for the last great offensive in the west in the spring of 1918. But there they were faced with thousands of fresh American troops sent to Europe after the United States had entered the war in April of 1917 in order to protest against an unrestricted submarine war declared by Germany. Even this last offensive failed. The peace treaties, signed at a conference in Paris in 1919, marked the most significant change to Europe’s borders in more than a hundred years. As for the world economy, it is important that large state entities fell apart (Austria-Hungary, the Ottoman Empire, Russia), and many of the successor states were flooded by high tariffs and non-tariff measures. New currencies of varying quality were created, the gold standard was abandoned, and Germany acceded to inflation as the answer to the reparations levied by the Treaty of Versailles. The revolutionary Russia completely fell out of the world economy and sealed itself up in isolation, which would not be disturbed until the need to fight together with others arose during the Second World War. The British, and especially the French, had lost millions of pounds of foreign investments in this country. During the interwar period, nationalist disputes were strengthened, the state intervention of the ‘temporary’ war economy was reduced only slowly and foreign trade stagnated. A systematic recovery of the world economy did not take place because the United States – politically and economically the most powerful state essentially unencumbered with war hardships and the lender to virtually all of the Allied powers – sought to isolate itself.   The Nature and Emergence of the Global Economy      – 61 –

The question of war debts and reparations was acquiring a more and more radical position as the total industrial production in Europe, along with its wealth, declined during the whole war period. Very few countries (perhaps with the exception of the USA, Great Britain and partly France) had tried to finance a part of the war expenditures by increasing taxes. Most states relied on international loans, and considered that the defeated enemy would be forced to compensate their war debts in the form of reparations (like France in 1871). Therefore, practically throughout the entire interwar period, France, the major debtor (together with Britain, they were heavily indebted to the United States), was determined to raise money in the form of reparations from defeated Germany. This effort limited possible mutual economic and political cooperation. Despite some successful negotiations (the Dawes Plan of 1924), compelled by social unrest in various European countries (e.g. the consequences of the German hyperinflation of 1923), this issue contributed to antagonism among virtually all parties involved. ‘Americans demanded their money back, France, Italy and other countries refused to pay their debts until they got the German reparations, and the Germans claimed that they were unable to pay the specified amount’ (Kennedy 1996:334), and continued amortization of their debt through hyperinflation, which eventually derailed their economy. Thus war debts had engaged all of the countries which had participated in the First World War, until the Great Depression in 1929, when most of the debts were forgiven out of necessity. Although London wanted to keep its position as the most important financial centre, and Britain tried to restore the Pax Britannica, its relatively weak economy and high debt meant that the world financial centre and economic activity in general moved to the United States. As they, however, tended towards isolationism, the inter-war world economy was quite different from the rapidly growing economy, based on liberalism and free trade in the 19th century, as described above. Moreover, the structure of the U.S. economy did not depend on foreign trade, and it was not so open and tended towards protectionism, especially in agricultural production. Virtually all European countries were encumbering further debts with the United States, now the world’s largest creditor. But those were not like the British loans known from the 19th century, i.e. long-term to develop infrastructure (ports, railways) or to make use of immediate profit opportunities in the mining and manufacturing industries. The U.S. short-term loans had high interest rates, and they were often used by the recipients to offset deficits in the balance of payments or to invest in agriculture. This unwise use of short-term loans in a long-term sector, i.e. agriculture, was the result of a  phenomenon new in its entirety and potentially very destructive, which was the policy of self-sufficiency. Based on the bitter experience of the First World War, when governments were unable to provide for the basic needs of their populations, different ruling regimes ceased to rely on international trade, as it had failed in their view. Long before the Great Crash – 62 –

of 1929, liberalism with its pursuit of efficiency and profitability through the global division of labour had been replaced with neo-mercantilism, which was an effort to strengthen their own power with little regard to economic results. Strengthening the so-called strategic areas went hand in hand with further increases of government intervention in the economy. Structural shortcomings of the European economies were hidden beneath the surface in the late 1920s as governments enjoyed a massive influx of U.S. dollars in short-term loans. Meanwhile, the interest rates of these debts grew alarmingly, and since they could not be paid off by exports, they were redeemed with further loans. The whole system began to collapse in the summer of 1928, when a boom in the USA and the subsequent increase in interest rates by the Federal Reserve authority had strongly decreased capital outflows. The ‘Wall Street Crash’ in October 1929, which had terminated this boom and the subsequent cuts in U.S. loans, provoked a spontaneous chain reaction. A sudden lack of cheap loans decreased both investment and consumption, which in turn drastically limited market demand in industrialized countries. Afflicted food producers and raw material suppliers tried to compensate falling incomes with a desperate increase of supply. This was followed by an almost complete collapse in prices, which in turn prevented the purchase of consumer goods. International trade restrictions spread from the United States (the strongly protectionist Smoot and Hawley’s Customs Tariff) to Europe, resulting in a virtual stop in international trade which had not yet reached the level of before the First World War. Having ‘completed’ these measures with a failure to pay debts, currencies of practically all European countries left the gold standard and experienced a significant devaluation. The financial crisis, which had originated in the United States, had moved into the real economy and become the Great Depression. Between 1929 and 1933, the world production of goods decreased by about 38%. The United States alone lost approximately one-third of its GDP in those years. The crisis gradually seized more and more states and sectors, grew into a depression and became long-term. Probably its worst social consequence was increasing unemployment (see Table 2.6), which affected over a quarter of the working population for a long time. Table 2.6: Unemployment, percentage of active population Year 1926 1929 1932 1933 1936 1938

USA  2.8  4.7 34.0 35.3 23.9 26.4

Germany 10.0  8.5 29.9 25.9  7.4  1.9

Great Britain 12.5 10.4 22.1 19.9 13.1 12.9

France  3.0  1.0 15.4 14.1 10.4  7.8

Source: Stellner 2006:77   The Nature and Emergence of the Global Economy      – 63 –

Economists do not always agree about the causes of the crisis. The dominant view offered by monetarists suggests failure on the part of the Federal Reserve. The Bank policy caused a significant shrinking of the money supply, a policy shared by central banks of other countries notably France (Irwin, 2010:8). This made loans and production very expensive and businesses fail. Other schools offer different explanations. Keynesians argue that the recession was caused by a lack of consumption and/or over-investment. Some economists hold a so-called uncertainty hypothesis claiming consumers were temporarily uncertain about their future after the Great Crash limiting consumer spending on durable goods (Rommer 1990:598) bringing a collapse of prices and the Great Depression about. Views on the solutions applied are even more diverse. In March 1933, President Franklin Delano Roosevelt (1882–1945) introduced the illiberal program called the New Deal in the United States. This program cancelled the traditional liberal strategy of deflationary austerity policies, and focused on the provision of temporary work for the unemployed through large state projects to overcome the crisis. In banking, the Federal Reserve authorities were ordered to provide money to banks with low stocks of assets and enable credit expansion. The pillar of the ‘first New Deal’ also introduced ‘self-regulation’. That was represented in particular by the National Industrial Recovery Act – NIRA. This Act created the National Recovery Administration – NRA, which was intended to limit competition through negotiations between employers, unions and the government. The NRA determined wages and hours of work – ‘the codes of fair competition’. In addition, there were a number of regulatory agencies which continued to curtail the U.S. liberal business environment, such as the Agricultural Adjustment Act & Administration – AAA, the Federal Emergency Relief Administration – FERA, the Tennessee Valley Authority – TVA, the Work Project Administration – WPA, etc. Between 1935 and 1936, President Roosevelt initiated a  series of other measures, which are usually called the second New Deal. The aim was to better utilize existing resources in the economy and redistribute wealth through the WPA towards farmers, old and poor people, and those in organized trade unions. Within a few years, the United States reached a much higher level of redistribution through the state budget, a technique which European governments had been implementing since the 1880s. As for the solutions of the Great Depression itself, the results of all these measures which dramatically changed society were never proven successes or failures as the United States did not stop facing economic difficulties until the launch of massive armaments for warfare. In other words, the Great Depression in the United States was ended by their entry into World War II in 1941. Economic recovery in the Great Britain proceeded somewhat differently than in the United States. For the first time, Britain focused mainly on domestic demand and the good old pro-export fields, such as coal and textiles, which experienced a slow decline in their share of GDP. A slow retreat of the crisis was thus ensured by new jobs in the automobile and electrical industry. – 64 –

Britain reached financial stability, although it never restored the financial and export primacy of the times of Pax Britannica, because this position was maintained by the USA thanks to the scale of their production and economy, in spite of all the current problems. Britain came out of the economic crisis relatively quickly, doing the best of all the industrialized countries and using purely liberal principles, with the big exception of high tariff barriers that would still plague the world long after World War II. Because France was less industrialized than Britain, the USA and Germany, the Great Depression hit it later. Their economic recovery, however, was all the longer. Short-term recovery would never last long. Unemployment never fell to the pre-war level, and the volume of production also never returned to the pre-war level. The tragedy of the First World War, along with the economic depression, also caused political instability. Society polarized, giving birth to a large number of fascist organizations, and a growing number of socialist and communist deputies in the parliament were represented in the Popular Front after the elections in 1936. Frequent changes of governments did not allow a meaningful economic policy. There were severe consequences of the Great Depression in Germany. ‘After Black Friday, the U.S. banks withdrew short-term loans to retain their own liquidity. To German borrowers that meant considerable problems, since no other economically important country could rival the dependence of German economy on foreign capital. The financial and banking crisis, marked by the industrial depression, resulted from the structural weakness of the German banking sector. The post-war hyperinflation had buried the population’s ability and desire to save money. The unemployment in 1929 was reaching 2 million people’ (Stellner 2006:75). All we have said about the political instability of France applies twice as much to Germany. Communist states, emulating the Soviet model, such as the Bavarian Soviet Republic, were established in its territory. In 1933, the National Socialist regime came to power after the Weimar Republic collapsed under the onslaught of economic difficulties following the Wall Street collapse in 1929. The Chancellor and Der Führer (the leader) of Germany Adolf Hitler (1889–1945) and his government abolished unions, halted the growth of wages and deprived the citizens of extensive rights. Surprising similarities can be made with the regime of Soviet Communists regarding Four-year plan (Five-year plan in the USSR), the use of terror for economic ends, controlled prices, the decrease of consumption and increase of government investment, or the control of production (Temin 1991). Unlike the Communists, the Nazis did not confiscate private property or abolish all of the institutions of the liberal state. Instead, the Nazi regime basically redirected straight to a policy of preparing for war, and helped to increase arms production. Covertly at first (due to its own weakness and the conditions of the Versailles peace treaty), it built the Navy and Air Force. Unemployment was successfully reduced by the introduction of conscription. The regime also built dams, highways, railways, housing, and encouraged the growth of   The Nature and Emergence of the Global Economy      – 65 –

industries needed for warfare (automobiles, chemicals, and heavy machinery industries). Though preparing for war the production of military equipment is always unsustainable, since it draws investment funds from productive sectors, it helped Nazi Germany in the short-term to overcome the effects of the Great Depression. The unemployment rate in Germany in 1938 was less than 2%, and its share of the world industrial production had increased again, after an extended period of time (see Table 2.7). Tab. 2.7: Share of world industrial production, 1929–1938, in percentages

Country United States USSR Germany Great Britain France Japan Italy

1929 43.3 5 11.1   9.4   6.6   2.5   3.3

1932 31.8 11.5 10.6 10.9   6.9   3.5   3.1

1937 35.1 14.1 11.4   9.4   4.5   3.5   2.7

1938 28.7 17.6 13.2   9.2   4.5   3.8   2.9

Source: Kennedy 1996:402

The Great Depression had affected the whole world and caused an unprecedented economic downturn. Prices on the world market declined by 60% in 1929–1932, and the volume of world trade fell by more than 50%. Profits and income, as well as tax revenues, declined in an, until then, unimaginable way. Unemployment affected as much as a quarter of the working population in many countries (in the U.S. it was over 35%). It was only after the Second World War, in 1949, that global trade regained the level of 1929. The crisis also relatively strengthened existing Communist dictatorship and helped the rise of Nazi dictatorship, which unleashed the Second World War.

THE CHAPTER SUMMARY European economic relations in the early 19th century were strongly influenced by the Napoleonic wars. France first introduced the continental blockade, a measure to prevent imports from Britain and its colonies to the European continent. Many countries, however, circumvented it for economic reasons. No matter how unpleasant the blockade was for Britain, it led to an increase in trade with the British colonies on the Asian, African, and American continents. Furthermore, in 1806 the Holy Roman Empire was dissolved, the Vienna Congress significantly amended the European borders, and the Spanish overseas empire crumbled. Since 1815, after the defeat of Napoleon at Waterloo, international economic relations were shaped by the hegemony of Great – 66 –

Britain, which kept its privileged position, albeit with certain problems, until the First World War in 1914. The barriers of free trade were removed, which brought prosperity for all and reduced the threat of earlier trade wars. The path to Liberalism was not easy though. The effort to repeal the Corn Laws in Britain, which finally occurred in 1846, became synonymous with the fight against mercantilism. Thanks to the many competitive advantages, free trade maintained British supremacy. Linking national economies, stimulated by liberalism, resulted in the creation of the world economy in the last third of the 19th century, which was associated with globalization, i.e. the convergence of commodity prices on world markets. Many authors speak of the first wave of globalization in this case, which was characterized by liberal long-distance trade and subsequent foreign investments, mainly from Britain. British companies built mainly power plants, ports, and railways; waves of population came along with their capital. This first wave of globalization lasted until the First World War. The relative decline of Britain, however, had begun earlier with increasing competition from the USA, Germany and France, and partly as a result of the slower development of new branches in the UK alone. The First World War, whose outbreak seemed to contemporaries extremely unlikely, had an enormous impact on the world economy. It left behind millions of dead and those disabled for life, the centre of the world economy shifted to the USA, and there was an increase in the number of state apparatuses that started to interfere remarkably with economic activities. In addition, the financial system collapsed, high indebtedness led to the abandonment of the gold standard and high inflation, due to the collapse of large state units, borders in Europe changed significantly, new currencies were created, foreign trade stagnated, and industrial production and fertility in Europe decreased. Moreover, the solution to many problems of the post-war economy was complicated by American isolationism and protectionism. U.S. short-term loans with high interest rates were unwisely used to equalize the balance of payments deficits and for investments in agriculture, which were based on the new policy of self-sufficiency. Liberalism was replaced with neo-mercantilism. Another blow to the world economy was struck by the crisis that began on ‘Black Friday’ on Wall Street in late 1929, which gradually spread to other states and grew into a long-term depression. Each country tried to cope with it on its own. The United States was trying to deal with it by means of illiberal intervention in the economy within the so-called New Deal program of President Roosevelt. Economic recovery, however, did not occur until the U.S. entered into World War II in 1941, after the start of a massive armament. Great Britain by contrast, followed liberal principles when dealing with the crisis, except for high tariffs, and came out of the crisis relatively quickly. The depression affected Germany most of all, yet it also had managed to overcome it relatively quickly, with the advent of the Nazi regime and a redirection of the economy to the war effort.   The Nature and Emergence of the Global Economy      – 67 –


The Post-War Development of  the World Economy

3.1 RECOVERY OF THE WORLD ECONOMY IN 1945 There is no space to describe the events of the Second World War here. However, it is important to note that economic factors were just as, if not more, important as military and political issues throughout the whole of this terrible chapter in human history. To describe the overwhelming power of the United States, the world’s largest economy, we would do best to quote British Prime Minister Winston Churchill (1874–1965), who upon learning of the U.S. entry into the war (as a response to the Japanese attack on Pearl Harbour) said, ‘So we have won after all! England will live, Britain will live, the Commonwealth, and the Empire will live… We will not be erased from the map. Our history is not over. Maybe we will not even have to die as individuals. Hitler’s fate was sealed. MussolinI’s fate was sealed. And as for the Japanese, they will be crushed to dust. Everything else is just a matter of the correct use of overwhelming force… Because I was full and saturated with emotions and feelings; I went to bed and slept the sleep of the rescued and grateful’ (Churchill 1993:598–599). As that was the year 1941 and the war was to last for another four long years, Hitler was standing just outside of Moscow, and – 68 –

the Japanese expansion in Southeast Asia (which would threaten Australia in a few months), had yet to begin, these words may seem a mere outcry of emotions. However, the economic power of the allies, their human potential, gradually supported by technological superiority, which ultimately resulted in the completion of the atomic bomb, justified this optimism indeed. The increase in the war production of all nations involved in this second full-scale war was enormous. Given the vast resources, the increase was significantly greater among the allies. From 2% of GDP in 1939, war production in the USA had reached 40% by 1943, which comprised 40% of all of the world’s armament production. Similarly, the GDP of 88.6 billion USD in 1939 had increased to 135 billion USD in 1944 (Stellner 2006:84). Thus the United States’ production in 1944 was not only greater than Germany, Italy, and Japan, but also than that of the rest of the world combined. Unemployment had almost disappeared; as 12 million men had been summoned to arms, they had to be replaced, much as they were during the First World War with women. The proportion of women employed outside their homes increased from 26% in 1939 to 32% in 1944. The increasing stockpiles of the United States were more and more manifested on the battlefields too. Prior to its entry into the war, the USA firstly had supported Britain, and later the Soviet Union with deliveries under the LendLease Act. These deliveries were crucial for both warring countries for most of the war. For example, almost all trucks, the majority of railway locomotives, and large quantities of war material at the Soviet front line were of American origin. In 1943, the allied production of tanks was almost sevenfold compared to the Axis countries; the situation for aircraft was similar (see Table 3.1). Tab. 3.1: Armament Production in 1943


Overall billion USD

Number of aircraft

Number of tanks

Number of artillery pieces

Germany Japan Great Britain USSR USA

13.8  4.9 11.1 13.9 37.5

25 220 16 700 26 200 34 900 85 900

10700 (12100)    800   7 500 24 100 38 500

  109 300   29 400 132 100 178 700 278 900

Source: Stellner 2006:84

If the British had the upper hand when it came to both crew and material when landing in Sicily (Operation Husky) in 1943, then during the landing in Normandy (Operation Overlord) in June 1944, it was the Americans who had the upper hand. This superiority was constantly growing. Along with purely military material, Western Europe was also supplied with civil material including goods, in order to prevent fundamental shortages of supply in   The Post-War Development of the World Economy      – 69 –

liberated territories. After the German troops surrendered on 8 May 1945 and the Japanese empire capitulated on 2 September 1945, the victorious powers were forced to supply Europe and Japan with basic food, clothing, etc. for a relatively long period of time. Economic factors also significantly influenced the post-war division of the world. For example, Winston Churchill was reluctant to shift the Polish borders to the west, stating that there was a settled German population, traditionally producing grain and food for the rest of the then occupied German territories, and thus their expulsion and occupation of the land would have meant that the British would have had to provide for millions more refugees during a time of their own food shortage. The economies and the societies in Europe and East Asia were completely disorganised (including Japan, ravaged by the devastating fire raids on Tokyo and other centres). ‘During the Second World War 110 million people were called to arms, and 27 million soldiers lost their lives, out of which the S ­ oviet Union lost 13.6 million, China 6.4 million, Germany 4 million and Japan 1.2 million soldiers. The loss of civilian population had also surpassed all previous military conflicts. As a result of the raids, guerrilla fighting, mass murder, inhumane treatment in labour and concentration camps, deportation and expulsion, 25 million civilians had died (of which 7 million were Russians, 5.4 million Chinese, 4.2 million Poles, and 3.8 million Germans). Poland had lost a full 17% of her population during the war! The Soviet Union had paid a severe toll for victory: 710 towns, 70,000 villages, 32,000 industrial enterprises, 65,000 km of railways, and 1,870 bridges had been destroyed on its territory. In Germany, 40% of the total housing stock had been destroyed or heavily damaged, in Japan every fourth house was completely destroyed, so almost two million people had been left without a  shelter’ (Stellner 2006:85). Therefore, the United States was the main source of material for civilians in regard to both the allies and the rest of Europe in the post-war period. Those basic needs changed into a demand for civilian goods, allowing the growing U.S. economy, and particularly companies focused on armed forces supply, to redirect to peacetime production. So, American world dominance continued after the war. The United States, despite the huge increase in national debt during the war years, did not become poorer, but rather richer. After the war had ended, they owned nearly two-thirds of the world’s reserves of gold, controlled half of the world’s coal production, more than half of electricity production; and, by means of their multinational companies, owned two-thirds of petroleum production, dominated most major industries, and became the largest exporter of goods, accounting for one-third of the world’s exports. Their position was just slightly weaker than that of Britain after the Napoleonic Wars. Like Britain, they often informally dominated political decision-making in the world, while all their potential economic rivals were requesting deliveries of basic goods and services for their war-torn economies.

– 70 –

3.2 THE ORIGIN OF WORLD FINANCIAL INSTITUTIONS – THE BRETTON WOODS SYSTEM The Allies, the Americans in particular, responded to this situation in two ways. First of all, they established the United Nations (UN) at a conference from April to June 1945 in San Francisco. The UN was the administrator of humanitarian aid to the war-torn countries. Through the UNRRA (United Nations Relief and Rehabilitation Administration) the United States supplied Europe with food, clothing, medicines, and other essential needs worth four billion dollars, and the other affected countries were provided with another three billion dollars for recovery. After UNRRA had finished, it was followed up by other UN specialised agencies. In 1944, Prime Minister Churchill and President Roosevelt were already corresponding on the post-war reconstruction of Europe and the world. In particular, the USA was determined to not allow the same mistakes made after the First World War when the individual European states had been forced to pay war debts, or reparations, leaving them with no means for reconstruction and development, which had radicalised the population and led to the collapse of democratic regimes. As Churchill put it, this terrible war should bring at least fifty years of peace. The U.S. Government had therefore decided to help rebuild Europe not only through loans, but also by financial support. In June 1947, the Minister of Foreign Affairs G. C. Marshall (1880–1959) released the European Recovery Program, or ERP. In July 1947, representatives of sixteen European countries which were interested in U.S. help, met in Paris and set up the Committee for European Economic Co-operation, CEEC; all democratic countries of Western Europe became members thereof. Czechoslovakia and Finland also sought to participate in the committee, but after intervention by the Soviet Union, they withdrew their requests. In the spring of 1948, the U.S. Congress approved the ERP law, which was to be managed by the Economic Co-operation Administration (ECA). Meanwhile, CEEC was transformed into the Organisation for European Economic Co-operation and Development, OECD, whose task was to distribute U.S. assistance in coordination with the ECA. Between the years 1948 and 1952, the USA provided sixteen mainly Western European states with assistance worth $12.8 billion. The Marshall Plan as it came to be popularly known meant the economic recovery of Europe. In addition to direct economic aid, British Prime Minister Churchill and U.S. President Roosevelt drew up the Atlantic Charter, establishing a ‘special’ relationship between the United States and Great Britain, and in particular with the United Nations as the means to maintain international peace and security. The UN can take action on a wide range of issues and has multitude of specialized agencies. Three of those remain important for the world

  The Post-War Development of the World Economy      – 71 –

economy, two of which were the direct result of the conference in the Atlantic Bretton Woods resort. Table 3.2: Distribution of Marshall Plan aid (percentage of the total amount of 12.8 billion USD)

Great Britain France Italy Germany (FRG) Netherlands Greece Austria Belgium other

24.9 21.2 11.8 10.8  7.7  5.5  5.3  5.3  7.5

Source: Stellner 2006:89

The first of these was the World Bank (International Bank for Reconstruction and Development – IBRD) which is based in Washington D.C. and whose official purpose is to promote economic and social development in developing countries. This investment bank is owned by the governments of member states with their shares, and who guarantee the repayment of the funds obtained by issuing bonds on the capital market. IBRD loans cannot be granted to individuals or rich countries. Poorer countries can obtain loans on more favourable terms. Most loans must be repaid in 12–15 years. The World Bank is a member of the World Bank Group – WBG. The WBG includes many other important institutions. The first of these is the International Development Agency, which seeks to reduce poverty through interest-free loans provided to the poorest countries of the world. (Its funding comes from contributions from wealthy member states.) The second is the International Financial Corporation which was established in 1956 to provide technical assistance and advisory services to governments and businesses in developing countries with the overall aim of supporting commerce in those states. Another institution is the Multilateral Investment Guarantee Agency which promotes direct foreign investment in developing countries, particularly through guarantees, thus reducing the uncertainty arising from non-trading risks. The final one we will mention is the International Centre for Settlement of Investment Disputes which is the arbiter of investment disputes between foreign investors and host countries. In its sixty-plus year history, the World Bank has itself been criticised from two sides. On the one hand, for loans to developing countries with medium levels of income that would have been able to finance their development – 72 –

projects on the international financial market (as critics argue, although these loans are repayable and well spent, they do not go to the neediest countries on the planet); and on the other hand for loans to the poorest countries, arguing that those monies have in fact been donations to the authoritarian regimes in mostly undemocratic states. Not only are these monies not used for the original type of planned investment, but they are also often spent to purchase weapons or other kinds of support for the non-democratic regime, and moreover, they are not usually paid back, with the excuse that the country is insolvent and its economy is not able to support debt repayment. Another body established in Bretton Woods was the International Monetary Fund – IMF, which now has 188 members, up from its original 30 members. Its key task is to reduce the degree of payment imbalances and improve the economies of member states. The IMF also functions to guarantee the new international financial system. Before the First World War, there was the gold standard, guaranteed by Great Britain. It allowed the exchange of national currencies for gold as a universal currency, which helped to stabilise (or fix) the currency in a predetermined ratio. To examine more closely how this system worked, the following example might help. Let us say that the British pound begins to appreciate over the long accepted value of five dollars a pound. ‘If an American importer of £100 English tweed tries to pay for the tweed with dollars, it costs more than the $500 it cost before. Nevertheless, the importer has another option involving the purchase of gold that can reduce the cost of the tweed. Instead of using dollars to pay for the tweed, the American importer can exchange the $500 for gold, ship the gold to Britain, and convert it into £100. The shipment of gold to Britain is cheaper as long as the British pound is above the $5 par value (plus a small amount to pay for the cost of shipping the gold)’ (Mishkin 2006:469). Imports of gold to Britain contribute to the increase of English gold reserves, while the U.S. reserves are reduced. Larger amounts of gold in the UK de facto mean more gold for less produced goods. The prices (in gold, the amount of which is growing) will increase and the pound firmly bound to the gold will stop appreciating. The value of the British pound will return to the level of $5 a pound. The First World War created huge barriers in world trade. States were no longer able to exchange goods for gold and the gold standard collapsed. For reasons explained in the previous chapter, the gold standard could not be fully applied even in 1929, much less during the Great Depression. A standard requires a steady moderate increase in gold production, which is something that cannot be guaranteed. When this condition is fulfilled, the gold standard results in long-term price stability and reduces government borrowing, which becomes very expensive. Thus the advantage of the gold standard is usually the responsible monetary policies of governments. After 1944, the Allies discussed a moderate version of the gold standard in Bretton Woods. As the USA was in the totally unique economic position   The Post-War Development of the World Economy      – 73 –

described above, the U.S. dollar was the only currency freely convertible into gold, available exclusively to foreign governments and central banks at a price of $35 per ounce of gold. All other currencies were fixed to the U.S. dollar in the fixed exchange rate system. The U.S. dollar also served as the reserve currency, which means that U.S. dollars were kept in the central banks of other countries as foreign currency reserves. This system obliged the central banks of participating countries to maintain the value of their currencies at a predetermined level against the U.S. dollar. As soon as, e.g. the British pound appreciated above the arranged level, the Bank of England was obliged to sell pounds from its inventory. If the value of the British pound fell, it was the duty of the Bank to purchase pounds in order to reduce the amount on the market so that pounds became scarcer, and therefore their value would increase. The role of the IMF was to keep the system operating by lending loose funds, provided by member countries, and to maintain a system of fixed exchange rates in the states where the buying and selling of their national currencies by their central banks had not managed to maintain a solid fixed rate. Long-term downward pressure on a national currency always comes from a payments imbalance. If states fail to sell products to foreign markets, it means they do not have sufficient means to pay for their imports, causing a payments imbalance and downward pressure on the domestic currency. Since the devaluation of a domestic currency in the system of fixed exchange rates is not possible, the central banks of such countries need long-term foreign currency loans, until structural reforms of the economy take place (employee salary cuts, decrease in prices of exported goods, increased efficiency through technology, or a redirection to the export of different goods or to another foreign market). These loans were provided by the IMF on the basis of a  reform plan, submitted by the government applying for a  loan. During the 50s and 60s the system worked well as even if the share of world gold held by Americans was constantly decreasing. By 1970, however, the economies destroyed during WWII, notably Germany and Japan, recovered and with it American economic superiority weakened. This together with the costs of newly established social programs of the so called ‘Great Society’ (political slogan of U.S. President Lyndon B. Johnson first mentioned in January 1965) and of the Vietnam War (1954–1975) caused a deficit in the balance of payments, and public debt. The USD become overvalued and Bretton Woods System partners were de facto pressured to appreciate their currencies, thus hurting their export capabilities just to keep the system stable. West Germany was the first to leave the system in May 1971 with others asking for exchange of their currencies into gold. In this situation, American President Richard Nixon (1913–1994) decided to suspend convertibility of the USD into gold abandoning a key instrument of the Bretton Woods System. This decision came to be known as Nixon Shock and was followed by the Smithsonian Agreement in December 1971, which tried to find and renegotiate an exchange rate regime functioning within new conditions (Breton Woods II). – 74 –

Ultimately, this proved to be impossible and by 1973 all developed countries decided to abandon the system of fixed exchange rates and switch to a system that is described by some authors as a hybrid. This means that most states have freely floating exchange rates, which the central banks do not interfere with, or only very little. Some states support a controlled floating system, where a range is set in which the currency may fluctuate without any intervention purchases aiming to change the rate. Then many smaller states have their currencies pegged to the currencies of major world economies, particularly the U.S. dollar, and still others have created a mutual monetary union such as the countries of the European Monetary Union. The common element after 1971, however, has been the reduced role of gold in international financial transactions. ‘Not only has the United States suspended the convertibility of dollars into gold for foreign central banks, but since 1970 the IMF has been issuing a paper substitute for gold, called Special Drawing Rights (SDRs). Like gold in the Bretton Woods system, SDRs function as international reserves. Unlike gold, whose quantity is determined by gold discoveries and the rate of production, SDRs can be created by the IMF whenever it decides that there is a need for additional international reserves to promote world trade and economic growth’ (Mishkin 2006: 474). In other words, while there was a real or at least a theoretical dependence of the world’s debt on something physical – gold – in the inter-war period and then until 1971, from 1971 on creating another loan has been a political decision simply taken by the central banks, or the IMF. The last large institution whose foundations were laid in Bretton Woods, but which was created first as an international treaty in 1947, was the General Agreement on Tariffs and Trade – GATT, which later became the World Trade Organisation – WTO. GATT was created in 1947 as a stopgap, which lacked an institutional basis. It was basically a set of rules that applied only to trade in goods. It was not efficient enough to settle mutual disputes, and every country could block its provisions. GATT was a conference for negotiation rather than an administrative institution, yet it had a small secretariat in Geneva and achieved fairly significant success. Table 3.3: Volume of world trade 1850–1971 (1913 = 100)

























Source: Kennedy 1996:502   The Post-War Development of the World Economy      – 75 –

GATT came into existence on 1 January 1948 when the agreement was signed by 23 states. They were committed to reducing the control of more than 45,000 tariffs that had been plaguing international trade. Although the U.S. Congress refused to ratify the already planned institution, i.e. the International Trade Organisation – ITO in 1950, the progress of tariff reduction in the next forty years has been the most positive institutional change in this regard. GATT, as well as the later WTO, was governed by principles, two of which Cihelková (2001:61) identifies as the most important. The first one being the principle of non-discrimination, which is applied through the unconditional most favoured nation status. In the text of the original General Agreement of 1947 it was worded as follows: All agreements, advantages, privilege or immunity granted by any contracting party to any product originating in any country, or where specified, shall be accorded immediately and unconditionally to the same product originating in the territories of all other contracting parties, or there designated. This clause is irrevocable. The second principle compares foreign to domestic economy, which is applied through the ‘parity clause’. This is a contractual clause to ensure the equal treatment of imported goods and domestic goods. The same treatment applies particularly to internal regulations and taxes, and regulations related to the distribution, purchase and sale of goods. Agreements within GATT were achieved through ‘negotiating rounds’, which could be held in several states and take several years to complete (see Table 3.4). Table 3.4: Rounds of GATT negotiations

Year Location / Name 1947 Geneva 1949 Annecy 1951 Torquay 1956 Geneva 1960–1961 Geneva / Dillon’s round 1964–1967 Geneva / Kennedy’s round 1973–1979 Geneva / Tokyo Round 1986–1994

Geneva / Uruguay Round

Topics Tariffs Tariffs Tariffs Tariffs Tariffs Tariffs and anti-dumping measures Tariffs, non-tariff measures, ‘framework’ agreements Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of the WTO, etc.

States  23  13  38  26  26  62 102 123

Source: WTO

As the number of members of the organisation has been growing (in March 2013 it was at 159 members and 18 observers of the organization), – 76 –

so has its importance, along with the difficulties of negotiating various tariff and non-tariff adjustments. Among the various multilateral negotiations of the GATT contracting countries, it is worth particularly noting the Uruguay Round. It began in 1986 and formally ended in April 1994, while the concluded agreements took effect from 1 January 1995. This round extended the operation of GATT with new rules and principles in new areas, such as trade in services, protection of intellectual property rights, and other aspects of investment activities, etc. This round, however, mainly achieved the transformation of GATT into the WTO, some 45 years after this idea was originally presented. The difference between GATT and the WTO is quite significant. ‘The WTO is a permanent institution with far greater powers. Commitments in the WTO are full and permanent. It has a system for rapid settlement of disputes, which prevents the blocking of decisions’ (Cihelková et al. 2001:61). It also has a larger area of competence, which was provided during the Uruguay Round. The WTO has a  number of critics too, often showing their opposition through radical measures. Indeed, almost every meeting of the WTO representatives is accompanied by ‘anti-globalists’ riots’, but it is also quite clearly condemned by some professionals and academics. In this context, therefore, we shall take a few lines to define the concepts which are subject to significant misunderstandings. The WTO is an organisation that promotes the reduction of barriers to world trade. It is therefore a liberal organisation in principle, which aims to create a  supportive environment to maximise the global division of labour through trade and investment. This allows an increase in wealth for everyone, although each one to a different degree. As we have seen earlier in the example of Great Britain and its gunboat diplomacy in the 19th century (see Chapter 2), a mercantile criticism of this effort claims that major economies may use their momentary authority to enforce liberal principles that allow them to maintain the status quo. In other words, for instance, the WTO promoting a reduction in tariff barriers to trade for new industries in a developing country that is not yet able to compete, may result in the liquidation of the particular industry. Even assuming the validity of this criticism, the alternatives advocated by mercantilists can hardly be described as more efficient or equitable. From the definition of mercantilism we know (see Chapter 1) that it seeks to strengthen the power of its own country. Since World War II, this tradition has mainly consisted of ‘comprehensive government handling of the movement of goods, services, and capital in foreign relations, as well as domestic production support, in order to maintain a positive balance of payments and to control as much of the world capital, precious metals, and international trade as possible. The starting point is the basic concept of power, which is immutable, and a country either gains or loses its share of the world power. The government should aim to continue its growth, even if it meant an economic slump for all involved. With regard to the Japanese economic system and the trade policy of China, some speak of neo-mercantilism’ (Evan 2010:32).   The Post-War Development of the World Economy      – 77 –

The most tragic consequences of liberal market rejection can be seen in the ‘strategy of self-sufficiency’ (autarky). A good example of self-sufficiency in the Cold War period was China in the 1950s and 60s. Its isolation was the result of an economic embargo imposed by the United States and its allies after China had parted, even with the Soviet Union, during the Cultural Revolution. In their absurd attempt to increase self-sufficiency in steel production, for example, the Chinese communists constructed thousands of small blast furnaces ‘in every village’. This mission led to huge waste and produced desperately poor quality steel. This instance perfectly documents that specialisation and the global division of labour yield economies of scale, superior technology, and efficiency. Self-sufficiency in turn leads to low quality, inefficiency and poor technology. Self-reliance is also mentioned as a fundamental objective of the common EU agricultural policy. Even against some stiff competition this is the worst economic policy of the EU that yearly costs almost half of the joint budget, even after forty years of reforms. It blocks a significant part of the European workforce and economic resources within a sector which, when compared to the rest of the world, has been uncompetitive for nearly a century. Self-sufficiency almost always leads to economic primitivism and/or a huge waste of resources belonging to the state where applied. Historical examples are numerous. Ever since China left its isolation and abandoned the idea of self-sufficiency in the 80s, it has experienced a massive increase in trade, which, together with pro-market oriented reforms, has led to three decades of double-digit economic growth. Its ideological companion, North Korea, has not left the idea of self-sufficiency even after the end of the Cold War, which has been one of the causes of repeated famines. The inadequacy of the self-sufficiency policy and its disastrous economic results can only be tolerated in times of war, when few other options are available. This is one of the reasons why countries applying this policy often give the impression of constantly being threatened by war or calamities of similar extent. Only a very few countries rely on self-sufficiency. Many countries, however, want to adapt international trade to their terms and conditions, and use various strategies of manipulation, in order to encourage domestic production and protect it from the pressure of world markets. This policy is called protectionism. In principle, all protectionist policies are opposed to liberalism, whose primary objective is to eliminate these protectionist practices from world trade. The most cited reason is the protection of a new industry. An example might be the development of the automobile industry in South Korea, where the government encouraged consumers to buy domestic cars. In many present-day developing countries it is the textile industry which the governments protect, because they consider low capital intensity best for the future development of their country. Another motive may be protection in times of crisis. During the oil crisis, the U.S. government protected the U.S. automobile industry from Japanese competition by import quotas and loan guarantees, until the crisis had passed. By then, American manufacturers were able to – 78 –

offer efficient small cars, which were the market segment the Japanese industry had dominated before. Similarly, ‘scrappage’, appropriating a part of the cost of a new car to the consumers who have their old vehicle scrapped, was designed in times of the financial crisis of 2007–2009, not only to help the German economy, but also the automobile industry. Another reason to protect an industry is its claim to be of vital importance to national security. ‘In the 80s, U.S. officials sought to protect U.S. electronics and computer industries against being driven out of business by Japanese competitors, because those industries were considered crucial to military production. A government-sponsored consortium of U.S. computer chip companies called Sematech was formed to promote the U.S. capability to produce chip cheaply (ordinarily the government would discourage such a consortium as an antitrust violation)’ (Goldstein 2006:314). Generally, millennia old reasons are named for self-reliance or protectionism in the name of national security such as to be self-sufficient in production of vital items (food, clothing, energy, weapons). Leaving aside the fact it is not possible to any but most primitive countries to achieve this state of affairs, it is also reducing mutual trust and reliance achieved only through foreign trade and investment thus making war, which is trying to prevent by claiming its readiness to it, more likely. While good shape of country military and warehouses full of provisions are reasonable precautions, it is liberal view of national security proven by centuries of human history that free trade decreases likelihood of war while protectionism increases it. One reason for protectionism may also be the use of protectionist policies by a competitor on the world market. One of those policies could be ‘predatory pricing’, where one of the competitors, possessing good capital stock, which is often supported by governmental or quasi-governmental finances, tries to obtain a large portion of the world market, or even a monopoly, by a dramatic price decrease so as to benefit from its attained position after the prices have been raised again. This policy is usually combined with the method of ‘dumping’, i.e. reducing prices below the cost of production. The obvious problem with the determination of dumping is the difficulty of determining production costs, since all that is available is the manufacturer’s data. In other words, it is basically impossible to say whether the price of imported goods is dumping, seeking to flood the local market, or whether it is only a case of effective production and healthy competition. Generally, the complaint of dumping is often abused. The anti-dumping measures of the European Union could serve as an example. Any manufacturer, who feels aggrieved by cheaper imports from countries outside the EU, may file a complaint with the European Commission to initiate anti-dumping proceedings. According to some sources, as much as 25% of all submitted applications are deemed eligible. The EC responds with an anti-dumping duty up to the difference between the prices on the domestic and the importer’s markets. In a similar manner, the European Commission uses anti-subsidy measures to combat states that subsidise their production   The Post-War Development of the World Economy      – 79 –

or exports. If the affected party appeals, this conflict is often resolved within the WTO. The standard protectionist measures are: quotas, customs duties, and more recently, non-tariff barriers. Probably the worst of these for world trade have always been quotas. They are harmful in virtually any sector of society; nevertheless, their negative impact on the economy and international trade in particular, has been proven many times. The quota acts as a limit on the maximum amount of goods that a country can export to other countries. After its exhaustion, it is no longer possible to import any goods unless prohibitive duties start, e.g. a 100% customs duty. Despite their harmfulness, quotas have been and still are used by many states. The United States government used them against Japanese vehicles in the 80s, when the U.S. automobile industry was dramatically losing in competition with those cars. Likewise, the Czech Republic was given quotas on steel and other products before entering the EU. In both cases, the quotas had been negotiated, i.e. declared as voluntary, after the Japanese and Czechs had accepted for various (political) reasons the fact that their export to the target countries would be limited. The simplest trade policy is the tariff. On the basis of the price or another technical specification, difficulty to change (e.g. engine capacity), a unit fee is determined which must be paid before the goods are sold on the import market. Tariffs may not only reduce imports and thus balance the payments of the country where applied, but they can also become an important source of income. This is the case of the EU, for instance, which has been a real laboratory for protectionist measures. As for the European Commission, customs duties on the import of industrial products from third-party countries belong to the ‘exclusive’ or ‘independent’ sources that automatically flow into the EC budget. The application of duties is therefore independent from the decisions of national governments. Member states just levy the duties on behalf of the EC, and they actually keep 10% to finance their customs administration. This sheds light on why a further reduction in tariffs in the EU may run into strong resistance from the EC. The third important group of protectionist measures are subsidised state loans, or guarantees for such loans, for exported goods or balanced investment units. Loans can sometimes take the form of non-refundable grants or tax relief if the company or industry faces strong competition from abroad. Both the EU and the USA have used these methods, namely to support their agricultural products. Also, in the Czech Republic there is the Export Guarantee and Insurance Corporation (EGAP), which is a national instrument for the promotion of exports. Recently, since the GATT / WTO finally allowed a reduction in customs duties, mainly on industrial products after decades of intensive negotiations, many countries, determined to apply protectionist policies at almost any cost, resorted to ‘non-tariff barriers’. These states apply various restrictions and controls which make it difficult to get the goods onto the market and to the – 80 –

consumers, although they have been legally imported. Bureaucratic barriers, under various pretexts, lengthen delivery periods or disable getting parts of the manufacturing process to a specified location at a specified time. Environmental protection and labour market regulations are often cited or otherwise the goods fall short of health and safety regulations. These disputes again come before the WTO. The objective of the defendant (i.e. protectionist) state, however, is often to hinder particular products from accessing a certain market at a specified time. This goal is often achieved, though after several years of negotiations the WTO will eventually decide against the protectionist state. Finally, one’s opposition to free trade can be expressed purely on a voluntary basis. It is called economic nationalism, where citizens are encouraged to buy goods of domestic origin by various groups. Particularly well-known examples have been mentioned in the world press. The famous boycott of Israeli goods during the fights in Gaza or the rejection of French goods by American citizens (the so-called ‘freedom fries’ instead of French fries) at the time of the American occupation of Iraq. Even in peacetime, millions of people believe that buying domestic goods is to their advantage. These trends are further strengthened in times of economic crises, as governments help businesses with a low proportion of foreign capital. Basically, all protectionist measures may help the domestic industry in the short term, and are always harmful to consumers (though they join the protectionist measures voluntarily). In the long term, the protection becomes addictive for the domestic industry by not forcing it to restructure or carry out other necessary changes. In addition, the arbitrary decisions of the government thereon are always at the mercy of a multitude of interest and lobby groups.

3.3 THE PAX AMERICANA AND THE SECOND WAVE OF GLOBALISATION The previous subsection outlined the institutional basis of the post-war development of the world economy. This development was largely different from previous developments because the world was now being formed by two new superpowers – the major victors of the war – the United States and the Soviet Union. While the Soviet Union did not play a major role in the economic cooperation of the free world (on the development of the economy of the Eastern bloc and its collapse, see Chapter 4), the United States became its most important centre. Therefore, this chapter and some of the next ones will especially observe its method of development and the ‘Pax Americana’. The weakening of Western European economies, together with the occupation of Japan after WWII enabled the U.S. multinational companies to aim in these directions too. The nature of those investments, however, was completely different from the practice of the nineteenth century (see Table 3.5). Americans invested directly. No displacement of the population took place,   The Post-War Development of the World Economy      – 81 –

only the management tips moved; for multinational companies, the objective of investment was to gain control over entire areas of the economy in a foreign country. ‘These direct investors in foreign countries were more akin to companies of the mercantilist era than the free traders and financiers, who dominated Britain in the nineteenth century’ (Gilpin 1975:11). Table 3.5: Summary of foreign investment in the 19th and 20th centuries

Investment typology

British foreign investment in the nineteenth century

U.S. foreign investment in the twentieth century


banks, individuals, the bond market portfolio, loans mining, agriculture, transport


kind of investment branch main motivation investment location migration

local opportunity for immediate profit Europe, United States, land resettlement (Australia, Canada) supported mass migration

direct industry, mining (particularly petroleum), trade global corporation strategy Europe, Latin America, Canada, Middle East (petroleum) corporations management

Source: Gilpin (1975)

The disintegration of the global economic system after the Second World War was almost complete. Some authors even speak of two independent waves of globalisation; albeit their timing is not agreed upon, (refer to Figure 3.2 describing the timing of Jones). As for the first one, which was based on acquiring resources and building infrastructure due to the war effort and post-war nationalisation, not much has been left of it. Huge economies, such as China after the Communist victory over nationalists of Chiang Kai-shek (1887–1975), and to a large extent, India after the Indians had gained independence from Great Britain in 1947, insulated themselves from the global economy after the war. Thus they followed the economy of Soviet Russia which had been isolated from the world economy in 1917, and after World War II preferred separate economic relations with its new satellites in Eastern Europe within the COMECON (Council for Mutual Economic Assistance) which was formed on 8 January 1949 as a  counterweight to the Marshall Plan. All of these economies, often inaccessible at that time, were striving for self-sufficiency and enclosed with high tariff barriers and which the leading countries of the first wave of globalisation (especially Great Britain and France, but also the USA) had formerly made significant investments in, were now destroyed by war or nationalised. At the same time, barriers to the entry of new foreign investors had grown in many countries after the Second World War. All of that had an obvious negative impact on the scale of integration of the world economy. – 82 –

MNEs and cross-border integration

First global economy (1880–1929)

Disintegration (1930–1980) Beginning of new global economy (1950–1979)

New global economy (1979–...)


– 1880






Source: Jones (2005)

‘The first Asian tigers, such as Japan and South Korea, whose followers are huge recipients of foreign investments today, or for example, even the postwar Germany, had never been aware of the concept of foreign direct investments. They achieved their success mainly thanks to credits and accumulation of capital based on a strong reduction of consumption’ (Evan 2008:22).3 The development of the post-war German economy has been repeatedly described as Germany’s economic miracle. ‘In 1945, Germany was divided into four occupation zones. Americans were opposed to the continuation of the war economy principles and, fearing Soviet expansion, supported the establishment of the Federal Republic of Germany along with the liberalisation program of the Federal Minister of the Economy and later Chancellor, Ludwig Erhard (1897–1977). Firstly, a monetary reform took place in 1948, and then Erhard launched the economic reform’ (Stellner 2006:91). Ample finance for the reform in Germany was secured by the Marshall Plan, so investment could flow to virtually all aspects of the economy.

3.4 DECOLONISATION AND ITS IMPACT ON THE WORLD ECONOMY The Great Britain, seeking to maintain its superpower status after the war, found itself in the ‘austerity years’. There was no way to finance the huge British war costs, combined with its extensive international commitments after the loss of India. Also, the war debt of the British government to the United 3 For post-war development in Japan, refer to Chapter 5.   The Post-War Development of the World Economy      – 83 –

States was enormous. Apart from the financial difficulties, the colonies were now viewed very differently by the British, as well as other European colonial powers, compared to the times prior to World War II, or even before 1914. European empires were based on quid pro quo, or possibly misbalanced mutual benefit between the metropolis and the local elites. In times of difficulties, however, the metropolis had to be self-confident and self-righteous, believing that their superiority was not only technical and military, but also spiritual or at least moral. This belief allowed them to act toughly in times of trouble. However, the horrors of World War II had not only destroyed the complacent arrogance but also the willpower to keep empires. The final end to the British power position came with the Suez crisis. The proclamation of the State of Israel in 1948 and the defeat of Arab intervention gave birth to a nationalist response in Egypt, where a young army officer, Gamal Abdel Nasser (1918–1970), came to power in 1952. The British, who until not long before had possessed a significant influence in Egypt through the pro-Western king, suddenly lost all their positions. This was manifested in 1956 when Nasser, without any prior consultation or compensation, nationalised the Suez Canal Company, which had not only been an important symbol of Western supremacy in the developing world, but which had also had a substantial economic influence on Egypt. Together with the French and Israelis, the British invaded Egypt. To the great surprise of the three powers, the Americans sided with the Soviet government and forced them to evacuate Egypt. Besides the great humiliation of the British and French, it had additional political and economic consequences. Since 1957, the whole British Empire has been gradually decolonised with varying degrees of independence within the British Commonwealth of Nations. The failure of the Egyptian campaign also meant the collapse of French power in Africa. French President Charles de Gaulle (1890–1970) offered independence to many countries of black Africa, on condition of their participation in a French version of the Commonwealth. The reward for not breaking all ties with France would be French economic assistance. Although in many countries, decolonisation took place without violence, French Algeria was a very important exception. Algeria had been declared an integral part of France where three million French settlers were living. The war for independence in this petroleum-rich country brought about unimaginable brutality and excesses on both sides, lasting practically from 1956 to 1962. To resolve the conflict in Algeria, which was threatening to escalate into an entire national tragedy, the French elite recalled the first post-war French President General de Gaulle, after twelve years of seclusion. He held a referendum on strengthening presidential powers in autumn 1958. A significant change in the constitution thus ended the fourth French Republic and marked the beginning of the presidential system of the Fifth Republic. As a hero of the First World War, and the founder of the Free French, saving the honour of France during difficult times of defeat and occupation while the majority of the nation was – 84 –

collaborating with the Germans during the Second World War, de Gaulle had sufficient credit to allow him to order a withdrawal from Algeria. The General calmed the domestic situation and strengthened the international position of France; however, he complicated the international political situation of France by departing from a friendly relationship with the USA. Efforts to strengthen the confidence and restore the superpower status of France were not realistic and to some extent threatened the European integration process (see the next section). Besides India (1947), an overwhelming majority of other states on the Asian continent won their independence. ‘In 1946 the Philippines declared independence from the United States, in 1948 Burma acquired sovereignty from Britain, in 1949 Indonesia from the Netherlands, and in 1954 Laos, Cambodia, and Vietnam from France. Except for Singapore, which exited the Malaysian federation in 1965, all of the states of Indochina were characterised by high levels of illiteracy, an agrarian economy (although, for example, Indonesia’s economy was also based on rich petroleum deposits), poverty, high population growth, political and economic instability, manifested by recurrent religious and ideological clashes and bloody dictatorships, often of communist origin. The strong influence of communist ideology in the region caused not only a strong engagement of the Soviet Union, but also an attempt to face this threat by the United States; the U.S. attack on Vietnam has become one of the most famous symbols of the Cold War’ (Stellner 2006:113). At one point, Americans had 550,000 troops in Vietnam; however, their inability to destroy the armed forces of North Vietnam, even by the most devastating air strikes, led to their withdrawal and eventual defeat in 1972. The American-backed quasi-democratic South Vietnam was then annexed by communist North Vietnam, which became a trauma that the USA was recovering from until the end of the Cold War. Similar to Asia, ‘strong men’ brought victory in their nations’ struggles for independence in Africa. That often led to decades of brutal dictatorships or civil wars (e.g. the Second Congo War where by 2008, in the war and its aftermath, 5.4 million people had been killed mostly from disease and starvation). Such an environment is completely inappropriate for economic development. The tyranny, incompetence, and ignorance on the part of many African leaders allowed, or to some extent reinforced, the dominant role of the former colonial powers in various states. Most African countries soon accumulated huge foreign debts which prevented them from achieving any significant economic development. Economically, most countries failed to participate in the international division of labour and their development stagnated; in significant number of cases, citizens of those new independent states had worse standards of living than under colonial rule. Within approximately thirty years after World War II, the map of the world had completely changed. The new countries became known – by the term of the French demographer Alfred Sauvy (1898–1990) – as ‘the third world’.   The Post-War Development of the World Economy      – 85 –

3.5 EUROPEAN ECONOMIC INTEGRATION IN THE 1950S AND 60s The discord among the Allies (the USA and Great Britain on the one side, and the Soviet Union on the other) was already quite obvious during the conferences in Tehran and Yalta, in 1943 and 1944 respectively. The relative weakness of Great Britain and thus its war contribution to the Allies’ cause meant that Winston Churchill’s ideas were ignored by the US Administration on quite a few occasions, including his efforts to invade Mussolini’s occupied Balkan states in order to prevent Stalin’s domination of Central Europe, or not to put any conquered territories of Germany under Russia’s charge. Needless concessions were therefore offered to the Soviets who eagerly seized them on every occasion. The threat of Nazi Germany was gone, and yet another war started. Churchill’s famous speech to an American audience at Fulton University in March 1946 truthfully described what had become fairly visible. The Cold War had divided Europe into two blocks, separated by an Iron Curtain. European economic conditions were the worst that they had been in generations; its massive centuries-built empires were crumbling at an unprecedented pace. Europe was weak, not only having lost many of its old historical cities behind the Iron Curtain, but the Continent had also been divided in many aspects. The thriving social movement and labour unions (Churchill’s Conservative Party lost the elections to the Labour Party while he was attending the Potsdam international conference in 1945) combined with the popular Communist parties in West Europe, namely France and Italy. For long months it seemed Communists would win the civil war in Greece (1946–1949). Several countries were littered with immigrants, driven from their homes. In Germany alone, more than 13 million refugees from the East were forced to resettle in a split and significantly reduced country, occupied by the Soviet Union, Great Britain, the USA and France. Therefore the fast economic recovery in Europe in 1945–1968 is rightfully considered a miracle, or called the European economic renaissance. The great help of UNRRA to Europe, the Marshall Plan, and the membership of European countries in economic institutions, described above, were crucial in the first phase of the European reconstruction. But it was Winston Churchill again, in his speech in Zurich in September 1946, who contributed a strong impulse to the idea of the unification of western countries under what he called the United States of Europe. Coming from the realistic school of thought in international relations, he suggested a Franco-German partnership as its core. However, he did not envisage the participation of Great Britain in this project, which – as he was hoping – was still able to sustain its Empire and remain a great power in her own right. Such an idea would remain potent in Britain for the following two decades, making any early participation of Britain in European integration almost impossible. – 86 –

The first truly European organisation was born out of the post-war efforts of non-governmental organisations, among which the Union of European Federalists was probably the most influential one. At its congress, the organisation agreed upon a document which institutionalised the cooperation of European states in political, cultural, and economic fields. This resolution was presented to European governments in 1948 and in May 1949 it was signed by ten member states, including the UK, to establish the Status of the Council of Europe. All security and military issues were explicitly dropped from the document, so as not to cast doubt on the exclusivity of the North Atlantic Alliance (NATO), which came into being in April 1949. The Council of Europe consisted of two rather diametrically opposed bodies. The Committee of Ministers became dominant with the right to veto any proposal from the other advisory body which was called the Parliamentary Assembly. This development was a result of a sceptical British standpoint in European integration, which had been based on supranational institutions. The UK’s influence was still strong enough to block any loss of national sovereignty, but it also naturally prevented any deeper integration whatsoever. Despite the fact that the Council has become a rather large organisation, currently consisting of 47 member states, its tasks were gradually limited to cultural, social, and legal issues. These include the European Convention on Human Rights (since September 1953) and the European Court for Human Rights (since 1959) to support the Convention. As the Council of Europe had become a ‘dead end’ for the federalists and the true integration of Europe, other avenues needed to be explored. On 1 July 1948, the Netherlands, Belgium and Luxembourg created a tariff union. However, though culturally and economically very close and already intertwined, these three states experienced some difficulties as large numbers of non-tariff barriers still existed and border controls had to continue operating. In Scandinavia, the Joint Nordic Committee for Cooperation was created with similar tasks in February 1948, i.e. to decrease tariffs and to create an external common customs tariff. However, the Committee’s proposals were not accepted due to general fears of the Swedish economy’s domination, as it was the most robust in Scandinavia. A handful of other initiatives for various degrees of political and economic integration were considered, as it was the general consensus of politicians, NGOs, and citizens that integration was a possible solution to prevent future military conflicts. The worst consequences of the war had been overcome within five years of its end. Thanks particularly to the Marshall Plan, European economies were growing, the communists had lost most of their political power in western parliaments, as well as the civil war in Greece, and social conflicts had been significantly reduced. The decrease of tariffs under GATT had also yielded some initial successes. It took time, however, before the American administration started to lose its accommodating attitude towards the Soviet Union – a legacy of the late President Roosevelt’s term in office – as President Harry Truman   The Post-War Development of the World Economy      – 87 –

(1884–1972) and the Secretary of State, Dean Acheson (1893–1971), sought to limit Moscow’s sphere of influence. The Truman Doctrine of containment to stop the spread of communism put American foreign policy in line with Churchill’s speech in Fulton. The Cold War had truly begun as international tension grew steadily, particularly in Asia, where the People’s Republic of China was created in September 1949, and on the Korean Peninsula the Cold War escalated into a regional hot war (1950–1953). These events, together with a European squabble over the distribution of the Marshall Plan, threatened to cause the American administration to redirect its attention outside of Europe before any real economic cooperation had even begun. It was under such circumstances that several French high officials came to the conclusion that a generally acceptable French initiative was needed; otherwise the momentum would be lost completely, and thus the French sphere of influence over European relations would diminish. France, as one of the four Allies – albeit the weakest – was in a very good position for such a step, being able to offer up a partnership to Germany, whereas Britain was unwilling to do so for reasons described above. Jean Monnet (the head of the French Planning Commissariat, born in 1888 and died in 1979), the author of the proposed plan, focused on coal and steel. These two commodities and the German area of production, the Rhineland, or rather the French dependence on imports from this area, had been a French nightmare ever since the mid19th century. It could be said that the means of German militarism had come from this area, such as the heavy weapons produced there, which had been used against France in three wars over a span of 75 years. The French were naturally worried by German heavy industry and wanted to gain as much control as possible; ideally, to get permanent access to German coal from that area. Monnet introduced his plan for a European Coal and Steel Community (ECSC), effectively putting together both the German and the French sources of the two commodities, to French Minister of Foreign Affairs, Robert Schuman (1886–1963). He fully supported it to such an extent that the plan, which effectively started European integration, is now called the Schuman Plan. The German reaction was positive, as it perfectly matched the policies of government of German Chancellor Konrad Adenauer (1876–1967). Apart from the obvious aim to reunify their divided country, the Germans wanted something that a less than generous mind would describe as a reintroduction to the human race after the atrocities they had committed during the war. Therefore, they were willing to take part in almost any sustainable integration project, particularly if it would transform their relations with their long-standing enemies, such as France. As soon as the American Administration was positively inclined to the peaceful integration of European countries, the last German condition had been fulfilled, and Germany agreed to the plan. Britain and Scandinavia refused to participate. The UK’s traditional objections had combined with its unwillingness to share control of the still important coal industry. Four other countries applied for membership, each – 88 –

following its own national interests. The three countries of the Benelux had learned over the course of history that a good German-Franco relationship was vital to their well-being. The motives of Italy were similar to those of Germany, as it tried to shake off its fascist past and military defeats. The Treaty of the European Coal and Steel Community was signed in Paris in April 1951. The ECSC was the first real European economic integration project, but it also offered an experiment as to which political arrangements are and are not possible among European countries. Its economic impact was, however, rather modest due to the fact that while the mutual trade of coal and steel increased significantly, several countries, most notably France, successfully blocked the free trade in these commodities well into the 1960s. In 1959, the surplus of coal in Europe combined with the ECSC unwillingness to respond to it almost led to the collapse of the organization, which lost much of its prestige. Generally, the road to free trade in Europe proved to be more difficult and time consuming than expected, and supranationalism was not taken up smoothly by the governments and citizens of Europe. Nevertheless, the ECSC must be considered a success, since quite a few integration projects had failed. We do not have the space to describe them in full; but let us name just some of them. In 1950, the French Minister of Foreign Affairs René Pleven (1901–1993) proposed a plan for the European Defence Community (EDC) as a reaction to the American demand for rearming West Germany in order to strengthen European defences during the Korean War. After vigorous disputes and many compromises, the EDC treaty was signed in Paris in 1952 by Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany. However, the Treaty never came into effect, because in 1954 the French Parliament did not ratify it due to their fear of German military personnel domination within the proposed European army (most of the French army being posted in Indochina at that time). To strengthen the common foreign affairs of member states, the European Political Community (EPC) was to encapsulate the ECSC and EDC. Due to the problems with the ratification of the EDC treaty, this initiative likewise did not materialise. Similarly unsuccessful was the project for Western European Union (WEU) which aimed to integrate West Germany and Italy into a western defence mechanism, but it succeeded in doing just that. The German and Italian armies became part of the WEU, which in turn became part of NATO. Thus, the high hopes for European integration in the fields of foreign and defence policies did not materialise; the only functional defence project remained the transatlantic initiative, namely NATO. Finally we must not forget to mention an ultimately unsuccessful effort by Britain to create an alternative to the ECSC (and the European Economic Community – EEC, as described later) in the form of an organisation which would establish a free trade zone. In 1960, seven countries (Great Britain, Sweden, Norway, Denmark, Switzerland, Portugal, and Austria) unwilling to join the EEC with its political and social integration, created the European   The Post-War Development of the World Economy      – 89 –

Free Trade Association (EFTA). Though successful in increasing the volume of trade among its members, the organisation could not compete with the much larger and more influential EEC. Once Great Britain had decided to join the EEC, the development of EFTA virtually ceased. The second half of the 1950s brought some relief to Europe. The fact that the Soviet Union had become a third nuclear power in 1949 (after the USA and UK) did not lead to a nuclear war for the time being. The Korean War was over, one of the worst dictators in human history, Joseph Stalin, was dead, and thus nuclear war seemed even less likely. Also, a peace treaty signed with Austria in 1955 meant the country remained democratic without Soviet influence. On the other hand, Great Britain and France realised after the Suez Crisis that their empires were gone and both countries were therefore more focused towards European affairs. France struggled in Algeria (see chapter 3.4), painfully realising the loss of its great power status and trying to make up for it by becoming a nuclear power. Despite the many failures in integration efforts, the tireless Jean Monnet came up with a new idea before his tenure as the head of the ECSC came to an end. Trying to extend the integration in the coal and steel industries to other sectors, he ultimately chose the dynamically growing industry of nuclear energy. When consulting with the Benelux countries, he suggested aiming even higher to form a complex European economic union. When European governments were presented with both sector integration in the field of nuclear energy and economic integration, including a customs free zone and single market, their reaction could already be anticipated. From the very beginning to this day, France has wanted more protectionism; being sceptical of free trade and well aware of its industries’ lack the competitiveness compared to its partners and therefore staunchly defended its national industries, particularly in agriculture. The Dutch would defend rather the opposite ideas of free trade, equal treatment of all and fiscal responsibility. (West) Germany would take part and finance any integration project where it could be seen as a solid and respectful partner, focusing on practical issues and sustainability. The same concerns, aims, and a narrow self-interest may be observed even today. The outcome of the ministers of foreign affairs’ meeting in Messina, Italy, in June 1955, however, was positive. The ministers agreed to establish a European organisation for the peaceful use of nuclear energy and the European Investment Fund, which would provide assistance to less developed European regions and to introduce a common market, and Britain was invited to join. On the other hand, the unification of social policies and a common agricultural policy, originally agreed upon in theory, would become a prime source of future discord. France was particularly interested in the European Atomic Energy Community (EURATOM) in order to control Germany’s nuclear ambitions, while its aims to become a nuclear power itself would have stayed unchecked. The French did not care at all about the common market, whose – 90 –

main proponents were the Dutch leaders, but tying these two issues together facilitated their mutual agreement. Despite fierce opposition, France also managed to connect its overseas territories to the common market and thus make them eligible for development funds, financed by all six future members. In that way, it managed to secure political influence over its former colonies. After ten months of intensive work and negotiations the founding treaties for both the European Economic Community and EURATOM were signed in Rome on 25 March 1957. Britain did not join. While the first problems of the British Empire were already revealed during its heyday of Queen Victoria’s reign (lived between 1819 and 1901) and became obvious after World War I, the heroic fight and unity of Britain and her colonies during World War II muddled the picture for a few short years. The independence of the ‘Jewel in the Crown’ in 1947, and ultimately the Suez Crisis in 1956, finally made everyone realise that Britain was in Europe and the British Commonwealth was no replacement for the British Empire. However, the British government still needed to grasp the necessity of integration, which was brought about by the American administration of Presidents Dwight David Eisenhower (1890–1969), and later on John Fitzgerald Kennedy (1917–1963). Negotiations started in October 1969, but were blocked by France under Charles de Gaulle twice. France rightfully concluded that the negotiations with Britain and other ‘free trade’ countries over various policies would shift against French interests. De Gaulle publicly announced that Britain would join the EEC only over his dead body. And so it happened. The UK, together with Denmark and Ireland, became members of the EEC at the beginning of 1973, two years after the General’s death. De Gaulle, a romantic nationalist at heart, was destructive for European integration in several ways. He vetoed a majority rule within the common market and blocked any hopes of further supra-nationality. He also developed France’s own nuclear weapons and withdrew from NATO’s integrated military and leadership structures, which he considered dominated by Americans. Thus, throughout the 1960s, the EEC thrived economically, but integration in political or social affairs was very limited. There has been one outstanding issue until this day, important both economically and politically to Europe, as well as the countries it traded with – the Common Agricultural Policy (CAP, see also chapter 5.1.3.). The policy was deliberately framed in a very general manner in the Treaty of Rome, as an agreement on anything meaningful was impossible, given the short time available before the Treaty was signed. France was the main proponent of protecting agriculture, since it is sometimes hostage to its farmers lobby. More than 20% of its total workforce was employed in agriculture in the 1960s; a rather complex system of state subsidies of agricultural products along with exports of agricultural goods was in place as well as direct payments to farmers. All of that, together with the presence of French agricultural products all over the world, resulted in relatively high prices for consumers. The situation was   The Post-War Development of the World Economy      – 91 –

different in Germany, which had historically lower yields due to its climate, and was less efficient, since German farmers had significantly smaller farms on average. Imports of much cheaper products were monopolised in order to keep prices high and protect domestic production. Britain, to name just three countries with three different models, allowed prices to drop to the level of world prices, while subsidising domestic producers en mass. When discussions over the practicalities of common agricultural policy started in 1958, great disagreements ensued. Participants, however, agreed that an internal market had to be protected from outside competition and they would strive for autarky (for the negative impacts of autarky see chapter 3.2). Both regulated prices and the artificial organisation of an agricultural market were to be used as tools. It took four years before negotiators came up with the first workable set of tools. As compromise usually suits no-one, the compromise in common agricultural policy meant an amalgamation of the policies of all of the member states, creating sets of rules which have been subject to constant reform up until today. Even the proponents of the CAP cannot deny that it is immensely wasteful, while Euro-sceptics compare its effects to a local nuclear war, as this single policy even cost 87% of the EEC budget at one point. At the beginning of the 1960s, despite all of the above discussed problems, six EEC member states reached a certain level of institutional integration among three functional organisations, namely the ECSC, the EEC, and ­EURATOM. The member states were willing to create one larger European Commission and the nucleus of a future European government. A treaty to merge those three organisations was signed in April 1965 in Brussels. The European Communities, the new name of the organisation, was given a Council of Ministers, a European Parliament, and a European Court of Justice. The newly created European Commission had 14 ministers. These were, nevertheless, still nominated by individual governments. This development was perceived as one leading to supra-nationality governed by France. France saw a danger in both the European Parliament, which wished for more competences, and the European Commission, which required its own inalienable source of income. Typically, there was discord over the sources of financing CAP. France decided to block all important decisions of the EEC by non-participation for many months until January 1966, when a compromise was finally reached in Luxembourg. The European Commission was not to claim the powers of a government but to consult and inform national governments, and the European Parliament’s competences were not increased and a majority vote was not allowed. Negotiations over the CAP could continue. Therefore, despite eventual enlargement, European identity did not overcome national rivalries during the 1970s and the first half of the 1980s. A new wind of change blew into European affairs with the Single European Act in 1986 when the movement of labour, capital, and services strengthened existing free trade in goods, thus establishing a true single market and rechristening the EC the European Union (EU) through the Maastricht Treaty in 1993. It needed new – 92 –

minds in the persons of the German Chancellor Helmut Kohl (born 1930) and the French President François Mitterrand (1916–1996), to take the lead in pushing for monetary union and beyond.

3.6 THE WORLD ECONOMY BEFORE AND AFTER THE OIL CRISES IN THE 70s With decreasing tariffs and the major role of multinational corporations, the importance of international trade and particularly the movement of capital gradually increased, although, according to some authors, in 1979 the total volume of international investment was still lower than in 1914. It was due to the vanished costly capital investment of the pre-war period in mining or, more generally, the acquisition of raw materials. Another significant reason was the two oil crises (1973 and 1979), whose impact on the international financial system is described in the section of this chapter on the IMF. Now let us focus on the causes and consequences of this development for the world economy in general. Ever since British warships exchanged coal for petroleum as their fuel, along with most industries which did the same before or soon after the First World War, the importance of the Middle East for the world economy and politics began to grow. To secure the supply of Middle East petroleum, the British created protectorates in the petroleum producing areas, or alternatively they either installed or maintained positively inclined rulers on their thrones. Though the Americans did not go that way due to their anti-imperial ethos, their multi-national companies played a very similar role. These corporations invested huge amounts into the development of newly discovered petroleum resources, which were yielding enormous profits for them from the 20s up to the 70s. A western petroleum company cartel (the Seven Sisters) was maintaining petroleum prices, and payments to local rulers were very low by today’s standards. While the British had given up their territories and protectorates (typical for the first wave of globalisation) after the Second World War as a part of decolonisation, western and especially North American petroleum companies maintained low petroleum prices until 1973 (typical for the second wave of globalisation). In October 1973, Egypt and Syria launched a joint surprise attack on Israel (the fourth Arab-Israeli War, called the Yom Kippur War). Arab petroleum-exporting countries decided to punish the United States, which supported Israel, with a petroleum embargo. At the same time these countries associated in OPEC (Organization of the Petroleum Exporting Countries established in 1960) limited their total exports. The price of petroleum thus quadrupled within weeks. The states of OPEC decided to maintain that for them, the favourable developments even after the Yom Kippur War had finished, and the Western world would be forced to pay many times more for petroleum.   The Post-War Development of the World Economy      – 93 –

The actual embargo was lifted in March 1974 as a result of the ‘oil summit’ in Washington. OPEC countries use quotas to define their share of the exports of the entire cartel, a practice which has been applied until today. The oil shock of 1973 had a huge impact on the world economy. In addition to the abolition of the Bretton Woods system, as it had been defined in 1944, and the transition from gold to the IMF special drawing rights, it has had a major impact on the industry of the Western world. In virtually all countries, there was so-called stagflation, i.e. a reduction or decline in GDP alongside a dramatic simultaneous increase in inflation. Since petroleum, which was an essential input for all transportation and most industries, had now become much more expensive, companies raised the prices of their products to share part of their costs with consumers (inflation), while laying off and decreasing production which was beyond what they could afford (unemployment and a decline in GDP). The only solution was a gradual restructuring of the industry and the introduction of new materials and technologies that reduce petroleum consumption. That was quite a long and painful process. After 1976, the greatest impact of the crisis seemed to have been overcome. However, the overthrow of the Shah during the Iranian revolution in 1979 caused a collapse of supplies from this major petroleum exporting country, resulting in a further increase in petroleum prices on world markets. Although the second petroleum shock was not as dramatic as the first one, ­unemployment and inflation stayed dramatically high until a further recovery in 1982. At the end of the 70s, there were still 19 million unemployed in Europe alone, therefore some authors refer to this period as the lost decade. At the same time, they point out that the Arab states had successfully placed a wedge between the United States on the one hand, which had diversified its sources and relied on the Middle East for less than 20% of its petroleum needs, and the European Union with Japan on the other hand, which were still dependent on Middle East petroleum. This wedge was reflected particularly in relation to Israel where Europeans were forced to hold a more or less ­neutral or pro-Arab stance, while the Americans stayed unquestionable Israeli allies until the presidency of Barack Hussein Obama (born 1961). Western economies, however, have benefited from their forced restructuring after the oil crisis. Namely, the automobile industry has redirected to lighter vehicles, with consumption being one of the basic indicators. The economy as a whole has become ‘lighter’, having redirected from heavy to electrical and other light consumer industries and services. General use of composite materials, special plastics, a faster application of ‘space knowledge’, i.e. the materials and techniques developed for the aerospace industry, has been beneficial to western economies. The opening of new deposits of petroleum and the expansion of current ones outside the Middle East (the North Sea, Alaska, Angola, Russia, and others) has led to still less dependence on Middle East petroleum since the 1980s, mainly, though not exclusively, for the United States. – 94 –

3.7 THE ORIGIN OF INTERNATIONAL CAPITAL MOBILITY – FROM BANKS TO MULTINATIONAL CORPORATIONS AND FDI Although the importance of multinational corporations (MNCs) has been demonstrated several times in specific historical situations, within the Pax Americana it has been a key phenomenon in the world economy and it is therefore necessary to define the nature and origin thereof systematically. A multinational corporation means any manufacturing or trading company in which the ownership, management, production, and marketing overlap with multiple states. It can be seen from above how the developed market economies (DME) governments, influenced by a mercantilist economy approach, may effectively redirect the activities of these companies. The following is a more comprehensive description, part of which was first mentioned in Evan (2010b) of the relationship between governments and multinational companies which aims to find the essence of MNCs’ existence. Hymer was the first to note (1976) that the existence of MNCs was not self-evident, and therefore they must have specific advantages over domestic firms to be able to cover the costs associated with conducting business in foreign countries. Along with Kindleberger (1969), he pointed out that the existence of MNCs was inherently incompatible with the market environment. They argued that domestic firms would have otherwise gained a competitive advantage over MNCs in the long term, due to the additional costs those operations in several states demand. They concluded that if that was not done and multinational companies were developing well in the long run, it had to be a case of ‘market failure’. The sufficiently long-lasting existence of MNCs’ benefits over domestic firms in the host country has been accepted by economic theory. Many scientific papers deal with the substance therein. Vernon (1972) came up with the theory of product life cycle, arguing that the decision to invest abroad follows immediately after market occupation through exports and needs to take advantage of the MNC’s technological and organisational superiority before it is lost with the gradual expansion of new technologies and procedures. This theory was followed by the ‘the ageing contract theory’. The product life-cycle theory was further extended, for example, to the case of capital specific to a particular industrial sector (Caves 1982), but in all it has been criticised (it cannot anticipate when the product will enter the next phase of its life cycle and only explains investment that replaces export, etc.). This theory was later replaced by an eclectic model of international production (Dunning 1996). Dunning sees the advantages of multinational corporations in two areas. Firstly, the benefit of ‘net ownership’ that is easily transferable and internal to the company. This advantage (trademarks, patents, technological processes, etc.) is greater than the additional cost of investment   The Post-War Development of the World Economy      – 95 –

and operation in different countries. It remains important that the company had full control over this advantage and vice versa, local market competition could not apply a similar advantage. The advantage of net ownership is crucial for MNCs and provides the company with an opportunity to carry out commerce with higher yields and lower costs when compared to domestic firms. ‘It is undeniable that much of the foreign direct investment of U.S. multinational corporations use corporate benefits to achieve extraordinary gains based on patents, technical knowhow, trademarks, etc., which could not be fully exploited through domestic production and subsequent export or licensing, or by other means’ (Feldstein 1994:5). If an MNC lost this benefit, or if its income was sufficiently reduced, then it would no longer be able to operate simultaneously in multiple states. While some of the net ownership benefits are of a purely arbitrary nature (for example, the conditions of brand registration, patent length, etc.), or based on the MNC’s monopoly over a given resource (protected or directly provided by the government of a state) or service, it is also clear that another part of the benefits (technology, organisational practices and marketing strategies) becomes obsolete as they become known to a larger sphere of manufacturers. For some investment methods that happens more quickly than for others. For instance, reducing the inflow of U.S. foreign direct investment (FDI) to developing countries in 2003 and MNCs’ simultaneous contracting with local producers in those countries was labelled as dangerous for the U.S. economy. US analysts expressed concern precisely over the fact that the US MNCs might thus lose their competitiveness if firms from developing countries acquire their technology. Generally, it can be said that the benefits of net ownership is associated with an often arbitrary political decision. This is even truer for another advantage which is the advantage of allocation. That depends on the nature of the host country, which is external to the company, and therefore not transferable. The attractiveness of regions can vary significantly over time and the host state may, to some extent, ‘provide’ the MNC with a favourable environment for investment through incentives, whether it is providing infrastructure, tax benefits, financial or even regulatory incentives, or weakening the protection of workers and the environment, etc. Multinational corporations make decisions about FDIs and its location once they find an investment opportunity that maximises both types of benefits. Still, for FDI to occur, the profit from these benefits must be greater than the costs of operations in several countries. An MNC has a range of options which can be used to penetrate a foreign market. Export is one of the least binding and has the lowest initial cost, followed by licensing, and franchising. A joint-venture is more expensive; nevertheless, it offers a higher level of control, which is even truer of the MNC’s subsidiaries or branches. Within the Pax Americana, the means of expansion of multinational corporations is FDI. Foreign investment generally refers to any investment – 96 –

made by a private company or an individual in a foreign country. The foreign capital used for the investment may enter into the economy either directly through input into existing companies, developing new greenfield projects or joint-ventures, or indirectly in the form of loans or purchases of shares without primary efforts to influence businesses. An indirect or portfolio foreign investment (FPI) is usually short-term by its nature; it uses the current market situation and is primarily intended to provide a financial return. Typically, indirect investment attempts to maximise short-term profits, avoiding risk by buying small quantities (often well below ten percent) of the securities of one company, and to have substantial geographic diversification. A FDI is more permanent in nature, and aims to ensure control over the resources, income or supplies of foreign economies. It creates both an economic and political relationship between the investor and the government of the host country. In terms of the state which the investor enters (a developing economy, but also a developed market economy), long-term investment is always preferable because it replaces the missing domestic savings and enables financing of the restructuring of the economy. If it takes on the form of FDI, it can also imply other non-financial benefits. Long-term investment also has a limited destabilising impact on monetary development and the current account deficit. Some authors perceive FDI inflows directly as a stabilising element that prevents attacks on the currency. Frankel and Rose (1996) use data from more than one hundred developing countries to show that a currency crashes4 ‘tend to occur when FDI inflows dry up, when reserves are low, when domestic credit growth is high, when northern interest rates rise, and when the real exchange rate shows over-valuation’ (Frankel-Rose 1996:21). For stability of the economy, it is desirable to minimise the proportion of short-term capital. It uses the difference in interest rates and exchange rates and may cause a financial crisis by its sudden departure. It is economically unproductive and increases inflation. From the MNC’s (investor’s) point of view, what matters is the optimal use of its advantages for an investment to achieve the greatest possible profit, which could not be achieved otherwise by different forms of cooperation (e.g. an agreement with domestic companies, licensing, etc.), or export. Substantial benefits are based on factors featured by the host country (market size, cheap labour, free natural resources, etc.). The strategic reasons for investing (new markets, new product development, etc.) are important, too.

4 The authors define a currency crash as a nominal depreciation of the currency by at least 25 percent combined with at least a ten percent decline in the value of the currency per year. Concurrently, a currency crash is counted only once in three years in order to avoid repeated counting of the massive decline within one currency crisis.   The Post-War Development of the World Economy      – 97 –

The above-mentioned principles imply the complementary positions of both players. It is obvious that if a multinational corporation decided merely on the basis of the aforementioned natural factors, and the host country’s government was able to ensure the safety of the invested capital (as well as other factors, as indicated below), there would be a continuous slow and mainly uniform circulation of resources around the world – i.e. the absolute antithesis of the Marxist system of the advanced core and a dependent periphery of less developed countries. The reality is different though. The liberal tradition in FDI remains unfulfilled because 70 percent of FDI is realized between the European Union (EU), USA and Japan (UNCTAD 1998). It is necessary to include the position of the investor’s home country in our thinking, i.e. the developed market economies (DME). DME countries respond to the existence of multinational corporations in full accordance with the mercantilist tradition in two different ways. Firstly, in pursuing their national interest they will not allow world investments to be allocated by the market, as they would relocate into new areas too dramatically. ‘It quickly became clear that the overwhelming proportion of direct investment occurs among the similar, high-income developed countries, not between dissimilar countries. “North-north” investment dominates “northsouth” investment even after correcting for income levels and other determinants’ (Markusen-Maskus 1999:3). To ensure that the investments are diverted, there are systems of incentives for investors, i.e. programs of subsidies for multinational corporations investing in various countries. These programs have begun to be introduced even by countries which are still liberal in this regard, as a means of self-defence. The more advanced a state the ‘better’, meaning a larger program for investors. It is therefore not surprising that the countries of Western Europe are more active in the use of incentives than other European countries. ‘A significant number of governments of developed and developing countries fell into competition with the others through incentives in order to obtain MNCs’ investments. These investment incentives tend to divert FDI flows in favour of developed countries, due to their ability to offer essential financial incentives’ (Kumar 2001:16). The advent of investments in some developing countries in the 80s coincided with the expansion of incentives and privatisation in these countries. Secondly, developed countries support the existence and further development of their national multinational corporations. This has two effects. The MNC support by parent states5 results, along with the willingness (or necessity) to establish extensive subsidy programmes in an increased tax burden, and thus strengthens the government’s role in the economy; at the same time it excessively strengthens the MNCs at the expense of other types of companies. 5 For example, the United States allows its multinational corporations to deduct the tax paid to the government of the place of investment from taxes paid in the USA. – 98 –

Multinational corporations invest in enhancing their competitive advantages, namely technology, and strengthening their position in the global market. That leads to intensified competition and the application of offensive and defensive MNC strategies. Another effect is the redirection of FDI which flows from their natural directions back to the developed market economies. Tab 3.6: Fifteen largest MNCs according to turnover in billions of USD
















General Motors


General Motors



359.0 312.4






Wal-Mart Stores




Royal Dutch / Shell


Royal Dutch / Shell



Royal Dutch / Shell




British Petroleum



General Electric




Chevron Corp







General Motors



Mobil Oil


Mobil Corp.


Daimler Chrysler





General Electric









Conoco Phillips














Ford Motor



Gulf Oil




Mitsubishi Corp.



British Petroleum


Nissan Motor


General Electric










Standard Oil




Altria Group


Source: UNCTAD (1998), UNCTAD (2007)

Eventually, the vicious circle of underdevelopment in affected developing economies expands, as they remain under-capitalised. Venables (2000) in his recently constituted theory of new economic geography deals with the   The Post-War Development of the World Economy      – 99 –

optimal allocation of capital proposed that out of the three factors of production, only capital is internationally mobile. He concludes that under these conditions, capital moves fairly close to the original economic centre (DME countries). Thus, only a group of close-by developing countries, which are already among the richest ones, can benefit from it, albeit more intensively. Conversely, the outermost states, usually with relatively lower income, remain unaided. As a result, there is high-quality, continuously improved technology available to MNCs, but also an illiberal system, where the capital and investments circulate quickly, but unevenly, and almost exclusively among the developed market economies. In the 70s and 80s, foreign investments were dominated by banks and foreign portfolio investment. The most exclusive among them were American international banks that lent money to countries with medium levels of income. Unlike FDI, which would gradually replace it, FPI is very sensitive to some overall macro-economic indicators. To avoid a major outflow of FPI from the target country, the host country must constantly meet the following conditions: 1. 2. 3. 4. 5. 6. 4. 5. 9.

economic growth favourable interest rates stability of the relevant exchange rate portfolio liquidity convenient capital transfer transfer of profits abroad at low cost stable banking system and reserves accounting standards and auditing quality a good regulation of the securities market

The two oil crises, however, did not create a situation which would satisfy the above-mentioned conditions. Thus capital was rapidly being transferred from the mainly developing countries that were most affected, which consequently worsened the crises due to a lack of capital. While the influx of FPI in developing countries was declining, the share of the developed countries in the total amount of foreign investment was increasing. The FDI boom over the 80s and 90s had been caused by several factors. The decreasing costs of technology, telecommunications and computer technology in particular helped businesses to invest and operate in several countries simultaneously. Some areas of the world, such as South East Asia, experienced massive economic growth, opened up to world investment flows, and began to subsidise export-oriented manufacturers significantly. The collapse of the Soviet bloc opened up more opportunities in countries hungry for Western goods and investment. In the 90s especially, developing countries opened up to international capital and implemented a relatively extensive privatisation – 100 –

of state assets. Since then, the long-term average share of FDI in developing countries has been very slowly, but steadily growing. Furthermore, during the 90s more states than ever before became, at least formally, democratic and carried out full or partial economic reforms towards a market economy. Hence, the world had become a single market to MNCs. These changes have been enhanced by so called economic neoliberalism approach urging governments to reduce deficit spending while decreasing tax burden, open up markets to trade by limiting protectionism, privatize state-run businesses and generally deregulate. In 1997, the flows of world FDI exceeded $400 billion (UNCTAD 1998). Coherence between trade and investment has increased, as the decision on the allocation of trade and services has also become a decision on the allocation of investment. The total assets of 450 000 branches of multinational corporations has reached 13 trillion dollars. Sales of these foreign branches are growing faster than world exports of goods and services. Branches of multinational corporations have also participated in one-third (9.5 billion dollars) of world trade. This can be seen as the share of the public market internalised by MNCs. The movement of world FDI in the global gross domestic product (GDP) in 1997 was 21 percent, while the share of world trade to world GDP has ranged between 40 and 45 percent in the long run (UNCTAD 1998). ‘Global growth in foreign investment is twice outrunning the growth of international trade, which has hitherto been considered the major mechanism for linking national economies. Between 1986 and 1999, FDI grew by as much as 17.7 percent a year, while world trade grew by 5.6 and world GDP only by two and a half percent a year’ (Evan 2008:23). The sources of 84.8 percent of FDI flows in 1997 were the developed countries of Western Europe (46.2 percent), the United States (27 percent), Japan (6.1 percent), and others. Also, nearly 60 percent of all FDI regressed to these countries. Adding South-east Asian countries (20.6 percent) to this, we find that the rest of Asia, Africa, Eastern Europe and Latin America comprised about 20 percent of FDI flows in 1997 (UNCTAD 1998). Even more unevenly distributed are the FDI reserves in the world, where the share of developed countries, together with South East Asia, amounts to approximately 83.3 percent of the total reserves. If we hold on to the liberal tradition, this situation cannot be reasonably explained. The fall in FDI in 2001 has been explained in various ways ranging from radical phenomena, such as the terrorist attacks in New York and the subsequent uncertainty in global markets, to structural problems of FDI, whose sharp increase had mainly been due to mergers and acquisitions (M&A). Meanwhile, the M&A level decreased the most, even in the following years. The overall level of long-term FDI growth has thus attained a less dramatic and probably more sustainable growth curve. Nevertheless, FDI and their MNC bearers in particular, have been facing an increasing barrage of criticism from various fronts.   The Post-War Development of the World Economy      – 101 –

However, the actions of individual governments towards these giants have been condemned even more than the MNCs’ operation itself. ‘Eyes have particularly turned to subsidies paid to MNCs, and international contracts with MNC parent states, often interpreted as a loss of the host state’s sovereignty. Therefore, unfortunately, globalisation is often rightfully viewed by the citizens of individual countries instead of being a process in which everyone gains (liberalism), as a process in which one state gains at the expense of another (mercantilism) or one social group over another (Marxism).’ (Evan 2008:24) Despite the efforts to reach international agreement, neo-mercantilist state intervention has taken place. Foreign investment is experiencing growth, which is motivated at least partly, by the results of government incentives for investors. The current economic policy of various countries causes investment to become a substitute for trade, rather than its complement. We see the replacement of relatively free trade with relatively subsidized investment flows. If government intervention is not limited, it will unleash a global political debate similar to the one recorded by historians in various European countries in the 19th century, during the transition to free trade. Although some authors have pointed out that MNCs do have ‘competitive natural’ goals even today, (Markusen 1997) others suggest that as for investment, we are still in the mercantilist phase, which has lasted well over three centuries (1500–1820) in the case of trade.

THE CHAPTER SUMMARY World War II dramatically affected the world’s economy. The United States became by far the most powerful nation, and launched the era of Pax Americana. Already in 1944, they were producing more than the rest of the world combined, and their support was crucial to the Allied victory and their postwar reconstruction. After the war, the large demand for civilian goods, mainly in Europe, enabled the U.S. economy to transition to peaceful production and continue its dominance. The U.S. position resembled the position of Great Britain after the Napoleonic wars. In contrast to the situation after the First World War, the United States did not isolate itself from the rest of the world, but it realised the need for active aid to the war-torn economies. Humanitarian Assistance to Europe and other countries came from the USA through UNRRA which was established at the newly founded United Nations. In addition, the United States announced the Marshall Plan, i.e. a program of economic recovery in Europe in 1947. The distribution of American aid, which had reached 12.8 billion USD between 1948 and 1952, was entrusted to the newly established OECD, together with the Office for Economic Cooperation. This aid was crucial in the first – 102 –

phase of European economic recovery that is sometimes called a European economic renaissance due to its speed and effectiveness. The USSR and its satellites refused the aid and preferred to cooperate within COMECON that was created in 1949. The world economy has also been significantly influenced over the longterm by the emergence of some international institutions. These include the World Bank, as the investment bank intermediary lending support to economic and social development in developing countries. Another institution is the IMF, which was to become the guarantor of a new international financial system. The last significant institution was the GATT, called WTO since 1995, whose task is to liberalise world trade by reducing tariffs and non-tariff barriers. Multinational corporations, that is companies with ownership, management, production, and marketing overlapping with multiple states, have enjoyed grand importance in world economy within the Pax Americana. They have expanded through foreign direct investment, a long-term investment with the aim to control resources, income or supplies of foreign economies. As such, they have a  close relationship with the governments of the host countries and gain advantage from investment incentives that distort liberal market and trade, and thus return the world economy to a mercantilist tradition. Decreasing costs of technology, massive economic growth in certain areas in the world, and the collapse of the Soviet bloc are some of the reasons for a boom in FDI in the 1980s and 1990s. However, most of the FDI has been realized between the EU, USA and Japan. De-colonization also had profound impacts on the world economy. The former colonies of European states in Africa and Asia gained independence in the 1950s-1970s and most of them were characterized by high levels of illiteracy, the agrarian economy, poverty, high population growth, and political and economic instability. Some of them, such as Algeria and Congo, experienced long and bloody civil wars, others, such as Vietnam, became Cold War battlefields between democratic and communist states. These countries were soon to be known as ‘the third world’, failing to participate in the international division of labour and their development stagnating. European states saw a few attempts for closer cooperation after the war. The first organization – the Council of Europe – came into existence in 1949. However, its tasks were soon limited to cultural, social and legal issues. The first real European economic integration project came with a French initiative that led to the European Coal and Steel Community. The Treaty was signed by Italy, France, Germany and the Benelux states in 1951 and integrated the coal and steel industries of the member states. In 1957, the same countries signed founding treaties for both the European Economic Community and EURATOM that extended and deepened their integration. In April 1965, the three organizations merged into the European Communities. All of the treaties were a result of hard negotiations and compromises and did not overcome   The Post-War Development of the World Economy      – 103 –

national rivalries during the 1970s and 1980s. A new wind of change came in 1986 with the Single European Act that established a true single market, and in 1993 through the Maastricht Treaty that rechristened the EC to the European Union. The world economy was heavily influenced by two oil crises in 1973 and 1979. The oil shock of 1973 lead to the abolition of the Bretton Woods system, increased unemployment, inflation, and a decline in GDP. However, the Western economies have in the long-run benefited from their forced restructuring.

– 104 –


The End of the Bipolar World

4.1 EASTERN BLOC COUNTRIES BEFORE THE FALL OF COMMUNISM The violent seizure of power by the Bolsheviks in Russia in November 1917 gave rise to the first communist dictatorship in a country with which German philosopher and revolutionary Karl Heinrich Marx (1818–1883) certainly did not reckon. This vast country was predominantly agrarian, so Marx’s teachings, which foresaw a revolution in the most industrialised countries of the world, had to be changed. The ideology of the new state thus would be Marxism-Leninism, which already ceased to suppose that revolutions would occur in industrialised countries, where – in Marx’s words – the exploitation of labour by capital was the greatest. The Civil War (1918–1921), accompanied by a collapse of the economy, and namely the increasing resistance of workers and peasants against the totalitarian methods of the so-called War of Communism, led to a partial release. Lenin introduced a new Economic Policy (NEP) in the economic sphere. In part, market economy was restored with relatively free internal trade and guaranteed personal property, small industrial businesses and land could be rented, wages paid in cash, and receiving   The End of the Bipolar World      – 105 –

foreign investment was allowed. As market-oriented measures usually do anywhere, these soon brought a recovery both in agriculture and industry, and contributed significantly to the victory of the Bolsheviks and strengthening of the regime. This quasi-market environment (80% of the industry and services were held by the government), however, collapsed relatively soon because the fixed purchase prices of agricultural crops were falling as the new leadership, headed by Joseph Stalin (Ioseb Vissarionovich Dzhugashvili, born 1879 and died 1953), was trying to raise funds for the industrialisation of the country. ‘The peasants responded in a “market” fashion: instead of supplying the prescribed quotas on the market for state-fixed prices, they preferred the more favourable sales of grain to Nepmen [the new entrepreneurial class named after the NEP – ed. T.E.] on the free market, feeding cattle with it, or growing industrial crops for the state’ (Stellner 2006:57). After nationalisation in 1917, Stalin could no longer borrow money from abroad for the industrialisation of the country. Therefore, he abolished the NEP in 1928 and forcibly collectivised agriculture. The consequences were disastrous. In a desperate effort to prevent expropriation, farmers slaughtered their cattle and vandalised their property. Anyone who resisted the collectivisation was dispossessed, displaced, and eventually deported to labour camps (Gulags). Thus the regime had unleashed mass terror even before the Second World War, which makes it probably the worst regime in human history, at least in terms of the amount of people who were tortured and killed. The collectivisation campaign itself caused a famine that ‘mainly broke out in the Volga region and in Ukraine in the years 1932–1933. The starvation caused deaths, especially among children, who moreover often became victims of cannibalism. A minimum of eight million people fell victims to the famine and subsequent epidemics’ (Stellner 2006:58). It took seven years before collectivisation was completed in 1936. Stalinist repression did not end there, however. The terror pervaded the whole of society. Perhaps the most important issue in light of the coming war, was the purges in the ‘Red’ army in 1937. They claimed three out of five marshals, ‘13 out of 15 army commanders, 50 out of 57 corps commanders, 154 out of 186 division commanders, and 401 out of 456 colonels. In total, the cleansing had claimed 25,000 officers [some sources say 27,000 people], including six out of every seven colonels and generals. If a bloodbath of such volume had stricken one of the most professional armed forces today, it would hardly have “left enough people to operate a newspaper stand”, as it was captured by a seasoned general’ (Bellamy 2011:32).6 So the Stalinist terror in the Soviet Union claimed millions of victims, even in times of peace. ‘The 1926 census 6 In this context, the execution of Polish officers by the NKVD in the Katyn Forest (1940) comes as no surprise. There is also no reason to disbelieve Winston Churchill when he says that at the Teheran conference (1943) Stalin stated that in order to break the German militarism, it was necessary to kill 50,000 German officers. Only Churchill’s fierce resistance and leaving the room meant that Stalin then turned the entire suggestion into a joke. – 106 –

recorded 148.8 million inhabitants. The country ravaged by the [Civil, ed. note T.E.] War had reached a certain degree of stability by then. Demographers say that the average annual increase was 2.3%. According to the most conservative estimates, which only add 2.3% every year, without increasing the growth rate, the population in 1937 should have been 186.4 million. Had the growth rate been increasing, it should have been 191 million. In fact, a mere 156 million were counted, i.e. 30.4 million less than the expected lower estimate, which means only slightly over a seven million increase in eleven years. It is practically impossible to determine what percentage of these dead or uncounted people had died in prisons and camps, and how many were claimed by the famine’ (Bellamy 2011:25). Industrialisation, heavily paid for by the decline in the farmers’ standard of living and their very lives, continued. The development of heavy industry, metallurgy, coal and ferrous or non-ferrous ore mining and electricity production were the top priorities within the five-year development plans. ‘Between 1928 and 1937, coal production had increased from 35.4 million to 128 million tonnes while steel production increased from 4 million to 17.7 million tonnes. Electricity production had increased sevenfold, the amount of machine tool production had multiplied more than twenty times, and almost forty times as many tractors were produced. In the late 1930s of the 20th century, Soviet industrial manufacturing overtook the French, Japanese, and Italian production in terms of volume. On the other hand, for example, the communication system remained on a primitive level, despite new investment in the rail network, whose length had increased by 48% during the years 1913–1940. At the beginning of the planning period, the organisation of the Soviet economy was aimed exclusively at remaining independent as largely as possible from foreign countries. However, key industrial equipment, along with technical knowledge, had to be imported from advanced capitalist countries. Foreign technical experts and consultants, mainly from the USA and Germany, therefore retained great importance in the first five-year period; during the Great Depression they were glad to be hired’ (Stellner 2006:59–60). The industrialisation method of the 30s was well described by an American researcher, an employee of the American Embassy who had been evacuated from Moscow ahead of the advancing German troops in the winter of 1941 to the ‘substitute’ capital city of Kuibyshev. The diplomat describes that in a city of about half a million there were only four paved roads, ‘a nice new clubhouse of the NKVD’ (the predecessor of the Russian KGB security service), two little hotels, and one bus line, apart from a minimum of cars and trucks, being supplementary to horses and camels as a means of transport. ‘Just a short trip out of the city, a few miles beyond the suburbs of Kuibyshev, there was another city – almost as big as the former – but consisting entirely of factories. It was a Nameless city [Bezymianny], a city of smokestacks, where large factories neighboured one another as houses. Several factories produced aircraft components and assembled aircraft – it was actually a kind of huge conveyor belt,   The End of the Bipolar World      – 107 –

although not machines, but factories… As a matter of fact, this sleepy residential city served only as a gigantic shelter for tens of thousands of workers who set out on foot or by a wheezy trolleybus to the factories in the Nameless City every day’ (Bellamy 2011:300). All the negative aspects of the Soviet totalitarian regime were enhanced after absolute war had been launched by the Germans on 22 June 1941 (Operation Barbarossa). Nazi Germany and the Communist Soviet Union had been allies until that day, having divided Poland within the framework of the Molotov-Ribbentrop Pact (Nonaggression Pact signed on 23 August 1939, the Germans gained 190,000 square km while the Russians attained a 200,000 square km area). The Soviet-annexed parts of Poland were renamed as Western Belarus in the north and western Ukraine in the south. Moreover, Stalin was granted a free hand in the Baltic region by Hitler, where he annexed the three Baltic republics, thus becoming the new soviet republics – a part of the USSR. Then, using threats, he forced Romania to secede from Bessarabia because the Romanians – like the Baltic States – could neither rely upon the help of Germany since the signing of the Pact, nor upon the UK, due to their location. The Winter War (1939–1940) between the USSR and Finland was also a result of the pact since the Finns could no longer rely on any assistance from any of the great powers. Only Finnish valour, causing terrible causalities to the Russians in winter conditions, and Stalin’s fears of the Great Britain choosing to defend democratic Finland in the case of his further progression, prevented annexation of the whole country. With his attack on the USSR, Hitler unleashed the last of his aggressive wars and caused the Soviet Union to become an invaded ally of democratic states. Despite terrible losses, (during the first month of the war it amounted to almost the entire army in peacetime, i.e. 4,000,000 men, and a loss of more than a third of its European area without the annexed territories), the USSR was able to win in this all-out war at the cost of further enormous losses. Concerning the total loss of life and material damage of the Second World War, see chapter 3. Very important deliveries under the Lend-Lease Act came to the Soviet Union in convoys from the USA via the UK by the northern Arctic sea route through the port of Murmansk, and after a temporary joint British-Russian annexation of Iran, also by the longer southern journey through this country. Unimaginable atrocities of the war, including torture and mutilation, executions without trial or even cause, scorched earth policy, the use of civilians as human shields, etc. were committed on both sides. Both sides also possessed the security or retaining units, SS or NKVD respectively, which aimed to ensure the security of the military supply front. As the lines of battle repeatedly shifted to and fro, very few people passed the screening of those units and thus managed to survive passing through the front-lines. As a result, large areas of eastern Poland and Ukraine remained entirely without inhabitants, as it was difficult to maintain undivided loyalty to both the Nazi and the – 108 –

Communist regimes. ‘The stories about old people, women and children used as “ambassadors”, are reflected in Zhukov’s message: “Germans who tried to cross the Neva, were herding locals as human shields”. His comment is telling: “Our mortar and artillery fire must be particularly accurate against the enemy, which is farther away, so as not to hit our people”’ (Bellamy 2011:355). As we can see, a lack of interest in his own life, as well as others’, was the basic characteristics of a capable general, as is illustrated in the example of the Soviet Marshal, Georgy Konstantinovich Zhukov (1896–1974). The above-mentioned example serves as proof that after the defeat of Nazi Germany, the Russians regarded the annexation of the whole of Central and Eastern Europe and the Balkans as their right. A reward for the horrors suffered during the war, not unlike the logic of the Molotov-Ribbentrop Pact, was being a buffer zone against anything that may come from the west. Nothing testifies to that better than Stalin’s own words, in reply to congratulations on the success of the Red Army’s Berlin operation from American Ambassador William Averell Harriman (1891–1986) at the Potsdam Conference in July 1945: ‘“Alexander I made it to Paris”, Stalin replied laconically; meaning the occupation of Paris by Russian soldiers in 1814’ (Bellamy 2011:20). While Stalin was trying to get to Paris, Churchill spoke of the territory that the free world had lost behind the Iron Curtain in his famous speech to American audiences in March 1946. The Cold War had begun. In this new war, Stalin rejected the Marshall Plan, forcing Soviet satellites to reject this means of a major revival of West European countries. Under the new slogan ‘war against fascism ends war against capitalism begins’, regardless of the suffering of the population, the equipment of the armed forces with the latest weapons was continually expanded. Both huge investments and industrial espionage soon yielded their fruit as the Soviets had possessed the atomic bomb since 1949, and four years later, the hydrogen bomb too. ‘The main burden of recovery, however, lay on Soviet population, which was forced into higher performance in an atmosphere of renewed police terror and the party surveillance apparatus (the number of ministries for industry and construction rose from 21 to 33). Extra shifts at weekends, massive promotion of ‘socialist competition’ to increase productivity, and various ‘innovative movements’ led eventually to surpassing pre-war production in heavy industry in the beginning of 1948, and in the consumer industry a year later. The monetary reform of 1947 eliminated the excess purchasing power that arose during the war, led to restrictions on the black market and restrained the higher profits of kolkhozes’ (Stellner 2006:101). Although electricity production and the supply of agricultural machinery increased, neither agricultural yields nor the overall standard of living of the population did. Stalin’s primary objective was to export the political and economic system into the Central European and Balkan satellites. By 1948, all of these satellites had one-party rule and followed the USSR in assaults on religion, civil liberties, and ideological indoctrination, empowered by the help of the   The End of the Bipolar World      – 109 –

Red Army and the NKVD. From an economic perspective, it is important that the entire industry had been nationalised and the emphasis was unambiguously placed on heavy industry, whose centres were being established or expanded. Forced collectivisation, according to the Soviet model, encroached upon agriculture in all of these countries. Besides the German occupation zone (later to become East Germany) and Czechoslovakia, none of these agricultural or agro-industrial countries had enough specialists; therefore they opted for the so-called Taylorism, where a person is simply a complement to the machine. Table 4.1: Uprisings against communism


Country (and centres of uprising) June 1, 1953 Czechoslovakia-Plzeň (Pilsen) June 17, 1953 East Germany-East Berlin June 28, 1956 Poland-Poznan October-November 1956 Hungary-Budapest

Event strikes, unrest strikes, uprising strikes, uprising revolution, crushed by Soviet army intervention

spring and summer 1968


democratization of the regime, crushed by Warsaw Pact army intervention

1970 – 1971

Poland-Gdańsk, Gdynia

strikes, uprising

June 1976

Poland-Płock, Radom

demonstrations, looting



1980 – 1981


Charter 77 (Charta 77), movement Independent Trade Union Solidarity (Solidarność), strikes, social movement

Source: Author

The only supposed satellite that was de facto free of USSR influence was Yugoslavia. There communist partisan leader and President, Josip Broz Tito (1892–1980) had been building the illusion of a whole Yugoslavia, having been liberated separately, which implied his enormous popularity. This enabled him to face Stalin, who was eventually forced to reject ‘Tito, the mad dog’, imposing an economic blockade on Yugoslavia. Yugoslavia quickly found the USA to be a new business partner, and it teetered between the two blocks with its policy of non-aligned states until Tito’s death. For Yugoslavia, the break-up with Stalin in 1948 meant establishing a form of central planning, intended to ensure greater self-reliance. The Yugoslav system of workers’ control over enterprises was also unique. A switch-over from central planning towards – 110 –

markets was taking place between 1952 and 1974, establishing a system later called market socialism, the so-called third way between central planning and market capitalism (Estrin, 1991). The communists’ aversion to private ownership, no matter how collectivist it was, along with some negatives – like increasing unemployment, the growing differences in wages, and business cycles, made them assert a political oversight over the self-managed enterprises. The reforms of 1974 and all the reforms during the 1980s redirected Yugoslavia back, closer to central planning. In the Soviet Union itself, after the death of Stalin, the ‘liberal’ or ‘reformist’ wing of the Communist party prevailed in the struggle for power. The power of the secret police became somehow limited, and even some of the labour camps were gradually closed down. Stalin’s aggressive foreign policy had antagonised many and led to a strong system of western alliances, implicitly isolating the USSR. This was supposed to change through ‘liberalisation’ and so-called ‘peaceful coexistence’, terms coined by the new Soviet leader, Nikita Sergeyevich Khrushchev (1894–1971). The liberalisation meant, first of all, de-Stalinisation after Khrushchev’s famous ‘secret speech’ at the 20th Party Congress in 1956. Forced glorification of the former dictator was abandoned, and more cultural freedoms were given to artists, including the writer Alexandr Isayevich Solzhenitsyn (1918–2008), who in 1962 published his immensely influential book ‘One Day in the Life of Ivan Denisovic’, describing life in the Gulags. From an economic point of view, despite positive changes, such as a transfer of resources from heavy industry and the military to the production of consumer goods and agriculture, it became obvious that reforming a system based on central planning was impossible. It was not only economists who understood that the double digit growth in industrial production during the 1920’s and 1930’s had been motivated and maintained by terror, causing widespread fear. With de-Stalinisation and curbing of the, until then, unchecked police state, this negative motivation started fading away, along with economic productivity. Until its disintegration, the USSR would begin every new decade with a larger productivity gap behind the Western countries. Productivity was followed by all relevant social-economic indices, until it had reached a point where this ‘lagging behind’ became widely known among all of the Central and Eastern European population. In 1964, the conservative circles, alarmed by some of Khrushchev’s policies, sprang into action and the leader fell in what is arguably the first Russian bloodless palace revolution. A new, more conservative leader, Leonid Ilich Brezhnev (1906–1982), oversaw a long period of political and economic stagnation. Stability was guaranteed by a massive build-up of military forces which allowed the Soviets to crush any reform in Central and Eastern Europe, namely the Prague Spring of 1968. Shortly after the invasion into Czechoslovakia, Brezhnev proclaimed the so-called Brezhnev doctrine, which allowed the USSR and its allies within the Warsaw Pact (1955–1991, established as a reaction to admission of West Germany into NATO) to intervene in any country in   The End of the Bipolar World      – 111 –

the Soviet sphere of influence where socialism could be endangered by the ‘counter-revolution’. Relative military strength was not backed up by the failing economy, as the state administration and military expenses required an ever growing share of GDP. Table 4.2: GDP per capita in selected counties between 1960 and 1990 in Int. GK$.

Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Germany   7 705   7 952   8 222   8 386   8 822   9 186   9 388   9 397   9 864 10 440 10 839 11 077 11 481 11 966 12 063 12 041 12 684 13 072 13 455 13 993 14 114 14 149 14 040 14 329 14 783 15 140 15 469 15 701 16 160 16 558 15 929

Italy   5 916   6 373   6 827   7 262   7 487   7 598   7 942   8 454   9 105   9 566   9 719 9 839 10 060 10 634 11 046 10 742 11 385 11 668 12 064 12 720 13 149 13 200 13 252 13 391 13 719 14 096 14 496 14 946 15 523 15 969 16 313

Czecho- HunUK slovakia gary Poland USSR   8 645 5 108 3 649 3 215 3 945   8 857 5 263 3 816 3 426 4 098   8 865 5 304 3 962 3 341 4 140   9 149 5 170 4 168 3 502 3 985   9 568 5 372 4 388 3 622 4 439   9 752 5 533 4 410 3 787 4 634   9 885 5 741 4 646 3 991 4 804 10 049 5 964 4 894 4 103 4 963 10 410 6 223 4 934 4 317 5 202 10 552 6 354 5 062 4 241 5 225 10 767 6 466 5 028 4 428 5 575 10 941 6 658 5 238 4 707 5 667 11 294 6 858 5 336 5 010 5 643 12 025 7 041 5 596 5 340 6 059 11 859 7 243 5 716 5 601 6 176 11 847 7 399 5 805 5 808 6 135 12 115 7 461 5 791 5 895 6 363 12 384 7 744 6 126 5 949 6 454 12 828 7 786 6 253 6 111 6 559 13 167 7 804 6 251 5 942 6 472 12 931 7 982 6 306 5 740 6 427 12 747 7 912 6 351 5 385 6 433 12 955 8 045 6 583 5 288 6 536 13 404 8 147 6 525 5 498 6 687 13 720 8 319 6 710 5 650 6 709 14 165 8 367 6 557 5 660 6 708 14 742 8 507 6 699 5 797 6 923 15 393 8 534 6 814 5 683 6 952 16 110 8 709 7 031 5 789 7 043 16 414 8 768 6 903 5 684 7 112 16 430 8 513 6 459 5 113 6 894

Source: Maddison Historical population Dataset – 112 –

United States 11 328 11 402 11 905 12 242 12 773 13 419 14 134 14 330 14 863 15 179 15 030 15 304 15 944 16 689 16 491 16 284 16 975 17 567 18 373 18 789 18 577 18 856 18 325 18 920 20 123 20 717 21 236 21 788 22 499 23 059 23 201

Japan   3 986   4 426   4 777   5 129   5 668   5 934   6 506   7 152   7 983   8 874   9 714 10 040 10 734 11 434 11 145 11 344 11 669 12 064 12 585 13 163 13 428 13 754 14 078 14 307 14 773 15 331 15 679 16 251 17 185 17 943 18 789

Table 4.2 demonstrates how the USSR and the countries of the Soviet bloc were slipping behind in GDP per capita during the last 30 years of communism. Particularly, the comparison between Czechoslovakia and Italy is telling despite the possible inconsistencies caused by the different statistics used. Roughly on par in the 60s, even after 15 years of communist rule in Czechoslovakia, the country regressed to one half of GDP per capita in 1990 in relation to Italy. Even more portentous might be a comparison between the USSR and Japan. On par in 1960, Japan became three times richer by 1990. The status quo was maintained by strong Russian patriotism, underlining their heroism during World War II, which had saved Central and Eastern Europe from the Nazi regime. Also, a certain level of re-Stalinisation now mingled with a collective – rather than personal – dictatorship and the privileges of the Communist Party members helped to prevent large dissent among ordinary Russians, being the main victims of the so-called shortage economy. Brezhnev’s era ended with his death in 1982, followed by an interim period, marked only by two state funerals of elderly supreme leaders. A major change finally came in the person of the relatively young Mikhail Sergeyevich Gorbachev (born in 1931) in 1985. Gorbachev ventured on the impossible mission to reform the Soviet system. The economy was to be subject to a true perestroika or restructuring, while glasnost – or openness – would be the new public discourse. Naturally, any open discussion, democratic practices or true representation collided with the Communist Party’s monopoly of power. The nationalist demands within the USSR itself, regardless of speaking about Central Europe or the Balkan satellites, soon escalated in national independence movements. With Gorbachev stating openly those local puppet leaders could no longer count on the Soviet Army backing, events took a quick turn. Communism collapsed in Central and Eastern Europe in the revolutionary year of 1989.

4.2 THE TRANSFORMATION OF CENTRAL AND EASTERN EUROPE The world economy was greatly influenced by the events which took place in Central and Eastern Europe in the late 1980s and during the 90s. All Central European communist countries (Czechoslovakia, Hungary, Poland, and East Germany) as well as Southeast Europe (Yugoslavia, Albania, Romania, and Bulgaria), along with most of the republics of the soon to be dissolved Soviet Union (Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, the Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan) underwent revolutions which opened the way to radical political and economic change. Although the most profound subsequent changes took place in Central Europe, they must have originated in the Soviet Union as all the communist countries in Europe had been mere satellites of Moscow.   The End of the Bipolar World      – 113 –

Therein Gorbachev had started the process, predominantly dedicated to economic changes. The political changes were accepted only to the extent in which they were deemed necessary, in order to motivate people and increase productivity. The economic changes within perestroika were not going well, so Gorbachev gradually decided to sacrifice more and more of the rigid political system to increase the chances for success. However, with perestroika being nicknamed katastroika (i.e. rather than re-construction, achieving a catastrophe) the legitimacy of the entire political and economic system was undermined, and the country was maintained by force until 1991. The disintegration of the soviet system was naturally limiting the country’s ability to rule over its satellites in Europe well before its final dissolution into the above mentioned 15 independent republics. Already in 1988, Gorbachev had announced a decision to withdraw the Soviet army positioned in Central European countries. About 240,000 troops, along with most equipment, were going to abandon these satellites by the end of 1990. The local communist parties were left to their own devices. In Poland, the last revolt against the communist establishment in 1981 was still in living memory. Therefore, the impact of the changes in the USSR was instant. The Solidarity movement (Solidarność) started its activities, such as protesting price increases or strikes, in the latter part of the 80s. In February 1989, the government, in trying to avoid a destabilisation of the country, entered Round Table negotiations. The Communist Party’s monopoly of power or ‘the leading role of the Communist Party’ was dismissed, and in 1989 Solidarity became a fully legalised party represented in parliament. The process was one of evolution rather than revolution, helped along by the great stabilising role of Pope John Paul II (1920–2005). Thus, the economic and political reforms had already started in 1989, while communist general and President Wojciech Witold Jaruzelski (1923–2014) did not leave his position until 1991. In Hungary, the changes were already emerging during the 80s when the communists, led by Jánosz Kádár (1912–1989), strived to limit oppression and increase the standard of living. In May 1988, Kádár was replaced by Károly Grósz (1930–1996), who introduced more market oriented reforms and allowed a limited discussion with opposition groups. By the beginning of 1989, the communists had reached a point of no return when the national television broadcast a statement which called the Hungarian Revolution of 1956, crushed by the invasion of the Soviet armed forces, a ‘popular uprising’, rather than a ‘contra-revolution’. Round Table meetings with the opposition followed shortly thereafter, and the border with Austria was opened. The dominant role of the Communist party was abandoned, whereas free elections were organised, thus having completed a peaceful transformation just before the dawn of the new decade. The purges within the Communist Party of Czechoslovakia after the Prague Spring of 1968, which was forcefully interrupted by the armed troops of the – 114 –

Warsaw Pact, had caused the party and the country’s leadership to be very conservative even two decades later. Indeed, it was a blend of pragmatism and conservatism, often void of any ideological fervour. There were very few believers in communism, and even less hoped for its successful reform. Being aware of the system’s limits, the communist representation was impassive to any calls for reforms from Moscow whatsoever. In January 1989, the so-called ‘Palach’s Week’ in Prague was cracked down on relentlessly. During that week, various dissident groups honoured Jan Palach (1948–1969) a student, who had burned himself to death in protest against the Soviet invasion of 1968. The situation was similar in the far more religious Slovakia, where quiet prayers were an integral part of the protests. It took almost all of 1989 and several more demonstrations, including the students’ protest on 17 November, which was brutally dispersed, leaving many injured and rumours of a dead student, to finally mobilise virtually all Czechoslovak citizens against the discredited regime. The chain of events of the so-called ‘Velvet Revolution’ escalated when despite being comprised of communists, the parliament elected opposition leader Václav Havel (1936–2011) to become the President on 29 December 1989; soon thereafter, free parliamentary elections followed. Arguably, the most conservative communist leadership was to be found in the German Democratic Republic, or East Germany. The most long-standing fear among the communist leadership, undermining stability and any semblance of the regime’s legitimacy, was making any comparisons with neighbouring West Germany. To avoid that, travelling to Western Europe, particularly to the Federal Republic of Germany (FRG), was strictly limited. After the Austro-Hungarian border had been opened in May 1989, crowds of East Germans tried to reach West Germany, via Czechoslovakia, Hungary and Austria; whereas, others arrived in Prague or Warsaw and climbed over the fence of the West German embassy, which all resulted in further restrictions in East Germany. Throughout the following months, while the issue of free travel was on the table, it became clear that it was directly connected to the fall of the regime and the reunion of East and West Germany. The dreaded Berlin Wall, a massive symbol of the Iron Curtain, was to fall unceremoniously on 9 November 1989. The party speaker, Günter Schabowski (born 1929), apparently had not given much thought to his statement, as it could be interpreted that East German citizens were now allowed to travel abroad. Vast masses started gathering at the border crossings in Berlin, and as there was no one else to confirm or refute the statement, the guards let people enter West Berlin. Having been protected by thousands of nuclear warheads and millions of soldiers, the communist regime in Europe ceased to exist in a blink of an eye without a single shot. However, there was one particular exception: Romania. Independent, both from Moscow and from most communist ideology, the Romanian dictator Nicolae Andruţă Ceauşescu (1918–1989) underpinned his power by the omnipresent secret police (Securitate) and a clientelistic system. Any dissent was   The End of the Bipolar World      – 115 –

harshly punished and the country was embracing the cult of personality of the long ruling dictator and his family. The first protests appeared in Timișoara, having been sparked by the forceful removal of a popular priest. To strengthen his position, Ceauşescu called for an official demonstration of support, which went badly wrong, as hundreds of thousands of people shouted anti-communist slogans. This bravado was soon followed by others in cities all around Romania. One crucial factor caused the Securitate to lose control; the army withheld its support from the regime. Ceauşescu and his wife were arrested, charged with genocide, and shot dead on Christmas Eve 1989. Various groups in the society formed the National Salvation Front. Although conditions were not as hard as in Romania, opposition forces in Bulgaria were weak and disorganised. Thus, the change had to be gradual and directed from within the Communist Party. The long-time communist leader, Todor Khristov Zhivkov (1911–1998), was deemed to have lost touch with reality as he was not willing to acknowledge economic problems or to deal with public protests. He was ousted by senior party officials and replaced by his rival, Petar Toshev Mladenov (1936–2000) on 10 November 1989. From that point on, communist rule in Bulgaria was virtually over as the leading role of the Communist Party was abolished in the beginning of 1990, enabling a political and economic reform. Albania was by far the most isolated of all the communist countries in Europe with arguably the most brutal regime under Enver Hoxha (1908–1985). A genuine opposition did not exist, thus gradual reforms taking place during the 1990s were directed by former communists. The first step was taken at the end of 1990 when groups of students protested power cuts and poor dormitory conditions in Tirana. These protests were used by Sali Ram Berisha (born 1944), a former physician of Hoxha’s and by now an alleged leader of the supposedly anti-communist Democratic Party of Albania to legalise non-communist political parties in December 1990. Free elections were held in March 1991, with the former communist party renamed as the Socialist Party of Albania taking a large majority of seats. A relatively high standard of living, a pluralistic political system and market socialism put former Yugoslavia aside from the rest of European communist countries. Within the federation, individual countries had an autonomous position, and many important decisions were being made locally. After market socialism had reached its limits and the leadership of the republics decided to solve the problem of the mounting external debt, the differences in incomes, along with the culture and style of living, created unfortunate ethnic overtones. A transformation from the communist or quasi-communist past into a  free society and market economy became intermingled with escalating violence, ultimately leading to a brutal civil war, ethnic cleansing, and the breakup of the country. Only Slovenia in the north escaped war as the military forces loyal to Yugoslavia were no longer able to wage a military campaign against it after Slovenia had seceded the Federation. The civil war lasted from – 116 –

1991 to 1995 in Croatia and between 1992 and 1995 in Bosnia and Herzegovina, resulting in the independence of both countries. In each of the transforming countries, the political changes were soon followed by economic ones. The aim was to redirect the centrally planned economies (CPEs) to free market ones. The main problem of CPEs had been their structure, which was deformed and centred on the heavy industry. Secondly, they were almost autarkic, trading only with each other, i.e. in markets where supply never matched demand (shortage economy), and therefore the quality was left to plummet. Finally, CPEs did not participate in the international division of labour with production determined by political decisions, commonly on strategic terms, and thus uncompetitive in free market conditions. The goal of the transformation process was therefore to create a competitive free market economy in the countries where it had not been operating for fifty to seventy years. This process had no historical parallels. A transformation includes systemic, institutional, and structural changes. There were two transformation methods used; a gradual one and so-called ‘shock therapy’. While the proponents of either method usually became bitter political rivals, a combination of both was usually used in practise. The gradual method involves a creation of legal and institutional framework first, followed by the gradual involvement of market forces advancing past the stage of state-control (de-étatisation), price deregulation and privatisation, as well as the liberalisation of external relations. The so-called shock therapy involves a rapid de-étatisation, and price deregulation accompanied with mass privatisation, usually through the voucher method, thereby postponing the creation of a legal institutional framework, such as a tax or social security reform, and the establishment of control mechanisms and institutions for proper market functioning. Table 4.1 illustrates how difficult the transformation process was. All of the transition countries experienced a rapid decrease of GDP during the first years of the transformation as old structures, markets and institutions had disappeared while new ones were not yet in place. The average inflation increased as much as the level of poverty. As the table suggests, even ten years later, the transition countries still had not reached their GDP level prior to the transformation. Although there were three exceptions to that rule: Poland, Slovenia, and Slovakia. The Czech Republic and Hungary had almost reached the 1989 levels. Generally speaking, the process was difficult, tempered with failures, and yet the results varied in each of the observed regions with Central Europe achieving the best results, while the former Soviet republics, particularly in Central Asia, did the worst (Tajikistan: the real output 1999/1989 ration of 0.29).7

7 For obvious reasons, this text does not include the five transition economies of East Asia, namely Cambodia, China, Lao P.D.R., Mongolia, and Vietnam. As envisioned before, for our purposes only China is relevant and will be dealt with in Chapter 5.   The End of the Bipolar World      – 117 –

Table 4.1: Selected characteristics of transition countries

Transition country/group EU accession countries (excl. the Baltics) Bulgaria Czech Republic Hungary Poland Romania Slovak Republic Slovenia Baltic states Estonia Latvia Lithuania Other South-east European countries Albania Bosnia and Herzegovina Croatia Macedonia, FYR Commonwealth of Independent States Armenia Azerbaijan Belarus Georgia Kazakhstan Kyrgyzstan Moldova Mongolia Russia Tajikistan Turkmenistan Ukraine Uzbekistan

Beginning Stabilisation of programme transition since

Real Average PPP GDP output inflation per capita ratio 1989–99 1999 1999/1989 0.95 35.5 10,009



1991 1991 1990 1990 1991 1991 1990 1992 1992 1992 1992 1991

Feb-91 Jan-91 Mar-90 Jan-90 Jan-93 Jan-91 Feb-92 Jun-92 Jun-92 Jun-92 Jun-92 Jun-93

0.67 0.94 0.99 1.28 0.74 1.01 1.05 0.68 0.78 0.56 0.70 0.77

   68.4     7.8    19.7    49.2    76.1    14.3    12.9    33.5    24.3    35.1    41.0 3,331.8

 4,812 13,408 11,273  8,832  5,798 10,255 15,685   6,850  7,909  5,893  6,750   3,651

1990 …

Aug-92 …

0.93 0.93

   33.4 13,118.0

 2,897  1,014

1990 1990 1992

Oct-93 Jan-94 Aug-94

0.80 0.59 0.53

  100.0    75.6   149.1

 6,793  3,903   3,337

1992 1992 1992 1992 1992 1992 1992 1990 1992 1992 1992 1992 1992

Dec-94 Jan-95 Nov-94 Sept-94 Jan-94 May-93 Sept-93 … Apr-95 Feb-95 … Nov-94 Nov-94

0.48 0.47 0.81 0.31 0.61 0.61 0.31 0.93 0.55 0.29 0.61 0.35 0.97

  106.5   233.2   162.4    17.9    77.3    22.3    16.5    46.5    88.0   688.5     4.9   169.4   304.5

 2,469  2,404  6,485  3,950  4,351  2,419 1,847  1,573  6,815  1,045  4,589  3,276  2,157

Source: IMF World Economic Outlook, October 2000, p.89 – 118 –

The massive economic downturn of the first years of transformation was particularly painful for the countries of the former USSR which lost almost 50% of their output, whereas in Central Europe it averaged only 15%. The failure of social systems, endemic corruption, and clientelism, caused socio-pathological phenomena. In several countries, life expectancy has dropped to 68.4 years on average, and illiteracy has become a problem, with 9.3% illiterate people above 15 years of age in the former Southeast European communist countries, and 7% within the former Soviet republics, respectively. By 1998, poverty in the transition countries had risen from 2% to 21% on average, with the Tajikistan having 70% of its citizens living in absolute poverty. This grim picture should not overshadow the fact that most of the transition countries reached the new millennium with far better institutions and prospects than they had had at the dusk of the communist era. Some version of democratic institutions and policies had been put in most places. A new structure of economies was offering perspectives for economic growth, particularly in the soon to be EU members, the shift from non-competitive ­COMECON markets to competitive world markets had mostly been completed, and trade deficits had been replaced by increased export capabilities. Another decade later, we see some of the new EU members reaching the GDP per capita levels of the poorest original EU members. Given the lower levels of public debt, large investments into their aged infrastructure, and the fact that the newly set-up private enterprises use altogether new technologies, it suggests that the productivity and income gap between Western Europe and the former communist countries of Central Europe might diminish.

4.3 THE FINANCIAL CRISES IN THE 90s In the three years preceding the Mexican peso (or financial) crisis the country economy had successfully developed, decreasing the inflation rate as the state budget had been in minor surplus. In January 1994, the North American Free Trade Agreement (NAFTA) came into force and in May Mexico was the first emerging economy to become an OECD member, boosting investors’ confidence further. Yet, enduring political instability (including the assassination of a popular presidential candidate), a renewed budget deficit, and especially a high deficit in the current account balance which had been credited to importing new technologies, were increasing uncertainty throughout the election year of 1994. The current account deficit was not considered a problem because capital inflows exceeded the deficit, so the overall balance of payments was in surplus. Capital inflow was comprised mostly of portfolio investments, short-term capital, and loans in foreign currencies, which increased gross foreign debt. In February 1994, interest rates in Mexico decreased as a result of falling inflation and as U.S. interest rates had risen, the interest rate differential   The End of the Bipolar World      – 119 –

had narrowed, causing first investors to leave. To reduce the current account deficit, the IMF recommended a 15% devaluation of the Mexican peso which the central bank conducted in December 1994. The result was a massive outflow of capital, a 120% devaluation of the Mexican peso, and the transition to a freely floating currency exchange rate. The outflow of capital caused a financial crisis and a subsequent economic depression. The USA provided Mexico with 50 billion USD as a stabilisation loan to be administered by the IMF. The loan was subject to a number of conditions; among them were the liberalisation of the economy, and improvement of conditions for the inflow of FDI. Within a year, the confidence of investors had been restored, there was a significant increase in FDI, and Mexico could begin to repay the US stabilisation loan. In July 1997, the largest currency crisis in the 90s broke out – the Asian currency crisis. It broke out in South-east Asia (Thailand, Malaysia, Indonesia, the Philippines, and South Korea), in an area which belonged to the most economically dynamic regions in the world. Significant achievements were especially reported for South Korea’s economy, which had become an OECD member at the end of 1996. Rapid economic development in this area had been financed by foreign capital, which had been attracted to the region by high interest rates. The currencies of the above mentioned countries had a stable exchange rate. As a result, the depreciation expectations were very low. Foreign capital flowed into those countries through local banks. Thanks to a state bank guarantee in the event of difficulties, investors could expect the governments to not let their banks fail. The state guarantee encouraged banks to accept higher risk loans. This in turn led to large business debt, strong personal ties between the managements and the banks added a high proportion of bad debts to the loan portfolio of banks and a weak banking sector. Increasing gross debt due to the many loans from abroad left several countries exposed to any necessitated devaluation. Thailand, the country where the crisis started, had acquired a crippling foreign debt even before the collapse of its currency. It was, however, the growing current account deficit of the balance of payments in some countries of the region that started the actual crisis. When the deficit of Malaysia and Thailand reached 8%, the IMF described this phenomenon as the result of a  rapidly rising domestic demand and demanded its reduction by creating a surplus in the state budget. This measure was taken but the current account deficit did not decline. The IMF recommended a 15% devaluation of the currency and began to criticise the state of the economies in Southeast Asia. Investors started to lose their confidence and the first attacks on the Thai baht and the other currencies in the region occurred. In July 1997, a devaluation of the Thai baht by the required 15% took place, but instead of calming down a number of currency speculations arose. After a deep depreciation of their currencies, the governments of Indonesia, Thailand, South Korea, Malaysia, and the Philippines had to abandon fixed – 120 –

rates and turn to the freely floating rates. Foreign investors lost their confidence in all Asian assets and began selling them and transferring their capital from Asian currencies to USD. This affected not only those directly involved due to a balance of payments deficit but also Hong Kong, Laos, and indirectly involved countries such as China, Taiwan, Singapore, Brunei, and Vietnam, as they suffered from a loss of demand and investors’ confidence. After the outflow of foreign capital and a reduction in asset prices, interest rates steeply increased, consequently resulting in an economic depression. The foreign investors’ confidence was not retained though and several countries dramatically increased their foreign debt to GDP ratio. The affected countries were offered stabilisation loans and recovery measures by the IMF which were based on a liberalisation of the economy and easing access to FDI. The two countries affected worst, Thailand and Malaysia, had first rejected the IMF’s recommendation as being too harsh. Nevertheless, given the continued weakening of their currencies, they were forced to adopt the recommendations which in turn stabilised exchange rates. A similar development occurred even in South Korea. The Indonesian Rupiah had undergone the worst devolution of all, having depreciated by 600% in six months, compelling the resignation of President Suharto from his position in 1966. Unlike the Mexican crisis, the Asian crisis was not caused by an excessively expansionary fiscal policy, the public budgets of most Asian countries were balanced or even in surplus during the outbreak of the crisis. The sources of instability were rather the private sector’s behaviour: an excessive accumulation of foreign and domestic debt, and an inefficient allocation of foreign and domestic savings. As always in such situations the error was not only on the part of Asian countries. Wrong decisions had been made by the lending institutions in the developed countries that underestimated the risk of lending in the situation of a country with central bank guarantees. In 1994, a monetary reform (Plano Real) had been carried out in Brazil in order to eliminate hyperinflation which subdued most of the economic growth in the 80s and 90s. The anti-inflationary policy of the central bank included a fixed exchange rate of the Brazilian Real. A stable exchange rate using crawling peg to USD and interest rates around 30 percent managed to ensure the inflation in Brazil had decreased from 3,000% to single digit level. Also, the anti-inflationary policy caused an appreciation of the Real during the transition phase. Stable finances led to a large influx of foreign capital and economic growth. Government spending in excess of budgetary income, however, proved to be the problem of the Brazilian economy. The state budget deficit and the debt in foreign currencies, namely the USD, was growing rapidly. When the Russian economic crisis of August 1998 caused investors to abandon risky markets Brazil became one of the affected regions. The high exchange rate of the Real became a burden as it sapped competitiveness and export ability. Brazil had current account deficits the maintenance of which, via capital account surpluses, had became problematic. Since 1996, the Brazil   The End of the Bipolar World      – 121 –

central bank has been using foreign exchange reserves to prevent the currency from depreciating. After the central government approved a fiscal adjustment programme, the IMF provided a 41,5 billion USD loan in November 1998 to prevent a further weakening of the Real. However, in January 1999 the Brazilian Federation state Minais Gerais announced its inability to pay for its debt to the central government. As it was one of the most economically important Brazilian states, this caused panic among foreign investors and resulted in an outflow of capital. The central bank decided to devalue the Real by 8% in January 1999. Within the same month the Real depreciated by 66% against the USD. Moderate economic downturn ensued with unemployment reaching 14 percent. It was not until 2000 when a worldwide decline in raw material prices stopped and prices of this crucial part of Brazil exports started to grow again, the situation stabilised. Another key factor was a tight fiscal and monetary policy, even with a floating currency guaranteed by the administration of new left-wing President Luis Inácio Lula da Silva (born 1945). Both factors helped Brazil to secure the confidence of investors and ensure an economic growth of 4.4 percent in 2000. The above-mentioned crises need to be briefly supplemented by the financial crisis in Argentina in the beginning of the 21st century. Argentina has had a ‘history of chronic economic, monetary and political problems’, but the financial crisis of 2001–2002, the beginning of which can be traced back to 1998, was exceptional in terms of its enormous consequences (Saxton 2003:1). In the period between 1998 and 2002, GDP fell by 28%, the Argentine peso, linked to the USD at a 1:1 ratio, devaluated to almost 4:1, unemployment rose from 12.4% to 23.6%, the number of people living below the poverty line soared from almost 26% to 57.5%, and inflation reached 41% in 2002 (Saxton 2003:1). In 1989, President Carlos Saúl Menem (born 1930) ascended to office and he carried out important reforms during his five-year mandate. Privatisation took place, along with deregulation and the reduction of certain taxes, and the state administration also underwent a partial reform. In 1991, the Convertibility Law was adopted which linked the Argentinian currency to the U.S. dollar, ended hyperinflation (in 1990 it was 1,344%; whereas, in 1991 it decreased to 84%, and in 1995 to 1.6%), and ensured monetary stability. All of that attracted foreign investors into the country. In 1998, however, the Argentinian economy was negatively affected by the crisis in Russia and Brazil, which in addition to Uruguay and Paraguay, belong among the major trading partners of Argentina. The devaluation of the Brazilian currency during the crisis had a negative impact on Argentinian exports and the economy entered a recession. Financial problems led the government to weaken bank balance sheets and to increase the budget deficit, which could not be financed by foreign loans (Mishkin 2006:195). In 2000 and 2001, the government raised taxes three times and ‘coerced the banks into absorbing large amounts of government debt’ (Mishkin 2006:195). A strong dollar in 2001 meant the reduction of Argentinian exports, so the government – 122 –

proposed a change of rates bound to the USD, i.e. a factual devaluation of the currency. Investors lost their confidence in the ability to repay debt and its price increased when the government was forced to partially refinance it at a higher interest rate. The IMF approved a loan of up to 22 billion USD. However, due to a failure to comply with the agreed terms, they were suspended in December 2001. At the same time, the government froze bank deposits after large withdrawals, and the economy found itself in a depression. A month later, the Law of Public Emergency and Reform of the Exchange Rate Regime was adopted, which among other things, devalued the Argentinian peso (over 70%), introduced a floating exchange rate, froze deposits, and approved the so-called ‘pesofication’, i.e. converted USD bank deposits and loans to pesos at a 1:1 ratio, even though the market exchange rate was 2:1. The loss to US currency holders amounted to 23 billion USD. This step was ultimately declared unconstitutional by the Supreme Court in 2003. The government measures led to the insolvency of many companies, the growth of inflation and interest, an inability to repay (which in turn further negatively affected the beleaguered banking sector), and a reduction of GDP growth, along with unemployment and poverty. A slow economic restoration began in the middle of 2002.

4.4 THE EUROPEAN UNION AND TRANSITION ECONOMIES The collapse of the Soviet bloc with its COMECON organisation was an excellent opportunity for the countries of Western Europe, mainly those neighbouring countries from the EU. As Central and Eastern European economies were opening up, new markets and new places for investment could be found. Central European countries especially possessed educated labour, a decent, though aged infrastructure, geographic proximity, as well as a history of a large strong manufacturing sector, and adequate agriculture from the times before the communist takeover after World War II. The populations of East Germany, Czechoslovakia, Poland, and Hungary resented imposed Soviet central planning, knowing quite well how inefficient a system it was, and were eager to join Western European structures, be it of an economic or political nature. East Germany presented a special case, since the transition came through the union with the FRG. German unification meant a transplantation of West Germany’s legal, administrative, and economic infrastructure to five new federal states. Thus, East Germany became almost instantly a part of the EU with access to its large market. The cost of this transformation was paid for by the fiscal framework of the FRG. East German industry could not survive this sudden exposure to competition, both within Germany and the EU. Many companies were closed down or taken over by West German businesses. The federal budget was thus forced to cope with rising unemployment, as well as to pay for infrastructure and other projects to bring East Germany on a par   The End of the Bipolar World      – 123 –

with the West. The result was a great decline in GDP (up to 35% between 1989 and 1991). The transition was very costly too, prompting the federal government to introduce a new so-called tax of solidarity. Czechoslovakia, and Poland to a large extent, were proponents of the shock therapy in the economic sphere. Their transformation, however, was naturally spread over six to eight years. In 1993, Czechoslovakia was split up along the borders of the former federation’s republics. The division was peaceful, with all the assets of the former federal republic being divided in a two to one ratio in favour of the Czech Republic, roughly in line with the population figures. All Central European countries became NATO members (1999), OECD members (the Czech Republic in 1995, Poland and Hungary in 1996, Slovakia in 2000) and they formed the so-called Visegrád Group to facilitate a quicker admission to the EU. Ultimately, the Visegrád Group had to wait for the ‘big bang’ when the EU expanded by 10 countries all at once in 2004. They were Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Malta, and Cyprus. This rather substantial enlargement from 15 to 25 countries had its own implications in the structure of EU institutions. We ought to describe the policy and institutional changes that facilitated not only this enlargement, but also include those which happened after the admission of Romania and Bulgaria in 2007, and Croatia in 2013. As the integration process continues there is an ever increasing tension in Europe, caused by the admission of poorer countries as measured by GDP per capita. New countries also bring with them their political and cultural specifics, nurtured by hundreds of years of independent or autonomous existence. There are as many as seven more countries in various states of the admission process (Iceland, Albania, Bosnia and Herzegovina, Serbia, Montenegro, Macedonia, and Turkey), as well as one non-state entity, the Serbian secessionist province of Kosovo and Metohija which is recognised by a majority of the EU countries as the Republic of Kosovo. Not surprisingly, the countries hoping for a deeper integration within the existing EU are not keen on expanding the Union borders. On the other hand, the countries resisting integration, especially the transfer of their sovereignty towards the EU capital of Brussels, hope that the Union will enlarge and thus set the integration process to become harder and lengthier, or even impossible. The Single European Act of 1986 was arguably the last major piece of legislation which a majority of countries from both above-mentioned ‘groups’ gladly agreed upon. This Act allowed the free movement of people, goods and services, as well as capital throughout the EC. After the revolutionary year of 1989, it was clear that for many of the new democracies of Central and Eastern Europe, membership in the EC was the priority of their policies. Governments, as well as people, equated EC membership to recognition of their long and painful transition process to become stable market oriented democracies. The EC was already confronted with a possible ‘eastern’ enlargement in 1990 during discussions about the – 124 –

unification of the FRG and GDR. The prospect of East Germany’s accession provoked proposals for a deeper cooperation of the then twelve EC member states that were not only supported by such countries as Germany or France, but also by Jacques Lucien Jean Delors (born 1925), the President of the European Commission. The plans for ‘more union’ or ‘more Europe’ included the strengthening of cooperation in economic, monetary and political spheres, and a commitment to create a common foreign and security policy. Already in December 1990, Rome hosted intergovernmental conferences of the EC members on monetary and political union. The debates on European monetary union (EMU) stemmed from the European Commission’s proposal of 1989 and were strongly influenced by, at least in the beginning, a sceptical Germany. The EMU was to be introduced in three phases, culminating in the creation of an independent European Central Bank and a common currency. Due to the German attitude, the states that wanted to adopt the Euro had to fulfil five rather strict so-called convergence criteria. Three of them are monetary. The first, price stability criterion, means that the average inflation rate (a 12-month average of yearly rates) of a member state shall not exceed the inflation rate of the three most stable countries with the lowest inflation rates by more than 1.5 percentage points. Inflation is measured by the Harmonised Index of Consumer Prices (HICP). The second criterion on long-term interest rates means that the average nominal longterm interest rate during one year prior to examination is no more than 2 percentage points higher than the three best performing member states with the lowest interest rates. The third criterion on exchange rate stability and participation in the Exchange Rate Mechanism (ERM II) means that the national currency has fluctuated for at least two consecutive years before the examination in the margins set in the exchange-rate mechanism within the range of +/– 15% from the central rate. The two additional criteria are fiscal. First, the criterion on the government budgetary position implies that a planned or actual government deficit does not exceed 3% of GDP at market prices, with two exceptions – the deficit ratio has declined substantially and continuously and is close to the 3% level, and if there is deficit in excess of 3% it is exceptional and temporary. Second, the criterion on government debt implies that the government debt ratio relative to GDP at market prices must not exceed 60% with the exception of when the value is approaching the reference value at a satisfactory pace. The objective of the criteria was to establish a stable environment favourable for investment and to support the financial discipline of the less responsible member states. However, the criteria did not prevent the admission of states that had not met them and/or manipulated their indices, such as Greece. Great Britain and Denmark have been granted an exception and may keep their national currencies. The other member states, including the new ones, must at some point accept the Euro. It was again the Germans who conditioned the realisation of the EMU upon the agreement of a political union. Luxembourg, the smallest member state,   The End of the Bipolar World      – 125 –

suggested during its presidency of the EC to build the future EU on three pillars – the Rome Treaty, the Common Foreign and Security Policy, and cooperation in justice and home affairs. A Dutch counterproposal to establish a closer union did not receive much support and the concept of three pillars became a backbone of the Maastricht Treaty signed in February 1992 and thus establishing the European Union. In every instance when the term EU was used in this text prior to 1992, it was done so from this point of the future. The first pillar fundamentally revised the Rome Treaty, its aim being to enhance the legitimacy of common institutions and to simplify the decision-making process. The European Parliament (EP) received more powers, such as the competence to influence the appointment and work of the members of the Commission, or the right to ‘cooperate’ with the Council on key issues like infrastructure, social fund or the development aid. However, the EP was not to have any influence over issues connected to the Common Agricultural Policy. In case of mutually contradicting opinions between the Parliament and the Council, the Council decides unanimously. The Parliament can also co-decide in the legislative process, and can therefore submit amendments or refuse the Council’s draft proposals. Nevertheless, the process is very complicated and applies only to issues specified in the Treaty. The Treaty introduced the principle of subsidiarity with a vision to further simplify the decision-making process and bring it closer to the citizens. From now on, the EU may act only if it is more effective than a decision and action on national, regional or local levels. In this regard, the Maastricht Treaty established a Committee of the Regions. The principle of subsidiarity and the Committee’s role were strengthened by the Treaty of Lisbon in 2009. It now has 353 members (regional representatives, mayors, or elected representatives of regions and cities) and has to be consulted during the legislative process in the EP and the Council in various areas, such as economic and social cohesion, health, education, employment, transport, trans-European networks, or social policy. The Treaty also established the Cohesion Fund within the first pillar, from which the EU funds environmental and transport projects in member states whose Gross National Income per capita is lower than 90% of the EU average. The EMU also became an important part of the first pillar. The second pillar involved Common Foreign and Security Policy (CFSP). Its objective is, according to the Treaty, to ‘safeguard the common values, fundamental interests and independence of the EU’, to strengthen the security of the EU, to preserve peace and strengthen international security, to promote international cooperation and develop democracy. The member states should consult and coordinate their policies within the Council and ‘speak as one voice’. However, it needs to be said that the ambitious CFSP has been hard to accomplish, as the civil war in former Yugoslavia and the second Gulf War have shown. The CFSP is more or less a continuation of European Political Cooperation (EPC) already established in 1970, only under a new name. – 126 –

The third pillar aimed to enhance free movement of citizens within the EU, as a necessary condition of a single market. It involved a number of regulations regarding immigration, asylum policy, and cooperation in affairs of justice, customs, and the like. The Schengen Agreement that created the Schengen Area without border checks became a part of this pillar in the Amsterdam Treaty in 1999. Only Ireland and Great Britain negotiated opt-outs from the Schengen Area, whereas Cyprus, Romania, Bulgaria and Croatia are bound to join. The ratification process was quite difficult. Denmark negotiated opt-outs in common currency and common security policies after its citizens refused to accept the Treaty in the 1992 referendum. The referendum was repeated the following year with almost 57% of voters in favour of the Treaty. French President Mitterrand decided to hold a referendum after the Danish failure, despite the fact that the Treaty had been already endorsed by the French Parliament. The tight result (51.05% in favour of the Treaty to 48.95% against) showed French anxiety about German unification and the situation in the Balkans, which the EU had not been able to deal with. British Prime Minister John Major had to join the vote on the Treaty with a vote of confidence, while the Germans had to wait for the Federal Constitutional Court’s decision on the constitutionality of the Treaty which was made in October 1993. The Maastricht Treaty entered into force a month later. Efforts for deeper integration continued. The first major amendment to the Maastricht Treaty came into force in 1999 and is known as the Amsterdam Treaty. It absorbed the Schengen Agreement, created the High Representative for Common Foreign and Security Policy, extended the powers of Europol, and expanded the areas of Qualified Majority Voting (QMV) in the Council. It also introduced the idea of enhanced cooperation. Under this procedure a minimum of nine member states can decide to cooperate more closely without the involvement of other members. However, it did not arrange for a possible ‘eastern’ enlargement. This was dealt with in the Nice Treaty which was signed in 2001 and came into force in 2003 after a repeated referendum in Ireland, just a year before enlargement. It came with significant institutional changes with regard to enlargement – it limited the size and the composition of the Commission, further extended the QMV in the Council and gave more weight to the largest states, allocated the number of seats in the Parliament in a way that enhanced the influence of small and middle-sized countries, and revised some of the common policies, such as CFSP, where it was possible to opt for enhanced cooperation. The disputes between countries asking for more integration and those now quite openly opposing it or even trying to reverse it grow bitter with every new piece of relevant legislation. The attempts for an EU constitution were stalled in 2005 after rejection by the French and Dutch citizens in referenda. However, the constitutional provisions and efforts to further reform the treaties have continued, and a draft of a new treaty was signed in Lisbon in 2007.   The End of the Bipolar World      – 127 –

The Lisbon Treaty came into force in December 2009, again after a repeated referendum in Ireland after some changes were made, and after Czech President Václav Klaus (born 1941) finally signed it in November 2009. The Lisbon Treaty came up with yet another significant change in voting – more of the QMV provided that the decision has been approved by a ‘double-majority’ (55% of EU member states, i.e. 15 states, representing at least 65% of the EU’s population), more of majority voting, and a reduction in the right to veto. It created two new positions, the Permanent President of the European Council and the High Representative of the Union for Foreign Affairs and Security Policy, by merging the positions of the external relations commissioner and the high representative for foreign affairs. The EU also gained a legal personality. The Treaty enhanced the powers of the Parliament, extended the areas of activity of the European Court of Justice, abolished the pillar structure, defined the distribution of competences between the EU and member states, and introduced EU exit clause for the first time.

THE CHAPTER SUMMARY Russia, later the Soviet Union, already saw the first communist dictatorship after the Bolshevik revolution in 1917. Nationalization of industry was followed by a forcible collectivization of agriculture with disastrous consequences. Opponents of the new regime were deported to work camps – the Gulags – and the society lived in fear. Hitler’s attack on the Soviet Union in 1941 brought the country into a temporal alliance with democratic states that ended soon after the war. The Soviet Union endured great losses during the war and saw the annexation of Central and Eastern Europe as its right. By 1948, all European satellites had a one-party system and followed (with the exception of Yugoslavia) the USSR. Some liberalization came after Stalin’s death with de-Stalinization under the new leader Nikita Khrushchev. However, from an economic point of view it soon became evident that a system based on central planning was impossible to reform and that the USSR lagged behind the Western countries more and more with every new decade. Conservatives took power again in the mid1960s under the leadership of Leonid Brezhnev who focused on a military build-up to be able to ‘protect’ socialism in the Soviet sphere of influence. A major change came in 1985 with Mikhail Gorbachev. He primarily focused on economic changes that were, however, not going well and ultimately lead to the fall of communism not only in the USSR but all of its satellites. Poland, Hungary, Czechoslovakia, and East Germany underwent relatively peaceful transitions, whereas Romania, Bulgaria, Albania and especially Yugoslavia, experienced a more or less violent change of the political system. The political changes in those countries were soon followed by economic ones. The aim was to redirect the centrally planned economy towards a free – 128 –

market one. Having no historical parallels, the process was hard for several reasons. The economies were deformed with their focus on heavy industry, they were almost autarkic in trading with each other and they did not participate in the international division of labour. Two transformation methods – a shock therapy and a gradual one – were usually combined in practise. All countries experienced a rapid decrease of GDP, an increase in average inflation, and level of poverty during the first years of transformation. However, by the new millennium most of the transition countries had far better institutions and prospects than under communist rule. The collapse of communism entailed profound changes for EC/EU countries. Membership in the EC/EU was declared a priority for many transforming countries. Czech Republic, Slovakia, Poland and Hungary formed the so-called Visegrad Group to facilitate a quicker admission to EU. They had to wait for another 10 countries to join the EU in 2004; Romania and Bulgaria joined in 2007, and Croatia in 2013. Others are in various states of the admission process. However, it was not only enlargement that occupied the governments of EU states. It was also a deepening of integration that lead to a common currency in some of the member states, and the Lisbon Treaty in which the EU gained a legal personality, further enhancing the powers of the European Parliament, or strengthening its common foreign policy in the person of High Representative of the Union for Foreign Affairs and Security Policy. The last decade of the 20th century also witnessed serious financial crises in various parts of the world – starting in Mexico in 1994, and followed by the Asian currency crisis in 1997, hitting Brazil in 1999 and Argentina in 2001 and 2002.

  The End of the Bipolar World      – 129 –


Major Centres of  the World Economy

5.1 THE EUROPEAN CENTRE The economic and institutional development of the European Union is addressed in some detail previously (see Chapters 3 and 4). We will therefore focus only on the main economic indicators and development over the last twenty years or so, relevant to the world economy which includes the European Economic and Monetary Union. The example of the common agricultural policy will help us to describe the action of the EU in the WTO.

5.1.1 ECONOMIC DEVELOPMENT OF THE EUROPEAN CENTRE Cihelková et al. describes the economic development of the 1990s (2001:135–143) which was marked by a recession in the first half, whereas the second half of the decade witnessed a renewed growth. Alongside other experts, she ranks the following among the underlying causes of the recession: an economic decline in all other economic centres of the world, as it had a negative impact on European exports; a high growth in Western European – 130 –

countries in the late 80s; and, the restrictive monetary policy of the EEC after the unification of Germany. ‘The economic recession had the greatest impact on the trends in employment. The average unemployment rate in the EU in 1993 reached almost 11%. In 1993, the EU saw an overall decline in economic growth of 0.4% which was reflected in the growth of public budget deficits of many countries (Denmark, Germany, Spain, Greece, France, Portugal, and the Great Britain). There was an increase in internal debt, too’ (Cihelková et al. 2001: 136).














Table 5.1: Unemployment rate in %

EU 27 Eurozone Belgium Bulgaria Czech. Rep. Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden UK

 8.7  8.5  6.9 16.4  8.7  4.3  7.5 13.6  4.2 11.2 11.1 9 10.1  4.9 13.7 16.4  2.2  6.4  6.7  3.1  3.6 16.1 4  7.3  6.7 18.8  9.8  5.6  5.4

 8.5  8.1  6.6 19.5 8  4.5  7.6 12.6  3.9 10.7 10.3  8.3  9.1  3.8 12.9 16.5  1.9  5.7  7.6  2.5  3.6 18.3  4.1  6.8  6.2 19.3  9.1  5.8 5

 8.9  8.4  7.5 18.2  7.3  4.6  8.4 10.3  4.5 10.3 11.1  8.6  8.6  3.6 12.2 13.5  2.6  5.8  7.5  3.1  4.2 20  5.1  8.6  6.3 18.7  9.1 6  5.1

9  8.8  8.2 13.7  7.8  5.4  9.3 10  4.6  9.7 11.1 9  8.4  4.1 10.5 12.5  3.8  5.9  7.6  4.2  4.3 19.7  6.4 7  6.7 17.6 9  6.6 5

 9.1 9  8.4 12.1  8.3  5.5  9.8  9.7  4.5 10.5 10.6  9.3 8  4.7 10.4 11.4 5  6.1  7.4  5.1  4.9 19  6.7  8.1  6.3 18.2  8.8  7.4  4.7

9  9.1  8.5 10.1  7.9  4.8 11.2  7.9  4.4  9.9  9.2  9.3  7.7  5.3  8.9  8.3  4.6  7.2  7.2  5.3  5.2 17.8  7.7  7.2  6.5 16.3  8.4  7.7  4.8

 8.2  8.5  8.3 9  7.2  3.9 10.3  5.9  4.5  8.9  8.5  9.2  6.8  4.6  6.8  5.6  4.6  7.5  7.1  4.4  4.8 13.9  7.8  7.3 6 13.4  7.7  7.1  5.4

 7.2  7.6  7.5  6.9 5.3  3.8  8.7  4.7  4.6  8.3  8.3  8.4  6.1 4 6  4.3  4.2  7.4  6.4  3.6  4.4  9.6  8.1  6.4  4.9 11.1  6.9  6.1  5.3

 7.1  7.6 7  5.6  4.4  3.3  7.5  5.5  6.3  7.7 11.3  7.8  6.7  3.6  7.5  5.8  4.9  7.8  5.9  3.1  3.8  7.1  7.7  5.8  4.4  9.5  6.4  6.2  5.6

9  9.6  7.9 6.8  6.7 6  7.8 13.8 11.9  9.5 18  9.5  7.8  5.3 17.1 13.7  5.1 10 7  3.7  4.8  8.2  9.6  6.9  5.9 12  8.2  8.3  7.6

 9.7 10.1  8.3 10.2  7.3  7.4  7.1 16.9 13.7 12.6 20.1  9.7  8.4  6.5 18.7 17.8  4.5 11.2  6.8  4.5  4.4  9.6 11  7.3  7.3 14.4  8.4  8.4  7.8

 9.7 10.2  7.2 11.2  6.7  7.6  5.9 12.5 14.4 17.7 21.7  9.7  8.4  7.8 15.4 15.4  4.8 10.9  6.5  4.4  4.2  9.7 12.9  7.4  8.2 13.5  7.8  7.5 8

Source: Eurostat   Major Centres of the World Economy      – 131 –













Table 5.2: Inflation (consumer price index) in %

EU 27 Eurozone Belgium Bulgaria Czech. Rep. Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden UK

 1.9  2.1  2.7 10.3  3.9  2.7  1.4  3.9  5.3  2.9  3.5  1.8  2.6  4.9  2.6  1.1  3.8 10 3  2.3 2 10.1  2.8 45.7  8.9 12.2  2.9  1.3  0.8

 2.2  2.3  2.4  7.4  4.5  2.3  1.9  5.6 4  3.7  2.8  1.8  2.3 2  2.5  1.6  2.4  9.1  2.5  5.1  2.3  5.3  4.4 34.5  8.6  7.2  2.7  2.7  1.2

 2.1  2.2  1.6  5.8  1.4  2.4  1.4  3.6  4.7  3.9  3.6  1.9  2.6  2.8 2  0.3  2.1  5.2  2.6  3.9  1.7  1.9  3.7 22.5  7.5  3.5 2  1.9  1.3

2  2.1  1.5  2.3 –0.1 2 1  1.4 4  3.4  3.1  2.2  2.8 4  2.9 –1.1  2.5  4.7  1.9  2.2  1.3  0.7  3.3 15.3  5.7  8.4  1.3  2.3  1.4

2  2.1  1.9  6.1  2.6  0.9  1.8 3  2.3 3  3.1  2.3  2.3  1.9  6.2  1.2  3.2  6.8  2.7  1.4 2  3.6  2.5 11.9  3.7  7.5  0.1 1  1.3

 2.2  2.2  2.5 6  1.6  1.7  1.9  4.1  2.2  3.5  3.4  1.9  2.2 2  6.9  2.7  3.8  3.5  2.5  1.5  2.1  2.2  2.1  9.1  2.5  2.8  0.8  0.8  2.1

 2.2  2.2  2.3  7.4  2.1  1.9  1.8  4.4  2.7  3.3  3.6  1.9  2.2  2.2  6.6  3.8 3 4  2.6  1.7  1.7  1.3 3  6.6  2.5  4.3  1.3  1.5  2.3

 2.3  2.1  1.8  7.6 3  1.7  2.3  6.7  2.9 3  2.8  1.6 2  2.2 10.1  5.8  2.7  7.9  0.7  1.6  2.2  2.6  2.4  4.9  3.8  1.9  1.6  1.7  2.3

 3.7  3.3  4.5 12  6.3  3.6  2.8 10.6  3.1  4.2  4.1  3.2  3.5  4.4 15.3 11.1  4.1 6  4.7  2.2  3.2  4.2  2.7  7.9  5.5  3.9  3.9  3.3  3.6

1  0.3 0  2.5  0.6  1.1  0.2  0.2 –1.7  1.3 –0.2  0.1  0.8  0.2  3.3  4.2 0 4  1.8 1  0.4 4 –0.9  5.6  0.9  0.9  1.6  1.9  2.2

 2.1  1.6  2.3 3  1.2  2.2  1.2  2.7 –1.6  4.7 2  1.7  1.6  2.6 –1.2  1.2  2.8  4.7 2  0.9  1.7  2.7  1.4  6.1  2.1  0.7  1.7  1.9  3.3

Source: Eurostat

– 132 –

EEC/EU countries had been facing high unemployment rates since the 70s, mainly due to the oil crisis, increased competition from Asia (the so-called Asian Tigers), and the increasing economic activity of women. Currently, high unemployment (from 2000 to 2011 it averaged 8.7% for the EU-27) is also considered one of the major economic problems of the European Union, although – as in many other cases – considerable differences can be found among countries and regions. The unemployment rate in 2011 ranged from 21.7% in Spain to 4.2% in Austria (see Table 5.1). The difference amounts to 17.5%, while in 1999 it was ‘only’ 13%. Developments in the late 90s influenced the establishment of the Economic and Monetary Union (see the next section). With the convergence criteria adopted, it was necessary to reduce budget deficits, debt, inflation and interest, along with the stabilisation of exchange rates. All this provided the conditions for economic growth. The average GDP growth rose from 1.5% in the years 1992–1995 to 2.35% in 1996–1999. The average rate of inflation (GDP deflator) in the same period fell from 3.4% to less than 2%. Only the unemployment rate decreased very slightly, from 10.3% to 9.8% (Cihelková et al. 2001:137, 139). In 2004, the largest ever single expansion of the European Union by ten countries occurred, namely from the former communist bloc  – the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Slovakia, Malta, Slovenia, and Poland. Three years later, the accession of Romania and Bulgaria took place. The European Union had thus been added over one million square kilometres (to the original 3.2 million sq. km) and more than 100 million people (the ‘original Fifteen’ used to have about 397 million). The composition of the population in terms of age structure in 2009 was estimated at 15.5% of pre-productive age (0–14), 67.2% of working age (15–64), and 17.3% of post-productive age (over 65), with a total EU population growth of 0.2%. This growth, however, has increasingly been dependent on a positive net migration. The differences among member states grew bigger at that stage. Luxembourg has long had the largest GDP per capita. In 2011, according to the World Bank data it amounted to USD 115,038, while Bulgaria had to settle for the current USD 7,158 and Romania for USD 8,405. Huge regional differences are shown in the following table. They are NUTS-2 regions. Of a total of 271 in 2009, 39 of these regions exceeded 125% of GDP per capita. Eight of them were in Germany, five in the Netherlands, four were both in Italy and Austria, three in Belgium, Spain and the UK each, two in Finland, and one in each of the following: the Czech Republic, Denmark, Ireland, France, Slovakia, Sweden and Luxembourg. Sixty-five regions fell under the 75% threshold. Fifteen of those were in Poland, seven were both in the Czech Republic and Romania, six in Hungary, five in Bulgaria, four in Greece, France (overseas territory) and Italy each, three in Portugal and Slovakia, two in the UK, and one in each of the following: Spain, Slovenia, Estonia, Lithuania and Latvia (see Eurostat).

  Major Centres of the World Economy      – 133 –

Table 5.3: Regional GDP per capita, EU27, 2009 (in PPS, EU27 = 100)

20 regions with the highest GDP  1 Inner London (UK) 332  2 Luxembourg 266  3 Brussels (Belgium) 223  4 Hamburg (Germany) 188  5 Bratislava region (Slovakia) 178  6 Ile de France (France) 177  7 Praha (Czech Republic) 175  8 Stockholm (Sweden) 172  9 Groningen (Netherlands) 170 10 Åland (Finland) 166 11 Vienna (Austria) 161 12 Oberbayern (Germany) 160 13 Bremen (Germany) 160 14 North East Scotland (UK) 158 15 Darmstadt (Germany) 158 16 Utrecht (Netherlands) 157 17 Noord-Holland (Netherlands) 151 18 Hovedstaden (Denmark) 149 19 Bolzano (Italy) 148 20 Bekrshire, Buckinghamshire 142 and Oxfordshire (UK)

20 regions with the lowest GDP  1 Severozapaden (Bulgaria) 27  2 Severen tsentralen (Bulgaria) 29  3 Nord-Est (Romania) 29  4 Yuzhen tsentralen (Bulgaria) 31  5 Severoiztochen (Bulgaria) 36  6 Sud-Vest Oltenia (Romania) 36  7 Yugoiztochen (Bulgaria) 36  8 Sud-Est (Romania) 38  9 Észak-Magyarország (Hungary) 40 10 Sud-Muntenia (Romania) 40 11 Lublin (Poland) 41 12 Podkarpackie (Poland) 42 13 Észak-Alföld (Hungary) 42 14 Dél-Alföld (Hungary) 43 15 Nord-Vest (Romania) 43 16 Dél-Dunántúl (Hungary) 45 17 Podlaskie (Poland) 45 18 Warmia-Mazurskie (Poland) 45 19 Centru (Romania) 46 20 Swietokrzyskie (Poland) 47

Source: Eurostat

The composition of gross domestic product also varies. For the European Union as a whole, it was estimated that agriculture accounted for 1.8%, industry for 25.2%, and services for 72.8% of GDP in 2013. Well beyond this average was Romania, where the share of agriculture accounted for almost 8%, and services accounted for almost 60% of GDP. Like the vast majority of countries around the world, the EU countries were affected by the global recession between 2007 and 2009, which, among other things, was manifested by a reduction of economic growth in all countries except Poland (see Table 5.4).

– 134 –







 1.2  0.9  1.4  4.7  1.9  0.5 0  7.9  5.9  3.4  2.7  0.9  0.5  2.1  6.5  6.9  4.1  4.1  2.6  0.1  1.6  1.4  0.7  5.1  3.8  4.6  1.8  2.5  2.1

 1.3  0.8  0.8  5.5  3.6  0.4 –0.2  7.6  4.2  5.9  3.1  0.9 0  1.9  7.2 10.2  1.5 4 –0.3  0.3  0.8  3.9 –0.9  5.2  2.9  4.8 2  2.3  2.8

 2.5  2.2  3.2  6.7  4.5  2.3  1.2  7.2  4.5  4.4  3.3  2.5  1.5  4.2  8.7  7.4  4.4  4.5  1.8  2.2  2.5  5.3  1.6  8.5  4.4  5.1  4.1  4.2 3

2  1.7  1.7  6.4  6.3  2.4  0.8  9.4  5.3  2.3  3.6  1.8  0.7  3.9 10.6  7.8  5.4  3.2  4.2 2  2.5  3.6  0.8  4.2 4  6.7  2.9  3.2  2.2

 3.3  3.1  2.7  6.5  6.8  3.4  3.4 10.6  5.3  5.2 4  2.5 2  4.1 12.2  7.8 5  3.6  1.9  3.4  3.6  6.2  1.4  7.9  5.8  8.5  4.4  4.2  2.8

3  2.8  2.9  6.4  6.1  1.6  2.7  6.9  5.2  4.3  3.6  2.3  1.5  5.1 10  9.8  6.6  0.8  4.6  3.9  3.7  6.8  2.4  6.3  6.8 10.5  5.3  3.3  2.7

 0.5 –4.3  1.8  0.4 –4.2  1.8 1 –2.8  2.2  6.2 –5.5  0.2  2.5  2.5  2.3 –1.1 –5.2  1.7 1 –4.7  3.6 –5.1 –13.9  3.1 –3 –7 –0.4 1 –2 –4.5  0.9 –3.7 –0.1 –0.1 –2.7  1.5 –1.3 –5.2  1.3  3.6 –1.7 1 –4.2 –18 –0.3  2.9 –14.7  1.3  1.4  1.4  3.5  0.8 –6.7  1.2  5.4 –3.3  3.2  1.9  1.9  1.8  2.2  1.9  2.1  5.1  1.6  3.8 0 –2.5  1.3  7.3 –7,1 –1.3  3.7 –8,1  1.2  5.8 –4.8 4 1 –8.2  3.6 –0.6 –5.3  5.7 –0.1 –4.9  1.4

Average 2001–10


2  1.9  0.8  4.2  2.5  0.7  1.2  7.5  4.8  4.2  3.6  1.8  1.8 4 8  6.7  2.5  3.8 –1.6  1.9  0.5  1.2 2  5.7  2.9  3.5  2.3  1.3  2.5



EU 27 Eurozone Belgium Bulgaria Czech. Rep. Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden UK



Table 5.4: Growth of GDP in %

 1.3  1.1  1.4  4.1  3.2  0.7  0.9  4.1  2.5  2.4  2.1  1.1  0.3  2.8  4.1  4.6  3.1  1.9  1.9  1.4  1.6  3.9  0.7  4.2  2.7  4.9  1.9  2.1  1.5

Source: Eurostat

With the exception of Greece, Ireland, Spain, Lithuania and Romania, most economies already witnessed more or less economic growth a year later. However, further serious problems were not long in coming. In 2011, the Debt   Major Centres of the World Economy      – 135 –

Crisis in the euro area intensified, having been caused mainly by the banking crisis and the irresponsible fiscal policies of some governments. The Debt crisis first erupted in Greece, which asked the European Union and the IMF for funding in April 2010. A few months later it was joined by Ireland and Portugal in 2011, and Spain in June 2012. Already in May 2010, the Eurozone countries, the European Commission and the IMF agreed to create the European Financial Stability Facility (EFSF), i.e. a euro rescue fund, which provides loans and guarantees to the governments of countries affected by the crisis. The fund currently has EUR 750 billion at its disposal (440 billion provided by the euro area member states, 250 billion was guaranteed by the IMF, and the remaining 60 billion was provided by the EU’s emergency fund). Less than a year later, a decision was made to establish a permanent mechanism to provide financial assistance to states whose high debt would threaten the stability of the euro area. The European Stability Mechanism replaced the EFSF in 2013. Among other extremely indebted countries being Italy, Belgium, and France (see Table 5.5). Table 5.5: The indebtedness of euro area countries, 2011

State Belgium Germany Estonia Ireland Greece Spain France Italy Cyprus Luxembourg Malta Netherlands Austria Portugal Slovenia Slovakia Finland

Budget deficit (–) / surplus (+) as % of GDP   –3.7 –1  1 –13.1   –9.1   –8.5   –5.2   1.9   –6.3   –0.6   –2.7   –4.7   –2.6   –4.2   –6.4   –4.8   –0.5

Government deficit as % of GDP 98  81.2  6 108.2 165.3  68.5  85.8 120.1  71.6  18.2 72  65.2  72.2 107.8  47.6  43.3  48.6

Source: Eurostat

Despite all measures, the euro area has been unable to cope with the debt crisis, even if we leave aside the negative long-term consequences of the – 136 –

actions taken. Due to a lack of political will, the Greek government has hitherto not been able to implement the reforms agreed upon by the EC and the IMF. It seems that the Nobel laureate in economics Milton Friedman (1912–2006) was right when he considered the common currency in the EU disadvantageous, as the fiscal policies of individual member states were very different (see further in the section on EMU). According to WTO data in 2010, the European Union as a whole contributed to 15% of the world exports (compared to 8.38% by the USA, 5.05% by Japan, and 10.34% by China). The major export partners have been the United States, China, Switzerland (within the European Economic Area), Russia and Turkey. Industrial products represent over 80% of exports, 8.2% involve fuels and mining products, and 7.2% consist of agricultural products. The main import partners are China, the USA, Russia, Switzerland, and Norway. The largest shares of imports comprise 60% of industrial products, and 30.2% of fuel (WTO Trade Statistics).

5.1.2 THE ECONOMIC AND MONETARY UNION The aim to establish an economic and monetary union in the EEC had been adopted in the early 70s. In 1978 the agreement on the European Monetary System (EMS) was signed in order to stabilise exchange rates, and thus contribute to the development of trade between the countries of the European Community. A monetary unit of account ECU – European Currency Unit – was introduced, which was still being considered as a future common currency at the turn of the 80s and 90s. Following discussions and proposals on the form of EMU during the 80s, its final form was adopted by the Maastricht Treaty. A prerequisite for achieving this ambitious goal was to approximate member states’ economies and meet the convergence criteria (see chapter 4.4). The creation of the EMU was carried out in three stages. During the first stage, which took place from 1st June 1990 to 31st December 1993, member states narrowed the national currency fluctuation bands and consolidated the cooperation among their national banks. The next stage took place from 1st January 1994 to 31st December 1998. During that period, the European Monetary Institute (EMI), which directed the European Monetary System, was promoting the convergence of member states’ monetary policies and preparing procedures for the future European Central Bank, which replaced the EMI in 1999. At this stage the convergence criteria should have been fulfilled. Also in 1998, a decision was made on the common euro currency.8 The third phase 8 Just as a historical curiosity, I present the official explanation of the choice of the new European currency symbol, as quoted by Cihelková (2001: 163): namely that the euro symbol – a horizontally double crossed Greek epsilon – has several symbolic meanings. Firstly, it refers to Greece as the cradle of European civilisation, secondly, it is the first letter of the word Europe, and thirdly, it is crossed by two parallel lines to certify the stability and strength of the euro.   Major Centres of the World Economy      – 137 –

took place from 1st January 1999 to 1st March 2002, when all the EMU member countries introduced a common currency. At the beginning, the 11 countries that had met the convergence criteria entered the EMU. Only the Great Britain, Denmark, Sweden and Greece stayed out (the latter sought the membership in the EMU, but qualified only in 2001. As it is known today, it was on the basis of falsified data). The European Central Bank was established, which was the forefront of the European System of Central Banks (ESCB), and took over responsibility for the EU monetary policy. Other countries that have adopted the euro, were Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, and last came Estonia in 2011. Among the benefits of the EMU, economists regard the creation of a single economy, similar to the United States in its scope, the long-term reduction of inflation and interest rates decline, the transaction costs reduction, or the unification of rules for all market participants. In the light of the current euro zone debt crisis it is clear, however, that some earlier concerns arising from excessive differences among the twelve (seventeen in 2011) participating economies, deprived of choice to respond to any problems with adequate monetary instruments, have been confirmed.

5.1.3 THE EUROPEAN UNION AND THE WTO – AN EXAMPLE OF THE COMMON AGRICULTURAL POLICY The Common Agricultural Policy (CAP) has been a part of European integration since its inception in the 50s. Its cost climbed up to 87% of the joint budget in the 70s, and it still cuts off almost half of it, even after several reforms. It is currently funded from two sources, namely the European Agricultural Guarantee Fund (EAGF), which provides direct payments to farmers and the finances market measures etc., and the European Agricultural Fund for Rural Development (EAFRD), which – as the name suggests – provides means to support rural development. Given that the European Union as a whole is the largest producer of certain agricultural commodities (such as milk, wheat, olive, rapeseed oil) and the second or third largest producer of other commodities (such as beef and pork, eggs or potatoes), its agricultural policy significantly affects other countries, especially those dependent on agriculture (see WTO 2011:101). ‘In the past, domestic prices [i.e. within the EU] of many commodities were kept well above world market prices by export subsidies and intervention purchases with relatively high tariffs. When the export subsidies and intervention had been limited, the gap between international and domestic prices decreased. Despite that, the CAP reforms have not reduced the tariffs under the most favoured clause which remain relatively high’ (WTO 2011:105). In 2011, there were 1,998 different EU tariffs on agricultural products, whose average level was 15.2%, a decrease of more than 3% percent since 2006. The – 138 –

picture becomes less optimistic, however, when it is compared to the average non-agricultural products tariff which was 4.1%. Beside customs duties, the European Union uses other import quotas, has introduced a system of special agricultural standards and guarantees, and export subsidies. According to the WTO, the use of export subsidies may destabilise prices of agricultural products on world markets and ‘change the terms of trade to the detriment of the other exporters’ (WTO 2011:111). In the period between 1999 and 2009 taxpayers and consumers ‘paid’, because of the common agricultural policy, nearly one billion euros to European farmers. According to the WTO analyses this amount ‘represents a high level of support and maintains production and exports on a higher level and imports on a lower level than would be the case without it… The Common Agricultural Policy, despite the reforms over the last twenty years, still has a negative impact outside and inside the EU’ (WTO 2011:115). It is therefore not surprising that most of the litigation in the WTO which the EU participates in relates to its agricultural policy, although not exclusively to it. The very reason is the many trade barriers protecting European agriculture from cheaper competition from other countries. By 2006, 27 of the 46 disputes against the EU had been related to the agricultural policy. The agricultural policy had already come under sharp criticism for violation of GATT rules in 1961 during the Uruguay Round. The outcome of the dispute was not clear though. The CAP was not in direct conflict with GATT rules; however, it was not compatible either. One of the more important and longterm disputes related to the use of growth hormones in beef cattle. In 1980, some consumer protection groups highlighting the harmful effects of these hormones in humans and demanded their ban. That happened five years later in Germany, Belgium and Italy, who subsequently pushed to enforce this prohibition in European legislation. They soon succeeded, mainly due to domestic overproduction and an attempt to limit imports of beef. In December 1985, a regulation prohibiting both the use of hormones in the EEC and the import of products containing them was adopted, despite scientific studies that had not proven any harmful effects on human health. The lack of scientific justification meant a violation of GATT rules according to the United States and other countries. The ‘beef war’ fully erupted in 1989 when the EC banned imports of U.S. beef. In turn, the latter imposed sanctions on EEC worth $100 million. The controversy continued when the EU refused to withdraw its ban. The United States, therefore, along with Australia, New ­Zealand, Chile and Argentina filed a complaint with the WTO in 1996 and it was recognised as legitimate. Nevertheless, the EU did not fulfil its obligations, which had been enacted during the procedure, and the WTO approved the U.S. sanctions up to $116.8 million. ‘The EU has continued its legal defence of the policy in the WTO. After passing legislation in 2003 that changed the EU ban to… a provisional ban, subject to further scientific study, the EU notified the WTO that it was now in compliance with the WTO ruling’ (Davis 2007:20). It also initiated   Major Centres of the World Economy      – 139 –

a dispute in the WTO against the USA and Canada which had refused to end the sanctions. Another protracted conflict was, for instance, the ‘banana war’ between the EU on the one side and the USA and several Latin American countries on the other (Ecuador, Guatemala, Honduras, Panama, Mexico) which concerned the reduction of tariffs on banana imports from these countries. The cause had been significantly lower tariffs on imports from twelve former colonies (e.g. Cameroon, Ivory Coast and Belize) within the development aid framework; or, e.g. the sugar dispute, in which the EU protects its producers against cheaper imports with high tariffs, a support of its own producers, and subsidies of exports. A complaint against a violation of the WTO rules has been lodged by Brazil, Australia and Thailand. Settling commercial disputes in the WTO has been common practice, with many countries of the world participating therein.9 According to some economists and researchers, it is evident that ‘the EU ranks among the least cooperative trading entities’ (Davis 2007:2). Between the years 1960–1994 it changed its behaviour in 44% of cases of dispute. Over the same period, Japan did so in 88% and the USA in 76% of cases. The change often occurs only after a delay, decision blocking, or the introduction of sanctions against the EU.

5.2 THE UNITED STATES OF AMERICA The United States remains (despite many problems) the largest economy in the world. According to the World Economic Outlook, published yearly by the IMF, in 2011 it accounted for 19.1% of world GDP (the share of China as the second largest economy was 14.3%).

5.2.1 THE ECONOMIC DEVELOPMENT OF THE USA The U.S. economy in the early 90s was in a recession, which was characterised by economic stagnation and chronic unemployment. In 1991, GDP dropped by 0.9% and the unemployment rate reached nearly 7%. Although the George Herbert Walker Bush (born 1924) administration had started the necessary reforms, the situation failed to resolve or improve remarkably during his presidency. Thus, Democrats led by William (Bill) Jefferson Clinton (born 1946) took their chance in the 1992 elections, focusing on promoting economic growth and employment in their programme; in the coming years they also benefited from the upswing in the economic cycle.

9 All the disputes can be found in chronological order on the WTO website: , 27.8.2012 – 140 –

Table 5.6: Selected Economic Indicators, 1992–1999

Year GDP growth Export of FDI (net Inflation, Unemployment in %, goods and inflows, BoP, consumer (% of total constant services current price workforce) 2000 U.S. (% of GDP) U.S. dollar, index in % dollar in millions) 1992
















































Source: World Bank Date Series

‘The long-term goal of Clinton’s economic programme were major changes on the supply side of the economy, namely infrastructure and “human capital” development. In this area, Clinton’s programme focused on long-term support for research and development, redevelopment of education and retraining system in order to attain a higher mobility of the workforce during periods of high unemployment. Budgetary policy became the basic tool of economic policy. The revenue side of the budget was activated, which implied an increase of taxes’ (Cihelková et al. 2001:94). Unemployment was declining from 1993, which is considered by experts as the end of the recession and the beginning of the boom, to 2000 (see Table 5.6). Economic growth was supported by the low level of short-term and long-term interest rates during most of both Clinton’s election periods (1993–2000), which ultimately became a major contribution to the recent mortgage crisis in the USA. In the late 90s economic development was negatively affected by Asian (1997) Russian, and Latin American (1998) crises, resulting in a fall in U.S. exports and a growth of the current account deficit in the balance of payments. The latter climbed to 233.45 billion dollars in 1998, surpassing its 1987 maximum when it had reached 168 billion dollars. As a second reason for this deficit, the literature cites the consumer behaviour of Americans who were spending beyond their income and getting into debt, so that the annual rate of personal savings in the U.S. was close to zero. Despite that, owing to the previous economic boom, for the first time in 29 years the USA ended up with a budget surplus of $69.2 billion USD, i.e. 0.8% of GDP, in the 1997–1998 fiscal year. The United States enjoyed budget surpluses until 2001, when the surplus was more than $128 billion dollars. So far, the highest budget deficit   Major Centres of the World Economy      – 141 –

in the U.S. post-war history was recorded in 2009, in the context of the global crisis, which peaked at $1.4 billion, or 13% of GDP. The highest budget deficits belong to the periods of the First World War (16% of GDP in 1919) and the Second World War (24% of GDP in 1945). During the Great Depression, the budget deficit reached 5% of GDP. With a few rare exceptions, the U.S. governments have depended on budget deficits since the 1960s. Table 5.7: Population of the United States, 1992–1999


1992 1993 1994 1995 1996 1997 1998 1999

Total Population Fertility Population Population Urban Population growth rate ages 0–14 ages 15–64 population in % (children (% of total) (% of total) in % per 1 woman) 256,514,000 1.4 2 22 66 – 259,919,000 1.3 2 22 66 – 263,126,000 1.2 2 22 65 – 266,278,000 1.2 2 22 65 77 269,394,000 1.2 2 22 66 – 272,657,000 1.2 2 22 66 – 275,854,000 1.2 2 22 66 – 279,040,000 1.1 2 22 66 –

Source: World Bank Data Series Table 5.8: Selected Economic Indicators, 2000–2011

Year GDP growth in %, constant 2000 U.S. dollar 2000  4.2 2001  1.1 2002  1.6 2003  2.6 2004  3.5 2005  3.1 2006  2.7 2007  1.9 2008 –0.4 2009 –3.5 2010 3 2011  1.7

Goods and services exports (% of GDP)

Source: World Bank Data Series – 142 –

11 10  9  9 10 10 11 12 13 11 13 –

FDI (net Inflation, Unemployment inflows, BoP, consumer (% of total current price labour force U.S. dollar, index in millions) (in %) 321,274  3.4 4 167,020  2.8 4.7  84,370  1.6 5.8  63,750  2.3 6 145,966  2.7 5.5 112,638  3.4 5.1 243,151  3.2 4.6 221,166  2.9 4.6 310,093  3.8 5.8 158,581 –0.4 9.3 236,226  1.6 9.6 227,865  3.2 –

Table 5.9: Central government debt (% of GDP)

2001 2002 2003 2004 2005

32.4 43.5 46.2 47.0 47.3

2006 2007 2008 2009 2010

46.4 46.7 55.2 67.0 76.1

Source: World Bank Data Series

January 2001 marked the beginning of the presidency of George Walker Bush (born 1946), who in the next two years pushed through tax cuts for all taxpayers. This step had both many supporters and critics. According to the former, this measure was to encourage further economic growth and thereby increase revenue to the budget. To the contrary, critics point out that tax cuts reduce budget revenues and thus adversely affect not only government funding of health care (Medicare) and Social Security, but also lead to an increase in budget deficits. Their claim is supported by the fact that the budget deficit had reached as much as $162 billion USD during Bush’s second term of office in 2007. However, it is important to realise that in the years following 9/11 2001 the U.S. spending on defence and national security increased significantly. Just the wars in Iraq and Afghanistan are estimated to have cost $3 billion. Table 5.10: Population of the United States, 2000–2011

Year Population Population Fertility Population Population Urban total growth rate ages 0–14 ages 15–64 population in % (children (% of (% of total) in % per 1 total) woman) 2000 282,162,411 1.1 2.1 21 66 79 2001 284,968,955 1 2 21 66 – 2002 287,625,193 0.9 2 21 67 – 2003 290,107,933 0.9 2 21 67 – 2004 292,805,298 0.9 2 21 67 – 2005 295,516,599 0.9 2.1 21 67 81 2006 298,379,912 1 2.1 20 67 – 2007 301231207 1 2.1 20 67 – 2008 304,093,966 0.9 2.1 20 67 – 2009 306,771,529 0.9 2 20 67 – 2010 309,349,689 0.8 2.1 20 67 82 2011 311,591,917 0.7 – 20 67 – Source: World Bank Data Series   Major Centres of the World Economy      – 143 –

The Bush administration was also faced with the mortgage crisis. In 2001, the U.S. central bank (FED) reduced the base rate from 6.5% to 1.75%, aiming to help bankrupt companies, investors, and households, which had invested in overvalued technology stocks in the previous years (the heyday of the Internet and other new technologies). Although this step helped some companies and promoted economic growth, cheap consumer loans allowed American families to continue to spend beyond their means, i.e. to become increasingly indebted. Households spent mainly on consumer goods and real estate, using particularly adjustable-rate mortgages, which had no guaranteed amount of monthly payments in the years that follow signing the contract. Also, no-one checked the creditworthiness, i.e. the ability of borrowers to refinance these loans. The prices increased along with the number of purchased properties. In 2004, the FED increased the extremely low base rate (1%) to 2.25%, in December 2005 to 4.25%, and in 2006 to 5.25%. This increase was reflected in higher mortgage interest rates, which became less popular, along with a reduced demand for real estate, the price of which began to decline. In response to this trend, building companies reduced the number of newly built homes, thus reducing the offer, which means dealing with the crisis based on the market with no interference by the state. Many households, however, began to experience financial difficulties and the problems escalated in 2007 when fuel prices also witnessed a dramatic increase. According to some estimates, 20% of households had trouble paying the subprime mortgages worth about $140 billion, which in turn meant a liquidity crisis, the bankruptcy of some banks or their takeover by stronger banks. That first occurred in March 2008, when the fifth-largest investment bank Bear Stearns was taken over by JP Morgan Chase with the support of the FED. The U.S. Government also took over Fannie Mae and Freddie Mac to help refinance subprime mortgages, pumping tens of billions of dollars into them. It also provided assistance to large financial institutions. In September 2008, the government refused to help the fourth-largest investment bank Lehman Brothers, which went bankrupt, triggering panic in the financial markets. In order to stabilise these markets, Congress adopted the Troubled Asset Relief Program (TARP) in October 2008, a bailout of up to $700 billion that provided the U.S. government with funds to temporarily purchase assets and equity of financial institutions. In the mid-2008, the U.S. economy fell into recession, which due to interconnected financial markets spread nearly all over the world. After the acute crisis was over in 2011, it had become apparent that the total funds made available by FED for various types of bail-out schemes including Central Banks Liquidity Swaps, direct assistance to fourteen so called Too Big to Fail institutions or asset purchases was around $29.6 trillion USD (Felkerson 2011). GDP composition by sector in 2011 was about 1.2% agriculture, 19.2% industry and 74.6% services. The United States accounted for more than 8% of the world exports; the major export commodities included engineering products (aircraft, automobiles and their components, computers, etc.), fuel, mining – 144 –

products, and food. The USA is a net exporter of food. According to the WTO, its major export partners are Canada, the European Union, Mexico, China, and Japan. As for global imports the USA accounted for more than 12% thereof, mostly importing from China, the EU, Canada, Mexico, and Japan.

5.2.2 THE USA AND NAFTA The North American Free Trade Agreement (NAFTA) among the USA, Canada, and Mexico entered into force in 1994, but efforts to reduce trade barriers in this area were much older. The United States sought duty-free trade with Canada since the mid-19th century. This effort resulted in several agreements that reduced or completely eliminated tariffs on selected products in the second half of the 19th and the first half of the 20th century. In 1942, the USA became Canada’s largest trading partner. A specific proposal put forward by the United States in 1948 was refused on the Canadian side, thus agreements only in some sectors such as the automotive industry were made in subsequent years. Negotiations on the free trade agreement were restored in 1986. Trade between the two countries is the largest trade in goods and services between individual countries in the world. A year later the Canada-US Free Trade Agreement (CUSFTA) was signed, which entered into force in 1989. In the years 1985–1989, the United States signed three trade agreements with Mexico, which helped to double trade between the two countries in this period. At the same time, the ongoing negotiations between Canada and Mexico led to the signing of ten agreements that encouraged the until then quite superficial relationships in 1990. Cihelková lists several reasons that ultimately led to the signing of NAFTA. Regional integration would enhance the competitiveness of the three countries to world markets, and consequently take advantage of the opportunities and outcomes of GATT negotiations. The second reason stated was the intensification of European integration in the 80s and early 90s, as the establishment of an internal single market inspired the North American states. Thirdly, the results of CUSFTA fell short of the initial expectations. This is historically the first reciprocal free trade pact between a substantial developing country and developed economies and the second largest free trade zone in the world after the European Union. Despite the fact that by no means is NAFTA a case of integration similar to the European Union, it is more than just eliminating tariff and non-tariff barriers to trade among those countries. The agreement also comprises of investment rules, transport and financial services, intellectual property, government purchases, and dispute settlement procedures (Romalis 2004:2). Upon their entry into force, there was a gradual reduction and elimination of tariff and non-tariff barriers, which ultimately resulted in the creation of a free trade zone in 2008. It is necessary to emphasise the rule of origin, which determines that only products made   Major Centres of the World Economy      – 145 –

in the signatory countries may benefit thereof, or those that at least contain a specified percentage of ‘North American content’. There has been an increase in the volume of trade in the region, which grew faster than world trade, as well as an increase in FDI; NAFTA also partly contributed to economic growth particularly in Mexico and Canada while increasing in trade, both inter-regional and international, slightly reducing unemployment in the USA, and increasing Canadian wages in some sectors. Of the three states, developing Mexico has experienced the largest growth in trade; it was the second largest trading partner of the United States in 2001. In 1993, it had accounted for 9% of U.S. exports and for 6.9% of its imports. In 2001 it already comprised 13.9% of U.S. exports and 11.5% of imports. This increase, however, does not owe merely to NAFTA, but also unilateral trade liberalisation by Mexico, which began in 1986, as well as the devaluation of the Mexican peso in 1994–1995, which directly affected the growth of exports. NAFTA has, however, also contributed to a price increase, especially in the ‘highly protected sectors by driving out imports for non-member countries’ (Romalis 2004:26).

5.3 JAPAN 5.3.1 ECONOMIC DEVELOPMENT OF JAPAN Japan is currently the third largest economy in the world, after the USA and the PRC (note: the EU economy as a whole would be the second largest, moving Japan to the fourth position). Japan has experienced a long-term decline in its relative position, as it had been the second largest economy in the world over four decades, starting from the late sixties, when the Japanese post-war economic miracle was culminating. Japan was the first industrialised country in Asia, which occurred during the Meiji period (1868–1912). In 1871, the feudal system was abolished and a unified state was created. The new ruling class ‘created a free, competitive, government-stimulated economy. Japan began to build railroads and modern factories’, which the government sold to entrepreneurs at a cheap price, along with new shipyards (McKay 2008:871). They eventually became family conglomerates, called zaibacu, controlling most of the Japanese economy (over 30% of Japanese mining and chemical industry, almost 50% of engineering industry, and 60% of the stock exchange market, which was closely connected to Japanese politics. The four largest companies in existence at the beginning of the Second World War were Mitsubishi, Mitsui, Sumitomo, and Yasuda. The Japanese quickly adopted and adapted modern technologies and Western scientific knowledge, especially in their industry, health care and education. They also focused on building a strong navy, and reorganised the army according to the European model. In the late 19th century, Japan began its – 146 –

conquest policy. It beat China in the 1894 war for Korea, took over Taiwan a year later, fought European powers over Manchuria, invaded Russia (Port Arthur) in 1904, and became one of the major imperial powers in 1910 (McKay 2008:872). Later, it sought to create a ‘self-sufficient Asian economic zone’, however, due to the dependence on imported petroleum and metals from the Dutch East India and USA, it failed (McKay 2008:970). That was one of the main reasons for Japanese involvement in the Second World War on the side of Nazi Germany and Fascist Italy, after they merged in the so-called Axis of Berlin-Rome-Tokyo in 1936. After its unconditional surrender in September 1945, Japan was administered by the United States, which introduced a parliamentary system with the emperor as a  mere symbolic head of state. The Americans disbanded nine traditional zaibacu, controlling heavy industry and banking, and had them divided into 85 separate units. Some of them were later converted to the keiretsu, i.e. groups of interconnected companies with common shares. Their influence is still strong, especially in the automobile industry. Industrial production in 1946 reached a mere one fifth of the 1939–1944 average. The Korean War in 1951 resulted in the end of the U.S. occupation. Thanks to the UN troops fighting in the Korean War, which built their supply points in Japan, foreign exchange flowed into the country, which was so crucial in supporting the recovering Japanese industry. Thus, GDP had already attained its pre-war level in 1954. Massive investment in heavy industry was followed by a redirection of the economy towards ‘electronics, know-how export, technology, and the provision of foreign loans… The Japanese achieved primacy for example in manufacturing cine-cameras, cameras, motorcycles, electrical and other products’ (Stellner 2006:90). Table 5.11: Selected Economic Indicators of Japanese economy, 1992–1999

Year GDP growth Goods and FDI (net Inflation, Unemployment in %, constant services inflows, BoP, consumer (% of total 2000 U.S. exports current U.S. price index labour force) dollar (% of dollar, in (in %) GDP) millions) 1992  0.8 10  2,759  1.7 2.2 1993  0.2  9    119  1.3 2.5 1994  0.9  9    912  0.7 2.9 1995  1.9  9     39 –0.1 3.2 1996  2.6 10    208  0.1 3.4 1997  1.6 11  3,200  1.8 3.4 1998 –2 11  3,268  0.7 4.1 1999 –0.2 10 12,308 –0.3 4.7 Source: The World Bank Data Series   Major Centres of the World Economy      – 147 –

According to many economists, the emergence of the Ministry of International Trade and Industry in 1949, which formalised the cooperation between private companies and the government, had an irreplaceable impact on the so-called economic miracle after the Second World War. Next to it, they cite U.S. assistance (which ensured a stable currency and prices), private capital inflows, a population explosion (83 million in 1950 and almost 128 million in 2011 but decreasing), traditional Japanese thrift, which meant high savings and low-cost loans for investment in industry, and finally low defence spending (the army was dissolved after World War II). The state encouraged the private sector to invest in infrastructure, education and science, while expenditures on social policy remained minimal. Key factors were a strong emphasis on achieving the highest product quality, the introduction of management techniques and production methods from the West, and their improvement. The Japanese economy grew on average by 10% a year in the 60s, by 5% in the 70s, and by 4% in the 80s. A significant slowdown in the Japanese economy occurred during the 90s (an average annual GDP growth of only 1.7%), they are therefore referred to as ‘the lost decade’. It differed from other recessions in developed countries in at least two respects. The government managed to keep a low unemployment rate (about 2%) and a relatively slow growth in prices. In 1996, the new Prime Minister Ryūtarō Hashimoto (1937–2006) adopted a structural reform of the Japanese economy which was to revive the sluggish economy. Nevertheless, it failed for two main reasons. In the first place, the state’s ‘past debts’ are cited, i.e. losses of the banking sector of the so-called bubble economy in the late 80s when real estate prices soared speculatively and bank loans were provided with the expectation of their further growth. But prices dropped quickly and significantly, the result being an extraordinary increase in bankruptcies that also affected a number of financial institutions. It has been estimated that Japanese banks’ bad loans had reached 30% of the country’s GDP. As the second reason, it is stated as being the excise tax increase from 3% to 5% in April 1997, which was one of the main causes of the decline in domestic demand, leading to an increase in other taxes. Therefore a  year later, the so-called Big Bang was adopted, a  program of reforms aimed to deregulate the financial sector. It was to solve the big problems of Japanese banks’ bad loans, foreign exchange streamline operations, to reduce the tax burden, and to favour trade in financial assets. None of these reforms achieved the expected results and the Japanese economy caved in during the deepest post-war recession. There were several causes – low domestic demand, the decline in exports (Southeast Asian crisis), and Japanese bank lending restrictions. Such a deep recession has had two serious ­consequences, rising unemployment and the bankruptcy of many enterprises.

– 148 –

Table 5.12: Selected Economic Indicators of Japanese economy 2000–2011

Year GDP growth Goods and in %, constant services 2000 U.S. exports dollar (% of GDP) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

 2.3  0.4  0.3  1.7  2.4  1.3  1.7  2.2 –1 –5.5  4.4 –0.7

11 10 11 12 13 14 16 18 18 13 15 –

FDI (net Inflation, Unemployment inflows, BoP, consumer (% of total current price labour force) U.S. dollar, index in millions) (in %)  8,227 –0.7 4.8  6,191 –0.8 5  9,087 –0.9 5.4  6,238 –0.2 5.2  7,807 0 4.7  3,214 –0.3 4.4 –6,784  0.2 4.1 22,180  0.1 3.9 24,552  1.4 4 11,834 –1.3 5 –1,359 –0.7 5 –1,702 –0.3 –

Source: The World Bank Data Series

Table 5.13: Japanese population in 1992–1999


1992 1993 1994 1995 1996 1997 1998 1999

Total Population Fertility Population Population Urban Population growth rate ages 0–14 ages 15–64 population in % (children (% of total) (% of total) in % per 1 woman) 124,229,000 0.2 1.5 17 70 – 124,536,000 0.2 1.5 17 70 – 124,961,000 0.3 1.5 16 70 – 125,439,000 0.4 1.4 16 70 65 125,761,000 0.3 1.4 16 69 – 126,091,000 0.3 1.4 15 69 – 126,410,000 0.3 1.4 15 69 – 126,650,000 0.2 1.3 15 69 –

Source: The World Bank Data Series

  Major Centres of the World Economy      – 149 –

In the late 90s the Japanese economy began to experience a  deflation, a steep decline in prices and non-utilisation of production capacity as a result of the bank crisis and inadequate domestic demand. The proverbial Japanese thrift, which had been the engine of the Japanese post-war economic miracle, became one of the main reasons for the deflation. After a partial recovery, the recession deepened again in 2008 due to a decline in investment and the demand for Japanese exports caused by the global crisis. After another revival two years later, the Japanese economy was hit hard again. The tsunami and subsequent earthquakes in 2011 led to a decline in GDP of about 0.5%, whereas the total direct damage was estimated at $235–310 billion dollars. Table 5.14: Japanese population in the years 2000–2011


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total Population Fertility Population Population Urban Population growth rate ages 0–14 ages 15–64 population in % (children (% of total) (% of total) in % per 1 woman) 126,870,000  0.2 1.4 15 68 65 127,149,000  0.2 1.3 14 68 – 127,445,000  0.2 1.3 14 67 – 127,718,000  0.2 1.3 14 67 – 127,761,000 0 1.3 14 67 – 127,773,000 0 1.3 14 66 66 127,756,000 0 1.3 14 66 – 127,770,750 0 1.3 14 65 – 127,704,040 –0.1 1.4 14 65 – 127,557,958 –0.1 1.4 13 65 – 127,450,459 –0.1 1.4 13 64 67

Source: The World Bank Data Series

Japanese industry remains dependent on imported raw materials and fuel. Agriculture is subsidised and protected, and although the crop ranges among the largest in the world, Japan is still dependent on food imports in this case, namely from the EU and the USA as only 15% of the land is used for agricultural production. On the other hand, Japan may boast at having one of the largest fishing fleets in the world, accounting for about 15% of the world’s catch. The GDP structure (1.2% agriculture, 27.3% industry and 71.6% services), and employment by sector (3.9% in agriculture, 26.2% in industry, 69.8% in services) corresponds to an advanced economy. In 1980, the export of goods and services accounted for 13% of GDP, in the mid-90’s the share fell to 8%, and in 2010, thanks to a recovery, it landed at 15% of GDP. Japan’s main export partners are currently the People’s Republic – 150 –

of China, the United States, the European Union, South Korea, Hong Kong, and Taiwan. The main export commodities include means of transport, cars, electronics, computers, and chemical products. The most important import commodities are fuel, minerals, foodstuffs, machinery, and textiles. The major import partners are China, the USA, the EU, Australia, Saudi Arabia, the United Arab Emirates, South Korea, and Indonesia (see WTO Trade Statistics). In addition to the deflation and dependence on exports, Japan faces an aging population and depopulation. The current total fertility rate is only 1.4 children and almost a quarter of the population is older than 65 years (see Tables 5.13 and 5.14). Forecasts even predict that in 2050, the proportion of the population of working age to post-productive age will be 1:1. Another serious problem is a high public debt, which is currently over 200% of GDP.

5.3.2 JAPAN AND APEC Japan is an important member of the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC), G-8 and G-20. Japan reflected long-term interest in integration in the Asia-Pacific region, but the conditions immediately after the Second World War were not favourable. It took the economic growth and the related empowerment in East Asia for the Japanese to apply a more active policy. In 1977, they adopted the so-called Fukuda doctrine, according to which Japan will never become a military force and will seek peaceful cooperation in the region and the world, and in 1980 Japan initiated the Pacific Development Cooperation which was an important impetus to the actual creation of APEC in November 1989. APEC has 21 members  – Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taiwan, the USA, and Vietnam. The original membership (12 countries) was extended in the years 1991, 1993, 1994, and 1998. At the inception of APEC, three basic objectives of cooperation were formulated: developing and strengthening the multilateral trading system, strengthening interdependence and prosperity of member economies, and encouraging sustainable economic development. Originally, an informal discussion forum was replaced in 1993 with regular meetings of member countries’ leading economists and government officials, and at their meeting in Indonesia in 1994, a fundamental objective of creating a free trade area was adopted – by 2010 among the advanced economies, and by 2020 including the developing economies in the region. At subsequent meetings, specific measures to achieve this objective were taken. These include the Manila Action Plan for APEC of 1996, the Shanghai Agreement of 2001, and the Hanoi Plan of Action of 2006. Trade barriers should be reduced while the free movement of goods, services and capital should be promoted. ‘The average tariffs in the region fell   Major Centres of the World Economy      – 151 –

from 17% in 1989, when APEC was established, to 6.1% in 2009. Also non-tariff barriers to trade in the member states significantly reduced. Most of them comply with the WTO rules’ (APEC 2012:3). APEC activities focus on three key areas, namely trade and investment liberalisation, trade and commerce support, and economic and technical cooperation. Yet at the beginning of the millennium, this cooperation began to expand to other areas. Member states committed to fight against terrorist groups on their territories, or against the SARS disease in 2003; in 2007 they adopted the Declaration on climate change, energy security and sustainable development; and in 2010 they first discussed food security. The common denominator of all these and many other activities is an expanding and deepening cooperation with an emphasis on the liberalisation of trade and investment. Today, APEC represents a regional bloc which is characterised by vast economic power despite its internal geographic, economic, social, political, cultural, and other heterogeneity. Already by 1997, APEC contributed 33% to the overall area of ​​the world, 40% to the world’s population, 56% to global GDP, and 46% to world trade. The figures have remained similar until today. Japan has been a very active member of APEC. Its main initiatives include the Osaka Action Programme, adopted at the APEC meeting in 1995 in Osaka, Japan, which provides general guidance to the liberalisation process of the member states. They also include conduct in compliance with WTO rules, the equality of all member states, transparency, and of flexibility based on the level of development of individual countries. APEC countries are very important for Japanese commerce. In 2008, APEC countries comprised 75% of Japanese exports and 60% of Japanese imports, while almost 54% of Japanese FDI flowed therein (see Ministry of Foreign Affairs-Ministry of Economy, Trade and Industry 2010:8).

5.4 THE PEOPLE’S REPUBLIC OF CHINA 5.4.1 ECONOMIC DEVELOPMENT OF THE PRC The People’s Republic of China is the most populous country in the world, about a fifth of the world’s population (about 1.3 billion people) lives there, and in terms of land area, after Russia, Canada and the United States; it is the fourth largest state. In the first decades after World War II, its huge economic potential was not only wasted, but even razed to the ground. ‘The Great Leap policy (1958–1962) and The Cultural Revolution, which took place in the country between the years 1966 and 1969, aimed at annihilating capitalism and “modernisation” of the society, brought death to millions due to famine and to hundreds of thousands of people at the hands of fanatical Red Guards, as well as wrecked the country’s economy. The consequences were strongly felt during the 70s, – 152 –

when China tried to use its limited resources to develop the devastated country, including its military capabilities. It voluntarily became isolated from the rest of the world, promoting a self-sufficient economy’ (Evanová 2012:59). A change occurred after Mao Zedong’s death in 1976 (born 1893), with the dawn of the new Communist government, led by Deng Xiaoping (1904–1997), when China ‘began to seek peaceful coexistence with the West. Thus, it was, besides other things, able to reduce defence spending and devote itself fully to economic development, which assumed a greater openness to the world, including the growing cooperation in international organisations and regimes. The open-door policy and gradual economic reforms were introduced by Deng Xiaoping at the December congress of the Communist Party of China in 1978. In his opinion, ideology was not important any more. “It does not matter if the cat is black or white. As long as it catches mice, it is a good cat”, he said, and continued: ‘It is wonderful to be rich. Revolutionary slogans of international class struggle, which was declared as being over, were replaced with slogans of peace and development. Self-sufficiency was replaced with involvement in world trade’ (Evanová 2012:60). In addition to the open-door policy, the ‘four modernisations’ programme was adopted, relating to agriculture, industry, science and technology, and military, to become the basis of a new economic order in the country, the so-called socialist market economy. The massive economic development in the following decades has risen, and still leads to, concerns in many countries around the world. ‘The policy of a peaceful rise’ was publicly announced in 2003, although this concept had already appeared in the security strategies of the nineties. A year later, the term ‘peaceful development policy’ pushed through, as the word ‘rise’ had triggered a series of negative reactions. The Chinese government aimed to demonstrate, especially to Asian countries and the United States, that China’s development did not threaten international peace and stability; on the contrary it was beneficial for many states. Thus, China has strived to be viewed as a responsible great power on the rise. The following lines deal with its economic developments over the last thirty years.

5.4.2 KEY ECONOMIC INDICATORS AND DEVELOPMENT IN THE LAST THREE DECADES It should be emphasised that the economic and social development of China in the 90s, and all of the reforms have been carried out under the leadership of the Communist Party of China, and thus were not associated with the process of democratisation. China remains a communist dictatorship, harshly suppressing any attempt to change the political regime. In 1989, relations with the West reached their lowest ebb after the Chinese army had brutally suppressed the protests on Tiananmen Square in Beijing. The impetus for the settlement was Chinese support (albeit limited) for military intervention in   Major Centres of the World Economy      – 153 –

the Persian Gulf after Iraq’s invasion of Kuwait in 1990; e.g. diplomatic relations with the USA at the highest level or World Bank loans were restored, both of which had been stopped after the bloody action against the protesters. On the other hand, it must be said that economic development and the associated growth in living standards has been the most important goal of the ruling Communist government due to the absence of substantial political reforms. Its significant slowdown, associated with stagnation or a decline in living standards, could lead to undesirable political instability. The growth of Chinese economic power means that the country has faced less and less criticism for human rights violations. Thanks to its reform efforts, China has seen tremendous economic growth since the late 70s, reaching a yearly average of 9.7% or even roughly 11% over the period 2003–2007. In 2010, China became the second largest economy in the world next to the United States (or the third, if we take the EU as a whole), and the largest exporter at the same time, therefore, it must not be omitted in our overview of world economic centres. According to the World Bank, China currently ranks among the countries with medium income, its gross national income per capita amounts to $4,260 USD (2010). However, it must be emphasised that it still remains a developing country with vast differences between urban and rural populations, facing many serious problems (see below). The reform programme of the four modernisations began with the de-collectivisation of agriculture, i.e. the abolition of the People’s Communes. Farmers were allowed to rent farm land and begin managing it separately. Although the number of people employed in the agricultural sector dropped, its performance was steadily increasing and managed to provide food for onefifth of the world’s population. The subsequent industry reforms comprised of the use of excess production capacity for commercial production after the state plan had been met; five-year plans are approved similar to the former practise in this country (concerning the last five-year plan, see below). This step was followed by the ‘conversion of [some] state-owned enterprises into joint-stock companies’ and their gradual separation from the state. Besides that, ‘urban and rural businesses’, jointly owned by the cities and municipalities, were created along with privately owned companies. An important step was the admission of foreign companies to specially created special economic zones with favourable tax and customs duties, which were very attractive to investors thanks also to cheap labour. The first four zones were opened in 1980 in cities of Shenzhen, Zhuhai, Shantou, and Xiamen; a special (and the largest) economic zone was declared, the entire island of Hai Nan in 1988. In 1984, 14 port cities (e.g. Shanghai) became open to foreign investment, and since 1992 China has further opened up all the major cities of its inland provinces and autonomous regions. Being open to foreign investment relates to the influx of new technologies and know-how which is the essence of the science and technology modernisation. Finally, there has been a reform of the People’s Army, which, despite – 154 –

a significant reduction in the number of active men under arms, is the largest army in the world. While there were more than 4,000,000 active soldiers in 1985, twenty years later, the figure dropped by nearly a half to 2.3 million. On the other hand, spending on defence is steadily increasing, i.e. modernising military equipment or ‘logistics and information systems’. PRC’s defence spending is not published, but according to estimates by the Swedish SIPRI (Stockholm International Peace Research Institute), it rose from $16 billion USD in 1989 to $114 billion USD in 2010. Researchers add that the actual cost may be even higher. For comparison, U.S. spending, which is the highest in the world, increased in the same period from $526 billion USD to $687 billion USD. The results of the reforms are impressive. According to the World Bank, China has carried out two important transformations. Firstly, there has been the transition from an agrarian society to an industrial society. Even in the mid-90s, out of the working age population there were 54% working in agriculture, 33% in industry, and only 13% in services. In 2008, the share of people employed in agriculture fell to under 37%, industry to almost 29%, and the services sector recorded an increase to almost 35%. This, of course, has also changed the structure of GDP. In the mid-90’s, industry contributed 49%, agriculture 20%, and services 31% to GDP. In 2011, industry accounted for less than 47%, agriculture for 10%, and services for 43%. One can therefore speak of a late form of industrial revolution which China experienced in the 90s. Another, equally substantial change has been the transition from a centrally planned economy to a market economy, although with some specific features and the continued practise of approved five-year plans. Table 5.15: Selected Economic Indicators of China, 1992–1999


1992 1993 1994 1995 1996 1997 1998 1999

GDP Goods FDI (net growth and inflows, in %, services BoP, constant exports current 2000 (% of U.S. U.S. GDP) dollar, in dollar millions) 14.2 19 11,156 14 20 27,515 13.1 21 33,787 10.9 20 35,849 10 20 40,180  9.3 22 44,237  7.8 20 43,751  7.6 20 38,753

External Inflation, Unemploydebt consumer ment (DOD, price (% of total current index labour U.S. (in %) force) dollar, in billions)  72  6.3 2.3  86 14.6 2.6 100 24.2 2.8 118 16.9 2.9 129  8.3 3 147  2.8 – 144 –0.8 – 148 –1.4 –

Value added in agriculture (% of GDP) – – – – – 18 18 16

Source: The World Bank Data Series   Major Centres of the World Economy      – 155 –

Almost since the very beginning of the reforms, rapid, though uneven, economic growth and development has occurred in all 31 mainland provinces. In the publication, ‘China 2030: Building a Modern, Harmonious, and Creative High-Income Society from 2012’, the World Bank shows some examples of Chinese development. Two of the ten largest banks in the world are Chinese, China has the second largest network of highways in the world, six of the ten largest shipping container ports are located in China and owing to the increase in wealth and living standards, the number of people living below the poverty line has significantly decreased, etc. In its reforms China has applied a strategy which became known for the term ‘crossing the river by feeling the stones’. It was a gradual change, introducing market-oriented reforms by the ‘trial and error’ method, according to the needs of a particular region. Despite rapid growth, social and macroeconomic stability were successfully maintained. During the reforms, inflation was low most of the time, with the exception of the late 80s and in the early 90s when it reached more than 24% in 1994 (see Tables 5.15 and 5.16). This was especially in the case of the excessive demand driven by consumption of the population caused by rapid wage growth, exceeding productivity growth. Competition among regions was encouraged and barriers to the movement of goods, labour and capital were removed, causing the creation of a unified national market which was accompanied by massive investments in infrastructure. Table 5.16: Selected Economic Indicators of China, 2000–2011


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GDP Goods FDI (net growth and inflows, in %, services BoP, constant exports current 2000 (% of U.S. U.S. GDP) dollar, in dollar millions)  8.4 23  38,399  8.3 23  44,241  9.1 25  49,308 10 30  47,078 10.1 34  54,936 11.3 37 117,208 12.7 39 124,082 14.2 38 160,052  9.6 35 175,148  9.2 27 114,215 10.4 30 185,081  9.1 29 –

Source: The World Bank Data Series – 156 –

External Inflation, Unemploy- Value debt consumer ment (% added in (DOD, price of total agricurrent index labour culture U.S. (in %) force) (% of dollar, in GDP) billions) 145  0.3 – 15 184  0.7 – 14 185 –0.8 4 14 206  1.2 4.3 13 246  3.9 4.2 13 283  1.8 4.2 12 323  1.5 4.1 11 373  4.8 4 11 380  5.9 – 11 432 –0.7 4.3 10 549  3.3 – 10 –  5.4 –  9

However, it is also necessary to mention the friendly external conditions that have supported the growth of the Chinese economy. The World Bank states a relatively liberal trade, steady growth in world economic markets, reducing transport costs, and the expansion of FDI, or expansion of information technology (The World Bank 2012:6). Despite the apparent success, China faces many acute problems and thus a steady decline in the growth rate of GDP may be expected. For the period 2011–15, the World Bank expects an average GDP growth of 8.5%, and in the long run for 2026–30 about 5%. One of the major problems, which is also a result of the genocidal population policies (the so-called one-child policy), is the aging of the Chinese population. Though a developing country, China is the fastest aging nation in the world and the aging population may dampen the economy as much as overpopulation, which the Chinese have so long feared. Social instability may then occur due to the lack of women; it is estimated that in 2020 there will be 30 million more men than women in China. In addition, the cost of cheap labour is expected to grow, as it becomes more skilled thanks to improving education. Table 5.17: The Chinese population in 1992–1999


Total Population Fertility Population Population Urban population growth rate ages 0–14 ages 15–64 population (million) in % (children (% of total) (% of total) in % per 1 woman)


















































Source: The World Bank Data Series

Other less serious problems include reducing exports (mainly due to the current state of the global economy), and low domestic consumption, the continuing big differences between urban and rural areas, economic crime and corruption, or the rapidly deteriorating environment, leading, for example, to the loss of fertile soil.   Major Centres of the World Economy      – 157 –

Table 5.18: The Chinese population in the years 2000–2011


Total Population Fertility Population Population Urban Population growth rate ages 0–14 ages 15–64 population in % (children (% of total) (% of total) in % per 1 woman)











































































Source: World Bank Data Series

In March 2011, the ruling Communist Party adopted the Twelfth Five-Year Plan (2011–2015) at its congress, reflecting an effort to address the problems mentioned above. It has five basic objectives: 1. Maintain stable economic growth and prices, and to create new jobs; 2. to support further urbanisation and to reduce the disparities between urban and rural areas; 3. to ensure the growth of income, reduce poverty, and raise the living standards of the population; 4. to broaden access to public services, to improve education, and to create a functioning legal system; 5. to deepen reforms in key areas, such as taxation and to promote further integration into the world economy. These objectives are based primarily on efforts to stimulate domestic consumption and to strengthen the services sector, which partly reflects the current state of the global economy (The World Bank 2012). Many organisations and researchers warn China against the dangers of a so-called ‘middle-income trap’, which has caught many fast-growing countries, especially in Latin America and the Middle East. In 1960, there were 101 countries in the middle-income group, whereas only 13 of them belonged to the high-income group in 2008. These included, for example, Japan, Greece,

– 158 –

Ireland or Israel. Countries stay caught in this trap due to rising labour costs, thereby losing their competitiveness on world markets to countries still with low staff costs, still not being able to produce quality products with high added value as an advanced economy.

5.4.3 CHINA IN INTERNATIONAL TRADE China’s integration into international trade is closely linked with the open door policy adopted in 1978 which marked the opening of the country to foreign investment and developing the (socialist) market economy. In 1978, less than 5% of GDP was exported, in the late 90s the percentage was already about 20%, and in 2011 it was 29%. The main export commodities include machinery and transport equipment (47% in 2007), rubber, textile and metallurgical products (18% in 2007), chemical products (5%), food (3%), minerals and fuels (2%). The most important export partners are the United States, Hong Kong, Japan, South Korea, and Germany. The most important import commodities are electrical components and machinery, petroleum and fuels, optical and medical equipment, iron ore, plastics and organic chemicals. China imports mostly from Japan, South Korea, the USA, Germany, and Australia. An important milestone was the entry of the PRC into the World Trade Organisation (WTO) in 2001, after fifteen long years of difficult negotiations, during which China had to reduce or cancel more than 7,000 trade barriers. In spite of the many problems, China’s entry into WTO may be regarded as advantageous, not only for itself, but also for other countries. During its membership, China has become the largest exporter in the world (in 2001, it accounted for 4.3% of the world exports, in 2010 it was 10.6%) and the second largest importer. However, it is increasingly criticised for failing to comply with WTO rules (for example, for ignoring intellectual property), or slow implementation of the agreed upon changes and measures. The first dispute which the WTO had to resolve was held in 2004 when the United States complained about the value added tax which the Chinese had imposed on imported integrated circuits. Since then, it has been subject to increasingly frequent complaints, mainly by developed countries, while becoming tougher in defending its interests on the grounds of the organisation. Currently, for example, Chinese restrictions on exports of rare minerals that are important for many industries in the USA, EU and Japan, are being disputed. Among other things, there is concern in these countries that this measure, unless ­cancelled, may force multinational corporations to build more factories in China.

  Major Centres of the World Economy      – 159 –

Table 5.19: The course of proceedings on the PRC’s entry into the GATT/WTO

Year Events 1986 China applies to join the General Agreement on Tariffs and Trade 1989 Negotiations on accession to the GATT interrupted after the bloody suppression of protests in Beijing 1994 China intensifies efforts to join the GATT; accused of protectionism 1995 China announces a trade liberalisation programme in order to gain the support of the USA 1997 China reduces some import duties, the reduction does not apply to such products as automobiles 1998 China promises a further reduction of import duties, but the USA and other developed countries demand more openness to the import of foreign products and services 1999 The USA and China announce an agreement on the WTO 2000 Negotiations with the EU continue with calls for greater liberalisation of China’s inter-bank sector, due to the balance of payments deficit with China (more than 20 billion EUR per year) and for resolving contentious issues on 150 kinds of products and services, including insufficient market opening for European cars 2001 The USA and China came to an agreement on the contentious subsidies of agricultural products. That means that after accession to the WTO, China will be able to subsidise the production of its 700 million peasants (7–8% of the final value of the products); [PRC enters the WTO – ed. T. E.] Source: Cihelková et al. 2001:242

5.4.4 CHINA IN AFRICA We should also mention China’s activities in Africa, a continent with vast untapped mineral wealth, labour, fertile farmland, and a huge potential market, where China takes over the position of former colonial powers. ‘The shortage of [some] of raw materials leads China to seek long-term resources, and Africa is becoming a natural target of this effort, thanks to its natural wealth. China invests heavily in many African countries, regardless of the regime in each state, unlike the EU or the USA. President Hu Jintao stressed China’s commitment at the UN General Assembly to increase aid to Africa, reduce or cancel debts of the heavily indebted poor and least developed countries, and the growth of trade, investment and technological support’ (Evanová 2012:84). In 2009, China became the largest trading partner of Africa, pushing the United States into second place. In 2000, the Forum on Chino-Africa Cooperation organised its first conference in Beijing, which was attended by more than 80 ministers from China and 44 African countries, and representatives of 17 international and regional organisations. The results were the Declaration of Cooperation, and the – 160 –

Programme for China-Africa Cooperation in Economic and Social Development. The last, fifth conference was held again in Beijing this year. There, China agreed to provide a three-year loan of $20 billion (twice as much as promised at the fourth conference three years earlier). During the conference, agreements on mutual cooperation worth $341 million were signed, while signing further contracts worth up to $2 billion is expected in the near future. China has confirmed its position as Africa’s largest trading partner. China invests massively, namely in infrastructure, even in war-torn countries with rich mineral resources (e.g. Sudan/South Sudan – petroleum, Congo – copper, cobalt, Liberia – wood). However, PRC trades, invests or provides assistance not only to mineral rich countries but to all countries which have no diplomatic relations with Taiwan. The partnership is not without problems though. For example, South African Prime Minister, Jacob Gedleyihlekisa Zuma (born 1942), warned that the current trade between African countries and China, which is in some cases accompanied by a reduction or forgiveness of debt, are unsustainable in the long run. According to him, it is impossible, for example, for Africa to supply China with raw materials and to import expensive finished products in return. Moreover events on the ground seem to prove local Chinese difficulty. During this year’s protests of miners in Zambia, who were demanding a salary increase to the newly adopted minimum level, one of the Chinese managers of the company was killed.

THE CHAPTER SUMMARY The centres of the world economy include the European Union, the United States, Japan, and also China. Economic development of the European centre in the first half of the 90s was marked with recession which had a particularly negative impact on the development of employment, growth of general government deficits, and internal debt. Economic growth was restored in the late 90s, besides other things, through the establishment of the Economic and Monetary Union and the adoption of the convergence criteria. The differences among the states, however, remained great after the enlargements of 2004 and 2007, mostly through the accession of former Soviet bloc economies. EU countries were hit by a global recession between 2008 and 2009, and most of them resumed their growth a year later. In 2011, however, the debt crisis in the Eurozone intensified. Greece, Ireland, Portugal, and Spain successively asked the EU and the IMF for funding. Therefore, the euro rescue fund was established, to help the governments of those countries. The debt crisis has not been managed successfully, as yet, and according to some international organisations, it threatens the entire world with another possible global recession. Some scholars and economists have previously pointed out the inappropriateness   Major Centres of the World Economy      – 161 –

of the common currency because of the different economies of individual countries. This objective, however, was already adopted in the early 70s and specified by the Maastricht Treaty in 1992. The actual creation of a monetary union took place in three stages and was completed by the introduction of the common currency in 2002. The EU, like all other centres of the world economy, is an important member of the WTO, which often becomes the grounds for disputes about its Common Agricultural Policy. According to many, the latter negatively affects not just EU consumers, but the entire world, especially countries dependent on agriculture. The United States continues to be the largest economy in the world, despite many problems. After the recession in the early 90s, it experienced a boom during Bill Clinton’s presidency that lasted until 2000, except for the years 1997 and 1998. However, economic growth was, among other things, supported by low interest rates, which contributed to the recent mortgage crisis which erupted during the presidency of George W. Bush. In order to help businesses and households that invested in overvalued technology stocks in the 90s, the U.S. central bank decreased the basic interest rate in 2001. Cheap interest meant cheap mortgages that allowed households to purchase the property beyond their capabilities. Once the interest rates rose again, many households were unable to repay. Their incapability meant a bank liquidity crisis and the bankruptcy of some banks. Therefore, the crisis resulted in the financial crisis of 2008, when the government refused to help Lehman Brothers, the fourth-largest investment bank. The bankruptcy triggered panic in financial markets and the subsequent global recession. The USA, along with Mexico and Canada, comprise the North American Free Trade Agreement (NAFTA), which is the second largest in the world after the EU. The agreement came into force in 1995, followed by a gradual reduction of tariffs and non-tariff barriers, and the zone was created in 2008. During that period, trade among the three countries multiplied. Japan was the first industrialised country in Asia. It experienced strong economic growth after the Second World War when we talk about the Japanese economic miracle. The 90s, however, are already referred to as the lost decade, because Japan fell into a long-term recession withstanding the attempts to find a solution by the alternating governments. The main reasons include the bubble economy in the late 80s, the subsequent loss of the banking sector, an increased bankruptcy rate, a decline in domestic demand, and a decline in exports. One of the consequences of the recession at the end of the 90s was a deflation, i.e. a decrease in prices and the non-utilisation of production capacity. A partial recovery was ended by the 2008 global crisis and then by a tsunami and subsequent earthquakes in 2011. Its dependence on imports of fuel and raw materials and on exports contributes to the vulnerability of the Japanese economy. A serious problem is the aging population and extinction. Japan is a member of many international organisations. For its regional economic cooperation, the most important is its membership in – 162 –

APEC whose principal aim is to create a free trade zone between all 21 member states. China began to open up to the world at the end of the 70s after Mao Zedong’s death in 1978 when it adopted the open-door policy and economic reforms and joined the world trade. The new socialist market economy was based on a programme of four modernisations, concerning agriculture, industry, science and technology, and the military. A period of economic growth began, which peaked in 2003–2007 when it reached an average of 11%. The PRC became the second largest economy in the world after the USA in 2010, although it is still included among the developing countries with large internal differences. Over 30 years it has managed to transform from an agrarian to an industrial society and from a directly controlled economy to a market economy, albeit under the leadership of the Communist Party within the approved five-year plans. The last five-year plan adopted for 2011–2015 tries to solve some of the major problems of the Chinese economy. These include the aging population, a decline in exports, the differences between urban and rural areas, and the worsening environment. An important milestone for both the Chinese and world economy was its entry into the WTO in 2001. During its membership it became the world’s largest exporter and the second largest importer. The accession negotiations lasted for 15 years and the PRC had to reduce or abolish over 7,000 trade barriers. China is also trying to secure raw materials and strengthen its position as the largest investor in Africa.

  Major Centres of the World Economy      – 163 –


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Name Index

Acheson, Dean 88 Adenauer, Konrad 88 Alexander the Great 15 Aristotle 11, 20–21 Balboa, Vasco de 19 Berisha, Sali Ram 116 Blake, Robert 35 Brezhnev, Leonid Ilich 111, 113, 128 Bush, George Herbert Walker 140 Bush, George Walker 143, 162 Calvin, John 21–23, 33, 45 Catherine the Great 39 Ceauşescu, Nicolae Andruţă 115–116 Clinton, William (Bill) Jefferson 140–141, 162 – 168 –

Cobden, Richard 49 Colbert, Jean-Baptiste 30–31, 34 Columbus, Christopher 19, 24, 29 Cort, Henry 44 Cortéz, Hernando 19 Cromwell, Oliver 27, 31 Delors, Jacques Lucien Jean 125 Dzhugashvili, Joseph Vissarionovich (see Stalin) Eisenhower, Dwigt David 91 Ferdinand of Aragon 19 Friedman, Milton 137 Gama, Vasco de 18

Gaulle, Charles de 84, 91 Gorbachev, Mikhail Sergeyevich 113–114, 128 Grósz, Károly 114 Harrimann, William Averell 109 Hashimoto, Ryūtarō 148 Havel, Václav 115 Henry (Prince) 18 Heyn, Piet 35 Hitler, Adolf 8, 65, 68, 108, 128 Hoxha, Enver 116 Charles I 27 Charles II 27, 35 Charles III 31 Charles IV 31 Charles V 23 Charles VI 37 Child, Josiah 30 Churchill, Winston 68, 70–71, 86, 88, 106, 109

Magellan, Ferdinand 19 Maria Theresa 37 Marshall, George Catlett 71–72, 82–83, 86–87, 102, 109 Marx, Karl Heinrich 105 Mary Tudor 27 Mitterand, François 93, 127 Mladenov, Petar Toshev 116 Monnet, Jean 88, 90 Mun, Thomas 30 Napoleon Buonaparte 37, 46–49, 66 Nelson, Horatio 47 Nixon, Richard 74 Obama, Barack Hussein 94 Palach, Jan 115 Peter III 38 Peter the Great 33 Pizarro, Francisco 19 Plato 20 Pleven, René 89

Isabella of Castile 19 Roosevelt, Franklin Delano 64, 67, 71, 87 Jaruzelski, Wojciech Witold 114 Jefferson, Thomas 40, 140 Jenkins, Robert 36–37 John I 18 John Paul II 114 Kádár, Jánosz 114 Kai-shek, Chiang 82 Kennedy, John Fitzgerald 91 Kerensky, Alexander 61 Khrushchev, Nikita Sergeyevich 111, 128 Klaus, Václav 128 Kohl, Helmut 93 Lafayette, Marquis de 39 Lenin, Vladimir Ilich 61, 105 Louis XIV 28, 30 Louis XVI 40, 47 Luther, Martin 21

Sauvy, Alfred 85 Schabowski, Günter 115 Schuman, Robert 88 Smith, Adam 32–33, 45, 50 Solzhenitsyn, Alexander Isayevich 111 Spinoza, Benedict (Baruch) 27 Stalin, Joseph Vissarionovich 8, 86, 90, 106, 108–111, 113, 128 Stephenson, George 44 Tito, Josip Broz 110 Truman, Harry 88–89 Uljanov, Vladimir Ilich (see Lenin) Vernon, Edward 36 Victor Amadeus II of Savoy 36 Victoria (Queen) 91   Name Index      – 169 –

Sir Walpole, Robert 36 Watt, James 43 Weber, Max 21 Xenophon 11 Xiaoping, Deng 153

– 170 –

Zedong, Mao 153, 163 Zhivkov, Todor Khristov 116 Zhukov, Georgy Konstantonovich 109 Zuma, Jacob Gedleyihlekisa 161

Geographical Index

Acadia 36 Acapulco 19 Acre 14 Aden 18 Aegean Sea 14, 16 Africa 24, 26, 49, 53, 84–85, 101, 103, 160–161, 163–164 Alaska 94 Albania 113, 116, 118, 124, 128 Alexandria 11, 15 Algeria 84–85, 90, 103 Algiers 17 American mines 20, 36 Amsterdam 20, 25–26, 30, 127 Anatolia 11, 15 Angola 94 Antigua 23 Antioch 14–15

Antwerp 20, 25, 30 Appalachians 38 Argentina 53, 122, 129, 139 Armenia 113, 118 Asia 15, 19, 24, 26, 28–29, 34, 49, 57, 85, 88, 101, 103, 117, 133, 146, 162 Asiento 36 Atlantic coast 18, 20, 29 Augsburg 42 Australia 8, 26, 53, 69, 82, 139–140, 151, 159 Austria 31, 35, 37–38, 41–42, 54–58, 61, 72, 89–90, 114–115, 131–136 Austria-Hungary 55–58, 61 Austrian Netherlands 37, 47 Ayutthaya 18 Azerbaijan 113, 118 Azores 24   Geographical Index      – 171 –

Bahamas 23 Balkans 15, 17, 57, 109, 127 Baltic states 21, 108, 118 Barbados 23–24 Bay of Arguin 18 Bay of Bengal 34 Belarus 108, 113, 118 Belgium 11, 20, 29–30, 35, 42, 72, 87, 89, 131–133, 135–136, 139 Benelux 89–90, 103 Bessarabia 108 Birmingham 42–43 Black Sea 11, 13, 15, 17 Bohemia 16, 37, 41, 48 Bombay 34 Bordeaux 42 Borneo 26 Bosnia and Herzegovina 117–118, 124 Bosporus and Dardanelles 17 Brazil 24, 121–122, 129, 140 Bremen 16, 134 Bretton Woods 8, 71–75, 94, 104 Bristol 42 Britain 8, 11, 13, 25, 30–34, 36–50, 53–59, 62–73, 77, 82–83, 85–86, 88–92 British Hanover 37 British North America 49 British West Indies 49 Brittany 42 Bruges 30 Brunei 121, 151 Brussels 92, 124, 134 Bulgaria 15, 113, 116, 118, 124, 127–128, 131–135 Burma 85 Cadiz 11, 19 Cádiz 37 Caesarea 11 Caffa (Theodosia) 14 Calais 27 Calcutta 18, 34 Cambodia 85, 117 Canada 13, 82, 140, 145–146, 151–152, 162 – 172 –

Canary Islands 18, 24 Canton 18, 34 Cape of Good Hope 18 Cape of Storms 18 Cape Town 26 Caribbean 23–26, 28, 32, 35–39, 47 Cartagena 36–37 Ceuta 18 Ceylon 26, 34 Chile 139, 151 China 8, 14, 18, 34, 40, 50, 55, 70, 77–78, 82, 88, 117, 121, 137, 140, 145, 147, 151–161 Congo 18, 85, 103, 161 Constantinople 14–15, 20, 27, 45 Crete 16, 24 Crimea 14–15, 24, 55 Croatia 117–118, 124, 127, 129 Cuba 25 Cuba Puerto Rico 24, 37, 47 Curaçao 23 Cyprus 16, 24, 124, 127, 131–133, 135–136, 138 Czech Republic 80, 117–118, 124, 129, 133–134 Czechoslovakia 42, 71, 110–111, 113–115, 123–124, 128 Damietta 14 Danube 42 Danzig 16 Denmark 31, 89, 91, 125, 127, 131–135, 138 Dutch East India 26, 147 East African coast 18 East Germany 110, 113, 115, 123, 125, 128 East Prussia 48 Eastern Wales 43 Ecuador 140 England 13–14, 20, 24, 27–28, 31, 33, 36, 41, 43, 48, 68, 74 English Channel 48

Estonia 113, 118, 124, 131–133, 135–136, 138 Euphrates 10 Europe 8, 11, 13–26, 28–29, 31, 34–35, 37–48, 50, 52–53, 57–59, 61–63, 67, 69–71, 82, 86–91, 94, 98, 101–103, 109, 111, 113–117, 119, 123–125, 128, 138 Far East 53 Federal Republic of Germany (West Germany) 74, 83, 89–90, 111, 115 Finland 13, 71, 108, 131–136 Flanders 36 Florence 20 Florida 39 France 11, 13, 17, 24–25, 27–30, 33, 35–38, 40–42, 46, 48, 54–58, 62–63, 65–67, 72, 82, 84–86, 88–92, 103, 125, 131–136 Frisia 42 Gallia 12 Geneva 21–22, 75–76 Genoa 14–16, 20, 24, 29, 44 Georgia 113, 118 German Democratic Republic (East Germany) 110, 113, 115, 123, 128 Germany 86, 29, 42, 54–58, 60–63, 65–67, 69–70, 72, 74, 83, 86, 88–90, 92, 103, 107–113, 115, 123, 125, 128, 131–136, 139, 147, 159 Gibraltar 11, 17, 36 Granada 19 Great Britain 8, 28, 30, 32, 36, 38–41, 43, 45–46, 48, 53–54, 56–58, 62–64, 66–67, 69, 71–73, 77, 82–83, 86, 89–90, 102, 108, 125, 127, 131, 138 Greater Antilles 19 Greece 72, 86–87, 125, 131–133, 135–136, 138, 159, 161 Greenland 13 Guadeloupe 23, 38 Guatemala 140 Gulf of Guinea 18

Hai Nan 154 Haiti 24 Hamburg 16, 134 Havana 36 Hispania 12 Hispaniola 24 Honduras 140 Hong Kong 121, 151, 159 Hudson Bay 36 Hungary 20, 41–42, 55–58, 61, 110, 112–115, 117–118, 123–124, 128–129, 131–135 Iberian Peninsula 11, 13, 19, 47–48 Iceland 13, 124 India 12, 15–16, 24, 26, 28, 30–31, 34, 38, 44, 49–50, 53, 82–83, 85, 147 Indian Ocean 15, 18 Indochina 55, 85, 89 Indonesia 34, 50, 85, 120, 151 Iran 108, 116 Ireland 28, 41–42, 91, 127–128, 131–133, 135–136, 159, 161 Israel 84, 93–94, 159 Istanbul 14 Isthmus of Panama 19 Italy 14–15, 17, 21, 29, 36, 42, 56–58, 60, 62, 66, 69, 72, 86, 89–90, 103, 112–113, 131–136, 139, 147 Jamaica 23–24, 35 Japan 8, 27, 34, 40, 50, 55, 58, 66, 69–70, 74, 81, 83, 94, 98, 101, 103, 112–113, 137, 140, 145–147, 150–152, 159, 161–162 Java 26 Jordan Valley 24 Karaikal 34 Kazakhstan 113, 118 Kingdom of Naples 13, 35 Kladno 48 Korea 50, 78, 83, 88–90, 120–121, 147, 151, 159 Kosovo and Metohija 124   Geographical Index      – 173 –

Kuibyshev 107 Kyrgyzstan 113, 118 Laos 85, 121 Latin America 19, 23, 26, 36, 49, 53, 82, 101, 140–141, 158 Latvia 113, 118, 124, 131–133, 135 Levant 24, 53 Liberia 161 Lithuania 113, 118, 124, 131–133, 135–136 London 16, 20, 28, 32, 37–38, 42, 49, 53, 62, 134 Lübeck 16 Lucca 15, 21 Luxembourg 20, 87, 89, 92, 125, 131–136 Lyon 42 Macedonia 15, 118, 124 Madagascar 55 Madeira 24 Madras 34 Malacca 18, 26 Malay Peninsula 26 Malaysia 120–121, 151 Malaysian 18, 85 Malmö 16 Malta 17, 24, 124, 131–133, 135–136, 138 Manchuria 147 Manila 19, 151 Martinique 23, 38 Massilia 11 Mediterranean 7, 11, 15–17, 20, 24, 36, 39, 44–45 Menorca 36, 39 Mexico 36, 119–120, 129, 140, 145–146, 151, 162 Middle East 24, 82, 93–94, 158 Midlands 42 Milan 35 Miquelon 38 Mississippi River 39 Moldova 113, 118 Moluccas 18–19, 26 Montenegro 124 – 174 –

Moravia 41–42 Moscow 68, 88, 107, 113, 115 Murmansk 108 Naples 13–14, 20, 35 Netherlands 20, 22–23, 25–27, 29–30, 34–35, 37, 42, 45, 47, 72, 85, 87, 89, 131–136 New Amsterdam 26 New Guinea 24, 26, 151 New York 9, 26, 101 New Zealand 8, 139, 151 Newcastle 43 Newfoundland 13, 36, 38 Nile 10, 24, 99 Nile Delta 24 North Africa 13, 18, 24 North Korea 78 North Sea 14, 25–26, 94 North Vietnam 85 Northern Germany 21 Northern Italy 21, 42 Norway 89, 137 Norwich 42 Nova Scotia 36 Novgorod 13, 16 Oran 17 Orkney Islands 13 Oruro 35 Ostrava 48 Pacific 19, 53, 151 Pacific Islands 47 Palermo 14 Palestine 11, 24 Panama 19, 36, 140 Papua New Guinea 151 Paraguay 122 Paris 21, 38, 42, 61, 71, 89, 109 Pasco 35 Pearl Harbour 68 Persia 17, 154 Persian Gulf 18

Peru 151 Philippines 19, 47, 85, 120, 151 Pisa 15 Poland 34, 47, 70, 108, 110, 112–114, 117–118, 123–124, 128–129, 131–136 Pondichéry 34 Port Arthur 147 Porto Bello 36 Portugal 18–20, 29, 31, 89, 131–133, 135–136, 161 Potosi 35 Prague 111, 114–115 PRC 146, 152, 155, 159–161, 163 Prussia 37–38, 41, 47–48, 55 Puerto Rico 24, 37, 47 Red Sea 12, 15, 17–18 Rhine 36, 42 Rhineland 88 Rhone estuary 42 Riga 16 Romania 60, 108, 113, 115–116, 118, 124, 127–128, 131–136 Rome 11–12, 91, 125–126, 147 Rotterdam 25–26, 30 Russia 12–13, 16, 31–34, 44, 47–48, 55–58, 61, 82, 94, 105, 118, 122, 128, 137, 147, 151–152 Russian Federation 113 Sagres 18 Saint Kitts 35–36 Santo Domingo 24 Sardinia 36 Saudi Arabia 151 Scandinavia 12–13, 16, 21, 26, 44, 87–88 Scotland 22, 32, 43, 134 Senegal 39 Serbia 15–16, 124 Shanghai 151, 154 Sheffield 43 Scheldt River estuary 30 Siam 18, 34, 50 Siberia 8, 34

Sicily 13–14, 20, 24, 36, 69 Silesia 37–38, 41–42, 48 Singapore 85, 121, 151 Slovakia 115, 117, 124, 129, 131–136, 138 Slovenia 116–118, 124, 131–133, 135–136 Small Antilles 19 Socotra 18 South Korea 78, 83, 120–121, 151, 159 South Sudan 161 South Vietnam 85 South West of England 43 Southeast Asia 24, 26, 69, 120, 148 Southern Netherlands 35 Southern Silesia 42 Soviet Union (USSR) 42, 65–66, 69–71, 78, 81, 85–87, 90, 103, 106, 108–111, 113–114, 128 Spain 8, 16–17, 19–20, 25–26, 29, 31, 34–38, 47–48, 131–136, 161 St. Martin 23 St. Petersburg 33 St. Pierre 38 Stettin 16 Strait of Gibraltar 11 Strait of Hormuz 18 Strasbourg 21 Sudan 161 Sumatra 26 Suriname 23 Sweden 26, 31–32, 34, 38, 48, 89, 131–133, 135, 138 Switzerland 61, 89, 137 Syria 24, 93 Taiwan 121, 147, 151, 161 Tajikistan 113, 117–118 Tana (Tanais) 14 Thailand 34, 120–121, 140 Thrace 15 Tigris 10 Tilsit 48 Timișoara 116 Tirana 116 Tobago 39   Geographical Index      – 175 –

Trinidad 23 Tunis 17 Turin 42 Turkey 15, 124, 137 Turkmenistan 113, 117 Tuscany 21, 35

Venice 14–17, 20, 29, 44 Vera Cruz 36 Veracruz 19 Vienna 38, 40, 47, 66, 134 Vietnam 74, 85, 103, 117, 121, 151 Visby 16

Ukraine 106, 108, 113, 118 United Arab Emirates 151 United States 8, 17, 25, 29, 39, 47–48, 53–56, 58–59, 61–64, 66–71, 75, 78, 80–82, 85–86, 93–94, 98, 101–102, 112, 137–140, 142–147, 151–154, 159–162 Urals 55 Uruguay 76–77, 122, 139 USA 32, 53–56, 62–63, 65, 67, 69, 71, 73, 80, 82, 85–86, 90, 98, 102–103, 107– 108, 110, 120, 137, 140–141, 145–147, 150–151, 154, 159–160, 162–163 Utrecht 23, 35, 134 Uzbekistan 113, 118

Warsaw 110–111, 115 Washington D.C. 72, 94 West Afrika 18, 55 West New Guinea 26 Western Belarus 108 Western Hispanola 23–24 Western Ukraine 108 Wittenberg 21

– 176 –

Yanam 34 Yorktown 39 Yugoslavia 110–111, 113, 116, 126, 128 Zambia 161 Zurich 86

Subject Index

advantage of net ownership 96 Alpine trails 15 American War of Independence 45 Amsterdam Treaty 127 Anti-Corn Law League 49 Asia-Pacific Economic Cooperation (APEC) 151 Atlantic Charter 71 autarky (also self-sufficiency) 62, 67, 78, 82, 92, 117, 129, 153 Axis Berlin-Rome-Tokyo 147 balance of payments 30, 62, 67, 74, 77, 119–121, 141 Bank of England 28, 33, 74 battle of Kosovo polje 15 battle of Hastings 14 battle of Manzikert 15

battle of Trafalgar 46 Bible 21, 45 Boston Tea Party 39 Bretton Woods System 8, 71, 74–75, 94 Brezhnev doctrine 111 British East India Company 30 Canada-US Free Trade Agreement 145 Casa del Contratación 31, 35 Church of England 27 Committee for European Economic Co-operation (COMECON) 71, 82, 103, 119, 123 Commodity Exchange 25 Common Agricultural Policy 90–92, 126, 130, 138–139, 162 Company of Merchant Adventures of London 28   Subject Index      – 177 –

Congress of Vienna 40, 47 continental blockade 40, 46–48, 66 Continental congress (1st and 2nd) 39 convergence in incomes 54, 67 convergence in prices 28–29, 51–52 cotton gin 43 Council of Europe 87, 103 Council of Ministers 92 Council of Trent 22 crawling peg 121 Crusader states 14, 15 crusades 14–15, 44 Crimean Tatars 24 Crimean War 55 Cultural Revolution 78, 152 Dawes Plan 62 Declaration of Independence and the Union 39 de-collectivisation 154 decolonisation 83–84, 93 de-étatisation 117 democratisation (in China) 153 depopulation 20, 60, 151 de-Stalinisation 111 division of labour 19, 43, 51, 63, 77–78, 85, 103, 117, 129 Dutch East India Company 26 Dutch West India Company 26 eclectic model of international production 95 enclosures 28 Entente Cordiale 57, 58 EU constitution 127 Europa Universalis (also Españolizar Europa) 20, 22 European Agricultural Fund for Rural Development 138 European Agricultural Guarantee Fund 138 European Atomic Energy Community 90–92, 103 European Central Bank 125, 137, 138 – 178 –

European Coal and Steel Community 88–90, 92, 103 European Commission 60, 79, 80, 92, 125, 136 European Convention on Human Rights 87 European Court for Human Rights 87 European Court of Justice 92, 128 European Defence Community 89 European Economic and Monetary Union 130 European Economic Community (EEC) 89, 90–92, 103, 131, 133, 137, 139 European Financial Stability Facility 136 European Investment Fund 90 European Monetary Institute 137 European Monetary System 137 European Monetary Union (EMU) 75, 93, 125–126, 130, 133, 137–138, 161, 162 European Parliament 92, 126, 129 European Recovery Program 71 European Stability Mechanism 136 European Union (EU) 8, 79, 92, 94, 98, 104, 119, 123–124, 126–140, 145–146, 151, 154, 159–162 Exchange Rate Mechanism 125 factory of the world 49 fall of Constantinople 15, 20, Federal Emergency Relief Administration 64 Federal Reserve 63, 64 first fertility transition 60 first wave of globalization 8, 52, 54, 57–58, 67 First World War 39, 41, 53–54, 56–60, 62–63, 65, 67, 69, 71, 73, 84, 91, 93, 102, 142 five-year development plans 107 Five-Year Plan 65, 154–155, 158, 163 fixed exchange rate 74–75, 120–121 floating exchange rate 75, 120, 122

foreign direct investment (FDI) 83, 95, 96–101, 103, 120–121, 141, 146, 152, 155–157 four modernisations programme 153 fourth Arab-Israeli War 93 Free Trade Association 90 French East India Company 34 French Revolution 33, 40 Fukuda doctrine 151 Fulton’s steamer 44 General Agreement on Tariffs and Trade (GATT) 75–77, 80, 87, 103, 139, 145, 160 German hyperinflation 62 glasnost 113 division of labour 19, 51, 63, 77–78 global economy (also world economy) 7–8,10, 16, 19–20, 23, 40, 44–46, 48–55, 81–83, 93–95, 103–104, 113, 130, 158, 161–163 globalization 8, 50–52, 54, 57–58, 67 Glorious Revolution 28 gold standard 61, 63, 67, 73 gradual method 117 Great Crash 62, 64 Great Depression 8, 62–66, 73, 107, 142 Great Leap Policy 152 Great Northern War 32, 34 Great Society 74 Greek-Punic wars 11 gunboat diplomacy 50, 77 Hanse 16, 17, 25, 28, 45 High Representative of the Union for Foreign Affairs and Security Policy 128–129 Holy Land 14 Importation Act (also Corn Laws) 49, 67 industrial revolution 8, 11, 20, 28, 41, 43–45, 47, 49, 50–53, 57, 155 interdependence 52, 58, 151 International Centre for Settlement of Investment Disputes 72

International Development Agency 72 International Financial Corporation 72 International Monetary Fund (IMF) 73–75, 93–94, 103, 120–123, 136–137, 140, 161 invasion to Czechoslovakia 111 Iranian revolution 94 Iron Curtain 86, 109, 115 Joint Nordic Committee for Cooperation 87 keiretsu 147 Korean War 89, 90, 147 laissez-faire 43 League of Armed Neutrality 39 Lend-Lease Act 69, 108 liberalisation 83, 111, 117, 120–121, 146, 152, 160 liberalism 30, 32–33, 43, 45, 62–63, 67, 78, 102 long-distance trade 10, 13, 20, 44, 51, 67 Maastricht Treaty 92, 104, 126–127, 137, 162 market economy 51, 97, 101, 105, 116–117, 153, 155, 159, 163 market socialism 111, 116 Marshall Plan 71–72, 82–83, 86–88, 102, 109 Marxism 102, 105 Marxism-Leninism 105 mass privatisation 117 Meiji 146 mercantilism 30–33, 36, 45, 49, 67, 77, 98, 102, 103 mercantilist measures (also mercantilist policies) 28, 31, 39, 50, 53, 55 middle-income trap 158 Molotov-Ribbentrop Pact 108–109 monopoly 11, 15, 18, 27–32, 50, 51–52, 54, 79, 96   Subject Index      – 179 –

Multilateral Investment Guarantee Agency 72 multinational corporations (MNCs) 70, 81–82, 93, 95–102, 103, 159

protectionism 62, 67, 78–79, 90, 101, 160 putting-out system 42–43

Napoleonic wars 38, 40, 46, 49, 57, 66, 70, 102 nation of grocers 49 National Recovery Administration 64 nationalisation 82, 106 naval power 26, 30, 36, 38, 49, 57 Naval Store Bills 32 Navigation Acts 31, 32, 48, 50 neo-mercantilism 63, 67, 77, 102 New Deal 64, 67 new economic geography 99 New Economic Policy 105, 106 Nice Treaty 127 North American Free Trade Agreement (NAFTA) 119, 145, 162 North Atlantic Alliance (NATO) 87, 124

reconquista 19 rent-seeking 51, 52

OECD 71, 102, 119, 120, 124 oil crises 8, 78, 93, 94, 100, 104, 133 one-child policy 156 open-door policy 153, 163 Organization of the Petroleum Exporting Countries (OPEC) 93 Osaka Action Programme 152 Pacific Development Cooperation 151 Parliamentary Assembly 87 Pax Americana 8, 81, 95–96, 102, 103 Pax Britannica 8, 46, 49, 58, 62, 65 Pax Romana 11, 44, 49 perestroika 113, 114 Permanent President of the European Council 128 Potsdam international Conference 86, 109 Pragmatic Sanction 37 Prague Spring 111, 114 price revolution 20 privatisation 98, 100, 117, 122 – 180 –

quotas 52, 78, 80, 94, 106, 139

Schengen Agreement 127 Schuman Plan 88 scorched earth policy 108 second fertility transition 60 Second World War 53, 56, 59, 61, 64, 65–68, 70, 77, 82, 84–85, 91, 93, 102, 106, 108, 113, 123, 142, 146–148, 151–152, 162 Sengoku Jidai 27, 34 Seven Years War 8, 34, 38, 39, 57 shock therapy 117, 124, 129 shortage economy 113, 117 Silk Road 14–15, 17 single market (also Single European Act) 11, 44, 51, 90, 92, 101, 104, 124, 127, 145 Smithsonian Agreement 74 Smoot and Hawley’s Customs Tariff 63 Solidarity (Solidarność) 110, 114 Special Drawing Rights 75, 94 Splendid Isolation 57 Stamp Act 38 steam engine 41, 43–44 Stephenson’s locomotive 43 Suez Crisis 84, 90, 91 tariffs 30, 39, 53, 61, 67, 75–76, 80, 87, 93, 103, 138–140, 145, 151, 160, 162 tax of solidarity 124 Taylorism 110 Tennessee Valley Authority 64 the Treaty of Tordesillas 34 the Tsars 33 theory of product life cycle 95 Thirteen colonies 8, 32, 38 Thirteen Years War 34 Thirty Years’ War 23

three-field crop rotation 40 Time of Troubles 34 Tokugawa shogunate 34 transformation 51, 56, 60, 77, 113–114, 116–117, 119, 123–124, 129, 155 Treaty of Lisbon 126, 128–129 Treaty of Rome 91, 126 Treaty of Versailles 39, 65 Triangular trade 24 Triple Alliance 57, 58 Triple Entente 57, 58 Union of European Federalists 87 Union of Utrecht 23 United Nations 71, 102 UNRRA 71, 86, 102 Uruguay Round 76–77, 139 Vietnam War 74 Vikings 13, 16, 44 voucher method 117

Wall Street Crash 63 War of Communism 105 War of the Spanish Succession 35 wars in Iraq 143 Warsaw Pact 110–111, 115 Western European Union 89 Winter War 108 Work Project Administration 64 World Bank 72, 103, 133, 154–156 World Bank Group 72 world trade 8, 25, 50, 53–55, 58, 66, 73, 75, 77–78, 80, 101, 103, 146, 152–153, 159, 163 World Trade Organization (WTO) 75, 76–78, 80–81, 103, 130, 137–140, 145, 151–152, 159–160, 162, 163 World War I (see First World War) World War II (see Second World War) zaibacu 146, 147

  Subject Index      – 181 –