The Making of a Global World
Rebuilding the world economy
Explain how the post-war world economy was built and how globalisation began.
The Second World War. Fought between the Axis (Nazi Germany, Italy, Japan) and the Allies (the US, the Soviet Union, Britain, France) for six years. At least 60 million people died, roughly 3 per cent of everyone alive in 1939, and, unlike earlier wars, more civilians than soldiers. Two powers shaped what came after: the US, now dominant in the West, and the Soviet Union, which had become a world power.
Two lessons from the inter-war years.
- Mass production needs mass consumption. People can buy only if incomes are high and stable, which needs full employment. Markets alone cannot guarantee that, so governments must step in to steady prices, output and jobs.
- To keep full employment, governments need the power to control the flow of goods, capital and labour across borders.
Bretton Woods (July 1944). At a UN conference at Bretton Woods in the USA, countries agreed on a new system to keep the industrial world stable with full employment:
- the International Monetary Fund (IMF), to handle the trade surpluses and deficits of member countries;
- the World Bank (International Bank for Reconstruction and Development), to finance rebuilding after the war.
They began work in 1947. Western powers control their decisions, and the US has an effective veto. Currencies were fixed to the dollar, and the dollar to gold at $35 an ounce.
The golden years. The Bretton Woods system brought record growth for Western countries and Japan: world trade grew over 8 per cent a year from 1950 to 1970, and incomes nearly 5 per cent, with low unemployment. Developing countries rushed to catch up, importing modern machinery.
Free, but still poor. After the war, most colonies in Asia and Africa became independent, but they were burdened with poverty and the damage of colonial rule. The IMF and World Bank, designed for rich countries, turned to developing countries from the late 1950s. Ironically, the new nations now took advice from agencies run by their former rulers, and former colonial powers and big foreign companies still controlled much of their minerals and land. So developing countries joined together as the Group of 77 (G-77). They asked for a New International Economic Order (NIEO): real control over their resources, more development aid, better prices for their raw materials, and easier entry for their goods into rich countries' markets.
MNCs (companies working in many countries) spread widely in the 1950s and 1960s; high import tariffs pushed them to set up factories inside many countries.
The end of Bretton Woods and the start of globalisation.
- From the 1960s, costly overseas commitments weakened the US; the dollar could no longer hold its value against gold. Fixed exchange rates collapsed and floating rates (set by supply and demand) came in.
- From the mid-1970s, developing countries had to borrow from Western commercial banks, which led to debt crises and more poverty, especially in Africa and Latin America.
- Unemployment rose in the industrial world, and from the late 1970s MNCs moved factories to low-wage Asian countries.
- China, cut off since its revolution in 1949, rejoined the world economy, as did Eastern Europe after the Soviet Union collapsed. That is why so many TVs, phones and toys are made in China: low wages.
In recent decades, India, China and Brazil have changed rapidly, reshaping the world economy.
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