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The New Reality of the World Economy
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14228 |
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CURRENT ISSUES
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7 / 1988 |
2,991 Words |
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Penelope Hartland-Thunberg
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Most Americans over the age of 30 are aware that their country's position in the world has changed drastically over their lifetime, and not for the better. Most are discomfitted by this awareness but are unsure why it happened or what the implications of the deterioration may be. The shock produced by the transformation of the United States from a sustained position as the world's largest creditor to the role of world's largest debtor in three and a half years has been numbing; the contrast with the world of their childhood has become stark.
Looking back, it is clear that the deterioration of the world position of the United States was to some degree inevitable, to some degree the consequence of external shocks, to some degree the result of inadequate policy responses to changed circumstances, and probably to some degree due to complacency bred of past accomplishments. Important as it is, an explanation of the past 40 years is less important than an examination of what the next four decades are likely to hold for the United States. How do we stop the deterioration? What is required to reverse it?
At the end of World War II the United States was, by default, the largest, most vibrant and potent economy in the world. Because the productive capacities of Europe and Japan had been decimated during the hostilities, the U.S. share of world GNP (at over one-third) was something of a fluke that the United States, through the Marshall Plan and other similar programs, worked to correct. It was important to the political and strategic goals of the United States, as well as to the rest of the world, that others recover quickly and become able to support themselves at their prewar standard of living as soon as possible. By 1970 the U.S. share of global output had declined to 25 percent because over the previous two decades the world grew at an average rate of over 5 percent while the United States itself was growing at a healthy 3.8 percent.
The Shocks of the 1970s
The 1970s were a decade of trauma for the world, marked by three severe economic shocks. The early 1970s saw a basic discontinuity in world economic affairs generated by two successive jolts: the shift from fixed to fluctuating exchange rates during 1971-73 and the first oil price escalation in 1973-74. The collapse of the Bretton Woods-based international financial system was precipitated by mounting U.S. balance-of-payments deficits, especially during the 1960s, and an accompanying decline in U.S. gold reserves. The latter, which in 1950 had been more than three times the level of dollar claims held by foreigners, fell to less than 15 percent of those claims by 1971. The resulting depreciation of the dollar together with the quadrupling of the price of oil abruptly altered the terms of trade between the United States and the rest of the world. U.S. export prices dropped while import prices, heavily weighted by sizable U.S. oil imports, rose precipitously. To import the same quantities, the United States was required to export in much larger volume than before 1970. Almost overnight the U.S. economy--and those of other large oil importers--had become considerably less productive because world markets placed lower values on U.S. goods and higher values on goods produced elsewhere.
The world today would be a very different place if the second oil price escalation in 1979 had not happened. By that year the inflationary consequences of the first oil
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