Section 14. Current of the World Economy
The year 1971 was an epoch-making year in the postwar history of the world economy. President Nixon's announcement on August 15 of the suspension of the convertibility of the U.S. dollar into gold and the imposition of an import surcharge dealt a blow to the IMF and the GATT, respectively. As a result, the Bretton Woods arrangement which had supported the postwar world economy, was deeply affected. The direct cause that brought about such a situation can be found in the efforts of the United States to take its own measures to cope with the aggravation of its international payments position by making a major shift from its past policies. Needless to say, the relative importance of the U.S. economy lessened as a result. In other words, 1971 can be regarded as a year that saw clearly the relative lowering of the economic power of the United States, moves toward the expansion and strengthening of the EC, enhancement of Japan's economic standing, and the narrowing of the gap in economic power between the United States on the one hand and the EC and Japan on the other.
Thus, the postwar world economy, which had developed under the Bretton Woods arrangement with the United States as the main driving force, was subjected to a serious trial. Future developments of the world economy will be determined by the establishment of a new currency and trade system which is now being sought.
The turning-point in the world economy mentioned above came in a situation where stagflation had been in progress in the advanced capitalist countries as a whole. Moreover, international transactions became unstable because of the flotation of currencies adopted by key countries as a result of the suspension of the convertibility of the U.S. dollar into gold, thereby causing a great delay in the recovery of business except in a few countries. Needless to say, one of the major objectives of the multilateral currency realignment at the end of the year was to eliminate the currency unrest, thereby creating conditions necessary for stable international transactions.
The year 1971 was one of trials for the developing countries as well. The developing countries suffered a direct blow because of the imposition of the import surcharge and the cut in U.S. foreign aid under the new U.S. economic policy, and the instability of the currency and trade arrangements caused by the new economic policy seriously damaged the developing countries which occupy a very weak position in the world economy. It is expected that the developing countries will endeavor to establish a world economic order which can secure their own interests with the third UNCTAD opening in April 1972 as the start.
As for the communist countries, both the Soviet Union and the People's Republic of China made smooth progress throughout 1971. But the restlessness of the economies of capitalist countries in the latter half of 1971 considerably affected the communist countries whose trade with the West had increased. It is expected that the interrelation between the economic systems of both camps will increase with the further easing of tensions between the East and the West.
1. Business trends
In 1971, the world economy, centering around the advanced countries, was troubled by sluggish business and inflation, and because of the business stagnation in the advanced countries the exports of the developing countries did not grow so well and the tempo of their economic growth was slowed. Among the communist countries, both the Soviet Union and the People's Republic of China maintained more or less steady growth rates.
(1) Advanced nations
(a) Business stagnation
The real economic growth rate of the OECD members in 1971 is estimated to have been 3.5 per cent, which is higher than the 2.7 per cent in 1970. This can solely be attributable to the U.S. economy whose growth rate increased from a minute 0.7 per cent in 1970 to about three per cent in 1971, since the rates of growth in other major countries were lower than those in 1970.
Although the United States had taken measures to ease money since early 1970 ahead of other major advanced countries, the business recovery was weak. Business turned towards a tone of expansion at last in 1971 because of such factors as the averting of a strike by GM workers and the purchase of steel materials for stockpiling in anticipation of a strike by steel workers in August. But private investment in plant and equipment did not increase because the unemployment rate remained unimproved, and the operational rate of the manufacturing industries stayed at a low level of about 75 per cent through the first half of 1971. It is believed that personal consumption and private investment in housing particularly helped business to recover in 1971. The Canadian economy showed signs of recovery toward the end of 1970 as a result of positive expansionist measures taken simultaneously with the flotation of its currency in June 1970, but the unemployment rate still remained above six per cent because of the effects of the U.S. economy.
Business turned upward in 1971 in North America, although its recovery was weak. But business in European countries and Japan in 1971 was stagnant, and the rate of economic growth of major countries, except France, dropped to half or even below half the average of the 1960s. Enterprises affected by the international monetary unrest generally refrained from making new investments because of psychological uneasiness. There was a lack of enthusiasm for investment partly because equipment tended to be in surplus as a result of equipment investments accumulated during the long period of prosperity in the 1960s. By country, the rate of economic growth in the Federal Republic of Germany was a low 3.5 per cent, and the industrial operational rate dropped further because orders received tapered off after the flotation of the mark in May and the labor demand-supply position eased, In France, business recovered at the end of 1970, and personal consumption, housing construction and export demand increased in the first half of 1971. Its gross national product expanded smoothly at an annual rate of 5.5per cent. In Italy, the social unrest caused by the intensification of labor disputes since 1970 remained unsettled and general business stagnation continued in 1971. Its gross national product grew at an annual rate of only 0.5 per cent. In Britain, unemployment increased substantially in the latter half of 1970. Despite large-scale financial measures to stimulate business taken in April 1971, including a tax cut, Britain's unemployment rate was 4 per cent, the highest in the postwar years, and the annual growth rate of its gross national product stood at only 1.5 per cent.
(b) Continued inflation
Although the economic growth rate of the OECD member countries was generally low, the trend of price increases since 1968 remained unabated in 1971. The GNP deflator of the OECD members as a whole was about five per cent, a slight improvement compared with the six per cent of the preceding year, partly because of various measures to curb prices taken by the United States in 1971. The improvement can be attributed to a fall in the prices of raw materials.
The global inflation from 1968 through the first half of 1970 was characterized by a great advance in wholesale prices. The tempo of wholesale price increases slowed down in the latter half of 1970.
In the United States, price increases since 1968 caused by excessive demand created for both labor and management a fixation on inflation psychology, Inflation was deep-seated because of such factors as the creation of a pattern in determining wages by anticipating price increases and nonproductive government purchases which have remained on a high level for a long time.
Inflation in the United States seriously affected inflation in other advanced countries through trade and short-term capital movements, and it is believed that major economic powers in states of inflation affect each other.
In Britain, the vicious cycle of wages and prices remained deeply seated, and the rate of increase of the deflator increased from 7.3 per cent in 1970 to 10.4 per cent in the first quarter of 1971. In Japan, the rate of increase of the deflator slowed down a little. But consumer price increases continued to be conspicuous.
(2) Communist bloc
While business was generally stagnant in the free economic bloc, production generally increased smoothly in the communist bloc countries.
The Soviet economy in 1970 rid itself of the effects of unseasonable weather in 1969 and emphasis was put on the mining and manufacturing industries, partly because it was the 100th anniversary of the birth of Lenin, and the Soviet Union's national income increased 8.5 per cent, which exceeded the planned level. Industrial production continued to expand comparatively smoothly in 1971, and it increased 8.5 per cent during the first half of 1971 over the corresponding period of the preceding year. Production increased substantially in the machinery and chemical industries in particular. Although agricultural production reportedly fell short of the 1970 level because of poor weather conditions, the grain and cotton crops were good.
In the People's Republic of China, the confusion caused by the Cultural Revolution settled down and industrial production in 1969 almost recovered the pre-Cultural Revolution level as a result of policies that gave priority to the economy. It seems that not only industrial production but also production in other sectors also returned to the pre-Cultural Revolution level in 1970. In 1971, the People's Republic of China launched its fourth five-year plan, and it is believed that industrial production increased 10 to 15 per cent over 1970. Production of steel, machinery, chemical fertilizers and cotton yarn and cloth was particularly good. Agricultural production remained good for the 10th year in a row, while the production of not only food but also cotton and other industrial raw materials also was reportedly good.
In the East European countries, industrial production was stagnant due to unseasonable weather. It seems that industrial production in East Germany and some other countries tapered off in 1971 and fell short of the planned level. In Czechoslovakia and Hungary, agricultural production was good.
(3) Developing countries
The economies of the developing countries, which made comparatively smooth progress in the latter half of the 1960's because of increased agricultural production caused by the so-called "green revolution" and progress in industrialization, were affected by the business stagnation in the advanced countries in 1970, and their economic growth slowed down due to a tapering off in exports. Business in the advanced countries still did not recover satisfactorily in 1971, and prices of primary products on which the developing countries depended, such as cocoa, coffee, copper, rubber and tin, dropped, reflecting a fall in demand from the advance countries. And there was a tendency for the expansion of production in the developing countries to slowdown as a whole.
2. Trends in world trade
World trade, which had increased greatly since 1968, began to evidence a slowdown in the rate of increase at the end of 1970. In 1970, imports into major countries greatly increased thanks to increased consumption in the United States and other factors, and trade in the free world registered a high 14 per cent increase in nominal terms. But the rate of increase fell to 12.5 per cent in the first quarter of 1971 and 10.3 per cent in the second quarter.
Export prices continued to rise rapidly, registering 2.9 per cent in 1969 and 5.7 per cent in 1970. (The annual rate of increase of world trade in real terms dropped from 13.2 per cent in the boom year of 1968, to 9.4 per cent in 1969 and 8.6 per cent in 1970). Although world trade in 1971 increased more than 10 per cent in terms of value, it is believed that the increase was largely due to increased export prices, and that the real rate of increase in the first half of 1971 was about 7.5 per cent, which is lower than that in the preceding year. Although business in North America seemed to have turned upward in 1971, business in Europe and Japan remained stagnant. It is believed that the rate of increase of world trade slowed down further in the latter half of 1971 because of the new U.S. economic measures and the international monetary unrest. The rate of increase of trade in the OECD member countries in 1971 is believed to have been six per cent over the preceding year in real terms, a rate much lower than the nine per cent in 1970. By region, imports into the United States increased as business recovered in that country in 1971, and imports particularly increased substantially in the second quarter of 1971 because of such factors as imports for stockpiling in anticipation of a steel strike and also the effects of strikes by longshoremen. In Europe, imports tapered off in the latter half of 1970 through 1971 as a result of the business stagnation, and the rate of increase in imports slowed down. In Japan, the rate of increase in imports slowed down rapidly in 1971.
East-West trade showed that transactions between the OECD countries on the one hand and the Soviet Union and Eastern Europe on the other increased further in 1970 after a big increase registered in 1969. (Exports increased 12.2 per cent while imports increased 9.9 per cent.) East-West trade temporarily slowed down in early 1971 because of a decline in imports into the OECD countries from East Europe, a sharp drop in exports from West European countries to East European countries due to the completion of five-year plans of the latter and also because of the People's Republic of China's efforts to correct its excess of imports over exports. However, it seems that East-West trade headed for recovery in 1971, partly because of the start of new five-year plans in the East European countries, with the easing of tensions between the East and the West as the background.
3. International monetary situation
The IMF system, which had supported the postwar development of the world economy in the monetary field. came to a major turning-point in 1971. The measure to suspend the convertibility of the U.S. dollar into gold announced by President Nixon on August 15 upset the foundation of the gold-dollar standard which had formed the basis of the IMF system. Since various countries lost the basis on which to intervene in foreign exchange markets in their countries as a result, they all floated their currencies. In postwar international monetary history, Canada floated its dollar from 1950 to 1962 and also from June 1970 onward by going off the principle of the fixed parity, a basic principle for adjusting currencies under the IMF system, followed by Germany and the Netherlands which floated their currencies on May 10, 1970. But the currencies of the major countries had never been floated all at once, and the flotation of all major currencies in 1971 revealed that, of the three elements of the monetary system, namely, "confidence," "adjustment" and "liquidity" the first two had become fragile or bankrupt.
Lying behind the drastic measures taken by the United States in disregard of its national prestige was the chronic aggravation of its international payments position, especially the decrease of its gold reserves. In the several subsequent negotiations with major countries on the currency issue, the United States consistently called for the cooperation of other countries in its efforts to improve its international payments position.
After many twists and turns, a multilateral currency realignment to put an end to the flotation of the currencies of most major countries, which was "an abnormal situation," was realized at the conference of the Group of the Ten finance ministers in Washington on December 18. But the agreement was only on the exchange rates between the currencies of different countries, and the basic points concerning future international monetary arrangements are yet to be solved. Although the multilateral currency realignment eliminated the international currency unrest for the time being and temporarily provided those conditions for a new base on which international transactions can develop, the currency unrest cannot be eliminated completely unless some drastic reform is undertaken to eliminate the chronic imbalance in the international payments of various countries.
The international monetary crisis which was precipitated by the United States measure to suspend the gold-dollar convertibility was, of course, not a sudden development. It occurred as an extension of the international currency unrest in May in Europe, particularly in the Federal Republic of Germany, resulting from the worsening of the United States international balance of payments position which had been continuing from the previous year. It can be said that the crisis could be even traced back to the international currency unrest that arose since the pound sterling crisis of 1967 and that it had now appeared in a concentrated form.