Ch 3The Making of a Global World

Chapter 3: The Making of a Global World

Globalisation is often thought of as a purely modern economic phenomenon, but the making of the global world has a long history — of trade, migration, people in search of work, and the movement of capital. This chapter traces that history in four phases.

3. The Inter-war Economy (Board Exam)

Wartime Transformations — the First World War (1914-18)

• The war was fought between two power blocs: the Allies (Britain, France and Russia, later joined by the US) and the Central Powers (Germany, Austria-Hungary and Ottoman Turkey).
• It was the first modern industrial war — machine guns, tanks, aircraft and chemical weapons were used on a massive scale; millions of soldiers were recruited and transported by ships and trains.
• 9 million dead and 20 million injured — most of them men of working age, which reduced the able-bodied workforce in Europe and household incomes declined.
• Industries were restructured to produce war-related goods, and societies were reorganised for war — men went to battle, women stepped in to undertake jobs earlier done by men.
• The war transformed the US from an international debtor into an international creditor — the US and its citizens now owned more overseas assets than foreigners owned in the US.

Post-war Recovery: Britain's Decline

• Britain, the world's leading pre-war economy, faced a prolonged crisis. While Britain was preoccupied with the war, industries had developed in India and Japan; Britain now found it difficult to recapture its dominance in the Indian market and to compete with Japan internationally.
• Britain was burdened with huge external debts borrowed from the US.
• The war-time boom ended in an anxious contraction: in 1921 one in every five British workers was unemployed.
• Agricultural economies were also in crisis — e.g. wheat: when Eastern European supplies were disrupted during the war, Canada, America and Australia expanded production; after the war Eastern European production revived, creating a glut, falling grain prices, declining rural incomes and farmer indebtedness.

Rise of Mass Production and Consumption in the US

• The US recovered quicker; mass production became a characteristic feature of the US economy in the 1920s. Its pioneer was car manufacturer Henry Ford, who adapted the assembly line of a Chicago slaughterhouse to his new car plant in Detroit.
• The assembly line forced workers to repeat a single task at the pace set by the conveyor belt, greatly increasing output per worker. The 'T-Model' Ford was the world's first mass-produced car.
• Ford doubled the daily wage to 5 dollars in January 1914 to stop workers from quitting — and recovered the cost by speeding up the line and banning trade unions. He called this his "best cost-cutting decision".
• Lower costs and prices of engineered goods led to a housing and consumer boom; workers could now afford cars, refrigerators, washing machines — purchased through 'hire purchase' (instalments paid in weekly or monthly credit).
• Large investments in housing and household goods created a cycle of higher employment and incomes; in 1923 the US resumed exporting capital to the rest of the world and became the largest overseas lender, boosting European recovery and world trade for the next six years.

The Great Depression (1929 - mid-1930s)

During this period most parts of the world experienced catastrophic declines in production, employment, incomes and trade. Agricultural regions and communities were worst hit, as agricultural prices fell more sharply than industrial prices. Causes:

1. Agricultural overproduction: falling agricultural prices meant lower farm incomes; farmers tried to expand production to maintain incomes, which pushed even more produce into the market, pushed prices down further, and farm produce rotted for lack of buyers.
2. Withdrawal of US loans: in the mid-1920s many countries financed their investments through US loans. In the first half of 1928 US overseas loans were over $1 billion; a year later they were one quarter of that. Countries dependent on US loans faced acute crisis — banks collapsed and currencies crashed in Europe (e.g. the sterling), and agricultural and raw-material prices slumped in Latin America.
3. US protectionism: the US attempt to protect its economy by doubling import duties dealt another severe blow to world trade.

The US itself was severely hit: with falling prices and depression looming, banks slashed domestic lending and called back loans. Farms could not sell harvests, households were ruined, businesses collapsed; people were forced to give up homes, cars and consumer durables. By 1933 over 4,000 US banks had closed, and between 1929 and 1932 about 110,000 companies collapsed. A modest recovery came only by 1935.

India and the Great Depression

• The depression immediately affected Indian trade: India's exports and imports nearly halved between 1928 and 1934.
• As international prices crashed, prices in India plunged: between 1928 and 1934 wheat prices in India fell by 50 per cent.
• Peasants and farmers suffered more than urban dwellers. Though agricultural prices fell sharply, the colonial government refused to reduce revenue demands.
• Jute producers of Bengal: they grew raw jute processed for export as gunny bags; as gunny exports collapsed, raw jute prices crashed more than 60 per cent. Peasants who had borrowed in the hope of better times fell deeper into debt.
• Peasants used up savings, mortgaged lands, and sold jewellery and precious metals. India became an exporter of precious metals, notably gold. Economist John Maynard Keynes thought Indian gold exports promoted global economic recovery, and they certainly helped speed up Britain's recovery — but did little for the Indian peasant.
• Rural India was seething with unrest when Mahatma Gandhi launched the Civil Disobedience Movement at the height of the depression (1931).
• Urban India was less affected: those with fixed incomes found themselves better off as prices fell, and industrial investment grew as the government extended tariff protection to industries under nationalist pressure.

4. Rebuilding a World Economy: The Post-war Era (Board Exam)

The Second World War (1939-45) and its Effects

• Fought between the Axis powers (Nazi Germany, Japan, Italy) and the Allies (Britain, France, the Soviet Union and the US).
• At least 60 million people (about 3 per cent of the world's 1939 population) were killed — more civilians than soldiers died; vast parts of Europe and Asia were devastated; economic and social disruption was immense.
• Two crucial influences shaped post-war reconstruction: the emergence of the US as the dominant economic, political and military power of the Western world, and the dominance of the Soviet Union, which had defeated Nazi Germany and transformed itself into a world power.

Post-war Settlement and the Bretton Woods Institutions

• Economists and politicians drew two lessons from inter-war economic experiences: (1) an industrial society based on mass consumption needs stable incomes, which require steady, full employment — governments must intervene to minimise fluctuations of price, output and employment; (2) full employment requires government control over flows of goods, capital and labour.
• The United Nations Monetary and Financial Conference was held in July 1944 at Bretton Woods in New Hampshire, USA, to preserve economic stability and full employment in the industrial world.
• It established the International Monetary Fund (IMF) — to deal with external surpluses and deficits of member nations — and the International Bank for Reconstruction and Development (World Bank) — to finance post-war reconstruction. The IMF and World Bank are called the Bretton Woods twins; they commenced financial operations in 1947. The US has an effective right of veto over key decisions of both.
• The Bretton Woods system was based on fixed exchange rates: national currencies were pegged to the US dollar at a fixed rate, and the dollar itself was anchored to gold at a fixed price of $35 per ounce.
• The Bretton Woods system inaugurated an era of unprecedented growth for the Western industrial nations and Japan (1950-70): world trade grew over 8 per cent annually, incomes at nearly 5 per cent, unemployment averaged less than 5 per cent, and technology and enterprise spread worldwide.

Decolonisation, Development and the G-77

• Over the two decades after the war, most colonies in Asia and Africa became free, independent nations, but they were overburdened by poverty and long periods of colonial exploitation.
• The IMF and World Bank, designed for the industrial countries, shifted attention towards developing countries from the late 1950s — but former colonial powers and international agencies often continued to control vital resources (as with US corporations and colonial-era concessions).
• Even after growth in Western economies, most developing countries did not benefit; therefore they organised themselves into the Group of 77 (G-77) to demand a New International Economic Order (NIEO) — a system that would give them real control over their natural resources, more development assistance, fairer prices for raw materials, and better access for their manufactured goods in developed countries' markets.

End of Bretton Woods and the Beginning of 'Globalisation'

• From the 1960s the rising costs of the US's overseas involvements weakened its finances and the dollar's ability to maintain its value in gold. The system of fixed exchange rates collapsed in the 1970s and was replaced by floating exchange rates.
• From the mid-1970s the international financial system changed: developing countries could no longer easily obtain funds from international institutions and were forced to borrow from Western commercial banks, leading to periodic debt crises (especially in Africa and Latin America), lower incomes and increased poverty.
• Industrial unemployment rose in the West from the mid-1970s; MNCs (multinational corporations) began to shift production to low-wage Asian countries.
• China, cut off from the post-war world economy since its 1949 revolution, adopted new economic policies and returned to the world economy. Low wages in countries like China made them attractive destinations for foreign investment (e.g. TVs, mobile phones, toys made with low-cost Asian labour).
• The relocation of industry to low-wage countries stimulated world trade and capital flows. In the last two decades countries such as India, China and Brazil have undergone rapid economic transformation.

Timeline of Important Dates and Events