The changing world economy since 1900- 1 | UPSC Mains: World History PDF Download

Changes In The World Economy Since 1900

In one sense, in 1900 there was already a single world economy. A few highly industrialized countries, mainly the USA, Britain and Germany, provided the world’s manufactured goods, while the rest of the world provided raw materials and food (known as ‘primary products’). The USA treated Latin America (especially Mexico) as an area of ‘influence’, in the same way that the European states treated their colonies in Africa and elsewhere. European nations usually decided what should be produced in their colonies: the British made sure that Uganda and the Sudan grew cotton for their textile industry; the Portuguese did the same in Mozambique. They fixed the prices at which colonial products were sold as low as possible, and also fixed the prices of manufactured goods exported to the colonies as high as possible. In other words, as historian Basil Davidson puts it: ‘the Africans had to sell cheap and buy dear’.
The twentieth century brought some important changes:

(a) The USA became the dominant industrial power and the rest of the world became more dependent on the USA
In 1880 Britain produced roughly twice as much coal and pig iron as the USA, but by 1900 the roles had been reversed: the USA produced more coal than Britain and about twice as much pig iron and steel. This growing domination continued right through the century: in 1945, for example, incomes in the USA were twice as high as in Britain and seven times higher than in the USSR; during the next 30 years, American production almost doubled again. What were the causes of the American success?

The First World War and after
The First World War and its aftermath gave a big boost to the American economy. Many countries which had bought goods from Europe during the war (such as China and the states of Latin America) were unable to get hold of supplies because the war had disrupted trade. This forced them to buy goods from the USA (and also Japan) instead, and after the war they continued to do so. The USA was the economic winner of the First World War and became even richer thanks to the interest on the war loans it had made to Britain and her allies. Only the USA was rich enough to provide loans to encourage German recovery during the 1920s, but this had the unfortunate effect of linking Europe too closely with the USA financially and economically. When the USA suffered its great slump (1929–35), Europe and the rest of the world were also thrown into depression. In 1933, in the depth of the depression, about 25 million people were out of work in the USA and as many as 50 million in the world as a whole.

The Second World War
The Second World War left the USA the world’s greatest industrial (and military) power. The Americans entered the war relatively late and their industry did well out of supplying war materials for Britain and her allies. At the end of the war, with Europe almost at a standstill economically, the USA was producing 43 per cent of the world’s iron ore, 45 per cent of its crude steel, 60 per cent of its railway locomotives and 74 per cent of its motor vehicles. When the war was over, the industrial boom continued as industry switched to producing consumer goods, which had been in short supply during the war. Once again, only the USA was rich enough to help western Europe, which it did with Marshall Aid. It was not simply that the Americans wanted to be kind to Europe: they had at least two other ulterior motives:

• a prosperous western Europe would be able to buy American goods and thus keep the great American wartime boom going;
• a prosperous western Europe would be less likely to go communist.

(b)  After 1945 the world split into capitalist and communist blocs

• The capitalist bloc consisted of the highly developed industrial nations – the USA, Canada, western Europe, Japan, Australia and New Zealand. They believed in private enterprise and private ownership of wealth, with profit as the great motivating influence, and ideally, a minimum of state interference.
• The communist bloc consisted of the USSR, its satellite states in eastern Europe, and later, China, North Korea, Cuba and North Vietnam. They believed in state-controlled, centrally planned economies, which, they argued, would eliminate the worst aspects of capitalism – slumps, unemployment and the unequal distribution of wealth.

The next forty or so years seemed like a contest to find out which economic system was best. The collapse of communism in eastern Europe at the end of the 1980s enabled the supporters of capitalism to claim the final victory; however, communism still continued in China, North Korea, Vietnam and Cuba. This big contest between the two rival economic and political systems was known as the Cold War; it had important economic consequences. It meant that both blocs spent enormous amounts of cash on building nuclear weapons and other armaments, and on even more expensive space programmes. Many people argued that much of this money could have been better spent helping to solve the problems of the world’s poorer nations.

(c)  The 1970s and 1980s: serious economic problems in the USA
After many years of continual economic success, the US began to experience problems.

• Defence costs and the war in Vietnam (1961–75) were a constant drain on the economy and the treasury.
• There was a budget deficit every year in the late 1960s. This means that the government was spending more money than it was collecting in taxes, and the difference had to be covered by selling gold reserves. By 1971 the dollar, which was once considered to be as good as gold, was weakening in value.
• President Nixon was forced to devalue the dollar by about 12 per cent and to put a 10 per cent duty on most imports (1971).
• Rising oil prices worsened America’s balance-of-payments deficit, and led to the development of more nuclear power.
• President Reagan (1981–9) refused to cut defence spending and tried new economic policies recommended by the American economist Milton Friedman. He argued that governments should abandon all attempts to plan their economies and concentrate on monetarism: this meant exercising a tight control on the money supply by keeping interest rates high. His theory was that this would force businesses to be more efficient. These were policies which Margaret Thatcher was already trying in Britain. At first the new ideas seemed to be working – in the mid-1980s unemployment fell and America was prosperous again. But the basic problem of the US economy – the huge budget deficit – refused to go away, mainly because of high defence spending. The Americans were even reduced to borrowing from Japan, whose economy was extremely successful at that time. The drain on American gold reserves weakened the dollar, and also weakened confidence in the economy. There was a sudden and dramatic fall in share prices (1987), which was followed by similar falls all over the world. In the late 1980s much of the world was suffering from a trade recession.

(d)  Japan’s success
Japan became economically one of the world’s most successful states. At the end of the Second World War Japan was defeated and her economy was in ruins. She soon began to recover, and during the 1970s and 1980s, Japanese economic expansion was dramatic, as (Table: Gross National Product per head of the population in 1992)

Table: Gross National Product per head of the population in 1992

The Third World And The North–South Divide

During the 1950s the term Third World began to be used to describe countries which were not part of the First World (the industrialized capitalist nations) or the Second World (the industrialized communist states). The Third World states grew rapidly in number during the 1950s and 1960s as the European empires broke up and newly independent countries emerged. By 1970 the Third World consisted of Africa, Asia (except the USSR and China), India, Pakistan, Bangladesh, Latin America and the Middle East. They were almost all once colonies or mandates of European powers, and were left in an undeveloped or under-developed state when they achieved independence.

(a) The Third World and non-alignment
The Third World states were in favour of non-alignment, which means that they did not want to be too closely associated with either the capitalist or the communist bloc, and they were very suspicious of the motives of both. Prime Minister Nehru of India (1947–64) saw himself as a sort of unofficial leader of the Third World, which he thought could be a powerful force for world peace. Third World countries deeply resented the fact that both blocs continued to interfere in their internal affairs (neo-colonialism). The USA, for example, interfered unashamedly in the affairs of Central and South America, helping to overthrow governments which they did not approve of; this happened in Guatemala (1954), the Dominican Republic (1965) and Chile (1973). Britain, France and the USSR interfered in the Middle East. Frequent meetings of Third World leaders were held, and in 1979, 92 nations were represented at a ‘non-aligned’ conference in Havana (Cuba). By this time the Third World contained roughly 70 per cent of the world’s population.

(b) Third World poverty and the Brandt Report (1980)
Economically the Third World was extremely poor. For example, although they contained 70 per cent of the world’s population, Third World countries only consumed 30 per cent of the world’s food, while the USA, with perhaps 8 per cent of the world’s population, ate 40 per cent of the world’s food. Third World people were often short of proteins and vitamins, and this caused poor health and a high death-rate. In 1980 an international group of politicians under the chairmanship of Willi Brandt (who had been chancellor of West Germany from 1967 until 1974), and including Edward Heath (prime minister of Britain 1970–4), produced a report (the Brandt Report) on the problems of the Third World. It said that the world could be roughly divided into two parts

Map: The dividing line between North and South, rich and poor

The North – the developed industrial nations of North America, Europe, the USSR and Japan, plus Australia and New Zealand.
The South – most of the Third World countries.

Figure: Calorie intake per person per day

Table: Gross National Product per head of the population in 1992 (in US dollars)

The report came to the conclusion that the North was getting richer and the South was getting poorer. This gap between the North and South is well illustrated by the statistics of calorie intake (Figure: Calorie intake per person per day) and by the comparison of Gross National Products (GNP) of some typical North and South countries, or ‘developed’ and ‘low and middle’ economies.
GNP is calculated by taking the total money value of a country’s total output from all units of production, wherever production is situated; and it includes interest, profits and dividends received from abroad. This total value is divided by the population figure, and this gives the amount of wealth produced per head of the population. In 1989–90 the GNP of the North averaged over 24 times that of the South. In 1992 a highly developed and efficient country like Japan could boast a GNP of over $28 000 per head of the population, and Norway $25 800. On the other hand, among poor African countries, Ethiopia could manage only $110 per head, the second lowest GNP in the world.

(c)  Why is the South so poor?

• The South was and still is economically dependent on the North because of neocolonialism. The North expected the South to continue providing food and raw materials for them, and expected them to buy manufactured goods from the North. They did not encourage the South to develop their own industries.
• Many states found it difficult to break away from the one-product economies left behind from colonial days, because governments lacked the cash needed to diversify. Ghana (cocoa) and Zambia (copper) found themselves facing this problem. In states like Ghana, which depended for its income on exporting crops, it meant that too little food would be left for the population. Governments then had to spend their scarce money on importing expensive food. A fall in the world price of their main product would be a major disaster. In the 1970s there was a dramatic fall in the world price of such products as cocoa, copper, coffee and cotton. (Table: What commodities could buy in 1975 and 1980) shows the disastrous effects on the incomes, and therefore the buying power of countries such as Ghana and Cameroon (cocoa), Zambia, Chile and Peru (copper), Mozambique, Egypt and the Sudan (cotton), and Ivory Coast, Zaire and Ethiopia (coffee).
• At the same time, prices of manufactured goods continued to rise. The South had to import from the North. In spite of the efforts of the United Nations Conference on Trade and Development (UNCTAD), which tried to negotiate fairer prices for the Third World, no real improvement was achieved.
• Although a great deal of financial aid was given by the North to the South, much of it was on a business basis – the countries of the South had to pay interest. Sometimes a condition of the deal was that countries of the South had to spend aid on goods from the country which was making the loan. Some countries borrowed directly from banks in the USA and western Europe, so that by 1980 Third World countries owed the equivalent of $500 billion; even the annual interest payable was about $50 billion. Some states were forced to borrow more cash just to pay the interest on the original loan.
• Another problem for Third World countries was that their populations were increasing much faster than those in the North. In 1975 the total world population stood at about 4000 million, and it was expected to reach 6000 million by 1997. Since the population of the South was growing so much faster, a larger proportion of the world’s population than ever before would be poor.
• Many Third World countries had suffered long and crippling wars and civil wars, which ravaged crops and ruined economies. Some of the worst wars were in Ethiopia, Nicaragua, Guatemala, Lebanon, the Congo/Zaire, Sudan, Somalia, Liberia, Sierra Leone, Mozambique and Angola.
• Drought was sometimes a serious problem in Africa. Niger in West Africa was badly affected: in 1974 it produced only half the food crops grown in 1970 (mainly millet and sorghum), and about 40 per cent of the cattle died. As global warming gathered pace towards the end of the century, droughts became more frequent and many countries were dependent on overseas aid to feed their people.

Table: What commodities could buy in 1975 and 1980

(d) The Brandt Report (1980) was full of good ideas

For example, it pointed out that it was in the North’s interests to help the South to become more prosperous, because that would enable the South to buy more goods from the North. This would help to avoid unemployment and recession in the North. If just a fraction of the North’s spending on armaments was switched to helping the South, vast improvements could be made. For example, for the price of one jet fighter (about $20 million), 40 000 village pharmacies could be set up. The Report went on to make some important recommendations which, if carried out, would at least eliminate hunger from the world:

• the rich nations of the North should aim to be giving 0.7 per cent of their national income to poorer countries by 1985 and 1.0 per cent by the year 2000;
• a new World Development Fund should be set up in which decision-making would be more evenly shared between lenders and borrowers (not like the International Monetary Fund and the World Bank, which were dominated by the USA);
• an international energy plan should be drawn up;
• there should be a campaign to improve agricultural techniques in the South, and an international food programme should be drawn up.

Did the Brandt Report change anything? Sadly, there was no immediate improvement in the general economic situation of the South. By 1985 very few countries had reached the suggested 0.7 per cent giving target. Those that did were Norway, Sweden, Denmark, the Netherlands and France; however, the USA gave only 0.24 per cent and Britain 0.11 per cent. There was a terrible famine in Africa, especially in Ethiopia and the Sudan in the mid-1980s, and the crisis in the poorer parts of the Third World seemed to be worsening. Throughout the 1990s the US economy boomed under the Clinton administration, whereas the plight of the Third World became even more serious. At the end of 2003 the UN reported that 21 Third World states, 17 of them in Africa, were in crisis because of a combination of natural disasters, AIDS, global warming and civil wars. Yet the richest 1 per cent of the world’s population (around 60 million) received as much income as the poorest 57 per cent. Norway was top of the UN’s league table for human development: Norwegians had a life expectancy of 78.7 years, there was a literacy rate of virtually 100 per cent, and annual income was just under $30 000. In Sierra Leone life expectancy was about 35, the literacy rate was 35 per cent and annual income averaged $470. The USA seemed to attract the most hostility and resentment on account of this imbalance of wealth; it was widely believed that the growth of terrorism – especially the 11 September attacks on the USA – was a desperate response to the failure of peaceful attempts to bring about a fairer world economic system.
UN economic advisers were clear about what needed to be done. It was up to the West to remove trade barriers, dismantle its over-generous system of subsidies, provide greater debt relief, and double the amount of aid from $50 billion to $100 billion a year. This would enable poor countries to invest in clean water systems, rural roads, education and proper healthcare.

Global Warming

(a)  Early concerns
In the early 1970s scientists became concerned about what they called the ‘greenhouse effect’ – the apparently uncontrollable warming of the earth’s atmosphere, or ‘global warming’, as it became known. It was caused by large amounts of carbon dioxide, methane and nitrous oxide, three gases produced during various industrial processes and by the burning of fossil fuels, being released into the atmosphere. These gases acted like the glass roof of a greenhouse, trapping and magnifying the sun’s heat. Opinions differed about exactly what its effects would be; one alarming theory was that the ice caps, glaciers and snow in the polar regions would melt, causing the level of the sea to rise, and flooding large areas of land. It was also feared that Africa and large parts of Asia could become too hot for people to live in, and there could be violent storms and prolonged drought.
Some scientists dismissed these theories, arguing that if indeed the world was becoming warmer, it was a natural climatic change, not a man-made one. They played down the threats of flooding and drought, and accused those who suggested them of being anti-West and anti-industrialization. Industrialists themselves naturally welcomed these sympathizers, and as the debate between the two camps developed, nothing was done to reduce or control emissions of greenhouse gases.
Gradually the scientific evidence became more convincing: the Earth’s average temperature was definitely increasing significantly, and the fossil-burning habits of humans were responsible for the changes. The evidence was enough to convince US vice-president Al Gore, who in 1992 wrote a pamphlet advocating international action to combat the greenhouse effect. President Clinton later proclaimed: ‘We must stand together against the threat of global warming. A greenhouse may be a good place to raise plants; it is no place to nurture our children.’ In June 1992 the UN organized the Earth Summit conference in Rio de Janeiro (Brazil) to discuss the situation. Representatives of 178 nations attended, including 117 heads of state; it was probably the largest gathering of world leaders in history. Most of them signed a range of treaties undertaking to protect the environment and reduce emissions of greenhouse gases.
However, signing treaties was one thing, enforcing them was quite another. For example, in 1993 when President Clinton introduced a bill to tax energy, the Republican majority in the Senate, many of whose supporters were industrialists and businessmen, threw it out. By this time many other countries were showing concern at the worsening situation. In 1995 an Intergovernmental Panel on Climatic Change produced a report outlining the probable effects of global warming and concluding that there could be little doubt that human actions were to blame.

(b)  The Kyoto Convention (1997) and after
In 1997 another large international conference was held, this time in Kyoto (Japan), to work out a plan for reducing harmful emissions. It was appropriate that the conference was held in Kyoto, since, of all the industrialized countries, the Japanese had achieved most success in limiting their carbon emissions; and they had achieved it by heavy taxation on power and petrol. Statistics were worked out to show how much carbon each country was producing. The USA was by far the biggest culprit, emitting an average of 19 tons of carbon per head a year; Australia was not far behind with 16.6 tons per head. Japan emitted 9 tons per head a year, while the countries of the EU averaged 8.5 tons. On the other hand, the countries of the Third World emitted very modest amounts per head – South America 2.2 tons and Africa less than one ton.
The target set was to return global emissions to their 1990 levels by 2012. This meant that countries would have to reduce their emissions by different amounts to comply with the regulations; for example, the USA was required to reduce by 7 per cent, whereas France needed no reduction, since by 1997 the French were producing 60 per cent of their energy from nuclear power. In the end, 86 nations signed the agreement, which became known as the Kyoto Protocol. However, over the next few years this seemed to have little effect; in 2001 the Intergovernmental Panel on Climatic Change reported that climatic conditions were getting steadily worse. The 1990s was the hottest decade of the millennium and 1998 was the hottest year. In March 2001 the Kyoto Protocol was dealt a fatal blow when newly elected US President Bush announced that he would not ratify it. ‘I will not accept a plan that will harm our economy and hurt American workers’, he said. ‘First things first are the people who live in America. That’s my priority.’
Thus, early in the twenty-first century the world found itself in a situation where the USA, with no more than 6 per cent of the planet’s population, was emitting a quarter of all the greenhouse gases, and would continue to do so, whatever the consequences for the rest of the world. In 2003 the effects of global warming were increasingly worrying. The UN calculated that at least 150 000 people had died during the year as a direct result of climate change – prolonged drought and violent storms. During that summer, 25 000 people died in Europe because of the unusually high temperatures. The increased warmth and the storms provided ideal breeding conditions for mosquitoes, which were spreading into mountainous areas where it had been too cold for them. Consequently the death rate from malaria increased sharply, especially in Africa. Droughts caused famine and malnutrition, so that people were more prone to catch life-threatening diseases.

(c)  What happens next?
It was clear to climatologists that drastic measures were needed if dire consequences were to be avoided. Sir John Houghton, the former head of the British Meteorological Office, compared climate change to a weapon of mass destruction: ‘like terrorism, this weapon knows no boundaries. It can strike anywhere, in any form – a heatwave in one place, a drought or a flood or a storm surge in another.’ It was also being suggested that the Kyoto agreement, designed when climate change was thought to be less destructive, would be insufficient to make much difference to the problem, even if it were fully implemented. The tragedy is that the world’s poorest countries, which have contributed hardly anything to the build-up of greenhouse gases, are likely to be the ones most seriously affected. Recently published statistics suggested that in 2004 some 420 million people were living in countries which no longer had enough crop land to grow their own food; half a billion people lived in areas prone to chronic drought. The threats are exacerbated by the pressure of the growing world population (see Sections 28.1–3). A number of measures have been suggested:

• Professor John Schnellnhuber, director of the UK-based Tyndall Centre, which researches climate change, believes that an adaptation fund should be set up under the auspices of the UN and financed by wealthy polluters through levies based on the amount of emissions they make. The fund would be used to help poorer countries to improve their infrastructures, water industries and food production, and to cope with changes such as higher temperatures, rising river and sea levels, and tidal surges.
• A World Environment Court should be set up to enforce global agreements like the Kyoto Protocol. States must face fines large enough to deter them from breaking the rules.
• At national level, companies should be fined heavily for polluting rivers and dumping hazardous waste.
• An all-out effort should be made to develop new technologies so that ‘green’ power – solar, wind, tide and wave – will replace fossil fuels. Some people have suggested expanding nuclear power, an option which the French have chosen to take.

The main objections to all these alternatives are that they require fundamental changes in the way people live, and organize their countries’ economies, and they will cost a lot of money to secure returns that will only become apparent in the future. A few scientists have suggested that the best thing is to do nothing at all at present, and hope that future scientists will find new and cheap methods of reducing greenhouse gases. However, in the words of Murray Sayle, ‘long before that happy day, Miss Liberty may well be up to her bodice in New York harbour’. There were further worrying developments: in 2007 and 2008 a series of Gallup polls were held in 127 countries. These showed that over a third of the world’s population were unaware of global warming. A survey in the USA in October 2009 showed that only 35 per cent of Republicans thought there was any reliable evidence that global warming was actually taking place. More Gallup polls in 111 countries in 2010 showed a disturbing fall in the USA and Europe in the percentage of people who thought that global warming was a serious threat. However, in Latin America the opposite was happening: an increasing number of people were worried about the effect that global warming was going to have on their families.
It was fitting that Latin America hosted the next two important conferences: the UN Climate Change Conference in Cancun, Mexico at the end of 2010, and the UN Conference on Sustainable Development in Rio de Janeiro, Brazil in June 2012. There was little to show from the Cancun Conference. There was simply an agreement, not a binding treaty, that member states would aim, as a matter of urgency, to reduce emissions of greenhouse gases sufficiently to limit global warming to 2° C. Delegates from 190 nations attended the 2012 Conference in Rio de Janeiro. Brazilian president Dilma Rousseff told the conference that Brazil had made significant progress in reducing emissions, and was now providing 45 per cent of its energy from renewable sources, mainly hydropower. UN secretary-general Ban Ki-moon pointed out that the world had not yet risen to the challenge of reducing greenhouse-gas emissions by concentrating on sustainable development. The outcome of the conference was disappointing: no specific reduction targets were set and a proposed fund of $30 billion to help the transition to a green economy was dropped from the final agreement. Koomi Naidoo, the international director of Greenpeace, described the conference as an epic failure. ‘It has failed on equity, failed on ecology and failed on economy.’ Ban Ki-moon summed up the situation well. He pointed out that 20 years ago there were 50 billion people in the world; today there are 75 billion. By 2030 we shall need 50 per cent more food and 45 per cent more energy than we need today. ‘Let us not forget the scarcest resource of all – time. We are running out of time.’ As if to underline his concern, it was announced in September 2012 that sea ice in the Arctic had shrunk to its smallest extent ever recorded. Scientists were predicting that within 20 years the Arctic Ocean would be completely ice-free in the summer months. John Sauven, the head of Greenpeace UK, warned that ‘we are on the edge of one of the most significant moments in environmental history as sea ice heads towards a new record low. The loss of sea ice will be devastating, raising global temperatures that will impact on our ability to grow food, and causing extreme weather around the world.’

The World Economy At The Turn Of The Millennium

Since the USA was unquestionably the most powerful state economically during the last decade of the twentieth century, it was natural that the US economic system should come under close scrutiny. The EU, which some people saw as a rival power bloc to the USA, had a rather different view of how a market economy and society should be organized, in terms of international trade, care of the environment, aid and debt relief. According to British analyst Will Hutton, in his book The World We’re In (2003): ‘the relationship between the two power blocs is the fulcrum on which the world order turns. Managed skilfully, this could be a great force for good; managed badly, it could give rise to incalculable harm.’

(a) The American economic model
The US economic system evolved out of American traditions of freedom and the sanctity of property. The American right-wing attitude was that the law of private property and the freedom from government interference should be supreme. This was why the USA came into existence in the first place; people emigrated to the USA so that they could enjoy that freedom. It followed that the US federal government should interfere with people’s lives as little as possible, its main function being to safeguard national security.
On the question of social welfare – to what extent the state should be responsible for the care of the poor and helpless – attitudes were divided. The right-wing or conservative attitude was based on ‘rugged individualism’ and self-help. Taxation was viewed as an invasion of private property, and government regulations were seen as restraints on freedom and prosperity. The liberal attitude was that ‘rugged individualism’ should be tempered by the idea of a ‘social contract’. This held that the state should provide basic welfare in return for the respect and obedience of its citizens. Hence Roosevelt’s New Deal and Johnson’s Great Society – programmes introduced by Democrat administrations, which included large elements of social reform. For 16 out of the 24 years preceding 2005, the US had Republican governments which favoured the right-wing approach.
Both schools of thought had their supporters and champions in the USA. For example John Rawls, in his book A Theory of Justice (Oxford University Press, 1973), put forward a theory of ‘justice as fairness’. He argued in favour of equality and claimed that it was the duty of government to provide welfare and some redistribution of wealth through taxation. In reply, Robert Nozick, in his book Anarchy, State and Utopia (Harvard University Press, 1974), argued that property rights should be strictly upheld, that there should be minimal government intervention, minimal taxation and minimal welfare and redistribution. Nozick’s theories had a great influence on the New Right and were taken up by the neo-conservative branch of the Republican party. They were seen in action during the Reagan administration (1981–9), and even more so under George W. Bush (2001–9), when both taxes and welfare programmes were reduced. With neo-conservatism in the ascendant in the USA, it was only to be expected that, as the USA assumed the role of world leadership, the same principles would be extended to American international dealings; hence American reluctance to become involved in initiatives to help the Third World – on issues such as debt relief, international trade and global warming. There was no denying that the American economic system in its different variants had achieved remarkable success over the years. However, in the early twenty-first century the New Right approach was clearly faltering (see Section 23.6(d)); many liberal Americans were looking towards the European model as a potentially better way of providing a just economic and social order.

(b) The European economic model
The economic and social systems of western, democratic Europe, which took shape after the Second World War, varied from country to country. But they all shared certain basic characteristics – provision of social welfare and public services, particularly education and health, and a reduction in inequality. It was expected that the state would take an active role in regulating business and society and in operating a tax system that redistributed income more fairly and provided the revenue to finance education and healthcare. There was also the assumption that big business had a part in the social contract – it had responsibilities to society and so must function in a socially acceptable way, looking after its employees, paying fair wages and taking care of the environment. Whereas in the USA the interests of shareholders were paramount, in most parts of Europe the perception was that the interests of the entire business must come first; dividends were kept relatively low so that high investment was not neglected. Trade unions were stronger than in the USA, but on the whole they operated responsibly. This system produced highly successful companies and relatively fair and just societies.
Outstanding examples of successful European companies include the German car and truck manufacturer Volkswagen: some 20 per cent of the company’s shares are owned by the state government of Lower Saxony, shareholders’ voting rights are limited to 20 per cent and the company pays only 16 per cent of its profits as dividends – none of which would be allowed to happen in the USA. Michelin, the French tyre manufacturer, and the Finnish company Nokia, the world’s largest manufacturer of mobile phones, are high-performance organizations run on similar lines to Volkswagen. Another European success story is the joint German, French and British Airbus, which can claim to be the world’s most successful aircraft manufacturer, surpassing even the USA’s Boeing company. Western European states have generous welfare systems financed by a combination of taxation and social security contributions, and a high standard of public health and education. Even in Italy, Spain, Greece and Portugal, with their history of fascism and military dictatorships, the social contract exists, and unemployment insurance is the highest in Europe.
Many American analysts were critical of the European system, since during the 1990s unemployment rose in Europe, while the USA enjoyed an economic boom. The Americans claimed that European problems were caused by high taxation, over-generous welfare systems, the activities of trade unions and too much regulation. Europeans blamed their difficulties on the need to keep inflation under control so that they would be able to join the single currency launched in 1999. Europeans were confident that once that hurdle had been surmounted, economic growth and job creation would recover. European confidence in their system received a boost during the Bush administration, when it was observed that all was not well with the US economy.

(c)  The American system in action

• Even during the Clinton administration, the USA extended its economic principles into its global dealings. American interests usually came first, so much so that many people complained that globalization meant Americanization. Some examples were:
• During the 1990s the USA gained control of the International Monetary Fund (IMF), which meant that the Americans could decide which countries should receive aid, and could insist that governments adopted policies of which the USA approved. This happened to many Latin American countries as well as Korea, Indonesia and Thailand. Often the conditions imposed made recovery harder instead of easier. In 1995, when the World Bank suggested that debt relief was vital for some poor countries, it met stiff opposition from the USA, and its chief economist felt compelled to resign. Basically these developments meant that the USA could control the world’s financial system.
• In 1994 the USA used the General Agreement on Tariffs and Trade (GATT) to force the EU to open all its voice communications (post, telephone and telegraphs) to international competition. In 1997 the World Trade Organization (WTO), which succeeded GATT in 1995, agreed that 70 countries should be opened up to US telecoms companies on American terms. By 2002 there were 180 commercial satellites orbiting in space, and 174 of them were American. The USA all but controlled the world’s communications systems. It was to counter this that the EU insisted on launching its own Galileo space satellite system (see Section 10.8(d)).
• In March 2002 the Bush administration imposed import duties on foreign steel in order to protect the American steel industry. This brought bitter protests from the EU, since the function of the WTO was to encourage free trade. The USA resisted the pressure until December 2003; then, faced with threats of retaliatory duties on a wide range of American goods, President Bush cancelled the steel tariffs. In the same month, however, the US announced new tariffs on imports of textiles and television sets from China.
• In 2003 there was one positive step which benefited poorer countries: responding to worldwide protests from states suffering the worst ravages of HIV/AIDS, President Bush agreed that the patents controlling the necessary drugs should be overridden, allowing far cheaper versions to be produced for sale in the worst affected states. There was an ulterior motive, however: in return, the Americans were hoping to gain access to African oil and to set up military bases in strategic parts of the continent.

There was a long way to go before globalization produced a fair and just world in which wealth was more evenly distributed. Some observers believed that the way forward was in a reinvigorated and strengthened UN; others saw the newly enlarged EU as the best hope. The participation of the USA – the world’s richest nation – was still thought to be vital. As Will Hutton put it: ‘We badly need the better America back – the liberal, outward-looking and generous US that won World War II and constructed a liberal world order that in many respects has sustained us to this day.’ South African president Thabo Mbeki summed up the world situation admirably in July 2003 when he wrote: ‘The progressive politicians must demonstrate whether they have the courage to define themselves as progressive, recovering their historic character as champions of the poor, and break the icy ideological grip of right-wing politics. The African masses are watching and waiting.’ Sadly, what happened next can hardly have been more disappointing for them. The participation of the USA was still very much in evidence, but not quite in the way the commentators hoped for.