World Economy from 1945 to 1986 from Historical Perspective
Objective analysis of the past equips us with necessary knowledge and perspective to deal with the present and future. In other words, the importance of economic history and studying global factors and events that have formed the current economic situation has practical implications in terms of dealing with global economic issues and challenges (Coughlan and Coughlan, 2011).
Changes in the world economy taking place since 1945 have resulted in international market expansion for many businesses erasing borders between countries to a certain extent, and providing vast opportunities for businesses. However, this process was not unilinear, i.e. economic changes taking place after 1945 did not have the same impact for all countries and businesses. The nature of economic changes taking place in each geographical location after the Second World War, as well as, the impact of these changes on the performance of private entities depend on a wide range of factors such as political and economic system within the country, the level of economic development and infrastructure etc.
Global economic reality by the end of World War II, as aftermath of the Great Depression of 1930’s is referred to as a ‘Golden Age of Capitalism’ and this period lasted until till the beginning of 1970’s (Weber, 2007). Specific factors contributing to the significant rise of consumerism especially in USA in this period include the ‘baby boom’, rapid developments of automobile and aviation industries, and others.
The period of the ‘Golden Age of Capitalism’ from 1945 until 1986 is also marked with US dollar becoming the world’s major reserve currency and “between 1945 and the mid-1960s the United States may have accounted for 85 per cent of all new FDI flows” (Jones, 2005, online). Leading positions in many industries were assumed by US corporations in a global scale putting a foundation for the current form of multinational enterprises.
The formation of General Agreement for Tariffs and Trade (GATT) had marked a new area for the level of international trade and played a great role on the development of the world economy. “GATT came into being in 1947-1948 with twenty-three contracting parties who agreed to conduct trade with each other according to a specific set of basic rules” (Gibbon and Ponte, 2005, p.45). The most important GATT rules include the most favoured nation, national treatment, and the ban in principle of all border measures other than duties, taxes, and other charges on external trade (Aykin, 2007).
The creation of GATT had significant implications for businesses operating within the member countries in a way that major obstacles associated with engaging in international trade were effectively eliminated.
Lasting from 1946 until 1973, Bretton Woods system, also known as adjustable pegged exchange rate system had the main feature that “currencies were tied to each-other to provide stable exchange rates for commercial and financial transactions” (Carbaugh, 2010, p.469). The main rationale behind the introduction of the system was to avoid the repeat of 1930s Great Depression and assisting the expansion of the global economy.
According to Bretton Woods system the value of USD has been determined in relation to certain quantity of gold reserves, at the same time when the value if other currencies were determined in relation to USD.
It is important to note that in accordance to its purpose Bretton Woods system brought a relative stability to the world economy and international financial system at that time and this had positive impact upon international expansion of firms.
The collapse of Bretton Woods system in 1971 marked the end of the ‘Golden Age of Capitalism, and this has been mainly caused by the cease of dollar convertibility into the gold initiated by the US Federal Reserve as a response to rising payment deficit levels.
The International Monetary Fund (IMF), an international organisation created in 1944 at the Bretton Woods conference aims to assist countries with payment imbalances. Moreover, IMF provides policy advice to governments, undertakes economical statistical researches, and offers technical assistance to countries in terms managing their economies with an increased level of efficiency. However, the most significant assistance of IMF relates to providing loans to countries facing economic difficulties.
The IMF is funded by member countries that make financial contributions calculated on the basis of a quota system. The criticisms attracted by IMF include impractical policy foundations, dominant influence of western countries over the organisation, and anti-developmental impact of the Fund in some specific cases (Turner and Johnson, 2009).
Positive impact of IMF on the expansion of international businesses is obvious. For example, 28 billion EURO loan for Greece recently approved by IMF board (Lending, online, 2012) may save the country from bankruptcy, if effectively utilised, thus assisting in maintaining revenues for local, as well as, foreign businesses trading in Greece.
Creation of the World Bank as an important global economical event of the 20th century has to be discussed separately along these lines. Also, set up at the Bretton Woods conference, the Wold Bank “is a group of five international organisations, largely controlled by developed countries, which provides grants, loans, and advice for economic development of developing countries” (Spielvogel, 2011, p.975).
Although World Bank has been subjected to criticism in terms of the nature of its government, creation of uncompetitive economies, and it’s performance has been linked to generating poverty in some countries (Marshall, 2008), nevertheless, the overall impact of World Bank on the expansion of multinational firms can be assessed as positive.
The rationale behind this stand is the World Bank contribution to reducing poverty, and positively contributing to the effective facilitation of international trade and capital investment.
There is a consensus among leading economic theorists and practitioners that China’s emergence as an economic superpower starting from 1980’s as a result of massive economic reforms had caused dramatic changes in the global economic landscape (Lou and Wang, 2009).
Among major economic reforms and introduction of economic policies initiated by Chinese government, depreciated RMB exchange rate against USD has played a decisive role in increasing numbers of multinational companies basing their manufacturing plants in China (Villareal and Cai, 2010). Thus, China entering the global marketplace has radically changed the global economic landscape for multinational firms, by effectively attracting these firms as a country with cheaper resources in general, and human resources in particular.
Aykin, N. (2007) “Usability and Internationalisation” Springer Publications
Carbaugh, R. (2010) “International Economics” Cengage Learning
Lending (2012) International Monetary Fund, Available at: http://www.imf.org/external/np/exr/key/lending.htm
Lou, J. & Wang, S. (2009) “Public Finance in China: Reform and Growth for a Harmonious Society” World Bank Publications
Marshall, K. (2008) “The World Bank: From Reconstruction to Development to Equity” Taylor & Francis
Jones, G. (2005) “Restoring a Global Economy, 1950-1980” Available at: http://hbswk.hbs.edu/item/4961.html
Spielvogel, J.J. (2011) “Western Civilisation: Since 1300” Cengage Learning
Turner, C. & Johnson, D. (2009) “International Business: Themes and Issues in the Modern Global Economy” Taylor & Francis
Villarreal, R. & Cai, X. (2010) “Basic Considerations regarding the Provision of Public Services, Public Service System Reform and Fiscal Reform to finance Public Services: An Overview with Some Reflections on the case of China” UN Public Administration Programme
Weber, M. (2007) “General Economic History” Cosimo, Inc