The Age of Global Economic Crises (1929–2022) [1 ed.] 1032482516, 9781032482514

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The Age of Global Economic Crises

The frequency and repetition of economic crises over the last hundred years demands an analysis that allows us to discover the root causes of these situations and the problems they have generated in the world economy. This book investigates these cycles throughout the 20th and the early 21st century. Economic crises can be the result of political or military conflict, but they have also been the consequence of bad practices, unbridled speculation, excessive greed, or poor management by the rulers and leaders of nations. The contributors to this volume analyse the causes and consequences of economic crises from the Great Depression to the present day, incorporating postWorld War II reconstruction, the oil crisis of the 1970s and the “lost” Latin American decade of the 1980s, among others. This longer-term view allows the book to provide insights into understanding economic cycles in the long run, not just at a specific moment in time, and the ways in which they have spread internationally. This historical analysis also helps to shed new light on the current Covid-impacted situation, as it provides another reading of the main crises of recent centuries and their causes and consequences, as well as the measures and policies adopted to overcome the difficulties. This book will be of significant interest to readers in economic history, business history, politics, and economics and history more broadly. Juan Manuel Matés-Barco is Professor of Economic History and Business History at the University of Jaén. Graduate of the University of Zaragoza. Doctor from the University of Granada. Research stays in prestigious universities in Italy, France, and Portugal. Four six-year research periods recognised by the National Commission for the Evaluation of Research Activity (CNEAI. Ministry of Universities. Spain). Director of the journal Agua y Territorio/Water and Landscape (AYT/WAL). Researcher at the Permanent Seminar on Water, Territory, and the Environment: Public Policies and Citizen Participation. Coordinator of several research projects. Head Researcher of the Group of Historical Studies on the Company (GEHESE-UJA). María Vázquez-Fariñas is Lecturer in History and Economic Institutions Area (Department of Economic Theory and History) at the University of Málaga (Spain). PhD in Social and Legal Sciences and Degree in Business Administration and Management from the University of Cádiz. Actively involved as a component of the Research Group of Historical Studies on the Enterprise (GEHESE-UJA) and part of the Editorial Board of the journal Agua y Territorio/Water and Landscape (AYT/WAL). General lines of research focus on the economic and business history of 19th-century Cádiz (Andalusia, Spain) and the development of public services in contemporary Spain. Author of many works on these subjects published in national and international journals and publishing houses.

Routledge Explorations in Economic History Edited by Lars Magnusson Uppsala University, Sweden

The Economy of Renaissance Italy Paolo Malanima The Decline of British Industrial Hegemony Bengal Industries 1914–46 Indrajit Ray Industry and Development in Argentina An Intellectual History, 1914–1980 Marcelo Rougier and Juan Odisio Translated by James Brennan The Real Estate Market in the Roman World Edited by Marta García Morcillo and Cristina Rosillo-López An Economic History of the First German Unification State Formation and Economic Development in a European Perspective Edited by Ulrich Pfister and Nikolaus Wolf Inequality and Nutritional Transition in Economic History Spain in the 19th–21st Centuries Edited by Francisco J. Medina Albaladejo, José Miguel Martínez Carrión and Salvador Calatayud Giner Property, Power and the Growth of Towns Enterprise and Urban Development, 1100–1500 Catherine Casson and Mark Casson The Age of Global Economic Crises (1929–2022) Edited by Juan Manuel Matés-Barco and María Vázquez-Fariñas For more information about this series, please visit: www.routledge.com/ Routledge-Explorations-in-Economic-History/book-series/SE0347

The Age of Global Economic Crises (1929–2022) Edited by Juan Manuel Matés-Barco and María Vázquez-Fariñas

First published 2023 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2023 selection and editorial matter, Juan Manuel Matés-Barco and María Vázquez-Fariñas; individual chapters, the contributors The right of Juan Manuel Matés-Barco and María Vázquez-Fariñas to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-032-48251-4 (hbk) ISBN: 978-1-032-48252-1 (pbk) ISBN: 978-1-003-38812-8 (ebk) DOI: 10.4324/9781003388128 Typeset in Bembo by Apex CoVantage, LLC

Contents

List of figuresix List of tablesxi List of contributorsxiii Forewordxvi Prefacexx Acknowledgementsxxv 1 The Great Depression of 1929: crisis in the world economy

1

JUAN MANUEL MATÉS-BARCO

1.1  The Western economy in the early 20th century  1 1.2  Peace and economic instability in the 1920s  2 1.3  The 1929 crisis and its effects on the world economy  6 1.3.1  The crisis from the perspective of economic theory  7 1.3.2  The causes of the 1929 crash  8 1.3.3  The impact of the crisis in Europe  13 1.3.4  The impact of the crisis in Spain and Latin America  16 1.4  Depression, spread, and solutions  19 1.5  Economic recovery and military rearmament (1930–1939)  25 1.5.1  The United States and the New Deal  25 1.5.2  Britain: the effects of abandoning the gold standard  28 1.5.3  France: crisis and defeat  29 1.5.4  Germany: Hitler and rearmament policy  30 1.5.5  Stabilisation policies to curb the crisis in Latin America  32 1.6  By way of conclusion: a final assessment  34 1.7 References 35 2 Europe after World War II in 1945–1946 LEONARDO CARUANA DE LAS CAGIGAS AND JULIO TASCÓN FERNÁNDEZ

2.1 Introduction 38 2.2  The devastation in Europe  38

38

vi  Contents

2.3  The huge task of United Nations Relief and Rehabilitation Administration (UNRRA) in Europe  46 2.4  Moving borders in Europe and the difficulties in Yugoslavia and Greece  48 2.5 Conclusions 53 2.6 References 54 3 Major economic recessions in the last quarter of the 20th century: the oil crisis (1973–1980)

56

MARÍA VÁZQUEZ-FARIÑAS

3.1 Introduction 56 3.2  Historical context and general framework of the world economy  56 3.3  The first oil shock  58 3.3.1  Background and causes of the crisis  59 3.3.2  Immediate effects of the crisis  60 3.3.3  The main repercussions of the crisis in developed countries  62 3.3.4  The impact of the crisis on developing economies  65 3.3.5  Measures adopted to overcome the crisis  67 3.4  The second oil crisis  71 3.4.1  The reactivation of the crisis in 1979  71 3.4.2  Challenges and changes in economic policies after the second oil shock  74 3.5 Final considerations 79 3.6 References 80 4 The external debt crisis and the “lost decade” in Latin America (1980–1990) MARÍA JOSÉ VARGAS-MACHUCA SALIDO

4.1 Introduction 82 4.2  Types of crises: debt crises  83 4.3  The causes of the 1982 debt crisis  84 4.3.1  External factors: gestation during the 1970s  84 4.3.2  Internal factors: external over-indebtedness  88 4.4  The debt crisis and the lost decade in Latin America  89 4.5  The search for solutions  92 4.5.1  Adjustment programmes in debtor countries (1982–1985) 93 4.5.2  The Baker Plan (1986–1988)  94 4.5.3  The Brady Plan (1989–1998)  95

82

Contents vii

4.5.4  The results of adjustment and restructuring processes  96 4.6  The 1982 crisis in the rest of the world  97 4.7 Conclusions 102 4.8 References 103 5 The 1990s: crisis during the globalisation

105

SIMONE FARI

5.1 Introduction 105 5.2  1990–1993: the early nineties financial crisis  106 5.2.1  The end of a mania: Japan 1990  106 5.2.2  Crisis hits North America: 1990–1992  107 5.2.3  The Northern European crises: 1990–1993  108 5.2.4 Black Wednesday 109 5.3  Mexico 1994: “the tequila effect”  110 5.3.1 Macroeconomic causes 111 5.3.2 Microeconomic causes 112 5.3.3 Final remarks 113 5.4  1997–1998: the Eastern Asia crisis  114 5.4.1  The origins of the crisis  114 5.4.2  The beginnings of the crisis and the international contagion  115 5.5  1999: crisis in the South American cone  117 5.6  2000–2002: the dot.com crisis  118 5.7  Interpretation of the 1990s crises  120 5.8 References 124 6 Great global financial recession (2008–2013) MARÍA-LUZ DE-PRADO-HERRERA AND LUIS GARRIDO-GONZÁLEZ

6.1  Introduction and background of the crisis  127 6.2  The gestation of the first financial crisis of the 21st century  129 6.3  Development and expansion of the recession from the US  130 6.4  The Great Recession of 2008 in the US  135 6.4.1 Introduction 135 6.4.2  Use of CDS (Credit Default Swaps) and the fall of AIG (American International Group, Inc.)  136 6.4.3  Role of rating agencies  137 6.5  Contagion of the Great Recession in Europe (2010–2011) 138 6.5.1  The problem of risk premiums  138 6.5.2  Crisis in the Euro area  142 6.5.3  Sovereign debt and crisis  144

127

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6.5.4  Anti-crisis economic policy  145 6.5.5  New international economic regulation  146 6.6  Mild impact of the Great Recession in Latin America  148 6.6.1  Crisis in Latin America and the Caribbean (2008–2009) 148 6.6.2  Possible reasons for the lesser impact of the Great Recession in Latin America  156 6.7  Great Asian recession  159 6.7.1  Lower impact on China  159 6.7.2  Asian model for exiting the recession  160 6.7.3  China’s economic policy in the face of the crisis  161 6.8 Conclusions 167 6.9 References 168 7 Global economy vs. Covid-19 pandemic

172

MARIANO CASTRO-VALDIVIA

7.1 Introduction 172 7.2  The Covid-19 pandemic  172 7.2.1  Origin and spread of Covid-19  173 7.2.2  Pandemic control policies  174 7.3  The global economy before the pandemic  175 7.3.1 Advanced economies 176 7.3.2  Emerging markets and developing economies  177 7.4  The global economy during the pandemic  177 7.4.1 Advanced economies 178 7.4.2  Emerging markets and developing economies  178 7.5  Assessment and effects of the pandemic  179 7.6 References 180 Epilogue. The economic crises of the last century: a Spanish perspective

182

ANTONIO MARTÍN-MESA

Introduction 182 The crises of 1929 and 1973  183 The 2008 crisis  184 The latest crisis  185 Recession 186 Index188

Figures

1.1 Evolution of production and foreign trade (1929–1937) (1929 = 100) 14 1.2 Gross private investment in the US (1929–1940) (billions of dollars) 19 1.3 Indices of agricultural prices, cost of living, cost of production and agricultural wages in the United States (1919–1933) 20 1.4 Unemployment rate in the United States and in various European countries (1920–1938) 21 1.5 Index of industrial production and GDP (1932) (1929 = 100) 22 1.6 US national income (1929–1940) 26 1.7 Investment in the United States (1929–1940) 28 3.1 Crude oil prices, 1970–1985 (dollars/barrel) 73 4.1 World economic growth (1971–1982) (average annual rates) 87 6.1 Absolute and per capita GDP in the world (2007–2020) 128 6.2 Unemployment trends in the world, OECD, European Union, and Spain (% of total active population) 132 6.3 Total unemployment trends in the US, Latin America– Caribbean, Europe–Central Asia, East Asia–Pacific (% of total labour force) 132 6.4 Inflation, GDP deflation rate (annual %) in the world, OECD, European Union, USA 134 6.5 Italian and US loan risk premium (prime rate minus Treasury bill rate, %) 139 6.6 Risk premium basis points (bp) of Spain versus US and German risk premiums (referring to December except where indicated)140 6.7 Risk premium per loan in Brazil and Uruguay (prime rate minus treasury bond rate, %, logarithmic scale) 149 6.8 Trade in Latin America and the Caribbean (% of GDP) 150 6.9 World food commodity prices (deflated according to food price index 2014–2016 = 100) 151

x  Figures

6.10 Total natural resource revenues in Latin America and the Caribbean (% of GDP) 6.11 Average net terms of trade in Latin America and the Caribbean 6.12 China: GDP growth rate (annual %) 6.13 China’s exports and imports of goods and services (% of GDP) 6.14 FDI in China, net capital inflows and outflows (% of GDP)

152 155 162 164 165

Tables

1.1 Credits to stockbrokers, by origin, 1927–1929 (in millions of dollars) 9 1.2 New York Stock Exchange (1913–1929): stock price index (1935–1936 = 100) 10 1.3 Share prices in selected markets from September to December 1929 (monthly indices calculated on different bases) 11 2.1 GDP of various European countries 39 2.2 Casualties in WWII 44 3.1 Evolution of oil prices between October 1973 and January 1974 (reference prices in dollars per barrel) 61 3.2 GDP and GDP per capita growth, 1950–1973 and 1973–1992 (in percentages) 63 3.3 Impact of the oil crisis on developed countries (percentages) 64 3.4 Unemployment trends in industrialised countries during the first oil crisis (as a percentage of the labour force) 65 3.5 Trends in world trade, 1963–1981 (percentage change from previous year) 66 3.6 Growth of GDP and gross energy consumption between 1973 and 1999 (annual percentage) 70 3.7 Consumer prices during the second oil shock (rates of change) 74 3.8 Average annual growth rate of GDP and GDP per capita, 1993–2002 (in percentages) 78 4.1 External debt of Latin America and the developing countries as a whole (1973–1982) (billions of dollars and percentages) 86 4.2 GDP growth rates in Latin America (1980–1990) (average annual rates, percentages) 90 4.3 Inflation in Latin America (1970–1990) (average annual rates, percentages)91 4.4 World economy: annual GDP growth rate (1970–1990) (average annual growth rates, percentages) 98 4.5 Europe: total unemployment rate (percentage) 100 6.1 World Economic Growth Indicators (annual %) 128 6.2 Unemployment trend (% of total work force) 131

xii  Tables

6.3 Net terms of trade index: Latin American (LA) and Caribbean Countries (2000 = 100) 6.4 FDI, net capital inflows and outflows (% of GDP) 6.5 China: FDI flow 7.1 Overview of the World Economic Outlook projections (percent change)

153 164 166 176

Contributors

Juan Manuel Matés-Barco Professor of Economic History and Business History at the University of Jaén. Graduate of the University of Zaragoza. Doctor from the University of Granada. Research stays in prestigious universities in Italy, France, and Portugal. Four six-year research periods recognised by the National Commission for the Evaluation of Research Activity (CNEAI. Ministry of Universities. Spain). Director of the journal Agua y Territorio/Water and Landscape (AYT/ WAL). Researcher at the Permanent Seminar on Water, Territory, and the Environment: Public Policies and Citizen Participation. Coordinator of several research projects. Head Researcher of the Group of Historical Studies on the Company (GEHESE-UJA). María Vázquez-Fariñas Lecturer in History and Economic Institutions Area (Department of Economic Theory and History) at the University of Málaga (Spain). PhD in Social and Legal Sciences and Degree in Business Administration and Management from the University of Cádiz. Actively involved as a component of the Research Group of Historical Studies on the Enterprise (GEHESE-UJA) and part of the Editorial Board of the journal Agua y Territorio/Water and Landscape (AYT/WAL). General lines of research focus on the economic and business history of 19th-century Cádiz (Andalusia, Spain) and the development of public services in contemporary Spain. Author of many works on these subjects published in national and international journals and publishing houses. Leonardo Caruana de las Cagigas Tenured Professor at the University of Granada. Has published From Mutual to Multinational, Mapfre, 1933–2008, with Gabriel Tortella Casares and José Luis García Ruiz; Corporate Forms, edited by Robin Pearson and Takau Yoneyama; with André Straus (eds.), Highlights on Reinsurance History, Bruxelles, 2017; Role of Reinsurance in the World: Case Studies of Eight Countries, Palgrave Studies in Economic History, 2021; and, finally, The International

xiv  Contributors

Expansion of the Spanish Insurance Company MAPFRE, in Entrepreneurship in Spain: a History, Routledge, edited by Juan Manuel Matés-Barco and Leonardo Caruana de las Cagigas. Mariano Castro-Valdivia Lecturer of Economic History at the University of Jaén. Graduate in Economics from the University of Valencia. Doctor from the University of Jaén. Research stays at the Università degli Studi di Roma La Sapienza (Italy) and the Université Michel de Montaigne Bordeaux 3 (France). One six-year research period recognised by the National Commission for the Evaluation of Research Activity (CNEAI, Ministry of Universities, Spain). Research experience in the field of public services and the evolution of foreign investment in contemporary Spain. Researcher in several R+D+i projects of the Ministry. Secretary of the journal Agua y Territorio/Water and Landscape IAYT/WAL). Member of the Research Group of Historical Studies on the Enterprise (GEHESE-UJA). María-Luz De-Prado-Herrera From 1998 to 2018, she was Lecturer of Contemporary History at the Pontifical University of Salamanca. Since 2020, she has been at the University of Málaga. Her research includes the Spanish Civil War (1936–1939) and women’s history. She has about 30 national and international publications, including: The Popular Contribution to the Financing of the Civil War: ­Salamanca, 1936–1939, 2012; Robledo, R. (ed.), This Wild Nightmare: Salamanca in the Spanish Civil War, Barcelona: Crítica, 2007; Cuesta, J., and others (eds.), Wise Women? University Women in Spain and Latin America, Limoges: Presses Universitaires de Limoges, 2015. Simone Fari Associate Professor of Economic History at the University of Granada (Spain), where he has been since 2010. He previously covered posts as Lecturer in Economic History at the University of Turin, studied as a post-doctoral student at University of Lugano, and was a Fellow researcher at London Science Museum. He was awarded a PhD in Economic History at the University of Bari, Italy, in 2005. Currently, he is researching along two main lines: the fourth industrial revolution and the history of mobilities. His research and teaching activity are characterised by a high level of interdisciplinarity, moving between history, economics, history of technology, and social science history. Luis Garrido-González Professor of Economic History and Institutions at the University of Jaén. Was the editor of the book New Contemporary History of the Province of Jaén (1808–1950), Jaén: IEG, 1995. Publications as co-author include Economics and Economists Spaniards in the Civil War, 2008, edited by Enrique Fuentes

Contributors xv

Quintana. He has also published articles in leading journals in his field of study, such as: Industrial History; Investigation of Economic History; Journal of Agricultural History; and Ayer: Journal of Contemporary History. Currently, he is Chief Editor of the Bulletin of the Institute of Jaén Studies, CSIC-Spanish National Research Council. Antonio Martín-Mesa Professor of Applied Economics at the University of Jaén (1992/2021). ­Director of the Cátedra de Planificación Estratégica Territorial of the University of Jaén (2009/2021). Director of the Real Sociedad Económica de Amigos del País in Jaén (since 2015). Director of the Observatorio Económico de la Provincia de Jaén (since 1996). Head Researcher of the Group “Applied Economics Jaén” (1989–2016). Director of the Plan Estratégico de la Provincia de Jaén (1998–2008). Chairman of the Mercado de Futuros del Aceite de Oliva (2004–2009). Director of the Economics Department of the University of Jaén (1996–2004). Full member of the Instituto de Estudios Giennenses (since 1992). Julio Tascón Fernández Tenured Professor at the University of Oviedo, Department of Economics, Dean (Nov. 2014 – Dec. 2018); Vice-Dean of International Relations and ECTS coordinator, School of Economics and Business (2010–2011). Selected publications: Historia Económica Mundial: Una perspectiva eurocéntrica de la actividad económica, del Neolítico al siglo XXI, Biblioteca Nueva, Grupo Editorial Siglo Veintiuno, Madrid, 2012; “La inversión directa estadounidense en el sur de Europa: El papel de las variables institucionales (1966–2014)”, Revista de Economía Mundial, no. 44, 2016, 173–193; European Capital Movements (FDI) 1958–2018 Dataset, EUI Research Data, 2020, Robert Schuman Centre for Advanced Studies. European University Institute (https://hdl.handle. net/1814/68416). María José Vargas-Machuca Salido Graduate in Economic and Business Sciences from the University of Navarra and PhD from the University of Jaén. Lecturer in the Department of Economics at the University of Jaén, where she teaches the subject of the Spanish financial system in various degrees. She belongs to various research groups and teams related to her area of knowledge. Her research has focused on the history of the financial system, especially at the local level, a subject on which she has published several articles in specialised journals and chapters in collective works published by renowned national and international publishers.

Foreword

I am grateful to the authors of this book for the opportunity to write this brief foreword. Indeed, when the international economy suffers a serious crisis, such as the current 2008/2022 crisis, capable economic historians provide interpretative analyses of the origin, development, vicissitudes, and foreseeable effects of this phenomenon, which disrupts the domestic economic activities of countries, as well as those related to foreign countries, thus slowing down the world economy. This book, therefore, is the brilliant response of Professors Juan Manuel Matés-Barco and María Vázquez-Fariñas, with a select team of researchers, to the aforementioned crisis of the present, which is fully active. With good criteria and from a cyclical and dynamic conception, these professors relate the current situation with previous economic fluctuations, which had their origin in the crisis of the capitalist industrial system, known as the crisis of 1929, which arose between the two world wars. Faced with such a crisis, and before the end of the conflict, in 1943, a response to it emerged, inspired by John Maynard Keynes, through the Bretton Woods agreements, which guaranteed international monetary and exchange rate stability, accompanied by the Marshall Plan, the origin of Europe’s Golden Age (1950–1973) and the economic growth of the Western world in this period. The devaluation of the dollar in 1971 put an end to the Bretton Woods system, and a floating exchange rate system was installed, which has survived to the present day. Structurally, the oil crisis was driven by the change in relative prices, which favoured oil and the primary sector in general, against industrial prices. Counter-cyclical policies, then, were inspired by neoliberal principles, accompanied by crises in Keynesian conceptions, which were disqualified under the impulse of growing financial globalism. This led to the next crisis of 1991–1993, ostensibly with the speculation and successive devaluations of the pound sterling, and also the crisis of the monetary system of the European Union, which responded, at the turn of the 20th century, with the unified monetary order of the Euro. Stemming from neoclassical monetary principles, this supported an apparent international economic recovery, based on a fragile, non-explicit banking structure, with the core of businesses increasingly distant from Keynesian criteria of industrialising impulse.

Foreword xvii

That fragility exploded in 2008, with multiple banking crises and companies suffocated by effective stagflation. In the European Union, the political reaction persisted in the neoliberal canons of indiscriminate reduction of public spending, even in non-discretionary investments, inducing, in the business sphere, nominal decreases in current wages, nothing more disqualified by Keynes’ theory, and consequent stagnation of productive activities. This depressive dynamism, also fuelled by the Covid epidemic, has rightly forced the European Union to turn its economic and financial policy around, with mutualised bonds and expansionary spending content feeding the next EU generation; all in all, the war in Ukraine adds to the uncertainty. Personally, in the wake of the oil crisis, I was a pioneer in showing, econometrically, the effective impact of the 1929 crisis in Spain, although its intensity was lower than in the United States and other more industrialised countries. In Spain, it manifested itself, in very quantified terms, in a fall in industrial GDP, a drop in foreign trade, and also employment, especially from 1932 onwards, when the United Kingdom diverted imports of agricultural products to Commonwealth countries, previously purchased from Spain, such as Valencian rice, which would then be bought from Ceylon. In those years, valuable monographs on the Great Depression had proliferated in American universities, under the influence of John Maynard Keynes’ General Theory, which invited the study of economic cycles, with dynamic approaches, related in their origin to monetary changes and to other aspects, such as structural factors. The pioneering monetary explanation of the 1929 crisis was published by Milton Friedman and Anna J. Schwartz (Princeton, 1965). In 1978, Peter Temin published Did Monetary Forces Cause the Great Depression? In 1945, Folke Hilgerdt had pointed out that the slowdown in Latin American industrialisation in the 19th century was due to the negative trend in the terms of trade for countries exporting primary products compared to industrial countries. This approach was followed by the Nobel Prize winner Arthur Lewis (1949) to explain the 1929 crisis, adopting a sectoral rather than a geographical approach (Economic Survey, 1919–1939). In 1973, Charles Kindleberger published The World in Depression 1929–1939, taking intersectoral relative prices as an independent variable, expressed for numerous countries. Ben Bernanke, Nobel Laureate in Economics 2022, published “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression”, The American Economic Review, 1983. In that article, he stressed the importance of studying economic institutions, in particular financial institutions, which, rather than being a “veil”, can affect transaction costs and thus market and distributional opportunities. He also postulated that we were living in a new era called the “Great Moderation” where, according to him, modern macroeconomic policy had reduced the volatility of the business cycle, to the point where it should no longer be a central theme in economics. Later, Bernanke would see that his assertion had indeed been fulfilled during the Bretton Woods system; but with the floating exchange rate system, which emerged with the

xviii  Foreword

devaluation of the dollar (1971, New Economic Policy, Nixon Administration), crises would be cyclically intense, in particular the 2008 crisis, which emerged during his tenure at the US Federal Reserve. According to The New York Times, Bernanke was attacked for failing to foresee the financial crisis, for bailing out Wall Street, and, more recently, for injecting an additional $600 billion into the banking system to jump-start the sluggish recovery. Evidently, this criticism came from neoliberal positions; today, however, Bernanke has been awarded the Nobel Prize. Together with my colleague Pedro Fraile, at an international congress (Berne, 1986) we presented an essay, The Twentieth Century’s Two Big Crises: Origins and Similarities, in which we emphasised structural factors as opposed to monetary factors to explain both the 1929 and 1973 crises, highlighting Bernanke’s position, who had pointed out (1983) that the key to the 1973 crisis had been the deficient structure of the US banking system. Crises affect different territories with different intensities or in different ways, according to their specific economic structures. Keynesian theory shows that the resources allocated to investment, the starting point for promoting GDP and employment growth, do not necessarily generate inflation; it will depend on the sectors in which they are invested and their elasticity to gain productivity and stimulate demand, in addition to the elasticities of other variables, which do not necessarily generate an inflationary process. It is another matter that Keynes reasoned that a certain amount of inflation could be an incentive for investors, since a dynamism of rising sales prices ahead of production costs is stimulating for entrepreneurs and for the moderate capitalism projected by Keynesian economics. Today, the situation is completely different. Modern Monetary Policy (MMP), essentially Keynesian, though perhaps for some excessively schematic, in its approach and in its defence of budget deficits, does not complain about populist public spending policies, which do not make explicit the limits that inform a country’s public deficit and debt. The large volume of available resources is exalted; but the elements of their application and effects must be analysed in concrete terms and with the utmost rigour. In recent times, the idea that a restrictive public spending policy to overcome the current viral-economic crisis would be a very serious mistake, given the negative effects of the policies implemented in the face of the 2008 crisis, has been gaining momentum. Stephanie Kelton, a distinguished representative of the MMT and head of the Economics Department at the University of Wisconsin–Kansas City, a leader in Health Economics, points out in her recent book (The Deficit Myth, 2020) that maintaining a fiscal deficit and the expansion of public spending by increasing the money supply to prevent economic stagnation that generates social inequality is good and helps to spread wealth, warning that the current crisis is a continuation of the financial crisis of 2008. However, he also points out that the limit to the speed of an economy is not in the deficit but in inflation.

Foreword xix

That theory of MMT, considered in the final analysis – Professor Kelton’s work contains a sophisticated and well-argued scientific development, backed up by experience – has the appearance of effective viability in countries that have monetary sovereignty, such as the United States, Japan, the United Kingdom, or Canada; but it would be more difficult for it to be successfully applied in the Eurozone, given that here there is still no fiscal unity and monetary policy is conditioned by the tax and budgetary diversity of the member countries, such as Spain. I conclude by predicting an effective dissemination of this book, and I hope that its contents will project effective interpretations of the current economic reality, in order to promote counter-cyclical policies that restore prosperity and economic well-being to societies in all latitudes, while respecting national conditions, disaggregating indicators according to sectors and localities. Juan Hernández Andreu Professor Emeritus at Complutense University of Madrid

References Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression”. The American Economic Review, vol. 73, no. 3 (1983): 257–276. Fraile, Pedro, and Juan Hernández Andreu. “The Twentieth century’s two big crises. Origins and Similarities, The impact of the depression of the 1930’s and its relevance for the contemporary world”. In The Impact of the Depression of the 1930’s and its Relevance for the Contemperary World. A/5 session, 9th International Economic History Congress (Berne), ed. Tibor Iván Berend and Knut Borchardt, 355–365. Budapest: Karl Marx University of Economics, Academy Research Center, East-Central Europe, 1986. Friedman, Milton, and Anna J. Schwartz. The Great Contraction 1929–1933. Princeton, New Jersey: Princeton University Press, 1965. Kelton, Stephanie. The Deficit Myth: Modern monetary and the Birth of the People’s Economy. Ashland: Public Affairs, 2020. Kindleberger, Charles P. The World in Depression, 1929–1939. Berkeley and Los Angeles: University of California Press, 1973. Lewis, Arthur. Economic Survey, 1919–1939. London: Unwin University Books, 1949, 1966.

Preface

This book aims to study the economic crises of the last hundred years. The frequency and repetition of these cycles demand an analysis that allows us to discover the causes of these situations and the problems they have generated in the world economy. On several occasions, economic crises have been the result of political or military conflicts; but they have also been the consequence of bad practices, unbridled speculation, excessive greed for wealth, or poor management by the leaders of nations. For this reason, the interest of this work is to investigate these problems and describe the causes that have given rise to each of the crises that occurred throughout the 20th century and the beginning of the 21st century, analysing their consequences and the ways in which they have spread internationally. In recent decades, the growing interest in economic crises, their causes, and consequences, as well as the ways to deal with them in the best possible way, has motivated the development of this type of studies. However, most publications in recent years have focused mainly on the Great Depression of 1929, ignoring the fact that there are other important recessions in the global economy. For this reason, this book provides a study of great interest for understanding economic cycles and how they work throughout history and not just at a specific moment in time. On the other hand, in the 21st century we are immersed in a new cycle of economic recession, and the studies presented here help to better understand the present situation. This research aims to provide another reading of the main crises, their causes, and consequences, as well as the measures and policies adopted to overcome these critical situations. These studies are carried out with the aim of establishing relationships between the different crises of the last century and finding possible similarities and differences. In essence, the overall objective is to learn from the past, which is essential for understanding economic events and making sound decisions in a globalised world. In economics, the word “crisis” is the term most commonly used to express a difficult and complex situation for a country, a company, or the citizens themselves. This is an expression that has been used since the 20th century, especially after the crisis of 1907. Before that date, it was more common to use the word “panic”. To a large extent, the change came about because of the scenario it presented: fear of investment and fear of any economic process that

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entailed some risk. The move in language was intended to soften the terms of the scenario. The crash of the New York Stock Exchange in 1929 endorsed the trend and in an attempt to alleviate such a bleak outlook, the term “depression” began to be used, which had a softer tone and implied that it would be a temporary situation. In any case, “panic”, “crisis”, “depression”, “recession”, etc., are words that have become established among ordinary citizens since the beginning of the 20th century and, above all, in the first decades of the 21st century. Generally speaking, successive economic crises have been caused by a breakdown in the balance between production and consumption, characterised by a collapse in demand, the consequent business failures, and the resulting unemployment. During the Ancien Régime, the so-called subsistence crises were generated. Adverse weather conditions could provoke a period of bad harvests that led to famine, epidemics, and a weakening of the population. Trade and handicraft industry contracted systematically in the face of the delicate situation. For example, the crisis of 1348 was the result of several years of poor agricultural production, food shortages, and an epidemic such as the Black Death, which resulted in a very high mortality rate. The changes brought about by the industrial revolution from the 19th century onwards generated the so-called crises of overproduction or market saturation, often closely linked to financial crises. Throughout this century, subsistence crises and industrial crises sometimes coexisted. The combination of both crises – subsistence and overproduction – had a very negative effect on a large part of the population. The 1929 crisis was a clear example of so-called overproduction or market saturation crises. The 20th century, with its two world wars and the oil crisis of 1973, to name but a few of the most relevant moments, has been the testing ground for many critical situations. Moreover, the last decades of this century have seen significant financial crises with great intensity. In the international literature on the subject, it is common to distinguish between banking crises, currency crises, and “twin” crises. On the one hand, systemic banking crises are characterised by episodes in which an increase in non-performing loans leads to serious liquidity stress. Faced with this situation, the respective governments intervene in an extraordinary way by guaranteeing deposits, promoting bank takeovers or mergers, and injecting liquidity and capital into the banking system. On the other hand, currency crises correspond to episodes of massive asset sales, leading to a sharp fall in international reserves and a substantial devaluation of the exchange rate. “Twin” crises are characterised by mutual feedback between different typologies, usually coinciding with a mixture of banking and currency crises. In some cases, they are related to the level of a state’s external indebtedness and can lead to a “triple crisis” (banking, currency, and debt). The latter is often accompanied by the suspension of interest payments to investors by the government or the private sector. On other occasions, there have also been financial crises represented by real stock market crashes, characterised by a sharp fall in the price of movable assets – usually

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after a phase of increase known as the “real estate bubble” – typical of many situations such as those experienced in 2008 and leading to real “financial panics”. The economic and financial crises of the first decades of the 21st century, like many of those of previous eras, have been characterised by not only major market failures, but also the ineffectiveness of many governments and serious errors in state policies. The problems arising from asymmetric information have been very large and have led to high-risk situations, agency corruptness, imitation of wrong behaviour, and contagion processes. Moreover, governments have not been able to deal effectively with market failures and have even contributed to and multiplied the negative effects of incipient crises through their misguided policies. We therefore consider it necessary to analyse in detail the main crises that have occurred throughout recent history and, more specifically, from the first third of the 20th century to the present day. To this end, this volume includes eight chapters that cover the main economic crises, analysing in detail their causes or origins, their development, their main consequences, and the policies developed to overcome the situation in each case, among other aspects. In the first chapter, Juan Manuel Matés-Barco – Professor of Economic History and Business History at the University of Jaén – presents a study on the 1929 crisis and its effects on the world economy, especially in the West. To this end, a brief overview is given to the instability and uncertainty in the economy prior to the outbreak of the crisis. Likewise, the causes of the New York stock market crash, its repercussions, and the spread of the crisis to the main European countries are analysed. On the other hand, the recovery policies that some states implemented to mitigate the effects of the crisis are described. Finally, it takes stock of the crisis and its effects on subsequent developments in the North American and European economies. In the second chapter, Leonardo Caruana (University of Granada) and Julio Tascón (University of Oviedo) consider Europe after World War II in 1945– 1946. This war was by far the worst conflict that had occurred in Europe, and the destruction was massive. In the east of Europe, Leningrad was completely destroyed, as was Stalingrad, many places in Italy, and the cities of Saint-Nazaire or Roan in France. However, Warsaw probably suffered the greatest amount of destruction, while the image usually put forward is that of cities in Germany: Berlin or Hamburg, both of which were ghost cities. More than five years of war had terrible consequences for Europe. The population suffered enormously, and it is difficult to explain the horror, the inhumanity, and the crimes that occurred extensively throughout Europe, especially in the east. Hunger and deprivation of basic goods were unfortunately normal. As this chapter explains, the United Nations played an essential role in providing first aid to Europe and its population. In the third chapter, “Major economic recessions in the last quarter of the 20th century: the oil crisis (1973–1980)”, María Vázquez-Fariñas (University of Málaga) analyses the crisis of 1973 and all its main features. Oil has been considered one of the main sources of energy since the advent of the second

Preface xxiii

industrial revolution. Its consumption increased enormously throughout the 20th century, generating a strong dependence on this resource on the part of the most industrialised countries. In this context, the arrival of the oil crisis in 1973 and its reactivation in 1979 led to a paradigm shift in Western economies. The interventionist economic growth model that had prevailed in industrialised economies after the Second World War ended up collapsing and gave rise to new economic policies that completely changed the development model. Therefore, this chapter analyses the background and causes of this crisis, its effects, the main consequences, and the measures adopted to overcome the recession, as well as the characteristics of the new global economic environment that emerged, mainly due to high inflation and low growth in Western Europe. In Chapter 4, María José Vargas-Machuca (University of Jaén) studies “The external debt crisis and the ‘lost decade’ in Latin America (1980–1990)”. In August 1982, the Mexican government announced the impossibility of servicing its external debt as a result of the increase in interest rates, the evolution of the dollar price, and its own internal economic conditions. And it was not the only case. A year earlier, Costa Rica had also declared a moratorium on its foreign debt. In a short time, the difficulties reached other countries in a similar situation, which also suspended the payment of their external commitments. Thus began one of the most severe crises that Latin America had suffered in the last century, threatening the solvency of major international banks, especially the United States. The process of economic adjustment was long and costly, leading to what is known as the “lost decade” of growth in the region. So, the objective of this chapter is to delve deeper into this period of crisis, which was particularly intense in Latin America, but had serious consequences for the world economy. Chapter 5, by Simone Fari (University of Granada), describes “The 1990s: crisis during globalisation”. The last decade of the 20th century is usually considered a period of economic growth. Nevertheless, financial and banking crises shook some national economies around the world. At the beginning of the 1990s, crises took place in Japan, the United States, Canada, Finland, Sweden, and Norway. In 1994, Mexico faced a strong devaluation crisis that switched to a national economic crisis. At the end of the decade, financial crises arose in two different (but related) regions: Asia and South America. Finally, at the start of the new millennium, the dot.com bubble exploded because of the amazing development of the “new economy” during the 1990s. Were these crises mere fluctuations of the global free market, as liberal economists suggested? Following the neo-Schumpeterian interpretation, the chapter suggests these crises represented the typical transition from a technological paradigm to the next. In the sixth chapter, María-Luz De-Prado-Herrera (University of Málaga) and Luis Garrido-González (University of Jaén) conduct extensive research on the “Great global financial recession (2008–2013)”. The economic growth that occurred between 1994 and 2006 created an optimistic euphoria that led most people to believe that crises were a thing of the past. Between 2007 and 2008, this optimism faded. Humanity is now faced with the inexorable evidence

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that, from time to time, economic cycles of recession or growth emerge that, together with globalisation, bring about significant changes in the world economy. Following this introduction, this chapter analyses the origin and causes of the first great global financial recession of the 21st century. The work initially focuses on the case of the United States, which is examined in detail to explain the importance of the use of a series of complex, high-risk financial products and the role played by rating agencies. The study is then extended to Europe, Latin America, and Asia. The corresponding sections are devoted to these regions, in that order, in an attempt to clarify the peculiarities of the recession that took place in each of them. In Chapter 7, “Global economy vs. Covid-19 pandemic”, Mariano CastroValdivia (University of Jaén) analyses the effects of the Covid-19 pandemic on the global economy, differentiating between advanced and developing economies. The analysis is preceded by a brief history of the origin and dissemination of the infection and the policies to control the pandemic. In addition, the author analyses the state of the world economy prior to the onset of the pandemic by examining its main macroeconomic indicators. The study continues with the evolution of these macroeconomic indicators, and it also takes a balance sheet of the pandemic and its impact on the global economy, including the prospects for recovery in the face of the uncertainty generated by new variants of Covid-19 and the war between Russia and Ukraine. Finally, Antonio Martín-Mesa (University of Jaén) presents a final reflection that brings together the main aspects dealt with in a conference given at the Cátedra de Internacionalización of the University of Jaén on 24 October 2022. This chapter analyses the main characteristics that the economic crises of the last century have brought to Spain, focusing mainly on the 1929 crisis, the 1973 oil crisis, the 2008 crisis, and the latest crises caused by the Covid-19 pandemic and the Russian invasion of Ukraine. This general analysis is intended to make the reader reflect on the current state of the economy and the measures that could be taken to overcome the situation. These studies, and this book as a whole, are intended to be a reference work for the courses on economic history and the history of the company, but also a study and consultation text for academics, researchers, professionals, and readers in general. The works are the result of rigorous and detailed studies and capture the crises around the world and throughout history. In essence, these have been the main motivating factors behind the preparation of this work. Juan Manuel Matés-Barco University of Jaén María Vázquez-Fariñas University of Málaga

Acknowledgements

It is essential to thank all those who have made this work possible. Firstly, sincere thanks to the anonymous and external evaluators for the suggestions and guidance they provided to improve the contents of this book. Secondly, the warm response offered by the Taylor & Francis group for the publication of this project through the Routledge publishing house must be acknowledged. Nor can we forget the help provided by Andy Humphries as the publisher for Economics, Business, and Law at Routledge, and Holly Martin as the Editorial Assistant for Economics. Their attention and assistance have been invaluable. Thanks also to Professor Juan Hernández Andreu for his willingness to write the foreword, which introduces and greatly enhances this book. We would also like to thank Professor Antonio Martín Mesa for his reflections on the economic crises of the last century in Spain, which are the perfect culmination of this book. Finally, this research is part of the results of the Plan Propio de Investigación 2022 of the University of Jaén (Spain), so this work has been possible thanks to the support of this institution.

1 The Great Depression of 1929 Crisis in the world economy Juan Manuel Matés-Barco

1.1  The Western economy in the early 20th century The 20th century was marked by dramatic upheavals: two world wars – of great severity and destruction – and several economic crises. The “interwar period” (1918–1939) ran from the end of the First World War to the beginning of the Second World War. During these years, two events stand out: the birth of the Soviet Union and the economic crisis of 1929. In this chapter, we will deal with the second of these events. The outbreak of the First World War upset the international equilibrium of the early years of the 20th century. Until 1914, the political rivalry of the great powers had not generated tensions of such scope and gravity. From that year onwards, events far outstripped the attitudes of politicians and rulers (Casanova 2011). After an acute post-war crisis followed by a short depression in 1920, the industrialised countries of the West benefited from a period of expansion that lasted until 1929 (Aldcroft 1989). Political, social, and economic life had weakened in Europe, and some countries were on the verge of bankruptcy in the early post-war period. Growth during these years was very uneven. Britain suffered through a precarious situation after the deflationary experience of 1925, which led to a return to the gold standard; France endured tremendous instability; and Germany was plagued by terrible hyperinflation. In Spain, economic growth was similar to that experienced in the rest of Europe and coincided with the favourable international environment after the war. However, by 1930, the difference in Spanish GDP per capita compared to the most advanced countries was still considerable (Carreras and Tafunell 2010; Sánchez and Catalán 2013). The fragile foundations of the “Roaring Twenties” were largely overlooked out of ignorance. The crisis erupted in October 1929 with the collapse of the New York Stock Exchange. The depression spread rapidly around the world. Widespread unemployment affected almost every country and the national economy and trade declined sharply. Traditional liberalism was called into question and there was talk of a “deep crisis of capitalism”. The shock was very serious for the capitalist system because in those same years the whole world witnessed the first steps of a collectivist economy taking hold in the Soviet Union (Comín 2011b). DOI: 10.4324/9781003388128-1

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Between 1929 and 1932, the world experienced one of the worst depressions in history. The existing state of economic science was powerless to solve the problem, and the decisions taken by governments were, on the whole, misguided. Policies tended to be protectionist in nature, designed to insulate national economies from external “contagion”. Attempts at international cooperation failed at the London Conference of 1933. Each country avoided “external contamination” and sought to “export its unemployment” through protectionist policies (Parker and Whaples 2013). A case in point is the United States, which imposed very high tariffs. At this juncture, the depression spread very quickly, mainly because of the sheer scale of the US economy compared to the rest of the world. In 1929, 40% of world manufacturing production was located in the United States; its imports represented 12% of the world total, while its exports accounted for 15.8% globally (Matés-Barco 2017a). The improvement in 1933 had little to do with government recovery programmes, although some instigated ambitious plans to boost their economies. The recovery was very slow and uneven, especially in terms of job creation, to the extent that on the eve of the Second World War there were still a number of countries with very impoverished economies. This precarious situation led to rearmament policies that reactivated the arms industry, a major consumer of industrial raw materials. These actions were not only a danger to world peace, but also a fertile breeding ground for fascism.

1.2 Peace and economic instability in the 1920s Throughout the 19th century, the European continent experienced significant economic development. Sidney Pollard (1991) has noted that this process can be seen as a general phenomenon that transcends national borders, although it was most prominent in Europe and North America. Economic growth rates were modest and very uneven across countries, but were particularly strong in Britain, France, Germany, Belgium, and the Netherlands. However, the war of 1914–1918 was the dramatic precedent for the Second World War and led to significant stagnation. For all those who witnessed the high number of casualties, or the levels of destruction caused by this event, it was such a shock that it was referred to as the “Great War”. Once peace was achieved, far from alleviating economic problems, it arguably increased them for two main reasons. Firstly, because it led to increasing financial and monetary instability and, secondly, because it stimulated a certain economic nationalism. The best known of the treaties was that of Versailles, which established peace with Germany. Apart from territorial compensation for regions such as Alsace and Lorraine, the treaty allowed France to occupy the Saar Valley coal basin for 15 years and ceded parts of Prussia and part of Upper Silesia – rich in mineral deposits – to Poland. But the most significant aspects, apart from border adjustments, centred on dispossessing Germany of much of its mineral resources (iron, zinc, coal), depriving it of 13% of its arable land, as well as its colonies in Africa and the Pacific. In addition, it had to give up its

The Great Depression of 1929 3

navy, most of its merchant fleet, locomotives, wagons, trucks, etc. In short, it was a humiliating and rather onerous surrender, reflected in the famous War Guilt Clause in Article 231, which stated that Germany was responsible for having started the war. Basically, the Allies were attempting to justify the reparations that Germany had to make in compensation for the destruction caused by the war. But the Allies did not take a uniform position, and a Reparations Commission was appointed, which was to report by 1 May 1921. John Maynard Keynes, economic adviser to the British delegation to the peace treaty, warned of disastrous consequences for the whole of Europe if the demands for reparations were maintained. After resigning from the delegation because he did not agree with the measures adopted, he set out his reasoning, ideas, and approaches in a well-known book entitled The Economic Consequences of the Peace (Keynes 1919/1991). These ideas were much debated, but the passage of time confirmed his dramatic predictions. In Western Europe, some countries adopted very restrictive measures, such as protectionist tariffs and import bans on certain products. Others promoted their own exports through subsidies. Britain, an advocate of free trade, neglected this practice by maintaining and increasing the tariffs it had already put in place during the war in order to achieve its funding. Even the United States imposed very restrictive protectionist legislation, enacting laws such as the Emergency Tariff Act (1921), which banned imports of German dyes; the Fordney–McCumber Tariff Act (1922), with one of the highest tariff levels in American tariff history; and the Smoot–Hawley Tariff (1930), which even exceeded the rates of the 1922 law and provoked a chain reaction from other countries, which responded by increasing their tariffs against American products. Ultimately, the practice of such exaggerated economic nationalism, embodied in countless protectionist provisions, led to a slowdown in production and the establishment of lower than desired income levels (Hynes, Jacks, and O’Rourke 2012). But it was not only economic nationalism that caused the collapse of the international economy; financial and monetary disturbances also played a major role, with the problem of war reparations as a backdrop. At the end of the war, the debts of the Allied bloc countries amounted to more than $20  billion, which had been lent mainly by the United States and Great Britain. American leaders viewed the loans as simple commercial transactions, but they encountered European reluctance to repay these obligations. As this controversy manifested itself in all its crudeness, the issue of reparations emerged, as Britain and France demanded that Germany pay them not only for civilian damages, but also as compensation to cover the full cost of the war. The Reparations Commission estimated that Germany would have to pay 132  billion gold marks (about $3 billion), more than twice its national income. The precarious state of the international economy, coupled with the pressure on Germany to make the payments, resulted in uncontrolled inflation, leading to a disastrous situation in November 1923, when one US dollar was worth 4.2 trillion German marks (Holtfrerich 1986). A mark was worth less than the paper it was printed on.

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Hyperinflation not only occurred in Germany but also spread to other nations such as Bulgaria, Austria, and France itself. This led the League of Nations to adopt stabilisation measures that achieved their objectives by 1926. Although disputed, Keynes’ predictions about the crisis in the international economy seemed to be coming true. To turn the situation around, an international loan of some 800  million marks was granted to Germany, in addition to lower annual reparation payments. This loan, mostly from the United States, enabled Germany to resume paying reparations and to obtain the foreign exchange it needed to modernise its industry. Periods of war have a strong influence on economic activity. The post-war depression was quite severe, but very brief. It was followed by a longer period of expansion lasting until 1929, at least in the United States, which can be considered the peak of American and world prosperity. The American economy benefited from the thrust that the exigencies of war imposed on industrial production, both between 1914 and 1919 and between 1939 and 1945. The United States emerged stronger from the First World War. In the years that followed, it became the leading exporter of goods and services, as well as the leading investor of capital in other countries. In the meantime, Europe had to rebuild itself from its ruins. To help in this task, in 1919, the American government created the American Relief Administration (ARA) to provide economic aid to certain central European countries threatened by crisis and famine. In 1929, aid from the ARA totalled 1.415 billion dollars in foreign currency (29%), loans (63%), and grants (8%). The loans were never to be repaid because of the 1929 crisis. The situation in Europe, although challenging because of reconstruction needs, was not critical. The main problem lay in the difficulty of transforming a wartime economy into a peacetime one. The mass demobilisation of soldiers from the army could lead to a sharp rise in unemployment, but the forced savings accumulated during the war made it possible to finance the purchase of consumer goods to rebuild the household economy. The strong demand for consumer goods, especially in Great Britain, made it possible to hire this huge mass of demilitarised young men. The demand for capital and intermediate goods also increased as a result of the inflationary expansion process. In 1920 and 1921, the data show the severity of the crisis: the manufacturing industry shrank by 30% in Britain and 24% in the United States, and prices fell by about 37%. The depression was deep but short lived and is evidenced by the decline in demand for consumer durables. Several factors played a role in the fall in economic activity. On the one hand, the normalisation of international trade and the supply of raw materials and, on the other, restrictive monetary policies played an important role in this trend. The instability of 1920 is the prototype of a crisis of reconversion from a wartime to a peacetime economy. France also suffered serious imbalances, although they were not as deep as in Britain and the United States. Reconstruction boosted demand for capital goods and stemmed the depression. Budgetary and financial policy contributed to the maintenance of aggregate demand, as equilibrium was assured by advances from

The Great Depression of 1929 5

the Bank of France. Between 1922 and 1929, there was a period of expansion, although there were differences among countries. Two minor recessions in 1924 and 1927 softened this economic upswing. The 1920s saw international monetary reconstruction within the framework of the famous gold exchange standard, the failure of which in 1930 played a major role in the world crisis. Inflation inflicted deep wounds on European society, especially in Germany and Britain. The dire situation of the Germans, especially the middle class, wage earners, and workers, led to the inclination of these groups towards extremist politicians. It is symptomatic that the national socialists (Nazis) and the communists increased their parliamentary representation in the Reichstag in the 1924 elections. German hyperinflation followed the upswing in foreign exchange rates, which was faster than the rise in prices. In a second stage, rising prices took the lead, but foreign currencies (dollar, pound, franc) gradually replaced the mark as a means of domestic payment. German production increased until the beginning of 1923, so the government launched a stabilisation policy and created the Rentenbank and the Rentenmark. The Rentenmark was a currency guaranteed by the national wealth, endowed with legal tender status and with the same value as the pre-war gold mark. One Rentenmark was exchanged for 1 trillion paper marks. The operation generated confidence in the German currency and made it possible to obtain credit in 1924, which facilitated the inflow of foreign capital. In the Treaty of Versailles, the Reparations Commission had set at £6 billion the compensation Germany was to pay for the damage caused during the war. France was counting on these payments to rebuild its devastated regions and balance the budget. Germany, with its soaring hyperinflation, could not meet these debts, so France occupied the Ruhr region in January  1923. The Commission, chaired by the American Dawes, established that Germany would have to pay between £50 million and £150 million, with the first disbursement to be made thanks to an international loan of £40 million. Great Britain suffered a similar situation, as economic problems became particularly acute in the post-war period. The British had to deal with the readjustment of their economy, which was overly dependent on international trade, while unemployment rose to over 25% in the years following the Great Depression of 1929. The economic policy adopted by its rulers was not the most appropriate, and the initiative to return to the gold standard, taken in 1925 by the then Chancellor of the Exchequer, Winston Churchill, was very harmful. The repercussions of this measure were especially serious in the world of labour. Wages fell considerably, especially in the coal mines, prompting miners to call a general strike, which they tried to enforce in May 1926. It was supported by about 40% of unionised workers, and although it was a short-lived conflict, it left a trail of social confrontation that made it difficult to resolve the serious national and international problems afflicting the British economy. The British textile industry experienced a decline that resulted in the abandonment of exports to traditional markets. In 1907, Britain exported almost 90% of its total production, but by 1929 it had fallen to 73.7%, and by 1935 it

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accounted for only 57.6%. Between 1913 and 1937, the Far Eastern markets (Hong Kong, China, India, Japan) saw a 90% drop in the arrival of British textile products. This decline was due to the development of synthetic fibres and competition from Japanese products. The same was true of coal and iron and steel. Between 1900 and 1937, coal exports fell from 19.5% to 16.5%, and steel exports fell from 13.2% in 1913 to 8.3% in 1937. Inflation in France was not as high as in Germany but lasted until 1926. The price swings and the tremendous ups and downs are indicative of its economic instability. Between 1914 and 1926, one pound sterling went from 25.22 francs to 240 francs, and one dollar went from 5.18 to 49.22 francs. The Poincaré government achieved a significant decline in inflation and the French economy improved from 1926 onwards, thanks to international expansionary conditions and the devaluation of the currency, which boosted exports. Although the rate of industrial production declined in these years, the increase in manufactured goods was evident (Parejo and Sudrià 2012). The United States experienced strong economic expansion until 1929. From 1922 onwards, there was spectacular development in construction, electricity, and the automobile industry. The latter increased its production (33%) and led to an expansion of oil exploration, steel, rubber, and infrastructure construction, such as roads. The manufacture of electrical appliances boosted the production of electricity. Unemployment fell to just 2% of the labour force and the total output of manufactured goods increased by nearly 50%. The trend of international investment at this stage shows a lack of rationality. Britain, France, and the United States were at the forefront of foreign investment. New York emerged as the new financial centre and investment behaviour was extremely risky. American lenders flooded Europe and much of the world with unsafe and speculative investments. In essence, the United States lent capital to Europe so that Europeans would “buy” American products. It was a way of financing exports using a practice the British had employed extensively in the 19th century. The difference was that American companies and bankers forced this lending activity. These operations, by increasing the income and consumption of foreign countries – increasingly dependent on a continuous source of foreign exchange – made the outbreak of an unsustainable situation inevitable. Nevertheless, most of Europe experienced relative progress and, from 1924 onwards, the “Roaring Twenties” wore the face of optimism and economic prosperity. Much of the reparations for war damage had been paid, and this made it easier to solve the more immediate problems. However, the foundation of that prosperity was so fragile that 1929 showed most starkly how the progress of recent years had been but a mirage.

1.3 The 1929 crisis and its effects on the world economy Until 1929, none of the economic crises in previous history had been as farreaching as the one that occurred in that year. Above all, the “crash of 1929” is significant for its broad global impact, which was facilitated by the importance

The Great Depression of 1929 7

of the United States in the international economy. The exceptions were nations that, because of their precariousness or economic situation, were cut off from the capitalist system. In any case, the crisis did not begin at the same time in all countries, nor did it have the same magnitude, nor was its duration identical. As Morilla Critz (1991) points out, there are two basic truths that allow us to understand the shocks suffered by the international economy: 1) “the seeds of the crisis were scattered in many places”; and 2) “that from a certain moment (which we place in 1929), a chain reaction was set in motion, which amplified and spread the crisis from one sector to another, and from one part of the world to another”. 1.3.1 The crisis from the perspective of economic theory

The unfolding of the 1929 crisis has been well described by many scholars, but the analysis of the causes remains a matter of discussion and debate (Kindleberger 1991; Galbraith 1993; Marichal 2010). The complexity lies in explaining the severity, depth, and extent of the subsequent economic depression. History has shown how the capitalist system exhibits cyclical behaviour, which has been described differently according to the respective schools of economic thought (Barber 1974; Barnett 2017). First, there is the instability school, which characterises capitalism as an essentially unstable system. Malthus, Marx, and Keynes have been its leading exponents. Thomas Malthus (1766–1834) developed his theories on crises, underconsumption, and defended protectionism (Fernández-Delgado 2003). For his part, Karl Marx (1818–1883) pointed out the internal contradictions of capitalism, due to the difficulty of controlling the market and chronic underconsumption, which would lead to its destruction. At the same time, Marx harshly criticised the Malthusian theory of population as a superficial plagiarism of authors such as Daniel Defoe (1660–1731) and Benjamin Franklin (1706– 1790). On the other hand, in Capital – in contrast to Malthus – he defended the scientific and technological advances that would allow for exponential population growth (Martín-Muñoz 2003; Perdices de Blas 2003; RodríguezBraun 2006). In the 20th century, John Maynard Keynes (1883–1946) outlined a theory of stabilising intervention by the state, in order to avoid falls in effective demand (Galindo-Martín 2003; Wapshott 2016). Second, the stability school assumes that the market is able to cope with the different crises that the system undergoes and is capable of returning to equilibrium. Neoclassical economists are part of this group and have not been very interested in the analysis of cycles. Galbraith (1993), in his well-known book on the 1929 crisis, notes the reassuring statements of the economists of the time, who stubbornly ignored the serious situation that arose, even months after the crisis had affected most of the world’s population (Landreth and Colander 2006; Roncaglia 2017). The third school places the cycle at the centre of its theory. The economist Joseph Alois Schumpeter (1883–1950) was its most prominent figure. Of

8  Juan Manuel Matés-Barco

Austrian origin but based in the United States, where he was a professor from 1932 at Harvard University, he described the theory of the long development cycle inspired by the economist Kondratieff. Another economist, Kuznets, disseminated his theory of the infrastructure cycle (15–20 years), which accompanied the long cycle related to technological systems requiring major investments (locomotives with railways, automobiles with roads, electricity with dams, etc.). There are also financial cycles in which investment “euphoria” alternates with “panic” with the sale of shares (Galbraith 2011; Rothbard 2006/2012; Vegara 2019). 1.3.2 The causes of the 1929 crash

The United States emerged from the First World War in a favoured position, or at least in a stronger position than in 1914. In economic terms, it had shifted from being a debtor to a creditor and had expanded its sphere of influence in international markets, while Europe was very slowly trying to recover. The balance of trade was extremely favourable, the population was growing markedly, technological advances were very substantial, and the many markets were yielding to the momentum of American exports. However, serious economic problems, some of them of a structural nature, inherited from the 19th century, had been identified for years before the outbreak of the crisis. For example, there was a lack of interest in reinvesting in industrial activities, which led to an imbalance in this sector and an unfavourable trend in agricultural prices. Between 1920 and 1921, the country suffered an acute and brief economic crisis, which was reflected in the harsh living conditions of a large part of the population. Despite the difficulties, recovery was noticeable in the following years. The gap left by industrial investment was filled by channelling substantial amounts into speculation on the New York Stock Exchange. This speculative fever was evident throughout the 1920s. In these years, it experienced a spectacular rise that, at times, provoked an atmosphere of unbridled speculation and closed one of the most extraordinary speculative periods. The share price index rose from 100 in 1926 to 216 in 1929. Until March 1928, the rise in share prices was not excessive and remained in line with profits. From then on, a speculative boom phase ensued. Galbraith (1993) has pointed to the influence of certain large companies on this trend. Some businessmen painted a glowing picture and heralded a period of economic upswing and enormous profits. On 12 June 1928, there was a first warning with the sale of more than 5 million shares and an overall loss of 23 points in the value of the shares. From July onwards, the stock market experienced further rises and the election campaign for the US presidency focused on announcements of prosperity and welfare. During the summer of that year, American banks and investors began to restrict purchases of German and other bonds. The aim was to invest their funds through the New York Stock Exchange, which began to soar. After the election of Republican candidate Herbert Hoover, the stock market experienced a further rise. In his Memoirs

The Great Depression of 1929 9

(Hoover 1952/2016), recalling these fateful years, he called speculation a crime worse than murder and one for which men should be “reviled and punished”. The rise in the stock market did not correspond to increased productivity but was rather the result of an excessive process of speculation, by not only large corporations but also small and medium-sized investors. The investment fever stemmed from an exaggerated eagerness to achieve capital growth and was not based on the attraction that good dividends from a profitable company could offer. Thus, a spiral of acquisitions was unleashed, leading to a permanent upward spiral. In these months of speculative rises, many people of modest means rushed to buy stocks by borrowing money. New York banks were lending short term at 12% interest, when they were borrowing from the Federal Reserve at 5%. Even currency dealers were lending to their clients against the securities they were buying. Purchases of shares were often made for only 10% of the value being purchased, i.e., brokers advanced buyers 90% of the value of the shares and were obliged to borrow money to do so. More specifically, the loans obtained by the brokers rose from around 3.2 billion in 1925 to nearly 7 billion dollars in 1929 (Table 1.1). This is sufficiently illustrative of the effervescence in business (Eichengreen and Mitchener 2003). But speculation was doomed to failure if stock prices did not correlate with production and profits. And it was indeed the United States that was beginning to experience a certain degree of stagnation and regression. The US gross national product began to decline gradually and steadily in the early months of 1929. A sector as dynamic and expanding as automobile manufacturing began to falter. In March, production reached 622,000 vehicles, while six months later it was down to 416,000. In other words, production in this key industry fell by almost 40%. For its part, Europe – at the end of the summer of 1929 – was beginning to feel the decline in American investment abroad. Even Germany, the second epicentre of the conflict, was already in serious difficulties by the end of 1928. The economies of many countries deteriorated alarmingly until 1933, with a particular contraction of international trade and the industrial sector. The bomb had been primed; all that remained was for it to detonate. Table 1.1 Credits to stockbrokers, by origin, 1927–1929 (in millions of dollars) Date 31 December 1927 30 June 1928 31 December 1928 30 June 1929 4 October 1929 31 December 1929

New York banks

Foreign banks of New York

Other

TOTAL

1,550 1,080 1,640 1,360 1,095 1,200

1,050 960 915 665 790 460

1,830 2,860 3,885 5,045 6,640 2,450

4,430 4,900 6,440 7,070 8,525 4,110

Source: Prepared by author with data from Kindleberger (1985, 131).

10  Juan Manuel Matés-Barco

This scenario was unsustainable in the short term, but the monetary authorities neither understood nor wished to remedy this situation. Galbraith (1993) has shown how the great leaders and economists of the time were unaware of the seriousness of the economic situation. From the chairman of the Federal Reserve to prestigious economists at Harvard University, they spoke of the excellent health of American industry and the irrelevance of broker’s loans. At the same time, they argued that nothing could “stop stock prices from rising” and showed that the position “of the markets is satisfactory” and that the value of stocks “has a healthy base given the prosperity” of the United States. For these “learned economists”, stock prices “had reached a permanent value” (Table 1.2). The crisis manifested itself essentially in the United States. Its severity and duration have been among the most spectacular in the capitalist system. When analysing the causes of the crisis, it is relatively easy to list them, although it is more difficult to try to elucidate the importance of each one of them. The bibliography on the subject is immense and the explanations of its origin are endless, but they can be summarised into five key points. First, the existing imbalance in the international monetary system. The gold standard had been reintroduced in the 1920s, but under conditions that were not in keeping with the economic needs of the time (Bernanke 1983). The United States had changed its role from debtor to net creditor, without observing the “rules of the game” for the proper functioning of the gold standard, as well as not allowing net transfers from Europe. This set of actions caused the system to be unsound and its functioning to run into serious difficulties. The second issue refers to the structural changes that occurred in the 1920s, especially the decrease in the flexibility of the product market. The rise of monopolies became increasingly evident, and the labour factor began to decline markedly. The return to equilibrium became increasingly difficult. Third, the role of the New York Stock Exchange must be recalled. Its role has sometimes been exaggerated as both the trigger and the main cause of the crisis. In the United States, in the preceding months, a decline in investment, Table 1.2 New York Stock Exchange (1913–1929): stock price index (1935–1936 = 100) Years 1913 1921 1924 1925 1926 1927 ( June) 1927 (December) 1928 ( June) 1929 (September)

General index 71 58 95 106

238

Industrial values

63 80 90 103 134 195

Source: Prepared by author with data from Morilla Critz (1991, 119).

Railways

Public services

240 164 204 238 265 316 336 336 446

90 92 111 135 173 375

The Great Depression of 1929 11

production, and income had begun to be detected. At the same time, prices were falling. In Germany, this trend had been discernible a year earlier. Stock market crises had been frequent before and after 1929 and of even greater proportions, but none caused such a severe economic crisis. The fourth issue that determined the significance of the crisis was the restrictive monetary policy of both the United States and Germany. This led to financial panic, chain bankruptcies and deflation, all due to the absence of international lenders. Finally, the crisis was transmitted to the rest of the world through the lack of coordination, falling prices, and the mechanisms of the gold standard (Eichengreen 1992; Wolf 2010). At the same time, misinterpreted fiscal orthodoxy and protectionism aggravated the situation. Declining revenues inclined governments to reduce expenditures and increase taxes, right in the middle of the crisis, in order to achieve a balanced budget. Moreover, from 1931, all countries increased their levels of protection, making trade more difficult. The economic policies that had been pursued in previous years with positive results had completely opposite effects. The protectionism introduced in most countries led to a decline in exports and a fall in income. The brake on the situation occurred in October 1929, but despite its brutality it came in stages. The crisis manifested itself on 24 October – “Black Thursday” – when nearly 13  million securities were offered with almost no demand. The banks intervened in order to halt the fall and briefly managed to restore confidence. By the end of Black Thursday, share prices had fallen by between 12 and 25 points. On Monday, 28 October, the collapse began without any possibility of rescue. On that day, a total of 9,250,000 shares went on sale. Industrial assets were down 49 points and bankers were unwilling to buy any more securities. On 29 October – “Black Tuesday” – the panic triggered a new spate of stock market sell-offs (33 million shares), causing a terrible fall in the value of shares (Table 1.3). The Dow-Jones index of the New York Stock Exchange between September  1929 and January  1933 shows that the values of 30 companies fell from an average of $364.90 to $62.70 per share; the 20 government debt securities dropped from $141.90 to $28; and the stock prices of 20 railway companies declined from $180 to $28.10. Between October  1929 and July  1933 – the

Table 1.3 Share prices in selected markets from September to December  1929 (monthly indices calculated on different bases) 1929 September October November December

Belgium Canada France Germany Netherlands Sweden Switzerland UK USA 98 92 79

316 255 209 210

526 496 465 469

125 107

Source: Data taken from Kindleberger (1985, 141).

113 98 100

162

239 212 215

216 135 194 145

12  Juan Manuel Matés-Barco

bottom of the depression – the total value of traded capital fell by $74  billion. In the latter year, the national income of the United States did not reach $40 billion. Despite the catastrophe, a few days after these events, voices were still being heard, claiming that “the present stock market and business recession is not a precursor sign of a depression”. Or that it was unlikely that there would be a repetition of a situation as serious as that of 1920–1921. And even that the “recovery will take place in the spring [of 1930] and consolidate in the autumn”. The absence of perspective suggested that the industry was on the road to recovery. These statements show the lack of awareness of the seriousness of the problem, among both political leaders and the “brainy economists” of the time, as well as the inability to find appropriate solutions to emerge from the crisis (Roncaglia 2015). The stock market crash was not the cause of the Great Depression, but it was the starting pistol that signalled the race towards declining output and rising unemployment. The fragmentation of the banking structure was one of the weaknesses of the US economy. Not only was easy access to credit a problem, but also the mistakes made by the authorities in monetary policy, especially the actions of the Federal Reserve, which Galbraith (1993) describes as “a body of starling incompetence”. After many decades and numerous studies on the subject, there is no unanimity as to the most determinant causes of the depression. For some, they were mainly monetarist; for others, they lay in the fall in consumption and investment and how this spread throughout the economy. In recent years, new arguments have been put forward: the instability of agriculture, the First World War and the implementation of peace treaties, the breakdown of the gold standard, or the disruption of trade and the nationalist policies of the entire decade (Crafts and Fearon 2013). In any case, it is of great interest to reflect on the causes of the 1929 crisis and the subsequent depression. In this way, the economic policies applied by the different governments in order to achieve recovery can be appreciated with greater precision. The main difficulty lies in assessing the relative importance of each of them and differentiating between the stock market crash of 1929 and the depression that followed. Distinguishing between the causes of one and the other is not easy. It is clear that in the preceding months the importance of the problem was not grasped, and even the severity of the depression that followed was not even minimally perceived. As early as 1934, the complexity of the phenomenon and the impossibility of explaining it with a single reason were already being pondered. The influences were manifold and varied: ­political unrest, structural weaknesses, and nationalist mentality (Wandscheneider 2013). One of the reasons most often used to explain the collapse of the New York Stock Exchange is the exorbitant rise in stock prices. It has already been said that the boom in securities could not last indefinitely. Speculation decoupled from economic activity, that is, from production and profits, brings its own

The Great Depression of 1929 13

ruin. The lessons of speculation are recurrent – it had already occurred in 18thcentury England and 19th-century France – and provide clear evidence of its harmful aspects. One might then ask about the reasons that led to the long and enormous speculation of the years 1927–1929. It was the result of monetary inflation caused by the policy of cheap money and easy credit granted by the Federal Reserve. This conduct was one of the most serious mistakes made by any banking organisation in the last century (Almunia et al. 2010). US authorities were overwhelmed by the pace and momentum of events. The speed of the circulation of money and the expectations of speculators swept away everything in their path. It is clear that some causes did have a greater impact. For example, the excessive fragmentation of the banking structure, which was one of the weaknesses of the US economy (Galbraith 1993). Furthermore, the organisational structure of US firms was conducive to unbalanced and abusive practices. The development of holding companies and trusts encouraged intense speculation. Such companies owned bundles of shares and bonds and had a vested interest in skyrocketing share prices. Meanwhile, dishonest business practices were rampant, involving shady deals, swindles, and fraudulent schemes. High-profile personalities from politics, finance, industry, and even the cinema, through their popular influence, played a key role in these regrettable actions. In this course of events, the small and medium-sized investor was swept along by an excessive desire for profit and failed to see the deceitful deals that were right before their eyes. Maurice Niveau (1989) has emphasised how financial and banking structures, large capitalist interests, and mass psychology were cumulative causes of excessive speculation and high inflation. Moreover, as we have seen, the monetary authorities proved incapable of acting to prevent the crisis. 1.3.3 The impact of the crisis in Europe

The complexity of the crisis, the extent of its repercussions, and the diversity of situations make it difficult to analyse in detail the multiple causes of the depression. Recent research has shown the error of liberal orthodoxy. Economic science provided few solutions and excessive conservatism prevented the adoption of economic policies in line with the situation. Conjunctural factors played an important role. Bank failures resulted in corporate insolvency and compromised the creditworthiness and confidence of depositors. This, in turn, led to the hoarding of gold and banknotes, which paralysed investment. In addition, falling prices, especially agricultural prices, reduced the buying potential of producers and sellers. In this climate, unease, misgivings, and pessimism took hold of the population, which curbed its appetite for consumerism. Faced with low consumption and rising unemployment, producers and sellers did not renew their inventories, did not modernise their technology, and put the brakes on any kind of investment. This progressive reduction generated a multiplier mechanism that paralysed investment and increased the inflationary trend.

14  Juan Manuel Matés-Barco

In terms of structural factors, what stands out is the growing importance of the US economy in the rest of the world, which facilitated the rapid expansion of the depression. The stoppage of capital exports affected a number of countries, especially Germany, as well as the nations of Central and South America, which, seeing their financing channels interrupted, stopped buying US products (Campa 1990; Bulmer-Thomas 2002; Marichal 2012; Matés-Barco 2017b). The process was completed when the United States reduced its purchases of raw materials from these countries, causing prices to fall dramatically. This paralysis of international trade was compounded by the changes taking place in industry as a result of the second phase of industrialisation: traditional sectors (textiles and coal) gave way to new ones (chemicals and capital goods) (Figure 1.1). Protectionist measures (tariffs and quantitative restrictions) accelerated the decline in foreign trade. States sought to achieve a larger share of exports, but to import as little as possible, which led to trade paralysis. These “beggar-thyneighbour” policies – typical of the mercantilism of the 17th century – were once again adopted and caused serious problems for the world economy. Britain and the Commonwealth countries alleviated the harsh grip of the depression by practising the system of “imperial preference”. Another factor that facilitated the dampening of international relations was the collapse of the international monetary system. The abandonment of the gold

Figure 1.1 Evolution of production and foreign trade (1929–1937) (1929 = 100) Source: Prepared by author with data from Niveau (1989, 199).

The Great Depression of 1929 15

exchange standard affected international means of payment and monetary institutions. The weakness of monetary liquidity made it difficult to finance trade. The crisis in the international monetary system during the First World War caused London to lose its leading role. Between 1918 and 1930, London’s struggle with New York for international financial leadership created many problems for economic stability. To a large extent, the failure of the gold exchange standard was a result of this struggle and one of the consequences of the 1929 crisis, but the collapse of the international monetary system became a new cause that aggravated the depression of the following years (Bernanke and James 1991). The interwar period was a transitional stage between the end of 19thcentury capitalism – which some extend to 1914 – and modern capitalism after the Second World War. The demise of old structures and the establishment of new ones took time, which was needed to smooth out the rigidities of market mechanisms. The United States and Britain quickly resorted to devaluation and the search for measures to jump-start their economies. France and Germany, on the other hand, remained on the gold standard and pursued a policy of deflation. In both countries, the consequences were very divergent: while in France the failure of Laval led to the victory of the Popular Front, in Germany social conflicts facilitated Hitler’s rise to power (Comín 2002; Wandschneider 2008). The financial aspects of the crisis reached dramatic proportions and highlighted the need to create international bodies to regulate relations between countries. Conditions for banks began to worsen in the spring of 1931. In Austria, in May of that year, the Creditanstalt, one of the largest mixed banks in the country, went bankrupt. The difficult business environment had forced the bank to acquire 60% of the shares of many Austrian companies, in many cases compelled by the government itself. The bank’s non-performing loans amounted to 70% of total losses at the time of the bankruptcy. Moreover, 50% of its shares were in foreign hands and 40% of its business was outside Austria. Faced with abandonment, the government intervened very belatedly: exchange controls were introduced in October  1931 and the state became the bank’s preferred shareholder. The inability to stop the collapse of the Viennese bank dragged down the Hungarian and German banks. Between May and June, the Reichsbank lost half of its gold reserves. The United States had to provide aid to Germany by granting a moratorium on the payment of war reparations and debts still outstanding from 1918. Nevertheless, in July 1931 the banking crisis exploded with the collapse of Danatbank, one of Germany’s four largest banks. The government closed the banks and the stock exchange for a few days. The aim was to prepare a package of measures to halt the free fall, including raising the interest rate to 10% and injecting liquidity into the mixed banks. Danatbank was merged with Dresdner Bank and its capital, like that of Commerz, was largely taken over by the state. The state’s share in Deutsche Bank was onethird. At the end of the 1930s, the banks reverted to private ownership. The German banking shocks spread to the rest of Europe. The Bank of England, which held modest gold reserves, was beset by demands from other institutions and provoked a government crisis that resulted in the appointment of

16  Juan Manuel Matés-Barco

new ministers. The new administration ordered spending cuts and tax increases in order to balance the budget. Britain, prompted by various conflicts at the time, was forced to leave the gold standard, with a series of very negative repercussions for those countries that did not leave it, which were the vast majority. The adjustment of monetary policy by the United States led to the almost immediate bankruptcy of more than five thousand banks, 5,096 between 1929 and 1932, and was so far-reaching that it paralysed investment. Between 1929 and 1933, of the 26,000 existing American banks, some 11,000 closed their doors. This led to a strong deflationary process. The fragmented structure of the US banking system was one of the first causes of the chain of bank failures. Most banks were small, operating in very limited areas. The economic conditions of the region where they were located determined the success or failure of their management. France was the only European country to escape the financial crisis. Its large gold reserves (about 25% of the world’s stock) allowed it to withstand the crisis without too much stress. Its main problem was not to lose too much value as it disposed of its sterling reserves, which were heavily devalued. However, economic recovery took many years. A relative exception to the crisis was the Soviet Union. The triumph of the communist revolution of 1917 had moved its economy away from capitalist liberalism. With an economic structure based on planning and state control, the USSR was largely untouched by the Great Depression of 1929. At the time of the New York stock market crash, the Soviet leadership was focused on fiveyear plans that initiated a process of rapid industrialisation and collectivisation in agriculture. Stalin’s programme focused on encouraging the concentration of agricultural holdings in order to achieve an increase in production, which would lead to industrial expansion and increased taxation. Force and violence, such as purges and mass deportations, were common practice in implementing this policy, and the difficulties of Soviet agriculture in the decades that followed can be explained by the trauma of those years. The Stalinist dictatorship exploited agriculture. The agricultural surplus was supposed to finance industrial development, but the state’s appropriation of the harvests, in exchange for very low pay, discouraged initiative and reduced agricultural productivity. Implementation was uneven and incomplete. Some estimates for the first fiveyear plans (1928–1932 and 1933–1937) indicate that 70% of the objectives were achieved. Despite the mistakes and shortcomings of centralised planning, by the eve of the Second World War, the Soviet Union had become a major economic power (Matés-Barco 2017a). 1.3.4 The impact of the crisis in Spain and Latin America

The economic crisis affected Spain with a certain delay and relative moderation, but with a greater intensity and extent than traditional historiography has maintained (Comín 2011a, 75). The 1930s were characterised by declining production, rising unemployment, and falling prices. Agriculture was affected

The Great Depression of 1929 17

not only by falling prices, but essentially by falling exports. There was also a significant contraction in foreign investment and the return of a large number of emigrants. The protectionism prevailing at the time did not insulate the Spanish economy from the negative repercussions of the crisis on an international scale. Spain, even without joining the gold standard, acted in practice as if it belonged to it, as the peseta had adopted the French franc as a reference and appreciated against those currencies that left the gold standard (Comín 2010). The Spanish crisis at that stage was based on economic backwardness, which was manifested in the primacy of agriculture and the lack of integration of the sectors. The change of regime brought about by the proclamation of the Republic was not the trigger for the problems, but it is true that internal political factors had a “clear relevance and aggravated the economic crisis” (Comín 2011a, 76). Labour policies resulted in the growth in wages during the socialist republican biennium, but in the following years they remained stable, especially in agriculture. On the other hand, political instability, already detectable since 1928 with the weakening of the Primo de Rivera dictatorship, undermined business expectations and reduced private investment. In short, it is clear that the Spanish crisis was more superficial and shorter than the international crisis due to the rudimentary nature of the companies, their low level of financing, the predominance of the agricultural sector, and the relative isolation of the Spanish economy (Martín-Aceña 2004, 360–361). On the other hand, traditional historiography has pointed to 1929 as the turning point in Latin America’s economy. That year marked the shift from export-led economic growth to inward-looking development based on import substitution industrialisation. Structuralist economics has viewed this change in a positive light, while more traditional economics has considered it a lost decade. In any case, the transformation is evident. These years saw the emergence of novel economic, social, and political forces that brought about significant changes in the Latin American economy. Although export-led growth became more complicated in these years, the trend towards producing commodities was maintained and foreign trade continued to play a significant role. The total rejection of this export model took place after 1940, although it continued to survive in some small countries. The onset of the 1929 depression is linked to the crash of the New York Stock Exchange in October of that year, but some signs arrived somewhat earlier in Latin America. One such sign was the rise in prices despite low demand. For example, the price of Argentine wheat peaked in May 1927, Cuban sugar in March 1928, and Brazilian coffee in March 1929. The boom in stock markets led to an excess demand for credit and a rise in global interest rates. This led to a rise in the cost of holding inventories and reduced the demand for primary goods exported from Latin America. In turn, there was a flight of capital seeking higher interest rates outside the region, coinciding with a decline in foreign investors, who also sought more attractive rates of return in New York, London, or Paris.

18  Juan Manuel Matés-Barco

The collapse of the New York Stock Exchange triggered a chain of disruptions in the main markets supplied by Latin America. First, there was a decline in consumer demand due to the fall in the value of financial assets. The second problem was the credit crunch due to the non-payment of overdue debts and the resulting monetary contraction. Finally, importers were not replenishing stocks of raw materials due to falling demand and the lack of credit. Prices of export commodities fell by more than 50%. An analogous situation occurred with imports, although the price level did not fall as rapidly. The decline in export volumes and the prices of exported products resulted in a rather dire situation for Latin American economies. However, there were some exceptions, such as Venezuela, which was protected by oil; and Honduras, which held out because of the banana companies that chose this country to establish their low-cost plantations. In other countries, the consequences of the depression were extremely hard because of the effects it had on mining producers in Mexico, food industries in Argentina, and tropical products in the central zone. External debt – public and private – remained at a nominal interest rate and its repayment created serious problems for many governments. This scenario was compounded by a sharp decline in export revenues, which led to a drastic restriction on imports. Tax revenues from import tariffs fell sharply and generated a measure of collapse. The figures for Brazil are significant, as in 1928 it collected 42.3% of total tax revenue from import duties. Two years later, the same revenue had fallen by a third and tax revenue by a quarter. Chile suffered a similar situation because of its heavy dependence on export taxes. Debt repayment also affected the balance of payments. Public spending was severely affected, to the extent that Honduran civil servants were paid in postage stamps. Most Latin American republics experienced changes of government during the depression years and, to a large extent, political parties or leaders who had been out of power during the Wall Street crisis were favoured. There were exceptions, however, such as Venezuela, where the autocratic government of Juan Vicente Gómez remained in power until 1935, or Mexico, exhausted by civil war and revolutionary turmoil, which was abandoned to the Nationalist Revolutionary Party. In the absence of credit, governments could not resist and even Argentina, with a degree of solvency on the international markets, was unable to obtain new loans. The impact of the depression, although very uneven, particularly affected Chile and Cuba. In the Chilean republic, between 1929 and 1932, GDP fell by 35.7%, while in Cuba per capita national income fell by a third in the same years. Some countries withstood the onslaught of the crisis and mitigated its effects. Venezuela benefited from oil production with the lowest unit costs in the Americas. Peru, with exports dominated by foreign companies, managed to slightly mitigate the harsh adjustments. And the Dominican Republic, dependent on sugar exports, took advantage of not having signed the restrictive post-1929 sugar agreements.

The Great Depression of 1929 19

1.4 Depression, spread, and solutions The depression following the crisis of 1929 was very intense; it manifested itself in all its severity until 1932 and its repercussions spanned the entire globe (Accominotti 2011). The decline in economic activity in the United States had very serious repercussions: industrial production halved, and capital goods production fell by 75%. Private investment remained very weak throughout most of the decade and in 1937 was still 30% below its 1929 value (Figure 1.2). The financial difficulties of farmers, who were unable to repay their loans, together with the fall in agricultural prices, led to the bankruptcy of a significant number of small banks. This negative trend in prices had been going on since 1919, worsened from 1925 onwards, and became critical after 1929, with a fall of 55%. However, the cost of living – which fell by 33% – did not keep pace with prices, so the situation of small farmers became increasingly burdensome. Agricultural production did not decline during the depression, but prices indicate the drop in domestic and foreign demand (Figure 1.3). Unemployment became one of the clearest manifestations of the crisis. In October 1929, the number of unemployed in the United States was around 5 million and, one year later, it was close to 8 million. By the end of 1932, the figure had reached 12 million, and in 1933 the total was over 13 million. The unemployment rate was 27% of the working population of 48 million. In the autumn of 1932, there were about 6 million unemployed in Germany and in England about 3 million (Figure 1.4).

Figure 1.2 Gross private investment in the US (1929–1940) (billions of dollars) Source: Prepared by author with data from Niveau (1989, 187).

20  Juan Manuel Matés-Barco

Figure 1.3 Indices of agricultural prices, cost of living, cost of production and agricultural wages in the United States (1919–1933) Source: Prepared by author with data from Faulkner (1954, 627).

The fragmentation of the banking structure was one of the weaknesses of the US economy. It is interesting to note that it took several months to realise the “seriousness” of the situation. Despite the recovery of 1933 and the following years, it was not until very close to 1940 that the United States achieved full employment and the same volume of production as in 1929. After the good economic performance of 1937, a new crisis phase manifested itself. The depression of the 1930s spread to much of the world because of the size of the US economy and the economic relationships that existed between countries. In 1929, US industrial production accounted for 45% of world industrial output and its imports amounted to 12.5% of the world total (Figure 1.5). The decline in international trade was somewhat less than that of world industrial production. Between 1929 and 1932, world industrial production fell by 37%, while the volume of world trade fell by 25% in the same years. Along similar lines, falling prices caused the exchange value of goods to fall by 60%. The severity of the crisis in the United States, combined with uncertainty in other parts of the world, led to a massive return of capital. In 1929, foreign investments and imports totalled $7.4 billion. Just three years later, in 1932, this figure fell to 5 billion dollars, a drop of 32%. At the same time, the balance of trade fell dramatically, from 1.44 billion dollars in 1928 to 357 million dollars in 1933. From 1934 onwards, imports outstripped exports, resulting in a deficit of

The Great Depression of 1929 21

Figure 1.4 Unemployment rate in the United States and in various European countries (1920–1938) Source: Prepared by author with data from Morilla Critz (1991, 132); Maddison (1991); Zamagni (2001, 162).

$740 million. In the following years, up to the Second World War, it exceeded $1 billion. It is clear that the decline in American global demand was enough to initiate a negative multiplier process in the world economy. For example, the fall in German industrial production from 1928 onwards was due to the outflow of American capital. International initiatives to alleviate the crisis were few and, to a large extent, misguided. These included the creation of the Bank for International Settlements in Zürich on 20 January  1930. Its main task was to oversee the payment of war reparations. The moratorium imposed by Hoover, president of the United States at the time, and the definitive cessation of payments ordered by Hitler meant that it lost the function for which it had been created. The Swiss bank became a meeting place for central bankers, where international loans could be arranged. It played a key role in the training of economists with international skills, who joined the international organisations set up after 1945. It also excelled as a centre for the production of plans for the reorganisation of the international economic system. Vera Zamagni (2001) considers it to be a precursor in the functions of the European Central Bank and a place of informal coordination of the interventions of the central banks of each country. Most countries dealt with the crisis by defending the domestic market and restricting imports. It is worth recalling the protectionist measures adopted by

22  Juan Manuel Matés-Barco

Figure 1.5 Index of industrial production and GDP (1932) (1929 = 100) Source: Prepared by author with data from Zamagni (2001, 186); Niveau (1989, 187).

The Great Depression of 1929 23

the United States in 1930 to curb the depression, especially the increase in tariffs to defend its agriculture. This practice quickly spread to industrial products. The Hawley–Smoot Act, passed by Congress, was a consequence of this economic policy. These measures were imitated by a number of other countries, and, in retaliation, they responded to these decrees by sharply raising tariffs. Although protectionist policies became widespread, there were also attempts to reach international agreements aimed at ending the economic crisis. The collapse of the international monetary system, together with Britain’s abandonment of the gold standard, only exacerbated the situation. The British government adopted tariff increases between late 1931 and early 1932. The chain reaction was not long in coming, and many countries applied quantitative restrictions on imports, a measure that restricted them as much or more than raising tariffs. The multilateral system of trade of the 19th century was disappearing. Faced with collapsing prices and agricultural overproduction, countries defended their agriculture by avoiding buying foodstuffs abroad. Indebted countries and the least developed economies suffered the consequences of the fall in the prices of raw materials and, above all, in agricultural prices, which accounted for a substantial part of exports. To mitigate this situation, it became common for countries to devalue their respective currencies from 1929 onwards. In the Americas, this was the case in Argentina, Bolivia, Brazil, Venezuela, and Paraguay (Thorp 2002; Matés-Barco 2017b). In Europe, the most striking case was Hungary, but it also occurred in Australia and New Zealand. To alleviate the effects of these measures, some states reached partial agreements of a regional or preferential nature, but which discriminated against third countries. The Oslo Convention (1930) bound the Scandinavian countries Finland, Belgium, the Netherlands, and Luxembourg. Similarly, in 1932, Great Britain and the Commonwealth countries signed the Ottawa (Canada) agreements, which established “preferential rights” between member countries. In July  1931, in an attempt to alleviate the effects of the depression, exchange controls were introduced, a protectionist measure intended to stem the flight of capital. Attempts at international cooperation were rather limited, as most countries sought to increase their exports and limit their imports as much as possible. In effect, they had shifted into the practice of 17th-century mercantilism. In the summer of 1933, the International Monetary Conference – sponsored by the League of Nations – was held and, after several delays, eventually convened in London. The purpose of the event was to take measures to alleviate the serious situation caused by the collapse of the international monetary system in September 1931. The meeting was intended to seek solutions, but it was very complicated because of the different ways in which each country understood its commitment to the gold standard. The United States left in April 1933; France and Italy stayed in despite little internal coherence. Germany was bound to remain by the dictates of the Treaty of Versailles. This disparate situation eliminated any possibility of agreement on a common public spending programme, on stabilising the respective currencies, or on reducing protectionism. The

24  Juan Manuel Matés-Barco

conference ended with small, irrelevant agreements such as the price of silver or the sale of grain. These were poor results for an event that brought together 64 nations and in which the American lack of solidarity was evident in Roosevelt’s words. The American president announced that his government’s first measures would be those conducive to national reconstruction and that he could not enter into any international commitments that would interfere with that work. The meeting was a complete failure, demonstrated no willingness to pursue cooperative policies, and was the starting point for countries to devalue their respective currencies, adopt bilateral agreements, and strengthen their protectionist policies. International cooperation had failed, and the world was moving towards different, sometimes antagonistic solutions to overcome the crisis. In September 1936, a tripartite agreement was reached between the United States, France, and Great Britain, with the aim of safeguarding international equilibrium and defending freedom of exchange. In turn, they were prepared to support each other’s currency exchange for 24 hours. In this way, measures taken by a country whose currency was under pressure could take effect without causing any panic. For its part, the United States pledged to provide gold or dollars at agreed exchange rates if necessary. The declaration of intent called for the progressive elimination of measures that hindered trade relations between the countries. In fact, apart from a very slight lowering of tariffs or other similar provisions, this aim was swept aside by the recession of 1938 and by the Second World War. In 1944, at the Bretton Woods Conference, the Allied countries put the sad experiences of the interwar period on the table and tried to lay the new foundations of international trade. Between 1918 and 1939, economic practice had shown that the depression was exacerbated by protectionist and excessively individualistic measures (Feinstein, Temin, and Toniolo 1997). The repatriation of American capital goes a long way towards explaining the impact of the crisis on Germany. Its policy of systematic deflation, fearing a repeat of the runaway inflation of 1923, intensified the slide towards depression. Germany remained on the gold standard and did not alter its exchange rate. Britain, for example, did the opposite: it devalued the pound in September 1931. Obviously, these issues greatly hampered German exports. The “costs of poor international cooperation” were very high. On the one hand, the gold standard proved to be an excessively tight fit, making it difficult for a lender to emerge; on the other hand, the economic policies of individual countries, geared towards balanced budgets, only made the situation worse. The economic orthodoxy of the time was inadequate and the old policy mechanisms had become obsolete in a more complex and interrelated world, which required the application of very different parameters from those used at the time of the first industrial revolution. From an international perspective, the economy was in disarray, with a wandering and hesitant direction, which led to the emergence of economic blocs and the outbreak of a global conflict. In the long term, the crisis brought about important changes for the future of the world economy: on the one hand, the increased role of the state, and on the other, the efforts of the least developed countries to create their own

The Great Depression of 1929 25

industry to avoid dependence on the outside world. Nor can we forget the political repercussions, in particular the consolidation and triumph of fascism in several European countries.

1.5 Economic recovery and military rearmament (1930–1939) The early 1930s saw the only period of economic stagnation in almost a century. International trade was largely paralysed by economic stagnation in many of the most advanced regions. The economic performance of the main European countries was uneven, not only because of the consequences of the 1929 crisis, but also due to the different measures adopted by each of them. The dramatic events from 1939 onwards, full of barbarism and violence, call for an analysis of the events that preceded them to provide a glimpse of the reasons that led Germany to the folly of the Nazi dictatorship. The exploration must extend to France to understand its unpreparedness for war, despite the obvious signs of its imminent outbreak, to Italy to elucidate its imperialist ambitions and its consequent alliance with Hitler, and to Britain, which was the only European nation to experience some measure of economic recovery. The picture for each of these economies was very different, but all needed American help to withstand the onslaught of Hitler’s fury. 1.5.1 The United States and the New Deal

As mentioned earlier, attempts were made at international action to put the crisis to rest. However, reality revealed the deep connections between economic and political life, as well as the mistrust existing between some states. As a consequence of both, it proved difficult to find solutions that would please or suit all governments. Reactions to the crisis varied. In the case of the United States, a series of measures known as the “New Deal” were adopted, championed by then President Franklin D. Roosevelt. In order to deal decisively with this accumulation of difficulties, he developed an administration that applied a decidedly interventionist economic policy with the aim of combating the effects of the Great Depression. This programme was deployed between 1933 and 1938 with the aim of stimulating consumption and investment, reforming financial markets, and helping the poorest segments of the population (Romer 1992). Broadly speaking, the first actions focused on money and credit, followed by the implementation of specialised policies in the agricultural and industrial sectors, with the aim of supporting prices and boosting the purchasing power of the population (demand policies). The first objective was “reflation”, to raise prices, restore investor confidence, and give purchasing power to consumers. Two stages can be distinguished, the first in 1933, referred to as “FDR’s First 100 Days”, with measures designed to bring about a short-term improvement in the economy. The first provision prohibited the hoarding and export of gold (Emergency Banking Act). The second – the Agricultural Adjustment Act, and no

26  Juan Manuel Matés-Barco

less important – gave the president extraordinary powers to force the Federal Reserve to extend credit, to devalue the dollar to 50% of its gold value, and to authorise the minting of silver coins in unlimited quantities. With these laws, the president could create as much “inflation” as he saw fit. In October 1933, the dollar was devalued in order to encourage exports and raise domestic prices. The third major measure was the Banking Act, aimed at solving the structural problems of the banking system and protecting depositors by creating a Federal Deposit Insurance Corporation. This law prohibited the granting of credit to finance stock market speculation. The economic results were modest, but the situation improved (Figure 1.6). In June 1933, one of the most characteristic measures of the intervention programme was implemented: the National Industrial Recovery Act (NIRA), which brought together a series of regulations that were very advanced for the time. Its main objective was to revive the economy by preventing overproduction and developing codes of free competition. In addition to guaranteeing decent living wages, it aimed to ensure that companies made reasonable profits and, above all, that they respected the rules of competition, good business practices, and the elimination of “piracy” or dishonest behaviour. The government sought to raise prices, reduce working hours, and increase wages. The plan authorised the financing of $3.3 billion worth of public works. The great achievement of these years was the Tennessee Valley Hydroelectric Plan, which improved agriculture, industry, and navigation on its rivers. Everything was

Figure 1.6 US national income (1929–1940) Source: Prepared by author with data from Niveau (1989, 187).

The Great Depression of 1929 27

organised around a public entity – the Tennessee Valley Authority – which built factories and dams, introduced irrigation, repopulated some lands, etc. The great public works programme was not replicated in other parts of the country. Despite its achievements, in May 1935, the Supreme Court declared the NIRA unconstitutional because it blocked antitrust laws that sought to defend competition. In essence, it was a system of private economic planning with government oversight to protect the public interest, guaranteeing the right of workers to organise and bargain collectively. Although it was not his intention, Roosevelt encouraged the formation of monopolies with the New Deal and the concentration of economic power. To boost job creation, the Federal Emergency Relief Administration was created in 1933, with a budget of 500 million dollars to help the unemployed. Along the same lines, the Public Works Administration was established, which received an appropriation of 3.5 billion dollars to carry out public works and provide loans to state entities for infrastructure improvement and job creation. Between 1934 and 1936, another important set of economic measures was adopted to modernise the agricultural, banking, and financial structure. The Agricultural Adjustment Act contained a number of monetary provisions and included subsidies for farmers who chose not to plant on part of their land. In 1936, this law was declared unconstitutional. In response, the federal government began paying farmers to grow legumes and grasses on former cropland to regenerate the soil. Between 1932 and 1939, the reduction in the number of farmers reached 7%, and the decrease in the area cultivated with cereals, cotton, and tobacco amounted to 20%. This agricultural policy was quite expensive for state coffers and did not achieve very positive results. The economic policy represented by the New Deal has been widely criticised. At first glance, what was achieved between 1933 and 1939 was not very significant: unemployment remained high, and investment did not recover to 1928 levels. Private investment was low and public spending was not able to cope with the needs of such a large country (Figure 1.7). The depth of the depression was severe, and a policy based on budget deficits was not sufficient to overcome such a difficult situation. But a closer look shows that the measures taken helped to increase aggregate demand and slow its decline. In the absence of public spending, the depression would have been even more intense. In the history of capitalist development, the New Deal represents an experience of state intervention, which acted at a very complex juncture and tried to undo outdated structures. Moreover, in the social field, Roosevelt’s plan was beneficial because it was very humanitarian. Aid for the unemployed and benefits for the most disadvantaged social groups allowed economic activity to continue, not to mention the attention given to some fundamental areas of the American economy and society: social security, health, housing, natural resources, transport, and communications in general. It is difficult to make an overall assessment of the New Deal, but it is clear that the state had to intervene in the extremely critical situation in which the United States found itself at the beginning of the 1930s. Unemployment did not disappear, and the economy

28  Juan Manuel Matés-Barco

Figure 1.7 Investment in the United States (1929–1940) Source: Prepared by author with data from Niveau (1989, 187).

was not sufficiently revived, but it did help to alleviate the crisis. Overall, although the legislation and the measures adopted were not entirely successful, they did lead to an improvement in the purchasing power of industrial workers and farmers, as well as to a clear economic recovery. 1.5.2 Britain: the effects of abandoning the gold standard

In Europe, the problems were approached somewhat differently. While the United States had more influence in the rest of the world, Britain was losing ground in international trade. British governments, while adhering to liberal principles, gradually curtailed free trade policies. After abandoning the gold standard in September 1931, Britain looked to protectionist formulas for economic support from the rest of the British Empire. The pound sterling suffered sharp devaluations, against not only the US dollar and the French franc (around 30%), but also other weaker currencies, albeit to a lesser extent. In 1932 and 1933, the average devaluation was between 13% and 9%. Compared to other countries, this devaluation was a major benefit for the British economy, as the stagnation of international trade allowed for some movement in British exports. At the same time, the abandonment of the gold standard made an expansionary monetary policy possible, with low interest rates encouraging

The Great Depression of 1929 29

investment. Construction and industrial production experienced remarkable growth, which put Britain in an economically advantageous position. There are essentially two reasons for the high unemployment figures. Firstly, there were the structural features of the British economy itself, which led to the rationalisation and integration of companies through mergers. For this reason, investment shifted towards new manufacturing and away from traditional British industry, where unemployment was particularly concentrated. The second reason was the lack of a Keynesian fiscal policy, i.e., there was no expansion of public spending until 1938, when Britain began its rearmament policies (Fishback 2010). Alarming signals from Germany put the British economy on alert and war industry production was supported. In any case, the imbalance was evident and could only be countered with help from the United States. The shift towards protectionism was another important change in the British economy in this decade. The stagnation of international trade in the 1930s led Britain to abandon its leadership as an advocate of free trade, although it maintained preferential treatment for Commonwealth countries, which was ratified in the Ottawa Treaty. This allowed Britain’s foreign trade to be oriented towards the colonies, to the extent that they accounted for 50% of its exports and 40% of its total imports. This level of exchange was based on the enormous privileges granted to the colonies and was the beginning of the future process of decolonisation. The share of exports in national production fell from 33% in 1907 to 27% in 1924 and only 15% in 1938. In the same year, exports to Europe were around 30%, a percentage that fell to 20% after 1945. This decline was largely due to the severe impact of decolonisation on the British economy and the lack of interest in the process of European integration. The British government issued regulations – the Special Areas (Development and Improvement) Act (1934) – to help the mining regions of South Wales, Durham, and southern Scotland. The textile industry in the Lancashire district and the shipbuilding industry suffered a similar situation. Unemployment in these areas ranged from 30% to 60%. Migration to London, the southeast of England, or the former colonies was common in these years. At the same time, economic aid was granted to companies setting up in these areas and interest rates were kept low to facilitate investment. 1.5.3 France: crisis and defeat

France sustained its economy at acceptable levels in the years following the crisis, and its most acute manifestations came late. The consequences were not particularly severe, but they lasted longer and did not bottom out until 1936. When international war broke out three years later, in 1939, the French economy was even more shaky. Its low unemployment rate, large gold reserves, and economic dynamism in the 1920s enabled it to withstand the first onslaughts of the recession. A series of governments adopted a range of mostly ineffectual measures, and, as in other European countries, the economic turmoil sparked social protests.

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After the devaluation of the pound sterling, France’s income from tourism and exports fell sharply. Until 1936, the devaluation of the franc was avoided, and a restrictive monetary policy continued, which led to progressive deflation and a reduction in prices and wages. Although later than in other countries, the crisis also eventually reached France. Rising unemployment, falling prices, declining wages, and shrinking corporate profits were widespread. Several credit companies went into crisis: Banque Nationale du Crédit, Banque d’Alsace-Lorraine and Crédit Foncier du Brésil. Bankruptcies multiplied and savers lost their deposits. Scandals hit the headlines and exposed the deceitful collusion between politicians and big bankers. Increasing risks of devaluation led to the outflow of large amounts of capital and gold. The chaotic situation led to the rise to power of a left-wing government – supported by socialists and communists – headed by Léon Blum. The triumph in 1936 of the Popular Front, under the leadership of Blum, a veteran socialist, marked a shift in French economic policy, which was inspired by Roosevelt’s American experience. The change was based in particular on the theory that explained the crisis in terms of public underconsumption and envisaged recovery through increased purchasing power. However, the objectives achieved by the Popular Front were of the same tenor as its predecessors. The first measures of the new government were aimed at raising wages and reducing working hours. These wholly inadequate measures led to the export of capital and forced the inevitable devaluation of the French currency. The situation remained unfavourable because of the absence of investment and the inability to inject measures to boost recovery. In June 1937, Léon Blum asked parliament for exceptional powers, which were denied. Political paralysis continued for a few more months with short-lived governments, until April 1938. The Blum experience was notable for having practically eliminated unemployment, although it did not increase the level of production to any great extent. In 1937, at close to full employment, national output was 82% of what it had been in 1929. There were several reasons for this situation: the 40-hour working week, the return of industrial workers to the countryside, and demographic stagnation. In May 1938, Édouard Daladier came to power and put Paul Reynaud in charge of the economy. The change in economic policy was evident in the repeal of the measures taken by previous governments. To this end, investment incentives were approved, a vigorous military rearmament programme began, and industrial production returned to growth. However, the German attack in May 1940 could not be met with sufficient strength, and France found itself devastated and subdued in a brief military campaign lasting only 40 days. 1.5.4 Germany: Hitler and rearmament policy

Germany, in order to pull itself out of the economic crisis of 1929, pursued extremely deflationary policies: taxes were raised considerably, and interest rates reached very high levels. Germany’s precarious economic situation collapsed, and the public turned its back on the Weimar Republic. There were several

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reasons for this breakdown that explain the difficult situation in which Germany found itself. The first is that the collapse of the German economy inevitably led to the cancellation or suspension of war reparations, with all that this entailed for Germany itself and for creditor countries. A second aspect, no less important, is that the Treaty of Versailles imposed conditions that prevented the devaluation of its currency (the mark). However, in July 1931, exchange controls were introduced that insulated the mark from the effects of its appreciation against other devaluing currencies. The third issue was that, since 1928, there had been no foreign capital inflows into Germany, which meant that war reparations had to be paid out of the balance of payments surplus. To achieve this goal, a very restrictive economic policy had to be pursued. Other, no less relevant issues show how a revaluation would have increased the real weight of the debt; or the role played by wages, which were inflexible downwards due to the power of the trade unions and would have made fiscal policies largely ineffective. Ultimately, what is important is to highlight how complex it was for alternative policies to emerge that would improve Germany’s problematic situation (Schnabel 2004). Several measures shaped German economic policy throughout 1931. First, domestic prices were lowered, wages were cut (by up to 15%), and exchange controls were introduced in order to stem the exodus of capital. Nevertheless, the German economy was still floundering, and in 1934 it remained at a lower level than in 1929. To curb the external imbalance, the government introduced import licences, tighter controls on capital outflows, and bilateral agreements with other countries. Prime Minister Brüning and then Von Papen, who succeeded him in 1932, attempted to revitalise the German economy, but the failure of the extremely restrictive policies brought the Weimar Republic into disrepute. At the end of 1932, the Nazi party achieved great electoral success, which was the preamble to Adolf Hitler’s seizure of power in January 1933. Studies on the subject have clearly pointed out the malevolent connection between one action and another, as well as their knock-on effects. On the one hand, there was the disastrous policy of war reparations with hyperinflation and the destabilisation of the German economy; on the other, the ensuing economic crisis, the rejection of restrictive policies, and the search for dictatorial solutions based on revenge and violence. Germany was the first industrialised nation to achieve a full recovery, largely through the implementation of a systematically managed economy after Hitler came to power. One of the main goals of Nazi economic policy was to make the German economy self-sufficient in the event of war. Thus, they directed their research investments towards the development of goods that could be manufactured with the raw materials available in Germany. Trade agreements with countries in eastern Europe and the Balkans were strengthened, which encouraged the exchange of German manufactured goods for raw materials, thereby averting the outflow of foreign currency. Investment in sectors such as transport and construction was also bolstered. During these years, for example, the Volkswagen company emerged as the flagship of the German industrialisation

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process. In this line, there was a notable increase in public spending: in 1928 it accounted for 15% of national income, in 1934 it was at 23%, and by 1938 it had reached 33%. Between January 1933 and December 1934, the number of unemployed fell from 6 million to 2.6 million. State aid to enterprises in the form of subsidies was very high. These facts reinforced the popularity of the regime, which directed all productive effort towards a war economy. Rearmament began in 1936 and was intensified from 1938 onwards. The government directly controlled part of the resources through the “priority markets” and left the other part to the market. Hitler’s aim was to build up a stockpile of armaments by promoting the war industry, which would allow a blitzkrieg, as he did not consider it appropriate to take resources away from the private economy and civilian industry. However, the forecasts were not realised because of Göring’s ineffective leadership and Hitler’s decision to attack Poland ahead of schedule. Nevertheless, the Allied powers and the world were impressed by Germany’s massive war effort. The autarkic economic policy was another of the practices that prompted rearmament. It had a certain importance in the chemical industry to produce substitute materials, although dependence on other countries was very great in oil, iron, and metals needed for the aircraft industry. Hitler also promoted the economic exploitation of some central European countries, especially with the annexation of Austria (1938) and Czechoslovakia (1939). The creation of a “living space” through hegemony in other countries was of no particular significance, although trade in these areas improved somewhat. Imports from countries such as Spain, Italy, Yugoslavia, Bulgaria, Romania, Greece, and Turkey rose from 9.8% in 1929 to 18.7% in 1938, and exports from 11.2% to 20.8% in the same years. Although the increase is substantial, it was not sufficient to cover the colossal raw material needs of the German economy. In short, Nazism used the economy for its war aims, although it did not achieve the levels of efficiency it sought, nor did it manage to synchronise the rhythms of production with military operations. It is true that it set in motion a powerful, technologically advanced war machine that had the whole of Europe on the ropes; but its “energy Achilles’ heel”, the resistance of Stalin’s USSR, and the entry of the United States into the conflict thwarted its chances of victory. 1.5.5 Stabilisation policies to curb the crisis in Latin America

Latin American governments had to take measures to stabilise the economic situation and cope with the impact of the depression. First, they had to withstand the decline in capital inflows and the fall in export earnings; and second, they had to cope with the contraction in tax revenues, which resulted in a large budget deficit that could not be financed from foreign sources. It was thought that the adoption of the gold standard would automatically adjust the external imbalance. However, exports fell so sharply that after 1929 it was not possible to restore that balance. Gold and foreign exchange reserves fell particularly in those countries that tried to keep to the gold standard. In

The Great Depression of 1929 33

Colombia they dropped by as much as 65%, and in other countries it was decided to abandon it – as was the case in Argentina in 1929 – or to limit the outflow by means of banking restrictions. Most countries created a system of import quotas. Currency devaluation was rarely practised, as few governments appreciated the severity and duration of the crisis. In 1931, the British suspension of the gold standard and the depreciation of the pound sterling meant that the currencies of some Latin American countries suffered a tremendous collapse against the US dollar. However, in 1933, after the suspension of the gold standard in the United States, the opposite effect occurred with a sharp appreciation of Latin American currencies. In any case, it forced the respective governments to seek solutions for the monetary system and exchange rates. In general, almost all of them tried to peg their currencies to the pound sterling or the US dollar. Monetary policy during the depression was quite loose in many Latin American countries. Efforts to raise taxes, including tariffs, proved insufficient. Policies to reduce the budget deficit – due to the troubled social situation – leaned mostly towards debt servicing and ignored wage cuts, especially in the public sector. Public investment was boosted by road construction programmes in almost all countries. The growth of the road network was very significant and contributed indirectly to the expansion of agriculture and the development of manufacturing. Private investment also saw a slight rise. Growth in private consumption fuelled industrial progress in the 1930s. The recovery in domestic demand was driven by the implementation of flexible monetary and fiscal policies, as well as by the recovery of the export sector. The main change in the world trading system was the rise of protectionism. World trade had been growing steadily since 1932. For two years, the most industrialised countries reached a high level of imports. This trend allowed the exports of Latin American countries to remain at very stable levels. The big beneficiaries – Colombia, Nicaragua, Mexico, Bolivia, Chile, and the Dominican Republic – were the exporters of gold and silver due to the price increases in the 1930s. There were also some exceptions such as Honduras, Cuba, and Argentina. The recovery of the export sector, in both volume and monetary value, contributed to the growth of Latin American economies in the 1930s. This revival led to an expansion of domestic demand that enabled the non-export sector to increase its presence in the respective countries. Agriculture and manufacturing were the main beneficiaries of this orientation, but sectors such as construction and transport also benefited. Argentina saw a significant recovery in GDP, despite the lack of export growth. This was largely because it had a larger industrial structure than the other countries and manufacturing was a major contributor to its economy. The industrialisation of these years brought about a significant change in the composition of industrial production in the different countries. Processed food and textiles were the most important branches of manufacturing, but several new sectors came to the fore. Among the latter were consumer durables, chemicals and pharmaceuticals, metals, and paper. The market for industrial products

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diversified and domestic consumption expanded into basic supplies for other industries. Nevertheless, by 1939, industry’s share of GDP remained modest. On the other hand, the protectionism that preserved the domestic market did not make it easy to overcome the many inefficiencies in industry so that it could compete abroad. At the dawn of the Second World War, it was still small in scale, with a limited number of workers per establishment. Labour productivity was also quite low, well below that of the United States, and most of it was employed in food and textile production. This low output was due to a shortage of electricity, a lack of skilled labour, restricted access to credit, and the use of antiquated machinery. The financial system in Latin America did not undergo substantial alterations, but did see the creation of new central banks, the expansion of insurance companies, and the growth of secondary banking. Its stability is striking, which was due to the close relationship between banks and the export sector. Latin America’s recovery in the 1930s was relatively rapid. By 1932, Colombia had recovered its GDP level to that of 1928. Brazil achieved the same in 1933, Mexico in 1934, and Argentina, El Salvador, and Guatemala in 1935. Cuba and Chile did not reach 1928 levels until 1937 because of the severity of the crisis they suffered. Honduras, due to the successive banana export crises, did not recover its economy until 1945. The economic policies developed in those years by the respective governments had a certain degree of success. The incompetence of many of the leaders was compensated for in a few ways. First, there was the emergence of a remarkable group of well-trained civil servants and economists who were in charge of fiscal and monetary policy and were able to make decisions in a relatively apolitical context. Second, the relative incidence of inflation was not a serious problem during those years.

1.6 By way of conclusion: a final assessment Between 1929 and 1939, the European economy was very uneven and varied from country to country. Until the rearmament at the end of the decade, the policies adopted by governments were driven by domestic mechanisms and did not take into account a global perspective. The United States sought a solution to its problems through the New Deal, which led to a renewal of American policy and institutions, although it did not have a decisive impact on economic recovery. The countries that made the greatest economic progress in this decade were Germany and Japan. The former because its productive recovery was based on high public spending, for example on motorway construction, and the latter because the crisis was very contained and the subsequent upturn very solid. Great Britain was at an intermediate level, with a rapid recovery, although without reaching the level of Japan and Germany. France and the United States were the worst performers, the US because it suffered a very severe crisis and France because it developed ineffective recovery policies. The economies that coped best with the crisis pursued expansionary monetary policies, and Germany

The Great Depression of 1929 35

pursued an economic policy that was beneficial from all points of view. However, the United States adopted very negative and inadequate measures and did not develop its full productive capacity until it became involved in the war. In addition, the study of the Great Depression of 1929 provides an insight into the economic developments since 2008. Both the US housing crisis – which turned into a global recession – and the European financial crisis of a few years later show parallels with the interwar period. There are commonalities in both crises: the role of financial fragility, the propagation of the crisis through fixed exchange rates, and the intellectual weakness of political leaders to foresee in advance the dark clouds that were looming on the economic horizon. To some extent, the lessons of the recovery from the Great Depression have been reflected in the measures adopted by various countries in the 2008 crisis, especially in expansionary policies, in both the monetary and fiscal spheres.

1.7 References Accominotti, Olivier. Asymmetric Propagation of Financial Crises During the Great Depression. Working Paper. London: School of Economics and Political Science, 2011. Aldcroft, Derek H. Historia de la economía europea, 1914–1980. Barcelona: Crítica, 1989. Almunia, Miguel, Agustín S. Bénétrix, Barry Eichengreen, Kevin H. O’Rourke, and Gisela Rua. “From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons.” Economic Policy 25, no. 4 (2010): 219–265. DOI 10.1111/j.1468-0327.2010.00242.x Barber, William J. Historia del pensamiento económico. Madrid: Alianza Editorial, 1974. Barnett, Vincent. Historia del pensamiento económico mundial. Madrid: Paraninfo, 2017. Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” The American Economic Review 73, no. 3 (1983): 257–276. Bernanke, Ben S., and Harold James. “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison.” In Financial Markets and Financial Crises, ed. Glenn R. Hubbart, 33–68. Chicago: University of Chicago Press, 1991. DOI 10.3386/w3488 Bulmer-Thomas, Victor. “Las economías latinoamericanas, 1929–1939.” In Historia Económica de América Latina: Desde la independencia a nuestros días, ed. Tulio Halperin Donghi et al., 243–285. Barcelona: Crítica, 2002. Campa, José Manuel. “Exchange Rates and Economic Recovery in the 1930s: An Extension to Latin America.” The Journal of Economic History 50, no. 3 (1990): 677–682. DOI 10.1017/S0022050700037232 Carreras, Albert, and Xavier Tafunell. Historia Económica de la España contemporánea (1789–2009). Barcelona: Crítica, 2010. Casanova, Julián. Europa contra Europa, 1914–1945. Barcelona: Crítica, 2011. Comín, Francisco. “El período de entreguerras (1919–1935).” In Historia Económica de España, siglos X-XX, ed. Francisco Comín, Mauro Hernández, and Enrique Llopis, 285–329. Barcelona: Crítica, 2002. Comín, Francisco. “La crisis internacional de 1929 y la economía española durante la Segunda República.” In Las crisis a lo largo de la historia, coord. Antoni Furió, 97–154. Valladolid: Instituto Universitario de Historia Simancas, 2010. Comín, Francisco. “Política y economía: Los factores determinantes de la crisis económica durante la Segunda República (1931–1936).” Historia y Política, no. 26 (2011a): 47–79.

36  Juan Manuel Matés-Barco Comín, Francisco. Historia económica mundial: De los orígenes a la actualidad. Madrid: Alianza, 2011b. Crafts, Nicholas, and Peter Fearon. The Great Depression of the 1930s: Lesson for Today. Oxford: Oxford University Press, 2013. DOI 10.1093/acprof:oso/9780199663187.001.0001 Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression. New York: Oxford University Press, 1992. Eichengreen, Barry, and Kris Mitchener. The Great Depression as a Credit Boom Gone Wrong. BIS Working Paper No. 137. Basle: BIS, 2003. DOI 10.2139/ssrn.959644 Faulkner, Harold U. American Economic History. New York: Harper & Brothers Publishers, 1954. Feinstein, Charles H., Peter Temin, and Gianni Toniolo. The European Economy Between the Wars. Oxford: Oxford University Press, 1997. Fernández Delgado, Rogelio. “La escuela clásica (III): Thomas Robert Malthus y Jean Baptiste Say.” In Historia del pensamiento económico, ed. Luis Perdices de Blas, 163–200. Madrid: Síntesis, 2003. Fishback, Price. “Monetary and Fiscal Policy During the Great Depression.” Oxford Review of Economic Policy 26, no. 3 (2010): 385–413. DOI 10.1093/oxrep/grq029 Galbraith, John K. El crac del 29. Barcelona: Ariel, 1993. Galbraith, John K. Breve historia de la euforia financiera. Barcelona: Ariel, 2011. Galindo Martín, Miguel Ángel. “John Maynard Keynes.” In Historia del pensamiento económico, ed. Luis Perdices de Blas, 451–480. Madrid: Síntesis, 2003. Holtfrerich, Carl Ludwig. The German Inflation, 1914–1923. New York: Walter de Gruyter, 1986. DOI 10.1515/9783110860078 Hoover, Herbert. The Memoirs of Herbert Hoover: The Great Depression, 1929–1941, ­volume III. New York: Macmillan, 1952/2016. Hynes, William, David S. Jacks, and Kevin H. O’Rourke. “Commodity Market Disintegration in the Interwar Period.” European Review of Economic History, no. 16 (2012): 119–143. DOI 10.1093/ereh/her009 Keynes, John Maynard. Las consecuencias económicas de la Paz. Barcelona: Crítica, 1919/1991. Kindleberger, Charles Poor. La crisis económica, 1929–1939. Barcelona: Crítica, 1985. Kindleberger, Charles Poor. Manías, pánicos y cracs: Historia de las crisis financieras. Barcelona: Ariel, 1991. Landreth, Harry, and David C. Colander. Historia del pensamiento económico. Madrid: McGraw-Hill, 2006. Maddison, Angus. Historia del desarrollo capitalista. Sus fuerzas dinámicas. Barcelona: Ariel, 1991. Marichal, Carlos. Nueva historia de las grandes crisis financieras: Una perspectiva global, 1873–2008. Madrid: Debate, 2010. Marichal, Carlos. “Los bancos en América Latina, Siglos XIX y XX.” Revista de la Historia de la Economía y de la Empresa, no. 6 (2012): 13–22. Martín-Aceña, Pablo. “La economía española de los años 1930.” In La República y la guerra civil, coord. Santos Juliá, 445–465. Madrid: Espasa Calpe, 2004. Martín Martín, Victoriano. “Karl Marx.” In Historia del pensamiento económico, ed. Luis Perdices de Blas, 263–290. Madrid: Síntesis, 2003. Matés-Barco, Juan Manuel. “Desintegración económica y crisis financieras (1914–1939).” In Cambio y crecimiento económico, ed. Leonardo Caruana et al., 81–115. Madrid: Pirámide, 2017a. Matés-Barco, Juan Manuel. “El crecimiento económico en América Latina (1900–2015).” In Cambio y crecimiento económico, ed. Leonardo Caruana et al., 217–247. Madrid: Pirámide, 2017b. Morilla Critz, José. La crisis económica de 1929. Madrid: Pirámide, 1991. Niveau, Maurice. Historia de los hechos económicos contemporáneos. Barcelona: Ariel, 1989.

The Great Depression of 1929 37 Parejo Barranco, Antonio, and Carles Sudrià. “ ‘The Great Depression’ Versus ‘The Great Recession’: Financial Crashes and Industrial Slumps.” Revista de Historia Industrial, no. 48 (2012): 23–48. Parker, Randall, and Robert Whaples. Routledge Handbook of Mayor Events in Economic History. Abingdon, Oxon: Routledge, 2013. DOI 10.4324/9780203067871 Perdices de Blas, Luis (ed.). Historia del pensamiento económico. Madrid: Síntesis, 2003. Pollard, Sidney. La conquista pacífica: La industrialización de Europa, 1760–1970. Zaragoza: Prensas de la Universidad de Zaragoza, 1991. Rodríguez-Braun, Carlos. Grandes Economistas. Madrid: Pirámide, 2006. Romer, Christina D. “What Ended the Great Depression.” The Journal of Economic History 52, no. 4 (1992): 757–784. DOI 10.1017/S002205070001189X Roncaglia, Alessandro. Economistas que se equivocan: Las raíces culturales de la Crisis. Zaragoza: Prensas de la Universidad de Zaragoza, 2015. Roncaglia, Alessandro. Breve historia del pensamiento económico. Zaragoza: Prensas de la Universidad de Zaragoza, 2017. Rothbard, Murray N. Historia del pensamiento económico. Volume I: El pensamiento económico hasta Adam Smith; Volume II: La economía clásica. Madrid: Unión Editorial, 2006/2012. Sánchez, Alex, and Jordi Catalán Vidal. “Cinco Cisnes Negros: Grandes depresiones en la industrialización moderna y contemporánea, 1500–2012.” In Crisis económicas en España, 1300–2012. Lecciones de la Historia, ed. Francisco Comín and Mauro Hernández, 83–112. Madrid: Alianza, 2013. Schnabel, Isabel. “The German Twin Crisis of 1931.” Journal of Economic History 64, no. 3 (2004): 822–871. DOI 10.1017/S0022050704002980 Thorp, Rosemary. “América Latina y la economía internacional desde la primera guerra mundial hasta la depresión mundial.” In Historia Económica de América Latina: Desde la independencia a nuestros días, ed. Tulio Halperin Donghi et al., 99–121. Barcelona: Crítica, 2002. Vegara Carrió, Josep María. Historia del pensamiento económico: Un panorama plural. Madrid: Pirámide, 2019. Wandschneider, Kirsten. “The Stability of the Interwar Gold Exchange Standard – Did Politics Matter?” The Journal of Economic History 68, no. 1 (2008): 151–181. DOI 10.1017/ S0022050708000053 Wandschneider, Kirsten. “Financial Crisis in the Interwar Period, 1918–1939: Experiences Then and Lessons for Today.” Revista de Historia de la Economía y de la Empresa, no. 7 (2013): 99–117. Wapshott, Nicholas. Keynes vs Hayek: El choque que definió la economía moderna. Barcelona: Deusto, 2016. Wolf, Nikolaus. “Europe’s Great Depression: Coordination Failure After the First World War.” Oxford Review of Economic Policy 26, no. 3 (2010): 339–369. DOI 10.1093/oxrep/grq022 Zamagni, Vera. Historia Económica de la Europa Contemporánea. Barcelona: Crítica, 2001.

2 Europe after World War II in 1945–1946 Leonardo Caruana de las Cagigas and Julio Tascón Fernández

2.1 Introduction After the war, the situation in Europe was extremely difficult, and it would take several years for life to return to normal in many parts of the continent. The priority was primarily to reorganise countries, rearrange borders, and relocate people from where they were in the final days of the war to places where they could work and have a future. Prospects in many parts of Europe were bleak, so thousands of people had to leave Europe and emigrate, mainly to the Americas or to Western European countries such as France, Belgium, or the United Kingdom, although some also went to Australia and New Zealand. Famine would be a problem for two full years after 1945, and thousands of Europeans starved to death after hostilities had ended. The task facing the United Nations and the American, British, French, and Soviet armies was enormous: to feed civilians and help cities across Europe get back on their feet.

2.2 The devastation in Europe World War II was by far Europe’s worst war, and the destruction was massive. The GDP of many European countries fell dramatically. Output in France, Italy, and Austria halved in 1945 compared to 1939 levels, and German GDP fell by two-thirds in 1946 relative to 1939 (see Table 2.1). In Eastern Europe, Leningrad was completely destroyed, as was Stalingrad. In Italy, the Monte Cassino Abbey was in ruins, and Saint-Nazaire and Rouen in France suffered similar damage. However, it is likely that the most extensive ruins were in Germany, the defeated country. Berlin and Hamburg had become ghost towns, which is hard to imagine. Indeed, without photographic evidence, it is impossible to appreciate the extent of the destruction after five years of war. The population suffered enormously, and it is difficult to explain the horror, inhumanity, and crimes that were widely committed on all sides. Famine and deprivation of basic necessities were unfortunately the norm. US General Lucius D. Clay, Commander-in-Chief in Europe and military governor of the US Zone in Germany, called Berlin the city of death. No place was left untouched by the extensive bombardment, shelling, fires, etc. It is difficult to estimate the DOI: 10.4324/9781003388128-2

Europe after World War II in 1945–1946 39 Table 2.1 GDP of various European countries GDP (thousands of 1990 dollars)

France Germany Austria Italy

1939

1944

1945

1946

201 375 27 154

94 425 28 112

102 302 12 87

155 143 14 114

Source: Maddison (2003).

number of fatalities from the bombings in Germany; however, it is thought that a minimum of 305,000 people died, while other estimates are twice this figure. As for the number of people injured by the bombings, minimum estimates are 780,000. In addition, some 18,000,000 German civilians were left homeless. British historian Richard Overy calculated that, in total, some 353,000 civilians were killed by British and American aerial bombing raids on Germany (Overy 2014, 306–307). The motive for this annihilation is controversial, as the stated aim was to destroy German industry. However, the bombs mainly devastated civilian homes, and large numbers of women, children, and the elderly were killed. Undoubtedly, industry was badly hit, but the human cost borne by civilians was appalling. It is clearly one of the dark chapters of the war. The decision to bomb Germany came about as follows: British physicist Frederick Lindemann was a scientific adviser to the British government, and in March  1942 he recommended to Winston Churchill to bomb Germany. His reasoning was that he believed it was the most effective way to destroy enemy morale, based on the terrible experience of the British people suffering from the bombing of their cities. This assertion was questionable because the population of those British cities also wanted to do the same to the Germans and stood firm against the enemy despite the bombing. The other stated objective was to destroy the enemy’s industry. However, what was actually achieved in most cases was the death of thousands of innocent people. Nonetheless, at that time, bombing the enemy’s cities was considered “normal”, or at least the correct military strategy. But attacking only industrial sites was not easy. There was vigorous defence from antiaircraft weapons, and it was often a challenge for RAF or US bombers to find the exact location of industrial targets in Germany. As a result, they often failed to bomb the right place. What is clear is that the aim of breaking the spirit of the German people to defend their country was certainly not achieved. The bombing was intense with substantial assistance from American bombers, including the famous B-17 and B-29 and, of course, the well-known Lancaster, the British heavy bomber. The US Strategic Bombing Survey reported that a staggering 1,415,745 tonnes of bombs were dropped on Germany, half of the Western Allies’ strategic bombing in Europe. The other countries that also suffered heavy bombing were

40  Leonardo Caruana de las Cagigas and Julio Tascón Fernández

France, with a total of 570,730 tonnes of bombs dropped, Italy with 379,565 tonnes (Baldoli and Knapp 2012, 2), Austria, Hungary, and the Balkans with 185,625 tonnes and, finally, 218,873 tonnes dropped on other countries. In short, the destruction and costs were enormous. In France, for example, an estimated 67,078 French were killed by US–UK bombing raids. Regardless of the military success or otherwise of the bombing, the number of civilian buildings destroyed in Germany amounted to 3,600,000 dwellings, almost 20% of the country’s housing and 45% of the housing stock in major cities. This decision to bomb cities was a colossal mistake with terrible consequences (The United States Strategic Bombing Survey 1987, 35). Continuing with the destruction, by May 1945, cities in many parts of Eastern Europe had become ghost towns, and it often seemed that the only living beings were handfuls of terrified people clinging to survival. These poor souls lived in cellars, ruined buildings, or shacks on the ground and were completely deprived of vital facilities such as water, gas, or electricity. And this was the terrible plight of millions of people across Europe. To this devastation must be added the destruction of railways and waterways. Give the importance of these infrastructures to the German war effort, their targeting by Allied bombers made sense from a strategic perspective. The problem was that, after the war, rebuilding would take years and the cost would be considerable. In the case of Germany, before the war they had enjoyed one of the best railway systems in the world, and it was their main means of transporting goods and passengers. The most successful period of railway bombing was in late 1944 and early 1945. In this period, the military capacity of the US and British Air Forces increased enormously, while the German Luftwaffe grew weaker by the day. The number of trains diminished rapidly, from 900,000 freight cars loaded in August 1944 to 214,000 freight cars by March 1945. In that month, Albert Speer, German Minister of Armaments and Munitions, wrote to Hitler to inform him that the collapse of the transport system was imminent (The United States Strategic Bombing Survey 1987, 32). In addition, many bridges used by the trains were systematically destroyed, which meant that many lines were cut off from the rest of the network. In short, it was no longer possible to transport essential goods such as coal from the Ruhr to heat homes or for food to reach the cities. The destruction of the railway system was so complete that by March  1945 even German military divisions had serious difficulties receiving supplies. They had only less than a day’s supply and trains could not run for lack of coal. Germany simply no longer functioned – it was kaput! Inland waterway transport was another important network for the Germans, responsible for transporting over 20% of the nation’s cargo. The Allied attack on the waterway network was very efficient and took this transport system out of commission. Less important in those days was the transport of goods by road, so the road network was not a main target of Allied air raids. In the systematic destruction of Germany, electric power generation was another potential target (Griffith 1994, 17–22), as this source of energy was widely used. But it is surprising that German power plants were not targeted

Europe after World War II in 1945–1946 41

in the bombing raids. How is this possible? The commanders in charge of Allied bombing in occupied Europe discussed this option but concluded that Germany had such an excess power generation capacity that it would always be possible for the country to have sufficient electricity. They believed that if one power plant was destroyed, other plants in the power grid could make up for the loss and thus solve the problem. That assessment was a strategic blunder. Nevertheless, the other reason was that commanders felt there were many more important military targets. But while it is true there was no shortage of key sites to bomb, a strong case can be made that power plants should have been prioritised. Unfortunately, this mistake had terrible consequences and prolonged the war more than necessary. This is because, in fact, in 1939, before the war began, Germany had limited electrical capability. It was therefore in a risky position in terms of power supply for its cities and industries once the war began, a situation that grew more perilous as the war progressed. For example, the destruction of five major power stations would have damaged the electrical grid to such an extent that 8% of the country’s capacity would have been lost, and an attack on 45 plants would have knocked out 40%. Many German industrial plants ran solely on electrical power. (The United States Strategic Bombing Survey 1987, 34). If power plants had been destroyed, it would have represented a serious loss of industrial output, especially for critical weapons production. Until 1943, the war did not affect German territory to any great extent, and, in fact, industry functioned in such a way that it was able to produce for both the army and civilians. Life was not so bad in many places, and food and many goods could be produced for regular consumption by citizens. This situation eventually changed, but slowly, and chaos did not arrive until March  1945. Perhaps surprisingly, the general situation was that people had enough clothing and other goods to live a normal life. However, month by month they began to experience a different situation, as it became increasingly difficult to obtain everything they had had in 1943. In any case, essential foodstuffs were distributed in Germany in sufficient quantities practically until the end of the war. Chaos came abruptly in the spring of 1945, when the population suddenly found itself without food, clothing, or other necessities. German statistics indicate that the capital, Berlin, with a population of 4,338,756 in 1939, lost up to 50% of its habitable buildings, and its current population of 3,399,511 is still far lower than before the war. In August 1945, only 2,807,405 people lived in this ghost town, with no transport, no sewage, and no food. The Soviet, French, British, and American armies had the impossible task of feeding so many people and reorganising a city totally devastated morally and materially. The inhabitants received only half the rations they should normally have had, and more than a million people were left homeless. This extremely difficult situation was also repeated in other German cities; for example, 51.6% of Hanover was destroyed and 53.3% of Hamburg. Other cities were even worse off: 64% of Duisburg was flattened, 66% of Dortmund, and up to 70% of Cologne. The figures are staggering: between 18 and 20 million

42  Leonardo Caruana de las Cagigas and Julio Tascón Fernández

people were homeless, and there was no shelter for children, women, and the elderly. It is clear that the overall situation in Germany was very dire (Hastings 1979, 371–372). Elsewhere in Europe, the situation was similar. The Western Front in Italy was under German occupation from July 1943 to May 1945 and suffered extensive destruction of trains and a large number of ruined or damaged bridges (13,000). The reconquest of these territories by the Allied armies, freeing them from Nazi tyranny, had been a long, hard struggle that lasted almost two long years. And the question was how long it would take to rebuild everything. In the Netherlands, more than 200,000 hectares of farmland were ruined when German troops fought to defend that territory in 1944 following the Allied attack on Normandy, the famous D-Day landings of 6 June  1944. The Germans opened the dikes in September  1944, flooding everything and destroying all the crops. They also laid mines everywhere, especially on the roads. The telephone lines were pulled down and few bridges were left unscathed; they were either bombed by the Allies or blown up by the Germans during their retreat. The reconstruction needed in August 1945 was enormous: bridges, telephone lines, houses, etc., would have to be rebuilt, and all those land mines, many of which continued to kill and maim people after the war, had to be found. In south-eastern Europe, for example in Greece, up to a third of their beautiful forests were destroyed in the fight against German occupation, and more than a thousand towns were burned and left uninhabited in the fighting. In Yugoslavia, one of the regions where Axis troops resisted most strongly, about 60% of its livestock was lost, and hunger and misery spread rapidly. Axis looting of milk and grain made survival in Yugoslavia extremely difficult. It is also estimated that a third of its industry was in ruins. As the railways were a primary target, 77% of Yugoslavia’s locomotives were reportedly destroyed. Finally, we have the obligatory reference to the Soviet Union, the largest country with the greatest suffering. If we calculate the total destruction in numbers, 70,000 cities, towns, and villages were destroyed. This demolition was systematic; houses and farms were burned along with all the infrastructure. The German army’s justification for this unjustifiable military decision was that they feared the resistance and therefore destroyed the towns. They thought this would prevent members of the resistance from living there or being fed by the inhabitants. Today this is astonishing, but because they were afraid of what the resistance could do, they argued that it was acceptable. Brutality was extreme in the Soviet Union, the Baltic states, Greece, Yugoslavia, Poland, etc. The war in the USSR was so cruel that destruction was carried out by not only the invaders, but also the defenders. Food, petrol, or any other goods that were considered useful to the enemy were destroyed. But what about the civilians – could they find food? In both armies, military objectives came first, and civilians were left to starvation and misery. Both Hitler and Stalin were determined to leave nothing to the enemy. At first it was Stalin who ordered the Red Army to destroy everything that could benefit the enemy. The retreat

Europe after World War II in 1945–1946 43

was swift; the invasion began on 22 June 1941, and by December 1941 the Axis armies were already close to Moscow. The Soviets had to fight to defend their territory but also had to destroy what they left behind in their retreat. After the defeat of the Germans at the battle in Stalingrad in February 1943, the story was reversed, with Axis troops slowly retreating and again destroying anything that could be used by the Red Army. Another main target was industry, and in the Soviet Union up to 70% of it was destroyed (Aldcrof 2001, 107). In Poland, more than 15,000 kilometres of railway tracks were lost. In the end, by May 1945, the only way to travel in continental Europe for millions of people was on foot, without trains or automobiles. At sea, the Battle of the Atlantic saw heavy losses, with a total of 3,500 Allied merchant ships sunk and over 13 million gross tonnes lost. As a result, millions of tonnes of food did not reach Europe, such as wheat from the United States and Canada and meat and grain from Argentina. Other goods were not grown in Europe and normally came from Brazil or Colombia, such as coffee and bananas, which disappeared in many places. Economically, what was appalling, and a major problem, was the destruction of buildings that would take many years to rebuild at enormous cost. Just consider the reconstruction of Roan, Leningrad, Berlin, or Warsaw. It is difficult to estimate all the cultural buildings destroyed, the personal property lost, etc. In France, for example, 460,000 buildings were completely destroyed and 1.9  million damaged, according to French government information. Trade effectively disappeared, as did agricultural production. Hunger spread everywhere. Virtually nothing worked. The situation was terrible and chaotic in 1945 and 1946. There was so much to rebuild. In many countries there were new governments, or none at all in the defeated countries. In addition to the damage from bombing, another terrible truth of this war is the appalling number of people who died of starvation, which did not stop when the war ended because the situation was so chaotic. With regard to the Soviet Union, historians used to say that 20 or 22 million died in the war; it is difficult make a precise estimate. However, new research includes people who died of starvation, and today that number is estimated to be five or six million more. Thus, the current estimate of the Soviet Union’s World War II death toll is 26 or 27  million (see Table  2.2). Of course, the Soviet Union was not the only region suffering from famine; this was ubiquitous in both eastern and western Europe. Food supplies in the Netherlands were extremely limited at the end of the war. The Dutch Famine, known in the Netherlands as the Hongerwinter, began when the Allied military operation to liberate the Netherlands and force an opening into Germany, called Operation Market Garden, stalled at Arnhem, where Allied troops failed to secure a bridgehead over the Rhine in September 1944. In 1977, an epic war film was made about the failed operation: A Bridge Too Far. In response, the German administrator Friedrich Christiansen placed an embargo on food transports to the western Netherlands, where cities quickly ran out of food. The citizens of Amsterdam, for example, had only 580 calories per day. The norm was 2000 calories for men and 1500 calories

44  Leonardo Caruana de las Cagigas and Julio Tascón Fernández Table 2.2 Casualties in WWII Country Poland (1) USSR (2) Yugoslavia (3) Germany (4) Greece (5) Hungary (6) Netherlands (9) France (7) Italy (9) UK (9) US (9)

Total population in 1939

Total deaths

Deaths as % of 1939 population

34,849,000 194,090,000 15,490.000 69,300,000 7,222,000 9,129,000 8,729,000 41,680,000 44,394,000 47,760,000 131,028,000

6,000,000 26,600,000 1,700,000 7,300,000 507,000 464,000 301,000 750,000 457,000 450,700 418,500

17.21 13.70 10.97 10.53 7.02 5.08 3.44 1.79 1.02 0.94 0.32

Sources: (1) Piotrowski (1997, 305).  (2) Erlikman (2004, 21–35). (3) Dear and Foot (2005, 290). (4) Clodfelter (2002, 582). (5) Council for Reparations from Germany, Black Book of the Occupation, Athens (2006, 126). (6) Stark (1995, 59). (7) Frumkin (1951, 58–59). (8) Research Starters: Worldwide Deaths in World War II | The National WWII Museum | New Orleans (nationalww2museum.org).

for women. From December 1944 onwards, famine spread to Rotterdam and Amsterdam. Fortunately, however, thousands of children were sent to rural areas where there was more food. City dwellers were less fortunate, and an estimated 18,000 people starved to death by March 1945. As the war drew to a close, food supplies became increasingly scarce in the country. The withdrawal of the Germans led to a chaotic situation where everything stopped working. This became the “normal” situation and therefore regular food supplies were impossible. Millions of people suffered extreme hunger from December 1944 until May 1945, when the German army was finally defeated. The Dutch Famine is perhaps exceptional because it involved a modern, advanced, and knowledgeable people, but the occupation of the country and the war led to terrible things, and no one escaped the misery. The only positive aspect, if there was one, was that, after the war, research on the Dutch Famine helped researchers to better understand the effects of starvation on people (Lowe 2012, 58–60). A far worse situation unfolded in Greece, where an estimated 250,000 people died of starvation under German control. But the chaos continued in many respects after the war because so much had to be rebuilt. A terrible example of this occurred in the Soviet Union: the famine of 1946–1947. The figure is difficult to calculate, but Cormac Ó Gráda (2001, 21) estimates that 900,000 people died of starvation. In Ukraine there were 300,000 deaths and in Moldavia 100,000, but the famine also reached other parts of the western Soviet Union; in Russia and Byelorussia some 500,000 died (Hosking 2006). The situation was aggravated by the return of thousands of soldiers from the war. The first problem was that there was an increase in births, which is typical after a war and usually good news; however, with the unexpected arrival of bad years for agriculture production due to a terrible drought, they

Europe after World War II in 1945–1946 45

were unable to feed all those babies and many thousands of people. Thus, the privations of the war years, especially in something as essential as food, lasted long after the end of hostilities in May 1945, and this is just one dreadful example. In this case, the climactic difficulties of 1946 worsened the recovery of Soviet agriculture. The drought was considered as severe as that of 1891, half a century earlier. And as the Cold War was in fact just beginning, the Soviet government became obsessed with avoiding the appearance of weakness, even exporting food, and foregoing the opportunity for international aid. This famine was downplayed in Soviet historiography and it was only in the 1990s that more research on it emerged and its horror was fully appreciated. At the end of the Second World War, for the citizens in Europe the overriding objective, concern, and challenge of each day was to find enough to eat. And this was a problem for millions of people in many countries; the destruction was so massive that it would take months or a year to return to minimum living conditions. In a country that did not suffer so much from the war, the Netherlands, over 100,000 citizens were starving in May 1945 (Lowe 2015, 59). The war was over, yet the country was in a catastrophic situation. The United Nations Relief and Rehabilitation Administration (UNRRA) provided enormous quantities of food after the victory. However, it was too late for the thousands of people who had starved to death. In Amsterdam alone, 5,000 people died of starvation. In Rotterdam there were days when no food arrived. This is why the press in those days called the city a new concentration camp, and in this case an extremely large one, with over half a million inhabitants. In a few months, the situation had become disastrous. And we must remember that for the Nazis the Dutch people were considered very close to them. They belong to the Germanic community. As mentioned earlier, the daily food requirement for a man is about 2,000 calories; by May 1945, in Germany, it had fallen to only 1,400 calories. Thus, hunger was on the rise and health conditions were rapidly deteriorating. In France, the average daily food consumption was only 1,300 calories. And, of course, the black market flourished spectacularly, but in many places even the black market had no food to sell. The Belgians suffered as terribly as the Dutch or the French. In Eastern Europe it was worse. It is said that in Poland in 1945, 600 people a day were dying of hunger. However, it is difficult to say for sure, but it must have been appalling. Following Germany’s capitulation, the food situation in some places was even worse than in the days of war. In Germany, for example, in September 1945, food distribution was not efficient; in the part of Germany controlled by the British army, people consumed an average of only 1,224 calories a day. By March 1946, this figure had dropped even further, to only 1,014 calories. The situation was even worse in the French-controlled part of Germany, where it was below 1,000 calories per day (Lowe 2015, 62). In Italy, things were just as bad; there were hunger marches and food riots in Rome over shortages. In Naples, the tropical fish in the aquarium were eaten (Botting 2005, 168). In the Austrian capital of Vienna there was little to eat, and the average food intake throughout 1945 was only 800 calories. In Budapest,

46  Leonardo Caruana de las Cagigas and Julio Tascón Fernández

the Hungarian capital, the average was a mere 556 calories (MacArdle 1949, 201–206). Thus, misery, fear, and desolation were typical of daily life. There was no food, no work, no future. People resorted to eating dogs. Even grass was consumed, a sign of the desperation in which some people found themselves. All this general malnutrition brought disease, more sick people, etc. Malaria returned in some parts of Europe, and tuberculosis, and in Romania pellagra, which is typical with malnutrition. Food shortages were made worse by the lack of adequate distribution. The black market developed rapidly, but in many places, it took much longer to arrive, as food could no longer be delivered by rail or by road as bridges had been destroyed. The situation was so bad that in some places food supplies were stolen and not distributed to those who needed them most. The destruction of life in the war was staggering. The total number of dead is estimated at between 55 and 60 million. At least five million Jewish men, women, and children, and another six million people, died in Hitler’s extermination camps. Other estimates add between 19 and 28 million deaths from disease and starvation. More than 22 countries in Europe saw heavy fighting on their territory. The war was over, but famine, poverty, unemployment, etc., were the common picture in Europe. One of the ways to alleviate the dramatic situation was organised by the United Nations. Nevertheless, solving the thousands of problems would take many years.

2.3 The huge task of United Nations Relief and Rehabilitation Administration (UNRRA) in Europe The European crisis was enormous. The difficulty was so great that rebuilding the old continent would require the help of the newly created United Nations. The new situation, with two nations leading the world, the US and the Soviet Union, made it necessary to adopt urgent measures to revive economic activity in European countries. In addition, the fear of a democratic takeover by communists in France or Italy was a push in the same direction. War reparations were not demanded of the defeated countries of Western Europe, as had been the case after World War I, probably because it was obvious that they could not be paid. In fact, reparations were never even proposed. Instead, these countries would be fed and given economic aid. And the threat of the Soviet Union undoubtedly provided the impetus for the presence of the US military in Europe and for US aid in 1947 in the form of the Marshall Plan. The humanitarian problems had to be solved quickly. The political solution began with the United Nations Relief and Rehabilitation Administration (UNRRA), representing 44 nations, founded in 1943. The aim was to organise aid in primary supplies: food, fuel, clothing, medicine, shelter, etc. The Central Committee had representatives from four countries: the United States, Great Britain, the Soviet Union, and China. Funding, amounting to $3.7  billion, came from many countries, and 12,000 people worked in the organisation. In addition, charitable organisations collaborated with UNRRA. Aid went mainly to the hungry and the displaced, who numbered not in the

Europe after World War II in 1945–1946 47

thousands but in the millions. The personal situation was appallingly grim for many Europeans. In fact, the need was so great that the United Nations founded another organisation: the International Refugee Organisation, on 20 April  1946 (UNHCR 2000, 13). Its mandate included the maintenance of refugee camps, vocational training, tracing services to find lost family members, legal protection, and the resettlement of refugees. The largest number of refugees came from Eastern Europe. Refugee camps were established in the defeated countries – Germany, Austria, and Italy – and their inhabitants came mainly from Armenia, Poland, Latvia, Estonian, Lithuania, Yugoslavia, Greece, Russia, Ukraine, Hungary, and Czechoslovakia, as well as those Jews who survived the concentration camps that the Nazis built in various European countries. The number of refugees is still a matter of debate; the most conservative estimate is that at least 11 million people were displaced, including people from concentration camps, prisoners of war under the Germans, slave labourers used by the Nazis, and people fleeing the Soviet army (Hobsbawm 1994, 50–52). All these people fell under the euphemistic label of “internally displaced persons” (IDPs) and their care was assigned to UNRRA. The great challenge was that hundreds of thousands of them needed a new home and only a limited number of refugees were accepted by specific countries. At first the number was not sufficient and for a long time many IDPs could not be resettled. The refugee quotas were completely inadequate, and, by the fall of 1946, it was unclear whether the remaining IDPs would ever find a home. However, Belgium eventually accepted 20,000 IDPs to work in the coal mines. The UK accepted more than 267,000 IDPs, mainly from eastern countries. Canada accepted 27,000 and Australia 240,000, principally from Eastern Europe. A large number also went to the United States, over 200,000 in total, of whom a significant number were Jewish (Michigan Family History Network report). The social criticism was that these displaced people were a source of cheap labour; however, they agreed to emigrate because their only other option was to remain in the refugee camps, where the situation was obviously worse. The other major problem was the recovery of the European economy. In the summer of 1945, industrial production on the old continent was less than half of what it had been before the war. Some nations were even worse off, such as the defeated countries of Germany, Italy, and Austria, whose industrial capacity was only 25% of its pre-war level. If we look at GDP, the decline is striking – in France, Austria, and Italy it fell by 50% and in Germany by nearly 70% (see Table 2.1). While the physical destruction was enormous and the humanitarian problems overwhelming, mention must also be made of the financial chaos that ensued. The financial picture in Europe was alarming because the balance sheets of many countries were in tatters, burdened with huge debts they had no possible way of repaying. Inflation was accelerating and money was of little use in many places. There was a lack of foreign exchange reserves, gold, and so on. For example, Hungary suffered hyperinflation from June 1945 to August 1946 (Bomberger and Makinen 1983, 801–824). With a few exceptions – Sweden, Switzerland,

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Ireland, Portugal, and Spain – the rest suffered greatly from the many years of war. On the other side was the healthy situation of the Allies outside Europe, and in particular the United States, Canada, Australia, and New Zealand. If we look at the cities of New York or Washington in 1945 and compare them with Hamburg or London, the contrast was so great that the urgent need for all kinds of aid was clearly evident. It would be many years before European cities returned to normal life. The world had changed radically; whereas in the 19th century the Americans needed loans from French or British banks, now the tables had turned, and much more dramatically. Europe was in a desperate situation and rebuilding everything to how it had been before the war was clearly impossible. However, at least life could return to normal, and people could have a job, a salary, etc. To achieve this, Western Europe needed the help of the United States, and the US government also understood the importance of not leaving Western Europe alone to deal with the threat of the Soviet Union on its doorstep. The difference between Europe and the US in 1945 was great, mainly because the war had been fought on European soil. Providentially or not, US policy after 1945 was the opposite to that of 1918. They remain in Western Europe to this day. Some Americans favoured a return to their pre-1940 isolationist policy. However, that could mean the loss of the important European market, which could have affected the huge productive capacity of the US. The story is complex and there were many factors at play in the post-war decisions that were made, but thanks to US assistance, both before and after the Marshall Plan, the reconstruction of Europe and the recovery of the European economy proved to be more rapid and sustained than was thought possible in 1945. Another important factor that cannot be overlooked is the enormous amount of work done by the people of Europe, who toiled long hours for very low wages to regain a normal life. Also important were the new economic policies adopted by these countries and the clear decision of the citizens to follow these policies. For example, in Britain, the Labour party that won the elections introduced a new policy of full employment in a free society and shifted the country’s economic focus from warfare to welfare. These were essential changes that set the country on the right path to rapidly develop a prosperous economy and achieve economic recovery after the war. Perhaps even more impressive is what happened in Italy or Germany, where the destruction had been far greater and the American aid much less. Nevertheless, the effort and hard work of the people enabled rapid economic recovery in the early post-war years. Finally, it is necessary to explain the terrible decision of the victorious countries to move the borders of the Eastern Europe states and the consequences for millions of people, as well as the very special situation of Yugoslavia and Greece.

2.4 Moving borders in Europe and the difficulties in Yugoslavia and Greece It is important to mention the political decision to move the borders of Eastern European countries, which led to the expulsion of 40 million European

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civilians from their homes. Twenty-seven million people left their countries or were forced to do so. Many people of one nationality were forced to adopt another, especially Poles and Czechs, of whom 2.5  million became citizens of the Soviet Union. Twelve million Germans were forced to leave Eastern Europe. Another major problem was that the German army included foreign volunteers from many countries. In the Waffen SS, for example, there had been 500,000 foreign volunteers and conscripts, and in the Wehrmacht, there were an estimated one million foreigners, a large number of whom came from the Soviet Union, especially Ukraine. Many of them committed war crimes and some were tried at Nuremberg. What follows was in many ways a clever solution to the problem, but a questionable one and definitely unfair to millions of Europeans. In 1943, in Tehran, an important meeting took place between the leaders of the three main Allies – Roosevelt, Stalin, and Churchill – at which they began to organise post-war Europe. The details of the new Europe would eventually be worked out at two subsequent conferences in 1945, the first at Yalta in February, and the second at Potsdam in July. The latter meeting would be attended by two different leaders, as Roosevelt died in April and Churchill lost the British election on 5 July. The best-known border to be moved after the war was the western border of Poland. This was done because Poland had lost its eastern part to the Soviet Union in 1940. The idea was to compensate the Poles by giving them German lands, made up of East Prussia (except the capital Konigsberg, which passed to the USSR) and part of eastern Germany. Eventually, the Poles were to receive the territory up to the Oder and Neisse rivers, and all Germans living there had to move west. Germany lost the provinces of Pomerania, East Brandenburg, and Lower and Upper Silesia, and the port of Danzig. This part of Germany was home to over 11 million people, mainly Germans. As these lands were now Polish, it was considered appropriate for all Germans to leave the new Polish territory to avoid political problems in the future. It was an extraordinary decision, justified by the argument that Germany had lost the war and because of the terrible war crimes committed by the Nazis and the many atrocities carried out during the war by German troops. Nevertheless, innocent people suffered the consequences in these lands. What is clear is that the brutality of the war had also turned the leaders brutal and unconcerned about the fate of ordinary civilians. Stalin claimed that the Germans had already fled west before the Red Army arrived in that part of Germany. This was clearly an exaggeration; even if millions had done so, millions more were still living there. Moreover, some one million Germans had been killed between 1944 and 1946 in Poland. The tragedy in this part of Europe was appalling and the population of Poland fell enormously, from 34.8 million in 1939 to 23.9  million in February  1946. Poland was the place in Europe where the most Jews were murdered; an estimated three million were annihilated (The YIVO Encyclopedia 2005). Surprisingly, even though there had been many Jews in Poland before the war, in the post-war period they found it difficult to return. And as in many other places in Europe, the best solution was to travel to America or to other non-European countries, for example Israel.

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The ethnic problem was enormous after the war and in many places, people killed each other in cold blood. In a way it was reminiscent of the Nazis, who no longer ruled Europe, but this horrible practice was still followed by many people. Within the new borders of Poland, in a town called Kielce, the Polish army killed all the Ukrainian inhabitants so that Poles could live there (Snyder 2003, 194). Poland was the country that experienced the largest displacement of people; however, there were other examples in Eastern Europe, and it is estimated that more than 40 million people were displaced from their towns and cities. The situation was confusing and many of them were waiting to be transferred elsewhere. The nationalities of these people were varied: Armenians, Poles, Latvians, Lithuanians, Estonians, Yugoslavs (Slovenes, Croats, Serbs), Jews, Greeks, Russians, Ukrainians, Hungarians, and Czechoslovaks. Among them were former prisoners of war in Germany or Italy, slave labourers, and concentration camp survivors. The situation was such that, even two years after the end of the war, there were still 850,000 people in the so-called displaced persons camps across Europe. Nevertheless, the effort to find new homes for these people was proving successful, as in May 1945 the number of Europeans waiting to be sent elsewhere in Europe, or outside Europe to the United States, Canada, Australia, etc., had exceeded 15 million. Many atrocities occurred during the fighting in the Soviet Union, as also happened in Poland, and in Germany at the end of the war. However, southeastern Europe also saw its share of atrocities, which deserve mention. Perhaps the most horrific atrocities occurred in Yugoslavia, a state created in the aftermath of World War I and home to a great variety of cultures, beliefs, and languages. In this young country, the majority of the population was Serb, and the dominant religion was Eastern Orthodox Christianity. Less numerous, but also numbering in the millions, were the predominantly Roman Catholic Croats and Slovenes. And in the south, there were large numbers of Muslims in Bosnia and Herzegovina and North Macedonia. Finally, in Montenegro the population was predominantly Eastern Orthodox Christian, and there was a significant minority of Muslims. Conflict between cultures and religions led to violence and war crimes during the Second World War, but that was only one of the conflicts in this country. Another major conflict was the one between fascists and communists, which also had clear leaders in Yugoslavia. In the territory of Croatia there was an Ustaše government that had been installed by the Italian fascists. Its cruel and savage rule was appalling, although this, of course, is disputed. However, some analysts believe that it was even worse than the cruelty of the Nazis. Ante Pavelić, leader of the Ustaše, sought to eliminate Serbs from Croatia, killing a staggering percentage of them. He also banned the Orthodox Christian religion in Croatia, and in some places, Serbs had to be identified with a symbol on their clothing, like Jews under Nazi occupation in Europe. In the state of Serbia there was also a far-right leader – Draža Mihailović – leader of the Chetniks, a Serbian nationalist movement that sought to defend Yugoslavia and secure Serb rule in the new country that was to come after the war. He

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was certainly not as fanatical and criminal as Ante Pavelić, but he collaborated with the Italians, fighting against the Ustaše and the communists. He explained to the British government the additional difficulty they had in Yugoslavia. In this part of Europe there was not just one war: there was the war against the Axis, but also against the Ustaše, and, finally, against the communists, who had a large number of fighters among the partisans. Historically, Mihailović is a very controversial figure, since on the one hand he defended nationalist Serbia, but on the other hand he may have committed war crimes. After the war he was shot by Tito after a dubious trial. Ante Pavelić managed to flee to Argentina. Finally, there was the Croatian communist leader Josip Broz, commonly known as Tito, who fought against the Italians and Germans, and probably even more against the Ustaše and the Chetniks. He emerged on top and led Yugoslavia from 1945. War crimes in this part of Europe were terrifying in number and in cruelty and were also directed against Jews and Gypsies (Lowe 2015, 293–309). It is also surprising that Jews were mostly unwelcome, considering they were neither Croatian Catholic Christians nor Serbian Orthodox Christians. A great number of soldiers who had fought under the Ustaše were executed. In Italy, many fascist soldiers were also executed with no trial after the war. And in France, some people considered Nazis collaborators were executed without trial, sometimes clearly by mistake. What happened in Greece was also tragic because it led to a long civil war. The story began in Moscow in October  1944. Churchill and Stalin had an important meeting that would have a tremendous impact on the lives of millions of people and on the fate of several Eastern European states. The two men deciding this future were only Stalin and Churchill, and their meeting took place during the final German retreat. It was October 1944 and Hitler’s defeat was now certain. Roosevelt had asked for decisions to be made by all three, but he was ignored. This is one of those moments in history that will have consequences for decades to come. It seems that Churchill jotted down an excellent offer that Stalin could not refuse. The Soviet Union was to have control or influence over several countries: in Romania it would be 90%, in Bulgaria 75%, while in Hungary and Yugoslavia it would be less, 50%. In the end, however, Hungary came under Stalin’s control, while Yugoslavia, with its strong military under Tito, saw less Soviet intervention. In Churchill’s offer, only one country was to come under British control or influence: Greece. The future of five countries had been decided after long, secret discussions between the two governments, culminating in this secret agreement in October 1944. It is quite astonishing that two men could decide the fate of these countries and their millions of inhabitants, and that neither leader was from any of these regions. For Greece, the important part of the story is that Stalin accepted British control. In fact, by then the Red Army had already secured control of the other countries or was close to achieving it. The enormous power of this army was not checked by the Germans, the Italians, the Romanians (they joined the Allies in August 1944), or the Hungarians (Dallas 2006, 285–294).

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In four countries, it would be relatively easy for the communists, who would rule these states for decades, to gain control. The last country, Greece, would have to go through a dreadful civil war to avoid it. Churchill and the British government’s interest in Greece was to prevent the Soviet Union from having a military port on the open Mediterranean Sea. In the same month as the Churchill–Stalin meeting of 1944, the British government sent troops to Athens to take control of the city and prevent its occupation by the Red Army. The situation was complicated by the fact that the partisans were in strong control of the country after the withdrawal of the German army. The partisans had been fighting the Nazis since 1941. Italian forces had failed to take Greece in 1940, but German troops invaded the country from Bulgaria in April 1941 and achieved victory. The British did send some troops in early 1941, but this did not change the overall situation and did little to prevent a rapid Axis victory. Throughout 1942, 1943, and 1944, the partisans were active against the Axis occupation. The partisans as a whole held many different political views; however, the most important group was the National Liberation Front, known as EAM, whose paramilitary wing was the Greek People’s Liberation Army (ELAS). Although there were several political groups within EAM, the driving force was the Communist Party of Greece. In many ways, this meant that Stalin already had some influence in the country. Moreover, when the Red Army reached the Bulgarian border, it had direct contact with the Greek partisans. The Yugoslav communists were also in contact with their Greek comrades. In many ways it was the internal problems of the partisans that saved British political objectives. It is perhaps difficult to understand, but the aim of many partisans was to drive out the Nazis, and nothing else. Moreover, they did not have a proper national organisation and many within EAM were against Communist Party rule. Finally, Stalin did not push the partisans to take control of the country, even though in 1945 this was perhaps within their reach. History repeated itself in Greece, as in Italy or France; among the communist leaders, several did not understand why they did not take control of the country. Even the general secretary of EAM, Thanasis Hadzis, complained about it. After years of fighting the Germans, at the moment of victory, the British government was meddling in their country. How was this possible? The explanations stem from the infighting between Greece’s political parties and, above all, between the home-grown communists and fascists. Tension increased because the British government was unable to manage the emerging political strife. The first problem was Prime Minister Giorgios Papandreou’s choice of Colonel Panagiotis Spiliotopoulos as commander of the military forces in Athens. That was in many ways a provocation to the communists, as he was right-wing and anti-communist. Worse still, he was considered a Nazi collaborator. Aggravating the situation, several senior army officers considered removing Papandreou as prime minister in order to install someone from the extreme right. Then, in December 1944, several ministers representing EAM in the government resigned. The explanation was the serious problem they had with police officers who had served under the Nazis, some of whom had

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committed war crimes. Instead of resolving this critical situation, Prime Minister Papandreou asked EAM to disarm, but the risk to their lives in doing so was clear. They faced prison or worse. Confronted with a demonstration by EAM in Athens on 3 December 1944, the police opened fire, killing at least ten people and wounding more than 50. The reaction of EAM and ELAS was to attack police stations throughout the city, and British troops came to the defence of the police. That was a critical moment because some ELAS snipers, who had been so effective against Italian or German troops, were now targeting British soldiers (Lowe 2015, 348). To make matters even worse, the reaction of British General Scobie was to attack the suburb of Kaisariani with artillery and the RAF. What he achieved was killing women and children. In February 1945, a peace agreement was signed after the government agreed to purge the Nazi collaborators. However, many right-wing groups began to form in the country, attacking the communists, while the government failed to recognise the enormous efforts of the partisans to liberate the country, and several of them were arrested. The civil war began in March 1946 and lasted until September 1949.

2.5 Conclusions World War II ended in Europe in May 1945, but the problems faced by the survivors over the next two years were enormous. Conditions for millions of people were bleak, and thousands left Europe because they had no future on the old continent. Firstly, it was difficult to find enough to eat, and thousands starved to death. Secondly, millions of people had been displaced during the war all over Europe, not only Jews, but also slave workers and foreign soldiers in the German army, for example. That was part of the problem, but the decision after the war to move borders from one part of Europe to another, mainly in Eastern Europe, brought death, brutality, and misery. Germans in Eastern Europe had to relocate west or die. Poles and Ukrainians had similar stories, as did Finns and so on. The numbers are staggering – perhaps 40 million people were forced to move. The aim was to establish political territories with inhabitants of the same nationality. While the idea may have been well intentioned, the human cost was devastating. Cities or towns with a long history of belonging to one country suddenly found themselves part of another after the war. Perhaps the most incredible case is that of Konigsberg, which became part of the Soviet Union and was renamed Kaliningrad. The German inhabitants were replaced by other civilians, probably mostly Russians, but the city’s history is naturally linked to that of Prussia. This is hard to imagine today, but in 1945 it was done. One positive story was that the help of the United Nations, through the UN Relief and Rehabilitation Administration, representing 44 countries, was extremely important in reducing hunger and beginning the process of rebuilding a devastated continent. Today it is difficult to understand why cities were military targets when it was clear that they were mainly inhabited by civilians, but this was done systematically across Europe. Warsaw was perhaps the most

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destroyed city; however, many others came very close to total destruction: Berlin, Stalingrad, and so on. One silver lining after the war was that peace was desired by the vast majority. After so many years of death and destruction, the main goal was to avoid another war. In fact, although they look like two very different societies – capitalist and communist – the armies of both sides entered into a cold war, but never a hot one.

2.6 References Aldcrof, Derek H. The European Economy 1914–2000. New York: Routledge, 2001. DOI 10.4324/9780203021750 Baldoli, Claudia, and Andrew Knapp.  Forgotten Blitzes: France and Italy Under Allied Air Attack, 1940–1945. Prepress Solutions. Norfolk: Fakenham, 2012. Bomberger, William A., and Gail E. Makinen. “The Hungarian Hyperinflation and Stabilization of 1945–1946.” Journal of Political Economy 91, no. 5 (1983): 801–824. DOI 10.1086/261182 Botting, Douglas. In Ruins of the Reich. London: Methuen, 2005. Clodfelter, Micheal. Warfare and Armed Conflicts – A Statistical Reference to Casualty and Other Figures, 1500–2000, 2nd ed. New York: McFarland & Co, 2002. Council for Reparations from Germany. Black Book of the Occupation. Athens: Author, 2006. Dallas, Gregor. Poison Peace: 1945. The War That Never Ended. London: John Murray, 2006. Dear, Ian C.B., and Michael R.D. Foot. Oxford Companion to World War II. Oxford: Oxford University Press, 2005. Erlikman, Vadim. Poteri narodonaseleniia v XX veke: Spravochnik. Moscow: Russkaia Panorama, 2004. Frumkin, Gregory. Population Changes in Europe Since 1939. London: Allen & Unwin, 1951. Griffith, Thomas E. Strategic Attack of National Electrical Systems. Alabama: Air University Press Maxwell Air Force Base, 1994. Hastings, Max. Bomber Command. New York: Dial, 1979. Hobsbawm, Eric. The Age of Extremes: The Short Twentieth Century. London: Michael Joseph, 1994. Hosking, Geoffrey A. Rulers and Victims: The Russians in the Soviet Union. Boston: Harvard University Press, 2006. Lowe, Keith. Savage Continent: Europe in the Aftermath of World War Two. New York: Penguin Viking, 2012. Lowe, Keith. Continente Salvage: Europa después de la Segunda Guerra Mundial. Barcelona: Galaxia Gutenberg, 2015. MacArdle, Dorothy. Children of Europe: A Study of the Children of Liberated Countries, Their War-Time Experiences, Their Reactions, and Their Needs, with a Note on Germany. London: Victor Gollancz, 1949. Maddison, Angus. The World Economy: Historical Statistics. Paris: OECD, 2003. Michigan Family History Network Report. DP Camps Migration-Post WWII Annuities. Accessed 26 May 2022, www.dpcamps.org Ó Gráda, Cormac. Famine: A Short History. Princeton: Princeton University Press, 2001. Overy, Richard. The Bombers and the Bombed: Allied Air War Over Europe 1940–1945. New York: Viking Press, 2014. Piotrowski, Tadeusz. Poland’s Holocaust: Ethnic Strife, Collaboration with Occupying Forces and Genocide. New York: McFarland & Company, 1997.

Europe after World War II in 1945–1946 55 Research Starters. Worldwide Deaths in World War II | The National WWII Museum | New Orleans. Accessed 16 May 2022, www.nationalww2museum.org Snyder, Timothy. The Reconstruction of Nations: Poland, Ukraine, Lithuania, Belarus, 1569–1999. London: Yale University Press, 2003. Stark, Támas. Hungary’s Human Losses in World War II. Uppsala: Centre for Multiethnic Research, Uppsala University, 1995. United Nations High Commissioner for Refugees (UNHCR). The State of the World’s Refugees 2000: Fifty Years of Humanitarian Action. Oxford: Oxford University Press, 2000. The United States Strategic Bombing Survey. Air University Press Maxwell Air Force Base. Alabama, 1987, https://www.airuniversity.af.edu/Portals/10/AUPress/Books/B_0020_ SPANGRUD_STRATEGIC_BOMBING_SURVEYS.pdf The YIVO Encyclopedia. The YIVO Encyclopedia of Jews in Eastern Europe. New Haven, CT: Yale University Press, 2005.

3 Major economic recessions in the last quarter of the 20th century The oil crisis (1973–1980) María Vázquez-Fariñas 3.1 Introduction Energy is one of the main drivers of economic growth, and oil has been considered a key energy resource since the advent of the second industrial revolution. Its consumption grew at an extraordinary rate throughout the 20th century, increasing the dependence of the most industrialised countries on this resource. In this context, the arrival of an oil crisis in the last third of the century and the strong interconnection of the oil market with other markets would significantly affect economic activities across the globe. The last third of the 20th century was a transformative period in the world economy. In the 1970s, following the collapse of the Bretton Woods international monetary system and the problems arising from the oil crisis, globalisation took on new forms and posed fresh challenges, resulting in a new global economic environment characterised primarily by high inflation and low growth in Western Europe. During this time there was a noticeable shift toward more market-oriented policies, although it was not until well into the 1980s that economic growth recovered (Warlouzet 2017, 1–2). This chapter will therefore examine the last great economic recession of the 20th century, known as the oil crisis or the oil crash. Its analysis is approached in three large blocks, into which the different sections are fitted. In the first, after this introduction, the general framework of the world economy toward the middle of the 20th century is presented. The second section analyses in detail the background and causes of the crisis, its immediate effects, the main consequences, in both developed and undeveloped countries, and, finally, the measures adopted to bring an end to the recession. The third section examines the re-emergence of the crisis in 1979, analysing the measures adopted by the main powers to overcome this situation. The chapter closes with some conclusions about the period analysed.

3.2 Historical context and general framework of the world economy At the end of the Second World War (1939–1945), Europe was close to destitution. The conflict was the most destructive of all wars, although it is difficult DOI: 10.4324/9781003388128-3

Major economic recessions in last quarter of 20th century 57

to assess the exact economic consequences of an event of such enormous magnitude. Some estimates indicate that direct military expenditures amounted to more than one trillion dollars, to which must be added property damage, war debts with interest, benefits for those disabled, and the millions of people who suffered directly from its ravages or lost their lives, in actions directly related to both the war and those who died from starvation or disease (Matés-Barco 2017, 114–115). Approximate global population losses are estimated at around 60  million people, although there are difficulties in quantifying losses in regions such as China, which was embroiled in a civil war. Property damage was incalculable, as losses were extensive. Land suffered from the destruction of equipment and the loss of farm animals, with a consequent drop in the production of bread, grain, meat and livestock products, leading to major food shortages; industrial equipment and factories were badly damaged, causing industrial production to decline; the destruction of capital was very high and GDP fell sharply (although this was less so for the victorious countries than for the losers of the war); and transport and communications were restricted and/or disrupted. This led to a cessation of economic activity in most countries (Gómez 2022, 117–118). Thus, in the aftermath of the conflict, the international economic structure was disrupted and both victorious and defeated countries suffered from impoverished economies that needed to be rebuilt. However, in contrast to the poor state of the European economies, the US emerged from the war with a strengthened industrial base, which allowed it to play a key role in reconstruction efforts (Gómez 2013, 152; Matés-Barco 2022, 115). Against this backdrop, in the five years after 1945, Europeans managed to rebuild their economies, and the following quarter century was characterised by unprecedented overall prosperity, thanks to uninterrupted growth in the world’s most industrialised countries (Cameron and Neal 2015, 412). Many authors have described this period as the golden age of capitalism, with sustained economic growth extending almost worldwide. The most significant features of this period are high GDP growth, a rise in population, recovery and growth in employment rates, structural changes in production and the modernisation of production systems, monetary and exchange rate stability, and improvements in welfare levels (Barciela 2010, 339–361). All of this took place in an environment of price stability, which encouraged the process of real convergence at the global level (Segura 2010, 391). But the interventionist growth model of the golden age of the 1950s and 1960s would eventually collapse and generate the 1973 crisis. The beginning of the 1960s had been characterised by a strong rate of growth in the world economy, reinforced, in Europe, by the effects of the creation of the Common Market (Rojo 1986, 70). From then on, a new economic model, known as the Washington Consensus, was imposed, based on free markets, free trade, privatisation, and the abandonment of discretionary fiscal and monetary policies. In short, it advocated the dismantling of state economic intervention, the deregulation of markets, and external liberalisation (De Prado 2017, 156–157).

58  María Vázquez-Fariñas

In addition, although the world economy continued growing during the 1960s, by that time imbalances in the international monetary system established at Bretton Woods in 1944 began to be perceived, revealing the first signs of crisis. It was from 1967 onwards that two precursors were detected: the recession of 1966–1967, tackled in the US by increasing public deficits, and the recession of 1969–1971, which had great repercussions in industrialised countries (De Prado 2013, 204–205). The first antecedent, the recession of 1966–1967, had to do, in part, with the leadership problems that were already looming in the US economy, as it had lost much of its innovation advantage and had adopted strongly expansionary policies. It had been covering its balance of payments deficits by issuing dollars not backed by gold, but as hard currency. By doing so they spread their inflation on an international scale and thereby financed the Vietnam war, at the cost of greatly increasing their deficit. The dollar could no longer maintain its former parity against gold and became a fiat currency (De Prado 2022, 162). In August  1971, US President Richard Nixon announced the suspension of the convertibility of the US dollar to gold, and thus the end of the Bretton Woods system. Thereafter, there was no longer an organised monetary system. Currencies floated on international markets and the relationship between them was based on their relative exchange rates, although traditionally the exchange rate was usually expressed in terms of the dollar, which retained its role as the reference currency. The abandonment of convertibility allowed the US greater room for manoeuvre in managing its economy, both at home and abroad, as it remained the main reference currency and was also able to monetise its debt by issuing dollars (Feliu and Sudrià 2007, 483). From then on, governments turned to autonomous monetary policies, dispensing with fixed exchange rates, and opting for freedom of international capital movements. The United Kingdom, Japan, and most developing countries adopted a floating exchange rate system. By contrast, the Federal Republic of Germany and France led the way in Europe in the creation of the so-called currency snake. This consisted of a system that revolved around the Deutsche mark, since it was the strongest currency on the European continent, and obliged member countries to keep the exchange rate of their currencies within fluctuation bands of 2.25% with respect to their parities (De Prado 2017, 160). It should also be noted that since the end of the Second World War, the US, Japan, and the main European countries had been consuming oil on a massive scale, which meant that they were heavily dependent on this resource. This was accompanied by economic instability and the slowdown in growth that had been taking place since the 1960s. Against this background of instability and volatility, a new event exacerbated the situation in October 1973.

3.3 The first oil shock The outbreak of the 1973 energy crisis had far-reaching effects and completely altered the international panorama. The recession that followed put the brakes

Major economic recessions in last quarter of 20th century 59

on the period of expansion that the most industrialised economies had been enjoying since the 1960s and exacerbated the imbalances between these countries and the less developed nations. Furthermore, this situation showed the negative side of globalisation: the dangers that political conflicts and energy dependence can pose to economic growth and prosperity. We will now analyse the origins of this crisis and the main socio-economic repercussions for the world’s major economies. 3.3.1 Background and causes of the crisis

Some studies point out that the 1973 oil crisis had been brewing for many years. Producing countries had long been making efforts to free themselves from exploitation by the big oil companies and aspired to control their own oil production. Countries such as Mexico, Venezuela, and Iran had initiated efforts to control their rich oil fields in order to retain the oil revenues. In 1960, the price paid to producers for their oil was very low, which led Iran, Kuwait, Saudi Arabia, and Venezuela to found OPEC (Organization of Petroleum Exporting Countries) to develop a common policy on pricing, taxation, and production control through cartel methods. However, despite their efforts, by 1970 the OPEC countries had not managed to gain control of their own production, their oil continued to provide more profit for large foreign companies than for themselves, and prices were on a downward trend (Pecellin 1974, 46–49; Tortella 2005, 484). Oil was widely distributed around the world, although the Persian Gulf area had the largest reserves, while consumption varied depending on the economic development of countries, with the USA, Western Europe, and Japan being the largest consumers (Tortella 2005, 483). Against this background, world oil trade went into crisis, with a generalised increase in prices from 1970 onwards. Supply declined, as producing countries managed to impose their views and decisions over the interests of the large companies. In addition, there was a strong and unforeseen increase in demand, mainly due to the pace of industrialisation in importing regions. This led to an increased dependence on oil, as the slow growth of new energy sources, such as nuclear power, and the coal crisis in the steel industry caused this dramatic increase in the demand for oil (Pecellín 1974, 50–52). In addition, inflationary indices were inflicting heavy losses on the OPEC countries, so in July  1973, Algeria decided for the first time to unilaterally increase the reference price of a barrel of oil by nearly 30%. Shortly afterwards, the other member countries adopted similar measures without any coordination between them (Ruiz-Caro 2001, 20). There were also political tensions and conflicts in those years. After the 1967 Arab–Israeli war, known as the Six-Day War, Israel occupied the entire Sinai Peninsula, the Gaza Strip, an area of Syria bordering Israel and the part of Jordan west of the Jordan River (known as the West Bank). After this conflict, the USSR contributed to the rearmament of the devastated Egyptian army. When

60  María Vázquez-Fariñas

the Egyptian president died in 1970, he was succeeded by Anwar el-Sadat, who maintained relations with Moscow and continued with his predecessor’s demands, while trying to avoid direct confrontation with the Israelis (Maffeo 2003, 2–3). Despite the tense situation between Israel and Egypt, hostilities did not escalate until 6 October 1973, with the onset of the so-called Yom Kippur War, as the initial attack coincided with the Jewish holiday. This war, which lasted until 25 October 1973, pitted a coalition of Arab countries, led by Egypt and Syria, against Israel. Most of the attacks and military actions during the war took place in Arab territory, particularly in the Sinai and the Golan Heights, regions that Egypt and Syria wanted to recover because they had been occupied by Israel in the Six-Day War. Both sides suffered heavy losses, although Israel retained the conquered territories (Ministerio de Defensa 2006; Sancho-Sopranis 1974, 2). During the brief conflict, US and Western support for Israel was evident, while the USSR continued to support Egypt, leading to the birth of another major conflict: the oil crisis. 3.3.2 Immediate effects of the crisis

The internationally repercussions of the oil crisis were far-reaching. One of the first effects of the Yom Kippur War on the world oil market was the loss of much of the crude oil loaded at the Syrian and Lebanese terminals in the Western Mediterranean. During the conflict, other terminals were also seriously damaged, such as the Mediterranean terminal for Iraqi crude in Baniyas, the Syrian terminal in Tartus, and the Syrian refinery in Homs, thus reducing oil supplies to the West. Moreover, the war sparked a wave of solidarity among Arab oil-exporting countries, which agreed to reduce production. Furthermore, most banned the export of crude oil to the US, and some also to the Netherlands. These cuts, together with those resulting directly from the conflict, reduced oil supplies to the West by more than 15% in a short space of time (Centeno 1982, 24–25). As for the oil embargo on those countries that had supported Israel in the Yom Kippur War, three levels were established depending on the stance taken by the different countries toward the Middle East conflict. Firstly, countries considered friends would continue to receive the same amount of crude oil (albeit with the respective price increase); secondly, at an intermediate level, countries would be restricted by 25%, plus 5% imposed gradually; and finally, non-friends faced a total cut-off of supplies and the threat of adopting the same rule for those who helped them out on the oil issue. The Netherlands was the country most affected by the Arab embargo (Pecellin 1974, 61). However, this measure did not last long, as at the end of December the Arab countries decided to lift production restrictions for most of the consuming countries, although they maintained them for the United States, the Netherlands, and some other regions. It was at the end of March that they finally lifted the embargo on the US, thus normalising the supply situation in the following

Major economic recessions in last quarter of 20th century 61

months and reducing the pressure on open market prices, as will be seen later (Fedesarrollo 1974, 132). Oil supply disruptions resulting from political tensions or wars often have a major impact on crude oil prices. Simultaneously with this decision to restrict supplies, the exporting countries agreed to raise prices to unprecedented levels (Table 3.1), setting reference prices unilaterally thereafter, with complete disregard for the large oil companies with whom they had previously negotiated prices (Centeno 1982, 25). The victories of the Israeli army in the 1967 and 1973 wars were the trigger that prompted the Arab states to proclaim oil price hikes, which completely destabilised the world economy (Tortella 2005, 484). After an initial price increase in October, in December 1973, at a conference in Tehran, the Arab countries agreed on a further increase effective 1 January 1974. At the same time, they determined that prices would be adjusted each quarter to take into account the rate of inflation in the US. Thus, benchmark oil prices rose almost fourfold in the last quarter of 1973, also as a result of the supply constraints caused by the embargo and peaked in January 1974. The new price structure took as a benchmark the most common crude oil – Arab light – which was priced at $11.65 per barrel, up from $3.01 and $5.11 per barrel on 1 and 16 October  1973, respectively. From the beginning of the new year, with the increase in supply brought about by the partial lifting of the embargo, downward pressures began to be felt, reinforced by decreases in demand due to high prices and the rationing measures adopted by some countries. This phenomenon was accentuated in March, when the embargo on the US was lifted (Centeno 1982, 26–27; Fedesarrollo 1974, 135; Ruiz-Caro 2001, 20). The main objective of the increase in oil prices was to restore the purchasing value of exports, which had deteriorated as a result of the decline in the terms of trade between primary products such as oil and manufactured goods. For this reason, the rise in oil prices was followed by a rise in other commodity prices, which led to a sharp increase in prices across the board (Feliu and Sudrià 2007, 483). Table 3.1 Evolution of oil prices between October 1973 and January 1974 (reference prices in dollars per barrel) Type of crude oil

Arab Light 34º Iranian Light 34º Iraq Basrah 35º Kuwait 31º Abu Dhabi Murban 39º Libya 40º

October 1

3.01 2.99 2.99 2.88 3.08 4.60

October 16

January 1

Price

% increase

Price

% increase

5.11 5.09 5.06 4.90 6.04 8.92

70 70 70 70 96 94

11.65 11.87 11.67 11.54 12.63 13.76

128 133 131 135 109  54

Source: Prepared by author based on Centeno (1982, 26–27).

62  María Vázquez-Fariñas

The main problem was the strong dependence of Western countries on oil and the impossibility of replacing it in the short term with an alternative energy source, which increased the balance of payments deficit of importing countries. It is important to bear in mind that oil was not indispensable only as an energy resource, as its uses were many and varied. In fact, the dramatic increase in oil production and consumption in the years following the Second World War is largely explained by its importance to three major sectors: transportation, power generation, and the petrochemical industry. Moreover, as one of the main sources of raw materials, there was virtually no industry that did not use this resource in one or more of the above-mentioned ways (Venn 2013, 1–2). It was an irreplaceable part of transportation systems; it powered numerous electricity production plants, the demand for which was extremely high for transport, heating and air-conditioning, lighting, and as a source of industrial and agricultural energy, etc. In addition, oil was a raw material for the petrochemical industry, which produced such important end products as plastics, fertilisers, insecticides and pesticides, dyes, etc. The jump in oil prices therefore had a devastating effect. The immediate consequence was a dramatic and widespread spike in prices, as companies and governments passed the increases on to final products, causing inflation to soar (Tortella 2005, 485). The situation led to serious tensions and generated widespread instability. The restrictive measures that governments tried to impose clashed head-on with the struggle of different groups and social agents to obtain price and wage increases that would help to offset inflation. Among other anti-inflationary measures, governments worked to raise interest rates. Faced with the cost increases caused by higher prices and interest rates, many companies suspended payments or curtailed their activities. Banks found themselves in particularly difficult situations, with old loans at low interest rates and a sharp rise in the present cost of money, compounded by a wave of defaults, and many of these institutions went bankrupt (Tortella 2005, 485–486; De Prado 2022, 164). Rising costs and falling demand and profits led to the bankruptcy of many companies and thus to rising unemployment, which in turn sparked widespread social unrest, resulting in strikes, demonstrations, and street riots in many countries. In the period 1974–1984, unemployment in Europe was higher than during the depression of the 1930s. The difference lies in the fact that, in the 1980s, unemployment benefits allowed unemployed workers to maintain a certain level of income, thereby avoiding a further fall in demand and the transformation of stagnation into a depression, as had happened in the 1930s (Feliu and Sudrià 2007, 484; Tortella 2005, 486). As a result, the international economy entered a deep crisis. This situation forced oil-consuming countries to adopt emergency measures to deal with the oil shortage, as we will see below. 3.3.3 The main repercussions of the crisis in developed countries

The oil crisis had consequences that directly affected both developed and developing countries.

Major economic recessions in last quarter of 20th century 63

First, the situation led to recessions of varying intensity in all OECD (Organization for Economic Cooperation and Development) countries. GDP declined in absolute terms for the first time since the end of the Second World War. Table  3.2 shows the contrast between the period before and after the oil shock. In all regions, with the exception of the Asian economies, growth rates are markedly lower in the years after 1973. Compared to an average of 5% in the period 1950–1973, GDP growth averaged around 2.5% during the two decades that followed. More specifically, growth rates in Africa and Latin America fell by almost half compared to the previous two decades, with a modest increase in per capita income. In Western Europe, growth declined by more than 50%, while the US also suffered a significant, albeit more moderate, slowdown in growth, reducing by a third the rate of expansion achieved in the previous two decades. Eastern European countries suffered an economic slump in the period under study, as their GDP level in 1992 was lower than in 1973 and per capita income fell by almost a third. Only Asia expanded at higher rates than in previous decades, with very significant improvements in per capita GDP. The Asian expansion was mainly due to China and the new Asian dragons, in particular Korea and Taiwan, as Japan went from growing at rates of over 9% in the period 1950–1973 to below 4% (Segura 2010, 401–402). In developed countries, the turnaround was particularly sharp, as shown in Table  3.3, where we observe negative GDP declines for 1975; inflation rates that approached or exceeded 10%, doubling their growth rate; and rising nominal interest rates, which grew even more strongly in the years to come. In addition, oil-importing countries began to experience imbalances in their balance of payments, which encouraged speculative capital movements, amplifying financial imbalances (Martín-Aceña 2011, 153; Segura 2010, 404–405). The abrupt slowdown in the pace of economic growth triggered by this crisis had practically stretched the industrialised world’s productive capacity to the limit. The impact of the crisis was uneven and depended to a large extent on the anti-inflationary policies implemented by countries and the strength Table 3.2 GDP and GDP per capita growth, 1950–1973 and 1973–1992 (in percentages) GDP growth

Africa Asia ( Japan) (China) Western Europe Southern Europe Eastern Europe Latin America USA Source: Segura (2010, 401).

GDP per capita growth

1950–1973

1973–1992

1950–1973

1973–1992

4.5 5.2 (9.2) (5.1) 4.6 5.8 5.0 5.2 3.9

2.6 5.7 (3.8) (6.7) 2.0 3.0 −0.4 2.7 2.5

1.8 2.6 (8.0) (2.9) 3.8 4.8 4.0 3.4 2.4

−0.4 3.6 (3.0) (5.2) 1.7 1.0 −0.8 0.6 1.3

64  María Vázquez-Fariñas Table 3.3 Impact of the oil crisis on developed countries (percentages) GDP growth

USA Japan Germany France United Kingdom

Annual inflation

Public deficit/ GDP

Interest rate

1973

1975

1973

1975

1973

1975

1972

1975

5.8 8.0 4.8 5.4 7.3

−0.3 3.1 −1.3 −0.3 −0.7

5.5 11.1 6.5 7.4 8.5

8.1 11.3 6.0 11.8 23.3

−0.2 0.5 1.2 0.6 −2.7

−5.2 −2.8 −5.6 −2.3 −4.6

4.5 4.25 4.0 7.5 6.8

6.0 6.5 6.0 8.0 10.6

Source: Segura (2010, 404).

of their external trade. The pace of the deceleration in growth was stronger in those more advanced countries that applied more severe anti-inflationary policies, though they were also the countries that were able to recover more quickly from the first crisis (Centeno 1982, 252). However, the oil crisis was not a growth crisis – growth rates were lower than in the previous stage, although higher than at any other time – but rather a crisis of rising supply and falling corporate profitability. Supply became more expensive due to the overlap of higher oil and raw material prices with earlier increases in production costs. Against this background, the decline in the real wage bill (as a result of rising unemployment and wages lagging behind prices) led to a decline in demand. The rise in costs and the fall in demand and profits drove many companies into bankruptcy, resulting in an increase in unemployment (Feliu and Sudrià 2007, 483–484). Thus, inflation and unemployment went up in all OECD countries. Annual inflation rates rose from around 4% to double digits. In addition, net oilimporting countries experienced large balance of payments deficits, which, in the case of developing countries, led to increases in external indebtedness and, in the case of developed countries, to a decline in productive activity. All this simultaneously led to economic stagnation, rising unemployment, and inflation, giving rise to a previously unknown situation: “stagflation”, which would become a major headache for politicians and economists (Carreras 2003, 400; Feliu and Sudrià 2007, 484; Segura 2010, 398). One of the main repercussions of the crisis was the increase in unemployment rates. In 1973, this indicator had generally gone down as a consequence of the high rates of economic activity. But with the onset of the oil crisis, unemployment rates began to rise, albeit initially to a limited extent. However, toward the second half of 1974 and, above all, in 1975 when the crisis hit in full force, unemployment rose spectacularly, reaching 16 million unemployed in 1976 for the OECD countries as a whole and 16.3 million in 1978, before the arrival of the second oil shock (Table  3.4). The upward trend in unemployment continued to be pronounced throughout the five-year period 1974–1978, which covered the first crisis, despite the fact that in the final years

Major economic recessions in last quarter of 20th century 65 Table 3.4 Unemployment trends in industrialised countries during the first oil crisis (as a percentage of the labour force)

Canada USA Japan Germany France Great Britain Italy Spain

1974

1976

1978

5.3 5.6 1.4 2.2 2.8 2.6 5.9 2.6

7.1 7.7 2.0 4.1 4.4 5.3 6.3 4.9

8.4 6.1 2.2 3.8 5.2 5.7 7.2 7.5

Source: Centeno (1982, 258).

of this period the rate of economic activity and inflation experienced a certain recovery and containment, respectively (Centeno 1982, 257). The US, Japan, and the Federal Republic of Germany were the countries that best overcame this situation. For the US, the international monetary system allowed for a permanent imbalance in its current account. Moreover, the changed situation worked in its favour because the deficits of the European countries forced them to obtain more dollars, which remained the key to the international monetary system; oil price rises allowed many small producers to become more competitive and earn large additional profits. The Federal Republic of Germany, for its part, did not see its external balance of payments endangered. A similar situation occurred in Japan, which, given its dependence on oil for energy, was hit hard at the beginning of the crisis, although it was able to recover relatively quickly (De Prado 2022, 165). 3.3.4 The impact of the crisis on developing economies

The years prior to the crisis were relatively favourable for less developed countries. The rapid growth of the industrialised world created a huge demand for raw materials, which led to big increases in the prices of food, textile fibres, and metals. But the arrival of the economic crisis in the industrialised countries caused a sharp contraction in their imports of raw materials, with a consequent reduction in exports from the non-oil producing less developed countries. As can be seen in Table  3.5, the foreign sales of these less developed countries fell by 0.1% in 1974 and 0.5% in 1975, whereas in the preceding decade they had shown an average growth rate of 7%. However, from 1976 onwards, the exports of this group of countries grew considerably, although the arrival of the second oil crisis and the prolonged recession in the industrialised countries would bring about a slowdown in growth in the following years (Centeno 1982, 260–262). In terms of the performance of their economies, the group of non-oil producing developing countries includes more than one hundred countries with

66  María Vázquez-Fariñas Table 3.5 Trends in world trade, 1963–1981 (percentage change from previous year)

EXPORTS Industrialised countries Developing countries: Oil-exporting countries Non-oil exporting countries IMPORTS Industrialised countries Developing countries: Oil-exporting countries Non-oil exporting countries

Average 1963–72

1973

1974

1975

1976

1977

1978

9.0

13.2

7.1

−4.6

10.6

 5.1

6.1

9.1 6.7

14.8  8.9

−0.9 −0.1

−11.5 −0.5

14.3 11.6

 0.6  4.7

−4.0 9.5

9.0

12.1

0.7

−8.1

13.9

 4.2

5.2

8.3 6.7

20.3 11.6

38.5 7.5

41.4 −4.4

20.6  3.8

15.2  6.7

4.8 8.0

Source: Centeno (1982, 263).

very heterogeneous characteristics, making it very difficult to carry out a general analysis of them. One way to study them is to group them by geographical area and, although this is a great simplification, it allows us to approximate the impact of the oil crisis on their economies. Thus, we can say that the first oil crisis did not strongly affect Asian countries, which, after a slight dip in 1974, maintained sustained growth rates above even those of Japan, thanks to their labour-intensive industries. In addition, their inflation rates were below those of the industrialised world from 1975 onwards. In Africa and Latin America, economies grew at slower rates than in the period 1967–1972, with somewhat higher rates for Latin America, as African countries were more affected by the fall in demand for their raw materials from industrialised countries. However, inflation rates were extremely high and, in the case of Latin America, exceeded 40%. Finally, the rate of economic activity in the Middle East recovered quite well after a severe recession in 1974, with inflation rates that, although high, were lower than the average for the group (Centeno 1982, 262). Generally speaking, for non-oil producing Third World countries, the crisis was a catastrophe. One of the main negative consequences of the rise in oil prices was the redistribution of world wealth in favour of countries that, like the Arab nations, had a low propensity to spend, meaning that the increase in their external demand did not make up for the fall in domestic demand in importing countries, a fact that led to a production and employment crisis in these countries (Feliu and Sudrià 2007, 485). The major beneficiaries of the crisis were the oil-exporting countries and the large oil companies. Many OPEC developing countries nationalised their oil companies and saw their public revenues increase significantly (Caffentzis 2008–09, 64). In other words, Arab oil-exporting countries experienced remarkable economic growth in the short term, but not in the long term. Between 1974 and 1978, OPEC earned a combined surplus of $10  billion, an amount equivalent to half of the world’s total official monetary reserves.

Major economic recessions in last quarter of 20th century 67

However, these surpluses were not evenly distributed among countries and the differences became evident in the years following the crisis. Due to the reduction in sales and the sharp rise in imports, the external position of some exporting countries, such as Algeria, Nigeria, and Venezuela, deteriorated, while others continued to run large surpluses. This was the case for Saudi Arabia, which managed to maintain a strong current account surplus throughout the period. Despite the deficits of some countries, OPEC’s overall surplus reached 177.7 billion dollars in this period, a situation that lasted until the 1980s (De Prado 2017, 163–164; López 2017). 3.3.5 Measures adopted to overcome the crisis

Western Europe, Japan, and the entire oil-importing Third World suffered the most from the crisis. Consequently, the oil crisis divided the world along new borders. The US overcame the crisis with a modest energy-saving effort. The Soviet Union used the opportunity of rising oil prices to increase its export drive and make extraordinary profits on the world market. The OPEC countries enriched themselves to unprecedented levels. The OPEC countries with the largest populations (Iran, Iraq, Algeria, Venezuela, and, to a lesser extent, Indonesia and Nigeria) launched ambitious industrialisation and social welfare programmes. In the oil-importing Third World, OPEC’s decision completely paralysed their potential gains in living standards, but they were able to cope with this by going into debt. Their main problem was the reduction in the purchasing power of the more developed countries to which their exports were directed, since the OECD countries, with the exception of the US, became drastically poorer. All of them went from having very high growth rates 20 or 25 years earlier to much lower or negative ones (Carreras 2003, 399). Initially, governments generally tried to mitigate the effects of an immediate transmission of the crisis to markets and real incomes, so they adopted an accommodative policy. Although they were sensitive to the problems of inflation and public deficits, they tried to support the industrial sectors most affected by the rise in oil prices, which led to the emergence of large budget imbalances (Segura 2010, 405–406). Governments did not opt for a shock treatment to the crisis because that would have required accepting that higher oil prices implied a decline in the real income of oil importers and the loss of profits and employment in the most energy-intensive sectors, which would have entailed a restrictive monetary policy and lower public deficits. Most countries implemented measures to avoid the social costs of economic adjustment, i.e., they resisted passing on the consequences of higher commodity prices to the population. Private economic agents, for their part, were reluctant to accept that the change in circumstances was severe and long-lasting and demanded protective measures and compensation for the loss of purchasing power. They demanded that social spending be maintained, that unemployment coverage be extended, that wage increases should not fall below the inflation rate, that sectors and companies in difficulty

68  María Vázquez-Fariñas

should receive subsidies to sustain their economic activity, that taxes and social contributions should be reduced, and that, if necessary, price controls should be adopted (Martín-Aceña 2011, 150). The second half of the decade was also characterised by lax monetary policies, with large increases in the money supply to accommodate rising inflation and negative real interest rates. High inflation led trade unions to negotiate wages that more than made up for the inflation suffered and, despite the introduction of wage and price controls in some countries, there was a spiral of successive wage and price increases in parallel with rising unemployment rates (Segura 2010, 405–406). This reduced the economic incentives for innovation and slowed down the reallocation of workers among sectors. This was not only because Keynesian automatic stabilisers were at work (the increase in unemployment insurance expenditure and the fall in income tax revenue as a result of the crisis), but also because governments increased discretionary public spending to subsidise, with cheap and easy credit, public and private companies affected by the crisis. All this widened the budget imbalance because, while these policies cushioned the crisis and prevented a depressionary spiral, they also required tax increases. The result was reduced profits, loss of competitiveness, and inflation (De Prado 2013, 211). Therefore, in general, accommodative attitudes prevailed and belt-tightening policies were postponed. This may have been due to factors such as the political cost of such strategies; the fact that the crisis affected activities that had been at the heart of the strong industrial expansion of the previous decades and regions that were among the most prosperous in the developed world; and also the initial inability to cope with a hitherto unknown situation (Segura 2010, 405–406). However, as regards Europe, the responses to the crisis were somewhat different in each country. As mentioned previously, the breakdown of the international exchange rate stability agreed at Bretton Woods led to the emergence of a new landscape dominated by floating exchange rates, instead of the traditional fixed ones (De Prado 2013, 205). In this uncertain environment, EU countries liquidated plans for monetary unification and postponed those for coordinating their monetary policies in order to gain freedom of action. In general, we can distinguish three types of policies (Carreras 2003, 399–400): 1. In some countries, such as Sweden and Spain, governments chose to believe that the crisis was transitory and that the loss of purchasing power for the country as a whole could be covered by the public purse (MatésBarco 2006, 774). Oil prices were not fully passed on to the population and the state decided to reduce the taxes it collected from the sale of petroleum products. These countries enjoyed somewhat higher growth rates than the rest of the OECD, especially during 1974 and 1975, but could not escape the recession from the oil shock. In the years that followed, they did not develop any energy-saving policies, nor did they prepare their

Major economic recessions in last quarter of 20th century 69

populations to react cooperatively to the impoverishment they suffered. It should be noted that throughout 1974 and as inflationary pressures and external imbalances resulting from the oil crisis increased, restrictive monetary and fiscal policies became widespread in all industrialised countries, perhaps with the sole exception of Spain. There, the adjustment process did not begin until practically 1977, as a result of an erroneous assessment of the duration and depth of the crisis by the economic authorities. In any case, the restrictive policies had a negative effect on investment in industrial fixed capital, as businessmen preferred to wait before undertaking new investments; on construction, especially residential construction; and on real consumption, which experienced a sharp deceleration (Centeno 1982, 253). 2. A second, more numerous bloc – including countries such as France, Great Britain, and Italy, mainly – applied policies to pass on the new prices to the public and faced the crisis with a clear desire to save energy. However, income policy was not altered, and strong, well-organised trade unions achieved wage increases in line with price rises. This required governments to create more money and to finance inflationary policies. 3. Finally, Japan instantly implemented steep increases in the price of oil and its derivatives. This country endured the harshest crisis of all the developed countries, but once it had assimilated the new price structure, it returned to rapid growth, focusing on the development of less energy-intensive sectors, such as consumer electronics. For its part, the Federal Republic of Germany developed different mechanisms to achieve a similar goal. The Bundesbank wanted to contain inflation (something the Japanese gave up) and, to do so, forced all economic agents – households, firms, trade unions, and public administrations – to adjust their incomes. Germany emerged from the crisis with a stronger currency, low inflation, gains in competitiveness, and a renewed industrial structure, relieved of the burden of the most oil-consuming sectors. In addition, it should be noted that, faced with soaring oil prices and supply problems, many countries chose to reduce their dependence on oil by turning to other resources. Alternative energy sources included, in the short term, tar sands and oil shale; in the medium term, coal in its gasification and liquefaction processes; and, in the medium and long term, nuclear and solar energy. France, for example, opted for nuclear energy, while the USA and Canada turned to burning wood waste (Fedesarrollo 1974, 138; López 2017). These changes were to be accompanied by technical improvements and innovations in production processes, which occurred mainly in two areas: firstly, the adoption of more energy-efficient machines, i.e., with a better ratio between energy used and energy obtained; and secondly, the reduction of wage costs through the adoption of labour-saving machinery and processes, i.e., the replacement of man by machine in a greater number of production processes. For this latter reason, the exit from the crisis would be accompanied

70  María Vázquez-Fariñas

by the continuation of high unemployment rates, as we shall see below. Furthermore, it should be noted that innovations to promote energy savings were applied in a multitude of sectors, allowing the rise in energy consumption after 1973 to be much lower than the growth in GDP in the main developed countries (Table  3.6). The most significant advances were in the computer and telecommunications sectors, with increasingly powerful, yet inexpensive, devices. Thereafter, the spread of items such as microprocessors and laptops, which arrived in the home along with video games, mobile phones, and digital cameras, among other devices, completely revolutionised the market. At the same time, the spread of new technologies, networking, and the development of telecommunications, especially through the internet, brought with them a multitude of innovations, enabling networking, teleworking, videoconferencing, etc. Taken together, all these innovations represented great improvements compared to previous years, but there was still much to be done (Feliu and Sudrià 2007, 489–490). On the other hand, the pricing policy applied by the US also led to other measures since, by allowing newly discovered oil to be sold at a higher price than old oil, it led to a withdrawal of old crude oil from the market, thus provoking an artificial shortage while at the same time boosting oil exploration. This shortage forced a number of measures in the US and elsewhere, including gasoline rationing. In addition, the crisis raised awareness of energy conservation among businesses and individuals. For example, in 1974, the US authorities set a maximum speed limit of about 90 km/h, daylight saving time was imposed between 6 January 1974 and 23 February 1975, and major car manufacturers started to downsize their vehicles to reduce maximum fuel consumption to 9 litres per 100 km. All these measures were backed by the federal government, which formed the US Strategic Petroleum Reserve in 1975, the Department of Energy in 1977, and enacted the National Energy Act in 1978 (De Prado 2022, 167–168). Regarding the increase in non-OPEC oil drilling activity that occurred in the wake of the crisis, the new higher oil prices made profitable new explorations by the former Soviet Union, Mexico, the United Kingdom, and Norway, Table 3.6 Growth of GDP and gross energy consumption between 1973 and 1999 (annual percentage) Region USA Japan Italy France Great Britain Germany Average Change

GDP

Energy Consumption

3.0 2.9 2.3 2.2 2.1 2.1 2.4

1.0 1.8 1.1 1.4 0.2 0.0 0.9

Source: Feliu and Sudrià (2007, 489).

Major economic recessions in last quarter of 20th century 71

which all significantly increased their oil production between 1973 and 1981; this resulted in a drop in OPEC’s share of global oil production (Ruiz-Caro 2001, 21). But efforts by oil companies and consuming countries to diversify oil supply beyond OPEC and Middle Eastern sources had begun before the 1973 crisis. The Suez crisis of 1956 and the Arab–Israeli war of 1967 (the SixDay War) alerted countries and companies to the over-dependence on Persian Gulf oil and prompted a search for alternative supplies. Two such diversification projects that were already underway before the oil crisis received a decisive boost when it occurred: the Trans-Alaska Pipeline and North Sea oil (Priest 2016, 122–123). The exploitation of fields in the North Sea increased extraction fivefold in three years and left Britain fairly safe from the crisis. In a way, these discoveries allowed Europe to reduce its dependence on the Middle East (Tortella 2005, 488). In turn, the US managed to exploit its immense reserves in Alaska, which accounted for a third of the country’s total oil production (De Prado 2017, 166). Thus, the high prices of the decade allowed major international oil companies to start new production from the late 1970s onwards. Drilling in the North Sea, production in the North Slope (Alaska) and the construction of the Trans-Alaska pipeline to transport oil from the Arctic coast would not have been economically viable projects before 1973, but the high oil prices of those years made them possible (Thomson 2017, 100).

3.4 The second oil crisis By the end of 1978, the worst of the first oil shock seemed to be over, as European economies showed the promise of a rebound in their growth rates along with some decline in their inflation rates, and longer-term forecasts projected sustained growth of 3.5% to 5% (Centeno 1982, 257). The policies adopted by the different governments had already started to bear fruit and oil prices had begun to stabilise. It was in this context that the second oil crisis arrived, which paralysed the recovery that most countries were experiencing and brought with it major changes in the policies applied to alleviate the effects of the crisis. 3.4.1 The reactivation of the crisis in 1979

In 1979, the Shah of Iran was overthrown by an Islamist revolution led by Ayatollah Khomeini. This revolution was one of the most unexpected and extraordinary events of modern times. In less than six months, a mass protest movement, which received no outside support and had no weapons with which to fight, weakened and destroyed a state with an army of 400,000 men, enormous financial resources, and significant international backing. The mass protests, demonstrations and strikes that destroyed the Pahlavi regime began in September 1978, and in early February 1979, with the Shah already in exile, Ayatollah Khomeini returned from exile in France, marking the beginning of the Islamic revolution. He then established a provisional government, headed by the liberal Islamist and long-time opponent of the Shah, Mehdi Bazargan.

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A few weeks later, following a massive favourable vote in a referendum called for the purpose, an Islamic Republic was proclaimed (Halliday 2007, 35–36). Ayatollah Khomeini’s anti-Western statements and tension with the US created uncertainty in the oil market. In this turbulent context, war broke out between Iran and Iraq in the autumn of 1980. The Shah and Saddam Hussein had signed a non-aggression pact five years earlier in Algiers, which was supposed to put an end to border disputes, but times had changed. After the fall of the Shah, Saddam Hussein felt he no longer had to respect the agreement and invaded Iran in September  1980, beginning a conflict that would bring eight years of atrocities by both sides, with hundreds of thousands killed and wounded. It was this war with Iraq that shaped the Islamic Republic, much more than the revolution itself. Oil quickly became a major strategic asset in this war between two of OPEC’s most prosperous producing countries. Oilfields were the most desired targets of land, sea, and air attacks by both sides. The massive destruction sparked fear in the oil markets and triggered speculation. Furthermore, OPEC took advantage of the situation to spearhead a new increase in oil prices, again leading to the impoverishment of importing countries and a recession between 1981 and 1983 (Carreras 2003, 400–401; Halliday 2007, 40–42). This whole situation had a major impact at the international level, first of all because of the new surge in oil prices. Between December  1978 and May 1979, the price per barrel rose by up to 175% in some countries. In particular, in 1980, the price per barrel was around 30 dollars, and in 1981, with the Iran–Iraq war, it was close to 40 dollars (Figure 3.1). Between 1979 and 1980, prices rose by 57% in current terms and 38% in constant dollars, and again led to an increase in the current account surpluses of OPEC countries. The Iranian government joined in this speculative game initiated by OPEC and the big oil companies, selling crude oil on the free market and driving up the price per barrel. US companies and other multinationals also entered into this dynamic, selling refined products on the free market and contributing to the confusion and the maintenance of high prices. The reduction in supplies hit Japan and Europe the hardest, as they were the most dependent on Iranian oil. Some countries, such as Israel, South Africa, Sweden, and Spain, had to turn to the free market for oil supplies, in exchange for paying exorbitant prices. Although with some differences, these decisions led to a shortage similar in volume to that generated by the first oil crisis (De Prado 2013, 213; MartínAceña 2011, 150; Matés-Barco 2018, 257). With the onset of the second oil crisis, all the optimistic forecasts collapsed, leading once again to a slowdown in economic activity and a strengthening of inflationary pressures. Consumer price increases averaged 12% in 1980, compared to 7.2% in 1978. The average for the 1971–1977 period was 8.5%, and the exceptional rise in 1974 was only half a percentage point higher than in 1980 (Table 3.7). By country, the situation was similar to that of the first crisis, but quite variable. Among the least affected nations was Japan, which seemed to have become immune to energy crises; and among the most affected was

Major economic recessions in last quarter of 20th century 73

Figure 3.1 Crude oil prices, 1970–1985 (dollars/barrel) Source: Prepared by author based on De Prado 2013, 240–241.

the United Kingdom, despite the fact that it was already fairly self-sufficient in those years. Total employment, which had improved slightly throughout 1979, began to be affected by the decline in economic activity throughout 1980, a process that was then exacerbated by high interest rates, the unprecedented rise of the dollar and a number of structural factors, such as demographic trends, insufficient investment, and a bias toward labour-intensive, high-tech sectors. All this led to a record 30 million unemployed in the OECD zone by the end of 1982, three times more than before the first oil shock, and almost twice as many as in 1978. These 30 million unemployed represented 8.5% of the labour force, while in the European OECD countries the figure was 17.5  million unemployed at the same date, equivalent to 10% of the work force (Centeno 1982, 257–259). Along with the second oil shock, there were changes in the value of the dollar and in interest rates, leading to other consequences, such as the debt crisis. OPEC members had been earning large revenues from these crises, as the so-called petrodollars (dollars from oil sales) were very easily earned. Many of the OPEC countries had been investing their profits in search of profitable investment opportunities, and some even went into debt to carry out large projects that would allow them to develop their economies. As a result, OPEC countries, but also other non-oil producing countries, had borrowed in dollars to cover their trade deficits, hoping for better times and cheaper oil. But after the second shock, international economic conditions changed. The international exchange rate of the dollar, which had remained relatively low after the

74  María Vázquez-Fariñas Table 3.7 Consumer prices during the second oil shock (rates of change) Region

1979

1980

1981

Canada USA Japan France Germany Italy United Kingdom Spain All industrialised countries

9.1 11.3 3.6 10.6 4.1 14.8 13.4 15.5 9.0

10.2 13.5 8.0 13.5 5.5 21.2 18.0 15.0 11.8

12.5 10.3 4.9 13.1 5.9 19.1 11.8 14.5 9.9

Source: Centeno (1982, 259).

abandonment of the dollar’s gold convertibility in August 1971, began to rise with the accession of Ronald Reagan to the US presidency. The United States then took advantage of its hegemonic position and the world’s perception of its economic prospects and the strength of its currency, causing the US dollar to rise in tandem with the government deficit. This situation particularly affected all those economic agents who had borrowed in dollars, thus giving rise to the debt crisis, which would lead countries to make multiple adjustment efforts during the first half of the 1980s (Carreras 2003, 401–403). As for the heavy dependence on oil by the major industrialised powers that we saw in the first crisis, many countries – such as Germany or Japan – had already achieved major energy savings by the time the second shock hit, so the impact was minor. In other countries, this second crisis was the occasion to approve national agreements for the responsible distribution of the burden of the energy bill, as was the case in France, Great Britain, and Italy. Finally, in countries such as Spain and Sweden, the shock was very harsh, as energy and social adjustments had to be carried out simultaneously and belatedly (Carreras 2003, 401). In short, the second oil crisis initially had quite similar effects to the first in terms of recession and inflation, but it also completely dashed the expectations of recovery that the most advanced countries harboured at the end of 1978. However, the final consequences were different, as the industrialised countries immediately responded by applying restrictive monetary policies (Feliu and Sudrià 2007, 491). 3.4.2 Challenges and changes in economic policies after the second oil shock

When a second surge in oil prices occurred in 1979, the shock proved difficult to avoid and adjustments became urgent, but the reaction of the governments of developed countries was different from that adopted in the first crisis. In view of the results of the adaptive policies described in the previous sections, both policymakers and economic agents lost confidence in the ability of the

Major economic recessions in last quarter of 20th century 75

public sector to effectively influence the growth of economies and control inflation. Moreover, if inflation, the budget deficit, and the balance of payments deficit were grouped together, it was a guarantee of disaster. Therefore, managing the budget deficit and the balance of payment deficit emerged as the central objectives of the new economic policy (Martín-Aceña 2011, 150–151; Segura 2010, 406). There were reasonable grounds for distrust. Firstly, public spending had grown strongly in previous decades, financing the construction of infrastructure and social safety nets, with very positive effects on productivity. But this public spending required high taxes, which the public began to see as excessive, as social benefits grew more slowly. This perception began to undermine the social legitimacy of highly progressive tax structures and eventually led to what became known as the “tax revolt” of the late 1970s. Secondly, the cost of public debt increased following the change brought about by the onset of the crisis and the fall in the pace of economic expansion. Under these conditions, monetary policy was subordinated to the financing of deficits, which meant that if inflation was in the long run a monetary phenomenon, monetary policy was not only useless but also harmful, as an instrument to fight inflation. Third, the brutal distortion of relative prices caused by the jump in the price of crude oil could only be absorbed by very flexible markets that quickly converted price modifications into changes in quantities. But markets were very rigid, both labour and capital markets, with many restrictions that prevented them from absorbing the effects of shocks (Segura 2010, 406–407). At the same time, there was a need to reduce the uncertainties surrounding economic agents, to strengthen incentives, to improve the profitability of economies, to make markets more flexible, and to eliminate monopolies and inefficient and costly interventions; in short, the needed productive adjustments had to be undertaken (Martín-Aceña 2011, 150–151). The critical analysis of the performance of the public sector led economists and governments to the belief that the objective of economic policy should be to encourage the efficient functioning of markets and create stable conditions conducive to sustained economic growth. This meant that, as opposed to the active and discretionary economic policies of the 1950s and 1960s and the accommodative policies of the 1970s, the new economic orthodoxy rested on two pillars. Firstly, demandside policies should pursue stability as a fundamental objective, be neutral, and replace discretion with strict rules of behaviour known to agents, who would thus see their uncertainty in economic decision-making reduced. Secondly, the influence of the public sector on resource allocation processes should be orchestrated through an appropriate system of incentives, giving a greater role to markets, and removing obstacles to their flexible functioning. The former would imply making significant changes in the design of monetary and fiscal policies and the latter would be reflected in the processes of privatisation, liberalisation, and regulatory change (Segura 2010, 407). On the other hand, it should also be noted that the 1979 oil shock coincided with a conservative turn in world politics. In 1978, the Conservative

76  María Vázquez-Fariñas

Party led by Margaret Thatcher won the British elections, with a radically antiinflationary and anti-union policy programme. In the US, Ronald Reagan led the Republican Party to the White House in 1980. Both leaders, who exercised considerable influence in the rest of the world, represented remarkably similar things in their respective countries, with quite analogous government programmes. Both had been given their mandate thanks to a voter backlash against Keynesian-style easy money policies, as high inflation, coupled with stagnation and high unemployment, had become unacceptable to voters. Both Thatcher and Reagan pursued a monetary policy against inflation and a policy of market flexibilisation that led them to confront the trade unions and the large oligopolistic companies, and, especially in the British case, to carry out an intense campaign to dismantle the public business sector, with the consequent privatisation of companies (Tortella 2005, 486–487). In general terms, after the second energy crisis, reactions were much more homogeneous. Economic policies focused on fighting inflation by restricting the money supply, raising interest rates, increasing taxes, restricting social benefits, and liberalising and deregulating the economy and the various goods and services markets. To this end, as happened after the Great Depression of 1929, doctrines emerged that offered alternatives to Keynesian economic policies, which had proved incapable or of little use in combating stagflation because they did not consider the microeconomic behaviour of the agents participating in the markets as essential to understanding the effects of economic policies. Alternative approaches emerged that incorporated the hypothesis of efficient, selfregulating markets that did not require public interventions that distorted the allocation of resources. Thus, there was no need for a welfare state; decisions should be left to individuals, i.e., the private sector. The crisis of the 1970s therefore called into question the role of the state, which had too many inefficiencies. The market had lost its flexibility to adapt to the circumstances of a changing world, and it was necessary to eliminate rigidities, controls, and regulations, i.e., to return to a free market economy. To achieve this, given that the market was to take centre stage, the obstacles to its functioning had to be removed; in other words, the excessive state intervention and regulation characteristic of previous eras had to be reduced and the principle of subsidiarity had to be respected, meaning that the public sector should only do what it proved it could do better than private enterprise. As a result, various measures were adopted to deregulate labour and capital markets, eliminate quantitative credit controls and interest rate ceilings, liberalise goods and services markets and international trade, and eliminate exchange controls and tariff barriers of all kinds (Martín-Aceña 2011, 152–153). Specifically, in the second half of the 1980s, measures were taken to deregulate financial markets and reduce income taxes, which were replaced by indirect taxes. The aim was to boost savings in order to encourage investment and job creation. Anti-monopoly policies and the privatisation of public enterprises were also introduced to alleviate the budget deficit and bring prices down

Major economic recessions in last quarter of 20th century 77

through competition. The first two aims were achieved, although the revenues obtained were generally low. In addition, privatisations in the industrial sector allowed for the modernisation of some enterprises. However, the natural quasimonopolies of public utilities such as electricity, gas, oil, and railways were not eliminated, and the new private owners often pursued profits by restricting investment or investing in other sectors, so the success of privatisation was relative (Feliu and Sudrià 2007, 486). On the other hand, to obtain the necessary monetary stability to tame inflation, different policies were adopted: the US and Japan allowed their currencies to float freely; developing countries tried to maintain exchange rates through capital controls; and the countries of the European Economic Community made an effort to coordinate their policies more, so they reactivated the European Monetary System (EMS) and established rather narrow bands for their currencies. In addition, monetary unification was carried out, the main purpose of which was to reduce the differences in the economic policies of the member countries, which, in order to accede to the single currency, had to avoid budget and balance of payments deficits (Carreras 2003, 401; Feliu and Sudrià 2007, 486). The monetary and liberalising policies that were developed only partially achieved their objectives and with great differences from country to country. As a general rule, they succeeded in bringing down inflation, as well as controlling budget and balance of payments deficits, although they did not manage to raise growth rates or lower unemployment levels. In this regard, it should be noted that the 1980s also saw a theoretical rethinking of the principles on which the economic policy of the golden age had been based. The Philips curve (the inverse relationship between the inflation rate and the unemployment rate) was unsustainable, as employment levels could not be improved in exchange for allowing price rises, and discretionary demand policies had very limited effects on growth and employment. Therefore, economic policy should concentrate on ensuring the efficient functioning of markets and creating the conditions of stability conducive to sustained economic growth. For all these reasons, it was necessary to place limits on the welfare state and let private agents assume greater responsibility in the way in which their individual income was distributed (Martín-Aceña 2011, 151–152). This situation led, therefore, to the crisis of the welfare state. The adoption of monetarist measures aimed at restricting the money supply and public debt meant the abandonment of the goals of full employment and the pretension of maintaining workers’ real income. In addition, the welfare state was seen as a further source of inflation and loss of competition for European economies in the face of products from the newly industrialised countries, with lower production costs. But, at least in Europe, the theory that labour deregulation would improve employment must be considered a total failure: the stimulus to investment was not sufficient and innovation was focused on labour-saving techniques, so that unemployment rates remained worryingly high in many countries. In this regard, it should be noted that there were jobs that were not

78  María Vázquez-Fariñas

accepted by Europeans and required the arrival of immigrants. Moreover, in many cases, especially in sectors that continued to be labour-intensive, there was a shift of production to countries with less regulation and lower wage costs, which led to the strong growth of the Asian tigers in those years (Feliu and Sudrià, 2007, 488–489). Finally, the benefits from the reorientation of economic policies and the structural reforms were reaped rather slowly and unevenly. Toward the mid1980s, the European economies began a slow process of recovery, driven first, in 1983–1984, by the effects of the reactivation of the American economy, reinforced by the strong appreciation of the dollar, and then by a strengthening of domestic demand – initially encouraged by private consumption, and later by investment (Rojo 1986, 78). Broadly speaking, we can say that the situation triggered by the second oil shock lasted until 1985, when the value of the US dollar in foreign exchange markets was reduced thanks to the concerted action of the central banks of the most advanced economies. By 1986, the price of oil had fallen dramatically, the dollar was weaker, and inflation had been brought under control in most OECD economies. Moreover, from the early 1990s onwards, growth rates showed that economic activity was recovering, albeit with notable differences between regions (Table 3.8). However, the unemployment rate continued to rise, above 10% of the labour force. Unemployment thus became, especially in Europe, one of the main political problems and the most intractable of its economic challenges. Its resolution was slow in coming, as it required labour markets to become more flexible and changes in labour costs to keep pace with productivity gains. Moreover, despite falling oil prices, demand did not increase as rapidly as total production, a marked change from the situation in the 1950s and 1960s. Even the short-lived invasion of Kuwait in 1990 by Iraqi dictator Saddam Hussein Table 3.8 Average annual growth rate of GDP and GDP per capita, 1993–2002 (in percentages) Region World Eastern Asia and Pacific Europe and Central Asia European Union Latin America and Caribbean Southern Asia Sub-Saharan Africa USA Japan Russia China Source: Martín-Aceña (2011, 154).

GDP

GDP per capita

2.7 6.7 1.4 2.1 2.2 5.5 3.2 3.3 0.8 0.0 8.9

2.0 6.3 1.2 2.0 0.9 3.6 0.7 1.8 0.4 −0.2 8.0

Major economic recessions in last quarter of 20th century 79

caused only a small and brief rise in the oil prices. As soon as the Iraqi forces were driven out, the price fell again, even though it would take several years for Kuwait’s oil production to return to its previous levels. Thanks to increased energy efficiency within the industrialised world and the greater availability of alternative energy sources, when the price of crude oil suddenly tripled again in 2000, the effects were not as dramatic as in the 1970s (Cameron and Neal 2015, 436; Martín-Aceña 2011, 152; Rojo 1986, 78–79).

3.5 Final considerations In this chapter, we have seen that the 1973 oil crisis and its resurgence in 1979 led to a paradigm shift in Western economies. The interventionist economic growth model of the golden age eventually collapsed and gave rise to new economic policies, which completely changed the development model. After the first oil shock, the role of the state in the economy diminished and the market began to play a greater role. Keynesian policies proved ineffective or unhelpful when it came to combating the stagflation caused by the crisis, so policies focused on controlling inflation and reducing budget and external deficits were developed. However, after the second energy crisis, reactions were more homogeneous and economic policies generally focused on fighting inflation by tightening the money supply, raising taxes, restricting social benefits, and deregulating the economy. In general, the policies pursued in the advanced countries in the 1970s resulted in low growth, with inflation seemingly under control and a sharp rise in unemployment and prices. But the impact of the crisis differed from country to country. Those that acted more slowly in the long term, such as Spain and Sweden, had to take more drastic measures and took longer to emerge from the crisis. Others, such as the USA, Japan, and the Federal Republic of Germany, were able to recover more quickly, even though the crisis hit them hard at the beginning. On the other hand, the Arab oil embargo on Western countries created new challenges for the latter, which, in their quest to reduce their dependence on this resource, sought new alternative energy sources while trying to reduce their consumption. In this respect, it should be noted that this situation is still having a major impact. We live in a society of continuous and unbridled consumption, and it is only when resources become scarce that we become aware of that reality. While it is true that more and more people are advocating restrictive energy consumption policies to protect the environment, there is still much to be done. Finally, it should be noted that the current economic and political situation is forcing different governments to take urgent energy measures. Specifically, following Russia’s invasion of Ukraine in February 2022, international retaliation, and Russia’s cutting off gas supplies to Europe, it seems that we are going to live, or rather, that we are already immersed, in a new energy crisis.

80  María Vázquez-Fariñas

3.6 References Barciela López, Carlos. “La edad de oro del capitalismo (1945–1973).”In Historia económica mundial. Siglos X-XX, ed. Francisco Comín, Mauro Hernández, and Enrique Llopis, 339–389. Barcelona: Crítica, 2010. Cameron, Rondo, and Larry Neal. Historia económica mundial: Desde el Paleolítico hasta el presente, 4th ed. Madrid: Alianza Editorial, 2015. Caffentzis, George. “A Discourse on Prophetic Method: Oil Crises and Political Economy, Past and Future.” The Commoner, no. 13 (2008–2009): 53–71. Carreras, Albert. “El siglo XX, entre rupturas y prosperidad (1914–2000).” In Historia económica de Europa. Siglos XV-XX, coord. Antonio Di Vittorio, 301–433. Barcelona: Crítica, 2003. Centeno, Roberto. El petróleo y la crisis mundial: Génesis, evolución y consecuencias del nuevo orden petrolero internacional. Madrid: Alianza Universidad, 1982. De Prado Herrera, María Luz. “De la crisis del petróleo hasta la actualidad.” In Crisis y desarrollo económico, ed. Leonardo Caruana de las Cagigas, Domingo Cuéllar Villar, Luis Garrido González, Donato Gómez Díaz, Juan Manuel Matés-Barco, María Luz De Prado Herrera, and Andrés Sánchez Picón, 199–242. Madrid: Pirámide, 2013. De Prado Herrera, María Luz. “La época de crecimiento y recesiones económicas del último cuarto del siglo XX hasta la actualidad.” In Cambio y crecimiento económico, coord. Leonardo Caruana de las Cagigas, 155–187. Madrid: Pirámide, 2017. De Prado Herrera, María Luz. “La época de crecimiento y recesiones económicas del último cuarto del siglo XX hasta la actualidad.” In Claves del desarrollo económico, coord. Leonardo Caruana de las Cagigas, 157–189. Madrid: Pirámide, 2022. Fedesarrollo. “El impacto de la crisis petrolera mundial.” Coyuntura Económica: Investigación Económica y Social, no. 10 (1974): 131–142. Feliu, Gaspar, and Carles Sudrià. Introducción a la historia económica mundial. Valencia: Universitat de València, 2007. Gómez Díaz, Donato. “La economía internacional tras la Segunda Guerra Mundial (1945– 1973).” In Crisis y desarrollo económico, ed. Leonardo Caruana de las Cagigas, Domingo Cuéllar Villar, Luis Garrido González, Donato Gómez Díaz, Juan Manuel Matés-Barco, María Luz De Prado Herrera, and Andrés Sánchez Picón, 149–197. Madrid: Pirámide, 2013. Gómez Díaz, Donato. “La economía occidental tras la Segunda Guerra Mundial (1945–1973).” In Claves del desarrollo económico, coord. Leonardo Caruana de las Cagigas, 117–155. Madrid: Pirámide, 2022. Halliday, Fred. “Contexto sociopolítico: La política interna iraní y efectos en su política exterior.” Irán, potencia emergente en Oriente Medio: Implicaciones en la estabilidad del Mediterráneo, Cuadernos de estrategia, no. 137 (2007): 21–56. López Cabia, David. “Crisis del petróleo de 1973.” Economipedia, 2017. Accessed 30 January 2022, https://economipedia.com/definiciones/crisis-del-petroleo-1973.html Maffeo, Aníbal José. “La Guerra de Yom Kippur y la crisis del petróleo de 1973.” Revista Relaciones Internacionales, no. 25 (2003): 2–6. Martín-Aceña, Pablo. “Contraste entre dos crisis más una.” Historia y Política, no. 26 (2011): 135–168. Matés-Barco, Juan Manuel. “La economía durante el franquismo: La etapa del desarrollo (1960–1974).” In Historia Económica de España, coord. Agustín González Enciso and Juan Manuel Matés-Barco, 745–778. Barcelona: Ariel, 2006. Matés-Barco, Juan Manuel. “Desintegración económica y crisis financieras (1918–1939).” In Cambio y crecimiento económico, coord. Leonardo Caruana de las Cagigas, 81–115. Madrid: Pirámide, 2017.

Major economic recessions in last quarter of 20th century 81 Matés-Barco, Juan Manuel. “El factor económico: De la autarquía al desarrollismo.” In ¿Qué sabemos del franquismo? Estudios para comprender la Dictadura de Franco, coord. Manuel Ortiz Heras, 233–260. Granada: Comares, 2018. Matés-Barco, Juan Manuel. “Desintegración económica y crisis financieras (1918–1939).” In Claves del desarrollo económico, coord. Leonardo Caruana de las Cagigas, 81–115. Madrid: Pirámide, 2022. Ministerio de Defensa. El conflicto árabe-israelí: Nuevas expectativas. Monografías del CESEDEN No. 87. Madrid: Centro Superior de Estudios de la Defensa Nacional, 2006. Pecellín Lancharo, Manuel. La crisis del petróleo. Madrid: Zero, 1974. Priest, Tyler. “Shifting Sands: The 1973 Oil Shock and the Expansion of Non-OPEC Supply.” In Oil Shock: The 1973 Crisis and Its Economic Legacy, ed. Elisabetta Bini, Giuliano Garavini, and Federico Romero, 117–141. London and New York: I. B. Tauris & Company, 2016. DOI 10.5040/9781350987388.ch-005 Rojo, Luis Ángel. “Europa: El contraste entre dos décadas.” Papeles de Economía Española, no. 27 (1986): 64–86. Ruiz-Caro, Ariela. “El papel de la OPEP en el comportamiento del mercado petrolero internacional.” CEPAL – Serie Recursos naturales e infraestructura, no. 21 (2001); Santiago de Chile, Naciones Unidas, CEPAL, Proyecto CEPAL/Comisión Europea “Promoción del uso eficiente de la energía en América Latina. Sancho-Sopranis Favraud, Juan Manuel (trad.). “Cuarta guerra árabe-israelí.” Boletín de Información, no. 81-V (1974). Segura Sánchez, Julio. “La economía mundial entre 1973 y el siglo XXI: el final del crecimiento dorado.” In Historia económica mundial. Siglos X-XX, ed. Francisco Comín, Mauro Hernández, and Enrique Llopis, 391–432. Barcelona: Crítica, 2010. Thomson, Helen. Oil and the Western Economic Crisis: Building a Sustainable Political Economy: SPERI Research  & Policy. Cham: Palgrave Macmillan, 2017. DOI 10.1007/978-3-319-52509-9_4 Tortella, Gabriel. Los orígenes del siglo XXI: Un ensayo de historia social y económica contemporánea. Madrid: Gadir, 2005. Venn, Fiona. The Oil Crisis. London: Routledge, 2013. DOI 10.4324/9781315840819 Warlouzet, Laurent. Governing Europe in a Globalizing World: Neoliberalism and Its Alternatives Following the 1973 Oil Crisis. London: Routledge, 2017. DOI 10.4324/978131518987

4 The external debt crisis and the “lost decade” in Latin America (1980–1990) María José Vargas-Machuca Salido

4.1 Introduction During the 1970s, a significant number of developing countries used external borrowing as a strategy to boost their economic growth. The abundance of dollars in international financial markets, the inflationary context, the low real interest rates of the time, and the private banks’ own strategic approaches encouraged many developing countries, especially those in Latin America, to borrow money. Most of these operations took the form of short-term, dollardenominated loans at variable interest rates. As discussed in the previous chapter, the oil price rises of 1973 and 1979 led to significant inflationary pressures in most developed economies. The restrictive monetary policies implemented to deal with this situation induced interest rate hikes. As a result, countries indebted in dollars began to find it difficult to meet their debt commitments. This marked the beginning of the so-called debt crisis, which had a particular impact on Latin America. The situation exploded in August 1982, when the Mexican government announced a unilateral moratorium on its foreign debt payments. This was to be followed by other countries in the region, triggering a major upheaval in the international financial system. The debt crisis affected, in general, all developing countries. However, only Latin America experienced the “lost decade”, which is why this episode is often identified with this region and not with other parts of the world. The aim of this chapter is to take a closer look at this period of crisis, which, although it had a more intense impact on Latin America, also had repercussions for the world economy as a whole. The chapter is divided into five parts. First, following this introduction, the basic characteristics of debt crises are summarised. After analysing the main factors that caused it in Latin America, we discuss the most significant features of this recession and the consequences that led to the so-called lost decade in the region. This is followed by an analysis of the solutions adopted at the international level to deal with debt problems. Finally, an overview of the effects of the crisis in other parts of the world is provided.

DOI: 10.4324/9781003388128-4

The external debt crisis & the “lost decade” in Latin America 83

4.2 Types of crises: debt crises According to the Dictionary of the Royal Spanish Academy (DRAE), the term crisis is defined as “a profound change with important consequences in a process or situation, or in the way in which these are appreciated”. From the perspective of economics, the definition is a “reduction in the growth rate of an economy’s output, or a downturn in the activity of an economic cycle”. Therefore, an economic downturn could be said to be a situation in which there are major negative changes in the main economic variables, especially GDP and employment. From this perspective, an economic crisis could exhibit different degrees of severity, which requires us to define other concepts (Ruiz 2019): • Deceleration: occurs when the growth rate experiences a substantial reduction, while still maintaining a positive sign. • Recession: implies the abandonment of the economic growth path. The widespread and commonly used definition is that a recession occurs when an economy experiences negative GDP growth rates for at least two consecutive quarters. • Depression: the DRAE itself defines it as “a period of low general economic activity, characterised by mass unemployment, deflation, declining use of resources and low investment”. The triggers of an economic crisis can be very diverse: changes in interest rates, devaluation of a currency, poor implementation of economic policies in a given territory, etc. Depending on these initial factors and the main consequences of the difficulties generated, crises will be classified in a certain way: exchange rate, banking, debt, etc. An exchange rate crisis, for example, could be defined as a sharp depreciation or devaluation of the national currency in a relatively short period of time, forcing a change in the government’s economic policies. If this change did not take place or was insufficient, the exchange rate crisis would lead to a significant loss in the value of the currency. On the other hand, a banking crisis would arise if a significant fraction of the country’s financial system were to become insolvent. In this context, a debt crisis would occur if it were impossible to service the debt, i.e., interest payments plus debt amortisation (Maeso 2021). Debt crises can be either liquidity or solvency crises. In liquidity crises, the shortage of foreign currency to meet commitments is temporary, so that the country’s own economy is capable of generating sufficient resources in the near future. In the case of solvency, the inability to meet foreign currency debt service payments is structural in nature. However, it is often not easy to distinguish whether the difficulties are liquidity or solvency related. On the other hand, when the problematic debtor is the state, it is called a sovereign debt crisis (Maeso 2021).

84  María José Vargas-Machuca Salido

Investment is key to a country’s economic growth, as it increases productive capacity and efficiency. But investment requires financial resources. If domestic savings are not sufficient, it becomes essential to resort to external savings through borrowing or foreign direct investment. Debt can be incurred by the public sector (as was the case for many developing countries during the 1970s) or by the private sector (more typical of later decades). The inflow of resources through borrowing and foreign direct investment is used to finance investment (public or private) in order to boost economic growth. For this reason, economies often grow during periods of capital inflows. This is what happened in Latin America in the 1970s, where a strategy of growth through debt was adopted (Parodi 2015, 8). In such a situation, the interruption of capital inflows can lead to a major crisis. This was the scenario that Latin American countries had to face in 1982 when changes in the environment raised doubts about their ability to service their debt. This perception, together with the over-indebtedness of these countries, led to the interruption of the arrival of external resources in the form of debt for the region’s governments. As a consequence, some of them announced debt moratoriums, which forced them to restructure their payments (Parodi 2015, 7).

4.3 The causes of the 1982 debt crisis The factors behind the debt crisis in Latin America are complex and diverse. Some can be considered external, affecting not only Latin America but also other parts of the world. But there were also internal factors that caused the difficulties in Latin American countries to spread more intensely over time. However, these factors played a greater or lesser role in different countries, as each had its own social, economic, and political conditions. Thus, in some areas, the profound political changes and complicated civil conflicts of recent history played a key role. In others, declining economic activity and high inflation were accentuated by natural phenomena, droughts, and floods that particularly affected the agricultural sector and transport. Similarly, in some countries, the economic policies implemented, with their excesses or inadequacies, had particularly negative consequences (Bianchi 1986, 7). 4.3.1 External factors: gestation during the 1970s

After the Second World War, commercial banking in the northern hemisphere began a process of profound transformation that led it to intensify its lending policy. The process began in the United States in the 1950s but became internationalised in the following years. Initially, the preferred destination of financing was the industrialised countries. However, from the 1970s onwards, interest shifted to developing countries and, in particular, to Latin America, a region with higher relative development and a natural destination for US banks, which at that time were the leaders in international bank financing (Ffrench-Davis and Devlin 1993, 6).

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In 1944, the Bretton Woods agreements established a new international monetary system and prompted the creation of the International Monetary Fund (IMF) and the World Bank (WB). Until the late 1960s, the international lenders were these bodies and governments. However, in the following decade, this scheme changed in favour of international private banks, which began to gain prominence (Parodi 2015, 15). In 1971, the “Bretton Woods era” came to an end and the gold standard, which during that time had obliged IMF countries to maintain a fixed exchange rate against the dollar, and the US central bank to back its currency with gold, was suspended. As a result, countries no longer had to maintain a fixed exchange rate against the dollar and thus regained the freedom to issue money. The United States increased its issuance of dollars, with many of them ending up in European banks, where they became known as “Eurodollars”. On the other hand, as discussed in the previous chapter, in 1973 OPEC countries decided to increase the price of oil, which led to an increase in their export revenues. Exporting countries deposited these dollars (“petrodollars”) in international private banks, which further increased their ability to offer loans in that currency. This energy crisis also generated an increase in the demand for loans from both non-oil exporting countries, in order to finance the purchase of crude oil, and exporting countries, which saw an increase in their borrowing capacity due to the rise in the price of oil and as a way to maintain their economic growth. In general, all developing countries had to borrow to cope with the balance of payments imbalances caused by the rise in oil prices, and most of this financing was granted in dollars (Bernardos, Hernández, and Santamaría 2014, 498). Therefore, on the one hand, there was demand for credit from developing countries to finance their growth. On the other hand, private banks had resources and ways to allocate them. Moreover, they could do so without the conditions demanded by the IMF. Against this backdrop, the recession of the industrialised economies in the 1970s encouraged banks to direct their operations towards Latin America, seeking higher returns (Parodi 2015, 15). Latin American countries needed dollars to be able to finance the purchase of crude oil and maintain growth rates, and they obtained them by increasing external public debt. The financing was largely provided by international private banks in the major financial centres: New York, London, Tokyo, and Frankfurt (Parodi 2015, 17). Table 4.1 shows the main external indebtedness figures for Latin America and the developing countries as a whole between 1973 and 1982, in terms of both total volume and bank debt. Although, in gross terms, total debt increased, bank debt increased more sharply in general terms and with greater intensity in the Latin American region. Financial innovation also benefited private banking, for example with the emergence of syndicated floating rate loans. Under this arrangement, loans were granted by several lenders who shared the risk. Thus, if a government wanted to borrow more than one bank could lend, the bank would invite other

86  María José Vargas-Machuca Salido Table 4.1 External debt of Latin America and the developing countries as a whole (1973– 1982) (billions of dollars and percentages)

TOTAL DEBT Developing countries (1) Latin America (2) % (2)/(1) BANK DEBT Developing countries (3) Latin America (4) % (4)/(3) BANK DEBT % OF TOTAL Developing countries (3)/(1) Latin America (4)/(2)

1973

1977

1980

1981

1982

  108.2 42.8 39.6   42.5 25.7 60.5

  238.8 104.2 43.6   114.8 72.9 63.5

  444.6 204.3 46.0   257.1 160.1 62.3

  520.6 241.5 46.4   304.2 194.1 63.8

  574.4 260.7 45.4   337.6 213.4 63.2

39.3 60.0

48.1 70.0

57.8 78.4

58.4 80.4

58.8 81.9

Source: Prepared by author with data from Ffrench-Davis and Devlin (2005, 80).

financial institutions to participate in the operation, each contributing a portion of the total loan. This formula helped to diversify risk, which encouraged banks to increase their lending. In this state of affairs, total outstanding debt in Latin America rose from around 29 billion dollars at the end of 1970 to 159 billion dollars by the end of 1978, which represents a cumulative annual growth of approximately 24%. Around 80% of this was sovereign debt (Ruiz 2012, 6). International private banks played a crucial role in this process, especially US banks. Thus, for example, by late 1978, the financing provided by the top eight US banks represented around 23% of Latin America’s outstanding loans (Ruiz 2012, 6). A few years later, when the debt crisis erupted in 1982, the nine largest US banks had a loan-to-capital ratio of 180% with the countries of the region: 50% in Mexico, 4% in Brazil, 26% in Venezuela, 21% in Argentina, 12% in Chile and the rest in the other countries of the region (Ffrench-Davis and Devlin 2005, 87). This process of indebtedness on the part of developing countries also contributed to low or even negative real interest rates as a result of rising international inflation. While in the 1970s world prices rose at an average annual rate of 2%, between 1973 and 1982 they rose by 12%. Although the interest charged by banks was higher than that set by governments or multilateral organisations, the aforementioned inflation meant that during these years bank interest rates in real terms were negative (Ffrench-Davis and Devlin 2005, 80). Many of these operations were arranged at variable interest rates, referenced to LIBOR (London Interbank Offered Rate) and with half-yearly reviews, which meant that they were exposed to market fluctuations. The 1970s was a period of cheap credit, with low or even negative real interest rates. However, from 1978 onwards this situation changed, and interest rates began to rise, reaching a peak in 1982–1983, when the Latin American debt crisis emerged (Parodi 2015, 18).

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It was specifically the high inflation rates in advanced economies that caused interest rates to rise. In the 1970s, developed countries faced two recessions: 1974–1975 and 1979–1981 (Figure 4.1). In the first case, the recovery from the crisis was achieved through the implementation of expansionary monetary and fiscal policies, which, although they facilitated recovery between 1976 and 1978, led to significant inflationary pressures. With the primary objective of controlling inflation, the second recession was tackled with restrictive policies by raising interest rates. The first country to raise its interest rate was the US, which was severely affected by these difficulties. At the end of 1979, the Federal Reserve decided to raise interest rates to deal with inflation. This decision was soon followed suit by other industrialised countries to prevent capital flight. Thus, the three-month LIBOR, which in 1976 stood at 5.6%, rose to 16.9% by 1981. This increase was the trigger for the debt crisis in Latin American countries, giving rise to what many described at the time as the worst international financial crisis since the Great Depression of the 1930s (Ruiz 2012, 7). The negative impact of the interest rate hike was twofold. On the one hand, it slowed down the recovery of the advanced economies, which reduced their demand for imports from the Latin American region. On the other hand, since much of the debt of these countries had been incurred at variable interest rates, their external debt interest payments increased. These reached $40 billion in 1981, up from just under $6.9 billion in 1977 (Bianchi 1986, 11; Parodi 2015, 19). In addition, the recession in the advanced economies led to a significant drop in net capital inflows to Latin American countries, with very negative effects for the region. Without an inflow of resources, in the form of either debt or foreign direct investment, prospects for growth were severely limited for these economies.

Figure 4.1 World economic growth (1971–1982) (average annual rates) Source: Prepared by author with data from Parodi 2015, 19.

88  María José Vargas-Machuca Salido 4.3.2 Internal factors: external over-indebtedness

The situation of abundant liquidity prevailing in the international financial markets in the second half of the 1970s and the expansive policy carried out during those years by the private international banks in their relations with developing countries, especially those in Latin America, had as a counterpart in these countries a strong increase in external public indebtedness. The plan for these economies was based on the strategy of supplementing domestic savings with funds from abroad in order to boost investment and the rate of economic growth. In this way, despite the oil crisis, the region managed to maintain its growth rates in the 1970s by using the increased inflow of capital to cope with the rise in oil prices and the recession in more developed countries. In fact, Latin America maintained economic growth of nearly 7% in 1974 and close to 4% in 1975. These figures highlight the contrast between the economic evolution of this region and that of the developed countries, which faced a contraction in gross domestic product of 2% during the same period (Bianchi 1986, 9). The use of external financing from international private banks was maintained, in most cases, for a long time, despite the increase in exports. In this way, external over-indebtedness became a basic requirement of the development processes in this region and, therefore, an essential characteristic of the region. The expansion of external borrowing helped many countries to maintain higher rates of economic growth than would have been the case in its absence by financing higher levels of imports and capital formation. However, this strategy was not without risk, as it allowed the continuation of policies that necessarily led to increased inflationary pressures and/or balance of payments difficulties. In some countries, such as Mexico, the abundant inflow of external resources allowed the government to significantly increase public spending and control inflation, artificially containing the prices of public services and basic consumer goods by granting substantial subsidies. In other cases, such as Argentina, Chile, and Uruguay, external borrowing allowed the implementation of exchange rate policies aimed not so much at achieving a reasonable external balance as at limiting inflation (Bianchi 1986, 9). As a consequence, in both cases, imports increased significantly while exporting activities and those competing with imports saw their competitiveness reduced. At that time, the resulting increase in the trade deficit was not a problem, as it was covered by the inflow of external resources. These funds also made it possible to cover the growing volume of interest payments and even to increase the level of international reserves. As a result of these policies, and despite the significant level of growth in the second half of the 1970s, Latin America became more vulnerable to possible deteriorations in the global economic climate. This weakness became evident when the region had to cope with the effects of the severe recession in the advanced economies from 1980 onwards. The consequences of the second oil shock triggered the so-called debt crisis in the Third World, with a particular impact on Latin America. The situation

The external debt crisis & the “lost decade” in Latin America 89

erupted in August 1982 when the Mexican government announced a unilateral moratorium on its foreign debt payments. Mexico was to be followed by Argentina, Brazil, and Venezuela, which together accounted for almost 80% of the region’s total foreign debt. In this situation, capital inflows to these countries came to a screeching halt, with no creditors willing to continue lending or refinancing Latin American debt. With the governments of these countries unable to pay and the creditors, mostly international private banks, dependent on these payments, the shock to the international financial system was considerable (Parodi 2015, 30–31).

4.4 The debt crisis and the lost decade in Latin America The debt crisis in Latin America began in 1982, when many of the region’s countries declared their inability to pay their external debt. From that moment on, what has been called the “lost decade” for Latin America began, as a consequence of the intense adjustments that were essentially focused on reducing spending in order to obtain sufficient resources to pay the debt. Three significant features of this crisis can be inferred from the difficulties faced by the economies of the region in those years (Parodi 2015, 9; Bianchi 1986, 2–3). Firstly, there was the generalised nature of the recession, given that the difficulties affected the vast majority of Latin American countries, regardless of their size, type of government, economic strategy, etc. Although in some of these countries the consequences were more intense and prolonged than in others, the problems affected economies of considerable size, such as Mexico and Brazil, as well as small states in Central America and the Caribbean; net oilexporting countries, such as Venezuela and Ecuador, as well as others dependent on fuel imports, such as Uruguay and Paraguay; more developed economies and poorer ones; and countries that had been applying interventionist policies oriented towards the domestic market, as well as others with more open-minded free market approaches. This suggests the presence of external factors that negatively affected all of them. This conjecture is reinforced if we take into account the concurrence, up to 1982, with the greatest recession that the developed economies had experienced since the Second World War. Secondly, economic and social indicators showed a deep and lasting decline in all these countries. In particular, there were significant falls in GDP and employment, rising inflation and intensifying balance of payments problems, the consequences of which came to be compared with those of the Great Depression of the 1930s. Finally, although the debt crisis affected all developing countries in general, only Latin America experienced the “lost decade”, which is why this episode is usually identified with this region and not with other parts of the world. In the case of the semi-industrialised economies of South-East Asia, most of them overcame the effects of the international economic recession relatively rapidly, recovering high growth rates while keeping their inflation under control and without the need to renegotiate their external debt (Sachs 1985).

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This approach suggests, in turn, that there may be factors specific to the Latin American region that contributed to its negative outcome. As noted earlier, one of the main features of the crisis was the sharp deterioration in most of the main economic indicators simultaneously in the countries of the region. The widespread fall in GDP was coupled with rising unemployment in many of them and falling real wages, while inflation intensified and balance of payments problems worsened (Bianchi 1986, 4). Table  4.2 shows the GDP growth rates of Latin American countries by period between 1970 and 1990. If we compare the average growth rates in the 1970s with those of the following decade, we can see that there is a reduction in all countries except Chile, with a significant drop in the cases of Brazil and Ecuador. For the region as a whole, there is also a decline in development, from an average growth rate of 5.6% to just 1.2%. A more detailed analysis of the 1980s shows that, for most of the economies, the most significant problems occurred in the first half of the decade and most intensely in the two-year period 1980–1982, which is also reflected in the overall performance of the area: 0.4% between 1980 and 1982, 0.6% in the first five years of the decade, and 1.9% in the second. If GDP per capita were to be analysed, the trends would be very similar, with even more negative rates of variation as a consequence of the combination Table 4.2 GDP growth rates in Latin America (1980–1990) (average annual rates, percentages) Country

1970–1980 1980–1990

1980s 1980–1982 1980–1985 1985–1990

Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela TOTAL REGION

2.8 3.9 8.6 2.5 5.4 5.5 8.9 2.5 5.7 4.7 5.6 6.7 0.2 4.3 8.7 3.9 7.0 3.0 1.8 5.6

−0.9 0.1 1.6 2.8 3.7 2.3 1.9 −0.7 0.8 −0.4 2.3 1.7 −1.3 1.8 3.2 −1.2 2.5 0.5 0.4 1.2

−4.5 −1.8 −1.8 −3.9 1.6 −4.9 2.8 −8.3 −1.2 −3.1 0.6 4.0 2.2 5.8 3.9 2.3 2.7 −3.9 −1.8 −0.4

−2.1 −1.9 1.3 −0.5 2.5 0.2 2.0 −3.0 −1.2 −1.0 1.4 1.9 0.6 3.4 2.4 −0.3 2.1 −2.7 −2.0 0.6

0.3 2.2 1.9 6.3 4.8 4.4 1.7 1.6 2.9 0.2 3.2 1.4 −3.3 0.3 4.0 −2.1 2.9 3.7 2.9 1.9

Source: Prepared by author with data from ECLAC, Statistical Yearbook for Latin America and the Caribbean 1995.

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of the loss of dynamism in economic activity and the increase in population. According to 1995 data from ECLAC (United Nations Economic Commission for Latin America and the Caribbean), the average annual growth rate of this variable for the region as a whole fell from 3.2% in the 1970s to −0.9% in the following decade. Similarly, this reduction was more intense in the early years: −2.6% between 1980 and 1982, −1.6% between 1980 and 1985, and −0.1% in the rest of the decade. As in most crises, investment was the component of demand that was most affected. An item that had seen significant growth in the 1970s contracted by 30% between 1980 and 1984. The investment ratio fell to its lowest level in the last 40 years, from around 24% in 1980–1981 to below 16% in 1984–1985. This behaviour was fairly widespread in all countries in the area. Thus, not only the economic conditions at the time, but also the chances of a rapid recovery, were compromised (Bianchi 1986, 5). Changes in inflation are also significant (Table 4.3). The data for the 1970s were already high, but this did not prevent, with a few exceptions, inflation from continuing to rise in the period 1980–1985 in most countries. In many cases, average price growth rates during the second half of the 1980s exceeded not only 100%, but even 500% (Argentina, Brazil, Nicaragua, and Peru). Table 4.3 Inflation in Latin America (1970–1990) (average annual rates, percentages) Country

Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela

Geographical coverage Federal Capital La Paz Brazil Santiago Colombia City of S. José Ecuador El Salvador Guatemala Port-au-Prince Tegucigalpa Mexico Managua M.A. Panama City Assumption Lima M.A. Dominican Republic Montevideo Caracas M.A.

1970–1980

1980–1990

1980s 1980–1985

1985–1990

118.5 18.8 34.2 130.2 – 10.8 12.6 10.8 9.6 10.4 7.9 16.5 – 7.1 12.5 30.3 –

437.6 222.7 330.2 20.3 23.7 25.6 36.3 19.0 13.9 6.7 7.8 65.1 618.8 1.8 21.7 332.1 24.6

322.6 610.9 135.1 21.3 22.3 34.8 27.5 14.7 7.3 9.1 6.9 60.7 54.4 3.2 15.8 102.1 16.2

538.8 46.5 653.8 19.4 25.0 17.0 45.8 23.5 20.9 4.3 8.6 69.7 246.9 0.4 28.0 823.8 33.6

62.7 8.4

60.6 23.3

44.8 11.1

78.2 36.9

M.A. = Metropolitan Area. Source: Prepared by author with data from ECLAC, Statistical Yearbook for Latin America and the Caribbean 1995.

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As a result of these high levels of inflation, the purchasing power of wages was severely eroded. Between 1980 and 1990, the number of poor people increased from some 136 million to around 197 million people, and the poverty level rose from 35% to 41%. In turn, the number of destitute people grew from 62 million people to almost 92 million, and extreme poverty expanded from 15% to 18% over the decade (Parodi 2015, 13). In addition, the crisis had a serious impact on the external sector. Between 1981 and 1983, exports fell by almost 10%, while imports roughly halved following the interruption in net capital inflows in reaction to the declaration of the suspension of payments on Mexican debt in August 1982. As a result of this fall in external financing and the rise in interest payments, Latin America became a net exporter of resources in 1982, something that had not happened since 1968. Consequently, balance of payments balances worsened considerably and most of these countries were forced to implement adjustment programmes to reduce current account deficits, while at the same time renegotiating their external debt service (Bianchi 1986, 7). In short, in the case of Latin America, the period between 1980 and 1990 was characterised by, among other features, slower economic growth, high inflation, rising poverty, and serious balance of payments difficulties, and hence it has been called the region’s “lost decade”.

4.5 The search for solutions The historical development of international finance has featured numerous episodes of boom and bust, in many of which Latin America has played a leading role. In fact, after defaulting on its debt three times in the 19th century, the region defaulted again in the wake of the Great Depression of the 1930s. The 1982 debt crisis is yet another example. Its causes do not differ greatly from those of previous instances: a process of rapid and relatively reckless borrowing on both sides. This excessive willingness to lend on the part of creditors and an excessive readiness to borrow on the part of debtors resulted in a disproportionate overexposure of the former and eventually triggered a major crisis in the international financial system (Ffrench-Davis and Devlin 2005, 88). However, the way difficulties were dealt with in this case was relatively different. In previous crises, the anonymity and disconnectedness of creditors made it challenging for them to communicate and jointly manage problems. As a result, it was not possible to exert sufficient pressure on debtor countries to force their economies to adjust. For their part, borrowers, faced with the impossibility of refinancing their payments and unable to renegotiate with their creditors, often opted for unilateral default. In this way, the risk ended up being shared between the debtor and the creditor, since, by defaulting, the former passed on part of the costs to the latter. Creditors, aware of this situation, charged risk premiums at the time the loans were granted in order to be able to cope with this possibility. However, in many cases, banks had not accumulated sufficient reserves to deal with defaults, which meant serious problems for them and, by contagion,

The external debt crisis & the “lost decade” in Latin America 93

for the rest of the financial system. For their part, the debtor countries, although they managed to alleviate their debt burden somewhat, saw their reputation in international markets eroded (Ffrench-Davis and Devlin 2005, 89). In more recent times, until 1982, when a government could not pay, it tried to reach an agreement with the creditor to renegotiate its debt, either by reducing the instalments to be paid and/or the interest rate, which implied, de facto, extending the term of the loan. But in order to be able to continue paying, the debtor country needed new funds, so it did not pay with its own resources but with more debt. However, once the international financial markets cut off financing to Latin American countries in 1982, the option of refinancing disappeared, so each country had to find a way to meet payments with its own resources (Parodi 2015, 33). The most striking feature of the management of the 1982 crisis was the great coordination among creditors, which allowed them to halt or postpone the defaults of Latin American countries that had shown serious payment difficulties and avoid a string of debt moratoriums. The plans for resolving the crisis were developed between 1982 and 1998 in three phases: adjustment programmes in debtor countries (1982–1985), the Baker Structural Adjustment Plan (1986–1988), and the Brady Plan for debt reduction (1989–1998). 4.5.1 Adjustment programmes in debtor countries (1982–1985)

The response to the crisis was organised through a mechanism that emerged after the efforts of the G7 (Group of Seven, led by the US) governments, together with some of the most important international banks and multilateral organisations such as the IMF and the WB (Ffrench-Davis and Devlin 1993, 11). The proposed adjustment was based on the consideration that the debtor countries’ problems were problems of illiquidity rather than insolvency. In other words, there was a temporary situation in which the means of payment were not available, but which could be resolved in the future. Between August 1982 and the end of 1985, the resolution programmes put forward were based on economic adjustments in the debtor countries and debt restructuring in order to ensure a return to interest payments. Since the banks had suspended lending to these countries, the IMF had to step in and take the lead in implementing adjustment programmes. The IMF would provide emergency loans in exchange for conditionalities, i.e., measures that would free up resources for debt servicing. However, in order to provide the loans, the IMF also required that private creditors (commercial banks) be willing to resume lending. These would be so-called involuntary loans, without which IMF aid would not be effective (Parodi 2015, 34). This requirement introduced a new element into the management of debt crises with developing countries: the involuntary participation of the private sector. As a result of this requirement, the private sector began to demand systems of protection against state risk, which would be organised through the IMF acting as a bridge between banks and countries (Ffrench-Davis and Devlin 1993, 11).

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The macroeconomic adjustment programmes implemented by the debtor countries allowed the region to move from a trade deficit of about $7 billion a year to a trade surplus of $25 billion a year between 1983 and 1987. The foreign exchange surpluses generated by this shift were to be used to service the debt. However, it soon became clear that this would not be sufficient, and the need arose to restructure the debt and adjust the schedule of interest and principal payments. During this first phase of crisis management, three rounds of debt rescheduling were carried out. In total, the process involved some $10 billion in public financing and the provision of more than $40 billion in “involuntary financing” (Ruiz 2012, 9–10). These operations, while averting a widespread default and a collapse of the international financial system, soon proved unable to contain the worsening crisis. The world economy did not improve, banks did not lend new money, and debt continued to rise. Thus, in 1984, most Latin American debtor countries were still in recession and with little chance of growth, demonstrating that the crisis was going to last longer than expected and that some economies, in addition to liquidity difficulties, also had solvency problems (Parodi 2015, 35; Ruiz 2012, 12). 4.5.2 The Baker Plan (1986–1988)

In September 1985, at the annual meeting of the IMF and WB in Seoul, Korea, US Treasury Secretary James Baker announced a new mechanism to deal with the debt problem. The so-called Baker Plan, which included a longer-term perspective, had to deal with the deep recession in debtor countries resulting from severe macroeconomic adjustments, hence its slogan: “structural adjustment with growth”. To finance a fourth round of debt restructuring, the new programme maintained the two financial pillars of the previous stage: credits from official bodies combined with loans from private banks. However, in this case, the amounts involved were larger and the timeframe (three years) and geographical scope were extended, as it would affect 17 countries, 12 of them Latin American (Ruiz 2012, 12). Under this plan, the WB would take on a more prominent role than in the previous period. Similarly, the Inter-American Development Bank began to exercise structural support tasks. The more permanent nature of the proposal was reflected in the content of the agreements with the countries, which, in this case, involved commitments to structural reform, such as the privatisation of public companies and the liberalisation of trade in these countries. However, the Baker Plan faced two limitations. On the one hand, it was inadequate in its diagnosis, as it did not take into account the solvency problems of some economies. On the other hand, the fall in oil prices shortly after the announcement of the plan seriously affected Mexico and other producing countries, considerably reducing their expectations of recovery. From the financial point of view, the Baker Plan’s proposals were soon called into question. Neither the banks nor the IMF provided the amounts to which

The external debt crisis & the “lost decade” in Latin America 95

they had committed themselves, the former so as not to increase their exposure to debtor countries without additional guarantees, and the IMF because, until 1985, these countries had not fulfilled the adjustments they had committed to make. Thus, in 1987, the financial resources received by the Baker Plan countries were clearly lower than the debt payments. Therefore, it can be said that the plan failed because it did not manage to reactivate the region’s economy, nor did it ensure the arrival of new funds (Parodi 2015, 36). In addition, in 1987, the plan underwent a major change that marked the beginning of a new phase (Baker Plan “B”). From this date, alongside the traditional mechanisms of rescheduling with new loans, the plan began to allow for operations specifically aimed at reducing debt, such as debt buybacks at a discount, swaps, or conversions. For the first time, creditors seemed to explicitly recognise that at least part of the region’s debt would be uncollectible at face value (Ruiz 2012, 14; Ffrench-Davis and Devlin 2005, 94). 4.5.3 The Brady Plan (1989–1998)

In March 1989, the new US Treasury Secretary, Nicholas Brady, presented a new proposal with a key objective: to remove the burden of excessive debt. At the time, few doubted that the problems of these countries were more related to their solvency than to their liquidity. Moreover, the duration and intensity of the crisis were worrying because of the consequences it could have beyond the geographical and economic limits to which it had been confined until then, especially in the case of the US economy. It was therefore essential to return to economic growth and definitively resolve the debt problem that had turned the Latin American region into a constant source of uncertainty and volatility (Ruiz 2012, 15). In addition to the traditional instruments of the Baker Plan (a fifth round of restructuring was carried out), the new proposal added two new features. First, the prioritisation of the debt reduction mechanism, so that the financial resources of multilateral organisations were directly linked to debt reduction. In this respect, the Brady Plan involved $30 billion ($24 billion provided by the IMF and the World Bank and $6 billion by Japan) in debt repurchase or similar operations by debtor countries, including the guarantee coverage provided by the so-called Brady Bonds. The Brady Plan also proposed a series of changes to the regulatory and fiscal framework aimed at limiting the negative impacts on the US private banks involved. The second novelty of the proposal, which was in fact the most emblematic of the plan, was the so-called Brady Bonds, assets that combined relief for the debtor as a consequence of a reduction of the debt, with a guarantee for the creditor for the remaining amount. The creditor banks negotiated with the debtor government a certain write-down in the value of the debt. To cover the other part, the debtor government issued a bond, the main feature of which was that the bondholder was guaranteed to receive the principal (and sometimes the interest). To cover this guarantee, the debtor country bought a US Treasury

96  María José Vargas-Machuca Salido

bond of identical maturity with the proceeds of a multilateral loan. This collateral was deposited at the Federal Reserve, so that the creditor bank was guaranteed the safe collection of part of its loan while it could obtain liquidity by selling the bond on the secondary market. Between 1990 and 1998, a total of 17 countries restructured bank debts under the Brady Plan mechanism, ten of them in the Latin American and Caribbean region. The total volume of debt of this region that entered into these programmes was 148.57 billion dollars, with an average write-down of close to 30%, somewhat less in the case of large debtors, such as Mexico (14% writedown) and Brazil (12% write-down). It can be said, and this is widely accepted, that the Brady Plan was a success, as it brought closure to the serious debt crisis that had been affecting the region for far too long, and it did so in a relatively satisfactory way for debtors and creditors alike. While the results were much broader, a first approximation concerns the improvement in debt sustainability. If the debt-to-GDP ratio is taken as a proxy for this feature, the data show that, three years after the respective national agreements, only in two of the 17 countries (Argentina and Peru) was the debt-to-GDP ratio higher than before the implementation of the plan. In contrast, the average reduction in this indicator was around 20 percentage points. This improvement allowed most of the countries included in the Brady agreements to avoid debt default in the 2000s, with the exception of Argentina and Ecuador (Ruiz 2012, 16–17). 4.5.4 The results of adjustment and restructuring processes

All the adjustment and restructuring mechanisms adopted pursued three broad objectives: to avoid an international banking crisis, to restore a sustainable level of debt in debtor countries and to revive economic growth in these countries. Although the different measures adopted were not equally effective in all areas, it can be said that, in the first of these objectives, an acceptable result was achieved, as the solvency crisis in the debtor countries did not provoke a serious banking crisis in the creditor countries. This did not prevent the main US banks involved in the process from seeing their results eroded as a result of the large provisions that had to be made to cover the losses associated with their overexposure to Latin American countries. As for the second objective, the recovery of an acceptable level of debt and the return of debtor countries to the international financial markets, this was only achieved after the Brady Plan. In the previous plans, recourse to private credit had been made only through “involuntary financing”, which obviously did not respond to conventional lending criteria, and which was provided by the same banks already present in the region in an attempt to limit or postpone the negative effects of default. However, with respect to the third objective, the results of the process were far less satisfactory. Between 1980 and 1989, the Latin American region grew at an average annual rate of around 2%, a far cry from the economic dynamism

The external debt crisis & the “lost decade” in Latin America 97

that these countries had shown in the previous decade, when the average growth rate had been 6%. For example, in 1989, Venezuela’s GDP per capita was 26% lower than in 1980, and Argentina’s was 21% lower. This is why it is often said that the debt crisis marked the beginning of the region’s so-called lost decade (Ruiz 2012, 12).

4.6 The 1982 crisis in the rest of the world The same external factors that have been cited as instrumental in the outbreak of the debt crisis in Latin America triggered a short but intense recession in the world economy in 1982. The reasons for this were manifold. For one, the second oil shock caused petroleum prices to almost triple in 1979. Inflation reached new highs in several advanced economies (for example, in 1980 it stood at 13.5% in the US and 17% in the UK) (Kose and Terrones 2015, 45). To cope with rising prices, many of these countries, including Germany, Italy, Japan, the UK, and the US, began to tighten monetary policy by raising interest rates. This led to a sharp fall in economic activity and, in many cases, a significant rise in unemployment rates between 1982 and 1983. This was compounded by the deep debt crisis in developing countries, particularly severe in the case of the Latin American economies. Most countries began their recovery relatively quickly, although, in some cases, unemployment remained stubbornly high for some time. However, the debt crisis caused a longer-lasting slowdown in growth in many emerging and developing economies, especially in Latin America and the Caribbean and sub-Saharan Africa (Table 4.4). For the worst affected areas, the consequences of debt problems were worse than those of the Great Depression of the 1930s. Latin America’s growth and development was set back by ten years (“lost decade”). Africa regressed by nearly 20 years, returning to income levels at or below those of the independence era in the 1960s. Investment, production, consumption, and the provision of social services were slashed in order to generate export surpluses and raise funds for debt repayment. During the 1980s, per capita income fell by 15% in Latin America and 25% in Africa (Gunder 1989). In the case of Africa, the debt crisis had major consequences for the economy. It is true that the African debt stock was smaller than that of other continents, but the severity of its consequences stems from the fact that it related to smaller economies (Danso 1990, 6). The significant drop in export earnings and the continued rise in debt service obligations severely limited the import capacity of these countries. The reduction of imports of intermediate and capital goods reduced the potential to undertake development projects. Gross capital formation in the region fell from 23% of GDP in 1980 to 19% in 1987. As a result, the average annual rate of GDP growth reached only 1.8% per annum during 1980–1987, one percentage point less than the average annual rate of population growth. Consequently, real GDP per capita for 1987 was 8% lower than in 1980. Taking into account the adjustment for the fall in the terms of trade, the decline in Africa’s GDP was particularly steep, resulting in a much

Region Sub-Saharan Africa North America Latin America and the Caribbean South Asia East Asia and the Pacific Europe and Central Asia World

1970–75

1976–79

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

5.5 2.2 6.4 3.0 5.0 3.2 3.8

3.0 4.7 5.5 3.1 5.4 3.6 4.4

3.8 −0.3 6.7 6.5 3.8 1.3 1.8

−0.9 2.5 0.8 6.4 4.6 0.5 1.9

−1.2 −1.8 −0.3 3.8 4.2 0.9 0.4

−2.5 4.6 −1.9 6.7 4.4 2.0 2.6

2.3 7.2 3.9 4.2 6.2 2.6 4.7

2.0 4.2 3.2 5.4 5.7 2.8 3.7

1.9 3.5 3.8 4.8 4.9 2.8 3.4

3.0 3.5 3.2 4.2 6.3 3.1 3.7

4.4 4.2 0.6 8.4 7.7 4.2 4.7

2.5 3.7 1.8 5.4 5.1 3.5 3.7

2.5 1.9 −0.5 5.4 5.1 2.3 2.9

Source: Prepared by author with data from the World Bank, 2022. World Development Indicators.

98  María José Vargas-Machuca Salido

Table 4.4 World economy: annual GDP growth rate (1970–1990) (average annual growth rates, percentages)

The external debt crisis & the “lost decade” in Latin America 99

larger decline in living standards. For sub-Saharan Africa, the effects of the debt crisis were, if anything, even more pronounced. In 1987, real imports were only two-thirds of their 1980 level, as a result of higher debt service obligations, and export earnings were slightly above their 1977 levels. Between 1980 and 1987, gross capital formation fell from 20% to 13% of GDP, and real GDP per capita declined by 11%. These figures undoubtedly reflect the impact of the 1986–1987 oil price slump in Nigeria, the largest of the sub-Saharan countries and a major oil-producing country (Greene and Khan 1990, 12). The solution to the debt repayment problems of African countries was also addressed at the international level. At the Toronto summit in May  1988, a proposal was put forward offering bilateral creditors a choice between three debt renegotiation formulas to be rescheduled through the Paris Club (Greene and Khan 1990, 18). In the US, meanwhile, the 1981–1982 crisis was the worst economic recession since the Great Depression of the 1930s. The main cause can be found in the Federal Reserve’s change in monetary policy in 1979 towards more restrictive approaches involving higher interest rates. The unemployment rate of almost 11% at the end of 1982 was, until then, the highest in the post-World War II era. While unemployment was widespread, it was particularly severe in the case of manufacturing, construction, and automotive industries. Manufacturing accounted for three-quarters of all job losses in the goods-producing sector. The residential construction industry and automobile manufacturers ended 1982 with 22% and 24% unemployment, respectively (Urquhart and Hewson 1983, 7). Despite the pressure of unemployment and congressional requests to loosen monetary policy, the Federal Reserve stood firm in its approach. By October 1982, inflation had fallen to 5%. Interest rates began to fall, and unemployment declined rapidly from a peak of almost 11% at the end of 1982 to 8% a year later (Sablik 2013). Europe was also affected, albeit to a lesser extent, by the global economic recession in the early years of the decade, when its economic growth weakened. Average GDP growth rates in the EU-15 between 1980 and 1983 fell to 1.2% and per capita GDP to an average of 0.8%, compared to 3.3% and 2.9% respectively between 1976 and 1979. European countries managed to overcome this recession swiftly, so that by 1983 they had all recovered positive growth rates, returning to rates of expansion similar to those of the pre-crisis years (Palazuelos 2005, 16–17). These developments did not prevent the process of European integration from continuing to advance during this decade, with the incorporation of new states into the then European Economic Community and the approval of the Single European Act in 1986. The main problem in the EU-15 during these years was unemployment (see Table 4.5). Between 1980 and 1985, a total of six countries saw their unemployment rate exceed 10% (Belgium, Spain, France, Ireland, the Netherlands, and the United Kingdom). All of them managed to reduce these levels in the following years except Spain and Ireland, whereby the end of the decade unemployment rates still stood at 16% and 14%, respectively.

Germany Austria Belgium Denmark Spain Finland France Greece Ireland Luxembourg Norway The Netherlands Portugal United Kingdom Sweden

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

–

–

–

6.45 4.11 11.66 9.74 17.49 5.43 7.92 7.81 14.76 3.20 2.04 11.85 7.30 11.09 3.48

6.67 3.80 11.88 8.87 20.25 5.12 9.53 8.10 16.45 2.63 2.90 – – 10.90 3.07

6.87 3.60 11.32 7.8 21.64 5.00 10.26 7.80 17.92 2.96 2.32 10.48 8.18 11.49 2.83

6.61 3.12 11.28 6.03 21.26 5.32 10.23 7.36 18.03 2.64 1.79 – 8.70 11.51 2.23

6.82 3.79 11.26 6.09 20.61 5.07 10.74 7.36 18.07 2.47 2.03 9.90 7.38 11.02 2.15

6.32 3.55 10.13 6.49 19.85 4.47 10.18 7.65 17.44 2.00 3.02 9.37 6.01 9.01 –

5.71 3.14 8.28 8.15 17.33 3.14 9.62 7.46 16.10 1.59 4.83 8.70 5.13 7.41 1.46

4.89 3.25 7.25 8.34 16.27 3.07 9.36 7.02 14.09 1.61 5.26 7.67 4.64 6.97 1.83

1.90 9.10 7.00 11.40 4.86 6.42 – – – – – – 6.80 –

2.06 11.35 9.20 14.17 5.04 7.54 3.42 – – – 7.92 – 10.4 –

3.35 13.00 10.00 16.00 5.28 8.20 4.94 – – 1.70 – – 10.90 3.14

Source: Prepared by author with data from the World Bank, 2022. World Development Indicators.

100  María José Vargas-Machuca Salido

Table 4.5 Europe: total unemployment rate (percentage)

The external debt crisis & the “lost decade” in Latin America 101

In the case of Spain, unemployment became a structural problem for the economy. In the early 1990s, the unemployment rate would again rise above 20%, something that had already been observed between 1984 and 1987. The effects of the 1973 oil crisis had begun to be felt in Spain in 1975, somewhat later than in the OECD as a whole. However, the measures adopted to deal with the initial onslaught of the crisis were not sufficiently forceful. Although the effects were more intense between 1975 and 1980, the recession lasted until 1985 (Hernández 2013, 785). During these years, two “mutually conditioning” elements coincided: a deep economic crisis and a change of political regime (García 2016, 15). The result of this confluence was the establishment of a climate of strong uncertainty that would influence economic policy decisions. Politically, these were years of profound change. The democratic transition began in Spain in 1975. In November of that year, Juan Carlos I was named King of Spain, and one year later he appointed Adolfo Suárez as Prime Minister. He would be elected again through the ballot box in the general elections of June 1977 and re-elected in March 1979. President Suárez eventually resigned in 1981 as a result of differences with other leaders of his own party that had become apparent in the previous months, aggravated by the economic crisis in which the country found itself at the time. From the economic point of view, this period was characterised by a difficult crisis that, despite the measures adopted, was to last for an entire decade. When the country’s first democratic elections in 40 years were held in 1977, inflation stood at 25.4%, and the current account deficit reached 5 billion dollars. Many of the productive sectors were in recession, having failed to adapt to the consequences of the 1973 energy crisis. The indexation of wages to the Consumer Price Index (CPI) had caused wage costs to jump by between 18% and 24%, putting further upward pressure on prices in a constant inflationary spiral (Ros 2013, 23). To the more than moderate growth in per capita income (only slightly above one and a half percentage points on average) must be added the intensification of macroeconomic imbalances: inflation rates at unknown levels, worsening public accounts, a severe business crisis (of profits and investment), especially in the industrial sector, and, consequently, in the banking sector linked to it. As a consequence, the result was a net loss of almost two million jobs (García 2016, 17). The broad political and social consensus led to the formulation and approval of the Moncloa Pacts (1977). The aim was to find a way out of the crisis with measures aimed at distributing the costs of the crisis fairly. The provisions adopted laid the foundations for the country’s industrial future. There were basically three lines of action: firstly, an active monetary policy of a stabilising nature to counteract the effect of high inflation; secondly, a fiscal policy of consolidation through control of the public deficit and greater equity in fiscal distribution; and, finally, an appropriate income policy that would serve to limit the growth of real labour costs (wages and social security), which had been the main causes of inflation since 1973 (Fuentes 2005, 41). In short, it was a set of

102  María José Vargas-Machuca Salido

short-term measures to correct economic imbalances, accompanied by a series of structural improvements that would help consolidate democracy and put the economy on a fairer and more solid footing. The implementation of the first measures included in the Moncloa Pacts succeeded in reversing the situation to some extent during 1978. The inflation rate fell to 19.8%, the balance of payments surplus was achieved, and GDP growth approached 3%. Meanwhile, investment remained negative and the unemployment problem, far from abating, continued to grow, reaching a rate of 8% (Ros 2013, 24). The rise in unemployment was influenced by a wide range of factors, from economic causes, such as low industrial productivity or lack of confidence in investment, to factors as heterogeneous as political uncertainty, the return of emigrants, or the incorporation of women into the labour market (Hernández 2013, 791). The good results prompted a certain relaxation in the application of adjustment measures, which, together with changes of government and other domestic difficulties, led to a further decline in the economy until 1982. From that date onwards, the new government of the socialist party, which won the elections of that year, had to face serious economic difficulties: productive and investment weakness, high and persistent inflation, large public deficits, and the biggest problem – unemployment – which had already reached 14% (Ros 2013, 25). As a result, during that first socialist legislature (1983–1986), the political strategy focused on the consolidation of the main financial imbalances through the application of a restrictive monetary and fiscal policy, a coherent exchange rate policy and wage moderation. At the same time, structural reforms were implemented aimed at industrial restructuring, energy adjustment, labour market reform, social security financing, and public enterprises. All this contributed to a change in the country’s economic growth path, encouraged by its incorporation into the European Union in 1986 (Myro 2019). It can be said that from 1985 to 2007 Spain experienced a golden age of almost uninterrupted expansion, with the sole exception of the 1992–1993 crisis. However, as already mentioned, the unemployment problem, although it improved slightly in the last years of the 1980s, did not manage to return to an acceptable level. The unemployment rate remained above 15% until quite a few years later, becoming a serious structural problem of the Spanish economy.

4.7 Conclusions The oil shock of 1979 and its consequences for prices can be seen as the trigger for the severe downturn in the world economy in the early 1980s. In the advanced economies, the necessary tightening of monetary policy to cope with rising inflation led to a sharp decline in economic activity and, in many cases, a significant rise in unemployment rates between 1982 and 1983. Many developing countries had financed much of their growth in the previous decade with external borrowing from private international banks. As a

The external debt crisis & the “lost decade” in Latin America 103

result, rising interest rates triggered a major debt crisis that led to a long-lasting growth slowdown in many emerging and developing economies, especially in Latin America, the Caribbean, and sub-Saharan Africa. The first country to declare its inability to service its debt was Mexico in 1982. Other developing economies followed suit, triggering a major shock to the international financial system. A fundamental feature of the management of this debt crisis was the strong coordination among creditors, which enabled them to stop or postpone defaults by countries that had shown serious payment difficulties. The plans to resolve the crisis were developed between 1982 and 1998 in three phases: adjustment programmes for the debtor countries, mostly Latin American (1982–1985), the Baker Structural Adjustment Plan (1986–1988), and the Brady Plan for debt reduction (1989–1998). These measures succeeded in averting an international banking crisis and restoring a sustainable debt level in debtor countries. However, they failed to revive economic growth in the affected countries, giving rise to what has become known as Latin America’s “lost decade”. The 1982 crisis was also felt in other parts of the world. As in Latin America, it was particularly intense in sub-Saharan Africa. Despite this, the literature tends to associate the debt crisis with the former region, probably because the economies affected there were larger and more numerous. Growth and unemployment problems also appeared in the US and Europe. In the latter region, the case of Spain stands out, where the unemployment rate reached unsustainable levels in the mid-1980s. Although it fell somewhat at the end of the decade, it did not do so with sufficient intensity, which meant that unemployment became a structural problem in the Spanish economy.

4.8 References Bernardos Sanz, José Ubaldo, Mauro Hernández Benítez, and Miguel Santamaría Lancho. Historia Económica. Madrid: Universidad Nacional de Educación a Distancia, 2014. Bianchi, Andrés. “América Latina: Crisis económica y ajuste externo.” Estudios Públicos, no. 24 (1986): 1–52. Danso, Alex. “The Causes and Impact of the African Debt Crisis.” The Review of Black Political Economy 19, no. 1 (1990): 5–21. DOI 10.1007/BF02899929 ECLAC. Statistical Yearbook for Latin America and the Caribbean, 1995. Accessed 20 March  2022, www.cepal.org/es/publicaciones/909-anuario-estadistico-america-latinacaribe-1995-statistical-yearbook-latin-america Ffrench-Davis, Ricardo, and Robert Devlin. “La gran crisis de la deuda latinoamericana: un decenio de ajuste asimétrico.” In Macroeconomía, comercio y finanzas para reformar las reformas en América Latina, ed. Ricardo Ffrench-Davis, 2nd ed., 75–105. Bogotá: McGraw-Hill Interamericana-CEPAL, 2005. Ffrench-Davis, Ricardo, and Robert Devlin. “Diez años de la crisis de la deuda latinoamericana.” Comercio Exterior 43, no. 1 (1993): 4–20. Fuentes Quintana, Enrique. “De los Pactos de la Moncloa a la entrada en la Comunidad Económica Europea (1977–1986).” Información Comercial Española 826 (2005): 39–71. García Delgado, José Luis. “Economía y democracia: Cuatro decenios de historia española.” Cuadernos de Información Económica, no. 250 (2016): 15–24.

104  María José Vargas-Machuca Salido Greene, Joshua E., and Mohsin S. Khan. “African Debt Crisis.” African Economic Research Consortium, Special Paper 3 (1990). Gunder Frank, Andre. “Causas y consecuencias de la crisis de la deuda mundial.” El País, 1989. Accessed 29 March  2022, https://elpais.com/diario/1989/02/06/economia/ 602722805_850215.html Hernández Andreu, Juan. “La transición centrista (1975–1982).” In Historia Económica de España, ed. Agustín  González-Enciso and Juan Manuel Matés-Barco, 781–794. Barcelona: Ariel, 2013. Kose, Ayhan, and Marco Terrones. Collapse and Revival: Understanding Global Recessions and Recoveries. Washington, DC: International Monetary Fund, 2015. Maeso, Francisco. “Mercados financieros internacionales.” In Lecciones sobre economía mundial: Introducción al desarrollo y a las relaciones económicas internacionales, dir. José Antonio Alonso Rodríguez, 10th ed., 285–314. Cizur Menor: Civitas-Thomsonreuters, 2021. Moncloa Pacts. Full Text of The Economic Agreement and the Political Agreement. Madrid: Servicio Central de Publicaciones/Secretaría General Técnica Presidencia del Gobierno, 1977. Myro Sánchez, Rafael. “Crecimiento económico y cambio estructural.” In Lecciones de economía española, dir. José Luis García Delgado and Rafael Myro Sánchez, 14th ed., 43–65. Cizur Menor: Civitas-Thomsonreuters, 2019. Palazuelos Manso, Enrique. Fases del Crecimiento Económico de los Países de la Unión E ­ uropea–15. WP 06/05. Madrid: Instituto Complutense de estudios internacionales, 2005. Parodi Trece, Carlos. La crisis de la deuda en América Latina de la década de los ochenta. Conferencia Internacional Deuda, Inflación y Empresas en América Latina en las décadas de 1970 y 1980. Lima, 2015. Accessed 20 February  2022, https://repositorio.up.edu.pe/ bitstream/handle/11354/1108/DD1506.pdf?sequence=1&isAllowed=y Ros Hombravella, Jacint. “La última etapa de la economía franquista y los problemas económicos de la transición (1971–1982).” In Economía Española, dir. José Vallés Ferrer, 2nd ed., 23–26. Madrid: McGraw-Hill, 2013. Ruiz, Álex. “Enseñanzas latinoamericanas para una crisis europea.” Documentos de economía La Caixa, no. 25, 2012. Accessed 29 March  2022, www.caixabankresearch.com/sites/ default/files/content/file/2016/09/de25_esp.pdf Ruiz Ramírez, Héctor. “Sobre el significado de crisis económica, recesión, depresión y contracción.” Revista contribuciones a la Economía, 2019. Accessed 15 February 2022, www. eumed.net/rev/ce/2019/3/significado-crisis-economica.html Sablik, Tim. Recession of 1981–82. Federal Reserve History. Great Inflation, 2013. Accessed 29 March 2022, www.federalreservehistory.org/essays/recession-of-1981-82 Sachs, Jeffrey D. “External Debt and Macroeconomic Performance in Latin America and East Asia.” Brookings Papers on Economic Activity, no. 2 (1985): 523–573. DOI 10.2307/2534445 Urquhart, Michael A., and Marillyn A. Hewson. “Unemployment Continued to Rise in 1982 as Recession Deepened.” Bureau of Labor Statistics  Monthly Labor Review (1983): 3–12. Accessed 3 April 2022, www.bls.gov/opub/mlr/1983/02/art1full.pdf World Bank. World Development Indicators, 2022. Accessed 1 April  2022, https://­ databank.bancomundial.org/source/world-development-indicators

5 The 1990s Crisis during the globalisation Simone Fari

5.1 Introduction Economic history handbooks described the 1990s as a period of general economic expansion, characterised by a strong financial globalisation. The economic crises of this period are often remembered as tragic events but limited to some well-defined national or geographical contexts. For example, the Japanese economic crisis of 1990, the Eastern Asia crisis of 1997, or the Argentine crisis of 1998. Rarely are the financial and economic crises of the 1990s described, explained, and interpreted as interrelated phenomena. The main purpose of this chapter is to reconstruct the story of the 1990s crises, providing a unitary and coherent interpretation. The chapter follows a chronological order. After this introduction, the second section analyses the early 1990s financial crisis: 1) the 1990 Japanese crisis; 2) the North American crises (1990–1992); 3) the North European crises (1990–1993) and 4) the crisis of European currencies in 1992. Section  3 explores the banking and financial crisis that hit Mexico in 1994. Section 4 studies the currency, banking and economic crisis that affected all the nations of Eastern Asia starting from 1997. Section 5 describes the characteristics and causes of the financial and economic crisis that affected South America, and in particular Argentina, starting from 1998. Section 6 considers in depth the dot.com crisis that exploded in the United States in 2000. The last section differs from the others because it provides an overall and alternative interpretation of the 1990s financial and economic crises. Obviously, this chapter is not exhaustive, as it cannot delve into all the economic and financial crises of the decade. For example, the Russian crisis of 1998 is only hinted at because its origins are to be found in a complex political and social context that distances it from the other crises of the 1990s. Although in the individual sections the peculiar aspects of the 1990s crises are discussed, in the course of the chapter the interactions and connections between each of them are emphasised. Indeed, the 1990s crises could be interpreted as an aspect of a broader phenomenon.

DOI: 10.4324/9781003388128-5

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5.2 1990–1993: the early nineties financial crisis During the early 1990s, at least three financial crises took place: the Japanese crisis in 1990, the North American (Canada and the United States) crisis in 1990– 1992, and finally the North European (Norway, Finland, and Sweden) crisis in 1990–1993. In all three cases, the financial crises were the consequence of the bursting of a speculative bubble that had been encouraged by the deregulation policies during the second half of the 1980s. In all three cases, the financial crises turned into banking crises and led to recession and rising unemployment. Some of them were short-term recessions (Canada and the United States), others were medium term (Finland), and one was long term ( Japan). The early 1990s were also characterised by the high volatility of European currencies linked or close to the European Monetary System (EMS). In the second half of 1992, a currency crisis put many countries in difficulty and forced the United Kingdom to exit the EMS, renouncing membership of the single European currency. 5.2.1 The end of a mania: Japan 1990

In the early 1990s, a huge speculative bubble burst in Japan: stock and real estate prices plummeted. In the previous decade, both the Tokyo stock exchange and the real estate market had expanded tremendously. As a whole, the Japanese economy of the 1980s had been the protagonist of an amazing increase in production and industrial productivity, thus becoming the second world industrial power behind the United States. Japanese companies had challenged their US and European rivals by conquering significant portions of the international market. Toyota, Nissan, and Honda had dominated the automotive market, Sony, Matsushita, and Sharp had occupied the top positions among electronics firms, and Nikon and Canon had been the leaders in the photo-optics sector (Aliber and Kindleberger 2015). At the beginning of the 1980s, the Japanese economy was still under moderate control by government authorities. The ministry of finance, for example, kept low the interest rate on both household deposits and loans. Nonetheless, given the Japanese high propensity to save, private saving increased while corporate loans remained rather scarce, despite high demand. In fact, government officials used “windows guidance” to instruct banks about how many and which companies could receive loans. The real rate of return on both real estate and stocks was high because their prices were increasing, driven by industrial production. Japanese banks owned large quantities of real estate and stocks, so the banks’ capital also increased considerably. For this reason, the banks decided to increase their loans. In turn, the government encouraged banking loans and initiated a process of deregulation of the national financial market. In addition, the government severely reduced “window guidance” and open the doors to foreign investments and loans (Kanaya and Woo 2000). The Tokyo stock exchange thus attracted both domestic and foreign investors and speculators. The luxury building firms listed on the stock exchange and obtained substantial loans from banks. Real estate prices increased, driven by growing domestic demand that was fuelled by the liberalisation of mortgages.

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In turn, the real estate companies’ stock prices increased, and the other stock prices along with them. In short, the liberalisation of the Japanese financial market brought about a “speculative mania” that led to a steady rise in real estate and stock prices. In late 1989, government authorities realised that the speculative bubble was too big, and that real estate and stock prices were too far from their real market value. For this reason, the new governor of the central bank instructed banks to limit the growth rate of real estate loans so that it would not exceed the total loans growth rate. The market reacted immediately: without new loans, households and businesses could no longer buy new properties; both real estate and stock prices immediately plummeted. Foreign investors and property owners began selling frantically, triggering a vicious circle that pushed a further falling of real estate and stock prices (Ryozo 2021a). Stock prices fell by 30% in 1990 and a further 30% in 1991. Domestic demand fell and industrial firms concentrated their efforts on exports. In this way, however, the flows of capital abroad increased, strengthening the yen and increasing the price of exported goods. For this reason, Japanese companies tried reducing their production costs by moving manufacturing to the emerging countries of East Asia (Ryozo 2021b). The government and the central bank decided to bail out many large banks and did not make economic decisions that would have involved a radical impoverishment of the population. The advantage of these policies was a high quality of life by the Japanese today. The great disadvantage was that the presence of bad loans within the Japanese banking system prevented an adequate financing activity, triggering an economic stagnation during the next three decades, the so-called lost decades (Hirakata et al. 2016). 5.2.2 Crisis hits North America: 1990–1992

A few months after the start of the Japanese crisis, North America also entered a phase of short but intense economic recession. Following the adoption of restrictive policies, both stock and real estate prices decreased, inevitably leading to a decrease in GDP that was, however, limited to 1991. On the contrary, the unemployment rate of both countries increased and stayed high until 1995 (Gardner 1994). As in the Japanese case, the causes of the North American recession must be included in the context of a constant growth in industrial production and of a progressive increase in stock and real estate prices. In fact, the financial deregulation adopted in the 1980s stimulated both financial exchanges and speculation. In the second quarter of 1990s, the Canadian central bank decided to raise interest rates in order to contain inflation, which had been growing since the mid-1980s. The purpose of restrictive policies is in fact to stimulate savings by increasing the interest rate; in this way, the consumer buys fewer goods, demand falls, and prices should diminish. The possible “secondary” effects of restrictive policies are a decrease in industrial production and a consequent increase in unemployment (Dzialo, Shank, and Smith 1993). The negative effect on GDP

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was brief for both countries and ended in 1992; however, the occupation, especially in Canada, only began to recover in the second half of the 1990s. With regard to the possible causes that generated the North American recession, many economists agree on the inflationary trend stimulated by the financial deregulation of the 1990s, which was interrupted by the massive adoption of restrictive policies by central banks. Nonetheless, the Canadian crisis presented some specific differences from the US one. According to a widely shared interpretation, Canada suffered from “psychological inflation” on the part of consumers and reduced industrial competitiveness. Psychological inflation defines the behaviour of consumers who increase their demand in the belief that the prices will increase. For this reason, the central bank’s early interest rate hikes did not stimulate consumer savings (Thiessen 2001). Furthermore, many Canadians were convinced that the liberalisation of trade with the United States had damaged Canada, due to both the excessive appreciation of the Canadian dollar, which did not favour exports, and the lower productivity of Canadian industry. In fact, in the 1980s, Canadian companies had not modernised their technologies, unlike US companies that followed the example of Japanese industry. Only the combination of restrictive policies and fiscal reforms with the technological modernisation of the enterprises allowed the Canadian economic recovery (Wilson, Dungan, and Murphy 1994). In the US case, the shock was mainly external: the rise in oil prices following the invasion of Kuwait by Saddam Hussein’s Iraq. However, many blamed the recession on the deregulation policies of George Bush, Sr., who later lost the presidential election to Bill Clinton (Walsh 1993). 5.2.3 The Northern European crises: 1990–1993

At the end of 1990, three Northern European countries experienced a financial crisis that turned into a recession: Norway, Finland, and Sweden. Norway preceded the other countries and entered into crisis as early as 1988–1989, while Sweden and Finland experienced a decrease in their GDP starting from 1991. All three Nordic countries followed a fate quite similar to that of Japan. During the 1980s the production, productivity, and exports of the Nordic countries had grown. With them, even inflation, stock, and real estate prices. The speculative bubble burst in the second half of 1990, except for Norway. All three countries faced an economic recession and a drastic rise in unemployment; however, Finland was hit hardest. Finnish production grew again only in 1995, preceded by Sweden and Norway by a few years ( Jonung 2008). Many analysts agree that the aftermath of the Nordic crisis was a perfect mix of bad luck and bad policies. By bad luck we mean political shocks that triggered the crisis, while bad policies were the economic policies that laid the foundations of the crisis in the previous decade (Drees and Pazarbasioglu 1998). In the Norway case, the shock that triggered the crisis was the rise in the price of oil in 1986. Norway was the first European exporter of oil; the sudden increase in its price caused a drop in demand and a fall of Norwegian exports.

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Norway entered an inflationary spiral against which restrictive policies had to be adopted. These policies caused a decrease in production and an increase in unemployment. The situation worsened further when the two neighbouring countries, Sweden and Finland, entered recession in the late 1990s. The political shock that caused the Swedish and Finnish crises was, however, the collapse of the Berlin Wall and the dissolution of the Soviet Union. Specifically, it was German reunification that created a profound imbalance in the European Monetary System (EMS). Since the early 1980s, the currencies of the countries of the European Economic Community (EEC) were closely linked to the mark. The decision to reunify Germany involved an increase in the interest rate in order to avoid a surge in inflation. Being bound to the mark through bilateral treaties that imitated the EMR, the Swedish and Finnish currencies were excessively strengthened and both countries had to devalue their currency in order to defend their exports. Doing so, however, made imports more expensive by encouraging inflation that had been growing steadily for several years. In Finland, the political crisis of the former Soviet Union represented a further shock. In the previous decades, the Soviet Union had represented a privileged market for Finnish products: the abrupt decrease in exports encouraged the contraction of industrial production (Honkapohja and Koskela 1999). Regarding bad policies, many scholars believe that the liberalisation of financial markets and banking activities was poorly managed by the governments of the Nordic countries. Until the mid-1980s, banking and financial activities were regulated by government authorities and the central bank. The deregulation of the second half of the 1980s was accompanied by neither appropriate banking supervision operations nor a profound tax reform. For this reason, deregulation, as in the Japanese and Canadian case, caused a speculative mania that brought about the bursting of the bubble. Swedish economy recovered faster, due to the timelier adoption of the necessary countermeasures to the crisis: 1) tax reform; 2) the devaluation of one’s own currency; 3) the creation of independent authorities for banking supervision and the elimination of bad loans (Ergungor 2007). The Finnish economy recovered more slowly due to less incisive tax reform, which, however, prevented the increase in inequality, despite unemployment reaching one of the highest levels within the OECD (Uusitalo 1996). 5.2.4 Black Wednesday

On 16 September  1992, the British government announced an increase in interest rates to cope with rising inflation. The pound was subjected to a speculative attack as had happened for the Nordic countries a few years earlier. Some speculators, taking advantage of the ERM (Exchange Rate Mechanism) within the EMS, wanted to sell the pound at high prices and then buy it back after a few days at a lower price (devaluation). However, in the face of a great loss in value, the British government decided to abandon the ERM, thus starting a policy of appreciation of its currency to contain inflation (Sevilla 1995).

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Although it did not have an economic impact comparable to that of the other financial crises of the early 1990s, the currency crisis of September 1992 deserves special attention, especially for the political consequences it had. To fully understand the events of 1992, it is necessary to take a small step back to the early 1980s when the EMS criteria were established. Although the EMS was theoretically a flexible exchange rate system, it was in fact a system of almost fixed exchange rates. The EMS established that the individual currencies were linked to a reference currency, the German mark. The individual European currencies then had a fluctuation margin with respect to the established value, but the fluctuation window was small. During the 1980s the mark allowed stability for all currencies. The restrictive policies of the German central bank had helped contain inflation in all European nations. However, the German unification process generated a further tightening of these policies, which brought to an excessive appreciation of many European currencies, with the negative effect on exports. The first impacts of these policies were seen in 1990–1991, when the Nordic countries had to devalue their currencies to avoid the worsening of the recession. Norway, Sweden, and Finland did not belong to the EMS; however, they had linked their currencies to the mark through bilateral treaties. At the beginning of 1992, some speculators, including George Soros, began to sell the Italian lira, the Spanish peseta, and the Portuguese escudo, with the intention of buying these currencies at low prices thanks to the adjustments that would be applied within the ERM. These speculative attacks massively shifted to the British pound on September 16, giving rise to Black Wednesday. While Italy, Spain, and Portugal negotiated a temporary exit from the EMS and a subsequent return following the devaluation of their currencies, the United Kingdom decided to permanently exit EMS. Black Wednesday was therefore the moment of the definitive exclusion of the United Kingdom from the monetary integration process that would have led to the adoption of the single currency of the European Union, the euro (Budd 2004).

5.3 Mexico 1994: “the tequila effect” In Mexico, 1994 was particularly turbulent for both politics and the economy. On 1 January, the Zapatista revolt broke out in the Chiapas region, which was followed by an armed confrontation with the army. On March 23, Luis Donaldo Colosio, candidate for president of the ruling party, was killed during an electoral rally. A  few months later, Francisco Ruiz Massieu, secretary of the same political party, was also killed. This spiral of violence also shook the political and economic relations that Mexico had with other countries, in particular Canada and the United States. Despite a rising GDP, the Mexican economy gradually worsened during 1994. The excessive appreciation of the Mexican currency, the peso, threatened a sharp rise in inflation. Initially, the Mexican government raised interest rates to initiate restrictive policies. However, to avoid recession during the

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presidential campaign, the government decided to lower interest rates and to increase the issue of Tesobonos, which were short-term public debt instruments redeemable in pesos but denominated in dollars. In practice, the Mexican government was “internationalising” the Mexican debt. Numerous international investors doubted the financial credibility of Mexican treasury bills and began to sell them, sparking financial panic. Faced with a collapse in its treasury bills, the government had to devalue the peso and raise interest rates. The restrictive policies caused a brutal fall in the GDP (−6 % in 1995), an increase in unemployment, and a deep banking and credit crisis. The Mexican GDP recovered quickly as the depreciation of the peso immediately favoured exports; however, the Mexican society was deeply affected by this crisis. In the following years, unemployment and social inequality increased, encouraging an expansion in the level of poverty (Millán 1999). As in the case of Japan and Finland, Mexico’s financial and economic crisis was preceded by a decade of great economic growth. During the 1980s, Mexico had experienced an intense period of liberal reforms aimed at modernising a traditionally dirigiste economy. The culmination of the liberalisation process was the entry of Mexico into the North American Free Trade Area (NAFTA), which allowed the free movement of goods and capital between Canada, the United States, and Mexico (Aliber and Kindleberger 2015, 357). The causes of the crisis were mainly endogenous, both macroeconomic and microeconomic. However, the international opening of the Mexican financial market exacerbated the national and international effects of the crisis (Huerta 1998). 5.3.1 Macroeconomic causes

Until the mid-1980s, the Mexican government followed a statist development model in which public spending took the place of private investment to finance production. This development model led to a “stop and go” trend of the economy. In a recessionary scenario, the government stimulated production by increasing public spending (and public debt). The absence of private investments made Mexican products uncompetitive. However, the increase in domestic production stimulated domestic demand and, in the absence of significant imports, generated inflation. Faced with an appreciation of its currency and rising inflation, the government proceeded to devalue the peso and raise interest rates. These restrictive policies curbed inflation but led to an economic recession. Once the decrease in GDP and the rise in unemployment were recorded, the Mexican government again initiated expansionary policies by increasing public spending. In other words, the Mexican economy was unable to grow without creating imbalances (Casar 1989). Following the 1982 currency crisis, President Miguel de la Madrid decided on a radical change: favouring exports through a process of strong liberalisation, based mainly on the elimination of tariffs and the privatisation of stateowned enterprises. Such a projection towards international competition had to have as a prerequisite the containment of inflation. For this reason, de la

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Madrid and his successor Carlos Salinas made the anti-inflationary battle the symbol of the new economic policy. The containment of inflation took place through the control of inflationary inertia, that is, the trend towards a progressive increase in prices by entrepreneurs. In fact, in 1987, the Salinas government promoted the Economic Solidarity Pact: an agreement that provided for the alignment of public and private prices. In other words, the government undertook to communicate public goods and service prices, exchange rates, and minimum wages in advance. On the other hand, the entrepreneurs undertook to keep the increase in their prices in line with what the government proposed. The Solidarity Pact and the liberalisation policies worked: inflation dropped from 160% in 1987 to 7% in 1994 and the Mexican GDP continued to grow (Aspe 1993). According to many scholars, the main problem with the Solidarity Pact was that the price level was indexed to the exchange rate, which was kept constantly stable. In this way, the peso gradually appreciated, encouraging imports and disfavouring exports. The trade deficit, however, was offset by the intense flow of international capital that entered Mexico since the mid-1980s. Initially, US and Canadian companies invested directly in manufacturing businesses. However, the Mexico adhesion to NAFTA favoured an increase in financial flows. Mexicans took out international loans for domestic consumption, supported by the peso, which continued to appreciate. Gradually, investors questioned Mexico’s financial credibility and shifted their money to short-term government bonds (Cuadra 2015). The main mistake of Mexican governments was to insist on overvaluation of the peso, despite having sufficient official reserves to make a gradual adjustment of their currency. The political events of 1994 thus shook an economic system that was already unbalanced. Despite rising inflation, the Mexican government preferred not to touch the exchange rate, and it lowered interest rates. However, interest rate policy ceased in July 1994, to avoid worsening the recessionary effects during the presidential campaign. At that point, the issue of the Tesobonos was the only policy that could be adopted to avoid the devaluation of the peso (Lustig 1995a). Unfortunately, however, the massive issue of the Tesobonos made investors suspicious; in December 1994, they sold their shares, triggering panic. At that point, the government was forced to devalue the peso and initiate restrictive policies. 5.3.2 Microeconomic causes

The 1994 crisis was also caused by an endogenous factor of a microeconomic nature: a banking system unsuitable for the financial deregulation of the 1990s. Ever since Mexican governments had used public debt to finance industrial activity, the banks had been converted into the “treasury” of the state. This function was formally sanctioned with the nationalisation of the banks in 1982 by President Lopez Portillo.

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The nationalisation of the banks had two major negative effects. The first one was the failure to modernise the Mexican banking system. The public bank did not introduce the new information technologies that were spreading abroad. Furthermore, its employees, linked to a clientelist context, did not develop the necessary know-how to face the international financial market. The second negative effect is linked to the diffusion of brokerage firms (Casas de bolsas), which replaced the banks in the traditional function of collecting private savings, without however being subjected to the controls reserved for deposit banks. Such a banking system did not fit in with President Salinas’ deregulation policies. The public bank was thus modernised and started towards a privatisation process. Unfortunately, modernisation would have required skills that the Mexican banking system did not possess. Furthermore, the privatisation of 1992 favoured the brokerage firms, which had capital and a long experience in the field of intermediation but not in the banking one. Also in Mexico, as in Japan and Finland, the liberalisation and privatisation of banks was not accompanied by the implementation of adequate legislation to regulate its activity. Indeed, it was precisely the lack of regulation on loans that fuelled the domestic private debt out of all proportion. Once the speculative bubble burst in 1994, the banks had accumulated liabilities because private borrowers were not able to pay off their debts (Ortiz 1994). 5.3.3 Final remarks

The Mexican government responded to the crisis by implementing those measures that had not previously been taken: 1) devaluation of the peso, in line with restrictive policies; and 2) reform of the banking system in line with financial liberalisation. However, the intervention of the United States and Canada as international lender of last resort was essential for a rapid recovery of the Mexican economy. The immediate injection of liquidity by Canada and the United States allowed Mexican companies to continue their production. This intervention was linked to the heavy investments that Canadian and US companies had made in Mexico in the years following its entry into NAFTA. Thanks to the increase in liquidity in the banking system, Mexican companies were able to export immediately, favoured by the devaluation of the peso. In this way, the Mexican GDP resumed its growth as early as 1995 (Aliber and Kindleberger 2015, 279–312). The 1994 crisis in Mexico was largely caused by endogenous conditions. Although the governments of the 1980s had embarked on a process of strong liberalisation accompanied by the trade alliance with Canada and the United States, the reforms were incomplete. In the Mexican case, the liberalisation process was not the cause of the crisis in itself. The real problem was the failure to adopt a series of reforms that should have accompanied the deregulation and privatisation of the banking system. However, this lack can only be linked to the dirigiste characteristics that the Mexican economy had assumed in the previous 50 years (Lustig 1995b).

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5.4 1997–1998: the Eastern Asia crisis In the late 1990s a currency, financial, and, ultimately, economic crisis hit Eastern Asia. The dynamics of the crisis were very similar to that of 1994: a strong currency speculation forced government authorities to devalue local currencies and raise interest rates. Inevitably, these restrictive policies led to a contraction in production and an increase in unemployment. As in the case of Mexico, a weak banking system without effective controls underwent an intense process of liberalisation in the years preceding the crisis, during which banks were excessively exposed to credit risk. The initial currency crisis thus turned into an economic and banking crisis. The big difference from the Mexican crisis was the extension of the crisis to all the major economies of Eastern Asia: Thailand, Malaysia, Indonesia, South Korea, Philippines, Singapore, Taiwan, Japan, and, finally, Russia. All of these countries, except Russia, shared extraordinary economic and financial growth during the 1990s. Their financial markets attracted numerous foreign investors. Finally, the currencies of this area appreciated considerably, attracting many speculative activities (Chinn 1998). Compared to the “tequila effect”, the Eastern Asia crisis infected an entire continent and indirectly shook Western economies as well. However, once again, the causes of the crisis were mainly endogenous and linked to the peculiarities of the economic and financial system of the countries of Eastern Asia (Yellen 2007). 5.4.1 The origins of the crisis

In the Eastern Asia, the 1990s presented many similarities with the period preceding the 1990 Japanese crisis and the 1994 Mexican crisis. Firstly, all the countries of Eastern Asia during the 1990s experienced extraordinary economic and financial growth (Asian tigers and Asian dragons). In fact, following the 1990 Japanese crisis, an intense flow of capital had been directed towards the financial markets of Eastern Asia. Many Japanese and Western companies had set up industrial plants, attracted by the low cost of labour. However, as was the case in Japan in the 1980s, luxury real estate increased considerably in Thailand, Malaysia, Indonesia, and South Korea. The increasing of the building sector generated a double flow of capital: 1) the loans needed to start and manage construction companies; 2) the mortgages needed to purchase the new properties. Banks in Eastern Asia borrowed from international investors and, in turn, lent money exclusively within their respective countries. This one-way flow from abroad to these countries exposed businesses and citizens to greater risk. If the flow of international capital had been interrupted, the banks and, consequently, the companies would have remained without liquidity. As had happened in Japan in the 1980s, financial euphoria pushed up the stock and real estate prices, which increased relentlessly until 1997 (Radelet and Sachs 1998). Growth in GDP and increasing of investment and property prices also led to rising inflation, except in South Korea. In order to contain inflation without decreasing financial flows from abroad, the governments of Eastern

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Asia adopted a well-known economic policy: they kept their exchange rates fixed, resulting in a real appreciation of their currencies. The analogy with the Mexican crisis is not limited to the macroeconomic characteristics. At the microeconomic level, the nations of Eastern Asia were in fact characterised by a banking system not suited for the liberalisation and deregulation policies of the 1990s. With some national differences, Eastern Asian banks were poorly regulated, poorly supervised, and too dependent on international investors (Pomerleano 1999). In Thailand, commercial banks had precise limits on lending activity. However, the rapid spread of non-bank intermediaries allowed these constraints to be overcome and a credit bubble to grow. In addition, the Thai government’s fiscal policy favoured offshore borrowing. In this way, non-bank financial companies became the protagonists of the Thai credit bubble, supported by the almost total absence of limits and controls on their dual activity of accessing international credit and granting domestic loans. In South Korea, the presence of industrial conglomerates, the chaebol, very similar to the Japanese zaibatsu, had allowed the triggering of a banking crisis. Often the chaebols owned majority stakes in major banks. For this reason, companies borrowed easily from the banks of the same chaebol. This situation exacerbated the moral hazard problem: companies asked for large loans, convinced that their group would protect them in the event of credit exposure. In the 1980s, the Indonesian banking system had been dominated by five large state-owned banks. However, the 1989 privatisation caused a radical change: indeed, in 1994, the private banking sector overtook the state one. Beginning in the mid-1990s, a large number of small young companies characterised the banking system. Formally, the banks of Indonesia complied with all the recommendations of the Basel Committee. In reality, the lack of adequate mechanisms and supervisory bodies allowed the systematic circumvention of these rules by many banks. The Indonesian government, instead of ousting the fraudulent banks from the market, favoured corporate concentration and defended the overexposed public banks. In the mid-1990s, Malaysia had a banking system very similar to Indonesian: small banks with strong international credit exposure. As industrial investment was gradually replaced by speculative financing, the Malaysian government sought to encourage bank mergers and curb international speculation. However, the intervention of the Malaysian central bank came too late, in March 1997. 5.4.2 The beginnings of the crisis and the international contagion

The 1997 was characterised by a high political instability in Eastern Asia. In Thailand, Chavalit Yoingchaiyudh’s government was based on a large and fragile coalition that exploded in November with the resignation of the prime minister. In Indonesia, Mohamad Mahathir, prime minister since 1981 and main architect of the country’s economic development since 1996, openly

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began to take anti-Western positions that undermined his relationship with his minister of finance, who has always been liberal and pro-American. In Indonesia, the dictator Suharto, in power since 1967, had to face growing internal opposition, supported by a greater distrust of international organisations, which had acknowledged his ferocity and the high level of corruption of his administration. The crisis of 1997 gave the last shock to the Suharto dictatorship, which ended with his resignation in 1998. Finally, in South Korea the electoral victory of Kim Dae Jung in 1997 determined the definitive exit of the politicians who had had contacts with the military dictatorship. Although Kim Dae Jung later turned out to be a staunch liberal and defender of democracy, international markets were initially wary of his economic policies. Overall, international investors were worried about the political instability of the area, coupled with fears of Hong Kong’s handover to China in 1998. In this general atmosphere, the euphoria of previous years quickly turned into panic. The financial crisis officially began in July 1997 with a speculative attack on the Thai currency, the bath. In fact, in the first half of the same year, several Thai banks bankrupted, and the government carried out numerous bailouts through mergers. Due to the speculative attack, the government devalued the bath, and this devaluation caused a rise in real interest rates on the international loans that the banks had contracted. The devaluation therefore worsened the conditions of a banking system already in crisis. This was followed by the collapse of stock and real estate prices and the collapse of production activity due to lack of liquidity. The devaluation of the bath triggered speculative attacks on all those currencies whose countries had the same financial features: Malaysia, Indonesia, and the Philippines. In Malaysia, the first signs of the crisis appeared in March 1997, when the central bank decided to place limits on loans for the purchase of real estate and equity securities in order to curb the speculative bubble. International investors reacted immediately by selling their securities on the Malaysian stock exchange. The stock prices collapsed immediately, dragging the fragile banking system with them. The devaluation of the bath, therefore, worsened the situation, also involving the Malaysian currency. Indonesia and the Philippines also showed signs of a credit crisis already in the first half of the year and when speculative attacks engulfed these countries, many banks were already bankrupted (International Monetary Fund 1997). The contagion of currency speculation involved, one by one, all the nations of the region. Singapore’s currencies were targeted in September and then, in October, it was Taiwan and Hong Kong’s turn. In November, the speculative attack involved the South Korean won. South Korea had been rocked by a banking crisis during the early months of 1997. Some chaebols had bankrupted, dragging with them the commercial banks they had borrowed from. In November 1997, the attack on the Korean currency worsened the crisis. As the Korean economy is one of the most important in Eastern Asia, the collapse of its currency caused a second wave of devaluations of the currencies that had collapsed a few months earlier. In 1998 the speculative contagion involved

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other nations, in particular Russia, which entered a very serious financial and economic crisis (Alba et al. 1998). Initially, all governments in Eastern Asia avoided raising their interest rates in a desperate attempt not to enter a recession. However, in the end, all governments raised interest rates and negotiated a series of international loans with the IMF to guarantee the liquidity needed for productive activities (Fischer 1998). These loans were tied to a series of banking and tax reforms whose main purpose was to create a more solid, more controlled, and therefore less corrupt, financial system. The recovery in Eastern Asia was slow, and only in May 1999 did the economic and financial indicators show signs of recovery. According to many scholars, the slow pace of recovery in Eastern Asia was also linked to the ten-year stagnation in Japan, the most important economy of the area. Unlike the Mexican crisis, in which Canada and the United States acted as lenders of last resort, Japan could not perform this function during the Eastern Asia crisis (Corsetti, Pesenti, and Roubini 1999).

5.5 1999: crisis in the South American cone At the beginning of 1999, the contagion of Asian currency speculation reached South America. Paradoxically, Russia’s currency crisis caused a real earthquake in the economies of the cone. Russia shared some fundamental macro and microeconomic conditions with the countries of South America: 1) a strong international credit exposure, 2) a currency linked to the dollar and therefore appreciated in recent years, 3) a tax system unsuitable for deregulation, and 4) an uncompetitive banking system. Russia’s default was an unexpected event as most international investors were convinced it was “too big to fail”. Inevitably, therefore, the fear of bankruptcy extended to the two giants of the South American economy: Brazil and Argentina. The conditions that preceded the currency crisis in South America were the same as those of the other currency crises analysed so far. In the decade preceding the crisis, both Brazil and Argentina experienced spectacular economic growth, a relative increase in employment and intense financial activity. Both countries had diligently applied the advice of the IMF by initiating an intense activity of deregulation and privatisation of public enterprises. In particular, IMF reports described Argentina as a solid and dynamic financial reality. Nothing foreshadowed a disastrous economic crisis (Krueger 2002). In both cases, the crisis began with an attack to the national currency. As in the case of Eastern Asia, Brazil and Argentina had also fought inflation through the real appreciation of their currencies, which were anchored to the dollar. In this way, the government authorities were able to avoid restrictive policies. However, the flow of international loans to banks and their lending to individuals and businesses enhanced the domestic debt. Unlike the countries of Eastern Asia, the banking system, especially in Argentina, appeared solid and well supervised. However, in the face of a strong currency attack, Brazil and Argentina had to devalue their currency, generating the well-known chain of effects: increase

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in inflation, cut interest, a brake to production, explosion of the credit bubble, bankruptcy of indebted companies, and, finally, rising unemployment. Brazil recovered quickly, and its production was increasing already in 2001. On the other hand, Argentina entered a five-year period of economic recession that increased inequality and the level of poverty. The case of Argentina has aroused great interest among financial crisis specialists for two reasons: 1) the impact of the crisis, the worst in a period of peace; 2) the duration (Perry and Servén 2003). In the literature there is no agreement on the causes of such a profound financial and economic crisis. The best-known interpretation attributes to the cocktail of the fixed exchange rate and an excessively permissive fiscal policy the cause of the excessive appreciation of the peso, the Argentine currency. The lack of fiscal reform contributed to the growth of the public deficit, prompting an increase in public debt, fed mainly by international investors. The mix between a growing public and private debt and the real appreciation of the international currency produced a monetary imbalance that exploded when the peso was targeted by speculators (Kehoe 2003). Calvo, Izquierdo, and Talvi (2003) argue that two conditions led to excessive dependence on international capital: 1) a relatively closed economy characterised by few exports; and 2) strong liability dollarisation. The accumulation of shocks in the international financial market (the Asian crises, the Russian crisis, and the Brazilian one) caused a repeated series of stops to the inflows of capital, bringing banking and manufacturing activities to bankruptcy. Buscaglia (2004), on the other hand, underlines the importance of qualitative analysis of the economic reforms implemented by Argentina during the 1990s. Although these economic policies were perfectly consistent with the instructions of the IMF and the World Bank and, for this reason, fully entered the logic of the Washington Consensus, in reality the political practice hid old habits. In particular, the author argues that both the populist governments of Menem, which approved the reforms, and the “progressive” ones that succeeded him continued to make extensive use of clientelism that largely fuelled the deficit and public debt, preventing the implementation of a correct tax reform.

5.6 2000–2002: the dot.com crisis The dot.com crisis was a financial crisis, followed by a brief recession, that hit the United States between March 2000 and the first months of 2002. The crisis takes its name from the companies of the new economy, gathered in the Nasdaq index of Wall Street, which were the protagonists of an extraordinary speculative bubble between 1995 and 2000. The crisis was very different from the other crises of the 1990s. During the second half of the 1990s, many internet service companies were incorporated; indeed, the new technologies attracted many investors, especially private ones. When these companies were listed on the stock exchange, their stock price levitated. The Nasdaq, the index that brought together the stocks of dot.com societies, also influenced the stocks of

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traditional companies, whose prices began to rise rapidly from 1998. Following an increase in interest rates, in March 2000 stock prices fell. The collapse of the Nasdaq had intensified since September. The fall of stock prices, with the consequent loss of money by many consumers, caused the fall of the demand and, consequently, the prices collapsed. The financial crisis and recession were very brief, and since early 2002, Wall Street stock prices and the US GDP have risen again (Kraay and Ventura 2007). However, according to some authors, the dot.com crisis is a fundamental episode for understanding the affirmation of a new technological paradigm. For this reason, it is important to delve into the events that led to the creation of the dot.com bubble (Perez 2011). The internet originated from the Arpanet project, which was developed by the United States government through a collaboration between the army and some universities. However, the internet we know today was born in 1989 with the creation of the World Wide Web (www) by Tim Berners Lee. For some years, the web remained a tool available exclusively to ICT experts, but the introduction of browsers would have allowed universal access. Mosaic, the first internet browser, was launched by 21-year-old computer scientist Marc Andreesen. Two years later Andreesen founded the start-up Netscape with Jim Clark, with the aim of further developing the Mosaic browser. Netscape was released in January 1993 and within a few months became the most used browser in the world. In August  1995, Andreesen and Clark decided to launch an initial public offering (IPO). At the time, this choice was quite unusual for three reasons: 1) Netscape was a young company and did not offer metrics usually necessary for success on the stock exchange; 2) the company’s shares had not yet generated a profit; and 3) it was the first time that an IPO was used as a marketing strategy. Indeed, Netscape wanted to establish itself with the public before the launch of Microsoft’s browser. Contrary to the opinion of many financial analysts, Netscape’s IPO was an extraordinary success: starting at a price of $28, the single share had reached $58 by the end of the day. As of December, the price was $170 with a total market capitalisation of $6.5 billion. Many new economy companies (eBay, PayPal, Amazon) followed Netscape’s example. IPOs were used with a triple purpose: 1) raise capital; 2) earn immediate money, through the use of under-pricing; and 3) use stock market entry as a marketing strategy. The dot.com societies attracted new investors using two strategies: 1) obtaining the support of venture capitalist firms, which possessed an excellent reputation, normally required for listing; and 2) offering their shares at a price lower than the real one. In this way, the companies of the new economy achieved extraordinary success, especially with private investors. In the meantime, in fact, the development of the web had favoured the online trading of securities, radically lowering the costs of transactions and consequently increasing the financial flow (Quinn and Turner 2020, 152–169). There is no agreement on when the speculative bubble started. The entry of Netscape on the stock exchange is to be considered simply as the symbolic

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beginning of the rising trend in Nasdaq prices. Some scholars argue that the first symptoms of a speculative bubble appeared as early as 1995 and 1996. In the months that followed the IPO of Netscape, the Wall Street stock prices (fuelled by Nasdaq stocks) rose 34% and then again 25% in 1996. This would be consistent with a famous public speech by then Federal Reserve Chairman Alan Greenspan, who, in late 1996, warned that Wall Street was characterised by an “irrational exuberance”. Nonetheless, other scholars argue that stock prices had been overheating since 1998. In that year, many of the capital previously invested in Asian and Latin American markets returned to the US financial market. In 1998, stocks traded on Wall Street increased by 40%, while those belonging to the Nasdaq index increased by 90% (DeLong and Magin 2006). The rise in stock prices continued in 1999 but did not cause inflation. In fact, consumers were more likely to use their earnings for the purchase of shares than for buying goods. Faced with this situation, the Federal Reserve did not touch its interest rates until 2000. Indeed in 1999, the US government feared that the possible blocking of computer systems at the turn of the year (Y2K problem) could generate a financial panic. For this reason, policies of contraction were avoided until the first months of the new millennium. In March  2000, rates were raised to contain the appreciation of the dollar and the financial markets reacted with a collapse in prices that intensified starting in September of the same year. The collapse of the stock prices led to a decrease in available capital, a contraction of production activity, a decrease in household income, and therefore a recession. Unlike the other crises of the 1990s, the dot.com crisis did not cause a banking crisis. In fact, banks and institutional investors had been sceptical about new economy companies and had not consistently participated in the dot.com mania. It follows that the collapse of Nasdaq did not overwhelm the US banking system. Thanks to the solidity of the banks, companies were able to quickly resume their productive activities. For this reason, despite the succession of extremely negative political events (the 11 September attack), the recession quickly ended in early 2002 (Aliber and Kindleberger 2015, 212–217).

5.7 Interpretation of the 1990s crises At first glance, the crises of the 1990s may appear as national events, distinct and independent of each other. However, some authors, such as Aliber and Kindleberger (2015), described and explained the close connection of financial flows between nations and geographic areas affected by the 1990s crises. According to the two authors, many international investors in the 1980s had invested in the industrial, real estate, and financial businesses listed in the Japanese market. With the 1990 crisis, North American investors redirected their capital mainly to South America and, secondly, to Eastern Asia. Asian investors, in turn, after 1990, had transferred their industrial and financial interest from Japan to Eastern Asia countries. Initially, financial flows consisted of industrial

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investments aimed at relocating production to low-cost countries in both Eastern Asia and South America. These massive industrial investments were then followed by a financial and real estate mania. The Mexican crisis of 1994 had alarmed Canadian and US investors, and their respective governments had taken steps to act as lenders of last resort to safeguard the economic interests within NAFTA. On the contrary, in the face of the more extensive crisis in Eastern Asia in 1997, nothing could have been done by the stagnant economies of Japan and Korea, industrial leaders of the area. Finally, following the further contraction of the economies of South America, overwhelmed by the double recession of Brazil and Argentina, capital came back to North America, attracted by the speculative bubble of the dot.com. In the previous sections, the causes and possible interpretations of the individual crises of the 1990s have been analysed in depth. But using a broader temporal and geographical perspective, how can we interpret the wave of financial crises that rocked this decade? Is there a connection between these large international flows and the financial crises of the 1990s? For liberal economists, the considerable increase of global financial flows was one of the main characteristics of the globalisation of the 1980–1990s, fuelled by the policies of financial deregulation and privatisation of state enterprises. The creation of intense financial activities in Japan, South America, and Eastern Asia during the 1980s and 1990s had therefore been a positive consequence of the application of the neo-liberal policies, initially introduced by Reagan and Thatcher. From a neo-liberal point of view, the financial crises of the 1990s originated from an incorrect application of deregulation policies. In fact, South American and Eastern Asian countries didn’t adopt the right fiscal and banking reform during their own financial de-regulation. On the other hand, for the Keynesians and neo-Marxists, the very origin of the 1990s crisis would instead be identified in the unbridled application of the neo-liberal policies of deregulation and privatisation. According to these economists, all those countries that had opened their arms to the policies of deregulation and privatisation, within a few years had been overwhelmed by a financial mania that was followed by a huge speculative bubble. This was the fate of Japan, the countries of Northern Europe, South America, and Eastern Asia. In other words, the neo-liberal policies were the evil. To these two dominant interpretations we can add a third that we could define as neo-Schumpeterian. In this perspective, the crises of the 1990s would be one of the qualitative indicators of an ongoing technological revolution. In Schumpeterian terms, starting from the 1990s the economy of many countries would have experienced the creative/destructive phase of an economic cycle. Schumpeter originally affirmed that innovation is an endogenous variable and that technological revolutions occur when the simultaneous development of interrelated innovations take place. The nature and effects of these clusters of innovation have peculiar characteristics, but the trend of technological revolutions is cyclical. According to Schumpeter, capitalism is therefore characterised by a double trajectory: 1) linear and progressive, which allows a

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constant improvement of the technological conditions of civilisation as a whole; 2) cyclical and led by a social actor: the entrepreneur-innovator (Andersen 2009). In fact, Schumpeter adds an element that is often very contested by mainstream economics: the business cycle. At the microeconomic level, when an entrepreneur introduces an extraordinary innovation, he creates a new product that is rewarded by the consumer through an increase in demand and the consequent creation of a new market, which will initially be monopolist. Faced with the enormous earnings of the first mover, other entrepreneurs will try to enter the same market by overcoming the entry barriers that, in the meantime, the first entrepreneur has generated. After that, the market becomes an oligopoly and agreements between dominant entrepreneurs are favoured. Earnings, still high, continue to attract other entrepreneurs until a free market is established. Gradually, the market becomes saturated, and the profit margins progressively decrease until the explosion of an overproduction crisis (Schumpeter 1939). When the cycle is not only microeconomic but simultaneously involves entire industrial sectors, then a creative–destructive cycle is generated. This is the basis of the cyclical explanation of technological revolutions. Recently, some Schumpeterian economic historians have connected the creative/destructive cycle with other new concepts such as technological paradigm and large technical system (Freeman and Louça 2001). Following these interpretations, each technological revolution features three successive stages that show the diffusion of the new paradigm at three different levels: 1) the birth of new production sectors and auxiliary services (also defined as technical macrosystems or LTS, large technical system); 2) the “cultural” adaptation to the new paradigm by engineers, managers and consumers; and 3) the creation of norms and institutions suitable for the regulation and diffusion of the paradigm ( Juridicaladministrative regulation and higher education) (Perez 2004). Among Schumpeterian economists, Carlota Perez is the only one who has considered in depth the connection between speculative bubbles and creative– destructive cycles. Unlike other authors who speak of technological revolutions or “waves”, Perez defines each new technological cycle a “surge of development”. Each surge consists of four phases: 1) the irruption of a new technology; 2) the frenzy stage, when investors are attracted to the new technology; 3) the synergy, when new technologies adapt to society; and 4) the maturity, when the technology is definitively accepted. The first two phases constitute the installation period of the new technology, while the latter two constitute the deployment period of the technology itself (Perez 2002, 48). Through a qualitative macro-analysis, Perez noted that the transition from the installation period to the deployment period, defined as a turning point, is characterised by the bursting of a speculative bubble and the beginning of a recession. For example, during the third surge of development featured by the technologies of steel and electricity, the turning point was the 1890s Great Recession, and the turning point of the fourth surge of development (oil and mass consumption) was the 1930s Great Depression (Perez 2002, 78). Following the Perez model, the installation period of a technological paradigm coincides with the deployment

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period of the previous one. For this reason, the turning point is literally the moment when the private and institutional investors are choosing a new technological investment. During the turning point, everyone wants to invest in new technology, and, due to speculators, the euphoria turns into mania and therefore into a speculative bubble. When the financial market overheats too much, the speculative bubble bursts. During the recession, the new technology consolidates its role in society, and it convinces previously undecided investors. In other words, from the ashes of the recession, a new technological paradigm emerged. According to Perez, the dot.com crisis of 2001 marked the beginning of the turning point of the fifth surge, characterised by ICT. ICT irrupted between the 1970s and the 1980s and in the 1990s lived its frenzy period, characterised by financial euphoria (Perez 2002, 112–119). Perez published Technological Revolutions and Financial Capital in 2003, then a few years after the dot.com bubble burst and five years before the 2008–2013 crisis. More than 20 years after that crisis, today a more extensive and complete interpretation can be given by following Perez’s macro-qualitative model. First of all, the 1990s and 2000s can be considered as a turning point for the ICT paradigm. In fact, following Perez, even the previous paradigm, that of oil and mass consumption, had experienced a turning point of almost 20 years (1930s and 1940s). ICT irrupted between the 1970s and 1980s, initiating what some historians have called the third industrial revolution. Japan was the absolute protagonist of this phase, and its industrial companies were among the first in the world to introduce robotics and electronics into production processes. As illustrated in section 5.2, the development of Japanese industry attracted international capital during the 1980s, sparking a speculative mania that erupted in the 1990s. Meanwhile, the United States, following the Japanese example, had invested in the research and development of new technologies up to the introduction of the commercial internet. The crises of the early 1990s pushed industrial companies to relocate their production to those countries where the cost of labour was lower. For this reason, Canadian and US companies moved their plants to Mexico and Eastern Asia. For the same reason, companies from Northern Europe and Japan also moved their production to Eastern Asia. The investment of huge capital in the production of electronic devices in South America and Eastern Asia generated a new speculative mania that led to the financial crises of 1994 and 1997. The crises of Eastern Asia and South America pushed the investors to refocus on the US market, causing the Nasdaq index to skyrocket. As seen in section 5.5, institutional investors, such as banks and large financial firms, did not invest heavily in the dot.com industry. As predicted by Perez, in fact, institutions are slowly adapting to the new technological paradigm, and they remain sceptical of new industrial sectors until the start of the deployment period. This explains the brevity and low intensity of the dot.com crisis, which could therefore be interpreted as an appetiser for the intense crisis that broke out in 2008.

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The evolution of the ICT technology from the introduction of the microprocessor in the 1970s to the incorporation of the dot.com firms in the 1990s are the fil rouge that linked all the main 1990s crises. In other words, the 1990s crises evidenced the explosion of a new technological wave and the affirmation of a new technological paradigm.

5.8 References Alba, Pedro, Amar Bhattacharya, Stijn Claessens, Swati Ghosh, and Leonardo Hernandez. Volatility and Contagion in a Financially-Integrated World: Lessons from East Asia’s Recent Experience. Unpublished paper presented at the PAFTAD 24 Conference Asia-Pacific Financial Liberalisation and Reform, Chiangmai, Thailand, 20–22 May 1998. Aliber, Robert Z., and Charles P. Kindleberger. Manias, Panics, and Crashes: A History of Financial Crises, 7th ed. Basingstoke: Palgrave Macmillan, 2015. DOI 10.1007/978-1-137-52574-1 Andersen, Esben Sloth. Schumpeter’s Evolutionary Economics: A Theoretical, Historical and Statistical Analysis of the Engine of Capitalism. London: Anthem Press, 2009. DOI 10.7135/ UPO9781843313359 Aspe, Pedro. El camino mexicano de la transformación económica. Ciudad de México: Fondo de Cultura Económica, 1993. Budd, Alan. Black Wednesday: A Re-Examination of Britain’s Experience in the Exchange Rate Mechanism. London: The Institute of Economic Affairs, 2004. DOI 10.2139/ssrn.734203 Buscaglia, Marcos A. “The Political Economy of Argentina’s Debacle.” The Journal of Policy Reform 7, no. 1 (2004): 43–65. DOI 10.1080/1384128042000219726 Calvo, Guillermo, Alejandro Izquierdo, and Ernesto Talvi. Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina’s Lessons. Working Paper No. 9828. Cambridge: National Bureau of Economic Research, 2003. DOI 10.3386/w9828 Casar Pérez, José. Transformación en el patrón de especialización y comercio exterior del sector manufacturero mexicano 1978–1987. Ciudad de Mexico: Nacional Financiera, 1989. Chinn, Menzie D. Before the Fall: Were East Asian Currencies Overvalued? Working Paper No. 6491. Cambridge: National Bureau of Economic Research, 1998. DOI 10.3386/w6491 Corsetti, Giancarlo, Paolo Pesenti, and Nouriel Roubini. “What Caused the Asian Currency and Financial Crisis?” Japan and the World Economy, no. 11 (1999): 305–373. DOI 10.1016/S0922-1425(99)00019-5 Cuadra Montiel, Héctor. “Reflexiones sobre las crisis en los 90: México y el sudeste asiático.” Revista del Colegio de San Luis 5, no. 9 (2015): 32–63. DOI 10.21696/rcsl592015403 DeLong, J. Bradford, and Konstantin Magin. A Short Note on the Size of the Dot-Com Bubble. Working Paper No. 12011. Cambridge: National Bureau of Economic Research, 2006. DOI 10.3386/w12011 Drees, Burkhard, and Ceyla Pazarbasioglu. The Banking Nordic Crises: Pitfalls in Financial Liberalisation? Occasional Paper 161. Washington: International Monetary Fund, 1998. DOI 10.5089/9781557757005.084 Dzialo, Mary C., Susan E. Shank, and David C. Smith. “Atlantic and Pacific Coasts’ Labour Markets Hit Hard in Early 1990’s.” Monthly Labour Review 116, no. 2 (1993): 32–39. Ergungor, Ozgur Emre. On the Resolution of Financial Crises: The Swedish Experience. Policy Discussion Paper No. 21. Cleveland: Federal Reserve Bank of Cleveland, 2007. Fischer, Stanley. The IMF and the Asian Crisis. Forum Funds Lecture at UCLA, Los Angeles, 1998. Freeman, Chris, and Francisco Louça. As Time Goes by: From the Industrial Revolutions to the Information Revolution. Oxford: Oxford University Press, 2001.

The 1990s 125 Gardner, Jennifer M. “The 1990–91 Recession: How Bad Was the Labour Market?” Monthly Labour Review 117, no. 6 (1994): 3–11. Hirakata, Naohisa, Nao Sudo, Ikuo Takei, and Kozo Ueda. “Japan’s Financial Crises and Lost Decades.” Japan and the World Economy, no. 40 (2016): 31–46. DOI 10.1016/j. japwor.2016.07.003 Honkapohja, Seppo, and Erkki Koskela. “The Economic Crisis of the 1900s in Finland.” Economic Policy 14, no. 29 (1999): 400–436. DOI 10.1111/1468-0327.00054 Huerta González, Arturo. La globalización, causa de la crisis asiática y mexicana. Ciudad de México: Diana, 1998. International Monetary Fund. World Economic Outlook: Interim Assessment. Washington, DC: International Monetary Fund, 1997. Jonung, Lars. “Lessons from Financial Liberalisation in Scandinavia.” Comparative Economic Studies, no. 50 (2008): 564–598. DOI 10.1057/ces.2008.34 Kanaya, Akihiro, and David Woo. The Japanese Banking Crisis of the 1990’s. IMF Working Paper. WP/00/7. Washington, DC: International Monetary Fund, 2000. DOI 10.5089/9781451842401.001 Kehoe, Timothy J. “What Can We Learn from the 1998–2002 Depression in Argentina?” Scottish Journal of Political Economy, no. 50 (2003): 609–633. DOI 10.1111/j.00369292.2003.05005002.x Kraay, Aart, and Jaume Ventura. “The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account.” In G7 Current Account Imbalances: Sustainability and Adjustment, ed. R. Clarida, 457–495. Chicago: Chicago University Press, 2007. DOI 10.7208/chicago/ 9780226107288.003.0012 Krueger, Anne. Crisis Prevention and Resolution: Lessons from Argentina. Speech at National Bureau of Economic Research (NBER). Conference on The Argentina Crisis, Cambridge, 2002. Lustig, Nora. “México y la crisis del peso: Lo previsible y la sorpresa.” Comercio Exterior 45, no. 5 (1995a): 374–382. Lustig, Nora. The Mexican Peso Crisis: The Foreseeable and the Surprise. Washington, DC: The Brookings Institution, 1995b. Millán Valenzuela, Henio. “Las causas de la crisis financiera en México.” Economía, Sociedad y Territorio 2, no. 5 (1999): 25–66. DOI 10.22136/est001999457 Ortiz, Guillermo. La reforma financiera y la desincorporación bancaria. Ciudad de México: Fondo de Cultura Económica, 1994. Perez, Carlota. Technological Revolution and Financial Capital. Cheltenham: Edward Elgar Publishing, 2002. DOI 10.4337/9781781005323 Perez, Carlota. “Technological Revolutions, Paradigm Shifts and Socio-Institutional Change.” In Globalization, Economic Development and Inequality: An Alternative Perspective, ed. Erik S. Reinert, 217–242. Cheltenham and Northampton, MA: Edward Elgar, 2004. Perez, Carlota. “Finance and Technical Change: A Long-Term View.” African Journal of Science, Technology, Innovation and Development 3, no. 1 (2011): 10–35. Perry, Guillermo, and Luis Servén. The Anatomy of a Multiple Crisis: Why Was Argentina Special and What Can We Learn from It? Policy Research Working Paper No. 3081. Washington, DC: The World Bank Latin America and the Caribbean Region, 2003. DOI 10.1596/1813-9450-3081 Pomerleano, Michael. The East Asia Crisis and Corporate Finances: The Untold Micro Story. Washington, DC: World Bank, 1999. DOI 10.1596/1813-9450-1990 Quinn, William, and John D. Turner. Boom and Bust: A Global History of Financial Bubble, 1st ed. Cambridge: Cambridge University Press, 2020. DOI 10.1017/9781108367677

126  Simone Fari Radelet, Steven, and Jeffrey Sachs. The Onset of the East Asian Financial Crisis. Working Paper No. 6680. Cambridge: National Bureau of Economic Research, 1998. DOI 10.3386/ w6680 Ryozo, Himino. The Japanese Banking Crisis. Basingstoke: Palgrave Macmillan, 2021a. DOI 10.1007/978-981-15-9598-1 Ryozo, Himino. Lessons from the Japanese Banking Crisis. Unpublished presentation at Online seminar hosted by the Financial Stability Institute of the Bank for International Settlements, 22 April 2021b. DOI 10.1007/978-981-15-9598-1_5 Schumpeter, Joseph A. Business Cycles, 1st ed. New York: Mc Graw-Hill Company Books, 1939. Sevilla, Christina R. Explaining the September 1992 ERM Crisis: The Maastricht Bargain and Domestic Politics in Germany, France, and Britain. Unpublished presentation at European Community Studies Associations, Fourth Biennial International Conference, Charleston, 11–14 May 1995. Thiessen, Gordon. Canada’s Economic Future: What Have We Learned from the 1990s? Speech at Canadian Club of Toronto, Toronto, ON, 22 January 2001. Uusitalo, Hannu. Economic Crisis and Social Policy in Finland in the 1990s. Social Policy Research Center Discussion Paper No. 70, 1996. https://www.arts.unsw.edu.au/sites/ default/files/documents/dp070.pdf Walsh, Carl E. “What Caused the 1900–1991 Recession?” Economic Review, no. 2 (1993): 33–48. Wilson, Thomas A., Peter Dungan, and Steve Murphy. “The Sources of the Recession in Canada: 1989–1992.” Canadian Business Economics 2, no. 2 (1994): 3–15. Yellen, Janet L. The Asian Financial Crisis Ten Years Later: Assessing the Past and Looking to the Future. Speech to the Asia Society of Southern California, Los Angeles, CA, 6 February 2007.

6 Great global financial recession (2008–2013) María-Luz De-Prado-Herrera and Luis Garrido-González

6.1  Introduction and background of the crisis After the tremendous growth of the period 1951–1970, the various global crises of the last three decades of the 20th century weighed on economic performance. Per capita income, labour productivity, and activity growth declined (Table 6.1 and Figure 6.1). Unemployment, inflation rates, and external imbalances reached unprecedented levels, causing the process of real convergence to be reversed and the gap between rich and poor countries to widen again (Segura 2010). In the previous growth cycle (2000–2006), world GDP increased by 42%, with annual growth rates never falling below 2.5%. The progress of the world economy was particularly affected by the crisis of the technology companies (the dot.com bubble) and by the 11 September 2001 attacks on the Twin Towers in New York. The responses of the advanced economies with expansionary monetary policies partially propitiated the continuity of the bullish financial cycle, with increases in mortgage and other types of credit, as well as in the prices of certain assets, including real estate, due to the housing bubble in the US and Europe (Banco de España 2017). The answer lay in the control of inflation, which in advanced countries was contained at around 2%, with a peak of 2.4% in 2006. Globalisation and, above all, the growing integration of emerging economies into international trade contributed to this, by increasing competition and limiting the scope for price increases – margins – for goods and services in the more advanced economies. In some emerging economies, significant levels of savings were generated, leading to a fall in nominal and real interest rates – at constant prices – which intensified capital flows to advanced countries. The most interesting consequence was that they caused misalignments in the current account balances of the more developed economies – global imbalances. In 2008, the real estate and credit bubble that had been swelling for years burst in the USA. High-risk financial instruments were created that severely damaged the global economy. The collapse of Lehman Brothers, the investment bank that declared bankruptcy on 15 September 2008, spread to other financial institutions and marked the beginning of the subprime mortgage DOI: 10.4324/9781003388128-6

128  María-Luz De-Prado-Herrera and Luis Garrido-González Table 6.1 World Economic Growth Indicators (annual %)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

GDP

GDP per capita

4.43 2.00 −1.30 4.49 3.33 2.67 2.84 3.11 3.16 2.82 3.39 3.26 2.60 −3.36

3.17 0.74 −2.49 3.24 2.13 1.49 1.66 1.92 1.97 1.62 2.21 2.11 1.48 −4.39

Source: World Bank 2022b. Prepared by author.

Figure 6.1 Absolute and per capita GDP in the world (2007–2020) Source: Table 6.1. Prepared by author.

crisis. As Jason Lennard (2020), associate professor at the LSE, explains, almost immediately “the banking system and the hardest hit economies were bailed out to avoid a total collapse and then an ambitious programme of public debt purchases was implemented to relieve governments and stimulate growth”.

Great global financial recession (2008–2013) 129

In short, as Rodríguez-Canfranc (2020) points out, it was immediately clear that we were facing a Great Recession that, because it was systemic, could spread to the entire financial system. The level of indebtedness was unsustainable in the short term. Moreover, the credit quality of many assets was not well known to investors. It was inevitable that the system would collapse, with the resulting systemic consequences that would be seen later. A great deal of financial mistrust was generated on a global scale as a series of imbalances built up in many economies, not only as a consequence of the real estate and financial bubble, but also because of the high level of indebtedness of private companies and households, and the excessive leverage of much of the financial system. The economy came to a sudden halt due to the accumulation of imbalances, which precipitated the bankruptcy of many indebted companies and financial institutions, as well as the default on private mortgages. But the first phase of the Great Recession of 2008 was short lived, at least in the United States, where the Federal Reserve acted swiftly to lower interest rates from 5% to 0%. In short, the Great Recession that began in 2008 was not an accident that could not have been foreseen. The crisis was caused by an out-of-control financial industry.

6.2 The gestation of the first financial crisis of the 21st century As Pineda-Salido (2011) recalls, the period of deregulation had its origin in the Depository Institutions Deregulation and Monetary Control Act of 1980. A first step was taken by phasing out restrictions on certain interest rates. With the arrival of Alan Greenspan as Chairman of the US Federal Reserve in 1987, the deregulation process intensified, and Wall Street expanded its power of economic influence. Among the most important regulations were the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994 and, above all, the Gramm– Leach–Bliley Act of 1999, which was the most important expression of the extreme liberalisation advocated by Greenspan. Thanks to the latter Act, parts of the regulations contained in the Glass–Steagall Act of 1933 were repealed, and banks were authorised to offer both commercial and investment services. This facilitated the merger of Citicorp and Travelers and opened up the possibility of future large-scale mergers within the financial sector. It also allowed commercial banks to enter the investment banking business and thus take on more risk with their customers’ deposits. The problem was that deregulation and instability begin to go hand in hand in the financial markets. This led to the dot.com crash at the end of the 20th century. Between 1995 and 2000, investment banks contributed to the creation of a price bubble in technology companies listed on the Nasdaq. When these companies reached the peak of their price, which was based on the speculation of the stocks themselves, it all ended in a fall of the same magnitude as the rise of the preceding years (Hayes 2019).

130  María-Luz De-Prado-Herrera and Luis Garrido-González

Another problem arose with derivatives. These are complex financial products developed by investment banks, which accounted for almost all the demand in the market for financial products and services. Their functioning is extremely complicated because they are a financial product whose value is based on the price of another asset. In practice, they allow bankers and various intermediaries to bet on anything. According to Hera (2010), the rise of derivatives brought with it an important debate. At first, some economists and bankers argued that derivatives make markets safer; but just the opposite happened, and markets become more unstable. This is something that neither the political and monetary authorities nor the major investment banks took seriously. They thought that economic prosperity would be unstoppable. According to Stout (2009), this explains why the US Congress passed the Commodity Futures Modernisation Act (CFMA) in 2000, whereby the derivatives market was no longer subject to the regulation of the futures markets and any regulation of it was prohibited, eliminating the existing minimal control. Logically, once this law had been passed, there was an “open bar” to develop and position in the market a whole series of increasingly complex financial products. The definitive push came with the new administration of Bush ( Jr.), who began his first term as US president in 2001. The financial sector strengthened its profitability and power by being highly concentrated. It was controlled by five investment banks (Morgan Stanley, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Bear Stearns), two financial conglomerates (Citigroup, JPMorgan Chase), three insurance companies (AIG, MBIA, AMBAC) and three rating agencies (Moody’s, Standard and Poor’s – S&P – and Fitch). All these were linked by the securitisation food chain, which, through a new system, distributed trillions of dollars in mortgages and other loans to investors around the world (Gallant 2019).

6.3 Development and expansion of the recession from the US The various studies on economic crises agree that the Great Recession of 2008 and the Great Depression of 1929 are similar in the sense that they both originated in the United States, then spread to Europe, and later, to a greater or lesser extent, to the rest of the world. Therefore, 2008 was not about a halt in economic growth. The recovery from the Great Recession occurred with weak economic growth and an effect on employment that persisted over time. The fundamental issue was that, in order to solve the environmental problem, according to the sustainable development forecasts of the World Bank (2021) and the UN, climate change would have to be addressed, and this is incompatible with unlimited economic growth achieved at any price, which, hypothetically, creates an increase in employment. A series of structural variables of the economic crisis would have to be taken into account related to inequality in income distribution, uncontrolled

Great global financial recession (2008–2013) 131

speculative bubbles, or strong international trade and financial imbalances. To these must be added a series of factors linked to US deregulation and monetary policy whose aim was to benefit almost exclusively the financial system (Comín 2011). All this meant that we were facing possibly the worst financial crisis since the Second World War and the Covid-19 health–economic crisis of 2020–2022. The changes in the unemployment rate as a percentage of the active population, shown in Table 6.2, illustrate the most pernicious effect of the crisis. By the end of 2009, some 50 million people were unemployed, 20 million of them in China. Globally, some 200 million fell into extreme poverty. This is when some of the championed economic theories were discredited: that free and efficient markets – accompanied by financial deregulation, ICT, and financial engineering – are enough to ensure that depressive cycles and economic recessions will never return. It can be seen at a glance from Figures 6.2 and 6.3 that the first phase of the Great Recession of 2008–2009 affected the OECD countries, the EU (European Union), the United States, Latin America and the Caribbean, Europe– Central Asia, East Asia, and the Pacific. In contrast, Table 6.2 shows that its impact was less noticeable in South Asia and China. A second impact of the Great Recession is also observed in the unemployment figures; its resurgence between 2011 and 2013 only seriously affected some EU countries, including Greece, Ireland, Portugal, and Cyprus. It is true that it spilled over to Spain and almost as much to Italy. Fontana (2011, 2013) notes that, starting in 1986, the US Federal Reserve, led by Paul Volcker, carried out effective regulatory work to raise interest rates Table 6.2 Unemployment trend (% of total work force) World OECD

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

5.36 5.37 6.01 5.92 5.78 5.77 5.76 5.62 5.62 5.66 5.54 5.36 5.37 6.46

5.80 6.13 8.28 8.42 8.03 8.01 7.92 7.41 6.83 6.42 5.89 5.45 5.39 7.37

EU

7.44 7.20 9.12 9.80 9.83 10.80 11.32 10.84 10.02 9.12 8.14 7.26 6.69 7.37

Spain USA

8.23 11.25 17.86 19.86 21.39 24.79 26.09 24.44 22.06 19.64 17.22 15.26 14.10 15.67

4.62 5.78 9.25 9.63 8.95 8.07 7.38 6.17 5.28 4.87 4.36 3.90 3.67 8.31

Latin Europe– Eastern South China America Central Asia Asia Caribbean Asia Pacific 6.86 6.49 7.48 6.94 6.47 6.39 6.34 6.16 6.69 7.80 8.08 7.95 7.98 10.28

7.17 7.09 8.93 9.01 8.76 8.96 9.19 8.94 8.54 8.07 7.47 6.88 6.68 7.40

Source: World Bank (2022a), ILO modelled estimate. Prepared by author.

4.24 4.36 4.43 4.19 4.09 4.06 4.03 4.00 4.04 3.95 3.83 3.73 3.86 4.34

4.81 4.78 5.06 4.93 4.96 5.08 5.26 5.09 5.24 5.22 5.15 5.10 5.03 6.62

4.30 4.60 4.70 4.50 4.50 4.60 4.60 4.60 4.60 4.50 4.40 4.30 4.60 5.00

132  María-Luz De-Prado-Herrera and Luis Garrido-González

Figure 6.2 Unemployment trends in the world, OECD, European Union, and Spain (% of total active population) Source: Table 6.2. Prepared by author.

Figure 6.3  Total unemployment trends in the US, Latin America–Caribbean, Europe– Central Asia, East Asia–Pacific (% of total labour force) Source: Table 6.2. Prepared by author.

Great global financial recession (2008–2013) 133

to 20% nominal. The aim was to reduce inflation by making credit more expensive. It succeeded in bringing inflation down to 2% by the end of that year (Figure 6.4). But in the summer of 1987, President Reagan decided to introduce deregulatory measures in the US economy – so-called Reaganomics – and appointed Greenspan as Chairman of the Federal Reserve. Under Greenspan’s leadership, there were two decades of uncontrolled expansion, even if they were affected by successive crises that finally led to the Great Recession of 2008. As Figure 6.4 shows, falling inflation rates encouraged the supply of cheap money, which inevitably fuelled a speculative bubble in mortgage prices and other loans, incurred by large international investors and small savers alike. In 2008 they collided with reality. Prices only rebounded internationally in three specific years, 1995, 2008, and 2011; but the general trend remained downward until 2020, after which inflation shot up in 2021–2022. In fact, throughout the last quarter of the twentieth century, banking crises spread again, albeit of a local or regional nature. The preceding deregulation unleashed a wave of speculation in the economy, provoking a series of corrupt practices and scandals, such as so-called junk bonds, which promise high yields for high-risk businesses, or hostile takeover bids, which facilitate the acquisition of companies using credit. One of the biggest scandals in the US was that of savings and loan associations. These were authorised to invest their reserves in risky operations and leave traditional mortgages and other safe but less financially profitable investments on the side-lines. This led to 747 of them going bankrupt, having speculated in the purchase of junk bonds and, sometimes, in fraudulent operations. In 1989, President Bush (Sr.) had to bail them out at a cost to the state of some 125 billion dollars. This economic policy resulted, in the medium and long term, in an increase in the public deficit and, more importantly, in public and private debt. The latter, fuelled by deregulation, encouraged families to go into debt and stop saving. This inevitably led to not only an increase in economic inequality, but also the final burst of debt in the following years, thereby creating the ideal conditions for the 2008–2009 crisis in the US. As Pineda-Salido (2011) points out, in 2004, Henry Paulson (Chairman of the Board of Goldman Sachs), who had previously been Secretary of the US Treasury and a member of the Board of Governors of the International Monetary Fund (IMF), helped lobbyists to put pressure on the US Securities and Exchange Commission (SEC) to allow the leverage limit to be raised. Indirectly, this made it easier for banks, which are theoretically supervised by the SEC itself, to increase the amount of money they borrow and take on more risk. Until 2007, the level of leverage of US banks increased considerably, with some banks having a ratio of more than 30 monetary units of debt for each unit of capital. This meant that the value of their assets was reduced to the point of insolvency.

134  María-Luz De-Prado-Herrera and Luis Garrido-González

Figure 6.4 Inflation, GDP deflation rate (annual %) in the world, OECD, European Union, USA Source: World Bank 2022b. Prepared by author.

Great global financial recession (2008–2013) 135

6.4 The Great Recession of 2008 in the US This section explains how a long period of economic growth (World Bank 2021) led to an underestimation of risks. Real and financial asset prices were set at extremely high levels, as was private sector indebtedness, both financial and non-financial. As a result, in the US, after a phase of strong and prolonged expansion in the housing sector, there was an adjustment beginning in early 2006. But it was not until 2007 that subprime mortgage delinquencies began to rise sharply. 6.4.1 Introduction

In mid-2007, the first signs of the international financial crisis became apparent. At first, however, they were limited to subprime mortgages, a modest segment of the US mortgage market, which accounted for only 13% of all mortgage lending that year. But the borrowers benefiting from these mortgages had low or very low credit ratings. During the up cycle, they were mostly granted on very favourable terms, which increased their potential risk with initial interest rates below market rates and excessive amounts relative to borrowers’ income. Thus, borrowers were trapped in very long-term mortgages. Until then, as Tardi (2020) points out, mortgages were normally granted by local entities that received a monthly payment from their debtors. As the loan was repaid over the long term, these financial entities were prudent with the income they received, trying to minimise their reinvestments. Therefore, when someone requested a loan, the lender was confident that it would be repaid and accepted a return in relation to the agreed interest. But according to Conley (2019), along this chain a four-stage process developed: 1. Mortgages or other loans were granted, such as, for example, for the purchase of a vehicle, for university studies, second homes, etc. 2. Local lenders and financial institutions sold such loans to investment banks, thereby freeing themselves from the risk of default. They earned a significant accounting profit since, by selling the mortgages, they reduce their liability levels and increase their liquidity. This enabled them to make new loans, keeping the chain in constant motion. 3. Investment banks pooled thousands of mortgages and other loans to create complex derivatives called collateralised debt obligations (CDOs). These new financial products also included mortgage-backed securities. CDOs are, in fact, a type of loan made with an underlying asset, so that if the borrower defaults, the holder can retain the asset. 4. Investment banks sold these CDOs to international investors. Consequently, when someone made a mortgage payment, it was not received by the local entity with which they had contracted in the first instance, but by investors anywhere in the world.

136  María-Luz De-Prado-Herrera and Luis Garrido-González 6.4.2 Use of CDS (Credit Default Swaps) and the fall of AIG (American International Group, Inc.)

In reality, the leverage mentioned previously is not the only cause of the collapse of the financial system. The world’s largest insurance company, AIG, had long traded a huge number of derivatives known as CDS (Credit Default Swaps). The way the swaps worked for investors holding CDOs is that the CDS operated as insurance against a hypothetical default of the CDO; in return, investors paid a quarterly fee to AIG. At the end of 2006, the major investment banks, especially Goldman Sachs, decided to continue marketing toxic CDOs, while actively trading against them. At the same time, they continued to state publicly that they considered CDOs to be very safe investments, with AAA (triple-A) ratings comparable to US Treasury bills and, above all, high yields. In turn, Goldman and other investment banks were speculating with CDS, basically betting against CDOs, predicting the collapse of real estate speculation in the short to medium term. When CDOs failed, these banks made money. What is unprecedented about this situation is that the very banks that were selling these products – composed of subprime mortgages, among other debt obligations – thought it best not to warn their clients that they no longer trusted the financial products they themselves were marketing. Instead of telling the truth, they preferred to make money by exposing their clients to risk. It is worth noting that from 2007 onwards, Goldman Sachs had only been marketing CDOs, so the more losses the client suffered, the more profit they the bank made through CDS. But Goldman Sachs was not the only entity carrying out this type of practice as an investment bank; it was common throughout the whole banking sector. This was the case with Lehman Brothers, Morgan Stanley, JPMorgan, and investment funds such as Tricadia and Magnetar, which also bet against CDOs despite the fact that they themselves had designed them to earn billions of dollars that their clients lost. The situation continued to worsen, as CDOs continued to be presented to investors as very safe investments with a top rating (Pinsent 2012). Unlike normal insurance, CDS could be bought from AIG by its own speculative clients to bet against CDOs they did not own. To be clear, this meant that, if one normally took out a single policy to insure things one owned, in the world of financial derivative products it was now possible for any asset insured by its owner to also be insured by someone who did not actually own it. In the absence of regulation of the CDS market, AIG was never obliged to set aside specific amounts of money to cover losses that might arise. The insurer assumed a heavy concentration of risk in the event that a CDO failed to perform, having to return money not only to actual investors, but also to speculators. In the preceding years of strong economic growth, AIG had encouraged its agents and independent financial intermediaries to accept high risks. All of them, spurred on, generated income and profits that earned them bonuses and

Great global financial recession (2008–2013) 137

salary increases. This was a risky business strategy that, in the medium term, would lead to AIG’s bankruptcy. This was almost inevitable, as it had been distorting its compensation system for some time. Its incentive arrangements mainly granted large bonuses based on short-term profits but did not impose penalties for subsequent losses. These bonuses encouraged investment banks and insurance companies to take on risks that could decapitalise them and sink both their own companies and the entire financial system. During the speculative bubble, AIG wrote huge amounts of CDS, most of them on CDOs collateralised by subprime mortgages. By the time the CDOs collapsed across the board, AIG found itself without enough liquidity to pay out all the insurance claims. As early as 2007, AIG’s internal auditors had warned of the disastrous situation in which it found itself, but the company, in view of the profits being made and the dividend payments to its shareholders, refused to have its financial division’s accounts investigated. 6.4.3 Role of rating agencies

Investment banks hired different rating agencies to evaluate the CDOs they offered to their clients. The problem was that, instead of conforming to reality, most CDOs received the triple-A rating, the highest possible rating and therefore the safest. Moreover, the rating agencies, which are paid by the investment banks themselves, never legally assume any responsibility for their ratings if they turn out to be wrong. This is where one of the big problems arose. Most investors did not know what a CDO meant. They believed that the products in which they had invested their savings were very safe and offered a high return, which made them very attractive. The main international rating agencies were, and still are, Moody’s, S&P, and Fitch. They earned billions of dollars by assigning seemingly safe ratings to high-risk financial products. Like investment banks, these rating agencies increased their profits during the bubble period. The rating agencies are, in fact, the actual entities in charge of overseeing the products offered by banks to their clients. If they consider the investment to be too risky, it has to be rated as high risk and, consequently, at a much higher interest rate to offset the risk that the investor may suffer (Menezes-Ferreira and Rodil-Marzábal 2012). This is why it was necessary to pass on the risk with a continuous restructuring and sale of assets, to a point that it was impossible for anyone to determine the real risk of the marketed products. The rating agencies have never admitted this, but it was impossible for them to do their job properly, as they were unable to check the actual risk of the products. The real problem came to light when rating agencies gave triple-A ratings to financial products, despite the fact that they were linked to a high risk of default. The only explanation for this practice is pure greed, i.e., the profit they expected to earn. Despite being unaware of the real risk of the financial products, they chose to enter into the scheme to enrich themselves (Oliete 2012).

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As Ochoa-Mosquera and Del-Palacio-Tornos (2020) explain, investment banks used rating agencies to rate their products, offering them large sums of money if the financial product obtained a triple-A rating. But the system was perverted, because if the banks did not get what they wanted, they turned to other agencies to give it to them. The rating agencies did not alert the supervisory bodies to what was going on. They did not even consider communicating to the investment banks themselves that they should be stricter with their standards, or that they themselves did not actually know the risk of the securities they were rating. As a result, the availability of these funds continued unabated. The irony is that the lawyers defending the rating agencies would later claim, during legal proceedings for their fraudulent actions, that the triple-A ratings were mere opinions and indications. In other words, they argued that investors did not have to follow them. None of the agents involved in the securitisation chain paid particular attention to these facts, and the indiscriminate granting of subprime mortgages to NINJA (No Income, No Job, and No Assets) customers increased dramatically in the run-up to the Great Recession of 2008. Lenders relaxed mortgage conditions, which gave them access to this type of insolvent client, while investment banks only cared about selling CDOs. The more they sold, the more profits they reaped. Instead of creating a system of derivative products with ratings more in line with their risk, they preferred subprime loans associated with higher interest rates. This made them very attractive, and they were given the same ratings as other much safer financial products. This, together with an increase in official interest rates in the US, led to a huge growth in bad loans, a situation that forced debtors to renegotiate subprime loans they could not pay and to slip into a vicious circle of rising prices and interest rates.

6.5 Contagion of the Great Recession in Europe (2010–2011) The downturn in the European real estate sector was tied to the onset of a weakening of the expansionary economic cycle. It led to an upward adjustment of investors’ perception of risk and to declines in the prices of the financial assets originally agreed upon. This affected numerous banking products. As a consequence, some of the main funding markets, including interbank markets, came to an abrupt halt. 6.5.1 The problem of risk premiums

The problems in the financial markets were reflected in the spikes in risk premiums (Figure 6.5) and led to a tightening of private sector financing conditions in the United States, which then spread to other economies, especially the more advanced ones. Eurozone economies were affected, of course, with the Spanish case standing out for its importance (Figure 6.6).

Source: World Bank (2022b). Prepared by author.

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Figure 6.5 Italian and US loan risk premium (prime rate minus Treasury bill rate, %)

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Figure 6.6 Risk premium basis points (bp) of Spain versus US and German risk premiums (referring to December except where indicated) Source: https://datosmacro.expansion.com/prima-riesgo/espana?dr=2021-08. Prepared by author.

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As Carbó and Rodríguez-Fernández (2012) point out, risk premiums are not useful for predicting financial collapse. Many of the instruments and institutions that facilitated the crisis on both sides of the Atlantic had, until the eve of their bankruptcy, the highest rating from rating agencies. In a second phase, the so-called sovereign debt crisis erupted with force in some European countries from 2009–2010 onwards. Several of the peripheral economies then experienced significant downgrades in their sovereign debt ratings. These were clear signs of the deterioration and lack of confidence in the public finances and viability of some these countries’ economies. These included economies subject to bailout arrangements, such as Greece, Ireland, Portugal, and Malta. A little later, other countries such as Spain, Italy, and France become focal points, for not only their own economies, but also the future of the euro. This was inevitable, given their respective sizes and strategic importance. Figures 6.5 and 6.6 for Italy and Spain show a chronological summary of their respective risk premiums, which indicate a deterioration of credit quality in both. Between 2009 and 2012, the risk premium rose for the Spanish economy, and between 2011 and 2014 for the Italian economy. This was accompanied by instability in Greece. Spanish debt was not the only one to suffer at that time, as the Italian risk premium also rose, which reached 420.5 basis points, with a ten-year bond yield of 5.75%. In the case of Spain, on 29 January 2009, the S&P rating agency announced its intention to revise the AAA rating for the Kingdom of Spain, which gave it access to the most exclusive club. A few months later, on 28 May, Fitch became the second agency to withdraw the triple-A rating for Spain, and on September 30 of the same year, Moody’s followed suit and withdrew its triple-A rating for Spanish public debt. In March 2011, Moody’s downgraded its rating to Aa2. Moody’s disrupted the markets with frenzied activity between July and August  2011 by downgrading Portugal and Ireland to junk bond status and dropping Greece’s rating to the penultimate level of Ca. There was also the truly historic and traumatic event of the withdrawal of the US triple-A rating by S&P’s in August. All this led the EU to accuse the rating agencies of inciting speculation and destabilising the eurozone. Germany went so far as to call for measures to limit the power of the oligopoly formed by Moody’s, S&P, and Fitch. In October 2011, in addition to Italy, Fitch announced its decision to downgrade Spain’s rating by two notches to AA. In its opinion, the intensification of the sovereign crisis in the eurozone particularly affected Spain because of its high level of net external indebtedness and the fragility of its economic recovery. The risks of recession and the problems of the Spanish banking system led S&P to follow suit and announce that it was downgrading its rating to doubleA with a negative outlook. Finally, Moody’s downgraded its rating by two notches, from Aa2 to A1 (Carbó and Rodríguez-Fernández 2012). In this environment of uncertainty, in July  2012 the premium ended up reaching 550 bp against the US and 631 bp against Germany (Figure 6.6). This placed Spanish public debt in the “speculative” category.

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From 2008 onwards, wholesale funding markets were effectively closed. This forced financial institutions to deleverage in a disorderly fashion and liquidate their assets. They had to take further losses, which spread to other institutions not a priori exposed. Hedge funds, which had based their high returns on credit-financed investments, were forced to make major divestments. The situation continued to deteriorate, while tensions in the international financial markets increased. More and more institutions were affected. Some of them were subject to government interventions, such as Bear Stearns, Fannie Mae, and Freddy Mac in the US and Northern Rock in the United Kingdom. As is well known, in September 2008, the bankruptcy of the Lehman Brothers investment bank, followed by the nationalisation of AIG by the US government, was a quantum leap in investor distrust. In the days following the bank’s collapse, premiums quadrupled in the interbank market for three-month transactions, rising from less than one nominal percentage point to more than 3.5. The S&P 500 stock index also fell by 28% and its volatility tripled. The US financial system was on the verge of collapse, as reflected in rapidly rising risk premiums in international markets, falling stock prices, and accelerating volatility. What was happening in Europe and elsewhere in the world was that, in a globalised economy with high integration and complex interconnections between financial institutions, instability was spreading to all assets, markets, and economies, generating an enormous global financial crisis. Financing conditions worsened and the credit crunch meant that many companies had to adjust their workforces. This was compounded by a negative wealth effect due to falling real and financial asset prices and heightened uncertainty and distrust, which led to a significant drop in spending by agents and a recession in advanced economies, later transmitted to some emerging economies. In 2009, international trade flows contracted by 10.5% and global GDP fell by 0.1%, which in the case of advanced economies was 3.4%. This is considered to be the largest decline since World War II. 6.5.2 Crisis in the Euro area

Summarising the analysis carried out by the Banco de España (2017), international monetary authorities had been facing tensions by increasing their liquidity supply since 2007, coordinating, although not always, their actions. A good example is that they established currency swaps between the main central banks with the aim of facilitating access to foreign currency by financial institutions. Starting in 2008, three main types of measures were adopted: 1) monetary policy, 2) support for the most affected financial sectors, and 3) fiscal policy: 1. From September 2008, central banks lowered interest rates and coordinated with one another to introduce a series of measures that made the provision of liquidity to financial institutions more flexible, thereby increasing

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the number of institutions that had access to central bank financing. The assets accepted as collateral for monetary policy operations were expanded and maturities were lengthened to provide more liquidity to the market. In addition, some central banks made use of non-conventional instruments. In the case of the EMU (Economic and Monetary Union), the ECB (European Central Bank) changed its policy and lowered the reference rate by 50 bp in October 2008, reaching 3.75%, and in successive steps to 1% in May 2009. The Eurosystem fully met the demand for funds in all open market operations; the maturity of all new eligible collateral was extended; new 12-month maturity operations were implemented and a covered bond purchase programme was developed, including Spanish covered bonds. 2. Governments took further measures to support the banking sector in order to finance and recapitalise it. Deposit guarantees were extended, the state guaranteed bank issues, and public funds were provided through loans and/ or the purchase of high-quality assets. The deteriorating solvency of banks was resolved in many eurozone countries by injections of public capital, including the nationalisation of some institutions and, in other cases, through the acquisition of impaired assets or the introduction of asset value protection programmes for banks. As in the US, in extreme cases, systemically important banks in Europe were rescued, at a cost of US$1.5 trillion in 2010. Finally, the G20 agreed to undertake a reform of the global financial system. 3. Governments adopted policies to stimulate the economy, including both the expansion of public spending and tax cuts, as well as other assistance to the groups and sectors most affected by the crisis. All these policies had their real effect from 2009 onwards and, on average for the G20 countries, contributed 2% of GDP per year in 2009–2010. In the EU, the so-called European Economic Recovery Plan provided a fiscal stimulus of 1.5% of GDP. These programmes were mainly based on measures on the expenditure side through transfers and public investments. Global GDP began to recover smoothly in 2009, with positive growth in the second half of the year, reaching a rate of 5.4% in real terms in 2010. Financial markets stabilised, volatility and risk aversion were significantly reduced, asset prices recovered, and some segments of the capital markets gradually reopened. The recovery was relatively uneven across geographical regions: more consistent in emerging economies, where real GDP grew by around 7% in 2010, especially in Asia, and more subdued in advanced economies. Only the US, at 2.5%, and Japan, at 4.2%, recovered with some energy, while the eurozone remained at 2%. In the EMU, disparities by country were also observed: GDP growth was highest in Germany at 3.9%, and in Finland at 3%; in Spain there was stagnation at 0%, in Ireland at 0.4%, while Greece saw a fall of −5.5%. This was nothing other than the announcement of the arrival of the EMU crisis in the second phase of the Great Recession.

144  María-Luz De-Prado-Herrera and Luis Garrido-González 6.5.3 Sovereign debt and crisis

At the beginning of 2010, the process of economic normalisation in Europe was disrupted when the first symptoms of the sovereign debt crisis appeared in the eurozone. The cause was directly related to the mistrust raised in the final months of 2009 with regard to Greece’s public finances. But it was not only Greece; other European countries had also accumulated macroeconomic and financial imbalances during the previous expansionary cycle in relation to their public finances, private indebtedness, the real estate sector, the exposure of the financial system to both, and the loss of competitiveness of their economies. The EMU’s administrative and institutional apparatus was far from sufficiently developed. It lacked the flexibility to anticipate such problems, by either preventing them outright or establishing clear and transparent rules of procedure in the face of potential crisis scenarios. These latter aspects aggravated the tensions being generated and even transferred them to some member countries that were affected, even though they had not deviated from the recommended stability guidelines. The tensions arose as a result of the Greek fiscal crisis, but initially spilled over to the sovereign debt of economies facing high fiscal and financial vulnerabilities or poor economic growth prospects. The strong interaction of sovereign, banking, and macroeconomic risks led to a sharp rise in risk premiums in the affected countries. These problems also spread to the stock and foreign exchange markets and spilled over to wholesale bank financing. Serious liquidity problems eventually emerged in some institutions and affected the stability of the eurozone’s financial system. An intense debate began on the assistance provided by European institutions to the Greek authorities, which was finally approved in May 2010. It consisted of a package of financial support from EMU countries and the IMF, in exchange for Greece implementing a programme of economic adjustment and fiscal consolidation. The European Financial Stability Facility (EFSF) was also created, which was in place until 2013. This fund was intended to guarantee financial assistance to other countries in similar cases. If we add to all this the publication in July 2010 of the results of stress tests on European banks, it is easy to understand why market tensions began to ease. However, Irish banks soon faced fresh difficulties, with implications for that country’s fiscal position. In autumn 2010, this led to renewed market pressure, with the result that the Irish authorities had to request a new financial support package totalling up to 40% of Irish GDP. However, during 2011, tensions in EMU financial markets continued to intensify. This led to the preparation of a financial assistance package for Portugal, also in coordination with the IMF, which amounted to up to 42% of Portuguese GDP. In view of the Greek macroeconomic deterioration in 2012, the 2010 bailout was reviewed, and a second aid package was implemented, given the lack of confidence in the country’s ability to finance itself in the markets. The first

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two aid packages for Greece represented more than 100% of GDP. Investor pessimism then began to affect other eurozone countries. Contributing to this was the political problem of approving the aid, the poor macroeconomic and fiscal situation in many countries, and doubts about whether or not to include private sector debt in the restructuring of the new financial aid programme for Greece. The breakdown in confidence caused sovereign risk premiums to rise again in the summer of 2011, affecting countries such as Belgium and France, whose economies had been less involved in the crisis until then. Ten-year sovereign spreads vis-à-vis Germany reach a peak in November  2011, in which they reach levels of 189 bp in France, 560 in Italy, 485 in Spain, and 360 in Belgium. While banks held large sovereign debt portfolios, the erosion of these assets in the economically weaker EMU countries complicated the financing of eurozone banks. This increased the risk to the financial stability and economic performance of the most affected countries. It triggered tensions in exchange rates, the stock market, and the interbank market. In this second phase, the Belgian, French, Italian, and Spanish securities market supervisory authorities, in coordination with ESMA (European Securities and Markets Authority), jointly decided to introduce temporary restrictions on short sales of shares by financial institutions. Their objective was quite clear: to impose an orderly functioning of the capital markets and thereby achieve financial stability. 6.5.4 Anti-crisis economic policy

Globally, the performance of economic policies in 2010 and 2011 was very mixed. US monetary policy relied on unconventional stimulus measures, allowing the Federal Reserve to expand its balance sheet with the Quantitative Easing 2 (QE2) programme of staggered purchases of securities and increasing the total disbursed since 2008 to 2.35 trillion dollars, representing 15% of US GDP. In terms of fiscal policy, fiscal stimulus plans were adopted. With regard to EMU monetary policy, there was a preference for slightly reducing its expansionary capacity in the first half of 2011. Fiscal policy turned contractionary from 2010 onwards, in line with the complex situation in sovereign debt markets, and the European institutional framework was reformed. The ECB continued to expand liquidity during 2010, although in May of that year it launched the Securities Market Program, through which it purchased government bonds from countries in order to control and organise the functioning of the monetary policy transmission mechanism. Thus, in the first few months of 2011, tensions eased. The outlook for economic recovery in the area appeared to be strengthening, although inflation rates rose to levels approaching 3%, against a backdrop of rising energy and food prices. Between April and July, the ECB raised its main benchmark interest rate by 25 basis points. This did little good, as, in the face of the worsening sovereign debt crisis in the summer of 2011, EMU monetary policy changed course

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again through the adoption of expansionary measures, including cuts in official interest rates by the ECB. In December  2011, new auctions of three-year long-term loans to credit institutions were held, which were repeated in February  2012. Mandatory reserve requirements were also reduced and the assets eligible as collateral in monetary policy operations were expanded (Banco de España 2017). In short, given the tensions in sovereign debt markets, fiscal policy in the eurozone was contractionary in nature. It was not limited to the countries receiving financial aid but was also applied to the other economies in the area. At the G20 meeting in Toronto in mid-2010, countries agreed to make a considerable effort to reduce their respective public deficits by 2013. In the case of Spain, fiscal consolidation was brought forward to 2010, although in the rest of the eurozone economies it was implemented the following year. The public deficit for the eurozone as a whole, after discounting the effects of the economic cycle, was reduced from 4.3% to 2.1% between 2010 and 2012. Starting in 2010, the EMU undertook a reform of its institutional–administrative design. The sovereign debt crisis revealed the limits of this structure in several respects. First and foremost, it became clear that supervision had been neglected. The EMU had no systematised means to identify and prevent an excessive build-up of macroeconomic imbalances: the prolonged loss of competitiveness, an oversized financial sector with excessive concentration of risk in the real estate sector, heavy private indebtedness, and fiscal imbalances. From 2011 onwards, governance and oversight guidelines were strengthened with various legislative initiatives (Six-Pack, Two-Pack, Fiscal Compact). These initiatives bolstered the Stability and Growth Pact and national fiscal systems. New frameworks were created for the prevention and correction of macroeconomic imbalances, with an emphasis on current account imbalances, indebtedness, and the competitiveness of countries. Finally, a series of macroprudential supervision measures by a European Systemic Risk Board were put into operation. As the EMU had no crisis management and resolution mechanisms in place, in 2010 it temporarily created the EFSF. The aim was to avoid the same situation that occurred with the first Greek bailout plan, which was financed, in an improvised way, with bilateral loans from the member states. Faced with this reality, the ESM (European Stability Mechanism) was established in 2013 as a new permanent body. In the EMU, the need for banking integration was not considered. Consequently, regulatory and supervisory reform was undertaken to implement new prudential regulation and a new European oversight mechanism, the so-called European System of Financial Supervision. 6.5.5 New international economic regulation

The collapse of Lehman Brothers in September 2008 prompted international authorities to react by adopting a series of initiatives, including a reform of

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financial regulation and supervision (Banco de España 2017). To this end, a first summit of G20 leaders, including heads of state and government, was convened in November 2008 in Washington, DC, at which it was agreed to implement urgent and exceptional measures to stabilise financial markets and reform the international financial system. The following summit in London in April 2009 set out the broad outlines of this reform, which can be summarised in three key elements: 1) changes to prudential banking regulation – macroprudential, including a series of measures on the regime for systemically important entities; 2) other regulatory reforms; and 3) provisions for possible bailouts of financial systems. Beginning in 2008, reforms were developed based on a new institutional framework for the international coordination of financial regulation and supervision. These included the activation of the G20 as a forum for discussion and oversight with the summits of leaders and regular meetings of finance ministers and central bank governors; and the creation in 2009 of the FSB (Financial Stability Board), in which the range of participation was broadened to include new countries, including Spain, in addition to the members of the FSF (Financial Stability Forum), its predecessor. Importantly, FSB member countries made a number of commitments, including the obligation to make public their degree of adherence to agreed international financial standards – such as the Framework for Strengthening Adherence to International Standards of January 2010 – to undergo an assessment under the FSAP (Financial Sector Assessment Programme) of the IMF– World Bank every five years, and to submit to the FSB’s periodic peer reviews. The FSB became the main forum for international coordination in the financial sphere. Ministries of Finance, national supervisors, international organisations such as the IMF, OECD, WB (World Bank), and BIS (Bank for International Settlements), as well as other international bodies responsible for setting international standards and norms SSB (Standard Setting Bodies), including the BCBS (Basel Committee on Banking Supervision) or the IASB (International Accounting Standards Board), began to participate in the FSB. The European Commission entrusted the review of the institutional framework for European supervisory regulation to a group of independent experts chaired by Jacques de Larosière. Its Report of the High-Level Group on Financial Supervision in the EU of 25 February 2009, known as the “Larosière Report”, led to the creation of the ESFS (European System of Financial Supervision). It established new European supervisory authorities in charge of microprudential tasks for the banking sector: EBA (European Banking Authority); the securities sector: ESMA (European Securities and Markets Authority); and the insurance sector: EIOPA (European Insurance and Occupational Pensions Authority). All of them replaced, with the rank of “authority”, the former European committees in these same areas. A new institution for macroprudential oversight – the ESRB (European Systemic Risk Board) – was established. The ESFS became operational in January 2011, as did the other new bodies linked to it, although their respective implementing regulations were published in December 2010.

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6.6 Mild impact of the Great Recession in Latin America One can agree with Ocampo (2009a, 2009b) when he notes that, in the case of Latin America, the difference between an economic “recession” and an economic “depression” is never entirely clear. The region had gone through a markedly favourable cycle in 2003–2007, based on a rare combination of a financial boom, high commodity prices, and the arrival of large remittances from migrant workers. But this all came to an end in the course of 2008. 6.6.1 Crisis in Latin America and the Caribbean (2008–2009)

Several economies in the region began to experience a major slowdown, including Colombia, Mexico, Venezuela, and almost all the smaller economies in Central America and the Caribbean. Financing capacity had been shrinking since the third quarter of 2007, coinciding with the US financial crisis. In mid-2008, commodity prices began to fall, although it was not until the global financial meltdown of mid-September  2008 that the most significant problems were unleashed. It began with a credit crunch and a widening of risk spreads (Figure 6.7). Commodity prices then plummeted and some of the demand for these products was lost. Undoubtedly, the latter can be directly linked to the Great Recession in the advanced economies that were supplied with these commodities. Even those Latin American economies that managed to maintain growth until the third quarter of 2008, such as Brazil and Uruguay, eventually ran into difficulties. The peculiarity of the Latin American emerging economies lay in their ability to insulate themselves in the early stages of the crisis, thanks to a renewed rise in commodity prices, as well as a certain degree of security from foreign direct investment in view of the high level of international reserves and persistent demand from the major Asian emerging economies. Another interesting point is that the IMF’s predictions that emerging economies of the developing world would “decouple” from the negative economic trends of the advanced economies failed to come true. This is because, to use the terminology employed by Calvo (2008), in Latin America, this apparent “Indian summer” was followed by a “storm” triggered by the global financial crisis of September 2008. The contagion channels of the crisis in Latin America were based, firstly, on the decline of migrant remittances (Ocampo 2009a, 2009b). According to Latin American balance of payments statistics, their period of accelerated growth ended in 2006. In the following two years, they increased at an average of less than 3%, with a moderate contraction in 2008 for Mexico. In that case, the slowdown in US construction was the main channel of transmission linking the crisis to remittances. A high proportion of workers in the construction sector were Mexican migrants (13.8%), almost triple the average proportion of Mexicans in the US labour market, which stood at 5.1% ( JPMorgan 2008). A similar effect occurred for other Latin American countries due to the

Source: World Bank (2022b). Prepared by author.

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Figure 6.7 Risk premium per loan in Brazil and Uruguay (prime rate minus treasury bond rate, %, logarithmic scale)

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construction crisis in Spain, which was an important destination for Colombian and Ecuadorian migrants. Secondly, there was the deterioration of international trade. During the boom years from 2003 to 2006, there was a 9.3% annual increase in the volume of world trade. However, the growth rate of this indicator proved to be very sensitive to the economic cycle and, consequently, highly volatile. As a result, international trade amplifies not only boom phases, but also downturns in productive activity. Between 2008 and 2009, growth in Latin America and the Caribbean fell by almost 7% in relation to GDP (Figure 6.8). In the region as a whole, the decline in the volume of trade became an effective mechanism for propagating the crisis, but it particularly affected Mexico, Central America, and the Caribbean, whose exports are in manufactured goods and services. At the same time, the fluctuation of world food commodity prices was the main variable determining the behaviour of South American exports (Figure 6.9). The problem was that, as reflected in the ratio of total natural resource revenue to GDP in Latin America and the Caribbean, as shown in Figure 6.10, the prices of mining products, including energy products, performed better than agricultural products. The real price of minerals far exceeded that of the 1970s, although the price of energy products was higher than that of metals.

Figure 6.8 Trade in Latin America and the Caribbean (% of GDP) Source: World Bank (2022b). Prepared by author.

Source: FAO Food Price Index. Prepared by author.

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Figure 6.9 World food commodity prices (deflated according to food price index 2014–2016 = 100)

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Figure 6.10 Total natural resource revenues in Latin America and the Caribbean (% of GDP) Source: World Bank (2022b). Prepared by author.

On the other hand, agricultural products barely reached the levels of those years. Table 6.3 shows how in Latin America the terms of trade favoured the Andean countries, from Venezuela to Chile, which are important exporters of mining products. It should be noted that even in Colombia, two-fifths of its exports consisted of energy products (oil and coal) and metals (nickel and gold). On the other hand, Argentina, Brazil, and Paraguay, which depend on their exports of agricultural products, had only slight improvements in their terms of trade. In all Central American countries plus Uruguay, which are clearly reliant on oil imports, the terms of trade deteriorated, while in Mexico they improved. There, the predominant export of manufactured goods was combined with its foreign sales of oil. As Von Braun (2007) points out, the difference between mining and agricultural products indicates that the decisive factors in the formation of their prices were very different. In the case of energy and mining products, a key issue was the low rate of investment due to low prices from the mid-1980s until the beginning of the 21st century. Strong demand was linked to rapid growth in emerging economies, most notably for metals in China, leading to a recovery in prices. In the face of business expectations, investment revived; but in all mining projects there

Table 6.3 Net terms of trade index: Latin American (LA) and Caribbean Countries (2000 = 100) 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Argentina Brazil Chile Colombia Mexico Peru Paraguay Uruguay Venezuela Average LA–Caribbean

124.4 106.2 198.4 138.0 114.5 181.5 91.5 89.3 293.7 140.1

139.5 110.1 169.6 146.1 116.0 160.0 94.5 96.4 446.6 155.3

140.6 107.3 176.2 138.0 103.0 155.8 915 103.1 272.9 141.3

145.5 124.5 214.4 160.3 110.9 188.4 99.0 102.5 364.4 158.9

160.6 134.2 217.8 183.9 118.4 203.3 113.2 104.9 447.0 178.5

167.1 126.4 202.8 173.8 114.1 197.4 101.5 108.9 455.6 177.6

156.5 123.8 196.4 161.3 114.0 185.7 112.2 110.8 458.6 172.1

153.3 119.6 192.5 146.8 108.2 175.7 125.1 115.1 399.0 167.2

146.3 106.4 187.1 110.5 93.6 163.6 127.3 117.3 218.9 146.1

155.2 109.7 194.1 109.2 87.9 163.1 127.7 120.6 185.5 144.1

150.7 116.1 214.4 127.8 91.8 175.4 126.1 120.1 205.0 149.7

152.6 113.6 209.0 139.7 94.0 174.7 123.4 114.2 217.1 152.8

151.2 114.4 207.4 137.8 94.9 171.7 119.1 118.3 199.9 152.3

Source: World Bank (2022b). Prepared by author.

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Years

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is a relative lag between spending and investment decisions and production increases. In contrast, in the case of agriculture, the imbalance between supply and demand is much smaller. However, there is the impact of high energy prices, which translates into inflation for agricultural products that replace those used as feedstock to produce biofuels. The contraction of international trade was perhaps the most significant transmission mechanisms of the Great Recession of 2008 in Latin America. It could not be otherwise, considering the greater degree of openness that characterised Latin American economies, as seen in the average of the countries included in the Latin American and Caribbean group, depicted in Figure 6.11. However, historical experience teaches that, in order to take advantage of this – as proposed by ECLAC (United Nations Economic Commission for Latin America and the Caribbean) as early as 2008 – more proactive productive development policies must be put in place. Thirdly, there were capital flows. These, in line with Jara and Tovar (2008) or Ocampo and Tovar (2008), show two notable changes in the balance of payments of the seven largest economies selected by them – Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. One was the increase in assets, especially international reserves, but also in direct and portfolio investments abroad, which in all cases exceeded GDP growth in current dollars between 2003 and 2007. The second change was the variation in the composition of liabilities, characterised by a reduction in indebtedness and the presence of liabilities such as treasury shares. The latter included investments in the countries of the region by international investment funds, which also participate in local bond markets. The improvement in the balance of payments was undoubtedly an important asset for the region to cope with the new, unfavourable international conditions. Indeed, in six of the seven largest countries in the region, except Venezuela, the balance of payments surplus in the last quarter of 2006 and the first half of 2007 approached US$113 billion, of which close to US$100 billion was in the capital account, although approximately two-thirds of this went to Brazil and the rest to the other five economies (Ocampo 2007). Monthly Latin American bond issuances in international markets confirm that financing reached its highest level between mid-2006 and mid-2007. Issuances were growing but volatile, and private companies predominated, accounting for about 70%. Corporate issues generally have a higher cost and a shorter average repayment term than government bonds. They also require a faster turnover of debt and are more vulnerable to fluctuations in capital availability. Thus, when the international financial crisis hit, it spread in a complex way over time and had different effects in the various countries in the region. During the third quarter of 2007, the initial impact consisted of a sharp fall in capital flows and bond issuance, a moderate increase in financing costs, and a mild decline in stock markets. Spreads were volatile between July and September  2007, but their effects differed from country to country. They were manifested in an element that can

Source: Table 6.3. Prepared by author.

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Figure 6.11 Average net terms of trade in Latin America and the Caribbean

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be termed “political risk”. The widening and volatility of spreads were greater in Argentina and Venezuela. In Brazil and Colombia, on the other hand, the exchange rate was more sensitive to short-term movements in spreads. Mexico exhibited a strong correlation between both variables, but with much lower levels of volatility. In contrast, Chile and Peru were among the least affected economies. Further market turbulence occurred in June 2008, a precursor to the subsequent financial meltdown in September. It coincided with the fall in commodity prices. The explanation lies in the fact that many of Latin America’s emerging multinationals are suppliers of industrial commodities like steel and cement. Bond issuances plummeted in June and July and disappeared from the market from August onwards. Refinancing costs rose by 0.5%, even before the collapse in September 2008. Spread volatility was not much different. The separation of Argentina and Venezuela from the remaining larger countries was accentuated and, once again, in Brazil and Colombia the exchange rate became more unstable. Stock markets fell sharply. The collapse of mid-September 2008 increased these trends in Latin American economies (Bustillo and Velloso 2009). Credit of all types came to a standstill, capital outflows occurred, and all Latin American currencies depreciated. Exchange rate movements led to losses in the futures markets in the millions, especially in Brazil and Mexico. In addition, accumulated reserves fell in most Latin American countries. Financing costs rose sharply and stock markets experienced losses far in excess of those in advanced economies. Spreads became highly volatile, and all countries increased their correlation with exchange rate movements. Brazil, Chile, and Mexico were the countries with the greatest exchange rate instability. In contrast, Colombia was more stable than in previous economic difficulties. All these problems, as well as the uncertainties linked to the financial crisis in advanced economies, meant that the weakness of private external financing would continue in the short and medium term. In Latin America, however, the balance of payments crisis was less acute as a result of better initial conditions in terms of external indebtedness and the level of reserves. In addition, a favourable side effect of the new context was the easing of pressures for currency revaluation in several countries in the region. 6.6.2 Possible reasons for the lesser impact of the Great Recession in Latin America

According to Quenan (2013), the global economic crisis in Latin America can be seen as interrupting a growth cycle between 2003 and 2007. Baduel, Ordoñez, and Quenan (2010) argue that the Great Recession hit Latin America hard, although the effect was relatively short lived. The recovery began in the second quarter of 2009, and almost no country faced a prolonged external financing squeeze. It is true that between September  2008 and March  2009, risk premiums on sovereign debt rose across the

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board, followed by a recovery in March 2009 thanks to a decrease in risk aversion and abundant global liquidity. By then, capital flows were returning to the region and most Latin American countries had easier access to international credit markets. Between late 2008 and early 2009, the currencies of the countries in the region depreciated sharply, followed by a generalised revaluation from March– April 2009 onwards. In turn, following the slump in local stock markets at the end of 2008, most Latin American financial centres saw a rapid recovery in their operations beginning in March 2009. It is striking – in contrast to the US and Europe – how Latin America avoided being severely shaken by the economic and financial collapse and managed to overcome the worst effects of the Great Recession of 2008. What happened in Latin America overturned the region’s own history, traditionally much more sensitive to crises in advanced economies. In fact, it was the part of the developing world that was most adversely affected by the downturn in industrialised countries after the attacks on the Twin Towers in New York on 11 September 2001 (Lissardy 2018). According to Porzecanski (2018), 2008 was possibly the first time since the independence of Latin American countries that a major economic contraction and financial disaster in the most industrialised economies did not spark a debt, currency, or banking crisis in the region. Part of the explanation lies in the consumption stimulus measures undertaken to cope with the global crisis in Latin America. The differences between the region’s economic recovery and that of developed countries after the collapse of Lehman Brothers are striking. According to data from the World Bank (2022b), while Latin American GDP growth went from −1.9% in 2009 to 5.8% in 2010, OECD countries saw a fall of −3.5% and a rebound of only 2.9%. Latin America’s unemployment rate fell to 7.3% in 2010, while in the USA and the EU it exceeded 9.0%. While two of the hardest hit countries in the immediate aftermath of the crisis were Argentina and Mexico, with GDP contractions in 2009 of −5.9% and −5.3%, respectively, both countries recovered the following year, with Argentina’s economy growing by 10.1% and Mexico’s by 5.1%. Mexico’s recovery was hampered by its strong links to the US economy, which was facing its own difficulties. The crisis in Latin America “did not have the kind of consequences that eventually occurred in Europe, where countries that had never turned to the International Monetary Fund had to ask for its help” (Porzecanski 2018). Another explanation for the lesser impact of the Great Recession lies in Latin America’s commodity exports during the previous years, which provided enough foreign exchange to withstand the 2008 recession. Nor were banks bailed out, as was the case in the US and Europe. The explanation in the case of Latin America lies in the fact that: 1) improvements in banking oversight and some flexibility in exchange rate regimes were encouraged; 2) new bond and equity markets emerged, which financed companies

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and governments during the global upheaval; and 3) finally, but most importantly, the foreign exchange reserves of Latin American Central Banks had increased considerably and countries had managed to reduce their fiscal deficits thanks to commodity price increases, which help to increase export revenues (Porzecanski 2018). Most governments were able to react to the crisis with countercyclical economic policies. This allowed them, as never before, to invest more heavily in infrastructure, stimulate consumption, and transfer income to those most in need. In addition, there was relative political stability, as in several Latin American countries the electorate re-elected presidents or political forces in power, while in the USA and Europe there was greater destabilisation as the crisis led to several changes of government. The emergence of local capital markets provided Latin America with an alternative source of financing. In the United States, on the other hand, the debate has been raging for some time as to whether it would have been better not to have pushed through so many countercyclical measures in the wake of the 2008 crisis. In the words of the 2001 Nobel laureate in economics, Stiglitz (quoted by Lissardy 2018), “The Obama administration made a crucial mistake in 2009 in not pursuing a larger, longer, better-structured and more flexible fiscal stimulus. Had it done so, the US economy’s rebound would have been stronger”. But that view was quickly countered by a former Obama economic advisor, Lawrence Summers (2018): “I cannot see the basis for the argument that a substantially larger fiscal stimulus was feasible. And the effort to seek a much larger one certainly would have meant more delay at a time when economy was collapsing, and could have led to the defeat of fiscal expansion”. Some economists point to Latin America as a good example of what can be avoided with strict banking regulations. Former IMF Director for Latin America, Claudio Loser (2018), stated that “European countries and the US were totally exposed because the financial system was overextended and without sufficient protection. So, the crisis hit there very hard. Ultimately, macroeconomic policy in Latin America was better than in Europe”. But the global landscape changed over the following two years and long before the Covid-19 crisis emerged. Commodity prices fell and the complex economic recovery of the US and its trade war with China emerged, as did new crises in Venezuela and Argentina. It should be noted that the latter country was forced to turn to the IMF to prop up its currency (Loser 2018). Nevertheless, the region as a whole may be prepared for the possibility of new cyclical crises, but it is not advisable to fall into the risk of “complacency”. Latin American and Caribbean countries should never assume that because they have successfully weathered one term of trade shock, they are immune to further recessions in the future.

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6.7 Great Asian recession The crisis reached practically every corner of the planet. In the case of Asia, given China’s role as a global economic dynamo since the final decades of the 20th century, the contraction of its exports at the end of 2008 and the relative stagnation of its economy in the last quarter of the same year show that the global crisis also reached them. The question is to what extent. 6.7.1 Lower impact on China

For some individual countries, particularly those in regions that drive global growth and trade, the 2008–2009 global economic crisis had a different impact. Such was the case for the East Asian economies. China, for example, was at one extreme of the crisis (López-Villafañé 2011). Financially, it was little affected, but because of its strong links to international trade, on which a significant percentage of its economy depends, it could not help but suffer from the fall in demand for its exports. After all, exports represented more than 30% of GDP at the time. A  significant proportion of its manufacturing companies depend on foreign trade. They are responsible for employing large numbers of people, especially migrant labour from rural areas that flock to China’s large coastal cities. The recession in China undermined trade, mainly with the US, Europe, and Japan, which accounted for 50% of the total. As an alternative, the Chinese government supported the expansion of its domestic market, given the loss of a portion of the foreign market, and implemented an economic stimulus plan of US$590 million (Song 2009). This did not prevent a 6.1% decline in GDP in the first four months of 2009. This meant a loss of more than 10 million jobs among migrant workers, and some six million new graduates found it difficult to enter the labour market. China’s real economic and social problem was related to employment, as it faced an annual surge of around 15 million new job seekers. For every percentage point drop in GDP, labour pressure increases, and China cannot afford unemployment if it wants to maintain social stability. This, along with other policy reasons, explains the implementation of anti-crisis measures. It should be borne in mind that, in addition to the global Great Recession, China experienced a series of calamities in those years, such as the first half of 2008, with heavy snowfalls in January, the uprising in Tibet in March, and the Sichuan earthquake in May. The need to maintain high employment rates meant that China’s anti-crisis plan prioritised the export sector. This was the only way to absorb the large amount of available labour, as has always been the case in China’s economy in the past. This is why new tax breaks were granted for foreign trade and, most importantly, the exchange rate of its currency unit – the renminbi issued by the People’s Bank of China, whose basic unit is the yuan – was supported at a very competitive value against the dollar, even though this exacerbated the trade conflict with the US.

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The US authorities have always called for an appreciation of the yuan to make its exchange rate against the dollar more realistic. In fact, the data refute this argument, since between mid-2005 and 2008 the value of the yuan increased by 21% against the dollar. Despite this, the US trade deficit with respect to China not only did not decrease but increased from US$202 billion to US$268 billion. The weakness of the US government’s arguments that a more competitive dollar against the yuan automatically leads to an increase in its exports were evident (Ikenson 2010). Just before the summer of 2008, the Chinese authorities allowed their currency to revalue, but when the severity of the crisis became apparent, they decided to make a competitive devaluation to secure a favourable exchange rate for their export trade. Another important element in China’s trade relations with the US was seen in the latter’s financing through the purchase of its treasury bonds. By 2010, China was holding $800  billion of US debt in financial assets in US capital markets (Ikenson 2010). Asian financing capabilities underpinned the trade relations that the US maintained with these countries through large quantities of annual imports; this was the basis of its trade imbalance. According to Song (2009), using official Chinese statistics, the real figure was closer to US$1 trillion worth of US assets. In other words, the US depended on these types of resources to help fund the enormous bailout and economic stimulus programmes that would enable it to recover its economy. In view of the crisis in the US economy, it made them more dependent on Asian financing and, therefore, became a very powerful instrument in the economic relationship between the Asian powers and the US. It should be noted that the purchase of US government Treasury bonds was not the only form of financing, as other procedures were also used. One was the so-called yen carry trade, which, with near-zero rates in Japan, became a high-risk but high-return investment. It has been estimated that US$1 trillion of this trade was used for subprime loans in the US (Song 2009) and for other investments in emerging markets. Financial dependence on the dollar is an issue that the Great Recession brought back to the fore, especially in the context of China, which would prefer to diversify its financial reserves to reduce the weight of the dollar and trade its goods exclusively in its own currency. Bilateral trade programmes were being offered for this purpose, using this type of model. On the other hand, to solve the problem of dollar dependence in 2009, the governor of the People’s Bank of China proposed the transformation of the IMF’s special drawing rights into a supranational currency that would solve the credibility of a global reserve currency in the short to medium term (Huang 2010). 6.7.2 Asian model for exiting the recession

Asia recovered much faster than other regions, with the exception of Japan, although that country still maintained a powerful industrial and financial

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footprint. By 2009, the aggregate reserves of China, Japan, Singapore, India, and Hong Kong totalled $4 trillion, giving Asia three of the world’s four largest economies: China, India, and Japan. China’s immense domestic financial power, with total deposits of US$7.6 trillion, gave it great resilience. Between January and April  2009, its financial institutions extended credit to industrial enterprises worth some US$760 billion. In addition, aid for low-income residents in urban and rural areas was increased by 48% and 13%, respectively. In addition to this, other forms of support were also provided, such as subsidies for farmers and loans for the purchase of vehicles. China’s credit flow persisted in 2010, with credit growing by 17% to US$1.1 trillion (Song 2009; Information 2010; Xinhua Net 2010). Priority was given to employment growth, wage hikes, and improved productivity. The Great Recession put pressure on other powerful Asian economies, such as South Korea, India, Singapore, and Thailand, forcing them to devalue their currencies. In this way, they were able to increase their exports and provide a quicker solution to their domestic economic recessions (Choong-Lyol 2009). The Japanese economy saw its GDP fall by −6.2% in 2009. The Japanese government launched a series of stimulus packages to revive its economy, amounting to US$270  billion. It should be noted that, despite Japan’s long deflation, it still had formidable financial power, as its domestic savings deposits were worth US$15 trillion. Therefore, without this factor associated with Chinese savings, it is not possible to explain the reasons for the linkage with the US economy, whose disruptions affected them indirectly. 6.7.3 China’s economic policy in the face of the crisis

To cope with the crisis and in order to “guarantee 8% GDP growth” (VillescaBecerra 2015), the Chinese government revised its macroeconomic objectives for 2009. In November  2008, a series of fiscal stimulus measures were announced and implemented in 2009 and 2010. They amounted to 4 trillion yuan (about US$ 586 billion). The objective was to reactivate the economy by stimulating domestic demand, both private and state-owned (Yue 2009). Forty percent of these incentives were invested in infrastructure. Local governments also introduced their own incentive packages amounting to 18 billion yuan. The implementation of these fiscal policy measures was spent mainly on highways and railroads, agriculture, science and technology, environmental protection, education, and health. Investment in railway infrastructure increased by 67.5%, roads by 40.1%, education by 37.2%, and health and social welfare by 58.5% (WTO 2010). This policy of real rescue was accompanied by monetary expansion adopted by the People’s Bank of China to support fiscal policy. The result was the recovery of GDP growth during the third and fourth quarters of 2009 to 8.9% and 10.7%, respectively, which translated into an annual growth rate of 8.7%, that is, 0.7% higher than the planned target.

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The Chinese communist government employed “Keynesian” economic policy measures to sustain the financing of labour-intensive public works. The fall in exports caused by the decline in global demand, especially in the European and North American markets, was countered by boosting domestic demand supported by fiscal spending (Han 2012). Figure 6.12 shows the evolution of China’s GDP since 2007. It is possible to appreciate the marked contrast in 2008 and 2009 due to the effect of the Great Recession; however, compared to what was experienced by the world’s most important economies discussed earlier, it shows that the reduction in economic activity was slight, and even much less than that occurring in the second phase of the crisis during 2012 and 2013. It is true that it is eventually linked to the Covid-19 crisis, which is of Chinese origin, as can be seen in the 2020 data. However, in 2009, as indicated by the IMF (2011), while China’s GDP grew by 9.4%, world output declined by 0.7%. In 2010, GDP increased by 10.6%, while world output remained at 4.5%. This growth was sustained, despite the global financial crisis, because at the end of 2009 China was still producing 2.7 billion tonnes of coal, 51.3 billion metres of garments, 60.5 million tonnes of potassium fertiliser, 518 million tonnes of crude steel, 174 million personal computers, and 93 million colour televisions. And, if that were not enough, China accounted for two-thirds of

Figure 6.12 China: GDP growth rate (annual %) Source: World Bank (2022b). Prepared by author.

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the world’s production of photocopiers, microwave ovens, and footwear, 60% of mobile phones, and 75% of toys (NBS 2010). China mainly exported personal computers, cell phones, clothing, and footwear and imported iron, steel, petroleum and fuel minerals, machinery and equipment, plastics, and optical and medical equipment, as well as organic chemicals. Its main trading partners were the EU, the US, Japan, Hong Kong, and South Korea (China Balance of Trade 2010). However, since China joined the WTO (World Trade Organisation) in 2001, the value of its exports and imports had never fallen as much as in 2009, reaching only 45.2% of GDP, a drop of 12.4% from 2008. Chinese exports were the hardest hit, with a decrease of 16%, while imports fell by 11% (WTO 2011). According to data from the World Bank (2022b), the volume of total world trade decreased in 2009 to 52.4% of GDP, a loss of 8.6 points compared to 2008, and did not return to growth until 2010, at 57%. For its part, China, despite rising by 5.5 points, still accounted for 50.7% of GDP. This was one of the main consequences of the weakening of the dollar and a reduction in consumer spending in the US economy, which, in turn, had a strong impact on China’s exports from the second half of 2008, leading to a relative decline in its international trade. As China’s trade was mainly based on low value-added manufacturing, the reduction in exports brought with it a significant decline in imports. Figure 6.13 shows the behaviour of exports and imports between 2007 and 2020. It shows that they not only stopped growing, but also experienced a clear downward trend during the period in question. Only a slight recovery appeared in 2017, which could barely be sustained in 2018 for imports, but did not prevent the hedge rate from continuing its downward trend at least until 2019–2020, when a modest recovery began. China’s share of world trade, according to the WTO (2011), allowed it in the first half of 2009 to marginally overtake Germany for the first time in the value of its exports (US$521.7 billion for China compared to US$521.6 billion for Germany). It thus became the world’s largest exporter and, in global terms, the world’s second largest importer. But by far the key driver of Chinese growth was FDI (Foreign Direct Investment) (Yao and Kailei 2007). The huge fiscal stimulus packages launched by the Chinese government in 2009 demonstrate the importance of the fall in FDI due to the crisis experienced by the most advanced economies (Yue 2009). China managed to ensure that FDI not only did not decline symmetrically with the rest of the countries, but even turned out to be positive. The total world FDI flow between 2007 and 2009 fell by an average of 41.2% for both inflows and outflows, by 33.8% in the EU and 53.1% in the USA, while in China it increased by 18.2% (Table 6.4). As shown in Figure  6.14, with the exception of 2016, in all years of the series, FDI inflows as a proportion of GDP were higher than outflows. This is evidence of the strength of the Chinese economy and its resilience to the Great Recession that affected all economies globally.

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Figure 6.13 China’s exports and imports of goods and services (% of GDP) Source: World Bank (2022b). Prepared by author.

Table 6.4 FDI, net capital inflows and outflows (% of GDP) World

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

EU

Input

Output

Input

Output

5.0 3.5 2.1 2.6 2.8 2.7 2.7 2.4 3.6 3.5 2.7 1.2 1.7

5.4 4.0 2.2 2.6 2.9 2.2 2.5 2.2 2.9 2.8 2.6 0.8 1.2

10.0 5.1 3.3 3.7 5.6 4.0 4.0 2.8 5.7 5.3 3.7 −0.3 0.8

11.1 7.3 3.9 4.4 5.9 4.0 4.7 3.6 6.8 5.8 4.3 0.8 0.8

USA

China

Input

Output

Input

Output

2.4 2.3 1.1 1.8 1.7 1.5 1.7 1.4 2.8 2.5 1.9 1.0 1.4

3.6 2.3 2.2 2.3 2.8 2.3 2.3 2.2 1.7 1.6 2.1 −0.6 0.6

4.4 3.7 2.6 4.0 3.7 2.8 3.0 2.6 2.2 1.6 1.3 1.7 1.3

0.5 1.2 0.9 1.0 0.6 0.8 0.8 1.2 1.6 1.9 1.1 1.0 1.0

Source: UNCTAD (United Nations Conference on Trade and Development; 2012a); World Bank (2022b). Prepared by author.

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Figure 6.14 FDI in China, net capital inflows and outflows (% of GDP) Source: Table 6.4. Prepared by author.

In contrast to China, in the case of the EU, all years exhibit a deficit in the flow of FDI inflows and outflows, except 2012, when they were equal. With respect to the US with the exception of 2008, when they were equal, in all years between 2007 and 2014 outflows exceeded inflows, although from 2015 onwards the trend changes and FDI inflows outstripped outflows, with the exception of 2017, which saw a slight increase of just 0.2% relative to GDP. In China, a major downward effect on its economy was avoided, as the Chinese central government managed to open up new sectors to FDI, putting in place new laws and regulations, as well as a series of accompanying administrative reforms (Yue 2009). China remained the main destination of foreign capital, which came from more than 190 countries around the world and, at least since the final decade of the 20th century, has been increasing steadily, with the sole exception of a US$13.3 billion drop between 2008 and 2009 (Table 6.5). To explain this situation, there were a number of important features at work in the successful management of the Chinese economy. Banks were very cautious about investing in financial derivatives, thereby managing to limit their risk exposure in the trading of US mortgage-backed securities and mortgagebacked debt obligations. In this way, they maintained robust growth with sound

166  María-Luz De-Prado-Herrera and Luis Garrido-González Table 6.5 China: FDI flow Billions of US dollars 2007 2008 2009 2010

83.5 108.3 95.0 114.7

Sources: NBS (2010); UNCTAD (2012b). Prepared by author.

finances in a very volatile international economic environment. In fact, in 2008, behind the Industry and Commercial Bank of China, three other major Chinese state-owned banks ranked among the top five most profitable banks in the world. China’s central government injected US$19  billion at the end of 2008 in order to reduce overdrawn and under-performing loans in its banking system, and in 2009 it decided to accelerate the reform of the most troubled stateowned bank, the Agricultural Bank of China. The deft economic management of previous years, the high trade surplus, and the progressive flow of FDI helped China to accumulate large foreign exchange reserves, allowing it to tackle the crisis with considerable flexibility and a very expansive fiscal policy. Finally, China’s political model, dominated by the Communist Party, facilitated the ability to react smoothly and quickly to rebuild its economy (Xie 2007). In this way, it demonstrated to the rest of the world its power to ensure economic success. The Chinese example of emerging from the international economic crisis can be explained by a growth strategy based on two essential aspects: international trade and investment. To this can be added the momentum of its hightech industrial sectors (Fu and Balasubramanyam 2005). Macroeconomic factors, the capacity of its financial system, and the interventionist policy of the Chinese central government to stimulate the economy favoured not only recovery, but also a high growth rate. The state’s involvement in the economy is fundamental and partly explains the reasons for the success of the Chinese method to save itself during the crisis. The application of massive incentives to stimulate the economy proved feasible thanks to the strength of a fiscal position supported by the huge trade surpluses accumulated over many years. This was particularly true for 2008, when the stimulus package used was much larger compared to advanced economies in the West. The reforms carried out for the modernisation of the Chinese economy led to a significant improvement in the banking system, especially in relation to the maturity of the securities portfolio. The system has one of the largest

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foreign exchange reserves in the world, amounting to US$2.4 trillion at the end of 2009. Falling commodity and food prices during 2009 helped boost China’s imports. Falling oil prices allowed them to increase their reserves, while the global shortage of financial resources reinforced their foreign investment strategy. Moreover, as the Chinese financial system was not too closely connected to the international market, its economy did not experience the most damaging effects of the global financial crisis. But state intervention was crucial for the management of the financial market in terms of maintaining a very cautious position in deciding where and in what to invest.

6.8 Conclusions The Great Recession of 2008–2009 had different economic impacts. It was triggered in the US economy by the unrecovered debts of the so-called subprime mortgages. These spread first throughout its financial system and then around the world through credit networks. Ultimately, it affected demand in the US with the consequent loss of employment and investment. The result was a severe economic recession that spread through not only financial channels, but also trade with other countries. One of the main challenges for the US was that it had to rebuild its capacity to grow and create jobs. Likewise, it had to control its borrowing capacity as well as its fiscal deficit. The latter represented the main difference from previous US recessions, in terms of the burden of indebtedness on subsequent growth. All economies, in both Latin America and Asia, placed the concept of trade policy as a strategic focus rather than subordinating it to a development policy. In Latin America, the fall in the terms of trade was well managed, and China was able to confront the Great Recession thanks to its enormous financial power. But it is also true that, although the economies of Latin America and China fared well in the critical juncture of the global crisis, they face structural problems that cannot be avoided in the future. The most important of these is inequality between urban and rural areas, where per capita income in cities is much higher than in rural areas. Another problem is the unsustainable exploitation of their natural resources. Last but not least, there is the dilemma of corruption and the democratic deficit in the political–institutional sphere. From a historical perspective – and before the Covid-19 crisis – the years 2008 and 2009 turned out to be among the most difficult years that economic globalisation had faced in a long time. Almost none of the most advanced European economies escaped sharp declines in economic growth. However, the EU’s economic model and the appropriate direction of its economic policy avoided the worst consequences of the first phase of the Great Recession and enabled a recovery in the second phase from 2012 to 2013, defusing the most negative consequences of the crisis that began in 2008.

168  María-Luz De-Prado-Herrera and Luis Garrido-González

6.9 References Baduel, Bénédicte, Daniela Ordóñez, and Carlos Quenan. Note Mensuelle Amérique latine. Paris: Natixis, 2010 (Quoted by Quenan 2013). Banco de España. Informe sobre la crisis financiera y bancaria en España, 2008–2014, 2017. Accessed 9 February 2022, www.bde.es/f/webbde/Secciones/Publicaciones/OtrasPubli caciones/Fich/InformeCrisis_Completo_web.pdf Bustillo, Inés, and Helvia Velloso. The Global Financial Crisis: What Happened and What’s Next. Washington, DC: ECLAC Office in Washington, 2009. Accessed 10 F ­ ebruary 2022, https://repositorio.cepal.org/handle/11362/37857 Calvo, Guillermo. La super-crisis subprime: Claves para entenderla y navegarla. Presentation at the Corporación Andina de Fomento workshop on The Global Financial Crisis and Its Impact on Latin America, Caracas, 1 December 2008 (Quoted by Ocampo 2009b: 10, 32). DOI 10.18356/9b28fc47-en Carbó Valverde, Santiago, and Francisco Rodríguez-Fernández. Las agencias de calificación y la imagen de España, 2012. Accessed 8 February 2022, www.funcas.es/wp-content/uploads/ Migracion/Articulos/FUNCAS_PS/016art05.pdf China Balance of Trade. Trading Economics, 2010. Accessed 9 February 2022, www.trading economics.com/china/balance-of-trade Choong-Lyol, Lee. The Impact of Global Financial Crisis on Asia and Its Recovery. Paper presented at the Conference Global Crisis/Global Research: International Perspectives on Economic Turmoil. Munk Centre for International Studies. University of Toronto, Toronto, ON, 15–16 October 2009 (Quoted by López-Villafañé 2011). Comín, Francisco. Historia económica mundial: De los orígenes a la actualidad. Madrid: Alianza, 2011. Conley, Paul. “Collateralized Debt Obligations and the Credit Crisis”. The Balance, Bond Investing, 2019. Accessed 7 February 2022, www.thebalance.com/cdos-credit-crisis-417122 Fontana, Josep. Por el bien del imperio: Una historia del mundo desde 1945. Barcelona: Pasado & Presente, 2011. Fontana, Josep. El futuro de un país extraño: Una reflexión sobre la crisis social de comienzos del siglo XXI. Barcelona: Pasado & Presente, 2013. Fu, Xiaolan, and Vudayagiri N. Balasubramanyam. “Exports, Foreign Direct Investment and Employment: The Case of China.” The World Economy 28, no. 4 (2005): 607–625. DOI 10.1111/j.1467-9701.2005.00694.x Gallant, Chris. “What Is Securitization?” Investopedia, Investing Essentials, 2019. Accessed 7 February 2022, www.investopedia.com/ask/answers/07/securitization.asp Han, Miao. “The People’s Bank of China During the Global Financial Crisis: Policy Responses and Beyond.” Journal of Chinese Economic and Business Studies, no. 10 (2012): 361–390. DOI 10.1080/14765284.2012.724982 Hayes, Adam. “Dotcom Bubble.” Investopedia Market News, 2019. Accessed 7 February 2022, www.investopedia.com/terms/d/dotcom-bubble.asp Hera, Ron. “Forget About Housing, the Real Cause of the Crisis Was OTC.” Derivatives: Business Insider, 2010. Accessed 7 February 2022, www.businessinsider.com/bubblederivatives-otc-2010-5?IR=T Huang, Yiping. “The Future of the International Currency System and China's RMB.” EABER Newsletter, March 2010. Accessed 9 February 2022, https://eaber.org/wp-con tent/uploads/2011/05/EABER_SABER_Newsletter_2010_03_0.pdf Ikenson, Daniel J. “Appreciate This: Chinese Currency Rise Will Have a Negligible Effect on the Trade Deficit.” Free Trade Bulletin, no. 41 (2010); Cato Institute, Center for Trade Policy Studies. Accessed 9 February 2022, www.cato.org/free-trade-bulletin/ appreciate-chinese-currency-rise-will-have-negligible-effect-trade-deficit

Great global financial recession (2008–2013) 169 IMF (International Monetary Fund). World Economic Outlook. September  2011: Slowing Growth, Rising Risks. Washington, DC: IMF, 2011. Accessed 8 February 2022, www.imf. org/en/Publications/WEO/Issues/2016/12/31/Slowing-Growth-Rising-Risks Información. “Información de la Comisión Reguladora Bancaria de China.” Xinhua, no. 21 (2010) (Quoted by López-Villafañé 2011). Jara, Alejandro, and Camilo Tovar. Monetary and Financial Stability Implications of Capital Flows in Latin America and the Caribbean. BIS Papers No. 43. Basel: Bank for International Settlements, 2008. Accessed 10 February 2022, www.bis.org/publ/bppdf/bispap43.htm JPMorgan. “Determinants of Mexico’s Remittances from the U.S.” In Global Data Watch. New York: JPMorgan, 17 October 2008 (Quoted by Ocampo 2009a). Lennard, Jason. Statements from Cueto, José Carlos. “De la Gran Depresión al estallido de 2008: Cómo se resolvieron 4 grandes crisis económicas del pasado (y qué soluciones se podrían aplicar en la del coronavirus).” BBC News Mundo, 21 April  2020. Accessed 7 February 2022, www.bbc.com/mundo/noticias-52308022 Lissardy, Gerardo. “Cómo América Latina salió antes que las economías desarrolladas de la Brutal Crisis financiera de 2008.” BBC News Mundo. New York, 17 September  2018. Accessed 8 February 2022, www.bbc.com/mundo/noticias-america-latina-45528505 López-Villafañé, Víctor. “La crisis y sus repercusiones globales: El Este de Asia y América del Norte.” Relaciones Internacionales, no. 40 (2011): 243–250. Loser, Claudio. Statements from Lissardy, Gerardo. “Cómo América Latina salió antes que las economías desarrolladas de la Brutal Crisis financiera de 2008.” BBC News Mundo. New York, 17 September  2018. Accessed 8 February  2022, www.bbc.com/mundo/ noticias-america-latina-45528505 Menezes-Ferreira Jr., Vicente, and Óscar Rodil-Marzábal. “La crisis financiera global en perspectiva: génesis y factores determinantes.” Revista de Economía Mundial, no. 31 (2012): 199–226. NBS (National Bureau of Statistics of China). China Statistical Yearbook 2010. Beijing: China Statistics Press, 2010. Accessed 8 February 2022, www.stats.gov.cn/tjsj/ndsj/2010/ indexeh.htm Ocampo, Jose Antonio, and Camilo E. Tovar. External and Domestic Financing in Latin America: Developments, Sustainability, and Financial Stability Implications. Workshop on Debt, Finance and Emerging Issues in Financial Integration New York, 8–9 April 2008. Accessed 10 February  2022, www.un.org/en/development/desa/usg/statements/uncat egorized/2008/04/welcome-workshop-on-debt-finance-and-emerging-issues-in-finan cial-integration.html Ocampo, Jose Antonio. “The Macroeconomics of the Latin American Economic Boom.” CEPAL Review, no. 93 (2007): 7–28. DOI 10.18356/bd4f042a-en Ocampo, Jose Antonio. “Latin America and the Global Financial Crisis.” Cambridge Journal of Economics, no. 33 (2009a): 703–724. DOI 10.1093/cje/bep030 Ocampo, Jose Antonio. “Impactos de la crisis financiera mundial sobre América Latina.” Revista CEPAL, no. 97 (2009b): 9–32. DOI 10.18356/341cc175-es Ochoa-Mosquera, Jorge, and Francisco de Borja Del Palacio Tornos. Crisis financiera de 2008: causas, consecuencias y situación actual del sistema financiero. Final Degree Project. Comillas Pontifical University, 2020. Accessed 8 February  2022, http://hdl.handle. net/11531/37670 Oliete, Beatriz. “El papel de las agencias de calificación crediticia en la Crisis (I).” Empresa Actual.com: Espacio de actualidad recursos, 2012. Accessed 8 February 2022, www.empresa actual.com/el-papel-de-las-agencias-de-calificacion-crediticia-en-la-crisis-i/ Pineda-Salido, Luis. “La crisis financiera de los Estados Unidos y la respuesta regulatoria internacional.” Revista Aequitas: Estudios sobre historia, derecho e instituciones 1 (2011): 129–214.

170  María-Luz De-Prado-Herrera and Luis Garrido-González Pinsent, Wayne. “Credit Default Swaps: An Introduction.” Investopedia, Trading Instruments, 2012. Accessed 8 February 2022, https://finance.yahoo.com/news/credit-default-swapsintroduction-161254036.html Porzecanski, Arturo. Statements from Lissardy, Gerardo. “Cómo América Latina salió antes que las economías desarrolladas de la Brutal Crisis financiera de 2008.” BBC News Mundo. New York, 17 September  2018. Accessed 8 February  2022, www.bbc.com/mundo/ noticias-america-latina-45528505 Quenan, Carlos. “América latina frente a la crisis económica internacional: Buena resistencia global y diversidad de situaciones nacionales.” IdeAs 4 (2013). DOI 10.4000/ideas.780 Rodríguez-Canfranc, Miguel. “De la Gran Recesión a la Gran Pandemia: Diferencias entre la crisis de 2008 y la de 2020.” Web del BBVA, 2020. Accessed 23 January 2022, www.bbva.com/es/de-la-gran-recesion-a-la-gran-pandemia-diferencias-entre-la-crisisde-2008-y-la-de-2020/ Segura, Julio. “La economía mundial entre 1973 y el siglo XXI: El final del crecimiento dorado.” In Historia económica mundial siglos X-XX, ed. Francisco Comín, Mauro Hernández, and Enrique Llopis, 391–432. Barcelona: Crítica, 2010. Song, Guoyuo. 2009. China Under the Financial Crisis: Impacts and Reactions. Paper presented at the seminar Global Crisis/Global Research: International Perspectives on Economic Turmoil. Munk Centre for International Studies, University of Toronto, Toronto, ON, 15–16 October 2009 (Quoted by López-Villafañé 2011). Stout, Lynn A. How Deregulating Derivatives Led to Disaster, and Why Re-Regulating Them Can Prevent Another. Cornell Law Faculty Publications Paper 723, 2009. Accessed 2 April 2022, http://scholarship.law.cornell.edu/facpub/723 Summers, Lawrence. Statements from Lissardy, Gerardo. “Cómo América Latina salió antes que las economías desarrolladas de la Brutal Crisis financiera de 2008.” BBC News Mundo. New York, 17 September  2018. Accessed 8 February  2022, www.bbc.com/mundo/ noticias-america-latina-45528505 Tardi, Carla. “Collateralized Debt Obligation (CDO).” Investopedia, Trading Skills & Essentials, 2020. Accessed 7 February 2022, www.investopedia.com/terms/c/cdo.asp UNCTAD. World Investment Report 2008–2021, 2012a. Accessed 9 February 2022, https:// unctad.org/topic/investment/world-investment-report UNCTAD. Trade and Development Report, 2012b. Accessed 9 February 2022, https://unctad. org/publications-search?f[0]=product%3A394 Villezca-Becerra, Pedro A. “Crecimiento económico de China durante la crisis financiera mundial.” Nóesis: Revista de Ciencias Sociales y Humanidades 24, no. 48 (2015): 126–143. DOI 10.20983/noesis.2015.2.5 Von Braun, Joachim. The World Food Situation: New Driving Forces and Required Actions. Food Policy Report. Washington, DC: International Food Policy Research Institute, 2007. DOI 10.2499/0896295303 World Bank. World Development Indicators: Database, 2021. Accessed 16 December  2021, https://databank.bancomundial.org/source/world-development-indicators World Bank. Unemployment, Total (% of Total Labor Force) (Modeled ILO Estimate), 2022a. Accessed 8 February 2022, https://datos.bancomundial.org/indicator/SL.UEM.TOTL.ZS World Bank. Agricultura y Desarrollo Rural, 2022b. Accessed 7 February 2022, https://datos. bancomundial.org/indicator WTO. Trade Policy Review: Report by the Secretariat, China. Geneva: WTO. wt/tpr/s/230, 2010. Accessed 8 February 2022, www.wto.org/english/tratop_e/tpr_e/s230-00_e.doc) WTO. International Trade Statistics 2011, 2011. Accessed 8 February 2022, www.wto.org/ english/res_e/statis_e/its2011_e/its11_toc_e.htm

Great global financial recession (2008–2013) 171 Xie, Tao. The Model of Democratic Socialism and China’s Future. EAI Background Brief 472. Singapore: East Asian Institute/National University of Singapore, 2007 (Quoted by Villezca-Becerra 2015). Xinhua Net [online], 2010. Accessed 4 April 2022, https://english.news.cn/home.htm Yao, Shujie, and Wei Kailei. “Economic Growth in the Present of FDI from a Newly Industrializing Economy’s Perspective.” Journal of Comparative Economics 35, no. 1 (2007): 211–234. DOI 10.1016/j.jce.2006.10.007 Yue, Yunxia. “China’s Protective State Measures in the Crisis Era: Motivation and Effect.” In The Unrelenting Pressure of Protectionism: The 3rd GTA Report. A  Focus on the AsiaPacific  Region, ed. Simon J. Evenett, 79–88. London: Centre for Economic Policy Research, 2009.

7 Global economy vs. Covid-19 pandemic Mariano Castro-Valdivia

7.1 Introduction Economic history shows that the economy is cyclical. Humanity is fated to live with economic crises. Sometimes the severity of these crises generates global recessions (Matés-Barco 2022; De Prado Herrera 2022). This chapter addresses the recession caused by Covid-19 from a global perspective. But it also performs a disaggregated analysis of the economic situation in terms of the development level of countries provided by the International Monetary Fund (IMF) and divided into two large groups: 1) advanced economies and 2) emerging markets and developing economies, encompassing 39 and 156 countries respectively. For this study, we have analysed the publications of the IMF (2020a, 2020b, 2020c, 2021a, 2021b, 2021c, 2022a, 2022b, 2022c) and the World Bank (2020, 2021, 2022). In addition, we have consulted specific papers, such as those by Warwick J. McKibbin and Fernando Roshen (2020), Adam Tooze (2021), and James K. Jakson (2021), among others. We have also visited the websites of the World Health Organization (WHO), www.who.int/, the International Labour Organization (ILO), https://www.ilo.org/global/lang--en/index.htm, and the Organisation for Economic Cooperation and Development (OECD), www. oecd.org/, where relevant information for this chapter has been found. This study is structured in six sections. After this introduction, the second section summarises the origin and spread of the Covid-19 pandemic and the policies of control implemented to try to eradicate it. In sections three and four, we address how the global economy has evolved in the face of the Covid19 pandemic, disaggregating the analysis into the two groups proposed by the IMF. The third section focuses on the state of the economy before the pandemic, while the fourth section explains how the economy has evolved since 2019. This is followed, in the fifth section, by an assessment of the effects that the pandemic has had on the global economy and on its future. Finally, the chapter closes with a section noting the references used.

7.2 The Covid-19 pandemic Little more than a century has passed since the beginning of the Spanish Flu pandemic in 1918, which is estimated to have affected more than 1.8 billion DOI: 10.4324/9781003388128-7

Global economy vs. Covid-19 pandemic 173

people between 1918 and 1920, killed between 50 and 100  million people and had a fatality rate of between 10% and 20%. Since that time, there have been several global health crises, but none as serious as the Spanish flu and the Covid-19 pandemic we are currently battling. The virulence of the SARSCoV-2 virus set off all the alarm bells and forced exceptional and never-beforeconsidered measures to be taken at a global level to control the pandemic. 7.2.1 Origin and spread of Covid-19

In December  2019, the disease was detected in the city of Wuhan (Hubei province, China). In January 2020, the causative virus was identified, and the epidemic had by then spread to 18 countries. On 11 March 2020, the WHO, concerned by the alarming levels of spread of the disease and its severity, categorised SARS-CoV-2 as pandemic. At that time, there were already 118,000 cases in 114 countries and 4,291 deaths, giving a case fatality rate of 3.63%. In just three months, the disease had spread across the globe. The impossibility of combating the disease with existing drugs, the high degree of contagion, and its lethality, together with overcrowding in health care facilities, forced the population to confine themselves to their homes and practice social distancing. These measures were seen as the only way to control the pandemic. This led to the paralysis of the world economy and a severe economic recession in the second quarter of 2020 that affected the entire planet. Using the WHO Coronavirus (Covid-19) Dashboard data, available at https://COVID19.who.int/, we will describe how the disease evolved globally. By the end of that quarter, June 2020, the situation appeared to be under control and the de-escalation of lockdowns began. But that optimism was short lived, as a new wave of infections began to sweep across the globe within weeks due to reinfections and the emergence of new variants of the virus. By 30 June 2020, 10,474,928 cases had been detected and 552,011 people had died worldwide from the disease, with a case fatality rate of 4.98%. During the second half of 2020, hope for combating the disease focused on the development of vaccines. In record time, several vaccines offering protection against the disease appeared (Deb et  al. 2022). From 4 December 2020, when the first doses of vaccine were given, until 30 September 2022, 12,767,033,221 vaccine doses were administered worldwide. The global incidence of the disease as of 31 December 2020 was 82,936,820 cases and 1,928,535 deaths, with a case fatality rate of 2.33%. After almost a year of fighting the disease, the situation seemed to be under control by the health authorities. The year 2021 was seen with optimism, despite the average number of weekly infections remaining at around 400,000 cases and the average number of weekly deaths around 10,000; in fact, the death toll in some weeks in January and May  2021 was dramatic and reached more than 14,000 deaths. By 31 December 2021, the total number of cases worldwide was 287,113,573 and the number of deaths was already 5,450,457, bringing the case fatality rate to 1.90%.

174  Mariano Castro-Valdivia

The end of 2021 saw the emergence of a new variant of the virus – Omicron – less lethal but more contagious, which exponentially increased the global spread of the disease. As of 31 January 2022, there were 374,052,553 cases worldwide and the number of deaths was 5,686,820, bringing the case fatality rate of the disease down to 1.52%. During 2022, the pace of global vaccination continued to increase, although eradicating the infection will require vaccination rates to reach similar levels worldwide to prevent the emergence of new strains. As long as this uneven situation persists, the possibility of a new wave of the disease will remain. The global pandemic situation as of 30 September  2022 is as follows: 614,725,616 cases, 6,525,172 deaths, and a 1.06% case fatality rate. The results show that, after 30 months of fighting the pandemic, humanity seems to be winning the battle against the virus. 7.2.2 Pandemic control policies

The Covid-19 pandemic forced an unprecedented change in the way humanity lived. The situation was considered so serious by the authorities that global priorities changed. Politicians, faced with the available information, opted for policies aimed at containing the disease, as that seemed the only way to stop it, and prioritised public health over the economy (Sarkodie and Owusu 2021). Since the declaration of the pandemic on 11 March 2020, the political management of the pandemic has adapted to events. During the first three months of the pandemic, the vast majority of the world’s governments opted for mass lockdowns and the confinement of people to their homes. This meant the suspension of formal education and the paralysis of all non-essential economic activity. In order not to collapse the economy, governments had to activate policies to protect the public, including financial aid and subsidies, in order to maintain social cohesion and avoid anarchy. To this end, the IMF and the World Bank used various financial instruments to finance these compensatory policies for the population. The IMF significantly increased the issuance of special drawing rights (SDRs) during 2021 and the World Bank increased its lending in this period, especially in the geographical regions of Africa and Latin America and the Caribbean. The implementation of these policies led to a drastic reduction in global output in the second quarter of 2020 and generated a sharp misalignment in goods and services markets that forced a change in policy in the face of the Covid-19 pandemic. Policy now had to strike a new balance to keep the disease under control while still generating economic growth to sustain the population. During the second half of 2020, each country, depending on its health situation, implemented policies to bring its economic indicators back to prepandemic levels. GDP growth data for the third quarter were excellent, but not for the fourth quarter of 2020, as Covid-19 reinfections and the emergence of new strains of the virus after the summer made it necessary once again to limit the mobility of people and restrict economic activity until vaccines to prevent infection were available.

Global economy vs. Covid-19 pandemic 175

The other major global political commitment was the search for an effective vaccine. All global authorities committed to funding research, and this effort led to several vaccines being licensed by different national drug agencies within ten months. Vaccinations began in December  2020 and became widespread in advanced economies during the first half of 2021. Both the lack of industrial capacity to produce enough vaccines for a global immunisation plan and the economic interests of manufacturing laboratories have hindered efforts to control the disease. The global health situation with regard to the Covid-19 pandemic during 2021 was very uneven. Disease incidence rose sharply in the first quarter of the year in the Americas and Europe, in the second quarter in South-East Asia, and in the final quarter again in Europe. In this context, misalignments in global goods and services markets increased, leading to problems of product shortages and inflationary pressures. Faced with this situation, national economic policies sought to recover the economy as long as the basic health indicators of the pandemic were under control. During 2022, national policies against the pandemic have attempted to correct these market imbalances and compensate for the large economic inequalities that the economic situation has generated among the most disadvantaged population, a situation that has been aggravated by the war between Russia and Ukraine. This latter factor is significantly influencing the recovery potential of the world economy and side-lining the political concern over the Covid-19 pandemic, which for the time being is losing importance in the face of the political inability to resolve this conflict, a state of affairs that is generating uncertainty about the future of humanity.

7.3 The global economy before the pandemic IMF expectations for global economic growth in 2020, before the onset of the Covid-19 pandemic, estimated that GDP would expand by 3.4%. The IMF’s periodic publication of the World Economic Outlook (WEO), in April, July, and October, allows us to track the evolution of the world economy and its trends. The study described in this and the following section is based on information obtained from this database, which has been used to create Table 7.1 and will be analysed below. The average annual growth of the world economy between 2015 and 2019 was 3.378%. Projections for global GDP growth in 2019 showed no change, and the rate was expected to remain around 3.5% between 2019 and 2024, similar to previous years. However, uncertainty increased during 2019 and the economy slowed down so that real growth only reached 2.807%. On the other hand, the IMF data allow for a specific analysis for the European Union (EU), the second row of Table 7.1, which cannot be dealt with in the following sections because it includes countries from both classifications. Thus, the average annual economic growth of the EU between 2015 and 2019 was 2.358%. The EU economy before the pandemic, in 2019, grew at a rate of 2.009%, below expectations, as the uncertainties about the future of the EU generated in the 2008 financial crisis had not yet been satisfactorily resolved.

176  Mariano Castro-Valdivia Table 7.1 Overview of the World Economic Outlook projections (percent change)  

Projections

 

2019

2020

2021

2022

2023

World output European Union Advanced economies Euro area Germany France Italy Spain Major advanced economies (G7): Canada, France, Germany, Italy, Japan, United Kingdom, and United States United States Japan United Kingdom Canada Other advanced economies (advanced economies excluding G7 and Euro area) Emerging market and developing economies Emerging and developing Asia China India ASEAN-5: Indonesia, Malaysia, Philippines, Thailand, and Vietnam Emerging and developing Europe Russia Latin America and the Caribbean Brazil Mexico Middle East and Central Asia Saudi Arabia Sub-Saharan Africa Nigeria South Africa

2.807 2.009 1.743 1.592 1.054 1.884 0.500 2.082 1.604

−2.953 −5.593 −4.404 −6.086 −3.692 −7.902 −9.026 −10.823 −4.775

6.021 5.356 5.197 5.244 2.625 6.766 6.644 5.129 5.064

3.192 3.228 2.427 3.058 1.547 2.518 3.179 4.326 2.030

2.655 0.662 1.107 0.501 −0.294 0.658 −0.173 1.211 0.807

2.289 −0.357 1.672 1.880 1.951

−3.405 −4.619 −9.270 −5.233 −1.692

5.671 1.657 7.441 4.541 5.275

1.641 1.745 3.605 3.295 2.811

0.995 1.613 0.315 1.451 2.303

3.605

−1.892

6.617

3.738

3.734

5.210 5.951 3.738 4.871

−0.618 2.244 −6.596 −3.396

7.180 8.080 8.681 3.354

4.387 3.205 6.844 5.318

4.871 4.441 6.059 4.875

2.515 2.198 0.170 1.221 −0.199 1.660 0.334 3.177 2.208 0.859

−1.721 −2.664 −6.985 −3.879 −8.057 −2.701 −4.138 −1.649 −1.794 −6.514

6.800 4.749 6.903 4.619 4.782 4.494 3.241 4.699 3.647 4.892

−0.020 −3.408 3.471 2.788 2.136 4.954 7.602 3.580 3.169 2.097

0.628 −2.280 1.742 1.034 1.150 3.607 3.669 3.710 2.995 1.086

Source: Prepared by author based on data from IMF World Economic Outlook Database (2022).

7.3.1 Advanced economies

The IMF includes in this grouping the 39 most developed countries in the world and analyses them in an aggregate and disaggregated manner in three groups: Euro area,1 G7,2 and other countries.3 This group of countries recorded GDP growth in 2019 of 1.743%. The Euro area and the G7 (22 countries) were below average, although it is worth noting that the United States and Spain

Global economy vs. Covid-19 pandemic 177

had above-average growth rates: 2.289% and 2.082%, respectively. The only country in this group that had a decrease in 2019 was Japan. The performance of the rest of the countries analysed (17) was 1.951%. 7.3.2 Emerging markets and developing economies

The IMF includes in this classification the remaining 156 countries that make up its data panel. The combined growth rate of these countries in 2019 was 3.605%. By geographical groupings, the increase in GDP in Asia stands out, where China continued to lead world growth with a rate of 5.951%. At the other extreme, we have the Latin American and Caribbean region, with a negligible growth of 0.170%, where Mexico, one of the locomotives of the region, had negative growth. Other regions analysed by the IMF, Sub-Saharan Africa and the Middle East and Central Asia, performed unevenly. The former had a growth rate in 2019 of 3.177%, while the latter only reached 1.660%, which highlights the different speeds at which the economies of the countries analysed by this institution are operating.

7.4 The global economy during the pandemic The declaration of the pandemic came as a severe blow to the global economy, as no one expected it in early 2020. What was a local epidemic in January became a global health crisis in little more than a month. The paralysis of global economic activity was already affecting economic growth data in the first quarter. According to data from the Quarterly National Accounts Dataset of the OECD,4 94.12% of its members experienced GDP contractions in that period. The situation did not improve in the second quarter of 2020, as all OECD member countries had negative rates. In particular, the OECD GDP growth rate was −10.3%. From the third quarter onwards, the recovery of economic activity at the global level made it possible to recover part of the output lost in previous quarters, but it was not enough to end 2020 in positive territory. According to the IMF, the GDP growth rate of the world economy that year was −2.953%. In the case of the EU, it was −5.593%, the worst aggregate figure in the panel, showing that this region was the hardest hit by the Covid-19 pandemic in 2020. The performance of the world economy in 2021 in terms of GDP was excellent. The growth rate was 6.021%, which, compensating for the decline in 2020, meant a return to the long-term growth trend of 3% per annum. The outlook for 2022 and early 2023 has worsened due to the conflict between Russia and Ukraine to such an extent that if this uncertainty persists, the world economy could contract again in 2023. As for the EU, it was not able to recover its pre-pandemic production level in 2021. Moreover, its growth prospects will be strongly affected by the evolution of the war, as this region is the most exposed to it.

178  Mariano Castro-Valdivia 7.4.1 Advanced economies

The GDP growth rate of advanced economies in 2020 was −4.404%. Output in these countries declined more sharply than in the rest of the world, as the effects of the pandemic on these countries were greater. The Euro area and the G7 had the worst growth figures: −6.086% and −4.775%, respectively. By country, Spain, the UK, and Italy, in that order, had the worst growth figures: −10.823%, −9.270%, and −9.026%, respectively. The GDP growth rate of the rest of the advanced economies was −1.692%, slightly lower than the figure for emerging and developing countries as a whole. Output growth in 2021 in advanced economies was able to offset the losses suffered in 2020. The GDP growth rate of advanced economies in 2021 was 5.197%. However, the Euro area was not able to recover its pre-pandemic output, as its rate only grew by 5.244%. In the G7, only the United States was able to recover its production level, with a growth rate of 5.671%. The performance of the remaining advanced economies during 2021 was positive, as they recovered their output and had a cumulative GDP rate of 5.275%. The production outlook for 2022 and 2023 for advanced economies was good, until the outbreak of the Russia–Ukraine conflict. Developments in the war are affecting forecasts. Growth for 2022, despite the uncertainty, remains at around 3%, although expectations for 2023 are increasingly worse and point to various advanced economies entering recession, such as Germany and Italy. 7.4.2 Emerging markets and developing economies

The production performance in this group of countries during the pandemic has not been homogeneous, as the disease has followed different trajectories in each of them, which have impacted on their economic activity. The IMF data indicate that the GDP growth rate of these countries in 2020 was −1.892%, which shows that the fall in production was situated in the advanced economies and that economic policies had to resolve the market imbalances produced by the pandemic as soon as possible if we wanted to return to the path of growth and minimise the global economic inequality that it was generating. By geographical groupings, the fall in GDP in 2020 in Latin America and the Caribbean stands out, −6.985%, and especially in Mexico, −8.057%. Other regions analysed, such as the Middle East and Central Asia, Europe, and subSaharan Africa, experienced falls in their production of −2.701%, −1.721%, and −1.649%, respectively. In Asia, performance was mixed. While China managed to increase its production by 2.244% in 2020, as its economic recovery started in the second quarter, India saw its production fall by −6.596%. In 2021, output in emerging and developing economies grew significantly, by 6.617%, far exceeding pre-pandemic output levels. Asia again led the advance, with a GDP growth rate of 7.180%. China and India continued as the world’s leading manufacturers, with rates of 8.080% and 8.681%, respectively. By geographical groupings, Latin America, and the Caribbean, despite

Global economy vs. Covid-19 pandemic 179

increasing production by 6.903% in 2021, have not been able to compensate for the losses accumulated during the pandemic, as their two locomotives, Brazil and Mexico, with growth rates of 4.619% and 4.782%, respectively, have grown at a slower pace than the region. As a result, until 2022 this region has not been able to recover pre-pandemic production rates. Other regions analysed, such as Europe, sub-Saharan Africa and the Middle East, and Central Asia, with high GDP growth rates of 6.800%, 4.699%, and 4.494%, respectively, recovered prepandemic output levels by 2021. The forecasts for 2023 for these economies are generally good, despite the existing uncertainties: war, economy, and health. For the time being, expected growth rates have fallen compared to a few months ago, but they still maintain values that are not cause for concern, except in two of the regions analysed by the IMF: Europe and Latin America and the Caribbean. In the case of the former, the Russian recession due to the war is weighing down growth in this area as a whole. As for the latter, the weakness of its two economic locomotives explains the expected data. Economic growth expectations for Brazil and Mexico for 2023 are poor, with GDP growth expected to be slightly above 1% and trending downwards.

7.5 Assessment and effects of the pandemic The Covid-19 pandemic has marked the present and the future of humanity. Researchers are keen to assess what has happened and are looking for answers in the available data. The number of papers on this subject is growing (Altig et  al. 2020; Brodeu et  al. 2021; Castro-Valdivia and Vázquez-Fariñas 2022). The effects of the pandemic are being analysed from multiple perspectives, and there is a growing consensus among researchers on the costs and effects it will have on human society. To conclude this summary of the pandemic, let us recapitulate some significant data on the pandemic. From January 2020 to September 2022, almost seven million people have died worldwide. The disease appears to be under control thanks to vaccinations and to the fact that the new variants of the virus, although more contagious, have a lower case fatality rate. As of 30 September 2022, this rate had fallen to 1.06%, four times lower than at the height of the pandemic. Infections continue to grow, albeit at a slower rate, and the disease has now affected around 7.5% of the world’s population. On the other hand, it is important to note that battling the disease has required a lot of public money to be invested in global economic activity. During this period, all national governments generated public deficits in accordance with their borrowing capacity. According to IMF data, the United States closed the year 2020 with a deficit of 14.5% of its GDP, which translates into an extra US$2 trillion contribution to the American economy, making it possible to solve the basic economic problems generated by the pandemic. At the global level, the fiscal effort was also enormous, as according to the IMF the combined global deficit at the end of 2020 was 9.9%, which meant that

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governments contributed more than US$8 trillion to the real economy. This fiscal effort increased global public borrowing to 99.2% of world GDP. The events of 2021 made it necessary to continue with expansionary economic policies, despite the macroeconomic problems they could generate. Inflation has been rising in most advanced economies in recent quarters and all indications are that the world economy needs to adjust after recovering the growth indicators it had prior to the expansion of the disease. The pandemic has also affected the labour market, as the various ILO reports show. This organisation estimates that global employment fell by 75 million in 2021 and that the reduction will be 25 million in 2022. For its part, the OECD has calculated that 114 million jobs were lost worldwide in 2020 compared to 2019. The pandemic has therefore increased the problem of economic inequality in the market model. Finally, the pandemic and the conflict between Russia and Ukraine have negative effects on the functioning of the global economy. The imbalances between the different markets for goods and services, inflationary pressures, excessive public debt, and the increase in socio-economic inequalities among the population, among other existing problems generated by the disease, must be resolved through political actions that minimise the problems detected. To this end, economic policies should find a middle ground between economic orthodoxy, the sustainability of the planet, and the equitable distribution of wealth.

Notes 1 Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain. 2 United States, Japan, Germany, United Kingdom, France, Italy, and Canada. 3 Andorra, Australia, Czech Republic, Denmark, Hong Kong SAR, Iceland, Israel, Macao SAR, Korea, New Zealand, Norway, Puerto Rico, San Marino, Singapore, Sweden, Switzerland, and Taiwan. 4 The Organisation for Economic Co-operation and Development (OECD) is an international intergovernmental organisation comprising 38 member countries: Australia, Austria, Belgium, Canada, Chile, Colombia, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States.

7.6 References Altig, Dave, Scott Baker, Jose Maria Barrero, Nicholas Bloom, Philip Bunn, Scarlet Chen, Steven J. Davis, Julia Leather, Brent Meyer, Emil Mihaylov, Paul Mizen, Nicholas Parker, Thomas Renault, Pawel Smietanka, and Gregory Thwaites. “Economic Uncertainty Before and During the COVID-19 Pandemic.” Journal of Public Economics 191 (2020): 104274. DOI 10.1016/j.jpubeco.2020.104274 Brodeur, Abel, David Gray, Anik Islam, and Suraiya Bhuiyan. “A Literature Review of the Economics of COVID-19.” Journal of Economic Surveys 35, no. 4 (2021): 1007–1044. DOI 10.1111/joes.12423

Global economy vs. Covid-19 pandemic 181 Castro-Valdivia, Mariano, and María Vázquez-Fariñas. “La economía española en las primeras décadas del siglo XXI.” In Claves del desarrollo económico, coord. Leonardo Caruana de las Cagigas, 313–328. Madrid: Pirámide, 2022. Deb, Pragyan, Davide Furceri, Daniel Jimenez, Siddharth Kothari, Jonathan D. Ostry, and Nour Tawk. “The Effects of COVID-19 Vaccines on Economic Activity.” Swiss Journal Economics Statistics 158, no. 3 (2022). DOI 10.1186/s41937-021-00082-0 De Prado Herrera, María Luz. “La época de crecimiento y recesiones económicas del último cuarto del siglo XX hasta la actualidad.” In Claves del desarrollo económico, coord. Leonardo Caruana de las Cagigas, 157–189. Madrid: Pirámide, 2022. IMF. Fiscal Monitor, October  2020: Policies for the Recovery. Washington, DC: International Monetary Fund, Publication Services, 2020a. IMF. Global Financial Stability Report, October  2020: Bridge to Recovery. Washington, DC: International Monetary Fund, Publication Services, 2020b. IMF. World Economic Outlook, October 2020: A Long and Difficult Ascent. Washington, DC: International Monetary Fund, Publication Services, 2020c. IMF. Fiscal Monitor, October 2021: Strengthening the Credibility of Public Finances. Washington, DC: International Monetary Fund, Publication Services, 2021a. IMF. Global Financial Stability Report, October 2021: COVID-19, Crypto, and Climate: Navigating Challenging Transitions. Washington, DC: International Monetary Fund, Publication Services, 2021b. IMF. World Economic Outlook, October 2021: Recovery During a Pandemic. Health Concerns, Supply Disruptions. Washington, DC: International Monetary Fund, Publication Services, 2021c. IMF. Fiscal Monitor, October  2022: Helping People Bounce Back. Washington, DC: International Monetary Fund, Publication Services, 2022a. IMF. Global Financial Stability Report, October 2022: Navigating the High-Inflation Environment. Washington, DC: International Monetary Fund, Publication Services, 2022b. IMF. World Economic Outlook, October 2022: Countering the Cost-of-Living Crisis. Washington, DC: International Monetary Fund, Publication Services, 2022c. Jackson, James K. (coord.). Global Economic Effects of COVID-19. Washington, DC: Congressional Research Service, 2021. Matés-Barco, Juan Manuel. “Desintegración económica y crisis financieras (1914–1939).” In Claves del desarrollo económico, coord. Leonardo Caruana de las Cagigas, 81–115. Madrid: Pirámide, 2022. McKibbin, Warwick J., and Fernando Roshen. The Global Macroeconomic Impacts of COVID-19: Seven Scenarios. CAMA Working Paper No. 19, 2020. DOI 10.2139/ssrn.3547729; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3547729 Sarkodie, Samuel Asumado, and Phebe Asantewaa Owusu. “Global Assessment of Environment, Health and Economic Impact of the Novel Coronavirus (COVID-19).” Environment, Development and Sustainability 23 (2021): 5005–5015. DOI 10.1007/s10668-020-00801-2 Tooze, Adam. Shutdown: How Covid Shook the World’s Economy. London: Allen Lane Publishers, 2021. World Bank. The World Bank Annual Report 2020: Supporting Countries in Unprecedented Times. Washington, DC: World Bank, 2020. World Bank. The World Bank Annual Report 2021: From Crisis to Green, Resilient, and Inclusive Recovery. Washington, DC: World Bank, 2021. World Bank. The World Bank Annual Report 2022: Helping Countries Adapt to a Changing World. Washington, DC: World Bank, 2022.

Epilogue. The economic crises of the last century A Spanish perspective1 Antonio Martín-Mesa

Introduction After the invasion of Ukraine by the Russian army during the last days of February 2022, the world economy is facing a new crash, which is beginning to manifest itself as follows: •

Firstly, in the slowdown in GDP growth, to the extent that the optimistic forecasts of early 2022, when we thought the pandemic crisis was practically over, will have to be revised. • Secondly, the rise in energy prices, particularly oil, which on 9 March reached 128.5 dollars a barrel, given that electricity prices had already been rising spectacularly for several months (94 dollars on 14 October). • Thirdly, the rise in inflation, which in August brought the year-on-year growth of the CPI (Consumer Price Index) to 10.5% in Spain as a whole and in September to 8.9%, figures not seen since 1986. • Fourthly, in the paralysis of production in many companies due to the lack of supplies and the fall in demand, which has forced the partial closure of some of them, with the consequent ERTE (Expediente de Regulación Temporal de Empleo – Temporary Redundancy Proceedings) and, ultimately, with the growth of unemployment. • Lastly, to make a long list no longer, we are already witnessing repeated interest rate hikes (50 basis points in July and 75 basis points in September). • In short, the world economy, particularly that of Western countries, including Spain, seems to be close to an abyss that economists call “stagflation”, i.e., economic stagnation accompanied by inflation and even recession. This new setback comes at a time when, having overcome the sixth wave of the pandemic in Spain, our country and all the developed economies were preparing to revive GDP and return to growth figures similar to those we enjoyed before the onset of Covid-19. At this point it may be advisable to look back at what happened and how the crises of 1929, 1973, and the Great Recession of 2008 were dealt with, without forgetting those of lesser

DOI: 10.4324/9781003388128-8

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magnitude and duration, such as those of 1993 (after the events of 1992), the early 2000s (the technology bubble), or the most recent one, the pandemic from 2020 onwards. The first three mentioned, those of 1929, 1973, and 2008, were preceded by periods of great economic expansion: the “Roaring Twenties” followed by the “crisis of ’29”; expansion and growth in the 1960s, followed by the “crisis of 1973” (the so-called oil crisis); expansion 1996–2007, and then the “financial and real estate crisis” between 2008 and 2015.

The crises of 1929 and 1973 In the crisis of 1929, the recipes of the great Cambridge economist were applied, i.e., lowering taxes, reducing interest rates, increasing public spending, and devaluing currencies, in order to fight unemployment and revive the economy. In the event that major inflationary processes were to be faced, the opposite would be the case (raising taxes and interest rates, reducing spending, and revaluing currencies). However, our economist argued that inflation and unemployment could not coexist. Keynesian recipes worked perfectly until 1973. Indeed, from 1951 onwards, there was a great wave of prosperity. At the same time, there was a simultaneous surge in world demand as a result of the high inflation of the early 1970s, fuelled by the accumulation of dollar reserves (remember the devaluations of the US currency in 1971 and 1973). The overflow of demand contrasted with the difficulty of increasing production, the answer being higher prices (inflation). The consequence of higher food, commodity, and energy (oil) prices led to what we call “cost inflation”, with a sharp fall in corporate profits, the collapse of industry, and a significant crisis of the “fiscal state”, i.e., an increase in the public deficit. In the crisis of the 1970s, unemployment (economic stagnation and recession) coexisted with inflation, a phenomenon that had not existed before and which was certainly not foreseen by Keynes, since he only envisaged inflation caused by uncontrolled increases in global demand. However, at that time the world was facing cost inflation. Keynes had no answers. From then on, the liberal economic policies of Milton Friedman and the Chicago School, the supply-side policies, which advocate a shift from the macroeconomic to the microeconomic sphere, i.e., from the public sphere to the business sphere, came into being. The budget should be budget neutral, i.e., public revenues should be equal to expenditures. Production costs should be controlled at the firm level, reducing the wage bill, putting the emphasis on innovation, continuous improvement of productivity, efficiency, and competitiveness, moving to the economics of intangibles. Consequently, Keynes is dead, and Friedman becomes the champion of the new economic paradigm and will be so for several decades to come.

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The 2008 crisis In the early years of the 21st century, we witnessed a period of strong economic growth worldwide, significant credit expansion, increased indebtedness, very low interest rates (even negative in real terms), low risk perception by the markets, high growth in asset prices (real and financial), and weak control by the monetary authority. The result of all this is none other than a crisis of confidence, a lack of liquidity, a real estate crisis, more expensive bank liabilities, an increase in non-performing loans, and problems of insolvency of financial institutions. In 2008 we were faced with a new situation, as unemployment coexisted with a deflationary process (falling prices). Deflation is as much as or more pernicious than inflation, as agents delay consumption in the hope that prices will fall even further. Will Keynes have solutions for the new scenario that we faced from 2008 onwards? The Great Recession that began globally in 2008 produced a new scenario in which unemployment, the product first of economic stagnation and then recession, coexisted with a deflationary process, i.e., unemployment and falling prices (fall in the CPI). Now, once again, Keynes has solutions to offer. What would our resurrected and renowned economist propose? The solution should be to increase overall demand, which is made up of private consumption, investment, public spending, and the external balance. How? Well, with the recipes that worked in the 1930s: lowering taxes, reducing interest rates, increasing public spending, and encouraging currency devaluation to boost exports. But we are, once again, in an unprecedented situation, since we belong to the European Economic and Monetary Union (EMU), which means that we now have no control over interest rates, which depend on the monetary policy that is the responsibility of the European Central Bank (ECB) for the whole of the eurozone. Nor do we have the ability to alter exchange rates, as we did when there were national currencies (peseta, mark, franc, lira, etc.); instead, the value of the euro now fluctuates freely on the markets according to supply and demand. So, what are we left with? Only fiscal instruments, i.e., taxes and public spending. Yes, Keynes would advise us to reduce the tax burden and increase public spending to revive the economy. However, a new barrier came up during those years when the financial crisis and the real estate bubble burst, namely the Stability and Growth Pact, which prevented the public deficit from exceeding 3% of gross domestic product (GDP) and limited the volume of public debt of the Member States to 60% of GDP. In short, lowering taxes and increasing public spending was a very appropriate economic policy for relaunching the economy after the crisis and, in fact, was implemented by many countries worldwide. However, in Spain and throughout the Euro area it encountered the aforementioned obstacle. The European Union’s Stability Pact provided, however, that in exceptional situations the ceilings set for public deficit and debt could be exceeded, which

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happened across the board in practically all the euro countries. All in all, the great champion of the recovery from that crisis was the central bank, with Mario Draghi at the helm, who took the reins of monetary policy at the service of the recovery and left us with that sentence that will go down in economic history: “I will do what needs to be done and believe me, it will be enough”. And he did, launching an ambitious programme to purchase public debt and private assets, known as Quantitative Easing, for several trillion euros. Moreover, from 10 March 2016 until July 2022, the official interest rate of the euro has been 0%. In short, Keynes had a solution for the penultimate great economic crisis of our era, that of 2008, just as he has a solution for the one of the Covid-19 pandemic and for the one provoked by the Russian invasion of Ukraine.

The latest crisis Let us start with the crisis that began in 2020 as a result of the pandemic. Since the origin of the economic shock was due to causes unrelated to the economy itself, the first actions – of a fully Keynesian nature – were aimed at saving the damaged activities until the health crisis was overcome: •

The aim was to guarantee the activity of companies in order to facilitate their survival through lines of guarantees from the Official Credit Institute (Instituto de Crédito Oficial – ICO); by deferring taxes and social security contributions for small companies; by making commercial rules more flexible, etc. • In order to protect employment and contribute to the continuity of companies, Temporary Redundancy Proceedings (the Spanish ERTE) were carried out, the processing of which was simplified and speeded up; the Social Security (SS) took charge of unemployment payments and contributions to the SS itself. • As regards the most disadvantaged population, the Minimum Vital Income (Ingreso Mínimo Vital – IMV) was approved, which is a minimum guarantee instrument to combat the consequences of the crisis. It was a novelty in Spain, although it already existed in some 20 European countries. • In addition to all this, the European Commission approved a Recovery Plan (Next Generation EU), which envisages an allocation of 750,000 million euros, of which Spain will receive 140,000 (72,700 in direct aid and 67,300 in repayable loans). In short, a whole set of measures to reactivate demand, inspired by the most genuine Keynesian thinking and thanks to the exceptions of compliance with the deficit and public debt rules to which the EU Stability Pact obliged us. Just when it seemed that the world economy, and with it the European and Spanish economies, was beginning to get back on track, February 2022 saw the Russian invasion of Ukraine, causing a new shock to the world economy,

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the scope of which is still difficult to foresee. In addition to the very high inflation figures that we are enduring (in Spain they have not been known for more than 35 years), we must add the significant cut in growth forecasts made by the International Monetary Fund in October 2022: the eurozone will have a GDP increase of 3.1% in 2022 and 0.5% in 2023, leaving Germany at 1.5% and −0.3%; Italy at 3.2% and −0.2%, while the estimated growth for Spain is 4.3% and 1.2% in 2023. However, this is all very tentative and will depend on the evolution of the war. Another magnitude that is reaching absolutely unbearable levels is public debt, which in Japan has risen to 262.5% of GDP, in Italy 150.6%, in the USA 125.6%, and in Spain 116.4% (1.44 trillion euros). Faced with this panorama, what can be done: lower taxes with the consequent increase in the deficit and public debt, make an income pact that moderates wage increases and business profits, forget about updating pensions, whose revaluation has been approved to be carried out in accordance with the average evolution of the CPI? These are the questions that are on the table today and require serious and rigorous answers from the government and the opposition.

Recession The current economic outlook is very worrying, as everything points to a scenario in which we will have to endure high inflation, interest rate rises, economic stagnation, and even recession – negative GDP growth rates. Yes, citizens can have no other feeling than of alarm when in the economic press they find, among others, these headlines: “Spain faces the abyss of stagflation”, “The European Central Bank opens the door to a recession in 2023 if prices remain unchecked”, “Developed economies are slowed down by war”, “Inflation in the Eurozone becomes entrenched and raises fears of a sudden slowdown”, “The German trade balance goes into deficit for the first time in 31 years”, “Economists already see a recession in the US and Europe closer”, etcetera. In short, an economic future that is little short of apocalyptic. Unfortunately, it is absolutely certain that the European, US, and global economies are facing a situation in which inflation and economic stagnation will coexist, i.e., we could be imminently facing a scenario of “stagflation”. Indeed, everything seems to indicate that we are going to endure high rates of inflation in a period with high levels of unemployment and, all of this, with a stagnant economy, since to the extent that the trend elements that put upward pressure on costs are powerful, an economic recession may occur alongside high inflation. In Spain: • • •

Consumption plummets due to high prices. Growth forecasts are continually revised downwards. Fear of recession causes stock markets to plummet: the IBEX-35 (Spanish stock market index) stands at 7,500 points in October (an annual fall of

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• •

17%), the Euro Stoxx 50 (European index) accumulates an annual loss of 17.65%, and the German DAX falls by 19%. Companies are seeing their order books shrinking, bankruptcies multiplying, etc. Even the always “optimistic” and well-informed Spanish Minister of Economy, Nadia Calviño, affirmed last summer, in front of the Advisory Council of Economy, that “complex quarters of high inflation are coming” and that “it is necessary to reach an income pact in view of the current situation”.

There is no other statement to make when the CPI has reached a growth rate of 8.9% as of September 2022 (10.5% in August) and, even worse, when core inflation (general index without unprocessed food and energy products), i.e., that which has a structural and lasting character, has reached 6.2%. In the eurozone the situation is not much better, as inflation reached 9.1% in August 2022. In the face of this situation: do we just sit back and watch it happen; are we content to give compensatory subsidies to the most disadvantaged classes? My answer is no, because the problem must be tackled, as the saying goes, by “taking the bull by the horns”. At the national level, an income pact has to be made, which means moderation in wage rises at this time and agreeing to recover the purchasing power lost over the next few years, as well as moderation in the increase in prices and company profits. At the global level, however, the only recipe is “Stop the war in Ukraine”. I am frightened, terrified by the escalation of warmongering that is currently in the air, as this will not prevent the economic recession.

Note 1 Lecture given at the Cátedra de Internationalización of the University of Jaén, 24 October 2022.

Index

Note: Page numbers in italics indicate a figure and page numbers in bold indicate a table on the corresponding page adjustment programmes 92 – 94, 103 advanced economies 78, 87, 97, 102, 127, 142 – 143, 148, 156 – 157, 163, 166, 172, 175, 176, 178, 180 Africa 2, 63, 63, 66, 97, 174 Agricultural Adjustment Act 25, 27 Algeria 59, 67 allies 3, 39, 42, 48 – 49, 51 Altig, Dave 179 American Relief Administration (ARA) 4 Americas 18, 23, 38, 175 Andorra 180n3 Andreesen, Marc 119 Ante Pavelić 50 – 51 Anwar el-Sadat 60 Arab-Israeli war 59, 71 ASEAN-5 176 Asia xxiii, xxiv, 63, 63, 143, 159, 161, 167, 176, 177 – 178 Asian dragons 63, 114 Asian tigers 78, 114 Australia 23, 38, 47 – 48, 50, 180n3, 108n4 Austria 4, 15, 32, 38, 39, 40, 47, 100, 180n1, 180n4 baker 93 – 95, 103 Baker Plan 94 – 95 balance of payments imbalances 85 bank debt 85, 86 Bank for International Settlements 21, 147 Bank of England 15 bankruptcy 1, 15 – 16, 19, 62, 64, 117 – 118, 127, 129, 137, 141 – 142 Banque d’Alsace-Lorraine 30 Banque Nationale du Crédit 30 Bazargan, Mehdi 71

Belgium 2, 11, 21, 23, 38, 47, 99, 100, 145, 180n1, 180n4 Berners Lee, Tim 119 Black Thursday 11 Black Tuesday 11 Black Wednesday 109 – 110 Blum, Léon 30 bombing 39 – 41, 43 Brady Plan 93, 95 – 96, 103 Brazil 18, 23, 34, 43, 86, 89 – 91, 90, 91, 96, 117 – 118, 121, 148, 149, 152, 153, 154, 156, 176, 179 Bretton Woods xvi, xvii, 24, 56, 58, 68, 85 Britain 1 – 6, 14 – 16, 23 – 25, 28 – 29, 34, 46, 48, 65, 69, 70, 71, 74 Brüning 31 Bush, George 108, 130, 133 business xvi, xvii, xxi, 70, 76, 101, 112, 114, 117, 120, 122, 129, 133, 137, 152, 183, 186 businessmen 8, 69 Canada xix, xxiii, 11, 23, 43, 47 – 48, 50, 65, 69, 74, 106, 108, 110 – 111, 113, 117, 176, 180n1, 180n4 capital xxi, 4 – 7, 9, 12, 14 – 15, 17, 19, 20 – 21, 23 – 24, 30 – 32, 41, 45 – 46, 49, 57 – 58, 63, 69, 75 – 77, 84, 86 – 89, 91, 92, 97, 99, 106 – 107, 111 – 114, 118 – 121, 123, 127, 133, 143, 145, 154, 156 – 158, 160, 164 – 165 Caribbean 78, 89 – 91, 96 – 97, 98, 103, 131, 131, 132, 148, 150, 152, 153, 154, 155, 158, 174, 176, 177 – 179 CDOs 135 – 138 CDS 136 – 137

Index  189 Central Asia 78, 98, 131, 131, 132, 176, 177 – 179 Chile 18, 33 – 34, 86, 88, 90, 91, 152, 153, 154, 156, 180n4 China 6, 46, 57, 63, 63, 78, 116, 131, 131, 152, 158 – 167, 164, 164, 165, 173, 176, 177 – 178 Churchill, Winston 5, 39, 49, 51 – 52 Clark, Jim 119 Clinton, Bill 108 Cold War 45, 54 Colombia 33 – 34, 43, 90 – 91, 148, 150, 152, 153, 154, 156, 180n4 Commerz 15 Commodity Futures Modernisation Act (CFMA) 130 Common Market 57 Commonwealth xvii, 14, 23, 29 Consumer Price Index (CPI) 101, 182, 184, 186 – 187 contagion xxii, 2, 92, 115 – 117, 138, 148, 173 cooperation 2, 23 – 24, 63 Costa Rica xxiii, 90 – 91, 180n4 costs xvii, xviii, 18, 24, 40, 62, 64, 67, 69, 77 – 78, 92, 101, 107, 119, 154, 156, 179, 183, 186 Covid-19 xxiv, 131, 158, 162, 167, 172 – 174, 182 Covid-19 pandemic xxiv, 172 – 175, 177, 179, 185 Creditanstalt 15 Crédit Foncier du Brésil 30 crisis xvi, xvii, xviii, xx, xxi, xxii, xxiii, xxiv, 1, 4 – 8, 10 – 13, 15 – 21, 23 – 25, 28 – 35, 46, 56 – 60, 62 – 77, 79, 82 – 90, 92 – 97, 99, 101 – 103, 105 – 123, 127 – 131, 133, 135, 141 – 146, 148, 150, 154, 156 – 163, 166 – 167, 175, 177, 182 – 185 Cuba 18, 33 – 34 Cyprus 131, 180n1 Czech Republic 180n3, 180n4 Czechoslovakia 32, 47 Dae Jung, Kim 116 Daladier, Édouard 30 Danatbank 15 death xxi, 38 – 39, 43 – 46, 44, 53 – 54, 173 debt xviii, xxi, xxiii, 11, 18, 31, 33, 58, 67, 73 – 75, 77, 82 – 89, 86, 92 – 97, 99, 103, 111 – 113, 117 – 118, 128, 133, 135 – 136, 141, 144 – 146, 154, 156 – 157, 160, 165, 180, 184 – 186

debt crisis xviii, 73, 74, 82 – 84, 86 – 89, 92, 96 – 97, 99, 103, 141, 144 – 146 defaulting 92 De la Madrid, Miguel 111 Denmark 100, 180n3, 180n4 depression xvii, xx, xxi, 1 – 2, 4 – 5, 7, 12 – 20, 23 – 25, 27, 32 – 33, 35, 62, 76, 83, 87, 89, 92, 97, 99, 122, 130, 148 deregulation 57, 77, 106 – 109, 112 – 113, 115, 117, 121, 129, 131, 133 destruction xxii, 1 – 3, 7, 38, 40 – 43, 45 – 48, 54, 57, 72 devastation 38, 40 developing countries 58, 62, 64 – 66, 66, 77, 82, 84 – 86, 86, 87, 88 – 89, 93, 97, 102, 178 developing economies xxiv, 65, 97, 103, 172, 176, 177 – 178 Donaldo Colosio, Luis 110 Dow-Jones index 11 Draghi, Mario 185 Draža Mihailović 50 Dresdner Bank 15 Eastern Asia crisis 105, 114, 117 economic activity 4, 12, 19, 27, 46, 57, 64 – 66, 68, 72 – 73, 78, 83 – 84, 91, 97, 102, 162, 174, 177, 178 – 179 economic crisis xviii, xx, xxi, xxii, xxiii, xxiv, 1, 6, 8, 11, 16 – 17, 23, 30 – 31, 65, 83, 101, 105, 111, 114, 117, 118, 130 – 131, 156, 159, 166, 172, 182, 185 economic inequality 133, 178, 180 economic instability 2, 6, 58 economic orthodoxy 24, 75, 180 economic policy 5, 23, 25, 27, 30 – 32, 35, 75, 77, 112, 115, 133, 145, 161 – 162, 167, 184 economy xvi, xviii, xx, xxii, xxiv, xxiv, 1 – 7, 12 – 14, 16 – 17, 20 – 21, 24 – 34, 47 – 48, 56 – 58, 61 – 62, 76, 78 – 79, 82 – 83, 94 – 95, 97 – 98, 101 – 103, 106, 109 – 111, 113, 116 – 121, 127 – 129, 133, 141 – 143, 157 – 161, 163, 165 – 167, 172 – 175, 177, 179 – 180, 182 – 187 Embargo 43, 60 – 61, 79 Emergency Banking Act 25 Emergency Tariff Act 3 emerging markets 160, 172, 177 – 178 employment xvii, xviii, 20, 30, 48, 57, 66 – 67, 73, 77, 83, 89, 117, 130, 159, 161, 167, 180, 185 energy xxii, 32, 40, 56, 58 – 59, 62, 65, 67 – 70, 72, 74, 76, 79, 85, 101 – 102, 143, 145, 150, 152, 154, 182 – 183, 187

190 Index equitable distribution of wealth 180 ERTE (Expediente de Regulación Temporal de Empleo-Temporary Redundancy Proceedings) 182, 185 Estonia 180n1, 180n4 Euphoria xxiii, 8, 114, 116, 123 Euro area 142, 176, 176, 178, 184 Eurodollars 85 Europe xvi, xxii, xxiii, xxiv, 1 – 4, 6, 8 – 10, 13, 15, 23, 28 – 29, 31 – 32, 38 – 43, 45 – 51, 53, 56 – 59, 62 – 63, 63, 67 – 68, 71 – 72, 77 – 78, 78, 79, 98, 99, 100, 103, 121, 123, 127, 130 – 132, 131, 132, 134, 138, 142 – 144, 157 – 159, 175, 186 European Banking Authority (EBA) 147 European Central Bank (ECB) 21, 143, 184, 186 European countries xxii, 4, 21, 25, 29, 32, 38 – 39, 46 – 49, 58, 63, 65, 99, 108, 141, 144, 158, 185 European Economic and Monetary Union (EMU) 184 European Economic Community (EEC) 77, 99, 109 European Economic Recovery Plan 143 European Financial Stability Facility (EFSF) 144 European Insurance and Occupational Pensions Authority (EIOPA) 147 European Monetary System (EMS) 106, 109 European Securities and Markets Authority (ESMA) 145, 147 European Stability Mechanism (ESM) 146 European System of Financial Supervision (ESFS) 146 – 147 European Systemic Risk Board (ESRB) 147 European Union (EU) xvi, xvii, 102, 110, 131 – 132, 175, 176, 178 – 179, 184 expansion xviii, 1, 4 – 6, 14, 16, 29, 33 – 34, 59, 63, 68, 75, 88, 99, 102, 105, 111, 130, 133, 135, 143, 158 – 159, 161, 180, 183 – 184 external contamination 2 farmers 19, 27, 28, 161 fatality rate 173 – 174, 179 Federal Emergency Relief Administration 27 Federal Reserve xviii, 9 – 10, 12 – 13, 26, 87, 96, 99, 120, 129, 131, 133, 145

Financial Sector Assessment Programme (FSAP) 147 Financial Stability Board (FSB) 147 Financial Stability Forum (FSF) 147 Finland xviii, 23, 100, 106, 108 – 111, 113, 143, 180n1, 180n4 First World War 1, 4, 8, 12, 15 Fordney-McCumber Tariff Act 3 foreign debt xxiii, 82, 89 Foreign Direct Investment (FDI) 84, 87, 148, 163 foreign trade xvii, 14, 17, 29, 159 France xxii, 1 – 6, 11, 13, 15 – 16, 23 – 25, 29 – 30, 34, 38, 39, 40, 43, 44, 45 – 47, 51 – 52, 58, 64 – 65, 69, 70, 71, 74, 74, 99, 100, 141, 145, 176, 180n1, 180n2, 180n4 G7 93, 176, 176, 178 GDP xvii, xviii, 1, 18, 22, 33 – 34, 38 – 39, 39, 47, 57, 63, 63, 64, 70, 70, 78, 78, 83, 89, 90, 96 – 99, 102, 107 – 108, 110 – 114, 119, 127, 128, 128, 134, 142 – 145, 150, 152, 154, 157, 159, 161 – 165, 174 – 179, 182, 184, 186 Germans 5, 39 – 40, 42 – 44, 47, 49, 51 – 53 Germany xxii, 1 – 6, 9, 11, 11, 14 – 15, 19, 21, 23 – 25, 29 – 32, 34, 38 – 45, 39, 44, 47 – 50, 58, 64, 65, 65, 69, 70, 74, 74, 79, 97, 100, 109, 140, 141, 143, 145, 163, 176, 178, 180n1, 180n2, 180n4, 186 Glass-Steagall Act 129 global economy xx, xxiv, 127, 172, 175, 177, 180 global employment 180 globalisation xxiii, xxiv, 56, 59, 105, 121, 127, 167 gold standard 1, 5, 10 – 12, 15 – 17, 23 – 24, 28, 32 – 33, 85 Göring 32 Gramm-Leach-Bliley Act 129 Great Britain 3 – 5, 23 – 24, 34, 46, 65, 69, 70, 74 Great Depression xvii, xx, 1, 5, 12, 16, 25, 35, 76, 87, 89, 92, 97, 99, 122, 130 Great Recession 122, 129 – 131, 133, 135, 138, 143, 148, 154, 156, 157, 159 – 163, 167, 182, 184 Great War 2 Greece 32, 42, 44, 44, 47 – 48, 51 – 52, 100, 131, 141, 143 – 145, 180n1, 180n4

Index  191 growth xvi, xviii, xxiii, xiv, 1 – 2, 7, 9, 17, 29 – 30, 33 – 34, 56 – 59, 63 – 71, 63, 64, 75, 77 – 79, 82 – 92, 94 – 97, 98, 99, 101 – 103, 107, 111, 113 – 114, 117 – 118, 127 – 128, 128, 130, 135 – 136, 138, 143 – 144, 146, 148, 150, 152, 154, 156 – 157, 159, 161 – 163, 165 – 167, 174 – 180, 182 – 184, 186 – 187 Hitler, Adolf 15, 21, 25, 30 – 32, 40, 42, 46, 51 Honduras 18, 33 – 34, 90, 91 Hong Kong SAR 180n3 humanity xxii, xxiii, 38, 172, 174 – 175, 179 Hungary 23, 40, 44, 47, 51, 180n4 Hunger xxii, 42 – 45, 44, 53 hyperinflation 1, 4, 5, 31, 47 IBEX-35 186 Iceland 180n3, 180n4 impoverished economies 2, 57 India 6, 161, 176, 178 Indonesia 67, 114 – 116, 176 industrialised countries xvii, xxiii, 1, 33, 56 – 58, 65 – 66, 66, 69, 74, 74, 77, 84, 87, 157 inflation xviii, 3, 5 – 6, 13, 26, 34, 47, 56, 58, 61 – 69, 64, 72, 74 – 79, 84, 86 – 92, 97, 99, 101, 102, 107 – 112, 114, 117 – 118, 120, 127, 133, 134, 145, 154, 180, 182 – 184, 186 – 187 inflationary pressures 69, 72, 82, 87 – 88, 175, 180 instability xxii, 1 – 2, 4, 6, 12, 17, 58, 62, 115 – 116, 129, 141 – 142, 156 international cooperation 2, 23 – 24 International Labour Organization (ILO) 172 International Monetary Conference 23 International Monetary Fund (IMF) 85, 116, 133, 157, 172, 186 international monetary system 10, 14 – 15, 23, 58, 65, 85 investment xvii, xx, 6, 8 – 10, 12 – 13, 16 – 17, 19, 27 – 31, 28, 33, 69, 73, 76 – 78, 83 – 84, 87 – 88, 91, 97, 101 – 102, 111, 114 – 115, 123, 127, 129 – 130, 133, 135 – 138, 142, 148, 152, 154, 160 – 161, 163, 166 – 167, 184 involuntary financing 94, 96 Iran 59, 67, 71 – 72 Iraq 61, 67, 72, 108

Ireland 48, 99, 100, 131, 141, 143, 180n1, 180n4 Israel 49, 59 – 61, 72, 180n3, 180n4 Italy xxii, 21, 23, 25, 32, 38, 39, 40, 42, 44, 45 – 48, 50 – 52, 65, 69, 70, 74, 74, 97, 110, 131, 139, 141, 145, 176, 178, 180n1, 180n2, 180n4, 186 Japan xix, xxiii, 6, 34, 58 – 59, 63, 63, 64, 65, 65 – 67, 69, 70, 72, 74, 74, 77, 78, 79, 95, 97, 106, 108, 111, 113 – 114, 117, 120, 121, 123, 143, 159, 160 – 161, 163, 176, 177, 180n2, 180n4, 186 Korea 63, 94, 114 – 116, 121, 161, 163, 180n3, 180n4 Kuwait 59, 61, 78 – 79, 108 Latin America xvii, xiii, 16 – 18, 32 – 34, 63, 63, 66, 78, 82, 84 – 97, 86, 87, 98, 103, 120, 131 – 132, 131, 132, 148, 150, 152 – 158, 167, 174, 176, 177 – 179 Latvia 47, 180n1, 180n4 Lithuania 47, 180n1, 180n4 London Conference 2 Lopez Portillo, José 112 Lost Decade xxiii, 17, 82, 89, 92, 97, 103 lost decades 107 Luxembourg 23, 100, 180n1, 180n4 Macao SAR 180n3 Mahathir, Mohamad 115 Malaysia 114 – 16, 176 Malta 141, 180n1 manufacture 6, 14 market model 180 McKibbin, W. J. 172 Meném, Carlos Saul 118 Mexico xxiii, 18, 33, 34, 59, 70, 86, 88 – 89, 90, 91, 94, 96, 103, 105, 110 – 114, 123, 148, 150, 152, 153, 154, 156, 157, 176, 177 – 179, 180n4 Middle East 60, 66, 71, 176, 177 – 179 Minimum Vital Income 185 monetary system xvi, 10, 14, 15, 23, 33, 56, 58, 65, 77, 85, 106, 109 Nasdaq 118 – 120, 123, 129 National Energy Act 70 National Industrial Recovery Act (NIRA) 26, 27 Nationalist Revolutionary Party 18

192 Index Nazi(s) 5, 25, 31, 42, 45, 47, 49 – 53 Nazism 32 Netherlands 2, 11, 23, 42 – 43, 44, 45, 60, 99, 100, 180n1, 180n4 New Deal 25, 27, 34 New York 6, 9, 9, 15 – 17, 48, 85, 127, 157 New York Stock Exchange xxi, 1, 8, 10 – 12, 17 – 18 New York stock market crash xxii, 16 New Zealand 23, 38, 48, 180n3, 180n4 Nigeria 67, 99, 176 Nixon, Richard 58 North America 2, 98, 107, 121 North American Free Trade Area (NAFTA) 111 – 113, 121 Norway xxiii, 70, 100, 106, 108 – 110, 180n3, 180n4 oil crisis xvi, xvii, xxi, xxii, xiii, xiv, xvi, xxii, xxiii, xxi, 56, 59 – 60, 62, 64 – 67, 69, 71 – 72, 74, 79, 88, 183 oil price(s) 61, 62, 65 – 74, 78 – 79, 82, 88, 94, 99, 108, 167, 183 oil shock 58, 63 – 64, 68, 71, 73 – 75, 78 – 79, 88, 97, 102 Omicron 174 OPEC 59, 66, 67, 70, 72, 73, 85 Operation Market Garden 43 Organisation for Economic Cooperation and Development (OECD) 63, 64, 67, 68, 73, 78, 101, 109, 131 – 132, 131, 132, 134, 147, 157, 172, 177, 180, 180n4 Ottawa Treaty 29 pandemic xxiv, 172 – 175, 177 – 180, 182 – 183, 185 Panic xx, xxi, xxii, 8, 11, 24, 111 – 112, 116, 120 petrodollars 73, 85 Philippines 114, 116, 176 Poincaré 6 Poland 2, 32, 42 – 43, 44, 45, 47, 49 – 50, 180n4 policy xvii, xviii, xix, 4 – 5, 11 – 13, 15 – 16, 23 – 25, 27 – 35, 48, 59, 67, 69 – 70, 74 – 77, 84, 88, 97, 99, 101 – 102, 109, 112, 115, 118, 131, 133, 136, 142 – 143, 145 – 146, 158 – 159, 161 – 162, 166 – 167, 174, 184 – 185 Portugal 48, 100, 110, 131, 141, 144, 180n1, 180n4 post-war crisis 1

private investment 17, 19, 27, 28, 33, 111 Prussia 2, 49, 53 psychological inflation 108 public deficit(s) xviii, 58, 64, 67, 101 – 102, 118, 133, 146, 179, 183 – 184 Public Works Administration 27 Puerto Rico 180n3 rating agencies xxiv, 130, 137 – 138, 141 Reagan, Ronald 74, 76, 121, 133 Reaganomics 133 rearmament 2, 25, 29, 30, 32, 34, 59 recession(s) xx, xxi, xxii, xxiii, xxiv, 5, 12, 24, 29, 35, 56, 58, 63, 65 – 66, 68, 72, 74, 82 – 83, 85, 87 – 89, 94, 97, 99, 101, 106 – 111, 117 – 123, 127, 129 – 131, 133, 135, 138, 141 – 143, 148, 154, 156 – 163, 167, 172 – 173, 178 – 179, 182 – 184, 186 – 187 reflation 25 regulation(s) 26, 29, 76, 78, 113, 122, 129 – 130, 136, 146 – 147, 158, 165 Rentenbank 5 Rentenmark 5 Reparations Commission 3, 5 risk premiums 92, 138, 140 – 142, 144 – 145, 156 Roosevelt, Franklin Delano 24 – 25, 27, 30, 49, 51 Ruiz Massieu, Francisco 110 Russia xxiv, 44, 47, 78, 79, 114, 117, 175, 176, 177 – 178, 180 Russia-Ukraine conflict 178 Salinas, Carlos 112 – 113 San Marino 180n3 SARS-CoV-2 173 Saudi Arabia 59, 67, 176 Second World War xxiii, 1 – 2, 15 – 16, 21, 24, 34, 45, 50, 56, 58, 62 – 63, 84, 89, 131 Shah 71 – 72 Singapore 114, 116, 161, 180n3 Six-Day war 59 – 60, 71 Slovakia 180n1, 180n4 Slovenia 180n1, 180n4 slowdown xvii, 3, 58, 63, 65, 72, 97, 103, 148, 182, 186 Smoot-Hawley Tariff 3 socio-economic inequalities 180 Soros, George 110 South Africa 72, 176 South-East Asia 89, 175

Index  193 Soviet Union 1, 16, 42 – 44, 46, 48 – 53, 67, 70, 109 Spain xvii, xix, xxiv, 1, 16, 17, 32, 48, 65, 68 – 69, 72, 74, 74, 79, 99, 100, 101 – 103, 110, 131, 131, 132, 140 – 141, 143, 145 – 147, 150, 176, 176, 178, 180n1, 180n4, 182, 184 – 186 Special Areas (Development and Improvement) Act 29 Special Drawing Rights 160, 174 stabilisation 4 – 5 stability 7, 15, 34, 57, 68, 75, 77, 110, 144 – 147, 158 – 159, 184 – 185 stagflation xvii, 64, 76, 79, 182, 186 stagnation xvii, xviii, 2, 9, 25, 28 – 30, 62, 64, 76, 107, 117, 143, 159, 182 – 184, 186 Stalin xxii, 16, 32, 42, 49, 51 – 52 stock market(s) xxi, xxii, 8 – 9, 11 – 12, 16 – 17, 26, 119, 145, 154, 156 – 157, 186 Sub-Saharan Africa 78, 97 Suharto, Haji Mohammad 116 sustainability 96, 180 Sweden xxiii, 11, 21, 47, 68, 72, 74, 79, 100, 106, 108 – 110, 180n3, 180n4 Switzerland 11, 47, 180n3, 180n4 Taiwan 63, 114, 116, 180n3 Tennessee Valley Authority 27 Thailand 114 – 115, 161, 176 Thatcher, Margaret 76, 121 Treaty of Versailles 5, 23, 31 Turkey 32, 180n4 Ukraine xvii, xxiv, 44, 47, 49, 79, 175, 177 – 178, 180, 182, 185, 187 unemployment xxi, 1 – 2, 4 – 6, 12 – 13, 16, 19, 21, 27, 29 – 30, 46, 62, 64 – 65, 67 – 68, 70, 76 – 79, 83, 90, 97, 99, 100 – 103, 107 – 109, 111, 114, 118, 127, 131 – 132, 157, 159, 182 – 186 United Kingdom xvii, xix, 21, 38, 58, 64, 70, 73, 74, 99, 100, 106, 110, 142, 176, 180n2, 180n4 United Nations Relief and Rehabilitation Administration (UNRRA) 45 – 47 United States xvii, xix, xxiii, xiv, 2 – 4, 6 – 12, 14 – 16, 19 – 21, 23 – 25, 27 – 29,

32 – 35, 40 – 41, 43, 46 – 48, 50, 60, 74, 84 – 85, 105 – 106, 108, 110, 111, 113, 117, 118, 123, 129, 130, 131, 138, 158, 176, 176, 178 – 179, 180n2, 180n4 United States Strategic Bombing 40 – 41 USA 11, 21, 59, 63 – 65, 69, 70, 74, 78, 79, 127, 131, 132, 134, 139, 140, 157 – 158, 163, 164, 186 USSR 16, 32, 42, 44, 49, 59, 60 US Strategic Petroleum Reserve 70 vaccinations 175, 179 Venezuela 18, 23, 59, 67, 86, 89, 90, 91, 97, 148, 152, 153, 154, 156, 158 Vietnam 58, 176 Von Papen 31 Waffen SS 49 war(s) xvi, xvii, xxi, xxiii, xxiv, 1 – 6, 8, 12, 15 – 16, 18, 21, 24 – 25, 29, 31 – 32, 34 – 35, 38 – 54, 56 – 63, 71 – 77, 84, 89, 99, 131, 142, 158, 175, 177 – 179, 186 – 187 War Guilt Clause 3 Wehrmacht 49 Western Europe xxiii, 3, 38, 43, 46, 48, 56, 59, 63, 63, 67 window guidance 106 World Bank (WB) 85, 93 – 95, 98, 100, 118, 128, 130 – 131, 134 – 135, 139, 147, 149 – 150, 152, 153, 157, 162 – 164, 172, 174 World Economic 87, 128, 175, 176 World economy xvi, xx, xxii, xxiii, xxiv, 1, 6, 14, 21, 24, 56 – 57, 61, 82, 94, 97, 102, 127, 173, 175, 177, 182, 185 World Health Organization (WHO) 172 – 173 World Output 162, 176 World War II xxii, 38, 43 – 44, 53, 99, 142 World’s governments 174 Wuhan 173 Yoingchaiyudh, Chavalit 115 Yom Kippur War 60 Zaibatsu 115 Zürich 21