Repairing the Global Financial Architecture:
Painting over Cracks vs. Strengthening the Foundations

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columns.gif (1483 bytes) Comparing the Macroeconomic Performance of Developing and
Industrial Capitalist Economies During and After Bretton Woods

Table 1

Countries with Per Capita GDP Growth
Below 1960-71 Levels

. 1972-81 1982-91
Among 37 medium-size to large developing countries 49% 78%
Among 20 industrialized (OECD) countries 95% 90%
Among 48 oil-importing countries 77% 85%
Number of the above developing countries with falling per capita GDP (2 in 1960-71)
Source: David Felix, “Financial Globalization vs. Free Trade: The Case for the Tobin Tax,” UNCTAD Review 1996 (Geneva), Tables 2 and 5, pp. 63-103.
The Bretton Woods system began operations around 1946 and faded out soon after 1971. The "non-system" has now covered a similar time span. In the official and media spin, the non-system has —on welfare grounds—proved a clear winner over Bretton Woods. Liberalizing markets from the stultifying, price-distorting controls of the Bretton Woods era has unleashed entrepreneurial energies. Lifting capital controls and the integrating of financial markets have substantially improved the efficient functioning of the global economy, etc. The trouble with this assessment is that it is all mere assertion—with the exception of the explosive growth of capital flows.

By measurable macroeconomic performance criteria, the Bretton Woods era is the clear winner. Indeed, it has now been dubbed wistfully "the Golden Age of Capitalism." For the industrialized capitalist economies as a group, no period of comparable length, past or present, comes close to the high output and productivity growth rates, low sustained unemployment, and distributional equity of the Bretton Woods era.

But other factors than differences in exchange rate policy and capital controls influenced performance in each of the two eras. The Bretton Woods exchange rate regime did not become fully operational among the industrial countries until 1958, about the time the extra stimulus to European and Japanese economic growth from reconstruction had also faded out. The non-system evolved incrementally. It was not until the early 1980s that the spread of capital decontrol reached critical mass, enabling financial capital to flow freely and quickly around the globe. Oil shocks associated with Organization of Petroleum Exporting Countries (OPEC) price increases depressed growth in the oil-importing countries and raised it in the oil exporters during the 1970s, with the impact reversing in the 1980s, when oil prices plummeted.

Table 2

Annual Percentage Growth of the
Volume of Exports, 1959-94*

. G-7 Countries All OECD Countries World
1959-70 7.9 8.7 8.1
1971-82 6.4 6.4 6.2
1983-94 5.9 5.9 5.8
*Exports in constant prices
Source: David Felix, “On Drawing General Policy Lessons from Recent Latin American Currency Crises,” The Journal of Post-Keynesian Economics, vol. 20, no. 2, 1997/98, Table 3, pp. 191-221.
Minimizing the effect of these complicating factors is essential. This is done by comparing post-1958 data (when the Bretton Woods exchange rate regime had become fully operational among at least the industrialized countries) with post-1971 data divided into two successive periods of equal duration to the Bretton Woods subperiod. In the earlier period, exchange rates were floating, but capital controls were still largely in place. In the later period, free capital mobility had become pervasive, trade liberalization was accelerating, and domestic financial liberalization and privatization were well under way. If the "non-system" was merely taking time to produce salutary results, one would expect at least some of these benefits to show up in data of the later period. The contrary, however, is the case; most of the performance data show further deterioration.

Table 1 shows that the post-Bretton Woods slowdown of per capita GDP growth encompassed only about half the developing countries during the 1970s but spread to nearly four-fifths of these countries in the 1980s, with per capita GDP falling in 17 of the 37 developing countries in the sample. As for the industrialized countries, virtually all suffered a growth slowdown in both periods. The data also offer only partial support for an OPEC shock explanation of the growth slowdown. Growth slowed in 77% of the oil-importing countries in the 1970s when OPEC was riding high, but, despite the major drop in oil prices during the 1980s, the growth slowdown spread to 85% of the oil importers.

Table 3

Annual Percentage Growth of Gross Fixed
Investment at Constant Prices, 1959-94

. G-7 Countries All OECD Countries
1959-64
1965-70		 6.9
5.5		 6.9
5.4
1971-76
1977-82		 2.5
2.0		 2.5
1.7
1983-88
1989-94		 5.6
2.3		 5.4
2.3
Source: David Felix, "On Drawing General Policy Lessons from Recent Latin American Currency Crises," The Journal of Post-Keynesian Economics, vol. 20, no. 2, 1997/98, Table 5, pp. 191-221.
Table 2 highlights a more surprising finding concerning the globalization process. Not only was the resumption of floating exchange rates in the 1970s associated with a sharp retardation in the growth of the volume of exports, but retardation worsened despite the acceleration of trade liberalization in the 1980s. The share of exports in national output has risen persistently in most countries since the end of World War II. But after the Bretton Woods era, this rising share mainly reflected a greater slowdown of output than export growth.

Tables 3 and 4 extend the comparison to investment and productivity growth trends of the industrialized countries. Table 3 shows a massive sustained drop in the growth of real fixed investment after 1970 for the OECD countries and the G-7 subgroup, a rebound to Bretton Woods levels in 1983-88, but a return to depressed 1970s rates in the following six-year period. Sketchier data from the developing countries indicate that real investment growth rates held up in the majority of them during the 1970s, oil exporters basking in the OPEC boom, and others, mainly Latin American and Asian, relying heavily on foreign bank loans to supplement domestic financing. In the 1980s, however, real investment tumbled as falling oil prices forced oil exporters to retrench, and foreign banks cut off lending to over-indebted third world clients.

Table 4 shows productivity growth of the industrialized countries dropping sharply in the 1970s. But despite assertions that the pace of technological progress has since accelerated, no resurgence of productivity growth occurred from 1979-95.

Table 4

Annual Percentage Productivity Growth of
the OECD Business Sector, 1960-95

. Labor
Productivity		 Total Factor
Productivity
. 1960-73 1973-79 1979-95 1960-73 1973-79 1979-95
G-7 Countries 4.5 1.6 1.4 3.3 0.8 0.8
Other OECD
Countries		 5.1 2.5 2.0 3.0 1.0 1.1
All OECD
Countries		 4.6 1.7 1.5 3.3 0.8 0.8
Source: Organization for Economic Cooperation and Development, OECD Economic Outlook (Paris: June 1994), Appendix Table 59.
Table 5 indicates other adverse welfare trends in the industrialized countries. Unemployment rates rose after the demise of Bretton Woods, but more steeply and persistently in the EU than in the United States. Nevertheless, annual real wage income [real wage times (1- unemployment rate)] rose more in EU countries than in the United States. The contrasting wage trends—along with more generous EU unemployment safety nets—also help account for why income distribution worsened in the U.S. after the 1970s but not until the 1990s in the EU.

Table 5

Annual % Rates of Unemployment and
Growth of real Wages and GDP Per
Capita in the U.S. and the EU, 1960-95

. Unemployment Rate Real Wage Growth Real GDP per Capita Growth
. U.S. EU U.S. EU U.S. EU
1960-73 4.81 2.35 1.45 2.09 2.72 4.76
1974-79 6.68 4.57 0.03 5.30 1.62 2.52
1980-89 7.16 9.23 -0.85 3.32 1.49 2.23
1990-95 6.32 9.85 -0.68 1.07 0.85 1.55
Sheldon Friedman and Christian Weller, "One More Time: Labor Market Flexibility, Aggregate Demand and Comparative Employment Growth in the U.S. and Europe," Economic Policy Paper E011 (Washington: AFL-CIO Public Policy Department, 1998), Tables 1, 8, 10.

 

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