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The Postwar Economic Achievement

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1995
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THE BRETTON WOODS Conference of 1944 paved the way to currency convertibility and a more open trading system, which have stimulated economic growth, increased economic interdependence among nations, and underscored the benefits of international cooperation on economic issues.

Anniversaries are a time for reflection, and the fiftieth anniversary of the Bretton Woods Conference of 1944, which created the framework for international economic relations in the postwar era, is no exception. The main objective of the architects of the postwar economic order who gathered at Bretton Woods was to promote faster growth through increased integration of the world economy, in part through the institutions they founded—the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).

This objective has been achieved to a remarkable extent. The period since World War II has been marked by extraordinary economic growth that surpassed the expectations of the participants in the Bretton Woods Conference, even taking into account the slowdown in the 1970s and 1980s. In almost every country, the average annual growth of real output per capita has been higher during the past half century than during the gold standard and interwar eras (Table 1). Many challenges remain, however, particularly with respect to integrating all countries into the world economy.

Table 1Growth of real GDP per capita in selected countries, 1880–1990(average annual percent change)
Selected industrial

countries
Gold standard

1880–1913
Interwar period

1919–38
Post-World War II

1950–90
France1.32.73.1
Germany1.94.23.7
Italy1.60.93.9
Japan1.911.76.0
United Kingdom1.11.12.4
United States1.60.61.9
Selected developing

countries
Gold standard

1900–13
Period of world wars

1913–50
Post-World War II

1950–87
Brazil1.42.03.0
China0.3-0.34.9
India0.5-0.31.9
Indonesia0.5-0.22.6
Russia1.62.32.4
Source: IMF, World Economic Outlook, October 1994.

1885–1913.

Source: IMF, World Economic Outlook, October 1994.

1885–1913.

An open trading system

The sources of postwar prosperity are complex and not fully understood. But it is clear that economic growth has been driven not only by recovery from World War II but also by expanded access to education, an increase in saving and investment, technological advances, and greater integration of countries into the world economy through trade, communications, and capital markets. Arguably, growing trade integration has been the major contributing factor to the postwar economic boom.

Tamim Bayoumi,

a British national, is an Economist in the IMF’s Research Department.

The participants in the Bretton Woods Conference recognized the importance of trade liberalization and open payments systems, and the need for institutional oversight. The IMF was given the task of overseeing international monetary arrangements. While the World Trade Organization (WTO) would not be established until 1995, more than 50 years after the Conference, guidelines and rules for trade were provided by the General Agreement on Tariffs and Trade (GATT), concluded in Geneva in 1947.

Growth of world trade. Under the Bretton Woods framework, international trade has expanded rapidly since World War II, in part because of the gradual liberalization of trading regimes and external payments arrangements. In fact, growth of trade has consistently outstripped growth of output in almost every region of the world and has proved remarkably resilient in the face of events such as independence from colonial rule in many developing countries, the oil price rises of the 1970s, the move from fixed to floating exchange rates in 1973, and the debt crisis of the 1980s. Between the 1960s and the 1980s, merchandise trade as a share of output rose by half for industrial countries and by a third for developing countries (Table 2).

Table 2Trade as a percentage of GDP, 1950–89
1950–591960–691970–791980–89
Industrial countries23.324.632.036.8
Japan21.819.522.923.9
North America11.211.717.821.9
Western Europe37.238.948.756.9
Developing countries--28.034.438.4 1
Africa--48.255.154.4
Asia
East2--47.069.587.2
Other--17.219.624.0
Latin America26.323.924.927.9
Middle East--41.560.446.9 1
Source: IMF, World Economic Outlook, October 1994.

1980–87.

Excluding China.

Data not available.

Source: IMF, World Economic Outlook, October 1994.

1980–87.

Excluding China.

Data not available.

Trade liberalization. The liberalization of trade was given considerable impetus in the early postwar years by the actions of the United States. Marshall Plan aid, provided to rebuild the shattered economies of Europe, was conditional on recipients’ agreeing to a timetable for liberalizing their trading relations. The focus was on trade within Europe. It is a striking feature of Marshall Plan aid that the donor country, the United States, permitted recipients to temporarily levy higher tariffs on US goods than on European ones while their economies recovered.

The United States also provided significant funding for the European Payments Union, a regional clearing system designed to foster trade within Europe. These actions led the way to a general resumption of current account convertibility—i.e., the elimination of foreign exchange practices or restrictions that could block current international transactions—by the Western European nations on December 31, 1958. Since that time, the industrial countries have moved gradually toward liberalizing external payments and are now essentially free of exchange controls on both current and capital account transactions, and international capital markets are rapidly becoming globalized. The developing world has also seen a long-term trend toward both current and capital account convertibility, particularly during the past few years. However, foreign exchange payments are still far from being unrestricted in many developing countries.

Benefits of trade. Economies have benefited from open and expanding trade in a number of ways. Greater access to foreign markets has allowed countries to specialize in activities in which they have a comparative advantage. Investment has been stimulated by new activities and products, and rapid capital accumulation has led to faster output growth—which, in turn, has stimulated trade, leading to a virtuous circle of international economic expansion. A more open trading system—along with foreign direct investment and better communications—has encouraged technology transfers and contributed to a narrowing of the technological gap between the United States and other countries.

Postwar growth

Almost all countries have benefited from the postwar economic expansion. There have been significant improvements in the quality of life worldwide, and particularly in the developing countries. Between 1960 and 1990, life expectancy at birth rose from 53 years to 65 years, and child mortality under the age of 5 fell from 195 to 96 per 1,000. However, economic gains have not been evenly distributed among countries and regions (Chart 1), nor have they been consistent over time, for a variety of reasons.

Chart 1Growth of real GDP per capita, 1950–94

(1985 dollars: logarithmic scale)

Sources: Robert Summers and Alan Heston, “Penn World Tables (Mark 5)”: An Expanded Set of International Comparisons, Quarterly Journal of Economics, Vol. 108, May 1991; and IMF, World Economic Outlook data base.

Industrial countries. The 1950s and 1960s were a golden age for industrial countries, particularly the war-torn nations of Europe and Japan. While some of the high growth of the 1950s can be attributed to recovery from the ravages of World War II, growth accelerated somewhat in the 1960s, and prosperity surpassed expected levels. High levels of investment, education, trade expansion, and social consensus enabled the industrial countries to enjoy fast growth, high employment, and low inflation.

There was a significant slowdown after 1973, particularly in Europe and Japan (Chart 2). In part, this slowdown reflects a natural reduction of some of the forces at work in the recovery from the war. Rapid capital accumulation that had taken place in the 1950s and 1960s meant that the same investment ratio subsequently provided a smaller boost to the capital stock, while countries realized many of the benefits from specialization in production early, with the expansion of trade.

Chart 2Real GDP per capita growth in the industrial countries, 1950–94

(1985 dollars: logarithmic scale)

Sources: Robert Summers and Alan Heston, “Penn World Tables (Mark 5)”: An Expanded Set of International Comparisons, Quarterly Journal of Economics, Vol. 108, May 1991; and IMF, World Economic Outlook data base.

Government policies also seem to have contributed to the slowdown. Many governments reacted to the recessions caused by the oil shocks of the 1970s with expansionary policies, exacerbating existing inflationary pressures. Restoring inflation to low and predictable levels during the 1980s proved costly. Failure to reform labor-market practices led to rising structural unemployment. Finally, fiscal positions have deteriorated in many industrial countries since the early 1970s. The associated increase in government debt crowded out potential private investments through higher real interest rates.

The slowdown in growth coincided with the major industrial countries’ switch from fixed to floating exchange rates, suggesting a relationship. While the rise in exchange rate volatility that accompanied this switch cannot be completely discounted as a factor in the reduction of growth after 1973, it does not appear to have been a major cause. There is little evidence that greater volatility had a significant impact on trade, which continued to grow at a faster rate than output after 1973, or on investment levels (Table 3).

Table 3Investment as a percentage of GDP, 1950–89
1950–591960–691970–791980–89
Industrial countries24.527.828.326.2
Japan21.636.139.935.9
North America24.824.824.123.6
Western Europe24.129.428.925.2
Developing countries--20.324.923.5 1
Africa--12.517.214.6
Asia
East2--14.223.027.2
Other--15.316.917.1
Latin America17.717.520.817.2
Middle East--12.616.320.6 1
Source: Robert Summers and Alan Heston, “The Penn World Tables (Mark 5): An Expanded Set of International Comparisons,” Quarterly Journal of Economics, Vol. 108 (May 1991).

1980–87.

Excluding China.

Data not available.

Source: Robert Summers and Alan Heston, “The Penn World Tables (Mark 5): An Expanded Set of International Comparisons,” Quarterly Journal of Economics, Vol. 108 (May 1991).

1980–87.

Excluding China.

Data not available.

Developing countries. Economic growth in developing countries since World War II has been spurred by the expansion of international trade and, in part, by economic assistance from the World Bank (the IBRD and the International Development Association) and the industrial countries. However, growth experiences in the developing world have not been uniform—some regions have grown faster than others—and have differed in many respects from those of the industrial countries.

The countries of Africa and Latin America, for example, have shown the same pattern as the industrial countries of robust expansion followed by a slowdown. However, accelerated growth occurred at the end, not at the beginning, of the 1960s, and lasted through the 1970s. A more important difference is that per capita output fell in both regions—a much more dramatic outcome than in the industrial countries. The pattern in the Middle East has been similar. Recently, growth in per capita output has resumed in Latin America and the Middle East, while the decline in Africa has slowed.

The slower pace of economic growth in the early 1980s in Africa and Latin America reflects several interrelated factors, of which the most important are the decline in real commodity prices, the debt crisis, the rise in world real interest rates, and civil strife. Depressed and highly volatile real commodity prices continue to have a negative effect, particularly in Africa, although the problems of limited access to international capital markets caused by the debt crisis in the 1980s appear to have been largely resolved. External problems have often been exacerbated by poor economic management, characterized by excessive government interference in the economy; relative price distortions; inward-oriented trade policies; and unsustainable levels of inflation and government borrowing.

In contrast, economic growth in Asia was sustained throughout the 1980s and, if anything, has accelerated over time. This is particularly true in the newly industrializing economies of East Asia (Hong Kong, Indonesia, the Republic of Korea, Malaysia, Singapore, Taiwan Province of China, and Thailand), where annual growth in per capita output accelerated sharply in the late 1960s and reached an average of 5.5 percent in the 1970s and 1980s. Several of these economies have already caught up with some industrial countries, and per capita incomes in East Asia have now overtaken those in Latin America and the Middle East.

The reasons for the very high growth rates seen in East Asia over the past two decades are numerous. High levels of education, saving, and investment; efficient use of the labor force; and export diversification have all contributed. Successes in these areas have been supported by generally sound macroeconomic management and outward-oriented trade policies that have provided a stable economic environment conducive to private sector activity. As in Europe after World War II, expansion of international trade has allowed these countries to specialize production and import new technology. The result has been a virtuous circle involving investment, trade, and economic growth—an experience that a growing number of developing countries now seek to emulate.

In South Asia, growth of output per capita has been more modest, at an annual rate of just over 2 percent since the late 1960s, although it has recently shown signs of accelerating.

Challenges and opportunities

Despite the impressive achievements of the postwar period, a number of challenges—and opportunities—still remain if a more open, globally oriented trade and exchange rate regime is to be forged, effectively integrating national economies into a global market.

Increasing trade integration. In particular, there is scope for much deeper integration between the “old” market economies and the transition economies of Eastern Europe and the states of the former Soviet Union. International integration has also remained relatively limited in many other regions. This is particularly true in Africa, Latin America, and parts of Asia, where many countries have high tariffs and substantial nontariff trade barriers. Trade barriers erected in the industrial countries against imports of, for example, agricultural products and textiles, have also limited the expansion of international trade.

Prospects for greater trade integration are promising. The completion of the Uruguay Round of the GATT negotiations and the formation of the WTO promise to lower trade barriers worldwide for a wide range of goods and services. Regional trade agreements, most notably the North American Free Trade Agreement; the completion of the single market in the European Union; and the trend toward current account convertibility in many developing countries also indicate an increased commitment to open trading regimes.

Liberalizing capital markets. The expansion of international capital markets, together with domestic financial deregulation, provides an additional opportunity for improving the underlying performance of the international economy. While abrupt changes in capital market access can cause economic disruption, free capital markets are generally an efficient way of channeling saving into productive investment and increasing incentives to save and invest. Even in the industrial countries, however, much of the liberalization of capital markets has been very recent, and the main benefits will probably be seen in the future. Current trends toward liberalization can be seen as a return, after the long disruptions of two world wars, to the liberal international order that existed before 1914. Then, as now, capital transactions were relatively free, and capital flows were dominated by securities markets.

Improving domestic policies. Sound domestic macroeconomic and structural policies, along with unrestricted international transactions in goods and capital, provide the basis for successful economic expansion. Great strides have been made toward reducing inflation in the industrial countries during the 1980s and early 1990s. Unfortunately, the same cannot be said for many of the developing countries outside of Asia, or for the transition economies, where inflation continues to be high, impairing the underlying performance of markets by creating uncertainty.

Fiscal policy is another area of concern. In the industrial countries, the rapid increase in government spending during the 1970s and 1980s was accompanied by a steady expansion in the ratio of government debt to output. In the developing countries and most of the transition economies, where financial markets are generally less developed, the need to fund the fiscal requirements of the government is often a major reason for high inflation. In all cases, lax fiscal policies have been detrimental to underlying performance.

The 1970s and 1980s also saw an increase in structural rigidities in the industrial countries, as government policies increasingly impinged on underlying market mechanisms. The most obvious rigidities have been in labor markets. Both the actual and the “natural” rate of unemployment have continued to rise over time, with this trend being most obvious in Europe. In the developing world, government interference has caused many structural problems. It is noteworthy that in East Asia, the region with the best growth record, governments have often relied heavily on market mechanisms, particularly in agriculture.

Sound government policies and open markets for international goods are not unrelated. The historical evidence indicates that when sound government policies are combined with open international markets, a virtuous circle is created in which individuals have incentives to save and invest, which in turn provides the best support for sustaining sound policies and generating economic growth.

Promoting economic growth

The economic achievements of the postwar period were built year upon year, with the benefits accumulating steadily. Looking back on the past 50 years, it is clear that steady gains have added up to a period of extraordinary progress, unsurpassed in history. Other moves in this direction should generate high, sustained levels of economic growth worldwide, with a gradual convergence to the performance of richer countries similar to the experience of Europe and Japan in the “Golden Age.” At the same time, it is incumbent on the world community to promote economic progress by helping the poorer countries. Although many different types of assistance may be required, the most valuable will be liberal access to foreign markets.

This article is based on a chapter of the same title published in the IMF’s World Economic Outlook, October 1994.

Tamim Bayoumi

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