Oil crisis and development in the 1980s



Content
•I. General trends
•II. Development in 1970s and 1980s
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Starting points:
•after-war bipolar division of the world
•successful econ. development of Western countries during the after-war period
•period marked by increasing international trade supported by the Bretton-Woods system and GATT

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General trends
•A. Political tendencies
•B. Technological progress
•C. Economic theory
•D. Global problems
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A. Political tendencies
•struggle in the bipolar world
•disarmament treties (SALT I, SALT II)
•Helsinky Peace Process (1975)
•at the end of the 1970s
•right-wing shift in western countries – Reagan
•new round of armament at higher technical level i
•at the end of 1980s – collapse of the socialistic bloc
•Economic and military lagging behind
•Afganisthan
•Gorbachev – 2nd part of 1980s




B. Tecnological progress
•microelectronics
•automatization and robotization
•biotecnology
• USA leader + JP boom X Eur lagging behind

C. Economic theory
•Keynesianism replaced by neoliberal theories
•Phillips Curve
•STAGFLATION – new phenomenon
•STAGFLATION = ò product and simultaneous ñ prices
•        X
•CLASICAL RECESSION = ò product a  ò prices

Phillips Curve 1960 - 1969
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unemployment

Phillips Curves 1960 - 1996
(SR - left, LR – right)
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unemployment
unemployment

Comparison of stagflation and classical recession
•    STAGFLATION                 CLASSICAL RECESSION


Practical changes in economic policy
•deregulation in USA already under Carter but mostly under Reagan + Thatcher in GB
•Anglo-Saxon deregulation + support of competition ð pressure on Eur to follow them
•ðð creation of single market in Europe
•monetary policy – monetarism – monetary aggregates
•further round of liberalization of foreign trade
•Uruguay Round of negotiations in GATT + NAFTA

D. Global problems
•global problems
•concerning the whole humankind
•reaching beyond borders of individual countries
•Ignoration -> decline of the whole human civilisation
•The Club of Rome (1968)
•since 1972 UN Environment Conference (international conference on envir. issues)




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Development IN 1970s and 1980s
•  A. Crises in the 1970s
•B. Development of GDP
•C. Development of price levels
•D. International trade
•E. Capital flows
•F. Migration
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A. Crises in the 1970s
•collapse of the Bretton-Woods system
•food crisis
•raw materiál crisis
•oil crisis
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     GLOBAL CRISIS-
    STAGFLATION

The Food Crisis (1972)
•causes:
•the hundred years´ crop failure in Southeast Asia and Sub-Sahara Africa
•USSR crop failure 1972 - IM of large amount of grain from USA
•ò crop areas in developed countries (USA)
•ò stock of food in USA
•ð food shortage ðñ prices in 1973 by 2x
•but in 2 years ñ prices halted

Food price index, 1960-2003 (1990=100)
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The Raw Material Crisis
•since 1950s low and stable prices
•ð improving exchange rates in developed countries
•ð development of industry dependent on low prices of raw materials
•at the same time as The Food Crisis
•causes:
•simultaneous boom phase of economic cycle in developed countries (1973) ð lack of raw materials
•insufficient capacities ð unsustainable in LR
•problems for raw material-intensive industries

I. Oil Crisis (1974)
•ñ oil dependence in developer countries
•1950 ¼ of energy from oil X 1973 ½
•I. Oil Shock (1973)
•political reasons
•fourth Arab-Israeli War (Jom Kippur War)
•Israel I. serious problems – help from USA
•OPEC as reaction ò production by 5%
•ðñ prices from 2,5$/1973 to 11,65$ /1974

II. Oil Shock (1979)
•causes:
•uncertainty on markets
•Iran Revolution
•Iran - Iraq War– attack on Iran oil fields

•ðñ oil prices from 13,34/1979 ð 36,22/1982 =12x higher than in 1972
•predictions of absolute shortage ð failure  ð BUT reaction in developed countries
•ò oil dependency + ò energy intensity
•saving – e.g. cars
• discovery of new oil resources
•– North Sea – GB, NO
•ð in LR ò consumption ð negative for OPEC
U.S. energy intensity since 1950

Boeing 737
•first model in 1967
•approx. 100 passengers
•range of flight 2 775 km
•modern version B737-800
•almost 2x more passengers
•2x longer range of flights
•energy consumption lower by 23%
•… lower costs per seat (by 48%)

Nominal and real price of oil






B. GDP
•1973 very strongñ
•1974 ò GDP in certain countries
•mainly large countries such as GB, USA, JP and DE
•small ones – not so bad situation
•1975 worsen –all countries ò except NO
•òindustrial production in 10 developed capitalistic countries by 7,5% =  at the first time after
WWII
•the mostly effected – „traditional“ industries (ships, cars, …)
•1976 – rapid ñ production
•pre-war level pf production
•but certain countries problems - GB, JP
•in total  slowdown BUT from LR favourable
•BUT at the end of the 1970s production 5-15% below the potential

Growth of GDP in market prices, 1972-1978 (in %)
Country
1972
1973
1974
1975
1976
1977
1978
Average 1970/78
USA
5.8
5.4
-1.3
-1
5.5
4.8
4.4
2.9
Japan
8.9
9.8
-1
2.4
6
5.4
5.6
6.1
EEC
4
5.9
1.7
-1.4
5.1
2.3
3.1
3.2

Causes
•end of the catch-up effect
•inflation ð ñ uncertainty ð ò INV
•ò introduction of new technologies
•problems in energy-intensive industries
•worsening exchange rates
•ò productivity growth by 1% after 1970
•changes on the labour marketï rapid growth of population from previous baby boomðòaverage level of
experience
•ecology ð ñ gov. regulations
•oil prices ð writing-off the high-performance machines with high energy-intensity
•slowdown of technological progress
•no further possibilities to shifht resources from agriculture

Share in the world economy production, 1960-1980 (in %)
Country
1960
1970
1980
Less developed countries
11.1
12.3
14.8
Japan
4.5
7.7
9
China
3.1
3.4
4.5
EEC
26
24.7
22.5
USA
25.9
23
21.5
Other developed countries
10.1
10.3
9.7
USSR
12.5
12.4
11.4
Other socialist countries
6.8
6.2
6.1

•early 1980s problems
•II. Oil Crisis
•restrictive fiscal and monetary policy
•considerable change X after-war period
•ð econ. decline and stagnation
•1980 – 82  simultaneously almost all capitalistic countries
•less deep than after I. Oil Shock but longer ð slow recovery
•+ further problems: ñ inflation (effect of II. OS), negative INV, gov. deficit, current account
deficit, high U
•the mostly effected – traditional  industries

Growth of real GDP, 1979-1983 (in %)
Country
1979
1980
1981
1982
1983
USA
2.8
-0.3
2.6
-0.5
2.4
Canada
3.4
1
4
-4.2
3
Japan
5.1
4.9
4
3.2
3
EEC (10 countries)
3.5
1.1
-0.3
0.5
0.8

•improvement of indicators in the 2nd ½ of 1980s
•elimination of inflation ð stabilization of macro situation
•modernisation + rationalisation of production (automatization and robotization) ð ò production
costs + ñ  labour productivity
•1984 - 1990  - ñ GDP (except 1986)
•the end of the 1980s better than the beginning – problem U
•in total considerable slowdown X after-war growth

Growth of GDP p.c., 1948-88
country
1948-72
1972-88
Canada
2.9
2.6
France
4.3
2.1
FRG
5.7
2.2
Italy
4.9
2.8
Japan
8.2
3.3
GB
2.4
2.1
USA
2.2
1.7

Unemployment
•recession after  II. Oil Shock ñ U
•youth
•long-term unemployment
•structural
• ð new
•peak in 1984 and persisting
•reasons:
•slow econ. ñ
•restrictive policy of government and CB
•rigidity of labour market
•generous soc. policy
•gov. regulations
•ð ò interest in foreign LF ð attempt to return to native countries

Unemployment as % of labour in selected countries, 1973-1989



C. Increasing price level
•ñ prices of raw materials ð ñ costs ð inflation pressure BUT
•expansive monetary policy
•in ½ 1970s all except DE and CH two-digit P
•+ changes of price relations
•slower ñ prices industrial production
•ð exchange relations unfavourable for developed countries
•the worst DC

• 2nd ½ of 1970s moderation (persisting) P and at the end of 1970s ñ
•budget deficit – attempt to provide public goods
•better anticipation of P ð wage negotiations
• high wage claims (powerful unions) e.g. GB
•ð wage spiral of wages and prices in certain wages
•rapid disinflation would have impacts on real economy and E  X policy
•II. Oil Shock- more rapid disinflation
•peak of prices in 1980 except those of energy (1982)

Reasons of rapid disinflation
•strict EPs
•governments concerned about repeated wage price spirals
•ñ r in USA and appreciation of $ ð pressure on Eur to ñ r
•ð contribution of EP to ò P expectations
•limited ñ wages
•ñ productivity
•ò prices of raw materials
•substitutes + slow ñ industrial activity

Changes in price levels in selected countries, 1973-1989 (in %)



D. International trade
•NO ñ protectionism in response to crisis x 30s
•only Common Agricultural policy of EC
•continuous ñ  - ò only in 1975 and 1982
•direction of trade
•still mainly among developed countries
•ò share of USA and GB
•ñ share of DE and JP
•ñ share of OPEC and NIS

Development of the world export, 1951-2007 (percentual change)
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Leading world exporters by regions, 1963-1987 (in %)
Country
1963
1973
1979
1987
Developed countries*
64.3
68.2
63.4
68.2
Australasia, South Africa
2.8
2.7
2.1
1.7
Developing countries
20.7
19.2
25.3
19.7
CPE
12.1
9.9
9.3
10.4
total
100
100
100
100

Mutual trade between regions in  1963, 1979 a 1987 (in %)



Export share of the most influential economies, 1937 - 1987 (in %)
Country
1937
1950
1960
1973
1979
1987
GB
20
20
14
9
10
9
USA
23
32
28
20
20
17
France
7
10
9
11
11
10
Germany (since 1950 BRD)
16
6
15
19
19
20
Rest of Western Europe*
20
20
21
23
24
23
Canada
8
9
7
7
6
7
Japan
6
3
5
11
11
15
Total
100
100
100
100
100
100

Share of commodities



E. Capital flows
•relative inhibition of ñ capital flows in 1970s
•BUT end of constraints on capital flows
•USA 1974-75, GB 1979, JP almost all in 1980 and Eur until the end of 1980s
•ð more interconnected markets ð return to the situation before WWI
•mainly portfolio INV
•huge ñ foreign INV in 1980s
•main investors USA, GB, JP, DE, FR and NL

•direct foreign INV (DFI)
•relative ò importance of USA as  an investor + ñ share of certain Eur countries + JP
•in 1980s USA ñ as a host country for INV+ ò DC
•huge ñ portfolio INV in 1970s and 1980s
•at the beginning of 1970s 10 000 mill. SDR ð in 1986 150 000 mill.
•at the end of 1980s JP main portfolio investor (more than 50%) + DE and GB
•host countries – mainly USA + GB, DE, FR, CA

Direct foreign investments in the world according to country of origin, 1960-1995 (% of the total
volume)
Country
1960
1975
1985
1990
1995
USA
47.1
44.0
36.6
25.8
25.9
Great Britain
18.3
13.1
14.6
13.7
11.7
France
6.1
3.8
5.4
6.5
7.4
  subtotal
71.5
60.9
56.6
46
45
Japan
0.7
5.7
6.5
9.0
11.2
Germany
1.2
6.5
8.8
6.5
8.6
  subtotal
73.4
73.1
71.9
61.5
64.8
Netherlands
10.3
7.1
7.0
6.5
5.8
Canada
3.7
3.7
6.0
4.7
4.0
Switzerland
3.4
8.0
3.1
4.0
4.0
Italy
1.6
1.2
2.3
3.3
3.2
Sweden
0.6
1.7
1.8
3.0
2.3
  total
93.0
94.8
92.1
88.7
85.1

Capital and DC
•since 2nd ½ 1970s commercial banks – capital  to DC
•mainly after 1978
•reasons
•development of international banking
•liberalization of capital flows
•free capital – „petrodollars“

Problems with indebtedness of DC
•reasons:
•ñ oil prices
•current account deficits
•ò foreign reserves
•deterioration of terms of trade
•inflation pressures in developed countries ð ñ r ð change of capital direction
•appreciation of USD
•recession in western countries ð ò IM
•1982 MX bankruptcy (similar problems in AR, BR) – IMF …

F. Migration
•population growth - 1970-1990 from 3,7 bill. to 5,3 bill.
•stagnation of migration to developed countries in 1970s
• + somewhere even outflow

Percentage share of foreign migration in the world, European and North-American population,
1960-2005
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