RotaractMUN 2016 ECOSOC study guide

THE ECONOMIC AND SOCIAL COUNCIL SOFIA, 23-30 JULY 2016 TOPIC A: LOW OIL PRICES AND THEIR IMPACT ON THE GLOBAL ECONOMY prepared by Alexander Sohl TOPIC B: IMPLICATIONS OF SLOWING GLOBAL GROWTH FOR THE GLOBAL ECONOMY prepared by Plamen Patchev Table of contents THE ECONOMIC AND SOCIAL COUNCIL TOPIC A: LOW OIL PRICES AND THEIR IMPACT ON THE GLOBAL ECONOMY INTRODUCTION RECENT HISTORY AND IMPLICATIONS ON THE OIL PRICE 2003-2014 2014-today OUTLOOK DEMAND AND SUPPLY 11 SITUATION AND OUTLOOK FOR MAJOR OIL PRODUCERS 12 THE OPEC 12 DESCRIPTION OF THE OPEC 12 OUTLOOK SUPPLY 13 ECONOMIC SITUATION 13 NON-OPEC PRODUCERS 17 NORTH AMERICA (US, CANADA, MEXICO) 17 OUTLOOK SUPPLY 17 RUSSIA 17 OUTLOOK SUPPLY 17 ECONOMIC SITUATION 18 OTHER IMPORTANT ACTORS 19 THE IEA 19 THE IEF: A PLATFORM FOR DIALOGUE 20 IMPACT ON THE GLOBAL ECONOMY 21 FOOD PRICES 21 OIL DEMAND AND DEVELOPMENT 21 QUESTIONS A RESOLUTION SHOULD ANSWER 24 BIBLIOGRAPHY AND RECOMMENDED READING 25 Dictionary 26 TOPIC B: IMPLICATIONS OF SLOWING GLOBAL GROWTH FOR THE GLOBAL ECONOMY 27 INTRODUCTION 27 NATIONAL ACCOUNTING 27 IMPORTANCE OF THE GROSS DOMESTIC PRODUCT 31 STATUS QUO- SLOWING GROWTH AND ITS IMPLICATIONS 31 POSSIBLE APPROACHES TO THE PROBLEM 38 IS GROWTH FAIR? 42 IS GROWTH GREEN? 43 IS GROWTH IMPROVING OUR LIVES? 43 QUESTIONS A RESOLUTION SHOULD ADDRESS 44 BIBLIOGRAPHY AND RECOMMENDED READINGS 45 TOPIC B: ANNEX ON HISTORY OF GLOBAL ECONOMIC GROWTH 47 THE ECONOMIC AND SOCIAL COUNCIL “Making ECOSOC a truly meaningful organ that has the capacity to make a difference calls for new approach This is so especially now, during times of hardened economic uncertainty that ECOSOC`s role and relevance is ever- increasing” H.E Mr Miloš Koterec President, ECOSOC 2012 The Economic and Social Council (ECOSOC) was established under the United Nations Charter as the principal organ to coordinate economic, social, and related work of the 14 UN specialized agencies, functional commissions and five regional commissions The Council also receives reports from 11 UN funds and programs ECOSOC serves as the central forum for discussing international economic and social issues, and for formulating policy recommendations addressed to Member States and the United Nations system It is responsible for:  promoting higher standards of living, full employment, and economic and social progress;  identifying solutions to international economic, social and health problems;  facilitating international cultural and educational cooperation; and  encouraging universal respect for human rights and fundamental freedoms It has the power to make or initiate studies and reports on these issues It also has the power to assist the preparations and organization of major international conferences in the economic and social and related fields and to facilitate a coordinated follow-up to these conferences With its broad mandate, the Council's purview extends to over 70 per cent of the human and financial resources of the entire UN system The Council meets in alternating years at UN Headquarters or at the UN Office in Geneva The ECOSOC serves as the central forum for discussing international economic and social issues, and for formulating policy recommendations addressed to member states and the United Nations system A number of non-governmental organizations have been granted consultative status to the Council to participate in the work of the United Nations The Council has 65 member states out of the 193 UN member states, which are elected by the United Nations General Assembly for overlapping three-year terms Seats on the Council are based on geographical representation with 18 allocated to African states, 13 to Asian states, to East European states, 13 to Latin American and Caribbean states and 13 to West European and other states.1 For more information visit: http://www.un.org/en/ecosoc/about/ TOPIC A: LOW OIL PRICES AND THEIR IMPACT ON THE GLOBAL ECONOMY INTRODUCTION Many of us may still be able to imagine a time without the internet or cellphones, but most of us will not be able to imagine a world without oil Children’s toys, pharmaceuticals, agricultural products and almost every good you can buy have one thing in common: their transport and the packaging, if not the product itself, need materials produced from petrochemicals So even though we have so many touchpoints, we hardly ever think about the world’s most important commodity, except for when refueling ours cars maybe Mankind has been using oil for over 2000 years The first reports about oil use date back to Babylon and ancient Persia, where it was used in medicine and lighting The latter use case was also the reason for the first boom and the creation of the modern oil industry In the mid-19th century the discovery of various distillation products and mainly kerosene from crude oil changed the industrial landscape Kerosene was used as lamp oil back in the day while today you may know it as jet fuel http://www.unep.org/newyork/IntergovernmentalPolicyCoordination/EconomicandSocialCouncil/tabid/52272/ Default.aspx Figure 1: World primary energy usage (Mtoe) http://www.tsp-data-portal.org/ With new use cases and exploration of oil wells worldwide, oil soon became the world’s most traded commodity and replaced coal as most important source of primary energy Almost 2/3 of all produced oil products go into transportation, relating the increase in consumption to the increase in demand for transportation Other important consumers are the chemical industry Global cured oil consumption by sector 2012 Transport 12% Industry 16% use) power generation and (industry) Figure 2: Oil Production and energy consumption by Non-energy-use 8% (non-energy region source yearbook.enerdata.net 64% Other (agriculture, buildings, etc.) Consequently the regions consuming most crude oil are developed and developing nations Therefore the demand is highly dependent on their economic success The demand for oil in most of the developed and developing countries exceeds their local supply Therefore they are depending on imports from oil-rich regions in the Middle East, Russia, Africa or Latin America (see fig 3) This discrepancy between local supply and demand is the origin of the global hydrocarbon market O I L PRO D UCT I O N BY REG I O N 0 - OIL PRODUCTION [100 MT] 14 12 10 2008 North America 2009 Russia 2010 Asia 2011 Europe 2012 Latin America 2013 2014 Middle-East Africa TOTA L E NE RGY CO NSUMPT I O N BY REG I O N 60 OIL SONSUMPTION [100 MT] 50 40 30 20 10 2008 North America 2009 Russia 2010 Asia 2011 Europe 2012 Latin America 2013 Middle-East 2014 Africa Figure 3: Oil Production and Energy consumption by Region source yearbook.enerdata.net RECENT HISTORY AND IMPLICATIONS ON THE OIL PRICE In addition to the geographical factors there is a lot more to consider when it comes to the question of determining the price Since modern economies are highly dependend on the availibility of oil, the market has also a political dimension, making it even more complex The figure below shows the most important events with an influence on the oil price between the years 1841-2014 Events and developments influencing the oil price have become more frequent and drastic with the process of globalization However, for the purpose of the Sofia-Serdika Rotaract Global MUN 2016, the ECOSOC is recommended to address only the developments from the year 2003 onwards Nevertheless, it should be borne in mind that the event preceding the year 2003 can be seen as origins of many current developments Figure 4: History of Crude Oil Prices 1861-2014 Source: Goldman Sachs Global Investment Research 2003-2014 From the mid-1980s to September 2003 the inflation adjusted price for a barrel of crude oil was under 25$ In the early 2000s the Chinese demand for oil increased due to an acceleration in economic growth, leading to a higher industry demand and a wealthier population with more vehicles on the road At the same time, aging oil fields and a lack of investment in the U.S decreased the production Similar developments can be observed in the United Kingdom, Mexico and Indonesia, leading to an increase to almost 30$/bbl in 2003 In 2003 the invasion of Iraq marked a significant event for the oil markets The war shortened the supply for oil even further and slowed down global oil production in the region The markets reacted to this scarcity and uncertainty with a dramatic increase in the oil price over the following years Until June 2005 the price broke the psychological barrier of 60$/bbl, reaching 79$/bbl in mid 2006 2005 marked a tipping point in price development Before 2005 the supply matched the demand of crude oil, leading to elastic prices However, oil thirst in the BRIC countries continued to increase dramatically, leading to an excess demand for oil Drastic price swings and therefore inelastic prices are the consequent effect The price volatility in the following years is largely explained by shifts in demand for crude oil This market situation is also an ideal breeding ground for financial speculation In the short term, financial speculations in the future markets may lead to price increases Some sources argued, the increase prior to the 2007/2008 financial crisis was also due to speculations in the future markets: Interesting fact: During 2004-2007 the profit of all supermajor companies (Exxon, Total, Shepp, BP, Chevron, ConocoPhilipps) totaled 498,8 billion $ and now over 250,000 oil workers have lost their jobs Meanwhile, conflicts in the Middle East continued The situation in Iraq has still not settled and Israel and Lebanon went to war Additionally, North Korea started its missile launches and nuclear tests and tensions in eastern Turkey arose, followed by tensions in Nigeria On 2nd January 2008 the crude oil price cracked the 100$ mark The climb continued to 145.85$ on 3rd July 2008 due to fired shots at an Iranian boat and speculations about an Israeli attack on Iran Until the financial crisis took hold in July 2008, prices for oil plummeted to as low as 32$ in December that year The crisis left its marks mainly on European countries The European economy contracted and so did the demand for oil, impacting also the American economy, which reduced the demand even further A strong dollar also contributed to the development But the global excess supply was a short phenomenon As a reaction to the development of the global economy, the OPEC decreased its production, which lead to an oil price of 100$ in December 2010 In 2011 the Arab Spring with political turmoil in Egypt, Libya, Yemen, and Bahrain broke out Together with a weak dollar, this drove the prices back to 114$/bbl in May 2011 Especially supply problems in Europe held the European oil price high Libya was a major source for European oil imports, but production was halted after the civil war On the other side the pessimistic outlook on the European economy and concerns about another global recessions lowered the price to below 100$ With the European debt crisis still stunning the global economy and rising tensions with Iran, after sanctions due to their nuclear program, the price of oil stayed near 100$ The European debt crisis was the main influence factor for price swings during 2012 between 85 and 107$ The impact of the Libyan conflict still caused European oil prices to be higher than the U.S counterparts In 2013 good economic data from the U.S., China and Europe drove prices Furthermore, trouble in Egypt and the Syrian conflict made investors uncertain, resulting in a high of 100$/bbl Global conflicts continued in 2014 The dispute over Crimea, the rise of IS in Iraq, Libya and Syria caused prices to stay high 2014-today In 2014 a turning point was reached and the prices plummeted from over 106$ in June to as low as 26$ in February 2016 But why did this price drop occur? This complicated question may be reduced to the main economic principle: Supply and demand Since 2014 the production of oil has been significantly larger than consumption, ergo the markets react to this significant excess oil with a fall in prices Figure Oil Production and Consumption Balance, source: Short-term energy outlook May 2016 eia The explanation for the excess demand on the other hand, is not so easy But, as always in recent history, one could start with looking at the United States With new platforms in the Gulf of Mexico connected to the grid and the exploration of shale gas and oil, the domestic production of oil in the US has nearly doubled over the last couple of years The Arabian, African and Southern American oil that once was sold in the United States is now competing for Asian markets, and the producers are forced to drop prices Canadian and Iraqi oil production and exports are rising year after year Even the Russians, who are heavily stricken by economic problems, manage to keep pumping at record levels and Iran, in need for foreign currency, increased production after the agreement on easing sanctions in 2014 10 Put it more straightforward- imagine that you are driving a car When the car drives more and more faster, this is nice, however, it could be the case that the engine will overheat soon By observing the car from outside, you couldn’t really see whether the car’s engine is overheating This simple example shows greatly the problem of using GDP growth as the sole economic performance indicator Yes, the fast car is showing good performance, but for how long?8 In the economic field, this question is gaining importance At the last annual meeting of the World Economic Forum, the Nobel Prize laureate, Joseph E Stiglitz addressed the issue that GDP growth is not a good measure for well-being The chief-economist of the Forum, Jennifer Blanke also addressed it by stating that in the current world of rapid technological change and demographic shifts, GDP falls short of measuring welfare.9 After all, GDP measures just the final goods and services produced in an economy over a given period, without any attention to what is produced, how it’s produced or who is producing it Simon Kuznets, who defined the modern version of GDP in the 1930s, specifically warned against using it as a measure of welfare Of course, GDP is highly correlated with a lot of the things that we prize in a society: good education, quality infrastructure, functioning markets And yet, as has been long recognized, as a concept it is missing critical parts of the puzzle.10 Such parts can be as follows:11 IS GROWTH FAIR? Recent years have seen a significant rise in inequality across most OECD economies and it remains high in many developing countries What are needed are good jobs, education and opportunities for improved living standards more generally Researchers at the IMF and the OECD have started to measure the extent to which inequality slows growth through channels such as lower consumption At an extreme, economies that are not inclusive risk societal unrest and breakdown, as we saw during the Arab Spring and elsewhere It is not about how much is produced, but how the gains are distributed and the extent to which growth translates into broadbased improvements in living standards, touching all citizens rather than the lucky few This is World Economic Forum 2016 World Economic Forum 2016 10 World Economic Forum 2016 11 World Economic Forum 2016 42 true at a particular point in time but also with regard to future generations For example, are we building up debts that we will simply leave to future generations? Are we living at the expense of tomorrow? With public pension systems around the world, heavingly overwhelmed by the increasing number of pensioneers and at the same time, decreasing number of contributors, the question whether retirement schemes could provide adequate funds for the life after work should also be put on the agenda IS GROWTH GREEN? Another way to ensure that we don’t live at the expense of tomorrow is through responsible environmental behavior and ensuring that growth is as “green” as possible It is not just about how much we produce and grow but how we it and how much pressure this puts on our natural environment This is important in areas ranging from energy to agriculture to manufacturing of consumer goods and requires a focus on the how of production and also the life cycle of what we produce Efforts towards developing a more “circular economy” where manufacturing pays attention to how inputs will be reused in future production (in a sense “recycling 2.0”) are an important part of this story Environmental accounting can play a critical role, making sure that companies pay attention to and are held accountable for their environmental as well as financial impacts The fundamental question here is - in what state will we leave the planet for ourselves and for future generations? Constructing a well-functioning market for CO-2 emission quotas should also be placed on the agenda The reason why it failed till now is to be found mainly in the uncertain willingness-to-pay of the actors involved in it IS GROWTH IMPROVING OUR LIVES? New business models that are both adding more value as well as holding the promise of a greener future should be investigated Consumers around the world increasingly derive great value from new “sharing economy” business models such as Airbnb and Uber, where we make more use of what already exists rather than simply producing more “stuff” It is a question of adding economic and consumer value rather than quantity And yet the shortcomings of GDP are also clear here since much of this value derived from new technologies is not picked up in GDP and productivity numbers 43 Many developing countries have learned from the experience of advanced economies that simply focusing on GDP growth is not the way forward Indeed, the considerations outlined above are in some ways even more acute for those countries that are still in the process of raising living standards, and it very much matters how they go about the “catch-up” process For example, the African Development Bank, and many of its regional member countries, emphasizes the importance of fostering growth that is both inclusive and green, not merely high There is also an understanding in developing economies that it is important to focus on particular sectors in the development process - for example improving productivity in agriculture is widely seen to be of particular importance Thus, some life quality indicators could be taken into account QUESTIONS A RESOLUTION SHOULD ADDRESS - How should we measure welfare? Using GDP growth as the sole measure or also including other measures? - Should we target our efforts on tackling the global financial crisis first and then concentrate on measures for fostering global growth? - Which measures from the economic and fiscal policy set could prove effective in tackling the global financial crisis and/or fostering economic growth? - How should we approach the problem of high youth unemployment- a ticking bomb with regards to future growth perspectives? - Should we promote public investments in the economies or just rely on the concept of supply and demand? - Industry 4.0- who are the winners and who the losers? - Will the automatization of the working process enhance growth? - Should a wealth redistribution (for example, in form of various taxes) take place in order to diminish the wealth inequality? - Should we further push on fostering globalization? 44 BIBLIOGRAPHY AND RECOMMENDED READINGS Lequiller, F and D Blades (2014)- Understanding National Accounts, second edition OECD publishing Jones, C.I (2015)- The facts of Economic Growth Stanford GSB and NBER Crafts, N (2003)- Fifty years of economic Growth in Western Europe: No Longer catching up but falling behind? Discussion paper, issued by the Stanford Institute for Economic Policy Research Broadberry, S and L Gardner (2013)- Africa’s Growth Prospects in a European Mirror: A historical perspective The GAGE Chatham House Series, No Bunker, N (2014)- A Post-War History of US Economic Growth An examination of the contributions to Growth of the components of Gross Domestic Product Washington Center for Equitable Growth Radelet, S., J Sachs, and J-W- Lee (1997)- Economic Growth in Asia Background paper for the Asian Development Bank’s study “Emerging Asia: changes and challenges” Lee, J-W and K.Hong (2010)- Economic Growth in Asia: Determinants and Prospects Asian Development Bank Economics Working Paper Series No 220 World Bank Group (2016)- Global Economic Prospects, a flagship report Department of Economic and Sofial Affairs at the United Nations (DESA) (2016)- World Economic Situation and Prospects Update as of mid- 2016 Regling, K (2016)- The European Economy after the Crisis Presentation slides, shown in Singapore on the 18.02.2016 World Economic Forum (2016)- Agenda in focus: Beyond GDP World Economics: Global Growth Monitor, available http://www.worldeconomics.com/papers/Global%20Growth%20Monitor_7c66ffca-ff864e4c-979d-7c5d7a22ef21.paper 45 at: Krugman, P., M.J Melitz, M.Obstfield (2014)- International Economics, theory and policy Pearson Series in Economics Acemoglu, D., J Robinson (2012)- Why nations fail: The origins of Power, Prosperity, and Poverty Crown Publishing Group World Economic Forum (2016)- Agenda in focus: Beyond GDP Regling, K (2016)- The European Economy after the Crisis Presentation slides, shown in Singapore on the 18.02.2016 AT Kearney, Global Business Policy Council (2014)- Beyond the Crisis: Sustained Global Economic Growth? The Impact of the financial crisis on the real economy January 2016 Available at: archive.intereconomics.eu/downloads/getfile.php?id=719 IMF World Economic Outlook Update, Available at: http://www.imf.org/external/pubs/ft/weo/2016/update/01/info.htm De Grauwe, P (2010)- The Financial Crisis and the Future of the Eurozone Bruges Economic Policy Briefings 46 TOPIC B: ANNEX ON HISTORY OF GLOBAL ECONOMIC GROWTH It may come as a surprise for some, but growth as a concept has been present only in the last centuries Let the following table be consulted: For other world regions, cross-century data is barely available, however, the picture for the pre1830s is more or less the same throughout the world The pattern after 1830s is also similar for other world regions, however, the timing is different as the main reason for the increase of growth (Industrial Revolution) did not occur all over the world simultaneously After 1830, the growth levels jumped from 0.2 to more than per cent The main reason for that was the Industrial Revolution in Great Britain which lasted approximately from the 1760s to the 1830s The change that occurred in the manufacturing processes, improved the productivity enormously Before the Revolution, a big deal of the output was produced by employing only labor The introduction of steam engines and the succeeding mechanized cotton spinning for example, greatly increased the output per worker in the textile industry Other industries also benefited from this so in general, the added value improved greatly From this, the increase of growth followed 1930s and 1940s were time of international armed conflicts, thus growth was hampered as the majority of the means of production was employed in creating war machines and weapons Additionally, many countries experienced severe collateral damages which did not miss production facilities After the end of the World War II, growth in Western Europe marked the highest levels in history The period from the 1950s till middle 1970s is known as the Golden Age of European Economic Growth In that period, the Western European countries transformed in fact to welfare states The rapid growth came mainly from the shift of the workforce from agriculture 47 to industry In the postwar era, production was deteriorated and therefore, a need for catch-up emerged Also the favorable macroeconomic conditions in these decades caused an increase in investments.12 In the middle of the 1970s, a phenomenon called “productivity slowdown” caused a slowdown to the growth in Western Europe There were many reasons for this Positive transitory factors were weakened, the returns to investments diminished as the postwar boom went on and a significant reduction in the scope of catch-up growth as the productivity gap with the United States narrowed In fact, for many countries, this last factor may have been the most important As growth slowed down, the postwar settlements came under severe pressure and became less capable of delivering wage modernization while capital found new options in a more globalized world Till the 1970s there was also an increase in public spending and taxation relative to GDP Regulation of labor markets was also present According to some experts, this was also among the reasons of the slowdown.13 In the 80s, 90s, and beginning of the new century, growth levels were fluctuating around 2% USA may be considered as an interesting case The country also experienced the Industrial Revolution as in the 18th and 19th century, the ties with Great Britain were good However, the USA started with a certain lag The main reason is to be found in the fact that the abundance of land and scarcity of labor in the ‘New World’ made it less attractive to conduct expensive investments in machine production Nevertheless, the shift occurred, and the United States also enjoyed the benefits like in Great Britain The growth pattern in the USA in the early 20th century was similar to those of Western Europe, and was accounted mainly to some breakthroughs like electrification, steam turbines, internal combustion engine Some managerial concepts that originated in the United States in the early 20th century like the production line, employed by Henry Ford, were broadly adopted, also in Europe At the end of the 1920s, the United States became the largest economy in the world While in Europe the First World War broke out, the USA economy flourished.14 However, in the 1929 the Great Depression occurred, and almost the whole world was hit Global economic growth decreased on average with 15% p.a, and unemployment hit 12 Crafts 2003 Crafts 2003 14 Bunker 2014 13 48 unprecedented heights What was the cause of the Depression, is still being debated It is, however, widely accepted that the beginning oft he Great Depression was marked by the Stock Market Crash of 1929, called the ‘Black Tuesday' The main events that triggered this crash were on the one hand, the overurbanization of the American cities as many people moved from small to large cities, in order to find more prosperous jobs On the other hand, the overproduction of agricultural products, caused by the mechanization of agriculture contributed to the crash as well as the overoptimism of the investors who believed that markets will rise forever When we add some speculations with financial instruments or raw materials into the equation, then it is clear that stock markets cannot sustain it The graph below depicts the dimension of the Dow Jones Industrial Average Index This index shows how the 30 largest publicly owned companies based in the United States have traded during a standard trading session in the stock market Thus, we can say that this index is one of the major indicators of the performance of the US economy.15 Source: Wikipedia 15 https://en.wikipedia.org/wiki/Great_Depression ; ushistory.org 49 As said previously, the “Black Tuesday” as an isolated event cannot be accounted for the only reason for worldwide financial crisis As can be seen from the graph, the recovery of the Dow Jones Industrial Average started few days after the crash “The roaring twenties”, as historians say, were a time of booming business activity American firms earned huge profits at that time and invested a lot into expanding By 1929 companies expanded to a bubble point Workers were not able to fuel further expansion anymore, so a slowdown was unavoidable On the other side, while corporate profits skyrocketed, wages increased only marginally This sharpened the distribution of wealth So the richest % of the americans owned over a third of all American assets Such distribution is limiting growth because of the fact that, in this setting, the wealthy people tended to save the money that might have been put back into the economy if it were distributed among the middle and lower classes Middle class Americans already stretched their debt capacities by purchasing automobiles and household appliances on installment plans Thus, they didn’t have additional liquid assets, that is, for example cash.16 There were also some structural problems in the American economy that led to the outbreak of the Great Depression It should be notices that in those days banks operated without guarantees to their customers, were very light regulated, and they lent money to people that speculated in stocks very intensively Prices of the agricultural production were low during the 1920s, leaving farmers with tied hands Their situation worsened as well as the impact of the Great Depression spread in Europe, forcing European customers to limit their consumption and thus, making them less keen on American (agricultural) products.17 The dimensions of the economic damage can be observed in the following graphs.18 16 ushistory.org ushistory.org 18 Source: Wikipedia 17 50 Change in the economic indicators for the time period 1929-1932 Source: Global Growth Monitor Some European countries did not manage to recover until the very beginning of the Second World War Germany was also one of those countries Some historians claim that the economic 51 damage from the Great Depression was the main reason for the rise of the national socialistic government led by Adolf Hitler On the contrary, USA managed to recover smoothly, mainly through intensified interventions of the government into the economy Banks were also stricter regulated In this context, a special attention should be paid to the Glass-Steagall Act This act is in fact an amendment to the Banking Act of 1933 and contains four provisions that forbid a bank to operate as a commercial and investment one at the same time The act was abolished in 1999 and some economists argue that in this way, the trigger for the global financial crisis of 2008 was set In the aftermath of the Second World War, the growth rates were the highest Average annual growth was about 2,5% The largest driver of it was personal consumption expenditures Next were government expenditures, private investments, and net exports This high level of growth sustained till 1973 The period from 1973 to 1981 is known as the “transition era” The oil embargo of 1973, the second oil shock in 1978, and the abolishment of the Bretton Woods system triggered a period of slower growth and high inflation The US Federal Reserve brought the inflation partly under control by raising interest rates However, a new recession was not able to be avoided In this period, annual growth was 1,4% on average, with personal consumption being again the largest driver with 0,9%.19 The time period between 1981-2007 is labelled by the economists as “The great moderation” This period of economic growth coincided with a period of low inflation Income inequality also has risen In this period, average growth levels were about 2,1% on an annual basis Personal consumption was again the main contributor to it Private investments, net exports, and government expenditures were the other posts that contributed.20 The growth development in Asia was very different from Europe and the Americas Long time ago, the economies on the continent were rather closed and the countries of the region did not trade that much, internationally, compared with Europe The Great Depression also barely affected Asia Maybe the most remarkable implication from the Great Depression on Asia was the fact that China decreased its trade volumes with the USA tremendously However, after the 1960s, the growth of the Asian countries was unprecedented in the human history amounting to an average of 5,5% annually Especially East Asian countries grew tremendously for four 19 20 Bunker 2014 Bunker 2014 52 key reasons: they had a substantial potential for catching up, since they entered the 1960s with really low incomes Their economies, structural and demographic characteristics were favorable due to the unaffectedness by Second World War Additionally, the economic policies and strategies enforced worked in favor of a sustained growth Due to the fact that East Asian countries have had on average very low wages, they decided to use this advantage in order to produce products that are labor intensive, but not very technologically advanced These products were exported to almost every part of the world Politics managed to negotiate intensified free trade with the rest of the world, the currencies were made convertible, that is, able to be traded on the global currency markets, macroeconomic stability was provided, mainly in the sense that inflation were kept under control, and some innovative institutions like export processing zones, duty exemption schemes, incentive packages for foreign direct investment were established Rapid growth was also promoted by some demographic factors- literacy and education level increased, improved public health policies were implemented, and they contributed to the rise of life expectancy, to the agricultural sector was paid special attention by the government, thus, subsidies (financial aid from the state) for farmers were provided, and at the end, agricultural products were made affordable for the population, thus, increasing their disposable income, that is, the income that is left out of the total income for spending or saving Natural conditions such as proximity to sea and natural harbours played also a role, however, the main role was due to well organized economic and political institutions.21 Nevertheless, the continent was shaken by an economic crisis, “the Asian crisis of 1997” Currently, some leading Asian countries, are showing slowing economic growth which is proving problematic for the rest of the world This would be elaborated in the second chapter The growth story of the African continent was quite different Until the beginning of the 20th century, the continent, in its biggest part, was colonized The main reasons for this colonization are to be found in the need for resources that various European Empires needed in order to sustain the welfare of their citizens Most of the colonized countries served as exporters of raw materials to the empire that colonized them This activity gained importance especially after the outbreak of the Industrial Revolution where the need for resources for processing by the new machines increased tremendously The liberation of the African countries from their colonizers started roughly with the end of the first world war and was completed by the 1960s 21 Radelet, Sachs, Lee 1997 ; Lee and Hong 2010 53 During the colonial time, information on GDP-growth is barely available, partly because of the fact that statistics were not run and partly because of the fact that, in case of empire had colonized certain African countries, these counties belonged administratively to the empire and thus, only aggregated statistics for the whole region were performed However, as already said, the economic pattern of the most African countries until 1950s was exporting mainly raw materials which were abundant.22 It is important to note that after the African countries liberated themselves from colonists, their historical development was very heterogeneous This have had important implications on their economic indicators Thus, when it comes to aggregate conclusions about the African continent, rather single countries or regions should be compared For example, considering the chart below, yielding the level of GDP per capita in South Africa, Kenya, Nigeria, and Sierra Leone from 1950 to 2008 The GDP per capita in South Africa was throughout the whole period substantially larger than this of Kenya, Nigeria, or Sierra Leone The GDP per capita of Nigeria was in year 1968 the lowest inside the compared group, while from 1972 to 1980 surpassed Kenya and Sierra Leone The GDP per capita of Sierra Leone, in the 1990s, started to decline systematically, mainly due to the several civil wars that exploded in this period Source: Broadberry and Gardner 2013 22 Broadberry and Gardner 2013 54 Indeed, the different resource endowments and unique political histories in the African countries implied so different growth paths Sustained growth was not achieved However, one is clear- the wealthiest African country is South Africa and this country is considered to be the economic leader of the continent In the 19th century, the begin of the mineral discoveries was set It became clear that the supplies of gold and diamonds are very substantial This enabled some foreign direct investments and following, public revenue for the state treasury This enabled the government to push state-led industrialization and so the country became the most industrialized one at the continent Manufacturing outpaced mining and agriculture as South Africa’s leading industry by the 1970s During the 1980s, however, increased political instability resulting from protests against the repressive apartheid regime, combined with a falling gold price, led to a period of economic slowdown, which lasted until 1994.23 Nigeria was a different story Some tribal conflicts hampered their growth prospects in the 1950s Due to its favorable geographic position, abundance of many important natural resources- petrol, gas, tin, iron, plumbum, zinc, as well as a lot of land, suitable for agricultural purposes, Nigeria established a clear example of a country where incapability of political and economic institutions was a hindering factor for sustainable economic growth Moreover, the fluctuations of oil prices as well as some civil armed conflicts in the 1960s made the economic situation unsecure.24 Kenya’s economic performance since 1950 has been less volatile, but is shares many of the countries, pictured in the Figure above Its economic success in the 1950s and 1960s was largely due to agricultural exports, but Kenya benefited also from its dominant position in East Africa However, mismanagement of public revenues earned through the coffee boom in the 1970s along with the increasing of public funds for political patronage during the 1980s led to a poor economic performance A short recovery came to an end after the outbreak of ethnic violence in the aftermath of highly doubtful national elections in 1992 and 1997 Droughts and high oil prices as a result from the Gulf war worsened the situation further.25 23 Broadberry and Gardner 2013 Broadberry and Gardner 2013 25 Broadberry and Gardner 2013 24 55 Sierra Leone enjoyed favorable growth conditions in the 1950s due to its abundance of natural resources as well Until the early 1970s, the growth pattern was similar to Kenya and South Africa However, a gradual transition to a one-party state and following a more and more repressive regime which culminated into a brutal civil war in the 1991 which declined the GDP per capita substantially Recovery remained difficult task even until today.26 These countries can serve as a representation of the different growth and economic patterns of the continent As a summary, we can identify four patterns: - Countries that, due to their natural resource abundance, managed to pursue an industrialization of their national economies - Countries where utilization of natural resouces was hampered by tribal conflicts - Countries where poor performance of political and economic institutions led to stagnation of the welfare - Countries that have established dictator regimes and thus, hampered their natural resource utilization Of course, we cannot always subordinate a particular African country to exactly one of these patterns, thus, mixing would seem sometimes inevitable 26 Broadberry and Gardner 2013 56