Economic Shifts in Socialist and Developing Nations: 1945-1985
From 1945 to 1985, a significant portion of the world, including seven countries in Central and Eastern Europe (CEE), China, and other smaller nations, embarked on constructing a socialist economic system. Together, these countries accounted for one-third of the global population. It is important to note the differences in economic performance among these socialist countries. Their GDP per capita grew at a slower rate than that of developed capitalist countries (DCCs), leading to divergence between the two groups. There was also considerable divergence within the socialist bloc, particularly between China and the USSR.
Although the growth of the Soviet Union and the CEE countries approached or even surpassed that of capitalist countries, the income gap remained substantial. In the best-case scenario, the USSR’s income level reached only 50% of the average of the DCCs in 1973, and a mere 36% of that of the United States. However, it is crucial to acknowledge the economic achievements of these countries, considering that their population grew at a rate almost double that of the DCCs (1.85% vs. 0.99% annually). This population increase was accompanied by structural changes. Industrial growth outpaced overall economic growth and significantly exceeded that of the agricultural sector. Within the industrial sector, heavy industry experienced more rapid growth than light industry.
The proportions and cross-cutting were quite asymmetrical, and socialist law responded to the core development properties, carried out by carefully planning imperative: the primacy of heavy industry and light industry as a whole over agriculture. The savings-investment relationship was forced, and premium savings were allocated to capital formation, predominantly in heavy industry. The increase in inputs, rather than improvements in productivity, drove social growth. This is not to say that there was no innovation or technical change.
In short, the consequences of this growth pattern were the difficulty of achieving sustained long-term growth and a persistent declining trend in growth rates. Unlike capitalist economies, socialist economies grew at a slower pace, at least in the 1950s and 1960s. Consequently, it became necessary to introduce economic reforms, either by changing development strategies or modifying the central planning mechanism. In some cases, planning was made more flexible, combining it with elements and mechanisms characteristic of market economies. However, the reforms were largely unsuccessful because the problem was not planning errors or incorrect pricing but the system itself.
Developing Countries: Challenges and Transformations
According to the UN, developing countries are characterized by low income, a significant reliance on the primary sector, malnutrition, illiteracy, high population pressure, and, in many cases, recent independence following the decolonization period after World War II. Another feature of these countries is their undeniable heterogeneity.
Developing countries were not immune to the structural changes occurring globally. The primary sector’s share of the economy declined in favor of industry and services, although it continued to play a fundamental role. Public expenditure grew dramatically, similar to what occurred in developed countries. While these propositions apply to the aggregate of all developing countries, a more detailed analysis reveals numerous exceptions to these general guidelines. Some countries experienced growth in the primary sector, while others witnessed a regression to traditional structural situations. In some cases, public spending decreased while private investment increased. The range of scenarios is endless.
Three main problems hindered development during this period:
- Population Explosion: This was an undeniable reality in these countries and was directly related to the demographic transition, which differed in character from that experienced by developed countries in the late 18th and early 19th centuries.
- Integration into the International Economy: Developing countries lost market share in world exports during this period. This decline can be attributed to changes in the composition of international trade. The relative weight of primary products decreased between 1950 and 1973, while manufacturing experienced the opposite trend. This transformation did not favor developing countries, which were traditionally exporters of primary products. However, financial flows and innovations initially benefited these countries. Through various forms, such as donations, loans, and public funds, development assistance flowed from developed and socialist countries to developing countries. Aid from socialist countries often took the form of in-kind assistance or expertise.
- The Agrarian Problem: This was a fundamental issue for many developing countries and stemmed from both domestic and external demand. Countries traditionally reliant on agricultural exports faced reduced demand from importing countries, often developed countries that had achieved greater agricultural self-sufficiency or implemented protectionist measures such as tariffs and subsidies.
Global Crisis of 1973-1980: Characteristics and Impact
Prior to the oil price hikes of 1973, inflation and a slowdown in industrial growth, the foundation of the global economy, had already taken hold in national and international economies. These issues were linked to the dynamics of the economic system introduced during this period.
Oil became a recurring theme at the time. The consensus view often blamed the oil shocks for the genesis of all the economic difficulties of the moment. However, its importance should neither be overestimated nor minimized. The 1973 oil crisis should not be considered a supply crisis, although production cuts and distribution difficulties occurred. It was primarily a price shock resulting from the decision of the Organization of Petroleum Exporting Countries (OPEC) to take advantage of market conditions to raise crude oil prices.
The second oil shock followed and was also linked to political events, namely the Iranian Revolution of 1978-79, the invasion of Iran by Iraq in 1980, and the subsequent Iran-Iraq conflict. The drop in Iranian production and exports, one of the major exporters, triggered panic and exorbitant bids, similar to 1973. Prices rebounded, causing a crisis even more devastating than that of 1973. In the second part of the 1980s, oil prices eased, eventually dropping to 1973 levels.
The third shock in 1990 was also associated with political and military problems, specifically the Iraqi invasion of Kuwait, which initiated the first Gulf War. However, this time the price increase was short-lived, lasting only a single year, 1990.
The first two oil shocks (the third was different) represented a break from the pattern of previous historical crises and recessions in the capitalist world. This was evident in the different behavior of basic macroeconomic variables, requiring different approaches to address crisis and recessionary situations. The classic crises of capitalism had been demand or under-consumption crises, characterized by falling production, prices, and employment.
The crisis of 1973 marked the beginning of a new type of crisis with different symptoms: production contracted, prices increased, and there were also large shares of unemployment. This situation has been termed “stagflation,” a combination of stagnation or recession and inflation, which had previously never occurred together. The fundamental difference lies in inflation, but also in the overlapping symptoms of unemployment differences. Growth generated relatively fewer jobs than before, transforming unemployment from incidental to endemic, durable, and structural.
The different nature of the crisis required different remedies. Understanding the new nature of the crisis as a crisis of both supply and demand necessitated overcoming various economic policies of the time, meanwhile increasing the sense of instability and economic fragility. Growing unemployment became another constant of the period, raising two key issues: technological change and globalization, both of which were strongly marked during this period.
Regarding globalization, the internationalization of the economy was evident, not only in the principles of the GATT but also in practice. Despite general economic difficulties and some protectionist tendencies, non-tariff protectionism was implemented to some extent under the surveillance of the GATT. Technical innovation did not weaken. In the 1980s and 1990s, the intensity of innovation increased, but in the direction of the US technical paradigm, different from the Second Industrial Revolution that was widespread during the Golden Age. This has been called the Third Industrial Revolution (III RI).