The 1973 Oil Crisis and the Rise and Fall of the Welfare State
The 1973 Oil Crisis
The 1973 oil crisis was a major factor that contributed to the economic downturn of the 1970s. Since the early 1970s, OPEC countries had been increasing oil prices. However, the most significant increase came after the 1973 Arab-Israeli War. Arab countries used oil prices as leverage against Western governments, whom they accused of supporting Israel.
The immediate consequence was a rapid rise in oil prices, which jumped from $3 to $10 per barrel in less than two months. This surge distorted many economies, causing trade deficits, inflation, and unemployment.
While industrialized countries were severely affected, developing countries also suffered. They faced higher energy costs and reduced demand for their raw materials due to decreased industrial production in developed nations.
The Welfare State
The welfare state is a system where the state guarantees basic services to all citizens, such as healthcare, education, unemployment benefits, and pensions.
Keynesian Economic Model
This new role of the state was based on Keynesian economics, which advocated for significant state intervention in the economy. While private property and the market economy remained, state-owned enterprises were created, particularly in strategic sectors.
This model also involved wealth redistribution through a progressive tax system. Increased tax revenue funded welfare services, social security, and healthcare.
The state also acted as a mediator in industrial relations, fostering agreements between unions and employers for greater stability.
This Keynesian model was successful during the 1950s and 1960s, creating a strong middle class and strengthening democratic systems.
The Crisis of the Model
This model faced challenges in the early 1970s following the 1973 energy crisis, which triggered inflation and unemployment. Technological advancements also contributed to job losses, declining tax revenues, and increased public spending on unemployment benefits.
This led to a shift towards neoliberal economic policies, characterized by reduced state intervention, privatization of state-owned enterprises, and cuts in social welfare programs.
The “Asian Dragons”
Several Asian countries adopted an export-oriented growth model, focusing on manufactured goods for developed nations. Their success was partly due to their cheap labor, which lowered production costs and final prices compared to goods from developed countries.
Taiwan, South Korea, Singapore, Hong Kong, Malaysia, Thailand, Indonesia, and China became known as the “Asian Dragons.”
Causes of Growth
The rapid growth of the Asian Dragons was driven by several factors:
- The Role of the State: Governments eliminated barriers to foreign investment and provided support to multinational corporations, attracting investments mainly from Japan and the U.S.
- Specialization: These countries focused on medium-high technology consumer goods sectors.