Post-war Settlements

The Second World War was different than earlier wars. There were more civilian casualties in this war and many important cities were devastated beyond recognition.

The recovery after the Second World War was influenced by two important factors:

• The emergence of the US as the dominant economic, political and military power in the west.
• Transformation of the Soviet Union from an agrarian economy into a world power.

The world leaders met and discussed to work for post war recovery. They focused on two main objectives; which can be summarized as follows:

• Preservation of economic stability and full employment in the industrial world.
• Controlling the influence of the outer world on flow of capital, goods and labour.

Bretton Woods Institutions

United Nations Monetary and Financial Conference was held in July 1944 at Bretton Woods in New Hampshire, USA. The Bretton Woods Conference established the International Monetary Fund (IMF). This organization was established to deal with external surpluses and deficits of its members.

IMF and World Bank

The International Bank for Reconstruction and Development (IBRD) was set up to finance post-war reconstruction. This is popularly known as the World Bank. The IMF and World Bank are often referred to as Bretton Woods Institutions. The post-war economic system is also referred to as the Bretton Woods System.

The IMF and World Bank began their operations in 1947. Western industrial powers controlled the decision-making in these institutions. The US had an effective veto right over key decisions made by these institutions.

The Bretton Woods System was based on fixed exchange rate for currencies. The dollar was anchored to gold at a fixed price of $ 35 per ounce of gold. Other currencies were linked to dollar at fixed rates.

The Early Post-war Years

The Bretton Woods System started an era of unprecedented economic growth in the Western industrial nations and in Japan. Between 1950 and 1970, the world trade grew annually at 8% and incomes grew at nearly 5%. The unemployment rate averaged less than 5% in most of the industrialized countries during this period; which speaks about the stable nature of economic growth during this period.

Decolonization and Independence

Within the two decades after the Second World War, many colonies became independent and emerged as new nations. These countries were in deep economic trouble because of their long history of exploitation. During the initial phase, the Bretton Woods Institutions were not in a position to cope with the demands of these new nations. Meanwhile, Europe and Japan quickly rebuilt their economies and thus grew independent from the IMF and World Bank. From the late 1950s, the Bretton Woods Institutions began to shift their focus on developing economies of the world.

These institutions were under the control of former colonial powers. Hence, most of the developed countries there was always the risk of exploitation by the former colonial powers in the name of development. These countries organized themselves into G-77 (Group of 77) to demand new international economic order. They wanted real control over their natural resources, fairer price for raw materials and better access to the markets in the developed world.

End of Bretton Woods

From the 1960s onwards, the US finances and competitive strength was weakening because of its rising cost of overseas involvement. The dollar could not maintain its value in relation to gold. Thus the system of fixed exchange rate collapsed and the new system of floating exchange rate began.

From the mid 1970s, the international financial system changed in many ways. Earlier, developing countries could turn to international institutions for financial assistance. Now they were forced to borrow from Western commercial banks and private lending institutions. This led to periodic debt crises, lower incomes and unemployment in the developing world. Many African and Latin American countries suffered from such crises.

China had been cut off from the world economy since its revolution in 1949. China began to follow new economic policies and came back into the fold of world economy. Collapse of the Soviet Union and that of Soviet style communism in many Eastern European countries brought many countries into the fold of world economy.

Wages were quite low in countries; like China, India, Brazil, Philippines, Malaysia, etc. These countries became preferred sourcing destinations for many MNCs. India has also emerged as the most preferred hub for Business Process Outsourcing. In the last two decades, many third world countries have grown at a rapid pace and India, China and Brazil are their leading examples.