Recession of 1970s
RECESSION OF 1970S.WEAKNESSES IN DEVELOPED ECONOMIES
Strictly defined, there were two economic recessions in the 1970s, one dominating the years 1974–1975 and another the years 1979–1982. They are linked by being each initiated by increases in oil export prices imposed by the Organization of the Petroleum Exporting Countries (OPEC). In 1973–1974 OPEC quadrupled the price of oil exports and over the period 1978 to May 1980 doubled the existing price. These moves were intended to impose OPEC's own desired prices on the major transnational oil companies, who had themselves fixed the lower sales prices from the earliest years of exploration. In western eyes the increases were a threat to the West's vital strategic resources. In the producers' eyes they were the righting of an international injustice. Adjustment to such steep increases was very difficult, leading to shortages of gasoline and a heavy burden on consumers, particularly in countries such as the United States, where gasoline consumption was especially high.
The two recessionary episodes are linked also by their close succession. Countries that suffered the most in the first recession also suffered the most in the second because the recovery from the first was more difficult and in many cases not completed before the second episode began. Above all, however, they are linked by marking the definitive end of the great boom that began in 1945. The period 1974–1982 seemed a return to the economic difficulties of the years between the two world wars. It made it evident that governments had not, as they had begun to think, discovered a science of economic policy management that had banished severe depressions and unemployment forever. In both recessions unemployment and inflation moved sharply upward together, dispelling the idea that the management of the economy could rest on the belief that there was a trade-off between these two phenomena.
In retrospect, two other aspects of the oil-price quarrel seem more important than OPEC's decisions. One is the weakness of a prolonged period of prosperity that had come to depend increasingly on oil as the main source of energy. The other is the extent of common interest between the developed West and the relatively undeveloped oil-producing countries. Rich though they were, oil producers such as Saudi Arabia and Libya, the two initiators of the first oil-price shock, and Iran, the initiator of the second, needed their customers to provide the financial services that would lead to the reinvestment of their oil profits in domestic economic development. Most OPEC countries had little else to export other than oil. Thus, the common interest could only be endangered if prices drove those oil consumers depending mainly on imports toward investing in other forms of energy.
Delays in reaching a common understanding were attributable to lack of agreement over foreign policy issues between consumers and suppliers and to the character of domestic politics in the OPEC countries. Saudi Arabia was a deeply conservative supporter of American foreign policy. Libya, however, was seen as a troublesome and unpredictable international revolutionary state. Iran, the initiator
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of the second price increase, was strongly asserting its national identity and its independence from the United States. None of the Arab large-scale oil producers—Iraq, Kuwait, Libya, Quatar, and Saudi Arabia—could be readily recognized as a democracy. Neither could Iran. This was not an encouraging framework for negotiations, and the recycling of oil-producers' profits by the developed Western world at first went ahead only slowly.
Economic weaknesses in the developed countries played at least as big a part in the recessions as the increases in oil prices. Oil was not the commodity whose price rose the most over the decade 1972–1983. Food prices rose more, and this was attributable to the economic policies of the developed countries. Trade liberalization was not intended to extend to trade in agricultural products as ambitiously as it did to manufactures. The European Community's common market and its Common Agricultural Policy were based on the maintenance of Community preference in trade in its own agricultural products. The Community's trade with underdeveloped countries was protective of European farmers, closing the door on the import of any agricultural product covered by the Common Agricultural Policy, except when in Europe that product was out of season. The usual array of veterinary and horticultural safety rules were more rigorously imposed on exporters from developing countries than they were within Europe itself. For example, the share of agricultural exports from Africa as a proportion of the Community's total agricultural imports fell in every decade from 1960 to 2000. The United States replicated much of the European pattern of protectionism. Both Europe and North America subsidized their indigenous food producers and also their food exports to the underdeveloped world. That food prices in the developed world were a prime promoter of inflation was one consequence, a certain slowness of growth in the demand for manufactured exports from the developed world another.
Manufacturing industry was also experiencing in that decade a persistent change in its nature. What was at the time referred to as "deindustrialization" was the beginning of a sweeping change in the employment structure of manufacturing, whose output came to depend increasingly on what would previously have been classed as service-sector employment, such as design and marketing, and less on the physical labor of manufacturing. Responses to the two recessions were closely linked to this change. The remarkable volatility of the Italian economy was linked to its successes in the service-sector aspects of manufacturing. The successful record of the German economy in the 1970s, in contrast, hid its failure to invest more in the service-sector aspects of manufacturing. Traditional German engineering and chemical exports did not decline so much as in other developed countries. The dismal performance of the British manufacturing sector at the same time diverted attention from its early shift toward industrial service-sector employment. In part, therefore, the recessions of the 1970s were caused by restructuring in the nature of manufacturing employment, which in turn was restructuring the pattern of international trade.
From this troubled decade simple, but important, lessons can be drawn. A boom of unprecedented length had changed the composition of
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international trade in such ways that contemporaries could not predict the trading future. Most commentary on the recession of the 1970s correctly identifies Japan and Germany as the countries that escaped with the least damage to their economies. They were, however, by the end of the 1980s experiencing a stagnation of their exports relative to the growing strength of exports from, for example, the United Kingdom, which in the 1970s had been the least competitive of the major exporters. There is much evidence that it was the severity of the recessions that accelerated the shift in the commodity composition of British exports and in the pattern of employment.
Ability to overcome the problems of the 1970s was closely related to management-labor relations and to the encouragement of flexibility in working hours. This in turn meant heavy pressures on labor unions to conform to new patterns. Germany was the country where this posed the greatest difficulty. The impact of these changes on politics and on society in the West was varied among countries. The United Kingdom had perhaps the least to preserve from that period because it was then the most slowly growing of the industrial powers. France, Germany, and Japan had, in this context, the strongest reasons for conservatism. The United States, which grew only slowly in the 1950s but did much better in the 1960s was sharply divided over possible responses to 1970s conditions.
The weaknesses ascribable to the treatment of the underdeveloped world by the developed are ascribable to all the developed economies. OPEC did no more than draw attention to their existence. One verdict on the 1970s recessions might be that exceptionally long periods of high economic growth can leave developed economies at risk from the less sophisticated. Another would be that cooperation between them was the wiser way forward. Arab oil earnings, kept in European banks and invested in approved international development projects proved one way out of the recessions.
Blackaby, Frank, ed. De-industrialisation. London, 1979.
International Labour Office. World Recession and Global Interdependence: Effects on Employment, Poverty, and Policy Formation in Developing Countries. Geneva, 1987.
Organisation of Economic Co-operation and Development. OECD Economic Surveys: The United States. Paris, 1974, 1976.
Alan S. Milward