How far do you agree with this view? ‘Trade imbalances created greater difficulties for the development of the global economy between 1970 and 2000 than did the debt crisis of the developing world.’ How far do you agree with this view?

Introduction The development of the global economy can be measured by 1) economic indicators such as growth, inflation and unemployment, 2) the level of international trade and cooperation, and 3) a more equal global competition between countries. Both trade imbalances and the debt crisis of the developing world (specifically the 1980s Latin America debt crisis) created difficulties for the first two - the US trade deficit exacerbated the situation of stagflation and strained the international economic cooperative order. The debt crisis on the other hand not only resulted in a loss of economic growth in the developed and developing world as well as a loss of investor confidence, but also worsened the trade deficits faced by the developed world.

Impact of Trade Imbalances Exacerbated situation of stagflation (persistent inflation and unemployment) Loss of jobs: Loss of export competitiveness, especially in manufacturing sectors = industries close, jobs lost 19179-94 2.4mil jobs lost, mostly due to growing trade deficits since most trade involves manufactured goods Depressing effect on wages Workers no longer employed in manufacturing find jobs elsewhere, usually in the service industry where wages are lower Growth of imports mean if prices fall downward pressure is place on domestic prices, so firms have to cut wages or reduce their labour costs

Impact of Trade Imbalances Strained the international economic cooperative order Collapse of Bretton Woods System No sudden volatility in exchange rates or competitive devaluation, but marks an end to the certainty and stability of the Golden Age Protectionism Slowdown of international trade and increase in trade tensions Blame placed on tariffs on American products by foreign countries, and a lack of similar tariffs for imports into the US Robert E. Lighthizer, Deputy Spokesperson for US Trade Representative in 1984: “We are responding to unfair trade in the US”

Impact of Debt Crises Loss of economic growth (Developing world) Latin America with -9% growth per capita from 1980-85 In the 17 most Heavily Indebted Poor Countries (HIPCs), average annual growth rate 1965-80: 6.3%, 1980-87: -6%. IMF “structural realignment”  halving of minimum wage from 1987-94 Debt + high repayment commitments  unable to fund development programmes since resources channeled into repayment

Impact of Debt Crises Loss of economic growth (Developed world) Latin America decreased imports to increase forex needed to pay back debts: In 17 most HIPCS, 1981-86, imports from developed world decrease $72 billion UN Conference on Trade and Development: “Because of this import compression by the highly-indebted developing countries… the United States recorded a negative swing in its trade balance of about $12 billion between 1980 and 1986; the corresponding negative swings for the other developed market economy countries were much smaller: about $3 billion for Japan, $2.4 billion for the Federal Republic of Germany and $1.6 billion for the other EEC countries.”

Impact of Debt Crises Loss of investor confidence: stock market leads economy in rebound. If investors are confident and invest, then there will be great inflows of money into the market Unwillingness of banks to lend to developing countries  developing countries have fewer sources of external assistance, so if they cannot raise the money they would have to seek economic aid through public assistance Private gains from debt repayment based on public costs

Impact of Debt Crisis Loss of economic growth (Developed world) Developing countries reduce imports and try to export their way out of the recession, contributing to the trade deficit in developed countries Professor Richard Feinberg, testifying before Senate: “Nearly 1.6 million U.S. jobs have been lost due to recession in the Third World."

Evaluation Impact of trade imbalances have to be qualified Collapse of Bretton Woods and protectionism did not mark end of international economic cooperation International organizations: 1975 G8, 1981 World Economic Forum, 1993 EU Currency cooperation: 1971 European Exchange Rate Mechanism, 1985 Plaza Accord Protectionism at most slowed the growth of the global economy down, since the liberal market continued to function 1992 Maastricht Treaty 1994 NAFTA Debt crisis contributed to trade imbalances

Conclusion The debt crisis of the developing world created greater difficulties for the development of the American economies than the global economy, but the impact of trade imbalances i.e. the US trade deficit, were on a much wider scale, affecting the global economy directly. Though the debt crisis did contribute to the trade imbalances, the effects come later and are understood more as an impact on the US rather than the global economy - trade imbalances created greater difficulties for the development of the global economy.