Restoring a Global Economy, 1950–1980

In his recent book Multinationals and Global Capitalism, professor Geoffrey Jones dissects the influence of multinationals on the world economy. This excerpt recalls the rebuilding of the global economy following World War II.
by Geoffrey Jones

The 1950s onwards saw the beginning of the reconstruction of a new global economy. Between 1950 and 1973 the annual real GDP growth of developed market economies averaged around 5 percent. This growth was smooth, with none of the major recessions seen in the interwar years. World War II left the United States in a uniquely powerful position. While Europe and Asia had experienced extensive destruction and loss of life, no battles had been fought on the soil of the United States. The U.S. dollar became the world's major reserve currency. U.S. corporations assumed leading positions in many industries. Europe and Japan had to spend the immediate postwar decade undergoing extensive reconstruction, heavily dependent on official aid from the United States, yet over time Europe and Japan closed the technological and productivity gap with the United States. The emergence of a U.S. deficit on its balance of trade in the 1960s, and the devaluation of the U.S. dollar and the end of its convertibility into gold in 1971, provided symbolic signs of the ending of an era.

There remained many restrictions on the flow of capital, trade, and people across borders. Foreign companies were entirely excluded from the Communist world. In the twenty years after 1945 the European colonial empires were dismantled. In some cases, decolonization was followed by an aggressive reaction against the businesses of the former colonial power, and sometimes all foreign investment. The relatively small number of expropriations without compensation until the late 1960s—when a period of large-scale expropriation began—reflected the power and determination of the United States to protect foreign investments, but Western countries were unable to reestablish an international legal regime that guaranteed the property rights of international investors. Even in the developed countries, receptivity towards multinationals fell. In Europe and the United States, whole sectors were closed to foreign companies. The Japanese economy grew so fast that it had become the world's second-largest capitalist economy by the 1970s, but its governments systematically discouraged wholly owned FDI [foreign direct investment], and restricted it to a low level.

During the 1940s and early 1950s only the U.S. dollar was available as a major convertible currency. Elsewhere exchange controls regulated capital movements. They were often the instruments used by governments to screen or monitor FDI flows. The world-wide controls over capital movements were related to balance of payments concerns and the system of fixed exchange rates established at Bretton Woods. It was not until 1958 that most European countries adopted nonresident convertibility, which permitted foreigners to move funds for current account purposes freely from one country to another. This was the key development in the establishment of a liberal and open international economy. It had an immediate impact on FDI flows, with an increase of U.S. FDI into Europe.1 However, most developing countries continued to exercise tight controls over capital movements. Even most developed countries retained some exchange controls.

It was only after the collapse of the Bretton Woods system of fixed exchange rates in the early 1970s that controls over capital movements began to be slowly dismantled. The advent of floating exchange rates permitted a huge explosion in international financial markets from the 1970s, but these capital flows were different than before 1914, for they largely occurred between rich countries. In 1900 Asia, Latin America, and Africa had accounted for 33 percent of global liabilities. In the 1990s, they accounted for 11 percent.2

World trade barriers were reduced under the auspices of the General Agreement on Tariffs and Trade (GATT) signed in 1947. This process peaked in the 1960s, when the Kennedy Administration in the United States made major efforts to secure radical reductions in tariff rates. During the middle of this decade there was a comprehensive reduction of barriers to trade in manufactured goods. By the end of the 1960s, however, the U.S.-inspired drive for trade liberalization showed a loss of momentum, as U.S. balance of payments deficits began to cause concern about the scale of foreign imports. Nontariff barriers spread in the following decade. Most developing countries in Latin America, Asia, and Africa became progressively closed to international trade from the 1950s to the 1980s. Even the richest and most developed countries maintained very high levels of protection for agricultural products, far higher than before 1913.3

The advent of floating exchange rates permitted a huge explosion in international finance markets from the 1970s.

The formation of regional trading blocs was both a part of the process of reducing trade barriers and a limitation on it. The European Economic Community (later known as the EC, and, from 1993, the European Union) was formed in 1957, and initially consisted of six Western European countries. It developed common tariffs against external imports. An extreme case was the Common Agricultural Policy, adopted in 1966, which severely restricted U.S. agricultural exports to Europe. However, within Europe, free trade was established between the member countries, even though nontariff barriers persisted. The creation of such a large "Common Market" attracted many U.S. companies to Western Europe.

Technology made it easier than ever before for companies to move people, knowledge, and goods around the world. There were new waves of innovations in transport and communications. In 1958 the first commercial jet made an Atlantic crossing. This was followed by a phenomenal increase in air traffic. The development of telex was a considerable advance over telephones in facilitating international communications and coordinating multinational business. In 1965 the first satellite for commercial telecommunications was launched. During the 1970s the use of the facsimile machine took off. The movement of goods across the world was facilitated by the development of larger ocean-going ships, or super-freighters, and the growth of containerization.

The flow of migrants across borders remained constrained by immigration policies. Although the number of migrants was considerable—there were 3.2 million immigrants to the United States in the 1960s—it was much smaller relative to the host population than in the early twentieth century. The proportion of foreign-born in the U.S. population was less than 5 percent in 1970. There was also a major shift in the geographical source of emigrants. Europeans were much less important, although they moved within their home region. The proportion of Europeans and Canadian to total immigrants in the United States fell from 78 percent in the 1940s to 13 percent in the 1980s. Over the same decades the proportion of Latin Americans rose from 18 percent to 47 percent, and the proportion of Asians from 4 percent to 37 percent.4

By 1980, the integration of worldwide capital, commodity, and labor markets remained limited compared to the late nineteenth century.

The Resumption Of Multinational Growth

The expansion of the world economy prompted a recovery in the growth rate of world FDI. The system of international cartels was dismantled. By 1960 the world stock of FDI had reached $60 billion. By 1980 it was over $500 billion. These were the decades when the term "multinational" was invented, and when economic theorists turned their attention to explaining their existence.

Between 1945 and the mid-1960s the United States may have accounted for 85 percent of all new FDI flows. By 1980 it held 40 percent of total stock. In the twenty years after the end of World War II both German and Japanese FDI remained low, but growth during the 1970s gave the two countries an overall share of world FDI of 8 percent and 7 percent respectively. The German share finally surpassed that of the Netherlands by that date. By 1980 almost two-thirds of world FDI was located in Western Europe and North America. Latin America and Asia had declined very sharply in their relative importance as host economies. By 1980 there was no multinational investment in China, and almost none in India. Even Japan in that year accounted for less than 1 percent of world inward FDI stock.

The relative shift of world FDI to Western Europe and North America reflected the many barriers to foreign multinationals elsewhere. In agriculture and mining, and later in petroleum, foreign firms lost the ownership of production facilities in many countries, even if they remained very powerful in the transportation, processing, and marketing of commodities. By 1980 manufacturing FDI was larger than the natural resource and service sectors combined. In services, while transport and utility investments were no longer important, from the 1960s multinational banks, trading companies, and international commodity dealers began rapid international expansion.

In agriculture and mining, later in petroleum, foreign firms lost the ownership of production facilities in many countries.

As suggested in Figure 2.1, there were two different trends evident in this era. On the one hand, much of the multinational investment dating from the first global economy in resources and utilities was swept away. The high levels of integration seen in many commodities were broken by nationalizations and other forms of government intervention. Formerly large host economies including Russia, China, and even India—which retained a quasi-capitalist economy—were isolated from the world economy. On the other hand, new types of firms expanded abroad. These included management consultants, which transferred knowledge across borders, and fast food restaurants and hotels, which transferred lifestyles. They were particularly important in diffusing U.S. management and marketing techniques to other economies, although they were typically adapted in their new hosts. In Europe, firms also began to respond to European integration by building European-wide organizations and integrating previously autonomous national subsidiaries.

By 1979 the overall size of multinational investment was still smaller in relation to the world economy as a whole than in 1914. This reflected the barriers to foreign ownership erected in many countries and in many sectors, such as utilities, and the disappearance of the hugely capital-intensive investments in mining and petroleum. During the first global economy, much of the growth had been driven by the exchange of manufactured goods made in the developed world for the resources found elsewhere. The emergent new global economy was driven by trade, investment, and knowledge flows between Europe, North America, and Japan.

About the Author

Geoffrey Jones is a professor at Harvard Business School.