A New Age of Bailouts - Great Britain in the 1970s

A look at the first even IMF bailout (in the modern sense of the word)
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  1 A New Age of IMF Bailouts  –  Great Britain in the 1970s 12 October 2014 Hearing of IMF interventions generally conjures up images of developing nations (and the occasional Eurozone peripheral economy of late) facing some kind of financial difficulty. However, Great Britain, the cradle of the industrialized world, in 1976 was actually one of the first countries ever to be bailed out by the IMF in the modern sense of the term. Now, previously the IMF had already provided assistance plenty of times, including to advanced countries. Out of the 22 countries which were part of the OECD in the 1960s, no less than 8 negotiated new IMF programs during that decade, including France (1969), Japan (1962, 1964), Great Britain (1961-64, 1967, 1969) and even the US (1963-64). But these had been mostly to address balance of payment issues. Britain’s bailout in 1976, on the other hand, had strict conditionality elements with deep repercussions on the prevailing political ideology, sparking an intense private and public debate at the time as to whether the country should actually accept it. This episode inaugurated a much more interventionist approach by the IMF, anticipating many features of modern assistance programs. The bailout perhaps marked the culmination of a secular decline which had begun decades earlier. With the emergence of America and the Soviet Union as the global ideological and de facto superpowers at the end of World War II, the sun was setting fast upon the British Empire, which would fade away not long after. Still, in the postwar decades Great Britain offered plenty of prosperity, along with a free and vibrant society (who can ever forget the swinging sixties?), world-class music bands, abundant energy supplies and a respectable manufacturing sector. Then came the 1970s. And things got bad pretty quickly. Some Historical Context  2 The Labor Party was elected with a landslide majority in 1945 against the iconic wartime leader Sir Winston Churchill of the Conservative Party. Sweeping reforms of the economy were promptly introduced: the creation of a welfare state with national health, pensions and social security; industries were nationalized, seeking to broaden the state-planned manufacturing vitality during the war years; and taxes were raised to pay for the whole thing. As Britain emerged from the wartime devastation, the economy got better and better, and accelerated after Churchill ’s return to power in 1951. However, things were beginning to heat up abroad, with war raging in Korea, waves of Arab nationalism following the creation of the State of Israel and an increasingly belligerent Soviet Union. The Suez crisis of 1956 weakened Britain's global standing and the government's reputation, leading to the resignation of Anthony Eden, the Conservative Prime Minister who had succeeded Churchill. But Britain's economy remained fairly robust and with low unemployment into the 1960s, aided by tax cuts and other stimulative policies. Nevertheless, this was a time of change. Harold Wilson, the Labor party leader, ended 13 years of Conservative rule with a narrow victory in 1964 before increasing his majority in 1966. But despite the traditionally euroskeptic Conservatives losing their grip on power, Britain’s second attempt to join the  European Economic Community (“EEC”)  was once again vetoed by France’s President, Charles de Gaulle . At the same time, Britain’s increasing lack of competitiveness abroad was starting to become very apparent. The government eventually devalued the pound in 1967 to stem the continuous outflow of gold and dollar reserves. At the end of the decade, the swinging sixties were no longer swinging all that much. And Wilson was surprisingly voted out of power in 1970. In came a new Conservative government led by Edward Heath. And that’s when things sta rted to get interesting. Unlucky Heath Ushers In the Unlucky 1970s Heath came in through the liberal wing of the Conservatives, which means that he was a bit of a rare bird in relation to the party’s traditional free   market values. A proponent of the “third way”, he was pro -union, favored devolution of power to Scotland and Wales, launched the Department of the Environment and nationalized Rolls-Royce Aircraft Engines as it was about to go bankrupt. His manifesto was to modernize Britain and reverse its economic decline through better management, efficiency and above all by joining the EEC, which it finally did in the early part of the decade. Unfortunately, things started to go wrong right after Heath took over. Council workers went on strike in October 1970, an opening salvo in workers action that would become endemic over the rest of his mandate. His Industrial Relations Act of 1971 was bitterly opposed by the trade unions it sought to appease. A global financial crisis was slowly unfolding as Bretton Woods collapsed. There was massive unrest in Northern Ireland, complete with assorted terrorist attacks. And then the first oil shock hit in 1973.  3 Economic policy was also becoming volatile. In a bid to contain a rising unemployment, the new government decided to pump up demand. Large tax cuts were implemented, along with policies to boost salaries and credit growth. While the economy responded favorably initially, a period known as the “Barber boom” (name d after the Chancellor Anthony Barber), inflation began accelerating to levels not seen since the war. The oil crisis only made things worse, with price inflation reaching double digits by the end of 1973. As the Barber boom faded, the economy plunged into a deep recession, with output declines not seen since the depression in the 1930s. Britain was now stuck in “stagflation” . In order to prevent inflation spiraling out of control, the government responded by capping wages. Workers organizations responded immediately. In 1973, miners went on strike and were also joined by sympathetic trade unionists. Flying pickets successfully blocked coal and coke factories, which at the time produced the majority of the nation's power. With power in short supply, economic activity had to be curtailed. At the height of the strike, Britain was on a 3 day workweek. Lights out in Britain On Heath’s watch, the country would go on to lose 9 million working days to strike action. His government was in constant turmoil, declaring a state of emergency in a peacetime record of five times. The last of these, in 1974, triggered an early election, bringing Harold Wilson back in power: a known face hoping to govern an increasingly ungovernable Britain. New Government, Same Problems  4 Figure 1: Annual CPI Inflation in Selected Countries, 1969-1979 Source:  Britain’s inflation rate steadily outpaced that of its main trading partners for most of the decade. The peak was reached in 1975 at almost 25% annually, compared to a little over 9% for France and a remarkable 5.4% in Germany. Whatever ideas the new Labor government had, clearly they were not working. Primary among these was the “Social Contract”, a grand plan to run Britain like Germany, with government ministers and union leaders meeting to discuss policy and the best course for the country. And like all grand plans, it did not take long to backfire. The unions decided that they were in charge of the country and that their members should always get the best deal at the expense of everybody else. At the same time, the balance of payments situation was getting serious. In December 1974, Energy Minister Lord Balogh, an economist, warned Wilson that the country was exposed to a violent withdrawal of short-term money if people took fright on the British pound. If inflation was not contained a deep constitutional crisis could follow. But the inflation rate remained stubbornly high, along with unemployment and budget deficits. As advanced economies gradually recovered from the first oil shock, it did not take long for this increasingly unsolvable toxic trifecta to be noticed abroad. 0%5%10%15%20%25%30%19691970197119721973197419751976197719781979Great BritainGermanyFranceUS
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