Chapter III: The end of the Golden Age, the debt crisis and development setbacks

World Economic and Social Survey 2017 Chapter III

Key messages

  • The post-war economic boom ended, in 1971, with the collapse of the Bretton Woods fixed exchange rate system. While high inflation and unemployment became the norm in most developed countries, the prolonged and painful adjustment process could have been averted through more coherent international policy coordination.
  • Two approaches to global coordination were advocated by the Survey, which are still relevant today: adoption of an interest rate policy designed to reduce short-term capital flows and exchange rate volatility, and expansion of demand in surplus countries. As a result of weak policy coordination at the global level, developing countries paid a high price for adjustment, which set the stage for the debt crises of the 1980s.
  • In the absence of a fair debt workout mechanism, the cost of the debt crises in the 1980s was primarily absorbed by debtor countries, leading to a lost decade of development in Latin America and Africa. More judicious debt management—by debtors and creditors alike—could have reduced the social and economic cost of the debt crises.
  • While countries in Africa and Latin America implemented structural adjustment reforms imposed by conditionality for financial support, most countries in Asia followed a different development strategy. The divergence of the economic performances among regions underlines the importance of national policy space and ownership in identifying the development trajectories that best respond to a country’s own context.
  • After the success of the First United Nations Development Decade, in 1971, the United Nations launched a Second Development Decade. However, the experience with the Second—and later the Third and Fourth Development Decades—demonstrated how quickly a global commitment can evaporate in times of economic difficulties, which highlights the importance of a stable global economic environment for upholding the commitment to ambitious development agendas.

Chapter 3