c2 history notes - global economy - us dominance

7/28/2019 C2 History Notes - Global Economy - US Dominance

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HInternat

Rise of Keynesian Economics

Role of American MNCs

Political influence

Dollarisation

Objectives:1. To be clear and understand the re

power.

1. Introduction

The USA began in 1775 as a weak codeal with worsening socioeconomic pstate. In 1787, the USA adopted its cuduties of America's government havedemands. Today, the national governindirectly virtually all economic sectors

2. Reasons for US dominance in th

2.1. Rise of Keynesian Economics

The early 1930s saw the US stockclassical economic theory that assertregulated. Unbridled speculation hadrising depression was deepened byWhile the economy sunk further intobalance the budget.

2.1.1. The US economy during Roos

After Roosevelt became President in 1managing the economy. In his first 10by a variety of means stimulated the erepresented the first time that the USbust cycles. During WWII, the governdirect management of the economy fo

a Chong Institutionional History: 1945 2000

Major market for the worldeconomy

Committrade

Military mightPolitical

ability

Commitment to a liberal and

multilateral international

economic order

Domina

Woods s

Foreign Aid and Investment

sons for the dominance of USA as a global ec

nfederation of 13 sovereign states. As that miroblems, a political consensus arose to creatrrent constitution, which created a federal syststeadily risen since then to deal with new prent consumes nearly a quarter of GNP and r

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arket crash and the subsequent Great Depd that markets should be self-regulated rathecreated and then popped a huge speculativeresident Hoover's classical liberal economic hdepression, Hoover actually called for federa

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Hwa Chong InstitutionInternational History: 1945 2000

HWA CHONG INSTITUTION (COLLEGE)/ARTS DEPARTMENT/HISTORY UNIT Page 2Special Thanks to Mrs. Renee Low.

2.1.2. Growing government support for US industries

From WWII through today, the government has continued to target specific economic sectors fordevelopment with industrial policies. But instead of far-sighted policies of the war years, USA now picksindustrial winners and losers largely through a political process in which the most established industriespour money into the re-election funds of enough politicians until they are rewarded with a range ofgovernment subsidies, protection and other advantages. The power of the agribusiness and textilelobbies has enabled them to receive vast government largesse and import protection. Other industrieshave been favoured by being part of the military-industrial complex. US semiconductor, computer,aerospace and microelectronics industries to name some of the more prominent, were all shaped byWashington's military-industrial and technological policies.

2.2. Major market for the world economy: Surplus resources

WWII had engaged the resources of the industrialized belligerents in Europe and Japan and theirtraditional role of supplying manufactured goods to the rest of the world diminished greatly. The USA stillhad much surplus and filled in the gaps especially in Latin America but other countries had to look totheir own resources to meet demand from manufacturers. The countries not directly occupied ordamaged tended to be relative gainers from the changes produced by the war. Thus in 1945, USA

became the leading economy, owing its favourable position not only to the damage and destructionsuffered by its leading rivals but American technical and commercial superiority had been wellestablished before 1939 as well as its immense resources. Even by 1971, when others had madeprogress, USA still accounted for a third of world industrial production. In terms of output production in1967, if USA was taken at 100, Germany stood at 50, Japan and France at 45 and Britain at 35.

At the same time, agricultural productivity was many times higher than other advance countries notmerely due to superior technology but the number of acres per person exceeded those available inEurope and Japan by an enormous margin. USA produced almost half the world's total in 1946,compared with only 32 % in 1936-8. Its mercantile marine rose from 17% of the world's tonnage in 1939to 53% in 1947. It was the largest economy in the world with large resources of minerals, large farmingindustry. U.S oil production is the third highest in the world and it is the world's second largest producerof natural gas. It has the largest GDP and the third largest population in the world.

The United States has a capitalist mixed economy. Although private organizations constitute the bulk ofthe economy, government activity accounts for 12.4 percent of the GDP. The United States GDP of morethan $13 trillion constitutes 22 percent of the gross world product. The nation ranks as the third or eighthhighest GDP per capita, according to the International Monetary Fund. The economy is fuelled byabundance in natural resources, well-developed infrastructure, and high productivity. The United Statesis the largest importer of goods and second largest exporter. Canada, China, Mexico, Japan, andGermany are its top five trading partners.

2.3. US commitment to international trade

With its abundance of resources, favourable position after WWII, the demand for its exports (after WWII)and commitment of its leaders to push for international free trade, it led to the globalisation of theAmerican economy. The industrial policies initiated by the Roosevelt administration have continuedtoday and has forged a consensus on the importance of international trade and prosperity for Americanprosperity and the president's role in regulating it.

The American Constitution grants the power of regulating trade to Congress. Since 1934, however,Congress has periodically allocated powers to the president to negotiate trade agreements. The greatestincrease in presidential trade power occurred with the passage of the 1988 Omnibus Trade Act, whichmade it much easier for the president to retaliate against foreign dumping and other unfair practices thatcan harm America's economy. All American presidents from Roosevelt to Clinton have recommitted theUS to the ideal if not practice of free trade.


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Like any country, the US has industrial and trade policies designed to give its industries advantages overtheir foreign rivals. The difference is that most officials and politicians deny it and continue to championliberal economic theory as the basis for America's economy. In 1992, Clinton won the elections as duringhis campaign, he had indicated that he rejected the dichotomy between free trade and protectionism andthat his policies were on a different way to restore US competitiveness. When he became president, his

policies succeeded in reviving American power, although trade and payment deficits persist. Theglobalisation of the American economy is reiterated and interlinked to US as a major market, the role ofthe American MNCs, foreign aid and investment, political will and influence.

2.4. Role of American MNCs

Corporations set up shop overseas for many reasons, including gaining access to restricted markets,raw materials and technology, lower operating costs including cheap labour and weaker environmentalstandards, access to government investment incentives. Red tape, poor infrastructure, politicalinstability, corruption and unskilled workers can inhibit foreign investments.

Immediately after WWII, it was the American MNCs that expanded the fastest and by 1966, there werenearly 9000 American MNCs in Western Europe alone. American MNCs can have a powerful influence

in international relations and local economies. Multinational corporations play an important role inglobalization; some argue that a new form of MNC is evolving in response to globalization e.g. the'globally integrated enterprise'. Large multinational corporations can have a powerful influence ininternational relations, given their large economic influence in politicians' representative districts, as wellas their extensive financial resources available for public relations and political lobbying.

Case Study 1: MacDonalds

With the successful expansion of McDonald's into many international markets, the company has becomea symbol of globalization and the spread of the American way of life. McDonald's restaurants are foundin 120 countries and territories around the world and serve nearly 54 million customers each day.

McDonald's has become emblematic of globalization, sometimes referred as the "McDonaldization" of

society. The Economist magazine uses the "Big Mac index": the comparison of a Big Mac's cost invarious world currencies can be used to informally judge these currencies' purchasing power parity.Because McDonald's is closely identified with United States culture and lifestyle, its internationalbusiness expansion has been termed part of Americanization and American cultural imperialism.McDonald's remains a target of anti-globalization protesters worldwide.

Some observers have suggested that the company should be given credit for increasing the standard ofservice in markets it enters. In a study entitled Golden Arches East (Stanford University Press, 1998,edited by James L. Watson), it looked at the impact McDonald's had on East Asia, and Hong Kong inparticular. When it opened in Hong Kong in 1975, McDonald's was the first restaurant to consistentlyoffer clean restrooms, driving customers to demand the same of other restaurants and institutions. InEast Asia in particular, McDonald's have become a symbol for the desire to embrace Western culturalnorms. McDonald's have recently taken to partnering up with Sinopec, China's second largest oil

company, in the People's Republic of China, as it begins to take advantage of China's growing use ofpersonal vehicles by opening numerous drive-thru restaurants.

McDonald's multi-national, multi-billion dollar business and standardized products and procedures havecome to symbolize globalization and the American way of life, and the company has often found itself atarget of activism and a focal point of public debate.

Case Study 2: Ford Motor Company


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Ford Motor Company is an American multinational corporation and the world's third largest automakerafter Toyota and General Motors, based on worldwide vehicle sales. In 2006, Ford was the second-ranked automaker in the US with a 17.5% market share, behind General Motors (24.6%) but ahead ofToyota (15.4%) and DaimlerChrysler (14.4%). Ford was also the seventh-ranked American-basedcompany in the 2007 Fortune 500 list, based on global revenues of $160.1 billion. In 2006, Fordproduced about 6.6 million automobiles, and employed about 280,000 employees at about 100 plantsand facilities worldwide.

Case Study 3: Nike

Nike is the largest sportswear supplier in the world, with 500 factories around the world and officeslocated in 45 countries outside the United States. Most of the factories are located in Asia, includingChina, Taiwan, India, Turkey, Thailand, Vietnam, Pakistan, Philippines, Malaysia, and Korea.

Nike has been criticized for contracting with factories that allegedly use sweatshop labour in countriessuch as China, Vietnam, Indonesia and Mexico. Vietnam Labour Watch, an activist group, hasdocumented that Nike has violated minimum wage and overtime laws in Vietnam as late as 1996,

although Nike claims that this practice has been halted. In the 90's, Nike faced criticism for its use ofchild labour in Cambodia and Pakistan in its production of soccer balls. Although Nike took action to curbor at least reduce the practice of child labour, they continue to contract their production to companiesthat operate in areas where inadequate regulation and monitoring make it hard to ensure that childlabour is not being used.

Despite these criticisms, Nike's annual revenues have increased from $6.4 billion in 1996 to $15 billion in2006. Nike sells its products in international markets through independent distributors, licensees andsubsidiaries.

Case Study 4: Hewlett Packard

The Hewlett-Packard Company, commonly known as HP, is currently the world's largest informationtechnology corporation (by revenue) and is known worldwide for its printers, personal computers and

related services. Headquartered in Palo Alto, California, United States, it has a global presence in thefields of computing, printing, and digital imaging, and also provides software and services. HP is now theNo. 1 ranking company in worldwide personal computer shipments, surpassing rival Dell.

2.5. Military might

2.5.1. Size and budget

As the majority of World War II was fought far from its national boundaries, the United States did notsuffer the industrial destruction or massive civilian casualties that marked the wartime situation of thecountries in Europe or Asia. During the war, the United States had built up a strong industrial andtechnological infrastructure that had greatly advanced its military strength into a primary position on the

global stage.

The United States and Soviet Union jockeyed for power after World War II during a new Cold War,dominating the military affairs of Europe through the North Atlantic Treaty Organization (NATO) and theWarsaw Pact. The United States promoted liberal democracy and capitalism, while the Soviet Unionpromoted communism and a centrally planned economy, but both sides supported dictatorships whenpolitically convenient and engaged in proxy wars, including the Korean War and the Soviet war inAfghanistan.

The military budget of the United States in 2005, over $470 million, was estimated to be greater than thenext fourteen largest national military budgets combined. However, the military budget was only about 4


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percent of GDP, a lower percentage than that of twenty-six other nations. The Department of Defenseemploys 2,338,213 troops and over 800,000 civilian employees, disregarding contractors. In the shortterm, military spending can boost an economy. The U.S. military is deployed to more than 700 basesand facilities, on every continent except Antarctica. Due to the sheer size of its global military presence,scholars accuse the United States of maintaining an "empire of bases".

2.5.2. Advanced technology, vast number of bases globally and nuclear arsenal

The USA has bases all over the world, particularly in an incomplete "ring" bordering the Soviet Union tothe West, South and East. It also has the largest nuclear arsenal in the world during the first half of theCold War stationed on its own soil and also in Europe. It also has a strong and technologically advancedarmy, world's largest navy, and the largest and most technologically advanced air force in the world.Military assets such as a Nimitz class aircraft carrier are a means of power projection on a global scale one hallmark of a superpower.

2.5.3. US power projection and international influence

The ability of a nation to apply all or some of its elements of national power - political, economic,informational, or military to rapidly and effectively deploy and sustain forces in and from multiple

dispersed locations to respond to crises, to contribute to deterrence, and to enhance regional stabilityand enhances its influence greatly.

Military Might can be used as a leverage to influence the actions of another country and to boost one'sown position, elevate itsstatus as in the case of USA. This ability is a crucial element of a state's powerin international relations. The ability of a state to project its forces into an area may serve as an effectivediplomatic lever, influencing the decision-making process and acting as a potential deterrent on otherstates' behaviour. While a few long-range weapons such as the intercontinental ballistic missiles(ICBMs) and certain types of cruise missilesare capable of projecting deadly force in their own right,most discussion of power projection revolve around issues of military logistics.

The ability to integrate naval and air forces with land armies as part of joint warfare is generally viewedas a key aspect of effective power projection; airlift and sealift capabilities allow a country to deploy units

of soldiers or weapons to distant destinations not easily accessible by land forces. The aircraft carrierbattle group, strategic bomber, Ballistic missile submarine, and C-5B Galaxy strategic airlifter are allexamples of power projection platforms, as are military units designed to be light and mobile, such asairborne forces (paratroopers and air assault forces).

Forward basing is another method of power projection, which by pre-positioning military units orstockpiles of arms at strategically located military bases outside a country's territory, reduces the timeand distance needed to mobilize them for combat in a distant theatre of war.

2.5.4. US defense budget: the largest budget and most influential military power in the world

The U.S defence budget is the largest in the world, and is almost equal to the combined militaryspending of all other nations. The U.S.A has the second largest stockpile of nuclear weapons and inter-continental ballistic missiles in the world. It also has more aircraft carriers and ballistic missilesubmarines than any other country, and is the only country apart from Russia that operates strategicbomber aircraft. The U.S.A is the most influential member in NATO. The military budget of the UnitedStates in 2005, over $470 billion was estimated to be greater than the next fourteen largest nationalmilitary budgets combined. However, the military budget was only about 4 percent of GDP, a lowerpercentage than that of twenty-six other nations.

2.6. Political will and economic ability to promote international trade and economic development

2.6.1. Wealth of resources


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During WWII, the USA asserted leadership over both the military effort against the Axis countries andattempted to create a liberal global political economy. American wealth and power grew enormouslyduring WWII; even in 1938 the US had 54% of the world's gold and financial reserves, compared with11% each for France and Great Britain. From 1939 to 1945, American GNP increased from $88.6 billionto %135 billion and its gold reserves of $20 billion were 2/3 and its industrial output was half of the world

total. America's leaders mustered the will to match their nation's capacity to lead the world's economicrevival. Its most important initiative occurred in 1944 at Bretton Woods.

USA was a country not directly occupied or damaged by the war and gained from the war. In 1946, USAmanufacturers produced half the world's total output The Europeans suffering from unparalleledshortages of food, fuel, raw materials and capital equipment in the immediate post-war years saw theonly source of supply to lie in the surplus stocks of North Americaif they could afford it. As a resultduring the post war years the economic outlook of the industrialized world came to be dominated by the'dollar shortage'. It saw the shift in the distribution of the world's economic weight away from Europe toNorth America. The USA had the richer natural resources also being richer, could invest in more capitalyearly and thus keep ahead technologically.

2.6.2. Political changes: capitalism v socialism

Unlike after WWI where USA had withdrawn into isolationism, this time the US was determined to takeits place as the leading political power. Backed by overwhelming economic and military might, the USbecame one of the two superpowers and so the economic history of the world's economy cannot beseparated from political developments. In 1945, the U.S. emerged from World War II as one of twonuclear superpowers and a permanent member of the United Nations Security Council. The soleremaining superpower, it is the dominant economic, political, military, and cultural force in the world.

Following WWII, the world was divided into two hostile camps, the western 'capitalist' and largely-democratic countries led by the USA and the eastern 'socialist' countries dominated by the Soviet Union.From being allies, the two superpowers and their satellites or supporters saw each other with increasingsuspicion from 1947 onwards. The Soviet Union expanded westward absorbing 3 Baltic States and partsof Poland, Germany and Romania; the Red Army was used to help install communist governments in a

number of Eastern European states. The USA used its economic power to prevent countries in the restof the world from following the same path and surrounded the Soviet Union with a ring of threateningmilitary bases. Each of them tied their allies to themselves through tight military alliances, NATO and theWarsaw Pact.

This period of the Cold War would see these two powers armed to the teeth with lethal weapons but notconfronting each other directly but through a series of proxy armed conflicts, the Korean War (1950-53),the Vietnam Conflict (1965-75) and the Afghanistan war (1979-88). These political developmentsdominated world politics and would have an effect on economic developments as well. Due to the ColdWar conflict, USA exercised their political will to promote international trade and economic activities incapitalist countries so as to prevent communism from infiltrating into these countries and gaining worlddominance.

2.7. Political influenceHaving taken on the mantle of political leadership in the western world after 1945, USA saw itself as theleading military power, not merely in the struggle against communism in major wars such as Korea andVietnam but also other conflicts like Africa and the western hemisphere the political presence of USAwas immense and global. In addition, the US had an enormous armament programme as well as theCold War had led to large expenditure on espionage or propping of weak governments to keep themwithin the western orbit.

USA also supported its allies in Europe through economic aid, e,g. Marshall Plan and was the leadingcontributor, directly and through international organizations, to the provision of aid and loans to the ThirdWorld. All these saw to USA asserting its political power and influence worldwide.


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USA also had a strong and stable liberal democracy, a Permanent seat on the UN Security Council,strong ties with Western Europe, Latin America, British Commonwealth, end several East Asiancountries. After the dissolution of the Soviet Union in 1991 that ended the Cold War, the post-Cold Warworld is widely considered as a unipolar world, with the United States as the worlds sole remainingsuperpower.

USA's political influence after the Cold war

A great power is a nation or state that, through its great economic, political, military and diplomaticstrength, is able to exert power in the world. Its opinions are strongly taken into account by other nationsbefore taking diplomatic or military action. Characteristically, they have the ability to intervene militarilyalmost anywhere, and they also have soft cultural power to indirectly influence the behaviour or interestsof other political bodies through cultural or ideological means.

The election of Ronald Reagan as president in 1980 marked a significant rightward shift in Americanpolitics. In the late 1980s and 1990s, the Soviet Union's power diminished, leading to its collapse. Theleadership role taken by the United States and its allies in the United Nations sanctioned Gulf Warand the Yugoslav wars helped to preserve its position as the world's last remaining superpower and to

expand NATO.

The United States has vast economic, political, and military influence on a global scale, which makes itsforeign policy a subject of great interest around the world. Isolationism became a thing of the past,however, when the United States took a lead role infounding the United Nations, becoming a permanentmember of the Security Council, and host to the United Nations headquarters. The U.S. enjoys a specialrelationship with Britain, and close ties to Australia, Japan, Israel, and fellow NATO members.Additionally, they enjoy close ties to its neighbours through the Organization of American States and freetrade agreements such as the trilateral North American Free Trade Agreement with Canada and Mexico.

2.8. Commitment to a liberal and multilateral international economic order

2.8.1. NAFTAThe USA has attempted to increase its economic growth and bargaining power with other countries byforging a free trade association with its neighbours. In 1988, the USA, and Canada signed a free tradeagreement whereby they would eliminate tariffs and non-tariff barriers towards most of each other'sexports. In 1991, the USA, Mexico and Canada began negotiations to create a North American FreeTrade Association (NAFTA), which that year unified 363 million consumers and $6.5 trillion in economicactivities.

In his first year as President, Clinton negotiated his promised agreements with Mexico and after a majorpush managed to ratify NAFTA in 1993. The USA gained far more from NAFTA than Mexico, as US hadalready gained from the closer ties. In 1987, a trade agreement with Mexico nearly doubled bilateraltrade and tripled American exports from $15 billion until the US enjoyed a trade surplus of $5.4 billionand $41 billion in exports in 1992. America's trade surplus has translated into 350,000 new jobs for thecountry. In 1992, 8.5% of total American exports went to Mexico, making that US' third largest tradepartner after Canada and Japan.

NAFTA is predicted will create for USA 325,000 new jobs over the next decade and overall, the US willenjoy not only more but better paying jobs because export-related jobs pay 17% more than non-exportjobs. In this sense, US has not only strengthened itself internally economically but established itself to bea major economic influence and power regionally.

2.9. Dominance in the Bretton Woods system

US invitation to representatives of 44 different countries was to create a new global order and economy.Diplomats signed agreements designed to end trade barriers and competitive currency devaluations that


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had devastated the global political economy throughout the 1930s which had contributed to the rise offascism and imperialism in Italy, Germany and Japan. Hence there would be a fixed currency in whicheach currency would be tied to the dollar and in turn tied to gold at a value of $35 an ounce.

At that time, USA owned 70% of the world's official gold reserves. Currency rates were allowed to

fluctuate not more than 1% of the fixed rate. Countries that earned dollars from trade could redeem themwith gold. This fixed gold system would eliminate the problem of competitive currency devaluations. Formany of the industrialized nations between the period of the Korean War and the first oil shock of 1973was one of steady progress because of the stability provided by the American dominated Bretton Woodsfinancial and trading system.

The success of the measures initiated at Bretton Woods depended on the willingness of the USA whoseeconomy in 1944 accounted for more than half of the world domestic product. USA was needed to fundthese institutions and maintain the monetary policies conducive to world economic growth. Soon afterthe Bretton Woods institutions came into being, USA pegged the dollar to gold at US$35 an ounce,enacted large foreign aid programmes to pump liquidity into the international economic system andmade the largest subscription of funds of any PARD member to the assets of the World Bank. The USAnot only initiated the Bretton Woods conference, but took the lead in offering loans through the lMF,

World Bank and led in the multilateral approach to trade liberalisation through its support of GATT. Itsdominance in the World Bank, GATT and IIIF also saw to the push for implementation of marketoriented, laissez-faire type economic policies, thereby the thrust towards capitalism.

2.10. Dollarisation

2.10.1. Dominance of the US dollar

In the post-war years the US dollar had been the leading reserve currency; the currency in which centralbanks of other countries held their reserves to meet international obligations. It was also the keycurrency used within the IMF and the world's oil is traded in dollars. The dollar kept that status even afterthe relative economic power of the USA had been weakened as the central banks as well as citizens ofother countries continued to be willing to hold and trade dollars. The U.S. dollar is the currency mostused in international transactions.

Several countries use the U.S. dollar as their official currency, and many others allow it to be used in ade facto capacity. In 1995, over US $380 billion were in circulation, two-thirds of which was outside theUnited States. By 2005, that figure had doubled to nearly $760 billion, with an estimated half to two-thirds being held overseas, representing an annual growth rate of about 7.6%. The dollar is also used asthe standard unit of currency in international markets for commodities such as gold and petroleum. Evenforeign companies with little direct presence in the United States, such as the European companyAirbus, list and sell their products in dollars, although some argue this is attributed to the aerospacemarket being dominated by American companies. At the present time, the U.S. dollar remains theworld's foremost reserve currency, primarily held in $100 denominations. The majority of U.S. notes areactually held outside the United States. The dollar is the most important international reserve currency.

2.10.2. Dollarisation

Other nations besides the United States use the U.S. dollar as their official currency, a process known as

official dollarisation. For instance, Panama has been using the dollar alongside the Panamanian balboaas the legal tender since 1904 with a rate of change of 1:1. Ecuador (2000), El Salvador (2001), andEast Timor (2000) all adopted the currency independently. The former members of the US administeredTrust Territory of the Pacific islands, which included Palau, the Federated States of Micronesia, and theMarshall Islands, chose not to issue their own currency after becoming independent, having all used theU.S. dollar since 1944.

Two British dependencies also use the U.S. dollar: the British Virgin Islands (1959) and Turks andCaicos Islands. Some other countries link their currency to U.S. dollar at a fixed exchange rate. The localcurrencies of Bermuda and the Bahamas can be freely exchanged at a 1:1 ratio for US 1. Argentinaused a fixed 1:1 exchange rate between the Argentine peso and The U.S. dollar from 1991 until 2002.


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The currencies of Barbados and Belize are similarly convertible to a 2:1 ratio. In Lebanon, one dollar isequal to 1500 Lebanese pound and is used interchangeably as de facto legal tender. The exchange ratebetween the Hong Kong dollar and the United States dollar has also been linked since 1983 atHK$7.8/USD, and pataca of Macau, pegged to Hong Kong dollar at MOP1.03/HKD, indirectly linked tothe U.S. dollar at roughly MOP8/USD.

Several oil-producing Gulf Arab countries, including Saudi Arabia and Kuwait, peg their currencies to thedollar, since the dollar is the currency used in the international oil trade. The renminbi used by thePeople's Republic of China was informally and controversially pegged to the dollar in the mid-1990s atY8.28/USD. Likewise, Malaysia pegged its ringgit at RM3-.8/USD in 1997. On July 21, 2005 bothcountries removed their pegs and adopted managed floats against a basket of currencies. Kuwait didlikewise on May 20, 2007, and Syria plans to in July.

In some countries, such as Peru, although USD is not officially regarded as a legal tender, it iscommonly accepted. In Cambodia, the USD circulates freely or even preferred over the Cambodian riel.Amount of one dollar or more is given in dollar, while the riel serves as a subunit. The preference ofother countries to use the US dollar has propelled the USA as a dominant economic power with aninfluential currency status and regulation of world trade.

2.11. Foreign aid and investment

Foreign assistance is money or other aid made available in developing countries to help them speed upeconomic development or meet humanitarian needs. USA leads in the amount of foreign assistancegiven since WWII hence the dominance of USA in political, economic and military influence.

Types of aid

Grants: funds given free to a recipient state, for example, US regularly gives credits that can be used forpurchase of US grain.Loans: given to help in economic development, with long repayment times and low interest rates.Loan guarantees: promises by the donor state to back commercial loans to the recipient.Military aid: geared almost exclusively to political alliances than developmental needs.

Foreign aid and investment during the Cold war

Aid was largely provided by the USA after WWII not only to help in the development of the affected war-tom countries but almost certainly to counter the influence of communism.

2.11.1. Post-WWII aid and investment: growth of the capitalist economy

Refer to US aid to Japan and role in Japanese economic recovery, aid to Taiwan and Korea and impact(See lecture 1), Marshall Aid and impact on Europe. By 1949, with US aid, Europe was able to make arapid recovery with increased availability of goods in Europe and North America.

2.11.2. Agency for International Development: USAID

The main agency dispensing US foreign economic assistance (but not military aid) is the StateDepartment's Agency for International Development (USAID); which works mainly through the US

embassy in the recipient country. Major recipients of foreign aid include Israel, Turkey, Egypt and Iraq(since 2003)all important strategic allies in the volatile Middle East.

The US uses the promise of aid or the threat of cutting it off as a leverage in political bargaining withrecipients. For example, Pakistans nuclear weapons programme in the late 1980s, despite US warnings,resulted in the termination of a sizable flow of US aid. When Pakistan supported US military action inAfghanistan in 2001, US aid was restored. The US has sometimes cutoff foreign aid to protest humanrights violations by a country's military.


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In this aspect, the through the control/use of aid, USA is able to influence, dominate a recipient country'spolitical, economic orientations and hence its ability to play a vital role in world affairs. In foreign aid, thedonor must have the recipient government's permission to operate in the country (back to the principle ofnational sovereignty). This is occasionally violated when the US and its allies provided aid to Iraqi Kurdsagainst the wishes of the Iraqi government following the Gulf War.

2.11.3. The U.S. Peace Corps

The U.S. Peace Corps provides U.S volunteers for technical development assistance in developingcountries. They work at the request and direction of the host state but are paid by the US government. Itwas started by President Kennedy in 1961, the Peace Corps now has about 7000volunteers to 72 countries where they participate in projects affecting about a million people.

2.11.4. Aid through UN

Most of the multilateral lateral development aid goes through UN programmes that are dominated byUS who has major influence in the Security Council (before 1971) and contributions to UN funds. Theflow of such aid is coordinated by the UN Development Programme (UNDP) which manages about 5000projects at once around the world (focusing on technical development assistance). Other UN

programmes focus on capital, transferring technology and developing work force skills for manufacturing.UNIDO works on industrial trials, UNITAR on training and research. Most UN programmes such asUNICEF, UNFPA, UNESCO, WHO focus on meeting basic needs.

c2 history notes - global economy - us dominance

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