Economics

A

Energy Problems

By 1973, increasing international demand made oil a scarce and valuable commodity. At that time the Organization of Petroleum Exporting Countries (OPEC), which controls the bulk of the world's oil reserves, seized the opportunity to sharply raise prices. OPEC's policies dramatically reduced the possibilities of rapid economic growth both in the industrialized countries and in those developing nations without oil of their own. Oil, which in the autumn of 1973 cost $2 per barrel, sold in mid-1981 at nearly 20 times that figure. For rich countries, their oil import bill was the equivalent of a tremendous annual transfer of claims on their output and wealth to OPEC suppliers. Third World importers borrowed enormous sums, mostly from major banks in Western Europe and the United States. Staggering under the interest payments, poor nations have been compelled to slow the pace of their development plans. Although the sharp oil price decline in the mid- and late 1980s greatly benefited consumers in oil-importing nations, it added immensely to the burdens of oil exporters such as Mexico, Nigeria, Venezuela, and Indonesia, as well as the United States Sun Belt.

B

Inflation and Recession

Some advanced economies, notably Japan and West Germany (now part of the united Federal Republic of Germany), fared better than others during the 1970s and '80s. All of them, however, confronted persistent combinations of high inflation, severe unemployment, and sluggish economic growth. OPEC's transformation of the world energy market increased inflation by raising not only gasoline and home-heating fuel charges but also the prices of all the important manufactures into which petroleum enters, among them chemical fertilizers, plastics, synthetic fibers, and pharmaceutical products. These higher prices reduce purchasing power in much the same manner as would a severe new tax. Reduced purchasing power in turn depresses sales of consumer items, resulting in layoffs of factory and sales personnel. The entire procedure has a spiraling effect in all sectors of the economy.

For Americans, the lower oil prices of the mid- and late 1980s tend to restrain inflation and, like a cut in taxes, leave more income available for other purchases. Experts believe, however, that the crisis is likely to reappear in the 1990s, particularly if conservation efforts and development of energy alternatives continued to lag. See Inflation and Deflation.

C

The Role of Government

The various economic problems of recent years have stimulated serious debate about the proper role of public policy. Parties on the political left in Europe have advocated more controls and more planning. In the 1980s a different solution was offered by the Conservative Party government of Prime Minister Margaret Thatcher in the United Kingdom and by the Republican administration of President Ronald Reagan in the U.S. In both countries, attempts were made to diminish taxation and government regulation on private enterprise and thus, by enlarging the potential profits of corporations, encourage additional investment, higher productivity, and renewed economic growth. These were the central elements of supply-side economics, the guiding doctrine of the two leaders.

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Implicit in this government decision to provide businesses with increased incentives to invest, take risks, and work harder were the hopes that technology would reduce the costs of alternatives to oil as an energy source and that the nonenergy sectors of the economy, such as data processing and scientific agriculture, would experience rapid growth as a result of encouragements to invention and innovation.

D

Underdeveloped Economies

Poor nations desperately need aid from the rich nations in the form of capital and of technological and organizational expertise. They also need easy access to the markets of the industrialized nations for their manufactures and raw materials. However, the political capacity of rich nations to respond to these needs depends greatly on their own success in coping with inflation, unemployment, and lagging growth rates. In democratic communities, it is exceedingly difficult to generate public support for assistance to foreign countries when average wage earners are themselves under serious financial pressure. It is no easier politically to permit cheap foreign merchandise and materials to freely enter American and European markets when they are viewed as the cause of unemployment among domestic workers.

E

Outlook for the Future

By the early 1990s, the dissolution of the Soviet Union, coupled with the fall of Communist governments in most of Eastern Europe, underlined the trend away from centrally planned economies and toward a freer market system. Seeking to overcome a legacy of inefficiency and mismanagement, the post-Communist nations found themselves competing with Third World countries for investment capital and technological assistance.

Opinions differ as to how long sustained economic growth can continue. Optimists pin their hopes on the ability to improve crop yields and enhance industrial productivity through technological innovation. Pessimists point to diminishing resources, unchecked population growth, excessive military spending, and the reluctance of rich countries to share their wealth and expertise with less fortunate nations. Government instability, endemic corruption, and wide swings in economic policy make the Third World's economic prospects seem even less auspicious in the 1990s.

For information concerning specific economic concepts and problems, See Capital; Capitalism; Competition; Consumption; Currency; Debt, National; Finance; Foreign Trade; Labor, Division of; Monopoly. For further information on individuals mentioned, see biographies of those whose names are not followed by dates.

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