Economic Growth and Changes in the Relative Balance of Economic Power: 1990-2000

The final decade of the twentieth century saw a number of very important historical changes in global political relations. These directly produced further changes in many countries’ economic systems, resulting in their integration into international trade in goods and services and international capital flows. These changes were strongly related to the disappearance of the former so-called socialist bloc (“the Eastern Bloc”), led by the former

USSR, and so the formation of the Newly Independent States and the restoration of autonomy in the countries of Central and Eastern Europe and their transition towards democratic political arrangements and market economy. It was during this period that the longest war on European soil since the Second World War took place, namely the war against Bosnia and Herzegovina (1992-1995), as a consequence of the dissolution of the former Yugoslavia.

The period from 1990 to 2000 also saw the Maastricht treaty and the Stability and Growth Pact between the countries of the European Community, providing the basis for its transformation into the EU. The founding of the European Central Bank (1998) was followed by the introduction of the first regional common currency - the euro (1999). This has without doubt had (and will continue to have) far-reaching consequences. From a theoretical perspective, it was the first practical application and testing of the theory of optimal currency areas, introduced into the literature by Robert Mundell.⁴ The introduction of a common currency for the initial 11 member countries of the Eurozone was preceded by unconditional implementation of full-scale financial liberalization for all member countries, the legislative basis for which was provided by the European Single Act and the Maastricht treaty. The 1990s also saw three major financial crises: the so-called Tequila crisis in Mexico (1994), the South-East Asian crisis of 1997-1998, and the Russian rouble crisis (1998). The South-East Asian crisis was of greater proportions and had considerably greater consequences.

The 1990s, and in particular their second half, were a period of greater economic prosperity for the US economy than the preceding three decades had been. Rates of economic (and productivity) growth were high, particularly in the technology sector (the IT industry), and provided a basis for major inflows of capital as portfolio investment in US companies, again primarily in IT, particularly given the steep outflow of capital caused by the South-East Asian and the Russian rouble crises. Growing confidence in the strength of the US economy and its corporate sector saw share prices in that sector rising sharply. By the end of the decade, or more precisely the end of October 2000 (by when the common European currency had been in existence for more than 20 months), the dollar peaked against the euro, with one dollar worth a little more than EUR1.21. The rise in share prices in the United States came to an abrupt end with the implosion of the dot-com bubble in the second half of 2000. While the US economy was dominating the 1990s,

Table 3.2 Ten fastest-growing economies in the world: 1990-2000

Source: Calculated by the author using World Bank data.

the Japanese economy was marked by stagnation and preoccupied with “cleaning-up” the balance sheets of the major Japanese banks, which had dominated the world of global banking through the 1980s.

Based on our analysis of changes in relative economic power across the world, measured by the Cg, the group of ten fastest-growing economies included the following countries.

Note: Equatorial Guinea and Swaziland were, in fact, the two fastest- growing economies, with increases in the Cg of 872% and 634%, respectively, but have been excluded from the table as absolute outliers.

From Table 3.2 we see that the group of fastest-growing economies during the final ten years of the twentieth century did not include a single country in transition. This is hardly surprising, as the 1990s were the first years of transition, a period that entailed radical change to their political, institutional, economic, and social orders and therefore a decade ofadjusting to entirely new rules of the game. Most of these countries, and particularly those that had been part of the Soviet Union or the SFRY, saw major falls in GDP per capita and impoverishment during this decade. The countries with the greatest relative decline (the percentage drop in the Cg is in brackets) were: Tajikistan (-71.6), Moldova (-68.6), Georgia (-64.6), DR Congo (-63.7), Ukraine (-60.2), Azerbaijan (-54.5), Kyrgyz Republic (-48.1), Turkmenistan (-44.3), Russian Federation (-40.8), and Djibouti (-40.8).

In 1990, the five countries with the highest GDP per capita had an average Cg of 11.65. The average for the five poorest was 0.03. They were: Monaco, Liechtenstein, Bermuda, Luxembourg and Switzerland, and Uganda, Malawi, Mozambique, Liberia, and Ethiopia, respectively. These values for the Cg indicate that GDP per capita in the five richest countries was 11.65 times the world average (or 1165%), while it was approximately one 33rd (or just 3%) of the world average in the five poorest.

During the last decade of the twentieth century, differences in the distribution of newly produced goods and services (GDP) increased. Thanks to gradual and controlled opening-up to long-term capital flows based on inward (export-oriented) FDI, some of the poorest countries did succeed in boosting growth rates and reducing the gap from the world average. This reduction in their poverty could not compensate, however, for the major reduction in new wealth creation in a larger group of countries (namely the countries in transition and undeveloped countries). This led to rising economic inequality worldwide, certainly in comparison to the beginning of the decade. The list of the top five countries ranked by GDP per capita had barely changed by 2000. The five countries with the highest Cg that year were: Monaco, Lichtenstein, Luxembourg, Bermuda, and Norway. The five poorest countries were: Ethiopia, Burundi, Liberia, the Democratic Republic of Congo, and Rwanda.

In the last year of the twentieth century, the difference between the average Cg for the five wealthiest and that for the five poorest countries had increased compared to 1990 by 37.8%. Consequently in spite of the high rates of real economic growth in the group of fastest-growing countries, which at this point did include a number of developing countries (particularly China and Vietnam), the way in which the majority of other developing countries increasingly fell behind over the final decade of the last century, in combination with the continued impoverishment of poor and highly indebted countries and the sharp economic decline of the countries in transition which had previously been part of the former Soviet Union, produced a marked growth in inequality worldwide.