Nonetheless, the fact that the price increase was so steep suggests that it was not a simple matter of offsetting the marginal losses due to the devaluation of oil. OPEC countries viewed oil as a weapon to gain greater leverage with the US in the 1973 Yom Kippur War. They were reacting against US clientelism of Israel and wanted to put pressure on the US to force Israel to end its aggression. Furthermore, the oil exporters were aware that capitalist nations were hugely reliant on oil, and consciously exploited this vulnerability. Thus, the price hike of oil and therefore the ensuing economic crisis could be seen as being directly caused by OPEC acting in their own self-interest.
The reasons that explained why the capitalist world was again badly affected by the steep increase in oil prices in the second oil shock years if 1979-80 are largely similar to that of the first oil shock years. If the capitalist nations had invested in increasing fuel efficiency or seeking alternative sources of fuel during the Golden Age, then they would have been less adversely affected by the second oil shock. It takes time for such investment to pay off and yield clear results; doing so only after the years of the first oil shock was insufficient.
It is quite obvious that developments and happenings in the Golden Age exerted no influence over the second oil shock. The revolution in Iran (2nd largest world exporter of oil) in 1979 removed the Shah who was an American ally, and established an Islamic republic, hostile to international trade and shut down the Iranian oil industry. The outbreak of war between Iraq (3rd largest world exporter of oil) and Iran in 1980 caused the elimination of Iraqi oil exports. Thus, the two major oil exporters no longer exported oil and this resulted in a near tripling of oil prices, resulting in inflation and recession in the capitalist world. This deterioration in Middle Eastern affairs was however, not caused by developments and happenings in the Golden Age.
The Third World debt crisis that threatened to collapse the global capitalist system was a situation in which many third world countries such as Mexico defaulted on their loans as they went bankrupt. This adversely impacted the seven of the nine largest banks in the world which provided the loans and created a situation in which the international financial system could be destroyed. There were many causes of the Third World debt crisis and some were directly related to developments and happenings in the Golden Age.
A brief explanation for the cause of the crisis would be as follows. The export industry of the third world was very basic, low value-added and the value of their products and exports were worth very little. With the advent of the oil shocks, their exports further deteriorated in value since Western demand for their goods fell due to the recession in the West. More money also had to be spent on imports due to inflation in the West. Thus, the third world countries were unable to pay off the heavy debts incurred from massive borrowing and had to borrow even more to finance the debts, which turned out to be a vicious cycle. (Sidenote : talk about 3rd world’s leaders corruption)
During the Golden Age, the Marshall Plan that injected billions of dollars into the world economy gradually diminished America’s export earnings in the face of increasing competition. Furthermore, the US government spending on the Vietnam War as well as Johnson’s “Great Society” programmes created a budget deficit which resulted in rising interest rates in America so as to induce other countries to buy their treasury bonds and finance the budget deficit. Interest rates in the world gradually rose and this put burden on the third world nations who were trying to reschedule their existing debts.
Linked to this was the growth of a new money market in Europe in which a vast quantity of dollars could circulate, outside the control of US regulatory authorities. This meant that the restrictions which governments placed on banks to prevent irresponsible transactions did not exist. This encouraged oil exporter nations to store their increased earnings (due to the increase in revenue from oil price hikes) in the European banks which became known as the Petro-Dollar. It can be argued that the oil shocks was the critical factor that triggered the debt crisis and that this growth of a money market in Europe complemented the oil shocks by creating the premise for massive loaning of funds to take place. The European banks were keen and even pleaded with the Third World countries to borrow from them so as to gather revenue to pay off the interests. Seen from this perspective, it was such developments during the Golden Age that provided the conditions for the Third World debt crisis to take place.
Conversely, it can be argued that other factors that have existed even before or after the Golden Age have also contributed to the Third World debt crisis. The colonial legacy of monoculture in the third world countries prevented them from diversifying their economy and left them subject to price fluctuations, a trait of economic vulnerability. Furthermore, the protectionism practiced by the West to protect their domestic industries, most notably that of agriculture, and of manufactured and semi-manufactured goods, provided a disincentive for third world countries to advance and develop their domestic industries. The increase in protectionism after the two oil shocks by Western countries as an attempt to protect domestic industries well-being also served to sharpen the problem. Even though developments in the Golden Age such as GATT’s Kennedy Round not dealing with agriculture protectionism and the European Economic Community providing subsidies to their farmers, it can be pointed out that protectionism was a problem that have existed for long and this merely intensified the problem. It was in fact these background factors that prevented third world nations from embarking on the path of modernisation and industrialisation, thus leaving them in a desperate situation of their exports being so low in value and thus the chronic inability to pay off their debts.
Thus, the Crisis Decades should not be seen as a direct result of the Golden Age. In the case of the first oil shock, it was no doubt that the structural weakness of the capitalist economy, such as heavy reliance on oil, allowed the global economy to be in such a vulnerable position. However, it is also true that it was OPEC which decided to exploit this vulnerability for their private intentions. In the case of the Third World debt crisis, the oil shocks which occurred could be seen as the immediate cause, the critical factor that ignited the crisis. That happened on two accounts, the placing of Petro-Dollars in European banks which resulted in massive loaning as well as the fall in export earnings and rise in import prices. Whether or not we see the oil shocks as being a result of the Golden Age would then depend on our perspectives. Nevertheless, many developments during the Golden Age did facilitate and provide conditions for the Third World debt crisis to take place. However, there were fundamental weaknesses in the economies of the Third World countries that placed them in a peculiarly vulnerable position to the oil shocks, and developments in the Golden Age did not solely influence the outbreak of the debt crisis.