International Political Economy by jianghongl


									International Political Economy
             Politics and Markets
• Role of the state in liberal democracies: to induce
  economic performance
• Pluralist Approach
   –   The state is a neutral arena
   –   Actors have varying particular interests
   –   State has no intrinsic interests
   –   The study of politics is about government processes
• Class Approach
   – There are common class interests
   – The ruling class controls the agenda
   – It implements policy
           Needs of the state
• The state needs satisfactory economic
  performance from private asset controllers
  – Stability
  – Revenue
• So the state
  – Avoids reducing the confidence of business
  – Induces performance with incentives
         Changing the terms
• Losers in the market can change the rules if
  they have sufficient political influence
• Given the comments of Olson (―collective
  action problem‖) and Lindblom (―privileged
  position of business‖), these will be
  oligopolistic firms see Sugar or Steel
    Hegemonic Stability Theory
• Central Idea: The stability of the International System
  requires a single dominant state to articulate and enforce
  the rules of interaction among the most important members
  of the system.
• To be a Hegemon, a state must have three attributes:
   – The Capability to enforce the rules of the system;
   – The Will to do so;
   – A Commitment to a system which is perceived as mutually
     beneficial to the major states.
• Capability rests upon three attributes:
   – A large, growing economy;
   – Dominance in a leading technological or economic sector;
   – Political power backed up by projective military power.
            The Historical Record
• Portugal 1494 to 1580 (end of Italian Wars to Spanish invasion of
  Portugal) Based on Portugal's dominance in navigation
    – Hegemonic pretender: Spain
• Holland 1580 to 1688 (1579 Treaty of Utrecht marks the foundation
  of the Dutch Republic to William of Orange's arrival in England)
  Based on Dutch control of credit and money
    – Hegemonic pretender: England
• Britain 1688 to 1792 (Glorious Revolution to Napoleonic Wars)
  Based on British textiles and command of the High Seas
    – Hegemonic pretender: France
• Britain 1815 to 1914 (Congress of Vienna to World War I) Based on
  British industrial supremacy and railroads
    – Hegemonic pretender: Germany
• United States 1945 to 1971 Based on Petroleum and the Internal
  Combustion Engine
    – Hegemonic pretender: the USSR
          What does the Hegemon Do?
• The system is a collective good which means that it is plagued by a
  "free rider" syndrome. Thus, the hegemon must induce or coerce other
  states to support the system The US system tries to produce democracy
  and capitalism, thus it champions human rights and free trade. Other
  nations will try to enjoy the benefits of these institutions, but will try to
  avoid paying the costs of producing them. Thus, the US must remain
  committed to free trade even if its major trading partners erect barriers
  to trade. The US can erect its own barriers, but then the system will
• Over time, there is an uneven growth of power within the system as
  new technologies and methods are developed. An unstable system will
  result if economic, technological, and other changes erode the
  international hierarchy and undermine the position of the dominant
  state. Pretenders to hegemonic control will emerge if the benefits of
  the system are viewed as unacceptably unfair.
          Bretton Woods (1944)
• The Bretton Woods system of international monetary
  management established the rules for commercial and
  financial relations among the world's major industrial
  states. The Bretton Woods system was the first example in
  world history of a fully negotiated monetary order intended
  to govern monetary relations among independent nation-
• Preparing to rebuild the international economic system as
  World War II was still raging, set up a system of rules,
  institutions, and procedures to regulate the international
  monetary system. The planners at Bretton Woods
  established the International Bank for Reconstruction and
  Development (IBRD) (now one of five institutions in the
  World Bank Group) and the International Monetary Fund
         Bretton Woods (cont’d)
• The chief features of the Bretton Woods system were, first,
  an obligation for each country to adopt a monetary policy
  that maintained the exchange rate of its currency within a
  fixed value—plus or minus one percent—in terms of gold;
  and, secondly, the ability of the IMF to bridge temporary
  imbalances of payments.
• In the face of increasing strain, the system eventually
  collapsed in 1971, following the United States' suspension
  of convertibility from dollars to gold.
 Legacy of the Great Depression
• The experience of the Great Depression, when
  proliferation of foreign exchange controls and trade
  barriers led to economic disaster, was fresh on the minds
  of public officials.
• The planners at Bretton Woods hoped to avoid a repeat of
  the debacle of the 1930s, when foreign exchange controls
  undermined the international payments system that was the
  basis for world trade. The "beggar thy neighbor" policies
  of 1930s governments—using currency devaluations to
  increase the competitiveness of a country's export products
  in order to reduce balance of payments deficits—worsened
  national deflationary spirals, which resulted in plummeting
  national incomes, shrinking demand, mass unemployment,
  and an overall decline in world trade.
       Great Depression (cont’d)
• Trade in the 1930s became largely restricted to currency
  blocs (groups of nations that use an equivalent currency,
  such as the "Pound Sterling Bloc" of the British Empire).
  These blocs retarded the international flow of capital and
  foreign investment opportunities. Although this strategy
  tended to increase government revenues in the short run, it
  dramatically worsened the situation in the medium and
  longer run.
• Thus, for the international economy, planners at Bretton
  Woods all favored a liberal system, one that relied
  primarily on the market with the minimum of barriers to
  the flow of private trade and capital. Although they
  disagreed on the specific implementation of this liberal
  system, all agreed on an open system.
• International economic management relied on the
  dominant power to lead the system. The
  concentration of power facilitated management by
  confining the number of actors whose agreement
  was necessary to establish rules, institutions, and
  procedures and to carry out management within
  the agreed system.
           America’s Advantages
• That leader was the United States. The United States had emerged
  from the Second World War as the strongest economy in the world,
  experiencing rapid industrial growth and capital accumulation. The
  U.S. had remained untouched by the ravages of World War II and had
  built a thriving manufacturing industry and grown wealthy selling
  weapons and lending money to the other combatants; in fact, U.S.
  industrial production in 1945 was more than double that of annual
  production between the prewar years of 1935 and 1939. In contrast,
  Europe and East Asia were militarily and economically shattered.
• As the Bretton Woods Conference convened, the relative advantages
  of the U.S. economy were undeniable and overwhelming. The U.S.
  held a majority of world investment capital, manufacturing production
  and exports. In 1945, the U.S. produced half the world's coal, two-
  thirds of the oil, and more than half of the electricity. And the U.S.
  held 80 % of the world's gold reserves.
               The need to trade
• As the world's greatest industrial power, and one of the
  few nations unravaged by the war, the U.S. stood to gain
  more than any other country from the opening of the entire
  world to unfettered trade. The United States would have a
  global market for its exports, and it would have
  unrestricted access to vital raw materials. The United
  States was not only able, it was also willing, to assume this
  leadership role.
• William Clayton, the assistant secretary of state for
  economic affairs, was among myriad U.S. policymakers
  who summed up this point: "We need markets—big
  markets—around the world in which to buy and sell."
              The Atlantic Charter
• The Atlantic Charter affirmed the right of all nations to equal access to
  trade and raw materials. Moreover, the charter called for freedom of
  the seas, the disarmament of aggressors, and the "establishment of a
  wider and permanent system of general security."
• As the war drew to a close, the Allies sought to construct what had
  been lacking between the two world wars: a system of international
  payments that would allow trade to be conducted without fear of
  sudden currency depreciation or wild fluctuations in exchange rates—
  ailments that had nearly paralyzed world capitalism during the Great
• Without a strong European market for U.S. goods and services, most
  policymakers believed, the U.S. economy would be unable to sustain
  the prosperity it had achieved during the war. In addition, U.S. unions
  had only grudgingly accepted government-imposed restraints on their
  demand during the war, but they were willing to wait no longer,
  particularly as inflation cut into the existing wage scales with painful
        The Liberal International
            Economic Order
• Free trade relied on the free convertibility of currencies.
  Negotiators at the Bretton Woods conference, fresh from
  what they perceived as a disastrous experience with
  floating rates in the 1930s, concluded that major monetary
  fluctuations could stall the free flow of trade.
• The liberal economic system required an accepted vehicle
  for investment, trade, and payments. Unlike national
  economies, however, the international economy lacks a
  central government that can issue currency and manage its
  use. Bretton Woods set up a system of fixed exchange
  rates managed by a series of newly created international
  institutions using the U.S. dollar (which was a gold
  standard currency for central banks) as a reserve currency.
                      Gold Standard
• In the nineteenth and twentieth centuries gold played a key role in
  international monetary transactions. The gold standard was used to
  back currencies; the international value of currency was determined by
  its fixed relationship to gold; gold was used to settle international
  accounts. The gold standard maintained fixed exchange rates that were
  seen as desirable because they reduced the risk of trading with other
• Imbalances in international trade were theoretically rectified
  automatically by the gold standard.
    – A country with a deficit would have depleted gold reserves and would
      thus have to reduce its money supply. The resulting fall in demand would
      reduce imports and the lowering of prices would boost exports; thus the
      deficit would be rectified.
    – Any country experiencing inflation would lose gold and therefore would
      have a decrease in the amount of money available to spend. This decrease
      in the amount of money would act to reduce the inflationary pressure.
                 Reserve Currency
• Supplementing the use of gold in this period was the British pound.
  Based on the dominant British economy, the pound became a reserve,
  transaction, and intervention currency. But the pound was not up to the
  challenge of serving as the primary world currency, given the
  weakness of the British economy after the Second World War.
• The only currency strong enough to meet the rising demands for
  international liquidity was the US dollar. The strength of the US
  economy, the fixed relationship of the dollar to gold ($35 an ounce),
  and the commitment of the U.S. government to convert dollars into
  gold at that price made the dollar as good as gold. In fact, the dollar
  was even better than gold: it earned interest and it was more flexible
  than gold.
                       Pegged Rates
• What emerged was the "pegged rate" currency regime. Members were
  required to establish a parity of their national currencies in terms of
  gold (a "peg") and to maintain exchange rates within 1 %, plus or
  minus, of parity (a "band") by intervening in their foreign exchange
  markets (that is, buying or selling foreign money).
• In practice, however, since the principal "reserve currency" would be
  the U.S. dollar, this meant that other countries would peg their
  currencies to the U.S. dollar, and—once convertibility was restored—
  would buy and sell U.S. dollars to keep market exchange rates within
  1%, plus or minus, of parity.
• Meanwhile, in order to bolster faith in the dollar, the U.S. agreed
  separately to link the dollar to gold at the rate of $35 per ounce of gold.
  At this rate, foreign governments and central banks were able to
  exchange dollars for gold.
• International Monetary Fund (IMF)
• International Bank for Reconstruction and
  Development (IBRD)
• The IMF was to be the keeper of the rules and the main instrument of
  public international management. IMF approval was necessary for any
  change in exchange rates. It advised countries on policies affecting the
  monetary system.
• The big question at the Bretton Woods conference with respect to the
  institution that would emerge as the IMF was the issue of future access
  to international liquidity and whether that source should be akin to a
  world central bank able to create new reserves at will or a more limited
  borrowing mechanism.
• The IMF was born with an economic approach and political ideology
  that stressed controlling inflation and introducing austerity plans over
  fighting poverty. This left the IMF severely detached from the realities
  of Third World countries struggling with underdevelopment from the
         Subscriptions and quotas
• a fixed pool of national currencies and gold subscribed by each
  country as opposed to a world central bank capable of creating money.
• The Fund was charged with managing various nations' trade deficits so
  that they would not produce currency devaluations that would trigger a
  decline in imports.
• The IMF was provided with a fund, composed of contributions of
  member countries in gold and their own currencies. When joining the
  IMF, members were assigned "quotas" reflecting their relative
  economic power, and, as a sort of credit deposit, were obliged to pay a
  "subscription" of an amount commensurate to the quota.
• The subscription was to be paid 25% in gold or currency convertible
  into gold and 75% in the member's own money.
• The IMF set out to use this money to grant loans to member countries
  with financial difficulties.
• Each member was then entitled to be able to immediately withdraw
  25% of its quota in case of payment problems.
           Financing trade deficits
• In the event of a deficit in the current account, Fund members, when
  short of reserves, would be able to borrow needed foreign currency
  from this fund in amounts determined by the size of its quota
• Members were obligated to pay back debts within a period of eighteen
  months to five years. In turn, the IMF embarked on setting up rules and
  procedures to keep a country from going too deeply into debt, year
  after year.
• IMF loans were not comparable to loans issued by a conventional
  credit institution. Instead, it was effectively a chance to purchase a
  foreign currency with gold or the member's national currency.
• The IMF was designed to advance credits to countries with balance of
  payments deficits. Short-run balance of payment difficulties would be
  overcome by IMF loans, which would facilitate stable currency
  exchange rates.
• This flexibility meant that member states would not have to induce a
  depression automatically in order to cut its national income down to
  such a low level that its imports will finally fall within its means.
• Thus, countries were to be spared the need to resort to the classical
  medicine of deflating themselves into drastic unemployment when
  faced with chronic balance of payments deficits. Before the Second
  World War, European nations often resorted to this, particularly
• Moreover, the planners at Bretton Woods hoped that this would reduce
  the temptation of cash-poor nations to reduce capital outflow by
  restricting imports. In effect, the IMF extended Keynesian measures—
  government intervention to prop up demand and avoid recession—to
  protect the U.S. and the stronger economies from disruptions of
  international trade and growth.
           Changing the par value
• The IMF sought to provide for occasional exchange-rate adjustments
  (changing a member's par value) by international agreement with the
• Member nations were permitted first to depreciate (or appreciate in
  opposite situations) their currencies by 10 %. This tends to restore
  equilibrium in its trade by expanding its exports and contracting
  imports. This would be allowed only if there was what was called a
  "fundamental disequilibrium."
• (A decrease in the value of the country's money was called a
  "devaluation" while an increase in the value of the country's money
  was called a "revaluation".)
• It was envisioned that these changes in exchange rates would be quite
              US Dominance
• The IMF allocates voting rights among
  governments not on a one-state, one-vote basis but
  rather in proportion to quotas.
• Since the U.S. was contributing the most, U.S.
  leadership was the key implication. Under the
  system of weighted voting the U.S. was able to
  exert a preponderant influence on the IMF. With
  one-third of all IMF quotas at the outset, enough
  to veto all changes to the IMF Charter on its own.
• It had been recognized in 1944 that the new system could come into
  being only after a return to normalcy following the disruption of World
  War II.
• It was expected that after a brief transition period—expected to be no
  more than five years—the international economy would recover and
  the system would enter into operation.
• To promote the growth of world trade and to finance the postwar
  reconstruction of Europe, the planners at Bretton Woods created
  another institution, IBRD—now known as the World Bank.
• The IBRD had an authorized capitalization of $10 billion and was
  expected to make loans of its own funds to underwrite private loans
  and to issue securities to raise new funds to make possible a speedy
  postwar recovery.
• The IBRD (World Bank) was to be a specialized agency of the United
  Nations charged with making loans for economic development
                Trifflin’s Dilemma
• American economist Robert Triffin had first identified the problem of
  fundamental imbalances in the Bretton Woods system in 1960.
• The number of U.S. dollars in circulation soon exceeded the amount of
  gold backing them up. By the early 1960s, an ounce of gold could be
  exchanged for $40 in London, even though the price in the U.S. was
  $35. This difference showed that investors knew that dollar was
• There was a solution to Triffin's dilemma for the U.S. - reduce the
  number of dollars in circulation by cutting the deficit and raise interest
  rates to attract dollars back into the country. Both these tactics,
  however, would drag the U.S. economy into recession, a prospect new
  President John F. Kennedy found intolerable.
• In August 1971, President Richard Nixon acknowledged that the
  Bretton Woods system was finished. He announced that the dollar
  could no longer be exchanged for gold. The "gold window" was
                 The Nixon Shock
• By the early 1970s, as the Vietnam War accelerated inflation, the
  United States was running not just a balance of payments deficit but
  also a trade deficit (for the first time in the twentieth century).
• The crucial turning point was 1970, which saw U.S. gold coverage
  deteriorate from 55% to 22%, leading holders of the dollar to lose faith
  in the U.S. ability to cut its budget and trade deficits.
• In 1971 more and more dollars were being printed in Washington, then
  being pumped overseas, to pay for the nation's military expenditures
  and private investments.
• In the first six months of 1971, assets for $22 billion fled the United
  States. In response, on August 15, 1971, Nixon unilaterally imposed
  90-day wage and price controls, a 10% import surcharge, and most
  importantly "closed the gold window," making the dollar inconvertible
  to gold directly, except on the open market.
• By the year’s end, a general revaluation of major currencies allowed
  2.25 % devaluations from the agreed exchange rate. But even the more
     Transition to Supportership
• By March 1976, all the world's major currencies were
• Over the next two decades, the system will be renegotiated
  taking into account the post-WWII recovery of Europe and
  the Far East.
• This will be the WTO (1995).
              Mission of the WTO
• The WTO aims to increase international trade by promoting lower
  trade barriers and providing a platform for the negotiation of trade and
  to resolve disputes between member nations, when they arise.
• Principles of the trading system:
• 1. A trading system should be discrimination-free in a sense that a
  country cannot favor another country or discriminate against foreign
  products or services.
•   2. A trading system should be more free where there should be little
  trade barriers (tariffs and non-tariff barriers).
•   3. A trading system should be predictable where foreign companies
  and governments can be sure that trade barriers would not be raised
  and markets will remain open.
•   4. A trading system should be more competitive.
•   5. A trading system should be more accommodating for less
  developed countries, giving them more time to adjust, greater
  flexibility, and more privileges.
               Conflict Resolution
• Apart from hosting negotiations on trade rules, the WTO also acts as
  an arbiter of disputes between member states over its rules. And unlike
  most other international organizations, the WTO has significant power
  to enforce its decisions through the authorization of trade sanctions
  against members which fail to comply with its decisions.
• Member states can bring disputes to the WTO's Dispute Settlement
  Body if they believe another member has breached WTO rules.
• Disputes are heard by a Dispute Settlement Panel, usually made up of
  three trade officials. The panels meet in secret and are not required to
  alert national parliaments that their laws have been challenged by
  another country.
• If decisions of the Dispute Settlement Body are not complied with, it
  may authorize "retaliatory measures" - trade sanctions - in favor of the
  member(s) which brought the dispute. While such measures are a
  strong mechanism when applied by economically powerful states like
  the United States or the European Union, when applied by weak states
  against stronger ones, they can often be ignored.
                      Energy Crisis
• The 1973 oil crisis began in earnest on October 17, 1973, when Arab
  members of the Organization of Petroleum Exporting Countries
  (OPEC), during the Yom Kippur War, announced that they would no
  longer ship petroleum to nations that had supported Israel in its conflict
  with Syria and Egypt -- that is, to the United States and its allies in
  Western Europe. The Arab-Israeli conflict triggered an energy crisis in
  the making.
• Between 1945 and the late 1970s, the West and Japan consumed more
  oil and minerals than had been used in all previous recorded history.
  Oil consumption in the United States had more than doubled between
  1950 and 1974. With only 6% of the world's population, the U.S. was
  consuming 33% of the world's energy.
• Oil, especially from the Middle East, was paid for at prices fixed in
  dollars. Nixon ended the convertibility of the US dollar into gold,
  thereby ending the Bretton Woods system that had been in place since
  the end of World War II, allowing its value to fall in world markets.
  The dollar was devalued by 8% in relation to gold in December 1971,
  and devalued again in 1973.
• The devaluation resulted in increased world economic and political
  uncertainty. This set the stage for the struggle for control of the world's
  natural resources and for a more favorable sharing of the value of these
  resources between the rich countries and the oil-exporting nations of
• OPEC devised a strategy of counter-penetration, whereby it hoped to
  make industrial economies that relied heavily on oil imports vulnerable
  to Third World pressures. Dwindling foreign aid from the United
  States and its allies, combined with the West's pro-Israeli stance in the
  Middle East, angered the Arab nations in OPEC.
• The effects of the embargo were immediate. OPEC forced the oil
  companies to increase payments drastically. The price of oil
  quadrupled by 1974 to nearly US$12 per 42 US gallon barrel (75
Oil Prices
•   This increase in the price of oil had a dramatic effect on oil exporting nations,
    for the countries of the Middle East who had long been dominated by the
    industrial powers were seen to have acquired control of a vital commodity.
    The traditional flow of capital reversed as the oil exporting nations
    accumulated vast wealth. Some of the income was dispensed in the form of aid
    to other underdeveloped nations whose economies had been caught between
    higher prices of oil and lower prices for their own export commodities and raw
    materials amid shrinking Western demand for their goods. Much of it,
    however, fell into the hands of elites who reinvested it in the West or enhanced
    their own well-being. Much was absorbed in massive arms purchases that
    exacerbated political tensions, particularly in the Middle East.
•   OPEC-member states in the developing world withheld the prospect of
    nationalization of the companies' holdings in their countries. Most notably, the
    Saudis acquired operating control of Aramco, fully nationalizing it in 1980
    under the leadership of Ahmed Zaki Yamani. As other OPEC nations followed
    suit, the cartel's income soared. Saudi Arabia, awash with profits, undertook a
    series of ambitious five-year development plans, of which the most ambitious,
    begun in 1980, called for the expenditure of $250 billion. Other cartel
    members also undertook major economic development programs.
•   Meanwhile, the shock produced chaos in the West. In the United States, the
    retail price of a gallon of gasoline rose from a national average of 38.5 cents in
    May 1973 to 55.1 cents in June 1974. Meanwhile, New York Stock Exchange
    shares lost $97 billion in value in six weeks.

•   With the onset of the embargo, U.S. imports of oil from the Arab countries
    dropped from 1.2 million barrels (190,000 m³) a day to a mere 19,000 barrels
    (3,000 m³). Daily consumption dropped by 6.1 % from September to February,
    and by the summer of 1974, by 7 % as the United States suffered its first fuel
    shortage since the Second World War.

•   Underscoring the interdependence of the world societies and economies, oil-
    importing nations in the noncommunist industrial world saw sudden inflation
    and economic recession. In the industrialized countries, especially the United
    States, the crisis was for the most part borne by the unemployed, the
    marginalized social groups, certain categories of aging workers, and
    increasingly, by younger workers. Schools and offices in the U.S. often closed
    down to save on heating oil; and factories cut production and laid off workers.
    In France, the oil crisis spelt the end of the Trente Glorieuses, 30 years of very
    high economic growth, and announced the ensuing decades of permanent
•   The embargo was not blanket in Europe. Of the nine members of the European
    Economic Community, the Dutch faced a complete embargo (having voiced
    support for Israel and allowed the Americans to use Dutch airfields for supply
    runs to Israel), the United Kingdom and France received almost uninterrupted
    supplies (having refused to allow America to use their airfields and embargoed
    arms and supplies to both the Arabs and the Israelis), whilst the other six faced
    only partial cutbacks. The UK had traditionally been an ally of Israel, and
    Harold Wilson's government had supported the Israelis during the Six Day
    War, but his successor, Ted Heath, had reversed this policy in 1970, calling for
    Israel to withdraw to its pre-1967 borders. The members of the EEC had been
    unable to achieve a common policy during the first month of the Yom Kippur
    War. The Community finally issued a statement on 6 November, after the
    embargo and price rises had begun; widely seen as pro-Arab, this statement
    supported the Franco-British line on the war and OPEC duly lifted its embargo
    from all members of the EEC. The price rises had a much greater impact in
    Europe than the embargo, particularly in the UK (where they combined with
    industrial action by coal miners to cause an energy crisis over the winter of
    1973-74, a major factor in the breakdown of the post-war consensus and
    ultimately the rise of Thatcherism).
•   Unlike any other oil-importing developed nation, Japan fared particularly well
    in the aftermath of the world energy crisis of the 1970s. Japanese automakers
    led the way in an ensuing revolution in car manufacturing. The large
    automobiles of the 1950s and 1960s were replaced by far more compact and
    energy efficient models. (Japan, moreover, had cities with a relatively high
    population density and a relatively high level of transit ridership.)
• A few months later, the crisis eased. The embargo was lifted in March
  1974 after negotiations at the Washington Oil Summit, but the effects
  of the energy crisis lingered on throughout the 1970s. The price of
  energy continued increasing in the following year, amid the weakening
  competitive position of the dollar in world markets; and no single
  factor did more to produce the soaring price inflation of the 1970s in
  the United States.

• The crisis was further exacerbated by government price controls in the
  United States, which limited the price of "old oil" (that already
  discovered) while allowing newly discovered oil to be sold at a higher
  price, resulting in a withdrawal of old oil from the market and artificial
  scarcity. The rule had been intended to promote oil exploration. This
  scarcity was dealt with by rationing of gasoline (which occurred in
  many countries), with motorists facing long lines at gas stations. In the
  U.S., drivers of vehicles with license plates having an odd number as
  the last digit were allowed to purchase gasoline for their cars only on
  odd-numbered days of the month, while drivers of vehicles with even-
  numbered license plates were allowed to purchase fuel only on even-
  numbered days. The rule did not apply on the 31st day of those months
  containing 31 days, or on February 29 in leap years — the latter never
  came into play as the restrictions had been abolished by 1976.
• The 1973 oil crisis was a major factor in Japanese economy shift away
  from oil-intensive industries and resulted in huge Japanese investments
  in industries like electronics.
• The Western nations' central banks decided to sharply cut interest rates
  to encourage growth, deciding that inflation was a secondary concern.
  Although this was the orthodox macroeconomic prescription at the
  time, the resulting stagflation surprised economists and central
  bankers, and the policy is now considered by some to have deepened
  and lengthened the adverse effects of the embargo.
• Long-term effects of the embargo are still being felt. Public suspicion
  of the oil companies, who were thought to be profiteering or even
  working in collusion with OPEC, continues unabated (seven of the
  fifteen top Fortune 500 companies in 1974 were oil companies, with
  total assets of over $100 billion)
• Since 1973, OPEC failed to hold on to its preeminent position, and by
  1981, its production was surpassed by that of other countries.
  Additionally, its own member nations were divided among themselves.
  Saudi Arabia, trying to gain back market share, increased production
  and caused downward pressure on prices, making high-cost oil
  production facilities less profitable or even unprofitable. The world
  price of oil, which had reached a peak in 1979, at more than US$80 a
  barrel (503 US$/m³) in 2004 dollars, decreased during the early 1980s
  to US$38 a barrel (239 US$/m³). In real prices, oil briefly fell back to
  pre-1973 levels. Overall, the reduction in price was a windfall for the
  oil-consuming nations: Japan, Europe and especially the Third World.

• When reduced demand and over-production produced a glut on the
  world market in the mid-1980s, oil prices plummeted and the cartel
  lost its unity. Oil exporters such as Mexico, Nigeria, and Venezuela,
  whose economies had expanded frantically, were plunged into near-
  bankruptcy, and even Saudi Arabian economic power was significantly
  weakened. The divisions within OPEC made subsequent concerted
  action more difficult.
• In thirty-year-old British government documents
  released in January 2004, it was revealed that the
  United States considered invading Saudi Arabia
  and Kuwait during the crisis and seizing the oil
  fields in those countries. According to the BBC,
  other possibilities, such as the replacement of
  Arab rulers by "more amenable" leaders, or a
  show of force by "gunboat diplomacy," were
  rejected as unlikely

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