The German Wirtschaftswunder. An Economic Miracle

Contents

1) Introduction

2) World War II and Before

3) German Economic Growth

4) Marshall Plan and Recovery

5) Role of Institutions and Geography

6) Conclusion

Tables

Appendix

References

1) Introduction:

This Essay will deal about the story of economic growth of post-World War-II Germany. Devastated in terms of material loss and human well-being, Germany puts its name in the books of Economic History as a success story of development. The 'Wirtschaftswunder' (Economic Miracle) that started in early 50s is a matter of topic that has been intensely studied by scholars. The Essay will briefly describe some facts prior to World War II and the extent of loss during the war. The following part will highlight some data about the growth and explain how this was achieved and finally conclude everything.

2) World War II and Before:

It is worth noting that pre-World War I Germany was already among the wealthiest countries in the world ( 3rd largest in 1913 ) (Madison) with high level of industrialization. Already in 1900, German economy was the largest in Europe. However, the consequences of World War I, followed by high, 'unfair' reparation payment (Keynes, 1920) and economic hardships posed serious challenges, which (as Keynes) gave rise to radicalism that eventually led to World War II. Moreover, protective tariffs imposed by foreign countries on German goods ( Castillo, 2003 ) impaired growth. It took until 1927 for German economy to reach the level of 1913(Madison).

Even if the War Economy grew until 1944, World War II caused a huge loss of 8 million Germans including civilian deaths and other economic consequences in the following years. The opportunity cost was immeasurable. Germany also faced a breakdown of production to about one half of pre-war levels (Smolny, 1999). With already 5 million internally displaced people, other 14 million arrived from lost territories that were previously part of Germany (Oltmer, 2005). In 1946, GDP fell to the level of year 1897 (Madison), a 49 years low and comprised of only one third of the level of 1944 when the GDP was highest despite the war. This implies the huge extent of destruction.

3) German Economic Growth:

The determinants of growth will be included in the next part. This part is dedicated to the extent of growth. Figure 1 shows that Germany grew at an average of 6.55% from 1949 to 1973 and with 2.31% per year from 1974 to 1990. The year 1973/74 was hit by an Oil embargo and the German economy contracted by 1.5% while the inflation reached 7%. One can say that the ‘Steady State’ was reached by 1973. However, in 1967 there was also a moderate Recession which can be attributed to lower public and private investment in the previous years (Borowski, 2002). Also an Oil Embargo of 1967 following the ‘Six-Day War’ worsened the situation.

The Gross Capital Formation increased with an average of 7.63% per year from 1950 to 1973 and by 1% average from 1974 to 1990 (Figure 2). After the unification, until 1999, average growth slowed even further. The worker productivity increased by 5.05% from1950-70 and 2.95% from 1971-80 (Figure 3). This implies that, as Solow Model explains, growth is strongly correlated with investment and productivity in this case. From these figures we can conclude that Germany reached its steady state around 1974. After that, investment on capital averaged 1% while growth averaged 2.31% justifying the Solow Model to be correct in the case of Germany.

Figure 3 also shows the growth of real wages from 1951-80. Wages rise when productivity grows. This is one of the most important determinants of economic growth and in the case of Germany, it was partly due to the movement of labour from agricultural sector to industries ( Eichengreen, 2008 ). The share of employment in agriculture decreased from 24.6% in 1950 to 6.8% in 1974 whereas production and service sector respectively increased from 42.9% to 44% and 32.5% to 49.1% at the same period ( FSD, 2014)

4) Marshall Plan and Recovery: (How economic growth was achieved)

Following World War II, the US secretary of state, George Marshall proposed the idea of ' Marshall Plan' to rebuild European states. Along with other European countries, Germany received a substantial amount of $1.45 billion, equivalent to 14.5 billion of 2006 dollars ( Williamson, 2014). Marshall fund played an important role to reinstall basic infra-structures that were crucial to stimulate growth. The effect of 'Big Push' by Marshall Fund (Figure 2) was huge.

The economic policy of newly appointed finance minister and later chancellor Dr. Ludwig Erhard stimulated a take-off. He reformed the currency from 'Reichmark' to German Mark. The new currency was devalued at the initial phase which gave a boost in exports by increasing competitive advantage. German mark slowly appreciated in mid 50s increasing the purchasing power of workers. Consequently, it gave rise to tourism industries and 'life-style economy' as the Germans became able to save a part of their earnings. One of the German strengths in the early 20th century, the Auto-mobile industry experienced a sharp rise in production level. By mid 50s, all of car industries that existed in pre-WWII period were continuing their operation (Abelshauser, 2005). Other than Automobile, machineries, electric goods and chemical industries grew rapidly and were able to boost their export. Figure-4 shows that from 1953, Germany started with a trade surplus of 1 billion which reached 24 billion in 1974 and today (2013) it stands at 194 billion. According to Madison tables, even though German growth accelerated after these reforms took place, it took until 1956/57 to reach the GDP level of 1944.

5) Institutions and Geography

The role of institutions in economic growth is vital. They are the rules of the game in a society. Prevailing economic institutions affects distribution of resources (Acemoglu et al 2005). The development of institutions like European Payment Union to liberalize trade, establishment of the central bank called ' Bundesbank ' to maintain currency stability and a subsequent law which allows it to oversee other credit institutions was enforced. It is equally indisputable that trade increases employment and it was also the case with Germany. Undisciplined financial sector can either downplay their role in growth process or put the whole economy in risk. Hence, the Bundesbank played an important role to maintain this stability. The necessity of monitoring financial institutions was reflected by the Recession of 2008. Moreover, Frankfurt am Main was made a financial hub with ‘Bundesbank’ itself having its head office there. The role of financial markets in economic growth is undeniable. These institutions along with the establishment of GATT and Bretton Woods system added huge contribution to the recovery after war (Eichengreen, 1992) and accelerated growth. The banking system that was already well established in the previous century had difficulties to emerge again after World War II as the chief executives of important banks were tried for their involvement in war crimes. However, the ‘big banks act’ of 1953 allowed the re-establishment of them (Detzer et al, 2013). Cartel Office was established to prevent the formation of business cartels and monopolies. One uniqueness of German financial system are the ‘Sparkassen’/Saving Associations, a non-state institutions which run under public law that not only lends to the middle class, but also support in sustainable development in a responsible way ( Simpson, 2013) Their role in helping the economy grow is immense.

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