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The End of the German Miracle Author(s): Rudiger Dornbusch Source: Journal of Economic Literature, Vol. 31, No. 2 (Jun., 1993), pp. 881-885 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2728517 . Accessed: 26/09/2013 23:06
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Journal of Economic Literature Vol. XXXI (June 1993), pp. 881-885

The

End

of

the

German

Miracle*

By RUDIGER DORNBUSCH MassachusettsInstitute of Technology

ERMANY iS

in the headlines,not because

of super performancebut ratherbecause it seems to be on the ropes. Inflationfighting, once again, is taking its toll on growth in Germany and in all of Europe; the instant integration project for East Germany has translated into massive unemployment there and an exfinancialcost to come for a decade traordinary or more in the West. Prospectsfor an integrated Europe, with a common money and fully integrated markets and joint policies are moving offthe screen. If there ever was a miracle, today one is badly needed. The complacent,self-satisfied, overweight, and overpaid Germanyis not coping well with the challenges. The timely and importantbook by Giersch, Paque, and Schmieding fills a gap in the economic history of West Germany(at least in the English language)and it does so in a thoroughly professionaland substantialway.' The authors have set for themselves two tasks, to provide an account of events and to lay out a set of explanatoryeconomic hypotheses in the tradition of free market economics. They provide an almost blow-by-blow account of events and trends, and a record of opinions to document where Germany came from and where it went. The book is fully successful in this objective and thus deserves attention fromstudents of Germaneconomic history. Curiously the authors explicitly exclude economic historiansfrom their readershipand in* The Fading Miracle: Four Decades of Market Economyin Germany. By HERBERT GIERSCH, KARLHEINZ PAQUE, AND HOLGER SCHMIEDING. Cambridge

vite the interest of applied economists; let no student of economic history be put off by this unjustifiedexclusion. The book commentson Germanpostwareconomic events in a chronologicalfashion. A rundown of the chapter titles will give an immediate impression of postwar history, the issues, and the authors'angst: stylized facts 1945-90; 1945-48: establishing a liberal order; 1948-60: spontaneousgrowth;1960-73: towardmanaged growth; 1973-90: facing the slowdown; two cheers for German unification;a new miracle? No question, as a record this book is superb. The most interesting part is the account of the immediate postwar reconstruction,including monetary reform and decontrol. This is where the miracle happened most conspicuously as Henry Wallich (1955) described so well. The bold write-down of the monetary overhangis just one of the reformsof the time that would have been instructivefor the Soviet Union in the past few years. In this context one cannot pass up recountingthe Allied reaction to price liberalization in Germany. The turnaroundof Germany in 1948 was nothing short of a miracle. From one day to the next, productive forces were unleashed to let recovery and growth proceed at breakneck speed. The move from a socialist control economy to the free marketwas bold. One Sundayin 1948, while the Allied supervisorswere not watching, EconomicsministerErhardlifted summarilyall price controls. Jossleyn Hennessy (1964, p. 5) reports how it all started: he [Er"Theonly rationcouponis the mark" forceswere aghast. hard]said.The occupation The Frenchand the British,whose internal werebarely stillrigidwithcontrol, economies, convalescent,were furious. The Americans

and NY: Cambridge U. Press, 1992, pp. xiv, 302. 1 The standard source, so far, has been Gustav Stolper, Karl Hauser, and Knut Borchardt (1967) in its various editions.

881

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882

Journal of Economic Literature, Vol. XXXI (June 1993)

ing potentially everywhere to a politicization of economic life. For a while, they may be held back or brought into service of rapid market growthwhen people or the public can be made to believe that distributionalquarrelswill close growth opportunities to the detriment of all, eventuallyleadingto zero-sumsociety. But politicians, bureaucratsand leaders of corporatist organizationshave too short and too partial a view to meet the concerns of market-oriented economists. No doubt, the narrowinterests of the practioners of the corporatistsystem will often gain the upper hand, so that the economy is bound to slow down under the impact of mounting regulation and higher taxes, rising costs and shrinkingprofit margins.

werenervous. The US general Claysaid"Herr Erhard,my adviserstell me you'remaking a terriblemistake." "Don'tlistento them, General,"Erhard replied,"myadvisers tell me the samething." And, fromthen on, nothingbut growth. Even if there were tight spots, particularlyin the first few years, reconstructionwent faster and further than anyone would have predicted. In fact what people had expected cannotbe reconstructed today; but the success was such that it could not stay an orphan. Free market economics claimed paternity. This is just one of the key episodes in postwarGerman economic history that is spelled out in careful if dry detail. A special merit of the book is the careful integration of external developments into the analysis. The role of foreign demand and business cycles, startingwith the much welcomed Korean War boom, is given prominence. The role of trade policy as a source of growth is recognized and documented. The same is true for exchange rate policy from Germany'splace in the European Payments System to the early decision to move to convertibility on to the Bretton Woods system and floating. With so thorough an emphasis on the facts, the book would be better if the authors had complemented the fine review of stylized facts with a data appendix of the principal time series. True, they can be found in the volume in variousplaces, but organizedby episode they are less convenient for reference. But even as the complaintis registered, a compliment must be added for the thorough documentation of data and references which make the book an indispensable instrument for students of the German economy and of economic history. The authors'second objective is to interpret Germanevents from a perspective of free market economics-incentives, opportunities, competition, the marketare the positive forces, corporatismin all its forms stands for setbacks and a sapping of the juices; these negative factors account for the fading of the miracle. The authors' ideological premise is set out in the preface (pp. xi-xii):
Not only the miracle, but also the fading of the miracleprovides importantlessons. Corporatismand bureaucracy are strong forces, lead-

Curiously, though, where the authors'ambition is greatest, namely in trying to make their case for the positive force of unfetteredmarkets, the book is less effective. One would think that, at key stages in the history, they would have had taken up the central theme to demonstrate quite specificallyhow a particularstep, event, or decision led in the wrong direction and a market-friendly decision could have led to
much better outcomes. They mostly prefer to

leave the inference-declining performancereflects the nefarious results of bureaucracyand

corporatism-to the reader. That is not a successful strategy because they will, of course, get nods from those who share their predilections and need no convincing, but they will make few converts to their point of view. The authors' free market perspective and interpretation of the declining growth performance highlights the rise of the bureaucracy and of corporatism. In the first two decades, growth was strong because liberal influences were predominant and the scope for competition was widened. In the following two decades, increasingly confining influences limited growth performance. But one might ask why Japan also experienced strong performance in the first two decades of postwar growth in an environment where competition and liberalism were decidedly absent. Is it not rather Friedman's Law-reconstruction after wartime destruction makes for high growth-that is at work rather than the economic system? The authors, for example, attribute major growth effects to progressive trade opening. In Japan, by contrast, a determined industrial protection served to promote demand for a rapidly expanding

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Dornbusch: The End of the German Miracle

manufacturing sector. PerhapsJapanoffers too distant a comparison; in that case, why did France do almost as well as Germanybut succeeded with a system far away from German liberalism? The basic question of this book "Why is the Miracle Fading?" is entirely appropriate: Growthwas 8.2 percent in the 50s, 4.4 percent per year up to the oil shock, and merely 2 percent since then. What has gone wrong? The book's only systematic attempt at an answer is offeredin a section entitled "rootsof the growth slack" (pp. 207-21) where specific hypotheses about the 1973-89 growth decline are advanced. They run alonglines of the Euro-sclerosis discussionto which the lead authorhas been an important contributor. Euro-sclerosis became a fashionable catchword for persistently high unemploymentand slow growthin Europe in the 1980s. Unemployment was said to be classical rather than Keynesian: the problem was not a shortageof demand, but an excessive cost of labor. Product wages were too high, and substantial firing costs added to the cost of labor. As a result, in the Euro-sclerorisview, the cure had to be a defossilizing of the labor market, not the creation of demand. If the lessening of competition accounts for the slowdown, the authors argue that supply side economics in its variousforms is the right remedy. Today Euro-sclerosisas the central diagnosisof poor performancein the 1980s is suspect. Theoreticalresearchhas shown that firing costs need not translate into reduced average employment levels. They may discourage hiring, but they also discouragefiring. Not surprisingly, the outcome then depends on a host of parametersgoverning the size and persistence of disturbancesas well as trend growth in labor demand. Another reason for scepticism is that the atmosphereof Euro-sclerosisvanishedfrom one day to the next as Europe 1992 came on the scene and created a far more positive medium term outlook. Finally, the Germanexample of 1988-91 leaves little doubt that, in one of the apparently most fossilized European economies, employment growth was high the moment demand came on the stage. The boom of 1987-91 created more than 2 million jobs (an 8.6 percent growth in employment). There was quite obviously no reluctance to hire extra labor in the face of strong demand, even with-

883

out any assurancethat the boom would last. Euro-sclerosisis one centraltheme, the other is an emphasis on a uniquely German concept of the Social MarketEconomy. An Anglo-Saxon audience brought up to the sounds of Milton Friedman's unfettered competition or Robert Bartley'sThe Seven Fat Years cannot help but be curious about Germany'sconcept of a Social Marketeconomy-both S and M written in capital letters. One might expect a tension between the two-social stands for cooperationand cohesion, marketrepresentscompetitionand selfishness in the most positive sense. How has this workedin Germany?As it reforms,Eastern Europe must choose a model. A Social Market economy might sound just right in the Czech Republic for a Havel, if not for a Klaus. The book does not explain clearly how the model works in fact and whether it might be held accountable for poor performance. The tension, wherever it might have come up, is not brought out in stark colors and the reader will find no strong guidance here in shopping for attractive economic systems. There is some material(heavy going) covering the intellectual background(pp. 26-44) of the Social Marketmodel and Ordo-Liberalism (a tame version of laissez-fairewhich sprouts in Southern Germany), but it does not do enough to show how all this might work in practice.2At no point do the authors,however, even come close to asking whether Germany should have just dropped the "Social" and gone ahead to unlimited prosperity. It would have helped if they had placed the German model in perspective by comparingit with alternative economic systems in the West. Specifically,the authors might have asked whether Germany's corporate performancewas enhanced relative to, say, that of the United States by the implicit and explicit strictureson Germanfirmsto abide by a social code or by such institutionsas Mittbestimmung-the mandatoryrepresentationof labor on the boards of all but small firms. Or they might have argued and demonstratedthat the system leads to internalizingsocial conflicts and hence enhances performance.One way or the other, if the institution gets the limelight,
2A valuablesource on the Social MarketEconomy is Wolfgang Stutzel et al. (1982). See, too, Rudolf Richter (1979)and Holger Wolf (forthcoming).

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884

Journal of Economic Literature, Vol. XXXI (June 1993)

TABLE1
PRODuCTIVrry CATCHUPWITH THE U.S. (percent per year)

we should learn more about what it does or does not do. As a result of this omission, we gain no impression of whether Germany'seconomic experiment is special. A chapteron "HowGermanyReallyWorks?" would have offered important insights in how Germany'seconomy is distinctive and how its performancecould be improved. We all know about the independent Central Bank, but what else is there to know and what are the institutions or implicit structures that really matter? One comes to suspect, because of the sheer lack of documentationof anything very different, that all the talk about Social MarketEconomy, Ordnungspolitik,and Central Bankindependence in Germany is really not very differentfrom straightclassicaleconomics, but dressed up to look heavily intellectualand principled. And there is another suspicion. When Americanlibertarianstalk about the free market, they really mean it. But in Germany, and for these authors, free market economics is a lot tamer. The former is a free-for-all where everythingthat is not illegal is approved,where the limits are there to be tested, and the cheers go to whoever succeeds. In the German situation, social cohesion is a central parameterthat takes much of the aggressionout of competition before it even gets going. It is not difficultthen to side with the authors in their support for competition as an offsetting, invigoratingforce. The authorswant us to believe that superior performancein the early period is due to free market economics and poor performancelater to a lack thereof. But it is doubtful that free market economics has really been that important in the case of Germany. In fact, Germany does not reallydifferthat muchfromthe experience of a large group of industrial countries. Angus Maddison(1992) has reviewed the rates of catchupfor a group of 15 industrialcountries with the US as a front runner. He notes that the period 1950-73 was the high growthor great catchup period for all, not just for Germany. In the period 1890-1950, every single country in the group fell increasingly behind. In the period 1950-73 every country caught up at a briskpace. In 1973-87 all were still catching up, but now at a lesser rate because their backwardness had been reduced. The pattern of slowdown is the same in Germanyand for the entire group. It is as much the case for Austria,

1890-1950 Germany Group of 15 -0.98 -0.52

1950-1973 3.40 2.11

1973-1987 1.53 1.32

Source: Maddison (1992) Table 5.2

Italy or Japanas for Germany and it happens even more in Japanthan in Germany. The answer to the slowdownis therefore very unlikely to be found in Germany because the pattern is the same for everybody, regardless of their economic model. If there is anything setting Germany apart, it is probably the combinationof an extraordinarilyhigh level of unemploymentat the beginning. Almost 10 million refugees crowded the labor market;they were educated, skilled, and willing; they worked hard and they saved; and above all, they did not get in the way of a virtuous cycle of investment, productivity growth, graduallyrising real wages, saving, and investment. Whetherfree marketeconomicsor initial poverty and destitutionwere the prime movers in this dynamicsis wide open to discussion. There is anotherissue on which international evidence would have strengthened the argument. It is commonlyaccepted, and-theauthors certainly endorse this view, that the independent Bundesbankplays a key role in the German economy. It ensures a better inflationperformance, so the argument goes, and, with better inflation, economic performanceis better. The first part is readily accepted; Germany does have less inflationthan the Europeanaverage or virtually any country in Europe. But the second part is not there. German growth is not higher than growth for Europe on average. If low inflation has beneficial effects, the output loss incurredin the battles for low inflation may offset these. The net growth result then comes to the same as that of countries which are more complacentabout inflationand have less formidableinstitutions. Any evidence that there is a reputationor performancebonus in the case of Germany is not offered. In fact, the issue is not even raised.

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Dornbusch: The End of the German Miracle

The book was substantiallycompleted before German unification added a new, dramatic chapter to German economic history. Wisely, the authors are brief on the topic because the facts are still so much in flux. But they do stick out their neck at least. "Two cheers for the market, not three" is Arthur Okun's famous line. In this book unification gets two cheers in the chapter heading and we never find out why the third is missing. On the contrary,with due acknowledgmentsfor the transitiondifficulties, the authors express great confidence (p. 270): Although the transition to a marketeconomy in East Germany has been implemented in a waywhichaccentuates the problems of adjustmentandreorientation, thisdoesnotimplythat the medium-to long-term resultswill not be favorable. Afterall, East Germany has taken overa market economic order whichhasproven its viability the course throughout of WestGereconomic many's history. Once legal and administrative bottlenecks havebeenremoved, andoncetheinfrastructure has been brought close to Westernstandards, East Germany-in the heartof an integrating Europeand with the metropolis Berlinat its center-may well become a favoritelocation forinvestors. The authorshave us believe that corporatism and state coddling of enterprises have been the source of slowdown in the West. If that is correct, their optimism for the East must be questioned. Rapid wage equalization,with no basis in an equal narrowing of productivity differentials, is a sure recipe for unemployment. Massive transfers and the accompanying tax burdens are certain to slow down productive investment. Integration with East Germany may have been inevitable, it may be a good thing from the political point of view, but by now it is nothing but burdensome. True, East Germany'simports exceed GNP, but all that is paid for by West Germandeficits or taxes. And more; integrationwith East Germany is much harder than expected. Why

885

should firmsinvest in East Germanyratherthan in the Czech Republic where labor is just as productivebut far cheaper?Taxesin West Germany will rise for a decade, investment will fall, and increasingly West Germany may lose out in world markets. The Fading of the Miracle may just be starting because, in Germany itself, confidence is withering and the task of coping with (other people's) postcommunismseems too daunting. The GermanCouncilof Experts(Sachverstandigenrat (1992, p. v) in their most recent report addressesjust that fear, the loss of competitiveness and of investment and the shift to distributional struggles. Thereis reasonfor concern when the defense of established possessions and the attemptto shiftburdens to othersdominate economic discussion. . . Distributional immobistruggles lize whenthey leadto the consequence thata growthpolicy is no longeracceptedand the very premises for such a strategy-stable money, solid publicfinance,and competitive firmswillingto invest-are undermined in the crossfire of economic agents.
REFERENCES HENNESSY, JOSSLEYN. "The German 'Miracle, in Economic 'miracles.' Eds.: JOSSLEYN HENNESSEY, VERA LuTz, AND GIUSEPPE SCIMONE. London: The Institute of Economic Affairs, 1964, pp. 1-73. ANGUS.

MADDISON, RICHTER,

Dynamicforces in capitalist de-

velopment. Oxford: Oxford U. Press, 1992.

RUDOLF. Currency and economic reform. West Germanyafter World War II. Z. ges. Staat-

swiss., Special Issue, Sept. 1979, 135(3).

SACHVERSTANDIGENRAT

Fur Wachstumsorientioerung- Gegen LahmendeVerteilungsstreit.Stuttgart:

Metzler-Poeschel, 1992.
HAUSER, KARL AND BORCHARDT, GUSTAV;

STOLPER, KNUT. STUTZEL, WALLICH,

The Germaneconomy:1870 to the present.

WOLFGANG HENRY C. ET AL.

NY: Harcourt Brace, 1967.

Standard texts on the

social market economy. NY: Gustav Fischer, 1982.

Mainspringsof Germanrevival.

New Haven: Yale U. Press, 1955. WOLF, HOLGER. "Ordo-Liberalism. A Recipe for the

1990s?"in Postwar economic reconstruction. By

RUDIGER DORNBUSCH, RICHARD LAYARD, AND WILHELM NOLLING. Cambridge: MIT Press, forthcom-

ing.

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