Dornbusch German Miracle

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American Economic Association

The End of the German MiracleAuthor(s): Rudiger DornbuschSource: Journal of Economic Literature, Vol. 31, No. 2 (Jun., 1993), pp. 881-885Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/2728517 .

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Journal of Economic LiteratureVol. XXXI (June 1993), pp. 881-885

T h e E n d o f t h e German Miracle*

By RUDIGER DORNBUSCHMassachusetts nstituteof Technology

G ERMANY iS in the headlines,not becauseof super performancebut ratherbecauseit seems to be on the ropes. Inflationfighting,once again, is takingits toll on growthin Ger-manyand in all of Europe;the instantintegra-tion project for East Germany has translatedinto massive unemployment there and an ex-traordinaryinancialcost to come for a decadeor morein the West. Prospects oran integratedEurope, with a commonmoney and fully inte-grated markets and joint policies are movingoff the screen. If there ever was a miracle, todayone is badly needed. The complacent,self-satis-fied, overweight, and overpaid Germany s notcopingwell with the challenges.

The timely and importantbook by Giersch,Paque, and Schmiedingfills a gap in the eco-nomic historyof West Germany(atleast in theEnglishlanguage)and it does so in a thoroughlyprofessionaland substantialway.' The authorshave set for themselves two tasks, to providean account of events and to lay out a set ofexplanatoryeconomic hypotheses in the tradi-tion of free marketeconomics.They provide an almost blow-by-blow ac-count of events and trends, and a record ofopinions to document where Germany camefromand where it went. The book is fully suc-cessful in this objectiveand thus deservesatten-tion fromstudents of Germaneconomichistory.Curiously the authors explicitly exclude eco-nomic historiansfromtheir readershipand in-

vite the interest of applied economists; let nostudent of economic history be put off by thisunjustifiedexclusion.The book commentson Germanpostwareco-nomicevents in a chronological ashion.A run-down of the chaptertitles will give an immedi-ate impression of postwar history, the issues,and the authors'angst:stylized facts 1945-90;1945-48: establishing a liberalorder;1948-60:spontaneousgrowth;1960-73: towardmanagedgrowth; 1973-90: facing the slowdown; twocheers for German unification;a new miracle?No question, as a record this book is superb.The most interesting part is the account ofthe immediatepostwarreconstruction, nclud-

ing monetary reform and decontrol. This iswhere the miracle happened most conspicu-ously as Henry Wallich (1955) described sowell. The bold write-down of the monetaryoverhang s just one of the reformsof the timethatwould have been instructivefor the SovietUnion in the past few years. In this contextone cannot pass up recounting the Allied reac-tion to price liberalizationin Germany. Theturnaroundof Germany in 1948 was nothingshort of a miracle. From one day to the next,productiveforces were unleashed to let recov-ery and growth proceed at breakneckspeed.The move from a socialistcontroleconomy tothe free marketwas bold. One Sunday n 1948,while the Allied supervisorswere not watching,EconomicsministerErhard iftedsummarilyallprice controls. Jossleyn Hennessy (1964, p. 5)reportshow it all started:"Theonly ration oupon s the mark" e [Er-hard] aid.Theoccupationorceswereaghast.The Frenchand the British,whose internaleconomies,tillrigidwithcontrol,werebarelyconvalescent,were furious. The Americans

* The Fading Miracle: Four Decades of MarketEconomy n Germany.By HERBERT GIERSCH, KARL-HEINZ PAQUE, AND HOLGER SCHMIEDING. Cambridgeand NY: Cambridge U. Press, 1992, pp. xiv, 302.

1 The standard source, so far, has been Gustav Stol-per, Karl Hauser, and Knut Borchardt (1967) in itsvarious editions.881

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882 Journal of Economic Literature, Vol. XXXI (June 1993)werenervous.The USgeneralClay aid"HerrErhard,my advisers ell me you'remakingterriblemistake." Don'tisten o them,Gen-eral,"Erhardeplied,"myadvisersell methesame hing."And,from then on, nothingbutgrowth.Evenif there were tight spots, particularly n thefirst few years, reconstructionwent faster andfurtherthan anyone would have predicted. Infact whatpeople hadexpectedcannotbe recon-structed today;but the success was such thatit could not stay an orphan. Free market eco-nomics claimed paternity. This is just one ofthe key episodes in postwar Germaneconomichistory that is spelled out in careful if dry de-

tail.A special merit of the book is the carefulintegration of external developments into theanalysis. The role of foreigndemandand busi-ness cycles, startingwith the much welcomedKorean War boom, is given prominence. Therole of trade policy as a source of growth isrecognizedand documented. The same is truefor exchangerate policy fromGermany'splacein the EuropeanPayments System to the earlydecision to move to convertibility on to theBrettonWoodssystem and floating.With so thoroughan emphasis on the facts,the book would be better if the authors hadcomplemented the fine review of stylized factswith a data appendix of the principaltime se-ries. True, they can be found in the volumein variousplaces,butorganizedby episode theyare less convenient for reference. But even asthe complaint s registered,a compliment mustbe added for the thorough documentationofdata and references which make the book anindispensable instrument for students of theGermaneconomy and of economic history.The authors'second objective is to interpretGermanevents from a perspectiveof free mar-ket economics-incentives, opportunities,competition,the marketarethe positiveforces,corporatism n all its forms stands for setbacksand a sapping of the juices; these negative fac-tors account for the fadingof the miracle. Theauthors'ideological premise is set out in thepreface(pp. xi-xii):Not only the miracle, but also the fading ofthe miracleprovidesimportant essons. Corpo-ratismandbureaucracy re strong forces, lead-

ing potentially everywhere to a politicizationof economic life. For a while, they may be heldback or brought into service of rapid marketgrowthwhen people or the public canbe madeto believe thatdistributionalquarrelswill closegrowth opportunitiesto the detriment of all,eventually eading to zero-sumsociety. But pol-iticians, bureaucratsand leaders of corporatistorganizationshave too short and too partial aview to meet the concerns of market-orientedeconomists. No doubt, the narrow nterests ofthe practioners of the corporatistsystem willoften gain the upperhand, so that the economyis bound to slow down under the impact ofmounting regulation and higher taxes, risingcosts and shrinkingprofitmargins.Curiously,though, where the authors'ambi-tion is greatest, namely in trying to maketheircase forthe positiveforce ofunfetteredmarkets,the book is less effective. One wouldthinkthat,at key stages in the history, they would havehad taken up the central theme to demonstratequite specificallyhow a particular tep, event,or decision led in the wrong direction and amarket-friendly decision could have led tomuch better outcomes. They mostly prefer toleave the inference-declining performancere-flects the nefariousresults of bureaucracyand

corporatism-to the reader. That is not a suc-cessful strategy because they will, of course,get nods from those who share their predilec-tions and need no convincing, but they willmake few converts to their point of view.The authors' free market perspective and in-terpretation of the declining growth perfor-mance highlights the rise of the bureaucracyand of corporatism. In the first two decades,growth was strong because liberal influenceswere predominant and the scope for compe-tition was widened. In the following two de-cades, increasingly confining influences limitedgrowth performance. But one might ask whyJapan also experienced strong performance inthe first two decades of postwar growth in anenvironment where competition and liberalismwere decidedly absent. Is it not rather Fried-man's Law-reconstruction after wartime de-struction makes for high growth-that is at workrather than the economic system? The authors,for example, attribute major growth effects toprogressive trade opening. In Japan, by con-trast, a determined industrial protection servedto promote demand for a rapidly expanding



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Dornbusch: The End of the German Miracle 883manufacturingector. Perhaps Japanofferstoodistant a comparison;in that case, why didFrance do almostas well as Germany but suc-ceeded with a system far away from Germanliberalism?The basic question of this book "Why is theMiracle Fading?" is entirely appropriate:Growthwas 8.2 percent in the 50s, 4.4 percentper year up to the oil shock, and merely 2 per-cent since then. What has gone wrong? Thebook'sonly systematic attempt at an answerisoffered n a section entitled "rootsof the growthslack"(pp. 207-21) where specific hypothesesabout the 1973-89 growth decline are ad-vanced. Theyrun along lines of the Euro-sclero-sis discussionto which the lead authorhas beenan important contributor. Euro-sclerosis be-came a fashionable catchword for persistentlyhigh unemploymentand slowgrowth n Europein the 1980s. Unemployment was said to beclassical rather than Keynesian: the problemwas not a shortage of demand,but an excessivecost of labor. Product wages were too high,and substantialfiring costs added to the costof labor. As a result, in the Euro-scleroris iew,the cure had to be a defossilizingof the labormarket,not the creation of demand.If the lessening of competition accounts forthe slowdown, the authors argue that supplyside economics in its various forms is the rightremedy. TodayEuro-sclerosisas the centraldi-agnosisof poor performance n the 1980s is sus-pect. Theoreticalresearchhas shown thatfiringcosts need not translate into reduced averageemployment levels. They may discouragehir-ing, but they alsodiscourage iring.Not surpris-ingly, the outcome then depends on a host ofparametersgoverningthe size and persistenceof disturbancesas well as trendgrowthin labordemand. Anotherreason for scepticism is thatthe atmosphereof Euro-sclerosisvanishedfromone day to the next as Europe 1992 came onthe scene and created a far more positive me-dium termoutlook. Finally, the Germanexam-ple of 1988-91 leaves little doubt that, in oneof the apparently most fossilized Europeaneconomies, employment growth was high themoment demand came on the stage. The boomof 1987-91 created more than 2 million jobs(an8.6 percent growthin employment).Therewas quite obviouslyno reluctance to hire extralabor in the face of strong demand, even with-

out any assurance hat the boom would last.Euro-sclerosis s one centraltheme, the otheris an emphasis on a uniquely German conceptof the Social MarketEconomy. An Anglo-Saxonaudience brought up to the sounds of MiltonFriedman'sunfettered competition or RobertBartley'sThe Seven Fat Years cannot help butbe curious about Germany'sconcept of a SocialMarketeconomy-both S andMwrittenin cap-ital letters. One might expect a tension betweenthe two-social stands for cooperation and co-hesion, marketrepresentscompetitionand self-ishness in the most positive sense. How hasthisworked n Germany?As it reforms,EasternEurope must choose a model. A Social Marketeconomy might sound just right in the CzechRepublic for a Havel, if not for a Klaus. Thebook does not explain clearly how the modelworksin fact and whether it might be held ac-countable for poor performance.The tension,whereverit might have come up, is not broughtout in stark colors and the readerwill find nostrong guidancehere in shoppingfor attractiveeconomic systems.There is some material (heavy going) cover-ing the intellectual background pp. 26-44) ofthe Social Market model and Ordo-Liberalism(a tame version of laissez-faire which sproutsin Southern Germany), but it does not doenough to show how all this might work inpractice.2At no point do the authors, however,even come close to asking whether Germanyshouldhavejust droppedthe "Social" ndgoneahead to unlimited prosperity. It would havehelped if they had placed the Germanmodelin perspective by comparing t with alternativeeconomicsystemsin the West. Specifically, heauthorsmight have asked whether Germany'scorporate performancewas enhanced relativeto, say, that of the United Statesby the implicitandexplicitstrictureson German irmsto abideby a socialcode or by such institutionsas Mitt-bestimmung-the mandatoryrepresentationoflabor on the boards of all but small firms. Orthey mighthave arguedand demonstrated hatthe systemleads to internalizing ocial conflictsand hence enhancesperformance.One way orthe other, if the institutiongets the limelight,

2A valuablesourceon the Social MarketEconomyis Wolfgang Stutzel et al. (1982). See, too, RudolfRichter (1979) and Holger Wolf (forthcoming).



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884 Journal of Economic Literature, Vol. XXXI (June 1993)we should learn more about what it does ordoes not do. As a result of this omission, wegain no impressionof whether Germany'seco-nomic experimentis special.

Achapteron "HowGermanyReallyWorks?"would have offered importantinsights in howGermany'seconomy is distinctive and how itsperformancecould be improved. We all knowaboutthe independent CentralBank,but whatelse is there to knowand what are the institu-tions or implicit structuresthat really matter?One comes to suspect, because of the sheerlack of documentationof anythingvery differ-ent, that all the talkaboutSocial MarketEcon-omy, Ordnungspolitik,and Central Bank nde-pendence in Germany is really not verydifferentfromstraight classicaleconomics, butdressed up to lookheavilyintellectual andprin-cipled. And there is anothersuspicion. WhenAmerican ibertarians alk about the free mar-ket, they really mean it. But in Germany,andfor these authors, free marketeconomics is alot tamer. The former is a free-for-all whereeverythingthat is not illegalis approved,wherethe limits are there to be tested, and the cheersgo to whoever succeeds. In the Germansitua-tion, socialcohesion is a centralparameter hattakesmuch of the aggressionout of competitionbefore it even gets going. It is not difficult hento side with the authors in their support forcompetitionas an offsetting,invigorating orce.The authorswant us to believe that superiorperformance n the early period is due to freemarket economics and poor performance aterto a lack thereof. But it is doubtful that freemarketeconomics has really been that impor-tant in the case of Germany.In fact, Germanydoes not reallydiffer hat muchfromthe experi-ence of a large group of industrialcountries.Angus Maddison 1992)has reviewed the ratesof catchupfor a groupof 15 industrialcountrieswith the US as a front runner. He notes thatthe period1950-73 wasthe high growthorgreatcatchup period for all, not just for Germany.In the period 1890-1950, every single coun-try in the group fell increasingly behind. Inthe period 1950-73 every country caught upat a briskpace. In 1973-87 all were stillcatchingup, but now at a lesser rate because their back-wardness had been reduced. The pattern ofslowdown is the same in Germanyand for theentire group. It is as muchthe case forAustria,

TABLE1PRODuCTIVrryCATCHUPWITH THE U.S.

(percent per year)

1890-1950 1950-1973 1973-1987Germany -0.98 3.40 1.53Group of 15 -0.52 2.11 1.32Source: Maddison (1992) Table 5.2

Italy or Japanas for Germanyand it happenseven more in Japan han in Germany.The an-swer to the slowdown s thereforevery unlikelyto be found in Germany because the patternis the same for everybody, regardlessof theireconomic model.If there is anythingsetting Germany apart,it is probablythe combinationof an extraordi-narilyhigh level of unemploymentat the begin-ning. Almost 10 million refugees crowded thelabormarket; hey were educated, skilled, andwilling;they worked hardand they saved;andaboveall, they did not get in the way of a virtu-ous cycle of investment, productivity growth,graduallyrisingrealwages, saving, and invest-ment. Whetherfree marketeconomicsor initialpovertyanddestitutionwere the prime moversin this dynamics s wide open to discussion.There is another ssue on whichinternationalevidence would have strengthened the argu-ment. It is commonlyaccepted,and-theauthorscertainlyendorse this view, that the indepen-dent Bundesbankplays a key role in the Ger-maneconomy. It ensures a better inflationper-formance, so the argument goes, and, withbetter inflation,economic performance s bet-ter. The firstpartis readilyaccepted;Germanydoes have less inflation han the Europeanaver-age or virtually any country in Europe. Butthe second part is not there. German growthis not higher than growthfor Europe on aver-age. If low inflation has beneficial effects, theoutputloss incurred n the battles for low infla-tion may offset these. The net growth resultthen comes to the same as that of countrieswhich are more complacentaboutinflationandhave less formidable nstitutions.Anyevidencethatthere is a reputationor performancebonusin the case of Germanyis not offered. In fact,the issue is not even raised.



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Dornbusch: The End of the German Miracle 885The book was substantially ompleted beforeGerman unification added a new, dramaticchapter to Germaneconomic history. Wisely,the authors are brief on the topic because the

factsare still so much in flux. But they do stickout their neck at least. "Two cheers for themarket, not three" is Arthur Okun's famousline. In this book unificationgets two cheersin the chapterheading and we never find outwhy the third is missing. On the contrary,withdue acknowledgments or the transitiondifficul-ties, the authors express great confidence(p. 270):

Althoughhe transitiono a market conomyin EastGermany asbeen implementedn awaywhichaccentuateshe problems fadjust-mentandreorientation,hisdoesnot mply hatthe medium- o long-termesultswill not befavorable.Afterall, EastGermany as takenovera marketconomic rderwhichhasprovenitsviabilityhroughouthecourse fWestGer-many'sconomic istory.Once legal and administrativeottleneckshavebeenremoved, ndonce he nfrastructurehasbeenbrought loseto Western tandards,EastGermany-in the heartof an integratingEuropeand withthe metropolisBerlinat itscenter-may well become a favorite ocationfor nvestors.The authorshave us believe thatcorporatismand statecoddlingof enterprises have been thesource of slowdown in the West. If that is cor-rect, their optimism for the East must be ques-tioned. Rapid wage equalization, with no basisin an equal narrowing of productivity differ-entials, is a sure recipe for unemployment.Massive transfers and the accompanyingtaxburdens are certain to slow down productiveinvestment. Integration with East Germany

may have been inevitable, it may be a goodthing from the political point of view, but bynow it is nothing but burdensome.True, East Germany's mportsexceed GNP,but all that is paidforby West Germandeficitsor taxes. And more;integrationwith East Ger-many is much harder than expected. Why

shouldfirms nvest in EastGermanyrather hanin the Czech Republic where labor is just asproductivebut farcheaper?Taxes n West Ger-many will rise for a decade, investment willfall, and increasinglyWest Germanymay loseout in world markets.The Fading of the Miraclemayjust be start-ing because, in Germanyitself, confidence iswithering and the task of coping with (otherpeople's)postcommunismseems too daunting.The GermanCouncilofExperts(Sachverstandi-genrat (1992, p. v) in their most recent reportaddresses ust thatfear, the loss of competitive-ness and of investment andthe shiftto distribu-tional struggles.

There s reason or concernwhenthe defenseof established ossessions ndthe attempt oshiftburdens oothersdominateconomic is-cussion . . Distributionaltrugglesmmobi-lizewhentheyleadto the consequencehat agrowthpolicyis no longeracceptedand thevery premises for such a strategy-stablemoney, solidpublicfinance,andcompetitivefirmswilling o invest-are underminedn thecrossfire feconomic gents.REFERENCES

HENNESSY, JOSSLEYN. "The German 'Miracle, inEconomic 'miracles.' Eds.: JOSSLEYN HENNESSEY,VERA LuTz, AND GIUSEPPE SCIMONE. London: TheInstitute of Economic Affairs, 1964, pp. 1-73.

MADDISON, ANGUS. Dynamic orces in capitalistde-velopment. Oxford: Oxford U. Press, 1992.RICHTER, RUDOLF. Currencyand economicreform.West Germanyafter WorldWar II. Z. ges. Staat-swiss., Special Issue, Sept. 1979, 135(3).SACHVERSTANDIGENRAT Fur Wachstumsorientioer-ung- GegenLahmendeVerteilungsstreit.Stuttgart:Metzler-Poeschel, 1992.STOLPER, GUSTAV; HAUSER, KARL AND BORCHARDT,

KNUT. TheGermaneconomy:1870 to the present.NY: Harcourt Brace, 1967.STUTZEL, WOLFGANG ET AL. Standard texts on thesocial market economy. NY: Gustav Fischer, 1982.WALLICH, HENRY C. Mainspringsof Germanrevival.New Haven: Yale U. Press, 1955.WOLF, HOLGER. "Ordo-Liberalism. A Recipe for the1990s?" n Postwar economic reconstruction. By

RUDIGER DORNBUSCH, RICHARD LAYARD, AND WIL-HELM NOLLING. Cambridge: MIT Press, forthcom-ing.


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Dornbusch German Miracle