The Fading Miracle: Four Decades of Market Economy in Germany.

This book traces the development of the West German economy from its humble beginnings in 1945 to its absorption of the East German economy in 1990. The authors, all of whom are affiliated with the Kiel Institute of World Economics, present a lucid, well-organized discussion of events and economic policy making in post-war Germany. For students of post-war German economic history this book will serve as a handy reference work as it offers a comprehensive account of the reemergence of the West German economy as a major player in the league of trading nations. A notable plus is the extensive list of references which should be of great help in locating primary sources of documentation. Another noteworthy feature is the compact discussion of the overall track record of the German economy during the post-war period in the introductory chapter of the book. From an organizational standpoint this arrangement has the advantage that the reader gets a clear picture of the overall performance of the West German economy over the 1945-89 period right at the beginning of the book.

The main part of the book divides the post-war period into four distinct periods. They are: 1945-48, 1948-60, 1960-73, and 1973-89. Chapter 2 begins with an assessment of the state of the German economy after the collapse of the Nazi regime and the ensuing imposition of controls in the economic and political domain by the Western Allies. Against this background the economy could hardly be expected to rebound on its own. Radical economic reform was necessary to provide the foundation for a new economic order. In retrospect, the main pillar of the reform process was the unique German concept of ordoliberalism according to which the existence of individual freedom is not incompatible with the existence of a strong state. Far from curtailing individual freedom, the state serves the purpose of protecting the individual from the vested interests of large organizations, monopolies and cartels. The radical reforms carried out in 1948 and beyond bear the firm imprint of ordoliberal beliefs. Along with the currency reform, the establishment of a liberal economic order and the ensuing unleashing of market forces laid the foundation of the German economic miracle.

The unfolding of the miracle in the 1950s is described in chapter 3. The rapid growth in real output over the 1948-60 period was attributable to immense gains in labor productivity. These, in turn, were realized as a direct consequence of the swift restoration of the damaged capital stock and a reshuffling of labor from low productivity sectors of the economy such as agriculture to high productivity sectors such as manufacturing and various branches of the service industries. At the outset these positive developments were accompanied by rising and not falling unemployment as the currency reform forced capital-constrained firms to reduce part of their work force. Thanks to the speedy formation of capital which was induced through the enactment of tax legislation, the rolls of the unemployed began to decline in the early 1950s. The existing capital labor gap was reduced further by a sensible wage policy which resulted in falling unit labor cost and institutional reforms which liberalized the capital market. A large part of the German miracle owes its origin to favorable developments in the international arena. There Germany took the lead in unshackling international trade and finance by unilaterally cutting tariffs, loosening administrative controls, lifting capital controls and moving towards convertibility of its currency. Little wonder then that the volume of exports surged, stimulating further economic expansion.

The fading of the German miracle set in during the 1960-73 period. In chapter 4 the authors take pains to convince the reader that a change in economic, political and social conditions prompted the slowdown of the growth process. Although the economy experienced a state of overemployment fueled largely by an undervalued currency, the average growth rate of output fell from 8.2 during the 1950-60 interval to 4.4 percent in the 1960-73 period. A good part of the discussion focuses on the worsening supply-side conditions triggered by dramatic increases in wages and resource prices, and an expansion of the government sector. This period in particular witnessed the softening of the cooperative spirit between unions and the employers' federation. In the international arena this period observed initially the division of non-communist Europe into two trading blocks and subsequently the first steps toward economic integration in Europe.

The last of the core chapters attempts to analyze the causes of the weak performance of the West German economy during the 1973-89 period. The authors call this period aptly a "bitter period of awakening" for Germany as its economic growth record lagged behind that of most other highly industrialized countries. In the view of the authors, the roots of the growth slack can be traced to a further worsening of supply-side conditions. A large part of the blame for the low rate of net capital formation during the 1973-89 period is placed on the relatively low return on capital. Other factors which contributed to the pronounced decline in net capital formation were the steady erosion of good industrial relations and the increase in government hand-outs to subsidize ailing sectors of the economy. In addition, the authors blame the disincentive effects on labor supply of the existing structure of income and payroll taxation and the pronounced slowdown in factor productivity for the dismal growth record of the German economy during the post-1973 period. In the international arena the outstanding feature of West Germany's economic performance in the 1973-89 period was the accumulation of current account surpluses. More so than ever before Germany was urged by its major trading partners to act as a demand-generating locomotive to correct the existing trade imbalances. In retrospect the authors judge this policy prescription as unsuccessful as it led to a burgeoning fiscal and even a temporary current account deficit.

While the authors present a thoughtful and, in most but not all places, a balanced discussion of events in Germany during the post-war period, they are somewhat off the mark when making comparisons with the experiences of other countries. More specifically, in comparing the stance of fiscal policy in Germany and the United States, the authors point out that the U.S. recovery was triggered by sizeable increases in gross investment. This assertion is very dubious indeed as it was the huge fiscal stimulus imparted to the economy by the Reagan administration through the creation of additional government jobs, expansion of defense programs, higher income support payments and lower taxes which caused aggregate demand to expand. In the same vein, referring to the state of the U.S. economy in the mid-1980s as healthy is also somewhat of an overstatement as net investment during the 1984-1986 period amounted to merely 2.3 percent of income.

Two complementary chapters round off the discussion. Chapter six presents a short review of East Germany's post-war economic history, and chapter seven assesses the future prospects of the economy of the united Germany.

All in all, this book is recommended reading for all those who wish to secure a first-hand scholarly account of not only the forces which gave rise to the German miracle of the post-war era but also of the forces which contributed to its fading.

Alfred V. Guender University of Canterbury 

References

1. Friedman, Benjamin M. Day of Reckoning. New York: Vintage Books, 1989.