DP896 | West German Growth and Institutions, 1945-90

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31/01/1994

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Abstract

This paper uses a comparative and historical framework to evaluate the growth performance of the West German economy from the beginning of the post-war period in 1945 to the reunification of Germany in 1990. Cross-country growth equations are used at the outset to provide a benchmark against which Germany's performance can be measured. Such equations suggest that German growth in the 1950s was exceptional. It cannot be fully explained by the growth of factor inputs and the phenomenon -- common to Europe and Japan -- of catch-up. From 1960 to 1973, the unexplained residual disappears and growth is well explained by the investment share, `catch-up' and the decline in labour input. Along with the rest of the OECD, growth slows dramatically after 1973 with Germany's performance close to the average.The account of German `super-growth' in the 1950s focuses on an explanation of the growth failure of the Weimar period and the policy moves after 1945 which led to West Germany being admitted to the `convergence club'. The role of the Currency Reform, associated price liberalization and subsequent macroeconomic stabilization in promoting the establishment of market incentives is discussed. The comparison with Weimar highlights the importance of the policy of openness to international trade and the demise of the traditional pro-cartel attitude of policy-makers.German growth in the 1960s was characterized by adjustment to labour shortage brought on abruptly by the building of the Berlin Wall. The recruitment of foreign workers is discussed. After 1973, capital stock growth slowed dramatically in West Germany -- especially in manufacturing. Econometric evidence supports the prognosis at the time by policy-makers in Germany that reviving growth required a resoration of profitability.There is a major paradox about German performance after 1979 Indicators of comparative productivity show very weak German performance in manufacturing. The data suggests that convergence to US levels of productivity stopped. By contrast, Germany was able to maintain its share of world export markets -- including for those branches where relative productivity performance was particularly weak. This paradox is used to provide the background to the presentation of two contrasting views about Germany's performance: institutional sclerosis and dynamic adaptation.A major theme of the paper is the role of economic institutions in growth and in the penultimate section, the links between growth and charateristic features of the West German institutional set-up are explored. The paper concludes by asking what light is thrown on the prospects for growth in East Germany by the West German post-war experience.