Kushlan Sugathapala: What the German economic miracle can teach New Zealand

Despite being home to Germany's automotive industry, Stuttgart enjoys excellent air quality and green spaces. Photo / Getty Images, File

OPINION

Two economies lay shattered and in ruins after World War II. Their revival succeeded beyond anyone’s dreams and expectations; today, Japan is the third largest economy in the world and Germany the fourth.

What can New Zealand learn from the German Economic Miracle?

Neither were extreme free market economies. Germany’s “social market” model involved a high degree of worker participation and an excellent welfare net. Japanese companies promised workers lifelong employment in exchange for hard work and loyalty.

Investopedia tells the story of post-war Germany. Allied forces had bombed and destroyed much of its infrastructure, wiping out entire cities such as Dresden.

In 1939, Germany had a GDP of nearly $400 billion, the second most powerful economy in the world. This had shrunk by over 50 per cent by the end of the war.

Food production was reduced by 50 per cent, housing stock by 20 per cent, and industrial output by 33 per cent. Many males 18 to 35 — who could help rebuild the country — had been killed or crippled.

By 1955, West Germany’s GDP was back near $400 billion. Industrial output had quadrupled by 1958, with a steady growth rate of about 8 per cent annually.

How did Germany go from “rubble to riches” in just a decade?

The most influential economist in Germany post-1945 was Walter Eucken, who developed economic theories for a “social free market”; a capitalist free market, balanced with a strong role for the government; an extensive social welfare net for those struggling; and strong regulations to prevent monopolies and cartels.

Eucken was followed by his protégé, Ludwig Erhard, Economic Affairs Minister from 1949 to 1963, the “Father of the German miracle”, who successfully implemented the reforms.

Tejvan Pettinger, a British economist, summed up the pillars of the German Miracle as the social market economy. Increased mechanisation in agriculture allowed workers and capital to switch to industry. High savings, low consumption and focus on productivity enabled a high capital investment rate.

State investment went into public infrastructure – roads, trains, schools, and a social welfare net.

While only 5 per cent of the German economy, the Marshall Plan was economically and psychologically significant.

Focusing the economy on exports, Germany benefited from European Union’s tariff-free market. Its highly productive companies outperformed and grabbed a large share of the EU economy.

Germany specialises in complex, high-precision, high-value manufacturing exports, giving it a competitive advantage over lower labour-cost countries. High migration levels enabled an elastic labour supply, so high economic growth didn’t cause supply constraints.

West Germany’s workforce rose from 14 million to 20 million over the 1950s. Initially, migrants were often ethnic Germans displaced from other countries, particularly East Germany; later, workers from further afield, such as Turkey, Russia, Poland, Syria and Romania.

Work ethic, determination to focus on economic recovery, and hard work were essential for a defeated nation to come to terms with its past. The hours worked were not exceptionally high, and there was an effort to balance work and leisure.

But there was an expectation of productivity and achieving more whilst at work.

Kushlan Sugathapala. Photo / Supplied

Unions were non-political and pragmatic rather than confrontational.

Businesses were funded by long-term bank investment, with less reliance on the short-term focused stock market. Ninety-five per cent of all German companies are small and medium-sized “Mittelstand” enterprises, mostly family-owned.

Many European countries, including Germany, have high-level worker representation to ensure that employees’ interests are considered in business decisions. German companies with over 500 employees have 33 per cent worker representation on their board of supervisors, and those with over 2000 employees have 50 per cent.

A high value is placed on vocational training and work experience starting right from school. And a focus on continuous education and training throughout their work life.

The Deutsche Bundesbank (its Reserve Bank) was set up in 1957 with a remit to control inflation in view of past hyperinflation, a target made easier by economic productivity gains.

Rogernomics reforms were the polar opposite of Germany. Ultra-capitalist; a tax system with one of the highest burdens on low-income earners, poorly regulated monopolies, and a ridiculously inadequate welfare net.

Sadly, not much has changed since then. Centre-right governments shifted the goalpost further to the right, and the centre-left was too timid and conservative.

What can New Zealand learn from Germany?

Move towards a “social economy” emphasising caring for low and middle-income earners.

With one of the lowest debt levels in the OECD, we can well afford to upgrade our infrastructure, like rail, which doesn’t support national needs and are a drag on productivity. The German bullet trains zip at over 200km per hour; their transport services run like clockwork.

More investment is needed in tertiary education, both vocational and undergraduate; Germany’s higher education is almost free. And more capacity to train doctors, nurses, tradespeople, etc.

We need more security, funding, and recognition for researchers; Switzerland, with a population of eight million, has 30 Nobel Laureates. We have Sir Ernest Rutherford.

We have an unfair tax system, as Chris Hipkins alluded to in one of his first speeches as Prime Minister. Will he do something about it?

We need a visionary government bold enough to deliver the transformation promised by the previous Prime Minister.

- Kushlan Sugathapala is a researcher and writer on social justice issues.