Germany Market Economy

Following the fall of the Berlin Wall on 9th November 1989, and the subsequent integration of the Federal Republic of Germany or FRG (West Germany) with the GDR or German Democratic Republic (East Germany) in 1990, it created immense potential for the new Germany to emerge as a global economic powerhouse and as a fulcrum of the whole of Europe.

The German economy is now the world’s third largest economy when measured by exchange rate in US Dollars and is the largest in Europe.

The German economy is essentially a social market economy or known as “soziale marktwirtschaft” in German. It was originated and implemented by Christian Democrat Ludwig Erhard, Minister of Economics under the Chancellorship of Konrad Adenauer in the early 1960’s in former West Germany. Although the state provided subsidies and controls few segments of the economy, “free enterprise” and the “rule of the market” was also promoted as a part of governmental policy.

Soziale Marktwirtschaft or the Social Market Economy rested on three main principles:-

• Individual freedom rested on the liberal ideal of individuality.
• Solidarity meaning that an individual is part of a larger society consisting of mutual dependencies
• Subsidiary being a role of the state to shape the relation between individuality and solidarity. It should give the highest priority to individual rights and ensure that what can be done on the part of the individual should be done by it and not by the state.

Socialism on the part of West Germany was mainly limited to containing the monopolistic and oligopolistic tendencies which could arise in a competitive environment. The social role of the state was aimed at protecting the poor who could not withstand the forces of market at all times. The social aspect of the West German economy gradually spread its arms and became one of the most expansive in the world. The social cost rather than high wage rates prevalent in Germany entail German labor as being one of the costliest in the world and it places the German economy at a comparative disadvantage when compared to other European nations and Asian economies. The German tradition of “Denken in Ordnungen” means “order” in every sense of the term from the economy and society to the polity in a situation where the order is structural and not dictatorial. The German economy has major trading relations with France and is the second largest trading partner of the USA. Two way trades equaled $88 billion in 2000. Banking industry remains the strongest in Germany with no legal separation between commercial and investment banking. Universal Banking accounts for 92.6% of the total banking in the country. Stock markets are also competing for influence in the German economy. Market Capitalization of German Stock Markets was nearly $1.1trillion, representing almost 45% of the GDP at the end of 2004. Agriculture accounts for less than 1% of the Gross Domestic Product with employing only 2% of the workforce. The unification with the East has not brought any substantial change on this front. Services account for about 71% of the labor force with unemployment recorded at about 8% in 2006. Inflation is kept at a manageable level of 2% with the per capita GDP calculated at $ 29,700 in 2005.

After enjoying initial economic success in Germany and Austria, this model was further adopted in Northern and Western Europe during the Cold War era. This model is essentially relevant in the context of economies such as India, China, Brazil and many African countries on the path of development. This sort of mixed economy model entailing both state control and private enterprise and heeding to the needs of the poor can only sustainable and balanced development in these nations.

The model has enjoyed signal success since its days of implementation in the erstwhile West Germany. With initial success in the 1950’s to the trouble shocks in the 1970’s and 80’s, the present day Germany is a major exporter of engineering goods, trucks and automobiles in the world. The merger with East Germany, which was also a major supplier of machine tools, chemicals and electronics to Moscow, has in way cut the traditional export surplus of West Germany. The German culture of slow but steady economic growth with a healthy mix between the managers and workers ensure that most of the German companies which are small or medium sized, contribute to the growth of the economy.

The German model is one which should be emulated by most of the developing world striving for balanced economic growth.

 

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