An economic policy question posed in 1970s: Can the German Economic Miracle be Replicated in India?

The question remains relevant today as well minus of course the Eurozone business in which Germany is badly messed up.

MR Pai posed this question in 1970s and the article has been republished by Spontaneous Order blog:

At a time when India is beset with numerous economic problems, to talk of an Indian economic miracle might sound ridiculous. Yet, on the basis of visits to different parts of India over the last 15 years and a study of the West German economy, both in its theoretical aspect and a recent visit to that country, the author is confident that an Indian economic miracle is possible. It would mean the release of creative energies of the people to generate millions of jobs, more purchasing power for the poorer sections of the society and provision in the foreseeable future of not only the minimum necessities of life but also what we consider to be luxuries for everyone.

It is necessary to examine the foundations of what has been described as the German Economic Miracle. It is said by some that the massive Marshall Aid by the United States was responsible for the German Economic miracle. This is not correct. Marshall Aid may have accelerated the process, but even without such aid, the miracle would have taken place. On close examination, the word ‘miracle’ itself seems inappropriate to describe the West German economic reconstruction and economic progress. What happened was that certain economic consequences took place as a result of certain economic policies. When this was described as a Miracle, the description soothed the frustrated sense of a defeated people and gave them a pride in their achievements.

At the end of the Second World War, Germany was totally devastated. Yet today Western part of Germany, known as the Federal Republic of Germany, enjoys one of the highest standards of living in the world. There are so many job opportunities that nearly 2 million Italians, Spaniards, Turks and other foreigners are working in West Germany. Still the country is said to have 900,000 vacancies. Contrast this with 1950 when there were 12 million unemployed!

The hours of work per week have come down from 48.6 in 1955 to 43.3 in 1988. Per Capita income has multiplied four times. A sure indicator of progress, namely, the percentage of household expenses on food items (food, beverage and tobacco) has come down from 46.3 to 37.6 between 1958 to 1968. In the same period, excepting Portugal and U.S.A., none of the Western countries has had such a record of price stability as West Germany. Between 1949 and 1968, the national working time required for the purchase of items of daily use also became shorter in view of the progress of the economy. For instance, a kilo of bread required 23 minutes working time in 1949, but only 15 minutes in 1968; sugar: 58 minutes and 15 minutes; potatoes; 27 minutes and 17 minutes; motor car: 3,946 hours and 859 hours, respectively.

This progress was due to an economic philosophy known as the Social Market Economy. The theoretical foundations of this philosophy can be found in the books by the late Prof Walter Eucken, ‘Foundations of Economics’ and ‘This Unsuccessful Age’. Dr Ludwig Erhard, as a Minister for Economic Affairs, was a firm believer in this philosophy which he implemented.

This philosophy is not to be confused with laissez faire economics of the 19th Century. Social Market Economy is a combination of individual, collective and State efforts making use of the market mechanism but with due respect to considerations of social justice. Mr. Wolfgang Frickhoffer, Chairman of the Action Committee for Social Market Economy, sums up its characteristics as follows:

The basic idea is to keep competition alive by keeping the market free of distortions. Social market economy requires considerable State activities but not State intervention in economic affairs. By this is meant that the State must undertake the following functions in the economy:

(a) Promote anti-cyclical measures, maintain stability of currency, secure high employment and equilibrium in balance of payments. This is done by use of central bank measures for appropriate credit policy, by use of the Budget and fiscal policies, and by floating the rate of exchange, i.e., keeping the international value of the currency free from artificial restrictions.

(b) Competition is promoted by taking strict measures against monopolistic tendencies and restrictive trade practices. In Social Market Economy, free enterprise does not mean freedom to undermine freedom of enterprise. The State ensures fairness in business conditions for all, while accepting differences in human and natural resources as such differences are inevitable and also the basis of specialisation of labour.

(c) The State actively engages itself in doing those economic activities which cannot be done by individuals by themselves but without which economic life cannot function smoothly. In other words, social overheads or infrastructure facilities are provided by the State. Roads, communications, public sanitation, etc. constitute the infrastructure. Planning by the State should not be central planning of all economic activities, but planning by public authorities for provision of infrastructure.

(d) The most important factor in the Social Market Economy is adaptation intervention. The idea is to help private business, workers and others in the economy to adapt themselves to changes brought about by technological advances and not to protect any group of people or individuals at the expense of the general public. This is in sharp contrast to the old-time subsidies to industries in difficulties. Such subsidies are considered to be bad as they blanket market signals, and perpetuate inefficient allocation of resources. One important aspect of adaptation intervention is the close collaboration between the Government and business organisations, trade unions, local authorities, universities and those associated with or interested in economic processes.

(e) The State as a buyer of goods gives an impetus to technological development. For instance, the electronics industry, which is the basis of the second industrial revolution today, can be given a boost by State purchases for space research.

(f ) The State does not interest itself in nationalisation because as a partial owner it would be defected from its natural role- of an umpire in the economy. What makes the modern state powerful in the social market economy is not its ownership of enterprises, but sticking to its proper functions as described above. It does not indulge in centralised planning, but allows planning by the private units and planning by public authorities for providing the infrastructure.

The Social Market Economic policy is flexible and can be applied to all countries. It does not offer privileges to anyone. It is a sort of a rule of law in the economic sphere tempered with justice. It gives opportunities to entrepreneurs to serve the public by producing goods and services wanted by the public and in the process releases the creative energies of the people in all spheres of life.

This is something which is still so relevant and applicable to India. The state finds it difficult to exit from usual economic activity given its huge intervention due to legacy reasons. Instead of talking about free markets etc which do not find political acceptance in India, we could still look at Social Market economy.

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