Popular perceptions of West Germany's economic growth are polarized between those based on its continuing role as the miracle economy of post-war Europe and those emphasizing its institutional sclerosis, with inflexible labour and capital markets contrasting sharply with those of the dynamic US. In Discussion Paper No. 896, Research Associate Wendy Carlin assesses these contrasting perspectives in a comparative and historical perspective. She first estimates cross-country growth equations to provide a bench-mark to evaluate West German growth performance from 1945 to reunification in 1990. These suggest that its exceptional growth in the 1950s cannot be fully explained by the growth of factor inputs and `catch-up', which was common to the rest of Europe and Japan. During 1960-73 the unexplained residual disappears and growth is well explained by the investment share, `catch-up' and the decline in labour input; after 1973 growth slows dramatically, with Germany's performance close to the OECD average.

Carlin accounts for the `super-growth' of the 1950s by relating it to the Weimar Republic's poor growth record and policy moves after 1945 that allowed West Germany to join the `convergence club', including an increased openness to foreign trade and the demise of the traditional pro-cartel stance of industrial policy. Growth slowed in the 1960s as the West German economy adjusted to the labour shortage after the construction of the Berlin Wall, although unions played a significant role in exercising bargaining restraint and supporting recruitment of foreign workers. She then considers the major paradox about West German economic performance after 1979. Comparative productivity performance was very weak in manufacturing, and convergence towards US productivity levels stopped; Germany nevertheless maintained its shares of world export markets, even in branches whose relative productivity performance was particularly weak. Carlin relates this paradox to contrasting views of Germany's performance as an example of institutional sclerosis or of dynamic adaptation, and she explores the links between growth and the peculiarities of West Germany's economic institutions. She concludes by considering the implications of this analysis for the current prospects for growth in the East.

West German Growth and Institutions, 1945-90
Wendy Carlin

Discussion Paper No. 896, January 1994 (HR)