The Economic Recovery of Germany and Japan After the Second World War (WW2)
The Second World War (WW2) was one of the most devastating events in human history, causing millions of deaths, massive destruction, and widespread suffering. Among the countries that were most affected by the war were Germany and Japan, the main aggressors of the Axis powers. Both countries faced severe economic and social challenges after their defeat, such as occupation, inflation, food shortages, and political instability. However, within a few decades, both Germany and Japan managed to achieve remarkable economic growth and development, becoming two of the world’s largest and most advanced economies. How did they do it? What factors contributed to their rapid and successful recovery? And what lessons can we learn from their experience?
Germany: The Social Market Economy and the Marshall Plan
Germany was divided into four zones of occupation by the Allied powers after the war, and its capital Berlin was also split into four sectors. The western zones, controlled by the United States, Britain, and France, became the Federal Republic of Germany (FRG), while the eastern zone, controlled by the Soviet Union, became the German Democratic Republic (GDR). The two German states had very different economic systems and policies, with the FRG adopting a market economy and the GDR adopting a centrally planned economy.
One of the key figures behind the economic recovery of the FRG was Ludwig Erhard, who served as the Minister of Economics from 1949 to 1963, and later as the Chancellor from 1963 to 1966. Erhard was influenced by the ideas of Walter Eucken, a German economist who advocated for a “social market economy”, a concept that combined free-market capitalism with social welfare and state intervention. Erhard implemented several reforms that aimed to restore economic stability and growth, such as:
- Abolishing price controls and rationing, which had caused shortages and a black market.
- Introducing a new currency, the Deutsche Mark, which replaced the worthless Reichsmark and restored confidence and purchasing power.
- Reducing taxes and public spending, which stimulated private investment and consumption.
- Promoting free trade and competition, which increased productivity and efficiency.
- Establishing a social security system, which provided health care, pensions, and unemployment benefits to the population.
Another important factor that aided the economic recovery of the FRG was the Marshall Plan, a US-led initiative that provided financial and technical assistance to the war-torn countries of Western Europe. The FRG received about $1.4 billion (equivalent to about $15.3 billion in 2019) from the Marshall Plan, which helped to rebuild its infrastructure, industry, and agriculture. The Marshall Plan also fostered cooperation and integration among the European countries, which led to the creation of the European Coal and Steel Community (ECSC) in 1951, the precursor of the European Union.
As a result of these measures, the FRG experienced a period of rapid and sustained economic growth, known as the “Wirtschaftswunder” or the “economic miracle”. Between 1950 and 1960, the FRG’s GDP grew by an average of 8% per year, while its industrial production increased by 11.6% per year. The FRG also achieved full employment, low inflation, and a trade surplus. By the late 1950s, the FRG had become the world’s third-largest economy, after the US and the Soviet Union, and the largest economy in Europe.
Japan: The American Occupation and the Export-Led Growth
Japan was occupied by the US after the war, under the command of General Douglas MacArthur, who acted as the Supreme Commander of the Allied Powers (SCAP). MacArthur oversaw the political, social, and economic reconstruction of Japan, with the goals of democratizing, demilitarizing, and decentralizing the country. Some of the reforms that MacArthur implemented included:
- Drafting a new constitution, which granted universal suffrage, civil rights, and a parliamentary system of government, and renounced war as a sovereign right.
- Disbanding the military, and limiting the defense budget to 1% of GDP.
- Dissolving the zaibatsu, the large family-owned conglomerates that had dominated the economy and supported the war effort.
- Introducing land reform, which redistributed land from large landlords to small farmers, and increased agricultural productivity and rural income.
- Encouraging labor unions, which improved workers’ rights, wages, and conditions.
- Promoting education, which increased literacy and human capital.
Another crucial factor that facilitated the economic recovery of Japan was the US aid and market access. Japan received about $2.2 billion (equivalent to about $24.1 billion in 2019) from the US, mainly in the form of grants, loans, and goods. The US also provided Japan with security and protection, which allowed Japan to focus on economic development rather than defense. Moreover, the US opened its market to Japanese exports, especially during the Korean War (1950-1953) and the Vietnam War (1955-1975), which created a huge demand for Japanese products.
Japan adopted an export-led growth strategy, which relied on producing and selling high-quality and low-cost goods to foreign markets, especially the US. Japan also developed a close relationship between the government and the private sector, known as the “iron triangle”. The government, through agencies such as the Ministry of International Trade and Industry (MITI), provided guidance, subsidies, and protection to the private sector, while the private sector, through groups such as the Keiretsu, the successors of the zaibatsu, provided innovation, efficiency, and cooperation to the government. The government also invested heavily in infrastructure, research and development, and education, which enhanced the competitiveness and productivity of the economy.
As a result of these policies, Japan achieved a remarkable economic growth, known as the “Japanese post-war economic miracle”. Between 1950 and 1970, Japan’s GDP grew by an average of 9.6% per year, while its industrial production increased by 13.9% per year. Japan also became a world leader in several industries, such as automobiles, electronics, and steel. By 1968, Japan had surpassed Germany as the world’s second-largest economy, after the US.
Lessons from the Economic Recovery of Germany and Japan
The economic recovery of Germany and Japan after WW2 is a remarkable story of resilience, transformation, and development. Both countries managed to overcome the challenges and hardships of the war, and achieve unprecedented economic growth and prosperity. Their experience offers some valuable lessons for other countries that face similar situations, such as:
- The importance of political stability and democracy, which provide the foundation for economic development and social progress.
- The role of external assistance and cooperation, which provide the resources and opportunities for economic recovery and integration.
- The balance between market forces and state intervention, which provide the incentives and regulations for economic efficiency and social welfare.
- The focus on innovation and quality, which provide the competitive edge and value for economic growth and diversification.
The economic recovery of Germany and Japan after WW2 is not only a historical phenomenon, but also a relevant and inspiring example for the present and the future. As the world faces new challenges and uncertainties, such as the COVID-19 pandemic, the climate change, and the geopolitical tensions, the lessons from the economic recovery of Germany and Japan can help us to find solutions and opportunities for a better and more sustainable world.
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