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How come Germany and Japan became world economic powers after losing WWII?

Japanese economic takeoff after 1945In September 1945, Japan had nearly 3 million war dead and the loss of a quarter of the national wealth. How did Japan become the second largest economy in the world in the 1980s?Postwar Japanese economic takeoff was due to a variety of factors that had to do with American policies toward Japan, the international market, social mobilization, existent industrial capacities and experience, and government policies and expertise, among other things.1. Wartime experience:Between 1937 and 1945, during the war years, Japanese economy received rapid development. Production indices showed increases of 24 percent in manufacturing, 46 percent in steel, 70 percent in nonferrous metals, and 252 percent in machinery. Much of the increasingly militarized economy was diverse and sophisticated in ways that facilitated conversion to peacetime activity. On the automobile industry, for instance, of the 11 major auto manufacturers in postwar Japan, ten came out of the war years: only Honda is a pure product of the postwar period. Three of the ten: Toyota, Nissan, and Isuzu, prospered as the primary producers of trucks for the military after legislation passed in 1936 had driven Ford and General Motors out of the Japanese market. Other corporate giants on the postwar scene gained comparable competitive advantage during the war years. Nomura Securities, which is now the second wealthiest corporation in Japan after Toyota, was founded in 1925 as a firm specializing in bonds. Its great breakthrough as a securities firm, however, came through expansion into stocks in 1938 and investment trust operations in 1941. Hitachi, Japan's largest manufacturer of electrical equipment, was established in 1910 but emerged as a comprehensive vertically integrated producer of electric machinery in the 1930s as part of the Ayukawa conglomerate that also included Nissan. Similarly, Toshiba, which ranks second after Hitachi in electric products, dates back to 1904 but only became a comprehensive manufacturer of electric goods following a merger carried out in 1939 under the military campaign to consolidate and rationalize production. Whole sectors were able to take off in the postwar period by building on advances made during the war.After the war was over, many of the wartime companies and much of the technology used during the war were converted to peaceful economic development. Japanese private companies expanded quickly and fearlessly. They borrowed massive amounts from banks and took on large debts. The private companies developed rapidly, against the conservative advice of the government that they merge so as to compete more effectively against Detroit's Big Three. Instead, Toyota, Nissan, Isuzu, Toyo Kogyo (Mazda), and Mitsubishi all decided to produce full lines. An upstart motorcycle company founded by Honda Soichiro defied bureaucratic warnings and entered the auto market in 1963 with great long run success. In 1953, two young mavericks, Morita Akio and Ibuka Masaru, struggled for months with reluctant state officials before winning permission to purchase a license to make transistors. Beginning with the radio in the 1950s, their infant company, Sony, soon emerged as the global leader in quality an innovation in consumer electronics goods.Nationalism and the desire to catch up with the West persisted after WWII, but now the efforts were focused on economic and industrial goals. For example, machine gun factories were converted to make sewing machines; optical weapons factories now produced cameras and binoculars.The great devastation of the Japanese economy during the war and the need to rebuild it from scratch often led to the introduction of new technology and new management styles, which gave these companies a chance to update and upgrade themselves. Their changes were met with a friendly international environment of free trade, cheap technology and cheap raw materials. During the Cold War years, Japan was the client and friend of the advanced U.S. economy and Japanese markets were allowed to be closed while the American market was open to Japanese goods.2.U.S. policies toward Japan after 1947During the Cold War, strategic interests led the U.S. to allow Japan to export to the US while protecting its domestic market, enabling the formation of cartels and non-market driven factors in Japanese economy, and the development of an asymmetrical trade relationship with the U.S. The export-driven economy that Japan consequently developed also benefited enormously from an international market of low tariffs (by joining the GATT, forerunner of WTO), low prices of oil and other raw materials needed for industrial development.Because Article 9 of the Japanese constitution forbids Japan from rearmament, Japan has lived under the umbrella of U.S. military protection, spending only 1 per cent of their GNP on the military's defensive abilities (which is a huge sum of money as the Japanese economy grew to be the second largest in the world), which, percentage wise, helped save the Japanese much money if they were militarily on their own.2. The welfare society in JapanIn Japan, a welfare society rather than welfare state exists, characterized by total employment, including cartels of small and medium sized companies to prevent them from bankruptcy in order to maintain total employment.The welfare society and total employment enabled the Japanese state to devote much of the money it would have spent on welfare to industrial development, in the form of bank loans.The birth of the welfare society:During the American occupation:1946-49, Japanese economy was sustained by $500 million annually from the US. Despite this help, because of wartime devastation, Japanese economy was in shambles.In reaction, the American occupational forces invited the Detroit banker Dodge to balance Japanese economy, who introduced the Dodge Plan (1949): balance budget, reduce inflation, repay Japanese government debts. Fix exchange rate ($1=360 yen). (compared with $1=110 yen today)That this exchange rate made Japanese yen too expensive shows the high inflation going on in Japan before 1949.Reaction to the Dodge Plan: massive laying off of workers and economic recession, because Japanese goods became less competitive in the international market (too expensive) (Dodge hoped that after the initial pain, Japanese economy would start steady development later on).In reaction: state bank loans to private companies to prevent them from bankruptcy. In the 1950s, major concern of Japanese economy was capital accumulation and export promotion; also medium sized companies protested against tax increases. These concerns prevented the formation of a welfare state because that would require tax increases. Instead, the state promoted a welfare society through legislation. The welfare society, through maintaining near total employment via liberal government loans to private companies, dispensed with the need for unemployment benefits. Retirement pensions came largely from personal savings and company compensation, rather than benefits from the state.The welfare society saved Japanese government much money, which was liberally loaned to companies and guaranteed a secure supply of funding to many companies, leading some to competition and technological innovation. (but it also prevented some companies from upgrading themselves because of guaranteed funding, so it was a two sided story).Under the welfare society, limited unemployment benefits do exist, but they are provided by the private companies. The unemployment insurance premiums are borne by workers and employers on a fifty-fifty basis. The government pays only a partial sum of the management and operation costs--14 percent of the cost for unemployment insurance and the other services concerning unemployment is covered directly out of the national treasury account. The wage withholding is, in principle, set at 1.1 percent of the total annual salary. However, the actual rate of contribution to these schemes was lowered to 0.9 percent in fiscal 1992, and has been at 0.8 percent since fiscal 1993. Unemployment benefits were 60 percent to 80 percent of the wage before becoming unemployed for a period of 90 to 300 days, which was extended to 330 days after 2001. Conditions vary depending on age and length of time contributing to the system. The larger private companies were also responsible for subsidized housing, health benefits, retirement pension and other benefits for recreational activities in a package called lifetime employment, practiced after 1960. All these, naturally add to the cost of big corporations, which then pass the cost on to the consumers in the form of higher prices.3. Financing the Japanese economy and cooperation between the state and businessesIn the years from 1950 on, Japanese leaders in the bureaucracy and ruling political party, working in tandem with corporate executives, actively sought to manage and develop the economy. Over the 23 years from 1950 to 1973, Japan's gross national product (GNP; the total value of goods and services produced in a year) expanded by an average annual rate of more than 10 per cent with only a few minor downturns. There was also a high rate of investment in technology. Japan developed an export-oriented economy: much of what it manufactured would be sold abroad and the foreign currency they made would be invested in the purchase of technology, management, raw materials and energy sources for its further industrial development. Japan is a country with few raw materials for industrial development and non known oil reserves except for recent limited offshore discoveries. Today over 70 percent of manufactured goods from Japan are exported abroad. When this export driven economy first started in the 1950s, Japan had a favorable international environment: The United States led in negotiating a more open trading system through treaties such as the General Agreement on Trade and Tariffs (GATT, predecessor to today's WTO, World Trade Organization). Cheap and reliable energy supplies in the form of oil from the Middle East and elsewhere fueled industrial expansion at relatively low costs. Relatively affordable licensing agreements also gave Japanese companies open access to a host of new technologies from transistors to steel furnaces.A. Government regulation in the form of loans:Private banks, as well as public institutions such as the Industrial Development Bank, drew on individual savings to channel capital to businesses. In the early years of Japanese economic development from the 1950s to 1960s, 1/3 of the bank loans came from private savings. The average household saved under 10 per cent of its income in the early 1950s, but savings rate soared steadily as the economy grew and reached 15 percent by 1960 and topped 20 percent by 1970. Households have continued to save in excess of 20 percent since then. These funds, deposited in savings accounts of commercial banks or in the government run postal savings system, made up a vast pool of capital available for investment in industry. There has been such extensive government regulation of Japanese industry that Japanese capitalism is sometimes called "brokered capitalism" to refer to the extensive role the state plays in it. Of all government ministries, perhaps MITI has been the most instrumental. MITI and the Ministry of Finance encouraged the rationalization of firms and industries and guided the structural transformation of the economy. MITI stimulated the movement of capital and labor out of declining industries such as coal and textiles and into promising new industries with high growth potential--first into electronics, steel, petrochemicals, and automobiles, and later into computers, semiconductors, and biotechnology.Since MITI achieved most of its goals with the distribution of loans, where did the money come from? As mentioned above, a sizable amount of money came from personal savings, which was then channeled to economic development. The Ministry of Finance and MITI established the Japan Development Bank in 1951 with access to a huge investment pool known as the Fiscal Investment and Loan Plan (FLIP), which comprised the nation's savings in the postal savings system, a favorite place for individuals to put their money in because their accounts were tax exempt. FLIP thus amassed the savings four times the size of the world's largest commercial bank. It became a powerful policy tool which MITI used to provide low-cost capital to industries it favored for long term growth. The Ministry of Finance was ensuring the availability of capital. It put restrictions on the inflow or outflow of capital. It could ration and guide the flow of capital to large firms in industries such as steel, shipbuilding, automobiles, electronics and chemicals that were adopting new technology and were central to increasing productivity and exports. They also used tariffs, direct and indirect subsidies to key industries, for development.Where else does the money come from for MITI and the Ministry of Finance? Another important reason to explain the money for economic growth, besides the small percentage of Japan's GDP on military spending (1%), has been the minimum the government spent on welfare. Instead of building a welfare state, the government has encouraged the Japanese to become a welfare society--through total employment, in order to reduce or eliminate the need for the state to spend on unemployment benefits. Although retirement pension did exist for some workers in large companies, it was primarily the result of contributions of the company and the workers, and state contribution was minimal. Again, like unemployment benefits, pensions were paid out by individual employees and their companies on a 50/50 matching basis. Unlike the U.S. social security system, the Japanese state was involved in the process only in entrusting the money from both sides to a designated company for investment and payment upon the employees' retirement based on an agreed upon sum of annuity at the beginning of the employees' employment. This system also encouraged employees to stay in the same company for life in order to get the amount of pension promised at the beginning. The money the Japanese state saved from public spending was invested in the economy in the form of liberal bank loans from the Bank of Japan to the citibanks and other regional banks that boosted competition and technological innovations.According to John Dower, the Japanese bureaucratic control of economy through the many banks could trace its origin again to the war. Before 1927, there were about 1,400 ordinary commercial banks in Japan. That number steadily dropped so that by 1945, by mergers and absorptions, it was 61. And there has been little change since. The so called "city banks" which are really national banks, that stand at the hub of the postwar enterprise groups were in most instances greatly strengthened by critical legislation introduced between 1942 and 1944, which designated a certain number of "authorized financial institutions" to receive special support from the government and Bank of Japan in providing the great bulk of loans to over 600 major producers of strategic war materials. Thus, in 1931 the ratio of direct (equity, meaning stocks issued to the public or to some other private companies) to indirect (bank loan) financing of industry was roughly 9:1. By 1935, it was 7:3, and by 1945, as in the mid 1960s, it was 1:9 (meaning for every dollar a company got from issuing tocks, it got nine dollars from bank loans).After the war, because of indirect U.S. rule during the American occupation, the Japanese bureaucratic structure remained largely intact, and the Japanese government used some major banks to issue loans and direct economic development.B. Steps to avoid competition: monopolies (zaibatsu) and the KeiretsuDuring the American occupation, one of the decisions MacArthur made to liberalize Japan was to abolish the monopolies (zaibatsu). Because of the onset of the Cold War and the Korean War, the anti-monopoly stance was not upheld by the Americans to give the Japanese businesses a chance to compete more aggressively internationally. This opportunity was seized upon by the Japanese government. On Sept.1, 1953, the Diet amended the Anti-Monopoly Law so as to relax the Occupation-imposed restrictions on cartels, interlocking directorates, and mergers. To maximize the efficient use of resources, MITI preferred to have competition limited to a small number of very large corporations. The Fair Trade Commission's authority to prevent restraint of trade was constantly under attack from MITI. In one of the better documented cases of collusive behavior that resulted from the changed rules, six Japanese firms manufacturing televisions joined forces, forming a market stabilization group in 1956 to control the domestic price of televisions. They maintained a high price level in the domestic market while government tariff policy kept the market closed to foreign producers. With high profit margins and an ensured market at home, the industry turned to exports, especially to the US market. Through below-cost exports to the US market, the Japanese firms were able to drive most of their US competitors out of business. The Japanese government spurred and shaped the development of the television industry through preferential credit allocation via large banks, lax antitrust enforcement, condoning of de facto recession cartels, MITI guided investment coordination, and various forms of non-tariff barriers.Besides sustaining monopolies to some extent, the Japanese government also condoned the building of a more flexible business alliance of different companies, either horizontally or vertically, called the keiretsu. Six great enterprise groups--Mitsui, Mitsubishi, Sumitomo, Fuyo, Dai-ichi Kangyo, and Sanwa--were organized horizontally. That is, each "horizontal keiretsu" comprised several dozen members including a main bank, large financial institutions, the largest manufacturing firms, and a large general trading company. Within each group, members held each other's shares. They had interlocking directorates and engaged in intragroup financing and joint R&D ventures. These horizontal keiretsu helped to provide long-term stability, efficiency, reduced risk, and mutual support. There were also giant vertical keiretsu organized in the automobile, electronic, and other industries (Nissan, Toyota, Hitachi, Matsushita, Sony, etc.). They served to organize huge numbers of subcontractors and suppliers of services. The vertical keiretsu provided efficient, long term reciprocal benefits for a parent company and its suppliers, including coordination of planning and investment, sharing of technology and information, control of quality and delivery, and flexibility throughout the business cycles. Finally, the distribution keiretsu allowed manufacturers to control the mass marketing of products. These networks allowed manufacturers to prevent price competition among retailers, to maintain high profit margins in the domestic market, and so to permit cutthroat competition in the international market. In other words, they become an effective means to force Japanese consumers to subsidize the international competitiveness of large manufacturing firms.The following is an example of a keiretsu:Reciprocal shareholding of Mitsubishi Bank (1974)Top ten companies owned by Mitsubishi Bank per cent of sharesMitsubishi Heavy Industry 5.7New Japan Steel 1.4Mitsubishi Trading Company 7.8Asahi Hyaline 7.6Mitsubishi Chemical 5.6Mitsubishi Motors 3.3Mitsubishi Real Estate 3.9Tokyo Marine and Fire Insurance 5.7Kikki Japan Railway 3.5Japan Vessel 4.3Top ten owners of Mitsubishi BankMeiji Life Insurance 5.9Tokyo Marine and Fire Insurance 4.7Daiichi Life Insurance 3.6Mitsubishi Heavy Industry 3.2Japan Life Insurance 3.2Asahi Hyaline 2Mitsubishi Trading Company 2Mitsubishi Motors 1.4New Japan Steel 1.3Mitsubishi Trust Bank 1.34. labor unions, part time workers, and small companies.Local nature of labor unionsIn Japan, trade unions, in the 1940s and 50s, were very militant, so much so that the Japanese government and big businesses decided to negotiate with them via Confucian values of trust and reciprocity. Unionized workers were promised life time employment in exchange for relatively speaking low salaries. This only applied to big companies. In small ones, workers did not have either job security or high salary. This mutual understanding, reached between unions and the management after a tremendous coal miners' strike in 1960, allowed unions to negotiate with companies on a company basis instead of industry wide. It led to many company based unions and dedication to work with the reward of lifetime employment, which, together with numerous on job trainings, also contributed to postwar Japanese takeoff. The trade unions were more concerned about job security than consumer rights of the union members.Part time workersAlthough the welfare society maintained a total employment philosophy, it included many part-time workers who did not enjoy workplace benefits and had very low pay, and who were largely women. These people often worked for small companies that did not provide benefits such as lifetime employment as the big companies started to do after 1960, and unemployment did happen in these small companies. Quite a percentage of the work of the big companies, such as Toyota and Sony, were contracted to these small companies which helped to reduce costs and add to the profit margin of the products.5. Social mobilization of the Japanese: sacrifice for the nation's place in international economyUltimately it was the Japanese consumers who bore the brunt of shouldering the cost of Japanese companies' competition abroad, in the form of high cost of consumer goods. After the war, they were taught to redirect their devotion to the nation from its military expansion to economic expansion. They were constantly exhorted that they were a homogeneous people and superior to all other Asians, and superior even to the whites. To establish their national position in the postwar world, they should not be very concerned about individual well being, thus should not mind the high cost they have to pay for consumer goods that cost less abroad. It is the same kind of mentality that prevented the Japanese from talking about their worries and pressure and ethnic/religious differences that Norma Field discusses in her In the Realm of A Dying Emperor, while worries, anger, and frustration still pop up unexpectedly, often from the periphery instead of mainstream Japanese society.German phoenixIt is difficult to appreciate today the extent of Germany's devastation at the end of World War II. TV news coverage of Vukovar, the town in eastern Croatia almost completely destroyed during a three-month Serbian siege, offered an idea of what Germany, and most of continental Europe, looked like in 1945. Six years of intensifying aerial bombardment-culminating in such atrocities as the destruction of Dresden in February 1945-and six months of a bitterly contested Allied invasion-culminating in the Battle of Berlin in April and May 1945-had turned the most industrialized and populous parts of Germany into an immense Vukovar.Theodore White (1978, 422), the famous U.S. journalist, gave the following eyewitness account of a visit immediately after the war to the strategically important Ruhr region, one of the most heavily bombed sectors in Germany:[It] was the most thoroughly destroyed place that I had ever seen except for Hiroshima-worse than Tokyo, worse than anything in China. For miles around, the ground had been churned by Allied bombings and even now...it was like a panorama of waters, hurricane-lashed; except that the waves and troughs were made of earth, frozen to immobility by peace. By any standard, but especially given the extent of wartime destruction, the Federal Republic of Germany's economic development has been extraordinary. Until the economic effects of unification became apparent in 1991 and 1992, Germany had an enviable record of generally sustained growth, high employment, and low inflation. Despite recent shock waves, Germany's ability to bear the heavy burden of unification is testimony to the country's resilient economy and robust currency.An economic downturn throughout Western Europe contributed to, and in turn was exacerbated by, Germany's post-unification problems. Throughout the postwar period, Germany's and Western Europe's economic development have been inextricably connected. European integration provided the framework for Germany's emergence in the postwar period as an independent polity with a powerful economy. It is impossible, therefore, to divorce postwar Germany's economic history from the development of European integration.The Marshall PlanIn the immediate aftermath of World War II, the most important question for the victorious Allies was not whether such a heavily damaged region could ever recover, but whether it should ever recover. Germany's future lay entirely in the Allies' hands, and Germany's former enemies had little sympathy toward the country. Twice in as many generations, the Allies thought, Germany had instigated European wars that had become global conflicts. To prevent the recurrence of further conflict, U.S. Secretary of the Treasury Henry Morgenthau argued, Germany's surviving factories should be scrapped and the country completely "pastoralized." So virulent was Allied hatred of Germany by 1944 that the so-called Morgenthau Plan for a brief moment, (during the Quebec Conference), became official U.S. policy.A number of developments shortly after the war made nonsense of the Morgenthau Plan and caused a radical revision of U.S. policy toward Germany. First, U.S. officials realized that resentment toward the Versailles treaty, the punitive post World War I settlement, had contributed to the rise of fascism in Germany and to the outbreak of World War II. It would have been foolish for the Allies to risk fueling future German resentment by pursuing an equally harsh arrangement after 1945. Second, humanitarian concern not only to prevent mass starvation and destitution in Germany at the war's end but also to allow Germans to pursue a decent standard of living soon influenced Allied policy. Third, a revival of German industry and commerce would help offset the cost of occupation.The onset of the cold war in Europe was a fourth reason why the United States abandoned its punitive policy toward Germany. As the war came to an end, barely concealed animosity between the United States and the Soviet Union rapidly came to the fore. Fueled by economic, political, and military rivalry in the guise of an ideological crusade, the cold war divided the continent into a U.S.-dominated West and a Soviet-occupied East. The strategic fault line ran through Germany and resulted in the country's partition until 1990. Under the circumstances, West Germany's economic development was clearly in the interests of the United States. An economically strong West Germany could bolster Western Europe's defenses and undermine support for indigenous Communist parties.Probably the best-known international initiative ever undertaken by the United States, the Marshall Plan was the antithesis of the Morgenthau Plan. Named after then U.S. Secretary of State George Marshall, the plan sought to rebuild Western Europe economically, without distinction between former friend or foe. The plan, however, ran into the major obstacle of French intransigence. As Germany's closest Western neighbor, France had suffered far more than the United States from German aggression, and was far less inclined toward reconciliation. Moreover, France's own plan for postwar economic development presupposed that Germany would not be reindustrialized for a long time to come. Thus France opposed German economic recovery because of a genuine fear of German resurgence, and because of the consequences for France's own economic recovery.This put France in a double dilemma: how to win Marshall Plan assistance for itself but not for Germany, and how to maintain U.S. friendship (the United States was then the most powerful and influential country in the world) while maintaining a harsh policy toward Germany. U.S. patience with France was wearing thin, and Washington made clear to Paris that Germany would have to be included in any plan for Western Europe's economic development. After much soul searching and policy planning, France came up with a solution that provided the framework for West Germany's, and Western Europe's, extraordinary postwar economic progress. The proposal was to combine both countries' coal and steel sectors within a framework of functional economic integration.The Schuman DeclarationFrench Foreign Minister Robert Schuman unveiled his famous declaration at a press conference in Paris on 9 May 1950 . Jean Monnet, a brilliant French official with a lifelong commitment to Franco-German reconciliation and European integration, had devised the plan to pool production of coal and steel under a single supranational authority. At that time, coal and steel were the essential ingredients of economic reconstruction and future prosperity. Thus Schuman's short, simple statement outlined a strategy to reconcile German economic recovery and French national security in the context of European integration. The Schuman Declaration resulted first in the European Coal and Steel Community (1952), and later in the European Atomic Energy Community (1958) and the European Economic Community (1958). Today, these three communities are known collectively as the European Community.The Schuman Declaration created the climate in which West Germany's economic miracle flourished. That evocative phrase describes Germany's extraordinary recuperation from the devastation of 1945. Weakened by hunger and shocked by the trauma of defeat and occupation, Germans toiled tirelessly to clear rubble, remove wreckage, reopen roads and railways, and rebuild houses, schools, and hospitals. Despite the terrible extent of wartime destruction, a surprising amount of industrial capacity remained relatively intact, ready to be restored. Having gradually regained their strength and self-esteem, by the early 1950s Germans were ready to launch their country on the road to full economic recovery. The European Coal and Steel Community gave them the ability to do so; prevailing cheap labor and the economic effects of the Korean War also helped to fuel the boom.With an initial membership of France, Germany, Belgium, the Netherlands, Luxembourg, and Italy, the European Coal and Steel Community included a supranational High Authority, the institutional depository of shared national sovereignty over the coal and steel sectors. The High Authority was responsible for formulating a common market in coal and steel, and for such related issues as pricing, wages, investment, and competition.The European Coal and Steel Community disappointed ardent Euro-federalists, both in its conceptual framework and actual operation. It was an unglamorous organization that inadequately symbolized the high hopes of supranationalism in Europe. Yet the ECSC performed a vital purpose in the postwar world, in terms of German economic development, Franco-German reconciliation, and European integration.The ECSC served in lieu of a peace treaty concluding hostilities between Germany and Western Europe. This was no grand settlement in the manner of Westphalia or Versailles. The agreement to create a heavy industry pool changed no borders, created no new alliances, and reduced only a few commercial and financial barriers. It did not even end the occupation of the Federal Republic....By resolving the coal and steel conflicts that had stood between France and Germany since World War II, it did, however, remove the main obstacle to an economic partnership between the two nations. These were by no means inconsiderable achievements.Toward a More Comprehensive Economic CommunityIn a effort to relaunch the movement for European integration in the mid 1950s, the six ECSC countries considered forming a more comprehensive economic community. They proposed abolishing quotas and tariffs on intracommunity trade, establishing a joint external tariff, unifying trade policy toward the rest of the world, devising common policies for a range of socioeconomic sectors, and organizing a single internal market. The advantage of a common market in industrial goods was obvious to Germany, although Economics Minister Ludwig Erhard feared that it would be protectionist and, therefore, would distort world trade. Except for agriculture, Erhard's concerns were unfounded. In any event, as Franco-German reconciliation lay at the proposed Community's core, and the Community held the key to Germany's postwar rehabilitation and economic development, Chancellor Adenauer grasped the proposal's importance and overruled Erhard's objections.In March 1957, the six ECSC member states signed the Treaty of Rome and launched the European Economic Community. An extremely buoyant European economy saw the EEC off to a strong start when it began operating in January 1958. The first four years were the Community's "honeymoon...a time of harmony between the governments of the member countries and between [Community] institutions" (Marjolin 1989, 110). The treaty included a specific timetable for establishing a customs union by lowering and ultimately abandoning industrial tariffs between the six member countries. The first intra-EEC tariff reductions took place, on schedule, on 1 January 1959. As other rounds of tariff and quota cuts followed, the EEC simultaneously started to erect a common external tariff. So successful were these first steps toward a customs union that the Community soon decided to accelerate its planned implementation. Eventually the customs union came into being on 1 July 1968-eighteen months earlier than stipulated in the Treaty of Rome.From Boom to Bust: Germany in the 1960s and 1970sAs an emerging industrial giant, Germany benefited enormously from the explosion of intracommunity trade that followed the gradual implementation of the customs union. Between 1958 and 1960 alone, trade between the six member countries grew by 50 percent. The 1960s was a decade of extraordinarily high and sustained rates of economic growth in Germany and throughout Western Europe. Mirroring a similar development in the 1980s, following the launch of the European Community's single market program, economic growth was as much a result of "the increased activity of businessmen [as of] the actual reduction of tariffs. As soon as managers were convinced that the common market was going to be established, they started to behave in many ways as if it was already in existence" (Pinder 1962, 41).In the early 1960s, the EEC's newly established Common Agricultural Policy replaced Germany's customs duties, quotas, and minimum prices for agricultural products with a Communitywide system of guaranteed prices and export subsidies. The purpose of the CAP was to increase the EEC's agricultural productivity, ensure a fair standard of living for farmers, stabilize agricultural markets, and guarantee regular supplies of food. The number of German farmers continued to decline, but the CAP offered a reasonable living to those who stayed on the land.In the 1960s, Germany, more than any other Community country, enjoyed rapid economic development, a healthy balance of payments, and stable prices. Only twenty years after the end of the war, Germany's economy had developed remarkably. A strong work ethic, harmonious labor relations, good management, sound investment, growing domestic and international demand, and a reputation for product reliability and durability characterized the manufacturing sector. Machine tools, cars, household appliances, chemicals, and pharmaceuticals were the leading industries.The 1960s epitomized a golden age in Germany's economic development. It was a decade of soaring growth rates, ample employment, and relatively low inflation. The German economy became the driving force within the Community. In the early 1970s, however, the global economic bubble burst. Fiscal and monetary strains in the United States and Europe caused the postwar system of fixed exchange rates to collapse. President Richard Nixon's suspension in August 1971 of dollar convertibility compounded the prevailing sense of uncertainty and apprehension. The 1973 war in the Middle East and subsequent oil embargo produced sluggish growth and spiraling inflation and sent Western Europe into a recession. A robust economy and resilient currency helped Germany weather the storm, but the country's rate of economic growth declined while unemployment and inflation increased.Commitment to the Goal of Economic and Monetary UnionJust as Germany's immediate postwar economic development must be understood in the framework of European integration, so too must Germany's response to the challenges of the 1970s be seen in the context of the European Community. At a summit meeting in 1972, Community leaders committed themselves to the goal of Economic and Monetary Union by the end of 1980. Continuing exchange rate fluctuations and divergences of member states' monetary and economic policies soon made that goal impossible to attain. Throughout 1973, soaring inflation, rising unemployment, yawning trade deficits, and a worsening oil crisis started to undermine Community solidarity.Economic and Monetary Union was an early and inevitable victim of the ensuing disarray. The "snake," a device intended to keep the Community's currency fluctuations within an agreed tunnel, did not last long. Community currencies wiggled in and out of the snake, with the mark, buoyed by Germany's low inflation and large trade surplus, pushing through the top and the French franc and Italian lira, weakened by their countries' high inflation and large trade deficits, falling through the bottom.It was not until the end of the decade that the Community established a zone of relative monetary stability, thereby helping member states to fight inflation and recover economic growth. Based on a proposal by Chancellor Helmut Schmidt, in March 1979 the Community launched the European Monetary System, with a parity grid and a divergence indicator based on the European Currency Unit. Given Germany's relative economic and monetary well-being, the mark inevitably played the part of a reference currency.The consequent fall in inflation and stabilization of prices among the participating states brought the Community back to where it had been in the 1960s, before the collapse of the Bretton Woods system (a fixed system of currency parities pegged to the dollar whose value was linked to the price of gold). That, in turn, allowed the Community to direct its attention to the unfinished business of establishing a barrier-free, integrated market. With a quasifixed exchange rate regime operating in the community, member states were able to devise a program in the mid-1980s to bring about the free movement of goods, services, capital, and people.Germany was one of the prime movers behind the European Community's program to achieve a single market by 1992. As the Community's industrial giant, Germany had much to gain from a frontier-free market of approximately 350 million people. German manufacturers had already established a strategic alliance with the EC executive commission, and were at the forefront of efforts to promote intra-European collaboration in the high-technology sector. In 1985, the commission produced the so-called White Paper, a list of approximately three hundred legislative measures that the Community would have to enact in order to complete the single market. These directives covered the remaining physical barriers that prevented free movement of people and goods in the EC, the differences in national technical standards that hindered the free movement of goods, and the discrepancies in indirect tax rates between the member states that continued to inhibit trade.The Cost of Non-Europe to the European CommunityTo quantify the cost to the European Community of maintaining a fragmented market, the Commission initiated a research program on the cost of non-Europe. Based on data from Germany and three other Community countries, independent consultants assessed the costs and benefits of maintaining the status quo by analyzing the effects of market barriers and by comparing the Community with North America. The gist of the commission's findings was that existing physical, technical, and fiscal barriers to trade cost the Community 3 to 6 percent of its gross domestic product, or a total of $250 billion, annually.Despite protestations to the contrary, German business was not unanimous in its support of the single market program. Some manufacturers feared the consequences of market liberalization, preferring the protection of nontariff barriers and strict public procurement regulations. The alcoholic beverage industry, for instance, had hidden behind a German law of 1562 prohibiting the sale of imported drinks that did not meet minimum alcoholic content and purity requirements (Reinheitsgebot). In 1979, however, the European Court of Justice ruled that Germany could not discriminate against Community products that met standards set in member states where they were manufactured. The court's landmark case allowed the commission to develop the principle of mutual recognition, thus avoiding the otherwise impossible process of harmonizing in detail the member states' diverse product standards.Free movement of goods throughout the Community, which the principle of mutual recognition makes possible and the single-market program attempts to implement, clearly benefits Germany. Enterprises already manufacturing and marketing in a large market (Germany is the most populous Community country) will have a manifest advantage in a larger, integrated European market. In anticipation of such advantages, German enterprises of all sizes threw themselves wholeheartedly into the single market program, preparing for the eventual removal of remaining trade restrictions.German Unification and MaastrichtUnder the auspices of the European Monetary System and the single market program, Germany's economy developed steadily in the 1980s. Perhaps the only major problem was the cost and scarcity of labor. Low (and sometimes negative) population growth, together with Germans' unwillingness to perform menial labor, led to an influx of hundreds of thousands of "guest workers" in the 1960s, 1970s, and 1980s, which in turn aggravated social tension. At the same time, high wages for skilled workers, generous conditions, and a liberal welfare system drove up the cost of German labor and, by definition, German products. By the end of the 1980s, especially because of a drastically declining dollar, it seemed that German products might price themselves out of the international market. Structural unemployment, by German standards, had also reached a considerable volume and proved to be tenacious.By that time, the success of the single-market program convinced the Community to revive the quest for Economic and Monetary Union. In 1989, Jacques Delors, President of the European Commission, presented a plan for economic and monetary union to Community leaders. The plan outlined three stages, culminating in irrevocably fixed exchange rate parities, with full responsibility for economic and monetary policy passing to EC institutions. As a staunch supporter of European integration, Chancellor Helmut Kohl endorsed the Delors Plan and supported calls for an intergovernmental conference to determine the treaty revisions necessary to achieve Economic and Monetary Union.Revolution in Eastern Europe in 1989 and German unification in 1990 raised member states' concerns about the future of European integration and the extent of Germany's commitment to the Community. Germany itself was in no doubt about the depth of its economic and political integration in Western Europe, but appreciated neighboring countries' concerns. The intergovernmental conference on Economic and Monetary Union, therefore, opened in December 1990 in tandem with an intergovernmental conference on European political union. Both conferences ended a year later at the Maastricht Summit.The Maastricht Treaty provisions on Economic and Monetary Union adopted the three-stage process outlined in the Delors Plan. Stage one (then in progress) involved the establishment of free capital movement in the Community and closer monetary and macroeconomic cooperation between the member states and their central banks. Stage two, a transitional stage of intensified economic and monetary coordination, will begin in January 1994. Monitoring of member states' policies based on broad guidelines laid down by the Council of Ministers, and treaty constraints on member states' budget deficits, will facilitate economic policy coordination. The European Monetary Institute, intended to help coordinate the member states' monetary policies, will become operational at the beginning of the second stage.Stage three will begin on 1 January 1999 at the latest. If a majority of member states (possibly excluding Britain and Denmark, if they exercise the option they won at Maastricht to opt out of economic and monetary union) meet the convergence criteria earlier, it could begin on 1 January 1997. When stage three begins, the European system of central banks, consisting of the European Central Bank and the member states' central banks, will start to function, the European Currency Unit will become a currency in its own right, and rates at which member states' currencies are to be irrevocably fixed to each other and to the European Currency Unit will be determined.The intergovernmental conferences leading to the Maastricht Treaty took place in the warm afterglow of German unification. At the April 1990 Dublin summit, Community leaders welcomed imminent unification as a positive factor in the development of Europe as a whole and the European Community in particular, adding that it would contribute to faster economic growth in the EC. Indeed, unification caused a massive increase in public spending and initially buoyed the German economy with growth rates of 4.5 percent in 1990 and 4.8 percent in the first half of 1991.The negative economic consequences of unification, however, became fully apparent after the Maastricht Summit. Chancellor Kohl had rushed headlong into unification for understandable political reasons, but either ignored or failed to grasp the enormous economic cost. The German Democratic Republic was bankrupt, with few sellable assets, and soon became a millstone around united Germany's neck. Between 1989 and 1992, Germany's budget deficit expanded from barely 1 percent of gross domestic product to 7 percent; inflation rose from 1 percent to 4 percent.Previously, the German economy had been the engine of Community growth; suddenly Germany became an anchor dragging the Community's economy down. Fearful of rising inflation, the German central bank pursued a tight monetary policy which, because of the mark's predominance in the European Monetary System, kept interest rates high throughout Western Europe. At the same time, economic divergence in Western Europe made Economic and Monetary Union seem more remote than ever and caused severe strains in the European Monetary System. Contrary to its original purpose, the EMS had become a fixed-rate system instead of a system of fixed but adjustable rates. The fundamental weakness of the Italian economy, and the weakness of the British economy, plus the unacceptably high parity at which sterling had joined the system in 1990, caused both countries to withdraw their currencies from the EMS in September 1992.OutlookThe German government and parliament remained steadfast in their support for both the European Monetary System and economic and monetary union. Yet, popular attachment to the mark, which had become a potent symbol of the country's postwar economic power, caused widespread antipathy in Germany toward the Maastricht Treaty. Such popular unease about the treaty is palpable throughout the Community. Reasons vary from country to country, but as a result, economic and monetary union looks increasingly unlikely to happen by the end of the century.Footnotes:Germany enjoys strongest economic growth since reunificationhttps://www.oecd.org/germany/Better-policies-germany.pdfhttps://www.wiwi.uni-wuerzburg.de/fileadmin/12010400/diskussionsbeitraege/DP_102.pdfhttp://library.fes.de/pdf-files/id/ipa/09042-20120427.pdfJapanese economy posts longest expansion in more than a decade24 charts that explain the Japanese economyJapan emerges from recession but growth subduedRemembering Exactly How The Japanese Economy CollapsedJapan’s Shrinking EconomyJapan Has Good GDP Growth - Perhaps By Not Having Any For Two DecadesThe Japanese tragedyLost Decade (Japan) - WikipediaJapan Is One Of The Best Performing Economies Of The Last Decade

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