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German Methods can work in Zimbabwe

17 Feb 2019 at 23:02hrs | Views
After World War II, in 1945 Germany was divided into two with the United States, Great Britain, and France occupying the western portion of Germany and the Soviet Union occupying eastern Germany. Its economy was in shambles with majority of its infrastructure bombed and destroyed by the Allied Forces. Food production was half the level it was before the start of the war, industrial output was down by a third. Many of its men between the ages of 18 and 35, who could rebuild the country, had been either killed or crippled. Some 12 million Germans were refugees mostly

This is similar to the state of Zimbabwe’s economy that President Mnangagwa inherited after the takeover in November 2017. Zimbabwe’s infrastructure has a multitude of crumbling roads and bridges, ageing dams, outdated airports and obsolete telecommunication infrastructure. Food production was reduced to half the production level it was before the radical land reform of 2000. The agricultural sector was the backbone of the economy before the land reform and was in fact nicknamed “the breadbasket of Africa”. The unemployment rate currently stands at 95%, and there are very few jobs outside of the state service. With the majority of the population relying on most informal trading.

After the war German introduced price controls on goods and services this led to shortages and a massive black market. Germany's currency, the reichsmark, had become completely worthless, requiring its populace to resort to bartering for goods and services. Similar to the challenges that Zimbabwe is currently experiencing. Zimbabwe continue to experience a wave of rising prices of basic goods and shortages of crucial commodities, an inflation rate of 56.9 percent and constant shortage of foreign currency.

What is amazing is that by 1989, Germany envy of most of the world. Germany had the third-biggest economy in the world, trailing only Japan and the United States in GDP (Gross Domestic Products). GDP is defined as the total value of everything produced in the country. Germany's ascent to become the third world leading economy was known throughout the world as the German Economic Miracle. But how did German achieve this and what is the lesson that Zimbabwe can take from this achievement?

The person behind Germany’s economic rebirth was Walter Eucken, the son of a Noble Prize winner in literature. Eucken was a holder of an economics degree from University of Bonn and went on to teach at the University of Freiburg, where he became a leading internationally known economist, developing economic theories, which became known as the Freiburg School, ordo-liberalism or the "social free market."

Eucken's ideas and philosophy were mostly focused on free-market capitalism which allowed a role for government involvement to ensure that the system worked for the majority of the population. The government role was to put in place and implement strong regulations to prevent cartels and monopolies from forming, which are currently taking shape in Zimbabwe’s economy and will dominate if no legal framework is to put in place. Furthermore, to protect the vulnerable population Eucken took a leading role in the formation of social welfare system to serve as a safety net for those who would struggle in transforming German economy.

He was also a strong supporter of a central bank that was independent from the government which focused on using monetary policies to keep prices stable. In today’s economic systems this sound completely normal but at the time it was seen as pretty radical.

Then after the war a protégé of Eucken, Ludwig Erhard was appointed to the position of the finance minister of Bavaria and then worked his way up the ladder to become the director of the economic council, a very powerful and influential position. Once he gained political influence, Erhard began to bring Germany's economy back to life and had the major influence in the formulation of a new currency to replace the worthless remnant of the past. This strategic plan would reduce the amount of currency available to the public by a staggering 93%, a decision that would reduce the little wealth that German individuals and companies held. In addition, large tax cuts were also instituted in an attempt to spur spending and investment.

In a controversial move Erhard introduced a new currency on June 21, 1948 and removed price controls on the same day. Erhard was almost universally criticized for this decision even by the then U.S. General Lucius Clay, who was the commanding officer overseeing the occupied western half of Germany. Clay told Erhard that his advisors informed him that German's drastic new policy would be a terrible mistake, Erhard Famously, responded by saying:

"Don't listen to them, General. My advisers tell me the same thing."

But, remarkably, Erhard proved everyone wrong, overnight, West Germany came to life. Shops immediately became stocked with goods as people realized that the new currency had value. Bartering ceased quickly, the black market ended. As the commercial market place took hold, and as people once again had an incentive to work, West Germany's famed sense of industriousness also returned.

According to online statistics, in May 1948, Germans missed approximately 9.5 hours of work a week, spending their time desperately looking for food and other necessities, similar to what Zimbabweans have been through for the last 6 months. But in October, just weeks after the new currency was introduced and price controls were lifted, that number was down to 4.2 hours per week. In June, the nation's industrial production was about half of its level in 1936. By the end of the year, it was close to 80%. West Germany's growth continued over the years by 1958, its industrial production was four times higher than it was just one decade earlier.

During the time of economic revival, Germany was caught in the middle of the Cold War, The Cold War was a period of geopolitical tension between the Soviet Union with its satellite states, and the United States. West Germany was a strong ally capitalist USA with a large role for the government to keep an eye on the free market on the other hand East Germany was closely aligned with the Soviet Union and was communist. Side by side, this was a perfect opportunity to compare the two major economic systems in the world. There was not much to compare between the two because West Germany was blossoming while East Germany was lagging due to a struggling economy, lack of political freedoms and communist economic policies. Soon the East Germany's residents started to leave the country in droves to head to the prosperous West, even though they were restrictions on the movements. By November 11, 1989, the East German regime had no choice but to allow members of its country to travel directly to the west for the first time free of restrictions in decades. This was tantamount to a disaster as this led to the near-immediate collapse of East Germany, due to the exodus of people and in no time two nations were united again.

There was a distinct difference between the two, when reunification began in 1989, the eastern parts of the country had only 30% of the gross domestic product of the western half. But today, twenty years later 2019, the east still has only about 70% of the GDP. Looking back to 1948, none of this was even conceivable. Had it not been Walter Eucken and Ludwig Erhard, none of this might not have happened.

Could Mthuli Ncube be Zimbabwe’s equivalent to Walter Eucken or Ludwig Erhard? Zimbabwe need to take a leaf from the Germany economy that went through similar economic challenges. From ruins to prosperity!!!

Engineer Jacob Kudzayi Mutisi Chairman of the ICT Divison of Zimbabwe Institution Engineers (ZIE), Member of the Engineering Council of Zimbabwe (ECZ), Member of the Institution of Engineering and Technology (IET) and a Member of Institute of Directors (IOD)

Source - Engineer Jacob Kudzayi Mutisi
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