12.

Reconstruction after World War II and the Golden Age of economic growth, 1950- 1973 Contents Second World War, destruction and reconstruction Growth in the World, the West and other regions Proximate and some possible ultimate causes of this growth phenomenon The end of the Golden Age Consequences of World War II Like the First World War, but on a larger scale Destruction of capital stock (production and dwellings) Population: dead soldiers and civilians Destruction of human capital (mutilated and traumatized soldiers and civilians, loss in education, etc.) But, the bombings were only partly effective Large part of the bombings was not directed towards (heavily protected) industrial plants, but to easily identifiable large cities The strategy, especially of the Royal Air Force, was to strike hard, strike sure and to evade large losses due to flaks, etc., and therefore were directed at historical city centers, etc. Destructions of bridges and railway lines could be repaired relatively fast. In Germany, etc., productive capacity increased as part of the war effort, and destructions were relatively small, so that overall capital stock increased during the war (although the Soviets dismantled plants, etc., in the East, after 1945, which reduced the capital stock there to about half of the 1939 level) The main problem in Germany at the end of the War was the displacement of population to the countryside (as a consequence of city destruction and market disintegration) and hence labour shortage in the cities (only 56% capacity utilization in late 1948 and 69% in 1949; Vonyo 2012) But, again, focusing on Germany The 1938 Germany lost 9% of its population, but also lots of territory (in the East, to the restored Poland, which moved to the West) In these territories German population was expulsed or fled as the Red Army advanced Also, from the Soviet occupation zone/GDR many people fled to the British and American zones (and the later FRG) Trizonia (the later FRG) had 39.35 mio. Inhabitants in July 1939, but 47.7 mio. in September 1950 (Vonyo 2012) All regions grew, but there was not necessarily world convergence (all countries with data in Maddison, except UAE, Kuwait y Qatar)

What was different before and after WWII? (a slide I use sometimes for the Maddison exercise) No real catch-up with the US before WWII (except in the Great Depression, but due to other reasons) American technology was (remember Nelson and Wright): large-scale, resource intensive and labour-saving this was difficult to adapt in Europe in the interwar years and until 1945 (but war material production learned this) Also social capabilities were different than in the US The wars caused instability (and were the result of political instability itself) After WWII in EUROPE! conditions favoring rapid realization of potential: - Erosion of pre-existing vested interests - Channels of technology dissemination - Structural change (labour market) - International stability - Americanization of demand (supermarkets, marketing, branding, fastfood) enlarged social competence (education and professional experiences in large scale production, distribution and finance Americanization of production): _ accumulation of unfulfilled potential in the interwar period Lessons learned despite early ideas (Morgenthau Plan, etc.) in the end Germany was not punished by new reparations, etc., but controlled and integrated into a (Western) European cooperation that started with the European Coal and Steel Community (ECSC) in 1950, and eventually became the European Union (and the Eurozone) With the Marshall plan, the US helped Europe, but required European countries to cooperate and make joint proposals for help European integration went further: the European Payments Union, a multilateral mechanism to overcome dollar shortage in Europe and help European trade A new monetary regime was established, the Bretton Woods system, combining national monetary autonomy with fixed exchange rates (against a gold-backed dollar), but restricting international (short-term) capital mobility, and with an international organization (the IMF) to help overcome short-term imbalances Other institutions reinforced cooperation on a larger level (International Bank for Reconstruction and Development = World Bank, GATT for negotiations on tariffs and other trade barriers, United Nations, NATO, ...) Lessons learned (II) The state gained a more active role in the economy: macroeconomic management (inspired by Keynes) to avoid too severe recessions (and depressions), the rise of the welfare state, etc. Trade unions gained political and economic voice (in part due to labour shortage/dislocation in the postwar reconstruction). Firms and trade unions entered a pact, in which the former would make productive investments to assure reconstruction and growth and the later would moderate their struggle for higher wages, etc., to make possible future growth (in part a lesson learned from conflicts

over adjustment politics in the interwar years, the growth of the welfare state and labour representation in company boards was part of the deal) This has been interpreted as a change in vested interests that made possible institutional change Gold standard, unemployment and discontent Protectionism clearly reduced (average tariff, in percent) Convergence on the leader It seems that (Western) Europe now gets what impeded convergence on the leader (US) in the interwar years If this was the case, what would we expect? An increase in productivity per worker/hour worked Increase in investment (towards a level of capital intensive US production) Technology transfer from the US (mass production, scientific management, etc.) Demand changes (mass consumption) Change in institutions (this part we have looked at already) Increase in human capital (e.g., university eductation) and research and development (remember Nelson&Wright) Maybe also structural change (especially in the most backward European countries) So, Total Factor Productivity should grow faster than in the US Summary We see that Labour productivity (per hour) increases faster than in the US ( convergence; but Europeans work less, that slows down convergence of GDP per worker/per capita) The capital stock per hour work does the same TFP grows faster than in the US Capital quality increases (slightly) faster than in the US (that is replacing old with new capital goods) Labour quality (human capital) increases faster than in the US (except in Germany and UK) Also foreign trade and structural change contribute Capital The average investment rate (gross investment=new machines, structures, etc. in relation to GDP) in Western Europe increases from 9.6% of GDP (1920-38) to at least 18% in the period 1960-70 (even more if we follow the new estimates by Carreras and Tafunell 2006) During the Golden Age the European capital stock increased by 150% Capital per worker doubles (In the US, the investment rate was around 20%) (Historical Statistics of the United States) Technology transfer The first assistance of the US did not arrive in dollars, but in machines, fertilizers and raw materials; together with this help (beginning with the Marshall Plan) also arrived American technology

 Americanization of European industry: Foreign direct investments in Europe by American companies rise of new industries (petrochemicals, plastics, motorcars, electrical domestic appliances) Diffusion of the Taylorist-Fordist model (standardized mass production for standardized mass consumers, see below) In fact, this is still under-investigated, since it requires looking at firm level technology used and where it came from. But in the larger picture, the rise of managers, etc. is quite clear We also see an increase in investment in Research and Development _ like in the US, the process of technological innovation becomes institutionalized with in firms, although as with mass university education the fruits cannot be reaped immediately Human capital Increases, although the effect for growth in the beginning is small Makes possible that technologies transferred from the US are used more efficiently Most of it is not effective instantaneously, e.g. the increase in student and university numbers is one of the most important social phenomena of the 1960s, but it takes time until they finish their degrees, etc. Structural change (faster) Structural change and growth rates Why? Many European governments had fought the Grain Invasion (1870-) with higher tariff duties (1878-) Interwar years: more protection (partially to mitigate effects of overproduction and to help food autarchy) and help to maintain agricultural profits; also, pull factors into industry were weak since industrial performance was unstable in the interwar years At the end of WWII, Western Europe therefore had an oversized agricultural sector, which was not really competitive accounting for relative factor endowments, etc. (see First Globalization) But in the post-1945 context the fast increase in industrial production and productivity increases industrial wages and creates demand for industrial workers The conversion of (relatively) unproductive agricultural labour into (more productive) industrial labour increases the average productivity per worker (without increasing total hours worked) and hence contributes to TFP growth Conclusions The growth in the Golden Age was mostly due to capital accumulation and TFP growth We observe important changes in mentality (on various levels), in institutions, international cooperation and on the social side The end of the Golden Age was not so much caused by the Oil Crisis, but by the running dry of the sources of postwar growth

The rise of the European mass consumer All over Europe: the south (where still in the 1950s 60% of income was spent on food) catches up with the North (UK, France, Germany, Sweden) Transition from class based to lifestyle based consumption patterns Americanization _ marketing, advertising, supermarkets, individual and collective spare time consumption (incl. tourism, etc.) But this is adapted into a European model: not just individualized choice between consumption possibilities offered by the market, but consumer citizenship, social participation, redistribution of income and wealth in a more pronounced welfare state (consumption of public and social services, from public health and public education to public and subsidized culture) The end of the Golden Age The Golden Age ends in 1973 with the first Oil Crisis However, this shock is not the only and maybe not even the most important reason. Growth already slowed down since the late 1960s The sources of growth ran dry: Convergence: from Germany to Spain mass production had been adopted, etc. Structural change: had taken place (and Common Agricultural Policy retained the remaining agricultural work force) Eurosclerosis: in the integration process, rapid intra-European trade growth slows down It has also been argued that the pact between firms and trade unions weakened as new generations who had not experienced the Great Depression, etc., but postwar full employment entered the labour market