Identify and categorize the political economic systems in Germany and China.
Analyze the implications of political economic systems on public policy.
Introduction
From a political perspective, China and Germany have little in common. China is a socialist republic led by a single, communist political party and communist elites, while Germany is a democratic, federal parliamentary republic where two main political parties vie for dominance. China's political system is authoritarian where national political leaders are selected without nomination or election by the people; most political opposition is suppressed; and media, news, and information for the public is mostly controlled by the state. Germany's political system enables participation of its citizens in politics, representation of opposing views, a free media, and the protection of civil liberties.
China and Germany also operate under very different economic models. China's economy is a market-oriented, mixed economy where the majority of economic ventures are state-owned and dominated by the political interests of the single communist political party. Although not the direct opposite of China's controlled market economy, Germany's economy differs in a number of respects. It has a social market economy that brings in aspects of capitalism, particularly the prospect of free market competition, but also protects its economy from unbridled competition at the expense of its citizens. The main difference between the economic systems in China and Germany is the extent to which the government intervenes in the control and management of the market system. In short, the Chinese government dominates the market, mostly through state-owned enterprises, whereas the German government prefers to influence the market, mostly through regulation.
Although China and Germany differ in terms of their political and economic systems, they share some fascinating similarities in terms of their global trading approaches. Both China and Germany are political centers for regional trading blocs, and both maintain mutual dependency on their regional partnerships. Further, both China and Germany depend heavily on exports, with Germany's exports accounting for over 50 percent of its gross domestic product (GDP) and China's exports accounting for almost 25 percent of its GDP. (For reference purposes, United States' exports amount to less than 15 percent of its GDP.)
This heavy reliance on exports leads both China and Germany to face similar economic challenges and vulnerabilities, namely that each state's domestic production surpasses its domestic capacity to use, consume, or acquire goods. If German exports were to unexpectedly decline, domestic consumption would need to increase to levels not feasible with Germany's current population. If Chinese exports were to unexpectedly decline, a large segment of the population would be unable to buy domestic goods due to a lack of purchasing power. Therefore, two very different political economic systems find themselves with a similar problem of managing their export economies carefully in order to ensure domestic economic and political stability.
In what follows, we will compare the historical trajectories of political economic systems in Germany and China. As a reminder from Chapter 2, this is a Most Different Systems Design, an approach that examines cases that are quite different from one another, yet have the same outcome. Here, the political economic systems differ, yet the cases face similar economic challenges stemming from those systems.
According to its GDP, Germany is one of the largest economies in the world. It is also one of the largest global exporters. Germany has a highly developed political economic system that utilizes a social market economy, combining principles of capitalism with domestic social welfare considerations. It uses the capitalist principles of fair competition and competitive advantage. Fair competition affirms that industries will work to maximize their output and minimize costs to compete with similar industries, forcing the market to provide competitive options to consumers. While Germany's economy hinges on fair competition and competitive advantage, it does so with an eye toward mitigating the potential negative effects of capitalism on social welfare. It is useful to look at the roots of Germany's social market economy to understand the current status of Germany’s economy.
Germany’s social market economy was the product of dire economic conditions coming out of the first half of the 20th century. Following the signing of the Treaty of Versailles in 1919, which formally ended World War I, Germany was thrown into a weak democracy under the Weimar Republic. Germany suffered greatly, as the conditions of the Versailles Treaty forced Germany to drastically reduce its military, to relinquish some of its territory, to take full responsibility for World War I, and to pay exorbitant reparations to the Allies.
The main challenge facing the Weimar Republic was hyperinflation. Hyperinflation is a severe form of inflation (often defined as rates exceeding 50 percent per month) that can have deleterious effects on all aspects of a state's social, political, and economic situation.
When the Weimar Republic was forced to pay high reparations and war debts to the Allies (war debts totaled the equivalent of 33 billion U.S. dollars today), the German government tried to print more money. Germany abolished its use of the gold standard to produce more printed money, and in doing so, it induced a state of hyperinflation where inflation rates soared beyond 20,000 percent, with prices doubling every 3.7 days. Hyperinflation meant citizens could not buy basic goods, and many Germans went hungry. It also led to Germany to become delinquent on its reparation payments, leading France and Belgium to justify occupying the Ruhr Valley in Germany as payment. The German economy folded, and the Weimar Republic was forced to adopt a new currency (the Reichsmark) in 1924. The new currency stabilized the economy, but did not take away all of Germany’s economic and social woes.
At the height of the economic woes of 1923, Adolf Hitler gained notoriety as he advocated for the politically right-wing party, the National Socialist German Workers’ Party (NSDP), also known as the Nazi Party. In November 1924, Hitler led an unsuccessful attempt to overthrow the Weimar Republic, an attempted coup d'état referred to as the "Beer Hall Putsch." The devastating economic conditions of hyperinflation, unemployment, and poor working conditions were some of the factors that drew NSDP members to support Hitler.
Over the coming decade, Hitler rallied the German people by lambasting the Treaty of Versailles, calling it a disgrace to the German nation. He promoted German pride and ultranationalism, promising to unite all the German people inside and outside of Germany. He scapegoated many of Germany's problems on minority groups, particularly Germany's Jewish population, and on the communists, denouncing their beliefs. In 1933, the Nazis emerged as the largest party in the German Parliament (the Reichstag). The President of Germany at that time, Paul von Hindenburg, was compelled to appoint Hitler as Chancellor of Germany. Hitler leveraged a manufactured hatred for the Jewish population, communism, and the architects of the Treaty of Versailles, to transform Germany into a one-party non-democratic regime with a state-controlled economy.
Life under Nazi rule initially yielded strong economic outcomes. Hitler's leadership and command of a state-controlled economy enabled Germany to experience six years of rapid economic growth. This mercantilist approach allowed Germany to pursue its military objectives.
However, after Germany's surrender in World War II in 1945, it found itself in ruins. German leaders declared "Stunde Null," or "Zero Hour," where the country was going to need to rebuild itself in order to survive. Post-war German economists advocated for radical change, moving from a state-controlled approach toward one embracing greater free-market capitalist principles. At the same time, the German government wanted to ensure that the people's welfare, particularly the welfare of workers, was protected. Transitioning to a fully capitalist model was seen as too risky because leaders believed that not all workers would be able to compete effectively. This led to the adoption of a social democratic political economy.
According to its GDP, China has the second largest economy in the world, and it is the world's largest exporter and trading nation. However, if measuring economies based on purchasing power parity (PPP), China has the world's largest economy. PPP is a metric used to compare the prices of goods and services to gauge the absolute purchasing power of a currency. China pursues a version of state capitalism, where a high level of state intervention exists in a market economy, usually through state-owned enterprises. Over 60 percent of China's industries and enterprises are state-owned. Part of the reason for the high state intervention stems from China's political system, which is a non-democratic regime under the sole leadership of a single political party, the Chinese Communist Party. It is useful to look at the roots of China's market-oriented, mixed economy to understand the current status of China's economy.
China's Communist Party came to power in 1949 after defeating nationalists in a brutal civil war. The leadership intended to modernize China as fast as possible, with a desire to become more powerful. From 1949-1952, the Chinese government prioritized projects to repair transportation, communications, and power grids. Military installations and equipment and basic transportation, communications, and power systems had been destroyed during the war and were badly in need of repair. Under government direction, the banking system was centralized under the People's Bank of China. Moving toward a state-controlled economy, the state acquired more and more control over various industries. By the end of 1952, only 17 percent of industries were not state-owned.
After stabilizing the economy, China prioritized industrialization, and government officials looked to the Soviet model. By the end of 1956, all firms were state-owned. In 1958, Mao Zedong, Chairman of the Chinese Communist Party, determined that the Soviet model was not working for China. Instead, Zedong introduced the Great Leap Forward, a plan to increase production in all sectors of the economy simultaneously. For this initiative, communes were created to make Chinese farmers and workers work together cooperatively to increase output. These communes often had 20,000-40,000 members at a time, all tasked with combining their resources to produce more agricultural output. While the agricultural sector was working to increase output, so was the industrial sector. The economic results of the Great Leap Forward were disastrous for China. The first year yielded strong outcomes for both the agricultural and industrial sectors, but the subsequent years yielded poor outcomes. Due to bad weather conditions, poor allocation of resources, and poorly constructed equipment, agricultural output plummeted from 1959 to 1961. Poor water management additionally contributed to widespread famine, resulting in approximately 15 million deaths and a significant drop in birth rates.
Between 1961 and 1965, China again tried to reconstruct its economy. China reformed all of its agricultural practices, including by lowering taxes and providing more equipment. The government attempted to decentralize control of various industries to local governments to allow them to manage resources based on their unique needs. By 1965, economic conditions were again stable, and the Chinese government focused on seeking balanced growth across both agricultural and industrial sectors.
In 1966, Mao announced the Cultural Revolution, which was a socio-political and economic movement that sought to expel capitalists and promote the communist ideology. Attacking capitalism, Mao alleged that thebourgeoisie (those who own most of a society's wealth and means of production) were attempting to infiltrate China to perpetuate their economic superiority. Mao attempted to incite young people to violence against those who he accused of perpetuating capitalist practices. In general, the Cultural Revolution had devastating effects on China's economy, and it led to many deaths. The distraction and disruption of political fighting did not improve agricultural or industrial output. Instead, the disruptions to economic output put a strain on resources, labor, and equipment.
Figure \(\PageIndex{5}\): Mao's Cultural Revolution did more to distract from the economy than to grow it. Economic output fell in all sectors as political turmoil grew. (Source: Shenzhen Museum by Woo King Tam gwiam, Wikimedia Commons is licensed underCC BY-SA 4.0)
Mao died in 1976. In 1978, the Communist Party under Deng Xiaoping moved the country in a new direction. China reduced government controls, enabled market mechanisms, and generally attempted to reform the economy. This was not a sudden move away from communism, but a gradual move toward a mixed economy, designed to stimulate growth. These reforms slowly opened China to global trade, which improved economic outcomes. This success encouraged China to keep pursuing this strategy, and to also invest heavily in the education and training of government officials and future business leaders. China became a member of the World Trade Organization in 2001, cementing its transition from a command and control economy to a largely state capitalist society.
Conclusion
Despite having different political economic systems, the leaders of China and Germany share a similar problem today: how to handle economies that are largely export-based. The political leaders need to constantly and carefully balance the domestic concerns of their economies alongside their global customers who depend on their exports. If the global customer base fails, or switches trade partnerships, the Chinese and German economies may be unable to thrive. Beyond this, relying on exports leaves the states vulnerable to the economic conditions of those they trade with. If a trading partner is no longer able to afford the product or buy the goods, the exporting state will struggle. Depending on the severity, and as shown through the historical trajectories above, such struggles have the ability to cause unstable political conditions.
