8.3: Comparative Case Study - Germany and China

Learning Objectives

By the end of this section, you will be able to:

• Identify and categorize the different economic systems in Germany and China.
• Compare and contrast the various economic outcomes in relation to the political regimes in Germany and China.
• Analyze the implications for public policy in each of these countries in relation to their economic systems.

Introduction

From a political perspective, China and Germany have little in common. Their difference include:

• Government--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.
• Election and Media--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 are mostly controlled by the state. Germany’s political system enables the participation of its citizens in politics, the representation of opposing views, a free media, and the protection of civil liberties.
• 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. Germany 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 two countries do 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.
• Both China and Germany depend heavily on their exports, with Germany’s exports accounting for over 50% of their total GDP and China’s exports accounting for almost 25% of their total GDP. (For reference purposes, the US only exports what amounts to less than 15% of its GDP).
• Both systems, relying on their export economies, have created circumstances where their domestic production surpasses their own domestic capacity to use/consume/acquire goods. If German exports were to unexpectedly decrease or decline, domestic consumption would need to increase to levels not feasible with Germany’s current population. China would also face severe economic outcomes because its large population lacks the purchasing power to buy the goods produced by the country. Therefore, two very different market systems find themselves with a similar problem of managing their export economies carefully in order to ensure domestic economic and political stability.

Using the method of Most Different Systems Design, this case study will compare two countries, China and Germany, considering their different economic structures but similar economic challenges in the coming decades.

Germany’s Social Market Economy

• Full Country Name: Federal Republic of Germany
• Head(s) of State: President & Chancellor
• Government: Federal Parliamentary Republic
• Official Languages: German
• Economic System: Social Market Economy
• Location: Central Europe
• Capital: Berlin
• Total land size: 137,847 sq. miles
• Population: 80 million (July 2021 est.)
• GDP: $4,743 trillion
• GDP per capita: $53,919
• Currency: Euro

Based on GDP, Germany currently has the 5th largest economy, and is one of the largest global exporters in the world. It has a highly developed economic system utilizing a social market economy. Originating in 1949, this economic concept combined principles of capitalism with domestic social welfare considerations. It borrowed 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.

Germany’s Economic History

Germany’s social market economy was the product of dire economic conditions coming out of World War II. Following World War I (1914-1918), Germany was thrown into a weak democracy under the Weimar Republic. In addition, under the terms of the Versailles Treaty, the country was forced to drastically reduce its military, take full responsibility for the war, pay exorbitant reparations to the Allies, and ultimately relinquish some of its territories. The Weimar Constitution of 1919 attempted to shift power away from the German military, and more toward the political parties, including the Social Democratic Party (SDP) and the Independent Social Democratic Party of Germany (USDP).

The main challenge facing the Weimar Republic was hyperinflation, which occurs when inflation exceeds 50%. In order to pay the high reparations and war debts to the Allies, the German government tried to print more money. (The German debt totaled 132 billion gold papiermarks, the equivalent of $33 billion U.S. dollars at that time.) In order to produce more money, the country abolished its use of the gold standard. In doing so, inflation rates soared beyond 20,000%, with prices doubling every 3.7 days. For reference, in 1918, the exchange rate was 4.2 papiermarks to the U.S. dollar; by the end of 1923, the rate was 1 million papiermarks to the U.S. dollar. This hyperinflation meant citizens could not buy basic goods, and many Germans went hungry. It also led to Germany becoming delinquent on their reparation payments, leading French 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, called the Reichsmark in 1924. The new currency stabilized the economy, but economic troubles continued and planted the seeds for further societal distress.

During the 1920s, Adolf Hitler advocated for the politically right-wing party, the National Socialist German Workers’ Party (NSDP). These Nazi members were drawn by the devastating economic conditions of hyperinflation, unemployment, and poor working conditions. In November 1924, Hitler led an attempt to by over 2000 Nazi party members to overthrow the Weimar Republic in what later became called the Beer Hall Putsch. The coup d’etat was squashed by the local police. While serving his prison term for the failed attempt, Hitler drafted his autobiography, Mein Kampf (meaning, My Struggle).

By 1933, the Nazis emerged as the largest party in the Reichstag, or German parliament. President Paul von Hindenburg appointed Hitler as Chancellor of Germany. Over time, Hitler would use a manufactured hatred for the Jewish population, communism, and the architects of the Versailles Treaty, to transform Germany into a one-party dictatorship with a state-controlled economy. His leadership and command of a state-controlled economy enabled Germany to experience six years of rapid economic growth. This mercantilist approach also allowed Germany to pursue its military objectives.

After World War II (1939-1945), Germany was in ruins, including the country's physical capital. Hitler had commented suicide days before the war ended, so leadership was under the control of other officials. Post-war German economists advocated greater free-market capitalist principles. At the same time, the German government wanted to ensure that the people’s welfare, particularly those of the workers, was protected. Transitioning to a fully capitalist model was too risky, since many believed that not all workers or citizens would be able to compete effectively. These concerns led to the adoption of a social democratic political economy.

Germany’s Economy, Present Day Circumstances and Challenges

Germany is Europe’s largest economy and the largest exporter of goods in Europe. Prior to March 2020, Germany had experienced consistent growth for 10 years. When the Covid-19 pandemic struck, Germany’s economy contracted by 5% led by a decline in exports. Germany fared better than many of its European Union (EU) trade partners or global economies. For reference purposes, the Chinese economy contracted by almost 7%, and the U.S. economy contracted by over 19% in the first three months of the pandemic. Even as the pandemic has subsided, the country still grapples with unemployment, disruption of imports and exports, and the social fallout experienced by frequent shutdowns and isolations.

China’s Market-Oriented, Mixed Economy

Full Country Name: People’s Republic of China

Head(s) of State: President

Government: Communist party-led state

Official Languages: Standard Chinese

Economic System: Market-oriented, mixed economy

Location: Asia

Capital: Beijing

Total land size: 5,963,274.47 sq. miles

Population: 1.3 billion (July 2021 est.)

GDP: 19.91 trillion

GDP per capita: $14,096

Currency: Renminbi

Based on GDP, China has the second-largest economy, and is the world’s largest exporter and trading nation. However, if measuring economies based on Purchasing Parity Power, then China has the world’s largest economy. (Purchasing Parity Power (PPP) compares the prices of goods and services to gauge the absolute purchasing power of a currency.) China pursues state capitalism. Part of the reason for the high state intervention stems from China’s authoritarian system under the sole leadership of a single political party, the Chinese Communist Party. As one may suspect, over 60% of China’s industries and enterprises are state-owned. It is useful to look at the roots of China’s market-oriented, mixed economy to understand the current status of China’s economy today.

China’s Economic History

China’s Communist Party came to power in 1949 after they defeated the nationalists in a brutal civil war. Military installations and equipment, as well as basic transportation, communications, and power systems had been destroyed and were badly in need of repair or rebuilding. The leadership intended to modernize China as fast as possible. As such, from 1949-1952, the Chinese government prioritized projects to repair transportation, communications, and power grids. The banking system was centralized under the People’s Bank of China. Moving towards a state-controlled economy, the state began to acquire more and more control over various industries. By the end of 1952, only 17% of industries were not state-owned.

After having stabilized the economy, China prioritized industrialization. The government officials looked to the Soviet model. By the end of 1956, all firms were state-owned. During this time, the agricultural industry was largely revamped and, to some extent, considered to be secondary. Although not invested in, agricultural output increased due to more organization and cooperation of those working in the industry.

In 1958, Mao Zedong determined that the Soviet model was not working for China. Instead, Zedong introduced the Great Leap Forward, which asked the Chinese people to spontaneously increase production in all sectors of the economy at the same time. For this initiative, communes were created to make Chinese farmers and workers work together cooperatively to increase output. While the agricultural sector was working to increase output, the same expectations were also put on the industrial sector.

The economic results of the Great Leap Forward were disastrous. The first year yielded strong outcomes for both the agricultural and industrial sectors, but the subsequent years were poor. Due to bad weather conditions, poor allocation of resources, and poorly constructed equipment, agricultural output plummeted from 1959 to 1961. Poor water management contributed to widespread famine, which resulted in approximately 15 million people dying of starvation and a significant drop in birth rates. In the meantime, industries were expected to keep increasing output. However, the strain on the workers was too great, and industrial output declined.

Between 1961 and 1965, China tried to reconstruct its economy by replacing the concept of the Great Leap Forward. The country reformed all of its agricultural practices, including lowering taxes and providing more equipment. Attempts were made to decentralize control of various industries to local governments. By 1965, economic conditions were again stable, and the Chinese government focused on balancing 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 Communist ideology. Mao alleged that the bourgeoisie was attempting to infiltrate China with the goal to overthrow the communist government. (Bourgeoisie refers to the upper middle classes, who often own most of a society’s wealth and means of production.) Mao’s sayings and wisdom were compiled into the Little Red Book, which became a required reading of China’s militant communist youth movements, named the Red Guards. In general, the Cultural Revolution had devastating effects on China’s economy. The distraction and disruption of political fighting put a strain on resources, labor, and equipment.

Mao died in 1976. In 1978, under the leadership of Deng Xiaopeng, China reduced government controls, enabled market mechanisms, and generally attempted to reform the economy. This change was not a sudden move away from communism, but a gradual move towards a mixed economy, designed to stimulate growth. Slowly the country opened to global trade. In 2001, China became a member of the World Trade Organization, cementing its transition from a command and control economy, to a largely state-capitalist society.

China’s Economy, Present Day Circumstances and Challenges

Due to the Covid-19 Pandemic, for the first time since adopting capitalist reforms, China’s economy contracted. However, the country has been the first to bounce back with a growth rate of 8.5% in 2021. China is still export-heavy, but some industries are experiencing a decline, such as telecommunications, fabric/clothing, coal, and logging, due to supply and demand issues. Similar to trends in other countries, the pandemic hit women in the workforce disproportionately hard, with many women being made to decide whether to continue working or to support their families during the crisis. Also, employment opportunities for almost all sectors decreased, which put a strain on new graduates.

Under a largely authoritarian regime, there have been questions over how accurate China’s reporting on economic growth and output is. Some political scientists argue that the level and extent of continued economic growth are not feasible, and suggest the data reported does not appear legitimate. In tandem with this, the Corruption Perception Index (CPI) has repeatedly ranked China as having problems with corruption on every level. For instance, China reported little to no economic contraction during the 2008 recession.

Export-Based Economic Problems

China and Germany share a similar problem: how to handle economies that are largely export-based. Both China and Germany’s 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, these countries' economies may be unable to thrive. If a state is no longer able to afford the product or buy the goods, the exporter will struggle. The unemployment and economic slowdown caused by the COVID-19 pandemic, as well as the subsequent global recession, may lead citizens to question their government’s legitimacy. These ideas are evident in the rise of the far right in Germany and with the increase of public discontent in China. Will the fallout from the pandemic lead to political changes as well? Only time will tell.