ANALYSIS

Searching for a blueprint to rescue SA: Tips from Germany’s social market economy model

By Peter Fabricius 26 August 2020

Dresden after the 1945 firebombing raid, with a partial view of the destroyed city centre over the Elbe river. (Photo: Wikimedia)

Could Germany’s ‘miracle’ in rebuilding its shattered economy and society – after the hyperinflation of the 1920s and 30s, Nazism, the Holocaust and World War II – help avoid South Africa ‘doddering towards a failed state’?

Perhaps South Africa’s approximation of Germany’s celebrated social market economy – which guided it to such enormous economic and social success after the war – could be the neglected 2013 National Development Plan dusted off, updated, refreshed and actually implemented.

From the ashes and rubble of war, West Germany constructed Europe’s strongest economy – and one of the best in the world – from the blueprint of the “social market economy”.

Just across the Berlin Wall, East Germany tried to rebuild its part of the country with a socialist, totalitarian state which controlled the entire economy and the politics.

West Germany’s formula – a social compact between the left and the right, between labour and business, between free marketeers and socialists demanding a strong state to administer social justice – has been widely credited with steering first West Germany and then, after 1990, a reunited Germany, to its great success. 

Can the German model work in SA?

The Hanns Seidel Foundation and the Catholic Parliamentary Liaison Office held a webinar last week to ask if the social market model could be adapted to the South African context. 

Hanns Bühler, the foundation’s resident representative in South Africa, said “South Africa is facing an enormous economic decline” aggravated by the Covid-19 crisis. 

Unemployment, debts, the state budget deficit, and inequality were all rising. “The current development trajectory is increasingly untenable… and while there has been obviously important progress, economic empowerment has not been working in the way it was envisioned in 1994.” 

Bühler noted that the Institute for Security Studies had just forecast that “if the government successfully uses the coronavirus crisis to build a pro-growth social compact and implements evidence-based economic policies, South Africa’s economy could, by 2044, be almost 50% larger than the current path forecast for that year”. 

President Cyril  Ramaphosa has already spoken about a new economic model for South Africa. But many strategies and plans have been proposed in the past, and never really implemented. 

Socialism vs capitalism

In South Africa, the “never-ending debate” between socialism and capitalism was increasing in a time of crisis. But there was much more than only those two concepts, which was why Bühler’s foundation and the CPLO were holding a debate on the social market economy. 

There was no blueprint which could be copied, because the contexts were different. “But we can learn from each other and we can share experience.” 

Prof Dr Markus Beckmann, a business ethicist from Friedrich-Alexander-Universität in Erlangen-Nürnberg, Germany, said the architects of Germany’s post-war recovery realised they had to “think out of the box” – beyond the restrictive debate between capitalism and socialism – to avoid the country’s disastrous mistakes of the last few decades. 

Those architects – economics minister Ludwig Erhard and his economists, including Alfred Müller-Armack, who coined the term “social market economy”, saw the origins of WW2 in the economic crisis of the 1920s when the Weimar Republic experienced runaway inflation and had to print banknotes of up to 100 trillion Marks.

Then followed the Great Depression, mass unemployment, the Nazi government, WW2, the Holocaust, “the demise of German civilisation” and the destruction of Germany. 

Walter Eucken, the constitutional theorist of the social market economy, tried to answer Germany’s central  “soziale Frage” (social question) of how to ensure the state addressed all the people’s needs by reframing the relationship between the state and the market – to achieve prosperity, social cohesion and democracy, while avoiding totalitarianism. 

He proposed a social compact that all citizens could agree on. 

Each side argued from a moral point of view for its values, while disregarding the values of the other side, he said.  The “old liberals” stressed the primacy of freedom – more market, less state; believing if the state intervened in the economy, it would infringe on their freedom. 

“This was the position of laissez-faire; if you withdraw the state from the economy completely,” Beckmann said. “But others said, ‘I don’t benefit from freedom if I’ve lost my job, I’m unemployed so justice and security are primary.’” 

More state involvement

That position was represented by the left and the right – both socialists and conservatives said that for a just society and economy, Germany needed more state. That was a call for central planning. 

“But the problem should be put differently to be solvable,” Eucken wrote. “Whether less or more state activity, this question misses the point. It is not a quantitative but a qualitative problem. What kind of state activity should there be?

“The answer is that the state has to shape the forms in which economic activities unfold, but the state should not run the economic process itself.

Beckmann said Eucken had told the laissez-faire advocates that if one left the market to its own devices, experience had shown that it tended to form monopolies, cartels and the accumulation of economic power. That was Germany’s historical experience. 

“If you have powerful groups, they will actually capture democracy. This will diminish freedom for the rest and lead to a sclerotic monopolised cartelised economy. 

“So if you believe in freedom you need a strong state as an arbiter that carries out anti-trust policies and arbitrates independent law.”

And Eucken told those who insisted central planning was needed to deliver social security and justice, that it required a government with coercive power to enforce central planning.

“That limits freedom, but if you limit freedom and people cannot plan individually to do what they know is best, that will cause uncertainty and lower investment, initiative and prosperity.”

That would shrink the economic pie and create distributional conflicts and inequalities and corruption, as some would hold inordinate political and economic power in the bureaucracy, and some not. 

‘Prosperity, social justice and security are at risk’

“So if you’re interested in security and justice, you should do that without limiting freedom,” Eucken told them. Instead, what was needed was not more or less state, but a strong and capable state that created and enforced the rules of the economy – e.g. with incentives and anti-trust policies, but which did not intervene directly in the economy, for example, by fixing prices and creating jobs.  The state should in effect be the referee not a player in the economy. 

“That distinction provides the third option, between laissez-faire and central planning,” Beckmann said. This was the basis of “ordo-liberalism”, as Eucken called it – or the social market economy.  

Beckmann said Müller-Armack had added to this constitutional formula the idea that the social market economy “is not limited to merely empowering the tools of competition in a socially useful way… the market-based process of income generation provides a stable foundation for the government to redistribute income and to correct income distribution “

He said redistribution should also be framed correctly, not as simply taking money from the rich and giving it to the poor.

Instead, Müller-Armack proposed that social programmes should be conceived as exchanges or investments in society, not against the market, but for the market. 

“So instead of asking how much do we spend on social programmes, we should rather ask what do we actually do with it; what do we achieve, and is that productive?” Beckmann said.

“And so the question is not what can we do for the poor once they are excluded, but how can we remove the barriers to inclusion in the first place?” 

Spend on health, safety and education

Providing education for all citizens – especially when they were children rather than as adults – benefited society at large through improving the skills of the labour force and thereby boosting the economy. 

Social spending on health likewise created a healthier and therefore more efficient workforce, to everyone’s benefit.

“In the Covid crisis we saw that if you paid for the testing, for example, people will do more testing,” said Beckmann.

“And that’s not only good for that individual, but for society. It will save money for others. So if we invest in health for everybody, there will be a dividend for everybody.

“The same goes for community safety. The same now goes for furlough. If we don’t allow companies to lay people off too quickly, we can avoid a huge disruptive break in the economy.” Giving citizens a safety net of social insurance could “unleash risk productivity by giving them the confidence to become entrepreneurs and take risks”.  

Big differences between Germany and SA

Former finance minister Trevor Manuel in Davos, Switzerland, 28 January 2009. (Photo: EPA/LAURENT GILLIERON)

Former finance minister Trevor Manuel responded unenthusiastically to the proposal that South Africa should follow the social market model. He agreed that Germany, under the social market economy, had done well in addressing major stresses such as post-war reconstruction, reunification and the costs of inclusion, including merging the currencies of the two countries. 

The Bundesbank had been a formable bastion in the fight against inflation.

Germany had also weathered the 2009 global financial crisis and an influx of 1,5 million immigrants into Europe in 2015 and 2016.

Manuel noted that Germany now had a Gini Coefficient of around 0.23, “which means it’s substantially more equal than China and the US”. South Africa has one of the world’s highest Gini Coefficients, at around 0.65.

He suggested the social market economy was essentially unique to Germany and to the post-war circumstances in the country when it was introduced. He said it was more a cultural and political phenomenon than an economic model which could be applied elsewhere.

The main cultural phenomenon influencing it, Manuel said, had been the deep hatred of inflation by Germans who had experienced the hyperinflation of the pre-war Weimar Republic. 

And the real strength of German society was its high spending on social security, which was more the result of a social rather than an economic choice. That high spending, and the high German standard of living, were now coming under increasing pressure as the population aged.

Germany’s strong parliament

Other contributors to Germany’s success were its admirable life-long learning system, from kindergarten through school, and then to work apprenticeships.

There was also the strength of its parliament, the Bundestag, in balancing and exercising oversight over the executive. He contrasted this with South Africa’s weak legislatures – as exemplified by the KwaZulu-Natal ANC’s recent decision to give disgraced former eThekwini mayor Zandile Gumede a seat in the provincial legislature (though he didn’t mention her by name).

“Our national assembly and NCOP are too weak to exercise oversight… So the consequence is, we’re doddering along and we may be doddering towards a failed state.”

And so, although elements of the social market economy had taken root in other countries over the last 70 years, “as a system it doesn’t travel well… because that social compact which arose at the end of World War 2 is distinctly German in its nature and it has created a culture”. 

“The main thing is the trust that the population has in the strength of the institutions and the maintenance of that culture.”

SA’s culture of instant gratification

Manuel said if Germany’s post-war culture (of frugality) had bred the social market economy, South Africa had (by contrast)  developed a culture of instant gratification. 

“We’re living through a deep trauma at the moment with the response to Covid-19 having been exploited in the most abysmal fashion by all kinds of compradors,” he said.

The Zondo Commission, he said, was hearing evidence of the state paying firms R255-million to survey asbestos roofs. 

“All of that speaks to a state which is atrocious.

“All of that makes it hard to look at transposing the German experience immediately into South Africa,” he said.  

Manuel suggested that South Africa had missed the opportunity which the trauma of apartheid, and the transition to democracy, had created “for us to learn from the German experience and take it forward very strongly”.

“The question which confronts us in South Africa is, what do we do now, with almost three decades that were wasted. 

“The entire National Prosecuting Authority has been hollowed out. And the criminal justice system as well. So the ability of the state to enforce the law is minuscule. And without that, the basic principles one would require of a state cannot be delivered on. 

“If you can’t protect people; if you can’t ensure the institutions function to advance livelihoods; if you can’t maintain a justice system that feels like it’s inclusive – you face enormous problems. 

“And I’m hoping that by raising these matters now, the sense of a  traumatised nation will be understood and that will be used for a new compact going forward, over and above the reality of what Covid-19 has cost us as a nation, both in terms of lives and livelihoods.”

Ideological difference or just a weak state?

Some participants in the discussions differed with Manuel that Germany’s social market economy did not have much to offer South Africa. They suggested that SA already had, in theory, something akin to the social market economy – the National Development Plan which Manuel had played a key role in drafting.

They wondered if ideological differences were obstructing implementation of the NDP, or was it just a case of the state being weak.

Manuel said that the Zuma government hadn’t moved to implement the NDP. “And it should have been the government that developed the norms and standards and the programme for implementation. 

“So the plan probably needs to be refreshed. 

“The governor of the Reserve Bank said we don’t need a new plan. Take the NDP, refresh it, update the data sets, and then drive a programme for implementation so that we can effect the transformation… part of which Hanns (Bühler) referred to when he spoke of the ISS long term view on improving the quality of life for people.”

Perhaps this is the nearest South Africa will ever get to the social market economy. DM

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